By BOB TEDESCHI
Want to Be an Online Drugstore? Take a Number.
nless you enjoy making small talk while holding a box of Preparation H, the checkout line of a pharmacy is probably
the last place you want to bump into your neighbor.
There is an obvious antidote: the online pharmacy -- with the caveat that consumers will have
to feel secure about the privacy of their medical information online.
It's bitter medicine either way, but given the recent spate of announcements about the launch
of online drugstores, there are a number of deep-pocketed people who believe the
pharmacist of the future will turn out to have an electronic heart. And with the well-known retail
drugstore giants increasing their online offerings, the battle for customers could make the
online bookstore competition look like a playground scuffle.
Indeed, for every dollar Americans spent on books last year, they spent four on prescription
and over-the-counter medications, industry executives estimate. The drugstore totals: $90
billion on prescriptions, $20 billion on over-the-counter health goods, $20 billion on personal
care items, $20 billion on vitamins and other "wellness" products, and $15 billion on beauty
aids and cosmetics.
With that kind of cash at stake, one might expect the Internet to be flush with full-service online pharmacies. Instead
there's just one: Soma, a Seattle-based startup launched in mid-January by Tom Pigott, a former Eagle Scout whose
family founded Paccar, the world's second-largest maker of heavy-duty trucks.
But Soma will have to share the road soon enough. Both PlanetRx and Drugstore.com have announced plans to launch
before the end of March, and both have solid venture capital backing and marketing agreements with the major Web
portals.
And then there are the traditional retail drugstores. Analysts say it is just a matter of time before Rite Aid, CVS and
Walgreens step up to the plate, if only to defend their market share.
To stave off the competition, the early Internet players are weaving together what they say is a potent combination of
content and product offerings. For instance, not only can Soma customers order prescriptions from among the 15,000
health-related products available on the site, but they can also scan health-related news, and they will soon have access
to a database of medications that will allow them to check for potential side effects. Customers can also call or e-mail
the site's pharmacists around the clock with questions or orders, and get e-mail reminders to help with medications. To
allay consumer fears, meanwhile, Soma pledges complete confidentiality, encrypts all transactions and stores
information on a secure server.
PlanetRx and Drugstore.com will offer roughly the same security assurances and similar
content, but their business plans are more ambitious. Both companies will offer up to
30,000 items for sale. "We don't think what Soma offers represents what the customers
want," said Peter Neupert, chief executive of Drugstore.com.
What they want, he said, is more -- more cosmetics and beauty items, for instance,
bringing the online drugstore experience closer to its off-line counterpart.
Analysts say more may not necessarily be better. "With so many products you have to
deal with a lot more suppliers, and that makes fulfillment more complicated," said Evie
Black Dykema, an online retail analyst with Forrester Research. "I wouldn't want the
person in charge of my prescription to be distracted because they have to worry about
getting my cosmetics order filled, too."
According to their executives, PlanetRx and Drugstore.com will not expose themselves to
that sort of risk. Neupert said Drugstore.com has set up two distribution warehouses, one
for non-prescription items and one for medications. Meanwhile, Bill Razzouk, chief
executive of Planet Rx, said the company's distribution warehouse is in Memphis, near a major FedEx hub and a
regional UPS operation.
One interesting aspect of this tripartite struggle is the difference in marketing. While Planet Rx and Drugstore.com have
pursued marketing deals with portals, Soma has not -- and not because it can't afford to, Pigott said. "Will a $15 million
deal with AOL give you a great return on investment? No one knows," he said.
Instead, Soma will pursue marketing agreements with "like-minded health sites" like Intelihealth, Pigott said, while
devoting 70 percent of the advertising budget to mass media.
Spurning the portals may not be so foolish after all, said Melissa Bane, an electronic commerce analyst with the Yankee
Group, a Boston-based consulting firm. "Is Yahoo the best place for a prescription company to advertise? Who knows? I
think it remains to be seen," she said.
It also remains to be seen just how big the Internet pharmaceutical market actually is. While insisting that Walgreens
"certainly intends to get our share of the Internet market," Michael Polzin, a company spokesman, played down the
potential for buying medications online, saying that it "probably totals $10 billion."
Noting that prescription orders are evenly split between re-fills and acute medications, "you probably wouldn't order
something over the Internet if you had a sick infant," he said, "so the overall market is immediately cut in half."
Then, Polzin said, "since 80 percent of prescriptions are paid for by insurance providers, there's the question as to
whether online retailers can get into the insurers' [reimbursement] networks" -- a crucial issue, since customers who
cannot get reimbursed will go elsewhere.
One obstacle is the fact that many health insurers hire outside firms to perform mail-order
subscription re-fills. Since online pharmacies essentially perform the same service as mail-order
companies, some insurers won't welcome the competition.
For instance, Jim Hook, director of pharmacy programs for Blue Cross and Blue Shield's Federal
Employee Program, which insures 3.7 million people, said the online pharmacies "seem very
close to what our mail service provider does," and that "our arrangement contains some
exclusivity, so we'd have to look at that."
The online drugstores say that since mail-order pharmacies control 10 to 15 percent of the market
-- and not all have exclusive agreements with insurers -- these services won't prevent Internet
ventures from succeeding.
"But it is a pain," said Neupert, of Drugstore.com. "There are lots of exclusive contracts out there."
"Our argument is that, one, this is a different channel, and two, it is in the consumer's best interest to give them choice,"
he said. "Will it take time? Perhaps. But will consumer demand matter, and influence what these companies do over
time? Absolutely."
Soma, meanwhile, says the company has signed on with 70 percent of insurers, and hopes to reach 85 to 90 percent;
PlanetRx said through a spokeswoman that it "will get 100 percent" of the insurers, by negotiating partnership deals with
the mail-order providers, if necessary.
Assuming that they do gain the favor of the insurance companies, who will be left standing in three years, once the
brick-and-mortar giants join the fight? The online executives and analysts agree that, ultimately, two or three companies
will lead the way.
That means one thing: a fairly brutal war, with a lot of promising companies beaten into submission. If it's any consolation
-- and it probably isn't -- the losers should at least be able to handle the pain.
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