Carl Icahn Increases WebMD Stake 9.6% as Shares Fall 26%
WebMD defines itself as “the leading provider of health information services, serving consumers, physicians, other healthcare professionals, employers and health plans.” Its stock price plunged 29% on January 10 as it made several game-changing announcements. First, its CEO, Wayne T. Gattinella resigned from his position, and CFO and COO Anthony Vuolo will serve as interim CEO.
Second, the company terminated discussions regarding a potential sale. In late 2011, it announced that its board of directors had begun a search for a buyer to enhance stockholder value. Yahoo and AOL were rumored to be interested in the company.
Third, it announced a lowered earnings outlook. For 2012, it now expects that revenue for 2012 may be as much as 2% to 8% lower than revenue in 2011, and that revenues will decline more in the first half in the year, and improve in the second half. The decrease was due in part to less than anticipated sales activity for advertising and sponsorship products. Pharmaceutical company customers are managing the effects of their products losing patent exclusivity, which is limiting their marketing expenditures across all of their products. While WebMD anticipates more branded pharmaceutical products to be introduced to the market in 2012, most are slated for the latter half of 2012. Any marketing dollars contributed to WebMD from these products likely won’t have a meaningful impact on their top line for 2012.
The company is also expecting to face a more competitive landscape in its consumer products market in 2012, due primarily to the variety of ad networks and social sites companies can now advertise on.
In addition to the revenue declines, expenses at the company will also increase by as much as 5% to 8% as compared to last year. The company will spend more on areas that will promote its long-term growth, such as personalization, mobile, social, international, new content areas and new advertiser products and services. For this reason, it expects that its 2012 adjusted EBITDA and net income will decline substantially in 2011.
"While we face near-term challenges, I am confident that there is significant growth opportunity ahead for WebMD," said Martin J. Wygod, chairman of the board of directors. "I believe that the pressures facing the pharmaceutical industry will ultimately prove to be the strong catalyst for a meaningful shift by them to digital marketing solutions. WebMD offers a cost-effective, efficient and highly measurable alternative to traditional detailing to physicians and mass media to consumers."
WebMD is now trading at a P/E of 25.7, less than half of its P/E at the beginning of the year of 57.28, and at about the same as Google (GOOG) and slightly higher than Yahoo’s (YHOO) 18.91. Its P/S is at one of its lowest points in the company’s history at 2.96, and it has a P/B of 2.46.
Until recently, it had steady revenue growth at an annual rate of 23 percent over the past five years. Cash flow has been strong, near $90 million for the last two years, and reaching $119 million in the trailing 12 months, its highest ever. The company also has over $1.1 billion in cash on its balance sheet, though debt has been mounting in recent quarters. In the fourth quarter of 2010, it had $21.75 million in long-term liabilities, and in the third quarter of 2011 it had reached $966 million. Nonetheless, the company increased its stock repurchase program by $75 million to a total of approximately $90 million.
The Baron Opportunity Fund commented in their third-quarter letter that they believe WebMD is a strong company that will rebound from temporary setbacks.
“Although the company reported good quarterly results, management lowered guidance for the second half of the year due primarily to delayed implementation of previously sold advertising programs. Many large pharmaceutical companies are operating under corporate integrity agreements with the government and are taking longer than usual to conduct internal medical-legal reviews of new marketing programs. This has happened in the past, and we believe it will be a temporary phenomenon once again. We continue to have conviction in the fundamental long-term growth drivers for WebMD's business,” they wrote.
George Soros is also a big investor in WebMD, owning 5.6% of the company through convertible bonds due in 2016 and 2018, according to Forbes.
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