RealTime IT News

Another Big Branding Bet

The company had no revenues last year, and didn't even open a Web site until last February. But online health and beauty products retailer drugstore.com was bred for this day since its inception in April 1998.

Fueled by the buzz surrounding its declarative, branding-friendly domain name -- as well as backing from e-tailing giant Amazon.com, Silicon Valley VC firm Kleiner Perkins Caufield & Byers and underwriter Morgan Stanley Dean Witter -- drugstore.com's IPO rocketed off the launch pad Wednesday.

Shares of DSCM began trading early Wednesday afternoon at $65, before falling back to the mid-$50s. The company priced 5 million shares at $18 each on Tuesday.

Drugstore.com's strong debut should surprise no one, for it has put together all the essential elements for a successful Internet IPO - a ".com" name that screams out market leader and an A-list collection of financial supporters to tout the company's prospects.

Of course, it doesn't have much in the way of revenue. But that isn't necessary at this point to attract Internet investors, not if they're really eyeing two huge markets waiting for online companies to penetrate them: The $102 billion prescription drug market and the $60 billion combined market for over-the-counter health, beauty and wellness products.

And revenue shows signs of growing fast. From February to July 4, drugstore.com had $4.2 million in revenues (though it also had a slightly negative gross margin). Losses were heavy, though, as the company had spent $16.5 million in marketing and sales, accounting for more than half of the $31.3 million net loss through July 4.

To a great extent drugstore.com's fate is tied to Amazon.com's future. The online bookseller owns 26.8 percent of drugstore.com, and Amazon.com CEO Jeff Bezos sits on the board.

More important, drugstore.com has an exclusive agreement with Amazon.com that, according to an SEC filing, "prohibits us from selling advertising to, linking our Web site to or promoting on our Web site any company that sells products or services competitive with those which Amazon.com offers or which Amazon.com is preparing to produce or market."

That's a great advantage as long as Amazon.com is a category leader, but as the e-tail giant extends its reach into additional markets where its footprint may not be so heavy, this promotional deal looms as potentially restrictive for drugstore.com.

For now, though, the brand's the thing, and drugstore.com has the edge in that department over its two major online rivals, PlanetRx.com (which also is going public) and Soma.com.

While that's an important early battle to win, the real challenge comes when companies such as Wal-Mart -- which already processes prescription refill orders online -- step up the pressure.

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