drkoop.com's condition takes turn for the worse on Nasdaq


Somebody get drkoop.com a doctor.

Shares of the popular online consumer medical site founded by former U.S. Surgeon General Dr. C. Everett Koop plummeted more than 40 percent yesterday after auditors said they had "substantial doubt" about the future health of the business.

Shares of drkoop.com fell $2.5625, or 41 percent, to close at $3.6875 at the close of the Nasdaq yesterday. The company went public in June and traded as high intraday as $45.75.

The Austin, Texas-based company is the third most popular health care site on the Internet, with 2.8 million first-time visitors in February, according to Media Matrix. It has one of the most recognized brands on the Internet thanks to its well-known bearded founder.

Despite its popularity, PricewaterhouseCoopers LLP, in an audit filed Thursday with the company's annual report to the Securities and Exchange Commission, said drkoop.com did not have enough money to meet its projected operating expenses over the next 12 months.

The company is the latest in a string of e-commerce sites to run into financial troubles, sending analysts scrambling to figure out whether drkoop's ills portend larger problems for the fledgling dot-com industry.

"If this an indication of an epidemic, it's certainly not quarantined to the health care industry," said Eric Brown, a health care analyst at Forrester Research.

Online music retailer CDNow Inc., for example, also received bad news this week from its auditor, Arthur Anderson LLP, which questioned its ability to weather substantial losses and rapidly dwindling cash reserves. And Peapod, the online grocery delivery service, announced that its cash flow problems would force it to look for a buyer.

But drkoop, analysts said, was hurt as much by a series of embarrassing missteps that occurred last year as any fundamental flaws with its business model. Those include charges of insider trading and failing to disclose that several hospitals mentioned in the editorial content were also advertisers.

"He started out as the most trusted man in health care. But that brand integrity got pummeled," said Claudine Singer, senior health analyst at Jupiter Communications.

There were also business miscalculations. Analysts said the company failed to diversify fast enough. While competitors such as WebMD were striking deals with drug store chain CVS to sell drugs online, drkoop hinged its business primarily on content and advertising revenues.

Considering there are roughly 15,000 health care sites on the Internet, said Singer, content alone won't pay the bills. By 2004, there will be online advertising worth just $700 million, according to projections by Jupiter Communications. By comparison, online commerce will be a $10 billion business by the same year.

Analysts also said yesterday's pummeling may just be an indicator of shifting investment winds, as more venture capital firms start flocking away from consumer companies to bigger and potentially more profitable business-to-business e-commerce firms.

"There's a new kid in the sand box. And he's much better looking," said analyst Rob Labatt at Dataquest.

Analysts said there are three likely outcomes: bankruptcy, a new round of venture capital financing, or a buyout by another health care firm. Most analysts consider the last to be the most probable scenario.

In the end, drkoop's financial woes may be a blow to more than just the former surgeon general's company. According to SEC filings, he owns 2.61 million shares, or 8.3 percent, of drkoop.

When the stock touched $45.75 in July, the shares would have been worth $119.4 million. At yesterday's close, those shares had shrunk to $9.62 million.

Wire services contributed to this article

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