Blame it on the drugs. That is essentially the message that Cavan Redmond, new CEO for health information services provider WebMD Health (NAS: WBMD) , gave in the company's earnings conference call following poor quarterly results.
Redmond, hired away from Pfizer (NYS: PFE) just two months ago, had the unenviable task in his inaugural earnings call of explaining why WebMD's revenue and earnings declined sharply during the second quarter. He pointed primarily to reduced advertising spending by major biopharmaceutical customers due to expiring drug patents.
Is this really the main cause of WebMD's woes? Let's take a look.
Mr. Redmond certainly makes a good point about many heavy-hitter drugs going off patent. Pfizer lost exclusivity for Lipitor and Protonix in 2011. The two drugs combined for $6 billion in U.S. sales in 2010. Johnson & Johnson (NYS: JNJ) lost its U.S. patent protection for antibiotic Levaquin and ADHD/ADD drug Concerta. These two accounted for over $2.2 billion in sales.
Several blockbuster drugs lose patent protection in 2012 as well. Bristol-Myers Squibb (NYS: BMY) says goodbye to exclusivity for Plavix, which topped $7 billion in sales last year. Merck (NYS: MRK) loses protection for Singulair. The asthma drug brought in nearly $5.5 billion in 2011. And there are more to come.
Large pharmaceutical companies like these comprise WebMD's primary revenue source. As they spend less on marketing for drugs that go off patent, advertising revenue for WebMD goes down.
What about new drugs coming into the market? The trouble on that front, according to Redmond, is that 44% of new product applications in the U.S. so far this year have either been delayed or not approved.
WebMD's contention that revenue is being hurt by the travails of their large pharmaceutical customers appears to be based on facts. However, there is another fundamental problem that the company faces.
If expenses grow faster than revenue for too long, you're in trouble. That's a lesson covered in Budgeting 101. As the chart above shows, WebMD's trailing-12-month revenue didn't start to dip until the latter part of 2011. However, its problems started much sooner.
While Redmond acknowledged that the company is looking for cost efficiencies, no specifics were given in the earnings call. This probably should be a major focus area for WebMD, since they have more control over their internal costs than they do over how quickly their pharmaceutical customers can roll out new products.
If it were not for bad luck, it seems WebMD would have no luck at all.
Revenue from private portals has fallen each year since 2009. These private portals enable employers and health plans to provide personalized health and benefit information to their employees and members. Private portal services made up nearly 17% of total revenue last quarter.
Cavan Redmond's predecessor, Wayne Gatinella, resigned earlier this year after WebMD abandoned its search for a buyer. Although the company talked with five potential buyers, none made a formal proposal. That doesn't sound promising.
One analyst has even implied that the CEO change isn't enough. Stifel Nicolaus analyst George Askew wrote in a note to his clients that he was skeptical about how fast change could occur at WebMD as long as Chairman Martin Wygod remained in control.
The company is battling multiple lawsuits from shareholders alleging breach of fiduciary duty and corporate waste, among other charges. WebMD denies all of the allegations.
Then there's the competition. Privately held Everyday Health, which provides online health information and produces an Emmy-nominated television show, recently announced that its advertising revenue and sponsorship increased 35% in the first half of 2012 compared to last year. The company claims to have the largest audience in online health.
There is some good news. WebMD reported that traffic to its websites continued to grow last quarter, with 106.9 million unique users per month and 2.5 billion page views. That reflects increases of 29% and 25%, respectively, compared to 2011. Their new CEO could help spark a turnaround. Then there's... um, actually, that's all the good news I can think of.
The truth is that WebMD's woes aren't just related to drugs going off patent. That might not even be its biggest problem. Until management sorts things out, my opinion is that investors should avoid the stock.
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The article WebMD: Blame It on the Drugs originally appeared on Fool.com.
Fool contributor Keith Speights owns no shares in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Johnson & Johnson and Pfizer. Motley Fool newsletter services have also recommended creating a diagonal call position in Johnson & Johnson. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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