Copyright 1999 Times Mirror Company
Los Angeles
Times
February 20, 1999, Saturday, Home Edition
SECTION: Part A; Page 1; Metro Desk
LENGTH: 1386 words
HEADLINE:
PHARMACIES TO COMPETE ON THE INTERNET SOON
BYLINE:
JONATHAN GAW, TIMES STAFF WRITER
BODY:
The last holiday shopping season proved that people will click to buy books,
music and videos online. Now, in what's touted as the next big thing in
cyberspace, Internet-based pharmacies plan to take on the neighborhood
drugstores in the $ 102-billion U.S. market for prescription medications.
Three well-financed online-only pharmacies plan to open their virtual
doors by the end of next month. They are betting that consumers will overcome
their reservations and opt for the convenience, although not necessarily lower
prices, of ordering their prescriptions and other drugstore items online rather
than making a trip to the store.
Industry watchers said the Internet
pharmacies will have an initial advantage by bringing a fresh perspective to the
business and an understanding of how best to use technology in retailing. E-mail
reminders of when it is time to refill prescriptions, personalized stores based
on a customer's interests, and integration of medical information with the sale
of products, for example, may give online stores an edge. On the other hand,
because of the sensitive nature of medical information and the established
relationships between patients and their pharmacies, the online drugstores may
have an uphill battle.
"This is one industry that the established brick
and mortar brands may really have an advantage over a Web upstart," said Ken
Cassar, electronic commerce analyst with Jupiter Communications. "They have
existing relationships with doctors and patients and there are a lot of
ingrained habits with regards to both doctors and patients in the way
prescriptions are filled and refilled."
The online newcomers recognize
that convincing people to use the Internet to order items they will ingest poses
a significantly more difficult marketing challenge than selling books, but the
rapid maturation of the online sales medium gives them hope.
"At first,
it was perceived that people were worried about just buying online, putting
their credit card out there, never mind buying something to put in your mouth,"
said Stephanie Schear, a co-founder of PlanetRx Inc. in South San Francisco.
"Now, there's been a real tide change. People aren't as worried."
Also,
senior citizens, who make up a large percentage of prescription drug users, are
getting wired. More than 13 million people over the age of 50 use the Internet
in the United States, representing one out of six people online, according to a
survey by Charles Schwab Inc. and SeniorNet, a San Francisco organization that
helps adults with computers.
Mail Order Businesses Already Established
Although few people were used to receiving books in the mail before the
emergence of online commerce, consumers already order billions of dollars worth
of prescription drugs through the mail--$ 13.8 billion last year according to
the National Assn. of Chain Drugstores--primarily to attend to persistent
ailments such as diabetes and hypertension where medications have to be taken
regularly for years.
Pharmaceuticals share many qualities with other
categories that have been successful on the Internet. They are essentially
commodities, with one Zoloft pill being the same as any other, making it easy
for people to be comfortable buying them sight unseen; they can be easily stored
and shipped; and the market is relatively fragmented. They also have an
attractive price-to-weight ratio: The average Prozac prescription costs $ 225
and weighs 3 ounces, Schear said.
Not only is the amount of mail order
prescription drugs increasing, they also make up a greater proportion of the
market. In 1993, mail order accounted for less than one out of 10 prescriptions;
last year, it was nearly one out of seven.
The prescription drug
industry is growing faster than books, movies or music, with the industry nearly
doubling from 1993 to 1998, according to the trade group.
Although the
market may be more attractive, the barriers to entry for newcomers are higher,
too.
For starters, there are regulatory issues that distinguish
pharmaceuticals from other categories that have sold well online. Online
pharmacies will have to adhere to the same regulations as mail order pharmacies
and will handle prescriptions just as a mail order pharmacy would.
In
the case of Seattle-based Soma Corp., customers with new prescriptions have to
either fax or mail in the prescriptions from their doctors. A Soma pharmacist
then calls the doctor's office to verify the prescription.
For refill
prescriptions, a customer's records could be transferred from their current
pharmacy, either electronically or by mail, and Soma could fill the order
without the prescription in hand.
Like mail order pharmacies, online
pharmacies need to be licensed in every state to which they send prescription
drugs. None are licensed in California yet, according to the State Board of
Pharmacy.
Soma, the only one of the three online-only drugstores that
has launched so far, is licensed in 34 states and the District of Columbia.
"The most difficult aspect of this category, and the reason it took so
long to put this into place is because of all the legal and regulatory
requirements necessary to build a fully licensed pharmacy," said Tom Pigott,
president and founder of Soma.
One of the online pharmacies, Redmond,
Wash.-based Drugstore.com, which plans to open by the end of March, has
contracted with another company to fill the prescriptions. That other company is
licensed in all 50 states. Drugstore.com is working to become licensed, too, and
believes that it can send prescription drugs to all 50 states under its
arrangement, but California regulators are not sure.
"We're still trying
to get a handle on it. It's one of those gray areas," said Patty Harris,
executive officer of the California Board of Pharmacy. "My first impression is
that they have to be licensed as a pharmacy wherever they're advertising, and if
they're advertising in California they need to be licensed here."
Harris
said one of the state's concerns is that patients know whom to go to when they
have questions about the medication.
Of greater concern to regulators
have been online operations that sell drugs such as Viagra and Propecia to
people who have not seen a doctor. Some sites merely ask customers to fill out
an online questionnaire before selling them the drugs.
But the online
pharmacies are quick to distance themselves from those operations, saying that
they are not in the business of prescribing medications, only filling
prescriptions.
Another challenge for online operations are the existing
relationships between customers and their all-important health insurance
providers.
The vast majority of prescriptions are reimbursed by health
care organizations such as HMOs, and signing up the more than 1,500 third-party
providers can be daunting, particularly because several of the largest ones
either have mail order pharmaceutical operations of their own or exclusive
contracts with others.
"Most of the big fish with their own mail service
have been reticent to sign up," said Peter Neupert, chief executive of
Drugstore.com. "They've been interested in talking but not interested in
signing."
Without recognition from the HMOs, customers would be forced
to pay full price, making it unlikely that they would shop online.
Many
of California's largest health management companies, including Kaiser
Permanente, PacifiCare Health Systems and Aetna U.S. Healthcare, have their own
mail order prescription services and have not yet agreed to reimburse any of the
online drugstores.
Finally, while the market opportunity in
pharmaceuticals is larger, so are the competitors.
With a stock market
valuation of about $ 30 billion, Walgreen Co. is worth Amazon.com, EBay, Barnes
& Noble, Musicland Stores, CDnow and N2K combined. CVS Corp., Rite Aid
Corp., and American Stores Co., which owns Osco Drug and Sav-On Drugs, are worth
more than $ 10 billion each.
The experience of Barnes & Noble, which
has struggled to compete with Amazon.com in selling books online, has put
retailers of all kinds on notice of what could happen to their companies if they
let an Internet upstart establish themselves.
"Chief executives of large
brick and mortar companies don't want to be Amazoned," said Neupert.
LOAD-DATE: February 24, 1999 
