Summary
- The COVID-19 pandemic's impact on clinical trial delays has expanded the market opportunity for large, multinational CROs.
- IQVIA, one of the largest CROs, has real opportunities to expand its client base with its Q2 Solutions international offering, technical solutions, R&D programs, and its decentralized trial program.
- However, risks from digital investments and its current debt financing position show some weakness for shareholders in the near term.
- Current share price of ~$171 represents a fair market valuation going forward, with a longer-term view of higher value for shareholders a strong possibility.
Editor's note: Seeking Alpha is proud to welcome Madison Hathaway as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to SA Premium. Click here to find out more »
The COVID-19 pandemic has created a real opportunity for CROs to capture new clientele in need of expediting clinical research and trials. Of the larger, independent players, IQVIA Holdings ( IQV ) has shown some promise in being able to capture new market share with its decentralized trial program. There are, however, some caveats related to its current financial position, which would make it a near-term hold.
Introduction to CROs and Impact of COVID-19
Contract research organizations (CROs) assist and provide support to the pharmaceutical, biotechnology, and medical device industries in the form of outsourced research services - clinical support as well as trial development is a core service provided by many of the top firms to sponsors of trials. Performing one or more of a sponsor's trial-related duties and functions is a critical redundancy service that has been in high demand even before the COVID-19 pandemic. Recruiting and retaining patients for clinical trials is a huge barrier to clinical trial completion, even during normal times. An estimated 85% of all clinical trials experience delays pre-COVID, resulting in costs of anywhere from $600k-$8m every day. The number of applications for clinical trials has also not dissipated due to COVID, either. The number of registered studies as of October 2022 is over 400,000, with 2020 and 2021 seeing an uptick by 20% of yearly averages from roughly 30k registered studies on average to 36k-37k for each of those two years. Around 80% of non-COVID trials either were interrupted or stopped entirely. Nearly 6000 trials were stopped in the first six months of 2020 alone. Although trials have resumed, variation in trial status remains, severely impacting toxicology and infectious disease . Especially for trials occurring in the U.S. only, 43% of trials began more than six months after their initial planned start date. The demand for alternatives to in-person clinical trials has not been higher.
The percentage of recruiting studies as of Oct. 13, 2022, in the U.S. only represents over 21,000 studies. This, coupled with nearly an additional 44,000+ studies globally, represents a large potential pool of clients for expansion for CROs in the near term. With the global CRO market projected to reach $78 billion by the end of 2030 , CROs that dominate the marketplace are in a solid position to take advantage of this increased demand in in-person alternatives, with 10 companies controlling well over 50% market share. Numerous CROs have seen this increase in interest through acquisitions of some of the largest CROs.
Parexel ( PRXL ) was acquired by EQT Private Equity in late 2021, along with PPD, Inc. (PPD) by Thermo Fisher Scientific ( TMO ) in that same time frame. Of the remaining large players in the CRO space, IQVIA leads the pack in large, multinational CROs, showing real promise in capturing more market share through its digital programs, technology and analytics, and decentralized trial program.
Company and Financials Overview
IQVIA Holdings is a leading global contract research company that was incorporated in 2016 from the merger of two biopharmaceutical companies. There are three main streams of revenues: technology and analytics solutions, research and development solutions, and contract sales and medical solutions. Both the R&D solutions revenue segment as well as the technology and analytics solutions offer biopharmaceutical development services that IQVIA can utilize to take advantage of new project management and clinical monitoring needs.
IQVIA revenue by business segments (Madison Hathaway)
The equity beta of IQVIA is 1.36, with a CAPM of 11.57%. Based on the 2021 annual report, the interest expense is $375m, and the total debt borrowings is $12,125m. Cost of debt equals 3.09% and the total equity in millions is $6,042, while total assets are $24,689.
Currently, IQVIA is trading at a forward P/E of 17.67, which is slightly higher than the average forward P/E healthcare industry. To be conservative, the forward P/E for the normal case scenario used is 15. Forward P/E of IQVIA = stock price / 2022 expected EPS = $177.67 / 10 = 17.67.
In the quarterly view of 2022, second-quarter sales came in strong at $3.5 billion, up ~300bps YoY. IQVIA has grown its top line by 16% over the past two years. Segmentally, the technology and analytic solutions business contributed ~$1.4 billion. R&D solutions showed $1.95 billion and grew 310bps YoY, with this segment showing growth of 22% YoY.
Annual Revenue/Profit Expectations and Share Price Estimate
Based on IQVIA's historical five-year performance, they have a compounded annual growth rate of 9.5% for the past five years. The most recent year has an annual growth rate of 22.14%, and it is likely that such growth rates will continue as the demand for healthcare products continue to increase, even during times of high inflation.
For normal case assumption, I used the lower guidance of 10% revenue growth for the next five years. This is a conservative approach since lower revenue growth is used in comparison to IQVIA recent YoY growth rate of 22.14%, which is likely to continue. Terminal multiple of 15 is used, and this is also a conservative approach as the average forward P/E of IQVIA is 17.67.
For the best-case assumption, 15% growth rate is used for the next five years due to increase in demand from sponsors of trials and clinical studies, followed by a tapering down to 8% for the following five to 10 years. Terminal multiple is increased to 20 from the current average industry as there will be more liquidity flowing in if the current macroeconomic is more positive.
Lastly regarding the worse-cast assumption, 8% revenue growth rate is assumed with a taper down to 3% over the years. Terminal multiple is lowered to 10 from the current average industry. By applying a margin of safety of 10%, the fair value of IQVIA would be $171.50 in comparison to the current stock price of ~$178.
Past News Highlights and Insights
In 2021, IQVIA opened a 160k-square-foot lab facility in North Carolina, with additional expansions in the middle of the year to its Livingston, Scotland, campus. This campus improved its genetic sequencing capabilities, as well as cytometry tech to help analyze and measure cell populations global clinical trials. The improvements included dedicated cell isolation solutions, which is used in research and clinical areas such as HIV research and cancer immunotherapies. It is currently the largest life science employer in Scotland, processing 5 million biological samples from clinical trials internationally. Ultimately, the Q2 Solutions CEO Costa Panagos was appointed president of R&D solutions in the beginning of Q2 2022. IQVIA completed its Q2 Solutions acquisition from Quest Diagnostics via $760 million cash on hand in late 2021, contributing to IQVIA's current financial position.
Among his focuses, Panagos continues to expand IQVIA's decentralized trial program, allowing for greater flexibility from sponsors in conducting their trials. In a recent white paper, IQVIA demonstrated reductions in timelines for Final Protocol to First Patient In, timelines for FPI to Last Patient In, Screen Failure Rate, as well as protocol deviations. There exists a strong momentum for more trial designs incorporating decentralized trial programs, improving timelines and outcomes for trial sponsors and patients. The ability to achieve scale quickly with the maturation of IQVIA's digital tools and international teams leads us to believe that they are well positioned to add value for their sponsors and clients. However, decentralized trials has investors worried (and rightly so) about new digital platforms. Recent webinars have highlighted IQVIA's awareness of these new wave of digital biomedical monitoring and reporting, yet drilling down on specifics regarding costs and digital security have been sparse.
Interestingly, with regard to its clinical research team, IQVIA shows similar if not slightly lower compensation at IQVIA compared to other large CROs, with healthy recruiting and job postings to date. IQVIA currently utilizes risk-based monitoring (RBM) implemented for their DOS (days on sight) teams, which theoretically is supposed to lessen DOS for individual team members per client. With the RBM monitoring, team members are able to mix their visits of DOS with remote monitoring, and they are expected to have 8-9/month per client. This results in roughly 150 hours per month billable, which remains competitive, if not high for the industry.
These management expectations show in their earnings and financials. IQVIA Dedicated Line Manager for CRAs in the EU have 10 DOS on average. Industry standard is 8-10 DOS for any CRA at a CRO to meet their metrics. This points to higher output for "boots on the ground" CRA positions, but also limitations to their co-monitoring or additional monitoring frequency. Subsequently, these key positions might not get time to know their protocols since they are constantly reminded to finish "trainings" (on protocols) 3+ days early. An assessment can be made that IQVIA is hiring quickly to try to meet demand, but there might be shortfalls in training and onboarding occurring in order to meet quotas.
Potential Outside Factors and Downside Risks
Potential Lawsuits Due to Inability to Protect Data
IQVIA seems to be embracing digital data with regards to its clinical side monitoring and analytics, which could be a potential point of exposure. IQVIA has collected a huge amount of patient and client data, and it would be critical for them to safeguard the data well. Further details on their digital safeguards would be appropriate and help reinforce investor confidence, especially as they highlight programs like their decentralized trial program.
Investment in the Decentralized Trial Arms Race
Decentralized clinical trials has become an arms race amongst healthcare data and research providers. Even cryptocurrency billionaires are getting involved. The current and future landscape of innovative technologies for clinical trial analysis requires heavy investment into next generation devices to meet protocol objectives and to ensure regulatory compliance, all while navigating the challenges of global device logistics to ensure study timelines are met. A draft FDA guidance document published in January 2022 specifies that novel endpoints should be justified, and the method of assessing a patient's response should be " well-defined and reliable ." This poses a large challenge for any decentralized trial where there is remote patient monitoring.
Needless to say, short-term increases in the technology and analytic solutions business of IQVIA could be masking the need for larger investments into technology solutions to meet FDA criteria for decentralized trial programs.
Debt Financing Pitfalls
The weighted average cost of capital of IQVIA is 4.78%, with an equity financing ratio of 0.24. The debt financing ratio of 0.76 shows that IQVIA has relied more on debt financing as their debt financing ratio is at 0.76 in comparison to their equity financing ratio, which is 0.24. In the current macroeconomic environment, being too heavily leveraged on debts would not be favorable for IQVIA as the U.S. Fed has been hiking interest rates continuously in an attempt to reduce inflation. The high interest rates would lead to a higher interest expense for IQVIA, which will hurt their bottom-line earnings.
Conclusion
IQVIA is fairly valued at the moment, using several methodologies looking at the past few years. Although 2022 quarterly reports have shown strong growth, especially in its technology and research and development segments, IQVIA sees some headwinds for investors due to its debt position. It's also clear that IQVIA is making investments in its digital platforms as well as its decentralized trial program, both in terms of personnel as well as digital innovations. However, these also come with their own risks. Coupled with strong digital safeguards, I believe IQVIA shows promise in the medium term if it can keep its debt positions under control.
For further details see:
IQVIA Holdings Sees Digital Opportunities, But Debt Drags Growth