Cash infusion staves off dot-death for drkoop.com

Venture capital investors ride to the rescue at the last minute, but drkoop.com is not yet out of trouble.

By Tyler Chin, amednews staff. Sept. 11, 2000.

Thanks to some financial angels, drkoop.com Inc. has gotten another breath of life. Nevertheless, it could soon find itself back on its slow trip to the dot-com graveyard.

On Aug. 22, drkoop.com, whose rise and fall has mirrored the e-health sector's turbulent ascent and decline, received a $27.5 million financial bailout from a group of private investors, enabling it to stay afloat a while longer.

Riding the loop-de-Koop

The cash infusion came less than a day after the Austin, Texas-based firm disclosed in a quarterly report with the Securities and Exchange Commission that it had run out of cash and was on the verge of going out of business.

Poor management, bad deals, a troubled business plan and fickle investors all led to drkoop.com's near-death experience last month, analysts said.

Under the bailout, investors can convert their preferred stock into common stock at 35 cents a share starting May 2001 and exercise additional options that would raise their total investment to $27.5 million. In return for their investment, the investors also installed a new management team at drkoop.com and hold the right to name a majority of the company's board of directors.

Richard M. Rosenblatt will serve as CEO, Edward A. Cespedes as president and Stephen Plutsky as chief financial officer. Rosenblatt was a co-founder and CEO of iMall Inc., which was sold to Excite@Home last fall for $565 million -- well before Internet companies' stock prices plunged earlier this spring. He was senior vice president of e-business services at Excite@Home until he left the company last March.

Drkoop.com's co-founder, former U.S. Surgeon General C. Everett Koop, MD, will remain the company's chair. Former CEO Donald Hackett will remain a company director.

Prolonging the agony

Some on Wall Street saw the bailout as a waste of money.

"We were baffled by the investment and shocked to see it in light of what has happened within the last four months, especially with pure content plays," said Montie Weisenberger, analyst at Adams Harkness and Hill in Boston.

The problem with companies that offer only health information content to consumers is that they haven't been able to translate traffic to their Web sites into significant advertising and sponsorship revenue, Weisenberger said.

Based on the $6.5 million that drkoop.com spent in the second quarter to fund operations and working capital -- colloquially know as the "cash burn" rate -- Weisenberger estimated that drkoop.com will run out of money during the second quarter of 2001. That estimate is based on the assumptions that the company's burn rate will remain constant and that drkoop.com won't tap the additional $7.5 million that the investor group could provide later.

"What will probably happen is drkoop.com will be sold for pennies on the dollar," Weisenberger said. The investors "will never make their money back and that's why we're baffled."

Drkoop.com declined to comment and make the private investors available for comment because, it said, the company was pursuing additional financing.

In its filing with the SEC, the company reported that it lost $40.6 million in the second quarter of 2000, up from $11.4 million for the same period a year earlier. It reported revenues of $2.5 million for the second quarter, up from $1 million a year earlier.

Drkoop.com also reported that the SEC was investigating the company and former and current executives for securities law violations. The investigation was sparked by several class action lawsuits that shareholders have filed against the company since July 14.

The lawsuits allege that drkoop.com and its management made false and misleading statements about the company's financial condition and engaged in insider trading. The company has said that the lawsuits have no merit.

Thus far, drkoop.com is the most prominent e-health company to come close to biting the dust.

Other lesser known e-health companies have died recently without many people even being aware of their passing.

These dot-com bombs include epatients.com, which sought to build an online community of patients, and medicalbuyer.com, an online marketplace for medical supplies.

ADDITIONAL INFORMATION:

Riding the loop-de-Koop

June 7, 1999: Stock goes public at $9 a share.
July 6, 1999: Stock reaches historic intra-day high of $45.75.
March 30, 2000: Drkoop.com files annual report with the Securities and Exchange Commission disclosing that its auditors question the company's ability to survive.
April 25: Firm announces it has restructured agreements with America Online Inc. and Infoseek Corp., under which it slashed cash payments for space on the two Web portals. Also announced it would run out of cash in August and that it had hired an investment banking firm "to explore strategic alternatives."
May 19: Announces layoffs.
July 21-24: Two obscure companies -- Millennium Health Communications Inc., Reston, Va., and undertherapy.com, Beverly Hills, Calif. -- disclose they have submitted nonbinding offers to merge with drkoop.com. Many analysts see the "offers" as publicity ploys and indeed they fail to pan out.
Aug. 10: Stock hits 52-week low of 66 cents.
Aug. 21: Firm files quarterly report stating it has run out of money and is in danger of shutting down. Company also discloses it is under investigation by the SEC for alleged securities law violations.
Aug. 22: Stays afloat by lining up $20 million in funding and a new management team.