Tech Industry

Are drugstore IPOs the cure?

Drugstore.com's high-flying public offering last week has left analysts questioning whether competitor PlanetRx has the clout to match it and whether Soma.com sold out too early to CVS.

Drugstore.com's high-flying public offering last week has left analysts questioning whether competitor PlanetRx has the clout to match it and whether Soma.com sold out too early to CVS.

On its first day of trading, Drugstore.com closed at 50.25, nearly three times its initial price of $18, giving the company a market valuation of some $2.13 billion.

However, today the company's stock dipped 9 points to 35.81 in afternoon trading.

Despite that fluctuation, the company gained some $90 million from its IPO. And PlanetRx, which has filed to raise up to $69 million in a public offering of its own, could soon see a similar windfall. Although several companies including eToys joined Drugstore.com with big public offerings in recent months, others including BarnesandNoble.com, have not fared as well. E-commerce giants such as Amazon.com and eBay also have watched their stock value plummet in recent weeks as investor confidence waned.

Financial analyst Chris Vroom of Thomas Weisel Partners said the potential size of the pharmacy market and the sense that the Web is a natural place to sell drugs makes the online companies attractive to investors. The prescription drug market reached $102 billion last year.

"There's clearly a great deal of enthusiasm regarding this space," Vroom said.

Argus Research analyst Alan Mak said that PlanetRx could benefit by going public soon after Drugstore.com's IPO. Despite the recent downturn in Internet stocks, Mak said Soma.com might have missed a big chance to raise a lot of money when it sold itself in May to CVS for $30 million in stock.

"[I think Soma.com] could have sold themselves for a lot more money than that," Mak said.

Mak said Drugstore.com's IPO success has much to do with its investors. Big name firms taking an equity stake in the company include Amazon.com, General Nutrition Centers, and premier venture capital firm Kleiner Perkins Caufield & Byers.

"What more could you ask for?" Mak said. "Soma.com doesn't have anything like that, nor does PlanetRx."

But Lauren Cooks Levitan, a financial analyst with BancBoston Robertson Stephens, said Soma.com lacked the ingredients necessary for a successful IPO. Levitan said Soma.com's only "claim to fame" was that its site launched first. She speculated that the company's deal with Soma may have been done out of necessity.

Soma.com representatives said hooking up with CVS will help strengthen the company in the long term.

"Nobody feels we're missing out on anything," said Mike Hartmann, vice president of marketing at Soma.com. "This is only the first chapter."

To succeed, all online pharmacies face hurdles. Vroom said PlanetRx will need to team up with a pharmacy benefit manager (PBM)--essentially a broker between the health insurance company and the pharmacies--to succeed in the space. If a pharmacy doesn't have access to PBMs, its customers have to pay full price for prescriptions instead of using their health insurance.

Before its public offering, Drugstore.com teamed up with Rite Aid, which provides access to the company's PBM. Meanwhile, Soma.com sold itself to CVS, the nation's largest pharmacy, which has relationships with a number of PBMs.

"Getting the PBM relationship is critical," Vroom said. "Certainly it has an impact on how investors see the opportunity."