Markets

WebMD CEO Accused of Hiding Ad Losses From Investors

By Jim Edwards

Updated on: August 5, 2011 / 8:19 AM EDT / MoneyWatch

WebMD (WBMD) CEO Wayne Gattinella knew Big Pharma companies were pulling back on their plans to advertise on his site and magazine but let investors think they were in for a rosy year, according to a shareholder class action suit. The suit relies entirely on the timing of statements Gattinella made about WebMD's projected ad revenue in May, which were followed by a reduction in revenue guidance for 2011 in July.

The suit, in quoting Gattinella, also says something about the marketing plans of major pharmaceutical companies: That many are increasingly reluctant to advertise online because the FDA has stalled on publishing long-promised social media/Web 2.0 guidelines.

Here's the timeline, per the suit:

Feb 23, 2011: In WebMD's press release for Q4 2010, Gattinella says revenue for 2011 is expected to come in at $610-$640 million, up 14 percent.
April 12, 2011: WebMD reaffirmed its 2011 guidance. In fact, the suit alleges, sponsors were already cancelling or pulling back on plans to advertise on WebMD, the suit claims.
May 5, 2011: WebMD again reaffirms its 2011 guidance of a 14 percent revenue gain. But in a transcript of his comments to analysts reproduced in the suit, Gattinella made the oddly contradictory point that his advertisers might be reducing their spend (click to enlarge):

July 18, 2011: In his Q2 2011 earnings announcements, Gattinella reduces his 2011 guidance to $580-$600 million, repeating his sentiment from Q1 that the FDA regulatory review and ad cancellations were to blame.

Between May and July WBMD fell 42 percent to $32.48. Most of that loss followed the reduction in revenue guidance, the suit says. Not making things look good: COO/CFO Anthony Vuolo sold $3.4 million in shares prior to the collapse, and insiders at WebMD dumped $44.7 million in stock generally, the suit claims.

One interesting controversy in the suit is that Gattinella's statements about advertiser plans weren't exactly insider information: It's long been known by anyone following the industry that drug companies are frustrated by the lack of legal guidelines for promoting drugs on the internet. And it's also well known that a lot of big-spending drug brands are going to blip out of existence in the next year or so as their patents expire. Both those dynamics could be expected to reduce drug company ad budgets.

Why Gattinella thought WebMD would pile on a 14 percent sales gain at the same time as admitting WebMD wasn't immune from the industry-wide trend is something the lawyers will no doubt figure out. WebMD has yet to respond to the suit.

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