Fool.com: Healthcare at the Speed of Light? (News) November 12, 1999

Healthcare at the Speed of Light?

By Richard McCaffery (TMF Gibson)
November 12, 1999

Internet healthcare services company Healtheon/WebMD (Nasdaq: HLTH) worked quickly to sign partners, land customers, and build its brand name during the third quarter, but losses exceeded First Call estimates by four cents per share.

The Santa Clara, California company reported a net loss of $17.1 million, or $0.24 per share for the third quarter, compared to a net loss of $13.5 million, or $0.26 per share a year ago.

Since Healtheon just yesterday completed its mergers with WebMD, MEDE America, and MedCast, third quarter results include only Healtheon's operations. Revenues grew 128% to $28.7 million, up from $12.6 million a year ago. On a pro forma basis (looking at the newly combined companies), Healtheon's third quarter revenue hit nearly $50 million.

The stock fell more than $4 a share on word of the losses to around $38, way off its high of $126 3/16 reached last May after the initial public offering. This was kind of a strange reaction since the company is still very much building its network.

But it hasn't been a strong year for the sector overall as many companies delayed buying software and systems until after the Y2K shakeout. In addition, investors are trying to figure out what the Internet really means for this enormous, fragmented industry.

Medical information technology companies Shared Medical Systems (NYSE: SMS), McKesson HBOC (NYSE: MCK), and National Data Corp. (NYSE: NDC) have all suffered and trade well off their 52-week highs.

The group has also been weakened by improper revenue recognition practices at HBO & Co., acquired by McKesson to form McKesson HBOC earlier this year. The auditing issues forced the company to restate financial results.

In contrast to the healthcare services and software companies mentioned above, Healtheon/WebMD jumped into the business as a pure Internet play. The company is working to connect patients, physicians, and healthcare institutions through its partnerships, content and Web-based information network. The goal is to reduce costs and improve efficiencies, as well as the quality of care, by building a network.

The company has grown quickly. Founded in 1996, it has more than 70 health systems and is delivering services to 280,000 physicians. The company signed up about 33,000 physicians in the third, and another 15,000 in October. It's processing transactions with 11,000 dentists, 1,100 hospitals, and 46,000 pharmacies.

It has also built its partnership base quickly, which is key to improving efficiencies in a fragmented market. Strategic partners include Microsoft (Nasdaq: MSFT), Intel (Nasdaq: INTC), CNN, and United Health Group (NYSE: UNH). The company just signed a long term agreement with Intel to use its Internet Authentication Services to help secure the Healtheon/WebMD network.

With more than $300 million in cash and no long-term debt, the company is in a good position to grow. New customers during the last quarter include HealthSouth (NYSE: HRC), Advocate Health Care, HealthPartners, HealthUTAH, and Option Care Inc.

However, it's early in the game and the complicated nature of transactions in the healthcare industry, along with the difficulty of getting the industry to accept new technology, is an issue that will affect Healtheon and its competitors. This sounds obvious, but investors should recognize that the company's business model is a lot more complex than, say, an America Online (NYSE: AOL), which basically sells a service directly to consumers.

Still it's a promising concept and founder Jim Clark of SGI (NYSE: SGI), formerly Silicon Graphics, and Netscape fame, has a good track record. Investors should view Healtheon as a player to watch in this developing industry.

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