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Morningstar | IQVIA's Life Sciences Cloud Business Continues to Soar; Raising FVE to $131 Following Investor Day. See Updated Analyst Note from 19 Jun 2019

We are raising our fair value estimate for IQVIA to $131 per share following its investor day on June 18, where management laid out its strategy for growth through 2022 as well as plans for additional cost savings and deleveraging. The company continues to fire on all cylinders, with strong growth in both of its key segments, technology and analytics and research and development. We continue to believe shares look rich, but we believe that the narrow-moat company is competitively well positioned in life sciences technology and in the contract research space.

The company unveiled its midterm guidance, guiding a three-year revenue CAGR of 7% to 10% and 2022 adjusted EBITDA growth to be between 8% and 11%, both higher than we had previously modeled. Management also reviewed the goals laid out at the outset of the Quintiles and IMS Health merger in late 2016, including mid-single-digit revenue growth, adjusted EBITDA growth of 6% to 9%, reducing net leverage to 4 to 4.5 times adjusted EBITDA, and $200 million in merger cost synergies. All these goals were met, which is a testament to both management's execution and the robust operating environment within the biopharma space, driven by innovation and new drugs as well as solid funding for biotechs.

Our new valuation is largely driven by faster revenue growth in both technology and analytics and research and development. As one of the top contract research organizations in the world, we expect that the research and development segment will continue to grow slightly faster than the industry as IQVIA takes share from smaller CROs. For this segment, we model a 7.8% revenue CAGR from 2019 through 2022, within management's guidance of 7% to 10%.

We believe that IQVIA's solutions in CRM solutions, data analytics, and real-world evidence are underpenetrated and model a 9.1% revenue CAGR from 2019 through 2022, near the midpoint of management's midterm guidance.

While wide-moat Veeva will be difficult to displace in life sciences cloud solutions, IQVIA holds an advantage with its unique datasets (from legacy IMS Health) and best-in-class contract research business. Further, IQVIA has an established relationship with the majority of biopharma players, whether through its data business or its CRO business. Over the last several quarters, IQVIA has reinvested significantly in OCE, its CRM offering, and recently announced its intention to launch safety-related solutions for commercial compliance and pharmacovigilance, further encroaching on Veeva's territory. We expect real-world evidence, which involves using real-world data from patients to inform clinical trial design and execution and even serve as a virtual arm of a trial, will continue to slowly gain traction in the industry, with IQVIA best positioned to benefit from this trend in clinical trials given the breadth of its data and analytics.

The company also announced its intention to uncover an additional $200 million in cost savings by 2022, on top of its already-met goal of $200 million by 2019. This doesn't materially affect our fair value estimate as we had already modeled some margin improvement over the next several years. When comparing to pure-play peers such as Veeva or Icon, we think IQVIA has room to operate at a leaner level.

Additionally, the company's guidance signaled its intention to deleverage, with a net leverage target of 3.5 to 4 times adjusted EBITDA by the end of 2022. The company ended 2018 with gross debt of over $11 billion and a net leverage ratio of about 4.5 times. IQVIA's net leverage at the end of 2018 was roughly on par with peer Syneos Health, which took on debt for its 2017 merger but is targeting 3.9 times or less for 2019, but above the net leverage ratios of peers Icon and PRA Health. Much of this debt is used for stock repurchases, with an average repurchase price per share since the merger of about $90 per share. Of the roughly $8 billion in capital deployed since the merger, about $5 billion has been used to buy back shares, with the rest reinvested in the business or used for tuck-in acquisitions.

Double-digit adjusted earnings per share growth remains a key target for management, and adjusted EPS growth is a main pillar of the executives' compensation program, along with adjusted EBITDA growth and, to a slightly lesser extent, revenue growth and total shareholder return relative to peers. While we think management is appropriately investing in its core business, we believe stewardship could be improved with more rapid debt reduction than the company's intended pace. Regardless, we were reassured with the company's confirmed plans for debt reduction.