WebMD Corporation

views updated

WebMD Corporation

669 River Drive, Center 2
Elmwood Park, New Jersey 07407-1361
U.S.A.
Telephone: (201) 703-3400
Fax: (201) 703-3401
Web site: http://www.webmd.com

Public Company
Incorporated: 1995 as Healtheon Corporation
Employees: 5,635
Sales: $964.0 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: HLTH
NAIC: 518210 Data Processing, Hosting, and Related Services

WebMD Corporation, based in Elmwood Park, New Jersey, is best known for its consumer-focused healthcare information web site, but the company also offers a range of transaction and technology solutions for physicians, providers, and health plans. The company's WebMD Health unit operates the health information web site, which attracts more than 20 million visitors each month. WebMD also distributes its content and services to other Internet portals such as AOL and MSN, and media distribution partner News Corporation. Medscape from WebMD offers online education tools and medical information to more than 575,000 physicians and 1.6 million other healthcare professionals. WebMD Envoy provides electronic data interchange for the healthcare industry to determine eligibility and coverage, bill patients, process claims, and make reimbursements. WebMD Practice Services, through The Medical Manager, provides integrated practice management systems to help physicians automate appointment scheduling, maintain medical histories and charts, and streamline billing. The unit's professional Internet portal also offers members medical research, news, professional journals, and Web-based continuing medical education. WebMD is a public company trading on the NASDAQ.

Forming the Corporation in 1995

The legal history of WebMD Corporation began in December 1995 with the formation of Healtheon Corporation, but the company did not take its present shape until the 1999 merger with WebMD, Inc. In a sense, the men who launched these two enterprises cofounded today's hybrid WebMD. Healtheon's founder, James H. Clark, was already a famous entrepreneur before he turned his attention to the healthcare field. He was born in Plainview, Texas, in 1944 and endured a troubled childhood. His father earned money from doing odd jobs but suffered from a drinking problem, while his mother worked in a doctor's office to help support the family. After his parents divorced when he was 14, even though Clark was highly intelligent, especially in math, and enjoyed working on ham radios, he was bored in school and all too often found trouble. He let loose a skunk at a dance and set off a smoke bomb on the band bus, but did not get suspended until he told a teacher to go to hell. In his junior year in high school Clark simply dropped out. He enlisted in the Navy in 1961 and it was there that he resumed his education and launched his first business: a loan sharking operation that charged sailors 40 percent interest on money lent until payday. He earned his high school equivalency diploma in the Navy, and when he scored at the top on a math test he was promoted to algebra instructor. It was also in the Navy that he first became acquainted with computers and began taking college classes at Tulane University in New Orleans.

Discharged from the service, Clark married and worked as a full-time computer programmer while continuing his college education. He earned a B.S. and master's degree in physics from Louisiana State University, then in 1974 earned his Ph.D. in computer science from the University of Utah, where he began working on computer graphics. His doctoral thesis dealt with building special purpose hardware for 3-D graphics applications. With the intent of becoming a professor, Clark took a teaching position at the University of Santa Cruz, followed by stints at the New York Institute of Technology and University of California at Berkeley, before accepting a position as an associate professor at Stanford University in 1979. Along with six graduate students, Clark worked on three-dimensional graphics, developing what he called a Geometry Engine. He tried to sell the technology to such companies as IBM and DEC but found no takers. Instead, Clark quit Stanford in 1981 and founded Silicon Graphics, Inc. (SGI) with his students. SGI quickly became a leader in workstation three-dimensional computer applications, which would find a multitude of uses, such as movie special effects. By 1995 SGI would be generating more than $2 billion in annual revenues, but Clark would have moved on by then.

Clark resigned as chairman of the SGI board in February 1994, frustrated by the board's resistance to his idea to apply the company's technology to interactive television and digital game players. Clark's plan after leaving SGI was to pursue interactive television, but he quickly dropped that idea after becoming convinced that the Internet was the next wave to catch. The Internet had been around for a number of years but required knowledge of arcane and unforgiving programming commands. Then the University of Illinois created Mosaic, the first graphical user interface for the World Wide Web, which would revolutionize the Internet. Clark contacted the lead programmer on the Mosaic project, 23-year-old Marc Andreessen, and they agreed to launch their own company to create an improved and more commercial Mosaic browser. The result was Netscape Communications, launched in April 1994. It was an immediate success.

Presenting the Idea for the Company to the Netscape Board in 1995

Even as Netscape was preparing to go public in August 1995, completing an offering that would make him the first Internet billionaire, Clark was developing his next big idea: finding a way to transform industries by way of Web communications. Having experienced the frustration of filling out medical forms and waiting in doctors' offices, and given the size of the healthcare industry, Clark decided to create an Internetbased system that would create a central depository for patients' medical and billing records and cut through all of the red tape that restricted the efficiency of the healthcare field. He presented the idea to the Netscape board in 1995. The company's CEO, Jim Barksdale, had the first right of refusal, and declined the opportunity. But board member John Doerr, who was a partner with the venture capital firm Klein Perkins Caufield & Byers was interested. He brought Clark together with a partner in his firm, David Schnell, who was also a Harvard-trained doctor and already interested in involving the Internet with healthcare. Together Clark and Schnell devoted four months to customer research, agreed on a mission for the company, and then Clark recruited an SGI engineer, Pavan Nigam, to head a technical team that included other SGI alumni. The company's original name was Healthscape, but that was scrapped because of another product using it and a desire to differentiate the venture from Netscape. In December 1995 the business was incorporated as Healtheon Corp.

With Clark putting up $16 million of his own money, and venture capital from Kleiner Perkins and New Enterprise Associates, Healtheon set up shop for four months in Kleiner Perkins's "incubation suite" of offices reserved for start-ups. Schnell served as the company's initial chief executive officer. The initial focus was on developing software that allowed employees to manage health benefits by way of the Internet, an outsourcing service that connected employers to HMOs and insurance companies. Unfortunately, the idea received a less than enthusiastic response from potential customers. According to a 2001 Fortune profile of the company, Clark's original vision was flawed, not taking into account a number of obstacles: "For one thing, most doctors don't like computers; local hospitals are filled with old mainframe and minicomputers that don't talk to one another, let alone to physicians' offices a mile away. Putting patients' medical records online also stirs panic over privacy and confidentiality issues. . . . And the health-care industry is one of the stingiest spenders on IT. What's more, says Clark, the system's wastefulness is entrenched." After a year, Healtheon was adrift, Schnell quit, and Doerr stepped up efforts to woo the man he wanted to take over as CEO: Michael Long, the head of Continuum, an Austin, Texas, IT consulting company.

Long took over as Healtheon's CEO in July 1997 and soon convinced Clark to lead the company in a new direction. Rather than trying to automate insurers, Long wanted to focus on automating physicians, developing software that would allow them to accomplish such online tasks as checking a patient's coverage or making a referral to a specialist. In October, Long signed his first significant contract, a $25 million project to bring Internet processing services to Brown & Toland, a collection of 1,250 San Francisco-area physicians. In February 1998 he completed a major acquisition, the $150 million purchase of ActaMed, a medical records clearinghouse for doctors and insurers. The addition of ActaMed brought with it actual customers and cash flow, important because Healtheon was preparing to make an initial public offering (IPO) of stock.

Healtheon's 1999 IPO

Healthon filed to go public in July 1998 but canceled the October offering. Press reports claimed the company's road show was a disaster. According to the Wall Street Journal, one source "said executives fumbled basic questions concerning their proposed business model." Delays in the Brown & Toland project were also leading to unwanted notoriety. Moreover, market conditions for IPOs suddenly turned volatile. Healtheon's executives regrouped for four months, refined their business plan, finalized marketing partnerships with heavy hitters IBM and AT&T, and then successfully completed the offering in February 1999. Investors now began to embrace the stock, bidding it up by 700 percent in a matter of ten weeks. Much of that excitement was due to an announcement that Healtheon planned to acquire Atlanta-based WebMD, a healthcare informational web site. Now Healtheon would become multidimensional, able to serve both consumers and the professional community. In the words of an analyst quoted by the Wall Street Journal, "WebMD is the front end and Healtheon is the back end of an integrated company."

Company Perspectives:

Our products and services streamline administrative and clinical processes, promote efficiency and reduce costs by facilitating information exchange, communication and electronic transactions between healthcare participants.

WebMD's wonder kid founder, Jeffrey T. Arnold, shared some of the same traits as Healtheon's Clark. He was an indifferent student at the University of Georgia, where he studied communications before dropping out in 1993, only a few credits shy of graduation. While visiting his fiancée at a hospital where she worked he developed a concept for a business: a remote system that would allow cardiac patients to record any problems on a monitoring device, which could then create an electrocardiogram that could be transmitted to a computer and faxed to a doctor. Borrowing $25,000 from her father, the two launched Quality Diagnostic, grew it into a successful company and after two years sold it for $25 million. Arnold was just 26 years old. He used some of that money to launch his next business, a web site to offer free healthcare information to consumers and subscription services to doctors. He was less interested in developing technology than he was in signing up companies to provide medical information or services on his site, in this way securing content ahead of the competition. Another important decision was to employ the memorable WebMD name, paying $10,000 to a Web development company for the rights to it. After just a year, Arnold had lined up $720 million in long-term commitments from such companies as DuPont and CNN. During an Easter weekend vacation in 1999 Arnold and board member Boland Jones decided to cold call Microsoft and suggest a partnership. Within a matter of days, Microsoft was poised to invest $100 million in WebMD. Getting wind of the deal, Long cold called Arnold and set up a meeting to discuss a possible merger. Given how Microsoft had crushed Netscape in the Web browser field, Clark and Long wanted to avoid taking on Microsoft. Arnold was obligated to present the merger proposal to Microsoft and soon received their blessing on the deal.

When the Healtheon and WebMD $7 billion merger was consummated in November 1999 it included two smaller companies: Mede America and Greenberg News Networks. The resulting company became Healtheon/WebMD (the name would be shortened to WebMD Corporation less than a year later). Arnold became CEO and Long became COO and chairman of the board. The addition of Mede America, which operated an electronic processing system that handled some 350 million medical transactions a year, and Greenberg News, a daily news and information service for doctors, was just the first in a series of acquisitions and alliances that WebMD completed over the next several months in an effort to fill out the business. It acquired Medical Manager Corp., an established provider of management systems to physicians, and its subsidiary, Carelnsite, Inc., a provider of technology that allowed confidential information to be shared between patients, physicians, health plans, and other parties. WebMD paid $2.5 billion to acquire Envoy, which added significantly to its electronic data interchange capabilities and customer base. WebMD also established a partnership with the CVS drugstore chain to sell products on the Web as well as connect its pharmacists to insurers, and a four-year $100 million partnership with Medtronic Inc. to provide healthcare information on the Internet and other media to consumers and physicians. In addition, WebMD forged alliances with Medibuy.com, an online medical equipment supplier; Humana, a managed care network that processed claims between doctors and insurers; pharmaceutical Eli Lilly to promote Prozac and other drugs; IDX Systems Corp., a healthcare information systems company; and media mogul Rupert Murdoch's News Corporation to take WebMD overseas.

WebMD was certainly getting larger, but it remained uncertain that scale provided the kind of benefit that the company's business model assumed. Regional companies chipped away while WebMD struggled to get a handle on its business and achieve profitability. In mid-2000 the company began to reorganize and cost-cutting measures were implemented. As part of this housecleaning effort Arnold was forced to share power with Martin Wygod, a veteran healthcare executive who came to WebMD as part of the Medical Manager deal. More serious changes in the top ranks of management would soon follow. Nigram retired as chief technology officer, expressing a desire to go into semi-retirement and spend more time with his family. A few days later Arnold resigned as co-CEO and relinquished his position as a board member. Clark also resigned from the board. Both would soon be caught up in new ventures.

WebMD wrote down the value of many of its acquisitions leading to massive losses. After trading at higher than $100 the company's stock plunged to $3 in late 2001. Revenues grew steadily, however, improving from $102.1 million in 1999 to $964 million in 2003. After losing more than $3 billion in 2000 and another $6.7 billion in 2001, WebMD finally became marginally profitable in 2003, with expectations of posting at least $150 million in profits in 2004. Long gone, however, was Clark's dream of creating an overarching web-based system or his original idea to use the Internet to make healthcare transactions more efficient. Instead, WebMD evolved into a company with related product lines and some successful, albeit not interconnected, Internet portals. On the positive side, the company had achieved some diversity and was positioned not only to take advantage of the government requirement that all records be digitized but of other trends in the healthcare field as well. Of some concern to investors was that WebMD's two largest business areas, claims transaction services and physicians, were not experiencing the kind of internal growth for which investors had hoped. According to one analyst quoted by Business Week Online, the company's management team was "good at cutting costs and doing deals—but not at executing on an operating basis. . . . All the pieces are there. They just need capable people to put it together and make it work." Many investors believed that given time WebMD could live up to its potential, but in the words of Business Week Online, "many of them won't jump into the stock until WebMD shows it's made good on its promises."

Key Dates:

1995:: The Healtheon Corporation is founded by James H. Clark.
1997:: Michael Long is named CEO.
1999:: The company is taken public, and merges with WebMD, Inc.
2000:: Clark and WebMD's founder Jeffrey T. Arnold resign from the board to pursue other interests.
2003:: Company becomes marginally profitable for first time.