Rx for Trouble

Open wide and say, “Uh-oh”: Why Austin’s drkoop.com is in such bad health.

What’s in a name? If you’re former U.S. surgeon general C. Everett Koop, try $88.4 million: That’s the sum raised last June by drkoop.com when it sold nine million shares of its stock to the public. The cachet of an association with a famous, respected physician helped drive the online health information provider’s initial offering price of $9 to more than $45 within a month. The bull market for e-health stocks valued the Austin start-up at more than $500 million last summer, an astounding amount when you consider that its revenues the previous quarter were just $404,000.

Just as astounding, as of early 2000 drkoop.com was—well, choose your favorite health-related cliché: severely under the weather? on its last legs? on its deathbed? In mid-March the financial newsweekly Barrons gave the company just three months to live based on its rapidly dwindling supply of cash, and a report by drkoop.com’s auditors to the Securities and Exchange Commission similarly called its long-term survival into question, noting that it had “sustained losses and negative cash flows from operation since its inception.” Twice before, the auditors had warned about the company’s financial health, but investors paid no attention. This time, however, they did: The dire news slashed the price of drkoop.com’s already depressed shares another 43 percent to $3.56 on March 31. On April 29 the stock was trading at $2.75.

Whether the condition is truly critical remains to be seen. A spokesman for drkoop.com maintains that the auditor’s report was “not a prediction that the company is about to fold” and says a “host of strategic financing options” are being explored with the help of investment bank Bear, Stearns and Company. But whatever happens, the year-long roller-coaster ride offers plenty of lessons and warnings for dot-com investors and entrepreneurs—first and foremost, that celebrity is no guarantee of success on the Web.

It’s easy to see how, in this case, it might have seemed otherwise. “Dr. Koop has a brand name in the way that the Mayo Clinic has a brand name,” says Claudine Singer, a senior analyst at New York-based Jupiter Communications, a leading e-commerce research firm. That’s why Donald W. Hackett, a computer industry veteran, courted him for several months to sign on to a health-related Internet start-up. In 1997 Koop finally agreed to join Hackett’s online consumer health care network, Personal Medical Records, which relaunched as drkoop.com in March 1999. “I’ve had two major messages that I’ve tried to get out to the public all my professional life,” says the 83-year-old Koop, who in addition to chairing the company’s board is Senior Scholar at the C. Everett Koop Institute at Dartmouth College, in Hanover, New Hampshire. “One is to take charge of your own health. The other is that there is no prescription I can give you that is more valuable than knowledge.” He says he became convinced that a commercial Internet venture was the only way to get the word out: “I’ve tried the non-profit world, and the non-profit world is not interested in supporting those messages on the Internet or in any other way.”

The Web site that would eventually become drkoop.com went live in July 1998, offering a mix of content (the imparting of medical information) and e-commerce (the selling of health-related products). Among its notable features were pregnancy due-date and body-mass calculators, a forum for users to chat with and ask questions of doctors and each other, a Drug Checker (which warns of dangerous medicinal combinations), a database of hospitals and doctors, and a virtual mall where you could buy health insurance, prescription refills, and health and beauty aids. In the nearly two years since, the company has added a Community Partner Program, which connects physicians and health care organizations like Methodist Hospitals of Dallas to Internet users through co-branded Web sites, and has begun providing medical news to 22 TV stations as a way to build brand awareness.

With other online health sites offering similar goods and services, company officials know they need something special, and that’s where Koop comes in: By leveraging his good name (and his familiar bearded-and-bow-tied image), they’ve been able to create a trustworthy brand to which people, tech-friendly and otherwise, can comfortably turn. The number of registered users visiting the site rose from 280,000 before the IPO to more than 1.3 million this past March. Revenue from advertising and sponsorships, meanwhile, swelled from a mere $15,000 in 1998 to nearly $7.7 million last year, and total revenue—including e-commerce and the syndication of drkoop.com content to other sites—jumped from $43,000 in 1998 to $9.4 million last year.

Still, the company had losses of $56 million in 1999. Why? For several reasons.

It’s giving too much away. Most of the site’s content is available free of charge. “A lot of what we do is public service,” insists Hackett, who is drkoop.com’s CEO. Good works, however, don’t translate into good profits.

It’s growing too fast. In just three years the company has gone from 3 employees to 185, burning up cash along the way.

It’s overspending. Hoping to drive traffic to the site, officials of drkoop.com paid dearly for access to two popular Internet portals, hoping to tap into their mass audiences. Last July the company signed a four-year, $89 million deal with America Online that made it the highest-profile health-content provider to the service’s 20 million subscribers. More recently it signed a similar deal for an undisclosed amount with the Go Network, the Internet division of the Walt Disney Company, which has 22 million unique visitors. Yet the surge in traffic has been far less than expected, leading analysts to have second thoughts about the wisdom of the deals—and to wonder aloud if they could hurt drkoop.com’s chances of being acquired should

More Texas Monthly

Loading, please wait...