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e-health firms on sickbed
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May 1, 2000: 2:47 p.m. ET
Ailing Internet health-care companies scramble to regain their own well-being
By Staff Writer Martha Slud
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NEW YORK (CNNfn) - Online medical companies have touted themselves as the saviors of the bloated U.S. health care system, but these days, it's health-care Web sites themselves that are ailing.
Amid a widespread downturn in Internet stocks, burgeoning Web companies focusing on health advice, processing insurance claims and dispensing prescription drugs and medical supplies online have been among the biggest losers on Wall Street.
Online health care has attracted the attention of some of the biggest names in technology - lured by the promise of eliminating waste in the $1 trillion-per-year American health-care system. But although health care was considered among the hottest of all Web sectors only a few months ago, many investors have quickly soured on the young industry, putting the future of a number of newly minted public companies in doubt.
Once-highflying stocks have tumbled amid steep losses and paltry revenue, while a flurry of mergers and acquisitions in the sector now are in jeopardy because stock prices -- the currency Internet companies generally use to finance the deals - have steadily eroded.
 Industry analysts say that while virtually the entire Internet sector has come under pressure amid recent market turmoil, the online medical industry was one of the first victims because it is among the newest sectors to rush to the Web.
"Quite frankly, you've had a lot of companies that came public too early," said Caren Taylor, who follows the Internet health sector for E*Offering. "In markets where we've had a large sell-off, IPO stocks tend to be the ones that are abandoned first - and the e-health sector is rather new. Most of these companies have not even been public a year."
One of the best-known names in the space, cash-strapped medical information site drkoop.com Inc. (KOOP: Research, Estimates), disclosed last week that it expects to post much wider-than-expected first-quarter losses because of poor revenue, and also noted that it has hired investment banker Bear Stearns to explore its strategic options. The site, named for one of its founders - the popular former U.S. Surgeon General C. Everett Koop - went public in a healthy debut last June, but shares are now trading at less than $3 a share, down from an intraday high of $45 last July.
 Meanwhile, industry leader Healtheon/WebMD Corp. (HLTH: Research, Estimates), an online medical processing firm and the operator of a consumer-oriented Web portal, has led the sector downward amid concern that it lacks a coherent growth strategy. Investors also fear that a Feb. 14 agreement to acquire two of its main rivals, health software maker Medical Manager Corp. (MMGR: Research, Estimates) and its subsidiary CareInsite Inc. (CARI: Research, Estimates), might be in trouble. The company also could face some big competition from six big health maintenance organizations that agreed recently to form an online exchange for processing medical claims.
Healtheon stock has tumbled about 84 percent from its 52-week high. (CNN.com uses health content from WebMD, and parent firm TimeWarner Inc. has a small equity stake in the firm.)
Some mutual fund investors also are feeling the pressure on Healtheon stock. A nearly $1 billion investment in the company by Janus Capital Corp.'s mutual funds in January has weighed down the portfolio of several Janus funds, including the Global Life Sciences Fund (JAGLX: Research, Estimates) and the Janus Twenty Fund (JAVLX: Research, Estimates). Janus bought 15 million shares at $62 each, compared with a current trading price of about $20.
An industry that got ahead of itself?
Over the long term, analysts predict, the Internet ultimately will play a large role in health care transactions, replacing the antiquated technology now in place in most doctors' offices. But, they say, for firms that hoped to revolutionize the industry immediately, it's been a case of expectations that got way ahead of themselves.
"There's no question that the Internet as a means for improving communications and streamlining processes in health care will continue," said Christopher Russ, an analyst at First Union Securities. "The open question is if someone can create a profitable business model from that."
Part of the problem is that many health-related firms thought it would be relatively simple to duplicate the success of some other Internet companies, such as electronic retailers or general Web portals, Russ said. But, he said, these medical startups are finding that health care - with its vast network of doctors, hospitals, payers, pharmacies and patients - is extremely difficult to change and involves an array of ethical issues particular to the medical industry.
"The tremendous success of companies like America Online, Yahoo! and others has created an unrealistic expectation that other types of companies can have similar success in other verticals," he said. "Health care is a very, very tough market."
The resistance of the traditional health-care system to the Internet has surprised billionaire investor Jim Clark, the founder of Healtheon, who has had a Midas touch in launching successful technology companies including Silicon Graphics and Netscape. 
Speaking at an industry gathering in New York last week, Clark said he was unprepared for the entrenchment the company has encountered from the health care establishment in bringing medical processing online. He said he had no additional plans to invest further in health care except for his own company.
"There are a lot more efficient ways to put your money to work," he said.
In the wake of the company's well-publicized stock troubles, Clark recently announced plans to buy about $200 million worth of Healtheon stock in the open market in hopes of boosting its share price.
 Healtheon officials have said they are confident that all of the company's pending deals will go through, but Clark said he's told Healtheon executives they need to slow down and work to integrate acquisitions.
"They've got to stop for awhile and digest what they're doing," he said.
Another deal considered in critical condition is Internet firm TriZetto Inc.'s (TZIX: Research, Estimates) purchase of IMS Health (RX: Research, Estimates), an established health care data company, saying it's unclear how the merger will work. The companies, whose stocks have been battered as investors have given a thumbs down to the complex stock transaction, said they were considering revising the terms of the deal last week, hoping to convince investors that the combination is worthwhile. TriZetto stock is trading about 73 percent down from its 52-week high, while IMS shares are off 50 percent.
The woes of online health companies reflect Wall Street's increasing impatience with firms that can't deliver on promises, analysts say.
"A few months ago we were in a buoyant market where investors and analysts were willing to be more forgiving of flaws and more patient with profitability and success," Taylor said. "Investors and analysts are no longer so patient."
But like any sector, strong companies in e-health will set themselves apart and be rewarded in the end, predicts Daren Marhula, an analyst at U.S. Bancorp Piper Jaffray.
"If you strip everything back, health care is the most inefficient and the most under-automated industry in the country," he said. "Fundamentally, this industry will embrace Internet technologies, and it's just a matter of how they will be rewarded on Wall Street." 
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