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Online drug ads dispense bitter pill

By Monica Soto Ouchi
Seattle Times technology reporter

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The Bellevue-based company urged Google, Yahoo! and others to accept ad money solely from Internet drugstores certified by the National Association of Boards of Pharmacy (NABP).

While drugstore.com's concerns were directed at shielding consumers from questionable practices, another equally compelling issue is at stake:

Rogue Internet pharmacies have helped change the economics of finding new customers online by aggressively bidding for preferred placement on Internet search engines. The cost to advertise in this manner has evolved into a situation that finds many legitimate online pharmacies — drugstore.com among them — all but priced out of the game.

"They're buying the ability to get to the top of the list," Forrester Research analyst Elizabeth Boehm said. "They're certainly changing the economics of it."

In the past year, paid search has emerged as an important source of revenue for the online advertising industry as companies have opted to bid for the right to be associated with specific key words, from "Nike" to "Italian leather."

When an Internet user types a key word into a search engine, it returns the results accompanied by sponsored links along the right-hand side of the page. In a practice similar to auction-style shopping sites, the highest bidder receives the best placement.

Type the hair-loss remedy "Propecia" into Google's Internet search engine, for instance, and the results are dominated by sponsored links from companies that offer "free doctor consultation" — often a code of sorts for sites that will administer an online prescription without a physical consultation. Many of these businesses are run out of one-room storefronts.

"These masses of companies that don't pay overhead to run a real business are spending instead on preferred placement," Forrester's Boehm said.

The NABP estimates that 150 to 200 of the 600 pharmacies online operate in what are deemed the gray and black markets: as businesses that either allow customers to fill out an online prescription — which is not illegal in all states, but frowned upon by national oversight boards — or ones that don't require a prescription at all.

Drugstore.com — one of the largest online pharmacies, with $175.2 million in sales for the first nine months of the year — won't buy many of the pharmacy key words because the prices "are not effective for us to do that," Chairman Peter Neupert said.

The right solution?

Faced with this situation, drugstore.com is pushing search engines to accept paid ads only from sites verified by the NABP's Verified Internet Pharmacy Practice Sites, or VIPPS, program.

The certification program was developed in the spring of 1999 to address the proliferation of shadowy Internet pharmacies. The rigorous audit process requires, among many things, that online pharmacies comply with the licensing and inspection requirements of every state in which it does business.

Boehm said that while VIPPS is an excellent program, it's also a cumbersome process that takes a fair amount of time and resources.

Just 14 businesses that sell pharmaceuticals online have been certified by VIPPS. Likewise, many large, legitimate pharmacies are missing from the list, including AARPPharmacy.com, a discount prescription-drug service operated on behalf of the venerable AARP.

Jeff Kimmell, drugstore.com's vice president of pharmacy, said it makes no sense why a legitimate pharmacy wouldn't go through the certification process. "My first thought is that I would disagree that the bar is too high," he said. "When you're dealing with patient safety, the bar can't be high enough."

But John Rector, senior counsel of the National Community Pharmacists Association, said a move to accept ads from only VIPPS-verified pharmacies might carry anticompetitive consequences.

His organization represents the owners of nearly 24,000 independently owned pharmacies that generate more than $67 billion in annual sales, some of which offer prescription ordering online without VIPPS certification.

Pharmacists, he said, should be required to carry a license in each state where they dispense prescription drugs "and let the sanctions and remedies flow from that."

Boehm also said VIPPS might not be the only answer. "There's certainly an opportunity for a level below VIPPS and above just-take-anybody," she said.

Benefits for a few

The titans of paid search, Google and Overture Services (owned by Yahoo!), have taken seemingly opposing stances on drugstore.com's request. Google said it would continue to accept ads from online pharmacies that require customers to provide a doctor's prescription or consultation before fulfilling orders. However, that includes online pharmacies that write prescriptions without physically seeing the patient, a practice frowned upon by national oversight boards.

Overture Services has said it is evaluating a third-party service to help it identify legitimate online pharmacies.

If search engines are reluctant to give up the business, it's because they make "easily in the millions of dollars of revenue," Neupert said, estimating that rogue and off-shore Internet pharmacies spend at least 10 percent of revenue on advertising directed to new customers.

Drugstore.com spent more than 10 percent of its revenue on such advertising. "That would make it a big business," he said.

Meanwhile, some observers have questioned what drugstore.com stands to gain.

Much of the company's success in the online pharmacy business has come from selling discounted lifestyle drugs to consumers, the same types of drugs often advertised by other online pharmacies that operate in the gray and black markets.

Neupert said it would be unfair to characterize the company's request as self-serving. The issue, he said, is not about cost, but safety and quality.

"Our interest is making the Internet safer for people to buy prescription drugs," he said. "A significant part of the market is this no-prescription-required baloney, and that market is just going to go away."

A bigger share

If so, Boehm said, drugstore.com stands to capture some of that market, whether its intentions are commercially motivated or not. "They're never going to capture all of (the traffic)," Boehm said. "But there's potential for reaching people who don't know that they're not dealing with a legitimate site."

Jeff Lanctot, vice president of media at Seattle-based online ad agency aQuantive, said the prices for each key word would drop if the number of companies competing for key words fell.

And vying for the top spot is key if you want to reach customers, he said.

"You can go 40 listings deep," he said. "But we know most consumers will only look at the first page of those listings and will respond, most typically, to the first listing. It's very intuitive."

Monica Soto Ouchi: 206-515-5632 or msoto@seattletimes.com

Copyright © 2003 The Seattle Times Company