A Grim Prognosis for Drkoop.com

SAN FRANCISCO (04/03/2000) - In the eyes of its auditors, health-information company Drkoop.com needs life support. People looking at the company's books express "substantial doubt about its ability to continue as a going concern."

"The company has sustained losses and negative cash flows from operations since its inception," PricewaterhouseCoopers noted in Drkoop.com's annual report, which the medical site filed Thursday. Drkoop's stock price went into free fall Friday, dropping 48 percent to $3.25 in early morning trading. In 1999, the company lost $9.4 million on $56.1 million in revenues.

Drkoop officials could not be reached for comment Friday morning. According to the company's annual report, "Management intends to raise working capital through additional equity and/or debt financings in the upcoming year. However, there can be no assurance that such financing can be successfully completed on terms acceptable to the company."

The Austin, Texas-based company cofounded and chaired by former U.S. Surgeon General C. Everett Koop has taken a beating in recent months, buffeted by consolidation in the online health care industry. In addition, the company has suffered from growing doubts about the viability of advertising-dependent medical information sites. Competitors like Medscape and HealthCentral have diversified by adding e-commerce and medical services.

Medscape agreed to merge with online medical-records company MedicaLogic in February, and it now offers some transaction services for doctor's offices.

HealthCentral operates an online pharmacy, and it builds Web sites for hospitals and other health care institutions. Drkoop also has attempted to expand its services. The centerpiece of that strategy was to be an online medical record. Koop himself promised last year that every American would receive a free personal medical record. In January, however, the company quietly put the project on hold, citing privacy and confidentiality concerns raised by a group of Florida patients who were testing it. But Thursday's annual report makes clear that there were other problems with the medical record being developed by HealthMagic, a Winter Park, Fla.-based online medical records firm.

"The relationship never produced satisfactory results, and Drkoop.com is currently involved in settlement discussions with HealthMagic regarding possible legal claims that HealthMagic and Drkoop.com have against each other," the company states in the report. The company had planned to provide medical records to America Online's 20 million members as part of an $89 million deal which would have made Drkoop AOL's featured source of medical information. In turn, AOL had agreed to pay Drkoop.com $8 million to license the medical record.

The company also signed an agreement last year with pharmaceutical services company Quintiles Transnational, allowing Drkoop members to sign up for clinical drug trials. Drkoop receives a fee from Quintiles for each patient it successfully steers into a new drug trial. But when Quintiles struck an alliance with Healtheon/WebMD to develop online clinical trial recruitment and other services for the drug industry, Quintiles officials said their company would let the agreement with Drkoop lapse. Some of Drkoop's troubles have been self-inflicted.

The site came under attack last fall for failing to notify visitors that a group of hospitals featured in a section on community resources had paid for their inclusion, and that Koop was receiving a commission for products sold on the site. Koop and other high-ranking executives' recent filing to sell some of their shares fueled speculation that they were bailing out of the company.

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