PlanetRx.com: Moonshot IPO?

As a medical student at the University of Pennsylvania, Mike Bruner thought
there had to be a better way to allow for communications between
pharmacists, physicians and patients.

So, he created the first online pharmacy, known as
PlanetRx.com.
Oh, it was also an incredible e-commerce opportunity.

After all, the Web, with its convenience, privacy, wide product selection, immeasurable service and
educational resources, seems to be better than shopping at a traditional
brick-and-mortar drugstore (which is usually boring and embarrassing).

In light of this, Bruner did something very brilliant: he got a
first-round of financing from Benchmark Capital and Sequoia Capital.

Of course, these venture capital firms brought more to the table then just
money.

First of all, they helped to build a high-bandwidth management
team: William Razzouk, the CEO, has held executive-level positions with
AOL and FedEx; Steve Valenzuela, the VP of Finance, was the CFO of
LinkExchange; James Chong, the CTO, was the VP of Architecture and Planning
at Charles Schwab.

Next, PlanetRx.com signed marketing agreements with AOL, Women.com, Yahoo!
and Xoom.com. The company also signed a comprehensive agreement with Fox
Entertainment Group. In exchange for equity, Fox has agreed to provide
both cash and TV promotion.

Another strategy has been to purchase a variety of key domain names, so as
to create vertical sites. For example, PlanetRx.com has diabetes.com,
obesity.com and even depression.com.


Valuation

It is nearly impossible to place a valuation on the company. PlanetRx.com
is still in the formative stages — so it is of little help to use sales
multiples or customer metrics.

Perhaps the best way to value PlanetRx.com is to do a relative valuation,
that is, against its major rival, Drugstore.com (DSCM).
Currently, Drugstore.com has a market capitalization of $2.3 billion.

I would say that — when PlanetRx.com goes public — it will have a
valuation at a discount to Drugstore.com. Reasons include:

1. Brick-and-Mortar Partner: Critical to the success of the online
pharmacy category is selling prescription drugs.

However, this is no easy
feat, as about three-quarters of these purchases are paid by third-party
payors.

So, the way to capture this market is to team up with a
brick-and-mortar company that administers these plans, known as pharmacy
benefit managers (PBMs).

This is what Drugstore.com did when it had
Rite Aid (RAD)
invest in it. And this is what PlanetRx.com needs — and fast. This would
be a great thing to announce on the eve of its IPO.

Although, it will come at a steep price, as there are only a handful of
PBMs. For example, Rite Aid got a 25.3% equity stake in Drugstore.com for
a cash investment of a mere $7.6 million.

2. Amazon.com Partner: With its 10 million customers,
Amazon.com (AMZN)
has become the gorilla of e-commerce.

Of course, Amazon.com is using its
power to invade a myriad of vertical markets — which can be a nightmare for
competitors (there is, in fact, a verb for this: being “Amazoned”).

Instead of building an online pharmacy from scratch, which is a huge
undertaking, Amazon.com decided to partner with Drugstore.com, purchasing
a majority position.

Then again, there is no guarantee that Drugstore.com will be able to
effectively leverage this relationship. Perhaps Amazon.com may become
overextended and not be able to devote thenecessary resources to the
relationship. Consider that in July, while Drugstore.com had 1 million
unique visitors, PlanetRx.com had 1.1 million unique users.

Conclusion

But, even if PlanetRx.com sells at a discount of 30%, that gives the
company a cool valuation of $1.6 billion. In other words, it would still
be a red-hot IPO.
But an investment from a PBM would substantially close
the value gap.

The underwriter of PlanetRx.com is Goldman Sachs and the proposed ticker
symbol is PLRX.


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