Copyright 1999 The New York Times Company
The New
York Times
September 22, 1999, Wednesday, Late Edition -
Final
SECTION: Section G; Page 62; Column
1; E-Commerce
LENGTH: 1359 words
HEADLINE: Drugstores Scramble to Find Choice Corners in
Cyberspace
BYLINE: By LISA
PREVOST; Lisa Prevost is a Connecticut writer who contributes to The
New York Times and The Boston Globe.
BODY:
NOW that
the big pharmacy chains seem to have built facing drugstores at every
intersection in America, the competition to sell aspirin, shampoo and
antibiotics is moving onto the Internet just as aggressively.
The idea
has a lot going for it. From a practical standpoint, drugstore products are easy
to ship. A pile of toiletries fits neatly in a relatively small package. And
even the fruitiest of shampoos are nonperishable. More important to customers,
on-line pharmacies can make it easier than ever to refill a prescription or shop
around for the best deal in over-the-counter remedies. At some sites, detailed
information about individual prescriptions and thousands of health care products
is only a click or two away.
The potential for persuading on-line
customers to add a host of other, more profitable items to their prescription
orders is so great that the market has grown crowded since the beginning of the
year. Drugstore.com grabbed the media spotlight early as a result of its 40
percent backing by the on-line bookseller Amazon.com About the same time,
Planetrx.com and Soma.com opened, sending the chain drugstores scrambling to
bring their Web sites up to speed.
But to get from here to there,
retailers have discovered they need the blessing of the pharmacy benefit
managers, the companies that manage prescription benefits for health insurance
plans. That blessing is slow in coming.
Pharmacy benefit managers
arrange networks of pharmacies to fill prescriptions for the plans they manage
and then reimburse the stores for prescription costs. Patients are more likely
to shop at network pharmacies, where they can be sure their co-payments will be
honored. So it behooves all pharmacies, on line and otherwise, to maintain
contracts with benefit managers.
On-line pharmacies are not being warmly
received in these networks because of a turf war over mail-order prescriptions.
The largest pharmacy benefit managers, Merck-Medico Managed Care, Express
Scripts and PCS Health Systems, have long held exclusive contracts with their
clients for 90-day mail-order business. Reluctant to give ground to new
competitors, some are aggressively moving ahead with their own on-line
pharmacies.
If the fierce battle between Amazon.com and
Barnesandnoble.com over the comparatively paltry $15 billion book market is any
indicator of what is ahead, the on-line drugstore wars should be fierce. The
pharmacy benefit managers' influence has already reshaped an industry that began
early this year as a few high-profile on-line pharmacy upstarts and is now a
complex array of independent ventures and strategic partnerships.
"Right
now there's a lot of push and shove," said Evie Black Dykema, an E-commerce
analyst for Forrester Research in Cambridge, Mass. "Everyone's staking out their
ground."
The territory is huge. According to the National Association of
Chain Drugstores, the retail drugstore industry is a $153.6 billion market.
Chains account for about 60 percent of prescription drug sales, which total
about $103 billion and are growing by about 10 percent a year, leading the
president of Drugstore.com, Peter Neupert, to observe gleefully, "That's $10
billion in revenue just in new prescriptions every year."
Drugstore.com
and Soma.com figured out quickly that they would need powerful allies to gain
access to that revenue. One week, Mr. Neupert was boasting of the superiority of
his on-line store to real drugstores, and the next he was announcing a
partnership with the Rite Aid chain.
That deal gave Drugstore.com access
to the 50 million customers served by PCS of Scottsdale, Ariz., the
second-largest pharmacy benefit manager and a subsidiary of the Rite Aid
Corporation, based in Camp Hill, Pa. Though Drugstore.com will remain an
independent pharmacy, Rite Aid and PCS will have access to its site to make
Internet sales.
Just before that deal was announced in June, the CVS
Corporation said that it was acquiring Soma.com for $30 million. As the
country's largest drugstore chain, CVS, based in Woonsocket, R.I., has 55
million prescription customers and about 9,000 insurance providers.
"We
see the Internet as a logical, natural extension of our focus on convenience and
value," said Larry Zigerelli, the executive vice president for corporate
development at CVS. "Our Internet customers may choose to have their
prescriptions mailed, or in the case of acute prescriptions, to pick them up
in-store."
While Mr. Zigerelli said that most pharmacy benefit managers
had already worked out a mail option with CVS, some of the largest are holding
out, choosing instead to carve out their own presence on line. Just last month,
Express Scripts announced that it was transferring its fledgling E-commerce
subsidiary, Yourpharmacy.com, to Planetrx Inc., which will become the exclusive
on-line pharmacy for Express Scripts' 36 million members. In return, Planetrx
will pay the company more than $11 million a year in fees.
Express
Scripts will continue to handle 90-day mail-order prescriptions, about 10
percent of its business, said Barrett Toan, the company's president and chief
executive. But Planetrx will fill 30-day mail-order prescriptions for Express
Scripts customers and try to sell them health and beauty products at the same
time.
Express Scripts customers who shop at other on-line pharmacies
will have to pay full price if they want their prescriptions shipped. However,
co-payments will be honored when they order prescriptions at a chain drugstore
Web site, like CVS.com, and pick them up at a store. That retail store business,
after all, is the lifeblood of the pharmacy benefit managers.
"Certain
products like antibiotics will always be the exclusive domain of the retail
pharmacy," Mr. Toan said. "We don't see that changing."
T he chains
agree with that perspective but carry it one step further, arguing that their
contracts with benefit managers extend to their on-line operations regardless of
whether the prescriptions they fill are picked up at the store or shipped. "The
90-day mail-order prescription -- that is business the P.B.M.'s have today and
that will remain," Mr. Zigerelli said. "The 30-day, 60-day, or sometimes even
20-day prescription -- that is business that we fill. We fully expect that all
of our on-line customers will be able to receive their prescriptions by mail if
they choose."
No one is sure how this will play out. But David Restrepo,
a health analyst at Jupiter Communications in New York, speculated that the
pharmacy-benefit managers would have to reach a compromise. Such an awareness is
hinted at in the contract between Drugstore.com and PCS, he noted. While
Drugstore.com will be the exclusive on-line vehicle for mail-order prescriptions
for PCS, the contract leaves the way open for PCS to fill 30-day prescriptions
for retailers who set up shop on the Internet.
As for whether on-line
pharmacies will supplant the corner drugstore, the National Association of Chain
Drugstores is reserving comment. "There's no good way to determine their impact
yet," said Phillip Schneider, the director of public affairs for the
association.
But Mr. Zigerelli does not expect much pain at CVS. He
expects on-line pharmacy sales to account for no more than 10 percent of the
industry's revenue over the next decade. And he said he expected the Internet to
open new territory for CVS stores west of the Mississippi.
Though many
people will begin to buy their prescriptions and toiletries without going near
their neighborhood pharmacy, partnerships between on-line and retail stores will
continue to be crucial for reasons that have nothing to do with co-payments. No
matter how many choices they have on line, some customers still will want to
talk to a pharmacist in person.
"The level of personal interaction is a
lot more important in this category than in, say, books and CD's," said Erik
Brynjolfsson, the co-director of the program on electronic commerce and
marketing at the Massachusetts Institute of Technology. "The on-line approach
can bring in some cost-effectiveness, but what they lack is face-to-face human
interaction."
http://www.nytimes.com
GRAPHIC:
Photos: . . . across from this CVS store has hit the Internet with full force,
producing a bevy of pharmacy sites. The brick-and-mortar competition that put
this Duane Reade drugstore in Manhattan . . . (Photographs by Ozier Muhammad/The
New York Times)
LOAD-DATE: September 22, 1999
