Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Technology Stocks : eDrugstores: Drugstore.com, PlanetRx and Soma -- Ignore unavailable to you. Want to Upgrade?

To: Tom D who wrote (186)	8/4/1999 2:21:00 PM
From: Glenn D. Rudolph	Respond to of 254

Investment Highlights: * We are downgrading our near term recommendation on CVS (CVS/B-2-1-7/$49.38) to accumulate and Walgreens (WAG/A-3-1-7/$27.25) to neutral as we see a battle with PBMs ahead when these two retailers launch their sites later this month. * Standalone dot coms were foiled by the PBMs. In their place are coming the new larger integrated bricks and mortar dot coms, which are far more muscular. However, the PBMs seem ready for another fight. * The imminent launch of CVS.com (end of Aug) and Walgreen.com (Sep 1st) will precipitate a conflict with PBMs refusing to reimburse and retailers threatening to abandon PBMs pharmacy networks. * The crux of the conflict is PBMs see mail delivered internet prescriptions, even if they're only 30 day, as mail order and therefore as their exclusives. Retailers see it as a regular 30 day retail prescription that they deliver as a service to the consumer. * Although we suspect the major chain drugstores will be ultimately successful in negotiating their internet business into plans run by major PBMs, the near term uncertainty may take some time and some margin to resolve. * Retailer-owned dot coms can only succeed in quickly forcing the PBMs to accept internet scripts if all the major drugstore chains refuse to fill PBMs' prescriptions (who lock them out of internet business), without collusion between the retailers, something we think unlikely. * Ultimately the 30 day mail delivered internet prescription business is only a miniscule part of the very robust CVS and Walgreen business. However, we know that enthusiasm or concern about the internet elicits strong emotional reactions from all concerned and we foresee short term price turbulence while this channel confusion is sorted out, with or without bloodshed. * We believe CVS and Walgreen are more susceptible to negative market sentiment changes while these issues are ironed out. This is because they not only have much higher multiples than Rite Aid (RAD/C-3-2-7/$20.75) but because Rite Aid/ drugstore.com have access to a very large pool of captive business at PCS, something it can shut CVS and Walgreen out of. Fundamental Highlights: * The overall drugstore business is very strong for the major players and earnings growth, particularly at CVS, is magnificent. Comment United States Retailing/Food & Drug Chains 4 August 1999 Mark Husson First Vice President Sandhya Raju Assistant Vice President US Drug Retailers PBM Battle Looms In Dot Com Space Reason for Report: Industry Update Merrill Lynch & Co. Global Securities Research & Economics Group Global Fundamental Equity Research Department RC#30221605 Industr y