Cashing in on doctors' thinking

(Business 2.0 Magazine) -- Even when he was still doing his surgical training at Beth Israel Deaconess Medical Center in Boston, Daniel Palestrant's friends would pester him for what amounted to stock tips: What did he think of this controversial drug? What about that new medical device?

Palestrant often had answers, thanks to the buzz he was picking up from other doctors. For example, months before it became front-page news and sent Merck's (Charts, Fortune 500) stock into free fall, Palestrant's colleagues were talking about the possibility that Vioxx might be speeding some heart patients to their death.

It was from those impromptu chats in the hospital lounge that Palestrant got the idea for Sermo, an eight-month-old social network for MDs based in Cambridge, Mass. The company is already pulling in about $500,000 in revenue a month -- in a most unusual fashion. It doesn't get a penny from advertising, job listings, or membership fees. Rather, it makes its money by charging institutional investors for the opportunity to listen in as doctors chat among themselves.

It works like this: Say a young patient breaks out in hives after taking a new prescription. Does the medical community think it's a side effect of the drug, a rare symptom of the child's disease, or something else entirely? A doctor might write a bloglike post on the topic and pair it with a multiple-choice survey.

Other doctors can rate the question's value (on a scale of 1 to 5), vote on possible causes, or leave comments. All the while, Sermo is collecting fees from institutional investors who pay to troll the site for information that could move the market.

The doctors, for their part, know that they are being observed. In fact, Sermo offers them a cut of the action. Doctors who ask or answer a question that paying observers deem especially valuable receive bonuses of $5 to $25 per post. Only about 1 percent of posts have such payments associated with them, Palestrant says, and doctors don't know whether they're getting paid until the discussion triggered by their question is closed.

To keep that discussion untainted by commercial interests, only doctors whose credentials have been vetted are allowed to participate, and investors are not permitted to post comments.

But both sides seem to be getting value from the arrangement. Sermo has signed up 15,000 physicians -- making it the most popular social network for MDs, ahead of sites such as DoctorNetworking.com and DocsBoard.com -- and thousands more join every month. (Sermo has plenty of room to grow; the American Medical Association lists roughly 650,000 doctors as members.)

Informal e-mail chatter among physicians, of course, is no substitute for the peer-reviewed journal articles that are the gold standard of medical knowledge. The danger of a site like Sermo, critics point out, is that it can become a platform for misinformation -- one with the power to make or break a company.

Soon after the site launched in October, for example, one doctor reported -- without supporting evidence -- that the diabetes drug Byetta had been associated with sudden death in 50 patients.

Byetta's manufacturer says the claim was false, and no deaths are connected to the drug. Palestrant defends the site by noting that because no other doctors corroborated the post, it was never deemed credible. And he points proudly to the Sermo community's contrarian prediction in March that the FDA would eventually approve Provenge, Dendreon's drug for treating late-stage prostate cancer. The next day an FDA panel called it safe and effective, sending Dendreon (Charts) stock up 150 percent.

Palestrant is now courting further controversy by inviting pharmaceutical companies to buy the same kind of access as the investors. He insists that, like the Wall Street crowd, representatives of Big Pharma will not be able to interact directly with the doctors.

For Sermo to remain a useful forum -- and a viable business -- it must protect the MDs from interference while satisfying the curiosity of the paying subscribers. Finding the right balance will be tricky, but if Palestrant can pull it off, Sermo is positioned for healthy profits for many years to come.