27 Sep 14:00
By Joelle Tessler
NEW YORK (Dow Jones)--As more and more shoppers make purchases on the Web,
more and more offline retail chains are facing the very real possibility of
being "Amazoned."
The original victim of this syndrome was Barnes & Noble Inc. (BKS), which was
caught off guard by the rise of by Amazon.com Inc. (AMZN) several years ago. The
latest high- profile victim, Toys R Us Inc. (TOY), is playing catch-up with
eToys Inc. (ETYS) ahead of this holiday season.
But the online drugstore business could be the one corner of e-commerce in
which the giant offline chains will play just as big a Web role as the Internet
start-ups.
As the online drugstore industry has started to take shape over the past nine
months, chains like Rite Aid Corp. (RAD), CVS Corp. (CVS) and Drug Emporium Inc.
(DEMP) are emerging as key players as they stake claims to the Web. At the same
time, several leading online upstarts, including Drugstore.com Inc. (DSCM) and
Soma.com, have decided to team with offline chains. Even though these companies
beat the offline chains onto the Net, they concluded they need such
relationships to be contenders.
Offline chains, after all, have relationships with the pharmacy benefit
managers - the middlemen that go between the drugstores and the insurance
companies and employers to handle prescription coverage. These relationships are
critical to attracting customers with insurance. And the chains have the retail
stores that are important when a customer needs cough syrup or an antibiotic
right away.
"In the pharmacy business, perhaps more than in any other e-commerce category,
the bricks-and-mortar merchants are a valuable, if not essential, component,"
said Jupiter Communications analyst Ken Cassar. "The offline players are
well-positioned to play a big role in this area."
Already, Rite Aid has pulled ahead of the pack through a partnership with
Drugstore.com, giving it a 25.3% stake in the Internet start-up and creating a
co-branded pharmacy available through both companies' Web sites. With financial
backing from Amazon, Drugstore.com is probably the most well-established of the
online upstarts.
CVS, too, stands to benefit from its Net move. CVS gained an instant Web
presence with the purchase in June of Soma.com, which in January became the
first Web company to launch an online pharmacy. Soma.com is now CVS.com.
Drug Emporium just relaunched its Web site, which offers prescriptions and
general merchandise. Duane Reade Inc. (DRD) and J.C. Penney Co.'s (JCP) Eckerd
chain also have launched sites. And Walgreen Co. (WAG) is starting to sell
prescriptions online and will start selling general merchandise this year.
Although online sales will account for a tiny piece of these companies'
overall businesses and are unlikely to move their stocks in the near term, these
chains could prove good long-term investments in the growth of e-commerce.
In the future, Cassar expects more partnerships between the offline and the
online players as well as more consolidation. Companies, like PlanetRx.com and
Rx.com, that haven't yet partnered with offline chains could be pushed into
alliances, added E*Offering analyst Caren Taylor. In the end, she believes, the
online drugstore market will shake out to a handful of major players.
Confronting A Complex Industry
The emergence of the giant offline chains on the Web comes as the online
players confront an industry that is far more complex than they bargained for.
When they first began to set up shop online, most online drugstores assumed that
they would be able to strike agreements with the pharmacy benefit managers, or
PBMs - which handle pharmacy claims processing and limit prescription costs for
insurance companies and HMOs - and that the PBMs would reimburse them for
prescriptions that they filled.
But the online drugstores discovered that the PBMs - companies like Merck &
Co.'s (MRK) Merck-Medco and Rite Aid's PCS Health Systems Inc. - viewed them as
competitors since many PBMs run their own mail-order prescription operations.
Some PBMs even launched their own Web sites, such as Express Scripts Inc.'s
(ESRX) yourPharmacy.com.
Reluctant to let the customers in their networks patronize online drugstores,
many PBMs refused to cover prescriptions filled by these companies. This became
a barrier for the online-only pharmacies since the PBMs control about 80% of
prescription coverage in the U.S., according to E*Offering's Taylor.
"Only a very small part of the market is cash-and- carry," said William Blair
analyst Mark Miller, referring to customers who cover their full prescriptions
costs. "The vast majority of people have (insurance) benefits.... The online
drugstores underestimated the power of the PBMs."
Offline chains, on the other hand, have established relationships with the
PBMs and are trying to extend those relationships to their Web operations. While
the issue is far from resolved, Wit Capital analyst Richard Lee noted that the
chains can use their offline operations as leverage in negotiating with the
PBMs. Walgreen, for one, expects that most of its current PBM reimbursement
relationships will extend to its Web site, said Jeff Rein, treasurer.
The online upstarts also underestimated the importance of having a retail
presence offline. While customers who buy books or CDs over the Web can wait for
their orders, patients who need medication don't always have that luxury.
Taylor estimates as much as 50% of all prescriptions are "acute" - meaning
that they need to be filled right away, something the online drugstores cannot
do even though many offer overnight delivery. "No one is going to wait ... for
Drugstore.com to ship penicillin for the baby," Cassar said. The same principle
applies for over-the-counter remedies like Pepto-Bismol and Alka-Seltzer.
This, too, gave the offline chains a major advantage since their customers can
use their Web sites to order "chronic" prescriptions like blood pressure
medication, but still have access to their real-world stores for immediate
needs. Already, Wall Street has coined a term for this business model: clicks
and mortar.
"Theoretically, you could never go to a bookstore again," said
Robinson-Humphrey analyst David Magee. "But retail stores are necessary in this
space."
But even for chronic prescriptions, offline chains with Web sites have an edge
over online-only players. That's because customers who order some prescriptions
online and pick up others in the store may still want to keep all their
prescriptions at the same pharmacy to guard against the dangers of mixing drugs
that should not be combined.
Also consider the chains' trusted reputations, huge customer bases and buying
power, and it isn't hard to see what pushed Drugstore.com and Soma.com into
their arms.
Under its agreement with Rite Aid, reached in June, Drugstore.com now has a
reimbursement relationship with Rite Aid's PBM unit, PCS Health Systems, giving
Drugstore.com access to PCS's 50 million members. Drugstore.com President and
Chief Executive Peter Neupert said the company also accepts co-pay cards from a
number of other PBMs, and expects to eventually accept all the same co-pay cards
that are accepted in Rite Aid's retail stores.
Likewise, Soma.com has reimbursement relationships with most major PBMs,
including CVS's own PharmaCare, which has about 8 million people in its network.
PlanetRx.com Inc., which has registered to go public, has also struck an
offline relationship - in its case with a big PBM. PlanetRx.com is selling a
19.9% stake to Express Scripts and taking over the assets of yourPharmacy.com,
giving it access to Express Scripts' 36 million members.
But PlanetRx.com needs reimbursement relationships with other PBMs to expand
its customer base. And it still lacks an offline retail presence.
Meanwhile, Rx.com, which is selling over-the-counter health-care products now
and will launch an automated online pharmacy in mid-October, is working with
second-tier PBMs and directly with managed-care companies, said Rx.com President
and Chief Executive Joe Rosson.
Rx.com expects to have reimbursement deals with about 10 PBMs and managed-care
companies covering over 32 million people at launch. It will also bid for
Medicaid contracts.
- Joelle Tessler, Dow Jones Newswires; 201-938-5285
(END) DOW JONES NEWS 09-27-99
02:00 PM |
