STOCK WATCH


IMS Health: Drug-Company Enabler

This firm helps drug companies set marketing strategies. And it should benefit from new opportunities ahead, one analyst says.



Drug stocks have performed miserably for years. IMS Health (symbol RX) isn't a drug company, but its shares have been stuck in the same rut as those of big pharma. IMS traded at $26 in 1999, and after some ups and downs, it trades around $26 now. But Bank of America analyst Robert Willoughby on Monday upgraded the stock to a buy, citing new opportunities in pharmaceutical service companies.

IMS monitors to a fare-thee-well what happens to pills once they leave the factory. It tells drug companies, among other things, precisely how much of each medication an individual doctor prescribes and where patients get their prescriptions filled. The intelligence is invaluable to drug companies in targeting direct-to-consumer advertising, as well as deploying their sales reps, who visit doctors' offices to pitch drugs and dispense free samples. IMS also plays a key role in helping drug companies decide which products to launch and where to conduct clinical trials. What's more, with a 75% market share, the company's franchise is unshakeable -- which gives it pricing power with drug companies.

Willoughby sees IMS Health's return on capital (earnings divided by shareholder equity plus long-term debt) -- as well as the return on capital of other drug-service companies -- rising this year. Reason: the growing number of generic drugs coming to market, "surging" utilization of Medicare's prescription-drug benefit and improving profit margins, as more revenues drop straight to the bottom line. IMS made several deals last year, which hurt its return on capital. But Willoughby says the company has finished its latest acquisition binge and will concentrate on improving returns. He estimates that its ROC will be near 14% this year.

Willoughby is comfortable with the average analyst earnings estimate of $1.37 per share for this year and $1.58 for 2007, as reported by Thomson First Call. The price-earnings ratio is 19 on the 2006 estimate and 17 on 2007 earnings. IMS Health, despite the stagnation in its stock price, has seen higher earnings per share every year since 1998.

--Steven Goldberg




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