When it comes to wiring healthcare to the Internet, red ink continues to curb the industry's appetite for meals starting with the letter "e."
Web product vendors, struggling to persuade hospitals and other providers that investing in online technology should top their priorities, continue to report substantial and in some cases staggering financial losses.
Most of these companies, whose mission is improving providers' clinical and financial outcomes, have yet to better their own bottom lines. Industry observers said a shakeout is under way to narrow the field to vendors that can find their way to profitability and present minimal risks to customers.
Last month alone more than a dozen e-health stocks hit 52-week lows, according to Irving Levin Associates, a New Canaan, Conn.-based healthcare research firm.
Among the hardest hit:
* Three-year-old drkoop.com, based in Austin, Texas, reported a net loss of $57.9 million, or $1.60 per share, for the third quarter ended Sept. 30. That's 180% greater than its $20.6 million loss, or 68 cents per share, in the year-ago quarter. Revenue fell 31% to $2 million.
* HealthStream, a provider of Internet-based medical education, reported a net loss of $5.3 million, or 27 cents per share, on revenue of $2.7 million for the third quarter. The Nashville-based company is headed by Robert Frist Jr., nephew of HCA-The Healthcare Co.'s Thomas Frist Jr.
* Northbrook, Ill.-based InLight Technologies, founded by former Baxter International Chairman Vernon Loucks Jr., couldn't raise needed capital and closed its doors in September. The company marketed Internet services to patients. It was led by Loucks' son David.
* iMcKesson, the startup Internet unit of drug distributor McKesson HBOC, lost $10.1 million on operations in its second quarter ended Sept. 30. The unit posted revenue of $69.4 million.
* Medicalbuyer.com, a Johnson City, Tenn.-based online supply marketplace, went out of business in August after burning through at least $11 million in venture capital. The company failed to negotiate an alliance with a group purchasing organization, which could have opened hospitals' doors.
* Medscape, based in Hillsboro, Ore., lost $111 million, or $2.02 per share, a whopping 7.5 times its revenue of $14.8 million for the third quarter ended Sept. 30.
* Neoforma.com, an online supply marketplace based in San Jose, Calif., recorded a net loss of $47.5 million, or 46 cents per share, on net revenue of $2.3 million for the third quarter.
* Internet giant WebMD, which provides online content and transaction support, accelerated its financial decline in 2000 with a loss of $786.9 million, or $3.17 per share, in its third quarter. The Atlanta-based company reported revenue of $151.2 million for the quarter. In the first nine months of 2000, WebMD lost $1.7 billion, or $8.41 per share, on revenue of $318.2 million.
WebMD Chief Executive Officer Martin Wygod tried to soften the blow by pointing out that the loss would have been significantly smaller--at $65.8 million, or 27 cents per share--before restructuring and other one-time charges primarily related to acquisitions.
Despite its financial troubles, WebMD might have staying power now that its management team has been revamped, said Michael Davis, a research analyst with Stamford, Conn.-based Gartner Group. Former WebMD co-CEO Jeffrey Arnold resigned from the company earlier this fall. That left the top post to Wygod, a veteran healthcare executive brought to WebMD through the company's $2.1 billion acquisition of Medical Manager Corp.
And regardless of their dismal financial numbers, WebMD and other vendors remain bullish about efforts to digitize an industry that has been slow to join the information highway.
Industry analysts are not as optimistic.
Many e-health contenders "are more like projects or products masquerading as companies," said Bruce Hochstadt, M.D., a principal with investment banking firm Thomas Weisel Partners in San Francisco.
At hospitals, they have a tough sell. Many hospital CEOs "don't have the stomach, or for that matter the budget, to go through major (information) system changes unless they have to," Hochstadt said. In many cases, existing systems "are not pretty or fast, but they get the job done," he said.
The Gartner Group's Davis said risk-averse healthcare organizations will look to established, stable practice management or enterprise software vendors for e-health solutions. Likely candidates include Eclipsys Corp., IDX Systems, McKesson and Shared Medical Systems, he said.
Still, in this unpredictable market, some provider organizations have gone forward with e-health partnerships. One is the 140-physician Austin (Texas) Diagnostic Clinic, which last summer turned to Medscape for online transcription services as well an electronic medical record.
"There has already been a lot of attrition in the (e-health) industry. Medscape was one of the companies that had survived, and we felt (it) would be one of the last standing in terms of providing electronic medical records," said Kenneth Mitchell, M.D., the clinic's board chairman and medical director for managed care.
Medscape was formed in May through the merger of Hillsboro, Ore.-based MedicaLogic, an electronic medical records vendor, and New York-based Medscape, an online clinical reference source for physicians.
Medscape Chairman Mark Leavitt, M.D., who founded MedicaLogic, believes that Medscape is positioned for profitability despite its large third-quarter loss. "The fact that we're in a negative cash flow situation is not new to the company, nor is it unintended," Leavitt said.
The company says it is rapidly building market share, which will enable it to turn a profit in the near future. Some 33,500 clinicians now use Medscape's electronic medical record applications--up from 19,600 just one quarter ago.
That's good for Medscape, because profitability counts with providers when they look for partners. "Whether it is an e-health company or any other potential partner supplying products and services to a hospital, mounting losses of a prospective partner need to be weighed in the overall decision," said Marty Paslick, vice president of Internet strategy at HCA.
E-health companies that have raised capital through initial public offerings have had to play out their financial losses on a public stage, making them more vulnerable to criticism, observers noted.
Neoforma, for one, does not regret its IPO even as losses pile up and the pressure to please Wall Street intensifies. "We're absolutely thrilled we went public, despite the market downfall," said Robert Zollars, company chairman, president and CEO. "We're in it for the long term."
Although Neoforma's stock has traded at $1 to $3 in recent weeks, from a 52-week high of $78.75, the company is positioned for an upturn, like Medscape.
Neoforma has a 10-year partnership with Novation, the purchasing group for hospital alliances VHA and University HealthSystem Consortium, to develop a Web-based purchasing service. Because of the relationship, "people shouldn't be nervous about working with Neoforma," Novation spokesman Lynn Gentry said.
--With Cinda Becker