After Cutting Deals With Most of the Big Drug Cos, Sermo CEO Offers Health 2.0 Survival Tip: You Will Not Pay Your Bills with “Ads by Google”

8/28/08

Sermo has garnered the interest of the popular press by drawing doctors into the social networking sphere. Yet among venture capitalists and entrepreneurs the Cambridge, MA, startup has attracted more attention for devising a value proposition to convince the pharmaceutical industry and others to pay for access to its coveted online community of doctors; the first pharma to take Sermo up on that proposition, in a deal announced last year, was global giant Pfizer (NYSE:PFE).

Now Sermo CEO Daniel Palestrant says that his company’s list of paying pharma clients has grown to include nine of the 12 largest drug companies in the world (he wouldn’t name names, but think of Eli Lilly (NYSE:LLY), GlaxoSmithKline (NYSE:GSK), and Novartis (NYSE:NVS) as potential customers). This news answers some looming questions about whether Sermo would be able to sell multiple pharmas on the concept of paying for online interactions with docs. What’s more, it may be a positive harbinger for the budding Health 2.0 sector, which is banking on the migration of pharma marketing dollars to the Web as a main source of revenue.

Sermo, with a physicians-only community of nearly 77,000 members, is reaching out to a pharma industry besieged by mounting government oversight of its interactions with doctors, hampering the ability of drug reps to court clinicians through traditional means such as company-paid meals and golf outings. This clampdown is spurring the drug industry to find new ways to interact with its target audience.

“I think what’s happening is that Sermo is very quickly emerging as a medium that can not only allow industry to redefine its relationship with physicians but also to have tremendous cost savings and have tremendous insights,” Palestrant says. “It’s not unusual to have our clients find that the same things that they did offline or through other mediums they can do on Sermo for a tenth of the price and in a quarter of the time.”

Palestrant makes those claims without revealing details about how much his privately held firm charges pharma clients for access to its members. However, he talked about new products luring those customers (Sermo doesn’t allow advertisements or product promotions on its site), including an offering launched in recent months that allows drug companies and contract research organizations to recruit physicians to work on their clinical trials. To shepherd this and other programs, Sermo has recently recruited Pam Randhawa, the former vice president of marketing at Waltham, MA, clinical trials software firm Phase Forward (NASDAQ:PFWD), to be its VP of strategic development. (Rebecca detailed some of Sermo’s earlier offerings for pharma here and its product for Wall Street clients here.)

The U.S. pharmaceutical industry is expected to nearly double its spending on Internet advertising from an estimated $1.19 billion this year to a projected $2.2 billion in 2011, according to market research firm eMarketer, but the jury is still out on whether most of the young Health 2.0 startups chasing these dollars will be successful in this pursuit. Eventually I’d like to survey members of the Boston-area Health 2.0 cluster to find out which ones are attracting business from drug firms. The sense I get from Edward Cahill, a partner at HLM Venture Partners in Boston and a veteran healthcare IT investor, was that Sermo is somewhat unique in its success bagging pharma clients.

Cahill, who is not an investor in Sermo, watches the online marketing habits of the drug industry closely as a lead backer and director of Phreesia, a NY-based startup that provides doctors’ offices with touch-screen pads intended to replace the clipboards and paper forms doled out to patients at reception desks. Phreesia, which doesn’t charge physicians for its digital pads, makes money on healthcare ads and surveys that appear on the pads’ screens as patients fill in their information. The startup has landed 10 contracts from pharma outfits since the pilot launch of its PhreesiaPads last year, Cahill says. What’s the secret to Phreesia’s and Sermo’s successes with pharma? “What both companies offer are communications channels that are unique and are either patient- or doctor-specific,” Cahill says. “They allow not only a commercial messaging but a true interactive dialogue that is educational on both sides.”

Sermo’s Palestrant says that several Health 2.0 companies have approached him seeking to be bought out due to their lack of business traction. His advice to other startups in the field is to be able to deliver potential clients a clear value proposition, and he does not recommend that they rely on revenue from traditional online ads.

“You will not pay your bills with ‘Ads by Google,’” Palestrant says.

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