Quintiles Transnational Holdings Inc.
Quintiles Transnational Holdings (NYSE:Q) is the world's largest provider of bio-pharmaceutical development services and commercial outsourcing services. Its Product Development (PD) segment is the largest contract research organization (CRO) in the world, with a focus on Phase II, III, and IV clinical trials and related analysis, while its Integrated Healthcare Services (IHS) segment provides contract sales representation, consulting research and other healthcare services.
Quintiles FY15 services revenues were at $4.3bn with 71.6% contribution from the PD segment and 28.4% from the IHS business segment. Quintiles operating margins in FY15 were at a healthy 16.6% (+120 bps y/y) with PD operations margins of 23.7% (+200 bps y/y) driven mostly by forex gains. IHS operating margins came in at 8.2% (-20 bps y/y) due to lower margins in commercial services in North America and Japan partially offset by higher margins in late phase research. Book to bill (B2B) improved sequentially as IHS rebounds while backlog and biotech spending remain healthy. The overall B2B ratio of 1.32 saw a solid sequential rise (vs. 1.06 in 3Q) driven by a recovery in IHS while its B2B was also higher for its PD business segment and came in at 1.30 (vs. 1.20 in 3Q).
Quintiles leadership position allows it to benefit from both scale advantages and expertise advantages as it works on more trials than any competitor. Quintiles has over 1000 PhDs and is way ahead of other smaller CROs in terms of delivering value to its clients and global reach. The ongoing shift to outsourced research and development provides the CRO industry with steady growth regardless of growth in global research and development spending. Quintiles has less exposure than most of its peers in the unpredictable and highly competitive early-stage development industry.
- Sector-wide risks - Early contract termination, backlog conversion rate volatility, biotech financing volatility, mispriced contracts, customer and project concentration and acquisition integration effectiveness
- Life sciences R&D market growth remains flat
- Strategic deals leading to pricing pressure and margin deterioration
- Weaker than expected booking and margins
An enormous market with strong potential opportunity - Given average 10-15 year lifecycles for development, ever-expanding testing requirements and the pace of change, Q's solution set are expected to be viable for decades to come. Considering the breadth of Q's global client base and combined CRO/CSO (contract sales organization) offering, the total addressable market (NYSE:TAM) opportunity is estimated at $54 bn for its PD and $22bn for IHS segment with a total services TAM of $76bn. FY16 service revenue guidance of 7.0% to 8.5% growth compared to FY15 2015 and EPS guidance of $3.70 to $3.85 per share representing growth of 11.1% to 15.6% compared to FY15.
CROs experiencing a cyclical recovery and potential for Quintiles to increase market share - Recent strong biotech financing, an improved drug approval profile for large pharmaceutical players and relatively stable economy and regulatory environment bode well for CROs. The portion of total R&D spend outsourced to CROs will continue to increase creating a bigger pie for Quintiles. Hence, bigger CROs are expected to continue to take share as trial sponsors look to consolidate work with the largest and highest quality vendors. This should allow Quintiles to take share in both its PD and IHS segments.
Investment Rationale & Conclusion
Quintiles continues to have solid track record and is a bellwether in the CRO space. It has significant visibility into future growth that will benefit from being the leader in the late stage CRO industry. The fundamentals supporting growth in the CRO industry will continue to be positive with biotech funding over the last few years positive for clinical trial spend in the medium term and steady R&D spending from the major bio-pharma companies. There is significant upside potential for the stock as Q has multiple avenues for EPS growth. The firm's cash balance stood at $977 mn in Dec 2015 providing the company to use tuck-in acquisitions or share repurchases and drive additional earnings growth.
Industry fundamentals remain strong for both the early and late-stage CROs as they will continue to benefit from pharma and biotech R&D growth, increasing outsourcing penetration and expanded use of strategic partnerships resulting in enhanced market share gains by the larger CROs.
Quintiles currently trades at $63.17 (closing price as on Feb 18th , P/E ttm of 20.37) with its 52-week range of $55.01-80.05 and looks attractive with strong potential upside over the medium-term for reasons outlined below -
- The company's backlog and diversified customer base provides relative visibility and looks set for strong growth as biopharmaceutical companies increasingly outsource drug development work
- Quintiles' market share leadership in late-stage clinical trials, its diversified customer base and its strength in informatics will help in improving the company's financial performance
- Compelling valuations, margin expansion and strong business momentum likely to take the stock near its 52 week high over the medium-term
Disclosure: I/we 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.
Additional disclosure: (Sources: Company Annual Reports, Company Press Releases, Investor presentations, SEC Filings -Form 10-K, 10-Q, Morningstar, Outsourcing Pharma, Contract Pharma, Reuters, Yahoo Finance)