Description

IMS Health (“IMS” – $25.79)

IMS is the global information and technology leader in gathering, organizing and analyzing data for clients in the healthcare industry. Following its leveraged buyout in 2010, the company executed a value enhancing transformation and completed an IPO in 2014. Despite a subsequent accretive acquisition, secondary offerings and stock repurchases, the stock is up only marginally since going public. Accordingly, IMS is not only a newly transformed company, but it’s also a new stock and has already experienced several significant inflection points in less than 2 years since going public. This is a high quality business with a vast moat, recurring revenues and high EBITDA margins, yet the perceived overhang of a controlling shareholder has held down the shares. Driven by revenue growth, acquisition synergies and a shrinking share count, cash EPS could grow to $2.05 in 2017 and lead the stock to ~$40 per share. We believe its activist CEO will continue to pull these levers to enhance value and ultimately make IMS a great takeover target once again.

Business Transformation

“The main shift in our strategic direction since the LBO of 2010 has been to seek participation and expansion in value-added services built around our traditional data business.” – CEO Ari Bousbib

The backbone of IMS is its Information segment. This business is heavily relied upon by all major health insurance companies, governments, biotech firms and medical device makers to track 90% of all healthcare records, claims and prescriptions occurring all over the world in hospitals, pharmacies, insurance companies and laboratories. After 60 years in operation, IMS data has become entrenched within these organizations and highly integrated into their daily workflow. The company’s top 25 clients have done business with IMS for 25 years on average, 90% of segment revenue is contracted and the top 1,000 clients have a 99% retention rate. With no global competition and almost entirely recurring revenues, this business has high barriers to entry, a great moat and predictable free cash flow. These features made IMS a perfect LBO target in 2010 by a consortium including TPG, Leonard Green and the Canada Pension Plan.

The private equity consortium lined up a great CEO to lead the company – Ari Bousbib. After a successful career at UTX as Executive Vice President, Bousbib took over at IMS in September 2010 and sought to leverage the Information business, which essentially operates as a monopoly, and layer on a higher growth software segment. Historically, clients would purchase the data from IMS and purchase an analytical platform from a software company (for example, IBM). However, Bousbib recognized that the cost and difficulty of molding the IMS data to conform to an external analytic platform was not ideal for IMS clients.

Over the next several years, the company developed and acquired software platforms, eventually creating an analytics program, IMS ONE, that is customized (and continuously customizable by the user) to support, organize and analyze the data being sold by IMS. While there’s significant lead time in successfully convincing and migrating a client from a third party software onto the IMS One platform, by 2015 Technology revenue represented more than 50% of consolidated pro forma IMS revenue. With Technology segment revenue growing low double digits annually, versus low single digits for the Information segment, the transformation at IMS ignited by Bousbib continues to accelerate top line growth and free cash flow generation.

Accretive Acquisition

“We love this deal. The fit is great. The price is right, and the upside if we execute properly is even better.” – CEO Ari Bousbib

In April 2015, IMS completed the acquisition of a Client Relationship Management (“CRM”) technology business from a France based information services company called Cegedim (“CGM FP”) for $520m, or less than 6x 2014 EBITDA. The CRM product acquired was integrated into the company’s proprietary software and according to IMS was accretive to EPS on day 1. Ultimately, the opportunity is to get the EBITDA margins at CRM up from the mid-teens and into the 20%+ area, compared to IMS legacy margins in the low to mid 30’s. As part of CGM, this business had difficulties controlling cost and was not successful marketing the product – two areas IMS has focused on to improve the business. In the months following the acquisition, IMS already raised its cost synergy expectations by 20% and captured revenue synergies with more expected in the future.

Secondary Offerings and Stock Buybacks

“Our stock is a good investment.” – CEO Ari Bousbib

After a series of inflection points including the business transformation and the CGM transaction, the market was still lukewarm to this stock because the PE consortium held a 75% stake in the company and the shares didn’t trade with the volume you’d expect from an $8 billion company. The lack of liquidity and a perceived overhang from the large shareholders led to secondary offerings in May and August of 2015, bringing down the consortium’s ownership interest in IMS shares below 60%. We believe these share offerings are significant inflection points that will continue going forward at higher and higher stock prices over time.

Just as noteworthy is the inflection point in capital allocation. As part of the May 2015 secondary offering, IMS repurchased $300 million worth of stock from the PE firms. This was a major pivot by management and displayed its confidence in the business. Subsequently, on December 17, 2015, amidst a global sell-off in equities, IMS announced another $250 million open market share buyback to take advantage of its mispriced stock.

Valuation

“We will continue to drive value for shareholders in our company.” – CEO Ari Bousbib

Our view is that IMS will grow cash EPS from $1.50 in 2015 to $2.05 or more in 2017, driven by revenue growth, deal synergies and share repurchases. We also believe that as the company executes over the next few quarters, the multiple will expand to a level more in-line with businesses of this quality and stability. Using the midpoint of a multiple range of 18x-20x cash EPS, we get to a valuation of almost $40 per share. We also believe IMS could become a takeover target in the next 2 years, and command a valuation of 20x 2018 cash EPS , or a stock price of $45-$50.

Catalyst

• Share repurchases
• Secondary offerings
• Synergy and earnings ramp