Filed On 5/11/05 9:37pm ET · SEC File 333-124832 · Accession Number 950123-5-6174
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
5/12/05 WebMD Health Corp S-1 3:192 950123
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1: S-1 Registration Statement (General Form) HTML 1,305K
2: EX-23.1 Ex-23.1: Consent of Ernst & Young Llp HTML 5K
3: EX-23.2 Ex-23.2: Consent of J.H. Cohn Llp HTML 6K
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As filed with the Securities and Exchange Commission on
May 12, 2005
Registration
No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
WEBMD HEALTH HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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20-2783228 |
(State or other jurisdiction of
incorporation or organization) |
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(Primary Standard Industrial
Classification Code Number) |
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(IRS Employer
Identification Number) |
224 West 30th Street
(Address, including zip code, and telephone number, including
area code, of
registrant’s principal executive offices)
Douglas W. Wamsley
Executive Vice President
General Counsel and Secretary
224 West 30th Street
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
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Stephen T. Giove, Esq.
Shearman & Sterling LLP
599 Lexington Avenue
New York, New York 10022
Telephone: (212) 848-4000
Facsimile: (212) 848-7179 |
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Marc Rosenberg, Esq.
Andrew J. Pitts, Esq.
Cravath, Swaine & Moore LLP
Worldwide Plaza
825 8th Avenue
New York, New York 10019
Telephone: (212) 474-1000
Facsimile: (212) 474-3700 |
Approximate date of commencement of proposed sale of the
securities to the public: As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box. o
CALCULATION OF REGISTRATION FEE
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Proposed Maximum |
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Amount of |
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Aggregate Offering |
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Registration |
| Securities to be Registered |
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Price(1)(2) |
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Fee |
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Class A Common Stock, $.01 par value per share
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$50,000,000 |
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$5,885 |
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Estimated solely for the purpose of calculating the registration
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Including shares of common stock that may be purchased by the
underwriters to cover overallotments, if any. |
The registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act or until the Registration Statement shall
become effective on such date as the Securities and Exchange
Commission, acting pursuant to such Section 8(a), may
determine.
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The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not
permitted.
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PROSPECTUS
Shares
WEBMD HEALTH HOLDINGS,
INC.
Class A Common
Stock
This is our initial public offering of our Class A common
stock. We are selling all of the Class A common stock in
this offering.
We are a wholly owned subsidiary of WebMD Corporation, which we
refer to in this prospectus as our Parent. We intend to change
our corporate name, prior to completion of this offering, to a
new name that has not yet been chosen, but that will include
“WebMD,” which will also continue to be the primary
brand name for our products and services. Our Parent intends to
take the steps, over the next several months, needed to change
its corporate name to one that does not include
“WebMD” and to cease using “WebMD” as a
brand name for the products and services of its other business
segments.
We have two classes of authorized common stock —
Class A common stock, which is offered hereby, and
Class B common stock, all of which will be owned by our
Parent. Holders of our Class A common stock generally will
have identical rights to holders of our Class B common
stock, except that holders of our Class A common stock will
be entitled to one vote per share on all matters to be voted on
by stockholders, while holders of our Class B common stock
will be entitled to ten votes per share on all matters to be
voted on by stockholders. The holders of our Class A common
stock and Class B common stock generally will vote together
as a single class. Upon the completion of this offering, without
giving effect to any exercise of the underwriters’ option
to purchase additional shares, our Parent will own all of our
outstanding Class B common stock, which will represent
approximately %
of our outstanding common stock, and
approximately %
of the combined voting power of our outstanding common stock. As
a result, after this offering, our Parent will continue to
control us.
We expect the public offering price of our Class A common
stock to be between
$ and
$ per
share. Currently, no public market exists for our shares. We
intend to apply to have our Class A common stock quoted on
The Nasdaq National Market under the symbol “WBMD.”
Investing in our Class A common stock involves risks
that are described in the “Risk Factors” section
beginning on page 9.
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Per Share | |
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Public offering price
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Underwriting discount
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The underwriters may also purchase up to an
additional shares
of our Class A common stock from us, at the public offering
price, less the underwriting discount, within 30 days from
the date of this prospectus to cover overallotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
The shares of Class A common stock will be ready for
delivery on or
about ,
2005.
The date of this prospectus
is ,
2005.
You should rely only on the information contained in this
prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different
information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not,
and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not
permitted. You should assume that the information appearing in
this prospectus is accurate only as of the date on the front
cover of this prospectus. Our business, financial condition,
results of operations and prospects may have changed since that
date.
MARKET AND INDUSTRY DATA
This prospectus contains market and industry data and forecasts
that we obtained from third-party industry publications and
research firms, including Manhattan Research LLC, a leading
Internet marketing research firm. Unless we indicate otherwise,
all Manhattan Research studies referred to in this prospectus
were initiated and paid for by us. We refer to each of those
studies initiated by Manhattan Research, without our
participation, as a “subscription study,” since these
studies are available to the public on a subscription basis.
Industry publications and studies generally state that the
information contained therein has been obtained from sources
believed to be reliable, but there can be no assurance as to the
accuracy and completeness of such information. We have not
independently verified any of the publications or studies
prepared by third parties. The information contained in such
publications or studies may prove to be inaccurate because of
the way they were prepared and other limitations and
uncertainties inherent in data gathering processes. As a result,
you should be aware that market, ranking and other similar
information included in this prospectus, and estimates and
beliefs based on such information, may be incorrect. Neither we
nor the underwriters can guarantee the accuracy of such
information contained in this prospectus.
WebMD®, WebMD Health®, Medscape®, CME
Circle®, Medpulse®, The Little Blue Book™,
MedicineNet®, RxList®, Select Quality Care® are
among our trademarks.
SUMMARY
This summary highlights information contained elsewhere in
this prospectus. This summary sets forth the material terms of
this offering, but does not contain all of the information that
you should consider before investing in our Class A common
stock. You should read the entire prospectus carefully before
making an investment decision, especially the risks of investing
in our Class A common stock discussed under “Risk
Factors.” Unless the context otherwise requires, the terms
“we,” “us,” “our,” “our
company” and “WebMD” refer to WebMD Health
Holdings, Inc. and its consolidated subsidiaries following the
contribution and transfer to us of the subsidiaries and certain
related assets and liabilities that comprise our Parent’s
WebMD Health business segment. Unless the context otherwise
requires, the term “Parent” refers to our parent
company, currently known as WebMD Corporation, and its other
consolidated subsidiaries. We expect to retain the WebMD brand.
References in this prospectus to “common stock”
include both our Class A common stock, par value
$.01 per share, and our Class B common stock, par
value $.01 per share. Unless otherwise indicated, industry
data are derived from publicly available sources, which we have
not independently verified.
Our Business
Introduction
We are a leading provider of health information services to
consumers, physicians and healthcare professionals through our
public and private online portals. The online healthcare
information, decision-support applications and communications
services that we provide:
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enable consumers to obtain detailed information on a particular
disease or condition, analyze symptoms, locate physicians, store
individual healthcare information, receive periodic
e-newsletters on topics of individual interest, enroll in
interactive courses and participate in online communities with
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make it easier for physicians and healthcare professionals to
access clinical reference sources, stay abreast of the latest
clinical information, learn about new treatment options, earn
continuing medical education credits and communicate with
peers; and |
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enable employers and health plans to provide their employees and
plan members with access to personalized health and benefit
information and decision-support technology that helps them make
more informed benefit, provider and treatment choices. |
Our publicly available online services, which we refer to as
The WebMD Health Network, include WebMD Health,
our primary public portal for consumers, and Medscape from
WebMD, our public portal for physicians and healthcare
professionals.
WebMD Health and our other consumer portals help
consumers take an active role in managing their health by
providing objective and trusted healthcare and lifestyle
information. WebMD Health’s content offerings
include access to high quality health and wellness news articles
and features, and its decision-support services help consumers
make better informed decisions about healthcare providers,
health risks and treatment options. Medscape from WebMD
helps physicians and healthcare professionals improve their
clinical knowledge and practice of medicine. Its original
content, including daily medical news, commentary, conference
coverage, expert columns and continuing medical education, or
CME, activities are written by authors from widely respected
academic institutions and edited and managed by our in-house
editorial staff.
The WebMD Health Network had an average of approximately
23 million aggregate unique users per month and generated
approximately 588 million aggregate page views in the first
quarter of 2005. We believe our focus on creating and organizing
high quality content and offering innovative interactive
services has made The WebMD Health Network the leading
online health destination and has made the WebMD brand among the
most recognized and trusted in healthcare. According to recent
studies conducted by Manhattan Research, a leading Internet
market research firm, WebMD is the information
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source most frequently recommended by physicians to their
patients for healthcare information and Medscape from
WebMD is the information source most recommended by
physicians to their peers.
Our public portals generate revenue primarily through the sale
of advertising and sponsorship products, including CME services.
We do not charge user fees for access to our public portals.
The WebMD Health Network provides an efficient and
effective means for sponsors to reach, educate and inform target
audiences of health-involved consumers and clinically-active
physicians within the trusted environment of WebMD. We work
closely with our sponsors to develop programs for specific
groups of consumers, physicians and healthcare professionals and
give them placement on the most relevant areas on our portals.
Our advertisers and sponsors consist primarily of
pharmaceutical, biotechnology and medical device companies. We
are also increasingly attracting advertising sponsorships from
consumer products companies whose products relate to health,
wellness, diet, fitness, lifestyle, safety and illness
prevention.
Our private portals enable employees and health plan members to
make more informed benefit, provider and treatment decisions. We
provide a personalized user experience by integrating individual
user data (including personal health information), plan-specific
data from our employer or health plan clients and much of the
content, decision-support technology and personal communication
services that we make available through our public portals. We
generate revenue from private portals through the licensing of
our content and technology to employers, such as American
Airlines, Inc., Microsoft Corporation and PepsiCo, Inc., and to
health plans, such as Blue Cross Blue Shield of Massachusetts,
Cigna and Empire Blue Cross and Blue Shield.
In addition to our online presence, we also have a publishing
segment that provides complementary offline health content to
our user community. Our publications increase awareness of our
brand among consumers, physicians and healthcare professionals.
These publications include The Little Blue Book, a
physician directory, and WebMD the Magazine, a consumer
publication launched in early 2005 that we distribute free of
charge to physician office waiting rooms.
Our revenues have increased to $134.1 million in 2004 from
$84.2 million in 2002, an increase of $49.9 million.
Our net income for 2004 was $6.5 million compared to a net
loss of $24.4 million in 2002, an improvement of
$30.9 million. We cannot assure you that our revenues or
net income will continue to increase; however, to the extent
that our revenues increase in the future, we expect that our net
income as a percentage of our revenues will continue to increase.
Our Strengths
Our goal is to provide an efficient and effective means for
advertisers and sponsors to reach, educate and influence
health-involved consumers and clinically-active physicians
within the trusted environment of WebMD. We believe that we are
able to fulfill the needs of our clients with a differentiated
offering based on our following strengths:
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Our brand is widely recognized and viewed as a trusted source of
health and wellness information. |
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The WebMD Health Network is the leading online health
destination today. We had an average of approximately
23 million aggregate unique users per month and generated
approximately 588 million page views in the first quarter
of 2005. |
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Medscape from WebMD is the leading online provider of CME
programs, with approximately 63% of the online market for CME
services in 2003. |
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We are able to offer advertisers and sponsors programs that
deliver their message to either our entire audience or to more
targeted audiences of consumers, physicians and other healthcare
professionals based upon their interests or specialties. |
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We are able to offer advertisers and sponsors programs to reach
both health-involved consumers and clinically-active physicians. |
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We have good working relationships with our advertising and
sponsorship clients and a track record of providing them with a
more efficient use of their marketing expenditures compared to
traditional media. |
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We have the ability to offer employers and health plans a
platform that provides a personalized user experience for
employees and health plan members, which includes access to
individual user data, specific health plan benefit data,
relevant health-oriented content, treatment decision-support
applications, personal communication services, and integrated
third party applications and data. |
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Our senior management’s experience in and understanding of
the healthcare industry allows us to respond quickly to
developing industry trends with new products and services based
on our existing content, infrastructure and capabilities. |
Industry Background
The Internet. The Internet has emerged as a major
communications medium and has already fundamentally changed many
sectors of the economy, including the marketing and sales of
financial services, travel and entertainment, among others. The
Internet is also changing the healthcare industry, as more
consumers and physicians use it as a convenient source for
up-to-date health information and interactive decision-support
tools. Until recently, quality healthcare information was not
easily accessible. Most consumers relied on their physicians,
conversations with family and friends, their neighborhood
library and magazines when they needed answers to healthcare
questions. Physicians relied on medical societies, journals and
other publications, reference textbooks, conferences,
pharmaceutical sales representatives and industry meetings and
other physicians to keep informed. The Internet has transformed
how consumers and physicians find and utilize healthcare
information and WebMD has been a leader in enabling this
transition.
Advertising and sponsorship trends. Internet advertising
continues to grow rapidly. According to a February 2005 report
by eMarketer, an Internet market research firm, total online
advertising spending was about $9.5 billion in 2004, is
projected to grow approximately 20% in 2005 to $11.5 billon, and
is expected to reach approximately $17.6 billion in 2008.
We believe that this market growth is driven by the benefits of
online advertising relative to traditional media, which include
interactivity, rapid and measurable user feedback and the
ability to target consumers more efficiently.
Based upon industry estimates, we believe that pharmaceutical,
biotechnology and medical device companies spent approximately
$12 billion on marketing and education activities during
2004, excluding costs of product samples. We estimate that these
companies currently spend less than 5% of their marketing and
educational budgets on online media, but are becoming
increasingly aware of the benefits of using online media,
including the ability to reach targeted audiences
cost-effectively. As a result, we expect these companies’
online marketing and educational budgets to continue to
increase. According to an April 2005 report sponsored by the
Interactive Advertising Bureau, pharmaceutical and other
healthcare advertisers accounted for 6% of total online
advertising in 2004, an increase from 4% in 2003. We believe
that we are well positioned to benefit from the trend toward
increased online spending by these companies because of our
track record in providing a more efficient use of advertising
expenditures than traditional media and our strong working
relationships with a significant number of the major
pharmaceutical, biotechnology and medical device companies.
Healthcare industry trends. Our business is affected by
the following trends in the healthcare industry:
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Continued increases in healthcare costs have led to
cost-shifting by employers. According to a report from the
Centers for Medicare & Medicaid Services, or CMS,
healthcare spending in the United States rose to
$1.7 trillion in 2003, up from $1.6 trillion in 2002,
$1.4 trillion in 2001 and $1.3 trillion in 2000. The
CMS report indicated a growth rate in healthcare spending of
7.7% for 2003, compared to 9.3% for 2002, and 8.5% for 2001.
While overall healthcare costs are rising at a rapid annual
rate, employers’ costs of providing healthcare benefits to
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at an even faster rate. In response to these cost increases,
employers and health plans have been changing benefit plan
designs to increase consumer out-of-pocket costs and taking
other steps to motivate their members and employees to evaluate
their healthcare decisions more carefully in order to be more
cost-effective. This has led employers and health plans to
enhance wellness programs and take steps to provide healthcare
information and education to employees and members, including
through the use of online services. |
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Quality initiatives. In 1999 and 2000, a series of major
studies suggested that the nation’s healthcare system
should be fundamentally redirected to focus on continuous
quality improvement and anticipating healthcare needs, rather
than controlling access to services. Since then, health plans
have begun to recognize that encouraging the good health of
their members not only benefits the members but also has
financial benefits for the health plans. Healthier people need
less care and fewer costly services. Thus, controlling costs by
keeping people healthier and better managing chronic conditions
has become a significant focus for America’s healthcare
system. As part of these initiatives, health plans are offering
their members online access to health and wellness information
and decision-support tools. |
We believe that our private portals are well positioned to
benefit from these trends because they provide the tools and
information employees and plan members need to take a more
active role in their healthcare, such as helping them make more
informed decisions about healthcare provider, benefit and
treatment options. Employers and health plans can help their
employees and members make choices that reduce overall
healthcare costs by implementing our services and making the
needed information and decision-support tools available through
a convenient and easy-to-use online service. In addition, as
employers continue to implement high deductible and
consumer-directed healthcare plans, we believe we will be able
to attract more employers and health plans to use our private
online portals. Additionally, the increased financial
responsibility of consumers for their healthcare will also
benefit our public portals as we continue to expand the public
portal decision-support and personal health information
applications and as consumers and healthcare professionals
increasingly utilize the Internet for the information and tools
necessary to manage their health decisions.
Our Strategy
We have positioned our services to benefit from the trends
described above, and the other trends affecting the Internet,
online advertising and healthcare industries described in this
prospectus. Our goal is to be the leading provider of online
health information services in each of the markets in which we
participate and to use our content, technology platform and
expertise to continue to enter additional complementary markets.
To achieve our goal, we intend to:
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Enhance our current products and services. We intend to
continue to invest in the resources needed to deliver high
quality health and medical information. In addition, we intend
to continue to build our repository of in-depth health content,
broaden our interactive services and increase their
functionality, improve our technology platform and add
additional products and services. Our goal is to continue to
increase the number of consumers, physicians and healthcare
professionals using our Web sites, the amount of time they spend
there and, most importantly, the trust they have in WebMD. |
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Expand awareness of the WebMD brand. We plan to promote
the WebMD brand through relationships with strategic partners,
through advertising and through the breadth of products and
services that we offer. For example, we recently introduced
WebMD the Magazine, a consumer publication that we
distribute free of charge to patients in physician waiting
rooms, as a means of extending our brand into offline channels
and attracting incremental advertising dollars. |
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Deepen our relationships with existing clients and expand our
sponsorship base. We intend to increase The WebMD Health
Network’s advertising and sponsorship revenues by
continuing to provide an efficient and effective channel for
sponsors to reach, educate and inform large audiences of
health-involved consumers and clinically-active physicians
within the trusted environment of |
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WebMD. We believe that we are well positioned to benefit from
the expected shift of sponsorship spending from offline to
online media by pharmaceutical, biotechnology and medical device
companies as they continue to see the benefits of online
sponsorship relative to traditional offline media, including
interactivity, rapid and measurable user feedback and the
ability to more efficiently reach specific audiences. In
addition, we are focused on increasing sponsorship of The
WebMD Health Network by consumer products companies that
wish to communicate health- and lifestyle-related messages for
their products. |
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Increase market penetration of our private portals. We
intend to increase the market penetration of our private health
and benefits portals for employers and health plans by
demonstrating to prospective clients the return on investment
and increase in employee satisfaction on the part of our
existing clients from implementing our services. We expect
demand for these services to increase as more employers and
health plans seek to complement or replace their existing
offline benefit-related services with more efficient Web-based
decision-support tools and related online services. |
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Acquire complementary online and offline services. We
have a history of acquiring and successfully integrating
complementary companies. We expect to continue to supplement our
internal product development efforts with strategic acquisitions
that add new capabilities or help us enter additional
complementary markets. |
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Capitalize upon governmental initiatives relating to use of
information technology in healthcare. There are currently
numerous federal, state and private initiatives seeking ways to
increase the use of information technology in healthcare,
including the creation of portable consumer health records. We
believe that we are well positioned to play a role in such
efforts, as well as efforts to establish the adoption of
electronic medical records among physicians and to provide
channels for the exchange of information among patients,
providers and payers. |
Our principal executive offices are located at 224 West 30th
Street,
New York,
New York 10001 and our telephone number at
that address is (
212) 624-3700.
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Our Corporate Structure
The businesses that comprise
our company include acquisitions
made by our Parent beginning in 1999. Our operations were, until
2001, commingled with other operations of our Parent. In 2001,
our businesses were organized as a separate segment of our
Parent, which is currently called
“WebMD Health.”
WebMD Health Holdings, Inc.,
the registrant whose name appears
on the cover of the registration statement of which this
prospectus is a part, was incorporated in Delaware on
May 3, 2005 to be a holding company for our Parent’s
WebMD Health business segment in order to conduct this offering.
Prior to the completion of this offering, our Parent will
contribute and transfer to us the
subsidiaries and certain
related assets and liabilities that comprise our Parent’s
WebMD Health business segment. We intend to change our corporate
name, prior to completion of this offering, to a new name that
has not yet been chosen, but that will include
“WebMD,” which will also continue to be the primary
brand name for our products and services. Our Parent intends to
take the steps, over the next several months, needed to change
its corporate name to one that does not include
“WebMD” and to cease using
“WebMD” as a
brand name for the products and services of its other segments.
Prior to the completion of this offering, the certificate of
incorporation of WebMD Health Holdings, Inc. will be amended and
restated to, among other things:
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create two classes of common stock — Class A
common stock and Class B common stock; |
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establish the voting rights associated with each such class of
our common stock, pursuant to which holders of our Class A
common stock will be entitled to one vote per share on all
matters to be voted on by stockholders and holders of our
Class B common stock will be entitled to ten votes per
share on all matters to be voted on by stockholders; and |
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provide for the conversion of the Class B common stock into
Class A common stock upon the terms and subject to the
conditions set forth therein. |
Immediately following this offering, holders of our Class A
common stock will own
approximately %
of our outstanding common stock
and %
of the combined voting power of our outstanding common stock
(approximately %
of our outstanding common stock
and %
of the combined voting power of our outstanding common stock if
the underwriters exercise in full their option to purchase
additional shares).
Immediately following this offering, our Parent, which will hold
100% of our Class B common stock, will own
approximately %
of our outstanding common stock
and %
of the combined voting power of our outstanding common stock
(approximately %
of our outstanding common stock
and %
of the combined voting power of our outstanding common stock if
the underwriters exercise in full their option to purchase
additional shares).
As a result, our Parent will continue to control us following
the completion of this offering, and will be able to exercise
control over all matters requiring shareholder approval,
including the election of our directors and approval of
significant corporate transactions. In addition, our
Parent’s controlling interest may discourage a change of
control that the holders of our Class A common stock may
favor.
As of the date of this prospectus, our Parent has indicated that
it has no current intention to sell or otherwise dispose of its
Class B common stock. However, our Parent is not subject to
any contractual obligation to retain any of its Class B
common stock, except that it has agreed not to sell or otherwise
dispose of any of our common stock for a period of 180 days
after the date of this prospectus without the prior written
consent of the representatives of the underwriters, as described
in “Underwriting.”
We expect to enter into a number of agreements with our Parent
governing our separation from and our future relationship with
our Parent, including a services agreement. Under the services
agreement, we expect that our Parent will provide us with
administrative services, including payroll, accounting, tax,
employee benefit plan, employee insurance, intellectual
property, legal and information processing services. We
anticipate that the services agreement will provide for an
initial term of five years. We will, as a result, initially be
dependent on our relationship with our Parent for shared
services following this offering. It is also possible that some
or all of these services would be provided for longer periods
than the initial term. See “Certain Relationships and
Related Party Transactions — Agreements Between Us and
Our Parent.”
6
The Offering
|
|
|
Class A common stock offered
by us |
|
shares |
| |
|
Common stock outstanding after the offering: |
|
|
| |
|
Class A common stock |
|
shares |
| |
|
Class B common stock |
|
shares |
| |
|
Use of proceeds |
|
We estimate that our net proceeds from this offering will be
approximately
$ million
($ million
if the underwriters exercise in full their option to purchase
additional shares). We intend to use these net proceeds for
working capital and general corporate purposes, including
capital expenditures and acquisitions. |
| |
|
Voting rights |
|
Each share of our Class A common stock will entitle its
holder to one vote on all matters to be voted on by stockholders
generally. The holders of our Class B common stock
generally will have rights identical to holders of our
Class A common stock, except that each share of
Class B common stock will entitle its holder to ten votes
on all matters to be voted on by stockholders generally. Holders
of our Class A common stock and Class B common stock
will generally vote together as a single class. |
| |
|
Conversion rights |
|
Upon the completion of this offering, we expect our certificate
of incorporation to provide that, under certain circumstances,
our Class B common stock may be converted into our
Class A common stock at the option of the holder or
automatically. |
| |
|
Risk factors |
|
See “Risk Factors” and other information included in
this prospectus for a discussion of factors you should carefully
consider before deciding to invest in shares of our common stock. |
| |
|
Proposed Nasdaq National Market symbol |
|
“WBMD.” |
Unless we specifically state otherwise, all information in this
prospectus:
|
|
|
| |
• |
assumes that the underwriters do not exercise their option to
purchase additional shares; and |
| |
| |
• |
excludes shares
of our Class A common stock reserved for grants under our
incentive compensation plans after the pricing of this
offering, of
which will
be in the form of options to purchase shares of our Class A
common stock with an exercise price equal to the initial public
offering price per share,
and of
which will be in the form of restricted Class A common
stock. |
7
Summary Financial Data
You should read the following summary combined consolidated
financial data in conjunction with
“Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” our combined consolidated financial statements
and notes thereto and the unaudited pro forma financial
statements and related notes, all included elsewhere in this
prospectus. The
“Pro Forma” combined consolidated
statement of operations data below is adjusted to reflect our
acquisitions of MedicineNet, Inc. and HealthShare Technology,
Inc., as though those acquisitions occurred as of
January 1, 2004. The
“Pro Forma” combined
consolidated balance sheet data reflects the acquisition of
HealthShare Technology, Inc. as though the acquisition occurred
on
December 31, 2004. The pro forma information is provided
for illustrative purposes only and is not necessarily indicative
of the operating results that would have occurred if the
transactions had been consummated as of
January 1, 2004,
nor is it indicative of future operating results. In addition,
the
“Pro Forma As Adjusted” combined consolidated
balance sheet data below is further adjusted to reflect the sale
of the shares of our Class A common stock offered hereby
and the receipt of the estimated net proceeds after deducting
underwriting discounts and commissions and the estimated
offering expenses.
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Years Ended December 31, | |
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2002 | |
|
2003 | |
|
2004 | |
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|
| |
|
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| |
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|
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Pro Forma | |
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|
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|
|
Actual | |
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(unaudited) | |
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|
|
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| |
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| |
|
(in thousands) | |
|
Combined Consolidated Statements of Operations Data:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
84,203 |
|
|
$ |
110,152 |
|
|
$ |
134,148 |
|
|
$ |
144,637 |
|
|
Costs and expenses:
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
| |
Cost of operations
|
|
|
47,420 |
|
|
|
46,552 |
|
|
|
51,879 |
|
|
|
54,829 |
|
| |
Sales and marketing
|
|
|
47,814 |
|
|
|
47,369 |
|
|
|
48,701 |
|
|
|
50,587 |
|
| |
General and administrative
|
|
|
17,377 |
|
|
|
19,010 |
|
|
|
21,277 |
|
|
|
24,599 |
|
| |
Depreciation and amortization
|
|
|
2,486 |
|
|
|
4,463 |
|
|
|
5,620 |
|
|
|
12,016 |
|
| |
Restructuring and integration benefit
|
|
|
(5,850 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other (income) expense
|
|
|
(823 |
) |
|
|
— |
|
|
|
— |
|
|
|
19 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision
|
|
|
(24,221 |
) |
|
|
(7,242 |
) |
|
|
6,671 |
|
|
|
2,587 |
|
| |
Income tax provision
|
|
|
140 |
|
|
|
183 |
|
|
|
210 |
|
|
|
397 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(24,361 |
) |
|
$ |
(7,425 |
) |
|
$ |
6,461 |
|
|
$ |
2,190 |
|
| |
|
|
|
|
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At December 31, 2004 | |
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|
| |
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|
|
|
|
|
Pro Forma | |
| |
|
December 31, | |
|
|
|
Pro Forma | |
|
As Adjusted(1) | |
| |
|
2003 | |
|
Actual | |
|
(unaudited) | |
|
(unaudited) | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
Combined Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$ |
3,384 |
|
|
$ |
9,119 |
|
|
$ |
10,610 |
|
|
|
|
|
|
Total assets
|
|
|
120,630 |
|
|
|
146,496 |
|
|
|
183,467 |
|
|
|
|
|
|
Owner’s net investment/Stockholders’ equity
|
|
|
85,527 |
|
|
|
100,737 |
|
|
|
131,737 |
|
|
|
|
|
|
|
| (1) |
Reflects (a) the sale of the shares of our Class A common
stock in this offering after deducting underwriting discounts
and commissions and estimated offering expenses and (b) the
reclassification of Owner’s net investment to
Stockholders’ equity, reflecting the contribution to
capital of net amounts due to our Parent and the related
issuance of shares of our Class B common stock to our
Parent. |
8
RISK FACTORS
Any investment in our Class A common stock involves a
high degree of risk. This section describes circumstances or
events that could have a negative effect on our business. You
should consider carefully the following information about these
risks, together with the other information contained in this
prospectus, before you decide whether to buy our Class A
common stock. The occurrence of one or more of the circumstances
or events described below could have a material adverse effect
on our financial condition, results of operations and cash flows
or on the trading prices of our Class A common stock, and
you could lose all or part of your investment. The risks and
uncertainties described below are not exhaustive, and additional
risks and uncertainties that are not currently known to us or
that we currently believe are immaterial may also adversely
affect our business and operations. Our Risk Factors are
organized into the following broad categories: “Risks
Related to Our Operations and Financial Performance,”
“Risks Related to Our Relationships with Clients,”
“Risks Related to Our Technological Infrastructure,”
“Risks Related to the Legal and Regulatory Environment in
Which We Operate,” “Risks Related to Our Relationship
With Our Parent” and “Risks Related to Ownership of
the Class A Common Stock and this Offering.”
Risks Related to Our Operations and Financial Performance
Our online businesses are difficult to evaluate because they
have a limited operating history
Our online businesses have a limited operating history and
participate in relatively new and rapidly evolving markets. As a
result, our primary businesses have undergone significant
changes during their short history and are continuing to change
as a result of acquisitions, investments and market conditions.
We cannot assure you that our current business strategy will be
successful in the long term.
Many companies with business plans based on providing healthcare
information through the Internet have failed to be profitable
and some have filed for bankruptcy and/or ceased operations.
Even if demand from users exists, we cannot assure you that our
business will continue to be profitable.
The timing of our advertising and sponsorship revenues may
vary significantly, which could have adverse effects on our
operating results
Our advertising and sponsorship revenues may vary significantly
from quarter to quarter due to a number of factors, not all of
which are in our control, and any of which may be difficult to
forecast accurately. The majority of our sponsorship
contracts
are for terms of approximately four to 12 months. We have
relatively few longer term
contracts. We cannot assure you that
our current sponsors will continue to participate in our
existing programs beyond the terms of their existing
contracts
or that they will enter into any additional
contracts for new
programs that we offer.
In addition, the time between the date of initial contact with a
potential advertiser or sponsor regarding a specific program and
the execution of a
contract with the advertiser or sponsor for
that program may be lengthy, especially for larger
contracts,
and may be subject to delays over which we have little or no
control, including as a result of budgetary constraints of the
advertiser or sponsor or their need for internal approvals.
Factors that could affect the timing of our revenues from
advertisers and sponsors include:
|
|
|
| |
• |
the timing of FDA approval for new products or for new approved
uses for existing products; |
| |
| |
• |
seasonal factors relating to the prevalence of specific health
conditions and other seasonal factors that may affect the timing
of promotional campaigns for specific products; and |
| |
| |
• |
the scheduling of conferences for physicians and other
healthcare professionals. |
9
Lengthy sales and implementation cycles for our private
online portals make it difficult to forecast our revenues from
these applications and, as a result, may have an adverse impact
on our business
The period from our initial contact with a potential client for
a private online portal and the first purchase of our solution
by the client is difficult to predict. In the past, it has
generally ranged from six to 12 months, but in some cases
has extended much longer. These sales may be subject to delays
due to a clients’ internal procedures for approving large
expenditures and other factors beyond our control. The time it
takes to implement a private online portal is also difficult to
predict and has lasted as long as six months from
contract
execution to the commencement of live operation. Implementation
may be subject to delays based on the availability of the
internal resources of the client that are needed and other
factors outside of our control. As a result, we have limited
ability to forecast the timing of revenue from new clients.
This, in turn, makes it more difficult to predict our financial
performance from quarter to quarter.
During the sales cycle and the implementation period, we may
expend substantial time, effort and money preparing
contract
proposals, negotiating
contracts and implementing the private
online portal without receiving any related revenue. In
addition, many of the expenses related to providing private
online portals are relatively fixed in the short term, including
personnel costs and technology and infrastructure costs. Even if
our revenue is lower than expected, we may not be able to reduce
our short-term spending in response. Any shortfall in revenue
would have a direct impact on our results of operations.
As a result, we may be unable to adjust spending quickly enough
to offset any unexpected revenue shortfall or delay, in which
case our results of operations would suffer. In addition, in an
attempt to enhance our long-term competitive position, we may
from time to time make decisions regarding pricing, marketing,
services and technology that could have a near-term adverse
effect on our operating results.
Usage of our public portals depends on our ability to provide
high quality content, tools and services
Interest in our public portals for consumers, physicians and
healthcare professionals is based upon our ability to make
available high quality health content, decision-support tools
and other services that meet the needs of our users. Our ability
to do so depends, in turn, on:
|
|
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| |
• |
our ability to hire and retain qualified authors, journalists
and independent writers; |
| |
| |
• |
our ability to license quality content from third
parties; and |
| |
| |
• |
our ability to monitor and respond to increases and decreases in
user interest in specific topics. |
We cannot assure you that we will be able to continue to get
needed content at a reasonable cost. If we are unable to provide
content that attracts and retains users at a level that is
attractive to advertisers and sponsors, our revenues will be
reduced. In addition, our ability to deploy new interactive
tools and other features will require us to continue to improve
the technology underlying our
Web sites. The required changes
may be significant and expensive, and we cannot assure you that
we will be able to execute them quickly and efficiently.
We face significant competition for our products and
services
The markets in which we operate are intensely competitive,
continually evolving and, in some cases, subject to rapid
change. Our competitors include:
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• |
traditional media companies; |
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• |
general purpose consumer online services and portals and other
high-traffic Web sites that provide access to healthcare-related
content; and |
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• |
companies that focus on providing online and/or offline
healthcare-related content, including some that are
not-for-profit. |
Many of our competitors have greater financial, technical,
product development, marketing and other resources than we do.
These organizations may be better known than we are and have
more customers or
10
users than we do. We cannot provide assurance that we will be
able to compete successfully against these organizations or any
alliances they have formed or may form.
Governmental and private initiatives to support the adoption
of healthcare information technology may encourage additional
companies or governmental agencies to compete with us
There are currently numerous federal, state and private
initiatives and studies seeking ways to increase the use of
information technology in healthcare as a means of improving
care and reducing costs. For example, the Department of Health
and Human Services issued a report in 2004 entitled “The
Decade of Health Information Technology: Delivering
Consumer-centric and Information-rich Health Care.” These
initiatives may encourage more companies to develop applications
and services that compete with us, especially with our private
online portals. The effect that these initiatives may have on
our business is difficult to predict and we cannot assure you
that we will adequately address the risks created by these
initiatives or that we will be able to take advantage of any
resulting opportunities.
We have not been operated as an entity separate from our
Parent, and, as a result, our historical and pro forma financial
information may not be indicative of our historical financial
results or future financial performance
Our combined consolidated financial information included in this
prospectus assumes that, for the periods presented, we had
existed as a separate legal entity, and has been derived from
the consolidated financial statements of our Parent. Some costs
have been reflected in the combined consolidated financial
statements that are not necessarily indicative of the costs that
we would have incurred had we operated as an independent,
stand-alone entity for all periods presented. These costs
include allocated portions of our Parent’s corporate
overhead, interest expense and income taxes. Our combined
consolidated financial information included in this prospectus
may not be indicative of our future financial performance,
because these statements do not necessarily reflect our
historical financial condition, results of operations and cash
flows as they would have been had we been operated during the
periods presented as a separate, stand-alone entity.
We expect that accounting for employee stock options using
the fair value method will have a material impact on our
combined consolidated results of operations and earnings per
share
In December 2004, FASB issued SFAS 123R, which requires all
share-based payments to employees, including grants of stock
options by us and our Parent to our employees, to be recognized
in the financial statements based on their fair values,
beginning with the fiscal year that begins after
June 15,
2005. As permitted by SFAS No. 123, we currently
account for share-based payments to employees using the
intrinsic value method prescribed in APB Opinion No. 25.
Accordingly, the adoption of SFAS No. 123R’s fair
value method will have a material impact on the combined
consolidated results of operations and earnings per share. We
cannot predict what effect the reduction in our net income may
have on our stock price.
We will incur increased costs as a result of being a
separately traded public company
As a separately traded public company, we will incur legal,
accounting and other expenses that we did not incur as a wholly
owned subsidiary of our Parent, including costs associated with
the periodic reporting requirements applicable to a company
whose securities are registered under the Securities Exchange
Act of 1934, or the Exchange Act, recently adopted corporate
governance requirements, including requirements under the
Sarbanes-Oxley Act of 2002, and other rules implemented
relatively recently by the Securities and Exchange Commission,
or the SEC, and The Nasdaq National Market. We expect these
rules and regulations to increase substantially our legal and
financial compliance costs and to make some activities more
time-consuming and costly. We also expect that these rules and
regulations will make it more difficult and more expensive for
us to obtain directors and officers’ liability insurance.
11
Investors could lose confidence in our financial reports, and
our stock price may be adversely affected, if our or our
Parent’s internal controls over financial reporting are
found not to be effective by management or by an independent
registered public accounting firm or if we or our Parent make
disclosure of existing or potential significant deficiencies or
material weaknesses in those controls
Beginning with our Annual Report for the year ending
December 31, 2006, Section 404 of the Sarbanes-Oxley
Act of 2002 will require us to include an internal control
report with our Annual Report on Form 10-K. That report
must include management’s assessment of the effectiveness
of our internal control over financial reporting as of the end
of the fiscal year. Additionally, our independent registered
public accounting firm will be required to issue a report on
management’s assessment of our internal control over
financial reporting and a report on their evaluation of the
operating effectiveness of our internal control over financial
reporting. Our Parent is an
“accelerated filer” and
was required to include an internal control report in its most
recent and in its future Annual Reports on Form 10-K.
We continue to evaluate our existing internal controls over
financial reporting against the standards adopted by the Public
Company Accounting Oversight Board (PCAOB). During the course of
our ongoing evaluation of the internal controls, we may identify
areas requiring improvement, and may have to design enhanced
processes and controls to address issues identified through this
review. Remedying any deficiencies, significant deficiencies or
material weaknesses that we or our independent registered public
accounting firm may identify, may require us to incur
significant costs and expend significant time and management
resources. We cannot assure you that any of the measures we
implement to remedy any such deficiencies will effectively
mitigate or remedy such deficiencies. In addition, we cannot
assure you that we will be able to complete the work necessary
for our management to issue its management report in a timely
manner, or that we will be able to complete any work required
for our management to be able to conclude that our internal
control over financial reporting is operating effectively. If we
are not able to complete the assessment under Section 404
in a timely manner, we and our independent registered public
accounting firm would be unable to conclude that our internal
control over financial reporting is effective as of
December 31, 2006. Investors could lose confidence in our
financial reports, and our stock price may be adversely
affected, if our internal controls over financial reporting are
found not to be effective by management or by an independent
registered public accounting firm or if we make disclosure of
existing or potential significant deficiencies or material
weaknesses in those controls.
A determination that there is a significant deficiency or
material weakness in the effectiveness of our internal controls
over financial reporting could also reduce our ability to obtain
financing or could increase the cost of any financing we obtain
and require additional expenditures to comply with applicable
requirements.
In addition, investors could lose confidence in our financial
reports, if our Parent’s internal controls over financial
reporting are found not to be effective by management or by an
independent registered public accounting firm or if our Parent
makes disclosure of existing or potential significant
deficiencies or material weaknesses in those controls,
particularly if the reasons are relevant or related to our
internal controls.
Acquisitions, business combinations and other transactions
may be difficult to complete and, if completed, may have
negative consequences for our business and our
securityholders
We have been built, in part, through a series of acquisitions.
We intend to continue to seek to acquire or to engage in
business combinations with companies engaged in complementary
businesses. In addition, we may enter into joint ventures,
strategic alliances or similar arrangements with third parties.
These transactions may result in changes in the nature and scope
of our operations and changes in our financial condition. Our
success in completing these types of transactions will depend
on, among other things, our ability to locate suitable
candidates, negotiate mutually acceptable terms with them and to
obtain adequate financing. Significant competition for these
opportunities exists, which may increase the cost of and
12
decrease the opportunities for these types of transactions.
Financing for these transactions may come from several sources,
including:
|
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| |
• |
cash and cash equivalents on hand and marketable securities; |
| |
| |
• |
proceeds from the incurrence of indebtedness; and |
| |
| |
• |
proceeds from the issuance of additional common stock, preferred
stock, convertible debt or other securities. |
The issuance of additional equity or debt securities could:
|
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|
| |
• |
cause substantial dilution of the percentage ownership of our
stockholders at the time of the issuance; |
| |
| |
• |
cause substantial dilution of our earnings per share; |
| |
| |
• |
subject us to the risks associated with increased leverage,
including a reduction in our ability to obtain financing or an
increase in the cost of any financing we obtain; |
| |
| |
• |
may subject us to restrictive covenants that could limit our
flexibility in conducting future business activities; and |
| |
| |
• |
adversely affect the prevailing market price for our outstanding
securities. |
We do not intend to seek securityholder approval for any such
acquisition or security issuance unless required by applicable
law, regulation or by the terms of then existing securities.
Our business will suffer if we fail to successfully integrate
acquired businesses and technologies or to assess the risks in
particular transactions
We have in the past acquired, and may in the future acquire,
businesses, technologies, services, product lines and other
assets. The successful integration of the acquired businesses
and assets into our operations, on a cost-effective basis, can
be critical to our future performance. The amount and timing of
the expected benefits of any acquisition, including potential
synergies between
our company and the acquired business, are
subject to significant risks and uncertainties. These risks and
uncertainties include, but are not limited to, those relating to:
|
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|
| |
• |
our ability to maintain relationships with the customers of the
acquired business; |
| |
| |
• |
our ability to retain or replace key personnel; |
| |
| |
• |
potential conflicts in sponsor or advertising relationships; |
| |
| |
• |
our ability to coordinate organizations that are geographically
diverse and may have different business cultures; and |
| |
| |
• |
compliance with regulatory requirements. |
We cannot guarantee that any acquired businesses will be
successfully integrated with our operations in a timely or
cost-effective manner, or at all. Failure to successfully
integrate acquired businesses or to achieve anticipated
operating synergies, revenue enhancements or cost savings could
have a material adverse effect on our business, financial
condition and results of operations.
Although our management attempts to evaluate the risks inherent
in each transaction and to value acquisition candidates
appropriately, we cannot assure you that we will properly
ascertain all such risks or that acquired businesses and assets
will perform as we expect or enhance the value of
our company as
a whole. In addition, acquired companies or businesses may have
larger than expected liabilities that are not covered by the
indemnification, if any, we are able to obtain from the sellers.
13
Our success depends in part on our attracting and retaining
qualified executives and employees
Our success depends largely on the skills, experience and
performance of key members of our senior management team. Roger
C. Holstein, who served as our chief executive officer since
October 2004, resigned, effective
April 27, 2005, from all
his positions with our Parent and its
subsidiaries. Wayne
Gattinella, who has served as President of our Parent’s
WebMD Health segment since August 2001, will become our
President and Co-Chief Executive Officer, and David Gang, who
previously served as Executive Vice President of AOL Products at
America Online, Inc., will be joining us as Co-Chief Executive
Officer and Chief Operating Officer prior to the consummation of
this offering. We cannot assure you that the transition in
leadership will occur without disruption to our businesses.
We also depend, in part, on our ability to attract and retain
qualified writers and editors, software developers and other
technical personnel and sales and marketing personnel. We
anticipate the need to hire and retain qualified employees in
these areas from time to time. We cannot assure you that we will
be able to hire or retain a sufficient number of qualified
personnel to meet our requirements, or that we will be able to
do so at the salary and benefit costs that are acceptable to us.
Failure to do so may have an adverse effect on our business.
Risks Related to Our Relationships with Clients
Developments in the healthcare industry could adversely
affect our business
Most of our revenue is derived from the healthcare industry and
could be affected by changes affecting healthcare spending.
General reductions in expenditures by healthcare industry
participants could result from, among other things:
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| |
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government regulation or private initiatives that affect the
manner in which healthcare providers interact with patients,
payers or other healthcare industry participants, including
changes in pricing or means of delivery of healthcare products
and services; |
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consolidation of healthcare industry participants; |
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reductions in governmental funding for healthcare; and |
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adverse changes in business or economic conditions affecting
healthcare payers or providers, pharmaceutical, biotechnology or
medical device companies or other healthcare industry
participants. |
We are particularly dependent on pharmaceutical, biotechnology
and medical device companies for our advertising and sponsorship
revenues. Our business will be adversely impacted if business or
economic conditions result in the reduction of purchases by our
customers if they decide not to renew their commitments or
decide to renew their commitments at lower levels. Even if
general expenditures by industry participants remain the same or
increase, developments in the healthcare industry may result in
reduced spending in some or all of the specific segments of that
market we serve or are planning to serve. For example, use of
our products and services could be affected by:
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changes in the design of health insurance plans; |
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a decrease in the number of new drugs or medical devices coming
to market; and |
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decreases in marketing expenditures by pharmaceutical companies
or consumer product companies, including as a result of
governmental regulation or private initiatives that discourage
or prohibit promotional activities by pharmaceutical or medical
device companies. |
In addition, our customers’ expectations regarding pending
or potential industry developments may also affect their
budgeting processes and spending plans with respect to products
and services of the types we provide.
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The healthcare industry has changed significantly in recent
years and we expect that significant changes will continue to
occur. However, the timing and impact of developments in the
healthcare industry are difficult to predict. We cannot assure
you that the markets for our products and services will continue
to exist at current levels or that we will have adequate
technical, financial and marketing resources to react to changes
in those markets.
Our ability to maintain or increase our advertising and
sponsorship revenues depends on our ability to retain or
increase usage of our online offerings by consumers, physicians
and healthcare professionals
We cannot assure you that we will be able to attract a large
audience of health-involved consumers and clinically-active
healthcare professionals to our
Web sites. Since users of our
public portals may be attracted to our
Web sites as a result of
a specific condition or for a specific purpose, it is difficult
for us to predict the rate at which users will return to the
public portals or become members. Further, users of our Web
sites have numerous other online and offline sources of
healthcare information services. In addition, some of our
traffic and new members come to us through relationships with
third parties and, as a result, our traffic may vary based on
the amount of traffic to
Web sites of these third parties and
other factors outside our control.
Because we generate revenues by, among other things, selling
sponsorships of specific pages, sections or events on our Web
sites for healthcare providers and consumers and related
e-newsletters, a decline in user traffic levels or a reduction
in the number of pages viewed by users could cause our revenues
to decrease and could have a material adverse effect on our
results of operations.
We may be unsuccessful in our efforts to increase advertising
and sponsorship revenue from consumer products companies
Most of our advertising and sponsorship revenues have, in the
past, come from pharmaceutical, biotechnology and medical device
companies. During the past year, we have begun to focus on
increasing sponsorship revenue from consumer products companies
that are interested in communicating health-related or
safety-related information about their products to our audience.
However, while a number of consumer products companies have
indicated an intent to increase the portion of their promotional
spending used on the Internet, we cannot assure you that these
advertisers and sponsors will find our consumer
Web site to be
as effective as other
Web sites or traditional media for
promoting their products and services. If we encounter
difficulties in competing with the other alternatives available
to consumer products companies, this portion of our business may
develop more slowly than we expect or may fail to develop.
Risks Related to Our Technological Infrastructure
Our users depend on Internet service providers, online
service providers and other Web site operators to access our
online services
Users of our Web-based services depend on Internet service
providers, online service providers and other
Web site operators
for access to our
Web sites. Many of these providers have
experienced significant outages in the past and could experience
outages, delays and other difficulties in the future due to
system failures unrelated to our systems. Any significant
interruptions in our services or increases in response time
could result in a loss of potential or existing users of and
advertisers and sponsors on our
Web site and, if sustained or
repeated, could reduce the attractiveness of our Web-based
services.
15
Delivery of our online services requires uninterrupted
communications and computer service from third party service
providers and our own systems
Our online services are designed to operate 24 hours a day,
seven days a week, without interruption. To do so, we rely on
internal systems as well as communications and hosting services
provided by third parties. We do not maintain redundant systems
or facilities for some of these services. To operate without
interruption, both we and our service providers must guard
against:
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damage from fire, power loss and other natural disasters; |
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communications failures; |
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software and hardware errors, failures or crashes; |
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security breaches, computer viruses and similar disruptive
problems; and |
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other potential interruptions. |
We have experienced periodic system interruptions in the past,
and we cannot guarantee that they will not occur again. In
addition, some of our online services may, at times, be required
to accommodate higher than expected volumes of traffic. At those
times, we may experience slower response times or system
failures. Any sustained or repeated interruptions or disruptions
in these systems or increase in response times could damage our
relationships with clients. Although we maintain insurance for
our business, we cannot guarantee that our insurance will be
adequate to compensate us for all losses that may occur.
Implementation of changes in hardware and software platforms
used to deliver our online services may result in performance
problems
From time to time, we implement changes to the hardware and
software platforms we use for providing our online services.
During and after the implementation of those changes, a platform
may not perform as expected, which could result in interruptions
in operations, an increase in response time or an inability to
track performance metrics. Any significant interruption in our
ability to operate any of our online services could have an
adverse effect on our relationship with users and clients and,
as a result, on our financial results.
If the systems we use to provide online portals experience
security breaches or are otherwise perceived to be insecure, our
business could suffer
We retain and transmit confidential information, including
personal health records, in the processing centers and other
facilities we use to provide online services. It is critical
that these facilities and infrastructure remain secure and be
perceived by the marketplace as secure. A security breach could
damage our reputation or result in liability. We may be required
to expend significant capital and other resources to protect
against security breaches and hackers or to alleviate problems
caused by breaches. Despite the implementation of security
measures, this infrastructure or other systems that we interface
with, including the Internet and related systems, may be
vulnerable to physical break-ins, hackers, improper employee or
contractor access, computer viruses, programming errors, attacks
by third parties or similar disruptive problems. Any compromise
of our security, whether as a result of our own systems or the
systems that they interface with, could reduce demand for our
services, and could subject us to legal claims from our clients
and users, including for breach of
contract or breach of
warranty.
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Risks Related to the Legal and Regulatory Environment in
Which We Operate
Government regulation of the Internet could adversely affect
our business
The Internet and its associated technologies are subject to
government regulation. Our failure, or the failure of our
business partners or third party providers, to accurately
anticipate the application of laws and regulations affecting our
products and services and the manner in which we deliver them,
or any other failure to comply, could create liability for us,
result in adverse publicity, or negatively affect our business.
In addition, new laws and regulations, or new interpretations of
existing laws and regulations, may be adopted with respect to
the Internet or other online services covering user privacy,
patient confidentiality, consumer protection and other issues,
including pricing, content, copyrights and patents, distribution
and characteristics and quality of products and services. We
cannot predict whether these laws or regulations will change or
how such changes will affect our business.
Government regulation of healthcare creates risks and
challenges with respect to our compliance efforts and our
business strategies
The healthcare industry is highly regulated and is subject to
changing political, legislative, regulatory and other
influences. Existing and new laws and regulations affecting the
healthcare industry could create unexpected liabilities for us,
cause us to incur additional costs and restrict our operations.
Many healthcare laws are complex and their application to
specific products and services may not be clear. In particular,
many existing healthcare laws and regulations, when enacted, did
not anticipate the healthcare information services that we
provide. However, these laws and regulations may nonetheless be
applied to our products and services. Our failure to accurately
anticipate the application of these laws and regulations, or
other failure to comply, could create liability for us, result
in adverse publicity and negatively affect our businesses. Some
of the risks we face from healthcare regulation are as follows:
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because our business involves advertising and promotion of
prescription and over-the-counter drugs and medical devices, any
increase in regulation of these areas by the Federal Drug
Administration or the Federal Trade Commission could make it
more difficult for us to contract for sponsorships and
advertising; |
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our practices must comply with federal and state anti-kickback
laws; |
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because we are in the business of applying information
technology to healthcare, various aspects of HIPAA have affected
and are expected to continue to affect our business; and |
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in providing health information to consumers, we must not engage
in activities that could be deemed to be the practice of
medicine and a violation of applicable laws. |
Changes in industry guidelines or government regulation could
adversely affect our online Medscape offerings
Our CME activities are planned and implemented in accordance
with the Essential Areas and Policies of the Accreditation
Council for Continuing Medical Education, or ACCME, which
oversees providers of CME credit, and other applicable
accreditation standards. In September 2004, ACCME revised its
standards for commercial support of CME. The revised standards
are intended to ensure, among other things, that CME activities
of ACCME-accredited providers are independent of providers of
healthcare goods and services that fund the development of CME.
ACCME expects accredited providers to implement these standards
by May 2005. Implementation has required additional disclosures
to CME participants about those in a position to influence
content and other adjustments to the management and operations
of our CME programs. We believe we have modified our procedures
as appropriate to meet the revised standards. However, we cannot
be certain whether these adjustments will ensure that we meet
the new standards or predict whether ACCME may impose additional
requirements.
CME activities may also subject to government regulation by the
Food and Drug Administration, or FDA, the Office of Inspector
General, or OIG, of the United States Department of Health and
Human
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Services, a federal agency responsible for interpreting certain
federal laws relating to healthcare and state regulatory
agencies.
During the past several years, educational programs, including
CME, directed toward physicians have been subject to increased
scrutiny to ensure that sponsors do not influence or control the
content of the program. In response to governmental and industry
initiatives, pharmaceutical companies and medical device
companies have been developing and implementing internal
controls and procedures that promote adherence to applicable
regulations and requirements. In implementing these controls and
procedures, different clients may interpret the regulations and
requirements differently and may implement procedures or
requirements that vary from client to client. These controls and
procedures:
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may discourage pharmaceutical companies from engaging in
educational activities; |
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may slow their internal approval for such programs; |
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may reduce the volume of sponsored educational programs
implemented through our Medscape Web site to levels that are
lower than in the past; and |
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may require us to make changes to how we offer or provide
educational programs, including CME. |
In addition, future changes to existing regulations or
accreditation standards, or to the internal compliance programs
of potential clients, may further discourage or prohibit
potential clients from engaging in educational activities with
us, or may require us to make further changes in the way we
offer or provide educational programs.
We face potential liability related to the privacy and
security of personal information we collect from consumer and
healthcare professionals through our Web sites
Internet user privacy has become a major issue both in the
United States and abroad. We have privacy policies posted on our
Web sites that we believe comply with applicable laws requiring
notice to users about our information collection, use and
disclosure practices. However, whether and how existing privacy
and consumer protection laws in various jurisdictions apply to
the Internet is still uncertain and may take years to resolve.
Any legislation or regulation in the area of privacy of personal
information could affect the way we operate our
Web sites and
could harm our business. Further, we cannot assure you that the
privacy policies and other statements on our
Web sites or our
practices will be found sufficient to protect us from liability
or adverse publicity relating to the privacy and security of
personal information.
Under HIPAA, Congress established a set of basic national
privacy standards for the protection by health plans, healthcare
clearinghouses, healthcare providers and their business
associates of individually identifiable health information. We
cannot assure you that we will adequately address the risks
created by these privacy rules and we are unable to predict what
changes to HIPAA might be made in the future or how those
changes could affect our business.
In addition to HIPAA, numerous other state and federal laws
govern the collection, dissemination, use, access to and
confidentiality of patient health information. In addition, some
states are considering new laws and regulations that further
protect the confidentiality of medical records or medical
information. In many cases, these state laws are not preempted
by the HIPAA Privacy Standard and may be subject to
interpretation by various courts and other governmental
authorities, thus creating potentially complex compliance issues
for us and our customers and strategic partners. These privacy
laws at a state or federal level, or new interpretations of
these laws, could create liability for us, could impose
additional operational requirements on our business, could
affect the manner in which we use and transmit patient
information and could increase our cost of doing business.
We may not be successful in protecting our intellectual
property and proprietary rights
Our intellectual property is important to our businesses. We
rely on a combination of trade secret, patent and other
intellectual property laws and confidentiality procedures and
non-disclosure contractual provisions to protect our
intellectual property. We believe that our non-patented
proprietary technologies
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and business processes are protected under trade secret,
contractual and other intellectual property rights. However,
those rights do not afford the statutory exclusivity provided by
patented processes. In addition, the steps that we take to
protect our intellectual property, proprietary information and
trade secrets may prove to be inadequate and, whether or not
adequate, may be expensive.
We cannot assure you that we will be able to detect potential or
actual misappropriation or infringement of our intellectual
property, proprietary information or trade secrets. Even if we
detect misappropriation or infringement by a third party, we
cannot assure you that we will be able to enforce our rights at
a reasonable cost, or at all. In addition, our rights to
intellectual property, proprietary information and trade secrets
may not prevent independent third-party development and
commercialization of competing products or services.
Third parties may claim that we are infringing their
intellectual property, and we could suffer significant
litigation or licensing expenses or be prevented from providing
certain services, and which may otherwise harm our business
We could be subject to claims that we are misappropriating or
infringing intellectual property or other proprietary rights of
others. These claims, even if not meritorious, could be
expensive to defend and divert management’s attention from
our operations. If we become liable to third parties for
infringing these rights, we could be required to pay a
substantial damage award and to develop non-infringing
technology, obtain a license or cease selling the products or
services that use or contain the infringing intellectual
property. We may be unable to develop non-infringing products or
services or obtain a license on commercially reasonable terms,
or at all. We may also be required to indemnify our customers if
they become subject to third party claims relating to
intellectual property that we license or otherwise provide to
them, which could be costly.
We may be subject to claims brought against us as a result of
content we provide
Consumers access health-related information through our online
services, including information regarding particular medical
conditions and possible adverse reactions or side effects from
medications. If our content, or content we obtain from third
parties, contains inaccuracies, it is possible that consumers,
employees, health plan members or others may sue us for various
causes of action. Although our
Web sites contain terms and
conditions, including disclaimers of liability, that are
intended to reduce or eliminate our liability, the law governing
the validity and enforceability of online agreements and other
electronic transactions is evolving. We could be subject to
claims by third parties that our online agreements with
consumers and physicians that provide the terms and conditions
for use of our public or private portals are unenforceable. A
finding by a court that these agreements are invalid and that we
are subject to liability could harm our business and require
costly changes to our business.
We have editorial procedures in place to provide quality control
of the information that we publish or provide. However, we
cannot assure you that our editorial and other quality control
procedures will be sufficient to ensure that there are no errors
or omissions in particular content. Even if potential claims do
not result in liability to us, investigating and defending
against these claims could be expensive and time consuming and
could divert management’s attention away from our
operations. In addition, our business is based on establishing
the reputation of our portals as trustworthy and dependable
sources of healthcare information. Allegations of impropriety or
inaccuracy, even if unfounded, could therefore harm our
reputation and business.
We could be subject to breach of warranty or other claims by
clients of our online portals, or if the software and systems we
use to provide them, contain errors or experience failures
Errors in the software and systems we use could cause serious
problems for clients of our online portals. We may fail to meet
contractual performance standards or fail to meet expectations
that our clients have for them. Clients of our online portals
may seek compensation from us or may seek to terminate their
agreements with us, withhold payments due to us, seek refunds
from us of part or all of the
19
fees charged under those agreements or initiate litigation or
other dispute resolution procedures. In addition, we could face
breach of warranty or other claims by clients or additional
development costs. Our software and systems are inherently
complex and, despite testing and quality control, we cannot be
certain that they are error free.
We attempt to limit, by
contract, our liability to our clients
for damages arising from our negligence, errors or mistakes.
However, contractual limitations on liability may not be
enforceable in certain circumstances or may otherwise not
provide sufficient protection to us from liability for damages.
We maintain liability insurance coverage, including coverage for
errors and omissions. However, it is possible that claims could
exceed the amount of our applicable insurance coverage, if any,
or that this coverage may not continue to be available on
acceptable terms or in sufficient amounts. Even if these claims
do not result in liability to us, investigating and defending
against them could be expensive and time consuming and could
divert management’s attention away from our operations. In
addition, negative publicity caused by these events may delay or
hinder market acceptance of our services, including unrelated
services.
The ongoing Department of Justice investigation of our Parent
could have an adverse impact on our company
On
September 3, 2003, our Parent first learned that the
U.S. Attorney for the District of South Carolina, with the
assistance of the Federal Bureau of Investigation and the
Internal Revenue Service, was conducting an investigation of our
Parent relating to activities which may have been engaged in
before and after Medical Manager Corporation (now part of
Parent’s WebMD Practice Services business segment) merged
in 1999 with a predecessor of Parent, as well as after the
merged entity became a subsidiary of our Parent in 2000. Our
Parent believes that the investigation relates principally to
issues of financial accounting improprieties relating to Medical
Manager, including activities that artificially inflated
revenues and earnings of Medical Manager. Our Parent understands
that the SEC is also conducting a formal investigation into this
matter. In 2005, certain former employees of Medical Manager
agreed to plead guilty to mail fraud and tax evasion as a result
of the foregoing investigation.
While our Parent is not sure of the investigation’s exact
scope, it does not believe that the investigation relates to the
business of
our company. However, documents filed by the
U.S. Attorney in connection with the plea agreements
entered into by the former Medical Manager employees state that
these employees engaged in their fraudulent conduct
“in
concert with senior management,” and
“at the direction
of senior Medical Manager officers.” In its statement, the
U.S. Attorney stated that
“the senior management and
officers referred to in the Court documents were members of
senior management of the Medical Manager subsidiary during the
relevant time period.” Based on the information it has
obtained to date, our Parent does not believe that any member of
its senior management whose duties were not primarily related to
the operations of Medical Manager engaged in the alleged
improprieties. Our Parent understands, however, that in light of
the nature of the allegations involved, the
U.S. Attorney’s Office has been investigating all
levels of our Parent’s management. Some members of our
company’s senior management are also serving or have served
as members of senior management of our Parent. In the event
members of senior management were to be implicated in any
wrongdoing, it could have an adverse impact on
our company.
Our Parent has been cooperating and intends to continue to
cooperate fully with the U.S. Attorney’s Office. Our
Parent’s Board of Directors has formed a Special Committee
consisting solely of independent directors to oversee this
matter, with the sole authority to direct our Parent’s
response to the allegations that have been raised. The Special
Committee has retained independent legal counsel to advise it.
Our Parent has retained counsel to advise it in connection with
the investigation, and such counsel reports directly to the
Special Committee.
20
Risks Related to Our Relationship With Our Parent
Our Parent controls the direction of our business. The
concentrated ownership of our common stock and certain corporate
governance arrangements will prevent you and other stockholders
from influencing significant corporate decisions
We have two classes of common stock:
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Class A common stock, which entitles the holder to one vote
per share; and |
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Class B common stock, which entitles the holder to ten
votes per share, |
on all matters submitted to our stockholders. Following
completion of this offering, our Parent will own 100% of our
Class B common stock, which will represent
approximately %
of our outstanding common stock after this offering, or
approximately %
if the underwriters exercise in full their option to purchase
additional shares. These shares collectively will
represent %
of the combined voting power of our outstanding common stock
(or %
if the underwriters exercise their in full option to purchase
additional shares). Given its ownership interest, our Parent
will be able to control the outcome of all matters submitted to
our shareholders for approval, including the election of
directors, mergers or other business combinations and
acquisitions, dispositions of assets, future issuances of our
common stock or other securities, the incurrence of debt by us,
the payment of dividends on our common stock (including the
frequency and the amount of dividends that would be payable on
our common stock, a substantial majority of which our parent
owns) and amendments to our
certificate of incorporation and
bylaws. In addition, our Parent’s controlling interest may
discourage a change of control that the holders of our
Class A common stock may favor. Any of these provisions
could be used by our Parent for its own advantage to the
detriment of our other stockholders and
our company. This in
turn may have an adverse affect on the market price of our
Class A common stock.
The interests of our Parent may conflict with the interests
of our other stockholders
We cannot assure you that the interests of our Parent will
coincide with the interests of the other holders of our common
stock. For example, our Parent could cause us to make
acquisitions that increase the amount of our indebtedness or
outstanding shares of common stock or sell revenue-generating
assets. Also, after this offering, our Parent or its directors
and officers, may allocate corporate opportunities to itself or
direct them to other affiliates, which, prior to this offering,
could have been directed to us. So long as our Parent continues
to own shares of our common stock with significant voting power
our Parent will continue to be able to strongly influence or
effectively control our decisions.
Some of our directors and officers may also serve as
directors or officers of our Parent, and may have conflicts of
interest because they may own our Parent’s stock or options
to purchase our Parent’s stock, or they may receive cash or
equity based awards based on the performance of our Parent
Some of our directors and officers may also serve as directors
or officers of our Parent, and may own our Parent’s stock
or options to purchase our Parent’s stock, or they may be
entitled to participate in our Parent’s benefit plans,
which provide cash- and equity-based compensation to employees
based on our Parent’s performance. For example, Martin J.
Wygod, who currently serves as the Chairman of our Parent’s
Board of Directors, will also serve as the Chairman of our Board
of Directors. These arrangements and ownership interests or
cash-or equity-based awards could create, or appear to create,
potential conflicts of interest when directors or officers who
own our Parent’s stock or stock options or who participate
in our Parent’s benefit plans are faced with decisions that
could have different implications for our Parent than they do
for us. We anticipate that our
certificate of incorporation will
include provisions addressing potential conflicts of interest
between us and our Parent and its non-WebMD Health-related
subsidiaries and other similar entities. In addition, we
anticipate that our
certificate of incorporation will include
provisions regulating and defining our conduct as it may involve
us and our Parent and our and its
subsidiaries, directors and
officers. We cannot assure you, however, that the provisions in
our certificate of
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incorporation will adequately address potential conflicts of
interest or that potential conflicts of interest will be
resolved in our favor.
Following this offering, we will no longer receive capital
contributions from our Parent or have access to its assets or
borrowing power. We may not be able to raise additional funds
when needed for our business or to exploit opportunities
To date, our primary sources of financing have been from our
Parent. We will receive all of the net proceeds of this
offering. Following completion of this offering, our Parent will
have no obligation to provide any additional financing to us and
we will no longer have access to the borrowing capacity, cash
flow or assets of our Parent. Our future liquidity and capital
requirements will depend upon numerous factors, some of which
are outside our control, including the future development of the
markets we participate in. We may need to raise additional funds
to support expansion, develop new or enhanced services, respond
to competitive pressures, acquire complementary businesses or
technologies or take advantage of unanticipated opportunities.
If our capital resources are not sufficient to satisfy our
liquidity needs, we may seek to sell additional equity or debt
securities or obtain other debt financing. The sale of
additional equity or convertible debt securities would result in
additional dilution to our stockholders. The sale of debt would
result in increased expenses and could result in covenants that
would restrict our operations. We have not made arrangements to
obtain additional financing. We may not be able to obtain
additional financing, if required, in amounts or on terms
acceptable to us, or at all. As discussed below, we may also be
limited for tax reasons in our ability to sell equity or
convertible debt securities.
Following this offering, we will continue to be dependent on
our Parent to provide us with many key services for our
business
We have not been operated as a stand-alone company. We have been
operated as a wholly owned subsidiary of our Parent, and many
key services required by us for the operation of our business
are currently provided to us by our Parent and its
subsidiaries.
Prior to the completion of this offering, we will enter into
agreements with our Parent relating to certain intercompany
transactions between us and our Parent, including, among others,
a services agreement, a registration
rights agreement, a release
and indemnification agreement and a tax sharing agreement. Under
the services agreement, our Parent will provide us with
administrative services, including payroll, accounting, tax,
employee benefit plan, employee insurance, intellectual
property, legal and information processing services. We
anticipate that our services agreement with our Parent will be
for an initial term of five years. We believe that it will be
necessary for our Parent to provide these services for us under
the services agreement to facilitate the efficient operation of
our business as we transition to becoming a public company. We
will, as a result, initially be dependent on our relationship
with our Parent for shared services following this offering.
Once the transition periods specified in the services agreement
expires and if the services agreement is not renewed, or if our
Parent does not or is unable to perform its obligations under
the services agreement, we will be required to provide these
services ourselves or to obtain substitute arrangements with
third parties. We may be unable to provide these services
because of financial or other constraints or be unable to timely
implement substitute arrangements on terms that are favorable to
us, or at all, which would have an adverse effect on our
business, financial condition and results of operations.
We may be prevented from issuing stock to raise capital, to
effectuate acquisitions or to provide equity incentives to
members of our management and Board of Directors
Beneficial ownership of at least 80% of the total voting power
and value of our capital stock is required in order for our
Parent to continue to include us in its consolidated group for
federal income tax purposes, and beneficial ownership of at
least 80% of the total voting power of our capital stock and 80%
of each class of any non-voting capital stock that we may issue
is required in order for our Parent to effect a tax-free
split-off, spin-off or other similar transaction. As of the date
of this prospectus, our Parent does not intend or plan to
undertake a split-off or spin-off of our capital stock to our
Parent’s shareholders or to deconsolidate us from our
Parent’s consolidated group. Under the terms of the tax
sharing agreement that
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we anticipate entering into with our Parent, however, we have
agreed that we will not knowingly take or fail to take any
action that could reasonably be expected to preclude our
Parent’s ability to undertake a tax-free split-off or
spin-off. This may prevent us from issuing additional equity
securities to raise capital, to effectuate acquisitions or to
provide management or director equity incentives.
The new agreements we are entering into with our Parent in
connection with this offering could restrict our operations and
adversely affect our financial condition
We expect to enter into a number of agreements with our Parent
governing our separation from and our future relationship with
our Parent, including a services agreement, a registration
rights agreement, a release and indemnity agreement and a tax
sharing agreement, each of which will become effective upon
consummation of this offering. The terms and provisions of these
agreements may be less favorable to us than terms and provisions
we could have obtained in arm’s length negotiations with
unaffiliated third parties.
Our prior and continuing relationship with our Parent exposes
us to risks attributable to our Parent’s businesses
We expect to enter into a release and indemnification agreement
with our Parent, to be effective upon completion of this
offering. Under the terms of this agreement, our Parent is
obligated to indemnify us for losses that a party may seek to
impose upon us or our
subsidiaries for liabilities relating to
our Parent’s business that are incurred through a breach of
any agreement to which our Parent is a party, if such losses are
attributable to our Parent or are not otherwise expressly
assumed by us under any such agreement. Immediately following
this offering, any claims made against us that are properly
attributable to our Parent would require us to exercise our
rights under the release and indemnification agreement that we
expect to enter into with our Parent to obtain payment from our
Parent. We are exposed to the risk that, in these circumstances,
our Parent cannot or will not make the required payment. If this
were to occur, our business and financial performance could be
adversely affected.
We will be included in our Parent’s consolidated group
for federal income tax purposes and, as a result, may be liable
for any shortfall in our Parent’s federal income tax
payments
For so long as our Parent continues to own 80% of the total
voting power and value of our capital stock, we will be included
in our Parent’s consolidated group for federal income tax
purposes. By virtue of its controlling ownership and the tax
sharing agreement that we anticipate entering into with our
Parent, our Parent will effectively control all our tax
decisions. Moreover, notwithstanding the tax sharing agreement,
federal tax law provides that each member of a consolidated
group is jointly and severally liable for the group’s
entire federal income tax obligation. Thus, to the extent our
Parent or other members of the group fail to make any federal
income tax payments required of them by law, we would be liable
for the shortfall. Similar principles generally apply for state
income tax purposes in many states.
Risks Related to Ownership of the Class A Common Stock
and this Offering
The price of our Class A common stock may be subject to
wide fluctuations and may trade below the initial public
offering price
Before this offering, there has not been a public market for our
Class A common stock. The initial public offering price of
our Class A common stock will be determined by negotiations
between our Parent, us and representatives of the underwriters,
based on numerous factors, including those that we discuss under
“Underwriting.” This price may not be indicative of
the market price of our Class A common stock after this
offering. We cannot assure you that an active public market for
our Class A common stock will develop or be sustained after
this offering. The market price of our common stock also could
be subject to significant fluctuations. As a result, you may not
be able to sell your shares of our Class A common stock
quickly or at prices equal to or greater than the price you paid
in this offering.
23
Among the factors that could affect our Class A common
stock price are the risks described in this section and other
factors, including:
|
|
|
| |
• |
quarterly variations in our operating results compared to market
expectations; |
| |
| |
• |
changes in expectations as to our future financial performance,
including financial estimates or reports by securities analysts; |
| |
| |
• |
changes in market valuations of similar companies; |
| |
| |
• |
liquidity and activity in the market for our common stock; |
| |
| |
• |
sales of our common stock by our Parent or other stockholders; |
| |
| |
• |
strategic moves by us or our competitors, such as acquisitions
or restructurings; |
| |
| |
• |
general market conditions; and |
| |
| |
• |
domestic and international economic, legal and regulatory
factors unrelated to our performance. |
Stock markets in general have experienced extreme volatility
that has often been unrelated to the operating performance of a
particular company. These broad market fluctuations may
adversely affect the trading price of our common stock,
regardless of our operating performance.
Sales of substantial amounts of our common stock in the
public markets, including by our Parent, or the perception that
they might occur could reduce the price our Class A common
stock might otherwise obtain and may dilute your voting power
and your ownership interest in us
After the completion of this offering, we will
have outstanding
shares of Class A common stock
( shares
of Class A common stock if the underwriters exercise in
full their option to purchase additional shares). This number is
comprised of all the shares of our Class A common stock
that we are selling in this offering, which may be resold
immediately in the public market.
In addition, our Parent will
own shares
of our Class B common stock. It is anticipated that our
directors, executive officers and our Parent will agree, with
limited exceptions, that we and they will not directly or
indirectly, without the prior written consent of the
underwriters, offer to sell, sell or otherwise dispose of any of
our common stock for a period of 180 days after the date of
this prospectus. Subject to the selling restrictions described
under
“Shares Eligible for Future Sale” and
“Underwriting,” our Parent could, from time to time,
convert their Class B common stock into Class A common
stock and sell any or all of those shares. Further, following
the consummation of this offering, pursuant to the terms of a
registration
rights agreement that we expect to enter into with
our Parent, our Parent and its permitted transferees will have
the right to require us to register their common stock under the
Securities Act of 1933, or the Securities Act, for sale into the
public markets. Upon the effectiveness of any such registration
statement, all shares covered by the registration statement will
be freely transferable. Following the consummation of this
offering, we also intend to file a registration statement on
Form S-8 under the Securities Act to register an aggregate
of shares
of Class A common stock reserved for issuance under our
Long-Term Incentive Plan. Subject to the exercise of issued and
outstanding options, shares registered under the registration
statement on Form S-8 will be available for sale into the
public markets after the expiration of the 180-day lock-up
agreements.
We cannot predict what effect, if any, future sales of our
common stock, or the availability of common stock for future
sale, will have on the market price of our Class A common
stock. Sales of substantial amounts of our common stock in the
public market following our initial public offering, or the
perception that such sales could occur, could adversely affect
the market price of our Class A common stock and may make
it more difficult for you to sell your Class A common stock
at a time and price which you deem appropriate. The sale by our
Parent of additional shares of Class A common stock in the
public market, the perception that such sales might occur, or
the conversion of shares of Class B common stock into
Class A common stock, could dilute your voting power and
your ownership interest us, and
24
could reduce the price that our Class A common stock might
otherwise obtain or could impair our ability to obtain capital
through an offering of equity securities.
Our management has broad discretion as to the use of the net
proceeds from this offering and may not use those proceeds in
ways that will enhance our market value
Our management has broad discretion as to the use of the net
proceeds that we will receive from this offering. In the event
management does not apply these funds effectively, your
investment in our common stock may not result in a favorable
return.
We do not expect to pay dividends in the foreseeable
future
We currently anticipate that we will retain all of our future
earnings, if any, to fund the operation and expansion of our
business and to use as working capital and for other general
corporate purposes. Our Board of Directors will have sole
discretion to determine the dividend amount, if any, to be paid.
Our Board of Directors will consider a number of factors,
including applicable provisions of Delaware corporate law, our
financial condition, capital requirements, funds generated from
operations, future business prospects, applicable contractual
restrictions and any other factors our board may deem relevant.
Our Parent’s ownership of our Class B common stock
and the provisions of Delaware law and of our charter and
by-laws may discourage a change of control that our stockholders
may favor, which could negatively affect our stock price
Following completion of this offering, our Parent will own 100%
of our Class B common stock, which will represent
approximately %
of our outstanding common stock after this offering, or
approximately %
if the underwriters exercise in full their option to purchase
additional shares. These shares collectively will
represent %
of the combined voting power of our outstanding common stock
(or %
if the underwriters exercise in full their option to purchase
additional shares). Given its ownership interest, our Parent
will be able to control the outcome of all matters submitted to
our shareholders for approval, and will be able to prevent a
change in control of
our company that our stockholders may
otherwise favor.
Further, provisions in our
certificate of incorporation and
by-laws and in the Delaware General Corporation Law may make it
difficult and expensive for a third party to pursue a tender
offer, change in control or takeover attempt that our management
and Board of Directors oppose. Public stockholders that might
desire to participate in one of these transactions may not have
an opportunity to do so. Such anti-takeover provisions could
substantially impede the ability of public stockholders to
benefit from a change in control or to change our management and
Board of Directors.
Investors purchasing Class A common stock in this
offering will experience immediate and substantial dilution
The assumed initial public offering price of our Class A
common stock is substantially higher than the net tangible book
value per outstanding share of our common stock immediately
after this offering. As a result, you will pay a price per share
that substantially exceeds the book value of our assets after
subtracting our liabilities. Purchasers of our Class A
common stock in this offering will incur immediate and
substantial dilution of
$ per
share in the net tangible book value of our common stock from
the assumed initial public offering price of
$ per
share, which is the mid-point of the estimated range set forth
on the cover of this prospectus. If the underwriters exercise
their in full their option to purchase additional shares, there
will be an additional dilution of
$ per
share in the net tangible book value of our common stock,
assuming the same public offering price.
25
FORWARD-LOOKING STATEMENTS
This prospectus contains both historical and forward-looking
statements. All statements other than statements of historical
fact are, or may be deemed to be, forward-looking statements.
For example, statements concerning projections, predictions,
expectations, estimates or forecasts and statements that
describe our objectives, plans or goals are or may be
forward-looking statements. These forward-looking statements
reflect management’s current expectations concerning future
results and events and generally can be identified by use of
expressions such as “may,” “will,”
“should,” “could,” “would,”
“predict,” “potential,”
“continue,” “expect,”
“anticipate,” “future,” “intend,”
“plan,” “foresee,” “believe,”
“estimate,” and similar expressions, as well as
statements in future tense.
Forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause our actual
results, performance or achievements to be different from any
future results, performance and achievements expressed or
implied by these statements. General economic, business or
regulatory conditions affecting the healthcare, information
technology and Internet industries being less favorable than
expected and the other risks and uncertainties described under
the headings “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” “Business” and “Government
Regulation,” could affect our future results, causing those
results to differ materially from those expressed in our
forward-looking statements. In addition, other unknown or
unpredictable factors could also have material adverse effects
on our future results.
The forward-looking statements included in this prospectus are
made only as of the date of this prospectus. We expressly
disclaim any intent or obligation to update any forward-looking
statements to reflect subsequent events or circumstances.
26
USE OF PROCEEDS
The net proceeds from the sale of the shares of the Class A
common stock offered by us will be approximately
$ million,
based on an estimated initial public offering price of
$ per
share (the mid-point of the range set forth on the cover page of
this prospectus), after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us.
The primary purposes of the offering are to create a public
market for our common stock and to obtain additional capital. We
will be retaining all of the net proceeds of the offering and
expect to use those proceeds for working capital and general
corporate purposes, including capital expenditures and
acquisitions. We have no present commitments with respect to any
future acquisitions. Management will have broad discretion as to
the use of the net proceeds from this offering.
The amounts actually expended for each purpose and the timing of
such expenditures will depend on a number of factors, including
our realization of the different elements of our growth strategy
and the amount of cash generated by our operations. Pending
their use, the proceeds of the offering will be invested in
interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid dividends on our common stock.
Following consummation of this offering, we do not intend to pay
any cash dividends on our common stock in the foreseeable
future. Instead, we currently anticipate that we will retain all
of our future earnings, if any, to fund the operation and
expansion of our business and to use as working capital and for
other general corporate purposes. Our Board of Directors will
have sole discretion to determine whether to pay dividends in
the future based on conditions then existing, including our
earnings, financial condition and capital requirements, the
availability of third-party financing and any economic and other
conditions that our Board of Directors may deem relevant.
27
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
our capitalization as of
December 31, 2004:
|
|
|
| |
• |
on an actual basis; |
| |
| |
• |
on a pro forma basis to give effect to our acquisition of
HealthShare Technology, Inc. as though the acquisition occurred
on December 31, 2004; and |
| |
| |
• |
on a pro forma as adjusted basis to give effect to (1) the
sale of the shares of our Class A common stock in this
offering and the receipt of the estimated net proceeds after
deducting underwriting discounts and commissions and the
estimated offering expenses and (2) the reclassification of
Owner’s net investment to Stockholder’s equity,
reflecting the contribution of capital of net amounts due to our
Parent and the related issuance of shares of our Class B
common stock to our Parent. |
You should read this table together with the “Use of
Proceeds,” “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,”
“Description of Capital Stock,” our combined
consolidated financial statements, our pro forma financial
statements and the individual financial statements of certain
acquired businesses, along with the notes thereto, included
elsewhere in this prospectus.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, 2004 | |
| |
|
| |
| |
|
|
|
Pro Forma | |
| |
|
|
|
Pro Forma | |
|
As Adjusted | |
| |
|
Actual | |
|
(unaudited) | |
|
(unaudited) | |
| |
|
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
Cash and cash equivalents
|
|
$ |
3,456 |
|
|
$ |
8,117 |
|
|
$ |
|
|
| |
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A common stock, $.01 par value per share, shares
authorized (actual and pro forma as adjusted); shares issued and
outstanding
(actual); shares
issued and outstanding (pro forma as adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B common stock, $.01 par value per share, shares
authorized (actual, pro forma and pro forma as adjusted); shares
issued and outstanding
(actual); shares
issued and outstanding (pro forma as adjusted)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owner’s net investment
|
|
|
100,737 |
|
|
|
131,737 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
Total stockholders’ equity
|
|
|
100,737 |
|
|
|
131,737 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total capitalization
|
|
$ |
100,737 |
|
|
$ |
131,737 |
|
|
$ |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
Excludes shares
of our Class A common stock reserved for grants under our
incentive compensation plans expected to be granted after the
pricing of this offering, of
which will
be in the form of options to purchase shares of our Class A
common stock with an exercise price equal to the initial public
offering price per share,
and of
which will be in the form of restricted Class A common
stock. |
28
DILUTION
If you invest in our Class A common stock, your interest
will be diluted to the extent of the difference between the
initial public offering price per share of our Class A
common stock and the pro forma net tangible book value per share
of our common stock after the offering. Dilution results from
the fact that the per share offering price of the common stock
is substantially in excess of the net tangible book value per
share attributable to the existing stockholders for the
presently outstanding stock.
Our pro forma net tangible book value at
December 31, 2004,
after giving effect to our formation as a Delaware corporation
and assuming that our Parent converted all outstanding shares of
our Class B common stock
into shares
of Class A common stock, was
$ million,
or
$ per
share of common stock. Pro forma net tangible book value per
share represents the amount of total tangible assets less total
liabilities, divided by the number of shares of Class A
common stock outstanding.
After giving effect to our sale
of shares
of our Class A common stock offered by this prospectus at
an estimated initial public offering price of
$ per
share (the mid-point of the range set forth on the cover of this
prospectus) and after deducting the underwriting discounts and
commissions and estimated offering expenses payable by us, our
pro forma net tangible book value as of
December 31, 2004,
after giving effect to our formation as a Delaware corporation
and assuming that our Parent converted all outstanding shares of
our Class B common stock
into shares
of Class A common stock, would have been
$ million,
or
$ per
share of common stock. This represents an immediate increase in
pro forma net tangible book value of
$ per
share to our Parent, currently our sole stockholder, and an
immediate dilution of
$ per
share to new investors purchasing the Class A common stock
in this offering. The following table illustrates this per share
dilution:
| |
|
|
|
|
|
|
|
|
|
|
Assumed initial public offering price per share of Class A
common stock
|
|
|
|
|
|
$ |
|
|
| |
Pro forma net tangible book value per share of Class A
common stock at December 31, 2004 |
|
|
|
|
|
|
|
|
| |
Increase in pro forma net tangible book value per share of
Class A common attributable to new investors purchasing
Class A common stock in this offering
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Pro forma net tangible book value per share of common stock
after this offering(1)
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Pro forma dilution per share of common stock to new investors
|
|
|
|
|
|
$ |
|
|
| |
|
|
|
|
|
|
|
|
| (1) |
If the underwriters’ option to purchased additional shares
is exercised in full, the dilution per share to new investors
will be
$ per share. |
The following table summarizes, on a pro forma basis as of
December 31, 2004, the differences between our Parent
(currently our sole stockholder) and new investors with respect
to the number of shares of Class A common stock purchased
from us, the total consideration paid and the average price per
share paid before deducting the underwriting discounts and
commissions and our estimated offering expenses, assuming an
initial public offering price of
$ per
share and assuming that our Parent converted all outstanding
shares of our Class B common stock
into shares
of Class A common stock as of the date of this offering.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Shares Purchased | |
|
Total Consideration | |
|
Average | |
| |
|
| |
|
| |
|
Price per | |
| |
|
Number | |
|
Percent | |
|
Amount | |
|
Percent | |
|
Share | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands, except per share amount) | |
|
Our Parent
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
|
Investors purchasing common stock in the offering
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
|
|
|
|
|
100% |
|
|
$ |
|
|
|
|
100% |
|
|
$ |
|
|
29
SELECTED FINANCIAL INFORMATION
We present below our selected combined consolidated financial
data. The selected combined consolidated statement of operations
for each of the years in the three-year period ended
December 31, 2004 and the selected combined consolidated
balance sheet data as of
December 31, 2003 and
2004 have
been derived from the audited financial statements of WebMD
Health Holdings, Inc. included elsewhere in this prospectus. The
selected historical combined consolidated statement of
operations data for the year ended
December 31, 2001 and
the combined consolidated balance sheet data as of
December 31, 2001 and
2002 have been derived from our
unaudited combined consolidated financial statements. Our
unaudited financial information was prepared on a basis
consistent with that used in preparing our audited combined
consolidated financial statements and includes all adjustments,
consisting of normal and recurring items, that we consider
necessary for a fair presentation of the financial position and
results of operations for the unaudited periods.
You should read the following selected combined consolidated
financial data in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” the combined consolidated financial statements
and notes thereto and the unaudited pro forma financial
statements and related notes, all included elsewhere in this
prospectus.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(unaudited) | |
|
|
|
|
|
|
| |
|
(in thousands) | |
|
Combined Consolidated Statements of Operations Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
74,626 |
|
|
$ |
84,203 |
|
|
$ |
110,152 |
|
|
$ |
134,148 |
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of operations
|
|
|
75,946 |
|
|
|
47,420 |
|
|
|
46,552 |
|
|
|
51,879 |
|
| |
Sales and marketing
|
|
|
83,316 |
|
|
|
47,814 |
|
|
|
47,369 |
|
|
|
48,701 |
|
| |
General and administrative
|
|
|
30,359 |
|
|
|
17,377 |
|
|
|
19,010 |
|
|
|
21,277 |
|
| |
Depreciation and amortization
|
|
|
883,923 |
|
|
|
2,486 |
|
|
|
4,463 |
|
|
|
5,620 |
|
| |
Impairment of long-lived and other assets
|
|
|
1,415,888 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Restructuring and integration charge (benefit)
|
|
|
114,918 |
|
|
|
(5,850 |
) |
|
|
— |
|
|
|
— |
|
| |
Other income
|
|
|
— |
|
|
|
(823 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision
|
|
|
(2,529,724 |
) |
|
|
(24,221 |
) |
|
|
(7,242 |
) |
|
|
6,671 |
|
| |
Income tax provision
|
|
|
104 |
|
|
|
140 |
|
|
|
183 |
|
|
|
210 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(2,529,828 |
) |
|
$ |
(24,361 |
) |
|
$ |
(7,425 |
) |
|
$ |
6,461 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, | |
| |
|
| |
| |
|
2001 | |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(unaudited) | |
|
(unaudited) | |
|
|
|
|
| |
|
(in thousands) | |
|
Combined Consolidated Balance Sheets Data(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
520 |
|
|
$ |
149 |
|
|
$ |
358 |
|
|
$ |
3,456 |
|
|
Working capital (deficit)
|
|
|
(3,642 |
) |
|
|
(547 |
) |
|
|
3,384 |
|
|
|
9,119 |
|
|
Total assets
|
|
|
132,522 |
|
|
|
127,529 |
|
|
|
120,630 |
|
|
|
146,496 |
|
|
Owner’s net investment
|
|
|
92,045 |
|
|
|
86,426 |
|
|
|
85,527 |
|
|
|
100,737 |
|
|
|
| (1) |
Our combined consolidated results of operations and balance
sheet data as of and for the year ended December 31, 2000
are not available. Our Parent managed its operations as a single
business segment from its inception in 1995 until 2001 when, as
a result of a restructuring plan, it segregated its business
into multiple segments. As a result of this restructuring plan,
as of January 1, 2001, our operations were identified and
managed as a separate segment of our Parent. The Internet
operations that were unrelated to our Parent’s other
segments were identified and established as the WebMD Health
segment, which now comprises our company. It is impracticable to
identify our results of operations for our company for periods
prior to 2001 because our business was commingled with other
operations of our Parent. |
30
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis of financial
condition and results of operations contains forward-looking
statements that involve risks and uncertainties. Please see
“Forward-Looking Statements” for a discussion of the
uncertainties, risks and assumptions associated with these
statements. The results of operations for the periods reflected
herein are not necessarily indicative of results that may be
expected for future periods, and our actual results may differ
materially from those discussed in the forward-looking
statements as a result of various factors, including but not
limited to those listed under “Risk Factors” and
included elsewhere in this prospectus. In this management’s
discussion and analysis of financial condition and results of
operations, or MD&A, dollar amounts are in thousands.
Overview
MD&A is a supplement to our combined consolidated financial
statements and notes thereto included elsewhere in this
prospectus to provide an understanding of our results of
operations, financial condition, and changes in financial
condition. Our MD&A is organized as follows:
|
|
|
| |
• |
Introduction. This section provides a general description
of our company and operating segments, key trends affecting our
business, a description of the basis of presentation of our
financial statements, and a summary of the acquisitions we
completed during the current year and the last three years. |
| |
| |
• |
Critical Accounting Policies and Estimates. This section
discusses those accounting policies that both are considered
important to our financial condition and results of operations,
and require us to exercise subjective or complex judgments in
their application. In addition, all of our significant
accounting policies, including our critical accounting policies,
are summarized in Note 2 to the combined consolidated
financial statements included in this Registration Statement. |
| |
| |
• |
Results of Operations and Results of Operations by Operating
Segment. These sections provide our analysis and outlook for
the significant line items on our combined consolidated
statements of operations, on both a company-wide and a
segment-by-segment basis. |
| |
| |
• |
Liquidity and Capital Resources. This section provides an
analysis of our liquidity and cash flows, as well as a
discussion of our commitments that existed as of
December 31, 2004. |
| |
| |
• |
Recent Accounting Pronouncements. This section provides a
summary of the most recent authoritative accounting standards
and guidance that have either been recently adopted by our
company or may be adopted in the future. |
Introduction
We are a leading provider of health information services to
consumers, physicians and healthcare professionals. We have
aligned our business into two operating segments as follows:
|
|
|
| |
• |
Online Services. We provide both public and private
online portals. Our public portals generate revenue primarily
through the sale of advertising and sponsorship products,
including CME services. Our sponsors and advertisers include
pharmaceutical, biotechnology, medical device and consumer
products companies. Our private portals for employers and health
plans provide information and services that enable their
employees and members to make more informed benefit, provider
and treatment decisions. We generate revenue from private
portals through the licensing of our private portals to
employers and health plans. We also distribute our online
content and services to other entities and generate revenue from
these arrangements through the sale of advertising and
sponsorship products and content syndication fees. |
31
|
|
|
| |
• |
Publishing Services. We publish: ACP Medicine and
ACS Surgery: Principles of Practice, our medical
reference textbooks; The Little Blue Book, a physician
directory; and WebMD the Magazine, a consumer publication
launched in early 2005 that we distribute free of charge to
physician office waiting rooms. We generate revenue from sales
of subscriptions to our medical reference publications, from
sales of The Little Blue Book directories and from
advertisements in those directories, as well as from sales of
advertisements in WebMD the Magazine. Our publishing
business is a complementary business to our Online Services and
extends the reach of our brand and our influence with
health-involved consumers and clinically-active physicians. |
|
|
|
Key Trends Affecting Our Business |
Our business is affected by the continuing evolution of the
Internet and by trends affecting the healthcare industry,
including changes in healthcare regulation. The key trends that
are influencing our current strategies and investments are:
|
|
|
| |
• |
Consumers, Physicians and Healthcare Professionals Are
Increasingly Turning to the Internet. The Internet is
transforming the way health and medical information is accessed
by consumers, physicians and healthcare professionals. The
Internet allows consumers to have immediate access to searchable
information and dynamic interactive content. Consumers have an
increased interest in educating themselves about health and
wellness issues, motivated in part by the continued availability
of new treatment options and in part by the larger share of
their healthcare expenditures they are being asked to bear due
to changes in the design of health benefits being offered by
health plans and employers. The Internet has also become a
primary source of information for physicians and healthcare
professionals and is growing relative to traditional information
sources, such as conferences, meetings and offline journals.
According to the Accreditation Council for Continuing Medical
Education (ACCME), the Internet is an efficient way to educate
physicians and healthcare professionals and to promulgate
adherence to clinical guidelines in order to reduce the variance
in treatment patterns and raise the quality of care management.
Over the past several years, usage of our online services by
consumers, physicians and healthcare professionals has grown
significantly. While we cannot provide assurance that usage will
grow as quickly as it has during the past several years, we
intend to make the necessary investments to continue to provide
high quality and timely content and interactive services and to
continue to increase awareness of our brand. |
| |
| |
• |
Increased Online Marketing and Education Spending for
Healthcare Products. Pharmaceutical, biotechnology and
medical device companies spend large amounts each year marketing
their products and educating consumers and physicians about
them, only a small portion of which is currently spent for
online services. We believe that these companies are becoming
increasingly aware of the effectiveness of the Internet relative
to traditional media in providing appropriate health and
clinical information to inform consumers and physicians about
their products. We believe the increasing awareness of the value
of the Internet is likely to result in continued increases in
demand for our services from those advertisers and sponsors. |
| |
| |
• |
Continued Rapid Increases in Healthcare Costs. According
to a report from CMS, healthcare spending in the United States
rose to $1.7 trillion in 2003, up from $1.6 trillion in 2002,
$1.4 trillion in 2001 and $1.3 trillion in 2000. The CMS report
indicated a growth rate in healthcare spending of 7.7% for 2003,
compared to 9.3% for 2002, and 8.5% for 2001. While overall
healthcare costs are rising at a rapid annual rate,
employers’ costs of providing healthcare benefits to their
employees are increasing at an even faster rate. In response,
employers and health plans have been changing benefit plan
designs to increase consumer out-of-pocket costs and have taken
other steps to motivate their members and employees to evaluate
their healthcare decisions more carefully in order to be more
cost effective. This has led employers and health plans to
enhance wellness programs and to take steps to provide
healthcare information and education to employees and members,
including through the use of online services of the types we
provide through our private portals. By implementing our
services and making the needed information and decision- |
32
|
|
|
| |
|
support tools available through a convenient and easy-to-use
online service, employers and health plans can help their
employees and members make choices that reduce overall
healthcare costs. We expect the efforts to control healthcare
costs to continue and to create opportunities for additional
revenue from providing existing and new products and services
through our private portals and our public portals. |
In addition, there are other trends that we believe may become
more important over the next several years, including the
increasing focus at various levels of government on the
potential benefits of increased use of healthcare information
technology and related services.
Our Parent managed its operations as a single segment from its
inception in 1995 until 2001 when, as a result of a
restructuring plan, it segregated its business into multiple
segments. As a result of this restructuring plan, as of
January 1, 2001, our operations were identified and managed
as a separate segment of our Parent. The Internet operations
that were unrelated to our Parent’s other segments were
identified and established as the WebMD Health business segment,
which now comprises
our company.
Our combined consolidated financial statements have been derived
from the consolidated financial statements and accounting
records of our Parent, principally representing the WebMD Health
segment, using the historical results of operations, and
historical basis of assets and liabilities of the WebMD Health
related businesses. Management believes the assumptions
underlying the combined consolidated financial statements are
reasonable. However, the combined consolidated financial
statements included herein may not necessarily reflect our
results of operations, financial position and cash flows in the
future or what our results of operations, financial position and
cash flows would have been had we been a stand-alone company
during the periods presented.
On
March 14, 2005, we acquired HealthShare Technology,
Inc., which we refer to as
“HealthShare”. The purchase
price paid at closing was approximately $31,000 in cash. In
addition, we have agreed to pay up to an additional $5,000
during 2006 if certain milestones are achieved. HealthShare
provides health plans and employers, and their members and
employees, with online decision-support tools that evaluate both
the cost and quality of hospital care. HealthShare also provides
professional decision-support tools used by health plan
executives to develop provider networks, identify centers of
excellence, and evaluate comparative hospital quality.
HealthShare tools are also used by hospitals to provide online
decision-support to help enhance quality of care, manage costs
and profitability, and better understand market position. The
results of operations of HealthShare will be included in our
Online Services segment beginning
March 14, 2005, the
closing date of the acquisition.
In 2004, we acquired two companies, MedicineNet, Inc. and
RxList, LLC, which we refer to as the “2004
Acquisitions”, for a total purchase consideration of
approximately $22,489, comprised of $20,894 in cash, net of cash
acquired, $838 to be paid during the next two years and $757 of
estimated acquisition costs. In connection with the preliminary
allocation of the purchase prices, we recorded goodwill of
$13,387 and intangible assets of $8,216, with estimated useful
lives ranging from two to five years. Additionally, we agreed to
pay in 2006 and 2007 up to an additional aggregate amount of
$20,000 if certain milestones are achieved for these
acquisitions. The 2004 Acquisitions are included in our Online
Services segment.
In 2003, we acquired The Little Blue Book and Optate,
Inc., which we refer to as the “2003 Acquisitions” for
a total purchase consideration of approximately $14,113,
comprised of $13,926 in cash, net of cash acquired, and $187 of
acquisition costs. We agreed to pay up to an additional $2,500
if certain milestones are achieved. In connection with the
initial allocation of the purchase prices, we recorded goodwill
of $12,615 and intangible assets of $3,525, with estimated
useful lives of three to seven years. In addition, we paid an
additional purchase price of $1,500 and $1,000 in April 2004 and
2005, respectively, as a result of achieving the milestones
noted above, with such payments being recorded as increases to
33
goodwill. The Little Blue Book is included in our
Publishing Services segment and Optate is included in our Online
Services segment.
In 2002, we acquired one company, WellMed, Inc., which we refer
to as the “2002 Acquisition” for a total purchase
consideration of approximately $19,013, comprised of $18,763 in
cash and $250 of acquisition costs. In connection with the
allocation of the purchase price, we recorded goodwill of
$18,380 and an intangible asset of $2,700, with an estimated
useful life of three years. The 2002 Acquisition is included in
our Online Services segment.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and
results of operations are based upon our combined consolidated
financial statements and notes to combined consolidated
financial statements, which were prepared in conformity with
U.S. generally accepted accounting principles. The
preparation of the combined consolidated financial statements
requires us to make estimates and assumptions that affect the
amounts reported in the combined consolidated financial
statements and accompanying notes. We base our estimates on
historical experience, current business factors, and various
other assumptions that we believe are necessary to form a basis
for making judgments about the carrying values of assets and
liabilities and disclosure of contingent assets and liabilities.
We are subject to uncertainties such as the impact of future
events, economic, environmental and political factors, and
changes in our business environment; therefore, actual results
could differ from these estimates. Accordingly, the accounting
estimates used in preparation of our financial statements will
change as new events occur, as more experience is acquired, as
additional information is obtained and as our operating
environment changes. Changes in estimates are made when
circumstances warrant. Such changes in estimates and refinements
in estimation methodologies are reflected in reported results of
operations; if material, the effects of changes in estimates are
disclosed in the notes to our combined consolidated financial
statements.
We evaluate our estimates on an ongoing basis, including those
related to revenue recognition, the allowance for doubtful
accounts, the carrying value of prepaid advertising, the
carrying value of long-lived assets (including goodwill and
intangible assets), the amortization period of long-lived assets
(other than goodwill), the carrying value, capitalization and
amortization of software development costs, the provision for
income taxes and related deferred tax accounts, certain accrued
expenses and contingencies, transactions with Parent and the
value attributed to warrants issued for services.
We believe the following reflects our critical accounting
policies and our more significant judgments and estimates used
in the preparation of our combined consolidated financial
statements:
|
|
|
| |
• |
Revenue Recognition — Revenues from advertising
are recognized as advertisements are delivered or as
publications are distributed. Revenues from sponsorship
arrangements, content syndication and distribution arrangements
and licenses of our healthcare management tools and private
online portals are recognized ratably over the term of the
applicable agreement. Revenue from the sponsorship of CME is
recognized over the period we satisfy the minimum distribution
requirements. Subscription revenue is recognized over the
subscription period. When contractual arrangements contain
multiple elements, revenue is allocated to the elements based on
their relative fair values, determined using prices charged when
elements are sold separately. |
| |
| |
• |
Long-Lived Assets — Our long-lived assets
consist of property and equipment, goodwill and other intangible
assets. Goodwill and other intangible assets arise from the
acquisitions we have made. The amount assigned to intangible
assets is subjective and based on our estimates of the future
benefit of the intangible assets using accepted valuation
techniques, such as discounted cash flow and replacement cost
models. Our long-lived assets, other than goodwill, are
amortized over their estimated useful lives, which we determined
based on the consideration of several factors including the
period of time the asset is expected to remain in service. We
evaluate the carrying value and remaining useful lives of
long-lived assets, other than goodwill, whenever indicators of
impairment are present. We evaluate the carrying value of
goodwill annually, and whenever indicators of impairment are
present. We use a discounted cash flow approach to determine the
fair value of |
34
|
|
|
| |
|
goodwill. There was no impairment of goodwill noted as a result
of our impairment testing in 2002, 2003 or 2004. |
| |
| |
• |
Deferred Tax Assets — Our deferred tax assets
are comprised primarily of net operating loss carryforwards. At
December 31, 2004, we had net operating loss carryforwards
of approximately $607,000. Subject to certain limitations, these
loss carryforwards may be used to offset taxable income in
future periods, reducing the amount of taxes we might otherwise
be required to pay. Due to a lack of a history of generating
taxable income, we record a valuation allowance equal to 100% of
our net deferred tax assets. In the event that we are able to
generate taxable earnings in the future and determine it is more
likely than not that we can realize our deferred tax assets, an
adjustment to the valuation allowance would be made which may
increase income in the period that such determination is made,
and may decrease income in subsequent periods. |
| |
| |
• |
Transactions with Parent — Our expenses reflect
a services fee for costs related to corporate services provided
by our Parent for accounting, tax, treasury, legal, human
resources, certain information technology functions and other
services. The services fee is based on an estimate of the cost
of such services utilized by us and is determined based on a
specific identification basis where appropriate or an allocation
based upon total employees of both us and our Parent or other
reasonable measures of allocation. Our expenses also reflect
healthcare expenses related to the cost of our Parent’s
healthcare plans and stock compensation expense related to
restricted stock awards and deferred stock compensation. Our
sales and marketing expense reflects an allocation to our Parent
for the utilization of our advertising services available to us
from News Corporation. We and our Parent consider the services
fee, healthcare expenses and stock compensation, as well as the
allocation of advertising services to our Parent, to be a
reasonable estimate of the utilization of the services. Our cost
and benefit received as a stand-alone company would likely be
different than the amounts reflected in the combined
consolidated statements of operations. After the completion of
this initial public offering, our expenses related to these
items will be governed by a services agreement that we expect to
enter into with our Parent. |
Results of Operations
The following table sets forth our combined consolidated
statements of operations data and expresses that data as a
percentage of revenue for the periods presented (amounts in
thousands):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
|
Revenue
|
|
$ |
84,203 |
|
|
|
100.0 |
% |
|
$ |
110,152 |
|
|
|
100.0 |
% |
|
$ |
134,148 |
|
|
|
100.0 |
% |
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of operations
|
|
|
47,420 |
|
|
|
56.3 |
|
|
|
46,552 |
|
|
|
42.3 |
|
|
|
51,879 |
|
|
|
38.7 |
|
| |
Sales and marketing
|
|
|
47,814 |
|
|
|
56.8 |
|
|
|
47,369 |
|
|
|
43.0 |
|
|
|
48,701 |
|
|
|
36.3 |
|
| |
General and administrative
|
|
|
17,377 |
|
|
|
20.6 |
|
|
|
19,010 |
|
|
|
17.3 |
|
|
|
21,277 |
|
|
|
15.9 |
|
| |
Depreciation and amortization
|
|
|
2,486 |
|
|
|
3.0 |
|
|
|
4,463 |
|
|
|
4.0 |
|
|
|
5,620 |
|
|
|
4.1 |
|
| |
Restructuring and integration benefit
|
|
|
(5,850 |
) |
|
|
(6.9 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other income
|
|
|
(823 |
) |
|
|
(1.0 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision
|
|
|
(24,221 |
) |
|
|
(28.8 |
) |
|
|
(7,242 |
) |
|
|
(6.6 |
) |
|
|
6,671 |
|
|
|
5.0 |
|
| |
Income tax provision
|
|
|
140 |
|
|
|
0.1 |
|
|
|
183 |
|
|
|
0.1 |
|
|
|
210 |
|
|
|
0.2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(24,361 |
) |
|
|
(28.9 |
)% |
|
$ |
(7,425 |
) |
|
|
(6.7 |
)% |
|
$ |
6,461 |
|
|
|
4.8 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue is derived from our two business segments: Online
Services and Publishing Services. Online Services include
advertising, sponsorship, including online CME services, content
syndication and distribution, and licenses of private online
portals to employers and healthcare payers. Publishing Services
35
include sales of, and advertising in, physician directories,
subscriptions to professional medical reference textbooks,
broadcast fax services, and advertisements in our consumer
publication distributed to physician waiting rooms. Our
customers include pharmaceutical, biotechnology, medical device
and consumer products companies, as well as employers and health
plans.
Cost of operations consists of costs related to services and
products we provide to customers and costs associated with the
operation and maintenance of our public and private portals.
These costs include editorial and production,
Web site
operations and development, and costs related to the production
and distribution of our publications. These costs consist of
expenses related to compensation, creating and licensing
content, telecommunication, leased personnel, printing and
distribution, and non-cash advertising expenses related to the
sale of offline advertising through our media partners.
Sales and marketing expense consists primarily of advertising,
product and brand promotion, salaries and related expenses.
These expenses include items related to salaries and related
expenses of account executives, account management and marketing
personnel, costs and expenses for marketing programs, and fees
for professional marketing and advertising services. Also
included are non-cash expenses related to advertising services
acquired in exchange for equity securities of our Parent.
Advertising services consist of advertising, promotion and
distribution services incurred under our arrangements with News
Corporation, America Online, Inc. (AOL) and other partners.
General and administrative expense consists primarily of
salaries and related expenses of administrative, finance, legal,
information technology, human resources and executive personnel.
These expenses include costs of general insurance and costs of
accounting and internal control systems to support our
operations, a services fee for our portion of certain expenses
shared across all segments of Parent, as well as facilities
expense. Also included are non-cash expenses related to stock
compensation resulting from restricted stock awards in our
Parent’s common stock that have been granted to certain of
our employees and stock options assumed or issued in connection
with certain acquisitions with exercise prices less than the
fair market value of our Parent’s stock on the date of
grant.
Our revenues have increased to $134,148 in 2004 from $84,203 in
2002, an increase of $49,945. Our net income for 2004 was $6,461
compared to a net loss of $24,361 in 2002, an improvement of
$30,822. We cannot assure you that our revenues or net income
will continue to increase; however, to the extent that our
revenues increase in the future, we expect that our net income
as a percentage of our revenues will continue to increase.
The following discussion is a comparison of our results of
operations on a combined consolidated basis for the year ended
December 31, 2004 to the year ended
December 31, 2003.
Our total revenues increased 21.8% to $134,148 in 2004 from
$110,152 in 2003. Online Services and Publishing Services
accounted for $20,136 or 83.9% and $3,860 or 16.1%, of the
revenue increase, respectively. The increase in Publishing
Services revenue was primarily due to the full year impact of
the 2003 acquisition of The Little Blue Book. Our
revenues from customers acquired through our acquisitions in
2004 were not a significant portion of our 2004 revenues because
these acquisitions occurred late in 2004. Included in our 2004
and 2003 revenues are $12,000 per year relating to our content
syndication agreement with News Corporation, which expired in
January 2005.
Our company achieved a significant increase in combined
consolidated revenues without incurring a proportionate increase
in expenses. This resulted in an improvement in cost of
operations, sales and marketing and general and administrative
expenses as a percentage of revenue when comparing 2004 to 2003.
36
Cost of Operations. Cost of operations increased to
$51,879 in 2004 from $46,552 in 2003. Our cost of operations
represented 38.7% of revenues in 2004, compared to 42.3% of
revenue in 2003. Included in cost of operations were non-cash
advertising costs of $901 and $2,757 for 2004 and 2003,
respectively, which reflects lower sales of offline advertising
in 2004. Excluding the non-cash advertising costs, cost of
operations increased to $50,978 in 2004 or 38.0% of revenue from
$43,795 in 2003 or 39.8% of revenue. The $7,183 increase was
attributable to increased spending on information technology
and, to a lesser extent the full year impact in 2004 of printing
and distribution costs as a result of the 2003 acquisition of
The Little Blue Book.
Sales and Marketing. Sales and marketing expense
increased to $48,701 in 2004, from $47,369 in 2003, which
represents an increase of $1,332. Included in sales and
marketing expense were non-cash expenses related to advertising
and distribution services of $11,246 in 2004, a decrease from
$16,211 in 2003. This decrease was primarily due to a decline in
the expense related to our distribution arrangement with AOL
which was fully amortized in May 2004. Sales and marketing
expense excluding these non-cash expenses was $37,455, or 27.9%
of revenue in 2004, compared to $31,158, or 28.3% of revenue in
2003. The $6,297 increase is due to compensation related costs
due to a combination of increased commissions and increased
staffing, and the full year impact in 2004 of the acquisition of
The Little Blue Book.
General and Administrative. General and administrative
expense increased to $21,277 in 2004 from $19,010 in 2003.
Included in general and administrative expense are non-cash
expenses of $1,749 and $1,597 in 2004 and 2003, related to stock
compensation expense, which was higher in 2004 compared to 2003
primarily due to additional compensation expense related to
restricted stock issued to certain employees in early 2004.
General and administrative expense excluding these non-cash
expenses was $19,528 or 14.6% of revenue in 2004, compared to
$17,413 or 15.8% of revenue in 2003. The $2,115 increase is due
to increases in personnel related expenses resulting from an
increase in the number of our staff, and the full year impact in
2004 of the 2003 acquisition of The Little Blue Book. We
expect to report a charge related to the recruitment of our
co-CEO and the resignation of our former CEO during the second
quarter of 2005 in an amount of approximately $2.2 million.
Depreciation and Amortization. Depreciation and
amortization expense increased to $5,620 in 2004 from $4,463 in
2003. The increase was primarily due to intangible assets
relating to the 2004 Acquisitions and 2003 Acquisitions.
Income Tax Provision. Income tax provision in 2004 and
2003 primarily represents taxes from profitable operations in
certain jurisdictions in which we do not have net operating
losses to offset that income. Accordingly, we provided for taxes
of $210 and $183 related to state and other jurisdictions during
2004 and 2003, respectively.
The following discussion is a comparison of our results of
operations on a combined consolidated basis for the year ended
December 31, 2003 to the year ended
December 31, 2002.
Our total revenues increased 30.8% to $110,152 in 2003 from
$84,203 in 2002. Online Services and Publishing Services
accounted for $20,702 or 79.8% and $5,247 or 20.2%, of the
revenue increase, respectively. The increase is primarily
related to increased sales of our Online Services products and,
to a lesser extent, Publishing Services products. Revenue from
customers acquired through the 2003 Acquisitions and 2002
Acquisition contributed $9,579 to the overall increase in
revenue for 2003. We integrate acquisitions as quickly as
practicable, and only revenue recognized during the first twelve
months following the quarter in which the acquisitions close is
considered to be revenue from acquired customers. Included in
2003 and 2002 revenues are $12,000 per year relating to our
content syndication agreement with News Corporation, which
expired in January 2005.
37
Our company achieved a significant increase in combined
consolidated revenues without incurring a proportional increase
in expenses. This resulted in an improvement in cost of
operations, sales and marketing and general and administrative
expenses as a percentage of revenue when comparing 2003 to 2002.
Cost of Operations. Cost of operations decreased to
$46,552 in 2003 from $47,420 in 2002. Our cost of operations
represented 42.3% of revenues in 2003, compared to 56.3% of
revenue in 2002. Included in cost of operations were non-cash
advertising costs of $2,757 and $3,945 for 2003 and 2002,
respectively, which reflects lower sales of offline advertising
in 2003. Cost of operations excluding these non-cash advertising
expenses was $43,795 in 2003 compared to $43,475 in 2002. The
$320 increase is due to the full year impact of the 2002
Acquisition and the partial year impact of increased printing
and distribution costs as a result of the 2003 acquisition of
The Little Blue Book, offset by the full year impact of
reduced compensation related expense as a result of the
consolidation of
Web site development and operations effected
during 2002.
Sales and Marketing. Sales and marketing expense
decreased to $47,369 in 2003, compared to $47,814 in 2002.
Included in sales and marketing expense are non-cash expenses
related to advertising and distribution services of $16,211 in
2003, compared to $18,864 in 2002. Sales and marketing expense
excluding the non-cash expenses previously discussed was
$31,158, or 28.3% of revenue in 2003, compared to $28,950, or
34.4% of revenue in 2002. The $2,208 increase was due to a
significant increase in membership acquisition costs in 2003,
primarily related to the acquisition of a membership database,
increased staffing as a result of the full year impact of the
2002 Acquisition and the partial year impact of the 2003
acquisition of The Little Blue Book, offset by a
reduction in fees for marketing and advertising services.
General and Administrative. General and administrative
expense increased to $19,010 in 2003 from $17,377 in 2002.
Included in general and administrative expense are non-cash
expenses related to stock compensation of $1,597 in 2003,
compared to $2,665 in 2002. The decrease in non-cash stock
compensation was primarily related to the vesting schedules of
options issued and assumed in connection with our 2000
acquisitions. General and administrative expense excluding these
non-cash expenses was $17,413, or 15.8% of revenue in 2003,
compared to $14,712, or 17.5% of revenue in 2002. The $2,701
increase is due to the full year impact of the 2002 Acquisition
and the partial year impact of the 2003 acquisition of The
Little Blue Book.
Depreciation and Amortization. Depreciation and
amortization expense increased to $4,463 in 2003 from $2,486 in
2002. The increase was primarily due to amortization of
intangible assets relating to certain 2003 Acquisitions and a
2002 Acquisition.
Restructuring and Integration Benefit. During 2000 and
2001, our Parent initiated a restructuring, during which many
business relationships were exited or restructured in an effort
to reduce operating losses. During 2002, we recorded a benefit
of $5,850 related to the 2000 and 2001 restructuring activity
resulting from the favorable settlements of certain of these
restructured arrangements.
Income Tax Provision. Income tax provision in 2003 and
2002 primarily represents taxes from profitable operations in
certain states in which we do not have net operating losses to
offset that income. Accordingly, we provided for taxes of $183
and $140 related to state and other jurisdictions during 2003
and 2002, respectively.
Results of Operations by Operating Segment
We monitor the performance of our business based on income or
loss before restructuring, taxes, non-cash and other items.
Non-cash and other items include depreciation and amortization,
other income, non-cash advertising and distribution expenses
related to services acquired in exchange for our Parent’s
equity securities in acquisitions and strategic alliances, and
stock compensation expense. Corporate and other overhead
functions are allocated to segments on a specifically
identifiable basis or other reasonable method
38
of allocation. We consider these allocations to be a reasonable
reflection of the utilization of costs incurred. We do not
disaggregate assets for internal management reporting and,
therefore, such information is not presented. There are no
inter-segment revenue transactions and, therefore, revenues are
only to external customers.
The following table presents the results of our operations for
each of our operating segments and a reconciliation to net
income (loss):
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, | |
| |
|
| |
| |
|
2002 | |
|
2003 | |
|
2004 | |
| |
|
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Advertising and promotion
|
|
$ |
61,611 |
|
|
$ |
71,618 |
|
|
$ |
83,828 |
|
| |
|
Licensing
|
|
|
830 |
|
|
|
8,923 |
|
|
|
15,841 |
|
| |
|
Content syndication and other
|
|
|
17,008 |
|
|
|
19,610 |
|
|
|
20,618 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total Online Services
|
|
|
79,449 |
|
|
|
100,151 |
|
|
|
120,287 |
|
|
Publishing Services
|
|
|
4,754 |
|
|
|
10,001 |
|
|
|
13,861 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
84,203 |
|
|
$ |
110,152 |
|
|
$ |
134,148 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income (loss) before restructuring, taxes, non-cash and other
items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Online Services
|
|
$ |
(2,086 |
) |
|
$ |
16,145 |
|
|
$ |
24,902 |
|
|
Publishing Services
|
|
|
(848 |
) |
|
|
1,641 |
|
|
|
1,285 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
(2,934 |
) |
|
|
17,786 |
|
|
|
26,187 |
|
|
Restructuring, taxes, non-cash and other items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
(2,486 |
) |
|
|
(4,463 |
) |
|
|
(5,620 |
) |
|
Non-cash advertising and distribution
|
|
|
(22,809 |
) |
|
|
(18,968 |
) |
|
|
(12,147 |
) |
|
Non-cash stock compensation
|
|
|
(2,665 |
) |
|
|
(1,597 |
) |
|
|
(1,749 |
) |
|
Restructuring and integration benefit
|
|
|
5,850 |
|
|
|
— |
|
|
|
— |
|
|
Other income
|
|
|
823 |
|
|
|
— |
|
|
|
— |
|
|
Income tax provision
|
|
|
(140 |
) |
|
|
(183 |
) |
|
|
(210 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net income (loss)
|
|
$ |
(24,361 |
) |
|
$ |
(7,425 |
) |
|
$ |
6,461 |
|
| |
|
|
|
|
|
|
|
|
|
The following discussion is a comparison of the results of
operations for each of our operating segments for the year ended
December 31, 2004 to the year ended
December 31, 2003.
Online Services. Revenues were $120,287 in 2004, an
increase of $20,136 or 20.1% from 2003. The increase was related
to increased advertising and sponsorship revenue related to our
public portals and licensing revenues from our private online
portals. The revenue increase is primarily due to increased
demand for our public and private portals. Included in content
syndication and other revenues for 2004 and 2003 are
$12,000 per year related to our content syndication
agreement with News Corporation which expired in January 2005.
Income before restructuring, taxes, non-cash and other items was
$24,902 in 2004, an increase of $8,757 or 54.2% from 2003. As a
percentage of revenue, income before restructuring, taxes,
non-cash and other items was 20.7% in 2004, compared to 16.1% in
2003. The growth in earnings and margins is due to our ability
to deliver the increased revenues without incurring a
proportionate share of variable expenses.
39
Publishing Services. Revenues were $13,861 in 2004,
compared to $10,001 for 2003. The increase was attributable to
the full year impact of the 2003 acquisition of The Little
Blue Book. Income before restructuring, taxes, non-cash and
other items was $1,285 in 2004, a decrease of $356 from 2003.
Our Publishing Services segment is seasonal, where approximately
70% of our revenues were generated during the second and third
quarter of 2004 when the majority of our physician directories
are delivered. Due to the full year impact of The Little Blue
Book acquisition on 2004 fixed expenses, as a percentage of
revenue, income before restructuring, taxes, non-cash and other
items declined to 9.3% in 2004, compared to 16.4% in 2003.
The following discussion is a comparison of the results of
operations for each of our operating segments for the year ended
December 31, 2003 to the year ended
December 31, 2002.
Online Services. Revenues were $100,151 in 2003, an
increase of $20,702 or 26.1% from 2002. Revenues from customers
acquired through the 2003 Acquisitions contributed $5,853 to the
increase in revenue. The remaining increase of $14,849 for 2003
was primarily the result of increased sales related to
advertising and sponsorship on our public portals and licensing
revenues from our private online portals. Included in content
syndication and other revenue for 2003 and 2002 is
$12,000 per year related to our content syndication
agreement with News Corporation which expired in January 2005.
Income (loss) before restructuring, taxes, non-cash and other
items was $16,145 in 2003, an increase of $18,231 from a 2002
loss of $2,086. As a percentage of revenue, income (loss) before
restructuring, taxes, non-cash and other items was 16.1% in
2003, compared to (2.6%) in 2002. The growth in earnings and
margins is due our ability to deliver the increased revenues
without incurring a proportionate share of variable expenses.
Publishing Services. Revenues were $10,001 in 2003,
compared to $4,754 for 2002. Revenues from customers acquired
through the 2003 Acquisitions contributed $3,726 to the increase
in revenue. The remaining increase of $1,521 for 2003 was
attributable to growth in advertising revenues for The Little
Blue Book. Income (loss) before restructuring, taxes,
non-cash and other items was $1,641 in 2003, an increase of
$2,489 from a loss in 2002 of $848. As a percentage of revenue,
income before restructuring, taxes, non-cash and other items was
16.4% in 2003, compared to (17.8)% in 2002. The improvement is
due primarily to the acquisition of The Little Blue Book.
Liquidity and Capital Resources
Our primary source of financing has been net cash amounts
received from our Parent. Our Parent will continue to finance
our operations until this offering is completed. We will be
receiving the net proceeds of this offering and following
completion of this offering, Parent will have no obligation to
provide any additional financing. We plan to continue to enhance
the relevance of our online services to our audience and
sponsors and will continue to invest in acquisitions, strategic
relationships, infrastructure and product development. We intend
to grow each of our existing businesses and enter into
complementary ones through both internal investments and
acquisitions.
Cash provided by operating activities was $18,138 in 2004,
compared to cash provided by operating activities of $2,917 in
2003. The cash provided by operating activities in 2004 was
attributable to net income of $6,461 and non-cash charges of
$19,516, partially offset by net changes in operating assets and
liabilities of $7,839. The impact of changes in operating assets
and liabilities may change in future periods, depending on the
timing of each period end in relation to items such as internal
payroll and billing cycles, payments from customers and payments
to vendors. The cash provided by operating activities in 2003
was attributable to a net loss of $7,425 and net changes in
operating assets and liabilities of $14,686, offset by non-cash
charges of $25,028. The non-cash charges consist of depreciation
and amortization, non-cash expenses related to advertising and
distribution and stock compensation.
Cash used in investing activities was $26,742 in 2004, compared
to cash used in investing activities of $15,444 in 2003. Cash
paid for business acquisitions, net of cash acquired, was
$22,421 in 2004 and
40
primarily related to the 2004 Acquisitions. The 2003
Acquisitions consumed cash of $13,926 net of cash acquired.
Investments in property and equipment were $4,321 in 2004,
compared to $1,518 in 2003.
Cash provided by financing activities was $11,702 in 2004,
compared to cash provided by financing activities of $12,736 in
2003. Cash provided by financing activities for 2004 and 2003
related to net cash amounts received from our Parent.
Our principal commitments at
December 31, 2004 consisted
primarily of our obligations under operating leases and
contingent consideration payments of up to an aggregate of
$20,000 related to certain acquisitions achieving certain
milestones. Additionally, in connection with the March 2005
acquisition of HealthShare, we committed to pay up to an
additional $5,000 during 2006 if certain milestones are achieved.
The following table summarizes our principal commitments as of
December 31, 2004, as well as management’s estimates
of the timing of the cash flows associated with these
commitments. Management’s estimates of the timing of future
cash flows are largely based on historical experience, and
accordingly, actual timing of cash flows may vary from these
estimates. The contingent consideration payments of up to an
aggregate of $25,000, have not been included in the table below
as it is impracticable to estimate the timing or amount of any
payments related to these commitments.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Less Than | |
|
|
|
|
|
More Than | |
| |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
4-5 Years | |
|
5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(in thousands) | |
|
Leases(1)
|
|
$ |
35,389 |
|
|
$ |
2,351 |
|
|
$ |
7,034 |
|
|
$ |
6,047 |
|
|
$ |
19,957 |
|
|
Purchase obligations(2)
|
|
|
19 |
|
|
|
19 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Strategic relationships(3)
|
|
|
1,379 |
|
|
|
754 |
|
|
|
625 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
36,787 |
|
|
$ |
3,124 |
|
|
$ |
7,659 |
|
|
$ |
6,047 |
|
|
$ |
19,957 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
The lease amounts are net of sublease income. |
| |
| (2) |
Purchase obligations include amounts committed under legally
enforceable contracts or purchase orders for goods and services
with defined terms as to price, quantity and delivery. |
| |
| (3) |
The strategic relationships represent commitments in connection
with content and distribution services obtained for use on our
Web site and certain distribution arrangements. |
We believe that the net proceeds from this offering, together
with our available cash resources and future cash flow from
operations, will provide sufficient cash resources to meet the
commitments described above and our currently anticipated
working capital and capital expenditure requirements for the
foreseeable future, including the capital requirements of
approximately $20 million in 2005 primarily related to the
roll-out of new or updated products and services and the
relocation of our offices. Our future liquidity and capital
requirements will depend upon numerous factors, including
retention of customers at current volume and revenue levels, our
existing and new application and service offerings, competing
technological and market developments, and potential future
acquisitions. In addition, our ability to generate cash flow is
subject to numerous factors beyond our control, including
general economic, regulatory and other matters affecting us and
our customers. We may need to raise additional funds to support
expansion, develop new or enhanced applications and services,
respond to competitive pressures, acquire complementary
businesses or technologies or take advantage of unanticipated
opportunities. If required, we may raise such additional funds
through public or private debt or equity financing, strategic
relationships or other arrangements. We cannot assure you that
such financing will be available on acceptable terms, if at all,
or that such financing will not be dilutive to our stockholders.
Future indebtedness may impose various restrictions and
covenants on us that could limit our ability to respond to
market conditions, to provide for unanticipated capital
investments or to take advantage of business opportunities.
41
Qualitative and Quantitative Disclosures About Market Risk
We have had no exposure to interest rate sensitivity or exchange
rate sensitivity. We have no investments as of
December 31,
2004 and we do not conduct business in foreign currencies. We
may have future risk related to interest rate sensitivity if we
invest the net proceeds from the sale of our Class A common
stock in certain types of interest bearing obligations.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 123, “(Revised
2004): Share-Based Payment” (“SFAS 123R”),
which replaces SFAS No. 123, “Accounting for
Stock-Based Compensation,” (“SFAS 123”) and
supersedes APB Opinion No. 25, “Accounting for Stock
Issued to Employees.” SFAS 123R requires all
share-based payments to employees, including grants of stock
options by us and our Parent to our employees, to be recognized
in the financial statements based on their fair values. The pro
forma disclosures previously permitted under SFAS 123 no
longer will be an alternative to financial statement
recognition. We anticipate adopting SFAS 123R in the first
quarter of 2006. Under SFAS 123R, we must determine the
appropriate fair value model to be used for valuing share-based
payments, the amortization method for compensation cost and the
transition method to be used at date of adoption. The transition
methods include prospective and retroactive adoption options.
Under the retroactive option, prior periods may be restated
either as of the beginning of the year of adoption or for all
periods presented. The prospective method requires that
compensation expense be recorded for all unvested stock options
and restricted stock at the beginning of the first quarter of
adoption of SFAS 123R. We are evaluating the requirements
of SFAS 123R and expect that the adoption of SFAS 123R
will have a material impact on the combined consolidated results
of operations and earnings per share. We have not yet determined
the method of adoption or the effect of adopting SFAS 123R.
42
BUSINESS
Overview
We are a leading provider of health information services to
consumers, physicians and healthcare professionals through our
public and private online portals. The online healthcare
information, decision-support applications and communications
services that we provide:
|
|
|
| |
• |
enable consumers to obtain detailed information on a particular
disease or condition, analyze symptoms, locate physicians, store
individual healthcare information, receive periodic
e-newsletters on topics of individual interest, enroll in
interactive courses and participate in online communities with
peers and experts; |
| |
| |
• |
make it easier for physicians and healthcare professionals to
access clinical reference sources, stay abreast of the latest
clinical information, learn about new treatment options, earn
CME credits and communicate with peers; and |
| |
| |
• |
enable employers and health plans to provide their employees and
plan members with access to personalized health and benefit
information and decision-support technology that helps them make
more informed benefit, provider and treatment choices. |
We believe that we are well positioned to meet both consumer and
physician demand for timely, reliable and comprehensive health
information. We provide online services through several branded
public portals, including WebMD Health, our primary
public portal for consumers, and Medscape from WebMD, our
public portal for physicians and healthcare professionals.
WebMD Health and our other consumer portals provide
timely and credible healthcare and lifestyle information and
assist consumers in taking an active role in managing their
health.
The WebMD Health Network had an average of approximately
23 million aggregate unique users per month and generated
approximately 588 million aggregate page views in the first
quarter of 2005. We believe our focus on creating and organizing
high quality content and offering innovative interactive
services has made The WebMD Health Network the leading
online health destination and has made the WebMD brand among the
most recognized and trusted in healthcare. According to recent
studies conducted by Manhattan Research, WebMD is the
information source most frequently recommended by physicians to
their patients for healthcare information and Medscape from
WebMD is the information source most recommended by
physicians to their peers.
Our public portals generate revenue primarily through the sale
of advertising and sponsorship products, including CME services.
We do not charge user fees for access to our public portals.
The WebMD Health Network provides an efficient and
effective means for sponsors to reach, educate and inform target
audiences of health-involved consumers and clinically-active
physicians within the trusted environment of WebMD. We work
closely with our sponsors to develop programs for specific
groups of consumers, physicians and healthcare professionals and
give them placement on the most relevant areas on our portals.
Our advertisers and sponsors consist primarily of
pharmaceutical, biotechnology and medical device companies. We
are also increasingly attracting advertising sponsorships from
consumer products companies whose products relate to health,
wellness, diet, fitness, lifestyle, safety and illness
prevention.
Our private portals enable employees and health plan members to
make more informed benefit, provider and treatment decisions. We
provide a personalized user experience by integrating individual
user data (including personal health information), plan-specific
data from our employer or health plan clients and much of the
content, decision-support technology and personal communication
services that we make available through our public portals. We
generate revenue from private portals through the licensing of
our content and technology to employers, such as American
Airlines, Inc., Microsoft Corporation and PepsiCo, Inc., and to
health plans, such as Blue Cross Blue Shield of Massachusetts,
Cigna and Empire Blue Cross and Blue Shield.
43
In addition to our online presence, we also have a publishing
segment that provides complementary offline health content to
our user community. Our publications increase awareness of our
brand with consumers, physicians and healthcare professionals.
These publications include The Little Blue Book, a
physician directory, and WebMD the Magazine, a consumer
publication launched in early 2005 that we distribute free of
charge to physician office waiting rooms.
Our Strengths
Our goal is to provide an efficient and effective means for
advertisers and sponsors to reach, educate and influence
health-involved consumers and clinically-active physicians
within the trusted environment of WebMD. We believe that we are
able to fulfill the needs of our clients with a differentiated
offering based on our following strengths:
|
|
|
| |
• |
Our brand is widely recognized and viewed as a trusted source of
health and wellness information. |
| |
| |
• |
The WebMD Health Network is the leading online health
destination today. We had an average of approximately
23 million aggregate unique users per month and generated
approximately 588 million page views in the first quarter
of 2005. |
| |
| |
• |
Medscape from WebMD is the leading online provider of CME
programs, with approximately 63% of the online market for CME
services in 2003. |
| |
| |
• |
We are able to offer advertisers and sponsors programs that
deliver their message to either our entire audience or to more
targeted audiences of consumers, physicians and other healthcare
professionals based upon their interests our specialties. |
| |
| |
• |
We are able to offer advertisers and sponsors programs to reach
both health-involved consumers and clinically-active physicians. |
| |
| |
• |
We have good working relationships with our advertising and
sponsorship clients and a track record of providing them with a
more efficient use of their marketing expenditures compared to
traditional media. |
| |
| |
• |
We have the ability to offer employers and health plans a
platform that provides a personalized user experience for
employees and health plan members, including access to
individual user data, specific health plan benefit data,
relevant health-oriented content, treatment decision-support
applications, personal communication services, and integrated
third party applications and data. |
| |
| |
• |
Our senior management’s experience in and understanding of
the healthcare industry allows us to respond quickly to
developing industry trends with new products and services based
on our existing content, infrastructure and capabilities. |
Industry Background
General. The Internet has emerged as a major
communications medium, enabling millions of users to obtain and
share information and to interact and conduct business on a
real-time basis. According to industry sources, approximately
120 million American adults use the Internet on a monthly
or more frequent basis, with an estimated 90 million users
now accessing the Internet as an integral part of their every
day routine. Despite its short history, studies show that users
now devote more hours of the day to the Internet than to any
other medium. A 2004 Manhattan Research study showed that
consumers rely on the Internet as a convenient, trusted source
of healthcare information, decision-support and communication,
and that their satisfaction with general health information on
the Internet is greater than traditional sources, such as their
neighborhood library and magazines, and second only to
physicians. Rising healthcare costs and the greater financial
responsibility consumers will have for their healthcare will
increase consumers’ reliance on the Internet to help inform
their choices. The Internet allows consumers to have immediate
access to searchable and dynamic interactive content to check
symptoms, assess risks, understand diseases, find providers and
evaluate treatment options.
44
Effect on Healthcare. The Internet has already
fundamentally changed many sectors of the economy, including the
marketing and sales of financial services, travel, and
entertainment, among others. The Internet is also changing the
healthcare industry, as more consumers and physicians use it as
a convenient source for up-to-date health information and
interactive decision-support tools. Until recently, quality
healthcare information was not easily accessible. Most consumers
relied on their physicians, conversations with family and
friends, their neighborhood library and magazines when they
needed answers to healthcare questions. Physicians relied on
other physicians, medical societies, journals and other
publications, reference textbooks, conferences, pharmaceutical
sales representatives and industry meetings to keep informed.
Now, consumers and physicians are able to easily access
information online. According to Manhattan Research, of those
consumers who seek additional information as the result of an
offline advertisement, more than half will use the Internet. A
Manhattan Research subscription study in early 2004 cites that
approximately 63% of physicians read e-journals and
approximately 46% complete online CME programs on at least a
monthly basis. The Internet has transformed how consumers and
physicians find and utilize healthcare information and WebMD has
been a leader in enabling this transition.
Physicians Are Turning to the Internet to Improve Clinical
Practice. The Internet has become a primary source of
information for physicians and is growing relative to
traditional information sources, such as conferences, meetings
and offline journals. According to Manhattan Research,
approximately 97% of physicians are Internet users and physician
satisfaction with online sources of clinical information is
nearly equal to traditional offline sources. According to the
Accreditation Council for Continuing Medical Education, the
Internet has become an efficient way to educate physicians and
to promote adherence to clinical guidelines, crucial steps
towards reducing the variance in treatment patterns and raising
the quality of care.
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Advertising and Sponsorship Trends |
General. The U.S. market for advertising, broadly
defined, is made up of multiple, well-established channels,
principally consisting of print, television and radio media.
Total advertising expenditure for 2004 was estimated by
eMarketer in February 2005 to have been approximately
$264 billion, an increase of 7.6% compared to 2003, and is
projected by eMarketer to increase 5.4% in 2005.
Online Market. Internet advertising continues to grow
rapidly and, as a result, online spending is growing faster than
offline spending. According to a February 2005 report by
eMarketer, total online advertising spending was about
$9.5 billion in 2004, is projected to grow approximately
20% in 2005 to $11.5 billon, and is expected to reach
approximately $17.6 billion in 2008. We believe this market
growth is driven by several factors, including consumers
shifting their buying and media preferences to online and the
benefits of online advertising relative to traditional media,
which includes interactivity, rapid and measurable user feedback
and the ability to target consumers more efficiently.
Online Healthcare and Health-Related Market. The WebMD Health
Network competes in the market for online healthcare and
health-related advertising, sponsorship and education services
targeted to consumers and physicians. According to a 2005
Jupiter Research study, online spending for healthcare related
advertising is projected to grow an average of 19.7% annually
through 2009. We believe that the two primary sources for this
spending are pharmaceutical companies and consumer products
companies whose goods or services relate to health, wellness,
diet, fitness, lifestyle, safety and prevention.
Based upon industry estimates, we believe that pharmaceutical,
biotechnology and medical device companies spent approximately
$12 billion on marketing and education activities during
2004, excluding costs of product samples. We estimate that these
companies currently spend less than 5% of their marketing and
educational budgets on online media, but that they are becoming
increasingly aware of the benefits of using online media,
including the ability to cost-effectively reach targeted
audiences. As a result, we expect these companies’ online
marketing and educational budgets to continue to increase.
According to an April 2005 report sponsored by the Interactive
Advertising Bureau, pharmaceutical and other healthcare
advertisers accounted for 6% of total online advertising in
2004, an increase from 4% in 2003. We believe that we are well
positioned to benefit from the trend toward increased online
spending by
45
these companies because of our track record in providing a more
efficient use of advertising expenditures than traditional media
and our strong working relationships with a significant number
of the leading pharmaceutical, biotechnology and medical device
companies.
According to industry sources, we estimate that consumer
packaged goods companies spend in excess of $10 billion on
advertising for products and services that relate to health,
wellness, diet, fitness, safety and prevention. Similar to
pharmaceutical and other healthcare advertisers, we estimate
that only a small percentage of their spending was for online
media. We believe that these firms will continue to direct a
growing share of their spending online during the next several
years because of the enhanced ability to reach targeted
consumers efficiently and cost-effectively.
Healthcare industry trends. Our business is affected by
the following trends in the healthcare industry:
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Continued increases in healthcare costs have led to
cost-shifting by employers. According to a report from CMS,
healthcare spending in the United States rose to
$1.7 trillion in 2003, up from $1.6 trillion in 2002,
$1.4 trillion in 2001 and $1.3 trillion in 2000. The
CMS report indicated a growth rate in healthcare spending of
7.7% for 2003, compared to 9.3% for 2002, and 8.5% for 2001.
While overall healthcare costs are rising at a rapid annual
rate, employers’ costs of providing healthcare benefits to
their employees are increasing at an even faster rate. In
response to these cost increases, employers and health plans
have been changing benefit plan designs to increase consumer
out-of-pocket costs and taking other steps to motivate their
members and employees to evaluate their healthcare decisions
more carefully in order to be more cost-effective. This has also
led employers and health plans to enhance wellness programs and
take steps to provide healthcare information and education to
employees and members, including through online services. |
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Quality initiatives. In 1999 and 2000, a series of major
studies suggested that the nation’s healthcare system
should be fundamentally redirected to focus on continuous
quality improvement and anticipating healthcare needs, rather
than controlling access to services. Since then, health plans
have begun to recognize that encouraging the good health of
their members not only benefits the members but also has
financial benefits for the health plans. Healthier people need
less care and fewer costly services. Thus, controlling costs by
keeping people healthier and better managing chronic conditions
has become a significant focus for America’s healthcare
system. As part of these initiatives, health plans are offering
their members online access to health and wellness information
and decision-support tools. |
We believe that our private portals are well positioned to
benefit from these trends because they provide the information
and decision-support tools employees and plan members need to
take a more active role in their healthcare, such as helping
them make more informed decisions about healthcare provider,
benefit and treatment options. Employers and health plans can
help their employees and members make choices that reduce
overall healthcare costs by implementing our services and making
the needed information and decision-support tools available
through a convenient and easy-to-use online service. In
addition, as employers continue to implement high deductible and
consumer-directed healthcare plans, we believe we will be able
to attract more employers and health plans to use our private
online portals. Additionally, the increased financial
responsibility of consumers for their healthcare will also
benefit our public portals as we continue to expand the public
portal decision-support and personal health information
applications and as consumers and healthcare professionals
increasingly utilize the Internet for the information and tools
necessary to manage their health decisions.
Our Strategy
We have positioned our services to benefit from the trends
described above, and the other trends affecting the Internet,
online advertising and healthcare industries described in this
prospectus. Our goal is to be the leading provider of online
health information services in each of the markets in which we
46
participate and to use our content, technology platform and
expertise to continue to enter additional complementary markets.
To achieve our goal, we intend to:
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Enhance our current products and services. We intend to
continue to invest in the resources needed to deliver high
quality health and medical information. In addition, we intend
to continue to build our repository of in-depth health content,
broaden our interactive services and increase their
functionality, improve our technology platform and add
additional products and services. Our goal is to continue to
increase the number of consumers, physicians and healthcare
professionals using our Web sites, the amount of time they spend
there and, most importantly, the trust they have in WebMD. |
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• |
Expand awareness of the WebMD brand. We plan to promote
the WebMD brand through relationships with strategic partners,
through advertising and through the breadth of products and
services that we offer. For example, we recently introduced
WebMD the Magazine, as a means of extending our brand
into offline channels and attracting incremental advertising
dollars. |
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Deepen our relationships with existing clients and expand our
sponsorship base. We intend to increase The WebMD Health
Network’s advertising and sponsorship revenues by
continuing to provide an efficient and effective channel for
sponsors to reach, educate and inform large audiences of
health-involved consumers and clinically-active physicians
within the trusted environment of WebMD. We believe that we are
well positioned to benefit from the expected shift of
sponsorship spending from offline to online media by
pharmaceutical, biotechnology and medical device companies as
they continue to see the benefits of online sponsorship relative
to traditional media, including interactivity, rapid and
measurable user feedback and the ability to more efficiently
reach specific audiences. In addition, we are focused on
increasing sponsorship of The WebMD Health Network by
consumer products companies that wish to communicate health- and
lifestyle-related messages for their products. |
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Increase market penetration of our private portals. We
intend to increase the market penetration of our private health
and benefits portals for employers and health plans by
demonstrating to prospective clients the return on investment
and increase in employee satisfaction on the part of our
existing clients from implementing our services. We expect
demand for these services to increase as more employers and
health plans seek to complement or replace their existing
offline benefit-related services with more efficient Web-based
decision-support tools and related online services. |
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Acquire complementary online and offline services. We
have a history of acquiring and successfully integrating
complementary companies. We expect to continue to supplement our
internal product development efforts with strategic acquisitions
that add new capabilities or help us enter additional
complementary markets. |
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Capitalize upon governmental initiatives relating to use of
information technology in healthcare. There are currently
numerous federal, state and private initiatives seeking ways to
increase the use of information technology in healthcare,
including the creation of portable consumer health records. We
believe that we are well positioned to play a role in such
efforts, as well as efforts to establish the adoption of
electronic medical records among physicians and to provide
channels for the exchange of information among patients,
providers and payers. |
Our Online Services
Our high quality content and services have made our public
portals the leading online health destinations for consumers,
physicians and healthcare professionals. The WebMD Health
Network consists of public portals that we own and
third-party portals through which we provide our branded health
and wellness content, tools and services.
47
Owned Web Sites. A substantial majority of the visitors
to
The WebMD Health Network and of the page views
generated on
The WebMD Health Network are from
Web sites
that we own. The following provides a brief description of each
of our owned public portals:
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| Portal Site |
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Description |
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WebMD Health, our flagship consumer portal. |
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A health information site for consumers that is produced and
written by practicing physicians, including an online medical
dictionary with more than 16,000 medical terms. |
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An online drug directory with over 1,400 drug monographs, which
are comprehensive descriptions of pharmaceutical products
(including chemical name, brand names, molecular structure,
clinical pharmacology, directions and dosage, side effects, drug
interactions and precautions). |
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Our Web site for physicians and healthcare professionals. |
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The world’s first online-only, primary source,
peer-reviewed medical journal. |
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Other Sites. The third party portals that we support
include AOL Health with WebMD, the health channels of other AOL
properties and the online Fox News Health channel with WebMD.
Introduction. Healthcare consumers increasingly seek to
educate themselves online about their healthcare related issues,
motivated in part by the continued availability of new treatment
options and in part by the larger share of healthcare
expenditures they are being asked to bear due to changes in the
benefit designs being offered by health plans and employers. The
Internet has fundamentally changed the way consumers obtain
information, enabling them to have immediate access to
searchable information and dynamic interactive content. A 2004
study by Manhattan Research indicated that general health Web
sites are the primary source for healthcare information for
consumers. Manhattan Research also indicated that consumer
satisfaction with the Internet for healthcare information is
greater than for alternative sources such as health magazines,
television, news and advertisements.
Overview of Content and Service Offerings. Our goal is to
provide consumers with an objective and trusted source of
information that helps them play an active role in managing
their health.
WebMD Health and the other consumer portals
on
The WebMD Health Network provide our users with health
and wellness related information, tools and applications in a
variety of content formats. These content offerings include
access to high quality health and wellness news articles and
features, which are written, edited and published by our
90-person in-house staff, which includes professional writers,
editors, designers and board-certified physicians. Our in-house
staff is supplemented by medical advisors and authors from
widely respected academic institutions. The news stories and
other original content and reporting presented on
The WebMD
Health Network are based on our editors’ selections of
the most important and relevant health events occurring on any
given day, obtained from an array of sources, including
peer-reviewed medical journals, medical conferences, federal or
state government actions and materials derived from interviews
with medical experts. We offer searchable access to the full
contents of our
Web sites, including licensed content and
referenced-based content.
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WebMD Health includes the following features:
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| Feature |
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Description |
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WebMD News Center
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Offers daily health news articles that are reviewed by our
professional staff and written by health journalists. Content
focuses on “news you can use” and topics for stories
reflect national news stories of interest in the popular media
that day with original perspective from health and medical
experts. The News Center also features letters and feedback from
users. Ten to 15 stories are generated per day. |
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WebMD Editorial Features
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Our content asset focusing on a comprehensive look at a major
health issues that are in the news or otherwise contemporary,
with emphasis on health trends and national health issues. We
generate four to five editorial features per week. |
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Our features on National Health Observances contain special
reports based upon public health initiatives, such as Breast
Cancer Awareness Month or Heart Month, as well as seasonal
holidays and other seasonal health-related issues, such as
4th of July Safety, Super Bowl Weight Gain, Back to School,
Getting Ready for Camp or College and Valentine’s Day
Chocolate Guide for Health. |
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General Medical Information
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Our medical library allows consumers to research current
information relating to diseases and common health conditions by
providing searchable access to easy-to-read content, including: |
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— self–care articles |
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— drug and supplement references from leading
publications, including First Data Bank® |
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— clinical trials and research study information |
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— a patient’s guide to medical tests |
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— health topics A-Z, an alphabetical listing of
articles on specific health conditions and concerns |
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— interactive, illustrated presentations that visually
explain common health conditions and diseases |
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— step by step in-depth interactive condition guides
on 35 major conditions |
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— medical dictionary on 16,000 terms |
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— doctors’ views on important health topics |
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Health and Wellness Centers
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Centralized locations for content and services for both WebMD
editorial offerings and sponsor/advertiser offerings that are
specific to prevention and wellness topics. Each topic is
showcased in its own “Resource Center.” There are 15
major centers, including Women’s Health, Men’s Health,
Nutrition, Fitness, Healthy Aging, Skin and Beauty and Dental
Health. |
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| Feature |
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Description |
| |
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Disease and Condition Centers
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Centralized locations for content and services for both WebMD
editorial offerings and sponsor/advertiser offerings that are
specific to disease and condition topics. Each topic is
showcased in its own “Resource Center.” Each separate
topic center is designed to guide users through all aspects of
diagnosis, description of disease, treatment options and
management, as well as staying current on the latest research.
There are 50 major centers, including Allergy, Asthma,
Cholesterol, Diabetes, Epilepsy, GI Disorders and Hypertension. |
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Newly Diagnosed
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Articles and features that provide information specifically for
users affected by a condition as to which they or a loved one
have been newly diagnosed. |
Decision-Support Services. Our decision-support services
help consumers make better-informed decisions about healthcare
providers, health risks and treatment options, and assists
consumers in their management and monitoring of specific
conditions or treatment regimens on an ongoing basis.
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| Feature |
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Description |
| |
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Personalized Self Assessment
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Clinical, algorithm-based self assessments for major conditions
yielding personalized risk score based upon individual
characteristics (for example, gender, age, behavioral risks,
heredity), along with customized recommendations for further
education, treatment alternatives and a doctor report to share
with the individual’s physician. |
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Symptom Checker
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An interface that allows users to select male or female body and
area on the body where symptoms may be occurring to lead user to
relevant educational information. |
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Health-E-Tools
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Provides access to over 80 interactive calculators, quizzes and
slide shows to assess or demonstrate health topics, including a
target health rate calculator, body mass index calculator,
pregnancy calculator and ovulation calendar. |
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Find a Physician or Practice
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Allows consumers to search by physician or practice name, by
specialty sought, as well as by zip code and mileage. |
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Managing Healthcare & Benefits
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Offerings that educate users on issues surrounding choosing and
using health plans and managing their healthcare from a
financial and quality perspective. Other coverage topics such as
Medicare are addressed and resources and tools are made
available to users. |
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| Feature |
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Description |
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WebMD Health Manager
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WebMD Health Manager is an online direct-to- consumer
subscription service featuring a personal health record (an
application that assists consumers in gathering, storing, and
sharing essential health data), secure message center, personal
health risk assessments for overall health as well as 15
condition- specific assessments, doctor reports, medication
summaries, health calendar with reminders and alerts, printable
health emergency card, family member health record keeping,
weight loss, fitness and smoking cessation programs, and fully
personalized e-newsletter. |
Membership; Online Communities. We also provide
interactive communication services to our registered members.
For example, members can opt-in to receive e-newsletters on
health-related topics or specific conditions and to access
topic-specific events and online communities. Our online
communities allow our members to participate in real-time
discussions in chat rooms or on message boards, and allow
members to share experiences and exchange information with
others who share common health conditions or concerns.
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| Feature |
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Description |
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WebMD Live Events
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Offers scheduled live chat events, including audio and video
Webcasts, with healthcare experts and celebrity guests
discussing relevant health issues, with archives from each event
added to our searchable database. |
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Member Communities
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Provides access to over 50 online support communities allowing
consumers to share experiences and exchange information with
other members with their health condition or concern. Users may
access moderated chat rooms, message boards and posted member
columns focused on chronic health conditions and relevant health
topics. |
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WebMD University
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Topic-driven, interactive courses intended to help users
understand and manage specific health matters, such as diabetes,
nutrition, care giving and cancer, as well as gain insight from
other course participants. |
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E-Newsletters
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Allows consumers to receive personalized e-mail newsletters on
general health-related subjects and topics targeted to their
health concerns. In 2004, we offered newsletters, clinical
alerts and e-mail reports covering approximately 30 topic areas,
which we delivered to approximately ten million registered
members. |
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“Ask the Experts”
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A forum within which users can post their health questions for
experts. Provides over five new events each week and contains an
archive of approximately 800 transcripts. |
51
There are no membership fees and no general usage charges for
access to our online communities or to receive our
e-newsletters. However, we do offer a limited number of consumer
paid subscription services in the areas of diet and fertility
and paid membership in WebMD Health Manager.
Introduction. The Internet has become a primary source of
information for physicians and other healthcare professionals,
and is growing relative to other sources, such as conferences,
meetings and offline journals. According to a study done by
Manhattan Research in 2003, approximately 97% of physicians are
Internet users. Approximately 63% of physicians read e-journals
and approximately 46% complete online CME programs at least on a
monthly basis. Another study by Manhattan Research completed in
July 2004 concluded that physician satisfaction with online
sources of clinical information was nearly equal to traditional
offline sources. We believe that
Medscape from WebMD, our
Web site for physicians and other healthcare professionals,
located at
www.medscape.com, reaches more physicians than
any other professional
Web site and is well positioned to
increase usage by its existing members and to gain additional
membership and usage.
Medscape from WebMD, enables
physicians and other healthcare professionals to stay abreast of
the latest clinical information through access to resources that
include:
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timely medical news and coverage of professional conferences; |
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CME activities; and |
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full-text medical journal articles and drug and medical
literature databases. |
Content. Original content from Medscape from WebMD
includes daily medical news, commentary, conference
coverage, expert columns and CME activities are written by
authors from widely respected academic institutions and edited
and managed by our in-house editorial staff. We regularly
produce in-depth interviews with medical experts and newsmakers,
and provide alerts on critical clinical issues, including
pharmaceutical recalls and product advisories. Medscape from
WebMD also provides access to wire service stories and other
news-related content, and our CME programs include original
programs and online multimedia adaptations of live events.
We also publish an original electronic-only journal,
Medscape
General Medicine (
MedGenMed), indexed in the National
Library of Medicine’s MEDLINE reference database.
MedGenMed, the world’s first online-only, primary
source, peer-reviewed medical journal, was established in April
1999. Visitors to
www.medgenmed.com also can access
specialty sections, such as HIV-AIDS, Gastroenterology,
Hematology-Oncology, Pulmonary Medicine, OB-Gyn and Women’s
Health, Orthopedics and Sports Medicine and Psychiatry/Mental
Health.
Membership. Users must register to access the content and
features of Medscape from WebMD. Registration by users
enables us to deliver targeted medical content based on our
members’ registration profiles. The site is organized by
specialty and profession, including sites for nurses,
pharmacists, medical students, and members interested in medical
policy and business of medicine topics. The registration process
enables professional members to choose a Medscape home
page tailored to their medical specialty or interest. We offer
more than 30 specialty areas for Medscape users. For
example, a member registered as a cardiologist is automatically
directed to Medscape Cardiology rather than a more
generic home page. However, every member, regardless of medical
specialty or professional status, has access to
Medscape’s full suite of original and licensed
content through a uniform, easy-to-use interface. There are no
membership fees and no general usage charges for the site.
Members receive MedPulse®, our weekly e-mail
newsletter, which is published in more than 30
specialty-specific editions and highlights new information and
CME activities on the Medscape site. We also provide
“Special Reports” e-newsletters, which contain
information on specific conditions and treatments.
Continuing Medical Education (CME). Medscape is a
leading distributor of online CME to physicians and other
healthcare professionals, offering a wide selection of free,
regularly updated online CME activities designed to educate
healthcare professionals about important diagnostic and
therapeutic issues. Our CME programs include original programs
and online multimedia adaptations of live events. In
52
addition, our CME Live offerings provide real-time Webcasts of
continuing education programs on key topics and conditions.
These live Webcasts combine streaming audio and slide
presentations and allow participants to interact with faculty.
In 2004 over 927,000 physicians and healthcare professional
participants earned over 827,000 CME credits at Medscape,
an increase of 59% and 31%, respectively, over 2003. In the
first quarter of 2005, physicians and healthcare professionals
completed approximately 277,700 CME courses, an increase of 33%
compared to the same period in 2004. We also provide to our
users a service that automatically tracks CME credits
accumulated through our site.
We have organized the operations of our professional portals to
provide for appropriate separation of our education and
promotion programs from an editorial perspective. Our
educational activities for healthcare professionals are managed
within Medscape, LLC, our professional education subsidiary.
Individuals who work on educational matters within Medscape,
LLC, are not involved with promotional programs.
Our CME activities are planned and implemented in accordance
with the Essential Areas and Policies of the Accreditation
Council for Continuing Medical Education, or ACCME, which
oversees providers of CME credit, and other applicable
accreditation standards. In addition, some of our programs have
been produced in collaboration with other ACCME-accredited CME
providers. Medscape received provisional ACCME
accreditation as a CME provider in July 2002 and full
accreditation, for the maximum six-year period, beginning in
July 2004. Such accreditation allows Medscape to continue
to certify online CME activities. In September 2004, ACCME
revised its standards for commercial support of CME. The revised
standards are intended to ensure that CME activities of
ACCME-accredited providers are independent of providers of
healthcare goods and services that fund the development of CME.
ACCME expects accredited providers to implement these standards
by May 2005. We believe that we have modified our procedures as
appropriate to meet the revised standards. For more information
relating to ACCME’s new CME standards, see “Risk
Factors — Risks Related to the Legal and Regulatory
Environment in Which We Operate — Changes in industry
guidelines or government regulation could adversely affect our
online CME offerings” and “Government
Regulation — Regulation of Drug and Medical Device
Advertising and Promotion.”
Introduction. According to a Hewitt Associates study
(Healthcare Expectations: Future Strategy and
Direction 2005), large U.S. employers anticipate a
12% increase in the cost of providing healthcare coverage in
2005, which would represent an approximately 76% increase over
the last five years for healthcare premiums. In response to
increasing healthcare costs, employers and payers have been
enhancing wellness programs, educating employees, changing
benefit plan designs to increase consumer out of pocket costs
and taking other steps to motivate their members and employees
to use healthcare in a cost-effective manner. The new plan
designs include high deductible health plans that increase
consumer responsibility for healthcare costs and healthcare
decision-making. These are often referred to as
consumer-directed health plans. Consumer-directed health plans
generally combine high-deductible health insurance with a cash
account, such as a health reimbursement arrangement
(HRA) or a health savings account (HSA), containing pre-tax
funds that employees can spend on covered healthcare expenses.
The high-deductible insurance provides coverage for significant
health events. Consumer-directed healthcare plans put employees
in control of the first dollars they spend on healthcare each
year. The goal is to give consumers control of those dollars,
together with pertinent information about healthcare costs and
quality, so that they are able to make financially responsible
and informed healthcare purchasing decisions. In its 2005 study,
Hewitt Associates estimates that nearly one-quarter of larger
U.S. employers will be offering consumer-directed plans in
2005.
In implementing consumer-directed health plans, employers and
health plans generally also make available health and benefits
information and decision-support tools to help their employees
make informed decisions about healthcare providers and treatment
options. We believe that our WebMD Health and Benefits Manager
private portals provide the tools and information employees and
plan members need to take a more active role in their
healthcare. Our cost-effective, online solutions complement the
employer’s
53
or payer’s existing benefit-related services and offline
educational efforts and can be a key component of a
consumer-directed health plan. Our WebMD Health and Benefits
Manager portals also educate and encourage employees and plan
members to lower their health risks. By making the needed
information and decision-support tools available through a
convenient and easy-to-use online service, employers and payers
can help their employees and members make choices that reduce
overall costs. A 2005 study commissioned by the Blue Cross and
Blue Shield Association and conducted by the RAND Corporation
concluded that Web-based treatment decision-support tools can
play an important role in assisting in consumer treatment
decisions to foster improved outcomes. For example, RAND cited
studies that showed consumers who use decision-support tools are
less likely to choose elective surgery in favor of less invasive
procedures and are more likely to get preventive care.
We believe that increasing consumer enrollment in high
deductible consumer directed health plans will be a significant
driver for the growth of our private portals during the next
several years. In addition, as described in more detail below,
we believe that there are benefits to employers and health
plans, regardless of health plan design considerations, in
making the WebMD Health and Benefits Manager services available
to their employees and members, including reduced benefits
administration costs.
The WebMD Health and Benefits Manager. We provide
proprietary health and benefit management services through
private online portals that we host for employer and health plan
sponsors. Our WebMD Health and Benefits Manager private portals
provide a personalized user experience by integrating individual
user data (including personal health information) and
plan-specific data from our employer or health plan client, with
much of the content, decision-support technology and personal
communication services we make available through our public
portals. We typically integrate our applications into the
client’s
web site or intranet and provide secure access for
employees and plan members. We also offer a software platform
that allows us to integrate third party applications and data.
The portal is presented to each employee or health plan member
as a personal home page, with direct access to relevant content,
tools and other resources specific to the individual’s
eligibility, coverage and health profile. The WebMD Health and
Benefits Manager provides a user-friendly experience that
enables the employee or member to access and manage the
individually tailored health and benefits information and
decision-support technology in one place, with a common look and
feel, and with a single sign on. The components of the WebMD
Health and Benefits Manager include:
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WebMD Personal Health Manager. WebMD Personal Health
Manager includes health risk assessment tools, an electronic
personal health record and a suite of treatment decision-support
tools. These services enable members to understand their risks
with regard to specific conditions and store this information as
well as other medical data, including medication and treatment
history, in an electronic health record. Our services enable
members to receive targeted information, programs or messages
specific to the individual employee’s needs, based upon the
information they store in their master profile. |
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WebMD Benefit Manager. WebMD Benefit Manager is a set of
benefit decision-support applications that explain and provide
comparisons of health plan benefit choices, facilitating
informed selection and use of the employee’s benefit
options. For example, CostCompare allows an employee to forecast
and model individual premium and out-of-pocket costs for the
different types of benefit programs the plan sponsor may offer. |
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WebMD Integration Services. WebMD offers a set of
sophisticated integration services that facilitates seamless
access from the WebMD Health and Benefits Manager to third party
sites. This functionality allows health plans to present their
benefit programs within a single, unified interface, enabling
end-users to access third party sites without leaving our secure
portals. Users of our application integration services are able
to, among other things, view medical claims at their health plan
sites, re-order medication from a pharmacy site and import
medical, pharmacy and lab claims data. |
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WebMD Provider Decision-Support. As a result of our
acquisition of HealthShare Technology, Inc.
(“HealthShare”) in March 2005, our decision-support
suite now provides the capability for |
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employees and health plan members to compare relative cost and
quality measures of hospitals in order to select the hospital
they believe is most suited to their individual needs. These
comparisons are based on evidence-based measures, such as volume
of patients treated for particular illnesses or procedures,
mortality rates, unfavorable outcomes for specific problems,
average number of days patients stayed in hospitals and average
hospital charges for procedures or illnesses. |
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WebMD Site Manager. WebMD Site Manager is our online
service and administrative suite of applications that enables
our clients to manage many of the WebMD Health and Benefits
Manager functions locally without assistance from WebMD staff.
With Site Manager, employers and health plans are able to
analyze aggregate health data, address population health risks
more effectively and proactively implement preventive programs.
Site Manager’s messaging capabilities also allow employers
to streamline their communication with their employees. |
We believe that our services provide the following potential
benefits to an employer or health plan:
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reduced benefits administration, communication, and customer
service costs; |
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increased tax savings through increased participation in
Flexible Spending Accounts; |
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reduced hospital, physician and drug costs through more informed
utilization of the benefit plan; |
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increased member satisfaction with the employer and the benefit
plan; and |
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improved health outcomes based upon increased conformance with
benefit plan and clinical protocols. |
In addition, we believe that our services provide the following
potential benefits to employees or plan members:
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increased tax savings through increased participation in
Flexible Spending Accounts; |
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reduced benefit costs through more informed use of the benefit
plan; |
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improved health outcomes through more informed choice of
providers and treatment choices; and |
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improved understanding of health conditions through access to
support tools and educational information. |
Membership. Membership for each of our private portals is
limited to the employees and members of the respective employer
and health plan clients. Each member must initially register on
the private portal provided to them, at which point they are
given a unique user identification name and passcode that they
must utilize to achieve a secure sign-on each time they enter
the private portal.
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Advertising and Sponsorship |
The WebMD Health Network. We believe that The WebMD
Health Network offers an efficient means for advertisers and
sponsors to reach a large audience of health-involved consumers,
clinically-active physicians and other healthcare professionals.
The WebMD Health Network enables advertisers and sponsors
to reach either our entire audience or specific groups of
consumers, physicians and other healthcare professionals based
on their interests or specialties. Currently, the majority of
our sponsors and advertisers include pharmaceutical,
biotechnology, and medical device firms. In 2004, more than 65
pharmaceutical, biotechnology and medical device companies
purchased advertising and sponsorships for over 250 of their
brands on our network. As described above under
“— Industry Background,” these companies
currently spend only a very small portion of their marketing and
educational budgets on online media. However, we expect their
online spending to increase as a result of increased recognition
of its potential advantages over offline marketing and
educational activities. We believe that we are well positioned
to benefit from the trend toward increased online spending by
these companies because of our track record in providing a more
efficient use of advertising expenditures than traditional media
and our excellent working relationships with many of the
relevant decision-makers at these companies. Our
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sponsors also include numerous consumer packaged goods companies
that provide health-related products, and we are actively
pursuing additional opportunities in that market.
Key benefits that The WebMD Health Network offers
healthcare advertisers and other sponsors include:
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our reach of over 23 million aggregate unique users per
month in the first quarter of 2005, which we believe is much
larger than the number of unique users of any other sponsor
supported health-oriented Web portal; |
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our ability to help advertisers and sponsors reach specific
groups of consumers and physicians by specialty, product,
disease, condition or wellness topic, which typically produces a
more efficient and productive marketing campaign; |
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our ability to provide advertisers and other sponsors with
objective measures of the effectiveness of their online
marketing; and |
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the broad reach of Medscape’s educational related
activities, as evidenced by the 927,000 physician and healthcare
professional participants earning over 827,000 CME credits in
2004. |
We provide healthcare advertisers and other sponsors with the
means to communicate with targeted groups of consumers and
physicians by offering placements and programs in the most
relevant locations on our portals. The following are some of the
types of placements and programs we offer to advertisers and
sponsors:
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Media Solutions. These are traditional online advertising
solutions, such as banners, used to reach health-involved
consumers. In addition, clients can sponsor a variety of
condition-specific or specialty-specific e-newsletters, keyword
searches and specific educational programs. |
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Sponsored Content Solutions. These are customized
collections of articles, topics, and decision-support tools and
applications, sponsored by clients and distributed within WebMD
Health. |
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Patient Education Centers. Patient education centers are
sponsored destinations on Medscape for physicians to
access patient education materials on a particular topic or
condition. |
We do not place advertising or accept sponsorship on private
portals we develop and host for employers and health plans for
use by their employees and members.
Sponsored Grant-Based Programs. We receive revenue for
the distribution of CME and other educational programs sponsored
by pharmaceutical and medical device companies, as well as
foundations and government agencies. The following are some of
the CME products for which we receive funding:
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Conference Coverage. Medscape provides coverage of major
medical conferences. |
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CME Circle. CME Circle provides online multimedia
extensions of sponsor-supported CME activities, including
symposia, monographs and CD-ROMs, which we distribute online
through Medscape. |
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CME Live. These are original Medscape online
events featuring live streaming video, audio and synchronized
visual presentation by experts. |
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CME Cases. These are original CME activities presented by
healthcare professionals in a patient case format. |
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Resource Centers. Resource centers are grant-based
sponsored disease or condition-specific areas for conditions
such as congestive heart failure or breast cancers. These
centers include news, expert columns, guidelines and reference
material. |
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Publishing Services
Our offline publications for consumers, physicians and
healthcare professionals include:
The Little Blue Book. In 2003, we acquired The Little
Blue Book. The Little Blue Book is a physician directory
published annually in 146 distinct geographic editions, and
contains practice information on an aggregate of approximately
400,000 physicians. In 2004 we sold, both directly and through
pharmaceutical company sponsorships, approximately 350,000
copies of The Little Blue Book. We also use the
information used to produce The Little Blue Book to
generate both online and offline directory and information
products. Physicians utilize The Little Blue Book for
local and up-to-date physician, pharmacy and hospital contact
information. Physicians are listed free of charge in their local
area edition, along with their specialties, HMO affiliations,
office addresses and telephone numbers.
Reference Publications. We publish medical reference
publications, including the reference texts ACP Medicine
and ACS Surgery: Principles and Practice. ACP Medicine
and ACS Surgery are official publications of the
American College of Physicians and the American College of
Surgeons, respectively, although we wholly own the rights. They
are available for sale by subscription to individual physicians
and to institutions in multiple formats (print, CD-ROM and
Online). ACP Medicine has been a comprehensive and
regularly updated internal medicine reference for over
25 years.
WebMD the Magazine. We launched WebMD the Magazine
in April 2005 with an initial distribution of 1,000,000
copies. WebMD the Magazine is a full size, consumer
publication delivered free of charge to approximately 85% of
physicians’ offices in the United States. The editorial
format of WebMD the Magazine is specifically designed for
the doctor’s waiting room. Its editorial features and
highly interactive format of assessments, quizzes and questions
are designed to inform consumers about important health and
wellness topics. Its distribution allows sponsors to extend
their advertising’s reach and to deliver their message when
consumers are actively engaged in the healthcare process.
User Privacy and Trust
General. We have adopted internal policies and practices
relating to, among other things, content standards and user
privacy, designed to foster our relationships with our users.
Some of those policies are described below. In addition, we
participate in the following external, independent verification
programs:
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URAC. We were awarded e-Health accreditation from URAC,
an independent accrediting body that has reviewed and approved
the WebMD.com site and our private portal deployment of WebMD
Health Personal Manager for compliance with its more than 50
quality and ethics standards. |
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TRUSTe. We are a licensee of the TRUSTe Privacy Program.
TRUSTe is an independent, non-profit organization whose goal is
to build users’ trust and confidence in the Internet. In
January 2005, a panel of privacy experts, sponsored by TRUSTe,
ranked us among the ten most trusted companies in America for
privacy. |
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Health on the Net Foundation. Our WebMD.com and
MedicineNet.com sites comply with the principles of the HON Code
of Conduct established by the Health on the Net Foundation. |
Privacy Policies. We understand how important the privacy
of personal information is to our users. Our Privacy Policies
are posted on our
Web sites and tell users what information we
collect about them and about their use of our portals and our
services. Our Privacy Policies also explain the choices users
have about how their personal information is used and how we
protect that information.
Advertising and Promotion Policies. All advertisements,
sponsorships and promotions that appear on our
Web sites are
displayed in compliance with our advertising and promotions
policies. Among other things, as a matter of policy, we have
sole discretion for determining the types of advertising that we
accept, and under no circumstances would accept advertising
that, in our opinion, is not factually accurate or is not
undertaken in good taste. We also recognize and maintain a
distinct separation between advertising content that appears on
our
Web site and editorial content that we publish. We take
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meaningful steps to ensure that our users can easily distinguish
between sponsored content and our news reporting and other
editorial content.
Sales and Marketing
Our Sales, Marketing and Account Management Teams.
Our sales, marketing and account management personnel work with
pharmaceutical, medical device, biotechnology and consumer
products companies to place their advertisements and other
sponsored products on our public portals and in some of our
publications. These individuals work closely with clients and
potential clients to develop innovative means of bringing their
companies and their products and services to the attention of
targeted groups of consumers and healthcare professionals, and
to create channels of communication with these audiences.
Our Consumer Web sites. We seek to attract traffic and
new members to our consumer
Web sites through a variety of
methods to increase the awareness of our brand. We have an
agreement with News Corporation, which runs through August 2010.
Under the agreement, we receive advertising services,
principally on the News Corporation television and cable
properties. Approximately $30 million of advertising
services have been available for the 12 months ending
August 2005 and $12 million of advertising will be
available each of the next five years thereafter ending August
2010. We use this advertising for the purpose of building brand
awareness and as a complement to our online programs.
Medscape from WebMD. We seek to attract new members to
Medscape from WebMD through a variety of methods,
including advertising on other Internet sites and in medical
journals, pharmaceutical and other healthcare publications and
other targeted publications. We also promote Medscape from
WebMD at industry conferences, trade shows and medical
meetings and by using direct mail.
Our Private Online Portals. We market our private online
portals to employers and health plans through a dedicated sales,
marketing and account management team and through relationships
with employee benefits consultants and other companies that
assist employers in purchasing or managing employee benefits,
including Fidelity Human Resources Services Company LLC.
Our Publishing Services. We market The Little Blue
Book through a team of third party marketers, as well as
WebMD Health sales persons. In addition, we also market WebMD
the Magazine through a team of third-party marketers.
Seasonality
The timing of revenues from our clients are affected by seasonal
factors, primarily relating to the annual budget approval
process of the advertising and sponsorship clients of our public
portals, the timing of annual benefit enrollment periods of our
private portal clients and the annual distribution schedule of
The Little Blue Book.
Technological Infrastructure
Our Internet-based services are delivered through
Web sites
designed to address the healthcare information needs of
consumers and healthcare professionals with easy-to-use
interfaces, search functions and navigation capabilities. We use
customized content management and publishing technology to
develop, edit, publish, manage, and organize the content for our
Web sites. We use ad-serving technology to store, manage and
serve online advertisements in a contextually relevant manner to
the extent possible. We also use specialized software for
delivering personalized content through the WebMD Health and
Benefits Manager and, for registered members, through our public
Web sites. We have invested and intend to continue to invest in
software and systems that allow us to meets the demands of our
users and sponsors.
Continued development of our technological infrastructure is
critical to our success. Our development teams work closely with
marketing and account management employees to create content
management capabilities, interactive tools and other
applications for use across all of our portals. The goal of our
current and planned investments is to further develop our
content and technology platform serving various
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end-users, including consumers and physicians, and to create
innovative services that provide value for healthcare
advertisers, employers, payers, and other sponsors.
Strategic Relationships
AOL Relationship. In May 2001, we entered into an
agreement for a strategic alliance with the AOL division of Time
Warner, Inc. (
“AOL”). The original term of the
agreement was three years expiring
May 9, 2004, and we have
exercised our right to extend the original agreement for an
additional three-year renewal term ending
May 8, 2007.
Under the agreement, we are the primary provider of healthcare
content, tools and services on certain AOL properties and we
distribute a co-branded interactive site to certain AOL
properties. We share with AOL certain revenues from advertising,
commerce and programming on the health channels of the AOL
properties and on the co-branded service created by us for AOL.
We receive 80% of revenues up to an agreed-upon annual threshold
and 60% thereafter. AOL has guaranteed that we will receive a
minimum of $12 million during each year of the renewal term
for its share of advertising revenues. In the event of a change
of control resulting in WebMD being controlled by a competitor
of AOL, AOL has the right to terminate the agreement during the
sixty (60) day period following such change of control.
Fidelity Human Resources Services Company LLC. In
February 2004, we entered into a strategic relationship with
Fidelity Human Resources Services Company LLC
(
“FHRS”), a provider of human resources and benefits
outsourcing administration services. Pursuant to the agreement,
FHRS serves as a distributor of our online personal health
management products, and in connection therewith, FHRS
integrates our products with FHRS’s products to offer
employer customers of FHRS an integrated solution through
FHRS’ NetBenefits®
Web site. FHRS’s integrated
solutions provide employees with employer-provided health plan
information and our personal health management tools allow
employees to access a personalized view of their health care
options so that they can make more informed healthcare
decisions. Pursuant to the FHRS agreement, we have agreed with
FHRS to cooperate in marketing and selling the NetBenefits site
to FHRS clients. The initial term of the agreement runs through
August 31, 2007, and FHRS has the right to renew the
agreement for additional terms of one year after the initial
term (not to exceed four (4) one-year renewal terms). FHRS
has agreed to certain minimum level of employees to be covered
under the agreement. FHRS is an affiliate of FMR, Corp, which
reported beneficial ownership of approximately 10.8% of the
stock of our Parent at
December 31, 2004.
Competition
The markets we participate in are intensely competitive,
continually evolving and, in some cases, subject to rapid change.
Public Portals. Our public portals face competition from
numerous other companies, both in attracting users and in
generating revenue from advertisers and sponsors. Since there
are no substantial barriers to entry into the markets in which
we participate, we expect that additional competitors will
continue to enter these markets.
We compete with online services and
Web sites that provide
health-related information, including both commercial sites and
not-for-profit sites. Our competitors that provide online
services, tools and applications for healthcare consumers
include iVillage.com, DrKoop.com, drugs.com and
healthcentral.com. Our competitors that provide services, tools
and applications to physicians include merkmedicus.com,
eMedicine.com, uptodate.com and mdconsult.com. We also face
competition from non-profit sites, such as NIH.com and
medline.com.
Other competitors for advertising and sponsorship revenue
include:
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general purpose consumer online services and portals and other
high-traffic Web sites that include healthcare-related and non
healthcare-related content and services, including yahoo.com and
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publishers and distributors of traditional offline media,
including television and magazines targeted to consumers, as
well as print journals and other specialized media targeted to
healthcare professionals, many of which have established or may
establish their own Web sites or partner with other Web sites; |
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offline medical conferences, CME programs and symposia; and |
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vendors of healthcare information, products and services
distributed through other means, including direct sales, mail
and fax messaging. |
Competitors for the attention of healthcare professionals and
consumers include:
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the competitors for advertisers and sponsors described above; |
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public sector, non-profit and other Web sites that provide
healthcare information without advertising or sponsorships from
third parties. |
Private Portals. Our private portals compete with various
providers and vendors in the licensing of content and in the
sale of decision-support services and tools. Our competitors in
this market include:
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providers of decision-support tools, such as Hewitt Associates
LLP and Subimo, LLC; |
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wellness and disease management vendors, including Mayo
Foundation for Medical Education and Research and Staywell
Productions/ MediMedia USA, Inc.; |
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suppliers of online health management applications, including
HealthMedia, Health A-Z and Consumer Health Interactive; and |
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health information services and health management offerings of
health plans and their affiliates, including those of Humana,
Aetna and United Healthcare. |
Company History
Introduction. In early 2001, the primary source of
revenue for our Parent’s WebMD Health segment (then known
as its Portal Services segment) was from a small number of
significant sponsorship and advertising relationships with
pharmaceutical, biotechnology and medical device companies. We
have expanded our sponsorship base and our sponsors and
advertisers now include a significant number of pharmaceutical,
biotechnology and medical device companies as well as numerous
consumer products companies, none of which contributed more than
10% of our revenue in 2004.
Since 2001, our business has evolved and entered additional
markets as a result of acquisitions and internal investment as
follows:
Professional Portals. In 2001, we acquired
Medscape, the leading source of online clinical
information for physicians. Since our acquisition of
Medscape, we have emerged as the leading commercial
portal for healthcare professionals and the leading provider of
online CME for physicians. Our acquisition of Medscape
also increased our ability to originate healthcare content
for physicians. In late 2003, we purchased the membership
database and other assets of Physicians Online, LLC, another
leading medical information portal for physicians, and, in early
2004, we combined its membership and resources with
Medscape.
Consumer Portals. We have completed several acquisitions
that strengthened our public portal offerings for consumers. In
the fourth quarter of 2004, we acquired the businesses of
RxList.com and
MedicineNet.com. RxList is an
online drug directory for consumers and healthcare professionals
with over 1,400 drug monographs, and MedicineNet is a health
information
Web site for consumers produced and written by
practicing physicians.
Private Portals. In 2002, we acquired WellMed, Inc. and
began to provide employers and health plans with a suite of
online healthcare information services for use by their
employees and plan members. In 2003, we acquired the assets of
Optate, Inc., which provided healthcare benefit decision-support
tools.
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Recently, we have further strengthened this area of our business
with the March 2005 acquisition of HealthShare Technology, Inc.,
a leading provider of online decision-support tools that enable
consumers, payers and hospitals to compare costs and quality
measures of hospitals.
Publishing Services. In 2000, we began to publish ACP
Medicine and ACS Surgery: Principles of Practice (formerly
known as Scientific American Medicine© and
Scientific American Surgery), official and
well-established medical reference publications of the American
College of Physicians and the American College of Surgeons,
which are relied upon by physicians as important clinical
reference sources. We further extended our product offerings
with the 2003 acquisition of The Little Blue Book, a
company that publishes a pocket sized reference book containing
physician practice and contact information. The Little Blue
Book is published annually in 146 distinct geographic
editions, and contains practice information on an aggregate of
approximately 400,000 physicians. Most recently, we launched
WebMD the Magazine, a consumer publication that we
distribute to patients free of charge in physician waiting rooms
across the country.
Employees
As of
December 31, 2004, we had approximately 550
employees. Following this offering, we will continue to be
dependent on our Parent to provide us with many key services for
our business pursuant to a services agreement that we expect to
enter into with our parent upon the completion of this offering.
Our current employees are not represented by a labor union and
are not the subject of a collective bargaining agreement. We
believe our employee relations to be good.
Facilities
We lease office space in New York, New York for our headquarters
and our editorial and marketing operations and in Atlanta,
Georgia and Portland, Oregon for related operations. We believe
that the offices and other facilities described are, in general,
in good operating condition and adequate for our current
operations and that additional leased space can be obtained if
needed.
Intellectual Property
We rely upon a combination of patent, trade secret, copyright
and trademark laws, license agreements, confidentiality
procedures, employee and client nondisclosure agreements and
technical measures to protect the intellectual property used in
our business.
We use trademarks, trade names and service marks for healthcare
information services and technology solutions, including
WebMD®, WebMD Health®,
Medscape®, CME
Circle® The Little Blue
Book
tm
MedicineNet®, RxList® and Select Quality Care®.
We also use other registered and unregistered trademarks and
service marks for our various products and services. In addition
to our trademark registrations and applications, we have
registered the domain names that either are or may be relevant
to conducting our business names, including
“www.webmd.com,” “my.webmd.com” and
“medscape.com.” We also rely on a variety of
intellectual property rights that we license from third parties,
including our Internet server software and healthcare content
used on our
Web sites.
Legal Proceedings
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Merrill Lynch Fundamental Growth Fund, Inc.
et al. v. McKesson HBOC, Inc., et al. |
Our Parent was named as a defendant in the action Merrill
Lynch Fundamental Growth Fund, Inc., et al. v.
McKesson HBOC, Inc., et al., Case No. 405792, in
the San Francisco Superior Court. The original complaint in
this matter alleged that McKesson HBOC (now known as McKesson
Corp.), HBO and Company (which we refer to as HBOC), certain
officers and directors of those firms, Arthur Andersen LLP, and
Bear Stearns & Co. engaged in a number of practices
whereby HBOC and later McKesson HBOC improperly recognized
revenues. When these practices were discovered, McKesson HBOC
eliminated more than $327 million in revenues that HBOC had
recognized over the prior three years. The
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plaintiffs claim to have lost more than $150 million as a
result of the decline in McKesson HBOC’s share value after
the accounting practices came to light in April 1999.
On
September 4, 2003, the plaintiffs filed a fourth amended
complaint, naming our Parent and two other defendants, General
Electric Capital Corporation, Inc. and Computer Associates
International, Inc., for the first time. The complaint alleged
that our Parent aided and abetted alleged fraud by certain
defendants and conspired with those defendants in relation to
HBOC’s and McKesson HBOC’s alleged improper
recognition of approximately $14 million in revenue on two
software transactions. The plaintiffs also alleged that our
Parent made certain negligent misrepresentations with respect to
these transactions.
The plaintiffs alleged that our Parent, through its
participation in certain transactions with HBOC and McKesson
HBOC, learned that officers of HBOC and/or McKesson HBOC, HBOC
and McKesson HBOC were breaching duties owed to McKesson HBOC
shareholders by making material misstatements and suppressing or
omitting facts with respect to HBOC’s and McKesson
HBOC’s financial results for the periods ending
December 31, 1998 and
March 31, 1999 and that our
Parent aided and abetted and conspired with these defendants.
The complaint was based on alleged conduct by WebMD, Inc., a
Georgia corporation that was then a separate private company and
will be one of our
subsidiaries. One of the HBOC officers
allegedly involved became an officer of WebMD, Inc. on
December 1, 1998, after having served as HBOC’s
representative on the Board of Directors of WebMD, Inc. and was
dismissed by WebMD, Inc. after the accounting fraud at HBOC was
disclosed. The other HBOC officer allegedly involved served as
HBOC’s representative on the Board of Directors of WebMD,
Inc. and ceased to be a director of WebMD, Inc. upon dismissal
by McKesson HBOC. Plaintiffs seek unspecified damages against
our Parent. The complaint alleges numerous instances of improper
accounting by HBOC unrelated to the transactions between WebMD,
Inc. and HBOC and/or McKesson HBOC.
On
December 16, 2003, our Parent filed a demurrer, seeking
dismissal of the plaintiffs’ two claims against it. On
July 22, 2004, the Court sustained that demurrer, finding
that the plaintiffs’ claims were time barred. On
October 8, 2004, the Court dismissed plaintiffs’
Fourth Amended Complaint with prejudice as to California, but
without prejudice with respect to filing in another
jurisdiction. On
November 17, 2004, plaintiffs filed a
notice of appeal of the Court’s order in favor of our
Parent. On
November 30, 2004, our Parent filed a
cross-appeal for the purpose of challenging the form of the
order. Those appeals are in the process of being briefed.
In March 2004, McKesson Corp. filed cross-complaints against
General Electric Capital Corporation, Inc., Computer Associates
International, Inc., and our Parent for declaratory relief and
indemnification, alleging that each of these cross-defendants is
obligated to indemnify McKesson if McKesson is compelled to pay
any sum as the result of any damages, judgment or other awards
recovered by the plaintiffs against McKesson. McKesson sought
judicial determinations of the comparative fault of McKesson and
each cross-defendant for damages claimed by the plaintiffs, if
any such damages are found to exist, and declarations of the
amount that each cross-defendant is obligated to indemnify
McKesson if McKesson is compelled to pay any sum as the result
of any damages, judgment or other awards recovered by the
plaintiffs against McKesson. The cross-complaints against
General Electric and Computer Associates have since been
dismissed.
On
June 8, 2004, WebMD filed a demurrer, seeking dismissal
of McKesson’s claims. On
September 10, 2004, the Court
sustained the demurrer to McKesson’s claims against WebMD.
On
December 7, 2004, the Court dismissed McKesson’s
cross-complaint with prejudice and ordered entry of judgment in
favor of WebMD. On
January 27, 2005, McKesson filed a
notice of appeal of the Court’s order in favor of WebMD.
That appeal has not yet been briefed.
On
August 12, 2004, the original plaintiffs in the
California lawsuit, Merrill Lynch Fundamental Growth Fund, Inc.
and Merrill Lynch Global Value Fund, Inc., filed a separate
lawsuit in Superior Court in New Jersey, Middlesex County,
alleging substantially the same issues and claims against our
Parent as they did in the California lawsuit. In response to our
Parent’s motion to dismiss, plaintiffs filed a First
Amended Complaint on
January 4, 2005, dropping claims
against our Parent, but asserting the same claims against WebMD,
Inc.,
the company that engaged in the two software transactions.
On February 4,
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2005, the New Jersey court dismissed our Parent from the action
without prejudice, and stayed the New Jersey action until the
California action is resolved, subject to our Parent’s
entering into a tolling agreement with plaintiffs, which our
Parent has done.
Parent intends to vigorously defend against the plaintiffs’
and McKesson’s claims against our Parent and WebMD, Inc.
In the normal course of business, we are involved in various
other claims and legal proceedings. While the ultimate
resolution of these matters, and those discussed above, has yet
to be determined, we do not believe that their outcome will have
a material adverse effect on our consolidated combined financial
position, results of operations or liquidity.
63
GOVERNMENT REGULATION
Introduction
General. This section of the prospectus contains a
description of laws and regulations applicable to us, either
directly or through their effect on our healthcare industry
customers. The healthcare industry is highly regulated and is
subject to changing political, regulatory and other influences.
These factors affect the purchasing practices and operations of
healthcare organizations as well as the behavior and attitudes
of consumers.
Federal and state legislatures and agencies periodically
consider programs to reform or revise the U.S. healthcare
system. These programs may contain proposals to increase
governmental involvement in healthcare, lower reimbursement
rates or otherwise change the environment in which healthcare
industry participants operate. We are unable to predict future
proposals with any certainty or to predict the effect they would
have on our businesses.
Existing and new laws and regulations affecting the healthcare,
information technology and Internet industries could create
unexpected liabilities for us, cause us to incur additional
costs and could restrict our operations. Many of the laws that
affect us, and particularly those applying to healthcare, are
very complex and may be subject to varying interpretations by
courts and other governmental authorities. Our failure, or the
failure of our business partners, to accurately anticipate the
application of these laws and regulations, or other failure to
comply, could create liability for us, result in adverse
publicity and negatively affect our businesses.
Healthcare Regulation. Most of our revenue is either from
the healthcare industry or could be affected by changes
affecting healthcare spending. The healthcare industry is highly
regulated and is subject to changing political, regulatory and
other influences. These factors affect the purchasing practices
and operations of healthcare organizations as well as the
behavior and attitudes of consumers. Federal and state
legislatures and agencies periodically consider programs to
reform or revise aspects of the United States healthcare system.
These programs may contain proposals to increase governmental
involvement in healthcare, lower reimbursement rates or
otherwise change the environment in which healthcare industry
participants operate. Healthcare industry participants may
respond by reducing their investments or postponing investment
decisions, including investments in our products and services.
We are unable to predict future proposals with any certainty or
to predict the effect they would have on our businesses.
Many healthcare laws are complex and their application to
specific products and services may not be clear. In particular,
many existing healthcare laws and regulations, when enacted, did
not anticipate the healthcare information services and
technology solutions that we provide. However, these laws and
regulations may nonetheless be applied to our products and
services.
Other Regulation. This section of the prospectus also
contains a description of other laws and regulations, including
general consumer protection laws and Internet-related laws that
affect some of our businesses. Laws and regulations have been
adopted, and may be adopted in the future, that address
Internet-related issues, including online content, privacy,
online marketing, unsolicited commercial e-mail, taxation,
pricing, and quality of products and services. Some of these
laws and regulations, particularly those that relate
specifically to the Internet, were adopted relatively recently
and their scope and application may still be subject to
uncertainties. Interpretations of these laws, as well as any new
or revised law or regulation, could decrease demand for our
services, increase our cost of doing business, or otherwise
cause our business to suffer.
Regulation of Drug and Medical Device Advertising and
Promotion
The FDA and the FTC regulate the form, content and dissemination
of labeling, advertising and promotional materials prepared by,
or for, pharmaceutical or medical device companies, including
direct-to-consumer prescription drug and medical device
advertising. The FTC regulates over-the-counter drug advertising
and, in some cases, medical device advertising, as well as
general product or service
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advertising. Generally, based on FDA requirements, regulated
companies must limit advertising and promotional materials to
discussions of FDA-approved uses and claims. In limited
circumstances, regulated companies may disseminate
non-promotional scientific information regarding product uses or
claims not yet approved by the FDA.
Information that promotes the use of pharmaceutical products or
medical devices that is put on our
Web sites is subject to the
full array of the FDA and FTC requirements and enforcement
actions and information regarding other products and services is
subject to FTC requirements. Areas of our
Web sites that could
be the primary focus of the FDA and FTC include pages and
programs that discuss use of an FDA-regulated product or that
the regulators believe may lack editorial independence from the
influence of sponsoring pharmaceutical or medical device
companies. Television broadcast advertisements by us may also be
subject to FTC regulation and FDA regulation depending on the
content. The FDA and the FTC place the principal burden of
compliance with advertising and promotional regulations on
advertisers and sponsors to make truthful, substantiated claims.
If the FDA or the FTC finds that any information on our
Web site
violates FDA or FTC regulations, they may take regulatory or
judicial action against us or the advertiser or sponsor of that
information. State attorneys general may also take similar
action based on their state’s consumer protection statutes.
Drug Advertising. The Federal Food, Drug and Cosmetic
Act, or FDC Act, requires that prescription drugs (including
biological products) be approved for a specific medical
indication by the FDA prior to marketing. It is a violation of
the FDC Act and of FDA regulations to market, advertise or
otherwise commercialize such products prior to approval. The FDA
does allow for preapproval exchange of scientific information,
provided it is nonpromotional in nature and does not draw
conclusions regarding the ultimate safety or effectiveness of
the unapproved drug. Upon approval, the FDA’s regulatory
authority extends to the labeling and advertising of
prescription drugs offered in interstate commerce. Such products
may only be promoted and advertised for approved indications. In
addition, the labeling and advertising can be neither false nor
misleading, and must present all material information, including
risk information, in a balanced manner. Labeling and advertising
that violate these legal standards are subject to FDA
enforcement action.
The FDA regulates the safety, efficacy, and labeling of
over-the-counter drugs, or OTC drugs, under the FDC Act either
through specific product approvals or through regulations that
define approved claims for specific categories of such products.
The FTC regulates the advertising of OTC drugs under the section
of the Federal Trade Commission Act that prohibits unfair or
deceptive trade practices. Together, the FDA and FTC regulatory
framework requires that OTC drugs be formulated and labeled in
accordance with FDA approvals or regulations and promoted in a
manner that is truthful, adequately substantiated, and
consistent with the labeled uses. OTC drugs that do not meet
these requirements are subject to FDA or FTC enforcement action
depending on the nature of the violation. In addition, state
attorneys general can also bring enforcement actions for alleged
unfair or deceptive advertising.
There are significant administrative, civil and criminal
sanctions available to the FDA for violations of the FDC Act or
FDA regulations as they relate to labeling and advertising.
Administrative sanctions may include a written request that
violative advertising or promotion cease and/or that corrective
action be taken, such as requiring a company to provide to
healthcare providers and/or consumers information to correct
misinformation previously conveyed. In addition, the FDA may use
publicity, such as
press releases, to warn the public about
false and misleading information concerning a drug or medical
device product. More serious civil sanctions include seizures
and injunctions. Such measures could prevent a company from
introducing or maintaining its product in the marketplace.
Criminal penalties for severe violations can result in a prison
term and/or substantial fines. State attorneys general have
similar investigative tools and sanctions available to them as
well. The National Association of Attorneys General has formed a
Prescription Drug Task Force that has been active in addressing
issues related to prescription drugs.
Any increase in FDA regulation of the Internet or other media
for direct-to-consumer advertisements of prescription drugs
could make it more difficult for us to obtain advertising and
sponsorship revenue. In
65
the last 15 years, the FDA has gradually relaxed its
formerly restrictive policies on direct-to-consumer advertising
of prescription drugs. Companies can now advertise prescription
drugs for serious conditions to consumers in any medium if they
comply with FDA requirements. However, physician groups and
others have criticized the FDA’s current policies, and have
called for restrictions on any advertising of prescription drugs
to consumers and increased FDA enforcement. These critics point
to both public health concerns and to the laws of many other
countries that make direct-to-consumer advertising of
prescription drugs a criminal offense. Scrutiny of
direct-to-consumer advertising increased after Vioxx® was
withdrawn from the market due to potential safety concerns in
September 2004. Critics have proposed postponing
direct-to-consumer advertising for a new drug until the drug has
been safely marketed commercially for one or two years. In
response to these criticisms, the FDA or the FTC may alter its
present policies on the direct-to-consumer advertising of
prescription drugs or medical devices in a way that would
materially reduce our advertising and sponsorship revenues. In
early 2004, the FDA issued three draft guidance documents
intended to improve communication of: (1) risk information
in direct-to-consumer print advertisements, (2) disease
awareness information, and (3) risk information in
direct-to-consumer advertising of restricted medical devices.
These draft guidance documents do not alter existing FDA
regulatory requirements, but may lead to future policy changes.
Physician Education Programs. Activities and information
provided in the context of a medical or scientific educational
program, including continuing medical education or
“CME,” are not regulated by the FDA if they are
non-promotional. The FDA does, however, evaluate such activities
to determine whether they are independent of the promotional
influence of the drug or medical device sponsor or whether they
are promotional activities subject to the FDA’s advertising
and labeling requirements. In order to determine whether a
company’s activities are sufficiently independent, the FDA
looks at a number of factors related to the planning, content,
speakers and audience selection of such activities. To the
extent that the FDA concludes that such activities are not
independent from a manufacturer, such content must fully comply
with the FDA’s requirements. If the FDA or other regulatory
agency finds that an educational program violates the applicable
requirements, they may take regulatory or judicial action
against the sponsor or us.
During the past several years, educational programs, including
CME, directed toward physicians have been subject to increased
scrutiny to ensure that sponsors do not influence or control the
content of the program. In response to governmental and industry
initiatives, pharmaceutical companies have been developing and
implementing internal controls and procedures that promote
adherence to applicable regulations and requirements. In
implementing these controls and procedures, different clients
may interpret the regulations and requirements differently and
may implement procedures or requirements that vary from client
to client. These controls and procedures:
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may discourage pharmaceutical companies from engaging in
educational activities; |
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may slow their internal approval for such programs; |
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may reduce the volume of sponsored educational programs
implemented through our Medscape Web site to levels that are
lower than in the past; and |
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may require us to make changes to how we offer or provide
educational programs, including CME. |
In addition, future changes to existing regulations or
accreditation standards, or to the internal compliance programs
of potential clients, may further discourage or prohibit
potential clients from engaging in educational activities with
us, or may require us to make further changes in the way we
offer or provide educational programs.
Medical Professional Regulation
The practice of most healthcare professions requires licensing
under applicable state law. In addition, the laws in some states
prohibit business entities from practicing medicine, which is
referred to as the prohibition against the corporate practice of
medicine. We do not believe that we engage in the practice of
medicine and we have attempted to structure our
Web site,
strategic relationships and other operations to
66
avoid violating these state licensing and professional practice
laws. We do not believe we provide professional medical advice,
diagnosis or treatment. We employ and
contract with physicians
who provide only medical information to consumers, and we have
no intention to provide medical care or advice. A state,
however, may determine that some portion of our business
violates these laws and may seek to have us discontinue those
portions or subject us to penalties or licensure requirements.
Any determination that we are a healthcare provider and acted
improperly as a healthcare provider may result in liability to
us. Many states regulate the ability of medical professionals to
advertise or maintain referral services. We do not represent
that a physician’s use of our
Web site will comply with
these or other state laws regulating professional practice and
we do not monitor or control the content that physicians post on
their individual practice
Web sites using our
Web site
application. It is possible a state or a court may determine we
are responsible for any non-compliance with these laws, which
could affect our ability to offer this service to our customers.
Anti-Kickback Laws
There are federal and state laws that govern patient referrals,
physician financial relationships and inducements to healthcare
providers and patients. The federal healthcare programs
anti-kickback law prohibits any person or entity from offering,
paying, soliciting or receiving anything of value, directly or
indirectly, for the referral of patients covered by Medicare,
Medicaid and other federal healthcare programs or the leasing,
purchasing, ordering or arranging for or recommending the lease,
purchase or order of any item, good, facility or service covered
by these programs. Many states also have similar anti-kickback
laws that are not necessarily limited to items or services for
which payment is made by a federal healthcare program. These
laws are applicable to manufacturers and distributors and,
therefore, may restrict how we and some of our customers market
products to healthcare providers. Also, in 2002, the Office of
the Inspector General, or OIG, of HHS, the federal government
agency responsible for interpreting the federal anti-kickback
law, issued an advisory opinion that concluded that the sale of
advertising and sponsorships to healthcare providers and vendors
by Web-based information services implicates the federal
anti-kickback law. However, the advisory opinion suggests that
enforcement action will not result if the fees paid represent
fair market value for the advertising/sponsorship arrangements,
the fees do not vary based on the volume or value of business
generated by the advertising and the advertising/sponsorship
relationships are clearly identified as such to users. We
carefully review our practices with regulatory experts in an
effort to ensure that we comply with all applicable laws.
However, the laws in this area are both broad and vague and it
is often difficult or impossible to determine precisely how the
laws will be applied, particularly to new services. Penalties
for violating the federal anti-kickback law include
imprisonment, fines and exclusion from participating, directly
or indirectly, in Medicare, Medicaid and other federal
healthcare programs. Any determination by a state or federal
regulatory agency that any of our practices violate any of these
laws could subject us to civil or criminal penalties and require
us to change or terminate some portions of our business and
could have an adverse effect on our business. Even an
unsuccessful challenge by regulatory authorities of our
practices could cause us adverse publicity and be costly for us
to respond to.
Privacy Standards and Security Standards Under Health
Insurance Portability and Accountability Act of 1996
Under HIPAA, Congress mandated a package of interlocking
administrative simplification rules to establish standards and
requirements for the electronic transmission of certain health
information. Two of these rules affect our business:
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the Standards for Privacy of Individually Identifiable Health
Information, published December 28, 2000, which we refer to
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the Health Insurance Reform: Security Standards, published
February 20, 2003, which we refer to as the Security
Standards. |
These rules provide for civil and criminal liability for breach.
67
Privacy Standards. The Privacy Standards establish a set
of basic national privacy standards for the protection by health
plans, healthcare clearinghouses, healthcare providers and their
business associates of individually identifiable health
information. This rule became effective on
April 14, 2001
and the compliance date for most entities was
April 14,
2003. The Privacy Standards apply, through our contractual
relationships, to the portions of our business that manage
employee or plan member health information for employers or
health plans. The Privacy Standards provide for civil and
criminal liability for their breach and require us, our
customers and our partners to use health information in a highly
restricted manner, to establish policies and procedures to
safeguard the information, to obtain individual authorizations
for some activities, and to provide certain access rights to
individuals. We cannot assure you that we will adequately
address the risks created by the Privacy Standards or that we
will be able to take advantage of any resulting opportunities.
In addition, we are unable to predict what changes to the
Privacy Standards might be made in the future or how those
changes could affect our business.
Security Standards. On
February 20, 2003, HHS
published the final Security Standards. The Security Standards
establish detailed requirements for safeguarding patient
information that is electronically transmitted or electronically
stored. The rule establishes 42 implementation specifications,
20 of which are
“required,” meaning they must be
implemented as specified in the rule. Twenty-two are
“addressable.” Complying with addressable
implementation specifications requires a business to assess
whether they constitute a reasonable and appropriate safeguard
for the particular business; if not, an alternative approach
must be designed and implemented to achieve the particular
standard. The Security Standards apply, through our contractual
relationships, to the portions of our business that manage
employee or plan member health information for employers or
health plans. Most participants in the healthcare industry were
required to be in compliance with the Security Standards by
April 21, 2005. Some of the Security Standards are
technical in nature, while others may be addressed through
policies and procedures for using information systems. We
believe that our infrastructure and processes are in compliance
with the Security Standards. However, we are unable to predict
what changes might be made to the Security Standards prior to or
after the implementation deadline or how those changes might
help or hinder our business. The effect of the Security
Standards on our business is difficult to predict and we cannot
assure you that we will adequately address the risks created by
the Security Standards and their implementation or that we will
be able to take advantage of any resulting opportunities.
Other Restrictions Regarding Confidentiality and Privacy of
Patient Information
In addition to HIPAA, numerous other state and federal laws
govern the collection, dissemination, use, access to and
confidentiality of patient health information. In addition, some
states are considering new laws and regulations that further
protect the confidentiality of medical records or medical
information. In many cases, these state laws are not preempted
by the HIPAA Privacy Standard and may be subject to
interpretation by various courts and other governmental
authorities, thus creating potentially complex compliance issues
for us and our customers and strategic partners. These privacy
laws at a state or federal level, or new interpretations of
these laws, could create liability for us, could impose
additional operational requirements on our business, could
affect the manner in which we use and transmit patient
information and could increase our cost of doing business. In
addition, parties may also have contractual rights that provide
additional limits on our collection, dissemination, use, access
to and confidentiality of patient health information. Claims of
violations of privacy rights or contractual breaches, even if we
are not found liable, could be expensive and time-consuming to
defend and could result in adverse publicity that could harm our
business.
International Data Regulation
Other countries also have, or are developing, their own laws
governing the collection, use, storage and dissemination of
personal information or patient data. These laws could create
liability for us, impose additional operational requirements or
restrictions on our business, affect the manner in which we use
or transmit data and increase our cost of doing business.
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Consumer Protection Regulation
General. Advertising and promotional activities presented
to visitors on our
Web sites are subject to federal and state
consumer protection laws which regulate unfair and deceptive
practices. We are also subject to various other federal and
state consumer protection laws, including the ones described
below.
CAN-SPAM Act. Effective
January 1, 2004, the
Controlling the Assault of Non-Solicited Pornography and
Marketing Act of 2003, or the CAN-SPAM Act, became effective.
The CAN-SPAM Act regulates commercial emails and provides a
right on the part of the recipient to request the sender to stop
sending messages, and establishes penalties for the sending of
email messages which are intended to deceive the recipient as to
source or content. Under the CAN-SPAM Act, senders of commercial
emails (and other persons who initiate those emails) are
required to make sure that those emails do not contain false or
misleading transmission information. Commercial emails are
required to include a valid return email address and other
subject heading information so that the sender and the Internet
location from which the message has been sent are accurately
identified. Recipients must be furnished with an electronic
method of informing the sender of the recipient’s decision
to not receive further commercial emails. In addition, the email
must include a postal address of the sender and notice that the
email is an advertisement. The CAN-SPAM Act may apply to the
e-newsletters that our public portals distribute to members and
to some of our other commercial email communications. However,
there may be additional FTC regulations indicating that our
e-newsletters are outside the scope of CAN-SPAM. At this time,
we are applying the CAN-SPAM requirements to these email
communications, and believe that our email practices comply with
the requirements of the CAN-SPAM Act.
Regulation of Advertisements Sent by Fax. In 2004, the
Federal Communication Commission (FCC) issued a new
interpretation of a section of the Telephone Consumer Protection
Act that affects advertisements sent to telephone facsimile
(fax) machines. Under this new interpretation, unsolicited
advertisements which advertise the commercial availability or
quality of a product or service cannot be sent to the fax
machine of a recipient unless the recipient has signed a written
statement that includes the fax number to which these
advertisements may be sent and clearly indicates the
recipient’s consent to receive these advertisements by fax
from the sender. Previously, these advertisements could be sent
without permission to entities with whom a current business
relationship exists. However, the FCC has delayed the effective
date of the new interpretation until
June 30, 2005. We do
not send advertisements to fax machines in any significant
portions of our business. We intend to comply with the
FCC’s new interpretation effective as of the deadline.
COPPA. The Children’s Online Privacy Protection Act,
or COPPA, applies to operators of commercial
Web sites and
online services directed to U.S. children under the age of
13 that collect personal information from children, and
operators of general audience sites with actual knowledge that
they are collecting information from U.S. children under
the age of 13. Our sites are not directed at children and our
general audience site, WebMD Health, states that no one under
the applicable age is entitled to use the site. In addition, we
employ a kick-out procedure whereby anyone identifying
themselves as being under the age of 13 during the registration
process is not allowed to register for the site’s member
only services, such as message boards and live chat events.
COPPA, however, is a relatively new law, can be applied broadly
and is subject to interpretation by courts and other
governmental authorities. The failure to accurately anticipate
the application or interpretation of this law could create
liability for us, result in adverse publicity and negatively
affect our business.
Regulation of Contests and Sweepstakes. We conduct
contests and sweepstakes in some of our marketing channels. The
federal Deceptive Mail Prevention and Enforcement Act and some
state prize, gift or sweepstakes statutes may apply to these
promotions. We believe that we are in compliance with any
applicable law or regulation when we run these promotions.
Other Consumer Protection Regulation. The FTC and many
state attorneys general are applying federal and state consumer
protection laws to require that the online collection, use and
dissemination of data, and the presentation of
Web site content,
comply with certain standards for notice, choice, security and
access. Courts may also adopt these developing standards. In
many cases, the specific limitations
69
imposed by these standards are subject to interpretation by
courts and other governmental authorities. We believe that we
are in compliance with these consumer protection standards, but
a determination by a state or federal agency or court that any
of our practices do not meet these standards could result in
liability and adversely affect our business. New interpretations
of these standards could also require us to incur additional
costs and restrict our business operations.
In addition, several foreign governments have regulations
dealing with the collection and use of personal information
obtained from their citizens. Those governments may attempt to
apply such laws extraterritorially or through treaties or other
arrangements with U.S. governmental entities. We might
unintentionally violate such laws, such laws may be modified and
new laws may be enacted in the future. Any such developments (or
developments stemming from enactment or modification of other
laws) or the failure to accurately anticipate the application or
interpretation of these laws could create liability to us,
result in adverse publicity and negatively affect our businesses.
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MANAGEMENT
Directors and Executive Officers
We expect that the following persons will be our executive
officers and directors at the time of this offering:
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Co-Chief Executive Officer, President and Director |
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David Gang
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Co-Chief Executive Officer and Chief Operating Officer |
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Chairman of the Board |
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Executive Vice President and Chief Financial Officer |
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Douglas W. Wamsley
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Executive Vice President, General Counsel and Secretary |
Prior to the completion of this offering, we expect that our
Board will appoint additional members so that our Board will
consist of a majority of independent directors under applicable
SEC rules and The Nasdaq National Market listing standards.
Wayne T. Gattinella has served as President, since August
2001, and as Chief Executive Officer, since April 2005, of our
Parent’s WebMD Health segment. He is expected to serve as
Director and Co-Chief Executive Officer and President upon
completion of this offering. Previously, Mr. Gattinella was
Executive Vice President and Chief Marketing Officer for
PeoplePC, an Internet service provider, from April 2000 to
August 2001. From February 1998 to March 2000,
Mr. Gattinella was President of North America for
MemberWorks, Inc., a marketing services company.
David Gang is expected to join our Parent’s WebMD
Health segment prior to the consummation of this offering and to
serve as our Co-Chief Executive Officer and Chief Operating
Officer upon completion of this offering. Since joining America
Online, Inc., or AOL, a subsidiary of Time Warner Corporation,
and its predecessors, in 1995, Mr. Gang has served for more
than five years in senior management positions at AOL most
recently as Executive Vice President, AOL Products, where he was
responsible for creating and implementing all AOL products
shared across various platforms including narrowband, broadband,
wireless and voice and the launch of AOL 9.0 Optimized, the
latest version of AOL.
Martin J. Wygod is expected to serve as our Chairman of
the Board following this offering, and has served as our
Parent’s Chairman of the Board since March 2001 and as a
director since September 2000. From October 2000 until May 2003,
he also served as our Parent’s Chief Executive Officer.
From September 2000 until October 2000, Mr. Wygod served as
Co-Chief Executive Officer of our Parent. For more than five
years prior to its merger with our Parent in September 2000,
Mr. Wygod was Chairman of the Board and a director of
Synetic, Inc., which changed its name to Medical Manager in July
1999 when it acquired
the company of that name. He also served
as Chairman of the Board of CareInsite, Inc. from 1999 until its
acquisition by our Parent in September 2000. He is also engaged
in the business of racing, boarding and breeding thoroughbred
horses, and is President of River Edge Farm, Inc. It is expected
that Mr. Wygod will continue to serve as Chairman of the
Board of our Parent following this offering.
Anthony Vuolo is expected to serve as our Executive Vice
President and Chief Financial Officer upon the completion of
this offering. Mr. Vuolo has been Executive Vice President,
Business Development of our Parent since May 2003.
Mr. Vuolo has served in several executive positions at our
Parent and its predecessors since 1994. From September 2000 to
May 2003, Mr. Vuolo was Executive Vice President and Chief
Financial Officer of our Parent. From March 1999 until its
merger with our Parent in September 2000, Mr. Vuolo was
Senior Vice President — Business Development and
Treasurer of Synetic, Inc., which changed its name to Medical
Manager in July 1999 when it acquired
the company of that name.
Prior to
71
that, he was Executive Vice President — Finance and
Administration and Chief Financial Officer of Synetic from March
1998 until March 1999.
Douglas W. Wamsley is expected to serve as our Executive
Vice President, General Counsel and Secretary upon completion of
this offering. Mr. Wamsley has served as Senior Vice
President — Legal of
our company and Vice
President — Legal of our Parent from September 2001 to
the present. Prior to joining
our company, Mr. Wamsley
served as Executive Vice President and General Counsel of
Medical Logistics, Inc. from February 2000 through July 2001.
Prior to joining Medical Logistics, Mr. Wamsley served in
various legal positions with Merck-Managed Care LLC (now known
as Medco-Health Solutions) from December 1986 through January
2001.
Corporate Governance
Since our Parent holds over 50% of the combined voting power of
our common stock, we are eligible for certain exceptions to the
corporate governance rules of The Nasdaq National Market for
controlled corporations, including the rules relating to the
independence of our Board. However, it is currently not our
intention to avail ourselves of those exceptions. In general, we
intend to implement corporate governance structures similar to
those used by our Parent, which is not a controlled corporation.
These structures are described in this section of the
Prospectus. We also intend to adopt a Code of Business Conduct
similar to our Parent’s.
Board of Directors
Wayne T. Gattinella, our Co-Chief Executive Officer and
President, and
Martin J. Wygod are currently the only members of
the Board of Directors of
our company. Prior to the completion
of this offering, we expect that our Board will appoint
additional members so that our Board will consist of a majority
of independent directors under applicable SEC rules and The
Nasdaq National Market listing standards.
We anticipate that our
certificate of incorporation and
bylaws
will provide for our Board to be divided into classes of
directors serving staggered terms. We expect that each director
class will be as equal in number as possible, and each class
will hold office until the applicable annual stockholders’
meeting for election of directors following the most recent
election of such class. Any additional directorships resulting
from an increase in the number of directors will be distributed
among the classes so that, as nearly as possible, each class
will consist of an equal number of directors. The classification
of our Board may have the effect of delaying or preventing
changes in control or management of
our company.
Committees of the Board
In connection with this offering, our Board will form standing
committees similar to the equivalent standing committees of the
Board of our Parent, as described below, and to adopt written
charters for each such committee, other than the Executive
Committee, that are generally similar to the charter for the
equivalent standing committee of the Board of our Parent. In
addition, as described below, we intend to have a standing Board
committee consisting of independent directors who are not
members of our Parent’s Board with authority to review
transactions between us and our Parent to the extent such
committee determines to be appropriate. After this offering, our
Board may designate new committees, as it deems appropriate, to
assist with its responsibilities.
72
We expect that prior to the completion of this offering, our
Board will form an Executive Committee consisting of directors
that will have the power to exercise, to the fullest extent
permitted by law, the powers of the full Board.
Our Board will form an Audit Committee, at least one of whom
will be an “audit committee financial expert” as
defined in the rules of The Nasdaq National Market. Each member
of the Audit Committee will be financially literate at the time
such member is appointed. The composition of the Audit Committee
will satisfy the independence requirements of The Nasdaq
National Market and the SEC, without relying on any of the
exceptions available to controlled companies.
We anticipate that the Audit Committee will operate under a
written charter to be adopted by our Board, generally similar to
the charter of the Audit Committee of our Parent’s Board,
which will set forth the responsibilities and powers delegated
by our Board to the Audit Committee. We expect that the Audit
Committee will have the responsibility for, among other things:
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retaining and overseeing the registered public accounting firm
that serves as independent auditor and evaluating their
performance and independence; |
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reviewing the annual audit plan with our management and
registered public accounting firm; |
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• |
pre-approving any permitted non-audit services provided by our
registered public accounting firm; |
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• |
approving the fees to be paid to our registered public
accounting firm; |
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• |
reviewing the adequacy and effectiveness of our internal
controls with our management, internal auditors and registered
public accounting firm; |
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• |
reviewing and discussing the annual audited financial statements
and the interim unaudited financial statements with our
management and registered public accounting firm; |
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• |
approving our internal audit plan and reviewing reports of our
internal auditors; |
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• |
determining whether to approve related party
transactions; and |
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• |
overseeing the administration of our Code of Business Conduct. |
Our Board is expected to form a Compensation Committee. We
expect that each of these directors will be a non-employee
director within the meaning of Section 16 of the Exchange
Act, an outside director within the meaning of
Section 162(m) of the Internal Revenue Code and an
independent director under applicable Nasdaq National Market
listing standards.
We expect that the Compensation Committee will operate under a
written charter to be adopted by our Board, generally similar to
the charter of the Compensation Committee of our Parent’s
Board, which will set forth the responsibilities and powers
delegated by our Board to the Compensation Committee. We
anticipate that the responsibilities of the Compensation
Committee will generally include:
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oversight of our executive compensation program and our
incentive and equity compensation plans; |
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• |
determination of compensation levels for grants of incentive and
equity-based awards to our executive officers; and |
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• |
review of and making recommendations regarding other matters
relating to our compensation practices. |
73
We anticipate that our Board will designate a Nominating
Committee, with each director in such committee being an
independent director under applicable Nasdaq National Market
listing standards. It is expected that the Nominating Committee
will operate under a written charter to be adopted by our Board,
generally similar to the charter of the Nominating Committee of
our Parent’s Board, which will set forth the
responsibilities and powers delegated by our Board to the
Nominating Committee. We expect the responsibilities of the
Nominating Committee to generally include:
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identifying individuals qualified to become members of our Board; |
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• |
recommending to our Board the director nominees for each annual
meeting of stockholders; and |
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• |
recommending to our Board candidates for filling vacancies that
may occur between annual meetings. |
We expect that the Nominating Committee will adopt similar
procedures to those used by the Nominating Committee of our
Parent’s Board, which has not adopted specific objective
requirements for Board service and, instead, considers various
factors in determining whether to recommend potential new
members, or the continued service of existing members. Those
factors would generally include:
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the amount and type of the potential nominee’s managerial
and policy-making experience in complex organizations and
whether any such experience is particularly relevant to us; |
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• |
any specialized skills or experience that the potential nominee
has and whether such skills or experience are particularly
relevant to us; |
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• |
in the case of non-employee directors, whether the potential
nominee has sufficient time to devote to service on the board
and the nature of any conflicts of interest or potential
conflicts of interest arising from the nominee’s existing
relationships; |
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• |
in the case of non-employee directors, whether the nominee would
be an independent director and would be considered a
“financial expert” or “financially literate”
under applicable listing standards of The Nasdaq National Market
and applicable law; |
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• |
in the case of potential new members, whether the nominee
assists in achieving a mix of board members that represents a
diversity of background and experience, including with respect
to age, gender, race, areas of expertise and skills; and |
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• |
in the case of existing members, the nominee’s
contributions as a member of the Board during his or her prior
service. |
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Governance & Compliance Committee |
We expect that our Board will form a Governance &
Compliance Committee, consisting of at least two directors, each
of whom will be an independent director under applicable Nasdaq
National Market listing standards.
We anticipate that the Governance & Compliance
Committee will operate under a written charter to be adopted by
our Board, generally similar to the charter of the
Governance & Compliance Committee of our Parent’s
Board, which will set forth the responsibilities and powers
delegated by our Board to the Governance & Compliance
Committee. We expect the responsibilities of the
Governance & Compliance Committee will generally
include:
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• |
evaluating and making recommendations to our Board regarding
matters relating to our governance; |
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• |
assisting our Board in coordinating the activities of our
Board’s other standing committees, including with respect
to our compliance programs and provide additional oversight of
those compliance programs; and |
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• |
providing oversight of senior executive recruitment and
management development. |
74
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Related Parties Committee |
We expect that our Board will form a Related Parties Committee,
consisting of at least two directors. Each of these directors
will be an independent director under applicable Nasdaq National
Market listing standards and will not be, or ever have been, a
member of the Board of Directors of our Parent. The
responsibilities of the Related Parties Committee will include
developing and implementing procedures for approval of
transactions between us and our Parent.
Our company was formed in May 2005 to be the holding
company for our Parent’s WebMD Health segment and to
conduct this offering. We have not paid any compensation to the
persons we currently expect to be our executive officers. The
following table presents information concerning compensation for
services paid by Parent and/or its other
subsidiaries to our
Co-Chief Executive Officer and the other persons currently
expected to be our executive officers who received the most
compensation from our Parent and/or its
subsidiaries during the
year ended
December 31, 2004. In addition, the table
includes the same information for one person who formerly served
as Chief Executive Officer of our Parent’s WebMD Health
segment. The individuals listed in the table are referred to in
this prospectus as our
“named executive officers.” See
“— Compensation Arrangements with Named Executive
Officers” below for a description of existing compensation
arrangements for each of the named executive officers as well as
any change in those arrangements to become effective in
connection with this offering.
Summary Compensation Table
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Long-Term | |
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Compensation Awards | |
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Securities | |
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Annual Compensation | |
|
Parent | |
|
Underlying | |
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Restricted Stock | |
|
Parent Options | |
| Name & Principal Position |
|
Year | |
|
Salary ($) | |
|
Bonus ($) | |
|
Award(s) ($)(1) | |
|
SARs (#) | |
| |
|
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2004 |
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450,000 |
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300,000 |
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322,125 |
(2) |
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250,000 |
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Co-Chief Executive Officer,
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2003 |
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450,000 |
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125,000 |
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— |
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— |
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President and Director
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2002 |
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410,000 |
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165,000 |
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— |
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— |
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2004 |
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1,260,000 |
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402,000 |
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— |
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— |
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Chairman of the Board
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2003 |
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1,308,900 |
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— |
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— |
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— |
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2002 |
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1,400,000 |
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475,000 |
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— |
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— |
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2004 |
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450,000 |
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260,000 |
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322,125 |
(2) |
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250,000 |
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Executive Vice President and
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2003 |
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450,000 |
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— |
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— |
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— |
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Chief Financial Officer
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2002 |
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450,000 |
|
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200,000 |
|
|
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— |
|
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— |
|
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Douglas W. Wamsley
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2004 |
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200,000 |
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50,000 |
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128,850 |
(3) |
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100,000 |
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Executive Vice President,
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2003 |
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— |
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— |
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General Counsel and Secretary
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2002 |
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— |
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— |
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Roger C. Holstein(4)
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2004 |
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915,000 |
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402,000 |
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715,547 |
(5) |
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— |
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Former Chief Executive
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2003 |
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861,538 |
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— |
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— |
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500,000 |
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Officer
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2002 |
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480,000 |
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450,000 |
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— |
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1,000,000 |
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| (1) |
Holders of restricted shares of our Parent common stock (which
we refer to as Restricted Parent Stock) have voting power and
the right to receive dividends, if any are declared on our
Parent common stock, with respect to shares of Restricted Parent
Stock, but their ability to sell shares of Restricted Parent
Stock is subject to vesting requirements based on continued
employment, as described in the footnotes below. The dollar
value of Restricted Parent Stock listed in this column is
calculated by multiplying the number of shares granted by the
closing market price on the date of each grant, as described in
the footnotes below. |
75
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| (2) |
The dollar value listed in the table is based on $8.59 per
share, the closing market price of our Parent common stock on
March 17, 2004, the date of grant of 37,500 shares of
Restricted Stock, of which (a) 12,500 shares vested on
March 17, 2005, (b) 12,500 shares will vest on
March 17, 2006 and (c) 12,500 shares will vest on
March 17, 2007, subject to the terms of the plans and award
agreements. As of December 31, 2004, the aggregate value of
the 37,500 shares of Restricted Stock, all of which were
unvested at that date, was $306,000, based on the closing market
price of $8.16 per share of our Parent common stock on that
date. |
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| (3) |
The dollar value listed in the table is based on $8.59 per
share, the closing market price of our Parent common stock on
March 17, 2004, the date of grant of 15,000 shares of
Restricted Stock, of which (a) 5,000 shares vested on
March 17, 2005, (b) 5,000 shares will vest on
March 17, 2006 and (c) 5,000 shares will vest on
March 17, 2007 subject to the terms of the plans and award
agreements. As of December 31, 2004, the aggregate value of
the 15,000 shares of Restricted Stock, all of which were
unvested at that date, was $122,400, based on the closing market
price of $8.16 per share of our Parent common stock on that date. |
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| (4) |
Mr. Holstein was Chief Executive Officer of our
Parent’s WebMD Health segment from October 2004 until his
resignation in April 2005. |
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| (5) |
The dollar value listed in the table is based on $8.59 per
share, the closing market price of our Parent common stock on
March 17, 2004, the date of grant of 83,300 shares of
Restricted Stock, of which (a) 27,766 shares vested on
March 17, 2005, (b) 27,767 shares had a vesting
date of March 17, 2006 and (c) 27,767 shares had
a vesting date of March 17, 2007. As of December 31,
2004, the aggregate value of the 83,300 shares of
Restricted Stock, all of which were unvested at that date, was
$679,728, based on the closing market price of $8.16 per
share of our Parent common stock on that date. Effective as of
April 27, 2005, the date of Mr. Holstein’s
resignation from our Parent, all unvested restricted stock held
by Mr. Holstein was forfeited. |
In accordance with SEC rules, the above table does not include
certain perquisites and other benefits received by the named
executive officers, which do not exceed the lesser of $50,000
and 10% of any officer’s salary and bonus disclosed in this
table. In each of the years covered in the above table, none of
the named executive officers received more than $15,000 in
perquisites or other benefits and most of such benefits
consisted of automobile allowances.
The following table presents information concerning the options
to purchase our Parent’s common stock granted during the
fiscal year ended
December 31, 2004 to the named executive
officers for services rendered to our Parent and its
subsidiaries. Such options and other equity awards will continue
to be governed by the terms and conditions of our Parent’s
equity plans under which they were granted.
Parent Option Grants in 2004
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Individual Grants | |
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Number of | |
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Percent of Total | |
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Securities | |
|
Parent Options | |
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|
Underlying | |
|
Granted to | |
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Exercise or | |
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Parent Options | |
|
Employees in | |
|
Base Price | |
|
Expiration | |
|
Grant Date Present | |
| Name |
|
Granted (#) | |
|
2004(1) | |
|
($/Share) | |
|
Date | |
|
Value ($)(2) | |
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250,000 |
(3) |
|
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1.3 |
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8.59 |
|
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3/17/2014 |
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1,163,025 |
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— |
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— |
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— |
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— |
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— |
|
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250,000 |
(3) |
|
|
1.3 |
|
|
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8.59 |
|
|
|
3/17/2014 |
|
|
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1,163,025 |
|
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Douglas W. Wamsley
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100,000 |
(3) |
|
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0.5 |
|
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8.59 |
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3/17/2014 |
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465,210 |
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Roger C. Holstein
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— |
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— |
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