|
|
|
| Healthcare Corporate Finance News | |
 |
Market Intelligence on Health Care Venture Capital, M&A, Private Equity, and IPOs |
 |
|
|
Home | Publications | Resource Center | Database | Free Trials | Conference | Order | Senior Care Blog | Search | Contact Us 1-800-248-1668 |
|
|
|
|
May 2004 issue E-Health: Trying to Make a Come-Back
With Some Presidential Prodding Read the past headlines. |
E-Health: Trying to Make a Come-Back
With Some Presidential Prodding At the turn of the millennium, e-health was a hot topic—on Wall Street, in the health care arena, with consumers who suddenly had a wealth of information at their fingertips and even in the health care newsletter business. The three C’s, content, connectivity and commerce, were supposed to take the concept of e-health, as well as equity valuations, to new heights. New heights were reached, but they were short-lived. As high-flying stocks began to plummet, and in some cases disappear altogether, what was not known was whether it was a case of the baby being thrown out with the bath water, or whether the concept got way ahead of itself. Perhaps it was a little bit of both. Who can forget the reckless spending of companies such as Sick-Bay Health Media at the overcrowded E-Health World Conferences in 1999 and 2000? We never could quite determine what they did, or were promising to do. The bottom line is that they never did it, whatever it was, and you can buy the stock for $0.001 per share today, which is still over-priced. Or the market’s infatuation with drkoop.com, a content company that relied heavily on a well-known name in health care circles but offered little in terms of an ability to make money, especially not enough to warrant a market cap that peaked at nearly $1.0 billion within months of going public in mid-1999. Celebrity status was also used by HealthExtras (NASDAQ: HLEX), with Christopher Reeve (aka Superman) as the company’s first spokesman. Now, his name is nowhere to be seen at the company’s Web site, but at least the company is still around and actually made $3.4 million in this year’s first quarter. Perhaps that’s because it switched the corporate focus from being an Internet-based seller of supplemental health and disability benefit programs (that’s where Superman came in) to the pharmacy benefit management company that HLEX is today. This dot-com was fortunate to make the switch before it became dot-dust like so many of its comrades. Another favorite with strong venture capital backing was Helios Health, a company that put kiosks with Internet-based interactive education stations in physicians’ offices at no charge to the physicians. Instead of wasting time in the waiting room, patients could look up their symptoms and become more educated before walking into the examination room. Profits were to be made from advertising at the kiosks, and the company quickly lined up such heavyweights as Glaxo-SmithKline (NYSE: GSK), Johnson & Johnson (NYSE: JNJ), Merck (NYSE: MRK) and Pfizer (PFE). The concept, although somewhat unique and popular at the time, was flawed for three reasons. First, physicians didn’t necessarily want a more educated patient, because it meant more time discussing (and arguing about) options, time that was not being reimbursed by managed care companies. Second, patients preferred to look up their illnesses in the privacy of their homes (or at work on their employer’s time). Finally, this was before big pharma hit the airwaves in a significant way with their direct-to-consumer advertising, which became a much more profitable venue than kiosks in a doctor’s office. Fortunately for public equity investors, the company filed for Chapter 7 bankruptcy protection before it could file for an IPO. By the end of the summer 2001, a year after the Internet bubble burst, 17 of the nearly 40 publicly traded e-health companies were trading below $1.00 per share, two of which had already completed reverse stock splits to keep their prices up. Two and one-half years later, 10 of the companies are gone, 14 are trading at or below the levels of September 2001 and 14 are trading above. But, and here’s the rub for an industry that was still in the red when the bubble burst, fewer than a dozen of the companies are currently profitable, despite having had time to develop their business plans or redefine them (like HealthExtras). Cash burn rates were the number one topic regarding the e-health companies of the past, but today it is profitability. The sector may have gotten a boost recently when President Bush stated that everyone should have a personal electronic medical record (EMR) by 2014. While we applaud the sentiment, especially coming from a president who may be somewhat technologically challenged, the 10-year goal seems out of place relative to the capabilities in the system today. Other than the fringe who do not have any medical records to begin with (and probably won’t have an EMR in the future), it should not take a decade and three presidential elections to have one in place. Bush claimed that our "21st century health care system is using a 19th century paperwork system," but the reality is that there wasn’t a paperwork system in the 19th century and we still don’t know what our 21st century health care system will look like, especially if John Kerry has anything to say about it. We have been hearing for years that the U.S. health care system is wasteful, out-of-control and rife with errors. Nationwide EMRs will certainly help to control some of the waste and will reduce a significant portion of errors, especially as they relate to prescriptions, but they are not the panacea that will fix what ails our health care economy. One of the big issues will be to determine why the health care community, principally hospitals and physicians, have been so slow to adapt the new technologies that will save them both time and money, and presumably lower liability insurance premiums for all concerned. A case in point is WebMD (NASDAQ: HLTH), the largest e-health company in terms of both market cap and revenues. Putting aside for a moment that HLTH still does not know what it wants to be when it grows up, the company’s WebMD Medical Manager unit, which provides software and related services to physician practices, has shown slightly negative revenue growth in this year’s first quarter compared with the year-ago quarter, but a 78% operating income decline. And this is from one of the leaders in the sector. At least the company’s electronic data interchange services business had solid growth in both revenues and operating income, but most of that came from acquisitions. Despite hitting what is now a three and one-half year high of $12.49 per share last summer, HLTH has been languishing between $8.00 and $10.00 per share since last September. Exactly three years ago, when HLTH was trading at $5.50 per share and had $710 million of cash on the books, we stated in a former publication (that also succumbed to the e-health crash) that the company was fairly valued, and with 360 million shares outstanding (at the time), it was unlikely that the company would ever achieve stable profits to warrant a price above $10 per share based on normal price/earnings multiples. So far, our conclusion has stood up to the test of time. Moving more to the consumer-oriented side of e-health, online drugstores were supposed to be a big hit, saving people money with the added convenience of shopping from home with a larger selection of products available with the click of a mouse than any single bricks and mortar store could ever hope to offer. Unfortunately, the concept was much more appealing than the reality, and most of the independent online drugstores disappeared as they ran out of cash, and sometimes customers. The one remaining online drugstore that has any size to make a difference in the market is drugstore.com (NASDAQ: DSCM), which now has a market cap above $300 million (50% of what it was eight months ago). The only reason why it survived is because someone had the foresight to raise sufficient cash, before the crash, that has allowed the company to lose money for 20 consecutive quarters. But that cash balance is now one-half of what it was at the end of 2001, and the company continues to lose money. The good news is that DSCM should turn profitable in 2005 while revenues in the first quarter this year jumped by 48% compared with the year-ago quarter. The company added 306,000 new customers during the quarter, bringing the total customer base to over 5.1 million unique customers since inception. More importantly, sales from repeat customers increased by 45% in the quarter, which will help DSCM turn the corner to profitability. We continue to have a problem with a business model that has had five years to get costs under control, that will produce revenues of nearly $400 million this year, but still doesn’t make money. And the company’s competition is not other online drugstores, but the bricks and mortar stores that were going to be rendered obsolete by the technology revolution. So much for theory. So getting back to President Bush’s push for EMRs by 2014, that future development may be the catalyst needed for the Internet to finally, and significantly, impact the way we conduct the business of health care. From a cost-savings perspective, it would coincide with the baby-boomers entering the Medicare program starting in 2011, when the health care economy will truly be poised to collapse from excessive use and cost. It is still disheartening, however, that technology in health care has stalled at a time when it makes so much sense for all concerned. Mr. Bush is an unlikely figure to promote technological change in health care, and even though he’s not the one who invented the Internet, more than just presidential prodding will be needed to move us into the future, and to raise equity values for the remaining e-health pioneers. |
|
Like this article?
Click here for a FREE TRIAL. |
|
