Monday, August 29, 2005

Wolters Kluwer Buys IMS Competitor

As widely reported, Wolters Kluwer announced its acquisition of the Information Management division of NDCHealth bright and early this morning. The acquisition will approximately double the size of the Pharma Solutions Division of Wolters Kluwer Health (WKH) and will propel that division to be nearly equal in size to the Medical Research division, which includes the Ovid platform. The overall size of WKH will grow to almost $1 billion in revenue in 2005.

This acquisition fits with previous statements made by CEO Nancy McKinstry and WKHealth's CEO Jeffrey McCaulley with respect to their intention to add three new business intelligence products in 2005. The Pharma BI products of NDCHealth focus on decision support tools for sales and marketing departments within pharmaceutical, medical devices, and biotech companies. These high-value products (projected 2005 sales of $165 million) supplement WKH's flagship Adis R&D Insight pharma BI offering with new pharma BI offerings that compete more directly with the core IMS drug sales products. NDCHealth emphasizes the longitudinal aspects of its database with 7 years of historical data and differentiates itself from IMS by the fact that NDCHealth collects sales data on a customer level basis from retail, non-retail, mail order, and hospital and other institutional sources. One drawback of the collection is that it only covers the US market.

The multiples for the acquisition also look good at face value. However, there are a couple of details that require further scrutiny. WK states that the earnings multiple is 10.5 times EBITDA, which is in line with other industry deals. However, the calculation of EBITDA that is used includes adjustments that add $26 million in restructuring, depreciation and amortization, and expected cost synergies to the base $8.1 EBITA of the division in FY 2005 (which just ended for NDCHealth). The fact that $12.5 million in immediate expected cost synergies is factored in to the purchase price raises an eyebrow or two, but it's not impossible that WK can enact vast cost efficiences given the internal infrastructure improvements they have implemented over the past 2 years and the expected synergies in sales and marketing. The other concern relates to the rate of growth in sales of the target division. Nominal growth for the IM division of NDCHealth in 2005 was negative until Q4 when it was propped up by sales of ArcLight, a "new unique product". A lot is riding on the success of new products and the projected synergies between the companies in order to justify the terms of this deal. This deal definitely increases the position of Wolters Kluwer in the pharma business intelligence segment where it competes with Thomson Scientific & Healthcare, IMS, Reed Elsevier and others. But it is not entirely clear that the acquisition will give WK the boost in organic growth and in margins in the next year or two that it so sorely needs.
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