Healtheon/WebMD to Acquire Medical Manager, CareInsite

Updated from 9:35 a.m. EST

Healtheon/WebMD (HLTH Quote - Cramer on HLTH - Stock Picks) said Monday that it will acquire Medical Manager (MMGR Quote - Cramer on MMGR - Stock Picks) and its subsidiary, CareInsite (CARI Quote - Cramer on CARI - Stock Picks), in a move to expand its existing Internet-based health care information services.

The all-stock deal is valued at roughly $4.8 billion.

Under terms of the agreement, Atlanta-based Healtheon/WebMD will give 1.65 of its own shares for each share of Elmwood Park, N.J.-based Medical Manager and 1.3 of its own shares for each share of the 31% of CareInsite, also based in Elmwood Park, N.J., not owned by Medical Manager.

Analysts and investors applauded the deal Monday. In midday trading, shares of Healtheon/WebMD had risen 2 3/8, or 4%, to 57 3/8. Medical Manager had risen about 22 1/4, or 34%, to 87 1/4. CareInsight rose 4 5/16, or 6%, to 72 3/16. (Healtheon closed up 1 5/8, or 3%, at 56 5/8. Medical Manager closed up 21 3/4, or 33.5%, at 86 3/4. CareInsite closed up 4 1/8, or 6.1%, at 72.)

"This is a great acquisition for the company. Medical Manager fits very well into Healtheon's strategy," said Daren Marhula, analyst at U.S. Bancorp Piper Jaffray, which upgraded Healtheon/WebMD to a strong buy from buy on Monday, and has not underwritten any stock or debt for the company.

Healtheon/WebMD says the deal will help the company move toward its goal of streamlining the flow of medical information and statistics over the Internet. The company estimates that inefficiencies in administrative and clinical expenditures generate about $280 billion in unnecessary costs per year in the $1.2 trillion health care industry.

"This is a huge market they are trying to tap," said Marhula. "The medical sector is very wasteful. If they are able to capture even a tiny portion of the total money that is wasted, they have a very promising future."

Thus far, Healtheon/WebMD's wide-ranging strategy for bringing medical information and services to the Internet has been largely built on a spree of alliances and acquisitions since Healtheon and WebMD themselves merged in May 1999.

The company is focussed on using the Internet to create various ways to automate relationships between HMOs, doctors and patients. Some of those services include doctor-to-doctor medical data and statistics, processing insurance claims, Internet pharmacy services, and medical information and references for consumers.

In January, Healtheon/WebMD said the number of users for its services rose more than 50% for the month, to 5.7 million users, including 855,000 community enrollment users and 3.8 million unique visitors to the site.

Despite the growing ranks of users and aspirations to revolutionize the medical industry, however, the company has yet to turn a profit. For the first three quarters of 1999, the company tallied pro-forma net losses of about $53 million, or 79 cents per diluted share, on revenues of $69 million.

The company is slated to report total 1999 earnings on Feb. 17. A First Call/Thomson Financial survey of analysts is forecasting a loss of $1.30 a share for the year. That compares to a pro-forma 1998 loss of $1.55 per share.

Healtheon/WebMD chief executive officer Jeffrey Arnold has recently said the company expects to be profitable in 2002, faster than original estimates that it would take until 2003. Part of that revised estimate was due to the company's acquisition of Envoy, a profitable business which specializes in electronic transactions of health care industry data and billing.

The acquisitions are expected to be completed by the end of June, and are still subject to shareholder and regulatory approval.

In a separate release Monday, Medical Manager said the potential acquisition will not affect the timing of its previously announced call for redemption of its 5% convertible bonds due 2007. The company in late January called on investors to either convert holdings of the $159 million bond issue into stock or redeem the bonds for a cash payment.