WebMD: Blame It on the Drugs

Blame it on the drugs. That is essentially the message that Cavan Redmond, new CEO for health information services provider WebMD Health (Nasdaq: WBMD) , gave in the company's earnings conference call following poor quarterly results.

Redmond, hired away from Pfizer (NYSE: PFE) just two months ago, had the unenviable task in his inaugural earnings call of explaining why WebMD's revenue and earnings declined sharply during the second quarter. He pointed primarily to reduced advertising spending by major biopharmaceutical customers due to expiring drug patents.

Is this really the main cause of WebMD's woes? Let's take a look.

Fading brands Mr. Redmond certainly makes a good point about many heavy-hitter drugs going off patent. Pfizer lost exclusivity for Lipitor and Protonix in 2011. The two drugs combined for $6 billion in U.S. sales in 2010. Johnson & Johnson (NYSE: JNJ) lost its U.S. patent protection for antibiotic Levaquin and ADHD/ADD drug Concerta. These two accounted for over $2.2 billion in sales.

Several blockbuster drugs lose patent protection in 2012 as well. Bristol-Myers Squibb (NYSE: BMY) says goodbye to exclusivity for Plavix, which topped $7 billion in sales last year. Merck (NYSE: MRK) loses protection for Singulair. The asthma drug brought in nearly $5.5 billion in 2011. And there are more to come.

Large pharmaceutical companies like these comprise WebMD's primary revenue source. As they spend less on marketing for drugs that go off patent, advertising revenue for WebMD goes down.

What about new drugs coming into the market? The trouble on that front, according to Redmond, is that 44% of new product applications in the U.S. so far this year have either been delayed or not approved.

Budgeting 101 WebMD's contention that revenue is being hurt by the travails of their large pharmaceutical customers appears to be based on facts. However, there is another fundamental problem that the company faces.

WBMD Revenue TTM data by YCharts.

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WebMD: Blame It on the Drugs