Can WebMD Heal Itself?


WebMD Corp. (HLTH) was supposed to revolutionize the health-care system. Two years ago, the feisty startup went on a buying spree, picking off competitors and signing dozens of deals to create an Internet-based means of connecting patients and doctors with health-care institutions.

After reaching a high of $105 in May, 1999, the stock of the one-time Internet health leader led the march off the high-tech cliff as health-care dot-coms' stocks plummeted. While it looks like WebMD has survived the Internet meltdown, there's still fog surrounding the company that initially attracted partners such as Microsoft (MSFT) and DuPont (DD).

Shares have gained some momentum of late, rising out of the $5 graveyard to close on May 15 at $8.14. However, pressure on doctors, hospitals, and health insurers to be more cost-efficient is growing. And WebMD is in a position to become a major player -- but at a far slower pace -- by cutting costs and moving forward with some less ambitious digital services.

BITTER PILLS. A huge part of the Street's lingering enthusiasm for WebMD has to do with Chief Executive Officer Marty Wygod, who took the helm in September, 2000, after WebMD bought his company, Medical Manager. Wygod built a small mail-order pharmacy business in the early '80s and later sold it to Merck (MRK) for $6.6 billion. Josh Fisher of WR Hambrecht & Co. calls the 60-year-old Wygod "one of the best health-care executives, one of the most feared."

Since Wygod took over, Elmwood Park (N.J.) WebMD has been in the throes of a massive restructuring. Its first-quarter results, released on May 8, were in line with analysts' loss forecasts. The company reported a net loss of $1.04 billion, which is steeper than the year-ago quarter's loss of $431.5 million. But the higher figure includes charges taken as part of the restructuring and other noncash expenses. Making sense of the numbers at WebMD can be a challenge, but analysts agree the key to its financials for now is cost-containment.

To that end, the company says it will lay off 350 more employees, in addition to the 1,000 that have been pink-slipped since the overhaul began last fall. It's also eliminating many of the strategic alliances that have ended up being financial drains. Most analysts are satisfied with the losses and charges as the company realigns itself, expecting $75 million to $100 million in cumulative operating losses for the rest of 2001. WebMD could return to growth by early next year, some analysts predict.

At first glance, the company's revenues for the quarter appear to have doubled to $184.5 million. But on closer inspection, when this figure is compared to year-ago quarter results, revenues barely climbed 1%. Steve Halper, of Thomas Weisel Partners, expects the company's revenues to jump 25% in 2002 on increased software sales and higher claims volume. But its main revenue sources show signs of weakness. Both the transaction-services business, which processes upward of 500 million electronic transactions per quarter, and the physician practice-management services division are "barely growing," Fisher says.

DECEPTIVE NUMBERS. Roger Holstein, WebMD executive vice-president for marketing and strategic planning, argues that these numbers are deceiving. The elimination of various alliances that weren't worth the cost hurts short-term revenues in WebMD's core businesses. But long-term growth should come as more customers sign up for WebMD services. "On the physician side, we're focused on increasing our penetration of physician offices. Network services are going to be a huge part of our growth on the payer side," Holstein says.

He adds the company could reach some 20 million consumers who view WebMD's health information through America Online's portal, though that revenue stream is small due to the mass defection of Internet advertisers. Nonetheless, Holstein says WebMD will begin to show growth in the second half of the year.

The company has high hopes for its next big push -- a wireless handheld device for doctors. WebMD says it will charge between $250 and $400 per month for a service that doctors can use to perform a slew of tasks, with rollout is set for the end of 2001. Holstein says the device will allow physicians to write prescriptions, conduct lab inquiries, and monitor billing at any time.

Sounds great. The only trouble is that physicians don't seem to be tech buffs. Only 8% of doctors recently polled by the American Medical Assn. have embraced the Web for administrative functions.

CROWDED MARKET. Many analysts wonder if doctors, who have a myriad of cheaper electronic devices already available to them, will be willing to pay dearly for WebMD's souped-up version. "WebMD is going too fast. It's not what the market wants," Fisher says. "If they think they can grow at thousands per month, no one's been able to do that."

The handheld-products field is already very competitive. Allscripts (MDRX), which offers a less-costly product than WebMD, has been in the marketplace for some time. "There are so many e-health-care players, there is not going to be one dominant player, no matter what," asserts Rob Plaza, an analyst with Morningstar. Adds Ruby Holder, an analyst with ABN Amro: "They haven't given us a timeline, a product rollout that we could set expectations to."

Though Holder sounds frustrated with WebMD's vagueness, like her peers on the Street, she takes a positive long-term view of the company. "WebMD has amassed a group of assets that can create a new paradigm in the health-care marketplace," she says. "The question is: How long does that take?" Halper also cautions that WebMD is a "long-term, speculative investment." WebMD, he says, is still viewed "as the poster child for the failed e-health industry. But that will change as people start to value the assets they have."

Among WebMD's real-world assets are its Envoy health-care transaction business, which generated $98 million for the first quarter, and the Medical Manager physicians' practice-management division, which added $65 million to the top line. WebMD bought these two for $1.7 billion and $1.2 billion, respectively. The company also has around $660 million in cash on its books.

2006 DEADLINE. There are now 12 buy or strong buy ratings among the 21 research analysts who follow the stock. The remaining 9 rate it a "hold." The key to the company's success will be its ability to convince both HMO payers and doctors that it's worth the trouble and cost of switching to its services, says James Kumpel with Raymond James, who rates WebMD a buy.

No one can deny that health-care information technology has plenty of potential. WebMD has many pieces of the puzzle, but can it convince doctors and payers to spend on its services? A mandate from regulators to put patient records in electronic files by 2006 should push its potential customers to consider WebMD's offerings. But with all the uncertainty still surrounding the company's short-term prospects, smart investors may want to wait until the fog lifts a bit. By Amy Tsao in New York


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