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Analyst reports: Wall Street divided on WebMD's pulse

Analysts agree that WebMD is a sick company, but they're divided as to whether the online health portal can eventually shake its financial flu.

Analysts agree that WebMD is a sick company, but they're divided as to whether the online health portal can eventually shake its financial flu.

Atlanta-based WebMD announced late Monday that its third-quarter loss widened to $786.9 million because of the integration of acquisitions and marketing costs.

The loss, equal to $3.17 a share, was more than 46 times larger than the $17.1 million, or 24 cents, it lost in the same period of 1999. Sales more than quintupled to $151.2 million from $28.7 million.

Excluding certain costs, WebMD lost $65.8 million, or 27 cents per share. The company was expected to lose 22 cents a share, according to First Call/Thomson Financial.

At the end of the third quarter, the company had 167,000 registered physician users and 39,000 administrative users. WebMD, which connects insurers, doctors and patients in an online marketplace, had 14 million Internet transactions in the quarter--double the 7 million it had in the second quarter.

Merrill Lynch analysts David Risinger and Brandon R. Fazio were quick to brand the company's most recent quarterly performance as "messy," chiding WebMD's "weak pro forma sequential revenue growth in all of the company's major business segments and significant losses."

But they maintained their "short-term accumulate" rating and "long-term buy." They said the next three quarters will be "poor" because of restructuring uncertainties, but they predict positive earnings before interest and taxes in the fourth quarter of 2001.

The company also announced Monday that it has tapped Paul Brooke and Herman Sarkowsky to replace Jeff Arnold and Jim Clark as board members. Clark resigned from WebMD in October, casting a dubious spotlight on his reputation and that of the companies he has touched.

Brooke and Sarkowsky are longtime business associates of CEO Martin Wygod, and the Merrill Lynch analysts were bullish on the new board members' ability to cure the company.

"Brooke and Sarkowsky are strategically mined individuals with deep healthcare expertise," the analysts wrote in a research note issued Tuesday morning. "They should enhance the company's ability to create a highly influential (and profitable) electronic healthcare business over the next several years."

Analyst Steven Halper at Credit Suisse First Boston was also optimistic about WebMD's prognosis, reiterating his "buy" rating and setting his 12-month target price to $28 per share. James D. Ackerman and John Simon at Friedman Billings Ramsey reiterated their "buy" rating with a more modest 12-month target price of $18 per share.

WebMD shares inched up 3.09 percent in midday trading Tuesday to $10.44. The shares, which have traded in a 52-week range of $6.75 to $75.18, have tumbled 72 percent since the beginning of the year.

Despite some favorable reports on Wall Street, many analysts aren't certain whether WebMD's illness is temporary or chronic. They're concerned about the company's tendency to hemorrhage cash, particularly as the stock market slump dries up equity for WebMD's e-commerce partners.

James Kumpel at Raymond James Financial downgraded WebMD to "buy" from "strong buy." Anthony Vendetti at Gruntal reiterated his short-term and long-term "outperform" ratings and increased his loss estimates for fiscal 2000 and 2001. Chase Hambrecht & Quist reiterated a tepid "market perform" rating.

WR Hambrecht analysts Josh Fisher and Rosemary Wang dubbed WebMD's quarterly performance "dismal" and called future prospects sketchy. The analysts were especially concerned with whether WebMD could sustain key marketing partnerships with other online companies.

"We still do not know which partnerships will be continued or canceled," Fisher and Wang wrote in a research report issued Tuesday morning titled "Company Essentially Starting Over." "For example, negotiations with News Corp., Microsoft and AOL are currently underway."

The WR Hambrecht team also questioned WebMD's ability to hang onto supporting physician groups such as California groups Brown & Toland and Hill Physicians, which inflate WebMD's physician ranks with more than 3,000 members.

The pair, who reiterated their "neutral" rating, were equally dubious of sponsorship deals with Internet start-ups, many of which have been forced to pull the plugs on marketing plans because they're short of cash. Fisher and Wang questioned whether WebMD can maintain partnerships with Medibuy, HealthStream, SimplyHealth.com, MedCareers.com, Kiva Genetics and Quintiles Transnational.