WebMD was and remains the most remarkable company of the eHealth era.  It was remarkable for the incredible feeding frenzy it set off in the eHealth world when Healtheon bought the then privately held WebMD in 1999, making Jeff Arnold a very rich young man, and getting Jim Clark out of the business of competing with Microsoft (who were about to come after Healtheon using WebMD as a vehicle).  The original concept of the end-to-end eHealth company that could do all the varied gazillions of transactions in health care by putting them all into the Internet "cloud" was a very seductive concept.  However, as the bubble grew larger and larger, the decision to jump start the process by buying traditional health care IT companies like Medical Manager and Envoy (using the absurdly inflated stock of 1999 values) proved too tempting. Here’s a list of some of the companies they bought.

As soon as the acquisition spree took place, the old idea (catalogued by Michael Lewis who’s now off writing about baseball) of creating a "New, New" company was dead.  Furthermore, all the internal machinations ended up costing way too much in organizational terms.  When I was at i-Beacon we negotiated with 5 separate sets of WebMD/Healtheon employees to sell them a version of our consumer health record. It was a clusterf**k every time. This may be sour grapes but WebMD never got it together on those negotiations and instead 18 months later (after we were out of business) they ended paying $18m in 2002 cash for Wellmed and their health record.  Nothing wrong with Wellmed’s but they could have had ours (or all of us) for much less in Yr2000 stock, methinks, and it would have been a tremendous product well before they paid to get Wellmed. (Wellmed had raised about $40m in Venture capital in 2000, and its investors were lucky to get some of their money back, given what happened to most eHealth companies).

WebMD meanwhile ended up being  "reverse" taken-over by Marty Wygod of Medco fame — he was the one who’d originally bought Medical Manager.  By the time he started running the show for real in 2001, Wygod essentially stripped it down to the three parts of claims processing (Envoy, MedEAmerica & Kinetra), medical software (Medical Manager) and consumer and doctor online (WebMD, Medscape, Wellmed & everything else).  The first two parts made money, the last one never has (well it eked out a small profit last year but it lost $75m the year before). (WebMD also has a medical plastics business via Wygod’s old plastics company Synetics which it’s never got rid of). Revenue size-wise WebMD at Year end 2002 looks like this:
a) Transactions $466m
b) Medical software & services $275m
c) Portals $80m
d) Plastics $120m

Meanwhile the PE ratio–as of two days ago–is around 23 whereas those of other diversified medical technology and services companies like Cardinal Health (CAH) are closer to 18. So the web technology spin is still helping WebMD’s stock price even if it hasn’t really been helping transform health care the way we were promised by Jim Clark back in 1997.

The recent news is that something was fishy in the accounting at Medical Manager before Synetics bought it.  Medical Manager itself was a merger of several regional medical office software companies, and had to restate its earnings (and nearly went under) in 1999.  So yesterday (Sept 4) the FBI went into raid mode, and trading in WebMD stock was halted, opening today about 15% lower.

Is the raid and subpoenas a fuss about nothing, as the company says?  More than likely as it’s about old news. But a serious restatement of earnings for just that sector of the business could be a big drag on the stock, and if it’s PE was at parity with Cardinal’s, the stock price should be closer to 8 rather than 10. This of course all serves to take WebMD even further away from being the dominant health care company technology of the 21st century that never was.  And boy do we need one (or two or three….).