IQV Update: Strong secular drivers and near term upside to numbers

We have written on IQV a couple of times before: in 2017 we wrote a full report, and an update in 2018, both times our conclusion was that it is a core holding. If you would like a deeper understanding of what IQV does, we would suggest you look at the 2017 report.

• We continue to see IQV ($208) as a core holding, with ~5% upside to numbers, strong secular drivers and potential for some multiple expansion and low downside.

• Estimate 20% upside to shares.

Link to full Update

Our previous conclusions: widening moat, defensive business, potential for acceleration in the business, remains true in our opinion.

We believe the setting for growth for next few years is stronger than before.

• Biopharma R&D budget growth is likely to remain robust and see increased outsourcing.

• CRO consolidation due to increased tech intensity gives increased pricing power / scale benefits.

• IQV continues to increase market share and is best placed among peers.

• Pent-up demand is returning.

We expect the COVID related benefit to remain strong for a few years and drive earnings above guidance that expects a drop in Covid revenues to zero during Q2 2021.

• Not enough is known about the consequences and nature of COVID, hence we expect Real World Evidence gathering will continue on an ongoing basis.

• Increasing threats of variants means ongoing refinements needed in vaccines for a few years.

• There are new vaccines/treatments that are being developed for variants of the virus;

The stock is good value, given that we expect the recent acceleration in underlying growth to sustain.

• We expect IQV will easily beat its guidance for 2021 and estimate consensus estimates to rise by ~5% as COVID work comes in for H2 and 2022.

• The acceleration in the underlying CRO business, evidenced by backlog will show up in revenues in 2022.

• Backlog is still growing strongly with book/bill ~1.4x, giving us confidence on sustainability of increased underlying growth rates.

Valuation is not excessive

• IQV is trading at ~15-16x 2022 EV/EBITDA in our upside scenario, close to its average over the last few years, yet the EPS and EBITDA growth outlook is better than before.

• We believe that the re-rating of the broader market as well as better growth rates and prospects demands a better multiple for IQV.

• Using a DCF we see a 20% upside at 8% cost of capital.