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WebMD Health 10-K 2010
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the fiscal year ended December 31, 2009
or
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from          to          
 
Commission file number: 0-51547
 
 
 
 
 
     
Delaware   20-2783228
(State of incorporation)   (I.R.S. Employer Identification No.)
     
111 Eighth Avenue
New York, New York
  10011
(Zip code)
(Address of principal executive office)
   
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
     
Title of each class
 
Name of each exchange on which registered
 
Common Stock, par value $0.01 per share   The Nasdaq Stock Market LLC (Global Select Market)
 
Securities registered pursuant to Section 12(g) of the Act: Not Applicable
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  Yes o     No þ
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o     No þ
 
As of June 30, 2009, the aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant was approximately $265,246,000 (based on the closing price of the Common Stock of $29.92 per share on that date, as reported on the Nasdaq Global Select Market and, for purposes of this computation only, the assumption that all of the registrant’s directors and executive officers are affiliates).
 
As of February 25, 2010, there were 53,335,742 shares of Common Stock outstanding (including unvested shares of restricted Common Stock).
 
 
Certain information in the registrant’s definitive proxy statement to be filed with the Commission relating to the registrant’s 2010 Annual Meeting of Stockholders is incorporated by reference into Part III.
 


 

 
 
                 
        Page
 
    ii  
    iii  
 
PART I
      Business     1  
      Risk Factors     29  
      Unresolved Staff Comments     43  
      Properties     43  
      Legal Proceedings     43  
      [Reserved]     43  
 
PART II
      Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     44  
      Selected Financial Data     47  
      Management’s Discussion and Analysis of Financial Condition and Results of Operations     49  
      Quantitative and Qualitative Disclosures about Market Risk     72  
      Financial Statements and Supplementary Data     73  
      Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     73  
      Controls and Procedures     73  
      Other Information     74  
 
PART III
      Directors, Executive Officers and Corporate Governance     75  
      Executive Compensation     75  
      Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     75  
      Certain Relationships and Related Transactions, and Director Independence     75  
      Principal Accountant Fees and Services     75  
 
PART IV
      Exhibits and Financial Statement Schedule     76  
    77  
    F-1  
    E-1  
 EX-10.71
 EX-10.72
 EX-10.73
 EX-12.1
 EX-21.1
 EX-23.1
 EX-23.2
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-99.1
 EX-99.2
 EX-99.3
 EX-99.4
 
WebMD®, Medscape®, CME Circle®, Medpulse®, eMedicine®, MedicineNet®, theheart.org®, RxList®, Select Quality Care®, Summex®, Medsite® and WebMD Health and Benefits Managersm are among the trademarks of WebMD Health Corp. or its subsidiaries.


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This Annual Report on Form 10-K contains both historical and forward-looking statements. All statements other than statements of historical fact are, or may be, forward-looking statements. For example, statements concerning projections, predictions, expectations, estimates or forecasts and statements that describe our objectives, future performance, 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 can generally be identified by the use of expressions such as “may,” “will,” “should,” “could,” “would,” “likely,” “predict,” “potential,” “continue,” “future,” “estimate,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” and other similar words or phrases, as well as statements in the 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. The following important risks and uncertainties could affect our future results, causing those results to differ materially from those expressed in our forward-looking statements:
 
  •  failure to achieve sufficient levels of usage of our public and private portals;
 
  •  the inability to successfully deploy new or updated applications or services;
 
  •  competition in attracting consumers and healthcare professionals to our public portals and competition for advertisers and sponsors for our public portals;
 
  •  events or conditions that have a negative effect on promotional or educational spending by pharmaceutical and biotechnology companies or on the portion of that spending used for Internet-based services like ours;
 
  •  the inability to attract and retain qualified personnel;
 
  •  adverse economic conditions and disruptions in the capital markets;
 
  •  adverse changes in general business or regulatory conditions affecting the healthcare, information technology and Internet industries; and
 
  •  the Risk Factors described in Item 1A of this Annual Report.
 
These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other factors, including unknown or unpredictable ones, also could have material adverse effects on our future results.
 
The forward-looking statements included in this Annual Report on Form 10-K are made only as of the date of this Annual Report. Except as required by law or regulation, we do not undertake any obligation to update any forward-looking statements to reflect subsequent events or circumstances.
 
 
 


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In this Annual Report, we provide information regarding usage of The WebMD Health Network that we have determined using internal technology that identifies and monitors usage by individual computers and other electronic devices used to access the Internet (which we refer to, collectively, as electronic devices). As used in this Annual Report:
 
  •  A “unique user” or “unique visitor” during any calendar month is an individual electronic device that accesses a Web site in The WebMD Health Network during the course of such calendar month, as determined by our tracking technology. Accordingly, with respect to such calendar month, once an individual electronic device accesses that Web site in The WebMD Health Network, that electronic device will generally be included in the total number of unique users or visitors for that month. Similarly, with respect to any calendar month, an electronic device accessing a specific Web site in The WebMD Health Network may only be counted once as a single unique user or visitor regardless of the number of times such electronic device accesses that Web site or the number of individuals who may use such electronic device. However, if that electronic device accesses more than one site within The WebMD Health Network during a calendar month, it will be counted once for each such site. An electronic device that does not access any of the Web sites in The WebMD Health Network during a particular calendar month is not included in the total number of unique users or visitors for that calendar month, even if such electronic device has, in the past, accessed one or more of these Web sites. In addition, if an electronic device blocks our tracking technology, it will be counted as a unique user or visitor in a particular month each time it visits one of our Web sites.
 
  •  A “page view” is a Web page that is sent to the browser of an electronic device upon a request made by such electronic device and received by a server in The WebMD Health Network. The number of “page views” in The WebMD Health Network is not limited by its number of unique users or visitors. Accordingly, each unique user or visitor may generate multiple page views.
 
  •  With respect to any given time period, “aggregate page views” are the total number of “page views” during such time period on all of the Web sites in The WebMD Health Network.
 
Third party services that measure usage of Internet sites may provide different usage statistics than those reported by our internal tracking technology. These differences may occur as a result of differences in methodologies applied and differences in measurement periods. For example, third party services typically apply their own proprietary methods of calculating usage, which may include surveying users and estimating site usage based on surveys, rather than based upon tracking such usage.
 
Our private portals are licensed to employers and health plans for use by their employees and members. These private portals are not part of The WebMD Health Network, do not involve advertising or sponsorship by third parties, and their users and page views are not included in measurements of The WebMD Health Network’s traffic volume.

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PART I
 
Item 1.   Business
 
INTRODUCTION
 
 
WebMD Health Corp. is a Delaware corporation that was incorporated on May 3, 2005 under the name WebMD Health Holdings, Inc. Our principal executive offices are located at 111 Eighth Avenue, New York, New York 10011 and our telephone number is (212) 624-3700.
 
Our Class A Common Stock began trading on the NASDAQ National Market under the symbol “WBMD” on September 29, 2005 and later moved to the NASDAQ Global Select Market. On October 23, 2009, we completed a merger (which we refer to as the Merger) with HLTH Corporation, with WebMD continuing as the surviving corporation and each share of HLTH Common Stock being converted into 0.4444 shares of WebMD Common Stock. In the Merger, the outstanding shares of WebMD’s Class B Common Stock (all of which were held by HLTH) were cancelled. The shares of WebMD Class A Common Stock were unchanged in the Merger and continue to trade on the NASDAQ Global Select Market under the symbol “WBMD”; however, they are no longer referred to as “Class A” because the Merger eliminated both the Class B Common Stock held by HLTH and the dual-class stock structure that had existed at our company. For more information regarding the Merger and a description of the accounting treatment for the transaction, see Note 1 to the Consolidated Financial Statements included in this Annual Report.
 
 
We are a leading provider of health information services to consumers, physicians and other healthcare professionals, employers and health plans through our public and private online portals and health-focused publications. 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, to locate physicians, to store individual healthcare information, to assess their personal health status, to receive periodic e-newsletters and alerts on topics of individual interest, and to participate in online communities with peers and experts;
 
  •  enable physicians and other healthcare professionals to access clinical reference sources, to stay abreast of the latest clinical information, to learn about new treatment options, to earn continuing medical education (or CME) and continuing education (or CE) credit and to 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.
 
Public Portals.  The WebMD Health Network includes www.WebMD.com (which we sometimes refer to as WebMD Health), our primary public portal for consumers, and www.Medscape.com (which we sometimes refer to as Medscape from WebMD), our primary public portal for physicians and other healthcare professionals, as well as other sites through which we provide our branded health and wellness content, tools and services and select third party sites that WebMD supports. The WebMD Health Network does not include our private portals for employers and health plans, which are described below. In 2009, The WebMD Health Network had an average of approximately 61 million unique users per month and generated approximately six billion aggregate page views, and WebMD-owned sites accounted for approximately 95% of the unique users and approximately 98% of the page views.
 
WebMD Health and our other consumer portals help consumers take an active role in managing their health by providing objective healthcare and lifestyle information. Our content offerings for consumers include access to health and wellness news articles and features and decision-support services that help them make better informed decisions about treatment options, health risks and healthcare providers. Medscape from


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WebMD and our other portals for healthcare professionals help them improve their clinical knowledge and practice of medicine. The original content of our professional sites, which includes daily medical news, commentary, conference coverage, expert columns and CME activities, is written by authors from widely respected clinical and academic institutions and edited and managed by our in-house editorial staff.
 
Our public portals generate revenue primarily through the sale of advertising and sponsorship products, as well as CME services that are described below. We do not charge user fees for access to our public portals. We develop sponsored programs that target specific groups of health-involved consumers, clinically active physicians and other healthcare professionals and place these programs on the most relevant areas of The WebMD Health Network so that our advertisers and sponsors are able to reach, educate and inform these target audiences. Our advertisers and sponsors consist primarily of pharmaceutical, biotechnology and medical device companies and consumer products companies whose products relate to health, wellness, diet, fitness, lifestyle, safety and illness prevention. We also publish WebMD the Magazine, a consumer publication that we distribute free of charge to physicians for use in their office waiting rooms.
 
Private Portals.  Our private portal services enable employees and health plan members to make more informed benefit, treatment and provider decisions. We provide a secure, personalized user experience by integrating individual user data (including personal health information) and plan-specific data from our employer or health plan clients with decision-support applications and personal communication services. We also integrate into our private portals much of the content that we make available through our public portals. Our private portal applications are typically accessed through a client’s Web site or intranet and provide secure access for employees and plan members. We generate revenue from our private portals primarily through the licensing of our products to employers and health plans, either directly or through our distributors. We also offer telephone coaching services on a per participant basis across a population (employer or plan). Our private portals do not display or generate revenue from advertising or sponsorship.
 
 
We make available free of charge at www.wbmd.com (in the “Investor Relations” section) copies of materials we file with, or furnish to, the Securities and Exchange Commission, or SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports, as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the SEC.


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PUBLIC PORTALS
 
Overview of The WebMD Health Network
 
Our content and services have made our public portals the leading online health information destinations for consumers, physicians and other healthcare professionals. In 2009, The WebMD Health Network had an average of approximately 61 million unique users per month and generated approximately six billion aggregate page views.
 
Owned Web Sites.  During 2009, WebMD-owned sites accounted for approximately 95% of The WebMD Health Network’s unique users and approximately 98% of its page views. The following provides a brief description of the WebMD-owned public portals in The WebMD Health Network:
 
     
Consumer Portal Site
  Description
 
www.webmd.com
  WebMD Health, our flagship consumer portal.
www.medicinenet.com
  A health information site for consumers offering content that is written and edited by practicing physicians, including an online medical dictionary with thousands of medical terms.
www.rxlist.com
  An online drug directory with over 2,000 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).
www.emedicinehealth.com
  A health information site for consumers offering articles written and edited by physicians for consumers, including first aid and emergency information that is also accessible at firstaid.webmd.com.
Professional Portal Site
   
www.medscape.com
  Medscape from WebMD, our flagship Web site for physicians and other healthcare professionals.
www.medscapecme.com
  The Web site through which Medscape, LLC distributes online CME and CE to physicians and other healthcare professionals.
www.theheart.org
  One of the leading cardiology Web sites, known for its depth and breadth of content in this area.
 
Third Party Sites.  The WebMD Health Network also includes certain third party Web sites that WebMD supports. Those third party sites accounted for approximately 2.0% of the total page views on The WebMD Health Network during 2009. WebMD sells the advertising and program content on the areas of the third party Web sites that WebMD supports. Effective January 1, 2010, drugs.com became part of The WebMD Health Network. drugs.com provides free, accurate and independent information on prescription drugs, over-the-counter medicines and natural products.
 
Consumer Portals
 
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 costs 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. According to a study of health information technology by the National Center for Health Statistics of the Centers for Disease Control and Prevention (or CDC), approximately 51% of United States adults aged 18-64 had used the Internet to look up health information during the prior 12 months, based on a survey


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conducted in the first half of 2009. According to a June 2009 study by the Pew Internet & American Life Project, 61% of U.S. adults (or 83% of those who use the Internet) had searched for health information on the Internet, compared to 25% of U.S. adults in a similar study in 2000, and approximately 37% of U.S. adults had accessed social media related to health.
 
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 in The WebMD Health Network provide our users with information, tools and applications in a variety of content formats. These content offerings include access to news articles and features, special reports, interactive guides, originally produced videos, self-assessment questionnaires, expert led Q&As, community discussions, and encyclopedic references. Our in-house staff, which includes professional writers, editors, designers and board-certified physicians, creates content for The WebMD Health Network. Our in-house staff is supplemented by medical advisors and authors from widely respected academic and clinical institutions. The news stories and other original content and reporting presented in The WebMD Health Network are based on our editors’ selections of the most important and relevant public health events occurring on any given day, obtained from an array of credible 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 content of our Web sites, including licensed content and reference-based content.
 
We regularly make changes to the design of WebMD Health and our other consumer portals in order to increase visitor engagement with our content and to make it easier for users to navigate within our sites and find information. We test potential changes in design before they are made in order to determine if such changes are likely to result in, among other things, increased numbers of page views, video streams, slide show views or searches in a visitor session and increased repeat visits by our users.
 
Key Features of WebMD Health.  WebMD Health includes the following key features:
 
     
Feature
  Description
 
WebMD News Center
  Daily health news articles that are written by health journalists and reviewed by our professional staff. Content focuses on “news you can use” and the article topics reflect national news stories of interest in the popular media that day with original perspective from health and medical experts.
WebMD Editorial Features
  Comprehensive content focusing on major health issues that are in the news or otherwise contemporary, with emphasis on health trends and national health issues.
WebMD Daily
  Originally produced multi-media content served on our custom video player. WebMD Daily delivers a three to five minute health-related video of real patient stories and expert interviews, among other things, and includes narration, graphics and links to additional content on a given health topic. Sponsors are able to stream promotional messages within the video feature itself and within the surrounding viewing area.


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Feature
  Description
 
WebMD Health Centers
  WebMD Health Centers are centralized locations for content and services for both WebMD Health editorial offerings and sponsor offerings focusing on topics related to health, wellness and lifestyle. Each Health Center features newly organized and medically reviewed information and enables the user to easily locate the top articles, news, community features and health assessments for each topic. We also provide users an alphabetical listing of all Health Centers and other collections of articles, organized by specific health conditions and concerns, known as Health A-Z.
WebMD Health Guides
  Anchored within each Health Center, WebMD Health Guides are designed to guide users through the most current symptom, diagnosis, treatment and care information related to a particular health topic. These unique guides were created by our editorial staff of professional health writers in collaboration with our proprietary physician network.
WebMD Videos A-Z
  Included in the Health Centers are broadcast-quality health videos featuring real stories and expert interviews.
Slideshows
  Our slideshows are designed to educate users on specific conditions and other health topics in an engaging, visually rich format.
General Medical Information
  Our medical library allows consumers to research information relating to diseases and common health conditions by providing searchable access and easy-to-read content, including:
    — self-care articles
   
— drug and supplement references from leading
 publications, including First DataBank®
    — clinical trials and research study information
    — a patient’s guide to medical tests
   
— interactive, illustrated presentations that visually explain common health conditions and diseases
    — a medical dictionary
    — doctors’ views on important health topics
WebMD Healthy Pets
  The WebMD Healthy Pets site on WebMD.com, launched in October 2009, helps owners care for their cats and dogs with veterinarian-reviewed information on pet diet and nutrition, behavior and training, and preventive care. The site includes the WebMD Healthy Pets online newsletter, as well as interactive slideshows, videos and expert blogs to assist owners with daily decisions for their pet’s well-being. WebMD’s pet wellness information allows owners to take an active role in managing their pet’s health. WebMD Healthy Pets also focuses on the human health benefits of owning a pet, such as lower blood pressure and less anxiety, as well as the impact pets can have on health conditions such as allergies and asthma.

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Decision-Support Services and Other Online Tools.  Our decision-support services and other online tools help consumers make better-informed decisions about treatment options, health risks and healthcare providers, and assist consumers in their management and monitoring, on an ongoing basis, of personal health goals, specific conditions and treatment regimens.
 
     
Feature
  Description
 
WebMD HealthCheck
  Clinical, algorithm-based self assessments for major conditions yielding a personalized risk score based upon the user’s individual characteristics (e.g., gender, age, behavioral risks, heredity), along with customized recommendations for further education, potential treatment alternatives and a summary report to share with the user’s physician.
Symptom Checker
  An interactive graphic interface with advanced clinical decision-support rules that allow users to pinpoint potential conditions associated with their physical symptoms, gender and age. The Symptom Checker was created by an experienced group of physicians trained in the development of clinical decision-support applications.
Healthy Eating and Diet
  An educational channel focusing on diet, food, and fitness, designed to help users attain their goals in personal health, fitness and weight management. The channel includes expert interviews, diet assessment, a personal planner, a food database for nutritional information, as well as calculators, portion help, and a member area for discussion boards, blogs and user support.
First Aid & Emergencies
  Directs users to educational and treatment information that may be useful in the event of certain medical emergencies. Also included in this resource is a First Aid A-Z glossary of terms.
Tests & Tools
  Provides access to interactive calculators and quizzes to assess or demonstrate health topics, including a target heart rate calculator, body mass index calculator, pregnancy calculator and ovulation calendar.
Drugs & Treatments
  Users can search for information about prescription and over-the-counter medications by brand or generic name, or by condition. We also recently launched Drug Insights, a community product that allows consumers to anonymously review and share their personal experiences with individual prescription products.
WebMD Physician Finder
  Enables users to find and make an appointment with a physician based on the physician or practice name, specialty, zip code and distance.
WebMD Health Manager
  A free online service featuring a personal health record (a secure application that assists consumers in gathering, storing, and sharing essential health data in one centralized location), secure message center, personal health risk assessments for overall health, condition-specific trackers, 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.


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WebMD Mobile.  WebMD Mobile allows consumers to access certain WebMD tools on an iPhone, including Symptom Checker, First Aid, and Pill Identifier applications, as well as other health information. It has been downloaded more than 1.5 million times since launch and is the leading free health application in the iTunes Store.
 
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, where they can share experiences and exchange information with other members who share common health conditions or concerns. There are no membership fees and no usage charges for our consumer portals.
 
     
Feature
  Description
 
Community Centers
  Community Centers are designed to allow members to share their experiences and exchange information with other members with similar health conditions or concerns. Community Centers may include blogs, moderated message boards and posted member columns.
e-Newsletters
  Our selection of e-Newsletters allows consumers to choose to receive regular updates on topics targeted to their particular health concerns and on general health-related subjects based on their interests.
Expert Blogs
  Expert healthcare professionals and non-healthcare professional members alike chronicle their experience in these online “journals.”
“Ask an Expert”
  Health and wellness forums within which users can post their health questions and receive support and information from health experts, moderators and other members.
 
We will be launching a major new initiative in social networking called The WebMD Health Exchange in 2010. The WebMD Health Exchange will build on the hundreds of health communities that exist on WebMD Health today and will more closely integrate the social experience throughout our core health content areas. The WebMD Health Exchange will give consumers the opportunity to explore a health or wellness topic on their own terms by participating in WebMD expert moderated communities or by creating their own public community or invitation-only private community. The WebMD Health Exchange will leverage the knowledge and credibility of leading experts from renowned medical institutions where consumers can discuss personal challenges and get responses, insights and support. We expect that The WebMD Health Exchange will be an important new information source for our users and a powerful new communications platform for our sponsors.
 
WebMD the Magazine.  WebMD the Magazine is delivered free of charge to physicians in the United States for use in their office waiting rooms and reaches consumers right before they meet with their physicians. This allows sponsors to extend their advertising reach and to deliver their message when consumers are actively engaged in the healthcare process, and allows us to extend the WebMD brand into offline channels. The editorial format of WebMD the Magazine is specifically designed for the physician’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. The editorial content in the magazine is medically reviewed and approved by WebMD staff physicians.
 
 
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. We believe that our professional portals, which include Medscape from WebMD, MedscapeCME and


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theheart.org, reach more physicians than any other network of Web sites for healthcare professionals. We believe that we are well positioned to increase usage by existing and new members because we offer physicians and other healthcare professionals a broad range of current clinical information and resources. We expect that Medscape from WebMD, MedscapeCME and our other professional portals will continue to benefit from the general trend towards increased reliance on, and usage of, the Internet by physicians and other healthcare professionals.
 
There are no membership fees and no general usage charges for our professional portals. However, users must register to access the full array of content and features of our professional portals. We generate revenue from our professional portals by selling advertising and sponsorship programs primarily to companies that wish to target physicians and other healthcare professionals, and also through educational grants.
 
Medscape from WebMD.  Medscape from WebMD (www.medscape.com) enables physicians and other healthcare professionals to stay abreast of the latest clinical information through access to resources that include:
 
  •  timely medical news relating to a variety of specialty areas and coverage of professional meetings and conferences;
 
  •  full-text medical journal articles and reference content, including a comprehensive drug reference; and
 
  •  video and written commentary from leading medical experts.
 
Medscape from WebMD’s original content includes daily medical news, commentary, conference coverage, and expert columns written by our in-house news team and authors from widely respected academic and clinical 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. Medscape from WebMD develops the majority of its content internally and supplements that with third party content in areas such as drug information and full-text journal articles.
 
Medscape from WebMD is organized by physician specialty and profession, and also includes areas for nurses, pharmacists, medical students, and members interested in medical policy and business of medicine topics. Registration by users enables us to deliver targeted medical content based on such users’ registration profiles. The registration process also enables professional members to choose a home page tailored to their medical specialty or interest. Medscape from WebMD offers more than 30 specialty areas for its members. Medscape from WebMD members receive MedPulse®, a weekly e-mail newsletter, which is published in more than 30 specialty-specific editions and highlights new information on the Medscape from WebMD site.
 
Medscape from WebMD also publishes online medical reference information for physicians and other healthcare professionals, at emedicine.medscape.com. Thousands of attributed physician authors and editors contribute to the Clinical Knowledge Base, which contains peer-reviewed articles on over 6,500 diseases and disorders, many of which are illustrated with multimedia files. The evidence-based content, updated regularly by the physician authors and editors, provides practice information covering most medical specialties.
 
theheart.org Cardiology Site. theheart.org (www.theheart.org) is one of the leading cardiology Web sites, known for its depth and breadth of content in this area. theheart.org’s content includes the award-winning Heartwire news service, which covers breaking news across all the major subspecialties of cardiology. theheart.org also provides extensive video commentary from leading cardiologists, including in-depth panel discussions at the conclusion of major cardiology meetings. CME activities on theheart.org are developed and certified by Medscape LLC.
 
Continuing Medical Education (CME).  MedscapeCME (www.medscapecme.com) is the primary Web site through which our ACCME-accredited CME provider, Medscape, LLC, distributes online CME and CE to physicians and other healthcare professionals. The ACCME (the Accreditation Council for Continuing Medical Education) accredits and oversees providers of CME credit, as described under “Government Regulation, Industry Standards and Related Matters — Regulation and Accreditation of Continuing Medical Education” below. Medscape is also accredited as a provider of continuing nursing education by the American Nurses


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Credentialing Center’s Commission on Accreditation and as a provider of continuing pharmacy education by the Accreditation Council for Pharmacy Education.
 
MedscapeCME offers a wide selection of free, regularly updated online CME and CE activities designed to educate healthcare professionals about important diagnostic and therapeutic issues, including both original CME and CE activities that it develops as well as activities developed by accredited third parties. In 2009, approximately 6.5 million continuing education activities were completed by physicians and other healthcare professionals on MedscapeCME, an increase of approximately 24% over 2008. MedscapeCME educational activities are supported by independent educational grants provided by pharmaceutical and medical device companies, as well as foundations and government agencies. The following are some of the types of educational activities on MedscapeCME:
 
  •  CME Circle.  Third party CME activities, including symposia, monographs and CD-ROMs that MedscapeCME distributes online.
 
  •  CME Live.  Original online events featuring live streaming video, audio and synchronized visual presentations by experts on key topics and conditions.
 
  •  CME Cases.  Original CME activities presented by healthcare professionals in a patient case format.
 
  •  Resource Centers.  Grant-based collections of CME-certified content on the diagnosis and treatment of medical conditions.
 
Physician Connect.  In 2008, Medscape from WebMD expanded its online physician interaction resources by launching Physician Connect, an online community for physicians. By the end of 2009, Physician Connect had attracted more than 120,000 physician members. The Physician Connect social networking platform allows physicians to exchange information online on a range of topics, including patient care, drug information, healthcare-related legislation and practice management. Physicians can also create polls to elicit tailored, constructive feedback from other physicians. We also offer third parties the opportunity to sponsor Physician Connect discussions and polls so that they can gain insights into physicians’ perspectives and areas of interest. Medscape from WebMD also offers a variety of sponsored and unsponsored blogs where healthcare professionals can share their thoughts and opinions with the Medscape from WebMD community.
 
Medscape Mobile.  Medscape Mobile is a free medical application that provides physicians with Medscape’s industry-leading medical information in a convenient mobile format that can be accessed on demand on the iPhonetm and iPod touch®. Medscape Mobile includes Medscape’s specialty-specific news, comprehensive drug information, and clinical reference tools. Medscape Mobile also includes CME activities organized by specialty and designed for use on a mobile device. Medscape Mobile also provides access to The WebMD Health Directory, which contains contact information for over 400,000 physicians, 57,000 pharmacies, and 6,000 hospitals in a convenient search format. Medscape Mobile is currently available on the iPhonetm and iPod touch® and will soon be offered on additional mobile platforms, including BlackBerry®.
 
WebMD Professional Services.  We provide e-detailing services for pharmaceutical, medical device and consumer products companies, including activity development, targeted recruitment and online distribution and delivery. Traditional “details” are in-person meetings between pharmaceutical company sales representatives and physicians to discuss particular products. E-details are promotional interactive online programs that provide clinical education and information to physicians about medical conditions, treatments and products. We provide our pharmaceutical and medical device customers with a set of online solutions that help increase the sales efficiencies of their own direct detailing efforts. In an effort to improve operating efficiencies, several pharmaceutical companies have been reducing their field sales forces in the past several years. We believe that, in their effort to achieve greater overall market efficiency, pharmaceutical companies will increase their use of online promotional marketing, including e-detailing.
 
 
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


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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 advertisers and sponsors are pharmaceutical, biotechnology or medical device firms or consumer products companies whose products relate to health, wellness, diet, fitness, lifestyle, safety and illness prevention. 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. The WebMD Health Network ran approximately 1,600 branded or sponsored programs for its customers during 2009, approximately 1,400 such programs during 2008, and approximately 1,000 such programs during 2007.
 
Our public portals provide advertisers and sponsors with customized marketing campaigns that go beyond traditional Internet advertising media. We work with our advertisers and sponsors to develop marketing programs that are appropriately customized to target specific groups of consumers, physicians or healthcare professionals. Our public portal services are typically priced at an aggregate price that takes into account the overall scope of the services provided, based upon the amount of content, tools and features we supply as well as the degree of customization that we provide for the program. In addition, our contracts often include guarantees with respect to the number of users that visit the client-sponsored area. We also sell advertising on a CPM (cost per thousand impressions) basis, where an advertiser can purchase a set amount of impressions on a cost per thousand basis. An “impression” is a single instance of an ad appearing on a Web page. Our private portals do not generate revenue from advertising or sponsorship. See “— Our Private Portals: WebMD Health Services” below.
 
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:
 
  •  Media Solutions.  These are traditional online advertising solutions, such as banners, used to reach health-involved consumers and physicians and other healthcare professionals. In addition, customers can select targeted media packages, including condition-specific or specialty-specific e-newsletters, keyword searches and educational programs.
 
  •  Sponsored Editorial Solutions.  These are customized collections of articles, topics, and decision-support tools and applications, sponsored by clients and distributed within WebMD Health.
 
  •  E-details.  E-details are promotional interactive online programs that provide clinical education and information to physicians about medical conditions, treatments and products.
 
Key benefits that The WebMD Health Network offers healthcare advertisers and other sponsors include:
 
  •  our display of approximately six billion pages of healthcare information to users visiting our sites in 2009;
 
  •  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; and
 
  •  our ability to provide advertisers and other sponsors with objective measures of the effectiveness of their online marketing, such as activity levels within the sponsored content area.
 
 
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 ways to bring their companies and their products and services to the


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attention of targeted groups of consumers and healthcare professionals, and to create channels of communication with these audiences.
 
We have sole discretion for determining the types of advertising that we accept on our Web sites. All advertisements, sponsorships and promotions that appear on our Web sites must comply with our advertising and promotions policies. We do not accept advertising that, in our opinion, is not factually accurate or is not in good taste. Under our sponsorship policies, we take appropriate steps to identify content created by, provided by or controlled by a sponsor, so users of our sites can distinguish it from our editorial content and news reporting.
 
 
FDA.  We are working with the U.S. Food and Drug Administration (or FDA) to expand consumer access to timely and reliable health information from the FDA.
 
  •  The collaboration includes an online consumer health information resource on WebMD.com (www.webmd.com/fda), through which consumers can access information on the safety of FDA-regulated products, including food, medicine and cosmetics, as well as learn how to report problems involving the safety of these products directly to the FDA. There are also content and multimedia tools on specific topics, such as allergies and asthma, children’s health, diabetes, heart health and vitamins and supplements.
 
  •  FDA information is also located within WebMD’s homepage, WebMD Health News, WebMD Health Search, RSS feeds, and targeted WebMD Newsletters and Special Reports, and also included in WebMD the Magazine.
 
  •  WebMD also provides FDA public health alerts to all WebMD registered users and site visitors that request them. The cross-linked joint resource also features the FDA’s Consumer Updates — timely and easy-to-read articles that are also posted on the FDA’s main consumer Web page (www.fda.gov/consumer).
 
This joint effort provides health-minded consumers with access to the FDA as a source of timely health information focusing on daily issues such as food safety and the safe use of prescription drugs, over-the-counter medications, and cosmetics.
 
CDC.  The Centers for Disease Control and Prevention (CDC), part of the United States Department of Health and Human Services, is collaborating with Medscape on a special series of CDC Expert Commentaries, available at http://www.medscape.com/partners/cdc/public/cdc-commentary. In this series, experts from CDC offer video commentaries on current topics important to practicing clinicians, including regarding H1N1 and seasonal influenza, infection control and travel medicine. These commentaries are designed to deliver CDC’s authoritative guidance directly to Medscape’s audience of physicians, nurses, pharmacists and other healthcare professionals.
 
Yahoo!   In November 2007, we entered into a four year Service Agreement with a wholly owned subsidiary of Yahoo! Inc., a global Internet company, pursuant to which we have agreed to exclusively use Yahoo!’s sponsored search results product (which delivers paid advertisements in search results) across WebMD’s network of consumer sites. We have also agreed to exclusively use Yahoo!’s algorithmic Web search product. Under this agreement, we share revenues with Yahoo! based upon the amounts received by Yahoo! from advertisers for sponsored search results that appear on The WebMD Health Network, subject to certain minimum payment guarantees. At the same time, we also entered into a four year Distribution Agreement with Yahoo! pursuant to which we sell advertisements to third parties for display on Yahoo! owned and operated Web sites and certain third-party Web sites (which we refer to as the Yahoo! Properties). Our rights to sell such inventory are exclusive against certain other online health publishers. The Distribution Agreement includes mutual restrictions on the use of end-user data of a party received by the other party. Under the Distribution Agreement, we pay Yahoo! a specified percentage of advertising revenues for advertisements that we sell and display on the Yahoo! Properties. During the term of the Distribution Agreement, if we do not achieve certain annual minimums, Yahoo! may elect to terminate the exclusivity provisions.


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International Relationships.  We see a significant opportunity for international growth of our public portal services. Generally, we expect that we would accomplish this through alliances or joint ventures with other companies having expertise in the specific country or region.
 
  •  During the third quarter of 2007, we announced an alliance with the leading provider of online pharmaceutical and medical information in Latin America, Spain and Portugal, pursuant to which we are delivering Medscape from WebMD’s clinical information to these markets.
 
  •  In October 2009, we launched a new health information Website in the United Kingdom with Boots UK, the United Kingdom’s leading pharmacy-led health and beauty retailer. The co-branded Boots WebMD site at www.WebMD.boots.com features daily health and wellness news, condition and healthy living centers, interactive health tools, WebMD’s symptom checker, specialized health search, health videos and interactive slide shows. Boots supported the launch with a national marketing and consumer education effort to its large UK customer base to promote the new site, through in-store marketing, in its health and beauty magazines, on its heavily trafficked e-commerce site and to its large base of loyalty program members. In addition, Boots UK has engaged its thousands of pharmacists to create awareness of the site and its offerings during their frequent patient interactions.
 
We continue to evaluate opportunities for further international growth.
 
PRIVATE PORTALS
 
 
According to data made available by The Centers for Medicare & Medicaid Services (CMS) Office of the Actuary in January 2010, healthcare spending in the United States grew 4.4% in 2008, to $2.3 trillion (or an average of $7,681 per person), and continued to outpace overall economic growth. While the 2008 increase in healthcare spending was not as large as those in the prior several years, healthcare spending as a percentage of gross domestic product continued to increase according to the CMS data, reaching 16.2% in 2008. In response to increasing healthcare costs, employers and health plans have been:
 
  •  changing benefit plan designs to increase deductibles, co-payments and other out-of-pocket costs;
 
  •  enhancing health management and wellness programs and providing incentives for participation in those programs; and
 
  •  taking other steps to motivate employees and plan members to use healthcare in a cost-effective manner.
 
In connection with shifting greater responsibility for healthcare costs to consumers, employers and health plans are making available more health and benefits information and decision-support applications to help their employees and plan members make informed decisions about treatment options, health risks and healthcare providers. The goal is to encourage employees and plan members to take a more active role in managing their healthcare by providing relevant information, including data related to healthcare costs and quality. Through our WebMD Health Services business, we provide an integrated health and benefits management platform that helps employers and health plans present actionable information and applications through a convenient, custom private portal. Our online solutions complement the employer’s or payer’s existing benefit-related services and offline educational efforts. We also provide related services for use by employees and plan members, including lifestyle education and personalized telephonic health coaching.
 
Our private portals are not part of The WebMD Health Network and do not involve advertising or sponsorship by third parties; and we do not include private portal users or page views when we measure The WebMD Health Network’s traffic volume. We generate revenue from our private portals primarily through the licensing of our technology and content to employers and health plans, either directly or through our distributors. We offer our telephone coaching services on a per participant basis across a population (employer or plan).


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Our integrated health and benefits management solution suite, known as the WebMD Health and Benefits Managersm, is delivered through private online portals that we host for our employer and health plan clients. Membership for each of our private portals is limited to the employees and members (and their dependants) of the respective employer and health plan clients. In some cases, retirees are also included in the employee populations.
 
Our applications are typically accessed through a client’s Web site or intranet and provide secure access for registered members. 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. Each member must initially register on the private portal provided, at which point a unique user identification name and passcode are assigned. We personalize the user experience by integrating: individual user data (including personal health information); plan-specific data from clients; and WebMD content, decision-support technology and personal communication services. The WebMD Insight Enginesm is the platform we use to integrate third party applications, to consolidate and analyze data from multiple sources, and to drive the delivery of personalized information for each user of the Health and Benefits Manager. The Insight Engine also powers reporting services that help employers and plans identify population health risks, track program utilization, document the impact of health promotion initiatives, and measure results of ongoing campaigns.
 
The Health and Benefits Manager enables registered members to access health and benefits information and decision-support technology in one location, with a common look and feel, and with a single sign-on. The WebMD Health and Benefits Manager includes the following product suites:
 
  •  The WebMD Health Management Suite gives employees and plan members access to personalized content and tools that empower them to evaluate and manage their healthcare, motivate them to make healthier lifestyle choices, and help them improve their overall health. The Health Management Suite incorporates our WebMD HealthQuotientsm health risk assessment applications, which enable users to assess their overall health risks and to understand their unique risk factors with regard to specific conditions. The results of the health risk assessment are then used, along with the individual’s health profile and usage patterns, to give each user a personalized experience relevant to his or her specific needs and interests. Users can get consistent reinforcement from lifestyle improvement programs, health management content, and targeted health messaging. We complement our Health Management Suite with personalized telephonic health coaching services. Health coaches work one-on-one with employees and plan members to motivate them to improve their own health status by managing modifiable risk factors that lead to health conditions, by pursuing health conscious lifestyles, by actively seeking health and wellness knowledge and by understanding the impact of lifestyle decisions.
 
  •  The WebMD Benefits & Financial Suite helps employees and plan members understand the financial implications of their benefits options and make more informed benefits-related purchase decisions. Using WebMD Coverage Advisorsm, they can compare costs across available health plan options based on personalized information regarding coverage alternatives, along with cost-modeling and projection utilities. WebMD HSA Advisorsm provides personalized resources to assist in determining appropriate amounts for individuals to contribute to medical savings accounts based on their profile. The Benefits & Financial Suite is integrated with WebMD Health Management Suite applications and content, so users can align their benefits choices with their personal health profile and individual financial circumstances. Cost-modeling and projection tools help users to understand and adopt the right health plan for their situation.
 
  •  The WebMD Provider & Treatment Suite gives employees and plan members access to information and services that can help them factor quality and cost into decisions about care and treatment options. The Provider & Treatment Suite helps users analyze provider quality, identify appropriate drug and treatment choices, and understand the costs associated with their care. This suite leverages multiple data sources for cost and quality comparisons and provides a personalized, consistent user experience across a full set of integrated tools. The quality comparisons are based on evidence-based measures,


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  such as volume of patients treated for particular illnesses or procedures, mortality rates, unfavorable outcomes for specific problems, and average length of hospital stay. The WebMD Provider Selection Advisorsm included in this Suite allows users to search for healthcare providers (including physicians, hospitals, medical practices, dental providers and others) by name, specialty, location or healthcare need/situation and provides profiles and comparative information on these providers.
 
  •  The WebMD Health Record Suite helps employees and plan members gather, store, manage and share their essential health data. The Health Record Suite provides a secure personal health record for self-reported and professionally sourced health data, and prompts the employee or plan member with secure, personalized health alerts describing potential care or medication issues. Medical and pharmacy claims data as well as lab results can be automatically imported into individuals’ health records. In addition, the WebMD Health Record Suite allows individual users to authorize access by healthcare providers. Provider access to electronic health records encourages better communication and can reduce errors or duplications. The WebMD Health Record Suite is integrated with other suites in the WebMD Health and Benefits Manager and drives personalization in those tools. An individual’s health record is portable, independent of the specific employer or health plan. An individual can access their health record through webmd.com or the WebMD private portal of a future employer or benefit plan, using a single username/password as a secure identifier.
 
Whether used independently or as part of an integrated platform, these product suites help employees and health plan members become better-informed healthcare consumers. We also assist employers and health plans to motivate their employees and members through wellness incentive programs that encourage and reward specific health behaviors. The Insight Engine enables targeted communications campaigns that inform and motivate employees and plan members to change their behaviors and improve health status. Messages can be targeted based on health profile characteristics, demographics, or site usage, and they can be designed to raise awareness of specific resources and programs and to motivate lifestyle changes.
 
Telephonic Health Coaching
 
In addition to focusing on efforts to lower the cost of healthcare services, employers and health plans are also increasingly interested in influencing demand for healthcare services by focusing on health and wellness initiatives for their employees and plan members. A significant opportunity exists to reduce healthcare spending by motivating healthier behaviors and lifestyle choices, including in the areas of nutrition, weight management, exercise, stress management and smoking. These initiatives can also provide value for employers by enhancing employee satisfaction and company culture.
 
Through WebMD Health Services, we offer WebMD Health Coach, our one-on-one telephonic coaching service, to private portals clients who want to motivate employees and plan members with modifiable risk factors to make lasting health improvements. We tailor WebMD Health Coach programs to the goals of our clients, including by offering different levels of coaching intensity and allowing targeting of various risk factor profiles for coaching eligibility. For example, a client might offer a health coaching program for employees who have diabetes or are at risk for diabetes. Individuals are notified about their eligibility to participate in telephonic health coaching under programs selected by their employer or health plan. Our telephonic health coaching services, together with our private portal services, not only can help high-risk individuals identify important risk factors and change unhealthy behaviors, but also can help moderate-risk individuals to lower their risks and those who are healthy to stay that way.
 
 
Customers of WebMD Health Services include employers, such as International Business Machines Corporation, Metropolitan Life Insurance Company, Honda of America, The Kroger Co., Medtronic, Inc., EMC Corporation, Starbucks Corporation, Dell Inc., Walmart Stores, Inc., United Airlines and Hewlett-Packard Company, and health plans, such as Wellpoint, Inc., Blue Cross Blue Shield of Alabama, HealthNet, ConnecticutCare, Cigna and Horizon Blue Cross and Blue Shield.


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A typical contract for a private portal license provides for a multi-year term. The pricing of these contracts is generally based on several factors, including the complexity involved in installing and integrating our private portal platform, the number of our private portal tools and applications licensed, the services being provided, the degree of customization of the services involved and the anticipated number of employees or members covered by such license.
 
We believe that our private portals and related services provide the following potential benefits to an employer or health plan:
 
  •  encouragement of healthy lifestyles and behaviors that help reduce healthcare costs and improve employee productivity;
 
  •  reduced benefits administration, communication, and customer service costs;
 
  •  reduced hospital, physician and drug costs through more informed utilization of the benefit plan;
 
  •  increased enrollment in health management programs, including disease management or health coaching;
 
  •  increased conformance with benefit plan and clinical protocols; and
 
  •  enhanced health risk stratification that assists employers and health plans in selecting health management programs that are appropriate to the needs of their specific populations.
 
In addition, we believe that our private portals and related services provide the following potential benefits to employees or plan members:
 
  •  increased tax savings through increased participation in FSAs and HSAs;
 
  •  reduced benefit costs through more informed choice of benefit plan options and more informed use of the chosen benefit plan;
 
  •  improved health outcomes, through more informed choices of providers and treatments; and
 
  •  improved understanding and management of health conditions through access to support tools and educational information.
 
Relationship with Fidelity Employer Services Company LLC
 
In February 2004, we entered into a relationship with Fidelity Employer Services Company LLC, or FESCO, a provider of human resources and benefits outsourcing administration services. Pursuant to the agreement, FESCO serves as a distributor of our private portal services, and in connection therewith, FESCO integrates our products with FESCO’s health and welfare benefit products to offer employer customers of FESCO an integrated solution through FESCO’s NetBenefits® Web site. FESCO’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 healthcare options so that they can make more informed healthcare decisions. In May 2006, we expanded our agreement with FESCO to offer our online health care cost planning tools with FESCO’s 401(k) savings, pension and retirement accounts.
 
The original agreement with FESCO terminated in August 2009 but the relationship has continued under the transition provisions while the parties negotiate a new agreement for FESCO to continue to distribute our services. FESCO is an affiliate of FMR LLC, which reported beneficial ownership of shares representing approximately 15.6% of our Common Stock at December 31, 2009.
 
 
We market our private online portals and health coaching services to employers and health plans through a dedicated sales, marketing and account management team and through relationships with employee benefits consultants, distributors and other companies that assist employers in purchasing or managing employee


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benefits, including FESCO. See “— Relationship with Fidelity Employer Services Company LLC” above for more information regarding our relationship with FESCO.
 
 
Our public portals and private portals are delivered through Web sites designed to address the healthcare information needs of their users 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 meet 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 end-users, including consumers and physicians, and to create innovative services that provide value for healthcare advertisers, employers, payers, and other sponsors.
 
 
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. In addition, we participate in the following external, independent verification programs:
 
  •  URAC.  We have been awarded e-Health accreditation from URAC, an independent accrediting body that has reviewed and approved the WebMD.com site and our private portals deployment of WebMD Personal Health Manager for compliance with its quality and ethics standards.
 
  •  TRUSTe.  WebMD.com and MedicineNet.com are licensees of the TRUSTe Privacy Seal and our private portals deployment of WebMD Personal Health Manager is a recipient of the TRUSTe EU Safe Harbor programs. TRUSTe is an independent, non-profit organization whose goal is to build users’ trust and confidence in the Internet. Each year since 2005, TRUSTe and the Ponemon Institute have sponsored an independently administered user-based ranking of the most trusted companies in America, and WebMD has consistently ranked among the most trusted in each of those rankings.
 
  •  Health on the Net Foundation.  Our WebMD.com, eMedicine.com, eMedicineHealth.com, and MedicineNet.com sites and WebMD Personal Health Manager comply with the principles of the HON Code of Conduct established by the Health on the Net Foundation.
 
We understand how important the privacy of personal information is to our users. Our Privacy Policies are posted on our Web sites and inform users regarding the 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.
 
 
The markets we participate in are intensely competitive, continually evolving and may, in some cases, be subject to rapid change. Some of our competitors have greater financial, technical, marketing and other resources than we do, and some are better known than we are. We cannot provide assurance that we will be able to compete successfully against these organizations. We also compete, in some cases, with joint ventures or other alliances formed by two or more of our competitors or by our competitors with other third parties.


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Our public portals face competition from numerous other companies, both in attracting users and in generating revenue from advertisers and sponsors, and we expect that additional competitors will continue to enter the markets we participate in. We compete with online services and Web sites that provide health-related information, including both commercial sites and not-for-profit sites. These competitors include:
 
  •  general purpose consumer Web sites or search engines that offer specialized health sub-channels, including yahoo.com, msn.com, AOL.com, Google and Bing; and
 
  •  other high traffic Web sites that include healthcare-related and non-healthcare-related content and services.
 
Our competitors also include advertising networks that aggregate traffic from multiple Web sites, including advertising.com (which is owned by AOL), Tribal Fusion, Undertone Networks, Ad Blade and Everyday Health. Other competitors for advertising and sponsorship revenue include:
 
  •  publishers and distributors of traditional offline media, including television, radio, books, newspapers 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;
 
  •  offline medical conferences, CME programs and symposia;
 
  •  vendors of e-detailing services and our clients’ own in-house detailing efforts; and
 
  •  vendors of healthcare information and related services distributed through other means, including direct sales, mail and fax messaging.
 
Competitors for the attention of healthcare professionals and consumers also include public sector, non-profit and other Web sites that provide healthcare information without advertising or sponsorships from third parties, such as NIH.gov, CDC.gov and AHA.org.
 
 
Our private portal services compete, directly or indirectly, with various types of services provided by many different types of companies, including:
 
  •  wellness and disease management vendors, including Mayo Foundation for Medical Education and Research, StayWell Productions/MediMedia USA, Inc., Healthways, Health Dialog (which is owned by Bupa), and Alere (a division of Inverness Medical Innovations);
 
  •  suppliers of online and offline electronic personal health records and related applications and platforms, including Medem, CapMed, Epic Systems, Microsoft, Google and a variety of other companies;
 
  •  suppliers of other online and offline health management applications, including HealthMedia (which is owned by Johnson & Johnson), OptumHealth (which is owned by United Healthcare), A.D.A.M. Inc., and Consumer Health Interactive;
 
  •  health information services and health management offerings of health plans and their affiliates, including those of Humana, Aetna and United Healthcare; and
 
  •  other providers of health and benefits decision-support tools and related services.
 
GOVERNMENT REGULATION, INDUSTRY STANDARDS AND RELATED MATTERS
 
 
Healthcare Regulation.  Most of our revenue is derived either directly from the healthcare industry or from other sources that could be affected by changes in healthcare regulation. The healthcare industry is


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highly regulated and is subject to changing political, regulatory and other influences. This section of the Annual Report contains a description of laws and regulations applicable to us, either directly or through their effect on our healthcare industry customers, as well as healthcare industry standards that serve a self-regulatory function, and related matters. 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, regulations and industry standards may nonetheless be applied to our products and services. We cannot provide assurance that we will be able to accurately anticipate the application of these laws, regulations and industry standards to our operations. Our failure to accurately anticipate the application of these laws and regulations to our businesses, or other failure to comply, could create liability for us, result in adverse publicity and negatively affect our businesses.
 
Federal and state legislatures and agencies periodically consider programs to reform or revise aspects of the United States healthcare system. Congress is currently considering significant healthcare reform legislation. Healthcare reform legislation, if enacted, may increase governmental involvement in healthcare and health insurance, may change the way health insurance is funded (including the role that employers play in such funding), may change reimbursement rates and other terms of such insurance coverage, may affect the way information technology is used in healthcare, and may otherwise change the environment in which healthcare industry participants operate and the specific roles such participants play in the industry. One important focus of healthcare reform is control of healthcare costs over the long term. We believe that our services can play an important role in efforts to reduce healthcare costs. Accordingly, healthcare reform may create opportunities for us, including with respect to personal health record applications and health and benefits decision-support tools and, more generally, with respect to our capabilities in providing health and wellness information and education. However, we are unable to predict future legislation or proposals with any certainty or to predict the effect they could have on our business, and healthcare industry participants may respond to healthcare reform legislation or to the uncertainties created by potential legislation by reducing their expenditures or postponing expenditure decisions, including expenditures for our services.
 
Other Applicable Regulation.  This section of the Annual Report also contains a description of other laws and regulations, including general consumer protection laws and Internet-related laws that may affect 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 email, 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 laws or regulations, could decrease demand for our services, increase our cost of doing business, or otherwise cause our businesses to suffer.
 
 
The FDA and the Federal Trade Commission, or FTC, regulate the form, content and dissemination of labeling, advertising and promotional materials prepared by, or for, pharmaceutical or medical device companies. The FTC regulates over-the-counter drug advertising and, in some cases, medical device 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 certain non-promotional scientific information regarding product uses or claims not yet approved by the FDA.
 
Information on our Web sites that promotes the use of pharmaceutical products or medical devices is subject to FDA and FTC requirements as applicable and enforcement actions, and information regarding other products and services is subject to FTC requirements. If either agency finds that information on our Web sites violates regulations or guidance, it 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. Areas of our Web sites that could be the primary focus of regulators include pages and programs that discuss use of a regulated product or that the regulators believe may lack editorial


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independence from the influence of sponsoring pharmaceutical or device companies. Our television broadcast advertisements may also be subject to FTC and FDA regulation, depending on the content. The agencies place the principal burden of compliance with advertising and promotional regulations on advertisers and sponsors to make truthful, substantiated claims.
 
The Federal Food, Drug, and Cosmetic Act, or FDC Act, and its implementing regulations require that prescription drugs be approved by the FDA prior to marketing. It is a violation to market, advertise or otherwise commercialize such products prior to approval. The FDA allows for preapproval exchange of scientific information, provided it is non-promotional 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. Such products may be promoted and advertised only for uses reviewed and approved by the FDA. Drug labeling and advertising can be neither false nor misleading and must present all material information, including risk information, in a clear, conspicuous and neutral manner. There are also requirements for certain information (the “prescribing information” or “package insert” for promotional labeling and the “brief summary” for advertising) to be part of labeling and advertising. Labeling and advertising that violate these legal standards are subject to FDA enforcement action.
 
The FDA also regulates the safety, effectiveness, and labeling of over-the-counter (OTC) drugs 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. 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. On October 5, 2009, the FTC issued final revisions to its Guides Concerning the Use of Endorsements and Testimonials in Advertising. The FTC Guides require that advertisers disclose “material connections,” including payments and free products, between advertisers and endorsers to social media outlets, including Web sites and blogs. The new Guides also require advertisers to clearly disclose results that consumers can reasonably expect from a product. Finally, the Guides impose heightened disclosure requirements for celebrity endorsers for representations made outside of the context of traditional advertisements. In addition, state attorneys general may bring enforcement actions for alleged unfair or deceptive advertising.
 
There are several 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 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 the last year, FDA has increased enforcement of labeling and advertising violations. 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, injunctions, fines and consent decrees. Any of these enforcement 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.
 
Any increase in FDA regulation of the Internet or other media used for direct-to-consumer (or DTC) advertisements of prescription drugs could make it more difficult for us to obtain advertising and sponsorship revenue. In the last 15 years, the FDA has gradually relaxed its formerly restrictive policies on DTC advertising of prescription drugs, allowing companies to advertise prescription drugs to consumers in any medium, provided that they satisfy FDA requirements. However, legislators, physician groups and others have criticized the FDA’s current policies and have called for restrictions on advertising of prescription drugs to consumers and increased FDA enforcement. Congress and the FDA have shown interest in these issues as well and there is a possibility that Congress, the FDA or the FTC may alter present policies on DTC advertising of prescription drugs or medical devices in a material way. In addition, we received a letter from United States Senator Charles Grassley, dated February 18, 2010, requesting our response to questions and the delivery of


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certain documents regarding specific advertising programs. The letter also seeks information regarding how we maintain the independence of our editorial content. We believe that we have appropriate editorial policies and processes in place to assure the independence of the editorial content on our Web sites. We will be providing a letter and documents in response to the inquiry.
 
The FDA recently increased enforcement directed at Internet advertising, issuing letters to advertisers addressing standards for banner advertisements and sponsored links. Additionally, the FDA has recently solicited input on the issue of promoting FDA-regulated products using the internet and social media. There is a possibility that the FDA may issue a policy restricting or materially changing promotion using the Internet, social media and other sponsored health content on the internet. We cannot predict what effect any such changes would have on our business.
 
 
Activities and information provided in the context of an independent medical or scientific educational program, often referred to as continuing medical education or “CME,” usually are treated as non-promotional and fall outside the FDA’s jurisdiction. The FDA does, however, evaluate CME activities to determine whether they are independent of the promotional influence of the activities’ supporters. To determine whether a CME provider’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, such content must fully comply with the FDA’s requirements and restrictions regarding promotional activities.
 
Medscape, LLC distributes online CME to physicians and other healthcare professionals and is accredited by the Accreditation Council for Continuing Medical Education (ACCME), which oversees providers of CME credit. MedscapeCME (www.medscapecme.com) is the Web site through which Medscape, LLC distributes online CME. If any CME activity that Medscape, LLC provides is considered promotional, Medscape, LLC may face regulatory action or the loss of accreditation by the ACCME. Supporters of CME activities may also face regulatory action, potentially leading to termination of support.
 
Medscape, LLC’s current ACCME accreditation expires at the end of July 2010. In order for Medscape, LLC to renew its accreditation, it will be required to demonstrate to the ACCME that it continues to meet ACCME requirements. If Medscape, LLC fails to maintain its status as an accredited ACCME provider (whether at the time of such renewal or at an earlier time as a result of a failure to comply with existing or additional ACCME standards), Medscape, LLC would not be permitted to accredit CME activities for physicians and other healthcare professionals. Instead, Medscape, LLC would be required to use third parties to provide such CME-related services. That, in turn, could discourage potential supporters from engaging Medscape, LLC to develop CME or education-related activities, which could have a material adverse effect on our business.
 
Medscape, LLC’s CME activities are planned and implemented in accordance with the Essential Areas and Elements and the and Policies of the ACCME and other applicable accreditation standards. The ACCME’s standards for commercial support of CME are intended to ensure, among other things, that CME activities of ACCME-accredited providers, such as Medscape, LLC, are independent of “commercial interests,” which are now defined as entities that produce, market, re-sell or distribute health care goods and services, excluding certain organizations. “Commercial interests,” and entities owned or controlled by “commercial interests,” are ineligible for accreditation by the ACCME. The standards also provide that accredited CME providers may not place their CME content on Web sites owned or controlled by a “commercial interest.” In addition, accredited CME providers may not ask “commercial interests” for speaker or topic suggestions, and are also prohibited from asking “commercial interests” to review CME content prior to delivery.
 
From time to time, the ACCME revises its standards for commercial support of CME. As a result of certain past ACCME revisions, we adjusted our corporate structure and made changes to our management and operations intended to allow Medscape, LLC to provide CME activities that are developed independently from those programs developed by its sister companies, which may not be independent of “commercial interests.” We believe that these changes allow Medscape, LLC to satisfy the applicable standards.


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Recently, the ACCME and other organizations have been discussing ways to assure that commercial interests do not bias CME activities. The ACCME has published several proposals since 2008, including proposals to reduce communications between commercial interests and CME providers and to create special designations for CME activities that are not funded by commercial interests. The ACCME also suggested creating an independent CME funding entity to build a firewall between commercial interests and CME activities. The ACCME has not adopted these proposals but has revised its policies. It is possible that adoption of additional proposals could significantly affect Medscape, LLC’s business model.
 
During the past several years, educational activities, including CME, directed at physicians have been subject to increased governmental scrutiny to ensure that sponsors do not influence or control the content of the activities. For example, the U.S. Senate Finance Committee conducted an investigation of the sponsorship of CME activities, including an examination of the ACCME’s role in ensuring that CME activities are independent from the influence of their supporters. The Department of Justice continues to examine CME sponsorship by manufacturers. In response, companies have developed and implemented internal controls and procedures that promote adherence to applicable regulations and requirements. In implementing these controls and procedures, supporters of CME may interpret the regulations and requirements differently and may implement varying procedures or requirements. These controls and procedures:
 
  •  may discourage pharmaceutical companies from providing grants for independent educational activities;
 
  •  may slow their internal approval for such grants;
 
  •  may reduce the volume of sponsored educational programs that Medscape, LLC produces to levels that are lower than in the past, thereby reducing revenue; and
 
  •  may require Medscape, LLC to make changes to how it offers or provides educational programs, including CME.
 
In addition, future changes to laws, regulations or accreditation standards, or to the internal compliance programs of supporters or potential supporters, may further discourage, significantly limit, or prohibit supporters or potential supporters from engaging in educational activities with Medscape, LLC, or may require Medscape, LLC to make further changes in the way it offers or provides educational activities.
 
 
The Privacy Standards and Security Standards under the Health Insurance Portability and Accountability Act of 1996 (referred to as HIPAA) establish a set of national privacy and security standards for the protection of individually identifiable health information by health plans, healthcare clearinghouses and healthcare providers (sometimes referred to as “covered entities” for purposes of HIPAA). Prior to February 17, 2010, the Privacy Standards and Security Standards did not apply directly to our businesses and only covered entities were directly subject to potential civil and criminal liability under the Privacy Standards and Security Standards; as a “business associate” of covered entities, we were bound only by our contracts and agreements with those covered entities requiring us to use and disclose protected health information in a manner consistent with the Privacy Standards and Security Standards in providing services to those covered entities. However, the American Recovery and Reinvestment Act of 2009 (referred to as ARRA) strengthened and expanded the HIPAA Privacy and Security Standards and made certain provisions directly applicable to portions of our business that operate as business associates, such as those managing employee or plan member health information for employers or health plans. In connection with the sale by HLTH of its Emdeon Business Services business (or EBS), EBS agreed to license, through February 2018, certain de-identified data to HLTH for use in the development and commercialization of certain information products that use clinical data. We are currently using the data received under this license in our information services products. These products are subject to HIPAA.
 
With respect to our private portal business, ARRA requires us to report any unauthorized use or disclosure of protected health information, known as a breach, to our covered entity customers. In addition, ARRA imposes similar data breach notification requirements on vendors of personal health records that will


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require us to notify affected individuals and the FTC in the event of a data breach involving the unsecured personal information of users of our public portal services.
 
ARRA increased civil penalty amounts for violations of HIPAA and significantly strengthens enforcement by requiring the U.S. Department of Health and Human Services (HHS) to conduct periodic audits to confirm compliance and authorizing state attorneys general to bring civil actions seeking either injunctions or damages in response to violations of HIPAA Privacy and Security Standards that threaten the privacy of state residents. These new Privacy and Security provisions will require us to incur additional costs and may restrict our business operations. These new provisions will also result in additional regulations and guidance issued by HHS and will 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.
 
Genetic Information Nondiscrimination Act (GINA)
 
The Genetic Information Nondiscrimination Act (referred to as GINA), enacted in May 2008, does not apply directly to WebMD although it does apply to our private portal customers, including both employers and group health plans. GINA was enacted to prevent discrimination by group health plans, health insurance issuers and employers on the basis of genetic information. WebMD’s Health Risk Assessment (HRA), HealthQuotient, is typically offered to employees by their employer or group health plan as a voluntary component of a wellness program. The U.S. Departments of Labor, HHS and Treasury published Interim Final Rules implementing Title I of GINA, which apply to group health plans and health insurance issuers for plan years that began on or after December 7, 2009. The Interim Final Rules prohibit health plans from requesting, requiring or purchasing genetic information prior to or in connection with enrollment, or at any time for underwriting purposes, and state that “underwriting purposes” includes any incentive or disincentive (such as decreasing or increasing premiums) for completing an HRA. “Genetic information” is defined broadly to include information about an individual’s family medical history. The agencies have not finalized the regulations to date.
 
Title II of GINA prohibits employment discrimination based on genetic information as well as the request or purchase of genetic information of employees or their family members with limited exceptions. The Equal Employment Opportunity Commission issued proposed rules to implement Title II in March 2009. The proposed rules specify that genetic information may be collected in an HRA that is part of a wellness program only if participation is voluntary, and suggest that the agency will consider participation voluntary if the employer neither requires participation nor penalizes employees who do not participate. The agency has not finalized these regulations to date, either.
 
While each customer is responsible for ensuring that the wellness and benefit selections it offers are compliant with GINA, WebMD may face challenges as a result of varying interpretations of the law by the multiple enforcing agencies and uncertainties over the final form of the rules. Interpretations of the law may require us to modify the HealthQuotient product and could result in increased operational costs or decreased demand for our products.
 
 
In addition to HIPAA, numerous other state and federal laws govern the collection, dissemination, use, access to, confidentiality and security of patient health and prescriber information. In addition, Congress and some states are considering new laws and regulations that further protect the privacy and security of medical records or medical information. In some cases, more protective state privacy and security laws are not preempted by the HIPAA Standards 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 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. Claims of violations of privacy


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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.
 
 
General.  Advertising and promotional activities presented to visitors on our Web sites are subject to federal and state consumer protection laws that regulate unfair and deceptive practices. We are also subject to various other federal and state consumer protection laws, including the specific ones described later in this section.
 
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 imposed by these standards are subject to interpretation by courts and other governmental authorities. We believe that we are in compliance with the consumer protection standards that apply to our Web sites, 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, claims that we are violating any such standards could, even if we are not found liable, be expensive and time-consuming to defend and could result in adverse publicity that could harm our business.
 
In February 2009, the FTC published Self Regulatory Principles for Online Behavioral Advertising to address consumer privacy issues that may arise from so-called “behavioral advertising” (i.e., the tracking of online activities) and to encourage industry self-regulation. These principles serve as guidelines to industry. In addition, there is the possibility, supported by certain public statements, that the FTC may revise or eliminate the principles in favor of a more restrictive approach for companies that utilize behavioral advertising. In addition, there is a possibility of legislation, regulations and increased enforcement activities, relating to behavioral advertising. To the extent that our existing practices are inconsistent with any revised principles, new rules, new legislation and/or with future enforcement activities, our business may become subject to restrictions that could reduce our revenues or increase our cost of doing business.
 
In October 2009, the FTC adopted revised Guides Concerning the Use of Endorsements and Testimonials in Advertising. The Guides, which were last updated in 1980, became effective December 1, 2009. In addition to revising certain provisions regarding disclosures relating to endorsements and testimonials, the FTC clarified the Guide’s applicability to online and social media forums. The revised Guides may be an indication that the FTC may apply increased scrutiny to the use of endorsements and testimonials online and through traditional media. To the extent we rely on endorsements or testimonials, we will review any relevant relationships for compliance with the Guides.
 
Data Protection Regulation.  With the recent increase in publicity regarding data breaches resulting in improper dissemination of consumer information, many states have passed laws regulating the actions that a business must take if it experiences a data breach, such as prompt disclosure to affected customers. Generally, these laws are limited to electronic data and make some exemptions for smaller breaches. Congress has also been considering similar federal legislation relating to data breaches. The FTC has also prosecuted some data breach cases as unfair and/or deceptive acts or practices under the Federal Trade Commission Act. In addition to data breach notification laws, some states have enacted statutes and rules requiring businesses to reasonably protect certain types of personal information they hold or to otherwise comply with certain specified data security requirements for personal information. These laws may apply directly to our business or indirectly by contract when we provide services to other companies. We intend to continue to comprehensively protect all consumer data and to comply with all applicable laws regarding the protection of this data.
 
CAN-SPAM Act.  On 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, 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 that 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


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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. 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, even though we believe that FTC regulations issued in May 2008 confirmed our existing understanding that these email newsletter communications are not generally commercial emails. Many states have also enacted anti-spam laws. The CAN-SPAM Act preempts many of these statutes. To the extent that these laws are not preempted, we believe that our email practices comply with these laws.
 
Regulation of Advertisements Sent by Fax.  Section 227 of the Communications Act, which codifies the provisions of the Telephone Consumer Protection Act of 1991 (or TCPA), prohibits the transmission of an “unsolicited advertisement” via facsimile to a third party without the consent of that third party. An “unsolicited advertisement” is defined broadly to include any material advertising the commercial availability or quality of any property, goods or services. In 2005, the Junk Fax Prevention Act (or JFPA) was signed into law. The JFPA codified a previous interpretation of the TCPA by the Federal Communications Commission (or FCC) that a commercial fax is not “unsolicited” if the transmitting entity has an “established business relationship,” as defined by the JFPA and applicable FCC regulations, with the recipient.
 
In 2006, the FCC issued its final rules under the JFPA, which became effective on August 1, 2006. In the rules, the FCC confirmed that transactional faxes are permitted. It defined a transactional fax as one that facilitates, completes or confirms the commercial transaction that the recipient has previously agreed to enter into with the sender. The FCC stated that these faxes are not advertisements that are prohibited by the TCPA. The FCC also recognized that, if a transactional fax has a de minimis amount of advertising information on it, that alone does not convert a transactional fax into an unsolicited advertisement.
 
In addressing the so-called “EBR exemption” to the TCPA’s prohibition on unsolicited facsimile advertisements, the FCC adopted the JFPA’s definition of an “established business relationship” or “EBR,” which includes a voluntary two-way communication between a person and a business. The FCC rules specify that commercial faxes generally may be sent to those who have made an inquiry of or application to a sender within a prescribed period of time. The FCC rules do not prohibit faxed communications that contain only information, such as news articles, updates or other similar general information.
 
States from time to time have enacted, or have attempted to enact, their own requirements pertaining to the transmission of commercial faxes. These state requirements often, but not always, track the terms of the TCPA, the JFPA, and the FCC’s regulations. To the extent state commercial fax requirements have conflicted directly with federal requirements, they have to date been successfully challenged. We cannot predict the outcome of the FCC’s future rulemaking proceedings, the extent to which states may successfully enact more restrictive commercial fax laws in the future, or the outcomes of any judicial challenges to those laws.
 
We intend to comply with all applicable federal and state requirements governing the transmission of such faxes.
 
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 to 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 users identifying themselves as being under the age of 13 during the registration process are not allowed to register for the site’s member only services, such as message boards and live chat events. We believe that we are in compliance with COPPA.
 
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


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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.
 
FACTA.  In an effort to reduce the risk of identity theft from the improper disposal of consumer information, Congress passed the Fair and Accurate Credit Transactions Act (or FACTA), which requires businesses to take reasonable measures to prevent unauthorized access to such information. FACTA’s disposal standards are flexible and allow businesses discretion in determining what measures are reasonable based upon the sensitivity of the information, the costs and benefits of different disposal methods and relevant changes in technology. We believe that we are in compliance with FACTA.
 
 
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 sites, strategic relationships and other operations to avoid violating these state licensing and professional practice laws. We do not believe that we provide professional medical advice, diagnosis or treatment. We employ and contract with physicians who provide only health 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.
 
 
The Federal False Claims Act imposes liability on any person or entity who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a Federal healthcare program. The whistleblower (or “qui tam”) provisions of the Federal False Claims Act allow a private individual to bring actions on behalf of the Federal government alleging that the defendant has submitted a false claim to the federal government and to share in any monetary recovery. After the filing of a qui tam suit, the Federal government must determine whether it will intervene and control the case and, if it does not, the private individual may pursue the claim. In addition, various states have enacted false claim laws analogous to the Federal False Claims Act, and many of these state laws apply where a claim is submitted to any third-party payor and not merely a federal healthcare program. When an entity is determined to have violated the Federal False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties. It is not clear whether there is a basis for the application of the Federal False Claims Act to the types of services that WebMD provides. However, Federal False Claims Act cases have been brought against drug manufacturers, and have resulted in significant monetary settlements and the imposition of federally-supervised corporate integrity agreements in circumstances that include allegations that company-sponsored CME was unlawful off-label promotion.
 
 
There are federal and state laws that govern patient referrals, physician financial relationships and inducements to healthcare providers and patients. The federal healthcare program’s 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, including e-details. 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.


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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 so as not to imply an endorsement of the providers or vendors. 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.
 
 
Certain provisions of HIPAA (commonly referred to as the HIPAA nondiscrimination provisions) generally prohibit group health plans from charging similarly situated individuals different premiums or contributions or imposing different deductible, co-payment, or other cost-sharing requirements based on a “health factor.” Such differentials are, however, acceptable under the HIPAA nondiscrimination provisions if the differentials are applied through “wellness programs.” The Department of Labor, in coordination with the Department of the Treasury and HHS, has issued regulations that define “wellness programs” for purposes of the HIPAA nondiscrimination provisions, establishing specific requirements for wellness programs that reward participants who satisfy a standard related to a health factor. These requirements include (1) limiting the amount of the wellness program’s rewards, (2) the wellness program being designed to promote good health and prevent disease, (3) giving those eligible to participate in the wellness program the opportunity to qualify for the reward at least once a year, (4) providing a reward that is available to all similarly situated individuals, and (5) requiring disclosure of reasonable alternative standards that must be available under the wellness program.
 
Although HIPAA and its regulations state that certain excepted benefits, including supplemental benefits, are not subject to the wellness program rules, it does not define the term “similar supplemental coverage.” On December 7, 2007, the Department of Labor, in coordination with the Department of the Treasury and HHS, released Field Assistance Bulletin No. 2007-04 (FAB 2007-04) in response to the development of questionable health and wellness programs that were marketed as “similar supplemental coverage.” FAB 2007-04 clarifies the rules for supplemental programs and provides that supplemental benefits under a wellness program cannot discriminate on the basis of a health factor. With these new requirements in place, wellness programs that require individuals to meet certain health factors can no longer be considered supplemental and thus have to comply with HIPAA wellness program regulations described in the immediately preceding paragraph. According to FAB 2007-04, programs that do not meet these requirements may be subject to enforcement actions.
 
The Americans with Disabilities Act (ADA) prohibits discrimination on the basis of an employee’s disability or perceived disability. Among other things, it limits employers from inquiring about the disabilities of employees unless the questions are job-related and consistent with business necessity. The ADA also limits the circumstances in which an employer may require physical examinations or answers to medical inquiries. However, the ADA allows employers to conduct voluntary medical examinations and activities, including voluntary medical histories, as part of a voluntary wellness program. A wellness program is “voluntary” if the employer neither requires participation nor penalizes employees who do not participate. Records acquired as part of a wellness program must be kept confidential and may not be used for a discriminatory purpose. Many states and localities provide similar protections to employees.
 
We provide certain services related to wellness programs as part of our private portals business. See “Our Online Services — Our Private Portals: WebMD Health Services” above. We believe that we are in compliance with the laws and regulations applicable to these services, to the extent they apply to us.


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The WebMD Health Network is not directed to non-U.S. users; and nearly all of the users of our private portals are U.S. employees or plan members. As a result, we do not believe that we currently conduct our business in a manner that subjects us to international data regulation in any material respect. However, one element of our growth strategy is to seek to expand our online services to markets outside the United States. Generally, we expect that we would accomplish this through partnerships or joint ventures with other companies having expertise in the specific country or region, as was the case with our entry into the physician portal marketplace in Latin America, Spain and Portugal in 2007 and our co-branded Boots WebMD site launched in 2009 for consumers in the United Kingdom.
 
Many countries and governmental bodies have, or are developing, laws that may apply to online health information services of the types we provide, or to Internet sites generally, including laws regarding the collection, use, storage and dissemination of personal information or patient data. To the extent our operations are located within their jurisdiction or are directed at individuals within their jurisdiction, these laws may apply to us. In addition, those governments may attempt to apply such laws extraterritorially or through treaties or other arrangements with U.S. governmental entities. To the extent we fail to accurately anticipate the application or interpretation of these laws, we could be subject to liability and adverse publicity, which could negatively affect our business. In addition, these laws may impose additional operational requirements or restrictions on our business, and increase our cost of doing business.


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OTHER INFORMATION
 
Employees
 
As of December 31, 2009, we had approximately 1,400 employees.
 
 
We use trademarks, trade names and service marks for our products and services, including those listed below the Table of Contents of this Annual Report. We also use other registered and unregistered trademarks and service marks for our products and services. In addition, we have registered domain names, including “webmd.com” and “medscape.com” and the other domain names listed in this Annual Report. If we are unable to protect our marks and domain names adequately, that could have a material adverse effect on our business and hurt us in establishing and maintaining our brands.
 
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 intellectual property used in our businesses. We also rely on a variety of intellectual property rights licensed from third parties, including Internet server software and healthcare content used on our Web sites. These third-party licenses may not continue to be available to us on commercially reasonable terms. Our loss of or inability to maintain or obtain upgrades to any of these licenses could significantly harm us. In addition, because we license content from third parties, we may be exposed to copyright infringement actions if those parties are subject to claims regarding the origin and ownership of that content.
 
 
For a discussion of seasonality affecting our business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality” in Item 7 below.
 
 
To the extent required by Item 1 of Form 10-K, the information contained in Item 7 of this Annual Report is hereby incorporated by reference in this Item 1.


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Item 1A.   Risk Factors
 
This section describes circumstances or events that could have a negative effect on our financial results or operations or that could change, for the worse, existing trends in some or all of our businesses. 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 Common Stock and Convertible Notes or of securities that we may issue in the future. The risks and uncertainties described in this Annual Report are not the only ones facing us. 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.
 
 
Risks Related to Our Operations and the Healthcare Content We Provide
 
 
Users of The WebMD Health Network have numerous other online and offline sources of healthcare information services. Our ability to compete for user traffic on our public portals depends upon our ability to make available a variety of health and medical content, decision-support applications and other services that meet the needs of a variety of types of users, including consumers, physicians and other healthcare professionals, with a variety of reasons for seeking information. Our ability to do so depends, in turn, on:
 
  •  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 develop or acquire needed content, applications and tools at a reasonable cost. In addition, since consumer users of our public portals may be attracted to The WebMD Health Network as a result of a specific condition or for a specific purpose, it is difficult for us to predict the rate at which they will return to the public portals. Because we generate revenue by, among other things, selling sponsorships of specific pages, sections or events on The WebMD Health Network, a decline in user traffic levels or a reduction in the number of pages viewed by users could cause our revenue to decrease and could have a material adverse effect on our results of operations.
 
 
Attracting and retaining users of our public portals and clients for our private portals requires us to continue to improve the technology underlying those portals and to continue to develop new and updated applications, features and services for those portals. If we are unable to do so on a timely basis or if we are unable to implement new applications, features and services without disruption to our existing ones, we may lose potential users and clients.
 
We rely on a combination of internal development, strategic relationships, licensing and acquisitions to develop our portals and related applications, features and services. Our development and/or implementation of new technologies, applications, features and services may cost more than expected, may take longer than originally expected, may require more testing than originally anticipated and may require the acquisition of additional personnel and other resources. There can be no assurance that the revenue opportunities from any new or updated technologies, applications, features or services will justify the amounts spent.
 
 
The markets for healthcare information products and services are intensely competitive, continually evolving and, in some cases, subject to rapid change.


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  •  Our public portals face competition from numerous other companies, both in attracting users and in generating revenue from advertisers and sponsors. We compete for users with online services and Web sites that provide health-related information, including both commercial sites and not-for-profit sites. We compete for advertisers and sponsors with: health-related Web sites; general purpose consumer Web sites that offer specialized health sub-channels; other high-traffic Web sites that include both healthcare-related and non-healthcare-related content and services; search engines that provide specialized health search; and advertising networks that aggregate traffic from multiple sites. Our public portals also face competition from offline publications and information services.
 
  •  Our private portals compete with: providers of healthcare decision-support tools and online health management applications, including personal health records; wellness and disease management vendors; and health information services and health management offerings of healthcare benefits companies and their affiliates.
 
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 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. In addition, we expect that competitors will continue to enter these markets.
 
 
We believe that the “WebMD” brand identity that we have developed has contributed to the success of our business and has helped us achieve recognition as a trusted source of health and wellness information. We also believe that maintaining and enhancing that brand is important to expanding the user base for our public portals, to our relationships with sponsors and advertisers, and to our ability to gain additional employer and healthcare payer clients for our private portals. We have expended considerable resources on establishing and enhancing the “WebMD” brand and our other brands, and we have developed policies and procedures designed to preserve and enhance our brands, including editorial procedures designed to provide quality control of the information we publish. We expect to continue to devote resources and efforts to maintain and enhance our brands. However, we may not be able to successfully maintain or enhance awareness of our brands, and events outside of our control may have a negative effect on our brands. If we are unable to maintain or enhance awareness of our brands, and do so in a cost-effective manner, our business could be adversely affected.
 
 
Our online businesses have a limited operating history and participate in relatively new markets. These markets, and our online businesses, have undergone significant changes during their short history and can be expected to continue to change. Many companies with business plans based on providing healthcare information and related services through the Internet have failed to be profitable and some have filed for bankruptcy or ceased operations. Even if demand from users exists, we cannot assure you that our businesses will continue to be profitable.
 
 
Our business depends largely on the skills, experience and performance of key members of our management team. 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. Competition for qualified personnel in the healthcare information services and Internet industries is intense. 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 salary and benefit costs that are acceptable to us. Failure to do so may have an adverse effect on our business.


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Our advertising and sponsorship revenue may vary significantly from quarter to quarter due to a number of factors, many of which are not within our control, and some of which may be difficult to forecast accurately, including potential effects on demand for our services as a result of regulatory changes affecting advertising and promotion of drugs and medical devices and general economic conditions. The majority of our advertising and sponsorship programs are for terms of approximately four to twelve months. We have relatively few longer term advertising and sponsorship programs. We cannot assure you that our current advertisers and sponsors will continue to use our services beyond the terms of their existing contracts or that they will enter into any additional contracts.
 
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. Other factors that could affect the timing of contracting for specific programs with advertisers and sponsors, or receipt of revenue under such contracts, include:
 
  •  the timing of FDA approval for new products or for new approved uses for existing products;
 
  •  the timing of FDA approval of generic products that compete with existing brand name products;
 
  •  the timing of withdrawals of products from the market;
 
  •  the timing of rollouts of new or enhanced services on our public portals;
 
  •  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.
 
 
Most of our advertising and sponsorship revenue has, in the past, come from pharmaceutical, biotechnology and medical device companies. We have been focusing 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 many consumer products companies are increasing the portion of their promotional spending used on the Internet, we cannot assure you that these advertisers and sponsors will find our consumer Web sites 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. In addition, revenues from consumer products companies are more likely to reflect general economic conditions, and to be reduced to a greater extent during economic downturns or recessions, than revenues from pharmaceutical, biotechnology and medical device companies.
 
 
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, this period has generally ranged from six to twelve months, but in some cases has been longer. Potential sales may be subject to delays or cancellations due to a client’s internal procedures for approving large expenditures and other factors beyond our control, including the effect of general economic conditions on the willingness of potential clients to commit to licensing our private portals. 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.


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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 private portal revenue is lower than expected, we may not be able to reduce related short-term spending in response. Any shortfall in such revenue would have a direct impact on our results of operations.
 
 
We provide, in connection with our private portal services, comparative information about hospital cost and quality. Our ability to provide this information depends on our ability to obtain comprehensive, reliable data. We currently obtain this data from a number of public and private sources, including the Centers for Medicare and Medicaid Services (CMS), many individual states and the Leapfrog Group. We cannot provide assurance that we would be able to find alternative sources for this data on acceptable terms and conditions. Accordingly, our business could be negatively impacted if CMS or our other data sources cease to make such information available or impose terms and conditions for making it available that are not consistent with our planned usage. In addition, the quality of the comparative information services we provide depends on the reliability of the information that we are able to obtain. If the information we use to provide these services contains errors or is otherwise unreliable, we could lose clients and our reputation could be damaged.
 
 
In a healthcare market where a greater share of the responsibility for healthcare costs and decision-making has been increasingly shifting to consumers, use of information technology (including personal health records) to assist consumers in making informed decisions about healthcare has also increased. We believe that through our WebMD Health and Benefits Manager platform, including our personal health record application, we are well positioned to play a role in this consumer-directed healthcare environment. However, our ability to renew existing agreements for these services depends, in part, on increasing usage of our private portal services by our employer and health plan clients’ employees and members. Increasing usage of our services requires us to continue to deliver and improve the underlying technology and develop new and updated applications, features and services. In addition, we face competition in the area of healthcare decision-support tools and online health management applications and health information services. Many of our competitors have greater financial, technical, product development, marketing and other resources than we do, and may be better known than we are. We cannot provide assurance that we will be able to meet our development and implementation goals or that we will be able to compete successfully against other vendors offering competitive services and, if we are unable to do so, we may experience static or diminished usage for our private portal services and possible non-renewals of our customer agreements.
 
 
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


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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 harm our reputation and business.
 
 
One element of our growth strategy is to seek to expand our online services to markets outside the United States. Generally, we expect that we would accomplish this through partnerships or joint ventures with other companies having expertise in the specific country or region. However, our participation in international markets will still be subject to certain risks beyond those applicable to our operations in the United States, such as:
 
  •  challenges caused by language and cultural differences;
 
  •  difficulties in staffing and managing operations from a distance;
 
  •  uncertainty regarding liability for services and content;
 
  •  burdens of complying with a wide variety of legal, regulatory and market requirements;
 
  •  variability of economic and political conditions, including the extent of the impact of adverse economic conditions in markets outside the United States;
 
  •  tariffs or other trade barriers;
 
  •  fluctuations in currency exchange rates;
 
  •  potentially adverse tax consequences, including restrictions on repatriation of earnings; and
 
  •  difficulties in protecting intellectual property.
 
 
 
 
Our online services are designed to operate 24 hours a day, seven days a week, without interruption. However, we have experienced and expect that we will in the future experience interruptions and delays in services and availability from time to time. We rely on internal systems as well as third-party vendors, including data center providers and bandwidth providers, to provide our online services. We may not maintain redundant systems or facilities for some of these services. In the event of a catastrophic event with respect to one or more of these systems or facilities, we may experience an extended period of system unavailability, which could negatively impact our relationship with users. In addition, system failures may result in loss of data, including user registration data, content, and other data critical to the operation of our online services, which could cause significant harm to our business and our reputation.
 
To operate without interruption or loss of data, both we and our service providers must guard against:
 
  •  damage from fire, power loss and other natural disasters;


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  •  communications failures;
 
  •  software and hardware errors, failures and crashes;
 
  •  security breaches, computer viruses and similar disruptive problems; and
 
  •  other potential service interruptions.
 
Any disruption in the network access or co-location services provided by third-party providers to us or any failure by these third-party providers or our own systems to handle current or higher volume of use could significantly harm our business. We exercise little control over these third-party vendors, which increases our vulnerability to problems with services they provide.
 
Any errors, failures, interruptions or delays experienced in connection with these third-party technologies and information services or our own systems could negatively impact our relationships with users and adversely affect our brand and our business and could expose us to liabilities to third parties. Although we maintain insurance for our business, the coverage under our policies may not be adequate to compensate us for all losses that may occur. In addition, we cannot provide assurance that we will continue to be able to obtain adequate insurance coverage at an acceptable cost.
 
 
From time to time, we implement additions to or changes in the hardware and software platforms we use for providing our online services. During and after the implementation of additions or 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. In addition, in connection with integrating acquired businesses, we may move their operations to our hardware and software platforms or make other changes, any of which could result in interruptions in those operations. Any significant interruption in our ability to operate any of our online services could have an adverse effect on our relationships with users and clients and, as a result, on our financial results. We rely on a combination of purchasing, licensing, internal development, and acquisitions to develop our hardware and software platforms. Our implementation of additions to or changes in these platforms may cost more than originally expected, may take longer than originally expected, and may require more testing than originally anticipated. In addition, we cannot provide assurance that additions to or changes in these platforms will provide the additional functionality and other benefits that were originally expected.
 
 
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, denial-of-service attacks or other 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.
 
 
Our ability to deliver our online services is dependent on the development and maintenance of the infrastructure of the Internet by third parties. The Internet has experienced a variety of outages and other delays as a result of damages to portions of its infrastructure, and it could face outages and delays in the


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future. The Internet has also experienced, and is likely to continue to experience, significant growth in the number of users and the amount of traffic. If the Internet continues to experience increased usage, the Internet infrastructure may be unable to support the demands placed on it. In addition, the reliability and performance of the Internet may be harmed by increased usage or by denial-of-service attacks. Any resulting interruptions in our services or increases in response time could, if significant, result in a loss of potential or existing users of and advertisers and sponsors on our Web sites and, if sustained or repeated, could reduce the attractiveness of our services.
 
Customers who utilize our online services depend on Internet service providers and other Web site operators for access to our Web sites. All 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 such outages or other failures on their part could reduce traffic to our Web sites.
 
 
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 the online terms and conditions for use of our Web sites, including disclaimers or limitations of liability, are unenforceable. A finding by a court that these terms and conditions or other online agreements are invalid could harm our business.
 
 
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 client expectations. 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 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 will perform as planned.
 
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 would 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.
 
 
Risks Related to the Healthcare Industry, Healthcare Regulation and Internet Regulation
 
 
Most of our revenue is derived from the healthcare industry and could be affected by changes affecting healthcare spending. We are particularly dependent on pharmaceutical, biotechnology and medical device companies for our advertising and sponsorship revenue. General reductions in expenditures by healthcare industry participants could result from, among other things:
 
  •  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;
 
  •  consolidation of healthcare industry participants;


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  •  reductions in governmental funding for healthcare; and
 
  •  adverse changes in business or economic conditions affecting healthcare payers or providers, pharmaceutical, biotechnology or medical device companies or other healthcare industry participants.
 
Federal and state legislatures and agencies periodically consider reforming aspects of the United States healthcare system and Congress is currently considering significant healthcare reform legislation. Healthcare reform legislation, if enacted, may increase governmental involvement in healthcare and health insurance, may change the way health insurance is funded (including the role that employers play in such funding), may change reimbursement rates and other terms of such insurance coverage, may affect the way information technology is used in healthcare, and may otherwise change the environment in which healthcare industry participants operate and the specific roles such participants play in the industry. Healthcare industry participants may respond to healthcare reform legislation or to the uncertainties created by potential legislation by reducing their expenditures or postponing expenditure decisions, including expenditures for WebMD’s services. We are unable to predict future legislation or proposals with any certainty or to predict the effect they could have on WebMD.
 
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 market segments that we serve or are planning to serve. For example, use of our products and services could be affected by:
 
  •  changes in the design of health insurance plans;
 
  •  a decrease in the number of new drugs or medical devices coming to market; and
 
  •  decreases in marketing expenditures by pharmaceutical or medical device companies, including as a result of governmental regulation or private initiatives that discourage or prohibit advertising or sponsorship 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.
 
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.
 
 
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, could cause us to incur additional costs and could 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:
 
  •  Regulation of Drug and Medical Device Advertising and Promotion.  The WebMD Health Network provides services involving advertising and promotion of prescription and over-the-counter drugs and medical devices. If the Food and Drug Administration (FDA) or the Federal Trade Commission (FTC) finds that any information on The WebMD Health Network or in WebMD the Magazine violates applicable regulations, they may take regulatory or judicial action against us and/or the advertiser or sponsor of that information. State attorneys general may also take similar action based on their state’s consumer protection statutes. Any increase or change in regulation of drug or medical device


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  advertising and promotion could make it more difficult for us to contract for sponsorships and advertising. We cannot predict what actions the FDA or industry participants may take in the future, but the FDA’s enforcement against pharmaceutical advertising increased in 2009 from 2008 levels. It is also possible that new laws would be enacted that impose restrictions on such advertising. In addition, recent private industry initiatives have resulted in voluntary restrictions, which advertisers and sponsors have agreed to follow. Our advertising and sponsorship revenue could be materially reduced by additional restrictions on the advertising of prescription drugs and medical devices to consumers, whether imposed by law or regulation or required under policies adopted by industry members.
 
  •  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, including e-details. 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 result in adverse publicity and be costly for us to respond to.
 
  •  False Claims Laws.  The Federal False Claims Act imposes liability on any person or entity who, among other things knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a Federal healthcare program. In addition, various states have enacted false claim laws analogous to the Federal False Claims Act, and many of these states laws apply where a claim is submitted to any third-party payor and not merely a federal healthcare program. When an entity is determined to have violated the Federal False Claims Act, it may be required to pay up to three times the actual damages sustained by the government plus civil penalties. In recent years an increasing number of Federal False Claims Act cases have been brought against drug manufacturers and resulted in significant monetary settlements and imposition of federally supervised corporate integrity agreements in circumstances that include allegations that company-sponsored CME was unlawful off-label promotion. Any action against us for violation of these laws could cause us to incur significant legal expenses and may adversely affect our ability to operate our business.
 
  •  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. If a state determines that some portion of our business violates these laws, it 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 have acted improperly as a healthcare provider may result in liability to us.
 
  •  GINA.  The Genetic Information Nondiscrimination Act (GINA) prohibits discrimination based on genetic information in employment and in health insurance coverage. The law applies to our private portal customers including both employers and group health plans. WebMD’s Health Risk Assessment (or HRA), HealthQuotient, is typically offered to employees as a voluntary component of their employer-sponsored wellness program. Title I of GINA can have significant implications for wellness programs offered by group health plans in that it prohibits the collection of genetic information, which includes an individual’s family medical history, prior to or in connection with enrollment or for underwriting purposes. Underwriting purposes includes providing incentives or rewards for completion of an HRA that requests genetic information. Title II of GINA prohibits employment discrimination based on genetic information as well as the request or purchase of genetic information of employees or their family members with limited exceptions, including a limited exception for voluntary wellness


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  programs. WebMD may face challenges as a result of varying interpretations of the law by the multiple enforcing agencies including the U.S. Departments of Health and Human Services (“HHS”), Labor and Treasury and the Equal Employment Opportunity Commission. It is possible that the final regulations may require modifications to our HealthQuotient product to either eliminate or revise the family history section. Interpretations of the law may increase operational costs or decrease demand for our product.
 
Congress is currently considering significant healthcare reform legislation. Healthcare reform legislation, if enacted, may increase governmental involvement in healthcare and health insurance, may change the way health insurance is funded (including the role that employers play in such funding), may change reimbursement rates and other terms of such insurance coverage, may affect the way information technology is used in healthcare, and may otherwise change the environment in which healthcare industry participants operate and the specific roles such participants play in the industry. One important focus of healthcare reform is control of healthcare costs over the long term. We believe that our services can play an important role in efforts to reduce healthcare costs. Accordingly, healthcare reform may create opportunities for us, including with respect to personal health record applications and health and benefits decision-support tools and, more generally, with respect to our capabilities in providing health and wellness information and education. However, we are unable to predict future legislation or proposals with any certainty or to predict the effect they could have on our business, and healthcare industry participants may respond to healthcare reform legislation or to the uncertainties created by potential legislation by reducing their expenditures or postponing expenditure decisions, including expenditures for our services.
 
 
The Internet and its associated technologies are subject to government regulation. However, whether and how existing laws and regulations in various jurisdictions, including privacy and consumer protection laws, apply to the Internet is still uncertain. Our failure, or the failure of our business partners or third-party service providers, to accurately anticipate the application of these laws and regulations to our products and services and the manner in which we deliver them, or any other failure to comply with such laws and regulations, could create liability for us, result in adverse publicity and 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 and online services, including in areas such as: user privacy, confidentiality, consumer protection, marketing, pricing, content, copyrights and patents, and characteristics and quality of products and services. We cannot predict how these laws or regulations will affect our business.
 
Internet user privacy, personal data security and the use of consumer information to track online activities are major issues both in the United States and abroad. For example, in February 2009, the FTC published Self-Regulatory Principles to govern the tracking of consumers’ activities online in order to deliver advertising targeted to the interests of individual consumers (sometimes referred to as behavioral advertising). These principles serve as guidelines to industry. In addition, there is the possibility supported by certain public statements, that the FTC may revise or eliminate the principles in favor of a more restrictive approach for companies that utilize behavioral advertising. In addition, there is a possibility of legislation, regulations and increased enforcement activities relating to behavioral advertising. 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. We also notify users about our information collection, use and disclosure practices relating to data we receive through offline means such as paper health risk assessments. Moreover, we take steps to reasonably protect certain sensitive personal information we hold. We cannot assure you that the privacy policies and other statements we provide to users of our products and services, or our practices will be found sufficient to protect us from liability or adverse publicity in this area. A determination by a state or federal agency or court that any of our practices do not meet applicable standards, or the implementation of new standards or requirements, could adversely affect our business.


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Failure to comply with laws relating to privacy and security of personal information, including personal health information, could result in liability to us and concerns about privacy-related issues could damage our reputation and our business
 
Privacy and security of personal information stored or transmitted electronically, including personal health information, is a major issue in the United States. While we strive to comply with all applicable privacy and security laws and regulations, as well as our own posted privacy policies, any failure or perceived failure to comply may result in proceedings or actions against us by government entities or others, or could cause us to lose users and customers, which could have a material adverse effect on our business. In addition, we are unable to predict what additional legislation or regulation in the area of privacy of personal information, including personal health information, could be enacted and what effect that could have on our operations and business. Concerns about our practices with regard to the collection, use, disclosure, or security of personal information or other privacy related matters, even if unfounded and even if we are in compliance with applicable laws, could damage our reputation and harm our business.
 
The Privacy Standards and Security Standards under the Health Insurance Portability and Accountability Act of 1996 (or HIPAA) establish a set of national privacy and security standards for the protection of individually identifiable health information by health plans, healthcare clearinghouses and healthcare providers (referred to as covered entities) and their business associates. Currently, only covered entities are directly subject to potential civil and criminal liability under these Standards. However, the American Recovery and Reinvestment Act of 2009 (ARRA) amends the HIPAA Privacy and Security Standards and makes certain provisions applicable to those portions of our business, such as those managing employee or plan member health information for employers or health plans, that are business associates of covered entities. Currently, we are bound by certain contracts and agreements to use and disclose protected health information in a manner consistent with the Privacy Standards and Security Standards. Beginning on February 17, 2010, some provisions of the HIPAA Privacy and Security Standards began to apply directly to us. For periods prior to that, depending on the facts and circumstances, we could potentially be subject to criminal liability for aiding and abetting or conspiring with a covered entity to violate the Privacy Standards or Security Standards. As of February 17, 2010, we became directly subject to HIPAA’s criminal and civil penalties. ARRA increased civil penalty amounts for violations of HIPAA and significantly strengthens enforcement by requiring HHS to conduct periodic audits to confirm compliance and authorizing state attorneys general to bring civil actions seeking either injunctions or damages in response to violations of HIPAA Privacy and Security Standards that threaten the privacy of state residents. We cannot assure you that we will adequately address the risks created by these Standards. In addition, we are unable to predict what changes to these Standards might be made in the future or how those changes, or other changes in applicable laws and regulations, could affect our business.
 
 
Medscape, LLC’s continuing medical education (or CME) activities are planned and implemented in accordance with the current Essential Areas and Elements and the Policies of the Accreditation Council for Continuing Medical Education, or ACCME, which oversees providers of CME credit, and other applicable accreditation standards. ACCME’s standards for commercial support of CME are intended to assure, among other things, that CME activities of ACCME-accredited providers, such as Medscape, LLC, are independent of “commercial interests,” which are defined as entities that produce, market, re-sell or distribute healthcare goods and services, excluding certain organizations. “Commercial interests,” and entities owned or controlled by “commercial interests,” are ineligible for accreditation by the ACCME.
 
From time to time, the ACCME revises its standards for commercial support of CME. As a result of certain past ACCME revisions, we adjusted our corporate structure and made changes to our management and operations intended to allow Medscape, LLC to provide CME activities that are developed independently from programs developed by its sister companies, which may not be independent of “commercial interests.” We believe that these changes allow Medscape, LLC to satisfy the applicable standards.


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Medscape, LLC’s current ACCME accreditation expires at the end of July 2010. In order for Medscape, LLC to renew its accreditation, it will be required to demonstrate to the ACCME that it continues to meet ACCME requirements. If Medscape, LLC fails to maintain its status as an accredited ACCME provider (whether at the time of such renewal or at an earlier time as a result of a failure to comply with existing or additional ACCME standards), it would not be permitted to accredit CME activities for physicians and other healthcare professionals. Instead, Medscape, LLC would be required to use third parties to provide such CME-related services. That, in turn, could discourage potential supporters from engaging Medscape, LLC to develop CME or education-related activities, which could have a material adverse effect on our business.
 
 
CME activities may be subject to government oversight or regulation by Congress, the FDA, HHS, and by state regulatory agencies. Medscape, LLC and/or the sponsors of the CME activities that Medscape, LLC accredits may be subject to enforcement actions if any of these CME activities are deemed improperly promotional, potentially leading to the termination of sponsorships.
 
During the past several years, educational activities, including CME, directed at physicians have been subject to increased governmental scrutiny to ensure that sponsors do not influence or control the content of the activities. In response, pharmaceutical and medical device companies have developed and implemented internal controls and procedures that promote adherence to applicable regulations and requirements. In implementing these controls and procedures, supporters of CME may interpret the regulations and requirements differently and may implement varying procedures or requirements. These controls and procedures:
 
  •  may discourage pharmaceutical companies from providing grants for independent educational activities;
 
  •  may slow their internal approval for such grants;
 
  •  may reduce the volume of sponsored educational programs that Medscape, LLC produces to levels that are lower than in the past, thereby reducing revenue; and
 
  •  may require Medscape, LLC to make changes to how it offers or provides educational programs, including CME.
 
In addition, future changes to laws, regulations or accreditation standards, or to the internal compliance programs of supporters or potential supporters, may further discourage, significantly limit, or prohibit supporters or potential supporters from engaging in educational activities with Medscape, LLC, or may require Medscape, LLC to make further changes in the way it offers or provides educational activities.
 
 
 
 
As of December 31, 2009, WebMD had a total of approximately $352.7 million (face value) of investments in certain auction rate securities (ARS), including investments in ARS originally made by HLTH. The ARS had a carrying value of $279.7 million as of December 31, 2009. The types of ARS investments that we own are backed by student loans, 97% of which are guaranteed under the Federal Family Education Loan Program (FFELP), and all of which had credit ratings of AAA or Aaa when purchased. We do not own any other type of ARS investments.
 
Since February 2008, negative conditions in the regularly held auctions for these securities have prevented holders from being able to liquidate their holdings through that type of sale. In the event that we need to or want to sell our ARS investments, we may not be able to do so until a future auction on these types of investments is successful or until a buyer is found outside the auction process. If potential buyers are


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unwilling to purchase the investments at their carrying amount, we would incur a loss on any such sales. In addition, the credit ratings on approximately half of the ARS investments in our portfolio have been downgraded, and there may be additional such rating downgrades in the future. If uncertainties in the credit and capital markets continue, these markets deteriorate further or ARS investments in our portfolio experience additional credit rating downgrades, there could be further fair value adjustments or other-than-temporary impairments in the carrying value of our ARS investments.
 
 
Our Restated Certificate of Incorporation and Bylaws, as well as Delaware corporate law, contain provisions that could delay or prevent a change of control or changes in our management and Board of Directors that holders of our Common Stock might consider favorable and may prevent them from receiving a takeover premium for their shares. These provisions include, for example, our classified board structure and the authorization of our Board of Directors to issue up to 50 million shares of preferred stock without a stockholder vote. In addition, our Restated Certificate of Incorporation provides that stockholders may not act by written consent and may not call special meetings. These provisions apply even if an offer to purchase our company may be considered beneficial by some of our stockholders. If a change of control or change in management is delayed or prevented, the market price of our Common Stock could decline.
 
If certain transactions occur with respect to our capital stock, limitations may be imposed on our ability to utilize net operating loss carryforwards and tax credits to reduce our income taxes
 
WebMD has substantial accumulated net operating loss (NOL) carryforwards and tax credits available to offset taxable income in future tax periods. If certain transactions occur with respect to WebMD’s capital stock (including issuances, redemptions, recapitalizations, exercises of options, conversions of convertible debt, purchases or sales by 5%-or-greater shareholders and similar transactions) that result in a cumulative change of more than 50% of the ownership of capital stock over a three-year period (as determined under rules prescribed by the U.S. Internal Revenue Code and applicable Treasury regulations), an annual limitation would be imposed with respect to the ability to utilize WebMD’s NOL carryforwards and federal tax credits.
 
In November 2008, HLTH repurchased shares of its common stock in a tender offer. The tender offer resulted in a cumulative change of more than 50% of the ownership of HLTH’s capital, as determined under the applicable rules and regulations. As a result of this ownership change, there is an annual limitation imposed on the ability to utilize our NOL carryforwards and federal tax credits.
 
Because substantially all of WebMD’s NOL carryforwards have already been reduced by a valuation allowance for financial accounting purposes, we would not expect an annual limitation on the utilization of the NOL carryforwards to significantly reduce the net deferred tax asset, although the timing of cash flows may be impacted to the extent any such annual limitation deferred the utilization of NOL carryforwards to future tax years.
 
 
Our intellectual property and proprietary rights are important to our businesses. 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 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 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.


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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.
 
 
WebMD has been built, in part, through 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 and negotiate mutually acceptable terms with them, and to obtain adequate financing. Significant competition for these opportunities exists, which may increase the cost of and decrease the opportunities for these types of transactions. Financing for these transactions may come from several sources, including:
 
  •  cash and cash equivalents on hand and marketable securities;
 
  •  proceeds from the incurrence of indebtedness; and
 
  •  proceeds from the issuance of common stock, preferred stock, convertible debt or of other securities.
 
The issuance of additional equity or debt securities could:
 
  •  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;
 
  •  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 security holder approval for any such acquisition or security issuance unless required by applicable law, regulation or the terms of then existing securities.
 
 
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:
 
  •  our ability to maintain relationships with the customers of the acquired business;


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  •  our ability to retain or replace key personnel;
 
  •  potential conflicts in sponsor or advertising relationships or in relationships with strategic partners;
 
  •  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, that we are able to obtain from the sellers.
 
 
Our future liquidity and capital requirements will depend upon numerous factors, including the success of our service offerings, market developments, and repurchases of our common stock. 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. There can be no assurance that such financing will be available on acceptable terms, if at all, or that such financing will not be dilutive to our stockholders.
 
As widely reported, financial markets experienced extreme disruption during portions of 2008 and 2009, including volatility in the prices of securities and severely diminished liquidity and availability of credit. Financing may continue to be difficult to obtain on acceptable terms, and we could be forced to cancel or delay investments or transactions that we would otherwise have made.
 
Item 1B.   Unresolved Staff Comments
 
Not applicable.
 
Item 2.   Properties
 
We believe that our company’s offices and other facilities are, in general, in good operating condition and adequate for our current operations and that additional leased space in appropriate locations can be obtained on acceptable terms if needed.
 
We lease approximately 100,000 square feet of office space in New York City for our corporate headquarters and our editorial and marketing operations under a lease that expires in November 2015. We also lease additional office space in New York City and lease office space and operational facilities in: Elmwood Park, New Jersey; Atlanta, Georgia; Montreal, Canada; Chicago, Illinois; Herndon, Virginia; Indianapolis, Indiana; Omaha, Nebraska; Portland, Oregon; and San Clemente, California.
 
Item 3.   Legal Proceedings
 
The information relating to legal proceedings contained in Note 11 to the Consolidated Financial Statements included in this Annual Report is incorporated herein by this reference.
 
Item 4.   [Reserved]


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Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
 
We completed the initial public offering of our Class A Common Stock on September 28, 2005. Our Class A Common Stock began trading on the Nasdaq National Market under the symbol “WBMD” on September 29, 2005. Upon completion of our merger with HLTH Corporation in October 2009 and the resulting cancellation of our Class B Common Stock (all of which had been owned by HLTH), our Class A Common Stock began being referred to simply as Common Stock. Our Common Stock now trades on the Nasdaq Global Select Market. The high and low prices of our Common Stock for each quarterly period during the last two fiscal years are as follows:
 
                 
    High   Low
 
2008
               
First quarter
  $ 41.99     $ 23.15  
Second quarter
    35.40       21.86  
Third quarter
    35.00       23.80  
Fourth quarter
    29.99       13.63  
2009
               
First quarter
  $ 25.20     $ 19.37  
Second quarter
    30.70       20.15  
Third quarter
    34.43       28.73  
Fourth quarter
    38.97       31.00  
 
The market price of our Common Stock has fluctuated in the past and is likely to fluctuate in the future. Changes in the market price of our Common Stock may result from, among other things:
 
  •  quarter-to-quarter variations in operating results;
 
  •  operating results being different from analysts’ estimates or opinions;
 
  •  changes in analysts’ earnings estimates;
 
  •  changes in financial guidance or other forward-looking information;
 
  •  announcements or performance of products, services, pricing policies or business strategies by us or our competitors;
 
  •  announcements or performance of acquisitions or strategic partnerships by us or our competitors;
 
  •  developments in existing customer or strategic relationships;
 
  •  actual or perceived changes in our business strategy;
 
  •  developments in new or pending litigation and claims;
 
  •  sales of large amounts of our Common Stock;
 
  •  changes in general business or regulatory conditions affecting the healthcare, information technology or Internet industries;
 
  •  changes in general economic conditions; and
 
  •  fluctuations in the securities markets in general.
 
In addition, the market prices of our Common Stock and of the stock of other Internet-related companies have experienced large fluctuations, sometimes quite rapidly. These fluctuations often may be unrelated to or disproportionate to operating performance.


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On February 25, 2010, there were approximately 2,750 holders of record of our Common Stock. Because many of these shares are held by brokers and other institutions on behalf of stockholders, we are unable to determine the total number of stockholders represented by these record holders, but we believe there are more than 35,000 holders of our Common Stock.
 
 
We have never declared or paid any cash dividends on our Common Stock, and we do not anticipate paying cash dividends in the foreseeable future.
 
Repurchases of Equity Securities During the Fourth Quarter of 2009
 
The following table provides information about purchases by WebMD during the three months ended December 31, 2009 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act:
 
 
                                         
            Total
  Approximate
   
            Number of
  Dollar Value of
   
    Total
      Shares Purchased as
  Shares that May Yet
   
    Number of
      Part of Publicly
  Be Purchased Under
   
    Shares
  Average Price
  Announced Plans or
  the Plans or
   
Period
  Purchased(1)   Paid per Share   Programs(2)   Programs(3)    
 
10/01/09 – 10/31/09
        $           $ 30,000,000          
11/01/09 – 11/30/09
    65,300     $ 35.54           $ 240,900,000          
12/01/09 – 12/31/09
    6,370,938 (2)   $ 37.00       6,339,227     $ 30,000,000          
                                         
Total
    6,436,238     $ 36.98       6,339,227                  
                                         
 
 
(1)  Includes the following number of shares withheld from WebMD Restricted Common Stock that vested during the respective periods in order to satisfy withholding tax requirements related to the vesting of the awards: 65,300 in November and 31,711 in December. The value of these shares was determined based on the closing price of WebMD Common Stock on the date of vesting.
 
(2)  WebMD purchased 6,339,227 shares of WebMD Common Stock at $37.00 per share pursuant to a tender offer announced in November 2009 and completed in December 2009. For additional information, see Note 14 to the Consolidated Financial Statements included in this Annual Report.
 
(3)  In each period, $30 million relates to the repurchase program that WebMD announced in December 2008, at which time WebMD was authorized to use up to $30 million to purchase shares of its Common Stock from time to time. As of December 31, 2009, no shares had been purchased under this repurchase program. For additional information, see Note 14 to the Consolidated Financial Statements included in this Annual Report. The remainder relates to the authorization to purchase, at $37.00 per share, 5,700,000 shares of WebMD Common Stock pursuant to the tender offer referred to above in footnote 2 to this table, for a total purchase price of $210,900,000. That amount was later increased to 6,339,227 shares of WebMD Common Stock, for a total purchase price of $234,551,399.


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The following graph compares the cumulative total stockholder return on WebMD Common Stock with the comparable cumulative return of the NASDAQ Stock Market (U.S. and Foreign) Index and the Research Data Group (RDG) Internet Composite Index over the period of time covered in the graph. The graph assumes that $100 was invested in WebMD Common Stock on September 29, 2005 (the date of the initial public offering of WebMD Common Stock) and in each index on September 30, 2005. The stock price performance on the following graph is not necessarily indicative of future stock price performance.
 
COMPARISON OF 51 MONTH CUMULATIVE TOTAL RETURN*
among WebMD Health Corp., the NASDAQ Composite Index
and the RDG Internet Composite Index
 
(PERFORMANCE GRAPH)
 
$100 Invested on 9/29/05 in stock or 9/30/05 in Index, including reinvestment of dividends.
Fiscal year ending December 31.


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Item 6.   Selected Financial Data
 
The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with the consolidated financial statements and notes thereto, which are included elsewhere in this Annual Report.
 
                                         
    Years Ended December 31,(1)  
    2009     2008     2007     2006(2)(3)     2005(4)  
    (In thousands, except per share data)  
 
Consolidated Statements of Operations Data:
                                       
Revenue
  $ 438,536     $ 373,462     $ 319,232     $ 899,585     $ 842,660  
Cost of operations
    165,753       135,138       114,000       542,723       525,405  
Sales and marketing
    112,101       106,080       91,035       116,258       101,939  
General and administrative
    89,620       88,053       102,661       130,056       116,589  
Depreciation and amortization
    28,185       28,410       27,808       44,073       43,013  
Interest income
    9,149       35,300       42,035       32,339       21,527  
Interest expense
    23,515       26,428       25,887       25,472       18,442  
Severance and other transaction expenses
    11,066       6,941       2,527              
Gain on repurchases of convertible notes
    10,120                          
Gain on sale of EBS Master LLC
          538,024                    
Restructuring
          7,416                    
Impairment of auction rate securities
          60,108                    
Gain on 2006 EBS Sale
                399       352,297        
Other (expense) income, net
    (1,369 )     992       5,933       (4,252 )     (27,965 )
                                         
Income from continuing operations before income tax (benefit) provision
    26,196       489,204       3,681       421,387       30,834  
Income tax (benefit) provision
    (45,491 )     26,638       (9,053 )     50,033       (2,461 )
Equity in earnings of EBS Master LLC
          4,007       28,566       763        
                                         
Consolidated income from continuing operations
    71,687       466,573       41,300       372,117       33,295  
Consolidated income (loss) from discontinued operations, net of tax
    49,354       94,682       (18,048 )     393,527       34,170  
                                         
Consolidated net income inclusive of noncontrolling interest
    121,041       561,255       23,252       765,644       67,465  
Income attributable to noncontrolling interest
    (3,705 )     (1,032 )     (10,667 )     (405 )     (775 )
                                         
Net income attributable to Company stockholders
  $ 117,336     $ 560,223     $ 12,585     $ 765,239     $ 66,690  
                                         
Amounts attributable to Company stockholders:
                                       
Income from continuing operations
  $ 67,018     $ 465,725     $ 31,845     $ 371,844     $ 32,725  
Income (loss) from discontinued operations
    50,318       94,498       (19,260 )     393,395       33,965  
                                         
Net income attributable to Company stockholders
  $ 117,336     $ 560,223     $ 12,585     $ 765,239     $ 66,690  
                                         
Basic income per common share:
                                       
Income from continuing operations
  $ 1.40     $ 5.99     $ 0.40     $ 3.00     $ 0.22  
Income (loss) from discontinued operations
    1.05       1.22       (0.24 )     3.17       0.22  
                                         
Net income attributable to Company stockholders
  $ 2.45     $ 7.21     $ 0.16     $ 6.17     $ 0.44  
                                         
Diluted income per common share:
                                       
Income from continuing operations
  $ 1.21     $ 4.92     $ 0.36     $ 2.69     $ 0.21  
Income (loss) from discontinued operations
    0.86       0.96       (0.23 )     2.67       0.22  
                                         
Net income attributable to Company stockholders
  $ 2.07     $ 5.88     $ 0.13     $ 5.36     $ 0.43  
                                         
Weighted-average shares outstanding used in computing per share amounts:
                                       
Basic
    47,400       77,738       79,694       124,092       151,872  
                                         
Diluted
    57,740       97,824       83,886       147,382       156,807  
                                         


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    As of December 31,(1)
    2009   2008   2007   2006(2)   2005(4)
    (In thousands)
 
Consolidated Balance Sheets Data:
                                       
Cash, cash equivalents and investments
  $ 808,144     $ 917,897     $ 830,120     $ 651,464     $ 427,433  
Working capital (excluding assets and liabilities of discontinued operations)
    159,539       633,462       860,181       617,101       397,555  
Total assets
    1,288,548       1,501,734       1,651,481       1,469,795       2,213,558  
Long-term convertible notes, net of discount
    227,659       614,018       605,776       598,121       590,987  
Convertible redeemable exchangeable preferred stock
                      98,768       98,533  
Noncontrolling interest
          134,223       131,353       101,860       43,096  
Stockholders’ equity
    564,768       496,698       642,809       422,853       1,118,237  
 
 
(1)  On October 23, 2009, WebMD Health Corp. completed a merger with HLTH Corporation (the “Merger”), with WebMD Health Corp. continuing as the surviving company. The accounting treatment for the Merger results in HLTH Corporation being treated as the acquiring entity and the pre-acquisition consolidated financial statements of HLTH Corporation being treated as the historical financial statements of WebMD Health Corp. for all historical periods presented. In addition, the weighted-average shares outstanding used in computing income per common share have been adjusted by multiplying the historical weighted-average shares outstanding for HLTH by the 0.4444 exchange ratio in the Merger for all historical periods presented. Basic and diluted income per common share also have been recalculated to reflect the adjusted weighted-average shares outstanding for all historical periods presented. See “Introduction — Basis of Presentation; Accounting Treatment of the Merger” within Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is included in Item 7 of this Annual Report.
 
(2)  For the year ended December 31, 2006, the consolidated financial position and results of operations reflect the sale of a 52% interest in our Emdeon Business Services business (which we refer to as EBS), as of November 16, 2006. Accordingly, the consolidated balance sheet as of December 31, 2006 excludes the assets and liabilities of EBS and includes an investment in EBS Master LLC accounted for under the equity method of accounting related to our 48% ownership, and the consolidated statement of operations for the year ended December 31, 2006 includes the operations of EBS for the period January 1, 2006 through November 16, 2006 and our 48% equity in earnings of EBS Master LLC from November 17, 2006 through December 31, 2006.
 
(3)  On January 1, 2006, we adopted the new authoritative guidance which requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the service period based on their fair values. This resulted in additional non-cash stock-based compensation expense beginning in 2006 and subsequent periods. See Results of Operations within Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is included in Item 7 of this Annual Report.
 
(4)  The selected financial data for the year ended December 31, 2005 does not reflect the retrospective application of authoritative guidance for our 31/4% Convertible Notes, which were outstanding during this period and were fully redeemed or converted to equity during June 2005. The authoritative guidance requires cash settled convertible debt to be separated into debt and equity components at issuance and a value to be assigned to each.


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Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
This Item 7 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 our forward-looking statements as a result of various factors, including but not limited to those listed under “Risk Factors” in Item 1A of this Annual Report and those included elsewhere in this Annual Report. In this MD&A, dollar amounts (other than per share amounts) are stated in thousands, unless otherwise noted.
 
 
Management’s discussion and analysis of financial condition and results of operations, or MD&A, is provided as a supplement to the consolidated financial statements and notes thereto included elsewhere in this Annual Report and is intended to provide an understanding of our results of operations, financial condition and changes in our results of operations and financial condition. Our MD&A is organized as follows:
 
  •  Introduction.  This section provides: a general description of our company and its business; a description of our merger with HLTH Corporation (which we refer to as the Merger) and the accounting treatment of the Merger; background information on certain trends, transactions and other developments affecting our company; and a discussion of how seasonal factors may impact the timing of our revenue.
 
  •  Critical Accounting Estimates and Policies.  This section discusses those accounting policies that are considered important to the evaluation and reporting of our financial condition and results of operations, and whose application requires us to exercise subjective and often complex judgments in making estimates and assumptions. In addition, all of our significant accounting policies, including our critical accounting policies, are summarized in Note 2 to the Consolidated Financial Statements included in this Annual Report.
 
  •  Results of Operations and Supplemental Financial and Operating Information.  These sections provide our analysis and outlook for the significant line items on our statements of operations, as well as other information that we deem meaningful to understand our results of operations on a consolidated 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, 2009.
 
  •  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.
 
 
Our Company.  WebMD Health Corp. is a Delaware corporation that was incorporated on May 3, 2005. We completed an initial public offering on September 28, 2005. Our common stock trades under the symbol “WBMD” on the Nasdaq Global Select Market. From the completion of our initial public offering through the completion of the Merger on October 23, 2009, we were more than 80% owned by HLTH Corporation (which we refer to as HLTH). On October 23, 2009, stockholders of HLTH and WebMD approved the Merger and the transaction was completed later that day, with HLTH merging into WebMD and WebMD continuing as the surviving corporation. WebMD automatically succeeded to all of HLTH’s assets, liabilities and commitments upon completion of the Merger (other than the shares of WebMD Class B common stock owned by HLTH which were cancelled in the Merger). In the Merger, each share of HLTH common stock was converted into 0.4444 shares of WebMD common stock. The shares of WebMD’s Class A common stock were unchanged in the Merger and continue to trade on the NASDAQ Global Select Market under the symbol “WBMD”; however, they are no longer referred to as “Class A” because the Merger eliminated both WebMD’s Class B common stock and the dual-class stock structure that had existed at WebMD. The key reasons for the Merger


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included allowing HLTH’s stockholders to participate directly in the ownership of WebMD, while eliminating HLTH’s controlling interest in WebMD and the inefficiencies associated with having two separate public companies, increasing the ability of WebMD to raise capital and to obtain financing, and improving the liquidity of WebMD common stock by significantly increasing the number of shares held by public stockholders.
 
WebMD was the only operating business of HLTH at the time the Merger closed. Accordingly, the completion of the Merger did not have a significant effect on the operations of WebMD since there were no HLTH business operations to combine with WebMD’s business operations and, while HLTH had previously been providing certain corporate services to WebMD under a services agreement and had certain other agreements with WebMD, those agreements ceased when WebMD acquired HLTH. The employees and resources of HLTH used to provide services to WebMD under the services agreement became employees and resources of WebMD upon completion of the Merger.
 
Basis of Presentation; Accounting Treatment of the Merger.  The applicable accounting treatment for the Merger results in HLTH being considered the acquiring entity of the WebMD non-controlling interest. Therefore, the pre-acquisition consolidated financial statements of HLTH became the historical financial statements of WebMD following the completion of the Merger. For all prior periods presented in the Consolidated Financial Statements included in this Annual Report, the weighted-average shares outstanding used in computing income per common share have been adjusted by multiplying the historical weighted-average shares outstanding for HLTH by the 0.4444 exchange ratio in the Merger. Additionally, basic and diluted income per common share have been recalculated to reflect the adjusted weighted-average shares outstanding for the prior year periods presented. For the year ended December 31, 2009, these adjustments only apply to the portion of the year prior to the completion of the Merger on October 23, 2009.
 
The consolidated accounts of HLTH included, until the completion of the Merger, 100% of the assets and liabilities of WebMD, which was more than 80% owned by HLTH until the Merger. The ownership interests of the noncontrolling stockholders of WebMD are recorded as “noncontrolling interest” in the December 31, 2008 Consolidated Balance Sheet included in the Consolidated Financial Statements in this Annual Report. In the Consolidated Statements of Operations included in the Consolidated Financial Statements in this Annual Report, “Net income attributable to Company stockholders” reflects an adjustment for the noncontrolling stockholders’ share of the net income of WebMD until completion of the Merger.
 
Our Business.  We are a leading provider of health information services to consumers, physicians and other healthcare professionals, employers and health plans through our public and private online portals and health-focused publications. Our public portals for consumers enable them to obtain health and wellness information (including information on specific diseases or conditions), check symptoms, locate physicians, store individual healthcare information, receive periodic e-newsletters on topics of individual interest and participate in online communities with peers and experts. Our public portals for physicians and healthcare professionals make it easier for them to access clinical reference sources, stay abreast of the latest clinical information, learn about new treatment options, earn continuing medical education (which we refer to as CME) credit and communicate with peers. We generate revenue from our public portals primarily through the sale of advertising and sponsorship products, including CME services. 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. We also provide e-detailing promotion and physician recruitment services, information services and provide print services including the publication of WebMD the Magazine, a consumer magazine distributed to physician office waiting rooms. The sponsors and advertisers of our public portals include pharmaceutical, biotechnology, medical device and consumer products companies. Our private portals enable employers and health plans to provide their employees and members with access to personalized health and benefit information and decision-support technology that helps them to make more informed benefit, treatment and provider decisions. In addition, we offer, clients of our private portals, telephonic health coaching services on a per participant basis across an employee or plan population. We generate revenue from our private portals through the licensing of these portals and related services to employers and health plans either directly or through distributors.


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Background Information on Certain Trends Influencing the Use of Our Services.  Several key trends in the healthcare and Internet industries are influencing the use of healthcare information services of the types we provide or are developing. Those trends are described briefly below:
 
  •  Use of the Internet by Consumers and Physicians.  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 and has transformed how consumers and physicians find and utilize healthcare information.
 
  —  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 costs 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 health and wellness information, enabling them to have immediate access to searchable information and dynamic interactive content to check symptoms, assess risks, understand diseases, find providers and evaluate treatment options. According to a study of health information technology by the National Center for Health Statistics of the Centers for Disease Control and Prevention (or CDC), approximately 51% of United States adults aged 18-64 had used the Internet to look up health information during the prior 12 months, based on a survey conducted in the first half of 2009. According to a June 2009 study by the Pew Internet & American Life Project, 61% of U.S. adults have searched for health information on the Internet (compared to 25% in a similar study in 2000) and approximately 37% of U.S. adults have accessed social media related to health.
 
  —  The Internet has also become a primary source of information for physicians seeking to improve clinical practice and is growing relative to traditional information sources, such as conferences, meetings and offline journals.
 
  •  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; however, only a small portion of this amount is currently spent on online services. We believe that these companies, which comprise the majority of the advertisers and sponsors of our public portals, are becoming increasingly aware of the effectiveness of the Internet relative to traditional media in providing health, clinical and product-related information to consumers and physicians, and this increasing awareness will result in increasing demand for our services. However, notwithstanding our general expectation for increased demand, our advertising and sponsorship revenue may vary significantly from quarter to quarter due to a number of factors, including general economic conditions and the following:
 
  —  The majority of our advertising and sponsorship contracts are for terms of approximately four to twelve months. We have relatively few longer term advertising and sponsorship contracts.
 
  —  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 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.
 
Other factors that may affect the timing of contracting for specific programs with advertisers and sponsors, or receipt of revenue under such contracts, include: the timing of FDA approval for new products or for new approved uses for existing products; the timing of FDA approval of generic products that compete with existing brand name products; the timing of withdrawals of products from the market; the timing of roll-outs of new or enhanced services on our public portals; 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.


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  •  Changes in Health Plan Design; Health Management Initiatives.  In a healthcare market where a greater share of the responsibility for healthcare costs and decision-making has been increasingly shifting to consumers, use of information technology (including personal health records) to assist consumers in making informed decisions about healthcare has also increased. We believe that through our WebMD Health and Benefits Manager tools, including our personal health record application, we are well positioned to play a role in this environment. However, our strategy depends, in part, on increasing usage of our private portal services by our employer and health plan clients’ employees and members, respectively. Increasing usage of our services requires us to continue to deliver and improve the underlying technology and develop new and updated applications, features and services. In addition, we face competition in the area of healthcare decision-support tools and online health management applications and health information services. Many of our competitors have greater financial, technical, product development, marketing and other resources than we do, and may be better known than we are. We also expect that, for clients and potential clients in the industries most adversely affected by recent general economic conditions (including those in the financial services and automotive industries), we may continue to experience some reductions in initial contracts, contract expansions and contract renewals for our private portal services, as well as reductions in the size of existing contracts.
 
  •  Developments in Social Media and Other Internet Applications.  In the past several years, video and multimedia applications have become an increasingly important part of what users expect from Internet sites. In addition, consumers are increasingly using the Internet to access social media as a means to communicate and exchange information, including regarding health and wellness. Similarly, physicians and other healthcare professionals are increasingly participating in condition or topic specific community groups and other interactive applications. Consumers and healthcare professionals are also increasingly using handheld devices to access the Internet, with physicians increasingly using handheld devices in diagnosis and treatment at the point of care. We have invested and intend to continue to invest in software and systems that allow us to meet the demands of our users and sponsors, including customized content management and publishing technology to deliver interactive content, multimedia programming and personalized health applications that engage our users. The following are some of our recent and current initiatives to improve the user experience on our Web sites, expand our services and increase our user base:
 
  —  Physician Connect, our social networking platform for physicians, allows them to exchange information online on a range of topics, including patient care, drug information, healthcare-related legislation and practice management. Physicians can also create polls to elicit tailored, constructive feedback from other physicians. We also offer third parties the opportunity to sponsor Physician Connect discussions and polls so that they can gain insights into physicians’ perspectives and areas of interest. By the end of 2009, Physician Connect had attracted more than 120,000 physician members. Medscape from WebMD also offers a variety of sponsored and unsponsored blogs where healthcare professionals can share their thoughts and opinions with the Medscape from WebMD community.
 
  —  We plan to launch the WebMD Health Exchange, a social networking initiative that will build on the hundreds of health communities that exist on WebMD Health today and will more closely integrate the social experience throughout each of our core content areas, in 2010. The WebMD Health Exchange will give consumers the opportunity to explore a health or wellness topic on their own terms, by participating in WebMD expert moderated communities or by creating their own public community or invitation-only private community.
 
  —  Medscape Mobile is a free medical application that can be accessed on the iPhonetm and iPod touch®. Medscape Mobile includes Medscape’s specialty-specific news, comprehensive drug information and clinical reference tools. Medscape Mobile also includes CME activities organized by specialty and designed for use on a mobile device. Medscape Mobile is currently available on the iPhonetm and iPod touch® and will soon be offered on additional mobile platforms, including BlackBerry®.


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  —  WebMD Mobile is a free consumer application that allows consumers to access certain WebMD tools on an iPhone, including Symptom Checker, First Aid, and Pill Identifier applications, as well as other health information. It has been downloaded more than 1.5 million times since launch and is the leading free health application in the iTunes Store.
 
  —  We are pursuing opportunities to expand the reach of our brands outside the United States. In October 2009, we launched our first major consumer portal outside the United States in partnership with Boots, the UK’s leading pharmacy-led health and beauty retailer.
 
  •  Healthcare Reform Legislation.  Congress is currently considering significant healthcare reform legislation. Healthcare reform legislation, if enacted, may increase governmental involvement in healthcare and health insurance, may change the way health insurance is funded (including the role that employers play in such funding), may change reimbursement rates and other terms of such insurance coverage, may affect the way information technology is used in healthcare, and may otherwise change the environment in which healthcare industry participants operate and the specific roles such participants play in the industry. One important focus of healthcare reform is control of healthcare costs over the long term. We believe that our services can play an important role in efforts to reduce healthcare costs. Accordingly, healthcare reform may create opportunities for us, including with respect to personal health record applications and health and benefits decision-support tools and, more generally, with respect to our capabilities in providing health and wellness information and education. However, we are unable to predict future legislation or proposals with any certainty or to predict the effect they could have on our business, and healthcare industry participants may respond to healthcare reform legislation or to the uncertainties created by potential legislation by reducing their expenditures or postponing expenditure decisions, including expenditures for our services.
 
The healthcare industry in the United States and relationships among healthcare payers, providers and consumers are very complicated. In addition, the Internet and the market for online services are relatively new and still evolving. Accordingly, there can be no assurance that the trends identified above will continue or that the expected benefits to our businesses from our responses to those trends will be achieved. In addition, the market for healthcare information services is highly competitive and not only are our existing competitors seeking to benefit from these same trends, but the trends may also attract additional competitors.
 
Background Information on Certain Transactions and Other Significant Developments
 
2009 Tender Offer.  On December 10, 2009, we completed a tender offer for our common stock and repurchased 6,339,227 shares at a price of $37.00 per share. In this MD&A, we refer to this tender offer as the 2009 Tender Offer. The total cost of the 2009 Tender Offer was $235,220, which includes $670 of costs directly attributable to the purchase. The 2009 Tender Offer represented an opportunity for WebMD to return capital to stockholders who elected to tender their shares of WebMD common stock, while stockholders who chose not to participate in the 2009 Tender Offer automatically increased their relative percentage interest in our company at no additional cost to them.
 
Sale of Porex; Senior Secured Notes.  SNTC Holding, Inc., a wholly-owned subsidiary of the Company, entered into a stock purchase agreement, dated as of September 17, 2009, for the sale of our Porex business (which we refer to as Porex) for which we received $74,378 in cash at closing, subject to customary adjustment based on the amount of Porex’s working capital, received $67,500 in senior secured notes (which we refer to as the Senior Secured Notes) and incurred approximately $4,900 of transaction expenses. The sale was completed on October 19, 2009. The Senior Secured Notes are secured by certain assets of the acquirer. The Senior Secured Notes accrue interest at a rate of 8.75% per annum, payable quarterly. The Senior Secured Notes were issued in four series: the Senior Secured Notes of the first, second and third series have an aggregate principal amount of $10,000 each and mature on the first, second and third anniversaries of the closing, respectively; and the Senior Secured Notes of the fourth series have an aggregate principal amount of $37,500 and matures on the fourth anniversary of the closing. The historical financial information for Porex is reflected as discontinued operations within the consolidated financial statements contained elsewhere in this Annual Report.


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Divestiture of the Little Blue Book Print Directory Business.  In March 2009, we decided to divest the Little Blue Book print directory business (which we refer to as LBB). As a result, the historical financial information for LBB has been reflected as discontinued operations within the consolidated financial statements contained elsewhere in this Annual Report. During the three months ended June 30, 2009, we recorded an impairment charge of $8,300 to reduce the carrying value of LBB to its current estimated fair value. On September 30, 2009, we completed the sale of LBB in which we received cash proceeds of $2,590. The revenue and operating results of LBB had previously been reflected within our former publishing and other services operating segment. As a result of our decision to divest LBB, we eliminated the separate segment presentation for publishing and other services. We are currently reporting revenue in the following two categories: public portal advertising and sponsorship and private portal services.
 
Non-Recourse Credit Facilities.  On May 6, 2008 we entered into two substantially similar non-recourse credit facilities (which we refer to as the 2008 Credit Facilities) with an affiliate of Citigroup, secured by our auction rate securities (including, in some circumstances, interest payable on the auction rate securities), that would allow us to borrow up to 75% of the face amount of the auction rate securities pledged as collateral under the 2008 Credit Facilities. No borrowings were made under the 2008 Credit Facilities. A description of our auction rate securities (which we refer to as ARS) is included under “— Critical Accounting Estimates and Policies — Critical Accounting Policies — Fair Value of Investments in Auction Rate Securities (ARS)” below.
 
On April 28, 2009, we entered into amended and restated credit facilities with an affiliate of Citigroup (which we refer to as the 2009 Credit Facilities), replacing the 2008 Credit Facilities. As of the date of this Annual Report, no borrowings have been made under the 2009 Credit Facilities. The 2009 Credit Facilities are secured by our ARS holdings (including, in some circumstances, interest payable on the ARS holdings). We can make borrowings under the 2009 Credit Facilities until April 27, 2010. Any borrowings outstanding under these 2009 Credit Facilities after February 26, 2010 become demand loans, subject to 60 days notice, with recourse only to the pledged collateral. Loan proceeds may be used for general working capital purposes or other lawful business purposes (including repurchases of our own securities), but not for purposes of buying, trading or carrying other securities. The interest rate applicable to borrowings under the 2009 Credit Facilities will be the Open Federal Funds Rate plus 3.95%. The maximum that can be borrowed under the 2009 Credit Facilities is 75% of the face amount of the pledged ARS holdings. As of December 31, 2009, the maximum that we would be able to borrow under these credit facilities would be $264,525. Removals of ARS from the pledged collateral (including upon their redemption or sale) will reduce the amount available for borrowing under the 2009 Credit Facilities. The 2009 Credit Facilities are governed by amended and restated loan agreements, which contain customary representations and warranties of our Company, as borrower, and certain affirmative covenants and negative covenants relating to the pledged collateral. Under the loan agreements, our Company and the lender may, in certain circumstances, cause the pledged collateral to be sold, with the proceeds of any such sale required to be applied in full immediately to repayment of amounts borrowed.
 
2008 Tender Offer.  On November 25, 2008, we completed a tender offer for our common stock and repurchased 37,196,245 shares at a price of $19.80 per share. The total cost of the 2008 Tender Offer was $737,324, which includes $765 of costs directly attributable to the purchase. The 2008 Tender Offer represented an opportunity to return capital to stockholders who elected to tender their shares of common stock, while stockholders who chose not to participate in the 2008 Tender Offer automatically increased their relative percentage interest in our company at no additional cost to them.
 
2008 EBSCo Sale.  On November 16, 2006, we completed the sale of a 52% interest in the business that constituted our Emdeon Business Services segment, excluding our ViPS business unit (which we refer to as EBS) to an affiliate of General Atlantic LLC (which we refer to as GA). We refer to this transaction as the 2006 EBS Sale. From the closing of the 2006 EBS Sale to the closing of the 2008 EBSCo Sale on February 8, 2008, we owned 48% of EBS Master LLC (which we refer to as EBSCo), the entity that acquired EBS in the 2006 EBS Sale and accounted for that 48% ownership interest as an equity investment in our consolidated financial statements. On February 8, 2008, we entered into a Securities Purchase Agreement and simultaneously completed the sale of our 48% noncontrolling ownership interest in EBSCo for $574,617 in


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cash, net of professional fees and other expenses, to an affiliate of GA and affiliates of Hellman & Friedman, LLC.
 
ViPS Sale.  On July 22, 2008, we completed the sale of our ViPS business to an affiliate of General Dynamics Corporation. We received cash proceeds of $223,175, net of the working capital adjustment, professional fees and other expenses associated with the ViPS Sale. In connection with the ViPS Sale, we entered into a transition services agreement with ViPS whereby we provided ViPS with certain administrative services for a short period following the sale. The historical financial information of ViPS has been reflected as discontinued operations within the consolidated financial statements contained elsewhere in this Annual Report.
 
Directors & Officers Liability Insurance Coverage Litigation.  On July 23, 2007, HLTH commenced litigation (which we refer to as the Coverage Litigation) in the Court of Chancery of the State of Delaware in and for New Castle County against ten insurance companies in which HLTH was seeking to compel the defendant companies (which we refer to collectively as the Defendants) to honor their obligations under certain directors and officers liability insurance policies (which we refer to as the Policies). WebMD succeeded to HLTH as plaintiff in this action as a result of the Merger. HLTH was seeking an order requiring the Defendants to advance and/or reimburse expenses that HLTH has incurred and expected to continue to incur for the advancement of the reasonable defense costs of initially ten, and now four, former officers and directors of the HLTH’s former EPS subsidiary who were indicted in connection with the investigation by United States Attorney for the District of South Carolina (which we refer to as the Investigation) described in Note 11, “Commitments and Contingencies” located in the Notes to the Consolidated Financial Statements included in this Annual Report.
 
Pursuant to a stipulation among the parties, the Coverage Litigation was transferred on September 13, 2007 to the Superior Court of the State of Delaware in and for New Castle County. The Policies were issued to HLTH and to EPS, which is a co-plaintiff with WebMD in the Coverage Litigation (which we refer to collectively as the Plaintiffs). EPS was sold in September 2006 to Sage Software and has changed its name to Sage Software Healthcare, Inc. (which we refer to as SSHI). In connection with HLTH’s sale of EPS to Sage Software, HLTH retained certain obligations relating to the Investigation and agreed to indemnify Sage Software and SSHI with respect to certain expenses in connection with the Investigation and we assumed those obligations as a result of the Merger. HLTH retained (and we succeeded to as a result of the Merger) the right to assert claims and recover proceeds under the Policies on behalf of SSHI.
 
Prior to the filing of the Second Amended Complaint which is discussed below, the Policies at issue in the Coverage Litigation consisted of two separate groups of insurance policies. Each group of policies consists of several layers of coverage, with different insurers having agreed to provide specified amounts of coverage at various levels. The first group of policies was issued to EPS in the amount of $20,000 (which we refer to as the EPS Policies) and the second group of policies was issued to Synetic, Inc. (the former parent of EPS, which merged into HLTH) in the amount of $100,000, of which approximately $3,600 was paid by the primary carrier with respect to another unrelated matter (which we refer to as the Synetic Policies).
 
The carrier with the third level of coverage in the Synetic Policies filed a motion for summary judgment in the Coverage Litigation, which most of the carriers who have issued the Synetic Policies joined, which sought summary judgment that any liability to pay defense costs should be allocated among the three sets of policies available to us (including the policies with respect to which the Coverage Litigation relates and a third set of policies the issuers of which had not yet been named by us) such that the Synetic Policies would only be liable to pay about $23,000 of the $96,400 total coverage available under such policies. HLTH filed its opposition to the motion together with its motion for summary judgment against such carrier and several other carriers who have issued the Synetic Policies seeking to require such carriers to advance payment of the defense costs that we are obligated to pay while the Coverage Litigation is pending. On July 31, 2008, the Superior Court for the State of Delaware denied the motion filed by the carriers seeking allocation and granted HLTH’s motion for partial summary judgment to enforce the duty of such carriers to advance and reimburse these costs. Pursuant to the Court’s order, the issuers of the Synetic Policies have been reimbursing us for our costs as described above.


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On September 9, 2008 and February 4, 2009, respectively, the eighth and ninth level carriers of the Synetic Policies notified HLTH that they believe that they were not bound by the Court’s July 31, 2008 order regarding the duty of the Synetic carriers to advance and reimburse defense costs. This resulted in HLTH making a motion to the Court on February 23, 2009 to require such eighth and ninth level carriers to advance and reimburse defense costs. HLTH later settled with the eighth level carrier. Under the terms of the settlement such carrier will pay, in full and final settlement, an agreed-upon percentage of the policy amount against each payment of defense costs made by us as such policy continues to be implicated. On April 15, 2009, the ninth level carrier made a cross-motion for summary judgment claiming that, in light of a policy endorsement applicable only to the ninth level carrier, because of the time period during which the conspiracy charged in the Second Superseding Indictment is alleged to have taken place, the Synetic Policy issued by such carrier does not cover HLTH’s indemnification obligations. HLTH believed that such carrier’s motion was without merit and responded to the motion. On July 15, 2009, the Court granted summary judgment in favor of the ninth level carrier and unless and until we successfully appeal such decision, the ninth level carrier is not liable to pay any portion of the $10,000 total coverage of its policy with respect to our indemnification obligations. As of December 31, 2009, $83,100 has been paid by insurance companies representing the EPS Policies and the Synetic Policies through a combination of payment under the terms of the Policies, payment under reservation of rights or through settlement. Of this amount, $61,700 represents the portion received through settlement.
 
On November 17, 2008, HLTH filed a Second Amended Complaint which added four new insurance companies as defendants in the Coverage Action. These carriers are the issuers of a third set of policies (which we refer to as the Emdeon Policies) that provide coverage with respect to HLTH’s indemnification obligations to the former officers and directors of HLTH’s former EPS subsidiary who were indicted in connection with the Investigation. All but one of the carriers who issued the Emdeon Policies moved for summary judgment asserting that exclusions in the Emdeon Policies preclude coverage for HLTH’s indemnification obligations and HLTH filed motions seeking to compel such carriers to advance defense costs that HLTH was obligated to indemnify. On August 31, 2009, the Court issued two opinions. In the first opinion, the Court granted summary judgment in favor of HLTH with respect to one of the exclusions asserted by the carriers who issued the Emdeon Policies. In the second opinion, the Court granted summary judgment in favor of the carriers with respect to the other exclusion asserted by such carriers. One of the carriers only joined in the first motion with respect to which HLTH prevailed, although the policy issued by such carrier also contains language with respect to which the other carriers prevailed. We have made a motion to compel such carrier to advance defense costs and also asking the Court to rule that we have satisfied the $10,000 retention amount with respect to the Emdeon Policies and the Court has stayed a ruling on this motion pending the outcome of the appeals to the Supreme Court of Delaware discussed below. The implication of these opinions, when considered together, is that unless and until we successfully appeal the second opinion described above, we have (with the possible exception of the carrier who only joined in the motion regarding the first exclusion) effectively exhausted our insurance with respect to our obligation to indemnify the indicted individuals. We and the carriers who issued the Emdeon Policies (with the exception of the second level carrier with whom we have settled) have each appealed the trial Court’s August 31, 2009 rulings to the Supreme Court of Delaware and the Supreme Court has agreed to hear both appeals, which have been consolidated. The Supreme Court heard oral argument on both appeals on February 24, 2010.
 
The insurance carriers assert that our insurance policies provide that under certain circumstances, amounts advanced by the insurance companies in connection with the defense costs of the indicted individuals may have to be repaid by us, although the amounts that we have received in settlement from certain carriers is not subject to being repaid. We have obtained an undertaking from each indicted individual pursuant to which, under certain circumstances, such individual has agreed to repay defense costs advanced on such individual’s behalf.
 
In addition to the Coverage Litigation, on December 22, 2009, TIG Specialty Insurance Company (which we refer to as TIG), the second level issuer of the EPS Policies commenced an action against us (which we refer to as the TIG Action) to recover the $5,000 that TIG advanced to us in 2006. We have not yet answered the TIG Action but intend to vigorously defend our rights.


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There can be no assurance that we will ultimately prevail in the Coverage Litigation or the TIG Action or that the Defendants in the Coverage Action will be required to provide funding on an interim basis pending the resolution of the Coverage Litigation. We intend to continue to satisfy our legal obligations to the indicted individuals with respect to advancement of amounts for their defense costs.
 
Indemnification Obligations to Former Officers and Directors of EPS.  HLTH had certain indemnity obligations to advance amounts for reasonable defense costs for initially ten, and now four, former officers and directors of EPS, who were indicted in connection with the Investigation. In connection with the sale of EPS, HLTH agreed to indemnify Sage Software relating to these indemnity obligations and we also assumed that obligation in the Merger. During 2007, based on information available at that time, we determined a reasonable estimate of the range of probable costs with respect to its indemnification obligation and accordingly, recorded an aggregate pre-tax charge of $73,347, which represented our estimate of the low end of the probable range of costs related to this matter. We reserved the low end of the probable range of costs because no estimate within the range was a better estimate than any other amount. That estimate included assumptions as to the duration of the trial and pre-trial periods, and the defense costs to be incurred during these periods. During 2008 and 2009 we updated the estimated range of our indemnification obligation based on new information received during those periods, and as a result, recorded additional pre-tax charges of $29,078 and $14,367, respectively. The probable future costs with respect to this matter is estimated to be approximately $25,000, as of December 31, 2009 which includes costs that have been incurred prior to, but were not yet paid, as of December 31, 2009. The ultimate outcome of this matter is still uncertain, and the estimate of future costs includes assumptions as to the duration of the trial and the defense costs to be incurred during the remainder of the pre-trial period and during the trial period. Accordingly, the amount of cost we may ultimately incur could be substantially more than the reserve we have currently provided. If the recorded reserves are insufficient to cover the ultimate cost of this matter, we will need to record additional charges to our results of operations in future periods.
 
 
The timing of our revenue is affected by seasonal factors. Our public portal advertising and sponsorship revenue is seasonal, primarily due to the annual spending patterns of the advertising and sponsorship clients of our public portals. This portion of our revenue is usually the lowest in the first quarter of each calendar year, and increases during each consecutive quarter throughout the year. The timing of revenue in relation to our expenses, much of which do not vary directly with revenue, has an impact on cost of operations, sales and marketing and general and administrative expenses as a percentage of revenue in each calendar quarter.
 
Critical Accounting Estimates and Policies
 
Critical Accounting Estimates
 
Our MD&A is based upon our consolidated financial statements and notes to consolidated financial statements, which were prepared in conformity with U.S. generally accepted accounting principles. The preparation of the consolidated financial statements requires us to make estimates and assumptions that affect the amounts reported in the 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 consider to form a basis for making judgments about the carrying values of assets and liabilities, the recorded amounts of revenue and expenses and the disclosure of contingent assets and liabilities. We are subject to uncertainties such as the impact of future events, economic and political factors, and changes in our business environment; therefore, actual results could differ from these estimates. Accordingly, the accounting estimates used in the 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 consolidated financial statements.


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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 indefinite lived intangible assets), the amortization period of long-lived assets (excluding goodwill and indefinite lived intangible assets), the carrying value, capitalization and amortization of software and Web site development costs, the carrying value of investments including investments in auction rate securities, the provision for income taxes and related deferred tax accounts, certain accrued expenses, contingencies, litigation and related legal accruals and the value attributed to employee stock options and other stock-based awards.
 
Critical Accounting Policies
 
We believe the following reflects our critical accounting policies and our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements:
 
  •  Revenue Recognition.  Revenue from advertising is recognized as advertisements are delivered or as publications are distributed. Revenue from sponsorship arrangements, content syndication and distribution arrangements, information services and licenses of healthcare management tools and private portals as well as related health coaching services, are recognized ratably over the term of the applicable agreement. Revenue from the sponsorship of CME is recognized over the period we substantially complete our contractual deliverables as determined by the applicable agreements. When contractual arrangements contain multiple elements, revenue is allocated to each element based on its relative fair value determined using prices charged when elements are sold separately. In certain instances where fair value does not exist for all the elements, the amount of revenue allocated to the delivered elements equals the total consideration less the fair value of the undelivered elements. In instances where fair value does not exist for the undelivered elements, revenue is recognized when the last element is delivered.
 
  •  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 fair value using exit price and market participant view, such as discounted cash flow and replacement cost models. Our long-lived assets, excluding goodwill and indefinite lived intangible assets, are amortized over their estimated useful lives, which we determine 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, excluding goodwill and indefinite lived intangible assets, whenever indicators of impairment are present. We evaluate the carrying value of goodwill and indefinite lived intangible assets annually, or whenever indicators of impairment are present. We use a discounted cash flow approach to determine the fair value of goodwill and indefinite lived intangible assets. Long-lived assets held for sale are reported at the lower of cost or fair value less cost to sell. There was no impairment of goodwill or indefinite lived intangible assets noted as a result of our impairment testing in 2009 for any of our continuing operations.
 
  •  Fair Value of Investments in Auction Rate Securities (ARS).  We hold investments in ARS which are backed by student loans, 97% guaranteed under the Federal Family Education Loan Program (FFELP), and had credit ratings of AAA or Aaa when purchased. Historically, the fair value of our ARS holdings approximated par value due to the frequent auction periods, generally every 7 to 28 days, which provided liquidity to these investments. However, since February 2008, all auctions involving these securities have failed. The result of a failed auction is that these ARS holdings will continue to pay interest in accordance with their terms at each respective auction date; however, liquidity of the securities will be limited until there is a successful auction, the issuer redeems the securities, the securities mature or until such time as other markets for our ARS holdings develop. We cannot be certain regarding the amount of time it will take for an auction market or other markets to develop. Additionally, approximately one-half of the auction rate securities we hold were, during 2009, either downgraded below AAA or placed on “watch” status by one or more of the major credit rating agencies.


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We estimate the fair value of our ARS holdings using an income approach valuation technique. Using this approach, expected future cash flows are calculated over the expected life of each security and are discounted to a single present value using a market required rate of return. Some of the more significant assumptions made in the present value calculations include (i) the estimated weighted average lives for the loan portfolios underlying each individual ARS and (ii) the required rates of return used to discount the estimated future cash flows over the estimated life of each security, which consider both the credit quality for each individual ARS and the market liquidity for these investments. Additionally, effective April 1, 2009, we adopted new authoritative guidance which required us to separate losses associated with our ARS into two categories, the portion of the loss which is considered credit loss and the portion of the loss which is due to other factors. As discussed above, certain of the auction rate securities we hold were, during 2009, downgraded below AAA by one or more of the major credit rating agencies. These revised credit ratings were a significant consideration in determining the estimated credit loss associated with our ARS.
 
Our ARS have been classified as Level 3 assets as their valuation, including the portion of their valuation attributable to credit losses, requires substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in the securities. If different assumptions were used for the various inputs to the valuation approach including, but not limited to, assumptions involving the estimated lives of the ARS holdings the estimated cash flows over those estimated lives, and the estimated discount rates applied to those cash flows, the estimated fair value of these investments could be significantly higher or lower than the fair value we determined. We continue to monitor the market for auction rate securities as well as the individual ARS holdings we own. We may be required to record losses in future periods, either realized or unrealized, if the fair value of our ARS deteriorates further. See Note 16 located within the Notes to the Consolidated Financial Statements included elsewhere in this Annual Report for additional information regarding our ARS.
 
  •  Stock-Based Compensation.  Effective January 1, 2006, we adopted authoritative guidance which requires all share-based payments to employees, including grants of employee stock options, to be recognized as compensation expense over the service period (generally the vesting period) in the consolidated financial statements based on their fair values. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model. The assumptions used in this model are expected dividend yield, expected volatility, risk-free interest rate and expected term. Unvested stock options and restricted stock awards that were granted prior to January 1, 2006 continued to be accounted for using the same grant date fair value and same expense attribution method used under previously issued authoritative guidance, except that all awards are recognized in the results of operations over the remaining vesting periods. As of December 31, 2009, there was approximately $63.5 million of unrecognized stock-based compensation expense (net of estimated forfeitures) related to unvested stock options and restricted stock awards held by employees, which is expected to be recognized over a weighted-average period of approximately 3.1 years, related to the Company’s stock-based compensation plans.
 
  •  Deferred Taxes.  Our deferred tax assets are comprised primarily of net operating loss carryforwards. These net operating loss carryforwards may be used to offset taxable income in future periods, reducing the amount of taxes we might otherwise be required to pay. A significant portion of our net deferred tax assets, including the portion related to excess tax benefits of stock-based awards, are reserved for by a valuation allowance as required by relevant accounting literature. The remaining portion of our net deferred tax assets are no longer reserved for by a valuation allowance. Management determines the need for a valuation allowance by assessing the probability of realizing deferred tax assets, taking into consideration factors including historical operating results, expectations of future earnings and taxable income. Management will continue to evaluate the need for a valuation allowance in the future.
 
  •  Tax Contingencies.  Our tax contingencies are recorded to address potential exposures involving tax positions we have taken that could be challenged by tax authorities. These potential exposures result from applications of various statutes, rules, regulations and interpretations. Our estimates of tax contingencies reflect assumptions and judgments about potential actions by taxing jurisdictions. We


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  believe that these assumptions and judgments are reasonable. However, our accruals may change in the future due to new developments in each matter and the ultimate resolution of these matters may be greater or less than the amount that we have accrued. Consistent with our historical financial reporting, we have elected to reflect interest and penalties related to uncertain tax positions as part of the income tax provision.
 
Results of Operations
 
The following table sets forth our 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,  
    2009     2008     2007  
    $     %     $     %     $     %  
 
Revenue
  $ 438,536       100.0     $ 373,462       100.0     $ 319,232       100.0  
Cost of operations
    165,753       37.8       135,138       36.2       114,000       35.7  
Sales and marketing
    112,101       25.6       106,080       28.4       91,035       28.5  
General and administrative
    89,620       20.4       88,053       23.6       102,661       32.2  
Depreciation and amortization
    28,185       6.4       28,410       7.6       27,808       8.7  
Interest income
    9,149       2.1       35,300       9.5       42,035       13.2  
Interest expense
    23,515       5.4       26,428       7.1       25,887       8.1  
Severance and other transaction expenses
    11,066       2.5       6,941       1.9       2,527       0.8  
Gain on repurchases of convertible notes
    10,120       2.3                          
Gain on sale of EBS Master LLC
                538,024       144.1              
Restructuring
                7,416       2.0              
Impairment of auction rate securities
                60,108       16.1              
Other (expense) income, net
    (1,369 )     (0.3 )     992       0.3       6,332       2.0  
                                                 
Income from continuing operations before income tax (benefit) provision
    26,196       6.0       489,204       131.0       3,681       1.2  
Income tax (benefit) provision
    (45,491 )     (10.3 )     26,638       7.2       (9,053 )     (2.8 )
Equity in earnings of EBS Master LLC
                4,007       1.1       28,566       8.9  
                                                 
Consolidated income from continuing operations
    71,687       16.3       466,573       124.9       41,300       12.9  
Consolidated income (loss) from discontinued operations
    49,354       11.3       94,682       25.4       (18,048 )     (5.6 )
                                                 
Consolidated net income inclusive of noncontrolling interest
    121,041       27.6       561,255       150.3       23,252       7.3  
Income attributable to noncontrolling interest
    (3,705 )     (0.8 )     (1,032 )     (0.3 )     (10,667 )     (3.4 )
                                                 
Net income attributable to Company stockholders
  $ 117,336       26.8     $ 560,223       150.0     $ 12,585       3.9  
                                                 
 
Revenue from our public portal advertising and sponsorship is derived from online advertising, sponsorship (including online CME services), e-detailing promotion and physician recruitment services, content syndication and distribution, information services and other print services (including advertisements in WebMD the Magazine). Revenue from our private portal services is derived from licensing our private online portals to employers, healthcare payers and others, along with related services including lifestyle education and personalized telephonic coaching. Our customers include pharmaceutical, biotechnology, medical device and consumer products companies, as well as employers and health plans.


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Cost of operations consists of salaries and related expenses, and non-cash stock-based compensation expense related to providing and distributing services and products we provide to customers and costs associated with the operation and maintenance of our public and private portals. Cost of operations also consists of editorial and production costs, Web site operations costs, non-capitalized Web site development costs, costs we pay to our distribution partners, costs associated with our lifestyle education and personalized telephonic coaching services, and costs related to the production and distribution of our publications, including costs related to creating and licensing content, telecommunications, leased properties and printing and distribution.
 
Sales and marketing expense consists primarily of advertising, product and brand promotion, as well as selling expenses including salaries and related expenses, and non-cash stock-based compensation for account executives and account management. These expenses include items related to salaries and related expenses of marketing personnel, costs and expenses for marketing programs, and fees for professional marketing and advertising services. Also included in sales and marketing expense are the non-cash advertising expenses discussed below.
 
General and administrative expense consists primarily of salaries, non-cash stock-based compensation and other salary-related expenses of administrative, finance, legal, information technology, human resources and executive personnel. Also included in general and administrative expense are general insurance and costs of accounting and internal control systems to support our operations.
 
Our discussions throughout MD&A make references to certain non-cash expenses. The following is a summary of our principal non-cash expenses:
 
  •  Non-cash advertising expense.  Expense related to the use of our prepaid advertising inventory that we received from News Corporation in exchange for equity instruments that we issued in connection with an agreement we entered into with News Corporation in 1999 and subsequently amended in 2000. This non-cash advertising expense is included in sales and marketing expense as we use the asset for promotion of our brand.
 
  •  Non-cash stock-based compensation expense.  Expense related to the awards of all share-based payments to employees and non-employee directors, such as grants of employee stock options and restricted stock. Non-cash stock-based compensation expense is reflected in the same expense captions as the related salary cost of the respective employee.
 
The following table is a summary of our non-cash expenses included in the respective statements of operations captions.
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
Advertising expense included in:
                       
Sales and marketing
  $ 1,753     $ 5,097     $ 5,264  
                         
Stock-based compensation expense included in:
                       
Cost of operations
  $ 6,723     $ 3,818     $ 5,027  
Sales and marketing
    8,069       3,591       4,868  
General and administrative
    24,620       17,223       22,441  
                         
Income from continuing operations
  $ 39,412     $ 24,632     $ 32,336  
                         
 
2009 and 2008
 
The following discussion is a comparison of our results of operations for the year ended December 31, 2009, to the year ended December 31, 2008.
 
Revenue.  Our total revenue increased 17.4% to $438,536 in 2009 from $373,462 in 2008. The increase was primarily due to higher advertising and sponsorship revenue from our public portals. A more detailed


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discussion regarding changes in revenue is included below under “— Supplemental Financial and Operating Information.”
 
Cost of Operations.  Cost of operations was $165,753 in 2009, compared to $135,138 in 2008. Our cost of operations represented 37.8% of revenue in 2009, compared to 36.2% of revenue in 2008. Included in cost of operations were non-cash expenses related to stock-based compensation of $6,723 in 2009, compared to $3,818 in 2008. The increase in non-cash stock-based compensation expense for 2009, compared to 2008, resulted primarily from a broad-based equity grant made to employees during the end of 2008. As a result of the timing of this grant, the related non-cash stock based compensation expense was only partially included in 2008, but included during the full year of 2009.
 
Cost of operations, excluding the non-cash stock-based compensation expense discussed above, was $159,030, or 36.3% of revenue in 2009, compared to $131,320, or 35.2% of revenue in 2008. The increase in absolute dollars, as well as the increase as a percentage of revenue in 2009 compared to 2008, was primarily attributable to an increase of approximately $11,200 in development and distribution expense, and an increase of approximately $15,300 of website operations expense associated with the delivery of our advertising and sponsorship arrangements and increased traffic to our Web sites.
 
Sales and Marketing.  Sales and marketing expense was $112,101 in 2009, compared to $106,080 in 2008. Our sales and marketing expense represented 25.6% of revenue in 2009, compared to 28.4% in 2008. Included in sales and marketing expense were non-cash expenses related to advertising of $1,753 in 2009, compared to $5,097 in 2008. Non-cash advertising expense was lower in 2009 when compared to 2008 as we fully utilized the balance or our prepaid advertising inventory during 2009. Also included in sales and marketing expense were non-cash expenses related to stock-based compensation of $8,069 in 2009, compared to $3,591 in 2008. The increase in non-cash stock-based compensation expense for 2009, compared to 2008, resulted primarily from a broad-based equity grant made to employees during the end of 2008. As a result of the timing of this grant, the related non-cash stock based compensation expense was only partially included in 2008, but included during the full year of 2009.
 
Sales and marketing expense, excluding the non-cash expenses discussed above, was $102,279 or 23.3% of revenue, in 2009, compared to $97,392, or 26.1% of revenue in 2008. The increase in absolute dollars in 2009 compared to 2008 was primarily attributable to an increase in compensation and other personnel-related costs due to increased staffing and sales commissions related to higher revenue. The decrease as a percentage of revenue, excluding the non-cash expenses discussed above, for 2009 compared to 2008, was primarily due to our ability to achieve the increase in revenue without incurring a proportional increase in sales and marketing expense.
 
General and Administrative.  General and administrative expense was $89,620 in 2009, compared to $88,053 in 2008. Our general and administrative expenses represented 20.4% of revenue in 2009, compared to 23.6% of revenue in 2008. Included in general and administrative expense was non-cash stock-based compensation expense of $24,620 in 2009, compared to $17,223 in 2008. The increase in non-cash stock-based compensation expense for 2009, compared to 2008, resulted primarily from a broad-based equity grant made to employees during the end of 2008. As a result of the timing of this grant, the related non-cash stock based compensation expense was only partially included in 2008, but included during the full year of 2009.
 
General and administrative expense, excluding the non-cash stock-based compensation expense discussed above, was $65,000, or 14.8% of revenue in 2009, compared to $70,830, or 19.0% of revenue in 2008. The decrease of $5,830 was attributable to approximately $8,000 of corporate expense reduction initiatives throughout the year in anticipation of the Merger which was completed in October 2009, offset by an increase of approximately $2,200 in personnel and related expenses at WebMD. Our general and administrative expenses as a percentage of revenue declined during 2009 as compared to 2008, reflecting the $8,000 corporate expense reductions as well as our ability to achieve the increase in revenue without incurring a proportional increase in general and administrative expenses.
 
Depreciation and Amortization.  Depreciation and amortization expense was $28,185, or 6.4% of revenue in 2009, compared to $28,410, or 7.6% of revenue in 2008. Depreciation expense increased by


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approximately $2,900 during 2009 compared to 2008, resulting from capital expenditures made in 2009 and 2008, which was offset by a decrease in amortization expense of approximately $3,100 resulting from certain intangible assets becoming fully amortized.
 
Interest Income.  Interest income was $9,149 in 2009, compared to $35,300 in 2008. This decrease in 2009 primarily resulted from a decrease in the average rates of return, as well as lower average investment balances for the period, compared to the prior year period.
 
Interest Expense.  Interest expense was $23,515 in 2009, compared to $26,428 in 2008. Interest expense in 2009 and 2008 included $10,205 and $10,926, respectively, related to the amortization of the debt discount for our 31/8% Convertible Notes due 2025 (which we refer to as 31/8% Notes) and the amortization of the debt issuances costs for both our 1.75% Convertible Subordinated Notes due 2023 (which we refer to as 1.75% Notes) and our 31/8% Notes. During 2009 we repurchased $85,417 principal amount of our 1.75% Notes and $49,700 principal amount of our 31/8% Notes which resulted in the decrease in interest expense during 2009 when compared to 2008.
 
Gain on Repurchases of Convertible Notes.  During 2009, we repurchased $85,417 principal amount of our 1.75% Convertible Notes for $80,123, and $49,700 principal amount of our 31/8% Convertible Notes for $43,734. We recognized a net gain on the repurchase of these notes of $10,120 during 2009. There was no comparable repurchase activity in 2008.
 
Severance and Other Transaction Expenses.  We incurred severance and other transaction expenses of $11,066 during 2009 and $6,941 during 2008 related to the merger between HLTH and WebMD. During 2009, these expenses include severance and related expenses for certain HLTH senior executives that had severance and other benefits through pre-existing employment agreements which were triggered by the Merger. During 2008, these expenses related to professional fees, primarily consisting of legal, accounting and financial advisory services that we incurred related to a proposed merger between WebMD and HLTH that was never completed under the then proposed structure.
 
Gain on Sale of EBS Master LLC.  The gain on sale of EBS Master LLC of $538,024 in 2008 represented a pre-tax gain recognized in connection with the 2008 EBSCo Sale on February 8, 2008. For additional information see “— Introduction — Background Information on Certain Transactions and Other Significant Developments — 2008 EBSCo Sale” above.
 
Impairment of Auction Rate Securities.  Impairment of auction rate securities represents a charge of $60,108 related to an other-than-temporary impairment of the fair value of our ARS investments in 2008. For additional information, see “Critical Accounting Estimates and Policies — Fair Value of Investments in Auction Rate Securities” above.
 
Restructuring.  During 2008, as a result of our completion of the integration of previously acquired businesses and efficiencies that we realized from our infrastructure investments, combined with the continued reduction in shared services of HLTH following the divestiture of EPS, EBS and ViPS, we took an opportunity to better align the skill sets of our employees with the needs of our business. As a result, we recorded a restructuring charge of $7,416 during 2008. This amount includes (i) $3,575 related to the purchase of insurance for extended coverage during periods when we owned the divested businesses, (ii) $3,391 for severance expenses related to the reduction of our work force and (iii) $450 of costs to consolidate facilities and other exit costs.
 
Other (Expense) Income, Net.  Other expense was $1,369 in 2009, compared to other income of $992 in 2008. Other (expense) income, net includes (i) $2,331 and $1,092 in 2009 and 2008 of external legal costs and expenses we incurred related to the investigation by the United States Attorney for the District of South Carolina and the SEC, including legal costs we incurred related to the ongoing litigation with the insurance carriers regarding the coverage of certain expenses related to this investigation, (ii) $915 and $1,749 in 2009 and 2008 related to the reversal of indemnification accruals for certain tax contingencies associated with our former EBS subsidiary resulting from the expiration of various statutes and (iii) transition services income of $47 and $335 in 2009 and 2008 which represents amounts earned from the service fees charged to EBSCo and ViPS, for services rendered under their respective transition services agreements.


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Income Tax (Benefit) Provision.  We had an income tax benefit of $45,491 in 2009, compared to an income tax provision of $26,638 in 2008. The income tax benefit of $45,491 in 2009 includes a benefit of $58,578 related to the reversal of valuation allowance against our net deferred tax assets, including our net operating loss carryforwards, and certain state net operating loss benefits as a result of revised apportionment factors due to the Merger. The income tax provision of $26,638 in 2008 includes a provision of $20,504 related to the gain on the 2008 EBSCo Sale, which primarily relates to certain alternative minimum taxes and other state taxes that were not offset by net operating loss carryforwards. Also, the income tax provision in 2008 excludes a benefit for the impairment of ARS, as it is currently not deductible for tax purposes, and therefore, a valuation allowance is maintained on this deferred tax asset.
 
Consolidated Income from Discontinued Operations, Net of Tax.  Consolidated income from discontinued operations, net of tax, was $49,354 in 2009, compared to $94,682 in 2008. Included in discontinued operations is a pre-tax gain of $25,790 from the sale of Porex in 2009 and a pre-tax gain of $96,969 from the sale of ViPS in 2008. In addition, consolidated income from discontinued operations includes the aggregate pre-tax operating results of Porex and LBB of $5,575 in 2009 and the aggregate pre-tax operating results of ViPS, Porex and LBB of $29,369 in 2008. Also included in consolidated income from discontinued operations are pre-tax charges of approximately $14,367 and $29,078 in 2009 and 2008, respectively, related to our indemnity obligations to advance amounts for reasonable defense costs for the former officers and directors of EPS, who were indicted in connection with the investigation by the United States Attorney for the District of South Carolina and the SEC. In 2009, we also recorded income of $53,150 related to settlements with certain insurance carriers related to their coverage of the defense costs being incurred by the former officers and directors of EPS. The income tax provision included within discontinued operations was $21,224 and $3,134 during 2009 and 2008.
 
Income Attributable to Noncontrolling Interest.  Income attributable to noncontrolling interest was $3,705 in 2009 and $1,032 in 2008 and represents the interest of the former WebMD minority shareholders during periods prior to October 23, 2009, the closing date of the Merger. Historically, income attributable to noncontrolling interest fluctuated based on the net income or loss reported by WebMD, combined with changes in the percentage ownership of WebMD held by the noncontrolling interest shareholders.
 
2008 and 2007
 
The following discussion is a comparison of our results of operations for the year ended December 31, 2008 to the year ended December 31, 2007.
 
Revenue.  Our total revenue increased 17.0% to $373,462 in 2008 from $319,232 in 2007. The increase was primarily due to higher advertising and sponsorship revenue from our public portals. A more detailed discussion regarding changes in revenue is included below under “— Supplemental Financial and Operating Information.”
 
Cost of Operations.  Cost of operations was $135,138 in 2008, compared to $114,000 in 2007. Our cost of operations represented 36.2% of revenue in 2008, compared to 35.7% of revenue in 2007. Included in cost of operations were non-cash expenses related to stock-based compensation of $3,818 in 2008, compared to $5,027 in 2007. The decrease in non-cash stock-based compensation expense for 2008, compared to 2007, resulted primarily from the graded vesting methodology used in determining stock-based compensation expense relating to the stock options and restricted stock awards granted to our employees, which includes the options and restricted stock granted at the time of our initial public offering.
 
Cost of operations, excluding the non-cash stock-based compensation expense discussed above, was $131,320, or 35.2% of revenue in 2008, compared to $108,973, or 34.1% of revenue in 2007. The increase in absolute dollars as well as the increase as a percentage of revenue in 2008 as compared to 2007 was primarily attributable to an increase of approximately $13,000 in compensation-related costs due to higher staffing levels relating to our Web site operations and development, as well as higher staffing levels associated with our personalized telephonic coaching services. Additionally, the increase was also related to approximately $6,500 of higher costs associated with creating and licensing content for our sponsorship arrangements and Web sites.


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Sales and Marketing.  Sales and marketing expense was $106,080 in 2008, compared to $91,035 in 2007. Our sales and marketing expense represented 28.4% of revenue in 2008, compared to 28.5% in 2007. Included in sales and marketing expense were non-cash expenses related to advertising of $5,097 in 2008, compared to $5,264 in 2007. Also included in sales and marketing expense were non-cash expenses related to stock-based compensation of $3,591 in 2008, compared to $4,868 in 2007. The decrease in non-cash stock-based compensation expense for 2008, compared to 2007, resulted primarily from the graded vesting methodology used in determining stock-based compensation expense relating to stock options and restricted stock awards granted to our employees, which includes the options and restricted stock granted at the time of our initial public offering.
 
Sales and marketing expense, excluding the non-cash expenses discussed above, was $97,392, or 26.1% of revenue in 2008, compared to $80,903, or 25.3% of revenue in 2007. The increase in absolute dollars, as well as the increase as a percentage of revenue in 2008 compared to 2007, were primarily attributable to an increase of approximately $13,500 in compensation and other personnel-related costs due to increased staffing and sales commissions related to higher revenue.
 
General and Administrative.  General and administrative expense was $88,053 in 2008, compared to $102,661 in 2007. Our general and administrative expenses represented 23.6% in 2008, compared to 32.2% in 2007. Included in general and administrative expense was non-cash stock-based compensation expense of $17,223 in 2008, compared to $22,441 in 2007. Non-cash stock-based compensation expense was lower in 2008, compared to 2007, resulting primarily from the graded vesting methodology used in determining stock-based compensation expense relating to stock options and restricted stock awards granted to our employees, which includes the options and restricted stock granted at the time of our initial public offering.
 
General and administrative expense, excluding the non-cash stock-based compensation expense discussed above, was $70,830, or 19.0% of revenue in 2008, compared to $80,220, or 25.1% of revenue in 2007. Approximately $10,000 of the decrease in absolute dollars was attributable to lower corporate expenses in 2008, compared to 2007. These lower corporate expenses were achievable due to the reduction in our corporate infrastructure following the sales of EPS and EBS during the latter part of 2006 and the related wind down of our remaining responsibilities under the transition services agreements with those entities.
 
Depreciation and Amortization.  Depreciation and amortization expense was $28,410, or 7.6% of revenue in 2008, compared to $27,808, or 8.7% of revenue in 2007. The increase in 2008, as compared to 2007, was primarily due to approximately $3,900 in depreciation expense resulting from capital expenditures made in 2008 and 2007, which was partially offset by a decrease in amortization expense of approximately $3,300 resulting from certain intangible assets becoming fully amortized.
 
Interest Income.  Interest income was $35,300 in 2008, compared to $42,035 in 2007. This decrease in 2008 primarily resulted from a decrease in the average rates of return for the period, partially offset by higher average investment balances.
 
Interest Expense.  Interest expense of $26,428 in 2008 was relatively consistent with interest expense of $25,887 in 2007. Interest expense in 2008 and 2007 included $10,926 and $10,210, respectively, related to the amortization of the debt discount for our 31/8% Notes and the amortization of the debt issuances costs for both our 1.75% Notes and our 31/8% Notes.
 
Gain on Sale of EBS Master LLC.  The gain on sale of EBS Master LLC of $538,024 represented a pre-tax gain recognized in connection with the 2008 EBSCo Sale on February 8, 2008. For additional information see “— Introduction — Background Information on Certain Transactions and Other Significant Developments — 2008 EBSCo Sale” above. There was no comparable amount in 2007.
 
Impairment of Auction Rate Securities.  Impairment of auction rate securities represents a charge of $60,108 related to an other-than-temporary impairment of the fair value of our ARS investments in 2008. For additional information, see “Critical Accounting Estimates and Policies — Fair Value of Investments in Auction Rate Securities” above. There was no comparable amount in 2007.


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Restructuring.  As a result of our completion of the integration of previously acquired businesses and efficiencies that we continue to realize from our infrastructure investments combined with the continued reduction in corporate shared services following the divestiture of EPS, EBS and ViPS, we took this opportunity to better align the skill sets of our employees with the needs of our business. We recorded a restructuring charge during 2008 of $7,416. This amount includes (i) $3,575 related to the purchase of insurance for extended coverage during periods when we owned the divested businesses, (ii) $3,391 for severance expenses related to the reduction of our work force and (iii) $450 of costs to consolidate facilities and other exit costs. There was no comparable amount in 2007.
 
Other (Expense) Income, Net.  Other income, net was $992 in 2008, compared to $6,332 in 2007. Other income, net includes (i) $1,092 and $1,397 in 2008 and 2007 of external legal costs and expenses we incurred related to the investigation by the United States Attorney for the District of South Carolina and the SEC, (ii) $1,749 and $1,497 in 2008 and 2007 related to the reversal of certain sales and use tax contingencies resulting from the expiration of various statutes and (iii) transition services income of $335 and $5,833 in 2008 and 2007 which represents amounts earned from the service fee charged to EBSCo, Sage Software and ViPS, net of services EBSCo provides to us, for services rendered under each of their respective transition services agreements. We provided a significantly higher level of transition services in 2007, compared to 2008, as reflected by the lower fees charged in 2008.
 
Income Tax Provision (Benefit).  We had an income tax provision of $26,638 in 2008, compared to an income tax benefit of $9,053 in 2007. The income tax provision of $26,638 in 2008 includes a provision of $20,504 related to the gain on the 2008 EBSCo Sale, which primarily relates to certain alternative minimum taxes and other state taxes that were not offset by net operating loss carryforwards. Also, the income tax provision in 2008 excludes a benefit for the impairment of ARS, as it is currently not deductible for tax purposes, and therefore, a valuation allowance is maintained on this deferred tax asset. The income tax benefit of $9,053 in 2007 includes a benefit of $16,327 related to the reversal of valuation allowance against our net deferred tax assets, including our net operating loss carryforwards.
 
Consolidated Income (Loss) from Discontinued Operations, Net of Tax.  Consolidated income from discontinued operations, net of tax, was $94,682 in 2008, compared to a loss of $18,048 in 2007. Included in consolidated income (loss) from discontinued operations, net of tax, is a pre-tax gain of $96,969 from the ViPS Sale. In addition, consolidated income (loss) from discontinued operations includes the aggregate pre-tax operating results of our ViPS segment, Porex segment and LBB of $29,369 in 2008 and the aggregate pre-tax operating results of our ViPS segment, Porex segment, LBB and ACS/ACP Business of $31,724 in 2007. Also included in consolidated income (loss) from discontinued operations are pre-tax charges of approximately $29,078 and $73,347 in 2008 and 2007, respectively, related to our indemnity obligations to advance amounts for reasonable defense costs for initially ten, and now four, former officers and directors of EPS, who were indicted in connection with the investigation by the United States Attorney for the District of South Carolina and the SEC, which was partially offset in 2007 by $14,625 related to a settlement with two of our insurance companies related to the reimbursement of these defense costs. The income tax provision (benefit) included within discontinued operations was $3,134 and $(4,894) during 2008 and 2007.
 
Income Attributable to Noncontrolling Interest.  Income attributable to noncontrolling interest was $1,032 in 2008, compared to $10,667 in 2007 and represents the interest of the former WebMD minority shareholders. Historically, income attributable to noncontrolling interest fluctuated based on the net income or loss reported by WebMD, combined with changes in the percentage ownership of WebMD held by the noncontrolling interest shareholders.


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Supplemental Financial and Operating Information
 
The following table and the discussion that follows presents information for groups of revenue based on similar services we provide, as well as information related to a non-GAAP performance measure that we use to monitor the performance of our business which we refer to as “Earnings before interest, taxes, non-cash and other items” or “Adjusted EBITDA.” Due to the fact that Adjusted EBITDA is a non-GAAP measure, we have also included a reconciliation from Adjusted EBITDA to net income.
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
Revenue
                       
Public portal advertising and sponsorship
  $ 347,570     $ 284,416     $ 238,022  
Private portal services
    90,966       89,046       81,210  
                         
    $ 438,536     $ 373,462     $ 319,232  
                         
Earnings before interest, taxes, non-cash and other items (Adjusted EBITDA)
  $ 112,274     $ 74,255     $ 54,969  
Interest, taxes, non-cash and other items
                       
Interest income
    9,149       35,300       42,035  
Interest expense
    (23,515 )     (26,428 )     (25,887 )
Income tax benefit (provision)
    45,491       (26,638 )     9,053  
Depreciation and amortization
    (28,185 )     (28,410 )     (27,808 )
Non-cash stock-based compensation
    (39,412 )     (24,632 )     (32,336 )
Non-cash advertising
    (1,753 )     (5,097 )     (5,264 )
Severance and other transaction expenses
    (11,066 )     (6,941 )     (2,527 )
Equity in earnings of EBS Master LLC
          4,007       28,566  
Gain on repurchases of convertible notes
    10,120              
Gain on sale of EBS Master LLC
          538,024        
Impairment of auction rate securities
          (60,108 )      
Restructuring
          (7,416 )      
Other (expense) income, net
    (1,416 )     657       499  
                         
Consolidated income from continuing operations
    71,687       466,573       41,300  
Consolidated income (loss) from discontinued operations, net of tax
    49,354       94,682       (18,048 )
                         
Consolidated net income inclusive of noncontrolling interest
    121,041       561,255       23,252  
(Income) attributable to noncontrolling interest
    (3,705 )     (1,032 )     (10,667 )
                         
Net income attributable to Company stockholders
  $ 117,336     $ 560,223     $ 12,585  
                         
 
2009 and 2008
 
The following discussion is a comparison of the results of operations for our two groups of revenue and our Adjusted EBITDA for the year ended December 31, 2009 to the year ended December 31, 2008.
 
Public Portal Advertising and Sponsorship.  Public portal advertising and sponsorship revenue was $347,570 in 2009, an increase of $63,154 or 22.2% from 2008. The increase in public portal advertising and sponsorship revenue was primarily attributable to an increase in the number and average size of unique sponsored programs on our sites, including both brand sponsorship and educational programs. The number of such programs grew to approximately 1,600 in 2009, compared to approximately 1,400 in 2008. In general, pricing remained relatively stable for our advertising and sponsorship programs and was not a significant source of the revenue increase. Public portal advertising and sponsorship revenue includes revenue previously referred to as “advertising and sponsorship” revenue and “content syndication and other” revenue, as well as other print service revenue (which consists primarily of revenue from advertising in WebMD the Magazine).
 
Private Portal Services.  Private portal services revenue was $90,966 in 2009, an increase of $1,920 or 2.2%. The number of companies using our private portal platform was 138 in 2009 compared to 134 in 2008. In general, pricing remained relatively stable for our private portal services and was not a significant source of


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the revenue increase. We also have approximately 140 additional customers who purchase stand-alone decision support services from us. Private portal services revenue includes revenue previously referred to as “licensing” revenue.
 
Adjusted EBITDA.  Adjusted EBITDA increased to $112,274 or 25.6% of revenue in 2009 from $74,255 or 19.9% of revenue in 2008. This increase as a percentage of revenue was primarily due to higher revenue, specifically related to the increase in the number of brands and sponsored programs in our public portals, without incurring a proportionate increase in overall expenses. Additionally, corporate expense reductions of approximately $8,000 during 2009 in anticipation of the Merger contributed to the increase in Adjusted EBITDA in 2009 when compared to 2008.
 
2008 and 2007
 
The following discussion is a comparison of the results of operations for our two groups of revenue and our Adjusted EBITDA for the year ended December 31, 2008 to the year ended December 31, 2007.
 
Public Portal Advertising and Sponsorship.  Public portal advertising and sponsorship revenue was $284,416 in 2008, an increase of $46,394 or 19.5% from 2007. The increase in public portals revenue was primarily attributable to an increase in the number of unique sponsored programs on our sites including both brand sponsorship and educational programs. The number of such programs grew to approximately 1,400 in 2008 compared to approximately 1,000 in 2007. In general, pricing remained relatively stable for our advertising and sponsorship programs and was not a significant source of the revenue increase. Public portals revenue includes revenue previously referred to as “advertising and sponsorship” revenue and “content syndication and other” revenue, as well as other print service revenue (which consists primarily of revenue from advertising in WebMD the Magazine).
 
Private Portal Services.  Private portal services revenue was $89,046 in 2008, an increase of $7,836 or 9.6% compared to 2007. This increase was due to an increase in the number of companies using our private portal platform to 134 in 2008 from 117 in the prior year. In general, pricing remained relatively stable for our private portal licenses and was not a significant source of the revenue increase. We also have approximately 140 additional customers who purchase stand-alone decision-support services from us. Private portals revenue includes revenue previously referred to as “licensing” revenue.
 
Adjusted EBITDA.  Adjusted EBITDA was $74,255, or 19.9% of revenue in 2008, compared to $54,969, or 17.2% of revenue in 2007. This increase as a percentage of revenue was due to higher revenue from the increase in the number of brands and sponsored programs in our public portals as well as the increase in companies using our private online portal without incurring a proportionate increase in overall expenses.
 
Explanatory Note Regarding Adjusted EBITDA.  Adjusted EBITDA is a non-GAAP financial measure and should be viewed as supplemental to, and not as an alternative for, “income (loss) from continuing operations” or “net income (loss)” calculated in accordance with GAAP. Our management uses Adjusted EBITDA as an additional measure of performance for purposes of business decision-making, including developing budgets, managing expenditures, and evaluating potential acquisitions or divestitures. Period-to-period comparisons of Adjusted EBITDA help our management identify additional trends in financial results that may not be shown solely by period-to-period comparisons of income (loss) from continuing operations or net income (loss). In addition, we use Adjusted EBITDA in the incentive compensation programs applicable to many of our employees in order to evaluate our performance. We believe that the presentation of Adjusted EBITDA is useful to investors in their analysis of our results for reasons similar to the reasons why our management finds it useful and because it helps facilitate investor understanding of decisions made by our management in light of the performance metrics used in making those decisions. In addition, we believe that providing Adjusted EBITDA, together with a reconciliation of Adjusted EBITDA to income (loss) from continuing operations or to net income (loss), helps investors make comparisons between us and other companies that may have different capital structures, different effective income tax rates and tax attributes, different capitalized asset values and/or different forms of employee compensation. Please see the “Explanation of Non-GAAP Financial Information” filed as Exhibit 99.1 to this Annual Report for additional


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background information regarding our use of Adjusted EBITDA. Exhibit 99.1 is incorporated in this MD&A by this reference.
 
 
 
As of December 31, 2009, we had $459,766 of cash and cash equivalents and held investments with an aggregate fair value of $348,378. Our more significant investments include (i) a note receivable from Porex with a face value of $67,500 and a fair value of approximately $64,000 and (ii) investments in ARS with a face value of $352,700 and a fair value of approximately $280,000. While liquidity for our ARS investments is currently limited, we entered into non-recourse credit facilities with Citigroup that will allow us to borrow up to 75% of the face amount of our ARS holdings through May 2010. Our working capital as of December 31, 2009 was $125,342. Our working capital is affected by the timing of each period end in relation to items such as payments received from customers, payments made to vendors, and internal payroll and billing cycles, as well as the seasonality within our business. Accordingly, our working capital, and its impact on cash flow from operations, can fluctuate materially from period to period.
 
Cash provided by operating activities from our continuing operations in 2009 was $107,423, which related to consolidated net income of $121,041, adjusted for income from discontinued operations $49,354, for the non-operating gains on repurchases of convertible notes of $10,120 and for non-cash expenses of $37,412, which include depreciation and amortization expense, non-cash interest expense, non-cash advertising expense, non-cash stock-based compensation expense and deferred income taxes. Additionally, changes in operating assets and liabilities provided cash flow of $8,444, primarily due to increases in deferred revenue of $18,861, an increase in accrued expenses and other long-term liabilities of $7,677 and a decrease in prepaid expenses of $6,979, offset by an increase in accounts receivable of $25,073.
 
Cash provided by operating activities from our continuing operations in 2008 was $62,490 which related to consolidated net income of $561,255, adjusted for income from discontinued operations of $94,682 and equity in earnings of EBS Master LLC of $4,007, for non-operating items including the $538,024 gain on the sale of EBS Master LLC and the $60,108 impairment of auction rate securities, and for non-cash expenses of $75,472, which include depreciation and amortization expense, non-cash interest expense, non-cash advertising expense, non-cash stock-based compensation expense and deferred income taxes. Additionally, changes in operating assets and liabilities provided cash flow of $2,368.
 
Cash provided by investing activities from our continuing operations was $56,732 in 2009, compared to cash provided by investing activities from our continuing operations of $718,334 in 2008. Cash provided by investing activities from our continuing operations in 2009 included $72,318 of proceeds from the sale of discontinued operations of Porex and to a lesser extent LBB. The more significant items contributing to the cash provided by investing activities from our continuing operations in 2008 included $574,617 of net proceeds received from the 2008 EBSCo Sale, $223,175 of net proceeds received from the ViPS Sale and $23,333 we received, which was released from escrow, from the sale of our EPS segment, which was sold in the latter part of 2006. In 2009 we received $2,300 related to the sales of available for sale securities compared to net purchases of available for sale securities in 2008 of $58,811. We used $17,886 in connection with purchases of property and equipment in 2009 compared to $24,265 of purchases of property and equipment in 2008.
 
Cash used in financing activities from our continuing operations was $331,547 in 2009, compared to cash used in financing activities from our continuing operations of $715,593 in 2008. Cash used in financing activities in 2009 principally related to the repurchases of our 1.75% Notes and our 31/8% Notes in the aggregate of $123,857, and the repurchase of a total of 6.3 million shares of our common stock through our tender offer for $235,220, less $6,818 related to tendered shares that were not yet delivered as of December 31, 2009. These uses of cash were offset by net proceeds of $25,253 from the issuance of common stock in connection with employee stock option exercises, net of cash used for withholding taxes due on these stock option exercises and from vesting of restricted stock. Cash used in financing activities in 2008 principally related to $737,324 used to purchase common stock in connection with a tender offer in 2008, offset by the net proceeds of $21,683 from the issuance of common stock in connection with employee stock


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option exercises, net of cash used for withholding taxes due on these stock option exercises and from vesting of restricted stock.
 
Included in our consolidated statements of cash flows are cash flows from discontinued operations of Porex and LBB, as well as cash flows from our ViPS and ACS/ACP businesses in 2008, through the date when each of these discontinued operations were divested. Also included in cash flows from discontinued operations provided by operating activities in 2009 and 2008 is the receipt of $26,795 and $44,937 during 2009 and 2008 of reimbursements from our Director & Officer insurance carriers, offset by $36,479 and $37,091 in payments made in 2009 and 2008, respectively, in connection with the defense costs of the former officers and directors of our former EPS subsidiary in connection with the investigation by the United States Attorney for the District of South Carolina and the SEC. For additional information, see “Introduction — Background Information on Certain Transactions and other Significant Developments — Directors & Officers Liability Insurance Coverage Litigation and Indemnification Obligations to Former Officers and Directors of EPS.”
 
 
The following table summarizes our principal commitments as of December 31, 2009 for future specified contractual obligations, as well as the estimated timing of the cash payments associated with these obligations. This table also provides the timing of cash payments related to our long-term debt and other obligations included in our consolidated balance sheets. 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.
 
                                         
          Less Than
                More Than
 
    Total     1 Year     1-3 Years     4-5 Years     5 Years  
    (In thousands)  
 
Convertible notes(a)
  $ 537,863     $ 274,527     $ 263,336     $     $  
Leases(b)
    35,905       7,928       11,972       9,181       6,824  
                                         
Total
  $ 573,768     $ 282,455     $ 275,308     $ 9,181     $ 6,824  
                                         
 
 
(a) Convertible notes includes our 31/8% Notes, and our 1.75% Notes, which are first redeemable at the option of the holders in 2012 and 2010, respectively. Amounts include our contractual interest payments through the earliest date at which these notes are redeemable by the holder.
 
(b) The lease amounts are net of sublease income.
 
The above table excludes $14,199 of uncertain tax positions, including interest and penalties, as we are unable to reasonably estimate the timing of the settlement of these items. See Note 15, “Income Taxes” located in the Notes to Consolidated Financial Statements elsewhere in this Annual Report.
 
 
As of December 31, 2009, we had $459,766 of cash and cash equivalents and held investments with an aggregate fair value of $348,378. Based on our plans and expectations, and taking into consideration issues relating to the liquidity of our ARS investments, as well as the redemption provision that becomes available to the holders of our $265 million of 1.75% convertible notes in June 2010, we believe that our available cash resources and future cash flow from operations will provide sufficient cash resources to meet the cash commitments of our 1.75% Notes, our 31/8% Notes and to fund our currently anticipated working capital and capital expenditure requirements, for at least the next twenty-four months. Our future liquidity and capital requirements will depend upon numerous factors, including retention of customers at current volume and revenue levels, implementation of new or updated application and service offerings, competing technological and market developments, potential future acquisitions and whether holders of our 1.75% Notes and our 31/8% Notes elect their rights to convert their holdings to equity or elect their rights for redemption. 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 plan to continue to enhance our online services and to continue to invest in acquisitions, strategic relationships, facilities and technological


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infrastructure and product development. We intend to grow each of our existing businesses and enter into complementary ones through both internal investments and acquisitions. 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 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.
 
Off-Balance Sheet Arrangements
 
We have no material off-balance sheet arrangements.
 
 
 
We adopted the new authoritative guidance which establishes accounting and reporting standards for noncontrolling interests, previously called minority interests. This new guidance requires that a noncontrolling interest be reported in the consolidated balance sheets within equity and separate from the parent company’s equity. Also, the new guidance requires consolidated net income to be reported at amounts inclusive of both the parent’s and noncontrolling interest’s shares and, separately, the amounts of consolidated net income attributable to the parent and noncontrolling interest, all on the face of the consolidated operating statement. In addition, discontinued operations and continuing operations reflected as part of the noncontrolling interest should be allocated between continuing operations and discontinued operations for the calculation of earnings per share. The consolidated financial statements reflect the retrospective application of this accounting standard which we adopted effective January 1, 2009.
 
We adopted the new authoritative guidance which requires cash settled convertible debt to be separated into debt and equity components at issuance and a value to be assigned to each. This new guidance affects the accounting for our 31/8% Notes. The value assigned to the debt component will be the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the bond’s cash proceeds and this estimated fair value, which was $61,300 at the time the 31/8% Notes were issued during August 2005, represents a debt discount and will be amortized to interest expense over the period from issuance to August 2012 (the first date on which we may be required to repurchase the 31/8% Notes at the option of the holder). The $61,300 also represents the value of the equity component on the 31/8% Notes and was included within additional paid-in capital through December 31, 2008. The consolidated financial statements reflect the retrospective application of this accounting standard which we adopted effective January 1, 2009.
 
Effective January 1, 2009, we adopted the revised authoritative guidance on business combinations which changed existing practice, in part, as follows: (1) contingent consideration arrangements are now fair valued at the acquisition date and included on that basis in the purchase price consideration; (2) transaction costs are now expensed as incurred, rather than capitalized as part of the purchase price; (3) reversal of valuation allowances created in purchase accounting are now recorded through the income tax provision; and (4) in order to accrue for a restructuring plan in purchase accounting, all authoritative guidance would have to be met at the acquisition date. While the adoption of this standard did not have a material impact on our financial statements, it could materially change the accounting for business combinations consummated in the future and for tax matters relating to prior acquisitions settled subsequent to December 31, 2008.
 
Effective January 1, 2009, we adopted the authoritative guidance which clarifies that unvested share-based payment awards with a right to receive nonforfeitable dividends are participating securities. We reflected the impact on the year ended December 31, 2009 in the Net Income (Loss) Per Common Share section of Note 2 contained elsewhere in this Annual Report. The adoption of the new guidance did not have a material impact


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on the years ended December 31, 2008 and 2007 and accordingly, those periods were not retrospectively adjusted.
 
In April 2009, the Financial Accounting Standards Board (which we refer to as the FASB) issued authoritative guidance requiring disclosures about fair value of financial instruments in interim reporting periods. Such disclosures were previously required only in annual financial statements. Because this pronouncement applies only to financial statement disclosure, it did not have an impact on our results of operations, financial position or cash flows.
 
In April 2009, the FASB issued authoritative guidance which changed when and how to assess other-than-temporary impairments of securities and to improve the financial statement presentation of such impairments. A more detailed description of this new guidance and the impact of its adoption is discussed in Note 16 contained elsewhere in this Annual Report.
 
In May 2009, the FASB issued authoritative guidance establishing general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. This new guidance was effective for interim or annual financial periods ending after June 15, 2009.
 
In June 2009, the FASB issued authoritative guidance which established the FASB Accounting Standards Codification (which we refer to as Codification). On the effective date of this new guidance, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification became non-authoritative. This new guidance was effective for financial statements issued for interim and annual periods ending after September 15, 2009. Because this pronouncement applies only to financial statement disclosure, it did not have an impact on our results of operations, financial position or cash flows.
 
 
In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective beginning January 1, 2011, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables. In addition, revenue under multiple element arrangements will be allocated using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. We are currently evaluating the impact that this new guidance will have on our results of operations and financial position.
 
In January 2010, the FASB issued an amendment regarding improving disclosures about fair value measurements. This new guidance requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. We do not expect the adoption of this guidance to have an impact on our results of operations and financial position.
 
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk
 
 
The primary objective of our investment activities is to preserve principal and maintain adequate liquidity, while at the same time maximizing the yield we receive from our investment portfolio.


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Changes in prevailing interest rates will cause the fair value of certain of our investments to fluctuate, such as our investments in auction rate securities that generally bear interest at rates indexed to LIBOR. As of December 31, 2009, the fair market value of our auction rate securities was $279.7 million. However, the fair values of our cash and money market investments, which approximate $459.8 million at December 31, 2009, are not subject to changes in interest rates.
 
We have entered into non-recourse credit facilities (which we refer to as the Credit Facilities) with Citigroup that is secured by our ARS holdings (including, in some circumstances, interest payable on the ARS holdings), that will allow us to borrow up to 75% of the face amount of the ARS holdings pledged as collateral under the Credit Facilities. The interest rate applicable to such borrowings is the Open Federal Funds Rate plus 395 basis points. No borrowings have been made under the Credit Facilities to date.
 
The 31/8% Notes and the 1.75% Notes that we have issued have fixed interest rates; changes in interest rates will not impact our financial condition or results of operations.
 
 
Currently, substantially all of our sales and expenses are denominated in United States dollars; however, Porex, which was sold on October 19, 2009 and included in discontinued operations, was exposed to fluctuations in foreign currency exchange rates, primarily the rate of exchange of the United States dollar against the Euro. This exposure arises primarily as a result of translating the results of Porex’s foreign operations to the United States dollar at exchange rates that have fluctuated from the beginning of the accounting period. Porex did not engage in foreign currency hedging activities. Foreign currency translation gains (losses) relating to our Porex operations were $2.1 million, ($4.2) million and $3.3 million in 2009, 2008 and 2007, respectively.
 
Item 8.   Financial Statements and Supplementary Data
 
 
Our financial statements required by this item are contained on pages F-1 through F-48 of this Annual Report on Form 10-K. See Item 15(a)(1) for a listing of financial statements provided.
 
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A.   Controls and Procedures
 
As required by Exchange Act Rule 13a-15(b), WebMD management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of WebMD’s disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of December 31, 2009. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that WebMD’s disclosure controls and procedures were effective as of December 31, 2009.
 
In connection with the evaluation required by Exchange Act Rule 13a-15(d), WebMD management, including the Chief Executive Officer and Chief Financial Officer, concluded that there were no changes in WebMD’s internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), during the fourth quarter of 2009 that have materially affected, or are reasonably likely to materially affect, WebMD’s internal control over financial reporting. Completion of our merger with HLTH in October 2009 did not materially affect WebMD’s internal control over financial reporting because there were no HLTH business operations to combine with WebMD’s business operations and because HLTH personnel and resources used to provide certain corporate services to WebMD (including processes with respect to internal control over financial reporting, such as general and stock-based compensation, payroll, federal and state income taxes, and SEC financial reporting) prior to the merger under a Services Agreement between HLTH and WebMD, became employees and resources of WebMD upon completion of the merger.


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Item 9B.   Other Information
 
At our Annual Meeting of Stockholders held on October 23, 2009, our stockholders voted with respect to the following matters:
 
  •  Proposal 1 — To adopt the Agreement and Plan of Merger, dated as of June 17, 2009, between HLTH and WebMD, and to approve the transactions contemplated by that agreement:
 
         
Votes FOR
    247,740,072  
Votes AGAINST
    63,222  
Abstentions
    24,915  
Broker non-votes
    2,363,908  
 
  •  Proposal 2 — To elect as Class I directors for a three-year term:
 
             
Mark J. Adler, M.D. 
  — votes FOR     249,760,007  
    — votes withheld     432,110  
             
Neil F. Dimick
  — votes FOR     250,125,437  
    — votes withheld     66,680  
             
James V. Manning
  — votes FOR     250,136,040  
    — votes withheld     56,077  
 
  •  Proposal 3 — To ratify and approve an amendment to WebMD’s Amended and Restated 2005 Long-Term Incentive Plan to increase the number of shares of WebMD Class A Common Stock issuable under that Plan by 1,100,000 shares, to a total of 15,600,000 shares:
 
         
Votes FOR
    243,370,572  
Votes AGAINST
    21,583  
Abstentions
    26,450  
Broker non-votes
    2,363,908  
 
  •  Proposal 4 — To ratify the appointment of Ernst & Young LLP as the independent registered public accounting firm to serve as our independent auditor for the fiscal year ending December 31, 2009:
 
         
Votes FOR
    250,139,083  
Votes AGAINST
    21,583  
Abstentions
    26,450  
Broker non-votes
    0  
 
As a result, the individuals listed above for Proposal 1 were elected and Proposals 2 and 3 were each approved. For each director and for Proposals 2 and 3, the totals include 240,500,000 votes cast FOR by HLTH, the holder of all of the outstanding shares of WebMD Class B Common Stock at the time of the 2009 Annual Meeting.


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Information required by Items 10, 11, 12, 13 and 14 of Part III is omitted from this Annual Report and will be filed in a definitive proxy statement or by an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report.
 
Item 10.   Directors, Executive Officers and Corporate Governance
 
We will provide information that is responsive to this Item 10 in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the captions “Directors and Executive Officers” and “Corporate Governance” and possibly elsewhere therein. That information is incorporated in this Item 10 by reference.
 
Item 11.   Executive Compensation
 
We will provide information that is responsive to this Item 11 in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the caption “Executive Compensation,” and possibly elsewhere therein. That information is incorporated in this Item 11 by reference.
 
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
We will provide information that is responsive to this Item 12 in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the caption “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,” and possibly elsewhere therein. That information is incorporated in this Item 12 by reference.
 
Item 13.   Certain Relationships and Related Transactions, and Director Independence
 
We will provide information that is responsive to this Item 13 in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the caption “Certain Relationships and Related Transactions,” and possibly elsewhere therein. That information is incorporated in this Item 13 by reference.
 
Item 14.   Principal Accountant Fees and Services
 
We will provide information that is responsive to this Item 14 in our definitive proxy statement or in an amendment to this Annual Report not later than 120 days after the end of the fiscal year covered by this Annual Report, in either case under the caption “Services and Fees of Ernst & Young,” and possibly elsewhere therein. That information is incorporated in this Item 14 by reference.


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Item 15.   Exhibits and Financial Statement Schedule
 
(a)(1)-(2) Financial Statements and Schedule
 
The financial statements and schedule listed in the accompanying Index to Consolidated Financial Statements and Supplemental Data on page F-1 are filed as part of this Report.
 
(a)(3) Exhibits
 
See “Index to Exhibits” beginning on page E-1, which is incorporated by reference herein. The Index to Exhibits lists all exhibits filed with this Report and identifies which of those exhibits are management contracts and compensation plans.


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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 2nd day of March, 2010.
 
 
  By:   
/s/  ANTHONY VUOLO
Anthony Vuolo
Chief Operating Officer and
Chief Financial Officer
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
 
             
Signature
 
Capacity
 
Date
 
         
/s/  Wayne T. Gattinella

Wayne T. Gattinella
  Director; President and Chief Executive Officer (principal executive officer)   March 2, 2010
         
/s/  Anthony Vuolo

Anthony Vuolo
  Chief Operating Officer and Chief Financial Officer (principal financial and accounting officer)   March 2, 2010
         
/s/  Mark J. Adler, M.D.

Mark J. Adler, M.D.
  Director   March 1, 2010
         
/s/  Paul A. Brooke

Paul A. Brooke
  Director   March 1, 2010
         
/s/  Kevin M. Cameron

Kevin M. Cameron
  Director   March 1, 2010
         
/s/  Neil F. Dimick

Neil F. Dimick
  Director   March 1, 2010
         
/s/  Jerome C. Keller

Jerome C. Keller
  Director   March 1, 2010
         
/s/  James V. Manning

James V. Manning
  Director   March 1, 2010
         
/s/  Abdool Rahim Moossa, M.D.

Abdool Rahim Moossa, M.D.
  Director   March 1, 2010
         
/s/  Herman Sarkowsky

Herman Sarkowsky
  Director   March 1, 2010


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Signature
 
Capacity
 
Date
 
         
/s/  Joseph E. Smith

Joseph E. Smith
  Director   March 1, 2010
         
/s/  Stanley S. Trotman, Jr.

Stanley S. Trotman, Jr.
  Director   March 1, 2010
         
/s/  Martin J. Wygod

Martin J. Wygod
  Director   March 1, 2010


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WEBMD HEALTH CORP.
 
 
         
    Page
 
Historical Financial Statements:
       
    F-2  
    F-3  
    F-4  
    F-5  
    F-6  
    F-7  
    F-8  
    F-9  
Supplemental Financial Data:
       
The following supplemental financial data of the Registrant and its subsidiaries required to be included in Item 15(a)(2) on Form 10-K are listed below:
       
    S-1  
 
All other schedules not listed above have been omitted as not applicable or because the required information is included in the Consolidated Financial Statements or in the notes thereto. Columns omitted from the schedule filed have been omitted because the information is not applicable.


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Table of Contents

 
 
Management of WebMD Health Corp. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 (the Exchange Act) as a process designed by, or under the supervision of, a company’s principal executive and principal financial officers and effected by its board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
 
  •  pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
 
  •  provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
 
  •  provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies as identified.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
WebMD management assessed the effectiveness of WebMD’s internal control over financial reporting as of December 31, 2009. In making this assessment, WebMD management used the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment and those criteria, WebMD management concluded that WebMD maintained effective internal control over financial reporting as of December 31, 2009.
 
Ernst & Young LLP, the independent registered public accounting firm that audited and reported on the Company’s financial statements as of December 31, 2009 and 2008 and for each of the three years in the period ended December 31, 2009, has audited the Company’s internal control over financial reporting as of December 31, 2009, as stated in their report which appears on page F-3.
 
March 2, 2010


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The Board of Directors and Stockholders of WebMD Health Corp.
 
We have audited WebMD Health Corp.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). WebMD Health Corp.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
 
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, WebMD Health Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the COSO criteria.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of WebMD Health Corp. as of December 31, 2009 and 2008, and the related consolidated statements of operations, equity and cash flows for each of the three years in the period ended December 31, 2009 of WebMD Health Corp. and our report dated March 2, 2010 expressed an unqualified opinion thereon.
 
/s/ Ernst & Young LLP
 
New York, New York
March 2, 2010


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The Board of Directors and Stockholders of WebMD Health Corp.
 
We have audited the accompanying consolidated balance sheets of WebMD Health Corp. as of December 31, 2009 and 2008, and the related consolidated statements of operations, equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index to consolidated financial statements and supplemental data at page F-1. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of WebMD Health Corp. at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
 
As discussed in Note 2 to the consolidated financial statements, effective January 1, 2009, the Company retrospectively adopted authoritative guidance relating to (i) non-controlling interests in consolidated financial statements and (ii) accounting for convertible debt instruments that may be settled in cash upon conversion. As further discussed in Note 2 to the consolidated financial statements, effective January 1, 2009, the Company adopted (i) authoritative guidance clarifying that unvested share-based payment awards with a right to receive nonforfeitable dividends are participating securities, and (ii) revised authoritative guidance related to accounting for business combinations, and effective April 1, 2009, the Company adopted authoritative guidance which changed when and how to assess other-than-temporary impairments of securities.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), WebMD Health Corp.’s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 2, 2010 expressed an unqualified opinion thereon.
 
/s/  Ernst & Young LLP
 
New York, New York
March 2, 2010


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    December 31,  
    2009     2008  
 
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 459,766     $ 629,848  
Accounts receivable, net of allowance for doubtful accounts of $1,511 at December 31, 2009 and $1,301 at December 31, 2008
    118,155       93,082  
Prepaid expenses and other current assets
    11,419       18,644  
Investments
    9,932        
Deferred tax assets
          26,096  
Assets of discontinued operations
          131,350  
                 
Total current assets
    599,272       899,020  
Investments
    338,446       288,049  
Property and equipment, net
    52,194       56,633  
Goodwill
    202,104       202,104  
Intangible assets, net
    26,020       32,328  
Deferred tax assets
    50,789        
Other assets
    19,723       23,600  
                 
TOTAL ASSETS
  $ 1,288,548     $ 1,501,734  
                 
                 
LIABILITIES AND EQUITY                
Current liabilities:
               
Accrued expenses
  $ 63,721     $ 54,595  
Deferred revenue
    98,474       79,613  
1.75% convertible subordinated notes due 2023
    264,583        
Deferred tax liabilities
    12,955        
Liabilities of discontinued operations
    34,197       100,771  
                 
Total current liabilities
    473,930       234,979  
1.75% convertible subordinated notes due 2023
          350,000  
31/8% convertible notes due 2025, net of discount of $22,641 at December 31, 2009 and $35,982 at December 31, 2008
    227,659       264,018  
Other long-term liabilities
    22,191       21,816  
Commitments and contingencies
               
Stockholders’ equity:
               
Preferred stock, 50,000,000 shares authorized; no shares issued and outstanding
           
Common stock, $0.01 par value per share, 650,000,000 shares authorized; 57,243,710 shares issued at December 31, 2009 and 203,661,733 shares issued at December 31, 2008
    572       2,036  
Additional paid-in capital
    9,469,857       12,564,864  
Treasury stock, at cost; 6,296,944 shares at December 31, 2009 and 158,610,889 shares at December 31, 2008
    (233,651 )     (3,292,997 )
Accumulated deficit
    (8,634,585 )     (8,776,618 )
Accumulated other comprehensive loss
    (37,425 )     (587 )
                 
Stockholders’ equity
    564,768       496,698  
Noncontrolling interest
          134,223  
                 
Total equity
    564,768       630,921  
                 
TOTAL LIABILITIES AND EQUITY
  $ 1,288,548     $ 1,501,734  
                 
 
See accompanying notes.


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Table of Contents

 
 
                         
    Years Ended December 31,  
    2009     2008     2007  
 
Revenue
  $ 438,536     $ 373,462     $ 319,232  
Cost of operations
    165,753       135,138       114,000  
Sales and marketing
    112,101       106,080       91,035  
General and administrative
    89,620       88,053       102,661  
Depreciation and amortization
    28,185       28,410       27,808  
Interest income
    9,149       35,300       42,035  
Interest expense
    23,515       26,428       25,887  
Severance and other transaction expenses
    11,066       6,941       2,527  
Gain on repurchases of convertible notes
    10,120              
Gain on sale of EBS Master LLC
          538,024        
Restructuring
          7,416        
Impairment of auction rate securities
          60,108        
Other (expense) income, net
    (1,369 )     992       6,332  
                         
Income from continuing operations before income tax (benefit) provision
    26,196       489,204       3,681  
Income tax (benefit) provision
    (45,491 )     26,638       (9,053 )
Equity in earnings of EBS Master LLC
          4,007       28,566  
                         
Consolidated income from continuing operations
    71,687       466,573       41,300  
Consolidated income (loss) from discontinued operations, net of income tax provision (benefit) of $21,224, $3,134 and $(4,894) in 2009, 2008 and 2007
    49,354       94,682       (18,048 )
                         
Consolidated net income inclusive of noncontrolling interest
    121,041       561,255       23,252  
Income attributable to noncontrolling interest
    (3,705 )     (1,032 )     (10,667 )
                         
Net income attributable to Company stockholders
  $ 117,336     $ 560,223     $ 12,585  
                         
Amounts attributable to Company stockholders:
                       
Income from continuing operations
  $ 67,018     $ 465,725   <