Healthy Prognosis for Drugstore.com

Abstract

By aligning with the likes of Internet powerhouse Amazon.com and retail distribution leaders Rite Aid and General Nutrition Corp., Drugstore.com has not only overcome the obstacles, but has emerged as an early leader in the field. Some market observers are giving an early thumbs up to the company's 5 million share IPO.

Selling drugs and beauty aids over the Internet may seem like another dot.com smooth-sailing venture, but it was no fun for Drugstore.com (NNM:DSCM) to get pushed out of the HMO prescriptions market when several distribution heavyweights recently flexed their muscles.

Intent on potentially entering the online retail market themselves, several PBMs, pharmacy benefit management companies, the networks that control HMO drug plans, dealt their online colleagues a hefty blow.

But with a little help from some new- found friends, drugstore.com is fighting back and apparently has the inside track. By aligning with the likes of Internet powerhouse Amazon.com (NNM:AMZN) and retail distribution leaders Rite Aid (NYSE:RAD) and General Nutrition Corporation (NNM:GNCI), the online retailer not only overcame the obstacles, but has emerged as an early leader in this field.

"What they've done with Rite Aid is opened up some of the healthcare plans that they been barred from," said Mark Husson, analyst with Merril Lynch Global Securities. "Now they have not only PCS (Drugstore.com's online drug plan,) but also all the other plans Rite Aid has."

As such, some market observers are giving an early thumbs up to the company's 5 million share, Morgan Stanley Dean Witter-led initial public offering.

"As far as the partnerships that have emerged on the Internet, we think they are one of the strongest players," said Matthew Patsky, managing director at Adams, Harkness & Hill. "Rite Aid and GNC give them probably the broadest reach in getting product to people."

Bolstering drugstore.com's prospects is the fact that drugs, beauty aids and other self care items the company sells are not perishable and are a natural for e-commerce and for "continuity," ordering the same item every so often over the Net rather than standing on line. "The thing that's big, big opportunity is continuity across the board," said Patsky.

At the same time, customers are often reluctant to wait two days for a prescription to come in the mail. This is why lining up with Rite Aid and GNC is key.

"It is going to be very hard to develop an Internet pharmacy strategy that's not linked to bricks and mortar," said Patsky. "The drugstore.com management identified the distribution challenge very early on and addressed it with its partnership with Rite Aid and GNC while there are players who have not addressed the issue."

Several questions still linger, mainly whether Rite Aid's 50 million customers will take to online shopping. "There is some potential here," Husson said. "The question is whether enough consumers will want to switch from brick-and-mortar to make it a viable vehicle."