CVS sees online as Rx for success

Summary:Plans to join the growing online competition with purchase of Soma.com.

CVS Corp. has decided to get into the online drug business, announcing today that it has purchased Soma.com in a $30 million deal.

Soma was the first online drugstore online, launching its store in January, but it’s not alone. Redmond, Wash.-based drugstore.com came online in February and San Francisco's PlanetRx in March. Express Scripts Inc. (Nasdaq: ESRX), a pharmacy benefits manager, will launch YourPharmacy.com at the end of this quarter.

The sudden popularity has caught the interest of other firms as well. Amazon.com (Nasdaq: AMZN) owns 40 percent of drugstore.com. And in January, America Online Inc. (NYSE: AOL)signed a three-year, $15 million marketing deal with PlanetRx.

But the entrance of CVS, the nation’s second-largest drug store chain, could change the playing field dramatically. The company had made tentative steps toward the online world, announcing its intention to sell vitamins and personal-care products online through its CVS.com site by the end of the quarter.

The Soma acquisition will allow it to step up those plans.

Complete online pharmacy
"The acquisition of Soma.com and its outstanding organization will accelerate the execution of our Internet strategy by immediately giving us an expanded online presence," CEO Tom Ryan said in a release. "This will give us a valuable head start and significant first-to-market advantages as the only major drugstore chain with a complete online pharmacy and front-store offering."

CVS said today that it will "significantly" expand Soma’s current stock of prescriptions and other products, and will also make its private label products and photo-processing services online as well.

The company also plans to offer personal health pages, health management programs and marketing programs to its online offerings.

The company has not yet decided on how far it will integrate the two brands, but Ryan said that it plans to leverage the CVS brand online.

"It will have the CVS name down the road, we're certainly going to leverage that. The question as to the full name will be decided," in teh next four to six weeks, Ryan said.

Integrating operations is a definite, however.

"Probably by late summer we will have an integrated program with e-commerce and the retail store systems combined, so a customer can order on the Internet and pick up in the store," he said.

While CVS is new to e-commerce, it does have a leg up on some of the pure-Internet drugstores -- its relationships with the pharmacy benefit manager networks, which handle prescription plans for insurance companies.

"When you or I go to CVS we pay our co-pay and the balance is picked up by whoever pays our prescription plan," said David Restrepo, health analyst at Jupiter Communications in New York. "But now if you go online you would have to pay the entire price out of pocket. As a subsidiary of CVS, Soma should have access to these PBNs."

Switching consumers over to online purchasing may also save the company money, Restrepo said.

"Ultimately its cheaper for CVS to fill prescription via mail, or the Internet, rather than through the store," he said. "In the long term they'd rather cannabalize themselves online then have someone else do it."

And by offering consumers both the online and offline option, the company can insure that it will be able to satisfy its customers, Ryan said.

"We can take care of the patient's needs for acute and chronic medication. A young mother has a child with an earache isn't going to go online and wait two to three days," he said. "We've asked CVS customers what their preference was [next day delivery, two to three day delivery, or picking it up in the stores] and the research we've done to date is overwhelmingly in favor of picking it up in the store or at least having that option."

Soma will operate as a subsidiary of CVS, reporting to CVS vice president of corporate development Larry Zigerelli. The company expects to complete the merger in June.

Topics: Amazon, E-Commerce, Health

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