An interesting read:
The health.net Industry –
The Convergence of Healthcare and The Internet
Internet
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January 8, 1999 (41 pp.)
Stephen M. Fitzgibbons
(415) 439-3458 stevef@hamquist.com
Richard Lee
(415) 439-3219 rlee@hamquist.com
Dow 30: 9643.32
S&P 500: 1275.09
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INTRODUCTION
A woman diagnosed with malignant melanoma consults three oncologists in her area for treatment options. Following a unanimous recommendation, she begins chemotherapy. The treatment is unsuccessful and the cancer spreads. All the time, she is unaware of an experimental immunotherapy that has helped 85% of patients in early tests.
A car accident victim is wheeled into the emergency room. Delirious with pain, the patient is injected with Demerol by a physician who is unaware that the patient is currently taking Nardil, an anti-depressant. The two drugs mix to create a near-lethal combination; the man suffers multiple seizures and his body temperature rises to 106 degrees.
A hospital administrator plans to purchase several million dollars of equipment to build a new imaging center. Referencing sales people and outdated catalogs, the administrator compares products and prices among regional distributors. Time constrained, he purchases the equipment, not realizing that broader comparisons could have saved him $900,000.
What do these three scenarios have in common? The simple answer is that they are all examples of costly mistakes that stem from incomplete information. Unfortunately, the U.S. healthcare system is plagued with information-related problems. Of the roughly $1 trillion spent on healthcare in the United States in 1998, an estimated $250 billion relates to the delivery of unnecessary or avoidable care, the performance of redundant tests, and the incurrence of excessive administrative costs. This statistic, however, only tells half the story. The intangible costs of poor information flow far outweigh the quantifiable inefficiencies. Unlike other industries, in healthcare, good information can mean the difference between life and death.
We believe the Internet will dramatically change how information flows and how people and organizations interact in healthcare. As an inexpensive and ubiquitous technology, the Internet will be used to streamline current processes, enhance the quality of care, and create entirely new ways of conducting business. Individual participants, such as patients and physicians, will benefit from the Internet's strength as an information source and a communications medium. Companies that successfully deploy Internet-based strategies will grow revenues and decrease costs at the expense of their less advanced competitors.
This report seeks to define the health.net industry. The health.net industry stands at the confluence of healthcare and the Internet; health.net companies are leveraging the growth of the Internet and capitalizing on huge opportunities in the changing world of healthcare. While companies from established industries, such as healthcare information technology (HIT), will deploy Web-based products and strategies, the primary focus of this report is on the emerging pure-play health.net companies. These companies are innovators and, in our opinion, will drive significant change in healthcare during the coming years. In doing so, successful companies will reap the rewards of progress, benefiting from rapid growth in customers, revenues, and eventually profits. While only a few health.net companies are publicly traded today, we believe several companies will pursue public offerings within the coming months. Accordingly, investors face an excellent opportunity to learn about the industry early and selectively invest in companies as they reach the public market.
REPORT HIGHLIGHTS
The Internet, as a low cost, ubiquitous, and flexible technology, is the fastest growing medium in history. Healthcare, the largest sector of the U.S. economy, is inefficient, fragmented, and suffers from poor information flow. We believe the Internet will dramatically change healthcare by enhancing communications, streamlining processes, and creating new business opportunities. Health.net companies, in our opinion, will be a driving force behind this change and reap the rewards of progress.
The three largest health.net revenue opportunities, in our opinion, are e-commerce, connectivity, and advertising/sponsorship. E-commerce, estimated to be in the hundreds of billions of dollars, represents the largest and most immediate opportunity. The connectivity market, estimated to be $10+ billion, will be penetrated more gradually. We estimate the current advertising/sponsorship opportunity to be in the hundreds of millions of dollars, although with huge potential upside.
We break the health.net industry into three segments: (1) content, community, and services (CCS); (2) connectivity and communications; and (3) e-commerce. Our methodology for placing individual companies within specific segments is based on core competencies and strategies, realizing that in many cases segments overlap.
The CCS companies generally focus on creating and aggregating content, building communities, offering value-added services, and facilitating e-commerce. Through internal development, partnerships, and acquisitions, these companies aim to create high quality content and services offerings, rapidly acquire customers, and build powerful brand names. Successful CCS business models will likely rely on multiple revenue streams, including advertising, sponsorship, subscription, e-commerce, and other service-related fees.
The connectivity players, consisting of HIT and emerging health.net companies, provide solutions to connect the various healthcare participants including providers, patients, payers, and suppliers. These companies will incrementally deploy Web technology in an effort to rapidly aggregate users on the front- and back-end of transactions. While we believe the opportunity is huge, and the work critical, the progress will likely come gradually as a number of hurdles need to be cleared.
The e-commerce companies are pursuing substantial opportunities in both the consumer and business markets. Consumer strategies are evolving around broad platforms, such as retail pharmacy, as well as niche markets, such as nutritional products. Business strategies vary widely, and in many cases, focus on developing online markets in which buyers and sellers can be matched, and procurement and fulfillment can be streamlined. We believe successful companies will share certain fundamental qualities such as an established brand name, superior customer service, a well-integrated content offering, and strong management.
The HIT companies are pursuing Web strategies that generally focus on two goals: Web-enabling existing product lines, and creating Web-based offerings with entirely new functionality, such as disease management applications and connectivity solutions. We look for many HIT companies to partner with the emerging health.net players.
Traditional valuation metrics based on profitability are not being applied to many Internet stocks. Health.net investors, for the time being, should focus on top-line growth, increasing traffic, and strong brand awareness.
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