Quintiles Q
June 16, 2016 - 5:41pm EST by
Seastreak
2016 2017
Price: 25.00 EPS 0 0
Shares Out. (in M): 336 P/E 0 0
Market Cap (in $M): 8,400 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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  • Healthcare
  • Merger

Description

Thesis Summary (NOTE: all numbers adjusted to per IMS shares, but deal will close in Q shares)

The recent merger of IMS - the world’s leading provider of healthcare data and insights to the life sciences industry and Quintiles (Q) - the world’s largest Clinical Research Organization (CRO) has, in our view, created a world class asset that will enjoy a dominant position across Healthcare Information, Clinical Research and Healthcare Analytics & Consulting.

 

We believe that IMS + Q is a case of 1+1 >2.  The complete suite of a) the most comprehensive database spanning sales, prescription and promotional data, medical claims, electronic medical records and social media, b) a smarter CRO that leverages the data to speed up and reduce the cost of clinical trials and c) an end-to-end Real World Evidence platform that spans retrospective and prospective analysis of drug effectiveness, would make IMS-Q the largest outsourced provider to the Life Sciences industry, with several offerings that are mission critical to both the commercial and the R&D functions of their customers. We believe the merger positions the combined company to gain market share as well as increase its share of wallet of its life sciences customers. 

 

We think that no other company in this highly fragmented field can compete with the breadth and depth of the new IMS-Q and the upside from accelerating growth could be significant.  We believe there is some precedent that gives us comfort that the combination could be powerful.  In 2015 LabCorp (LH) combined with Covance (CVD).  LabCorp’s data which is rather limited by comparison to IMS and consists of a database with US-only diagnostic data, accounting for only 30% of the potential patient population available for trial recruitment (70% is outside the US), is on track to deliver $300M of revenue synergy or ~350bps of cumulative incremental growth over 2016-2018. IMS data is global and more robust as it draws from several sources including drug manufacturers, wholesalers, pharmacies, physicians, hospitals, laboratories, health plans and other payers, governments, services organizations, information technology vendors, patients and social media. The far more complete and richer data should allow IMS-Q to achieve much better growth than LH-CVD, which is not adequately reflected in management’s $450-800M or revenue synergy guidance.

 

What makes the stock particularly compelling is that the combined company is trading at ~13x forward EPS with limited synergies which would be an attractive multiple for either IMS or Q on a standalone basis.  We believe this entry point has been created by a dislocation and lack of understanding in the respective shareholder bases that were either more business service oriented in the case of IMS or healthcare focused as in the case of Q – but with little overlap.  In addition, people were unhappy with the Q quarter as the book to bill was lower than expected as management blamed some timing issues, but IMS had a chance to see the run rate of the business after the quarter ended and felt very comfortable with the growth rate for Q.

 

If the business develops along the lines we anticipate in our base case, EPS (accruing to the IMS shareholder) would grow to $2.64 in 2020 from $1.52 in 2015, driven by 6.5% organic revenue growth, $450M of cumulative revenue synergies and $100M of cost synergies. Assuming leverage is maintained at 4x Net Debt/EBITDA, which seems likely, and excess capital is used to repurchase shares, IMS-Q can buy back 54% of the outstanding shares over 2017-2020 and grow EPS to the area of $4 by 2020. Valued at 17-20x IMS shares could be worth $68-$80 by 2020. To add some context around the valuation multiple, 17-20x seems like a fair multiple given the 20%+ ROIC, an EPS CAGR of 26% in this case, and close 100% net income to FCF conversion. Also, historically Q and other CROs have traded at ~18-20x and IMS has traded at 16-20x.  In our upside case we assume$150-250M of cost synergies, $800M–$1Bn of cumulative revenue synergies (representing 200-250bps of incremental revenue growth per annum) and keeping leverage at 4.0x Net Debt/EBITDA yields an EPS range of $4.68 -$5.55.  Applying a multiple of 20-25x which seems reasonable in light of an EPS CAGR of 38-46% this would represent would yield a stock price of $94-$139.

 


The following table outlines the pro forma EPS for existing IMS shareholders before and after the Q merger:

Valuation

 

2017E

2018E

2019E

2020E

Q share price

$67.46

 

 

 

 

 

IMS share price

$25.49

 

 

 

 

 

FDSO (M)

 

336

336

336

336

IMS EPS pre-deal (Estimate)

$1.82

$2.03

$2.27

$2.51

P/E

 

 

14.0x

12.6x

11.3x

10.1x

EPS growth

 

11%

12%

11%

 

 

 

 

 

 

 

FDSO (M)

 

279

254

228

204

IMS EPS pre-deal including repurchases (Estimate)

$1.92

$2.23

$2.62

$3.09

P/E

 

 

13.3x

11.5x

9.7x

8.2x

EPS growth

 

16%

18%

18%

 

 

 

 

 

 

 

Pro-forma EPS of IMS-Q

$4.63

$5.26

$6.04

$6.70

Implied IMS EPS

$1.78

$2.02

$2.32

$2.57

P/E

 

 

14.3x

12.6x

11.0x

9.9x

EPS accretion

-2%

0%

2%

2%

EPS growth

 

14%

15%

11%

 

 

 

 

 

 

 

Pro-forma EPS of IMS-Q including repurchases

$5.17

$6.41

$8.27

$10.38

Implied IMS EPS including repurchases

$1.99

$2.46

$3.17

$3.99

P/E

 

 

12.8x

10.4x

8.0x

6.4x

EPS accretion

4%

11%

21%

29%

EPS growth

 

24%

29%

26%

 

The primary sources of synergies and earnings growth for IMS-Q are:

Cost synergies:

Management has guided $100M of cost synergies. To put this in perspective, it is ~6% of the combined SG&A expense of IMS-Q.   We view this as conservative, which makes sense given the CEO of IMS is going to be taking over the combined company but likely views the transaction as more of a “merger” than “purchase” from the board level and therefore feels  the need to be more judicious in his initial description and characterization of the amount of ultimate cost reduction.  In addition to duplicative public company costs and other corporate costs, combining the Real World Evidence businesses of IMS and Q is expected to be a meaningful source of cost synergy, which we think is not fully baked into the $100M guidance. Illustratively- IMS revenue per employee is $195K. Recognizing that 50% of IMS’ revenue comes from selling data which is not people intensive, say Q’s revenue per employee in its commercial business increases to 75% of IMS’ level or $146K from $119K today. Assuming cost per employee of $50K per annum, this would amount to a headcount reduction of 1,729 employees, only 18% of Q’s workforce and yield cost savings of $86M. So we make the point that the $100M guidance seems low and has the potential to be exceeded over time. Every $25M of additional cost synergy adds $0.04 to EPS.  Our upside case assumes total cost synergies of $150-250M.

 

Leverage:

Given the recurring nature of IMS-standalone, the leverage target was 4-5x EBITDA before the merger with Q. The combined IMS-Q also has high FCF conversion and can support leverage of around 4x EBITDA in management’s opinion. The additional capital can be used to repurchase shares or accretive acquisitions, consistent with Ari Bousbib’s historical track record and preferred balance sheet structure. This is not something that the street is focused on and can be significant source of earnings growth. Based on our estimates, IMS-Q can buy back 54% of the outstanding shares over 2017-2020 propelling EPS CAGR to 28%, compared to 20% without share repurchases.

Revenue Synergies:

Management has guided 100-200bps of revenue growth acceleration over 2017-2020 which translates to ~$450-800M of cumulative revenue synergies over 2017-2020. Every $50M of revenue synergy adds $0.04-$0.05 to EPS. Broadly, following are the sources of revenue synergies as a combined company:

·         CRO business: IMS-Q hopes to improve the win rate (and hence market share) of the CRO business by designing better trials, increase speed of recruitment and speed of trial execution by leveraging IMS's ~530M anonymized patient data. This is not dissimilar from what LH-CVD is attempting to do. While it could mean a tougher competitive environment for CROs going forward, the deal wins achieved by the LH-CVD combination is encouraging. We also believe that IMS data is significantly richer and broader compared to LH’s US-only diagnostic data because 70% of the clinical trials are done outside the US. IMS also has more sources of data compared to labs and hence has more robust and complete information. Lastly, the Q-DGX JV will always remain an avenue Q can tap if diagnostic data becomes imperative for any reason.

·         Real World Evidence business: While both IMS and Q each have their own RWE offerings, they complement each other. So they hope to create a full cycle evidence generation platform to improve their competitive position. This is a high growth area driven by the gradual shift towards value and outcome based pricing models within healthcare. IMS-Q hopes to "productize" what is today an ad-hoc consulting/solution based model for performing market studies to drive better ROIs for the commercial organizations of Pharma companies.

Bundling/Cross-selling/ gaining wallet share:

We believe that being the largest outsourced provider of mission critical services to the life sciences industry, IMS-Q will enjoy an enhanced position of power and will be able to sell more services to their customers over time, effectively leveraging their large size and monopoly position in the Information business. This is a win-win strategy because clients would end up saving money by buying services from one scale player at an attractive total cost rather than several disparate vendors who logically would be unable to offer competitive prices compared to IMS-Q’s bundled end-to-end offerings. We don’t incorporate this into our model and believe the effective bundling could propel revenue growth towards or above the higher end of management’s guidance of $800M.

 

2020 EPS Sensitivity to cost and revenue synergies are shown below:

 

   

2020 EPS before share repurchases

   

2020 EPS including share repurchases

   

Cost Synergy

   

Cost Synergy

   

50

100

150

200

250

 

 

50

100

150

200

250

 

450

$2.51

$2.57

$2.63

$2.69

$2.75

 

450

$3.79

$3.99

$4.20

$4.43

$4.67

 

500

$2.53

$2.59

$2.65

$2.71

$2.77

 

500

$3.84

$4.05

$4.26

$4.50

$4.74

 

550

$2.55

$2.61

$2.67

$2.73

$2.79

 

550

$3.90

$4.11

$4.33

$4.57

$4.82

 

600

$2.57

$2.63

$2.69

$2.75

$2.81

 

600

$3.96

$4.18

$4.40

$4.64

$4.89

Revenue

650

$2.59

$2.65

$2.71

$2.77

$2.83

Revenue

650

$4.03

$4.24

$4.47

$4.71

$4.97

Synergy

700

$2.61

$2.67

$2.73

$2.79

$2.85

Synergy

700

$4.09

$4.31

$4.54

$4.78

$5.05

 

750

$2.63

$2.69

$2.75

$2.81

$2.87

 

750

$4.15

$4.37

$4.61

$4.86

$5.13

 

800

$2.65

$2.71

$2.77

$2.83

$2.89

 

800

$4.22

$4.44

$4.68

$4.94

$5.21

 

850

$2.67

$2.73

$2.79

$2.85

$2.91

 

850

$4.28

$4.51

$4.75

$5.01

$5.29

 

900

$2.69

$2.75

$2.81

$2.87

$2.93

 

900

$4.35

$4.58

$4.83

$5.09

$5.38

 

950

$2.71

$2.77

$2.83

$2.89

$2.95

 

950

$4.41

$4.65

$4.90

$5.17

$5.46

 

1000

$2.73

$2.79

$2.85

$2.91

$2.97

 

1000

$4.48

$4.72

$4.98

$5.26

$5.55

 Business Description:

Q:

Q is the largest CRO in the world, with a market share of ~15%. The total CRO market is ~$100Bn, of which ~$50Bn is the maximum that can be outsourced, of which $25Bn is currently outsourced. The outsourcing trend is expected to continue because the CROs bring scale, specialized skills and faster patient recruitment times, thus offering life sciences customers cost savings and faster time to market. The CRO market is growing at 6-8% which approximates standalone Q’s long term growth expectation.

 

Q operates in 2 segments- Product Development (75% of Q standalone revenue and 90% of operating income) and Integrated Healthcare services (HIS, 25% of Q standalone revenue and 10% of operating income).  Its Product Development segment is the CRO business providing clinical research services for mid-late stage drug development. Its Integrated Healthcare Services segments provide commercial services, communications and engagement services, real-world and late phase research, and other healthcare solutions.

 

IMS:

At the core of IMS, it collects data from drug manufacturers, wholesalers, pharmacies, physicians, hospitals, laboratories, health plans and other payers, governments, services organizations, information technology vendors, patients and others on a global basis and distributes it to life sciences companies (pharma and biotech). Around this core, IMS is now expanding its markets by leveraging its monopoly-like position in its Information business to capture and grow its market share by cross selling related technology services to its existing life sciences clients.

 

IMS is a high quality business with a deep moat in the form of its monopoly-like position as a healthcare information/data provider. The average tenure of its top 25 clients is >25 years and retention rate for top 1,000 clients is 99%. IMS scale is a significant competitive advantage and barrier to entry because it has been collecting and selling information for 60 years. Its unparalleled depth and breadth of data is difficult to replicate by competitors that are, consequently, largely regional.  The largest competitor- Symphony is ~10% the size of IMS’ Information business and has been unable to really create a dent in IMS market share. Also, the long history implies that IMS’ data is entrenched in its clients’ workflow, and the company consequently enjoys highly recurring revenues, high incremental margins, and generates significant free cash flows. It has a capital light model with Capex ~5% of revenue and little to no working capital requirements.

 

Before IMS was taken private in 2010 (by TPG, CPP Investment board and Leonard Green), previous management routinely exercised its monopoly position by increasing prices to drive revenue growth, which frustrated clients. While this was effective in growing FCF it led to low growth because volume stagnated once IMS saturated the life sciences market. Current CEO Ari Bousbib, appointed by the private equity owners, changed the company’s strategy to focus on a larger related TAM and growth. He leveraged IMS’ entrenched information offerings to sell related technology services to the existing client base rather than take annual price increases. This strategy is advantageous to clients because IMS data interacts better with IMS software as opposed to molding the data for third-party software and analytics platforms (E.g. IBM). This was a win-win proposition because clients save on integration costs when they choose IMS for both Information and Services. Given the high fixed-cost nature of its data, IMS can scale its technology solutions quickly and at low marginal cost, while propelling growth. 

 

 

 IMS operates in two segments:

Information (51% of IMS standalone revenue, 54% of gross profit)

IMS: Information

 

 

 

 

 

 

 

$ Millions except per share data

2014A

2015A

2016E

2017E

2018E

2019E

2020E

Organic Revenue

1,551

1,536

1,405

1,524

1,539

1,555

1,570

cc organic growth

1.70%

1.4%

1.00%

1.00%

1.00%

1.00%

1.00%

Inorganic Revenue

 

106

141

 

 

 

 

contribution to cc  growth

 

7.0%

9.5%

 

 

 

 

Revenue in constant currency

1,551

1,642

1,546

1,524

1,539

1,555

1,570

cc growth

1.70%

8.40%

4.25%

1.00%

1.00%

1.00%

1.00%

 

 

 

 

 

 

 

 

currency impact on organic revenue

(36)

(145)

(19)

 

 

 

 

contribution to growth

 

-9.6%

-1.3%

 

 

 

 

currency impact on inorganic revenue

 

(14)

(18)

 

 

 

 

contribution to growth

 

-0.9%

-1.2%

 

 

 

 

Currency impact

(36)

(159)

(37)

 

 

 

 

contribution to growth

 

-10.5%

-2.5%

 

 

 

 

 

 

 

 

 

 

 

 

Reported organic revenue

1,515

1,391

1,386

1,524

1,539

1,555

1,570

organic growth

-0.7%

-8.2%

-6.5%

1.0%

1.0%

1.0%

1.0%

Reported inorganic revenue

 

92

123

0

0

0

0

contribution to growth

 

6.1%

8.3%

0.0%

0.0%

0.0%

0.0%

Reported Information Revenue

1,515

1,483

1,509

1,524

1,539

1,555

1,570

growth

-0.7%

-2.1%

1.8%

1.0%

1.0%

1.0%

1.0%

 

 

 

 

 

 

 

 

Information Gross Profit

850

817

822

831

847

871

887

margin

56.1%

55.1%

54.5%

54.5%

55.0%

56.0%

56.5%

 

This is the backbone of IMS. In this segment, IMS collects information from a wide variety of data suppliers (manufacturers, wholesalers, pharmacies, physicians, hospitals, laboratories, health plans and other payers, governments, services organizations, information technology vendors, patients and others) on a global basis. IMS has the most comprehensive data base which can be narrowed down to a zip code in certain developed markets It has 500 million comprehensive, longitudinal, anonymous patient records (i.e., records that are linked over time for each anonymous individual across healthcare settings).

 

The data is standardized organized, structured and integrated into useful market insights and sells it primarily to life sciences companies (pharmaceuticals, Biotech etc.). The TAM for information is ~$3Bn, of which IMS has 50% market share. IMS has 5000 clients, with the top client contributing ~5% of revenue. Life Sciences clients use IMS data to address fundamental operational questions such as:

 

90% of Information revenue is from subscription or license-based contracts and has historically been recurring and predictable.  10% is ad-hoc and depends on pharma spend. Majority of the costs in this segment are fixed and relate to data acquisition. This segment has normalized gross margin in the high 50s and grows 1-2% with all of the growth coming from emerging markets.

 

Risks

·         This segment can be a little lumpy on a quarterly basis due to the 10% ad-hoc portion of the business, as witnessed in 3Q2015 when clients exhibited tentative buying behavior, which revered in 4Q2015

·         Drug price regulation could also be an immediate headwind if clients responded to drug price cuts by cutting costs as kneejerk reaction. However IMS data is not a significant portion of pharma marketing and R&D budgets to warrant such a reaction in our view. Conversely, the data and/or analytics could help clients justify drug prices by measuring efficacy ( Real World Evidence)

·         Within the information segment all of the growth comes from EMs while DMs are largely flat. Any macro weakness in the emerging markets (which tend to be predominantly patient pay markets) could result in drug companies realigning their spend levels to match underlying market growth and hence result in a lackluster growth in the information segment

 


 

Technology Services (49% of IMS standalone revenue, 46% of gross profit)

IMS: Technology Services

 

 

 

 

 

 

 

 

$ Millions except per share data

 

2014A

2015A

2016E

2017E

2018E

2019E

2020E

Organic cc Revenue

 

1,144

1,258

1,316

1,785

1,952

2,140

2,352

cc organic growth

 

12.3%

11.7%

11.2%

9.0%

9.3%

9.6%

9.9%

Cegedim cc Revenue

 

 

293

390

 

 

 

 

contribution to cc  growth

 

 

26%

27%

 

 

 

 

Revenue in constant currency

 

1,144

1,551

1,707

1,785

1,952

2,140

2,352

cc growth

 

12.3%

37.7%

18.7%

9.0%

9.3%

9.6%

9.9%

 

 

 

 

 

 

 

 

 

currency impact on organic revenue

 

(18)

(74)

(19)

 

 

 

 

contribution to growth

 

 

-6.6%

-1.3%

0.0%

0.0%

0.0%

0.0%

currency impact on inorganic revenue

 

 

(38)

(51)

 

 

 

 

contribution to growth

 

 

-3.4%

-3.5%

0.0%

0.0%

0.0%

0.0%

Currency impact

 

(18)

(113)

(69)

 

 

 

 

contribution to growth

 

-1.8%

-10.0%

-2.5%

0.0%

0.0%

0.0%

0.0%

 

 

 

 

 

 

 

 

 

Reported organic revenue

 

1,126

1,183

1,298

1,785

1,952

2,140

2,352

organic growth

 

 

5.1%

-9.8%

9.0%

9.3%

9.6%

9.9%

Reported Cegedim revenue

 

 

255

339

0

0

0

0

contribution to growth

 

 

22.6%

23.6%

0.0%

0.0%

0.0%

0.0%

Reported Technology Revenue

 

1,126

1,438

1,637

1,785

1,952

2,140

2,352

growth

 

10.5%

27.7%

13.9%

9.0%

9.3%

9.6%

9.9%

 

 

 

 

 

 

 

 

 

Technology Gross Profit

 

553

688

752

880

969

1,065

1,173

margin

 

49.1%

47.8%

45.9%

49.3%

49.7%

49.8%

49.9%

 

The Technology segment consists of a mix of projects, large-scale engagements, multi-year outsourcing contracts and multi-year Software-as-a-Service (“SaaS”) licenses. It has 4 sub-segments elaborated in the following section.

 

The TAM for these services is $42Bn and IMS has the opportunity to capture market share by increasing penetration of its tech services within its base of 5000 information clients.

 

The technology services segment is highly competitive with a high level of interest and investments from Technology consulting companies (IBM, Accenture, Deloitte, Cognizant Technology Solutions, Infosys etc.), Consulting and Analytics companies (McKinsey, Nielsen, The Advisory Board, ZS Associates, Verisk etc.) and CROs and healthcare focused companies (Quintiles, Covance, Parexel, RTI Health Solutions, Symphony Health Solutions, Synovate Healthcare, Trizetto, Veeva, etc.).

 

Majority of the costs in this segment relate to personnel cost because IMS leverages its database and does not have to spend much additionally for data acquisition, which is a significant competitive advantage. Also, because IMS data and software are inherently inoperable, bundling them together eliminates integration cost and effort for clients.

 

This segment has normalized gross margin in the high 40s and grows high single digit organically. Acquisitions are expected to add ~2% to growth annually.

The following table outlines the growth and margin profiles of the sub-segments of Technology Services:

IMS: Technology Services - Sub segments

 

 

 

 

 

 

 

 

$ Millions except per share data

NOTE

2014A

2015A

2016E

2017E

2018E

2019E

2020E

Revenue

 

 

 

 

 

 

 

 

Tech& Apps - organic revenue

A

 

393

448

516

593

682

784

reported organic growth

 

 

 

14%

15%

15%

15%

15%

Cegedim revenue

B

 

255

339

339

339

339

339

reported Cegedim growth

 

 

 

0%

0%

0%

0%

0%

Tech & Apps reported revenue

 

 

647

788

855

932

1,021

1,124

reported growth

 

 

0.0%

21.7%

8.5%

9.0%

9.5%

10.0%

% of Technology Revenue

 

 

45%

48%

48%

48%

48%

48%

 

 

 

 

 

 

 

 

 

Workflow Analytics reported revenue

C

 

431

457

494

534

576

622

reported growth

 

 

 

6%

8%

8%

8%

8%

% of Technology Revenue

 

 

30%

28%

28%

27%

27%

26%

 

 

 

 

 

 

 

 

 

Real World Evidence reported revenue

D

 

216

244

280

322

371

426

reported growth

 

 

 

13%

15%

15%

15%

15%

% of Technology Revenue

 

 

15%

15%

16%

17%

17%

18%

 

 

 

 

 

 

 

 

 

Consulting reported revenue

C

 

144

148

156

163

172

180

reported growth

 

 

 

3%

5%

5%

5%

5%

% of Technology Revenue

 

 

10%

9%

9%

8%

8%

8%

 

 

 

 

 

 

 

 

 

Technology Services Reported Revenue

 

1,126

1,438

1,637

1,785

1,952

2,140

2,352

reported growth

 

 

 

13.9%

9.0%

9.3%

9.6%

9.9%

 

 

 

 

 

 

 

 

 

Gross Profit

E

 

 

 

 

 

 

 

Tech & Apps before synergies

 

 

 

385

417

455

 

 

margin

 

 

 

48.8%

48.8%

48.8%

 

 

Cegedim synergies

B

 

 

25

50

60

 

 

Tech & Apps

 

 

 

410

467

515

564

621

margin

 

 

 

52.0%

54.7%

55.3%

55.3%

55.3%

% of Technology Gross Profit

 

 

 

52%

53%

53%

53%

53%

Workflow Analytics

 

 

 

229

247

267

288

311

margin

 

 

 

50.0%

50.0%

50.0%

50.0%

50.0%

% of Technology Gross Profit

 

 

 

29%

28%

28%

27%

27%

Real World Evidence

 

 

 

117

135

155

178

205

margin

 

 

 

48.0%

48.0%

48.0%

48.0%

48.0%

% of Technology Gross Profit

 

 

 

15%

15%

16%

17%

17%

Consulting

 

 

 

30

31

33

34

36

margin

 

 

 

20.0%

20.0%

20.0%

20.0%

20.0%

% of Technology Gross Profit

 

 

 

4%

4%

3%

3%

3%

Technology Gross Profit

 

553

688

785

880

969

1,065

1,173

margin

 

49.1%

47.8%

47.9%

49.3%

49.7%

49.8%

49.9%


 

A: Tech & Apps: an extensive range of cloud-based applications and associated implementation services. SaaS solutions support a wide range of commercial and regulatory processes, including multi-channel marketing, CRM, performance management, incentive compensation, territory alignment, roster management, call planning, compliance reporting and Master Data Management. These solutions are used by healthcare companies to manage, optimize and execute their commercial strategies in an orchestrated manner while meeting their regulatory obligations. IMS uses proprietary algorithms, to combine country-level data, healthcare expertise and therapeutic knowledge in over 100 countries to create Global Market Insight family of offerings such as MIDAS, Analytics Link and Disease Insights, which provides a leading source of insight into international market dynamics and are used by most large pharmaceutical companies. Tech & Apps is growing at mid-teens with gross margins higher than segment average.

 

B: Cegedim: In April 2015 IMS acquired French company Cegedim for ~$445M This acquisition was transformational and expanded total revenue by ~20% and filling key gaps in IMS’ portfolio through its CRM software and a physician database (OneKey) which is reported under the Information Segment. Cegedim has 15% EBITDA margins which over time should expand to 20%+ by achieving run-rate cost synergies of $60M by 2017. Note that over the course of 2015, management has both raised synergy estimates and accelerated the timeline for realizing them. The following table shows the allocation of Cegedim within IMS’ segments.

 

Cegedim Segments

 

 

 

 

 

 

 

 

2015A

2016E

Information Revenue (OneKey database)

 

 

 

 

 

 

141

123

growth

 

 

 

 

 

 

 

 

0%

0%

mix

 

 

 

 

 

 

 

 

27%

27%

Tech Services

 

 

 

 

 

 

 

 

 

 

Subscription based CRM

 

 

 

 

 

 

 

 

284

265

growth

 

 

 

 

 

 

 

 

 

7%

mix

 

 

 

 

 

 

 

 

53%

57%

On-premises Subscription based

 

 

 

 

 

 

 

106

74

growth

 

 

 

 

 

 

 

 

 

-20%

mix

 

 

 

 

 

 

 

 

20%

16%

Tech Services Revenue

 

 

 

 

 

 

 

 

390

339

growth

 

 

 

 

 

 

 

 

 

 

mix

 

 

 

 

 

 

 

 

73%

73%

Cegedim Revenue in constant currency

 

 

 

 

 

 

532

464

cc growth

 

 

 

 

 

 

 

 

-6%

0%

 

 

 

 

 

 

 

 

 

 

 

currency

 

 

 

 

 

 

 

 

(68)

 

contribution to growth

 

 

 

 

 

 

 

 

-12%

 

 

 

 

 

 

 

 

 

 

 

 

Information Revenue (OneKey database)

 

 

 

 

 

 

123

 

mix

 

 

 

 

 

 

 

 

27%

 

Tech Services

 

 

 

 

 

 

 

 

 

 

Subscription based CRM

 

 

 

 

 

 

 

 

248

 

mix

 

 

 

 

 

 

 

 

53%

 

On-premises Subscription based

 

 

 

 

 

 

 

93

 

mix

 

 

 

 

 

 

 

 

20%

 

Tech Services Revenue

 

 

 

 

 

 

 

 

339

 

mix

 

 

 

 

 

 

 

 

73%

 

Reported Revenue ($)

 

 

 

 

 

 

573

564

464

 

growth

 

 

 

 

 

 

 

-1.6%

-18%

 

 

C: Workflow Analytics & Consulting Services: IMS provides a broad set of strategic, analytic and support services to help the commercial operations of life sciences companies successfully transform their commercial models, engage more effectively with the healthcare stakeholders and reduce their operating costs. Global teams leverage local market knowledge, therapeutic area expertise and global information resources to assist clients with portfolio, brand and commercial strategy, as well as pricing and market access. Workflow Analytics is growing at high single digits with gross margins higher than segment average. Consulting is growing at mid-single digits with gross margins lower than segment average.

 

D: Real World Evidence: These solutions enable clients to use anonymous patient-level data to understand treatments, outcomes, and costs to inform and advance healthcare decision making. With patient privacy and security safeguards, IMS offers data assets that integrate medical claims, prescriptions, electronic medical records, biomarkers and government statistics as needed for research requirements.  IMS’ propriety technologies and advanced analytic skills help clients manage and use this information to understand the effectiveness and economic efficiency of drugs in real-world use. IMS also helps biopharmaceutical companies engage more productively with health plans, providers and government agencies. RWE is growing at mid-teens with gross margins around segment average.

 

E: Gross Margin: Tech & Apps have the highest gross margin followed by Workflow Analytics, RWE and consulting in descending order. While the exact margins are not disclosed, our assumptions shown above triangulate well with reported financials and seem reasonable.

 


 

The following table outlines IMS-Q’s earnings profile:

IMS-Q  Pro forma income statement

USD Millions except per share data

2015A

2016E

2017E

2018E

2019E

2020E

Revenue

 

 

 

 

 

IMS

2,921

3,146

3,309

3,491

3,695

3,923

growth

 

8%

5%

5%

6%

6%

Q

4,326

4,650

4,976

5,324

5,697

6,096

growth

 

7.5%

7.0%

7.0%

7.0%

7.0%

Synergies

 

45

135

315

450

acceleration in growth

0.6%

1.6%

3.5%

4.6%

Revenue

7,247

7,797

8,330

8,950

9,707

10,469

growth

 

7.58%

6.84%

7.45%

8.45%

7.85%

 

 

 

 

 

 

 

EBITDA

 

 

 

 

 

 

IMS

886

943

1,067

1,159

1,265

1,377

margin

30%

30%

32%

33%

34%

35%

Q

819

880

942

1,008

1,079

1,154

margin

19%

19%

19%

19%

19%

19%

Synergies

 

 

 

 

 

Revenue synergies

15

45

104

149

margin

 

 

33.0%

33.0%

33.0%

33.0%

Cost synergies

33

67

100

100

Synergies

0

0

48

111

204

249

EBITDA

1,705

1,823

2,057

2,278

2,548

2,779

margin

23.5%

23.4%

24.7%

25.5%

26.2%

26.5%

growth

 

6.9%

12.8%

10.8%

11.8%

9.1%

 

 

 

 

 

 

 

Depreciation

 

 

 

IMS

136

148

156

164

174

184

% revenue

5%

5%

5%

5%

5%

5%

Q

128

138

147

158

169

180

% revenue

3%

3%

3%

3%

3%

3%

Synergies

 

 

 

 

 

Depreciation

264

285

303

322

342

365

 

 

 

 

 

 

 

EBIT

 

 

 

 

 

 

IMS

750

795

911

995

1,092

1,192

margin

26%

25%

28%

29%

30%

30%

Q

691

743

795

850

910

974

margin

16%

16%

16%

16%

16%

16%

Synergies

0

48

111

204

249

EBIT

1,441

1,538

1,754

1,957

2,206

2,414

margin

19.9%

19.7%

21.1%

21.9%

22.7%

23.1%

 

 

 

 

 

 

 

Interest  expense, net

IMS

166

166

166

166

166

166

Q

98

98

98

98

98

98

Synergies

 

 

 

 

 

Interest  expense, net

264

264

264

264

264

264

 

 

 

 

 

 

 

 

2015A

2016E

2017E

2018E

2019E

2020E

Taxes

 

 

 

 

 

 

IMS

92

108

130

145

162

180

Tax rate

15.8%

17.2%

17.5%

17.5%

17.5%

17.5%

Q

159

173

187

202

218

235

Tax rate

27%

27%

27%

27%

27%

27%

Synergies

 

 

11

Taxes

251

281

328

371

424

469

Tax rate

21.3%

22.1%

22.0%

21.9%

21.9%

21.8%

 

 

 

 

 

 

 

Net Income

 

 

 

 

IMS

492

521

615

684

764

847

Q

434

472

510

551

594

641

Synergies

 

 

38

87

159

Net Income

926

993

1,162

1,321

1,517

1,682

 

 

 

 

 

 

 

IMS-Q EPS

$3.69

$3.95

$4.63

$5.26

$6.04

$6.70

growth

 

7.2%

17.1%

13.7%

14.8%

10.8%

 

 

 

 

 

 

 

IMs-Q FDSO

251

251

251

251

251

251

 

The following table outlines the pro forma EPS for existing IMS shareholders before and after the Q merger:

Valuation

 

2017E

2018E

2019E

2020E

Q share price

$67.46

 

 

 

 

 

IMS share price

$25.49

 

 

 

 

 

FDSO (M)

 

336

336

336

336

IMS EPS pre-deal ( Estimate)

$1.82

$2.03

$2.27

$2.51

P/E

 

 

14.0x

12.6x

11.3x

10.1x

EPS growth

 

11%

12%

11%

 

 

 

 

 

 

 

FDSO (M)

 

279

254

228

204

IMS EPS pre-deal including repurchases ( Estimate)

$1.92

$2.23

$2.62

$3.09

P/E

 

 

13.3x

11.5x

9.7x

8.2x

EPS growth

 

16%

18%

18%

 

 

 

 

 

 

 

Pro-forma EPS of IMS-Q

$4.63

$5.26

$6.04

$6.70

Implied IMS EPS

$1.78

$2.02

$2.32

$2.57

P/E

 

 

14.3x

12.6x

11.0x

9.9x

EPS accretion

-2%

0%

2%

2%

EPS growth

 

14%

15%

11%

 

 

 

 

 

 

 

Pro-forma EPS of IMS-Q including repurchases

$5.17

$6.41

$8.27

$10.38

Implied IMS EPS including repurchases

$1.99

$2.46

$3.17

$3.99

P/E

 

 

12.8x

10.4x

8.0x

6.4x

EPS accretion

4%

11%

21%

29%

EPS growth

 

24%

29%

26%

 

 

 


 

The following table outlines IMS-Q’ free cash flow profile:

IMS-Q Pro forma Free Cash Flows

USD Millions except per share data

2016E

2017E

2018E

2019E

2020E

Sources

 

 

 

 

 

 

Net Income

993

1,162

1,321

1,517

1,682

Depreciation

285

303

322

342

365

(Increase) Decrease in WC

Deferred taxes

35

35

35

35

Other

 

 

 

 

 

 

Total Sources

1,278

1,500

1,678

1,894

2,081

 

 

 

 

 

 

 

Uses

 

 

 

 

 

 

Capital Expenditure

312

333

358

388

419

Required Debt Repayments

0

0

0

0

0

Dividends

0

0

0

0

0

Tuck-in acquisitions

Total Uses

312

333

358

388

419

 

 

 

 

 

 

 

FCF

 

966

1,167

1,320

1,506

1,663

FCF per share

$3.85

$4.65

$5.26

$6.00

$6.62

 

The following tables outline IMS-Q’ balance sheet before share repurchases:

IMS-Q Pro forma Balance Sheet

USD Millions except per share data

2015A

2016E

2017E

2018E

2019E

2020E

Cash

1,325

2,291

3,458

4,778

6,284

7,947

Cash/share

$5.28

$9.13

$13.78

$19.04

$25.04

$31.66

 

 

 

 

 

 

 

Debt

6,767

6,767

6,767

6,767

6,767

6,767

Debt/Share

$26.96

$26.96

$26.96

$26.96

$26.96

$26.96

 

 

 

 

 

 

 

Net debt

5,442

4,476

3,309

1,989

483

(1,180)

Net Debt/share

$21.68

$17.83

$13.18

$7.92

$1.92

($4.70)

 

 

 

 

 

 

 

Net debt/EBITDA

3.2x

2.5x

1.6x

0.9x

0.2x

-0.4x

 

 

 

 

 

 

 

Equity

1,236

2,229

3,391

4,713

6,230

7,911

Equity/share

$4.92

$8.88

$13.51

$18.77

$24.82

$31.52

 


 

The following tables outline use of cash for share repurchases:

Use of Cash for IMS-Q

2015A

2016E

2017E

2018E

2019E

2020E

Share Repurchases

Target Net Debt/EBITDA

3.5x

4.0x

4.0x

4.0x

4.0x

Target Net debt

6,381

8,228

9,114

10,192

11,117

 

 

 

 

 

 

 

Beginning Net debt

4,476

8,228

9,114

10,192

FCF

 

 

(1,167)

(1,320)

(1,506)

(1,663)

Additional borrowing

4,919

2,206

2,584

2,587

Ending Net debt

4,476

8,228

9,114

10,192

11,117

 

 

 

 

 

 

 

Total Debt

6,767

11,686

13,892

16,476

19,064

Total interest expense

456

542

643

744

Interest expense

4%

4%

4%

4%

 

 

 

 

 

 

 

Capital available

4,919

2,206

2,584

2,587

 

 

 

 

 

 

 

Repurchase price

$67.46

$77.58

$89.22

$102.60

$117.99

growth

 

 

15%

15%

15%

15%

Repurchase multiple

18.3x

19.6x

17.2x

16.0x

14.3x

 

 

 

 

 

 

 

Shares repurchased

63

25

25

22

 

 

 

 

 

 

 

FDSO

251

251

188

163

138

116

 

 

 

 

 

 

 

Additional interest expense

192

278

379

480

Net Income

926

993

970

1,044

1,138

1,202

growth

 

 

 

8%

9%

6%

EPS

$3.69

$3.95

$5.17

$6.41

$8.27

$10.38

growth

 

 

 

24%

29%

26%

P/E

 

 

13.0x

10.5x

8.2x

6.5x

 

 

Risks:

·         Consolidation within life sciences clients

 

·         A shift towards specialty drugs infused in doctor’s offices away from drugs sold in pharmacies is a tail risk. However, IMS is probably the best positioned data provider to enhance its physician database. Note that this trend would emerge over time and the shift will not occur overnight.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Closing deal

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    Description

    Thesis Summary (NOTE: all numbers adjusted to per IMS shares, but deal will close in Q shares)

    The recent merger of IMS - the world’s leading provider of healthcare data and insights to the life sciences industry and Quintiles (Q) - the world’s largest Clinical Research Organization (CRO) has, in our view, created a world class asset that will enjoy a dominant position across Healthcare Information, Clinical Research and Healthcare Analytics & Consulting.

     

    We believe that IMS + Q is a case of 1+1 >2.  The complete suite of a) the most comprehensive database spanning sales, prescription and promotional data, medical claims, electronic medical records and social media, b) a smarter CRO that leverages the data to speed up and reduce the cost of clinical trials and c) an end-to-end Real World Evidence platform that spans retrospective and prospective analysis of drug effectiveness, would make IMS-Q the largest outsourced provider to the Life Sciences industry, with several offerings that are mission critical to both the commercial and the R&D functions of their customers. We believe the merger positions the combined company to gain market share as well as increase its share of wallet of its life sciences customers. 

     

    We think that no other company in this highly fragmented field can compete with the breadth and depth of the new IMS-Q and the upside from accelerating growth could be significant.  We believe there is some precedent that gives us comfort that the combination could be powerful.  In 2015 LabCorp (LH) combined with Covance (CVD).  LabCorp’s data which is rather limited by comparison to IMS and consists of a database with US-only diagnostic data, accounting for only 30% of the potential patient population available for trial recruitment (70% is outside the US), is on track to deliver $300M of revenue synergy or ~350bps of cumulative incremental growth over 2016-2018. IMS data is global and more robust as it draws from several sources including drug manufacturers, wholesalers, pharmacies, physicians, hospitals, laboratories, health plans and other payers, governments, services organizations, information technology vendors, patients and social media. The far more complete and richer data should allow IMS-Q to achieve much better growth than LH-CVD, which is not adequately reflected in management’s $450-800M or revenue synergy guidance.

     

    What makes the stock particularly compelling is that the combined company is trading at ~13x forward EPS with limited synergies which would be an attractive multiple for either IMS or Q on a standalone basis.  We believe this entry point has been created by a dislocation and lack of understanding in the respective shareholder bases that were either more business service oriented in the case of IMS or healthcare focused as in the case of Q – but with little overlap.  In addition, people were unhappy with the Q quarter as the book to bill was lower than expected as management blamed some timing issues, but IMS had a chance to see the run rate of the business after the quarter ended and felt very comfortable with the growth rate for Q.

     

    If the business develops along the lines we anticipate in our base case, EPS (accruing to the IMS shareholder) would grow to $2.64 in 2020 from $1.52 in 2015, driven by 6.5% organic revenue growth, $450M of cumulative revenue synergies and $100M of cost synergies. Assuming leverage is maintained at 4x Net Debt/EBITDA, which seems likely, and excess capital is used to repurchase shares, IMS-Q can buy back 54% of the outstanding shares over 2017-2020 and grow EPS to the area of $4 by 2020. Valued at 17-20x IMS shares could be worth $68-$80 by 2020. To add some context around the valuation multiple, 17-20x seems like a fair multiple given the 20%+ ROIC, an EPS CAGR of 26% in this case, and close 100% net income to FCF conversion. Also, historically Q and other CROs have traded at ~18-20x and IMS has traded at 16-20x.  In our upside case we assume$150-250M of cost synergies, $800M–$1Bn of cumulative revenue synergies (representing 200-250bps of incremental revenue growth per annum) and keeping leverage at 4.0x Net Debt/EBITDA yields an EPS range of $4.68 -$5.55.  Applying a multiple of 20-25x which seems reasonable in light of an EPS CAGR of 38-46% this would represent would yield a stock price of $94-$139.

     


    The following table outlines the pro forma EPS for existing IMS shareholders before and after the Q merger:

    Valuation

     

    2017E

    2018E

    2019E

    2020E

    Q share price

    $67.46

     

     

     

     

     

    IMS share price

    $25.49

     

     

     

     

     

    FDSO (M)

     

    336

    336

    336

    336

    IMS EPS pre-deal (Estimate)

    $1.82

    $2.03

    $2.27

    $2.51

    P/E

     

     

    14.0x

    12.6x

    11.3x

    10.1x

    EPS growth

     

    11%

    12%

    11%

     

     

     

     

     

     

     

    FDSO (M)

     

    279

    254

    228

    204

    IMS EPS pre-deal including repurchases (Estimate)

    $1.92

    $2.23

    $2.62

    $3.09

    P/E

     

     

    13.3x

    11.5x

    9.7x

    8.2x

    EPS growth

     

    16%

    18%

    18%

     

     

     

     

     

     

     

    Pro-forma EPS of IMS-Q

    $4.63

    $5.26

    $6.04

    $6.70

    Implied IMS EPS

    $1.78

    $2.02

    $2.32

    $2.57

    P/E

     

     

    14.3x

    12.6x

    11.0x

    9.9x

    EPS accretion

    -2%

    0%

    2%

    2%

    EPS growth

     

    14%

    15%

    11%

     

     

     

     

     

     

     

    Pro-forma EPS of IMS-Q including repurchases

    $5.17

    $6.41

    $8.27

    $10.38

    Implied IMS EPS including repurchases

    $1.99

    $2.46

    $3.17

    $3.99

    P/E

     

     

    12.8x

    10.4x

    8.0x

    6.4x

    EPS accretion

    4%

    11%

    21%

    29%

    EPS growth

     

    24%

    29%

    26%

     

    The primary sources of synergies and earnings growth for IMS-Q are:

    Cost synergies:

    Management has guided $100M of cost synergies. To put this in perspective, it is ~6% of the combined SG&A expense of IMS-Q.   We view this as conservative, which makes sense given the CEO of IMS is going to be taking over the combined company but likely views the transaction as more of a “merger” than “purchase” from the board level and therefore feels  the need to be more judicious in his initial description and characterization of the amount of ultimate cost reduction.  In addition to duplicative public company costs and other corporate costs, combining the Real World Evidence businesses of IMS and Q is expected to be a meaningful source of cost synergy, which we think is not fully baked into the $100M guidance. Illustratively- IMS revenue per employee is $195K. Recognizing that 50% of IMS’ revenue comes from selling data which is not people intensive, say Q’s revenue per employee in its commercial business increases to 75% of IMS’ level or $146K from $119K today. Assuming cost per employee of $50K per annum, this would amount to a headcount reduction of 1,729 employees, only 18% of Q’s workforce and yield cost savings of $86M. So we make the point that the $100M guidance seems low and has the potential to be exceeded over time. Every $25M of additional cost synergy adds $0.04 to EPS.  Our upside case assumes total cost synergies of $150-250M.

     

    Leverage:

    Given the recurring nature of IMS-standalone, the leverage target was 4-5x EBITDA before the merger with Q. The combined IMS-Q also has high FCF conversion and can support leverage of around 4x EBITDA in management’s opinion. The additional capital can be used to repurchase shares or accretive acquisitions, consistent with Ari Bousbib’s historical track record and preferred balance sheet structure. This is not something that the street is focused on and can be significant source of earnings growth. Based on our estimates, IMS-Q can buy back 54% of the outstanding shares over 2017-2020 propelling EPS CAGR to 28%, compared to 20% without share repurchases.

    Revenue Synergies:

    Management has guided 100-200bps of revenue growth acceleration over 2017-2020 which translates to ~$450-800M of cumulative revenue synergies over 2017-2020. Every $50M of revenue synergy adds $0.04-$0.05 to EPS. Broadly, following are the sources of revenue synergies as a combined company:

    ·         CRO business: IMS-Q hopes to improve the win rate (and hence market share) of the CRO business by designing better trials, increase speed of recruitment and speed of trial execution by leveraging IMS's ~530M anonymized patient data. This is not dissimilar from what LH-CVD is attempting to do. While it could mean a tougher competitive environment for CROs going forward, the deal wins achieved by the LH-CVD combination is encouraging. We also believe that IMS data is significantly richer and broader compared to LH’s US-only diagnostic data because 70% of the clinical trials are done outside the US. IMS also has more sources of data compared to labs and hence has more robust and complete information. Lastly, the Q-DGX JV will always remain an avenue Q can tap if diagnostic data becomes imperative for any reason.

    ·         Real World Evidence business: While both IMS and Q each have their own RWE offerings, they complement each other. So they hope to create a full cycle evidence generation platform to improve their competitive position. This is a high growth area driven by the gradual shift towards value and outcome based pricing models within healthcare. IMS-Q hopes to "productize" what is today an ad-hoc consulting/solution based model for performing market studies to drive better ROIs for the commercial organizations of Pharma companies.

    Bundling/Cross-selling/ gaining wallet share:

    We believe that being the largest outsourced provider of mission critical services to the life sciences industry, IMS-Q will enjoy an enhanced position of power and will be able to sell more services to their customers over time, effectively leveraging their large size and monopoly position in the Information business. This is a win-win strategy because clients would end up saving money by buying services from one scale player at an attractive total cost rather than several disparate vendors who logically would be unable to offer competitive prices compared to IMS-Q’s bundled end-to-end offerings. We don’t incorporate this into our model and believe the effective bundling could propel revenue growth towards or above the higher end of management’s guidance of $800M.

     

    2020 EPS Sensitivity to cost and revenue synergies are shown below:

     

       

    2020 EPS before share repurchases

       

    2020 EPS including share repurchases

       

    Cost Synergy

       

    Cost Synergy

       

    50

    100

    150

    200

    250

     

     

    50

    100

    150

    200

    250

     

    450

    $2.51

    $2.57

    $2.63

    $2.69

    $2.75

     

    450

    $3.79

    $3.99

    $4.20

    $4.43

    $4.67

     

    500

    $2.53

    $2.59

    $2.65

    $2.71

    $2.77

     

    500

    $3.84

    $4.05

    $4.26

    $4.50

    $4.74

     

    550

    $2.55

    $2.61

    $2.67

    $2.73

    $2.79

     

    550

    $3.90

    $4.11

    $4.33

    $4.57

    $4.82

     

    600

    $2.57

    $2.63

    $2.69

    $2.75

    $2.81

     

    600

    $3.96

    $4.18

    $4.40

    $4.64

    $4.89

    Revenue

    650

    $2.59

    $2.65

    $2.71

    $2.77

    $2.83

    Revenue

    650

    $4.03

    $4.24

    $4.47

    $4.71

    $4.97

    Synergy

    700

    $2.61

    $2.67

    $2.73

    $2.79

    $2.85

    Synergy

    700

    $4.09

    $4.31

    $4.54

    $4.78

    $5.05

     

    750

    $2.63

    $2.69

    $2.75

    $2.81

    $2.87

     

    750

    $4.15

    $4.37

    $4.61

    $4.86

    $5.13

     

    800

    $2.65

    $2.71

    $2.77

    $2.83

    $2.89

     

    800

    $4.22

    $4.44

    $4.68

    $4.94

    $5.21

     

    850

    $2.67

    $2.73

    $2.79

    $2.85

    $2.91

     

    850

    $4.28

    $4.51

    $4.75

    $5.01

    $5.29

     

    900

    $2.69

    $2.75

    $2.81

    $2.87

    $2.93

     

    900

    $4.35

    $4.58

    $4.83

    $5.09

    $5.38

     

    950

    $2.71

    $2.77

    $2.83

    $2.89

    $2.95

     

    950

    $4.41

    $4.65

    $4.90

    $5.17

    $5.46

     

    1000

    $2.73

    $2.79

    $2.85

    $2.91

    $2.97

     

    1000

    $4.48

    $4.72

    $4.98

    $5.26

    $5.55

     Business Description:

    Q:

    Q is the largest CRO in the world, with a market share of ~15%. The total CRO market is ~$100Bn, of which ~$50Bn is the maximum that can be outsourced, of which $25Bn is currently outsourced. The outsourcing trend is expected to continue because the CROs bring scale, specialized skills and faster patient recruitment times, thus offering life sciences customers cost savings and faster time to market. The CRO market is growing at 6-8% which approximates standalone Q’s long term growth expectation.

     

    Q operates in 2 segments- Product Development (75% of Q standalone revenue and 90% of operating income) and Integrated Healthcare services (HIS, 25% of Q standalone revenue and 10% of operating income).  Its Product Development segment is the CRO business providing clinical research services for mid-late stage drug development. Its Integrated Healthcare Services segments provide commercial services, communications and engagement services, real-world and late phase research, and other healthcare solutions.

     

    IMS:

    At the core of IMS, it collects data from drug manufacturers, wholesalers, pharmacies, physicians, hospitals, laboratories, health plans and other payers, governments, services organizations, information technology vendors, patients and others on a global basis and distributes it to life sciences companies (pharma and biotech). Around this core, IMS is now expanding its markets by leveraging its monopoly-like position in its Information business to capture and grow its market share by cross selling related technology services to its existing life sciences clients.

     

    IMS is a high quality business with a deep moat in the form of its monopoly-like position as a healthcare information/data provider. The average tenure of its top 25 clients is >25 years and retention rate for top 1,000 clients is 99%. IMS scale is a significant competitive advantage and barrier to entry because it has been collecting and selling information for 60 years. Its unparalleled depth and breadth of data is difficult to replicate by competitors that are, consequently, largely regional.  The largest competitor- Symphony is ~10% the size of IMS’ Information business and has been unable to really create a dent in IMS market share. Also, the long history implies that IMS’ data is entrenched in its clients’ workflow, and the company consequently enjoys highly recurring revenues, high incremental margins, and generates significant free cash flows. It has a capital light model with Capex ~5% of revenue and little to no working capital requirements.

     

    Before IMS was taken private in 2010 (by TPG, CPP Investment board and Leonard Green), previous management routinely exercised its monopoly position by increasing prices to drive revenue growth, which frustrated clients. While this was effective in growing FCF it led to low growth because volume stagnated once IMS saturated the life sciences market. Current CEO Ari Bousbib, appointed by the private equity owners, changed the company’s strategy to focus on a larger related TAM and growth. He leveraged IMS’ entrenched information offerings to sell related technology services to the existing client base rather than take annual price increases. This strategy is advantageous to clients because IMS data interacts better with IMS software as opposed to molding the data for third-party software and analytics platforms (E.g. IBM). This was a win-win proposition because clients save on integration costs when they choose IMS for both Information and Services. Given the high fixed-cost nature of its data, IMS can scale its technology solutions quickly and at low marginal cost, while propelling growth. 

     

     

     IMS operates in two segments:

    Information (51% of IMS standalone revenue, 54% of gross profit)

    IMS: Information

     

     

     

     

     

     

     

    $ Millions except per share data

    2014A

    2015A

    2016E

    2017E

    2018E

    2019E

    2020E

    Organic Revenue

    1,551

    1,536

    1,405

    1,524

    1,539

    1,555

    1,570

    cc organic growth

    1.70%

    1.4%

    1.00%

    1.00%

    1.00%

    1.00%

    1.00%

    Inorganic Revenue

     

    106

    141

     

     

     

     

    contribution to cc  growth

     

    7.0%

    9.5%

     

     

     

     

    Revenue in constant currency

    1,551

    1,642

    1,546

    1,524

    1,539

    1,555

    1,570

    cc growth

    1.70%

    8.40%

    4.25%

    1.00%

    1.00%

    1.00%

    1.00%

     

     

     

     

     

     

     

     

    currency impact on organic revenue

    (36)

    (145)

    (19)

     

     

     

     

    contribution to growth

     

    -9.6%

    -1.3%

     

     

     

     

    currency impact on inorganic revenue

     

    (14)

    (18)

     

     

     

     

    contribution to growth

     

    -0.9%

    -1.2%

     

     

     

     

    Currency impact

    (36)

    (159)

    (37)

     

     

     

     

    contribution to growth

     

    -10.5%

    -2.5%

     

     

     

     

     

     

     

     

     

     

     

     

    Reported organic revenue

    1,515

    1,391

    1,386

    1,524

    1,539

    1,555

    1,570

    organic growth

    -0.7%

    -8.2%

    -6.5%

    1.0%

    1.0%

    1.0%

    1.0%

    Reported inorganic revenue

     

    92

    123

    0

    0

    0

    0

    contribution to growth

     

    6.1%

    8.3%

    0.0%

    0.0%

    0.0%

    0.0%

    Reported Information Revenue

    1,515

    1,483

    1,509

    1,524

    1,539

    1,555

    1,570

    growth

    -0.7%

    -2.1%

    1.8%

    1.0%

    1.0%

    1.0%

    1.0%

     

     

     

     

     

     

     

     

    Information Gross Profit

    850

    817

    822

    831

    847

    871

    887

    margin

    56.1%

    55.1%

    54.5%

    54.5%

    55.0%

    56.0%

    56.5%

     

    This is the backbone of IMS. In this segment, IMS collects information from a wide variety of data suppliers (manufacturers, wholesalers, pharmacies, physicians, hospitals, laboratories, health plans and other payers, governments, services organizations, information technology vendors, patients and others) on a global basis. IMS has the most comprehensive data base which can be narrowed down to a zip code in certain developed markets It has 500 million comprehensive, longitudinal, anonymous patient records (i.e., records that are linked over time for each anonymous individual across healthcare settings).

     

    The data is standardized organized, structured and integrated into useful market insights and sells it primarily to life sciences companies (pharmaceuticals, Biotech etc.). The TAM for information is ~$3Bn, of which IMS has 50% market share. IMS has 5000 clients, with the top client contributing ~5% of revenue. Life Sciences clients use IMS data to address fundamental operational questions such as:

     

    90% of Information revenue is from subscription or license-based contracts and has historically been recurring and predictable.  10% is ad-hoc and depends on pharma spend. Majority of the costs in this segment are fixed and relate to data acquisition. This segment has normalized gross margin in the high 50s and grows 1-2% with all of the growth coming from emerging markets.

     

    Risks

    ·         This segment can be a little lumpy on a quarterly basis due to the 10% ad-hoc portion of the business, as witnessed in 3Q2015 when clients exhibited tentative buying behavior, which revered in 4Q2015

    ·         Drug price regulation could also be an immediate headwind if clients responded to drug price cuts by cutting costs as kneejerk reaction. However IMS data is not a significant portion of pharma marketing and R&D budgets to warrant such a reaction in our view. Conversely, the data and/or analytics could help clients justify drug prices by measuring efficacy ( Real World Evidence)

    ·         Within the information segment all of the growth comes from EMs while DMs are largely flat. Any macro weakness in the emerging markets (which tend to be predominantly patient pay markets) could result in drug companies realigning their spend levels to match underlying market growth and hence result in a lackluster growth in the information segment

     


     

    Technology Services (49% of IMS standalone revenue, 46% of gross profit)

    IMS: Technology Services

     

     

     

     

     

     

     

     

    $ Millions except per share data

     

    2014A

    2015A

    2016E

    2017E

    2018E

    2019E

    2020E

    Organic cc Revenue

     

    1,144

    1,258

    1,316

    1,785

    1,952

    2,140

    2,352

    cc organic growth

     

    12.3%

    11.7%

    11.2%

    9.0%

    9.3%

    9.6%

    9.9%

    Cegedim cc Revenue

     

     

    293

    390

     

     

     

     

    contribution to cc  growth

     

     

    26%

    27%

     

     

     

     

    Revenue in constant currency

     

    1,144

    1,551

    1,707

    1,785

    1,952

    2,140

    2,352

    cc growth

     

    12.3%

    37.7%

    18.7%

    9.0%

    9.3%

    9.6%

    9.9%

     

     

     

     

     

     

     

     

     

    currency impact on organic revenue

     

    (18)

    (74)

    (19)

     

     

     

     

    contribution to growth

     

     

    -6.6%

    -1.3%

    0.0%

    0.0%

    0.0%

    0.0%

    currency impact on inorganic revenue

     

     

    (38)

    (51)

     

     

     

     

    contribution to growth

     

     

    -3.4%

    -3.5%

    0.0%

    0.0%

    0.0%

    0.0%

    Currency impact

     

    (18)

    (113)

    (69)

     

     

     

     

    contribution to growth

     

    -1.8%

    -10.0%

    -2.5%

    0.0%

    0.0%

    0.0%

    0.0%

     

     

     

     

     

     

     

     

     

    Reported organic revenue

     

    1,126

    1,183

    1,298

    1,785

    1,952

    2,140

    2,352

    organic growth

     

     

    5.1%

    -9.8%

    9.0%

    9.3%

    9.6%

    9.9%

    Reported Cegedim revenue

     

     

    255

    339

    0

    0

    0

    0

    contribution to growth

     

     

    22.6%

    23.6%

    0.0%

    0.0%

    0.0%

    0.0%

    Reported Technology Revenue

     

    1,126

    1,438

    1,637

    1,785

    1,952

    2,140

    2,352

    growth

     

    10.5%

    27.7%

    13.9%

    9.0%

    9.3%

    9.6%

    9.9%

     

     

     

     

     

     

     

     

     

    Technology Gross Profit

     

    553

    688

    752

    880

    969

    1,065

    1,173

    margin

     

    49.1%

    47.8%

    45.9%

    49.3%

    49.7%

    49.8%

    49.9%

     

    The Technology segment consists of a mix of projects, large-scale engagements, multi-year outsourcing contracts and multi-year Software-as-a-Service (“SaaS”) licenses. It has 4 sub-segments elaborated in the following section.

     

    The TAM for these services is $42Bn and IMS has the opportunity to capture market share by increasing penetration of its tech services within its base of 5000 information clients.

     

    The technology services segment is highly competitive with a high level of interest and investments from Technology consulting companies (IBM, Accenture, Deloitte, Cognizant Technology Solutions, Infosys etc.), Consulting and Analytics companies (McKinsey, Nielsen, The Advisory Board, ZS Associates, Verisk etc.) and CROs and healthcare focused companies (Quintiles, Covance, Parexel, RTI Health Solutions, Symphony Health Solutions, Synovate Healthcare, Trizetto, Veeva, etc.).

     

    Majority of the costs in this segment relate to personnel cost because IMS leverages its database and does not have to spend much additionally for data acquisition, which is a significant competitive advantage. Also, because IMS data and software are inherently inoperable, bundling them together eliminates integration cost and effort for clients.

     

    This segment has normalized gross margin in the high 40s and grows high single digit organically. Acquisitions are expected to add ~2% to growth annually.

    The following table outlines the growth and margin profiles of the sub-segments of Technology Services:

    IMS: Technology Services - Sub segments

     

     

     

     

     

     

     

     

    $ Millions except per share data

    NOTE

    2014A

    2015A

    2016E

    2017E

    2018E

    2019E

    2020E

    Revenue

     

     

     

     

     

     

     

     

    Tech& Apps - organic revenue

    A

     

    393

    448

    516

    593

    682

    784

    reported organic growth

     

     

     

    14%

    15%

    15%

    15%

    15%

    Cegedim revenue

    B

     

    255

    339

    339

    339

    339

    339

    reported Cegedim growth

     

     

     

    0%

    0%

    0%

    0%

    0%

    Tech & Apps reported revenue

     

     

    647

    788

    855

    932

    1,021

    1,124

    reported growth

     

     

    0.0%

    21.7%

    8.5%

    9.0%

    9.5%

    10.0%

    % of Technology Revenue

     

     

    45%

    48%

    48%

    48%

    48%

    48%

     

     

     

     

     

     

     

     

     

    Workflow Analytics reported revenue

    C

     

    431

    457

    494

    534

    576

    622

    reported growth

     

     

     

    6%

    8%

    8%

    8%

    8%

    % of Technology Revenue

     

     

    30%

    28%

    28%

    27%

    27%

    26%

     

     

     

     

     

     

     

     

     

    Real World Evidence reported revenue

    D

     

    216

    244

    280

    322

    371

    426

    reported growth

     

     

     

    13%

    15%

    15%

    15%

    15%

    % of Technology Revenue

     

     

    15%

    15%

    16%

    17%

    17%

    18%

     

     

     

     

     

     

     

     

     

    Consulting reported revenue

    C

     

    144

    148

    156

    163

    172

    180

    reported growth

     

     

     

    3%

    5%

    5%