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Update: Drugstore.com soars 179 percent in IPO

Drugstore.com Inc. (Nasdaq: DSCM) closed up 32 1/4, or 179 percent, to 50 1/4 Wednesday after it priced its initial public offering at $18 a share Tuesday night.

The 5 million-shares were originally set for a price range of $9 to $11 a share.

No one can accuse Drugstore.com of not operating at Internet speed. The online drugstore, which first launched its store in February, hits Wall Street just five months after opening its doors.

But investors looking for their next IPO fix will gobble up shares of Drugstore.com.

Drugstore.com sells health, beauty, wellness, personal care and pharmacy products. Morgan Stanley Dean Witter is the lead underwriter.

For the quarter ending April 4, the company had sales of $652,000 and a loss of $10.2 million. For the quarter ending July 4, Drugstore.com reported sales of $3.5 million and a loss of $18.8 million. The company counted 168,000 customers as of July 4. And in one year, Drugstore.com jumped from three employees to 245.

Drugstore.com's initial public offering was expected to do well based on its high-profile partnerships with Rite-Aid and Amazon.com (Nasdaq: AMZN). Although Drugstore.com is well-known via its high-profile relationships, some of those partnerships could limit the company.

Amazon, which owns a 50 percent stake in Drugstore.com, can substantially limit Drugstore.com's moves. The Amazon agreement prohibits Drugstore.com from selling advertising to, linking its Web site to or promoting on its Web site any company that sells products or services to competitor Amazon. Considering Amazon's mission to be e-tailer to the masses, the partnership could become a burden if Amazon encroaches on Drugstore.com turf.

In June, GNC and Rite-Aid inked a 10-year pact where Drugstore.com will be the exclusive online retailer of Rite Aid and GNC products. GNC and Rite-Aid collectively own 33 percent of Drugstore.com.

The GNC is a straightforward marketing deal, but the Rite-Aid pact is more complicated. Drugstore.com didn't have much of a choice, but to align itself with Rite-Aid. According to Sheryl Skolnick, a health care analyst with BancBoston Robertson Stephens, Drugstore.com needed Rite-Aid's access to third party benefit payments. Online stores were not likely to get access to the back-end systems that allow benefit payments for subscriptions. The end result? Online players such as Drugstore.com have to partner with real-world counterparts such as pharmacy benefit management companies (PBMs).

Under the Rite-Aid deal, Drugstore.com users can order prescriptions and pick them up at a local Rite-Aid store.

Like the Amazon partnership, Drugstore.com's Rite-Aid deal could be limiting. Rite-Aid is supposed to advertise Drugstore.com, but the online retailer can't control the placement of the ads. Meanwhile, Drugstore.com can only promote Rite-Aid online.

Drugstore.com will also have to do more wheeling and dealing, according to regulatory filings. Drugstore.com said it expects pharmacy sales to "account for a significant percentage of our total sales." But sales will depend on the availability of reimbursement from third-party payors such as government health administration authorities, private health insurers, health maintenance organizations (HMOs), PBMs and other organizations.

The competition is also intense. Drugstore.com won't have a free ride while real-world drugstores fumble online opportunities. CVS recently acquired Soma.com and will battle Drugstore.com.

And the dance is just beginning.

"We anticipate these strategies will continue to evolve with more moves from various players expected over the coming months," said Skolnick in a recent report. "Given the size and importance of this consumer market segment, with solid growth anticipated as the population ages, we still believe there is sufficient room for multiple winning business models.">