Healtheon shares jump on WebMD deal

Healtheon shares climbed 20.3750 to close at 100.6250 a share after both companies unveiled details of the deal, a stock swap with an estimated worth of $9.84 billion, as well as a $250 million investment from Microsoft.

As reported yesterday, the two companies have been in merger talks for several weeks. Under the deal, the shareholders of each company will get an equal stake in the new company, which will be called Healtheon WebMD, and trade under the symbol HLTH.

The merger combines Healtheon's expertise in processing health-care transactions with two WebMD online portals devoted to doctors and patients.

"This merger is about leadership and this merger is about winning," said Jeffrey Arnold, chief executive of Healtheon WebMD, at a press conference held this morning.

Under the deal, Santa Clara, California-based Healtheon will exchange 1.815 of its shares for each share of Atlanta-based WebMD. Other investors including Intel, Excite, and software wholesaler Softbank will invest another $110 million.

The investment is software giant Microsoft's strongest move to date into the nascent--and potentially huge--online healthcare industry, which is targeting a wide range of health- care transactions over the Internet. Arnold said the investment will be used to underwrite 11 million months of free subscriptions for doctors, with about 2,000 Healtheon WebMD sales representatives targeting new physician accounts.

With the move, the firm is dumping its $29.95 per month subscription rate, though Arnold noted that getting up to 56,000 doctors signed up for free for their service as potential future customers is more important than the subscription money.

"This market is about speed and scale," he said. "It doesn't matter to us if a partner or a doctor pays for it...It's getting to market first and getting the physician enrolled."

Once the company has seeded the physician community, Healtheon WebMD will move to make money on a per transaction basis as doctors offices use the portal to access medical records and information, claims submissions, referrals, and lab orders--as well as buy drugs, medical equipment, and other health-care products.

The idea, executives said, is to eventually get doctors to pay to use the portal to access up-to-date medical information and discuss medical issues with peers during off hours, while administrators use the portal for everyday transactions with pharmacies, labs, and affiliates. About 5,000 doctors currently subscribe to WebMD, the company said.

The company also expects consumer traffic to its site to surge through the new alliances with portals Excite, MSNBC, and CNN. Arnold said the firm has no intention of selling any of its users personal information to pharmaceutical companies.

While most e-commerce dollars to date have gone to sites selling consumer products such as books, CDs, and computers, analysts say consumers--particularly those tired of the bureaucratic runaround from managed-care networks--are eager for ways to get more information about health and health-care products. A recent Jupiter Communications study predicts that online health and medical advertising will grow to $265 million by 2002, with half of that money coming from direct advertising from pharmaceutical companies to customers

"A lot of people are betting a lot of money on software to straighten out the inefficiencies of the health care industry and that plays into Microsoft's strengths," David Restrepo, an analyst at Jupiter Communications, a market-research firm based in New York, told Bloomberg.

The merger is expected to be completed by the fourth quarter, at which time the Web portals will be integrated. The combined portal will operate under the name WebMD, retained for its strong name brand recognition, the companies said. Healtheon chief executive Michael Long will be chairman and chief operating officer of the new company and Healtheon chairman Jim Clark will be a board member. Clark, founder of Netscape Communications, is a longtime rival of Microsoft chairman Bill Gates.

Clark downplayed that rivalry during today's press conference, saying that "business is a dynamic thing."

"I thought I'd be on this side of the fence for awhile," he said.

The merger is not expected to impact Healtheon's acquisition of Mede America, a handler of electronic health-care transactions. The company agreed to buy Mede in April in a transaction valued at about $460 million.

Combined, after the Mede acquisition, the company is worth nearly $20 billion, analysts noted.

"It's phenomenal - this is an enormous acquisition," said Daren Marhula, analyst at U.S. Bancorp Piper Jaffray.

Healtheon lost about $54 million on $48.8 million in sales last year. But for these companies, Marhula said, posting a profit dwarves the importance of building a brand.

"The person with the strongest brand has the best chance of winning in the long-term," he said.

Now, the competition between Healtheon and its main rival, Synetic, is expected to heat up, he said. With its $1.3 billion merger with medical practice management software firm Medical Manager this week, Synetic increased its access to physician's desktops to nearly 120,000. Meanwhile, WebMD estimates it can reach roughly 200,000 desktops through Healtheon's installed base, Marhula said.

Bloomberg contributed to this report.