A healthy float for Medical House? (August 16, 2000)

By Elliott Gotkine & Greg Herbert, UK-iNvest.com

If you were worried that you'd missed out on the flotation of The Medical House, you need not. Although the original prospectus said the offer would close on July 31, a supplementary prospectus and extension to the offer was deemed necessary after a deal with Pharmacy2U was sealed and "several blue chip companies" expressed "significant interest" in the company's medical content and digital secure patient records. Despite the Pharmacy2U deal, which will bring in an additional £280,000 in revenues for The Medical House over the next two years, investors -- both institutional and retail -- will still be able to snap up the shares for 50p a pop, as originally planned. This will help the company raise £2.15m after expenses, which will value the company at £25m. Brewin Dolphin Securities is the broker.

The Medical House comprises two divisions: Information and Products. The former provides medical content via the Internet, including patient records, medical information, learning materials for students and medical news. It distributes these over its websites, healthworks.co.uk and derweb.co.uk. The company hopes to use these to take advantage of the growing demand for medical information and content. Both sites have been going for some six years and have tens of thousands of users. And while many content providers rely on advertising revenues The Medical House makes money by selling its content to other parties, be they pharmacies or mothers-to-be.

Ian Townsend, founder and chief executive of The Medical House believes the scope for the content division is enormous. "The sky's the limit," he says. The company has already signed deals with some "very big" companies -- many of them FTSE 100 companies, including British Telecom BT. Both because The Medical House only pays for its content once it sells it -- it pays a 15% royalty to the authors -- and because it distributes its content over the Internet, it has low overheads. "We make a very good margin on our content," says Townsend, "though I wouldn't like to specify." Perhaps more importantly, the company has exclusive agreements both for content ownership and for distribution. Which means some information is only available through The Medical House or its partners and other content providers will find it hard to get a look in.

Eurocut, as the products division is called, concentrates on the manufacture of orthopaedic instruments for knee and hip replacements. This side of the business has been going for 12 years. In that time, it has become Europe's leading manufacturer of orthopaedic instruments and has deals in place with such industry grandees as Johnson & Johnson JNJ. "We're way ahead of the competition," says Townsend. The only reason the company is coming to market is so as to have an acquisition currency with which to buy-in more content. The products division generates lots of cash and the company expects a profit of "not less than £300,000 for the year ended June 2000".

And if you think about it, the prospects seem pretty bright. Imagine falling ill in deepest Guatemala. You need your medical records but it's the middle of the night back home. All the doctor need do (assuming he/she has an Internet connection) is call up your medical records from the site, which you yourself would have entered before jetting off. The Medical House has already received interest from companies as far afield as Canada and South Africa and has many long-term contracts in place.

As for the competition, you would probably think of the US's Healtheon/WebMD HLTH as its inspiration. Aside from the Yank's lack of a product division, there is one major difference between the two companies. "They burn cash and we make cash," says Townsend. And although the £25m valuation and (minimum) expected profit of £300,000 leaves the group on a price-earnings multiple of over 80, at least it has a PE. Healtheon, capped at $2.2bn, is still racking up huge losses. And given The Medical House's growth prospects and its solid record, the shares look set for a healthy debut when trading begins on September 4.

Reproduced with kind permission of http://www.ukinvest.com/