Marty Wygod Rides Again
Martin J. Wygod is nothing if not single-minded. Ivan L. Rubin, a friend of the drug-industry dealmaker, remembers a walk on a beach years ago. As they discussed Wygod's latest deal, Rubin looked down and noticed that Wygod's feet were blistered. "He was concentrating so much on what he was talking about that he didn't even realize he was burning the soles of his feet," says Rubin.
That's typical Wygod, a man who has come to be a feared force in the health-care world. A former Wall Street whiz with such clients as raider Victor Posner, Wygod, now 59, made his first big splash in health care in the 1980s with his Medco Containment Services Inc., a pharmacy-benefit management (PBM) company. By wresting low prices from drugmakers to help big customers like General Motors Corp. save money on their mounting pharmaceutical benefits bills, Wygod built Medco into a $2.6 billion business before selling out to Merck & Co. for $6.6 billion in 1993. Briefly, Wall Street even thought Wygod might be Merck's next chairman.
Instead, Wygod headed off to California to spend more time with his wife and two young children. But now he's back--and in a big way. Wygod and his team of old Medco colleagues have been quietly building an Internet health-care company called CareInsite Inc. It aims to create an online system that would link physicians, pharmacists, PBMs, and payers such as HMOs--a sort of electronic hub that would simplify and speed the exchange of information throughout the entire medical community. Doctors will be able to do everything from viewing a patient's medical history or checking test results online to submitting insurance claims and zapping prescriptions to the nearest pharmacy.
Wygod figures that he'll attract plenty of insurers, HMOs, and PBMs because his system will help doctors choose the most cost-efficient treatments allowed by individual plans. And by offering faster medical-claims processing and more readily available information on a patient's medical history, Wygod also is betting physicians will clamor to sign on. CareInsite will make its money by getting a fee for each transaction and by receiving a cut of the savings it expects to generate for insurers.
CareInsite will start rolling out its service in the New York area in September. And with prescription-drug expenses rising 15% or more annually at many HMOs, drugs will be an early target for cost savings. That means that when physicians write a prescription for a pricey drug, they'll get a message showing that a less expensive treatment is available.
But Wygod, who signed a noncompete agreement with Merck, is under fire. In February, the drug giant filed a suit alleging that Wygod's new venture violates his agreement and those of several Medco veterans who followed him out the door because it will rival Merck's PBM. Wygod's noncompete agreement expired in May of this year. But Merck contends that three of his top executives are still restricted for varying periods through September, 2002.
Wygod is fighting back. On July 9, CareInsite filed a series of counterclaims against Merck charging that Merck wants to squash CareInsite because it could pose a threat to the company's market power. It also charges that Merck attempted to hurt CareInsite's June initial public offering by spreading news of the lawsuit to institutional investors. Merck says the counterclaim is without merit. But Wygod insists CareInsite does not compete with Merck's PBM, arguing that it will simply use his system to pass along their information to doctors.
BESIEGED. The Merck lawsuit, in fact, has Wygod feeling so besieged that he now is holding out the possibility that he may go into direct competition with Merck, possibly getting back into the PBM business. "If they attack me," he says, "I might as well [compete with them]."
That's not all he has to contend with. Wygod is scrambling to catch up to hotshot Healtheon Corp., which is putting together a rival service to provide health-care data over the Net. Healtheon's profits will rely primarily on transaction fees and advertising and subscription sales, says Vice-President Dr. Charles E. Saunders. With a $4.7 billion market capitalization, Healtheon Corp. has used its rich stock price to do a flurry of deals, including a pending merger with WebMD, a consumer health-care Web site. And on July 20, Healtheon got another boost when Merck announced its PBM will use an electronic prescription services that Healtheon will develop for a pilot
Even without those distractions, however, Wygod faces a herculean challenge in creating a system that links the disparate groups of players in the highly fragmented $1 trillion industry. And getting physicians, who are often slow to embrace technology, to use it won't be easy. "This is one of the most complex business models we have seen on the Internet," says James W. Breyer, managing partner at venture-capital firm Accel Partners.
Despite the obstacles, Wygod has been picking up momentum in recent months. A Wygod-led holding company, Synetic Inc., which owns 73% of CareInsite, struck a deal in May to pay $1.1 billion for Medical Manager Corp., which markets software used by 120,000 physicians to manage their practices. Earlier this year, New York-based insurers, including Group Health Inc. and Empire Blue Cross & Blue Shield, agreed to use CareInsite services, which they'll start rolling out this September. And in June, Horizon Blue Cross Blue Shield of New Jersey struck a similar deal. "They have a clear vision of what they want to accomplish," says William J. Marino, Horizon's chief executive officer. "That gives them a much better opportunity to succeed than a lot of the other players out there."
E-commerce experts also say CareInsite has a good shot. "It's too early to call a winner," says Jupiter Communications analyst David Restrepo of the race by CareInsite, Healtheon, and others to provide medical information and services online. But he believes Wygod will benefit from his "detailed understanding of how PBMs and payers work."
HORSE SENSE. Wygod is going all out to put that understanding to work. He spends about one week a month at the company's New Jersey headquarters. The rest of his time, Wygod is visiting potential clients or working out of a small office minutes from his Rancho Santa Fe (Calif.) spread, a three-bedroom ranch house on 100 acres of rolling hills, where he lives with his wife, Pamela, and their two kids.
It's a long way from his early years in New York City, where Wygod worked as a teenager walking horses at Belmont and Aqueduct racetracks. Wygod soon discovered he could make a lot more betting at the track and developed a lifelong passion for horse racing. Indeed, his career over the years reads like a series of big bets, most of which have been winners. In New York, Wygod formed his own brokerage firm when he was just 26 and struck it big two years later when he advised Victor Posner in his raid on Sharon Steel Corp. In 1982, Wygod sold off a home-health-care business he had built and purchased a Posner-controlled vitamin and mail-order pharmacy business called National Pharmacies Inc. for $36 million. It became the genesis of Medco.
Medco, of course, has been Wygod's biggest win yet. When Merck swooped up the company, Wygod eventually walked off with stock and fees worth more than $250 million. And soon thereafter, he left. "To be in a large company...is just not his thing," says Albert M. Weis, a former Wygod partner and now a Synetic director. Putting the squeeze on the big guys like Merck is clearly more Wygod's style. And if he succeeds, Wygod will once again be holding the feet of some old foes to the fire.