Drugstore.com reports profitable 2007 EBITDA for first time

NEW YORK Over-the-counter medicines, prestige beauty, contact lenses and a partnership with Rite Aid—which accounts for 24 percent of revenue—drove drugstore.com’s business EBITDA profitable for the first time last year, drugstore.com’s president, chairman and chief executive officer Dawn Lepore told analysts at the Jefferies fourth Annual Internet Conference held here Wednesday.

“We have an accelerating finanical 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 brick-and-mortar 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 do the marketing. They actually fill the prescriptions in their stores,” she said, and split the contribution margin with Rite Aid in those instances that a Rite Aid pharmacy customer refills a prescription online but designates a store for pick up. “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 topline 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 were a percentage of the OTC orders that were going out the door unprofitable,” Lepore said, prompting 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. Part of the challenges in making its Internet pharmacy profitable is two-fold. Medco Health, which commands approximately 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 participation. “Those are older customers who don’t tend to buy other products online, so that didn’t make sense for us.”

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 much more profitable business,” Lepore said, noting that drugstore.com has strong margin share among cash-paying prescription customers and customers for “lifestyle drugs,” drugs indicated for erectile dysfunction like Cialis or Viagra that aren’t typically covered by health insurance plans.

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