An Introduction to Online Healthcare
Part 2

By Jeff Fischer (TMF Jeff)

(September 30, 1999) -- The three main industry segments of online healthcare are:

  • Connectivity
  • Commerce
  • Content
Healthcare connectivity involves software and related data storing (and sharing), as well as hardware to a lesser degree. The connectivity industry will reach an estimated $11 billion in size by 2003. Healtheon and pending merger content partner WebMD are a leading connectivity entity. Other leaders include xCare.net (not yet public), CareInsite (Nasdaq: CARI), and AllScripts.com (Nasdaq: MDRX). Companies that provide software and infrastructure to connect healthcare providers with hospitals, labs, patients, doctors, insurance companies, pharmacy benefit managers, and everyone in between face a tremendous task but a lucrative market.

Commerce companies face great challenges as well. Business-to-consumer online commerce is highly competitive and promises low net margins, especially on the sale of nonproprietary products. It does hold better promise, however, in selling store-branded vitamins and prescription drugs, both of which are multibillion dollar industries. In the business-to-consumer retail space, already several companies compete online. They include the recently public Drugstore.com, which has an important partnership with Rite Aid (NYSE: RAD); CVS (NYSE: CVS), which has acquired Soma.com; Walgreens (NYSE: WAG); Express Scripts (Nasdaq: ESRX); PlanetRx; Rx.com; and several others. Business-to-consumer online health-related commerce is expected to be a $30 billion industry by 2003.

Business-to-business healthcare commerce is expected to be a $170 billion industry by 2003. Just as Intel plans to conduct most sales online at large savings, healthcare equipment and supply companies can save large sums by doing so as well. Business-to-business healthcare commerce leaders include Chemdex (Nasdaq: CMDX) and SciQuest.com (not public). These two companies are traditional vertical retailers (producer to middleman to business consumer). Horizontal commerce leaders that sell healthcare items to businesses in auction format, much like an eBay, include CIMTEK and Neoforma.

Connectivity and commerce is joined by content -- and with it, community -- to round out the online healthcare landscape. Thousands of health-related content sites have opened up online. The content leader, as measured by unique visitors, is DrKoop.com. DrKoop sported 2.2 million unique visitors in August, up 58% from July. Media Metrix ranked DrKoop the 28th most popular site in the online news, information, and entertainment category. Second behind DrKoop in August was mayohealth.org, with 936,000 unique visitors, followed, in order, by ThriveOnline, OnHealth.com, and WebMD.

Content is not just about serving consumers. It is also about providing content to professionals (doctors, nurses, hospitals, labs). This is a potentially enormous business because high-end information will typically be sold on a subscription basis. Another leader, Medscape (Nasdaq: MSCP), came public this week. Finally, MediConsult.com (Nasdaq: MCNS) is an admirable site that provides information typically suitable for both doctors or patients.

Online healthcare is new. Investors must understand that high risk is involved when investing in the related stocks. Whenever one invests, and in whatever industry, the Fool espouses considering the leaders first and foremost. Regarding online healthcare, leaders can largely be spotted by measuring the number of unique visitors and revenue at content sites, by sales growth and unique accounts at commerce sites, and by sales growth (which also means market share) and installed base numbers at connectivity businesses. Brand name and the buzz surrounding a company should not be ignored, either. Positive buzz cannot be underrated -- it is a very valuable asset in a networked world.

A Fool has several advantages when analyzing online companies. The most obvious advantage is the ability to investigate the "face" of a business firsthand. Visit online healthcare sites. Compare the content and communities at content sites and the ease of shopping and product depth at commerce sites. You might find that you like DrKoop's content and community best, and you may enjoy Drugstore.com's 1-Click shopping (thanks to Amazon) and Product List feature. When studying connectivity companies, an investor should watch revenues (again, this is market share) to see which companies are leading the market. A leading and growing installed base of users is integral to success in the software business.

Consider some current leaders that we have mentioned.

At $14 per share, DrKoop.com has an enterprise value (which is market cap minus cash plus long-term debt) of approximately $340 million. The company is expected by some analysts to grow revenue from $1 million last quarter to as high as $30 million in fiscal 2000. This will not be an easy task. However, predicting the results just one year ahead is almost as difficult as achieving those results. A better solution for long-term investors is to think five years ahead. If DrKoop can maintain its lead, today's valuation may prove conservative. The cost to build and create the leading healthcare content brand online will eventually be much greater than $340 million. In June, I briefly questioned DrKoop's valuation in a Rule Breaker Portfolio column as being too high. I'm questioning it much less now.

In commerce, companies are so young that there are not many numbers to analyze yet. At $38 per share, Drugstore.com has a market value of $1.6 billion. The company had $4.2 million in revenue the past six months and 1 million unique visitors in the month of July. The business-to-consumer marketplace is crowded with competition, but Drugstore's partnership with Amazon.com (Nasdaq: AMZN) gives it high visibility. Drugstore.com was the Focus Company in the most recent issue of The Motley Fool's Internet Report. The latest issue of the report focuses on online healthcare.

Finally, in connectivity, at $36 per share, Healtheon has a market value of $2.5 billion. Revenue of more than $140 million is anticipated in 2000, up from $48 million in 1998. Behind it, CareInsite is anticipated to hit revenue of $135 million in 2000.

The long-term potential of online healthcare-related services is enormous. Early leaders have emerged; some will lead briefly, others indefinitely. This is a major industry and it is arriving online relatively late. It is an industry well worth watching and considering. To continue your Foolish research, visit the companies mentioned, compare them to their competitors (there are so many competitors we focused only on a few leaders here) and visit relevant company message boards on the Fool. For more research and information all in one place, consider subscribing to The Motley Fool's Internet Report.

Here's to your health. Fool on!

Back to Part 1 -- An Industry Introduction

Related Links:
Healtheon's Web Site
OnHealth Network's Web Site
WebMD's Web Site
Chemdex's Web Site
Thriveonline's Web Site
Medscape's Web Site