In the battle of online pharmacies, the combatants are finding that shelf space is as important as cyber space.
Shopping online for drugs is convenient and is especially attractive for a bashful consumer because it affords the privacy that the neighborhood pharmacy can't. These factors spurred the popularity of such stocks as drugstore.com and PlanetRx.com when they went public in mid-1999.
But the initial euphoria has faded, and these stocks now are trading at half the value of their early highs. Unlike selling books and CDs on the Web, operating a drugstore through the American health-care system is quite complex. The health care industry has so many asphyxiating layers, it would make a Victorian dress seem comfortable. In addition, insurance companies and health maintenance organizations (HMO's) that are part of this ensemble, are hell-bent on controlling claim costs.
The Middle Men
Complicating matters are pharmacy benefit managers(PBMs), who essentially act as go-betweens for pharmacists, doctors and insurers by overseeing health insurance claims and the distribution of drugs.
For instance, some HMO customers cannot buy from a drug dispenser such as Rite Aid if it is not affiliated with the PBM that the customer's HMO has ties to. The result is that the PBMs have a virtual stranglehold on the drug dispensing industry.
These factors altered the online drugstore landscape almost immediately. That's why CVS.com, a brick-and-mortar retailer with 4,100 stores but no online strategy, acquired stand-alone online drug retailer Soma.com for $30 million.
"Really, a bargain price for an Internet company, but then Soma.com didn't have access to a PBM and CVS did," said David Restrepo, an analyst at New York-based Jupiter Communications.
CVS has a relationship with the country's largest PBM, Merck-Medco. Drugstore.com, a former stand-alone, also succumbed and sold 25 percent of itself to Rite Aid. Rite Aid owns PCS, the second-largest PBM in the United States.
PlanetRx is still unattached to a brick-and-mortar retailer, but it did sell 20 percent of the company to America's number three PBM, Express Scripts, to have access to its customers.
The Brick-and-Mortar Solution
The prescription drugs market is currently $100 billion with acute-care drugs and chronic-care drugs at $50 billion each. The chronic care market includes 30-day prescriptions available at a retailer and 90-day prescriptions, all mail-order through PBMs. It is easier to imagine online drugstores gaining market share in the chronic care market - pre-prescribed drugs taken regularly - rather than the acute-care market, which needs immediacy.
Clearly, acute-care drug dispensing needs a brick-and-mortar solution, analysts said. In that area, sites such as drugstore.com and CVS.com that have relationships with physical stores, will have to come up with solutions akin to a Web grocer, or to something like Kozmo.com, and offer free delivery.
"CVS is trying to be a leader in this acute care market," said Maureen Stansic, an analyst at Cambridge, Mass.-based consulting firm Mainspring Communications. Stansic added that some doctors have signed up to a system called Metalogic that links CVS electronically to doctors' offices.
"They need a critical mass of doctors participating," Stansic said.
It is in the chronic care (30-day and 90-day) drugs segment that the customer acquisition battle will be fought. PBMs have about 24 percent of the chronic-care drugs segment through their mail-order business.
"The pie is big enough, and the online drugstores are competing in different ways for customer acquisition," Restrepo said.
CVS.com, for instance, offers cheaper prices online than in its store. Drugstore.com's major shareholder is Amazon.com, and this relationship helps attract customers at lower costs. PlanetRx.com is focusing on content and commerce. It's building 29 "communities" with separate domain names. Of those, 22 are disease-specific sites. The idea is that customers with these chronic illnesses will harness the site for content and mosey over to the commerce end of the site to fill and eventually reorder their prescriptions.
Close to 87 percent of the 3 billion prescriptions filled each year are for 30-days, and this sector is growing 16 percent a year.
"I see PBMs relinquishing some of their 30-day business, but not their 90-day mail-order business" Restrepo said.
Some Toothpaste with that Viagra?
One of the main issues for online drugstores is shipping costs, which erode their already thin margins on prescription drug sales. This is where the health and beauty aid category comes in. Prescriptions will be the driver, and once an online store can get a repeat customer, it will try to get them to also buy their shampoos and toothpaste.
"Health and beauty aids make a lot more sense on the Internet than in a store, as you can order any size of anything you want, without the store having to pay rent for shelf space" Stansic said. Drugstore.com enhanced its offerings recently with the acquisition of Beauty.com, which offers one of the largest selections of prestige cosmetics on the Internet.
The battle is heating up as these online stores are navigating and understanding the complexities of the health care system. The online consumer healthcare market is projected at $1.7 billion by 2003, according to Jupiter Communications.
"The truly successful in the next few years will be the one that has a great brick-and-mortar store and a great Web strategy," Brown said.