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Citigroup analyst Mark Mahaney initiated coverage on WebMD (ticker: WBMD) with a Sell rating. Excerpts from his November 8th note to clients:

SUMMARY

* We are initiating coverage of WBMD with a 3H (Sell, High Risk) rating and a $22 price target. More than anything, THIS IS A VALUATION CALL. We see several positives -- 1) Pharma marketing is under-indexed on the Web today & may be near a "tipping point;" 2) WebMD is a clear leader in several segments; and 3) WebMD's fundies, particularly its margins, are strengthening. But...

* At 65X our 2006 pf EPS and 25X our 2006 EBITDA estimates (which are within guidance), WBMD sports a multiple that is at a material premium to its l-t growth rate. And its multiple relative to its growth rate is at the high end of our coverage group. We don't see a pending negative catalyst, but we do see risks that may not be fully reflected in the shares - 1) M&A integration/ rollup risk; 2) Near-term uncertainty over DTC advertising; and 3) AOL partnership risk.

* What would make us Neutral/Bullish? "Tipping point" evidence that would indicate material upside to our estimates and/or share price correction.

WBMD INVESTMENT THESIS

We are initiating on WBMD with a Sell rating and a $22 price target. More than anything, this is a valuation call. We see a mix of fundamental positives and negatives. Key investment positives include:

1. WBMD is a play off the strong secular growth in online advertising – we estimate a 20% CAGR for U.S. online advertising from 2005 to 2008;

2. WBMD’s core target market, health-related marketing, is potentially a very large category on the Web – total health-related advertising in the U.S. was over $13B in 2004, with the largest pharmaceutical companies spending only 1.3% of their ad budgets online;

3. WBMD should benefit from increased healthcare adoption of the Internet –69%of consumers now go online for health information, and there is clear evidence that physicians, employers, and health plans are all increasing their usage of the Internet;

4. WBMD is a market leader in the different segments it competes in – its consumer public portal is the leading online health content site in terms of unique visitors and page views, and its professional public portal has strong acceptance among physicians; and

5. WBMD’s business model is demonstrating clear operating leverage –intherecently completed September quarter, organic EBITDA margins rose 420 bps Y/Y to 20.1%, with 33% incremental margins. With WBMD, we also see several key investment risks:

1. Near-term uncertainty over Pharma DTC (direct-to-consumer) advertising –DTC advertising is still relatively new, and recent heightened public scrutiny (e.g. FDA hearings) creates uncertainty over spending trends. The offset is that the mix shift of Pharma marketing towards the Net may be near a “tipping point.

Source: Citigroup Initiates Coverage on WebMD With "Sell" (WBMD)