Description

I recommend buying IQV, a diversified healthcare service provider delivering professional services, technology, and analytics solutions across the drug development life cycle.  I believe IQV offers attract risk/reward and has a clear path to accelerate earnings growth into next year.

Business overview

IQVIA was formed through the 2016 merger of IMS Health, a data and analytics provider, and Quintiles, a leading contract research organization (CRO).  There are some good older pitches on both companies and IQV which are helpful resources on the name. 

Today Research and Development Services, formerly Quintiles, drives 55% of revenue and 49% of EBIT.  CRO’s manage and execute clinical trials on behalf of pharma and biotech customers.  This includes finding and enrolling patients, arranging sites and administrators, handling supply distribution and custody management and analyzing results.  Typically IQV also has some input into clinical trial design and over time this has become an increasingly value-add niche.

The former IMS business operates as Technology and Analytics Solutions (TAS) which is 40% of revenue and 49% of EBIT.  TAS consists of four subsegments: 1) Data and information (30% of sales) an extremely profitable provider of prescription sales and physician contact information and a virtual monopoly with ~70% share.  This data is used by pharma sales organizations for sales tracking, market share analysis, benchmarking sales rep performance, managing physician outreach, and industry trend analysis. It is mission critical data that sits at the heart of the modern pharma CRM, but is largely a mature business and grows low single digits.  2) Technology (25% of sales) is a mixture of point solutions and platforms growing high single digits. Applications include data management and warehousing, digital marketing, compliance, event tracking and social media and a CRM suite and R&D suite.  3) Consulting (25% of sales) IQV contracts for consulting engagements which they package with IMS data and technology.  Typical projects include pricing decisions and salesforce productivity and optimization and the business grows low double digits.  4) Real world evidence (20% of sales) grows high teens and conducts studies on behalf of regulators and pharma companies. RWE studies are increasingly used for evaluation of drug efficacy and are viewed as a key avenue to accelerate time to market for drugs that demonstrate favorable safety data in preclinical and Phase I trials. Additionally, the rise of niche therapies and the data challenge collections they pose are a structural tailwind here.

The last segment is Contract Sales and Medical Solutions (5% of revenue, 2% EBIT) which provides outsourced sales and marketing to biopharma companies and isn't a needle mover for the overall story. 

Investment Thesis

CRO’s are high quality businesses with HSD core growth and IQV continues to gain share- Running clinical trials is a complex business requiring a global footprint and carrying high regulatory and compliance requirements.  Because of the complexity and risks, biopharma customers focus on working with CROs with established relationships and with strong reputations for quality.  IQV is the largest global CRO with ~15-20% share and has taken share through COVID.  IQV won two of the four COVID clinical trials and handled RWE monitoring on the other two.  IQV has been leveraging these relationships to grow share at the expense of third tier vendors like SYNH and is well positioned to continue that trend. 

Attractive downside protection due to durable customers and end markets- Life science compounders have been a mess in recent quarters with CTLT, WST, DHR and others trading off on a mix of bioprocessing exposure in a stuffed channel and COVID cliffs coming due.  IQV’s chief COVID exposure was through clinical trials which were the leading edge of COVID business and are long since out of the numbers.  IQV first got into its COVID comps last year and will be free and clear of those headwinds in the next two quarters.

Additionally, IQV is well insulated from current macro pressures and benefits from the acyclical nature of healthcare.  The drug development pipeline is the cornerstone of future biopharma profitability and typically will be the last thing to get cut.  Per management, the CRO business has grown during recessions over the past two decades.  While in previous downturns the S&P 500 has seen revenue contract by as much as 10%, IQVIA's R&Ds business and the CRO industry as a whole never experienced a year of revenue decline. 

Large cap customer exposure insulates IQV from headwinds impacting smaller peers- CROs have broadly sold off this year on concerns around the biotech funding environment which were largely driven by weakness from MEDP and CRL, both of whom are focused on earlier stage trials and smaller biotech customers.  In contrast, IQV caters primarily to the large pharma end of the spectrum which is much less sensitive to the funding environment.  IQV has been adamant throughout the year that they are seeing no impact and that has carried through in results through the first three quarters of the year.  On their 1Q earnings call IQV quantified their exposure for investors, detailing that emerging biotechs drive just 10% of the R&DS backlog and 7% of RFP volumes.  Taking other segments into account this is just a MSD exposure for the firm. Rather than focus on smaller biotechs, IQV is heavily engrained in large cap biopharma.  Further, with balance sheets flushed with COVID cash and biotech valuations down dramatically from 2020/21 we have seen large pharma M&A accelerate which is a positive for IQV. 

Valuation

Today IQV is trading at 18x NTM earnings.  In the last 5 years, the stock has traded at an average multiple of ~22x forward earnings. If you’re of the mind that 2020-1H21 should be thrown away, that multiple moves to 20x.  Topline growth in 3Q was 5%, but as we lap the final COVID comps (and FX comps) in the next couple of quarters I expect we will see growth reaccelerate to low double digits and margins continue to improve as we comp lower margin COVID revenue streams. Incremental EBITDA margins through 2022 have been ~50% (vs reported EBITDA margins in the low 20s) and I expect that can continue the next few quarters.  Against that backdrop, I believe IQV is likely to compound earnings in the mid teens for the next couple of years.  At 20x my 2025 earnings estimate of $14.95, I come to a price target of $299 which would deliver a 22% two year CAGR.

Catalyst

 - 4Q earnings and 2023 guide

 - Topline acceleration through 2023