DrugMax
by
Bridget McCrea
Largo-based drug wholesaler doing well in the land of giants.
W
ILLIAM L. LAGAMBA LIKENS THE IDEAL DrugMax Inc. experience
to a grocery store visit: you go in for the low-priced milk
and eggs, but walk out with a cartload of the essentials
plus produce , meat and other higher- margin items.
"We
have the same philosophy," says LaGamba, DrugMax's president
and chief operating officer. "Customers are already buying
their Viagra and Celebrex from us and they're used to
ordering from us and know they'll get their orders the next
day so now it's time to start selling that shopping cart."
By
that, LaGamba means generic drugs which fetch much higher
margins for wholesalers like DrugMax than brand-name pharmaceuticals,
over-the-counter products, health and beauty care aids and
nutritional supplements. "That's where we as an industry
make more money," says LaGamba.
Since
it was founded in 1999, Largo-based DrugMax has been focused
on doing just that: making money. The 97-employee firm grew
from $21.1 million in revenues in 2000 to $177.7 million
last year. This year, it increased sales 52% to $271.3 million
for the fiscal year that ended March 31.
LaGamba
joined DrugMax in late-1999 when the company went public
and acquired Pittsburgh-based Becan Distributors Inc., a
niche wholesaler of pharmaceuticals he founded in 1997.
At the time, DrugMax had no revenues to speak of, says LaGamba,
and was more of a "concept company" that was selling nutritional
supplements via the Internet.
Today,
DrugMax serves the nation's independent and small regional
chain pharmacies, institutions, and alternate care facilities
from distribution centers Pennsylvania, Ohio, and Louisiana.
The company maintains an inventory excess of 20,000 SKU's
(stock-keeping units) from more than 500 pharmaceutical
manufacturers and companies, and is licensed to ship to
the 50 states and Puerto Rico.
In
keeping with its original concept, roughly 15 percent of
DrugMax's sales are made through the Internet. But LaGamba
says the company relies heavily on its inside sales force,
which can introduce the mom-and-pop pharmacies to DrugMax's
bread-and-butter: generic drugs.
"The
Internet helped us get across the country very quickly,
and that has really contributed to our growth," says LaGamba,
who adds that he continues to be amazed by customers who
enter orders on the Internet at 2 a.m. One of the disadvantages
of the Internet, he says, is that it's hard to convince
a customer buying Prilosec to consider an alternative without
someone explaining it to them.
"We
can't get that across on the Internet," says LaGamba, who
expects DrugMax's Internet sales to increase gradually over
the next few years. "Our inside salespeople continue to
be very successful at upselling and contributed significantly
to our growth and success.
Sometimes, the reps and the Internet work in tandem. In
fact, LaGamba says it is not unusual for a customer to check
out the DrugMaxWeb site for information, then call up a
salesperson to place an order all the while reading from
the Internet order sheet on their computer screens. "They
just didn't want to take the next step of pushing the button,"
LaGamba says.
In
the Land of Giants
DrugMax isn't alone in its quest to increase its generic
sales. Hoover's Online (Nasdaq: HOOV) an Internet business
news service lists the firm's top three competitors as
Amerisource-Bergen, Cardinal Health and McKesson. Combined,
LaGamba says DrugMax's three competitors reap about 80 percent
of the drug wholesale business, and do about $30 billion
each in sales each year.
Going
into an arena where a trio of $30 billion behemoths resides
each with unlimited resources has been a big challenge,
says LaGamba. Early on, he decided not to go head-to-head
with the gorillas but instead work in a sym-biotic fashion
with them. The average independent pharmacy buys about $100,000
of product each month, and $80,000 to $90,000 of that comes
from a single, primary supplier.
DrugMax
hasn't gone after that chunk. Instead it settles for the
remain-ing $10,000 to $20,000 a month allocat-ed to a secondary
supplier. "We go after that business, so our larger competitors
tend to tolerate' us, for lack of a better term," says
LaGamba. "It's a strategy that has allowed us to grow quite
nice-ly."
On
August 16, DrugMax stock closed at $1.90, down from a 52-week
high of $7.25 on Nov. 20, 2001. The day before, on August
15, DrugMax announced financial results for the first quarter
ending June 30, 2002, in which revenues were $63.1 million,
an 11 percent decrease from $70.9 million for the same quarter
last year. Gross profit, however, was about $2 million for
the same period a 10 percent increase over $1.8 million
last year.
LaGamba
attributes the profit increase (despite reduced quarterly
rev-enue) to the increased activity in the generic segment
of the market. That segment grew by nearly 30 percent over
the previous year's quarter, to $3.7 million compared with
$2.85 million for the same quarter last year.
In
the fiscal year ending March 31, DrugMax revenue was up
52.7 percent to $271.3 million, com-pared with revenue of
approximately $177.7 million in 2001. Profit was $2 million
for the year, up from a loss last year of $7.8 million.
A
Growing Segment
When DrugMax came on the scene in 1999, there were many
similar companies scrambling to set up shop on the Internet.
Today, most of those competitors are gone, mainly because
they were reluctant to carry inventory and instead were
operating as nothing more than drug brokers.
"We're
already ahead of the game as one of the only survivors in
that area," says LaGamba. "When we came out there were about
20 in the space, and most are gone because they didn't have
actual product. We, on the other hand, took possession of
the product and weren't just trying to broker a deal."
DrugMax
is also tapping a growing segment that consists of about
25,000 mom-and-pop pharmacies scattered across the country.
The Internet has been a key to aggregating that splintered
marketplace because, by its very nature, the DrugMax storefront
is immediately open everywhere. So, by using the Internet,
the scattered mom-and-pop pharmacy industry, can take advantage
of any discount pricing offered by DrugMax, simply by making
use of Internet ordering.
LaGamba
says that about 9,500 of those small stores use the DrugMax
Web site to place orders. It's a market that over the last
10 years has suffered at the hands of large, national drugstore
chains and discount retailers like Wal-Mart, but one that's
made a comeback over the last three years. DrugMax has a
handful of drugstore chains on its customer roster, but
not many.
To
further spur growth, DrugMax last year partnered with India-based
Moraine Laboratories Ltd. to form a joint venture company,
MorepenMax, which will provide low-cost generic pharmaceuticals
in the U.S.
MorepenMax
utilizes Morepen's ISO 9000 certified facilities, which
were already developing and manufacturing a vast range of
generic pharmaceuticals including Loratadine, a generic
form of Claritin (an antihistamine used to treat allergies).
DrugMax will market and distribute the generic drugs nationwide.
According
to LaGamba, the partnership is part of a five-year strategy
that will begin to take form over the next few months. The
partnership takes DrugMax's generic goals a step further
by giving the company a bigger stake in the development
and manufacturing process while keeping in place its established
sales and marketing components.
Analyst
Dave Lavigne of Denver-based Schneider Securities follows
DrugMax. He says the company's strategies have been good
so far, but he questions the firm's ability to make strategic
acquisitions or grow further without a substantial infusion
of capital. "The bad thing about DrugMax is that it doesn't
have a particularly liquid balance sheet, so its growth
will be constrained by its capital," says Lavigne. "For
the firm to grow substantially, it will need access to capital
to make acquisitions or expand its distribution channels."
LaGamba
acknowledges the criticism. It would need capital for DrugMax
to make strategic acquisitions. But no such injection of
capital is necessary for internal growth, he says. MR
