1Mby1M Deal Radar 2010: HealthWarehouse.com, Cincinnati, Ohio

HealthWarehouse.com is an online pharmacy whose goal is to eliminate every possible layer of cost between drug manufacturers and consumers and pass those savings onto the consumer. It will soon be licensed in all 50 states (Maine is the last state to be licensed by the end of July) and is the fastest-growing and largest legal online pharmacy in the country. HealthWarehouse.com is one of only 20 pharmacies to be Verified Internet Pharmacy Practice Sites (VIPPS) certified in United States.

Based in Cincinnati, Ohio, HealthWarehouse.com was founded by Lalit Dhadphale in 2007. The idea for HealthWarehouse.com started out of a mistake. Dhadphale was an early investor in a company making generic pharmaceuticals in India. The investors had spent millions of dollars and three years getting the factory FDA approved. The company’s first prescription drug was generic Metformin, a common diabetes drug. At the start of the process, the cost of Metformin was 27 cents a tablet. By the time the company finished the product three years later, the price had collapsed to 1 cent a tablet. Since the cost was 2 cents a tablet, the company had to figure out how to sell it. Everyone realized that there were no online players that sold pharmaceuticals legally to consumers over the Internet. The only way to sell drugs in the United States was to contract with one of the big three wholesalers (McKesson, Cardinal, or Amerisource), but they had no interest in the product owing to the price collapse.

Dhadphale has been in Silicon Valley since the mid-1990s working for companies such as CNET and Excite. In 1999, he cofounded an ASP e-commerce company called Zengine, which the group took public and later sold. While the team had no prior experience with healthcare, it had extensive Internet and e-commerce experience. Its members were surprised at how little the Internet had made inroads in the healthcare and pharmaceutical space. This is what led them to believe there was an opportunity.

The value proposition to consumers is simple: cost, convenience, and customer service. In the United States, prescription drugs can be extremely expensive For example, Simvastatin for high cholesterol is $62 for 30 tablets at Walgreen’s (without insurance). A 90-day supply (90 tablets) at HealthWarehouse is $9.50. It is able to offer low prices by eliminating inefficiencies in procuring drugs and also because it does not operate thousands of brick-and-mortar locations – all prescriptions are filled in one location. Second is convenience: Prescriptions are delivered free, which can be especially useful to the elderly. Also, because HealthWarehouse’s prices are often cheaper than most co-pays, patients may be able to skip filling out insurance forms. Third, the company aims to provide friendly service. HealthWarehouse does accept more than 150 insurance plans.

The market for pharmaceuticals in the United States is $350 billion, and the worldwide market is $750 billion. There are 1 billion prescriptions written a year in the United States. Health Warehouse’s top segment is people on chronic medications (maintenance medications). These conditions include, diabetes, high cholesterol, blood pressure, and mental health. For younger women, this includes birth control as well. These people generally take the same medications year after year, making Internet mail-order convenient for them. For acute medications, a local pharmacy is obviously better since patients need them right away.

But for other medications, in terms of timing, HealthWarehouse feels it’s well positioned. There is an unprecedented $40 billion worth of brand-name drugs coming off patent in the next two years. Brick-and-mortar pharmacies have a high percentage of third-party payer sales (insurance or Medicare), which means lots of brand sales. Their revenues will be decreased significantly when a $10-billion drug like Lipitor goes to generic. There are not enough revenue dollars, says HealthWarehouse, in a generic drug to support the real estate and infrastructure of brick-and-mortar pharmacies. They will have to replace this revenue, and one obvious way to do this will be to raise prices on their generic drugs.

HealthWarehouse raised about $3.7 million thus far: a $9,000 seed round in August 2007; $1.2 million angel round in September 2008; another $1 million angel round in May 2009; and $1.5 million cash received from a reverse split with a public shell in May 2009. HealthWarehouse is a public company, so all revenue numbers are available in its filings under the symbol HEWA. In 2009, revenue was $3.8 million. In Q1 2010, the company did approximately $1.25 million in sales and reached breakeven for March. It is unable to share Q2 revenue since it has not yet announced results publicly.

HealthWarehouse went public at this revenue level for two reasons. First, it believed that the public markets would have a strong appetite for investing in the business: the business model could be seen as recession-proof given the high cost of co-pays and the fact that insurance companies can and do refuse to cover costs for many drugs; there are significant regulatory barriers owing to the abuse of selling drugs online (it took HealthWarehouse two years to get its licenses); and there is little competition. The two main competitors are Drugstore.com and MedStore.com, but MedStore.com does not accept insurance plans. Advertising is regulated, and finally, HealthWarehouse felt that investors wanted to see a clear monetization strategy.

The second reason for going public is that the company felt it needed to have the credibility of a public company to instill confidence in consumers. When prices are so low, it is not unexpected that consumers assume the drugs are, for example, impure drugs from China or obtained illegally.

In terms of financial engineering, HealthWarehouse feels that it has accomplished much already by taking a low-revenue company public. It raises capital only when it is necessary or for capital improvements and will continue to do so in the future. Dhadphale believes that the company has a strong foundation financially to execute on the business model, which is positioned well in terms of current macro trends in healthcare, finance, and the economy.

While the original business started with making the drug channel more efficient, HealthWarehouse looks to build a more comprehensive application. Dhadphale feels that the company has established the e-commerce part of its strategy and knows how it makes money. The next step will be to add content, community, and context to the equation. HealthWarehouse is beginning to put these pieces together to create a more comprehensive offering. It has already acquired content and is looking at potential acquisitions for community and Web 2.0 applications. It is also looking at a strategy to do monitoring online, especially for diabetics. This will increase the time spent on the site.

Dhadphale considers HealthWarehouse to be a long-term disruptive play in a space that has seen little change in decades. The team is looking forward to building the business for the long term and seeing where it goes.

Recommended Readings
Wal-Mart Aims at PBM Mail Profits (from Dr. Adam Fein’s DrugChannels blog)
Built To Enjoy: eClinicalWorks CEO Girish Navani
E-Commerce Gold Rush

This segment is a part in the series : 1Mby1M Deal Radar 2010