Can Any Medicine Cure PlanetRx? - Company Business and Marketing

Industry Standard, The, Sept 18, 2000 by Karl Schoenberger

Culture clash, questionable deals and an entrenched health care industry have driven the online drugstore into trouble.

When William J. Razzouk took on the position of CEO at the upstart Internet pharmacy PlanetRx in the fall of 1998, he had his marching orders from major investors: Turn the company's modest efforts at selling online prescription drugs into a viable business that could compete for dominance on the Internet. And do it quickly.

Razzouk, a veteran logistics expert from FedEx -- a company known for planes that fly on time -- applied the same kind of discipline to the scrappy band of struggling entrepreneurs. But it soon became painfully clear that Razzouk's tough and regimented style was at odds with the informal culture of this Oakland, Calif., startup, according to a half-dozen current and former employees and individual investors.

Meanwhile, with Razzouk's executive team hell-bent on rushing to market and building a brand, executives cut costly and questionable deals. But they failed to execute a very important one -- an alliance with a brick-and-mortar prescription drug retailer.

Efforts to rescue the company began in April amid the tech-stock crash panic, when it announced a major retrenchment and layoffs of 70 employees. At the end of August the company said it would cut another 50 jobs and relocate its headquarters from South San Francisco, Calif., to its distribution center in Memphis, Tenn. By then, Razzouk was gone, and CFO Steve Valenzuela had resigned.

Today the company is hanging by a thread, bleeding scarce capital while its Nasdaq stock price has dropped below the dollar level. When the tide turned against business-to-consumer Internet commerce shares, the company was wounded more gravely than its online pharmacy rivals because it lacked an offline drug chain partner.

Perhaps most important, it had also failed to negotiate an advantageous deal at the real power core of the sector, the pharmacy benefit-management industry. The benefit managers control medical insurance contracts, thereby dominating the most profitable part of the prescription drug market. Could the troubles at PlanetRx mean that online prescription drugstores simply weren't meant to be?

So it wasn't all Bill Razzouk's fault, but he was replaced in April by Michael Beindorff, his second-in-command and an experienced marketing executive with a background at Visa USA and Coca-Cola. Razzouk retained the nominal title of chairman, but had stopped commuting to the Bay Area from his home base in Memphis before he completely severed his ties to the dot-com at the beginning of August to join the local venture capital firm Paradigm Capital Partners.

There's no question that Razzouk built a big company, even if it was shaky, within the span of one year. He pumped up an obscure Internet startup with a half-dozen employees into a major market contender with a workforce of 460 people - including a large staff of licensed pharmacists who manned a 24-hour operation at the company's state-of-the-art computerized distribution center. Problem was, too little attention was paid to business fundamentals, analysts say, and the rapid growth proved unsustainable.

Contacted by telephone at his home in Memphis, Razzouk, who is known to most outsiders for his courtly Southern manners, was dignified and polite. But he declined to comment on the allegations about his abrasive management style or the reasons for his leaving PlanetRx. "I don't think I have anything to apologize for. What we did in such a short period of time was incredible," says Razzouk, who at last count owned 2 million PlanetRx shares. "It's a terrific company. I don't have anything negative to say about anyone there?

The string of marketing agreements he rushed to negotiate with strategic partners did not seem careless then, Razzouk contends. He and his financial backers on the board of directors apparently were acting on blind faith that an unstoppable Internet boom would allow them to grow greater and greater revenues that would theoretically lead to profits and eventually justify the exorbitant costs of hyping the brand. Everyone else seemed to be playing that game -- including the money-burning juggernaut Amazon.com, a key partner to PlanetRx archrival Drugstore.com.

"If you look at the company in terms of the metrics of the time, it did what it said it was going to do, very successfully," says Razzouk, speaking with a hint of pride. "Now the rules have changed. I don't think a company can be criticized for doing what it told its investors and its customers it was going to do."

To understand PlanetRx's troubles, you need to dig deeper than the "Founding Story," located on its Web site. The story begins with a young medical student and his idea that patients would be better served if they could get help online managing their diseases and buy their prescription drugs on the Web instead of at drugstores. The student, Michael Bruner, was so excited about the possibilities he envisioned that he quit his studies at the University of Pennsylvania Medical School and moved to Northern California.