IPO Watch: Epocrates

Epocrates Inc. is a healthcare information technology company; its flagship product, Epocrates Rx,is a drug-reference database that cross-checks medications and is promoted as having averted many a medical mix-up. The company, which filed an initial public offering late last month, has some skeptics, though. Some equity analysts say if the company doesn't change its business model, the hype won't be long-lived.

Based in San Mateo, Calif., Epocrates boasts that its applications and online services are used by 1 in 4 U.S. physicians. Its software was recently featured at a demo of Apple's 2.0 iPhone, to be released in June, and is part of a growing trend of using mobile devices in the medical field. The company's competitors include WebMD and Thomson's Physicians' Desk Reference, both providers of medical reference databases. Epocrates is currently the top online drug reference database program, with Thomson's PDR in second.

Epocrates expects to raise $75 million with its offering and plans to use $22 million of the proceeds to pay dividends to holders of the company's Series B preferred shares. Last year, Epocrates reported earnings of $25 million, up sharply from $1.4 million in 2006. Company CEO Kirk Loevner says there are "no plans to go beyond our core business," but says Epocrates will expand its lab interpretation tools (which catalog diseases and their symptoms for easier diagnosis), add to the popular drug database, and publish studies.

Loevner would not say when the stock (with the proposed Nasdaq symbol EPOC) would debut.

"I remember the excitement several years ago when Epocrates led the pack," says Emory Petrack, a physician who is president of Petrack Consulting and former chief of emergency services at a Cleveland children's hospital. Petrack, his colleagues at the Ohio-based emergency medical services group, and some half-million others worldwide have come to rely on the service. If doctors are starting a patient on a medicine, they check to see what the patient is already taking and use Epocrates on their smartphones to see if the new medication is compatible with the others.

Erika Fishman of the New York-based market research group Manhattan Research says Epocrates "has put itself in the ultimate position of luring in new users by offering up free access." She adds that, "with medical schools mandating the use of PDAs, students are sure to scoop up available programs."

But some analysts doubt that users will stick with Epocrates. Rafael Garcia, an equity analyst with the Chicago investment research company Morningstar, says the company relies too much on revenue from advertising by pharmaceutical companies instead of charging for its service.

"There's nothing that will make doctors loyal to Epocrates," Garcia says. The company is "just trying to capitalize on the sector—and it's really hot," he adds.

The analyst believes that the competition could eventually overwhelm Epocrates. "Epocrates is popular today," Garcia says. "If they will be successful 10 years down the road—I don't think so."

WebMD, which had earnings of $65.9 million in 2007, has threatened to sue Epocrates for false advertising. In its IPO filing, Epocrates says such legal action could force the company to "spend significant amounts of time and money to defend ourselves." WebMD has retained outside counsel but has not filed a suit.