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STREET WISE By Amey Stone December 30, 1999 A Chemicals Superstore with an Explosive Cyber Formula The rage for B-to-B Net stocks and Chemdex' strategy of moving boldly beyond lab supplies have made its stock rocket On the surface, Chemdex (CMDX) seems like the classic example of a dot.com stock that has soared on little more than hot air. Its core business is operating an online marketplace for laboratory supplies. It acts as an intermediary between the suppliers of things like HIV antibodies and methyl ethyl keytone and the research labs that use such stuff -- collecting fees from both sellers and buyers in its role as a kind of online chemicals superstore. That doesn't sound like a major opportunity -- and so far, it isn't. In the first nine months of 1999, Chemdex did only $11.5 million in sales and lost $33 million, equal to $1.58 a share. It isn't expected to post a profit until early 2003. Yet, because of excitement over the "B-to-B," or business-to-business, subsector of Internet stocks, Chemdex' shares have nearly doubled in just the past month. The volatile stock went public in late July at $15 a share and closed on Dec. 29 at $115, taking a breather following its record high of $143 the day before. In all, the high-flying B-to-B sector added $29 billion in market capitalization between Dec. 16 and Dec. 22, for a total of $94 billion, estimates Robertson Stephens.   CEO Perry realized he could do the same thing for other industries for a lot less money and time   Before you dismiss Chemdex' $4 billion market cap as a sign that Internet investors are using too many chemicals themselves, it's worth taking a look at what's propelling the stock. Chemdex currently sells more than a million products from about 1,500 suppliers, handling roughly 2,000 transactions daily. Banc of America Securities, which started coverage of Chemdex on Dec. 13 with a buy rating and a price target of $130, puts the global market for life sciences at $15 billion to $20 billion. That's a pretty big opportunity if Chemdex can dominate online sales. More important to investors, Chemdex plans to go after a lot more markets than just lab supplies. Already, it is branching into health care, an industry similar to lab products in that it's fragmented and complex. David Perry, president and CEO of Chemdex, realized after he had set up the so-called vertical site for the chemicals business that he could do the same thing for other industries for a lot less money and in a lot less time. So in late September, Chemdex announced that it would acquire Promedix, an online seller of specialty medical products. There's a $35 billion to $40 billion global market for things like catheters, surgical instruments, and pacemaker batteries. Chemdex expects to launch that online marketplace, now in testing, in the first quarter of 2000. While Perry spent $50 million and about 18 months to set up Chemdex, it will take $5 million to $10 million and three to six months to do Promedix, he says. THE BIG TENET VENTURE. In an even bigger deal, Chemdex announced on Dec. 13 that it is forming a new company, of which it will own 25%, with hospital operator Tenet Healthcare (THC). This as-yet-unnamed venture will serve the $143 billion annual market for high-volume medical supplies -- everything from bedpans and gauze to paper clips and floor wax. The plan is to take it public sometime in 2000, says Perry. Chemdex shareholders will benefit from owning a piece of the new company. They also stand to gain because, in a related agreement, Tenet and the nearly 400 hospitals that are part of its purchasing organization promise to use Promedix for up to $500 million a year in specialty medical-supply purchases. Chemdex will also get paid for the work it does setting up the tech infrastructure for the new company. "Tenet is emblematic of what they will be trying to do," says Mark Gulley, an analyst with Banc of America Securities. "They are going after some pretty large markets, and right now B-to-B dot.coms are trading off of the size of those markets." Other potential revenue streams are still emerging. Chemdex hopes to generate revenues by selling information it has gathered about product sales to suppliers and may consider licensing its technology down the road, says Perry. That could add up to the kind of growth Internet investors like to see before they place their bet. While Chemdex' $8.5 million in sales in its most recent quarter doesn't sound like much, it is nearly triple its $2.9 million in sales for the prior quarter ended in June. Gulley expects the company to post $24 million in 1999 revenues and $131 million in 2000, based on the Chemdex.com site alone. Enterprise (usually corporate) customers -- the kind that pay Chemdex to integrate its Web site with their own procurement system -- have grown to more than 100, up from 49 at the end of June, says Perry. A NAME CHANGE? Perry won't say what markets he will target next or when. But it is clear that he plans to form several new online marketplaces over the next few years. "We'll start fairly close to home," he says. Eventually the structure of the company could change into something similar to a holding company, with the Chemdex site as just one subsidiary. Perry concedes that in the near future it may become necessary to change the company's name to reflect its broader mission. "We think the world is going to change incredibly fast," says Perry. "We will be a very big company that plays in a lot of verticals." All that is well off in the future, though, meaning that for now Chemdex is a speculative investment. "It's a story-driven stock," says Paul Cook, co-portfolio manager of the Munder NetNet Fund (MNNAX), who says he has a small Chemdex position. "The proof of concept is still kind of out there." Meantime, Internet investors take heart that Chemdex has the best in venture-capital backing, with Kleiner Perkins Caufield & Byers and CMGI (CMGI). "It's kind of like belonging to a great country club," in terms of contacts, says Gulley. It also has a strong management team. "David Perry is an extraordinarily capable executive," says Gulley. "He knows how to create shareholder value."   Chemdex is already facing stiff competition from the likes of SciQuest and VerticalNet   Still, to succeed Chemdex will have to surmount plenty of challenges. It will have to expand quickly beyond its low-margin roots to keep investors interested. It is already facing stiff competition from the likes of SciQuest.com (SQST) and, more broadly, VerticalNet (VERT), which operates 53 industry-specific portals. Perry argues that VerticalNet's service, which emphasizes community and content more than e-commerce, isn't as deep as Chemdex' and thus will find it harder to attract e-commerce partners. But Cook, who has a larger position in VerticalNet, believes it may make sense to go after more industries to start "and see which ones work" before adding depth. Cook is the first to concede that he could be proved wrong. If Chemdex can maintain its first-mover advantage in the chemicals and health-care markets while grabbing a lead in other new B-to-B markets, it could easily grow into what now seems a lofty share price. In a few years, shareholders in Chemdex -- or whatever it comes to be called -- could be glad they took a flyer on what started out as a play on the growing online market for laboratory supplies. Stone is an associate editor at Business Week Online _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					Amey Stone covers the markets and investing for Business Week Online WEB POINTERS To visit some of the sites mentioned in the story, click here: Chemdex Promedix Tenet Healthcare VerticalNet SciQuest CMGI Kleiner Perkins Munder NetNet Fund Banc of America Securities