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The Demise of A Riches to Rags Internet Story

by Tamara Straus

Unethical blur between advertising and medical advice
Adam Smith is smiling in his grave. His conviction that markets are self-regulating proved true earlier this month when, the once flush healthcare Web site founded by former U.S. Surgeon General C. Everett Koop, was deemed to have little chance of survival.

PricewaterhouseCoopers said the company "has sustained losses and negative cash flows from operations since its inception," which "raise substantial doubt about its ability to continue as a growing concern." Translated this means that the $88.5 million netted from its July 1999 IPO has largely been spent and that attempts to raise cash through e-commerce and advertising have failed. is an Internet riches to rags story par excellence -- with all its shoddy undertones. When the company went public last July, stock rocketed from its original offering of $9 a share to as high as $45.75, a leap based to a great extent on the buzz generated by Koop's good name.

The company then proceeded to "monetize," as one says in Internet parlance. It established "partnerships" with over a dozen hospitals (which paid $40,000 each for the endorsement), and began collecting advertising revenues from Web sites such as and (from which Koop personally received a 2-4 percent commission). In September, discontinued the latter two arrangements after the media blasted the company for unethical practices.

Regardless of criticism, though, things looked especially bright around Thanksgiving time. had signed a brand-pushing agreement with Creative Artists Agency and made deals with and three of Disney's GO Network sites to be their exclusive health content provider. Traffic flowed heavily. But the price for that traffic (currently estimated at 2.8 million monthly visitors) was high. In July, began paying AOL $89 million to feature its logo on AOL's portals -- a figure that today represents nearly 181 percent of the company's total available cash.

Yet this is what every Web site in post-IPO rapture was -- and still is -- doing: overspending, to build brand recognition, so as to build traffic, so as to make the all-important e-commerce business model look legit. "We are in a mad panic to go out and get lives on the system," Healtheon CEO Mike Long was quoted as saying in Michael Lewis' book "The New New Thing." Without "lives," Long's word for users, neither nor Healtheon -- a medical administration site that is also fairing badly -- can get the revenues needed before the IPO funny money runs out.

It is perhaps unfortunate it was the market that took down Dr. Koop and not the small, but vociferous group of health and environmental activists that have fought to expose him. Last year, the National Environmental Trust found that Koop had urged the U.S. House of Representatives to extend Schering-Plough's patent on the allergy drug Claritin for an additional three years, without disclosing that his Koop Foundation had received a $1 million grant from the pharmaceutical company. When questioned by the press, Koop responded, "It never occurred to me that it could be a conflict of interest."

This was not the only indiscretion Koop has been accused of. New York Times reporter Holcomb Noble wrote several articles last fall highlighting the unethical blur between advertising and medical advice on Koop's Web site. Noble broke the story that was promoting hospitals for a fee and that "America's Family Doctor" was receiving a kickback for the sale of drugs and vitamins through his site. He also disclosed that Koop ignored warnings from healthcare workers and patients who said that latex surgical gloves could cause dangerous allergic reactions. Koop trivialized the concerns at a Congressional hearing and failed to mention that he had once received $650,000 in consulting fees from WRP Corporation, a major latex glove manufacturer.

Some doctors, such as Sidney Wolfe who directs the Public Citizen's Health Research Group, argue that Koop, who is 83, "suffers from a pathological dose of naivete" in his Web site dealings. But Wolfe's analysis seems far too generous. Certainly Koop has done much to promote AIDS awareness and fight the tobacco industry, but the list of unethical faux pas has grown much too long to be excused as innocence.

As Wolfe pointed out in his recent article on, served as publicity hack for Warner-Lambert as recently as March. The Web site accepted endorsement funds from the company for its "Diabetes Center" even though Warner-Lambert's diabetes drug, Rezulin, had been associated with 90 cases of liver failure, including 63 deaths. To top it off, the day after the Food and Drug Administration took Rezulin off the market posted a New York Post article that argued the drug should remain available. has also relied on the American Council on Science and Health (ACSH) to provide much of the site's content, despite urgings by advocacy organizations like Healthcare Without Harm to discontinue the relationship. ACSH, a nonprofit, is widely seen as a front group because it receives funding from chemical and manufacturing companies whose products ACSH tends to endorse.

Koop has defended his record throughout these debacles, insisting that he has no interest in making money. He has repeatedly told the press that the chief purpose of is to give Americans a new way to find medical information and take control of their healthcare.

If this is true then justice is being served in terms fit for a capitalist satire. On February 15, the company posted a loss of $19.9 million, bringing the total loss for 1999 to $82.5 million. Koop's personal holdings, once worth more than $40 million, have dropped to about $5 million -- and the descent continues. As of April 6, the company's stock was valued at an all-time low of $2.6 a share.

Bankruptcy is now in's future. "Based on its current stock value, drkoop will probably go bust or be bought by a larger firm," said Mark Mulcahy, an analyst who follows the company for Pacific Growth Equities in San Francisco.

Other analysts are nodding their heads. In the April 5 issue of, Aram Fuchs wrote: "It might be too soon to call terminal. Nevertheless, with the company's ad revenue failing to cover the cost of goods and incredible marketing liabilities, we think investors should treat drkoop like a dirty Kleenex and get rid of it."

Of course's financial troubles are part of a wider Internet start-up scare. Irrational exuberance has also come home to roost for CDNow, a top online music seller, and Value America, a PC retailer, which have received similar warnings from auditors of dwindling cash reserves and unacceptably low revenues.

"This is the beginning of a major dot-com shakeout," Joe Sawyer, an analyst with Forrester Research, told the Los Angeles Times.

"This is the year where they will really sort out which ones of these companies have business models that will ever become profitable some day," said Michael Murphy, editor of the California Stock Letter.'s fate is now in the hands of its investors. They may have little concern for issues of medical ethics, but they will probably know a dirty hankie when they see one. Even so, the motto -- "The best prescription is knowledge" -- may ultimately function as a double meaning in the history of Internet healthcare.

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Albion Monitor April 10, 2000 (

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