‘Net providers acquiring assets to help them assume identities

‘Net providers acquiring assets to help them assume identities – Industry Overview

John Dalton

The trio of major players fighting to establish a home within the expanding landscape of the e-commerce marketplace have discovered they’re required to invent identities as third-party providers but not reinvent the wheel.

Within a time frame of about 30 days, Neoforma, the Global Healthcare Exchange (GHX) and Medibuy went about acquiring existing supplier networks and software that will support their goal of leapfrogging the competition by reducing time frames for ramp-up, start-up and beta testing.

Along the way, Neoforma announced it was trimming down by divesting itself of a pair of underperforming business units and bulking up with additional investment from group purchasing organization (GPO) Novation.

GHX weighed in by announcing a deal that is probably intended take a bite out of the e-commerce revenues to be developed by Neoforma’s joint venture with the Canadian Health Marketplace (CHM), the new Internet marketplace under construction by Medbuy, a major north-of-the-border GPO.

All that activity coincides with GHX’s intent–and the announced timeline of the CHM–to go online by the end of first quarter 2001. As the offspring of many of the planet’s largest device and med-surg product suppliers, GHX is expected to drink deeply from the worldwide e-commerce trough. And CHM and Novation have plans to establish a major beachhead by homesteading the broad reaches of the Canadian marketplace.

“This will tell us whether third-party providers have a real role in the supply chain,” says one marketing rep for a major U.S. device manufacturer. “So far it hasn’t been a stretch to say suppliers and providers are not convinced that these providers are the way to go.”

The alpha role among third-party providers represents revenue potential that has caused a number of suitors to belly up to the bar. But so far, nobody’s been presented with a check.

Oiling the gears

In late January, Neoforma announced it had entered into a series of agreements with Novation and its parent organizations–VHA Inc. and University HealthSystem Consortium (UHC)–by which additional capital would be added to company coffers.

VHA committed to investing $20 million in Neoforma. UHC and i2, a Dallas provider of Internet services, made additional investments, bringing the influx of equity financing to $30.5 million, i2’s investment was in conjunction with its recently announced partnership agreement with Neoforma.

At the time, Neoforma also amended its exclusive 10year strategic agreement that resulted in the formation of Marketplace@Novation[TM], the online e-commerce supply chain platform already up and running in a sizable number of VHA and UHC hospitals.

Under the amended agreement, Novation will guarantee a gross volume-based fee to Neoforma for all purchases conducted through the marketplace, effectively increasing the revenue going to Neoforma from Marketplace@Novation.

That fee will be based on a sliding scale determined by the volume of transactions.

Neoforma said the agreement also “better reflects the value Neoforma is providing hospitals and suppliers participating in Marketplace@Novation and provides Neoforma with greater visibility into its future revenue streams.”

Bob Baker, CEO of UHC, said, “UHC felt it was strategically important for our members to have a reliable e-commerce partner that was devoted to their supply chain management needs, which is why we’ve made this investment.”

And, on the same day it announced the addition of the operating capital, Neoforma made it known it would divest a pair of business units it said were not aligned with its primary Internet strategy.

The units divested were General Asset Recovery (GAR), a medical equipment auction house that had become a familiar presence online at Neoforma.com., and U.S. Lifeline Inc., a content services business. Neoforma expects to save $9 million to $10 million in annualized operating expenses with the pending divestitures. They are expected to be completed by the end of first quarter 2001.

“The direct ownership of these businesses is no longer consistent with Neoforma’s core vision,” said Neoforma president and CEO Dan Eckert. “These business units do not provide Neoforma the growth opportunities or return on capital that we see in our marketplace business.”

Good news, and bad news

Neoforma says it has now signed up 328 hospitals and 67 manufacturers and representatives to participate in Marketplace@Novation. Based on that number, Neoforma believes its online site is currently the largest health care supply marketplace extant.

Less than a month into 2001, said Neoforma, it had surpassed its original hospital sign-up goal for the entire year.

“The progress we are making continues to exceed our expectations,” said Eckert.

The signed hospitals represent approximately $8.4 million in annual supply purchases, and each hospital has committed to transact a minimum of 50% of its annual purchases through Marketplace@Novation.

Currently, 83 hospitals are connected to the marketplace and Neoforma is implementing another 90. It expects to connect a minimum of 75 hospitals each quarter.

The connectivity goal may represent a sense of urgency at Neoforma. In mid-February it announced that net loss for the fourth quarter of 2000 was $19.4 million, compared with a loss of $16.8 million a year earlier.

“Our fourth quarter net revenue does not reflect the health of our core marketplace business,” said Bob Zollars, chairman and CEO of Neoforma. He said the gross marketplace transaction volume of $34 million was “outstanding,” and demonstrated the momentum the firm is building.

And, the company said, the figures are consistent with its estimates announced in late January, and not out of line with its operating plan.

In fourth quarter 2000, said Zollars, the company chose to focus on building its long-term profitability through negotiating the enhanced Novation relations, securing the technology partnership and go-to-market strategy with i2, raising the additional capital through Novation and divesting non-core operations.

With all of the above it was successful, said Zollars, and insists, “We enter 2001 stronger than ever.”

The added touch

In early February, GHX made simultaneous announcements that it had contracted to add OmniBuyer, an e-procurement application for the health care industry from Omnicell Inc., to its online capacity and created a strategic alliance with Ormed Information Systems that will allow GHX to integrate the installed online systems of more than 300 Canadian hospitals.

“Partnering with Omnicell is a key factor in achieving our overall goal of providing connectivity options for our customers,” said GHX president Mike Mahoney.

Currently, more than 1,300 hospitals and health care facilities use the Omnicell software that could provide each facility with connectivity to GHX and provide a huge, installed customer base.

“Omnicell is a series of cabinet systems at point of use that tracks product and use against a master account,” says Steve Schorer, VP of Business Development for GHX who was also the founder of CentriMed, the company whose software and Westminster, Colo., physical plant GHX incorporated into its current online structure. “It is a way of trying to drive accountability at point of use.”

Through Omnicell’s systems, users have control over the dispensing and management of supplies where they are being used.

GHX says it expects to integrate the first joint GHX-Omnicell customer–Chicago’s Rush-Presbyterian St. Luke’s Medical Center–by the first week of April 2001.

John Cashmore, director of purchasing for Rush-Presbyterian, said the joint venture will provide “a complete solution to our procurement needs.”

With the collaboration, individual hospital departments can place orders through OmniBuyer while making purchasing decisions, and tracking orders, based on GHX catalog information received directly from suppliers and distributors.

“We can accelerate market penetration significantly by helping each other,” says Schorer of the cooperation between Omnicell and GHX. “We give them a verified catalog of context and robust supplier connectivity, and they bring us a single point of connectivity with their hospitals.”

Omnicell would also bear the brunt of integration and connectivity responsibilities in hooking up with the supplier channel.

Northward bound

GHX says its alliance with Ormed creates one of the largest e-commerce supply management services for patient care products in North America.

The 300 hospitals within the Ormed platform represent more than a quarter of all Canadian hospitals. Together, says GHX, they are the largest group of health care providers participating in e-procurement in the country, currently purchasing more than $1 billion (Canadian) of products annually.

GHX said the combined e-commerce services provided by the collaboration will be available to all suppliers, distributors and health care institutions in both the U.S. and Canada.

“Ormed is an information systems company that’s been around since the late 1980s and a couple of years back saw the need to develop an exchange for their customers,” said Gary Hutton, GHX’s general manager for Canada. “The beauty of this strategic alliance is that Ormed has a group of clients that can be developed into an exchange-to-exchange connection.”

Hutton says Ormed’s customers are responsible for approximately $660 million (U.S.) in annual purchases of medical and non-medical supplies.

“In a way, the Ormed-GHX connection will be in competition with the CHM in the sense that Ormed customers are connecting to suppliers that are loaded onto GHX,” says Hutton.

Chris Sherback, president and CEO of Ormed, said connecting Ormed’s hospital clients to GHX will result in creating “the industry standard for supply chain management.”

“This is the perfect marriage,” he said.

And, in late February, GHX brought more companies to the party. Five new manufacturers and distributors–E-Z-Em, Delaware Valley Surgical Supply, Merry X-Ray Corp., Suture Express and AFFLINK–increased GHX’s total to 75 supplier members and 26 integrated delivery networks (IDNs) representing 207 hospitals.

The addition of new suppliers and distributors is the key to reducing procurement costs across the supply chain, says Mahoney.

Firming up the software

In early February, at the Healthcare Information Management System Society (HIMS) conference in New Orleans, Neoforma, GHX and Medibuy each announced deals with Lawson Software that will integrate the Minneapolis firm’s lawson.insightp[TM] e-Procurement Service into their online marketplaces.

Lawson says the software allows “complete procurement process automation,” from initial request for supplies or equipment from any area of a hospital, through payment for any medical or non-medical product.

Neoforma and Lawson will initiate their integration technology at Allina Health System, an IDN of 11 hospitals based in Minneapolis. The companies will work with Allina to develop the integration necessary to connect lawson.insight with Marketplace@Novation.

Lawson will provide its software to Medibuy’s application service provider (ASP)-based marketplace and enable the Internet provider’s buyers to fully outsource their materials management information systems.

Dennis Murphy, CEO of Medibuy, said the deal with Lawson will “better enable utilization of limited resources, better pricing through contract compliance and streamlining the receiving and accounting process.”

GHX and Lawson will launch an initial pilot site in second quarter 2001. Lawson will provide all installation, training and basic customer support, and GHX will provide integration assistance and ongoing marketplace connection support services.

All told, the spate of activity can be summed up by Dan Eckert’s assessment of Neoforma’s position.

“We absolutely believe it makes a lot of sense for suppliers to have an Internet presence of their own, but we also believe it makes an awful lot more sense to connect into a single marketplace.”

* www.ghx.com www.neoforma.com www.medibuy.com

COPYRIGHT 2001 J.B. Lippincott Company

COPYRIGHT 2001 Gale Group