Insurance Reimbursement Critical to Survival of Online Drugstores; Gomez Advisors Releases New Internet Drugstore Scorecard

Business Wire, August 26, 1999

LINCOLN, Mass.--(BUSINESS WIRE)--Aug. 26, 1999--

Gomez Advisors, the leading provider of e-commerce research and analysis, released the results of its new Internet Drugstore Scorecard Thursday.

Research found that the online drug market is expected to grow from $11 million in 1998 to $890 million in 2002, making it one of the fastest-growing e-commerce industries.

The overall winner for the Gomez Advisors Internet Drugstore Scorecard was Planet Rx, followed by Drugstore.com (Nasdaq:DSCM) and yourpharmacy.com. Gomez Advisors ranked these sites because they all demonstrated outstanding design and navigation, top-notch customer service and rich content including drug interaction checking and comprehensive health information. Rounding out the top five Scorecard sites were CVS.com (NYSE:CVS) and RxUniverse.com.

According to Gomez Advisors Senior Analyst Martin De Bono: "The competition is intense in the online drug market, with a few powerful bricks-and-mortar retailers like CVS and Rite Aid (NYSE:RAD) doing whatever it takes to compete. At the same time, Internet startups in this space are facing huge competitive hurdles, primarily their inability to cover prescriptions. Customers just won't buy from an online drugstore that won't reimburse them for their insurance-covered medication."

In order to cover prescriptions, drugstores must have relationships with pharmacy-benefits management companies (PBMs). PBMs represent more than 175 million people in the United States, 80 percent of the covered population. When people fill a prescription at a pharmacy covered by their PBM, they typically pay $5 or $10, but if they go outside the network they pay much more.

As competition has mounted between online and bricks-and-mortar pharmacies, Rite Aid -- owner of pharmacy benefits management company PCS -- and other large chains began maneuvering to have PBMs terminate their contracts with online retailers. As a result, online drugstores have been forced to partner with traditional pharmacy chains.

Amazon.com reportedly paid $40 million for a 25 percent stake in Drugstore.com, whereas Rite Aid Pharmacy recently paid just $7 million for the same 25 percent stake in the company.

According to De Bono: "This is a classic example of the leverage that bricks-and-mortar pharmacy chains have over their Internet competitors. Rite Aid provided Drugstore.com access to millions of insured customers which was crucial for the survival of Drugstore.com."

It is estimated that yourpharmacy.com (owned by PBM giant Express Scripts) has access to 100 million covered patients, CVS has access to 80 million and Drugstore.com has access to 50 million. "The real threat here is that the PBMs may all develop their own online drugstores and go head-to-head with the retailers who have traditionally been their partners," said De Bono. "That's exactly what is happening with yourpharmacy.com."

In a sign of the industry's potential, De Bono noted that neither Wal-Mart (NYSE:WMT) nor Walgreen (NYSE:WAG), pharmacy giants, have invested heavily in their online presence. "When Walgreen and Wal-Mart start putting serious resources and marketing dollars behind their e-commerce drugstores, the growth of the industry will be dramatic," he said.

Demographics are the leading indicators for the growth potential of the online drugstore industry. "Senior citizens and people over 55 are the largest consumers of pharmaceuticals, but right now only 12 percent of this age group is using the Internet," De Bono said. "As millions of e-commerce and technology-savvy baby-boomers grow older, they will become the driving force behind the growth of the online drugstore industry."

About Gomez Advisors

GomezPro is the professional services division of Gomez Advisors and features foremost industry experts offering detailed, proprietary research, tools and analysis for specific e-commerce industries. GomezPro provides analysis and projections of e-commerce trends, competitive analysis, and information on consumer behavior for companies that want to attract and retain Internet customers.

Gomez.com, at www.gomez.com, is the online leader in providing consumers with the latest e-commerce information and tools that promote informed online purchasing decisions. The Gomez.com site has grown into a premier online hub where consumers can evaluate online service and product providers through nationally recognized Internet Scorecards.

These Scorecards rank the performance and quality of online service offerings for selected industries including auctions, autos, banks, booksellers, brokers, drugstores, music, travel, videos and more.

Gomez.com, Gomez Advisors, Internet Scorecard, and GomezPro are trademarks of Gomez Advisors Inc. All other products and brand names are trademarks or registered trademarks of their owners.