The Chemdex Approach to B2B E-Commerce

Picture this: A research scientist at a large drug company needs to order a specialty chemical to conduct a test. On average, she can take as much as five hours to find the right product at the right price, spending most of that time thumbing through five or six catalogs. The reason? The specialty chemicals business, which is part of the $10 billion life sciences industry, is highly fragmented. Nearly 5,000 suppliers jostle to supply more than 1 million life science products—including reagents, chemical compounds and laboratory equipment—to thousands of customers. Result: an overwhelming information bottleneck that can make even routine tasks, such as ordering new supplies, quite onerous for the research scientist.

Enter Chemdex, a business-to business (B2B) e-commerce firm that wants to make life easier for scientists and the giant companies and research institutes that employ them. Launched in September 1997, Chemdex lets buyers and sellers order life science products over the Internet through Chemdex Marketplace, a proprietary database. Although the company takes an average cut of some 5% on sales, the efficiency it brings to the transaction makes up for its fee-or at least so its customers seem to think. During the past two years Chemdex has signed up nearly 150,000 users who have ordered products from more than 2,000 suppliers. The database lists some 1 million products from beakers to specialty biochemicals.

All this has endeared Chemdex, which now has more than 200 employees and last month moved into new offices in Mountain View, Calif., to investors. Armed with venture capital from firms like Kleiner Perkins Caufield & Byers, E.M. Warburg Pincus, Galen Partners III, Bowman Capital, CMGI @ Ventures and Bay City Capital, the company went public last July, raising $117.6 million in its initial stock offering. In the first nine months of 1999 Chemdex lost $33.3 million on revenues of $11.5 million. Like most Internet companies, however, Wall Street values the company more for its potential and possible future growth than for past performance. When Chemdex went public six months ago, its stock price was $15 a share. The stock closed at $76 on January 14, giving the fledgling company a market capitalization of more than $2.4 billion.

David Perry, 31, founder and CEO of Chemdex, was at Wharton recently to participate in a series of lectures about e-commerce. Explaining his perspective on the B2B market, Perry pointed out that Chemdex’s approach to selling life sciences raw materials and laboratory supplies works because of characteristics unique to this industry. The life science industry values convenience more than a low price, and reliability in fulfilling orders more than rapid product delivery. "Business orders are non-discretionary, recurring and large," says Perry. "There’s also a high cost in switching suppliers." This creates a different profile for B2B websites than that for sites that cater to the consumer market.

Before he launched Chemdex, Perry, a former chemical engineer at Exxon, was the CEO of Virogen, a Boston biotech firm that he helped found. In that job, he saw scientists spend hours poring through catalogs to order specialized chemicals. This was an expensive use of their time, and Perry sensed a business opportunity – which ultimately led to the formation of Chemdex. As Perry sees it, the key to B2B e-commerce lies in attacking inefficiencies in markets. If a company can reduce the costs involved in transporting products, financing their purchase, or ordering them, by moving real-world processes onto the Internet, it can create a B2B niche. Says Perry: "If there’s an inefficiency that causes a problem, eliminating it is the heart of an e-commerce solution."

That, however, need not be all. Once a company has found a B2B solution for one industry – or vertical market, in geekspeak – it can do the same for others. "Once you attack the first vertical market, you can leverage that technology for a second vertical," says Perry. Chemdex is doing just that. Using its stock as a turbo-charged currency, the company last September agreed to acquire ProMedix, a provider of e-commerce solutions to health care professionals for an estimated $315.8 million. Chemdex sees several synergies between the health care supplies provider and itself. The most important of these is that the combined company will be able to enter the significantly larger market for health care products, whose size is estimated at some $143 billion. In pursuit of the same goal, Chemdex is also working to acquire SpecialtyMD, a company that serves the specialty health care products industry, for an estimated $104 million.