Heard on the Street
Ailing Stock Valuations Land
'E-Health' Firms in Sick Bay
By ROBERT MCGOUGH and ANN CARRNS
Staff Reporters of THE WALL STREET JOURNAL
Calling Dr. Killdeal?
Among the pallid Internet patients in Wall Street's sick bay these days are "e-health" companies. Stocks such as Healtheon/WebMD, TriZetto Group, MedicaLogic and Neoforma.com have had dizzying declines, falling 77%, 73%, 69% and 82%, respectively, from their peak prices of the past 12 months.
These stock drops pose risks for the companies' strategy of using their stocks as currency for acquisitions. And right now, lots of acquisitions are in the works.
Trizetto has agreed to buy IMS Health; MedicaLogic has agreed to buy Medscape; Neoforma.com has agreed to buy Eclipsys and a related company; and Healtheon has agreed to buy a flock of companies, including Envoy, OnHealth Network, Medical Manager and CareInsite.
On Friday, two high-profile Healtheon directors took pains to inject some life into the stock. Healtheon founder and Internet pioneer Jim Clark and venture capitalist John Doerr announced plans to personally buy a total of as much as $220 million of the stock in the open market. This news, coupled with the company's forecast of strong revenue growth, triggered a 35% gain in Healtheon shares Friday.
That sharp move, however, hasn't stopped some money managers who own shares of the companies to be acquired from complaining loudly about the prices they are getting in the mergers.
"I still believe that at these levels, the Medical Manager pieces aren't being properly valued," says Gary Kaminsky, managing director at Neuberger Berman, an investor in Medical Manager. "We continue to wonder whether we'll vote this deal when the proxy arrives."
Mr. Kaminsky's firm held more than 653,000 shares, or about 1.9%, of Medical Manager on Dec. 31.
At Healtheon's 4 p.m. price of $29.1875 Friday on the Nasdaq Stock Market, its offer of 1.65 Healtheon shares for each Medical Manager share values Medical Manager at about $1.86 billion.
Mr. Kaminsky reckons that Medical Manager, which provides office software for doctors, has a value of as much as $2 billion -- not even counting its 70% stake in CareInsite Inc., its publicly traded Web-focused unit that also is part of the deal and has a market capitalization of $2.48 billion based on Friday's closing stock price.
"The issue here is not Healtheon's long-term prospects, but rather, why would we sell you this asset base at these prices? It doesn't make sense," he says.
Another dissenter is Larry Feinberg, managing partner of New York health-care hedge fund Oracle Partners LP, which owns one million Medical Manager shares. Mr. Feinberg says the combined entity would be powerful, but adds: "When I look at the different components of Medical Manager, I'm still not happy about it as a Medical Manager shareholder."
That doesn't mean the deal won't close. Oracle and Neuberger represent a small percentage of Medical Manager's holders. There is no "collar" on the deal, meaning the exchange ratio is fixed, regardless of movement in Healtheon's stock.
At least investors believe Healtheon's deals make sense -- at the right price. Investors bailed out of TriZetto shares when that company announced a deal to buy IMS Health, which runs a health database. The complex deal requires TriZetto to issue more stock to buy IMS than TriZetto already has outstanding.
"The structure of the deal -- you can look at it 10 times and you'd still be confused," says Karey Barker, who manages about $110 million at money-management firm Wasatch. She bought TriZetto stock when it fell below its initial offering price, and sold some shares as they subsequently soared. She sold her remaining holdings when TriZetto announced its plans to buy IMS Health late last month.
Healtheon Chief Executive Jeff Arnold says the stock-market gyrations don't detract from his company's long-term prospects, and he expects the deals will close. When the vote is put to shareholders, he says, investors will have to look at the marketplace and evaluate alternatives.
"What are their options?" he says. "We're incredibly well-financed, and we'll be a winner in this space. We are all very committed to the deal. And because of that, the transactions will happen."
Of course, in light of the recent dot-com carnage, the electronic-health companies' stock prices would be getting hammered even if they weren't in the midst of a flurry of deals. In some instances, analysts have raised questions about such Internet issues as revenue recognition at these companies, as they have for other Web firms.
Martin Wygod, chairman of Medical Manager and CareInsite, declined to comment on possible shareholder unrest.
Bob Weissman, chairman of IMS Health, says his company's merger with TriZetto is still "very much in the works," and will strengthen the companies' position in the business-to-business health-care market.
Mark Leavitt, chief executive of MedicaLogic, a provider of electronic medical records, says his company's deal to acquire medical Web site operator Medscape is on track. The deal has no collar, he says, and there has been no discussion of renegotiating the terms.
Medscape Chief Executive Paul Sheils says he expects the deal to close. Shareholder votes are scheduled for May 15.
Mr. Leavitt says investors don't seem to be distinguishing among different e-health companies and are instead punishing the entire sector, because of confusion over some of the deals linking more-traditional companies with Internet concerns.
Bob Zollars, chairman and CEO of Neoforma.com, which operates an online marketplace for medical supplies, says the drop in share price shouldn't affect the deal, which, like the others, has no collar. "We're locked and loaded," he says. No date has been set for shareholder votes.
Mr. Zollars says word of the bid for software concern Eclipsys leaked before Neoforma.com anticipated, which caused confusion because the deal is somewhat complex. The company has been meeting with investors, he says, and feels confident the acquisition will close.
Eclipsys executives couldn't be reached for comment Friday.
So, why the mergers? The e-health companies see the Internet as the way to slice through the burdensome paperwork and bureaucracy that filter relations among doctors, patients, hospitals, drug companies and insurers -- an admirable and, perhaps, eventually profitable goal. The flurry of mergers is intended to bulk up to critical mass and broaden these Internet companies' revenue sources. The e-health companies seek to buy companies that make crucial products to fill out their market share, using their high-priced stocks as currency.
But Wall Street is suddenly less willing to grant high prices to these stocks. "The last thing an investor wants to do is to hold something where the business model is in flux or the financial model is uncertain," says Trent May, a money manager at Invesco Funds.
He dumped his Healtheon holding about a month ago. Like many investors, he says Healtheon has "a tremendous potential opportunity out there, it's a leader in what could be an enormous market for them, joining providers and clients" via the Internet. Mr. May says the problem for e-health and other Internet companies in the current market is that they offer potential, not realized, opportunity. "In times of uncertainty, those are the first companies that are sold" by investors, he said.
Further hurting the stocks of all e-health companies is the disclosure by health-information concern drkoop.com, in its annual report, that its auditors have questions about whether the money-losing company can continue as a going concern. Suddenly, profits, which had been seen as simply an obstacle to expanding market share for Internet companies, are being seen as crucial, even for companies running popular Web sites.
Through it all, some high-profile investors, including mutual-fund company Janus Capital, have been hurt in the carnage. Still, some managers say they think prospects for e-health companies remain in good shape.
Mark Sunderhuse, manager of $1 billion Berger New Generation Fund, is brave enough to say, before Friday's rebound: "I like Healtheon as much here as I did in the 60s," and his fund bought stock in the company last week. "When you look at a Healtheon, when you look at the parts they're putting together, it makes incredible sense," he says. "But the Street is worried about how they're going to integrate and manage it."
Write to Robert McGough at bob.mcgough@wsj.com and Ann Carrns at ann.carrns@wsj.com |
