Medscape -- The First 5 Years

Peter Frishauf

Disclosures

Medscape. 2005;7(2):5 

Medscape Year 4: May 1998-April 1999 -- Medscape Gets Moxie, Dot-Coms Go Wild

Medscape's fourth year got off to a dramatic start. FORTUNE magazine, in a cover story, crowned it one of the "12 Coolest Companies on the Planet", declaring "Of more than 15,000 Websites on health, one stands out as the niche's probable future Yahoo: Medscape."

FORTUNE magazine named Medscape, Inc. one of the "12 Coolest Companies on the Planet" in July 1998.

FORTUNE magazine named Medscape, Inc. one of the "12 Coolest Companies on the Planet" in July 1998.

The article added: "Medscape is fast acquiring the kind of buzz that Wall Street dreams are made of: Its backers include cybercelebrity Esther Dyson, its recently named CEO helped spearhead Dow Jones acclaimed Internet offerings, and it boasts more than 600,000 members.[19]"

It was the equivalent of a Broadway show getting a sensational review in The New York Times . We all believed that we could change the world, and now FORTUNE had said that we had. Just 3 weeks earlier, Crain's New York Business selected Medscape as one of it's top 4 "Awesome Foursome" companies in the city, complete with a staged photo of a rooftop ping-pong match with Paul Sheils and I. A few weeks later a review published by Excite.com declared: "If you think there's a bigger and better collection of freely available articles on and coverage of the medical profession, you may need brain surgery."

Crain's New York Business selected Medscape as one of it's top 4 "Awesome Foursome" companies in the city.

Crain's New York Business selected Medscape as one of it's top 4 "Awesome Foursome" companies in the city.

But for all the accolades, the sobering reality was that while Medscape had won the hearts and minds of its audience and critics -- and was rapidly gaining a customer base in the pharmaceutical industry -- the next challenge would be to cement Medscape the business on Wall Street.

Initially, the management team reasoned that the challenge was to prove that with great content and a valuable audience, we could acquire revenue and become profitable with the same proficiency that we acquired membership and traffic.

What we failed to understand was that the criteria for business success would shift from the performance of the site itself to the company's ability to make high-profile, million-dollar megadeals. In its third year, the story of Medscape would shift from Medscape the site to Medscape the business, and what Wall Street described as the "ehealth" sector.

Within months of Sheils taking the CEO position, a 28-year-old entrepreneur from Atlanta, Georgia, Jeff Arnold, debuted a new Web site, WebMD, and almost simultaneously announced that he had obtained $10 million in financing for his new site at an astounding valuation of more than $200 million -- some 10 times Medscape's valuation. At the time, the WebMD site was little more than an idea and a homepage -- it had sparse content, and its membership was unknown. Arnold's plan was to build his business through acquisitions and investment. He soon proved to be a master of that universe.

Medscape was on Arnold's radar, and that summer he was in our offices in New York to tell the WebMD story and to offer to merge Medscape into WebMD, valuing Medscape at less than his start-up business. The current site, Arnold said, was just a placeholder for things to come.

WebMD's investor was the hospital information technology company HBOC (since acquired by McKesson). HBOC, Arnold said, had developed exclusive "middleware" that would permit any physician to access a patient's electronic hospital record from any computer, and regardless of the systems of computers a hospital used, all by simply inserting a WebMD floppy disk into his/her computer. It was, Arnold said, part of WebMD's "end-to-end" vision of healthcare, one that would permit a patient to call a doctor's office and speak to a computer-controlled "virtual receptionist" to make an appointment, refill a prescription, or review a laboratory finding. The consumer WebMD site was only a doorway to this larger world.

Arnold is a passionate presenter, and reaction to the meeting was diverse. I remarked that he was "unbelievable" by which I meant that his description of what was possible with technology was not to be believed. To my astonishments, my colleagues took my comment as "unbelievably great." WebMD, they predicted, would come to dominate the ehealth space.

My colleagues were right, although not for reasons that had anything to do with what was possible with a floppy disk. I followed up on the presentation by consulting several experts who confirmed that the days of the magic diskette and virtual receptionist were a long way off and might never occur. (And who wants to talk to a "virtual receptionist" anyway?) But I failed to understand correctly the power of Arnold's ability to capture the imagination of both an audience and Wall Street.

Arnold's high initial $200 million valuation for his company would soon be eclipsed by a series of ever-more-impressive deals that would leave Medscape eating WebMD's financial dust. Logic had nothing to do with it: From a traditional economic analysis, Medscape was worth more than WebMD. A filing with the Security and Exchange Commission, for example, reported that in the first 9 months of 1998, WebMD lost $7.8 million on revenue of $75,000;[20] by contrast, Medscape had a loss of about $2.4 million on revenues of $1.6 million in the same period.[21] The differences were the perceived value of the WebMD vision and Arnold's showmanship. His initial success with HBOC was to be bested by spectacular announcements in the weeks and months to follow with investments in WebMD that included $250 million from Microsoft and other major deals with DuPont, Lycos, UnitedHealthcare, and the prestigious venture capital firm Kleiner Perkins Caufield & Byers. WebMD continued to reinvent itself more than a dozen times in the following years, creating all its value by buying companies with highly valued stock or obtaining investments from major financial institutions who bought the WebMD story. (Medscape the company along with Medscape the site were ultimately sold to WebMD, which also transformed itself after Arnold left in 2000. But more on this, later.)

WebMD's success with deals -- all of which valued it at many times Medscape's worth -- caused some members of Medscape's Board of Directors to question Medscape's business model. Medscape was in the media business: The founders and the new arrivals (Sheils and Drezner) all believed that content was king, and its customers were its healthcare audience and sponsors who wished to reach them. But Wall Street in 1998 had tired of the "content sector" and was now more enamored with what they termed "eCommerce" (a financial transaction conducted over the Internet) and on business efforts to connect patients to doctors on the Web. "Consumer-facing" sites like WebMD were seen as critical to this vision.

And so, in the summer of 1998, a decision was made that was to have a profound and ultimately fatal effect on Medscape the company, even as Medscape the site was declared "the #1 medical supersite," by the AMA's American Medical News .[22]

As a first step, the investors on the Board of Directors asked Medscape to commit to focus more on consumer health, from which several ehealth companies had sprouted on WebMD's lawn. One new entry was Atlanta-based Medcast, a well-financed venture with a logo and name resembling Medscape's. Medcast was running full-page ads in The New York Times and The Wall Street Journal, proclaiming that they had a unique method of educating patients in doctors' offices through Medcast terminals, a custom-built computer that Medcast was proposing to install physically in the physician's office to "own the doctor's desktop" through a program of pharmaceutical sponsorship. Drkoop.com and Onhealth.com were also concentrating on the consumer space.

Medscape's Board wanted a focus to compete with the consumer Web brands, and it was clear that they believed that the people who built the Medscape professional site were not the ones who could duplicate the perceived success of the new competition. I argued that Medscape should stay the course with increased emphasis on the consumer, by creating a sister site, Medscape Health, and that we should stay in the media and information sector, especially in medicine, where in the United States alone pharmaceutical companies spent billions of dollars supporting such efforts. Sheils also believed that Medscape could reach consumers as an extension of its professional effort, and mocked the $20,000 Medcast ads as a poor use of resources that Medscape should never emulate. Rather than spend hundreds of thousands of dollars advertising a service that didn't even exist, Medscape would build something real.

A few weeks later, a very private event took place in one Medscape member's life, that for a time looked like it might point the way to preserving the value of the Medscape professional presence while extending the brand to a new and exciting service for consumers.

John Frazee, vice president of news services for CBS News, had gone to his doctor for a routine physical examination. Days later, his physician called to say that his blood test results showed a raised lymphocyte count, highly suspicious of asymptomatic chronic lymphocytic leukemia (CLL). Another round of more sensitive and sophisticated tests was scheduled.

Frazee did what millions of Americans did as they prepared for the worst and hoped for the best: He turned to the Web.

Fortunately, Frazee did not have CLL, and in fact the new tests showed that he didn't have any disease. But by now Frazee was also intimately familiar with dozens of medical offerings on the Web. Medscape, he was to say, was head and shoulders the best, far more useful to someone like himself than all the consumer sites. "I became a well-informed consumer via the Internet on issues and options involved in lymphocytic leukemia," Frazee said.

So when CBS decided that it should team up with a healthcare site, Frazee persuaded his colleagues to call us in for a conversation. And he called us personally to thank us for the site and invite us to a meeting.

Other events made the summer conversation with CBS seem especially timely. While rose-colored memories recall the Internet boom on Wall Street as a bubble, in reality it was more like a rollercoaster that kept trending upward with dramatic and sometimes protracted dips along the way. One of the longest dips was in the spring, summer, and fall of 1998, which forced Healtheon, slated to go public in October 1998, to postpone its IPO. It's not a good idea to go public in a dip.

Sheils recognized that despite the lull on Wall Street, Medscape, to compete, had to raise more money as well as improve its sales. His first step was to conclude the acquisition of the Clinical Care Options business in October. In the process, Drezner became executive vice president of sales and was elected a company director.

Then, in November, everything changed in one dramatic day on Wall Street. A little known Web site, EarthWeb.com, with a charismatic CEO, Jack Hidary, ignited the dot-com boom with a record-breaking IPO that awarded first-day investors gains of 248%. Two days later, an even more obscure company, theglobe.com, went public, posting stratospheric first-day gains of 606%. The dot-com days of instant paper millionaires had arrived.

The Medscape phones were ringing off the hook, and discussions began with several Wall Street firms. Two investors, Robert Lessin and Media Technology Ventures, suggested that Medscape consider a fast-track IPO itself.[23] Especially since the Clinical Care Options acquisition, Medscape had more revenue and a better business model than EarthWeb or theglobe.com. But other investors on the Board of Directors wanted a more conservative approach, and it was decided that Medscape would contract with a major Wall Street investment bank, Credit Suisse First Boston (CSFB), to raise one more $20 million "private" round, and then go public the following year.

The decision to delay the IPO proved to be a costly mistake. While other companies took advantage of the hot IPO climate, Medscape management immersed itself in a bureaucratic and costly process with CSFB, which finally produced the required offering memorandum for the private financing in February 1999. The $20 million was raised, CSFB said, "with a single phone call," the same week when the memorandum was produced, leading some to wonder why the document was necessary in the first place. By contrast, Healtheon raised $40 million in its IPO in the same week, and saw its stock price triple on the first day, giving it a valuable currency in its public stock that was not available to Medscape. It was the first sobering sign that although Medscape understood how to create content, attract a valuable audience, and was on its way to winning customers and becoming profitable, both management and its Board of Directors would not be as successful as other dot-coms when it came to creating magic on Wall Street.

Nevertheless, throughout 1998 and through the first months of 1999, the basic low-cost operations at Medscape and its start-up culture remained largely intact, including its inexpensive 29th Street office loft. And the site itself made many improvements, adding a new drug searching tool integrating 2 databases and by incorporating the innovative Clinical Care Options content. Significantly, Medscape members going to the site would now land directly on one of more than 30 specialty pages of their choice, such as Medscape Surgery , Medscape Pediatrics , or Medscape Psychiatry . A milestone was achieved when Dr. Carl Barresse from Sarasota, Florida, became the 100,000th US MD to become a member. The December 31, 1998 calendar year closed with $3.1 million in revenues, up 102% from the previous year. Costs were up about 40%, primarily because staff had grown to 56.

The basic Medscape approach to its business was in contrast to many of the newcomers to the dot-com scene, such as pets.com, women.com, and govworks.com (immortalized in the documentary film Startup.com). We had a ping-pong table and office parties, but Medscape was devoid of the archetypal dot-com office where one could find $1000 Aeron chairs, designer Knoll desks and furniture, expensive espresso machines, panini sandwich presses, pool tables, foosball, expensive Italian leather couches, glass doors with sandblasted logos, $20,000 granite conference tables, and even massage rooms. Medscape eschewed lavish media events and advertising -- such as $2 million 20-second Super Bowl spots -- that competitors bought to grab "mindshare" to get Web traffic and create an exciting image on Wall Street. In some ways, by 1998, conservative Medscape was already an old-fashioned dot-com in contrast to newer entries. We were built on substance, not smoke.

The founders of Medscape, and Sheils and Drezner, were also comfortable with the notion of Medscape as a media business that -- like The New England Journal of Medicine or Yahoo! -- made money from sponsorship and advertising. We believed that we could grow the business to profitability in 2-3 years. The CBS discussions, the Clinical Care acquisition, and Medscape's response to a dramatic event that was to occur the next month, all kept Medscape on course: We would be the best Web site offering medical content, period. Company morale remained high. Yet, it was clear that success was also increasingly being judged more by the company's ability to close high-profile financial deals, often with little or no regard to strengthening Medscape's commitment to content.

We also understood the consequence of the failure to make the right deals, a poignant example being the sale of Netscape Communications to AOL in November 1998. Netscape the storybook company led by financial wunderkind and yachtsman Jim Clark and the idealistic ubergeek-boy-wonder-graduate student Mark Andreesen, the inventor of the Web browser. Netscape the company developed fierce brand loyalty as it commercialized the Web browser and went public in a spectacular IPO in August 1995. Netscape the company changed the world and challenged Microsoft only to be crushed by it, and then, for all practical purposes, disappeared as a relevant organization, all in less than 3 years. And the final irony of the Netscape sale was that a large part of its value to AOL was the popular Netscape netcenter.com page that was the default Web starting page for users of Netscape browsers. Netcenter, the only legacy of the company that survives today, is comprised of news feeds and a Web search box and makes money from advertising -- it is every bit as much of a media business as Google is today. So at the same time when Medscape was being advised that on Wall Street "content is a loser's game" and "forget the media business," AOL was buying a media property! It didn't make sense. Medscape, a promising and accomplished media player, was being told that it would suffer the same fate as Netscape but for the opposite reason: failure to switch from a media business to an ecommerce transaction business. Our Wall Street advisors trotted out charts demonstrating how "the mood" on "the street" was going through "sector rotation," a form of financial bipolar disorder in which the "smart investor who gets it" could switch sectors in anticipation of the street's next behavioral swing, just as Arnold had.

But there was little time for reflection, as events around us opened up an enormous new opportunity for Medscape, courtesy of a presidential sex drive and the incompetent actions of the AMA.

In the lens of history, the attempt to impeach President William Jefferson Clinton in January 1999 for trying to keep secret a private sexual affair -- and lying about it -- seems like a distant memory. A footnote to the impeachment -- the AMA's firing of George D. Lundberg as editor of JAMA -- was to provide another opportunity to transform Medscape -- and perhaps to solidify for the long term its standing as a preeminent force in medical media.

Lundberg's offense was the publication in January 1999 of data from the Kinsey Institute for Research in Sex, Gender, and Reproduction that found that 60% of college students surveyed in 1991 considered oral sex as "not having sex." E. Ratcliffe Anderson, executive vice president of the AMA, said the article was "inappropriately and inexcusably" timed to support Clinton's famous assertion that "I did not have sex with that woman Monica Lewinsky" and personally and summarily fired Lundberg.

In the New York offices of Medscape, we agreed with Lundberg's JAMA columnist Thomas DelBanco, quoted in The Wall Street Journal that the AMA "has made fools of themselves so often, they almost have a death wish."

I looked up Lundberg in our member database and noted that he had been a member since 1995. And he was a regular visitor. When I called he said, "Medscape is the best in the world at what it does" and welcomed a conversation. One month following his AMA firing -- and with a contract guaranteeing him editorial independence -- Lundberg was introduced at a press conference at the New York Academy of Sciences, New York, NY, as Editor in Chief of Medscape. Within weeks, he introduced MedGenMed a primary-source, peer-reviewed medical journal that has since published some 1300 articles. He quickly became -- and remains -- the most identifiable spokesperson for Medscape the site, and continues to innovate by publishing (and often authoring) original and provocative ideas in medicine and health policy.

Healtheon may have had its successful IPO in February 1999, its ecommerce vision, and its "magic diamond." But Medscape had George Lundberg, the world's most credible medical editor who, under his 17-year stewardship, had transformed JAMA into the most quoted medical journal of all time -- both in the professional literature and the consumer media. Now Medscape could execute on its Board's vision to develop a consumer franchise, preferably with CBS (where negotiations were progressing) with no compromise to staying in the media business in which it had its roots.

In retrospect, the most important and lasting achievement of the events of February 1999 was to insulate the fortunes of Medscape the site from Medscape the company, which, despite the optimism of the moment, was about to begin a series of fatal missteps that would lead to its demise a little more than a year after Lundberg's introductory press conference. The strengths of Medscape the site were understood when Lundberg began and, under his leadership, continues to improve to this day.

Medscape the site ended its fourth year in good health: By the end of April 1999, members logged in 4.6 million times, with American MDs accounting for 2 million of those visits. Membership was approximately 1.1 million, including more than 350,000 consumers, just as we had predicted in 1996. The Publishers' Circle had some 90 content sources.

Medscape the company also ended its fourth year with good financial news: In its first 3 months, revenue was more than half the revenue of the entire preceding year. Some 90 companies were doing business with Medscape, including every major pharmaceutical company. The Web had arrived as a medium. The little start-up on 29th Street had hit its stride and was now on the path to its own IPO. The company had 83 employees, and leased an entire additional floor (10,000 square feet) at its 29th Street location to accommodate its growing ranks.

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