Are Rite Aid's woes bad medicine for Drugstore.com?

Drugstore.com may suffer from Rite Aid's sale of pharmacy benefits manager PCS
Written by Margaret Kane, Contributor

Drugstore.com could be hurt by Wednesday's announcement that Rite Aid is selling its PCS Health System division to Advance Paradigm, according to regulatory filings.

PCS is a pharmacy benefits manager, a firm that administers prescription drug plans for consumers. Drugstore.cbsi.com had a ten year deal with Rite Aid and PCS that allowed it to take prescription orders online from their customers, for pickup either at the physical stores or through the mail.

Rite Aid, which is having major financial problems, sold PCS for nearly half of what it paid for it. PCS processes prescriptions for nearly 75 million customers. But Drugstore.com won't necessarily continue to have the same sort of access to them, the company said in Securities and Exchange Commission filings.

Drugstore.com did announce some good news Wednesday however, signing up the pharmacy benefits unit of WellPoint Health Networks, and getting access to its 22 million members.

But the PCS sale may become a larger issue. In Drugstore.com's annual report, the company said: "If Rite Aid sells a controlling interest in PCS to a third party, such third may not demonstrate the same level of commitment to our relationship with PCS as Rite Aid."

Striking a deal with the PBM firms is key for online drugstores. CVS has signed up Merck-Medco for its online unit, and PlanetRX has a deal with Express Scripts, although that deal has been scaled back somewhat.

Drugstore.com and Rite Aid haven't returned calls for comment. A Drugstore.com spokeswoman told the Wall Street Journal that the PCS deal can stand a change in control. According to company filings, Drugstore.com's agreements with Rite Aid and PCS can be terminated for breach prior to the ten year term.

While Rite Aid uses Drugstore.com as its exclusive online pharmacy, Advance Paradigm has its own online store, which also allows its members to order refills, and get the status of their orders.

If Advance Paradigm decides to ditch Drugstore.com in favor of its own site, that could mean big trouble for the e-commerce company.

According to Drugstore.com's most recent prospectus, filed 17 March, the company is relying heavily on Rite Aid's relationships with insurance companies and PBMs, including PCS, "to cover prescriptions processed by us".

"Sales billed through these relationships currently represent a significant percentage of our pharmacy sales," the documents state. A look at Drugstore.com's financials shows how important that is.

Revenue from pharmaceutical product sales jumped from $1.094m in the quarter ended 4 July, 1999 to $7.107m in the quarter ended 3 October, 1999. The company said the increase was primarily related to the commencement of the Rite Aid in-store pickup service for prescription refills.

Drugstore.com beat analysts expectations for the first quarter, losing $38.9m, or 86 cents per share, compared to expectations of $1.02, according to First Call.

And it recently signed a deal with Amazon.com that gives the uber-etailer 23.8 percent interest in the company and gives Drugstore.com the ability to sell through Amazon's site.

Take me to the e-commerce special.

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