IMS Health, Inc. Q2 2006 Earnings Conference Call Transcript (RX)

IMS Health (RX)
Q2 2006 Earnings Conference Call
July 19, 2006, 5:00 pm ET

Executives

Darcie Peck,Vice President of Investor Relations
Dave Carlucci, Chairman and Chief Executive Officer
Nancy Cooper, Chief Financial Officer
Gilles Pagot, Executive Vice President and President of or Global Business Management
Bruce Boggs, President of IMS Americas

Analysts

Eric Coldwell - Robert W. Baird & Co. Inc.
Robert Willoughby - Banc of America Securities
Steve Unger - Bear Stearns
Larry Marsh - Lehman Brothers
John Kreger - William Blair
Duane Pfennigworth - Raymond James
James Kumpel - Friedman Billings Ramsey

Operator

Ladies and gentleman thank you for standing by. Welcome to the IMS Health Q2 2006 Earnings Conference Call. [Operator instructions]. As a reminder this conference being recorded Wednesday July 19 2006. I would now like to turn the conference over to Darcie Peck, Vice President, Industrial Relation, please go ahead.

Darcie Peck,Vice President of Investor Relations

Thank you Vanessa. Good afternoon and welcome to the IMS Second Quarter 2006 Earnings Conference Call. With me today are Dave Carlucci, our Chairman and Chief Executive Officer, Nancy Cooper, our Chief Financial Officer, Gilles Pagot, our Executive Vice President and President, Global Business Management. Dave and Nancy will discuss highlights from our Q2 2006 results, and discuss our guidance for Q3 and the full year for ‘06. We posted slides with the highlights of our Q2 performance on our website, and I’d encourage you to view these during Dave and Nancy’s prepared remarks this afternoon. A question and answer session will follow our prepared remarks.

As a standard procedure let me read our safe harbor provision. Certain statements we make today are forward-looking within the meanings of the U. S .Federal Securities Laws. These statements include certain projections regarding the trends in our business, future events and future financial performance. We’d like to caution you that these statements are just predictions and the actual events or results may differ. They could be affected by inaccurate assumptions or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed.

We call your attention to our Q2 2006 Earnings Release which we issued earlier today, and our 2005 Annual Report on Form 10K which sets forth important factors that could cause actual results to differ materially from those contained in any such forward-looking statements. All forward-looking statements represent our views only as of the date they are made and the company undertakes no obligation to correct or update any forward-looking statements whether as a result of new information, future events, or otherwise

The financials we’ll talk to you today are on an adjusted basis. Adjusted results are those used by management for the purpose of global decision making including developing budgets and managing expenditures. Adjusted results exclude certain US GAAP measures to the extent that management believes the exclusion will facilitate comparisons across periods and more clearly indicate trends. Although IMS discloses adjusted results in order to give a full picture to investors of its business as seen by management, these adjusted results are not prepared specifically for investors and are not a replacement for the more comprehensive information for investors included in IMS’ US GAAP results. Adjusted results should be read in light of the detail reconciliation to results on an SEC reported basis in our Press Release, and I encourage investors to review the notes in our Press Release further describing adjusted results.

As it relates to our comments on guidance in accordance with Sarbanes Oxley, it’s important that you understand the basis of our guidance to you. Going forward as in the past our guidance excludes certain items such as the one Nancy will describe in our Q2 results because we feel it is a more reliable way to give you guidance on our core operational performance.

With that, now let me turn the call over to our CEO, Dave Carlucci. Dave?

Dave Carlucci, Chairman and Chief Executive Officer

Thank you Darcie. Good afternoon everyone and thank you for joining us. We had another great quarter. Our momentum remains strong and we are very pleased with our performance and operational execution around the world. What’s so exciting about our results is that we are playing to our strengths and clients are responding, and our performance in the first half gives us the confidence to increase our EPF guidance for the year.

Let’s get right to the highlights of the quarter. We achieved double digit revenue in operating income growth again in Q2. Revenue was $486 million, up 12% on a constant dollar basis. Excluding the expensing of stock based compensation, adjusted operating income grew 11% constant dollar, and our operating margin is strong 26%, up from 24% in the first quarter.

We told you last year at this time that we would maintain our strong margins at this level and we’ve done so. Further, we’re confident that we can continue on the path of balanced growth. Adjusted earnings per diluted share was $0.39 in the quarter, up 15% year-over-year and at the high end of our guidance. All of our business lines continued to perform well through the first half. Sales force effectiveness, our largest business line, grew 11% on a constant dollar basis year-to-date exceeding our guidance range. This growth is driven by strength in our core information assets that is creating competitive win backs especially in the US and continued traction of our SFE offerings in Japan. Our portfolio optimization business line was up 9% constant dollar through the first half with double digit performance in the second quarter. Traction for our MIDAS Quantum offering remained strong as clients used this global tool to conduct broader strategic portfolio analyses and planning across therapies and geographies.

Pharma clients also are tapping this suite of offerings more often to monitor the markets, products and competitors. Launch brand and other grew 20% on a constant dollar basis through the first half, slightly below our guidance for the year. Our performance here was impacted by our consumer health business in Europe. We saw accelerating growth in consulting and services which grew 39% constant dollar in the first half and 46% in the second quarter. Consulting and services now represent 17% of our business. By the way, we’re now among the leading consulting firms in this space and the results of a recent independent competitive benchmarking study validates this. We currently rank number four in the $4 billion global pharma consulting market, up from number six 6 in 2003 and we’re confident we’ll rank even higher by the end of this year.

We’re winning in market place because we’re clearly differentiated based on our information and analytics capability, depth of therapeutic expertise and the client access we enjoy. This is what evidence based consulting is all about, leveraging the broad insights at IMS to provide unique value to clients worldwide. We often focus on our success in consulting, but our services business is also doing very well.

Our information management and client services lines are off to a great start this year. The result of our expertise which includes information modeling and data warehousing, custom application development and business process services. To drive efficiency our clients are increasingly looking to IMS for both implementation services and end-to-end businesses process management. For example, in one on-going engagement, a cross regional IMS team is automating how a client collects and measures clinical research data helping them bring a new drug to market faster. These kinds of projects also lead to new demand for our consulting expertise to drive additional efficiency and further improvement in performance.

Now let me turn into our regional performance where momentum is strong across board. In the America’s we delivered another impressive quarter with revenue growing 14% constant dollar. Although this performance was tampered somewhat by challengers in Canada, we saw strong double digit gains in the US; our largest market. Our America’s result benefited from balanced contributions across our information and analytics and consulting businesses. This positive momentum underscores the success of our investments, our acquisitions and our focus on the areas of greatest importance to a client.

We saw exceptional growth in our managed care offerings in the quarter fuelled by our clients’ on-going need to understand the shifts and prescribing patterns due to Medicare Part D, and we had several competitive wins especially from small and medium sized clients who recognized the depth and unique value of our information assets. We’re demonstrating our capabilities also in the biotech market, last month we hosted our annual west coast bio pharma conference where we showcased our consulting expertise in Medicare sales force optimization and oncology. I also met with CEO’s and executives from a number of biotech companies this quarter, and they are particularly interested in our therapy class expertise, our increasing strong information assets in specialty channels and our expanding assets in oncology.

As you know oncology is a major focus for biotech, and by 2009 we expect it to become the largest therapeutic class doubling its current size to reach $55 billion in sales. About one half of the active pipeline of biotech companies involves oncology products and we continue to invest in this very important and complex field. Turning now to Europe, constant dollar revenue grew 8% and we posted another quarter of double digit operating income growth driven by continued operational improvements and the scaling of our consulting and services business there. Traditionally we’ve had good consulting and services growth in our global accounts. Now we’re seeing strength in the mid markets and we’re seeing a lot of success in multi country engagements that combine our information assets and consulting expertise.

Also in the quarter, Gilles Pagot had a keynote role at a premier European pharma industry conference attended by CEO’s of more than 20 leading European pharmaceutical company. He led several provocative discussions on pharma’s role in shaping the future of the market and his thought leadership demonstrates our capability and generates new opportunities for us at executive levels with our clients.

In Asia Pacific we delivered another outstanding quarter with 17% constant dollar revenue growth. Japan continued to be a bright spot for us where we also posted double digit revenue gains and strong operating income growth. Our SFE offerings are doing very well in Japan and our clients there are extending its use to additional therapy class. In addition, our portfolio optimization business is growing as Japanese based clients looked to us for insights and to opportunities for their products in other markets.

Across Asia, we’re winning new consulting and services engagements against entrenched competitors as clients increasingly see us as a major player. Customers can’t implement their growth strategies in Asia without strong consulting and services partners to supplement and extend their own resources and capability. Emerging markets worldwide are an important growth area for our clients, in fact they now account for 31% of pharma’s total growth. In these markets IMS grew over 20% in the quarter. Our ability to leverage our global capabilities into these markets is a key differentiator.

So we had an excellent second quarter and we are very pleased where we are at this point in the year. We’re executing well across the board and delivering balanced growth. We’re engaging our clients at higher levels with larger engagements and our dialogue with them has changed. We moved away from just talking about individual products to a deeper discussion of their business issues, the contributing market trends and how our expertise can make a real impact on their performance. So, now let me turn the call over to Nancy to take you through the detail of our second quarter financial results. Nancy?

Nancy Cooper

Thanks Dave and good afternoon everyone. We closed out the first half of 2006 with a strong quarter which was characterized by strength across all our regions and product lines by excellent cost and expense management and by strong cash flow. Revenue was $486 million, up 12% on a constant dollar basis and 12% as reported. Reported revue growth was slightly higher than constant dollar growth reflecting the weakening of the dollar this quarter over the second quarter of 2005. Foreign currency rates moved very little in the first quarter, but during the second quarter, the US dollar weakened fairly considerably. On a year-to-date basis the dollar has declined against our five major currencies by 6% to 7%.

Looking at the rest of our income statement, let me first take you through our financial results before stock based compensation expense, so that you can get a meaningful year-to-year comparison, and then I will walk you through the impacts of this in the quarter. We have included two tables in our press release that will guide you through these impacts, but first let me start with our income statement.

We continued to have excellent growth in operating income in the quarter and are executing on our balance growth plan. Operating income of $124 million grew 11% on a constant dollar basis and 12% as reported. Our operating margins were 26% better than the first quarter and flat year to year. Net interest expense in the quarter was $9 million reflecting the increase in our debt level and we are on track to have slightly under $40 million of net interest expense for the full year, and other income and expense net in the quarter was a negative $3 million. This primarily reflects the foreign exchange hedging losses due to the weaker dollar.

Net income for the quarter was $79 million, up 2% from the last year and adjusted EPS in the quarter was $0.39 up 15% year to year. By the way talking about hedging losses on a year to date SEC basis, we have generated a net $4.5 million in hedging losses due to the recent weakening of the dollar because we matched hedging gains and losses with operating income in each quarter, we’ve only recognized $1.2 million year to date about loss in our adjusted results. So that means that $3.3 million of net losses has been deferred into the second half.

Now let me walk you through the impact of FAS 123R on our financial results. We’ve included a slide in our presentation material that will help to you understand the impact. We recognize $12.1 million in cost and expense for FAS 123R in the second quarter. This is split between $1.9 million in operating costs and $10.2 million in SG&A, which matches how the employees with stock based options, stock based brands are distributed across our business. Including the impact of FAS 123R operating income was $112 million. Operating income margin with stock based compensation expense was 23% versus the 26% with office expense and is in line with our expectations for the full year.

Net income after stock based compensation expense was $71 million. Adjusted EPS including FAS 123R expense was $0.34 in the Q2. So you can see we have slightly over a $0.04 impact from stock based compensation expense in the quarter which is what we guided you to in April.

We had approximately $206 million weighted average diluted shares in the quarter and ended the quarter with approximately $202 million shares outstanding. Preliminary free cash flow for the quarter was $64 million bringing first half free cash flow to $18 million, and this is an increase of $13 million over the first half of 2005, an increase of 20%.

As you recall we bought back 29 million shares in January and the interest cost associated with that certainly reduces our free cash flow. And as a result however of the lower shares or first half free cash flow per share is up 32% versus the first half in 2005. DSO in quarter was 62 days essentially flat compared to second quarter of last year and that’s an improvement of one day over the first quarter of 2006.

Turning over to the balance sheet, cash and equivalents totaled $150.4 million at the end of the second quarter, an increase of $3.9 million compared to March 31 2006. Debt as of June 30 totaled $1.05 billion, a decrease of approximately $62.2 million compared with March 31.

Now turning over to our SEC results for the quarter. SEC EPS for the Q2 was $0.4 lower than our adjusted results with stock based compensation expense. Now Table 1 in the press release reflects the inclusion of a few gains and charges which we have excluded from adjusted results and now let me walk you through what these items are. First, we received $45 million from VNU as a result its changing control. After bankruptcies and taxes this contributed about $24 million to SEC net income in the quarter and as you know we did not take this cash into consideration in our net free cash flow for the quarter or our guidance for the year.

Secondly, IMS incurred an incremental tax charge of approximately $21.4 million. At the beginning of the year as we considered higher leverage levels for the company we saw that we had an opportunity to increase our balance sheet flexibility thus facilitating more leverage and giving us the potential to reduce interest expense for IMS going forward. In order to do this we needed to reorganize certain subsidiaries and simplify our international legal structure which we have essentially completed and this led the company to recognizing certain taxable gains and a resulting charge.

Now the third item is $7 million for the phasing of the tax rate for SEC purposes. Significant tax benefits were realized in Q1 from the favorable audit settlement in the US and these benefits are spread radically across the quarters in our adjusted results. The fourth item is $5.4 million due to the phasing of foreign exchange hedge gains and losses and due to the weakening of the dollar and the Q2 hedge losses were generated for SEC purposes and these losses have spread through the year in our adjusted results.

In terms of our financial results we had an excellent first half, and looking forward to the remainder of 2006 I am confident that we should see the year play out even better than we expected. First, we have tremendous strength in our balance sheets. Net free cash flow is strong and we are on track for our full year forecast of $265 million to $300 million.

Expenditures for the first half on capex are $56 million, right in line with their full year expectation of $99 million to $106 million. Working capital is in line with our expectations given our sustained excellent performance in DSO. When we look at our use of cash, I am pleased with our performance here as well. Through July we spent about $16 million on our acquisitions. Although it’s hard to predict the exact timing of these transactions, we have several excellent acquisition candidates in our evaluation process. So we still plan to spend $70 to $100 million on acquisitions this year. Our expectation is to maintain our very strong return on investment capital profile in line with prior years.

We’ve also paid down approximately $52 million of our debt and this put us a little ahead of our plans year to date. So far this year we have repurchased approximately $850 million of our outstanding shares. This was accomplished by an open market share repurchase of 4 million shares and the 25 million accelerated shares repurchase in January. And in regards the 25 million program the bank has now virtually completed executing this transaction.

Based on our current forecast of cash and debt positions we plan to spend up to an additional $150 million on open market share repurchase this year. So we feel very good about our cash positions heading into the second half. As Dave mentioned we are on a path for balanced growth. We’ve been operating this way and we will continue to focus to drive operating profit growth in line with revenue.

As we look to the remainder of the year there are several factors that will affect our performance and specifically our Q3 guidance to you. First, we normally see our revenue and profit skewed more towards the Q4, this is a typical seasonality in our business. This year we’ve had an unusual affect because in 2005 we had our largest acquisition year spending about $200 million mostly in the second half and this is a factor in the revenue borrow comparisons for Q3 and Q4. By the way, a higher component of our growth in the second half will be organic. Also we significantly reduced our outstanding shares this year by 12%, which on its own adds a little bit more variability in our quarterly earnings. What this means is now about $2 million of net income will impact our EPS by a penny. And so to accommodate this we will have a slightly wider EPS range in our guidance going forward.

Now considering those factors our Q3 guidance is constant dollar revenue growth of 10% to 13%, an adjusted EPS of $0.34 to $0.39. As you know these are all before stock based compensation expense, which we expect to have a $0.03 impact in the third quarter. With a strong first half as Dave mentioned, we are increasing our EPO guidance for the full year. Specifically, full year guidance is constant dollar revenue growth unchanged at 11% to 13%, constant dollar operating income growth of 9% to 13%, adjusted EPS of $1.47 to $1.53, which is $0.02 higher than our previous guidance range, and cash flow remaining at $265 million to $300 million. These are all before equity based compensation expense which we expect to have a 13% impact on full year EPS.

Now let me turn the call back to Dave.

Dave Carlucci

Thanks Nancy. You can see from our results that IMS serves a client base that needs us and recognizes the value of our offering. Our regions and our business lines are executing, and we have a broad set of capabilities to support a sustainable growth profile. As we look to the future, one thing we can be sure of is that the environment for our clients will be characterized by significant changes in the way they operate. And we are in a great position to capitalize on that. Yesterday we completed our annual strategic review with our board, where we looked at our business opportunities and financial model over the next several years.

As we developed our strategy we learned a couple of things. One, when we looked at our $5.2 billion market opportunity we gained one point of share in 2005 and now capture 31% of the market. And two, going forward, as we broaden our capabilities into new areas such as health economics and outcomes research and managed care, our addressable market has expanded to 6.1 billion. And all of our clients are looking for partners who can pull this together in a globally consistent way. IMS’s ability to leverage our deep industry knowledge for our clients is a key differentiator for us, and we have expertise in those areas most critical to our clients’ success. It’s for these regions we have confidence in our financial plans for 2008.

Revenue will grow in the high single to low double digits, our margins will remain strong and stable, and operating income will grow in balance with revenue. We have got a great business and we’re excited about our future. So thanks for your time this afternoon, and now we will be happy to take your questions.

Operator

Thank you. (Operator instructions). Our first question comes from the line of Mr. Eric Coldwell from the company Robert W. Baird, please proceed with your question.

Eric Coldwell - Robert W. Baird

Thanks very much and good afternoon. A quick question, the consulting and services business had a really phenomenal growth in Q2 better than we have modeled of course, yeah your firm margin was also stable and up quarter to quarter, I’m curious, what kind of profitability impact are you seeing from the CNS impact it’s obviously not as diluted as some people have been concerned about, and you know, if you could add on Dave, what kind of data add on’s you are getting with these consulting sales, what kind of traction you are seeing getting follow on data sales with the consulting business? And then finally if I could just get a quick headcount update on the number of global consultants? Thanks.

Nancy Cooper

Okay, sure, let me answer the first part of your question. Consulting if you remember that chart we had with all the red bars and the green bars, one of the ways we said this year what’s going to help is you know, we have got ability to still improve line utilization and consulting and in other parts of it and what we really gotten is improved performance and consulting which is in line with what we were expecting. And as part of our balanced growth as we grow out consulting we are going to able to improve profitability in part.

Dave Carlucci

Yeah, and on the question Eric, that we talked abut a lot about the pull we see on both sides, we actually see consulting pulling data access, but our data business creating as we go into the new areas like anonymous patient level data and longitudinal expertise pulling the need for consultative insights around it, so it’s really a two-way street and we never quite see it happen directly in a period so, you know, it will vary between the times these opportunities take place with clients but I would say in the longitudinal space it really requires consultative capability and the use of those data assets are part of a lot of the transactions that we were doing today. I think Gilles talked in past about some of the things we were doing in assessing the dynamic prescription trends versus just new and total prescriptions. And that starts with a consultative activity but brings a lot of data into the transaction. To answer your last question we’re at about 1,100 billable consultants.

Eric Coldwell - Robert W. Baird

Dave, as you look across your geographies, are there any major markets where you or you feel that you have truly hit scale or would you say there is still opportunities across most markets? Can you kind of give us a sense on directionally how much more room there is there?

Dave Carlucci

Yeah, I mean through -- at the end of last year we had about 7 countries that had over 10 million in consulting, we still have a long, long way to go, but part of that -- those numbers that Nancy talked about, we saw good improvement in European in terms of beginning to scale more across multiple countries but there is still a lot of room to continue to drive and build our capabilities across even still the major countries.

Eric Coldwell - Robert W. Baird

And if I could just have one follow-up and I’ll bail out. Obviously there has been a lot of debate in the market about the AMA’s new PDRP program, I’m curious if you can give us some sense of what the initial steps have been there, what initiative IMS has taken to work in the PDRP environment and if you can just give us a snapshot of how may physicians or prescribers have actually signed up out for this program?

Dave Carlucci

Sure, as you know we have been very active in formulating that program with the AMA and have been working in lockstep with them. It went into effect July 1, and as of Monday of this week there are a little over 2,900 physicians well or prescribers I should say against a universe of 1.4 million. So about to 2/10 of 1% of the population had signed on. We have also furnished our clients with the first report on that and the first list of those who have to have the data locked if you will, from distribution down to the sales rep level.

Eric Coldwell - Robert W. Baird

What have been the clients’ initial response if any, and is that creating revenue opportunities for RX or incremental costs that are -- that are offsetting those opportunities?

Dave Carlucci

No, I would say -- I would say neither, it’s not significant enough to have an impact where there is work around required and secondly we were able to make the changes to our system necessary and to implement it in a matter of weeks.

Eric Coldwell - Robert W. Baird

Okay, great, good job and I’ll let others get into the Q&A, thanks.

Dave Carlucci

Thanks Eric.

Operator

Thank you, our next question comes from the line of Mr. Robert Willoughby of Banc of America Securities; please proceed with your question.

Robert Willoughby - Banc of America Securities

Thank you. Nancy, I think you mentioned $72 million to $100 million in acquisitions spanning over the course of the remainder of the year, it sounds like fewer but larger transactions. Is that my -- take away from that in any color in terms of areas, geographies that some of these transactions might do for you?

Nancy Cooper

I don’t think you should interpret it Bob, as larger acquisitions, we serve a number of areas we’ve looked at. You can probably when you hear Dave lay out the -- the areas he’s focusing on, they’re good indications of areas we were looking at. So -- and it’s not in any one particular region, we really are very selective on the acquisitions we want to acquire, so we’ve got enough in the queue that we can continue to be quite selective.

Robert Willoughby - Banc of America Securities

That’s great, thank you.

Nancy Cooper

Thank you.

Operator

Thank you. Our next question comes from the line of Mr. Larry Marsh from the company of Lehman Brothers; please proceed with your question.

Larry Marsh - Lehman Brothers

Good afternoon, Dave, Nancy, good quarter. Nancy, just a couple of things I want to make sure I heard correctly. First you’re suggesting net interest income of $40 million for the full year in your expectations, is that right?

Nancy Cooper

Yeah, that is what we -- $40 million -- little less than $40 million of interest expense.

Larry Marsh - Lehman Brothers

So, a big step back after the second half with the share repurchase expense?

Nancy Cooper

Say it again, Larry?

Larry Marsh - Lehman Brothers

You are $50 million year to date?

Nancy Cooper

I’d have to look at that, it’s probably a little bit more than that, but it is back end loaded, you are right.

Larry Marsh - Lehman Brothers

Okay, and then you were saying you’d hope to repurchase about $150 million worth of stock in the second half of the year after the ASR is completed, is that right?

Nancy Cooper

That’s corrected, so we have completed through the first half the $29 million and then we’re going to buy the $29 shares -- the $850 million worth of stock and this in additional $150 million through open market share repurchases in the second half of the year.

Larry Marsh - Lehman Brothers

Right, so if I’m looking at that right you hope to repurchase about roughly half of your remaining 11 million share authorization this year, is that right?

Nancy Cooper

Yeah, that’s the share price -- yeah that’s about right.

Larry Marsh - Lehman Brothers

Okay, just a follow up of Bob’s question, did you make any acquisition in the second quarter?

Nancy Cooper

No, we made none in the second quarter but we did do is we closed in early July a small health economics acquisition.

Larry Marsh - Lehman Brothers

Okay, all right. And then just a contribution from constant dollar revenue growth from acquisitions this quarter?

Nancy Cooper

It was a little bit over 3%.

Larry Marsh - Lehman Brothers

Okay, and I guess the question for Dave, you know, you alluded to a lot of a very positive things in the quarter, the only two areas you highlighted as perhaps a little weaker than expected was Canada and in consumer health in Europe, could you elaborate a little bit on that?

Dave Carlucci

Sure, Canada was impacted by a couple of data quality issues from our suppliers and we had been working diligently to do what we have to do to improve upon the client deliverable and it has created a delay in some of our clients’ decisions. That’s primarily the issue in Canada. If I look at consumer health, one of our large markets is the UK and we are re-engineering our offerings there to include a more complete look at mass market information and that has had an impact on our business although we did see consumer health grow sequentially by about a million dollars, so it wasn’t like the business stopped but if you looked on it on a year-to-year growth basis it was not an impressive result.

Larry Marsh - Lehman Brothers

Uh-huh, and in Canada how much of an impact did that have in your America’s business this quarter, in the first quarter you had 16% constant dollar this quarter up 14% and is that something you think you can fix over the near-term or is that something you have to work through?

Dave Carlucci

Yeah, I feel very comfortable about the America’s view going forward and it was just that the point of it, one was to point out that we have some weakness in one of our regions but most importantly it was the bit of a drag, the US results were stronger than the 14 would indicate.

Larry Marsh - Lehman Brothers

Okay, I’ll stop here, thank you.

Operator

Our next question comes from the line of Mr. Steve Unger from the company Bear Stearns, please proceed with your questions.

Steve Unger - Bear Stearns

Good evening. First question is just regarding Japan and the penetration of the SFE products were reintroduced I guess about a year ago, could you give us an update as to how well that has been penetrating the previous customer base where we’re at in terms of getting back to normal?

Dave Carlucci

I think I characterized this last quarter the same way I would this quarter, we’re continuing to see an up tick in the number of therapy classes that are being applied as opposed to the number of clients using our new SFE offerings. So although that still continues to trickle up, the real difference and we knew last year as we finished the year we were actually we had where we thought we were in number of clients but slightly below where we thought would be in number of therapy classes. And this year we are starting to see because we see that the clients with the new offerings the uptake in the therapy class application.

Steve Unger - Bear Stearns

Okay, so then in terms of the overall revenue impact of the problem that you had with data suppliers, are we back to more normal revenue levels?

Dave Carlucci

I don’t if you are circling the question Steve, when do we expect to fully recover from the interruption we said we see that roll out over probably two to three years we feel comfortable with the pace we’re on but you know and the reason it’s hard to answer a little bit is the new incarnation you know, in that period we’ve built consulting and services, we’ve created an offering that’s less granular that requires more assistance from an interpretive point of view and we introduced implementation services to help clients accept the new offering. So it’s a little different mix and you know we still think that it takes time in this market to be able to get back to the levels of inside and utilization on the client’s part. And so I think we’re pretty much consistent and on track where we thought we’d be. We are particularly pleased that we continue to see improvement in operating income and at the revenue levels are holding in the double-digit range.

Steve Unger - Bear Stearns

Right. And then you mentioned you’ve increased your investments in the oncology area, I know that’s been a difficult market to track, could you elaborate on what you’re doing in the oncology area?

Dave Carlucci

Yeah, I would just say a couple of things. One is through some of our acquisitions we’ve gotten some incredible therapy class expertise and we probably have 50 people worldwide who now -- in our consulting organization who specialize in the area of oncology. We also signed an agreement with US oncology in the United States for more granular information and certainly the specialty retail assets we’ve acquired overtime and held that is where was a fairly strong set of offerings in outside the US, the G5 or six countries. So we’re still building on it, we know we are very zeroed in on the requirements but we are starting to build really momentum around having combination of a deeper data assets and more expertise.

Steve Unger - Bear Stearns

Is it easier or more difficult to develop the assets in international markets in oncology?

Dave Carlucci

More difficult than?

Steve Unger - Bear Stearns

Than the US?

Dave Carlucci

No actually we’re ahead is outside the US mainly because of the rich hospital data assets we have outside the US and we are building that capability in the US.

Steve Unger - Bear Stearns

Right. And then stemming from I think it was Eric’s question earlier, the PDRP program, maybe we should talk about the New Hampshire legislation and what the company has done or is doing to respond to them.

Dave Carlucci

Yeah, we’ve been very close to that situation obviously in New Hampshire, it has been signed into law and for those who are with familiar with the law (inaudible) legal with collect and distribute data on prescribing records of physicians. We don’t think it will have a material effect on us, it’s just less than one-half or 1% of all prescriptions in the United States but we think it’s a bad law and it’s really an anomaly because 15 states have considered similar legislation over the past few years and all have rejected it for two reasons. It blocks the flow of healthcare information and it is an unnecessary expansion of special rights to physician in the conduct of the professional practices. AMA was opposed as well to legislation. So couple with PDRP and physicians ability who are concerned about pharma sales, they certainly have the opportunity to opt out under PDRP and you can see from the volumes of the opt out that this is not a universal issue in terms of prescribers’ beliefs of the value of a pharmaceutical detailing call which as you know involves sampling in education on prescription. The downside of blocking that data for a number of (inaudible) is around efficacy and risk management is significant. So we continue to explore our alternatives we are working with other members of the industry who share that concern but we certainly want to be well aware of ensuring that we get the other side of the issue on the table moving forward.

Steve Unger - Bear Stearns

Okay, will the company be challenging the law in some fashion?

Dave Carlucci

We haven’t concluded on that yet.

Steve Unger - Bear Stearns

Okay, and then just on the ASR program, I believe there is a true opportunity to the amounts given that the stock has risen during the buy-back period, do you have an estimate Nancy, as to how much you’ll have to pay the bank that was running that program?

Nancy Cooper

Sure Steve, just around $18 million.

Steve Unger - Bear Stearns

$18 million?

Nancy Cooper

Yes.

Steve Unger - Bear Stearns

Okay, and that wasn’t paid in the quarter, correct?

Nancy Cooper

No.

Steve Unger - Bear Stearns

Okay. Thank you congratulations on a fine quarter.

Nancy Cooper

Welcome, thank you.

Steve Unger - Bear Stearns

Okay.

Dave Carlucci

Thanks Steve.

Operator

Thank you. Our next questions comes from the line of Mr. John Kreger from the company William Blair, please proceed with your question.

John Kreger - William Blair

Thanks very much, Nancy could you break down the 12% constant dollar revenue growth and the customer type, I think in the past you’ve given us that in a two or three categories.

Nancy Cooper

We haven’t done it, but you know actually I don’t believe it would be very dissimilar from what we’ve shows you before, with all three large medium and small are in double digits, small is a little bit more than the other two, but they are demonstrating good growth patterns and we feel like it’s proving the effectiveness of us as Dave was articulating getting it higher levels of management and the client.

John Kreger - William Blair

Great, and then as a follow-up to that, Dave, I think you mentioned on two different occasions that you had some competitive win backs in the US and where - you felt like you are getting good competitive wins, I think you said in Asia and as you look at that, could you just expand on what it is that you think is - are enabling you to do that, are you saying competitors backing out of the market and I gathered that certain client price that you are having more successful.

Dave Carlucci

Yeah, as I mentioned, we’re seeing more in the mid size client area. I think in the US, one of the big drivers is our next generation prescription services which will go into effect with clients - the beginning of ’07. A large clients has been doing a lot of preparation around that and I think it’s a key differentiator for us in terms of our ability to take our three major prescription databases and have a rationalization around the single number and also our ability to deliver that on a weekly basis, so our clients have the ability if they choose to take earlier actions than they have in the past on the monthly roll out. So, I think that’s a significant competitive advantage for us in the US. I think in the rest of the world, you know, we have increased rather substantially over the last three years our investment and data assets and I think it’s the breadth and capability of our assets and filling that out on a broader scale that’s impacting that in other areas.

John Kreger - William Blair

Great and then one last question, can you just expand a bit more on success that you are having with the managed care products, how are you seeing that playing out and is that still primarily with your pharma clients or is it broadening beyond the traditional client base?

Dave Carlucci

Well, it is two fold, it’s primarily with our pharma clients, as we said it’s in part the impact of Part D in the analysis that’s associated with that. There’s another piece that drove it and that is last year we answered the area of compliance programs, the ability to help clients ensure that they are in full compliance in contracting both in the private payer and government formulary area if we acquired a company called Envision that’s in that space. And that has been a big plus and we categorize that in the area of managed care.

John Kreger - William Blair

Great, thanks very much.

Dave Carlucci

Thanks John.

Operator

Thank you. Our next question comes from the line of Mr. James Kumpel, with the company Friedman Billings Ramsey, please proceed with your question.

James Kumpel - Friedman Billings Ramsey

Hi, good evening guys. Can you talk a little bit about Japan’s constant dollar revenue growth and whether or not it’s operating income growth on a constant dollar basis with greater or inline with that revenue growth?

Nancy Cooper

Hey Jim, a very consistent (indiscernible) was what we’ve communicated all year that we have had very nice top-line growth double digit and this is the year where operating income is starting to grow in Japan after a long period and we have never said that it’s growing at the same rate, but it is a contributor to the balanced growth we’ve been able to have of the last few quarters.

James Kumpel - Friedman Billings Ramsey

But generally would you say that it’s - would you be able to sort of give us a benchmark that maybe within the two to three year timeframe that you expect it to stabilize, the operating income?

Nancy Cooper

I think - I hopefully Jim, you’ve heard us say Japan is a fabulous market. It’s the pharma - it’s the market it’s growing quite a bit, there is a lot of investment we feel we need to make there, so we’re going to try to make sure we’re balancing this whole for IMS, we’re not shorting out our Japanese opportunity. So, it’s really is going to be a constant trying doing that juggling because we see that it’s a very good market, a lot of the Japanese clients as you heard Dave said are looking for where to invest elsewhere in the world and within Japan we see the opportunity that export a lot of the product offerings we have elsewhere into Japan.

Dave Carlucci

Yeah, I - let me just say after that Jim, I mean obviously our first and foremost half was to stabilize our situation in Japan and obviously it took some investment to redesign the offering to begin paying data suppliers that are very equal to what we pay in the rest of the world. But Nancy it’s on a very important point for us, keep in mind Japan is the second largest market in the world for pharma and it’s our second largest business. I feel we’ve been underinvested a bit in that market and you’ve seen that market growing of 1% to 2%, we saw it grow last year over 6%. So, as we go through our strategic plan and we when we go thorough our ’07 budgeting process, we have plans to make investments in Japan. We think it’s a good time to do it and we think we need to accelerate our capability in that market, so it isn’t a kind of think where you can look to you know, recovery storey. I look at Japan a little bit like the investments we’ve done in the rest of the business over the last five years, to generate that growth engine again and so that’s the way I see the market opportunity and we have all of our business lines and consulting and services leaders focused on the Japanese market plan so that we can take advantage of that opportunity.

James Kumpel - Friedman Billings Ramsey

And I’m just going to try to limit myself to the these two follow-ups. The first one’s probably that the tougher one, the second one’s probably the soft ball. The first one is can you describe some of the factors behind the wide range of guidance for the third quarter versus the usual $0.03 range. The softball one is if you could actually talk a little bit about how IMS is helping pharmaceutical companies, is they are trying to right size, the sales forces and SG&A spending and what involved and you’ve been taking as a part of that effort?

Dave Carlucci

Well, why don’t you let me take the softball. We’ve invested in the area of resource optimization which we had not really been a player in the past and that involve the partnership we did to join agreement with SAS to create our precision suite, and really what we’re doing is a much more focused analysis per clients in a much more customized way as they have to look at deploying the sales forces to more specialty areas than you know the large mega products we saw in the past. So, we are much more engaged at the level of understanding both the requirements for specialization and coupled with that which is actually part of launching brand and our promotional practice is really looking at the other elements of demand creation in the go to market strategy. So, it’s not only the SFEPs and the sales force optimization team, but we’re getting to ask the question on the heels of that, what are the other elements that are going to generate demand. So, those are the kinds of activities we’re involved in and we’re seeing very good traction.

James Kumpel - Friedman Billings Ramsey

In other words, its not just about pounding heads, it’s also about reallocating resources more appropriately.

Dave Carlucci

Absolutely. It’s all about productivity and redeploying in a much more targeted fashion around areas of expertise. What are the hot buttons for those who prescribe in those areas and a deeper understanding of it.

Nancy Cooper

And Jim, back to your first question, when we did the ASR and the $29 million shares, we really reduced the amount of shares we had outstanding buyout around 12%. And that ends up being -- a penny ends up $2 million. So we’re down a very small number and we operate in over a hundred countries. So we just decided that because we are down to that kind of granularity it was prudent to widen the range and it really is no more than that.

James Kumpel - Friedman Billings Ramsey

So, its not new factors of variance that you are experiencing at this point going forward, it’s a matter of the denominator going down?

Nancy Cooper

It’s the matter of the nominator going down.

James Kumpel - Friedman Billings Ramsey

Okay, okay great thank you guys.

Dave Carlucci

Thank you.

Nancy Cooper

Do we have time for one more?

Operator

Yes, we have -- our next question comes from the lines of Mr. Duane Pfennigworth of Raymond James. Please proceed with your question.

Duane Pfennigworth - Raymond James

Hi, thanks for taking the question. Looks like consulting was 19% of revenue in the quarter, can you give us a feel for how that varies by region?

Nancy Cooper

Sure, though we’re 12% constant dollar total, you had 14% constant dollar in the Americas, you had 8% in Europe and you had 17% in Asia.

Duane Pfennigworth - Raymond James

And consulting specifically, in those region?

Nancy Cooper

Consulting, I am sorry, Duan --

Duane Pfennigworth - Raymond James

-- just a percent of revenue, looks like it was 19% of total revenue, I am just wondering sort of regionally how that --?

Nancy Cooper

Well, let me give you -- we haven’t broken that up but let me give you some color. It was about 17% of revenue and when you sync up we always talk about the top 10 countries we are consulting is you kind of figure you are going to have more consulting in US, you better have more borrowing in Europe and you are going to be growing and Asia, so it would be smaller in growing so, well, they are quite right but they give you a little feeling of how its working out.

Duane Pfennigworth - Raymond James

Okay, great and may be just qualitatively, how average deal size is trending and how visibility into that business on a go forward basis may be changing?

Dave Carlucci

Yeah, it does vary by geography, but I would say we had a very strong quarter in the United States and as we look at our pipeline, our pipeline over all heading into the Q3 is up 6%. If you look at the consulting and services pipeline, it’s up a little higher than that.

Nancy Cooper

And Duane just to add clarity, the 17% that was for year to date, we will see in the quarter it’s a little higher.

Duane Pfennigworth - Raymond James

And then what size, are at nearly a $500 million run rate for that business or a 450, what size would you say you have achieved scale in that business?

Dave Carlucci

Its scale by geography -- by country really. I wouldn’t say scale is once you hit a certain number for the company, I really believe we have the typical challenges of trying to meet up resources and expertise at critical mass levels to service markets that involve unique subsidized issues, so if you are looking at pricing and reimbursement its fine to look at a goal believe, we have clients globally, we have them regionally, we do have the opportunity to get to the point where we are helping on pricing and reimbursement challenges at the local level. That takes a different level of capability and scaling of your business that just one example so, I don’t see this scale issue being one that is what we are going to deal with for a quite number of years.

Duane Pfennigworth - Raymond James

Great, thank you and then just lastly what’s your share count expectation for the Q3?

Nancy Cooper

I am not sure, we have a given a lot, I should tell you, we ended this quarter with 202 million shares outstanding diluted about 206 million. That a little bit more options in the quarter, little under two, so it’s a little hard to predict on options but that kind of gives you what we saw on the second -- you can guess what you think of the third.

Duane Pfennigworth - Raymond James

Thank you.

Nancy Cooper

Sure.

Dave Carlucci

Thank you everybody and we appreciate your joining the call and enjoy the summer months, take care.

Operator

Thank you ladies and gentleman that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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