Tuesday, April 11, 2006

IMS Health a Class Act

IMS Health (RX) is a class act, dare I say, best of breed. The company has a 35% share of what is believed to be about a $5 billion market in pharmaceutical prescription data. The company has attempted to upsell what has historically (over 50 years) been a business that aggregated data into more of a consultative business. As the company now proclaims, it is turning information into insights.

Its customers have historically been only the pharmaceutical manufacturers but the developing commercial success of biotech industry as well as the growing information needs of the health insurance and managed care industries have broadened the customer base. The goals of understanding what drugs are being sold, to whom, by whom, and for what purpose are important throughout the value chain.

RX is eight times the size of its closest competitor and operates in a far broader range of geographies with over 100 countries of data covered. It should be noted that its closest competitor NDC Health was acquired last year by Wolters Kluwer of the Netherlands.

A proposed merger of RX and VNU N.V. had been announced in July of 2005, but due to intense pressure by activist shareholders who believed the deal to be inadequate compensation for RX, was terminated in October of 2005. Ironically, VNU now faces its own activist tribulations.

In the last five years, the company has generated a total of $1.7 billion in CFFO. Capital expenditures have totaled only $502 million, hence, free cash flow over the last five years of $1.2 billion.

The company has been buying back stock quite aggressively with over $780 million in share purchases in the last five years. Last year’s buybacks were disrupted during the VNU interregnum but the company in January announced a buyback of 30 million shares of which already 25 million shares had been bought back. Given prior authorizations, some 11 million shares remain to be purchased.

The company’s return on invested capital was 30% for 2005 but historically has been mid 30’s to mid 40’s. Long term debt is about 60% of assets but interest coverage is substantial 21 times. Currency translation effects can be significant here too with foreign sales representing 56% of sales in 2005.

The company has settled some legacy tax issues with the IRS in March for $20 million having reserved $121 million for these issues.

The dividend was increased 50% in January to 12 cents quarterly.

I believe that the company should be valued in the low to mid $30’s versus its current $26. Enterprise value to EBIT is currently 13.1 times which seems low given the profitability, cash flow characteristics, and shareholder friendly return of capital.

Disclaimer: Some of my clients own a position in RX however, I and my family do not currently have a position here.


At 5:39 AM, Blogger Dan O'Leary said...

Awesome choice here! RX had fallen off my radar when the VNU saga started; back on now. I'd really like to have it at 10x EBIT though.


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