Epocrates, Mobile App Developer Since Palm Days, Preps for IPO-And for Push Into Electronic Medical Records
If you’re a young software engineer today, you’ve got to be in mobile. That’s why San Francisco and Silicon Valley are crawling with twenty-something developers building games and other diversions for the iTunes App Store and the Android Marketplace.
But there’s one local company that started building mobile apps before most of these people even hit puberty. It’s Epocrates, the San Mateo, CA-based company that began distributing drug reference data on Palm devices in 1998. Today, nearly half of the nation’s doctors have Epocrates on their smartphones and PDAs, often firing up the app in the exam room with patients to look up dosages and check drug interactions before writing prescriptions. The freemium service—which became one of the first third-party apps ever announced for the Apple iPhone in 2008—is also used by more than 150,000 nurses, not to mention pharmacists and medical students.
And now Epocrates wants to leverage its name recognition in this high-end market in two big ways. First, it’s attempting to go public: the company said in paperwork filed last July that it planned to raise $75 million in an initial public offering on the Nasdaq exchange. Just last week it raised its offering to an even more bullish $92.5 million (though the company hasn’t yet said when it will pull the trigger, price the deal, and start trading).
Second, it plans to push beyond its traditional reference market into the booming business of electronic health records (EHRs). That’s a stretch, from a technological and administrative point of view. The company hasn’t previously had to deal with actual patient data, which is governed by strict federal privacy regulations. But CEO Rosemary Crane says building EHR tools is a natural outgrowth of the company’s drug reference business. “We have a brand identity with physicians—they believe Epocrates is accurate, up-to-date, and timely,” Crane says. “They trust it. That allows us to move into this new space.”
I interviewed Crane about Epocrates’ growth plans back in October. Out of the nation’s 700,000 practicing physicians, she says, about 490,000 have smartphones, and 300,000 of those, or 61 percent, use Epocrates. But unlike most app makers, the company doesn’t depend on app sales or in-app advertising to make money (at least, not advertising the way you usually think about it). Rather, the company’s revenue—$94 million in 2009—comes from an interesting mix of sources.
About one-fifth of the company’s revenue comes from subscriptions to the premium versions of Epocrates, which cost $99 to $199 per year and come with extra information like treatment and lab-test guides and disease classification codes. Another 60 percent comes from drug manufacturers, who pay Epocrates to supplement its monographs on each drug with patient literature and contact information, so that doctors can contact manufacturers to request samples or ask questions. Crane, a Johnson & Johnson veteran who joined Epocrates in 2009, calls this the company’s “virtual representative service” and says it’s a good way for pharmaceutical companies to stay in touch with doctors even as they reduce headcount among their field sales reps.
Drug companies also sponsor in-app content such as daily updates and alerts on medical research. Big insurers pay the company to include their own formularies in the reference data (a formulary is the list of drugs an insurer has approved for reimbursement). Finally, drug makers and marketers pay Epocrates for help recruiting healthcare professionals who use the app for market-research surveys.
There’s another difference between Epocrates and most other mobile app companies. While most apps are only available for one or two mobile operating systems, Epocrates is “very agnostic to platforms,” in Crane’s words. That’s thanks to its long history, which stretches back to the beginning of the smartphone revolution. Co-founder Jeff Tangney started out distributing a freeware equivalent of the familiar Physicians’ Desk Reference for the Palm PDA in 1998. After 100,000 doctors downloaded it in the first year, he realized he was on to something big. “Physicians were going out and buying Palms so that they could download Epocrates,” Crane says. (Tangney has since left the company; today he’s working on a related product, a mobile medical directory service called Doximity mHealth.)
You can still run Epocrates on your Palm or Pocket PC device, but the original platforms were eventually overtaken by RIM’s BlackBerry, Microsoft’s Windows Mobile, and then, in 2008, by the iPhone. Apple’s blockbuster phone was a game-changer for Epocrates, Crane says. By 2005 or so, the company had hit a revenue plateau. Palm wasn’t coming out with new platforms, and BlackBerry was pursuing big corporate users, not healthcare providers. So when Apple introduced a marketplace for third-party iPhone apps, Epocrates jumped at the chance to exploit the phone’s relatively large color touchscreen.
Epocrates was one of five app providers highlighted by Steve Jobs when Apple unveiled the iTunes App Store in a March 2008 briefing. (The others were Salesforce, AOL, Electronic Arts, and Sega.) In the first four months after the iTunes store went live, Epocrates “achieved what would have been the entire year’s projected growth,” Crane says. “It was a linear slope and it’s still growing.”
With so many physicians and nurses already firing up Epocrates on their phones in the clinic, the company says it now has an opportunity to help doctors take whole practices digital. The 2009 federal economic stimulus legislation included $19 billion in incentives for EHR conversion, and Crane says Epocrates plans to offer small practices—those with 10 or fewer physicians, which are traditionally the slowest to adopt new information technologies—technology that helps them qualify for the subsidies with less hassle. “It will be SaaS-based, they won’t need a server, and it will be in a very competitive price range,” she says. “It will be very much designed for physicians, by physicians, not by engineers. We need to work within the physicians’ existing workflow, as opposed to pushing them into a workflow.”
Crane says Epocrates’ EHR system, which it expects to launch this spring, will focus on “the functions that are really necessary,” such as the ability to document a patient encounter, review lab results, and write electronic prescriptions. But she says the centerpiece of the Epocrates EHR—and one of its advantages in the marketplace—will be the traditional FDA-approved prescribing information, which discloses a drug’s safety and effectiveness profile. Even though this information, sometimes known as the “package insert,” is something many doctors rely on every day, few electronic medical record systems have found a way to display it very effectively. “If you were to ask physicians about the drug reference information in their existing EHRs, a lot of them are not happy, which is why a lot of them are still using Epocrates alongside their EHR,” she says.
Epocrates’ first EHR apps will be written for the Apple platforms. Last November the company spent $14 million to acquire Modality, a Durham, NC-based app studio that’s built more than 140 iPhone and iPad apps, including dozens of medical reference apps. Epocrates said in an announcement that the acquisition would augment its in-house Apple expertise and “accelerate the delivery of innovative clinical solutions.”
But even with the extra help on board, the company faces some challenges. As Epocrates itself points out in the obligatory “risk factors” section of its S-1 pre-IPO paperwork, it has limited experience building EHRs, which are a lot more complex than its older reference products. Patient data is protected by the notoriously stringent Health Insurance Portability and Accountability Act, or HIPAA, and privacy breaches or data inaccuracies could open the company to big lawsuits. On top of that, there’s no guarantee the government will certify Epocrates’ EHR as one of the systems that group medical practices can buy to qualify for the stimulus-act incentives.
But “a lot of what we do is regulated, so we do understand regulations,” Crane points out—referring, for example, to laws restricting the way drugs can be advertised and promoted. And the Epocrates brand should confer a big advantage, she says. “Our identity is mobile, simple, accurate, and usable at the point of contact” with patients, she says. “And we already have access to the network that we’re going to sell to, so we understand their needs and their issues.”
And just as important, Crane says, Epocrates understands how to monetize mobile information services without alienating its end users: physicians. Epocrates might be able to charge less than competitors for its EHR service if it can earn money in other ways.For instance, it could use its service as an expanded platform for sponsored messages from drug or medical-device manufacturers. “Imagine the physician has a diabetes patient, and needs to communicate about why they need to control [their condition],” Crane says. In that situation, she says, “sponsored patient literature is a benefit to the pharmaceutical company, and the doctor, and the patient. That’s just a simple example.” (In such encounters, information about patients and their conditions would never be revealed to pharmaceutical companies, she says.)
Investors themselves will get a chance to judge how well positioned the company may be for the already-competitive EHR market when Epocrates goes out on the market later this year. The company hopes to sell 6.16 million shares of common stock at $13 to $15 per share, which would bring in up to $92.5 million in gross proceeds. That would more than double the company’s total capitalization, and presumably create some long-awaited liquidity for Epocrates’ venture investors, who include Sprout Group, Goldman Sachs, Interwest Partners, Draper Fisher Jurvetson, Three Arch Partners, and The Bay City Capital Fund.
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