Health portals on the net are hot. Why isn't MDCM taking advantage of the situation to promote the company? There definitely is a lack of promotion ........ Dr Aita, what happened to the Electronic Records trade show that was supposed to take place in the state of Florida?
The temperature of OnHealth
One needs to look no farther than this week's initial public offering of
DrKoop.com (KOOP) to see that consumer health care portals are hot - red
hot. Shares of DrKoop.com jumped 80% on their first day of trading
Tuesday, closing at 16 7/16. After closing Friday at 15 7/8, DrKoop.com
now boasts a market cap of almost $438 million. Not bad for a Web site
that generated only $43,000 in revenue last year.
So does that mean former U.S. Surgeon General C. Everett Koop's name alone
is worth $438 million? Hardly. Internet investors seem transfixed by the
potential size of the online health care market - and don't think for a
minute that it's only neurotic day traders who are falling head over heels
for an online health care play like DrKoop.com.
The professional venture investor is also diving into this sector
headfirst. Even more telling than DrKoop.com's impressive IPO run-up is
the amount of money that venture capitalists have been pumping into online
health care in the past two weeks. Well known names like News Corp. (NWS),
E*Trade (EGRP), General Electric's (GE) GE Equity, Soros Fund Management
and Sequoia Capital have all made recent investments in the online health
care arena.
Why are venture capitalists so compelled to throw cash at the group?
Simple. The potential market size is staggering. Market research firm
Jupiter Communications estimates the online consumer health care market
will reach $1.7 billion by 2003. And it's a market that still has no
clear-cut leader like America Online (AOL) or Yahoo! (YHOO).
Investors, however, need to realize that DrKoop.com is hardly the first
consumer health portal to go public. OnHealth Network (ONHN) has had a
six-year head start on DrKoop.com, and DrKoop.com shareholders should take
a close look at the company's history. The online consumer health care
space hasn't always been as easy to crack as advertised. The market is
potentially huge, but there are also a significant number of ways to fall
off the path to cyberriches. Just ask the ousted original management team
at OnHealth.
OnHealth Network's murky past
The company was founded in 1991 as Interactive Ventures, a developer of
health and wellness information related CD-ROMs. In 1993 the company went
public, still generating all of its revenue from its CD-ROM business.
However, in 1996, with the CD-ROM industry collapsing, Interactive Ventures
announced a partnership with the Mayo Clinic to launch a health-related Web
site. The partnership was short lived as Interactive Ventures transferred
ownership of the site to Mayo and launched a competing health site called
OnHealth the following year. Clearly, Interactive Ventures was hoping the
Internet gold rush could turn its troubled company around. If only the
Internet was that easy.
Keep in mind that the company had still never turned a profit. For all its
Internet hoopla, Web-related revenue remained miniscule. Even worse, the
company had to swallow $1.5 million in expenses for the third quarter of
1997 that were related to two lawsuits involving Interactive Ventures. So
by the end of that year, the company again revamped its strategy, brought
in a new management team, and began to focus more attention on the Net.
The new strategy included the hiring of Robert Goodman, the former business
development manager at cable network MSNBC, as chief executive. Finally,
the company changed its name last year to OnHealth Network to reflect its
new focus.
So what does OnHealth.com offer today? It's actually very similar to
DrKoop.com. The consumer-oriented site features a variety of health
information, including health columns, a personal health tracking service,
audio interviews, medical research and discussion areas. OnHealth has
distribution and content-sharing relationships with sites like AOL's
Digital City, Yahoo's GeoCities, Microsoft's (MSFT) WebTV, Snap.com and
Disney's (DIS) GO Network. It's an impressive array of content partners
and distribution deals. If OnHealth could manage its finances half as well
as its content and distribution relationships, perhaps it would already be
one of the Street's Internet darlings.
OnHealth numbers
The financial situation for OnHealth still isn't pretty. By the end of
last year OnHealth's balance sheet was down to a little more than $2
million in cash and cash equivalents. In February, however, the company
completed a $14.3 million private placement led by a group of investors
that included the Van Wagoner Funds, bringing OnHealth's cash and cash
equivalents on hand to nearly $14 million at the end of March.
OnHealth burned through about $4 million in cash during the first quarter..
Applying that burn rate the second through fourth quarters suggests that
OnHealth will likely need to raise cash again through another private
placement near year's end. Another private placement would mean further
dilution for the company's existing shareholders.
OnHealth's revenue and bottom line are also faltering. The company
reported a first-quarter loss of $4.2 million, or 28 cents per share,
compared with a loss of $2.3 million, or 22 cents per share, a year ago.
An Internet company with increasing losses? Okay, we've seen that many
times before and it's not often a good sign, but it gets worse. Top line
revenue growth also slipped. The company reported revenue of $200,000 for
the latest quarter, down from $330,000 in the year-ago period. It's that
lack of top-line growth that has been the kiss of death for OnHealth.
Although widening losses are often acceptable in the name of “growing the
business,” top-line declines are cause for serious worry among Net
investors.
To be fair to OnHealth, the company's Web-related revenue is actually not
in decline. Remnants of its CD-ROM business still provided over half of
OnHealth's revenue last quarter. When the CD-ROM and Web site revenue are
separated from each other, total Web-related revenue actually jumped 21% in
the first quarter to $146,000, compared with $121,000 in the fourth quarter
of 1998. It's a laughably small revenue base to examine, but at least it's
growing. Every small victory counts when a company has a troubled past
like OnHealth. In addition, quarterly results reveal that gross margins
shot up from a negative 33% the first quarter of last year to a positive
85% in the first quarter of this year. It's hard to not like improving
margins if you are an OnHealth shareholder.
The real value
While increasing margins and revenue growth are positive signs, the true
value of OnHealth lies in its growing audience. I/Pro, OnHealth's
independent third-party auditor, reported 973,295 visits to OnHealth.com
last month, a 53% gain since the end of December. Although Internet
research firm Media Metrix pegs the site's traffic at a more conservative
410,000 unique visitors in March, the difference is likely caused by the
fact that OnHealth's I/Pro numbers mention "visits," not "unique visitors.."
To compromise, let's estimate that OnHealth's total eyeballs currently
number about 600,000.
Those 600,000 eyeballs represent OnHealth's most important asset. As
venture capitalists pour money into this space, they will fund online
drugstores and competing health care content sites that are desperate to
acquire eyeballs and customers to justify their bloated valuations.
OnHealth will likely find itself sucked into a larger health care portal or
e-commerce health care player like a drugstore.com or Healtheon (HLTH) in
the future.
The Doc Koop lovefest will likely continue in the coming weeks as Wall
Street analysts issue "buy" ratings on DrKoop.com. However, I believe
we're still more than a year away from seeing how the online consumer
health care market pans out. Leaders today could be also-rans tomorrow.
Perhaps OnHealth executives will hunt down C. Everett Koop in the meantime
and ask him if they can borrow the magic elixir he was feeding to Internet
investors this week.
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