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WebMD scraps sale talks, warns of weak 2012

By Lewis Krauskopf

(Reuters) - Popular health information website WebMD Health Corp took itself off the auction block and warned investors of lower 2012 profits as its advertisers in the drug industry pull back on spending.

Shares of WebMD, in which activist investor Carl Icahn owns a nearly 10 percent stake, tumbled 27.4 percent on the news.

WebMD, which had a market value of just over $2 billion as of Monday, also said on Tuesday its chief executive, Wayne Gattinella, had resigned. Anthony Vuolo, currently chief financial officer and chief operating officer, will serve as interim CEO.

The moves come after buyout discussions with several private equity firms failed to produce a deal, according to two people familiar with the matter.

WebMD is one of the best-known websites for consumers seeking health information on everything from allergies to cancer to better eating habits.

The company relies on advertising from drugmakers, who are now trying to curb expenses as they face generic competition to many of their top-selling medicines. For example, Pfizer Inc lost patent protection on cholesterol fighter Lipitor in November, while Bristol-Myers Squibb Co and Sanofi SA are set to lose U.S. exclusivity on blood clot preventer Plavix later this year.

"They were growing 20 percent. Now they're going through a rough patch where revenue is actually declining," Cowen & Co analyst Kevin Kopelman said. "This isn't a going concern problem. This is a very strong company with an incredible brand in the U.S. and a huge user base, and they're generating a lot of money."

To some extent, WebMD's status as a premium online brand, and the high advertising rates that it can charge, are forcing more cost-conscious advertisers to look twice at their spending on the site, he said.

A more difficult regulatory environment has also made it tougher for drugmakers to launch new ad programs, Kopelman said, compounding the problems for WebMD.

While a number of new medicines have received U.S. Food and Drug Administration approval for sale in the United States, WebMD does not expect advertising for those drugs to pick up significantly this year.

WebMD is also grappling with competition from myriad other websites that offer health tips and information on illnesses.

INVESTMENT NEEDS UP AS REVENUE DECLINES

WebMD Chairman Martin Wygod expects drugmakers, who have been among the biggest advertisers on more expensive media such as television, will eventually recognize the value of using outlets online.

"I believe that the pressures facing the pharmaceutical industry will ultimately prove to be the strong catalyst for a meaningful shift by them to digital marketing solutions," Wygod, who holds a nearly 2 percent stake, said in a statement. "WebMD offers a cost-effective, efficient and highly measurable alternative to traditional detailing to physicians and mass media to consumers."

For 2012, the company expects revenue to fall between 2 percent and 8 percent and it expects increased competition in its consumer products market.

The company also expects expenses to rise by 5 percent to 8 percent in 2012 due to longer-term investments in mobile and international platforms, as well as new advertiser products. With the higher expenses and lower revenue, WebMD said it expects net income will be "significantly lower" compared with 2011.

The performance is a sharp turnaround for WebMD, Kopelman said, noting that the company has almost $300 million in net cash.

"A lot of companies in this space are recognizing that advertising is a more challenging area," said Richard Forman, managing director of New York-based Health Venture Group, an investor in doctor-selection service Vitals.com.

Barclays Capital analyst Mark May said the forecast marked WebMD's third negative announcement related to the company's performance since July and the new 2012 projection is "significantly below our already below-consensus estimates."

"Fundamentals could remain choppy" given patent expirations on products extending through 2013, May said in a research note.

Founded in 1995 by James Clark, the Chairman of pioneering Web browser company Netscape, the company was originally called Healthscape and has undergone various permutations since its inception.

The company, which had a blockbuster IPO in 1999, initially focused on connecting the convoluted healthcare industry to the Internet, by creating a way for doctors, patients and insurance companies to access health records and process transactions online. In 2000, Healtheon merged with Atlanta-based WebMD, which developed online health information portals.

The WebMD website drew 25.4 million unique visitors in December 2011 and ranked as the U.S.'s No.2 most visited site in the Health category, behind Everyday Health, according to market research firm comScore.

WebMD said it started a process to consider strategic alternatives late last year that resulted in talks with several potential suitors. But a special committee of the board has now ended those discussions and has halted the process of reviewing a potential sale, WebMD said on Tuesday.

A source advising one of the private equity firms that looked at WebMD said: "They started a limited process with just a few people and then they opened it up to more buyers. Our guys were banging on the door to get in, they were really keen. But WebMD's management was never really forthcoming with information so they did not get the high offers they could, I think. It does not make sense. I think they did all this just to appease Icahn."

Credit Suisse had been advising the company in its sale process, according to another source close to the matter.

Aside from Icahn, who was not immediately available for comment, Kensico Capital Management is the top WebMD shareholder, with an 11.6 percent stake, according to Thomson Reuters data. Mutual fund company Vanguard Group and Calpers, the biggest U.S. public pension fund, are among other big holders.

(Additional reporting by Nadia Damouni in New York, Sarah McBride in San Francisco, Alistair Barr and Alexei Oreskovic in San Francisco, and Esha Dey in Bangalore; editing by Michele Gershberg, John Wallace, Gerald E. McCormick and Andre Grenon)

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