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Can Net drugstores outpace the chains?

Drugstore.com enters the online pharmacy foray, but the competition will extend beyond the Internet as the big chains show their muscle.

Venture capital firm Kleiner Perkins Caufield & Byers hit a home run with Amazon.com, creating one of the biggest brands on the Internet, but it's a new inning as newcomer Drugstore.com comes to the plate.

The much-anticipated site went live this evening, and will formally launch tomorrow. But with competition from chain pharmacies moving onto the Internet and other online retailers, obtaining Amazon-like returns won't be easy.

"The Amazon versus Barnes & Noble battle will pale in comparison to this fight," Forrester Research analysts Evie Black Dykema and Kate Delhagen wrote in a January report. "We expect a brutal struggle for market share, as players race to lock in relationships before the brick-and-mortar guys arrive."

Several well-funded online drugstores are jockeying for position in this nascent market. Soma, founded by Tom Pigott, heir to a truck manufacturing fortune, is the only one now up and running. But PlanetRx, backed by Sequoia Capital, has Federal Express management muscle behind it in CEO Bill Razzouk, the former executive vice president of worldwide operations for the shipping company.

Drugstore.com itself has been the subject of pre-launch hype usually reserved for major offline players.

In some ways, the hype is deserved. The prescription drug market is huge--generating $102 billion in sales last year--and fragmented. Independent pharmacies are a dying breed, with just 26 percent market share, and mail-order services command only 13 percent. The chains, from Walgreens and CVS to mass retailers like Wal-Mart, dominate the market with about 61 percent of total sales in 1998, but none is offering online prescription fulfillment--yet.

Walgreens allows customers with existing prescriptions on file to order refills on its Web site, but they must go to a Walgreens store to pick it up. So far, Walgreens is filling about 600 prescriptions per day from its Web site, said Laurie Meyer, a company spokeswoman. Rite-Aid and CVS offer the same service. Safeway doesn't offer any pharmacy services on its Web site, and Wal-Mart only refills prescriptions by phone.

But the chains aren't asleep at the wheel, either. Walgreens, which has stores in 36 U.S. states, has created a new business development group to drive online distribution. "We will be a force on the Internet," said Meyer.

Rite-Aid and General Nutrition Center, the vitamin and supplements retailer, have plans to launch a joint Web site in October that already has a $9 million ad budget in place for the next three years. That amount is likely to increase if the two companies find online success.

But online success will surely come at the expense of brick-and-mortar stores. Although online sales for the chain stores barely exist now, the Internet's promise of growth can't be dismissed. "We don't have cannibalization issues to compromise what we do online," said Suzan DelBene, vice president of marketing at Drugstore.com.

Publicly, the chain stores claim not to be worried about Soma, Drugstore.com, and PlanetRx. Their brand awareness is firmly in place, they say, and once they're filling prescriptions online, consumers will be more comfortable getting their prescriptions from a store that has both a physical and an online presence.

But the online pharmacies represent more than a mild annoyance to the chains. Last month, Wal-Mart filed suit in Seattle against Drugstore.com, Amazon and Kleiner Perkins for allegedly stealing trade secrets after Amazon hired away several information system executives from Wal-Mart. Kleiner Perkins shared information gleaned about Wal-Mart's systems with Drugstore.com, the suit charged.

If Wal-Mart and its brethren are worried about losing a technology race, the online pharmacies say, they should also be worried about customers who feel little connection to chain-store pharmacists. Although the economics of managed care favor the high-volume, low-margin retailers, it has reduced pharmacists to mere pill counters with little time for the consumers they serve.

"We'll give people the ability to have more interaction with pharmacists like they used to have," said David Beirne, a partner at Benchmark Capital, one of PlanetRx's venture backers.

The online drugstore will give consumers unlimited access to pharmacists, either by phone or email. Once Drugstore.com is up and running, its pharmacists will answer consumer queries within 24 hours of receiving them, according to DelBene.

In addition to more time with pharmacists themselves, the online drugstores say they're empowering consumers with health information they can't get at the corner pharmacy. All three have promised databases chock full of information about everything from side effects to drug interaction results, as well as personalized attention such as refill reminders. "We're satisfying the needs not being met in chain drug stores," said Soma's Pigott.

The pitch is similar to that of Amazon, whose promise of a wide selection, low prices and quick delivery has taken book retailing by storm. But the prescription drug market is more complicated than that. In this highly regulated industry, about three-quarters of all prescriptions are paid for by a third party, such as health insurers. Establishing relationships with insurers is a must for the online drugstores.

Soma claims to have signed up 70 percent of the health plans in the United States, although Pigott admits the market is so fragmented that it's a difficult process. "There are thousands of plans out there," he said. PlanetRx and Drugstore.com aren't releasing any numbers yet, but DelBene said not all insurers are receptive to the new business model, particularly those with their own mail-order services.

The online pharmacies are also still working on obtaining permission to sell prescription drugs in all 50 states. So far, Soma ships prescriptions to 35 states, but that list doesn't include California, the most populous state in the country.

The online pharmacies aren't limited themselves to prescription drugs, however. The market for over-the-counter health products is worth about $30 billion annually, and they're going after that market as well. DelBene says without the real estate costs associated with brick-and-mortar stores, Drugstore.com will be able to stock a wider selection of goods than chain stores, and she's not opposed to keeping "250 types of Tylenol" on the shelves of the company's Texas warehouse.

Soma offers non-prescription products, but it's going for quality, not quantity, according to Pigott. "There's nothing magical about offering 25,000 SKUs," he said.

Perhaps not, but neither Drugstore.com nor PlanetRx is counting on magic to bring them customers. Drugstore.com's investment from Amazon brings it not only a link from Amazon's home page but other cross-promotions as well, not to mention a new board member in Jeff Bezos. And sources say Drugstore.com is holding talks with Healtheon, another Kleiner Perkins company, for a possible alliance.

Both Drugstore.com and PlanetRx have signed marketing deals with America Online that will put them front and center in America Online's health area. Although financial terms of the deal were not disclosed, other companies have paid multiple millions of dollars for similar agreements. Drugstore.com has also secured an agreement that will give it dominant placement on Excite.

Soma, on the other hand, has gone it alone--so far. The company is readying a national marketing campaign, just 30 percent of which will go toward Internet advertising. Pigott hopes that being the first out of the gate will give Soma an advantage not just over the chain stores but over his online competitors as well.

"It makes a tremendous difference when you're the first out and learning and growing every day," he said. But, he admits, on the Internet, getting a lead on the competition is increasingly difficult. "You have a matter of weeks, not months, for getting your name out there," he said.