Quintiles - Too Rich Valuation For This Successful Offering

| About: Quintiles Transnational (Q)

Quintiles Transnational Holdings (NYSE:Q) made its public debut on Thursday May 9. Shares of the world's largest provider of bio-pharmaceutical development services and commercial outsourcing services ended their first trading day with gains of 5.3% at $42.11 per share. This came after shares reached intra-day highs of $44 per share. Shares consolidated around the $42 level on Friday, marking a modestly successful offering of Quintiles.

The Public Offering

Quintiles is a provider of development and commercial outsourcing services for the bio-pharmaceutical industry. Operating at the intersection of business services and healthcare, the firm offerings and expertise help healthcare and bio-pharmaceutical customers to improve efficiency and deliver better health outcomes.

Quintiles sold 23.7 million shares for $40 a piece. The company itself sold 13.1 million shares to the public, thereby raising $524 million for the firm. The remainder of the shares were sold by selling shareholders including TPG, Bain, 3i Group and Temasek. The public offering values the equity of the company around $5.27 billion.

The offering was quite a success. Initially the firm and selling shareholders only anticipated to sell 19.7 million shares in a preliminary price range of $36-$40 per share.

Some 18% of the total shares outstanding were offered in the public offering. At Friday's trading levels around $42 per share, the firm is valued around $5.53 billion.

The major banks that brought the company public were Morgan Stanley, Barclays, J.P. Morgan, Citigroup, Goldman Sachs, Wells Fargo and Deutsche Bank, among others.


Quintiles was founded over 30 years ago and has gradually grown to become a leader in the development and commercializaiton of new pharmaceutical therapies. The company employs some 27,000 across 100 countries around the globe. Its product development business, which makes up roughly three quarters of total revenues, is the world's largest contract research organization and is focused on clinical trials in Phase II, III and IV.

The integrated healthcare services division provides sales forces and related services, making up the remainder of firm's sales.

For the year of 2012, Quintiles generated annual revenues of $4.86 billion, up 12.4% on the year. Revenues include $1.17 billion in reimbursed expenses. Operating earnings rose by 44.9% to $267.4 million while net income fell by 26.5% towards $176.6 million. The fall in net earnings was entirely due to a higher effective tax rate of around 35%, which compared with just 8% in the year before.

The backlog stood at $8.7 billion at the end of the year, enough to generate 1.8 years of revenues based on 2012's levels. The company received $4.5 billion in new orders for 2012, against effective service revenue of $3.7 billion for a book-to-bill ratio exceeding 1.2.

The company ended its full year of 2012 with $567.7 million in cash and equivalents, and the company operates with almost $36 million in debt, equity and other investments. Quintiles operates with $2.44 billion in both short- and long-term debt, as well as capital lease obligations, for a net debt position of around $1.9 billion.

Friday's equity valuation of $5.5 billion, values the firm at around 1.1 times annual revenues and roughly 31 times 2012's annual net earnings.

Investment Thesis

As noted above, the public offering of Quintiles has been a modest success. Shares were offered 5.3% above the midpoint of the preliminary offering range, and are currently exchanging hands at around $42 per share, trading some 10.5% above the midpoint of the guided range.

The offering marks the next exit of a large private equity firm as markets are reaching fresh highs. TPG and Bain, which led the acquisition of Quintiles a few years ago, both reduced their stake towards 19% each. Founder Dennis B. Gillings reduced his stake to a similar percentage.

Key strengths are obviously the diversification across many companies. As a market leader, Quintiles is almost twice the size of its nearest competitor as it stands to benefit from an expected continuing trend in outsourcing of clinical and commercialization markets. The company reckons the market for its key product development unit will increase between 5% and 8% per annum through 2015. The company furthermore stands to benefit as biopharmaceutical companies are seeking to replenish revenues from the "patent cliff" in recent years.

As the company has a significant presence in the "BRIC" markets, Quintiles is well positioned to benefit from the trends which I have outlined above. First-quarter order intake for 2013 came in at $1.245 billion, up 18.3% on the year before. Revenues rose by 4.4% to $927 million, indicating a strong book-to-bill ratio of 1.34, thereby growing the backlog to $9.0 billion. Net profits rose from $43 million to $48 million in the meantime.

At this rate the company could report full-year revenues of around $5 billion with earnings coming in at $200 million. Given that Quintiles will use most of the proceeds of the offering to pay down debt, it could cut interest expenses by some $25-$30 million, or roughly $20 million after tax. Factoring this in, the valuation multiples could come down to a more acceptable 25 times annual earnings.

While the growing backlog should ensure growth in the coming years and the company has well diversified operations across customers and geographic regions, I will not jump on the bandwagon.

I remain on the sidelines on valuation concerns, as the expected 25 times earnings for 2013 is too rich for me.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.