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Medical Middleman On the Web Acquires Funds in the Millions

Mike Chermak appears to be one step closer to realizing his dream of a major return on his investment now that his health care business-to-business E-commerce firm is on its way to the stock exchange.

San Diego-based Medibuy.com, an Internet firm that serves as the middleman for medical suppliers and buyers in the $143 billion market for medical and surgical supplies, announced Jan. 13 it filed a registration statement with the Securities and Exchange Commission to go public.

The news follows a Jan. 10 announcement that Medibuy.com raised $77 million in an additional round of venture capital financing.

That brings the total funding to more than $150 million since the firm was incorporated in August 1998, Chermak said.

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Key investors include Kleiner, Perkins, Caufield & Byers and Sequoia Capital, both of Palo Alto; Oak Investment Partners in New York; Allianz Capital Partners in Munich, Germany; and E-partners of London and Silicon Valley.

Chermark and Medibuy.com co-founders Dr. Richard Propper and Charlie Smith couldn’t have received better news to ring in the new year, considering their venture is only 16 months old.

But like so many high-flying Internet companies, they can’t wait for global success.

Medibuy.com now touts 150 employees, most of them Internet junkies specializing in graphic design, software engineering and marketing, all dedicated to bringing it to success.

It’s a far cry from the 25 employees last April who built Medibuy.com’s Web sites through licensed technology.

The strategy to license technology and buy companies with promising technology continues to be an important part of Medibuy.com’s success.

The founders are banking on Dennis Murphy, president, chief executive and chairman of Medibuy.com, to take it to the top.

Murphy, who was the president of McKesson Health Systems in San Francisco , a division of the McKesson Corp. , was brought in by Smith in April 1999.


With 19 years’ experience in the health care industry, Murphy appeared to be the right man to bring Medibuy.com’s concept to hospital purchasing agents and buyers on one side, and medical equipment vendors and sellers of medical supplies on the other.

Murphy is the first to admit his job is full of challenges.

To convince buyers , most of whom are hospital managers , to abandon long-term relationships with big vendors and their pre-negotiated contracts is one thing.

To recruit suppliers to bring and keep their Web sites updated and pay Medibuy.com between 1 percent and 4 percent for each sale is another.

“As you read about business-to-business efforts within the Internet, one of the things that goes on is you have the chicken or the egg approach,” Murphy said. “The question is, do you go with the buyers first or suppliers?”

He decided to tackle both at the same time.

As a company board member during the first quarter of 1999, Murphy spread the Medibuy.com message at trade shows, meetings and to his friends in the health care industry.

Since he replaced Smith as president in April, Murphy rolled out an aggressive $3 million advertising campaign to spread the word.

This year, he set aside four times that amount , $12 million , to talk about Medibuy .com’s services.

That includes placing ads in the nation’s biggest health care publications and demonstrating the Web sites to buyers and suppliers at trade shows across the country.

So far, Medibuy.com offers buyers and sellers four applications on their Web sites.

Doing Their Bidding

The first application implemented last April, called eRFP, or electronic request for proposal, invites buyers worldwide to submit bids for equipment and medical supplies, Murphy said. The amount Medibuy.com charges suppliers depends upon the size, amount and nature of the sale, he added.

The second feature launched in June 1999, called eAuction, allows hospitals to sell used medical equipment. All items are covered by a 90-day warranty and a set of service manuals, Murphy said.

The acquisition of Summit Medical in Cincinnati, which specialized in identifying refurbished medical supplies, accelerated the growth of Medibuy.com’s Web sites, Murphy said.

The third site, called InstaCat, allows buyers to browse an online-catalog of suppliers. The acquisition of the privately held software firm PartNET in Salt Lake City in November was key to its success.

Its technology enabled Medibuy.com to contact affiliated suppliers worldwide with buyers’ requests, Murphy said.

The latest addition, called eSpecials, introduced two weeks ago, invites suppliers to offer promotional items on Medibuy.com’s sites, he added.

Murphy estimated about 1.4 million different health care products are sold by thousands of vendors in the United States alone.

So far, Medibuy.com has recruited 3,000 suppliers to offer their products on Medibuy.com Web sites.

He estimates a typical hospital buys $50 million worth of supplies a year, filling out 70 purchase orders a day.

The question is, will hospitals move into cyberspace to do so?

Most hospitals buy from big concerns that sell and distribute hundreds of products from smaller suppliers, said Chris Wade, who oversees ordering medical supplies and equipment for four hospitals of the Sharp HealthCare system in San Diego.

Wade said he places some 450 electronic orders per month via computer links than run from the hospital directly to a handful of vendors.

Sharp’s hospitals are among more than 1,000 hospitals nationwide that contract through the Premier Group Purchasing Organization based in Charlotte, N.C.

In order to not breach any contracts with the purchasing group, he won’t be able to buy any hospital supplies from Medibuy.com until it reaches an agreement with the group.

That’s something Wade has been looking forward to for a while now.

“If (Medibuy.com and Premier Group) would combine their skills, it would be to their advantage and (to the advantage of) the end user,” he said.

Murphy agreed. He said Medibuy.com wants to “leverage agreements that hospital systems already have with vendors,” while expanding its reach to outside vendors.

Faster And Cheaper

He estimated the entire Sharp HealthCare system buys between 80,000 and 120,000 medical products a year, half of which are placed through pre-negotiated contracts.

He said Medibuy.com can bring technology into the hospitals that would help them identify the other half of required products faster, cheaper and more efficiently than through current methods of faxes and phone calls.

Still, Sharp has reaped substantial financial benefits by selling old equipment on Medibuy.com’s sites, Wade admitted.

“We’ve made about four times what we would have made if we would have sold it ourselves,” he said. In the past, he would literally throw out used equipment to get rid off it.

Murphy thinks hospitals overseas will reap similar benefits as Medibuy.com is getting ready to open shop in the United Kingdom and Germany.

He said both countries have a high turnaround of medical equipment, replacing old technology with the latest on the marketplace.

Murphy couldn’t give specific dates for the expansion but said it will be sometime this year.

The recently announced injection of $77 million, which includes money from English and German investors, is likely to spawn the expansion.

With Medibuy.com’s current success, Chermak and Propper are looking to fund a dozen Internet firms at their own venture capital firm, RP Associates in La Jolla, Chermak said, which they started in mid-1999.


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