Research / Comparison to ONHN
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 Website. 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 theInternet 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 hasdistribution 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 $2million 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. |
