The Day Ahead: WebMD prognosis is wait-and-see

The WebMD story is all about cost cutting, improving operations, boosting margins and delivering profits
Written by Larry Dignan, Contributor

Acquiring companies is always the easy part. The hard stuff comes when you have to integrate the acquisitions and actually produce the much-ballyhooed synergies.

Ask online health-care company WebMD, the Atlanta-based company formerly known as Healtheon/WebMD and before that as just Healtheon. The merger-happy WebMD, renamed for branding effect, completed its biggest feat on Tuesday. WebMD got final shareholder approval for the acquisitions of Medical Manager and its CareInSite subsidiary as well as a stray deal with OnHealth Network.

The merger terms were rejiggered after dot-coms, including Healtheon, tanked. Meanwhile, investors grew weary of WebMD's never-a-dull-merger approach. WebMD has made eight acquisitions since November. And these weren't small purchases.

For almost a year, investors saw the same rerun. It went something like this: WebMD issues a lot of stock to buy a company, holds a conference call to tout the possibilities and later reports a lot of red ink. WebMD currently trades near its 52-week low.

Those merger days are over for WebMD -- there aren't many online health companies left to buy. Now the WebMD story is all about cost cutting, improving operations, boosting margins and delivering profits. And investors are in wait-and-see mode.

For the record, the WebMD strategy is still the same. WebMD's mission is make the health care system more efficient. The company brings home the bucks by conducting electronic health transactions and selling advertising, software and subscriptions.

Indeed, analysts said WebMD has acquired quite a collection of assets. "They have put a lot of strategic assets in place," said Conan Laughlin, an analyst at Deutsche Banc Alex Brown. "From a high level it makes strategic sense, but there are major operational challenges."

Laughlin's assessment is the common mantra on Wall Street when it comes to WebMD. "In theory this sounds great," said Kevin Berg, an analyst with FAC/Equities.

But? WebMD has to make its work together in an industry that's notoriously slow to adopt new technology. The company has to make Medical Manager's software Internet savvy. It also needs to link its transaction platforms together and plug it all into the WebMD site. If it all works -- and that's a big if -- patients can communicate with their doctors more efficiently.

Simply put, there's a lot of work to do before WebMD reaches online health-care nirvana.

Here are a few mileposts to watch to determine if WebMD is worth a gamble:

The plan: WebMD will report its third quarter earnings in late October or early November with analysts expecting a loss of 22 cents a share, excluding some hefty acquisition charges. Losing money is nothing new to WebMD, but investors will be anxiously awaiting the company's integration plans. Job cuts are nearly certain and the management will detail what businesses are expendable. Revenue and earnings projections for the merged entity also wouldn't hurt.

The products: Cydney Kislin, an analyst at Tucker Anthony, said WebMD is likely to have updated software by the end of the year. The new platform will integrate the WebMD portal with the desktop management software and transaction system. The big issue is how long will it take to put together an integrated Internet-based structure.

The management: There'll be a few management changes on the horizon. WebMD has way too many chefs in its kitchen. When the terms of the Medical Manager takeover were renegotiated, Medical Manager received equal management and board representation. Now the executive suite is crowded to say the least. The good news is that WebMD has a deep management team. The bad news is somebody will take a hike.

Analysts agree that the guy running the WebMD show is co-CEO Martin J. Wygod, formerly Chairman of Medical Manager and CareInsite. Wygod, 60, has tons of health-care experience and is respected on Wall Street. Many WebMD fans cited the "Marty factor" as the primary reason for being bullish on the stock.

If Wygod is so great why is he sharing CEO roles with 30-year-old Jeffrey T. Arnold, the former CEO of Healtheon? That's a technicality based on who had the bigger stock price when the companies merged. Analysts expect Wygod to rule the roost in the near future. "If anyone can make this work, Marty can," said Berg.

The payoff: So when will WebMD shares move? Analysts said it'll be six to nine months before investors see any discernable synergies. WebMD can't be a momentum stock with out some serious revenue growth. "A lot of investors are in wait-and-see mode," said Berg. "There are a lot of moving parts."

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