Drugstore.com turns a profit thanks to OTC/HBA offerings
NEW YORK drugstore.com achieve GAAP profitability for the first time in company history last year, drugstore.com’s president, chairman and chief executive officer Dawn Lepore told analysts at the Jefferies fourth Annual Internet Conference held here.—OTCs, prestige beauty, contact lenses and a partnership with Rite Aid—which accounts for 24 percent of its revenue—helped
“We have an accelerating financial model with expanding adjusted EBITDA and gross margins,” Lepore said. “And we are significantly growing our advertising and services revenue, which of course is important because that is 100-percent-margin revenue.”
Although the Rite Aid partnership, whereby drugstore.com serves as the No. 3 drug chain’s online entity, makes up almost a quarter of drugstore.com’s business, the Rite Aid business is only growing between 4 percent and 5 percent, Lepore reported. “It’s completely dependent on Rite Aid to grow it. They [Rite Aid] do the marketing. They [Rite Aid] actually fill the prescriptions in their stores,” she said, and split the contribution margin with drugstore.com. “It’s not a particularly strategic business, given that it’s not growing and it’s not something necessarily as high margin as something like OTC or beauty, but it is a good business,” Lepore said. The drugstore.com-Rite Aid online pact comes up for renewal in the middle of 2009, she said, “and we and Rite Aid will decide where to take that business going forward.”
The company began engineering its turnaround to a profit-generating online retailer in 2006, Lepore said. “Prior to 2006, our top line was growing significantly, but our adjusted EBITDA was declining. And we had to go through a fairly significant strategic shift,” she said. The OTC business, which makes up 53 percent of revenues for the click-and-order retailer, was identified as the chief driver for future growth, “but there was a percentage of the OTC orders that was going out the door unprofitable.” Lepore said that prompted the company to make internal changes within its supply chain to ensure that every order generated profit.
The company’s mail-order business, Rx Mail, which accounts for 11 percent of drugstore.com’s business, was also re-engineered for profitability. “Although it has been declining, it will grow starting in 2008, much more profitable,” Lepore noted. The challenge in making its Internet pharmacy profitable is twofold. Medco Health, which commands about 40 percent of the market, Lepore said, considers drugstore.com a competitor—and therefore drugstore.com is not included in the Medco plan—and a significant number of cash prescriptions have migrated north of the border. “There are probably about $1 billion of scripts that are filled in Canada,” she said. In addition, drugstore.com opted out of Medicare Part D. “Those are older customers who don’t tend to buy other products online, so that didn’t make sense for us,” Lepore said.
All of these factors have contributed to steep revenue decline for Rx Mail, Lepore said, “[but] we have now bottomed that out; that will be growing starting in 2008. [And] we’ve significantly expanded the contribution margin, so that’s now a more profitable business,” Lepore said, noting that drugstore.com has strong margin share among cash-paying prescription customers and customers for “lifestyle drugs,” such as erectile dysfunction drugs Cialis and Viagra, which aren’t typically covered by health insurance plans.