Analysts' Choice: Drug Tester Quintiles Passes Quadrix Exam

10/17/2016


  Recent Price
$76
  Dividend
$0.00
  Yield
0.00%
  P/E Ratio
21
  Shares (millions)
122
  Long-Term Debt As % Of Capital
111%
  52-Week Price Range
$81.45 - $55.01

QuintilesIMS ($76; Q) claims to be the world's largest contract-research organization (CRO), conducting clinical trials for experimental drugs. The race to bring new biosimilar drugs to market should keep Quintiles' services in high demand. Quintiles should also benefit from its customers outsourcing more of the tasks involved with drug development to cut costs.

The shares have advanced 9% over the past year, buoyed by solid operating momentum. For the 12 months ended June, Quintiles grew per-share profits 28%, sales 7%, and cash from operations 69%. The company entered July with a backlog of $12.54 billion, up 4% from the end of 2015 and more than twice its annual revenue. Operating profit margin has expanded in seven straight quarters.

Quintiles is a Buy and a Long-Term Buy.

Business breakdown

Quintiles generates revenue from services (75% of 2015 revenue) and reimbursed expenses (25%), payments to physicians who oversee clinical trials and travel expenses for workers. Quintiles views reimbursed expenses as pass-through costs to its customers that tend to be lumpy and provide little insight about the company's underlying performance.

The product-development unit (74% of services revenue), which houses the CRO businesses, performs midstage and late-stage trials for experimental drugs. It has provided services for 75% of all oncology drugs approved in the past decade.

The number of drugs in the early stages of development has surged 36% since 2010, a positive signal for future growth. Last year, biotech companies spent $54 billion on the clinical development of experimental drugs. About $22 billion of that total went to CROs. In addition, cost-conscious drugmakers are increasing their reliance on CROs. In 2015, 41% of Quintiles' addressable market was outsourced to CROs, up from 37% two years earlier. Management sees its potential market for CRO services growing 6% to 8% annually through 2018.

The health-care services business (26% of services revenue) helps drugmakers train and manage salespeople, build brands, and market products. About 23% of the $101 billion spent on such services last year was outsourced, up from 20% in 2013.

Earlier this month, Quintiles completed an all-stock acquisition of IMS Health for about $8.75 billion. Although investors greeted the deal with skepticism, the takeover does have strategic merit. IMS tracks prescriptions and medical claims, a trove of electronic records Quintiles can tap to help drugmakers target patients for clinical trials. Quintiles says synergies from the deal could create an additional 1% to 2% in annual revenue growth.

Conclusion

Management raised its 2016 guidance in July, its new outlook calling for per-share profits to rise 14% to 17%, excluding the IMS deal and stock buybacks. Analyst estimates are drifting higher, with the consensus projecting 15% profit growth on 10% higher sales.

An annual report for Quintiles Transnational Holdings Inc. is available at 4820 Emperor Blvd., Durham, NC 27703; (919) 998-2000; www.quintiles.com. 

QUINTILESIMS
Quarter
Per-Share Earnings*
($)
Sales
Change
Quarterly
Price Range
($)
P/E Ratio
Range
Jun '16
0.93
vs.
0.78
8%
71.44
-
61.21
20 - 17
Mar '16
0.89
vs.
0.72
11%
67.92
-
55.01
20 - 16
Dec '15
0.90
vs.
0.71
8%
72.68
-
63.62
23 - 20
Sep '15
0.94
vs.
0.65
2%
80.45
-
67.47
28 - 24
           
Year
(Dec.)
Sales
 ($Bil.)
Per-Share
Earnings*
($)
Per-Share
Dividend
($)
52-Week
Price Range
($)
P/E Ratio
Range
2015
5.74
3.33
0.00
80.45
-
56.46
24 - 17
2014
5.46
2.70
0.00
60.79
-
45.25
23 - 17
2013
5.10
2.10
0.00
47.50
-
40.10
23 - 19
2012
4.87
1.77
0.00
NA
NA
 
Quadrix Scores †
Overall
Momen-
tum
Value
Quality
Financial
Strength
Earnings
Estimates
Performance
90
89
48
94
44
97
69

   * Earnings exclude special items.
   † Quadrix scores are percentile ranks, with 100 the best.
   NA Not available.


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