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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