Drkoop.com's Cash Goes Up in Smoke

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Drkoop.com Inc. may not be an Internet-only retailer, but it's displaying all the symptoms: The health content Web site has only four months of cash left on hand.


A shortfall in direct-to-consumer advertising revenue and a subsequent higher loss expected this fourth quarter were blamed for the situation.


In fact, tight cash has forced drkoop to surrender 10 percent of its equity to America Online in lieu of tenancy payments and strike another equity-for-debt deal with Walt Disney Co.'s Go.com.


"In my opinion, their only option is to look for someone to purchase them or go under," said Rachel Terrace, health analyst at New York's Jupiter Communications.


The financial crisis bedeviling drkoop is largely the result of heavy dependence on pharmaceutical companies who were expected to advertise on the site.


"Basically, they didn't diversify the revenue streams enough to include other streams such as commerce," Terrace said.


Drkoop has now charged investment banker Bear, Sterns & Co. to "explore strategic alternatives available to the company," a prepared statement said. Drkoop public relations executives did not offer immediate access to company president/CEO Donald Hackett.


"Drkoop is most likely to be acquired, and I wouldn't be surprised if AOL purchased them or some other health commerce player did," Terrace said.


But it may take some effort to convince prospective suitors of drkoop's potential for attracting ads or retaining users.


According to Media Metrix figures for March, drkoop had 3.5 million unique visitors that month. The average number of unique pages viewed per visitor in that period was 4.6 and of minutes spent per page was only 4.5.


Thus, the user's average minutes per unique page was only 1 minute. Not much value for advertisers, Jupiter's Terrace said.


"If you look at the traffic figures, drkoop does have the second highest number of unique visitors among health-content sites behind Healtheon/WebMD," Terrace said. "However, consumers are not staying at drkoop's site for very long, especially in comparison to other health-content sites that have deeper content."


IntelliHealth, for instance, at 1.1 million unique visitors in March, had only a third of drkoop's audience. The average unique pages viewed per visitor that month, at 4.5, was almost neck-and-neck with drkoop's. Yet, the average number of minutes spent per page was higher at 5.2.


Some fault drkoop's content, most of which is licensed from Reuters, Multum Interactive Services, National Institute of Health and the American Cancer Society, and the site's tools and utilities for customer interaction are thin.


"They don't have much in terms of stickiness," Terrace said. "So without those sorts of things, you're not going to have consumers' returning or staying at your site very long, which is a problem in terms of advertising revenue, especially when that's your main source of revenue."


There are an estimated 15,000 health Web sites, each vying for a piece of the healthcare advertising pie. Jupiter's projections for that ad market in 1999, 2000, 2001 and 2004, respectively, are $100 million, $180 million, $280 million and $700 million.


Based in Austin, TX, drkoop was founded in July 1998 as a healthcare portal by a number of investors, including Dr. C. Everett Koop, former U.S. surgeon general.


In fiscal 1999, the company recorded losses of $82.5 million on total revenues of $9.4 million. Revenue for the first quarter of 2000 is expected to hover between $4.5 million and $4.7 million, "which was below internal expectations," an April 25 statement from drkoop said.


"We are clearly disappointed in the overall performance of the direct-to-consumer component of our advertising program for the quarter," drkoop's Hackett admitted in the statement.


The company, however, is working overtime to undo the damage.


The makeover began a few months ago with the process of bringing the ad sales and serving program in-house, which allows control of integrated packaging, inventory usage and cost-per-thousand impression rates. A new sales team for targeting pharmaceutical advertisers was also added.


Expenses related to consumers have been cut, as have marketing expenditures and professional fees. These moves slashed quarterly revenue cash and portal costs by over 57 percent to $6 million in this quarter.


Yet that still leaves the company cash-starved. As of March 31, it had only $24 million cash on hand and outstanding payments and liabilities of $16 million. It is owed $3 million.


Investors have kept drkoop's stock price under $4. The stock has fluctuated from roughly $2 to $45.75 over the past year.


"Well, the lesson in this case is that health content sites can't live on advertising alone," Jupiter's Terrace said, "and that they may have to diversify and partner across the spectrum of health players to acquire the most customers and revenue."
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