Internet strategies conference spotlights opportunities and pitfalls for device firms

October 4, 2000

Internet strategies conference spotlights opportunities and pitfalls for device firmse-volving business models center on physician and consumer adoptionBanners, links, and pretty pictures--while the Internet has conquered the fickle

Internet strategies conference spotlights opportunities and pitfalls for device firms

e-volving business models center on physician and consumer adoption

Banners, links, and pretty pictures--while the Internet has conquered the fickle interest of the general public, medical device vendors continue to search for ways to piggyback their brick-and-mortar businesses onto the Web wave. The sudden rise and fall of the dot-com phenomenon has forced many manufacturers to look seriously at the Internet as a legitimate business tool and to consider how it can be used as a viable means for reaching new customers and stimulating sales.

But as with anything new and evolving, developing an Internet-based business continues to be a trial-and-error process. Hoping to bypass the error phase, nearly 100 top-level medical device executives from more than 65 companies attended "Internet Strategies 2000," a conference hosted by the Advanced Medical Technology Association (AdvaMed, formerly the Health Industry Manufacturers Association) in San Diego last month.

Use of the Internet to hook into consumer power and better manage the healthcare supply chain accounted for much of the buzz at the three-day conference. Presenters hit hard on the need for manufacturers to maintain a "business as usual" approach regardless of whether a transaction occurs over the phone, by fax, or via the Internet.

"The laws of economics are the same," said Michael Mauboussin, managing director of Credit Suisse First Boston. "The nature of the information is different. The Internet enables mass customization, allowing a new model between big and cheap versus small and expensive."

Timothy Zinn, president of Zinn Enterprises Consulting Group, described the Web as a tool, not an industry. According to Zinn, one barrier to widespread adoption of e-business among integrated delivery networks (IDNs) is their reluctance to put resources into non-patient-care services, due in large part to lack of funding. Results of a survey conducted by the Zinn Group show that information systems account for just 2.5% of the annual operating budget for most IDNs.

However, Zinn maintains that lack of cash does not equate with lack of opportunity in the IDN market. He sees opportunities for Web-based products and services in linking internal clinical data silos, improving decision support systems, and creating personalized patient records.

"(IDN) CEOs are not sure how to go about using their patient base," he said. "The provider-perceived advantage of a portal is that consumers are taking charge of their own healthcare. There is opportunity in going beyond patient education to a personal patient status record, beyond the provider's computerized patient record."

Zinn sees physician adoption as the tipping point for Internet-based healthcare. He believes that a practice management system that realizes the Internet's potential as a productivity-enhancing tool is the "killer app" that will make online transacting the norm.

"Physicians believe the Web means more work for less money, and clinicians are concerned about sharing too much information," he said. "They balk at ‘online' because there is no perceptible return and no productivity improvement."

If you build it . . .

How to get physicians and hospitals to use the 'Net in their daily work was a theme addressed throughout the conference. Jim Doty, vice president of marketing and strategic consulting for Echobridge, cited a case study in which one of Echobridge's clients, an orthopedic device firm that he declined to name, used patients to reach the provider community.

"Our objective was to develop a relationship with the patient to create a demand for the products," he said. "We built a disease-specific ‘vortal' (vertical industry portal) for arthritis that had personalization options, self-diagnostic tools, and an ‘ask-the-expert' section. The patients' data are stored on their own hard drive."

According to Doty, the physician finder tool plays a major role in marketing the orthopedic device firm's products. Potential patients searching for physicians in their area are directed to orthopedists who use the company's products, and the finder database differentiates between physicians who stock only the shoulder products and those who carry the hip products. If no qualifying orthopedist is located in a patient's area, the patient is given the option to receive e-mail notification when the product of interest is offered in his or her region. This creates a selling point for the orthopedic firm to use in marketing its products to physicians and provides physicians with a ready-made patient base.

Statistics for the orthopedic site are more than 1500 unique visitors per day, 20% of whom are repeat visitors, and more than 100 e-mail information requests per week, according to Doty. Some 7% of the site's visitors use the physician finder.

Body1.com, another presenter at Internet Strategies 2000, is taking a different approach to harnessing consumer power. Chris Messina, CEO, sees consumers playing a key role in accelerating the adoption rate of medical technologies. As consumers become educated on various healthcare topics, they can participate in regulatory efforts to get devices and technologies approved for use, as well as request particular procedures or products from their providers.

"The Internet in the medical device industry serves a tactical purpose," he said. "Through a consumer health site network, the consumer can lead the physician."

Messina also emphasized the global business opportunities that Internet-based transactions enable. The firm cites buying power, Internet penetration, and population as the deciding factors for entering a market and intends to concentrate its efforts initially in Latin America and China.

Given the uncertainties of e-business and the failure of many consumer-oriented dot-coms, however, many vendors are choosing to invest in business ventures that have a higher chance for profitability. Some presenters at Internet Strategies 2000, such as Allegiance Healthcare and the Global Healthcare Exchange, made a case for B2B and supply-chain management as ways to capitalize on the efficiencies inherent in Internetworking.

Frank Arduini, director of IT for Allegiance Healthcare, pointed to the origins of e-commerce in proven technologies such as EDI (electronic data interchange). The focus on Web content has nothing to do with Internet transactions, according to Arduini. He sees the value of content as zero, while the value of the Internet is based solely on the value of the business transacted via its networking backbone.

"All of the old laws still stand," Arduini said. "Old-fashioned decision-making rests on ROI (return on investment). The Internet is machines talking to machines, nothing more and nothing less."

Participation in ventures such as the Global Healthcare Exchange, one of the highest profile B2B efforts in healthcare with more than 40 members to date, is one way medical device vendors are seeking to harness the efficiencies that e-business promises. According to general manager Mike Mahoney, the GHE will spend the next few months recruiting providers and is in talks with other existing exchanges regarding potential relationships. The organization is also planning to run free geographically based pilots in the fourth quarter.

"We want to be a nimble organization to meet the needs of our clients," Mahoney said. "We're execution focused, and our success depends on having a self-sustainable business model, no pure-plays."

VC pros and cons

Venture capital is another attractive option these days for both start-ups and established firms that want to break into e-healthcare. Financing options abound, with players such as Warburg Pincus and Schroder Ventures Life Sciences, not to mention investment arms of large corporations, ready to provide cash to companies with viable business plans.

Warburg Pincus' dedicated healthcare group looks at major growth potential for the companies that it invests in, according to Bess Weatherman, managing director. The firm considers the Internet a useful tool to raise consumer awareness of various medical products.

According to Jim Garvey, partner at Schroder, the Schroder Ventures Life Sciences division has $30 million under its management, a little over half at the seed and early stage. Sixty percent of the investments are in the U.S. In addition to mere money, the firm offers coordination, strategic planning, technical skills, and other management resources.

But VC-supported companies need to be aware that VCs will put them through hoops, according to Skip Sallee, CEO of MedCentral, a teleradiology services company funded by Schroder. St. Louis-based MedCentral has garnered $16 million in funding, half up front with an additional $8 million in the pipeline.

The e-health firm is going directly after the provider market but is pursuing profitability by concentrating its efforts on a high-margin niche: radiology. The radiology market accounts for $80 billion, or 8% of the entire healthcare market, but its growth is fast outpacing that of healthcare as a whole, according to Sallee. MedCentral is banking on increasing availability of bandwidth and adoption of the DICOM standard to make its ASP-based product offering attractive to smaller providers (fewer than 300 beds).

"Physicians care about the quality of patient care, their own lifestyle, and making money," Sallee said. "The success of e-health lies in addressing those three issues while not changing the way doctors do business."