TomD, thank you I downloaded it.
From Keith Benjamin of RS.
>>DRUGSTORES ONLINE – STARTUPS VS. SPIN-OUTS – With the IPO filing of Drugstore.com, a name-brand start-up funded by Kleiner Perkins, founded by a top Microsoft executive, recently backed by Amazon.com, it might almost seem as if the game was over at the beginning. We are big believers in the advantages of being first with a hot brand, like the intuitively strong "drugstore.com" address, combined with powerful distribution, like the emerging land baron Amazon.com. However, with similarly strong backing, PlanetRx boasts top VCs, including Sequoia, impressive management with a CEO from Federal Express and AOL, and enough money to mount an aggressive marketing campaign. Both are trying to exploit online advantages to take share of the huge market for prescription and non-prescription drugs and personal care items. While we still expect to go to the drugstore for immediate needs, many items are frequently repurchased and could easily be bought online. In ancient times, your local pharmacist actually provided advice. Now, the Web seems to be the best place for information about which vitamins to take, which cold medicine fits best, or which prescription drugs might react to each other.
But what about Walgreens, CVS, RiteAid and other land-based competitors who are in various stages of articulating their online strategies? For non-prescriptions items, we believe the start-ups may be able to move faster and further. For prescriptions, however, the game appears to be rigged in favor of those major retail chains which already have affiliations with (or in certain cases also own) the Pharmacy Benefit Managers (PBMs). What is a PBM?. Most of us have prescription cards that we use to fill prescriptions with a co-payment. PBMs provide a link between the pharmacy and your health insurance company, handling authorization, payments and paperwork. PBMs are usually paid a fixed fee per member per month by the insurance company. The PBM is at risk for the cost of providing the benefit. Therefore, PBMs usually decide which drugs to cover and which pharmacies should participate. Because high volume pharmacies are more efficient at purchasing pharmaceuticals and filling prescriptions, many PBMs have their own mail order pharmacies to fill prescriptions for maintenance drugs. Examples of partnerships include Merck-Medco/PAID Prescriptions, Express Scripts and Rite-Aid/PCS. We believe there is no obvious incentive to include the on-line, mail order pharmacies in their networks.
Effectively, PBMs control the prescription game. If you go to an online drugstore that is not connected (or in the network) of your PBM, you would need to pay cash and file a claim for repayment, a major inconvenience with a slim chance of a positive outcome. It is still not clear how the online start-ups will get around this challenge, although there may be a legal or regulatory case for open access. Still, we believe the online drugstores will have a big enough market opportunity to build big businesses. We will continue to monitor this evolving space looking for further strategic alliances and partnerships. For example, we wonder how Merck-Medco (which holds power not only as a leading pharmaceutical company but also as a leading PBM and mail order pharmacy) will address the online opportunity. In addition to the Web-based retail innovators and the land-based diversified giants like Walgreens, in this arena the PBMs and pharmaceutical companies are also significant players that can significantly affect who those eventual winners might be.<<
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