Amid Layoffs, PlanetRx Projects Deeper Losses

Just days after announcing that it would lay off some 15 percent of its workforce, online drugstore, Inc. (Nasdaq: PLRX) disclosed that an expensive agreement with a pharmacy benefits manager will lead to lower revenue for the second quarter and the remainder of fiscal 2000.

Costs associated with an agreement with Express Scripts, Inc. (Nasdaq: ESRX) will result in lowered revenue of about $9 million (US$) for the quarter ending June 30th. Financial advisor Goldman, Sachs & Co. has been hired to help the company “explore various strategic and financial alternatives,” PlanetRx said.

Restructured Agreement

PlanetRx and Express Scripts said they restructured their agreement to eliminate PlanetRx’s $14.6 million annual payment, and to give PlanetRx the opportunity to offer private label and mail-order operations to Express Scripts.

The San Francisco, California-based PlanetRx said it expects a pro forma loss for the second quarter of 62 to 63 cents per share, which is 4 or 5 cents more than originally estimated. Pro forma results exclude a $4.3 million fee for restructuring the Express Scripts contract and other items.

PlanetRx sells prescription drugs, pharmacy items and health and beauty aids, and provides medical information online.

Express Scripts said that the restructuring will mean a second-quarter charge of about $145 million on its books, partly offset by a tax benefit of about $55 million that will cut earnings for the quarter by about $90 million for the company.

“Much of the intent of the original agreement is preserved in the restructured agreement,” said Express Scripts Chief Financial Officer George Paz. “Our first priority is to continue to serve our clients and their members who are using the online pharmacy.”

Relationship Intact

PlanetRx will remain the “preferred Internet pharmacy” for Express Scripts for five years, and Express Scripts will keep its 10.4 million PlanetRx common shares.

PlanetRx said it is working to restructure other marketing agreements to further reduce cash payments. The cost-cutting steps should reduce cash burn in the second half of the year by 45 to 50 percent, the company said.

“We are refining our strategic relationships and taking the necessary steps to transition to a business which focuses on healthy revenue growth,” said Chief Executive Officer Michael Beindorff.

Shares Fall

Company shares fell 1/8 to 1 7/8 in Tuesday morning trading. Adding to the company’s woes were downgrades by two brokerage firms: Analysts at Chase H&Q and Deutsche Bank lowered their ratings to “market perform.” PlanetRx traded at a high of 36 1/2 last October, and has been dropping ever since.

The company, like many other Internet retailers that went public last year, has been struggling to compete in an increasingly crowded field. PlanetRx competes with (Nasdaq: DSCM) — which sells its wares on as well as its own Web site — and with such click-and-mortar pharmacies as CVS and Rite Aid.

Yet the market is a growing one. Online sales of health and pharmacy-related items totaled $1.9 billion last year, according to research firm ActivMedia, which projects the market to grow to $4.5 billion this year.

Forrester Research expects prescription drugs to account for $15 billion of an expected $22 billion in online healthcare product sales by 2004.

PlanetRx said it added 250,000 new members during the first half of the second quarter, bringing the total to more than 1.1 million. It also gained about 110,000 new customers, for a total of about 510,000.

Second-quarter results will be released during the last week of July.

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