In its second-largest acquisition, Amazon buys the company for $970 million.
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The company does have a relationship with health benefits provider WellPoint and it gains broader access to third-party payers under an agreement it has had since 1999 with the RiteAid chain for customers to pick up and pay for prescriptions at RiteAid stores. Under the exclusive arrangement, Drugstore pays RiteAid for product ordered online but picked up in store at a contracted price.
But by dealing largely with prescriptions for which consumers pay out of pocket, Drugstore.com skips the paperwork and expense of coordinating reimbursement from third-party payers. Drugs not typically covered by health insurance include big sellers such as Propecia, Viagra, and various weight control drugs. While he won’t reveal how much they contribute to revenues, Mark Grey, Drugstore.com’s general manager of pharmacy, says so-called “lifestyle” drugs represent a good portion of the company’s Rx business.
Third-party payers call the shots on pricing the prescription drugs they cover by telling the drugstores how much they’ll reimburse them when they fill a scrip. That means retail pharmacies that deal with health insurers don’t really use price to compete for consumers-but Drugstore.com does. By bypassing health insurers and running a cash prescription business, Drugstore.com has been able to negotiate discounts in some cases as much as 65% less than prices in retail stores. Some of the discounts are for acknowledged loss leaders, but Drugstore also takes costs out of the system for consumers by how it handles and packages drugs. Recently, for example, the site promoted 90-day supplies of prescription hair-grower Propecia. More often, prescriptions are filled in 30-day supplies, but Grey points out that bundling a three-month supply into one shipment cuts two-thirds of the shipping, handling and processing costs on the back end.
“We haven’t actively marketed the Rx side of our business, yet our pharmacy continues to grow quarter by quarter by word of mouth,” Grey says. What the company does market heavily is its brand. The Amazon deal has helped drive significant sales of high-margin personal care items, says senior director of marketing Betsy Hawkanson. “High-end spa items like massagers and electric razors sold incredibly well around the holidays, and it was because a lot of people went to Amazon to buy gifts,” she says.
While front-of-store goods are a smaller portion of total sales at chains like Walgreen’s and CVS, they’re a key contributor to both revenues and strategy at Drugstore.com, where they account for as much as 50% of sales. “Our pharmacy and front of store play off each other in important ways,” adds Hawkanson. “When you get regular customers coming back to you every month, it’s a great opportunity to sell to them from the front of the store.” To make it easy for customers to return, Drugstore works hard to make the site sticky. For example, a “Your list” feature on the home page navigation bar captures in one location every purchase the shopper has ever made on the site, so he or she can call up the list and replenish any item with a few clicks. Leaving no stone unturned when it comes to driving re-orders, Drugstore also will e-mail the reminder list to registered customers as often as they wish.
Drugstore.com has yet to produce net profits, but its strategy drove Q1 revenues up 44% to $32.8 million this year over the first quarter of 2000, while its net loss for the quarter narrowed by 44% to $21.8 million. Some $378 million¯most of it equity financing¯has been invested inDrugstore.com. “The ballgame has changed over the past two years,” Grey says. “Before, we were trying to grow and stay ahead of the competition. Now we’re much more focused on trying to be profitable in our business and doing the smart things we probably should have done all along.”