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Sermo Changes Strategy to Gain More Pharma Business, CEO Declines to Discuss Layoff Talk

Xconomy Boston — 

Sermo, provider of the nation’s largest online community of doctors, has had a tough year in getting financial services firms to pay for access to its physician network and has decided to shift its strategy more toward serving drug and medical devices manufacturers, CEO Daniel Palestrant tells Xconomy. The change comes amid talk of layoffs circulating at Cambridge, MA-based Sermo, according to a source familiar with the matter.

Xconomy has learned, from a source who asked to remain anonymous, that Sermo could be letting go more than one-third of its staff as soon as this week. Palestrant would neither confirm nor deny the possibility of layoffs, or say how many workers the firm employs. He did say, however, that Sermo has had to adjust its plan because the company has been affected by turmoil in the financial services sector and widespread consolidation and staff reductions in the pharmaceutical industry.

“We have to look at ourselves less as a startup company and more as an operating company,” Palestrant said. “That has all sorts of ramifications in the kinds of people you leverage, making cash flow-positive and profitability a tremendous priority.” He noted that Sermo is doing better than many other Web startups focused on health care—or so-called Health 2.0 firms—some of which have either folded or have been consolidated.

Sermo, which has raised more than $39 million in venture capital since its founding in 2005, allows physicians to circulate questions among their peers about how to best diagnose and treat patients with certain symptoms. The insights from this professional social networking are thought to be valuable not just for the physicians themselves, but for investors and drug companies that want to better understand how physicians use certain medical technologies. Sermo aims to sell subscriptions to those clients who want access to its database, but evidently, Wall Street wasn’t in a position to widely adopt this new tool for research this year.

Sermo’s online community has grown to more than 110,000 physicians. Last year, Sermo vastly expanded the access of financial analysts to its physicians-only community with the firm’s highly publicized partnership with New York-based financial information giant Bloomberg LP. Palestrant said the Bloomberg partnership remains intact, but he declined to provide details on whether it’s been a moneymaker for the company. The deal was struck in October 2008, a month after the collapse of Lehman Brothers and meltdown of other financial services firms.

“2009 is a lost year for financial services,” Palestrant says. “We’ve really tried to service our existing financial services clients while focusing on where the lion’s share of our revenue comes from, which is pharma.”

The growth of the company’s community of doctors appears to have slowed in 2009 as well. Based on figures from Sermo, the community grew from 50,000 to 90,000 physicians in 2008. The firm says that its community has added about 20,000 more physicians this year. Palestrant said, however, that activation among community members has grown by about 50 percent this year, but he didn’t provide specifics on how the company defines this measurement, or how active all of the physicians are. He noted Sermo has made a major push to improve the user experience with a next-generation Web platform, into which the firm has put 85 percent of its engineering efforts this year and plans to launch in 2010.

On the financing front, Palestrant says that his company has money to meet its future needs. There are plenty of investors that want to back his firm, Palestrant says, but he would not comment on whether the firm plans to raise another round of venture capital. Sermo board member Paul Margolis, a partner at Waltham, MA-based Longworth Venture Partners, told me last week that his firm would continue to fund the startup if it raises more money. He deferred all comments on Sermo’s finances to Palestrant.

Sermo raised $39.2 million in venture capital through three rounds of financing from September 2006 to September 2007, according to the firm’s website. The company’s investors include Longworth, Softbank Capital, and Legg Mason Capital Management.

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