Pharmacies to Compete on the Internet Soon
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.
