Today's Hot Takeover Prospects: Health Care Web Sites

By Stacey L. Bradford

There's nothing like a few takeover rumors to breathe some much-needed life into a lagging sector. On Friday, shares of depressed health care Web sites jumped on speculation that a major Internet portal — maybe Yahoo! (YHOO), or Lycos (LCOS), or America Online (AOL) or Excite At Home (ATHM) — was interested in acquiring one of their number, Healtheon/Web MD (HLTH).

For all the hype surrounding the dot-coms, the health care subsector had largely been ignored by Wall Street. Sure, Drkoop.com (KOOP) and Healtheon/Web MD, which was founded by Jim Clark of Netscape fame, received some ink after they went public. But for the most part, these stocks have done little more than tread water as their Internet brethren soared to unbelievable heights last year.

But even without the takeover froth, analysts say these sites may be worth a second look for their strong fundamentals. As with the rest of the Internet universe, where content sites are in deep disfavor, Wall Street isn't particularly interested in companies like Medscape (MSCP), which operate sites that provide consumers with information and make their money from selling advertising. Instead, Wall Street is looking to the business-to-business sites that make money by providing electronic administrative services and linking the patient and physician to the insurance companies.

And the health care industry may be particularly fertile ground for such efforts. Unlike other data-heavy businesses like financial services, much of the health care industry has yet to upgrade its antiquated information systems. So these sites represent an opportunity to get in on the ground floor as health care leapfrogs from the 1970s to the 21st century, says Punk Ziegel analyst Michael Knepper. And unlike many of their Internet brethren, at least a handful of these health-oriented sites could be profitable in the next year or so.

First, consider the market opportunity. Health care is the largest sector of the U.S. economy — a $1.25 trillion industry this year. Of that, $250 billion goes to overhead and administrative costs that could be cut down with the use of the Internet. Nor is the consumer portion of this market to be sneezed at: According to Cyber Dialogue, an Internet research firm, 36% of Americans who use the Web seek out health information.

Now, consider the valuations. Sure, the average business-to-business health care site tends to be more expensive than the disfavored content sites, but it still trades for just 15 times 2000 revenue. (This compared to Yahoo, which wafts up around 110 times 2000 revenue.) "It is a challenge to call any of these companies cheap relative to other industries," says Brian Kearns of Banc of America Securities. "But relative to the other B2B Internet sites, these are a bargain."

They certainly didn't get any cheaper on Friday. Perhaps the best known of the transaction-based sites is Healtheon/Web MD, which soared as much as 27% in midday trading. Based in Santa Clara, Calif., this $3.5 billion Web site is positioning itself as a one-stop shop for health care. It connects physicians, hospitals and insurance companies to cut down on administrative burdens and speed claims processing. And it also provides consumers with medical information.

Healtheon/Web MD also boasts strong strategic alliances. Microsoft (MSFT) and DuPont (DD) are underwriting its rollout to doctors in exchange for advertising. This month, the company has been busy signing even more deals. It inked a five-year alliance with managed-care company Humana (HUM) to handle its online claims, referrals and other benefits in at least three of its markets. Humana, in turn, will promote Web MD exclusively to its physicians and patients in those target markets.

Earlier in the month Healtheon/Web MD signed another agreement to make drugstore behemoth CVS (CVS) its exclusive drug retailer. And on Wednesday it entered into an agreement with Medibuy.com to design and operate an integrated electronic-commerce marketplace for the procurement of medical and other supplies by physicians. "It is doing a lot of the right things to build critical mass," says Kearns. The company is expected to be profitable in 2003 and trades for 10.5 times 2000 revenue.

Another intriguing company is CareInsite (CARI). This Elmwood Park, N.J.-based firm connects physicians, payers, suppliers and patients and offers them a menu of e-commerce offerings for automating administrative tasks. Its product is currently in use in the New York region and the company intends to start rolling it out nationally later this year.

CareInsite's founder, Marty Wygod, has quite a track record in the health care industry. Back in the 1980s he created Medco, a pharmacy benefits company that he sold to pharmaceutical giant Merck (MRK). And through an affiliation and exclusive agreement with Medical Manager, a software company that helps doctors' offices with billing, claims and scheduling, CareInsite already has access to 185,000 physicians, or an estimated one-third of all U.S. doctors.

CareInsite isn't cheap. Unlike the other e-health care sites that have performed miserably in the past six months, CareInsite has been an investor's dream. Since going public in June 1999, its shares have shot up 169%. It now trades for a startling 435 times 2000 revenue. But the revenue side of that equation should expand once its market of doctors adopts its e-product and sales ramp up. Bruce Hochstadt of Thomas Weisel Partners expects sales to increase to $327.6 million in 2002 from $11.9 million in 2000. CareInsite is expected to be profitable by the second half of 2001.

One of Punk Ziegel's Knepper's favorite picks is Atlanta-based Adam.com (ADAM), an Internet portal that makes money licensing its content to other sites. With the thousands of content sites out there, there is sure to be plenty of demand for the company's sophisticated information — whether those content sites make any money or not.

Adam.com started out as a health-education CD-ROM manufacturer selling versions of its encyclopedia, which covers 4,000 topics and includes 10,000 pages of information, to the K-12, college and medical school markets. Now thanks to the Internet, the company hopes to make money through co-branding, licensing and private labeling fees. "The company has demonstrated the enormous appeal of the content it has been developing for the past 15 years," Knepper says. "With the Internet they finally have the vehicle to deliver it." Adam.com already has deals with CNN, Yahoo and Excite. The company is expected to be profitable in early 2001 and trades for just less than eight times 2000 revenue.

All three of these companies should be considered risky investments. They are still young, unproven businesses in competitive arenas. There is also the danger that these companies will suffer along with other health care stocks as the Medicare debate rages in Washington this election year. But if Friday's takeover fever is based on anything real, somebody out there wants what these companies have to offer.