InformationWeek

MedChannel, a San Francisco company that will launch its medical-industry network this month, is one of the first to tackle the thorny issue of integrating all the parties in a marketplace. "They are definitely on the leading edge of where the net marketplace industry is going," says Hollis Bischoff, VP of the electronic business strategies group for Meta Group.

In order to understand the niche MedChannel wants to fill, consider the unsophisticated state of most marketplaces. The typical medical market often receives an order online, but then forwards it to distributors and manufacturers by E-mail, fax, or phone. In addition, doctors and hospitals have no way to track the order electronically because the marketplace's system isn't integrated with that of the distributor or manufacturer.

Anytime there is a customer-service issue, the front-end net marketplace has problems, says Bill Bain, MedChannel's chief technology officer. "They can't look into their distributors' system and find out the status of an order," he says.

For their part, manufacturers have trouble anticipating and forecasting orders. As a result, orders can lag or manufacturers have to maintain costly excess inventory.

Most medical markets are trying to aggregate customer demand and bring people onto the Internet, MedChannel CEO Richard Sommer notes. "I didn't see any competitive advantage in putting up just another online catalog without the infrastructure to allow all the parties to communicate with each other," he says. MedChannel's ultimate business goal is to provide services and integration, as well as offering a medical marketplace for the industry.

MedChannel recently concluded beta trials for its online marketplace, which linked 350 physicians in the United States, a medical warehousing company, and 20 Asian manufacturers of commodity medical supplies such as rubber gloves and gowns. The foundation of the network is Oracle's Message Broker object-oriented middleware. MedChannel integrated its Oracle ERP engine directly into the middleware layer with Blue Martini Software Inc.'s TeleConnect customer service application.

Because MedChannel has done this integration, marketplace participants can have views into one another's systems using Web browsers. For instance, MedChannel can look into the warehouse-management system of Livingston Healthcare Services, the Newark, Del., warehousing company that took part in the trials, and check inventory levels in near real time. "MedChannel is the first medical market to take the complete supply chain into account," says Vance Moore, VP of sales and marketing for Livingston Healthcare.

The key, Sommer says, is to build front-end connectivity at the same time as the layer that connects logistics, distributors, and manufacturers. "The front end is where all the business rules and processes are," Sommer says. "If you don't build the back at the same time, you're creating a legacy system where all the processes are bad, so it will have to be ripped out and replaced."

MedChannel eventually wants to create a global medical supply chain that will support a variety of Asian-made medical products and it also reached a deal with the Chinese government to provide portal access for that country's hospitals.

The physicians involved in MedChannel's beta trial like what they see. Dr. Phillip Wagner runs an occupational health practice from two offices in Eureka, Calif. He has used MedChannel for the past six months to order medical supplies and finds prices are lower because the system cuts some distribution costs. Additionally, orders tend to be filled more accurately than through his traditional distributors. "It is the future of supplies, especially for smaller medical groups like myself," Wagner says. "I can't afford to employ a purchasing agent or materials manager."

Still, many important questions remain until the formal launch. MedChannel's Bain says the company is still finalizing negotiations with distributors and setting its pricing model for the exchange and services.

MedChannel also talks about a service model of providing the network and back-end integration for other online medical marketplaces that want to focus solely on front-end transactions-a plan Bischoff says has significant potential. For example, Dan Eckert, executive VP at Neoforma .com Inc., a Santa Clara, Calif., provider of business-to-business E-commerce services, says MedChannel's back-end integration could be a valuable addition to his online service, which concentrates on the front end of medical procurement. "The two models are complementary," Eckert says. "Anything like this that could potentially take inefficiencies out of the supply chain might be of great interest to medical manufacturers."

MedChannel must also show that a system that works well in a limited beta test can scale up to potentially thousands of users. It must also convince distributors and hospitals about the benefits of giving up their proprietary electronic data interchange systems.

Sommer says that's a case of simple economics. Online marketplaces want to reduce the $1.7 billion in costs at the order-management end of the medical supply chain, according to Efficient Healthcare Consumer Response, a consulting firm. But most of the costs in the supply chain are at the back end-where MedChannel is looking to cut intermediary distributors and reduce inefficiencies.

"The idea of cutting costs from the supply chain instead of just from the hospital procurement end is exciting," says Frank Gillett, a senior analyst at Forrester Research.

MedChannel was incorporated in April 1999 and got its first round of funding, for $6.5 million, two months later. In a second round in March, MedChannel raised $42 million from a diverse syndicate of venture capitalists, including Trinity Ventures, Johnson & Johnson Development, and Bessemer Venture Partners.