Copyright 1999 The Buffalo News
The Buffalo News
May 2, 1999, Sunday, FINAL EDITION
SECTION: BUSINESS, Pg. 14B
LENGTH: 1320 words
HEADLINE:
ONLINE DRUGSTORES GIVING TRADITIONAL CHAINS A DOSE OF;
COMPETITION
BYLINE: DEBORAH COHEN; Bloomberg News
DATELINE: REDMOND, WASH.
BODY:
Janet Baker doesn't buy her birth-control pills at Walgreens
anymore.
She orders them from Drugstore.com for $ 2 less than the $ 19
she paid at the store, and without the hassle of traffic, parking and waiting in
line. "It was a no-brainer for me," said Ms. Baker, 39, an administrative
assistant who lives near Seattle.
Ms. Baker has discovered the online
drugstore, which is making traditional drug chains and their shareholders
nervous these days. A number of online start-ups, some with ties to established
Internet companies, are taking aim at Walgreen Co. and other drug retailers,
setting the stage for what may be one of the biggest and most controversial
battles yet in cyberspace. "The Internet competition is like a cold shower for
the drug chains," said Kate Delhagen, an analyst for Forrester Research Inc.,
which tracks electronic commerce. "It's forcing the industry to wake up."
The stakes are big. U.S. sales of drugs, vitamins and personal-care
products will reach $ 180 billion this year, estimates Mark Husson, a Merrill
Lynch analyst. That's almost five times the $ 38.5 billion in total sales
Forrester projects this year for books and music, two of the most successful
online categories.
Drugstore.com and other start-ups, including
Soma.com, PlanetRX Inc. and RX.com, are betting they can win over a lot of busy
bargain hunters like Ms. Baker. They say the convenience of buying online will
also help them tap the growing demand for health-care products from an aging
U.S. population.
The prescription business is especially appealing.
Surging sales to older consumers helped boost prescription sales 15 percent last
year to $ 102.5 billion, according to the National Association of Chain Drug
Stores. That makes prescriptions one of the fastest-growing parts of U.S.
retailing.
Online sales of drugs, vitamins and personal-care products
will soar to about $ 6.3 billion in five years from $ 213 million last year,
Forrester estimates. That would more than double the $ 3 billion in sales that
Forrester projects for online book sales in five years. Online book sales
totaled $ 630 million last year.
Drugstore stocks already have taken a
hit. The Standard & Poor's Retail Drug Store Index, which tracks the shares
of four big drug chains -- Walgreen, CVS Corp., Rite Aid Corp. and Longs Drug
Stores Corp. -- has dropped 19 percent since Feb. 24, while the S&P 500
Index has risen 8.7 percent.
The index's slide began with a 5.6 percent
decline on Feb. 25. That was the day after Drugstore.com opened for business and
Amazon.com Inc., the big online book seller, disclosed its 46 percent stake in
the Redmond, Wash., company.
Walgreen, the biggest U.S. drug chain, is
down 5.4 percent this year.
"The drugstores are out of favor," said
Jonathan Ziegler, a Salomon Smith Barney analyst. "It's just the whole Web being
out there."
Conversely, shares of Express Scripts Inc. soared 17 13/16,
or 24 percent, to 91 7/8 on March 30, when the St. Louis pharmacy benefits
manager said it would open Web sites to sell drugs and provide health
information in the second quarter.
Seattle-based Soma.com, which opened
in January, has links with Internet directory firms such as Yahoo Inc. to help
steer customers to its site. It uses advertising in some markets to skewer the
drug chains, mocking their alleged impersonal treatment, long lines and poorly
trained employees.
South San Francisco, Calif.-based PlanetRX, the
featured Internet drugstore on America Online Inc., the biggest online service,
opened in March. It plans to begin a national ad campaign this week. Austin,
Texas-based RX.com begins selling non-prescription drugs and health products
this week. Soma.com, PlanetRX, RX.com and Drugstore.com are all privately owned.
Companies that sell prescription drugs on line face issues not faced by
those that sell books and other consumer products, though. One is whether the
Internet sites will foster sales of prescription drugs to unauthorized users.
The Internet pharmacies say they're taking pains to prevent abuses.
Nonetheless, the concerns have prompted U.S. Rep. John Dingell, D-Michigan, to
ask the General Accounting Office for a formal review of the emerging industry.
"A host of serious regulatory concerns are indeed raised by online pharmacies,"
Dingell said in a letter to the GAO last month.
Some health-care
professionals also have misgivings. Misuse of drugs that aren't obtained
directly from a pharmacist "happens a lot," said Belinda Brown, a nurse who
treats AIDS patients at Chicago's Howard Brown Memorial Clinic.
"People
get them in the mail and they don't take them right," Ms. Brown said. She works
closely with a nearby Walgreens to ensure its pharmacists give her patients
ample guidance.
But Walgreen can't rely solely on people like Ms. Brown
to send it customers. It's beefing up its Internet site and by this fall will
have one that can "handle products and prescriptions any way people want them,"
said spokesman Michael Polzin.
No. 2 CVS and No. 3 Rite Aid are also
improving their Web sites.
For now, the chains' online sites do little
more than help users locate stores and order prescription refills that must be
picked up the old-fashioned way. Forrester's Delhagen calls the sites "archaic."
Most of the online companies, on the other hand, let users buy just
about anything sold in a drugstore, from fake fingernails to St. John's Wort.
Customers can also fill or refill prescriptions on line, after doctors submit
them by phone or fax. Soma.com says it can process 50,000 prescriptions a day.
Ms. Baker, the Drugstore.com customer, said logging on has the added
advantage of putting her a mouse click away from a wealth of health and product
information, including price comparisons, that she couldn't gather in a store.
The online drugstores also offer lower prices on many products. For
example, 100 Advil caplets cost $ 10.49 at a Chicago Walgreens recently,
compared with $ 8.49 on Drugstore.com. However, Drugstore.com adds $ 4.95 to
orders totaling less than $ 75 for mail delivery within three to five days.
Shipping is free for orders of more than $ 75 and prescription-only orders.
The biggest hurdle facing the online companies with no prior drug
business may be gaining the participation of pharmacy benefits managers, which
handle about 85 percent of all prescribed drugs sold to insured Americans.
These companies, including some owned by the drug chains, try to reduce
health insurers' costs by obtaining drugs more cheaply. The pharmacy benefits
managers also fill prescriptions directly by mail and have little motivation to
sign on with Internet competitors. Mail order accounted for 13 percent of
prescriptions sold last year.
Merck & Co.'s Merck-Medco Managed
Care, a major U.S. pharmacy benefits manager, has had "some discussions" about
hooking up with online drugstores but has no plans to do so, said Julie Mandell,
a Medco spokeswoman. It, like Express Scripts, is expanding its Internet
services.
Drugstore.com claims not to be worried. It says it has signed
on health plans representing 70 million people, or about half the insured U.S.
population.
In the end, the chains say, they will hold their ground by
playing up what they say is their big advantage: the personal service and
counsel of in-store pharmacists.
"Knowing there's a man in a white coat
who's going to talk to them" will remain a powerful attraction for many
consumers, especially those who need drugs right away, Merrill Lynch's Husson
agreed.
But the Internet pharmacies say the personal attention touted by
the chains is waning.
"Frankly, pharmacists are under a lot more
pressure" and have less time to spend with customers, said Peter Neupert, a
former Microsoft Corp. executive who is Drugstore.com's chief executive. "The
idealized notion of a community pharmacist is largely dead."
LOAD-DATE: May 4, 1999 
