DRUGSTORES NEXT FOR INTERNET

The first big battles in online retailing were over books, music CDs
and videos.

The next major fight will be over something more fundamental to most
people: prescription drugs.

The opening salvo comes today when Drugstore.com -- funded in part by
a 40 percent stake from Amazon.com, the e-commerce powerhouse -- comes
online as the first major cyberspace pharmacy.

Drugstore.com will offer not only prescription drugs but also most of what
consumers would find in a Walgreen or Rite Aid: over-the-counter drugs,
cosmetics, vitamins, toothpaste and shampoo, all delivered to your door.

There will be plenty of competition for the market, worth $110 billion
a year in prescription drugs alone and larger than the sales of books,
CDs and videos combined.

Last month, Soma.com -- which focuses on filling prescriptions -- came
online. Within a month, Bay Area-based PlanetRx.com, with as much
high-powered backing as Drugstore.com and a relationship with America
Online, will open its cyber-doors. Later in the year, Rite Aid, one of
the biggest drugstore chains, will open a Web site with General
Nutrition Cos., the top vitamin retailer.

`Crowded space'

``There is lot of market to fight for . . . and there are a lot of
reasons that suggest it will lend itself to the Internet,'' said Ken
Cassar, an analyst with Jupiter Communications, which follows
e-commerce. ``That's the reason it's becoming a crowded space very,
very quickly.''

Analysts believe online drugstores will be a hit with
consumers.

``Unlike bookstores, where people like to go to shop, discover, get a
cup of coffee, no one likes browsing the Preparation H section of the
drugstore,'' said Peter Neupert, president and CEO of Drugstore.com,
during a Wednesday briefing at the offices of the venture capital firm
Kleiner Perkins Caulfield & Byers in Palo Alto.

``People are uncomfortable shopping for something that can be
sensitive like birth control pills, simply because they're not in a
private setting,'' added Bill Razzouk, CEO of South San
Francisco-based PlanetRx.com.

The pharmacy sites operate very much like a brick-and-mortar
drugstore. Consumers file their prescriptions electronically and then
the prescriptions are confirmed with doctors by phone. But instead of
having to wait for the prescription or pick it up later, consumers
have it shipped to them. Drugstore.com says the shipping cost will be
about $4.75 per order.

The sites are also offering customers the chance to ask licensed
pharmacists questions about their drugs, extensive editorial material
on health and wellness, and e-mail services that remind people when
it's time to refill their prescriptions.

Consumers will also be able to buy related products while they're
visiting the site.

At real-world pharmacies, noted Cassar, the prescription business
``doesn't ever need to make a profit although (it) does. . . . It's
there to drive sales of other products.''

Like prescription drugs, many of those products are what retailers
call ``replenishment items'' -- things that customers run out of and
have to restock. That's what keep customers coming back on a regular
basis.

Kinks to work out

For consumers, there are some limitations involved in online
prescriptions. And for the online sites, there are some hurdles.

For consumers, the biggest problem is that one can't simply walk in
and get a prescription filled immediately. The sites will offer fast
delivers, Razzouk said. For example, PlanetRx.com will guarantee
next-day delivery if the prescription is received by 7:30 Pacific Time
the night before. But even the fastest delivery won't help in some
cases.

``Online buying doesn't work for acute conditions that need to be
dealt with immediately,'' said Cassar. ``It does work for chronic
conditions where you're taking drugs on a long-term basis at regular
intervals.''

For the online retailers, the big problems are dealing with different
regulations in different states, and forging relationships with HMOs
and insurance companies, which pay for more than 80 percent of all
prescription drugs.

``It's not as simple a marketplace as books,'' said Stephen
Fitzgibbons, an analyst with Hambrecht & Quist Group who follows
health-care Internet companies. ``The disadvantage is that it takes
longer to establish yourself and make sure you have the proper
infrastructure. The advantage is that if you establish yourself as a
successful player, you benefit from higher barriers to entry.''

Right now, for example, Soma.com can deliver drugs in only 30 states.
Drugstore.com is licensed to deliver in only 20 but will be able to
deliver nationwide because its distributor is licensed in every state.

Drugstore.com has signed agreements with insurers who cover 70 million
people in the country. PlanetRx.com says it is making similar
progress. But Razzouk admitted that ``a lot of education is still
needed (with insurers) . . . although I think in about three or four
months, light bulbs will start going off.''

Traditional competition

And there are still the brick-and-mortar drugstore giants like
Wal-Mart, Rite Aid and Walgreen. Although only Rite Aid is poised to
go into the online marketplace, they are still a potent retail force.

Still, optimism about the potential of this online segment is
high.

``We see absolutely tremendous momentum building in this market,''
said Kate Delhagen, an analyst with Forrester Research. ``We think the
category is ripe for the picking.''

Mercury News Staff Writer Scott Herhold contributed to this
report.