WebMD’s Business Model May Need Surgery

by Susan J. Aluise | January 11, 2012 11:32 am

“Be careful about reading health books,” Mark Twain once quipped. “You may die of a misprint.”

Health-information website WebMD (NASDAQ:WBMD[1]) may not be suffering from a misprint, but it sure is suffering: Shares fell 29% on Tuesday after CEO Wayne Gattinella resigned and the company forecast a big earnings hit this year due to falling ad revenues. It didn’t help that the company also took itself off the market[2].

While this week’s news was unexpected, the e-health site has been in and out of the ER a lot over the past year. The company has been the subject of controversy, with critics charging that its content was steering readers toward drugs manufactured by advertisers such as Eli Lilly (NYSE:LLY[3]). It also settled a U.S. Justice Department. investigation last summer. From May to October, the stock fell by more than 55%.

While WebMD had recovered somewhat in recent months, Tuesday’s nearly 29% drop wiped out the all the earlier gains and more. Besides pulling itself off the market and Gattinella’s resignation, the company spooked the market with 2012 revenue forecasts that could be 2% to 8% lower than WebMD posted last year.

All businesses go through rough patches, and advertising/sponsorship-supported publishing — online or otherwise — is a fickle business. WebMD attributes its ad-revenue slide to pharmaceutical companies’ recent loss of patent protection for several major drugs. As blockbuster drugs such as Pfizer’s (NYSE:PFE[4]) Lipitor, Bristol-Myers Squibb‘s (NYSE:BMY[5]) Plavix and Eli Lilly’s Zyprexa (NYSE:LLY[3]) lose patent protection, it’s understandable that they would cut back on advertising.

WebMD’s argument is plausible — Big Pharma’s revenues will take a hit this year because of the so-called patent cliff. But that’s not the whole story. Advertising and sponsorship is about audience and impact, and in that regard, WebMD may be starting to show its age. The health-information provider was an Internet success story during the dot-com boom and held its own long after the novelty of online symptom-checkers faded.

But the company’s successful past may have left it more vulnerable to competition than anticipated. Although the portal received more than 107 million unique users per month and total traffic of 2.24 billion page views in the third quarter of last year, revenue from the private-portal services it sells to employers fell 10%, to about $20 million. And at this point, broader trends suggest people are turning to other sources for medical information — particularly social media.

So the biggest threat to WebMD’s business model may be Facebook and Twitter. A recent survey from health-care research firm National Research found that 96% of the nearly 23,000 consumers it surveyed use Facebook to gather information about health care, with 28% using YouTube and 22% using Twitter. Hospitals, health-care providers and private insurers also are seeing social media as a tool to engage consumers.

This paradigm shift in health-care information will force WebMD to rethink what it wants to be in the next generation of e-health. With a market cap of nearly $1.5 billion, the company has a price-to-earnings growth ratio of nearly 1.8, indicating that its share are overvalued. The stock is trading in the low- to mid-$26 range, and its one-year return is –51%.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

Endnotes:
  1. WBMD: http://studio-5.financialcontent.com/investplace/quote?Symbol=WBMD
  2. took itself off the market: http://investorplace.com/2012/01/webmd-is-rushed-to-emergency/
  3. LLY: http://studio-5.financialcontent.com/investplace/quote?Symbol=LLY
  4. PFE: http://studio-5.financialcontent.com/investplace/quote?Symbol=PFE
  5. BMY: http://studio-5.financialcontent.com/investplace/quote?Symbol=BMY

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