| 2018 | 2019 | ||||||
| Price: | 100.48 | EPS | 5.32 | 6.42 | |||
| Shares Out. (in M): | 212 | P/E | 18.9 | 15.7 | |||
| Market Cap (in $M): | 21,332 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | 9,668 | EBIT | 1,869 | 2,110 | |||
| TEV (in $M): | 31,000 | TEV/EBIT | 16.6 | 14.7 | |||
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IQVIA (IQV) – Long
$100.48 / Share
Summary
IQVIA was formed by the merger of IMS Health, an information and technology services provider to pharmaceutical companies, with Quintiles, a contract research organization (CRO) serving biopharma companies by facilitating clinical trials. IMS is a subscription-based data provider to the healthcare industry, with a dominant market position (~50% market share and more than 5x larger than its closest competitor). Quintiles is the largest CRO and benefits from the secular trend toward increased outsourcing of clinical trials. The pro forma company, equipped with unmatched data/analytics resources, has unique capabilities that will allow it to take market share, gain pricing power, and improve margins. The pro forma company is now managed by legacy IMS CEO Ari Bousbib, who has had an excellent track record at IMS and before.
At $100.48/share, IQV trades at a compelling price given the company’s strong competitive position, growth potential and great management team. With high single digit revenue growth, margin expansion and smart capital allocation, IQVIA will likely grow EPS at 15-20% annually over the next 5 years. At the current price, we believe an investment in IQV is a compelling risk-reward with minimal risk of permanent capital loss.
IQVIA R&D Solutions Segment (Legacy Quintiles)
Quintiles is the world’s largest provider of clinical trial support and related services. Quintiles was founded in 1982 by Dr. Dennis Gillings, who today owns 4% of the company. Quintiles went private in 2003 with One Equity and was sold in 2007 to a private equity group including TPG and Bain Capital. The company went public in 2013. After the Q-IMS merger, the majority of the legacy Quintiles business became the R&D Solutions segment of IQVIA.
The IQVIA R&D Solutions segment (45% of PF 2017 revenue, 48% of EBITDA) is the market leading contract research organization (CRO) – focused on outsourcing of Phase I-IV clinical trials and associated laboratory and analytical activities. CROs’ growth is tied to R&D spending from biopharma companies, which are outsourcing more clinical development work in order to increase efficiency. CROs recruit patients into clinical trials more quickly, lowering the overall time to market. Time to market is a key driver of the ultimate value of a drug because patent protection is in effect for a finite period of time. Drug companies of all sizes do not see clinical operations as a core competency, and many smaller companies simply can’t afford to perform these functions in-house. Pharma companies including the largest pharma players have increasingly found that outsourcing clinical trial work is more cost-effective than flexing internal staff up and down based on current trial workloads. Note that for a typical large pharma company, 15-20% of revenue is spent on R&D, of which roughly half is for clinical work.
Today, global pharma companies spend ~$100bn annually on drug development, with $59bn spent at the clinical stage (as opposed to the pre-clinical/discovery stage). These figures are likely to grow ~2-3% annually going forward. Clinical development outsourcing penetration is currently at 44%, meaning that the clinical CRO market is $26bn today. Penetration could potentially reach 75% many years down the road, similar to levels achieved in IT outsourcing. Combining pharma R&D spending growth with increased outsourcing, the CRO market will likely grow ~5-7% annually over the next 5 years.
The business model is asset-light, and CROs benefit from a high level of revenue visibility (traditionally, ~80% of legacy Quintiles’ annual revenue comes from backlog at the beginning of the year). While the CRO industry has and will likely continue to grow nicely, the industry is quite competitive and fragmented. Most large pharma companies work with multiple CROs, typically 2-4.
IQVIA’s R&D Solutions business is benefitting from numerous secular growth drivers from FDA regulation and increasing cost pressures on in-house pharma R&D. Several factors are making trials much more complex to run (which is a boon to IQVIA and other global, broad-capability CROs):
While the above factors provide IQVIA with a competitive advantage over smaller competitors, several of the other large CROs have similar capabilities. Thus, prior to the IMS merger, Quintiles did not have any substantial competitive advantages relative to other large CROs. Large CROs have successfully taken market share from smaller CROs over time, a process that shows no signs of abating. The bar keeps getting higher in terms of which CROs are well-qualified and positioned to win business, given increasing trial complexity and specialization.
While large CROs have generally taken market share over the last few years, IQVIA’s share has remained relatively flat at 14-15%. Note that legacy Quintiles was focused on high margin projects at the expense of growing profit dollars, a focus that has shifted under Ari Bousbib’s leadership.
IQVIA for the most part does not have a presence in the discovery/preclinical stage of the drug development process. Charles River Labs and Covance have the largest share in that segment of the market. IQVIA’s core CRO business is running Phase I-IV clinical trials. IQVIA has a strong presence in almost all major therapeutic areas. The two largest therapeutic areas for the company are currently oncology (which will continue to be the most important driver of R&D growth going forward) and central nervous system diseases such as Alzheimer’s. Other major areas include cardiovascular diseases and diabetes.
IQVIA also has ~30% share in the market for central lab services by virtue of its 60%-owned joint venture with Quest Diagnostics, called Q2. This has essentially become a duopoly, with Labcorp/Covance holding ~50% share as the largest player. However, the central lab services market is a much smaller market than the Clinical business – the TAM for Central Lab is $2bn+ vs. $26bn for Clinical.
IQVIA Integrated Engagement Services Segment (Legacy Quintiles)
The Integrated Engagement Services segment (10% of PF 2017 revenue, 4% of EBITDA) segment offers a variety of services related to the post-approval market. The biggest offering is in commercialization services, which is basically outsourced pharma sales. Offerings include salesforce recruiting, training/development and deployment, patient education, market access consulting, brand communication and medical education. IES has a large competitor in the sales/marketing arena called Syneos Health, which was previously named inVentiv and owned by a private equity group led by TH Lee. The business has been a poor performer in recent years and has never been nearly as profitable as the core CRO offering.
IQVIA Commercial Solutions Segment (Legacy IMS)
The IMS business makes up the overwhelming majority of PF IQVIA’s third segment, Commercial Solutions (~45% of PF 2017 revenue, 49% of EBITDA).
IMS’ core asset is its data, which consists of sales, prescription and promotional/marketing data, medical claims, and electronic medical records. This 20 petabyte dataset includes over 500 million anonymous electronic health records and numerous other sources. IMS gathers this large amount of data and uses its analytics to help customers improve performance, target physicians and patients, drive sales, and optimize pricing. The company's customers are primarily participants within the healthcare industry, including biopharma, consumer health, and medical device manufacturers, as well as distributors, providers, and payers. These companies represent ~90% of the company's revenue. Other customers include government agencies, policy makers, researchers, and the financial community. IMS’ largest customer represented ~5% of the company's revenue in each of its last three years as a standalone company. The company's rich data offering has created long-lasting customer relationships, evidenced by the fact that its top 25 customers have been working with them for an average of 25 years.
In IQVIA’s core information business (which represented 47% of legacy IMS revenue), the company dominates with 50% market share of the $3bn global market for prescription drug data. After IQVIA, the competitive set is fragmented and lacks a single player with a data set rivaling IQVIA’s. The closest rival in this space is Symphony Health Solutions, a healthcare data and analytics firm with ~$200 million of 2017 revenues that was recently acquired by PRA Health, a clinical CRO. Other competitors include Ipsos Healthcare, inVentiv Health, Kantar Health, The Advisory Board Co., Nielsen, and GFK – however, none of these companies go head-to-head with IQVIA in its core market of tracking script data. Other companies provide data that is seen as superior to IQVIA in certain niches – Flatiron Health, for example, in oncology. However, there is no single data provider who comes anywhere close to the scope and scale of IQVIA’s dataset, or has the commercial infrastructure in place to monetize their dataset.
About 60% of the revenue IQVIA generates from its information business comes from selling sub-national data on prescription trends in over 50 countries, which is often used by pharmaceutical companies to drive sales/marketing efforts and to determine salesforce compensation. Another 30% of the company’s revenue comes from selling national data in over 70 countries, which is used more for corporate-level strategy. The remaining 10% of IQVIA’s information business revenue is generated in non-pharmaceutical industries such as financial services that have use for the data. Generally, 90% of the information business’ sales are subscription-based, and 10% are ad-hoc purchases of data.
IQVIA’s long-standing relationships with distributors and vast database create deep competitive moats in the IMS business. IQVIA has contracts in place with most suppliers, ranging from one to ten years. For larger contracts, the most common duration is five years. IQVIA’s suppliers are also its customers, creating a level of interdependence. Pharma companies and other suppliers are only able to get the level of industry wide detail from IQVIA by first submitting their own data, which has given legacy IMS a very sticky client base with 99% retention.
Before IMS was taken private in 2010 (by TPG, Canada Pension Plan Investment Board and Leonard Green), IMS took advantage of its market dominance by increasing prices to drive revenue growth, which frustrated clients. While this was effective in growing free cash flow, it led to low growth because volume stagnated once IMS saturated the life sciences market. Ari Bousbib, at the time of the 2010 buyout, changed the company’s strategy to instead drive sales growth in related markets. He leveraged IMS’ entrenched information offerings to sell related technology services to the existing client base. This strategy is advantageous to clients because IQVIA data interacts better with IQVIA software as opposed to molding the data for third-party software and analytics platforms (e.g. Oracle, IBM). This provides value because clients save on integration time and costs when they choose IQVIA for both information and technology services.
Outside of the core information offering, IQVIA’s Commercial Solutions segment derives revenue from several other sources:
The competitive set for these technology services (which represented 53% of legacy IMS revenue) is obviously quite fragmented, as IQVIA is attacking huge markets. However, the key point is that despite facing many competitors, IQVIA is uniquely able to take advantage of full access to the most powerful database in the industry at no incremental cost. Additionally, these end markets are growing rapidly as IT provides more value in healthcare. Because of its in-house data business as well as the excellent management of Ari Bousbib and his team, IQVIA’s Commercial business has much higher margins than one would expect, at ~50%+ GM and high EBITDA margins.
Q-IMS Transaction/Synergy Overview
The Quintiles+IMS merger rationale is as follows: by adding integrated data to the largest global CRO, IQVIA will have a competitive edge in identifying and locating targeted clinical trial patients and thus enabling biopharma clients to complete trials more efficiently. This competitive advantage will lead to market share gains over time, and result in 100-200 bps of acceleration in total company revenue growth. The promise of creating a real competitive advantage in the CRO industry is quite powerful.
IQVIA has taken advantage of its data resources to provide customers with a real-time, data-focused approach, allowing for the optimal design of a clinical trial. The company will be able to improve the quality and speed of the clinical trial recruitment process by using patient-level data to target sites with the greatest odds of finding eligible patients. Note, in particular, that for trials outside the US, where electronic medical records are not widely available, IQVIA’s data will provide a very meaningful advantage in finding specific patient populations.
As therapies, and thus trials, become more targeted and complex due to the increasing importance of specialty drugs, data will also significantly enhance IQVIA’s ability locate areas with sufficient volumes of patients for trials. This will allow IQVIA to improve execution of clinical trials, not only allowing customers to increase speed to the market but also allowing the company to grow revenue through a faster backlog conversion rate. Because drugs are generally patented during the early stages of the development process, and each year stuck in clinical trials represents another year lost before the patent cliff, speed to market is a major focus for the pharma customers.
IQVIA’s revamped approach to clinical trials has clearly been resonating with biopharma customers over the past year – since the time of the merger, $1.6bn of gross awards have been won because of the next-generation capabilities. Next-gen represented 20% of the bookings the company generated in 2017, and management currently aims to drive this number closer to 50% over the coming years.
Other CROs, acknowledging the importance of analytics capabilities, have also begun building out and emphasizing their own data offerings. Currently, PRA appears most successful in terms of using analytics capabilities (acquisition of Symphony Health + Predictivv Enterprise Suite) – this has allowed them to take market share (currently tied for #3 share with PRXL) and report the best book-to-bill in the industry in 2016-2017. LabCorp/Covance also is trying to take advantage of their lab data in order to identify patients at sites, but this effort has not translated into sales momentum yet. Parexel has built out data capabilities via their alliance with Optum, but they seem weaker than those of IQVIA and PRA. Other players (Icon, Syneos, Medpace, and PPD) seem weaker on data capabilities than those already mentioned. The advantage of IQVIA over all the others is that its data capabilities clearly have the broadest scope and the most global coverage.
Real World Evidence is another area of strategic importance for the merger. Both companies had prior businesses serving this area, and their combined expertise and data assets will likely make them a market leader in providing retrospective studies. The pro forma company currently has ~$600mm in RWE revenue. This business is a major area of optimism for the industry and is projected to grow low-double digits.
Another area of potential optimism around the merger has to do with a revamping of the Quintiles sales/relationship process. Legacy Quintiles had 152 sales people, and the stated goal of the company now is to get up to 700-800 salespeople. This emulates the strategy Ari put in place at legacy IMS of becoming more deeply embedded at key clients. It is likely that the pricing strategy in the new regime will become slightly more aggressive, as IQV starts to push for market share.
With the closing of the merger, IQVIA raised its cost synergy target to $200 million run-rate annually exiting 2019. This was an increase from $100 million originally announced. Savings will come from rationalizing geographic overlaps, administrative costs and duplicative technology infrastructure of the combined organization. Cutting out unnecessary IT infrastructure seems to be a major point for Ari, as well as back-office support resources in India, China, and central Europe. The targets were doubled after the transaction closed, and the integration teams had more time to specifically identify tangible cost saving projects. In general, Ari seems to set conservative cost targets and aims to beat them.
IQVIA management has stated that in the wake of the IMS merger, they are hoping to move more of their CRO contracts to a fixed price model, where the sponsor is quoted a price for the full trial upfront, and IQVIA can take advantage of more efficient operations and data capabilities to run trials faster. CRO contracts today are largely cost-plus type contracts, in which CROs generate more revenue for more hours of work. Fixed price contracts would be very attractive to biopharma clients, as one of their top complaints about CROs is that costs almost always are higher than initially estimated as more hours of work are needed to complete a trial, and the CROs pass on additional labor costs to the client. It is unclear today to what extent the business will shift to fixed price, but it is certainly an opportunity the management team is focused on.
While we have been focused on potential integration risks given the size of this merger, the integration is progressing well. Unsurprisingly for a merger of this size, there has been some turnover at the senior executive level. Importantly, there has not been significant turnover at the key account manager level, and CRA turnover since the merger has been in-line with historical levels, indicating that there has not been tremendous disruption in the broader employee base.
Valuation
IQVIA currently trades at 15.7x 2019 P/E. In a base case, we project that the company will likely grow revenue mid-high single digits and expand EBITDA margins into the high twenties percent over the next 5 years, driven by cost synergies and continued improvements in the business. This will allow the company to grow EBITDA ~10% annually. With that growth as well as an appropriately levered capital structure and smart acquisitions as well as value-accretive share repurchases, the company will likely grow EPS 15-20% annually over the next 5 years.
Management
IQVIA is run by an excellent chairman and CEO, Ari Bousbib. Ari became the Chairman and CEO following the completion of the merger and was the Chairman and CEO of IMS previously. He joined IMS in 2010 following a transaction where a private equity group led by TPG and the Canada Pension Plan Investment Board took the company private. Prior to IMS, Ari spent 14 years in a number of leadership positions at United Technologies. Before UTC, Ari was a partner Booz Allen Hamilton, a management and technology consulting firm.
Ari’s performance at the UTC Otis elevator business was excellent. He took what had previously been a sleepy business and grew it at an annualized rate of 11%, from $6.4bn to $12.9bn, and increased operating margins from 13% to 19%. At Otis, Ari emphasized upselling on maintenance and other ongoing services as well as general streamlining and productivity improvements. The track record at IMS has also been strong. From 2010 to 2016, sales grew from $2.2 billion to $3.2 billion, and EBITDA margins grew from 25% to 30% (32% excluding the margin dilutive impact of the Cegedim acquisition). Ari’s key operational initiatives were aggressive cost cutting (from 2010 to 2015 he increased headcount in India from 0 to 2,000) and driving revenue growth (in part by increasing number of client facing employees).
Regarding capital allocation, Ari believes buying back shares at current prices is an excellent use of cash. The company has already been aggressive in buying back shares in the wake of the merger’s closing, buying back $3.6bn of stock since the close of the merger at an average price of $82.76/share. Ari also seems very comfortable running with a reasonably levered capital structure.
Ari currently holds ~$275mm in IQV stock and options. His ownership is about ~50% stock and ~50% in-the-money options and SARs. His ownership in IQV represents the majority of his net worth. We believe that he remains motivated at the prospect of growing the business and remaining as CEO of the company for the long term.
Mike McDonnell is CFO of IQVIA. Mike joined Quintiles in 2015 and previously served for seven years as CFO at Intelsat, a global satellite service provider. Before that, he was CFO at both MCG Capital Corporation and EchoStar Communications (DishNetwork). Earlier in his career, he was a partner at PricewaterhouseCoopers. Mike also served as a member of the board of directors of Catalyst Health Solutions, Inc., a publicly held pharmacy benefits management company.
Risks
Dependent on continued R&D growth/outsourcing trends. A slowdown in pharma R&D growth would be negative – even worse would be a reversal of the trend towards outsourcing. Neither seems likely, however.
CRO price competition. Fierce competition could be more pronounced if R&D spending declined, or pharma companies further limit their number of preferred providers. However, all CRO executives we’ve spoken with have been adamant that pricing will remain rational.
Capital allocation. It is possible that there is going to be some large scale M&A going forward, yet we believe the chance of poor capital allocation by Ari is very low.
Customer concentration. Though IQVIA has less customer concentration than its large CRO peers, it is still dealing with large clients with significant buying power.
Integration risk. The integration may result in the loss of key legacy Quintiles sales/account managers, although no one of significance has left yet.
Significant leverage. The company will likely run at ~4-4.5x net leverage. While we view this as appropriate given IQVIA’s low risk, highly cash generative business model, there is nevertheless meaningful financial leverage and the legacy IMS business has a high fixed cost base.
Technological disruption in any of IQVIA’s segments. Many startups are attempting to change the way data is used in healthcare, and are perhaps more nimble than IQVIA.
Pharma consolidation. The buying power of IQVIA’s customers is already high – further consolidation would accentuate the situation.
Generics approved faster. Since subscriptions for IQVIA data on new branded prescription drugs are more expensive than subscriptions for data related to generic drugs, further generic penetration would be a headwind. Additionally, less profits for the pharmaceutical industry would potentially mean less spending on R&D, as well as on the other services IQVIA offers.
Legal risks. Potential change in law that prevents pharma and/or IQVIA from using full IQVIA data sets. Vermont law in 2007 restricted this but was ruled unconstitutional by Supreme Court in 2011.
Conclusion
IQVIA is a well-positioned business in an industry with nice growth tailwinds. Under the current CEO, we believe the company will operate excellently and allocate capital effectively. We believe an investment in IQV at current prices is a compelling risk-reward with minimal risk of capital loss over a 5 year period.
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