Pharmacy Integrates Medicine, Organic Products

Sign On San Diego / September 8, 2007

By Terri Somers
STAFF WRITER

In an era when it seems a Rite-Aid, Walgreens or CVS is popping up on almost every other corner, something unusual happened in La Jolla last week: A new pharmacy opened, and people seemed excited about it.

“This is a great store. I expect to be sending many of my patients here,” chiropractor Michael Ackerman said during the grand opening Thursday of Pharmaca Integrated Pharmacy on Girard.

Ackerman, whose profession focuses increasingly on good nutrition in conjunction with spine health, said he visited a Pharmaca in Oregon and returned to San Diego raving about the store.

Walking through the door at Pharmaca, a whiff of botanicals and flattering lighting are the first indications that this is not the typical big-box pharmacy to which Americans have grown accustomed.

There are no pantyhose, DVDs or frozen food. Instead, there are smooth tan shelves fashioned from recycled wood products brimming with luxury-brand organic health and beauty products. The gray carpeting is made from recycled milk containers. The soothing paint colors on the wall are environmentally friendly.

A nutritionist, an herbalist and a homeopathic practitioner roam the floor, offering to help find the right organic skin care product to comfort sun-weary skin, an herbal supplement to ward off illness, or vitamins to compensate for those depleted by the prescription medicine customers come to get refilled.

In the back of the 4,500-square-foot store, pharmacist Chris Jeff Crutchfield wants to talk about prescriptions and how they might interact with herbs. Or he can inform which vitamins heart medications deplete and introduce the nutritionist, who can recommend the best vitamin products.

At least, that's the goal at Pharmaca, said Barry Perzow, founder and chief executive of the Boulder, Colo.-based chain.

“Pharmaca is trying to do something different, more of an East meets West kind of pharmacy,” he said. “It's a pharmacy that has been developed with prevention in mind, as opposed to just treating disease by filling prescriptions. We want to educate customers on how not to get sick.”

The La Jolla store's opening is the chain's 17th since it was founded six years ago. Perzow projected $75 million to $100 million in revenue for all stores combined this year. Perzow, who has worked in retail for more than 25 years, previously started a chain of natural food stores called Capers, which were based in Vancouver, British Columbia. He “struggled and starved” in the 1980s, when few people were worrying about organic products. But his fortunes changed when an increasing number of consumers started to look for alternative foods and products that were not exposed to harmful chemicals.

Through the years, the health and beauty segment of the organic market became the fastest growing, Perzow said. He theorized that if those products sold so well in an understaffed supermarket business model, they might fare even better in an environment where trained and certified professionals such as nutritionists and homeopathic practitioners could help educate customers.

After Wild Oats bought his company, Perzow had time to pursue that idea.

His business model, he said, is based on the European pharmacy, where holistic medicine is primarily the focus of the storefront, and prescription medicine, a later option, is in the back.

“First of all the Europeans have a better health care. They're not as sick as Americans,” Perzow said. “But holistic and preventive medicine is their first choice, not prescription drugs.”

The nonprescription part of holistic health care is also a profit driver.

In traditional pharmacy models, the prescription business is 75 percent of revenue. But the profit margin on prescription drugs is low, at least for the pharmacy, because it's driven by third-party payers, Perzow said. These pharmacies do a good business by churning out a high volume of prescriptions, he said.

Meanwhile, in the front of the store, where pharmacies make 25 percent of their revenue, they sell lots of merchandise with a higher profit margin. And they offer the soda, chips, liquor, batteries and other merchandise to pull consumers into the store. A typical Walgreens has 25,000 to 30,000 items for sale.

Pharmaca sells only 12,000 items.

Under the Pharmaca business model, 60 percent of revenue is driven by the 6,000 to 8,000 pieces of merchandise in the front of the store, which demand a higher profit margin. For instance, there's a colorful display in La Jolla of $7-a-bar organic soap, infused with fragrant botanical oils and petals.

There are some mainstream products that are not all natural, such as Pantene and Dove shampoos and conditioners. But they are placed on the bottom shelf. Above them are the organic hair care lines such as ShiKai and Giovanni, and spa skin car lines such as Astara and Jurlique, to which the staff try to steer customers.

Of the 40 percent of the revenue generated by the pharmaceutical offerings in the back of the store, prescription compounding is 25 percent.

And Pharmaca markets that compounding as another feature that sets it apart from the large chain pharmacies. Compounding involves the pharmacist's custom making a drug, perhaps tweaking the dosage, or putting a drug in a topical solution rather than a capsule or liquid form.

“Forty years ago, compound was all there was,” Perzow said.

But very few large pharmacies have the space or time for compounding now, he said.

However, the public is starting to recognize that when it comes to drugs, one size does not fit all, he said. People come in different sizes and have different tolerance levels, food allergies and abilities to swallow pills. Compounding allows the pharmacist to work with the customer and his or her doctor to tailor a prescription – even if the medication is for someone's pet.

Tired, frustrated and bloody from trying to get a cat to swallow a pill? Pharmaca boasts that its pharmacist can work with the veterinarian to formulate a topical solution to administer to the inside of Fluffy's ear.

But the big and growing demand for compounding is fueled by the hormone replacement market, Perzow said.
Pharmaca is not alone in San Diego in looking to serve that market.

In Banker's Hill, University Compounding Pharmacy has a 20-year-old business providing compounding services and is considered one of the largest, if not the largest, in the state.

University Compounding Pharmacy deals with a network of more than 1,000 physicians, owner John Grasala said. Its work is heavy in the hormone replacement area, and the company's eight pharmacists also compound prescriptions of drugs that drug makers have discontinued, often because the mass market isn't large enough.

Grasala said he doesn't consider Pharmaca to be a major competitor, because it does not have his established network of physicians, who refer their patients to University.

Pharmaca thinks its competitive edge is its staffing.

“What's really important here is having extremely knowledgeable people on your sales floor,” said Pharmaca board member Tom Stemberg, of Highland Capital Partners in Boston.

“In many cases, the manufacturers of product lines sold in Pharmaca will not sell in other retail channels because they don't see the kind of professionalism they see at Pharmaca. It's the superior customer experience that gets the customers coming back again and again,” said Stemberg, who founded Staples.

Among the many customers milling about the store on its opening day was Renata Herbst, who lives and works in La Jolla.

“I like to be able to walk everywhere,” Herbst said as she surveyed the luxury skin-care lines and picked up the Dr. Hauschka brand face lotion. “This is a brand that I'm familiar with from Germany, where I'm from,” she said.

A few feet away, an aesthetician applied organic cosmetics to the face of a well-dressed middle-age woman.

Pharmaca is doing what it can to beef up male interest with a virility line of offerings. And special events that include educational workshops and product demonstrations and sampling aim to broaden the customer base, Perzow said.
Pharmaca carefully selects the geographic markets for its stores. The average income must be at least $100,000 and at least 50 percent of the population must have a college education.

Locations that Perzow has identified include Portland, Ore.; Seattle; Santa Fe, N.M.; Boulder, Colo.; and Los Angeles. Point Loma is on the chain's list of future San Diego sites, he said.

Pharmaca has had “consistent double-digit revenue growth in the last six years,” Perzow said. And new stores see 25 percent to 40 percent revenue growth annually, he said.

Privately owned, the company has reportedly attracted more than $70 million in investment, including $18 million from Highland Capital Partners. Perzow said his goal is 150 stores in five years.

Retail industry analyst George Whalin is skeptical about that goal.

“There's no question that natural and organics is a growing business that is quickly spreading across the country,” he said. “But 150 stores in five years? Whole Foods didn't get there.”

For investors and employees, who also get shares in the company, the ultimate goal is an initial public offering.

“I think all of us would like to think that someday we could be a big public company, but we've got a long way to go to get from here to there,” said Stemberg, managing general partner at Highland Capital Partners.

“We've got to build up our market presence in the markets throughout the western United States. . . . You really only get efficient and profitable once you get multiple stores in a marketplace.”

Terri Somers: (619) 293-2028; terri.somers@uniontrib.com

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