IMS Health Q4 2006 Earnings Conference Call

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IMS Health (RX)
Q4 2006 Earnings Call
February 01, 2007 5:00 pm ET

Executives

Darcie Peck - VP of IR
Dave Carlucci - Chairman & CEO
Leslye Katz - CFO
Gilles Pajot - COO

Analysts

Larry Marsh - Lehman Brothers
Natalie Friedman - William Blair
Robert Willoughby - Banc of America Securities
Steve Unger - Bear, Stearns
Eric Coldwell - Robert W. Baird and Company
James Kumpel - Friedman, Billings
Norm Fidel - Alliance Capital

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the IMS Health fourth quarter and full-year 2006 earnings call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer. [Operator Instructions]

As a reminder, this conference is being recorded, Thursday, February 1, 2007. I would now like to turn the conference over to Darcie Peck, Vice President Investor Relations. Please go ahead.

Darcie Peck

Thank you, Tim. Good afternoon, everyone, and welcome to our fourth quarter and full-year 2006 earnings conference call.

With me today are Dave Carlucci, our Chairman and Chief Executive Officer, Leslye Katz, our Chief Financial Officer and Gilles Pajot, our Chief Operating Officer. Dave and Leslye will discuss our fourth quarter and full-year 2006 results and our guidance for the full year for 2007.

As in the past, we've posted slides on our website which highlight our performance and I would encourage you to review these during Dave and Leslye's prepared remarks this afternoon. A question-and-answer session will follow our prepared remarks.

As standard procedure, let me read you our Safe Harbor provision. Certain statements we make today are forward-looking within the meaning of the U.S. federal security laws. These statements include certain projections regarding the trends in our business, future events and future financial performance. We would like to caution you that these statements are just predictions and the actual event or results may differ.

They can 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 fourth quarter 2006 earnings release issued earlier today. And our third quarter 2006 report on form 10-Q which set forth important factors that would cause actual results to differ materially from those contained in any such forward-looking statements.

All forward-looking statements represent our views only as the date they're 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. Certain of the financial measures we'll talk to today are on an adjusted non-GAAP basis. These include, for example, operating income, net income, EPS and free cash flow for 2006.

Detailed reconciliations to results on a US GAAP reported basis is in our press release, and I encourage investors to review the notes in our press release further describing adjusted non-GAAP measures.

Now, let me turn the call over to Dave Carlucci. Dave?

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Dave Carlucci

Thank you, Darcie. And thanks everybody for joining us. I'm pleased to be with all of you this afternoon to review our outstanding performance for 2006 and our outlook for 2007. We closed out the year with another strong performance turning in exceptional revenue, earnings per share and operating income gains.

For the fourth quarter, revenue was up 14% as reported and 10% constant dollar. And before stock-based compensation expense, operating income rose 12% reported and 11% constant dollar in the quarter. Operating margins were 25%, and adjusted EPS was $0.43 up 8% year over year.

Our results for the full year were exceptional. Revenue growth was 12% and 11% constant dollar. We delivered 12% growth in operating income for the year, 11% constant dollar. We're very pleased with this excellent operational performance. The first time in four years that we achieved full-year double-digit operating income gains.

Our operating margins remain strong and stable. Adjusted EPS grew 12% to $1.54, better than the high end of our guidance. And preliminary free cash flow was $290 million, reflecting the solid fundamentals of our business. We continue to drive a tremendous amount of free cash flow.

In 2006, we were able to return over $880 million of cash to shareholders through our share repurchase program. The strategic moves we've made over the past few years are yielding results with clients responding positively to a key differentiator for us. Our continuum of information, analytics and consulting. We're winning in the market place and no matter how you look at it, we're delivering strong performance across all dimensions of the business. Be it customer set, business lines or geography.

A key driver of our success in 2006 was our information and analytics offerings. To give you some perspective, this area of our business represents 82% of our total revenue and grew 8% last year. That's the highest rate we have seen in a number of years and it drove nearly 60% of our total growth in 2006. We did this by broadening our base of information assets while continuing to benefit from additional pull-through from consulting engagements.

Our information audits performed very well. We're seeing more clients buy incremental information about therapy classes, most notably for specialty drugs and anonamized patient level information to identify opportunities by patient segment.

In addition, clients are looking for us for information on a more frequent basis, moving from quarterly to monthly to weekly and even in some cases daily metrics. More than ever, they are asking for global, consistent information and analytics as they look to roll out their global strategies in more markets.

This has led to a significant rise in demand for our MIDAS offerings to analyze global pharmaceutical sales. MIDAS grew more than 30% last year. Clients are buying additional geographic views, new channels, and they want new analytics to understand the impact of generics and pharmaceutical company mergers. These are innovative offerings and they provide unique value to clients. As the complexity of the market drives a need for more granular information, our consultants are equipped to help them understand the market, optimize their sales forces and demonstrate the value of their products.

Consulting in services grew 29% last year and is now generating more than 18% of IMS's total revenue. We're building scale, we're adding expertise and extending our methodologies into more countries. At the same time, we improved our utilization and margins. The number of consulting engagements has risen significantly over the past year, and the average contract size has increased 18%. Clearly, we're engaging new audiences in more accounts and gaining significant business with clients, as a result.

In 2006, our revenue from top 20 accounts grew 10%, with five of those growing their business with us more than 20%. While we hear a lot about the challenges facing large pharma, especially Pfizer over the past six months, Pfizer and 13 others in the top 20 are growing their business with us in double digits.

Our medium-sized account grew 13% in 2006, and our small and emerging biotech accounts grew 12%. The success with which we have with our clients extends across all of our business lines, which is a testimony to the scope of our capabilities and how we can help them in a number of ways.

Sales force effectiveness, our largest business line, grew 9% constant dollar for the year. You're all aware of the recent sales force initiatives announced by our clients and these are creating a number of opportunities for us. We saw outstanding demand for our information in non-retail channels such as long-term care and steady acceptance of our DDD/SFE over in Japan.

And the excellent growth in our sales and account management consulting practice was driven by the global launch of our precision sales force offerings. Our portfolio optimization business line turned in another exceptional performance with 9% constant dollar growth led by demand for our global MIDAS offerings.

Launch brand and others had solid 18% constant dollar growth in 2006. Revenue from our pricing and market access consulting practice nearly doubled as clients considered optimal strategies in a challenging pricing and reimbursement environment. Overall, we're pleased with our business line performance.

It is the continued focus and execution of our teams in the regions that enable us to deliver these results every single quarter. In our Americas region, we grew 13% for the year and 12% constant dollar. 3 points faster than in '05. Key client win backs, a strong performance in our information offerings and acceleration in consulting and services drove results. We're also excited about double digit gains in our large accounts in the U.S.

The Europe, Middle East and Africa region grew 11% and 9% constant dollar in '06. This performance was driven by exceptional strength in midsize markets, demand for our information products and the roll-out of our health economics and outcomes research capability. And what's equally impressive is our improved operating margins in AMEA.

Our Asia Pacific region grew 11%, 14% constant dollar. This marks the second consecutive year where both Japan and Asia PAC grew in double digits. Greater China, India and Korea continue to be bright spots for us, all exceeding 25% growth. As large pharma looks for new opportunities in these markets. More clients are turning to our consulting teams across the regions as we roll out new offerings such as Promo 360 and precision sales force.

In summary, we had another great year. We're executing on our strategy, building and delivering new offerings and becoming more relevant than ever to clients. And I have confidence in our ability to sustain momentum this year.

So, let's turn to our guidance for 2007. We expect constant dollar revenue growth of 9% to 11%. Constant dollar operating income growth of 9% to 11%. Earnings per share of $1.56 to $1.60, and free cash flow of $290 to $325 million.

To help achieve this outlook, we announced two key executive appointments last week. I'm very pleased to have Gilles Pajot as our Chief Operating Officer. Under Gilles leadership, we'll continue to accelerate the delivery of innovative global offerings and reach a broader range of healthcare industry clients.

And as you know, we appointed Leslye Katz as our Chief Financial Officer. Leslye has served as acting CFO for the past five months and has demonstrated exceptional leadership and judgment during that time. She has a deep knowledge of our business, and I'm pleased to have her as a member of our senior team.

So, now, let me turn the call over to Leslye to take you through the details of our financial results and guidance for 2007. Leslye?

Leslye Katz

Thanks, Dave and good afternoon. I'm delighted to be appointed CFO of this great company. As Dave described, we finished 2006 with another strong performance in the fourth quarter. Revenue was $544 million, up 14% reported and 10% on a constant dollar basis, reflecting the generally weaker dollar versus Q4 2005. This was IMS's ninth straight quarter of double-digit constant dollar revenue growth. Acquisitions contributed about one point to our constant dollar growth in the quarter. With the remaining 9 points coming from organic growth.

Operating income in the fourth quarter before FAS 123-R was $135 million, up 12% reported and 11% constant dollar. As we did every quarter last year, we continued to grow our operating income in balance with revenue growth. This resulted in another quarter of excellent operating margins performance at 25% before FAS 123-R expense and 23% after FAS 123-R.

Net income was $88 million, down 7% in the quarter. Due largely to higher interest expense associated with our 2006 accelerated share repurchase program and foreign exchange hedge losses in 2006 versus gains in Q4 2005. Our adjusted EPS before stock-based compensation expense was $0.43, up 8%. Including stock-based compensation expense, our EPS was $0.40, consistent with the analyst consensus.

With this Q4 performance, IMS finished another great year in 2006 across multiple operational and financial dimensions. I would like to share a few more of those operational and financial highlights with you. And then give you some additional insight into why I'm confident that we will continue our strong performance into 2007.

Revenue for 2006 reached 1.96 billion, up 12% reported and 11% constant dollar. We spent $54 million to acquire six businesses in 2006 and about 2 points of our revenue growth came from acquisitions. Organic revenue growth was about 9%. 1 point higher than 2005 and a very strong performance.

Consulting and services revenue reached $360 million, up 29% constant dollar. CNS revenue now exceeds 18% of total IMS revenue, up from 9% three years ago. Reflecting the success of our strategy to build out consulting and services capabilities that leverage our information and analytics.

Operating income was $490 million before FAS 123-R, up 12% reported and 11% constant dollar. And we met our commitment to stabilize margins at 25%. After FAS 123-R expense, operating margin was 23%.

Driving operating income growth in line with revenue growth was a primary objective for us in 2006, and we delivered. We did this by improving operational efficiency in production and development, improving utilization in our CNS business and continuing to integrate acquisitions into our regional operations.

Cost for production and development, which include our data center operations, data management and production of our syndicated and custom information offerings, grew about 2 points slower than revenue growth as we continue consolidating operations into lower cost hubs.

In consulting and services, utilization improvements were achieved in all geographies, helping to drive margin improvement. We maintained stable and strong margins while continuing to invest in new data assets and capabilities to drive future growth. Our data acquisition costs were in line with revenue, and we launched four global information and services offerings.

Adjusted EPS before FAS 123-R was $1.54, up 12% versus 2005 and just ahead of revenue and operating income growth. The powerful cash flow generation of our Company and strong balance sheet position allowed us to return $880 million to shareholders in 2006 via share repurchases.

Free cash flow was $290 million, a 91% flow-through of adjusted net income. DSO for the year was 61 days, consistent with 2005. Our year-end debt balance was $975 million, down $138 million from our March 31, 2006, level which was the high point for debt on our quarterly balance sheet. Including FAS 123-R, adjusted EPS was $1.41, and this was $0.12 lower than our GAAP EPS of $1.53.

There was one major item in our GAAP EPS that we excluded from adjusted results. That was a $45 million pretax payment from VNU on the break-up of the merger, less $6 million in banker's fees equating to about $0.12. As we look ahead to 2007, our guidance will reflect growth off of the $1.41 adjusted EPS.

Our performance in 2006 was excellent by all financial measures. And we are well-positioned to continue that strong performance into 2007. As Dave said, we expect constant dollar revenue growth of 9% to 11%. Constant dollar operating income growth, again in balance with revenue, at 9% to 11% and EPS of $1.56 to $1.60. We expect free cash flow of $290 to $325 million.

Let me share a few of the key factors that we have incorporated into these guidance ranges. Revenue growth reflects an expected level of spending for acquisitions in 2007 of $70 to $100 million. We started the year with over 60% of our annual revenue in hand, meaning it is already committed under contracts with clients.

Our pipeline of opportunity has increased substantially compared to this time last year, reflecting the breadth of offerings we have developed and a focus on building out the pipeline beyond the current quarter. This strong visibility and momentum gives us confidence in our 9% to 11% constant dollar revenue growth guidance.

On a business line basis, this guidance breaks down as follows: We expect sales force effectiveness constant dollar revenue to grow 7% to 10%, consistent with 2006 guidance. This is our largest business line, and we see continued strong demand for our information and consulting as our clients increasingly look to optimize their sales forces.

Our portfolio optimization revenue growth range for 2007 is 7% to 10% constant dollar, up from 2006 guidance, as we expect to continue to benefit from the rich data assets we have acquired globally. In addition, we significantly strengthened our consulting and services capabilities in this space by acquiring the life sciences business of Strategic Decisions Group in the fourth quarter of 2006.

SDG is the leader in portfolio strategy consulting to the pharmaceutical and biotech industries. Launch Brand and other services revenue growth is expected to be 16% to 22% constant dollar, down from our 2006 guidance primarily due to the lower pace of our 2006 acquisitions spending.

In Q4 2006, we did acquire DRS High a U.S.-based forecasting consulting company which adds excellent capabilities to CNS in Launch and Brand. We're also confident we can continue to grow operating income in line with revenue growth and maintain operating margins at current levels.

This will be achieved in much the same way as 2006. Continuing to hold data acquisition spending in line with revenue growth, driving efficiencies in production and development, leveraging prior acquisitions, improving CNS metrics, such as utilization, to help improve gross margin and continuing to invest in building and marketing the right offerings that meet our clients' needs.

In particular, we will continue to invest in data assets and consulting capabilities to support our Therapy Class Focus and our health economics and outcomes Research expertise globally. As I mentioned, our EPS guidance is $1.56 to $1.60, up 11% to 13% above the 2006 adjusted EPS of $1.41. Many of you have observed that IMS results, as presented in our press releases, are complicated. And while we strive to improve our clarity with each press release, you're right. They are complicated.

In 2007, we plan to take further steps to simplify as we will report only one view of EPS. Our GAAP results. This is in line with what most S&P 500 companies do, and we believe it will help reduce the complexity in our earnings announcements. As many of the legacy items that gave rise to our differences between adjusted and GAAP results are behind us, we expect few if any differences in full-year 2007. But at the same time, we will continue to highlight and to quantify those items that we believe will give you a clearer picture of our performance and operational trends.

One such item will likely be foreign exchange. Our EPS guidance for 2007 reflects the FX hedging program we put in place early in the year. The hedge program largely offsets the variability and operating income due to the dollar strengthening or weakening with hedge gains or losses in other income.

This hedging program is consistent with what we've done for each of the last several years. On a full-year basis, this it essentially eliminates EPS fluctuation due to changes in exchange rates, but it introduces some quarter-to-quarter variability in EPS. We'll continue to highlight and quantify these quarterly impacts in '07.

Another such item is our tax rate. In '06, our tax rate on an adjusted basis was 29%, steady quarter to quarter. On a GAAP basis, the tax rate varied quarterly from a tax benefit of 25% to a tax expense of 53%, fluctuating due to the timing of realization of tax benefits and provisions.

In 2007, we expect our tax rate to be approximately 31% on a full-year basis barring any unforeseen statutory tax rate changes. But similar to prior years, the tax rate we report will likely vary quite a bit quarter to quarter. As with foreign exchange, we will continue to highlight and quantify these quarterly impacts in 2007.

The final element of our guidance is free cash flow, which we expect to be $290 to $325 million in 2007. Our free cash flow generation continues to be extremely strong and gives us the flexibility to both invest in our business and return cash to our shareholders. On January 19th of this year, we executed a 6.1 million share repurchase at a cost of approximately $170 million. As we did last year, we did this through an accelerated share repurchase program.

We have found the ASR to be an efficient way to benefit our shareholders while optimizing the economics of the repurchase. Our EPS guidance reflects the impact of the 6.1 million share ASR and does not assume any additional share repurchases for the year. However, as you have seen over the last several years, we have the financial flexibility to purchase additional shares when we see that as the best use of our cash.

Our year-end debt position and cash flow projections result in our expectation that interest expense in 2007 will be approximately 20% to 25% lower than in 2006. I hope I've given you a lot of insight into the factors behind our 2007 guidance, both financial and operational and why we're very confident of achieving it.

You will note that our guidance ranges have narrowed a bit, both in terms of operating income growth and EPS. We did this because we continue to improve our visibility into the factors that drive our performance. For the past five years, we have met or exceeded our revenue and EPS guidance. That's a terrific track record. And one we're very proud of.

With that great track record behind us, we are taking the step of moving away from providing specific quarterly guidance for 2007. This ducktails with our decision to report a single view of EPS in 2007, the GAAP view, which, as I described, has some quarterly volatility due to tax and FX movement.

In this transition year, to GAAP reporting and annual guidance, Darcie and I will work with you to make sure clarity and transparency are in no way diminished, and we will continue to provide important metrics into our business trends.

Looking to Q1 2007, we have historically found that if we are able to deliver 22% to 23% of our full-year revenue in the first quarter, we're well-positioned to achieve our full-year guidance. And that is consistent with what we expect in Q1 2007. On a margin basis, Q1 is typically our lowest margin quarter of the year. And we also expect that to continue into 2007.

There are several operational factors that will be key to our success in the first quarter. These include completing our clients' implementation of NGPS, renewing our client contracts, maintaining strong growth in our emerging and other key markets and successfully integrating our recent acquisitions.

A great finish to 2006 and a strong outlook for 2007. That is definitely the way any new CFO would like to start. I look forward to getting out on the road and meeting you in person as quickly as I can.

Let me turn it back to Dave now to give you his perspective on the operational priorities that will help drive growth in 2007 and beyond.

Dave Carlucci

Thanks a lot, Leslye. Well, going forward, we certainly see a lot of opportunities in the market and we're better-positioned than we have ever been to capitalize on them. I spent a lot of time with our clients over the past year and it is very clear that they need our insights and rely on our capabilities more than ever.

While the pharmaceutical industry faces a host of challenges, this remains a healthy market place. The market is more complex with very different drivers and a different geographical mix. Clients need to understand how these market dynamics impact their businesses. They'll no longer have just one or two blockbusters driving growth. They'll have a different and broader portfolio of drugs with specialty products playing a much bigger role.

They need expertise across many disease areas and geographies and are dealing with different sets of prescribers. That calls for more granular metrics to measure the market, different sales models and new requirements to demonstrate the value of medicines.

We've done a great job of picking the right areas where we can help our clients the most. They're looking for us to provide new ways of measuring performance and value on a more consistent and global basis. And we've responded by investing in anonamized patient level data where we're providing clients with deeper insights to understand physician treatment decisions and patient compliance.

We're also addressing other critical areas and broadening our insights into emerging markets and new distribution channels which are in high demand. These and other investments are driving the next generation of our market measurement offerings which will continue to roll out under our new models, new metrics program.

As I mentioned earlier, pharma companies are looking at ways to reduce the size of their sales forces. You might assume this would lead to clients spending less with us, but let me assure you that this is not the case. We've been supporting our clients sales force productivity efforts for a long time. And with precision sales force and Promo 360 offerings, we'll continue to hone sales force and promotional effectiveness for them.

Also, for pharma demonstrating the value of medicines will be critical in 2007, as regulators and payers require significant evidence of the clinical value, safety and economic benefit of drugs. This plays right into our health economics and outcomes research initiative and the six acquisitions we've made in this area.

And finally, by developing clinical expertise in critical therapy areas like oncology, IMS is able to combine its deep information and intellectual capital to become even more relevant to our clients. These are the priorities for our business that will continue to fuel IMS's growth. So I hope this afternoon we gave you a more in-depth perspective of what drove our success in 2006 and what we need to do to continue on that path in 2007.

Thanks for your time, and now Leslye, Gilles and I would be happy to take a few questions.

Question-and-Answer-Session

Operator

[Operator Instructions]

Our first question comes from the line of Larry Marsh with Lehman Brothers. Please proceed.

Larry Marsh - Lehman Brothers

Thanks. Good afternoon, Dave and Leslye. Congratulations on your official promotion. Thank you for all of the detail. I guess I had -- just a little bit of elaboration for Leslye and a couple of quick points and then a broader question for you, Dave.

Leslye, let's see. First of all, the -- the announced acquisitions, you talked about LSG and DRSI. Looks like you spent about $30 million in total for acquisition of the quarter. What was the name of the other company and was one significantly bigger than the other two?

Leslye Katz

Thanks, Larry. The other company is LS -- I'm sorry, is called About Pharma. It is a small, Italian pharmaceutical publishing and events company in the quarter.

Larry Marsh - Lehman Brothers

Okay. All roughly the same size?

Leslye Katz

STG was larger. DRSI a little smaller and About Pharma the smallest.

Larry Marsh - Lehman Brothers

Okay. Let's see. Tax rate sounds like netting through it, you're assuming it goes up a little bit this year, is there any particular reason for that? You know, beyond that quarterly noise?

Leslye Katz

No particular reason other than we have tax planning strategies and they vary year to year as to what they're going to produce.

Larry Marsh - Lehman Brothers

Okay. And then just a clarification. I know last year you, with your annual hedging reset on currency, you were negatively impacted by about $0.11 versus a benefit of about $0.03 a year before.

What sort of benefit or negative impact are you going to have in '07?

Leslye Katz

'07, we expect a positive impact of about $0.01.

Larry Marsh - Lehman Brothers

Okay. Thank you. One more. Option exercise in Q4, was it about a 1.5 million? Significantly different?

Leslye Katz

I think it was up a little bit above that. I think it was around $2 million options exercised in the fourth quarter. We'll confirm that for you.

Larry Marsh - Lehman Brothers

Dave, big picture, as Gilles, the promotion to Chief Operating Officer, that's obviously distinguished himself. You named him Global Business Management head about a year ago.

Elaborating a little bit about what triggered the interest in expanding his role even further and help us to understand what sort of -- what he's going to be doing differently in this role and is there going to be another promotion behind that to fill some of his current responsibilities.

Dave Carlucci

Well, Larry, we -- Gilles will join us -- Gilles joined us a year ago to accelerate our global transformation to ensure we that were able to launch our products more effectively globally and, of course, leverage all of the investments we've made in our business from a data point of view and from an acquisitions point of view. He drove the responsibility for our business lines and consulting and services, and he'll continue to do that.

But he will take on the added responsibility of running the operating team which we have in the Company that meets eight times a year with our geographic heads as well as our business lines as well as consulting and services.

So, Gilles will have the ability to go anywhere he needs in the business to execute on our operational plans for '07 and beyond, and it is also a recognition for the incredible job he's done over the last nine years and the thought leadership that he's brought in to execution into the Company. So, I'm very, very pleased to have him as a partner in this new role.

Larry Marsh - Lehman Brothers

Very good. Thank you.

Operator

Our next question comes from the line of Natalie Friedman with William Blair. Please proceed.

Natalie Friedman - William Blair

Hi, thanks. It's Natalie for John Kreger today. Dave, I was hoping you could talk about long-term opportunities with government programs and if you view the government sector as a meaningful future growth driver for IMS.

Dave Carlucci

As you know, our business has been expanded by a couple of things, particularly in the managed care arena. With government as a payer and Medicare, there is a big piece here that relates to pharma but it also plays into the assistance we can give in analyzing the breadth of those programs and success of those programs.

We also, as you know, acquired a company called Synchronous Knowledge which provides services to the Department of Defense and particularly the Air Force but expanding to help them analyze their cost and utilization of medicines.

We also have government business outside the United States, and we see it as an opportunity with CMS, with the FDA and with other parts of the government as evidence based medicine and the desire for more granular information and understanding of spending patterns gets more and more important.

So, this is an area focus for us but if I look at 2007 on the key drivers of our growth, I would say we'll see growth most likely above the ranges that we discussed for the total IMS growth but again, off a fairly small base.

Natalie Friedman - William Blair

Okay, thank you.

Operator

Our next question comes from the line of Robert Willoughby with Banc of America Securities. Please proceed.

Robert Willoughby - Banc of America Securities

Thank you. Leslye, you threw it in there and I think I missed it. Just the guidance for the factors below the line. You had a comment I think on interest expense and other income expense. Was that down 25% year over year in '07?

Leslye Katz

Yes. Interest expense we expect to be down 20% to 25%.

Robert Willoughby - Banc of America Securities

Just the interest expense? Okay.

Leslye Katz

Correct.

Robert Willoughby - Banc of America Securities

What are you assuming for the share base for the earnings calculation in '07?

Leslye Katz

With the 6.1 million share repurchase and with expected option exercises for the year, I think we're probably close maybe four or five, six million shares above where we are this year on a fully diluted basis.

Robert Willoughby - Banc of America Securities

Okay. And is there an acquisition spending kind of guesstimate where you might come in '07 or higher or lower than '06?

Leslye Katz

Yes. We've based our guidance on about $70 to $100 million of acquisition spending in '07.

Robert Willoughby - Banc of America Securities

That's great. Thank you.

Operator

Our next question comes from the line of Steve Unger with Bear Stearns. Please proceed.

Steve Unger - Bear, Stearns

Hi, good evening.

Dave Carlucci

Hello, Steve.

Steve Unger - Bear, Stearns

First question, just regarding the next generation prescription services. Could you give us some color as to what that means for your U.S. clients and what needs to be done by you and them for the roll-out?

Dave Carlucci

Well, most of the work has been done on the roll-out, Steve. We launched completely to well over 100 of our clients in January. So, the completion issue really relates to the fact that they and we are running in parallel for a period of time which we expect to wind down and Leslye called that out as an area that we want to stay focused on in the first quarter.

It has gone extremely well. And we think it is a significant differentiator for us as we move to weekly data. And as we give our clients the ability to take the three data streams they have for targeting implementation and compensation purposes and fold those into a single number view, which is proving to be quite significant to them.

We're very, very pleased with what we're seeing through January. It is really just a question of making sure that all of the parallels go fine and all of the full production is completed as we exit the quarter.

Steve Unger - Bear, Stearns

Okay. So all three data streams then are coordinated on frequency basis as well?

Dave Carlucci

Yes. Weekly.

Steve Unger - Bear, Stearns

Weekly.

Dave Carlucci

From monthly on some to weekly.

Steve Unger - Bear, Stearns

Excellent. And then turning to consulting, you had $360 million of consulting revenues. How much of that is economics and outcomes? And maybe could you give us some breakdown as to the different buckets of consulting?

Dave Carlucci

We really don't break it down. As I mentioned, we've done six acquisitions in that arena. We're in the process just as we did with our promotional offerings in Promo 360 where we took five acquisitions and took the best of those methodologies to put out a set of offerings, we're still in the process with health economics to get to a common set of methodologies that will allow us to leverage that capability globally.

In addition, we see it as about a $500 million market place, and we roughly have about 5% share of that right now. So, we think it will continue to grow, again, another one that will grow slightly faster than the overall IMS growth, but I really do believe that this is going to be more and more critical to our clients as they're focused on the value of medicines, particularly in the United States.

As you know, Steve, this has been a phenomenon in Europe for a long, long time and in other parts of the world with government becoming primary payer in the U.S., this is going to be more important.

Steve Unger - Bear, Stearns

Excellent. And then thirdly, just on oncology analyzer, could you give us a status update on the roll-out of that? How is that going?

Dave Carlucci

I'll let Giles give you a view on that.

Gilles Pajot

I think we're going to roll out the G7, the major seven countries, the five majors in Europe, U.S., and Japan by the end of the first quarter.

Steve Unger - Bear, Stearns

End of the first quarter?

Gilles Pajot

Yes.

Steve Unger - Bear, Stearns

Excellent. Just lastly, stock options expense, Leslye. What are you expecting in stock options expense for 2007 relative to 2006?

Leslye Katz

I think it will be about in line with 2006.

Steve Unger - Bear, Stearns

Okay. Great. Congratulations on a great year. Thank you.

Dave Carlucci

Thanks a lot, Steve.

Operator

Our next question comes from the line of Eric Coldwell with Robert W. Baird and Company. Please proceed.

Eric Coldwell - Robert W. Baird and Company

Thanks very much. Three questions. First off, appreciate the constant dollar guidance and very good numbers on the revenue side for '07. Do you have a sense on how FX is going to impact the reported growth at the top line?

Leslye Katz

I think it is very difficult to predict that. That's really going to be a function of how the dollar moves throughout the year. So, I'm sorry but that's one I can't -- I don't have good visibility into.

Eric Coldwell - Robert W. Baird and Company

Well, Leslye, with the dollar weakening so much at the end of the fourth quarter, we should start -- at least at a minimum, start off Q1 at a pretty good position, correct?

Leslye Katz

I think that's true. against, most of the currencies, the one that's not true against is the Yen. That's the only one moving the other way.

Eric Coldwell - Robert W. Baird and Company

Yes. Second question, just my general question each quarter, can you give us an update of the three data restriction programs or proposed legislative issues out there, PDRP, Stark and what's going on in the New Hampshire court case.

Dave Carlucci

Sure. As you know, IMS and Verispan are co-plaintiffs in a lawsuit which is seeking to overturn the prescription restraint law in New Hampshire. And this case, it is being litigated as we speak, Eric. So, since the trial is still underway, counsel has advised it would be inappropriate for me to comment on any aspect of that case. But we're in the middle of that right now.

If you look at PDRP, after 36 weeks, we have about 5200 prescribers who have opted out, which is less than 4/10 of a percent. So, on a base of 1.4 million prescribers, it has not become significant, although we do know that the AMA will start to promote it more as a means to ensuring that other more onerous type efforts to limit data are blunted in terms of a physician's view of their flexibility.

This is the best way possible for a physician to decide whether they want a degree of knowledge on the part of a pharma detailer. So, although PDRP has not had a major impact, it is a great vehicle to make sure that physicians feel like they're being dealt with in an appropriate manner.

As it relates to Stark Paloma, frankly, I haven't heard much of Stark Paloma lately. Now that we're in a new legislative session that, bill will have to be reintroduced. At this stage, as you know, there are a number of other agenda items related to pharma and drug costs that I think are higher up on the agenda.

So, it is fairly quiet on that front right now.

Eric Coldwell - Robert W. Baird and Company

Okay. Thanks. And then my final question, I know it is in three parts here but I'm a big fan of what you guys are doing. Great numbers. No doubt about it. At the same time, I think a lot of folks on the street would love to see a little bit of margin accretion in the Company.

We're looking at another year of stellar performance. Japan's coming back. You're holding your data costs in line with revenue. You've got less M & A. You're beating growth targets. You're cutting production costs below the rate of sales growth. You're getting scale in consulting.

I can go on and on and on. To deliver 1% of margin improvement is only a $20 million opportunity out of a $2 plus billion revenue stream. You know, at what point can we kind of sit back and say that some of the margins can accrue to the streets so we start to get some high-teens earnings growth and a little more confidence that this is a good investment at current multiples.

Leslye Katz

Fair question, Eric. In addition to heading out on to the road quickly to meet with all of you, I will also be heading out to meet with management in several of our key geographies over the next few months. My agenda, really, is to take a hard look at everything we do from across an expense standpoint.

You know we've done a lot of acquisitions over the last several years, and we've made good progress on leveraging those acquisitions and allowing them to not further destabilize our margin and in fact, to keep our margins stable over the last couple of years. And that's really good progress.

And as you noted, we very rapidly built a consulting and services business, partly through acquisitions and partly organically. We are improving our utilization and that would contribute to a gross margin improvement there. And so those are two areas that I'll be delving into further as I hit the road.

But really, everything is on the table as far as I'm concerned in terms of looking for opportunities to leverage what we do. And as we move into our long-term planning cycle in the spring, I think we'll be in a much better position to assess then what opportunities we would have to leverage our model as we look out and build our plan over the next two to three years.

Eric Coldwell - Robert W. Baird and Company

That's great, Leslye. Glad to hear it. Again, great job in '06 and look forward to another good year.

Leslye Katz

Thanks. I would like to just clarify one comment I made earlier. About our shares outstanding, a question that Bob Willoughby asked about our shares outstanding heading into 2007. I think rather than up, it is more like they're going to be really stable in line with 2006 rather than up a bit.

I think, again, our 6.1 million share repurchase and our option exercises will perhaps roughly balance. So, I just wanted to clarify that point.

Operator

Our next question comes from the line of James Kumpel with Friedman, Billings. Please proceed.

James Kumpel - Friedman, Billings

Hi, good evening. Gilles, I think last quarter you may have commented a little bit about the drug approval environment and how you expected more launches in 2007 as compared to recent years. I wanted to see if anything in the intervening months has changed your mind or if you still see basically an improving approval cycle of going into 2007.

Gilles Pajot

There is no major dramatic change in the market place except that there is a very strong will by the FDA and by European authorities to speed the launch of new products, if they can come up with a clear cart blanche plan, to mitigate the risk profile of the drugs. And there is at least one in Japan.

A lot of new products were not launched that last few years. We see the new wave of products which has been launching in other countries. But I mean, the real, again, discussions in the market place and with the authorities is to find ways to make sure that some very innovative drugs, especially the specialty drugs which are in the pipeline now could reach the market as quick as possible.

James Kumpel - Friedman, Billings

Okay. Well, also, if I could, Dave, could you comment a little bit about how IMS's business gets affected by consolidation. You probably have to do this at least ten times a year with investors, but last time when Pfizer Pharmacia consolidated, there were concerns about certain line items in your -- on the income statement and how much it would get affected.

There's rumors now about Bristol-Myers and SUNOVI coming together. Can you talk a little bit about the actual experience with Pfizer and Pharmacia? And just where SUNOVI and Bristol kind of fit to your top tier of accounts?

Dave Carlucci

Sure, Jim. We have gotten the question a lot. Since Pfizer and Pharmacia, we've seen Sanofi and Aventis merge. We've seen Bayer/Schering and others. Short term, it hasn't had much impact on our business at all. And over time, we've kind of shown the ability to come through that activity and grow our business, and I think there's two factors and we just saw it in that series of mergers in Europe that took place in a one-month period.

And that is people are evaluating the geographies at a much deeper level and certainly they're trying to get to a position from a therapy class perspective where they can be more relevant in a broader set of geographies. Both of those add tremendous opportunity for us.

Secondly, we've had our consulting and services organization very attune to moving into action on helping them with all of the areas and the practice areas whether it be portfolio, optimization or whether it be sales force effectiveness and then that leads later on to promo effectiveness.

So, even in a couple of mergers this year, we saw our revenue grow well over 10%, and in one case, over 20%. So, it really is a pretty stable situation for us.

James Kumpel - Friedman, Billings

Okay. That's great. That's consistent with I think with your experience of Pfizer and Pharmacia.

Dave Carlucci

That's right.

James Kumpel - Friedman, Billings

I guess the last question I had was related to just the competitive dynamic in the states in particular but abroad if you would like, you had -- I think mentioned in the preamble that you had actually had some winbacks of clients in certain cases.

I was wondering if you could cover the areas that you're referring to and maybe highlight as to whether or not the NDC deal last year changed anything in the competitive dynamic from pricing or aggressiveness in the market place and whether or not that actually opens up new opportunities for you.

Dave Carlucci

Yes, I think, it really is a value story and certainly as clients look at where we were going with NGPS and where we were taking the standard to the next level, it has been a major differentiator. So, as you know, we've tried to get the price value equation more and more in our favor in the last five years, primarily by adding more value to the client.

So, it has really been that differentiation that allowed us to win that -- those two significant wins that we had in the U.S. as well as position us very well going forward. So, those are really primarily the dynamics.

James Kumpel - Friedman, Billings

Okay. Thank you very much.

Dave Carlucci

Thanks, Jim.

Darcie Peck

Hey, Tim, I think we have time for one more question.

Operator

Absolutely. Our final question comes from the line of norm fiddle with alliance. Please proceed.

Norm Fidel - Alliance Capital

Yes, thank you. I may have missed this, but could you go through the reasoning for the increase in the adjusted tax rate in '07 and any possible implications for the years beyond that?

Leslye Katz

Yes. Basically, we have tax strategies, tax planning strategies in place and they come to fruition in different years, in different ways and the way those strategies are playing out in '07 puts the tax rate up a couple of points over '06.

But it can go really either way as we look out into '08 and beyond. So, I don't have a good outlook for you there. But I'm comfortable with the 31.

Norm Fidel - Alliance Capital

Thank you.

Dave Carlucci

All right. Well, we thank you very much for joining us and look forward to reporting out after the first quarter. Thank you.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and we ask that you please disconnect your line.

Have a great day, everyone.

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