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Healtheon/WebMD: Getting Healthier

I have written about Healtheon/WebMD (HLTH) several times and even included it on my Top Ten List for 2000 (see here "Net Stock Picks for the Millennium"). Every time I write about the company, it seems to be a new company -- as it constantly morphs itself into the online health powerhouse.

Of course, the company has been on a buying binge. With a high market capitalization, this is a wise strategy. Why pay cash when you can use stock as currency?

Healtheon has several advantages. First of all, its online competitors have relatively low market capitalizations. In other words, they do not have the luxury to grow by acquisition.

Next, Healtheon's brick-and-mortar competitors are, for the most part, slow to react. They have been waiting patiently as Healtheon has been eating their lunch. Traditionally, the healthcare industry has been very conservative and not amenable to partnerships. In fact, when there is an acquisition, it is typically a hostile one (case in point was the fight of Pfizer for Warner-Lambert).

Interestingly enough, the low valuations of Healtheon's competitors is a great opportunity. That is, Healtheon can build its empire on the cheap.

An example is Healtheon's purchase of OnHealth Network. The price was $264 million in stock -- amounting to $83 per user. Basically, the purchase was to get content, community and eyeballs -- which can then be monetized with e-commerce. By folding OnHealth into Healtheon, the plan is to make the mega site the most trafficked online health destination for consumers.

This should not be difficult. According to Media Metrix, OnHealth is the most trafficked health site (3.2 million unique visitors) and WebMD.com is No. 3, with 1.7 million unique users. About 10 percent of the two sites have duplicate members.

The front-end can then be hooked into Healtheon's back-end, which will be an online transaction system that ties patients, doctors, and payers. The Healtheon back-end is the result of acquisitions. There was the purchase of Medical Manager (MMGR) and its subsidiary, CareInsite (CARI) for $5.2 billion. Medical Manager reaches 185,000 physicians, whereas CareInsite has deep penetration with payers. Another key acquisition was for Envoy for $2.5 billion. The company has an extensive EDI (electronic data interface) system that will allow Healtheon to process about 2 billion transactions per year.

Conclusion

An aggressive acquisition's strategy is a double-edged sword. A big obstacle is integration. There are different cultures; there are different inform ation systems; there are different market segments. Healtheon's challenge is to make everything sync.

So, yes, there is still lots of risk with the investment. Then again, if the company is able to integrate the acquisitions, the upside can be tremendous, as the company becomes the dominant online player of a trillion dollar industry. Maybe that's why lots of smart money is flowing into the company, such as the recent $930 million investment from Janus Capital Corp, a firm that knows how to pick long-term winners.