Some See Upside for Healtheon

Some See Upside for Healtheon


Some See Upside for Healtheon


By Hal Plotkin
Silicon Valley Correspondent


Several leading health-care analysts say Healtheon/WebMD Corp.’s {HLTH} beaten-down stock may be a good buy, now that the dust appears to be settling from last week’s downgrade by Dain Rauscher Wessels.

Healtheon/WebMD’s stock has taken quite a beating lately, dropping more than 60 percent over the past 10 weeks.

One-year chart for Healtheon/WebMD Corp.

The stock took another drubbing last Thursday when Dain Rauscher Wessels analyst Jeffrey Peters, based in Minneapolis, downgraded shares of the Internet provider of the exchange of medical and administrative information, to “neutral” from “strong buy-speculative.”

Peters cites several reasons for the move, including concerns about whether Santa Clara, Calif.-based Healtheon/WebMD will be able to complete several pending acquisitions, consolidations elsewhere in the nascent online health-care sector and the recent announcement of possible new competition from a consortium of leading health-insurance companies.

“We believe the recent actual and rumored [mergers and acquisition] activity in the health-care information technology and e-health markets, as well as the discussions among payers to develop a consortium, has changed the fundamental outlook near term for Healtheon” Peters wrote in his report. “In our opinion, there appears to be the potential for more significant competitors to Healtheon than we thought was feasible even six weeks ago.”

Citing a variation on the old “buy-low, sell-high” rule, however, several other analysts say Healtheon/WebMD’s recent tumble to below its 52-week low leaves the stock attractively priced, though the overall stock market has become too volatile for them to put any price targets on the stock.

“I’m a little disappointed, but I’m still accumulating the stock,” says Barry Hyman, chief market strategist at Ehrenkrantz King Nussbaum Inc., based in New York. “The sector is definitely going to happen. I can understand Wall Street’s concerns, but I believe Healtheon will be a survivor.”

Hyman sees Healtheon/WebMD’s current woes as mostly temporary. He expects a favorable resolution of the pending Justice Department review of the company’s acquisition of Nashville, Tenn.-based Envoy Corp., the world’s largest electronic medical-claims processor, and its alliance with IDX Systems Corp., a medical-software maker based in Burlington, Vt.

Hyman is also skeptical that the competing health-insurance companies that have announced their intention to cooperate will in fact be able to quickly band together in common purpose.

“Those companies have trouble agreeing on anything, let alone a strategy for starting an online health-care collaboration from scratch,” Hyman says. “It’s really more of a validation this market is going to be a given.”

“The insurers have mostly just sent up a flare,” agrees Claudine Singer, health-care analyst at Jupiter Communications, based in New York. “They’re facing the same problem Healtheon has with lack of momentum. It is, however, the first true potential competition for Healtheon that has emerged. The others are really small fish.”

Singer says she thinks investors have overreacted to the recent news concerning Healtheon/WebMD. “Wall Street was too optimistic about the ability of companies such as Healtheon to generate instant momentum,” she says. “Now, I think we’re seeing an over-correction of pessimism.”

Several other analysts agree, saying they remain positive on Healtheon/WebMD’s stock, despite the recent setbacks.

“Healtheon is definitely a company I still like,” says Mark Mulcahy, an analyst at Pacific Growth Equities, based in San Francisco. “It’s going to be very hard for competitors to get together and form anything that will be materially competitive with Healtheon’s offerings.”

Mulcahy reiterated his “buy” rating on Healtheon/WebMD’s stock earlier this week. “They are by far the largest player,” he says.

Other analysts say Healtheon/WebMD’s stock has come under price pressure, mostly because of changes in perceptions about Internet stocks in general, rather than due to the underlying fundamentals.

“Like many other Internet stocks, Healtheon has quickly moved from a concept stock to a show-me stock,” says Stephen Denelsky, an analyst at Credit Suisse First Boston, based in New York. “The company’s fourth-quarter report left investors underwhelmed. And then there are the uncertainties regarding the pending acquisitions. When you have a 60 percent drop in a stock, you have to question whether those deals are going to get done.”

Nonetheless, Denelsky says he feels comfortable with the “hold” rating he issued when he initiated coverage of Healtheon/WebMD’s stock in mid-March.

“I’ve been saying from the very get-go that this is going to be an evolution, not a revolution,” Denelsky says. “Everything about Healtheon is transaction-oriented. That plays right into the strength of the Internet. Healtheon’s vision is right on. It’s going to get there. It’s just not going to get there overnight.”

Denelsky says he would be more enthusiastic if he was certain Healtheon/WebMD would be able to complete its pending acquisitions expeditiously and successfully merge those operations into a seamless operation.

“The fourth quarter was not very encouraging, but if you assume all those pieces will fit together, it would be a ‘buy’,” Denelsky says.

Eric Brown, who leads the health-care research team at Forrester Research, based in Cambridge, Mass., says developments within the health-care industry bode well for Healtheon/WebMD.

Brown says the health-care industry is itself experiencing changes that are increasing pain in many areas. Hospitals are increasingly losing money, he notes. There is also a heightened sensitivity to medical errors.

“It’s a slow-moving, risk-averse industry,” Brown says. “But survival is starting to be at risk here. Those are the forces that will drive people into the arms of these Internet solutions.”

Hyman, of Ehrenkrantz King Nussbaum, adds that Healtheon/WebMD got a bum rap last month when Barron’s used inaccurate numbers that led to the company’s unwelcome placement on the magazine’s list of Internet firms that will soon run out of operating cash. The magazine corrected the figures the day after they were published, a recalculation that added more than $1 billion to Healtheon/WebMD’s operating coffers.

“Healtheon really got slammed,” Hyman says. “And Wall Street mostly did not pick up on the correction.”

“This is a viable sector,” Hyman insists. “Healtheon can still be considered a leader.”

Singer agrees.

“The industry moves at a lumbering pace,” Singer says. “But there is going to be an inflection point a few years down the road when the current crop that is in medical school begin to populate the field. They will have been raised on the Internet, and they won’t know any better than to use it. It’s highly unlikely the system will remain as antiquated as it is over the long term.”

Although no analysts are willing to predict exactly when there will be a turnaround for Healtheon/WebMD, the consensus among many of those following the stock, which hit a post-initial public offering high of 126, is that it now has more upside than downside potential.

On March 3, the company reported a loss of $288 million on revenue of $102 million in 1999, as compared with a loss of $54 million on revenues of $49 million in 1998.

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About the Author /

My published work since 1985 has focused mostly on public policy, technology, science, education and business. I’ve written more than 600 articles for a variety of magazines, journals and newspapers on these often interrelated subjects. The topics I have covered include analysis of progressive approaches to higher education, entrepreneurial trends, e-learning strategies, business management, open source software, alternative energy research and development, voting technologies, streaming media platforms, online electioneering, biotech research, patent and tax law reform, federal nanotechnology policies and tech stocks.