Outsell’s Louise Garnett and Chuck Richard comment on today’s announcement that VNU will acquire pharmaceutical industry research powerhouse IMS Health.
Not many companies could acquire and digest IMS Health. At $1.6 billion in 2004 revenues, IMS Health is the third-largest company in Outsell’s Market Research Reports & Services (MRRS) segment. Acquirer VNU, with $3.4 billion in 2004 revenues, is No. 1 in this same market segment. The only company between the two market research giants is Taylor Nelson Sofres (TNS), at $1.7 billion in 2004 revenue. We have been seeing consolidation in MRRS but nothing of this magnitude within the Top 10 players. The only other recent major acquisition was NOP World, by GfK, earlier this year.
Market Research Reports & Services (Non-IT) Revenue Performance of Top 10 Vendors by Size, 2002-2004:
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VNU has continued its strategy to be the clear and established leader in certain market segments, such as media and consumers. This acquisition of the largest syndicated market research firm covering the pharmaceutical industry is yet another example of VNU’s strategy of being the leader in its chosen field of competition. IMS Health operates off of a syndicated research model and is the dominant player in its field. VNU has embraced market segments where strong syndicated revenue streams are available and barriers to entry are high. The IMS Health acquisition fits both categories. In terms of target markets, both companies have targeted sales and marketing buyers, with VNU focused on consumer and media companies and IMS Health focused on pharmaceutical companies. This acquisition brings VNU squarely into the pharmaceutical industry and creates a combined force that is second to none.
Two other potential acquirers of IMS Health came to mind: GfK and Thomson.
GfK has been acquiring healthcare and pharmaceutical market research companies, including an acquisition in June of a 33 percent share of Research Matters, a Swiss pharmaceutical market research agency based in Basel. GfK also acquired NOP World’s market research business from United Business Media in April. It is interesting to note, however, that in January 2005 GfK sold its 50 percent participation in IHA-IMS Health, Switzerland, to IMS Health. At the same time GfK acquired the remaining 20 percent that IMS Health held in GPI Kommunikationsforschung, Germany, a pharmaceutical market research company. GfK’s acquisitions have been market-research-oriented companies rather than the syndicated research products that form the mainstay of IMS Health. GfK is clearly staking out the market research business in the healthcare and pharmaceutical markets, leaving the syndicated side of the market to IMS Health and now VNU.
Thomson’s STM division also came to mind, since IMS Health and Thomson have continued to run into each other competitively over the last few years on the pharmaceutical industry’s desktops. Thomson has been moving from the R&D side into the business side, where IMS Health was already established. Given Thomson’s STM revenue at $836 million in 2004, the fact that the two companies’ competitive overlap was very small, and IMS Health’s size, IMS Health was too large and specific to make sense as a Thomson acquisition.
One surprise is that none of the business-to-business (B2B) publishers serving the pharmaceutical industry ponied up to get into this space in the same vein as McGraw-Hill’s acquisition of JD Power, leveraging analysis and ratings information across its properties. But with IMS’s $1.6 billion revenue, even the larger players like RBI and CMP are only about half IMS’s size in B2B, so the guppy would be swallowing the whale in those cases.
In terms of the finance side of the deal, we first must note that it’s a shame to see one of the ultra-cool ticker symbols disappear – IMS Health is RX on the NYSE. That’s up there with Gartner's IT and Salesforce.com’s CRM. Aside from that, here’s our take on the deal:
- Multiples are medium-high, but not at the “outrageous” or “shocking” levels.
- 18.0x operating income and 14.4x EBITDA are reasonable, if a little rich, given IMS Health’s operating margin of 25 percent and solid revenue growth of 14 percent.
- 4.4x revenue may appear high, but actually is not, given the high margins and EBITDA multiples which effectively track cash flow and determine what a buyer can pay and still make the targeted return on investment.
- IMS Health has risen slowly in the Outsell 100(SM) rankings, from No. 28 in early 2003 to a breakthrough into the Top 20 – No. 18 – in the fourth quarter of 2004.
Overall, the IMS Health acquisition is a coup for VNU, and we applaud VNU for making a strategic market move that will likely prove to be a synergistic acquisition rather than a pure-play consolidation. Time will tell how the consolidation and synergies will play out and what the impact may be for current IMS subscribers. Combining IMS’ traditionally ethical (prescription) pharmaceutical focus with the consumer focus of ACNielsen makes for interesting potential in terms of the public’s drive for more patient/consumer control of healthcare choices and prescription spending. This marriage has the potential to deepen understanding about such issues as how healthcare decisions are made, why doctors prescribe certain drugs more than others, and the impact of a consumer-market orientation on prescription drugs, thereby augmenting the pure prescription sales data that is core to IMS.