Medscape Debuts Brian Graney (TMF Panic)
September 28, 1999
Proving that it's never too late to jump onto the Internet initial public offering boat, online healthcare information source Medscape Inc. (Nasdaq: MSCP) delivered a healthy return to its stakeholders in its first day of trading today. The company sold 6.6 million shares at a price of $8 per share, with 600,000 of those shares set aside for marketing partner CBS Corp. (NYSE: CBS). Having the Tiffany Network in its corner adds some early respectability to Medscape's business in a competitor-filled online healthcare space, but many challenges lay ahead for the young company.
For starters, the firm is working with an unproven business model. The idea behind online healthcare content providers like Medscape is to offer timely and helpful medical-related information to all kinds of users. The company's Medscape.com portal claimed 1.2 million registered users as of the end of June, split among physicians, allied healthcare professionals, and consumers.
That's great, but it's not like Medscape's services are unique. The competition is large and diverse, ranging from publicly held content rivals such as adam.com (Nasdaq: ADAM), drkoop.com (Nasdaq: KOOP), Mediconsult.com (Nasdaq: MCNS), and OnHealth Network (Nasdaq: ONHN) to large governmental clearinghouses such as the National Library of Medicine's Medline service. At this point, discernible competitive advantages are about as rare as rabies cases in England.
With the total healthcare industry accounting for a whopping $1 trillion annually and the average doctor's appointment reduced to just a few minutes of patient-doctor face time, the market and demand for online healthcare information delivery is certainly there. The key question is how a company such as Medscape is going to carve out its own niche and grab its chunk of the market opportunity. Leveraging the user base for healthcare e-commerce opportunities certainly seems reasonable at some point down the road, but right now the company is relying almost entirely on a single revenue stream -- advertising.
While the jury is still out on whether an advertising-based business model will work out on the Web with the same success that it has worked in other media this century, Medscape's situation is somewhat unique. In fiscal 1998, the company derived 92% of its $3 million in revenues from pharmaceutical companies, with a full 48% of that ad stream represented by only three drug makers. Such reliance on only a few ad clients is a common dependency problem for many upstart Web companies, but in this case, the figure may not be as ominous as it may seem at first glance. That's because if a company is going to rely on a single industry on an all-out ad revenue model, the pharmaceutical industry is not a bad choice.
According to the company, drug makers spent an estimated $1.9 billion last year in medical journal print advertising and other promotional efforts. Medscape's ad-based strategy hinges on stealing away as many of these ad dollars as possible by publishing quality healthcare content, specifically in its own peer-reviewed eMed online journals. Such a strategy would take a considerable amount of effort, but it seems like the company's best bet for growth.
CBS's promotional support and the impending launch of a co-branded CBS.Medscape.com website aimed at consumers should help attract advertisers. The backing could also help maintain the company's $600 million first-day market valuation in the same way that the CBS nameplate has helped keep the share prices of MarketWatch.com (Nasdaq: MKTW) and SportsLine USA (Nasdaq: SPLN) safely above their IPO prices. However, diagnosing the potential of online healthcare companies such as Medscape at such as an early point in the industry's development is a tricky and risk-filled undertaking for any investor.
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