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Healtheon: Bedridden but Unbowed
individualinvestor.com
Staff Writer: Judith Graham (3/24/00)
After forging a dizzying array of mergers and alliances in the past 18 months, Healtheon/WebMD (NASDAQ: HLTH - Quotes, News, Boards) is finally feeling the crunch. And so are its shareholders.
Since the online healthcare heavyweight reported less-than-stellar fourth-quarter results in early March, its stock has suffered, raising uncertainty about its proposed deal to buy Medical Manager (NASDAQ: MMGR - Quotes, News, Boards) and its subsidiary CareInsite (NASDAQ: CARI - Quotes, News, Boards) and its ability to integrate an extensive suite of deals.
We recommended the stock in December at a price of $42.63. Shares shortly thereafter surged and we again recommended the stock in January at $74.31. The stock fell to $57.38 last month and we again reiterated our ?buy' recommendation. Now the stock is at $34.69 ? and guess what? We still like it.
First, though, let's peddle through Healtheon's woes, then we'll explain why we remain loyal to this wounded soldier.
At Tuesday's ING Barings Health Internet Conference, Healtheon COO Mike Long attempted to quell some fears that the Medical Manager/CareInsite deal was fraying, assuring investors that the merger is still on. And Medical Manager and CareInsite CEO Martin Wygod also reiterated his commitment to the deal. But for many investors, it's more than just pending mergers that concern them. (In fact Healtheon has inked more than 80 mergers and alliances in the past 18 months.)
After Healtheon reported a loss of $1.98 per share for the fourth quarter ? falling short of some Street estimates ? investors have been waking up to the reality of what lies ahead. Not only will Healtheon incur tremendous acquisition costs, it also faces hefty expenses for marketing and integration. Bracing for such challenges, the company recently delayed some of its selling effort until it can fully integrate the WebMD Practice product with Medical Manager's practice management systems.
Another issue weighing on Healtheon's future concerns the rate at which doctors are adopting the Internet for transactions. Only 10% of the estimated 30 billion health care transactions are currently conducted electronically, and some analysts estimate that 80% to 90% of all physicians still don't use the Internet to conduct transactions.
'It's not going to be an overnight thing,? says Scott Fidel, an associate analyst at PaineWebber. ?Most folks do believe this is where administrative transactions are going. But the Street is reforming now and waiting to see the numbers that show doctors actually adopting the system. This will be the number one catalyst that is going to affect the stock in the near term.?
It also didn't help matters when Barron's highlighted Healtheon in a March 19 article as one of 200 companies likely to burn through its cash stash before the end of the year. The stock lost another $4.13 in Monday trading as a result.
Marking yet another thorn in Healtheon's side, recent reports propose that some HMOs may form a consortium to bypass Healtheon's claims transaction services. And recent media attention to privacy issues may also be weighing on consumers' minds.
All that considered, it's only natural that investors are concerned. Even the Street has opted to wait this one out. As Fidel notes, ?For the meantime, it's still going to be a purgatory period.?
Now that Healtheon is taking a breather from its buying binge and the market has had some time to evaluate its prospects, it suddenly has a lot more to prove than its ability to build an online healthcare empire. And given the uncertainties that lie ahead, it's likely investors will hold out for Healtheon's next report card before again bidding up its stock.
As Martin Hadelman, president of Advisors for Healthcare in Roswell, Georgia, points out, there are still a lot of questions Healtheon must answer to restore investor confidence.
?Do they have enough management talent to be able to take these acquisitions and merge them with some philosophical bent and the efficiency [needed] in order to serve the marketplace? And can they do that efficiently and also turn a profit? The judgment on that is out in future somewhere,? he says. ?Acquiring a company doesn't make a company effective. There are lots of stories around of mergers that just don't work.?
What makes Healtheon's task even more daunting is that it's not only trying to execute one strategy as competitors like drkoop.com (NASDAQ: KOOP - Quotes, News, Boards) are doing, it's trying to execute many strategies at once:
acting as a back office for transactions, enabling doctors to eliminate the traditional paperwork involved in processing bills, insurance approvals, drug prescriptions, lab reports and referrals.
attracting physicians not only to use its transaction services, but for its WebMD Practice news and information program.
establishing its consumer portal as the premier healthcare destination for consumers on the web.
?Trying to tap three very distinct and complex markets is very tough to do,? Hadelman says. ?It's going to take superior effort and superior management and superior luck to make it all happen.?
Another issue Healtheon might soon have to factor into its plans is privacy. Concern last month surrounding DoubleClick's (NASDAQ: DCLK - Quotes, News, Boards) data-gathering practices was just the tip of the iceberg. Access to medical records is a key ingredient in transferring the healthcare industry online.
By law, Healtheon is required to code external transactions between hospitals, doctors and insurers in standardized electronic language, with safeguards to protect patients' privacy and preventing unauthorized access.
But given many consumers' distrust of technology, especially in light of recent events with DoubleClick, such coding may not be enough to suppress privacy concerns.
That's not to say Healtheon can't emerge as the 800-pound gorilla in online healthcare. It's certainly the odds on favorite for attaining that status. But there are a lot of potentially critical bumps it could hit along the way.
By most projections, the company won't reach profitability until 2002, so its stock is not for the impatient investor. But neither are most Internet stocks. As for Healtheon's cash situation, several analysts dismissed Barron's information as inaccurate, since Barron's mistakenly used the company's fiscal year results in place of fourth quarter results to calculate its burn rate.
According to Pegasus Research, an Internet research firm, Healtheon's adjusted burn rate in months, based on fourth-quarter revenue of $33.24 million, and operating loss of $236.67 million and depreciation and amortization of $177.85 million, would be 14.9 months. Furthermore, Barron's calculations excluded the $930 million investment Healtheon received from Janus Capital and an additional $100 million from News Corp. (NYSE: NWS - Quotes, News, Boards) in the first quarter of 2000.
Bottom Line:
Healtheon still appears to be well positioned to capture the online healthcare market despite numerous challenges facing the company. Although the stock may tread water in the near-term, we think Healtheon's long-term outlook remains healthy (yes, pun intended).
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