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Bull of the Day: Quintiles (Q)

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The biopharma rally of the past year is a wonder to behold. Driven by healthcare demographics, exciting new science, fantastic earnings growth, and big-cap M&A, the trends appear poised to continue strong for several more years.

And while the "science" of getting new drug therapies through the FDA gauntlet is full of landmines for investors, there are some essential "infrastructure" companies which don't have any FDA risk because they simply serve the scientists and get paid either way.

Quintiles Transnational Holdings (Q) is a 32-year old health sciences company that went public again last May. They are the largest pharmaceutical outsourcing company in the world, with annual revenues of $5 billion. The company is a leader in both outsourced drug development and commercialization services, operating in 100 countries.

Quintiles has helped develop or commercialize all of the top 50 best selling drugs. That means their clients include big pharma names like Johnson & Johnson (JNJ - Free Report) , Pfizer (PFE), and Merck (MRK) as well as biotech giants Amgen (AMGN - Free Report) , Gilead (GILD - Free Report) , and Biogen Idec (BIIB - Free Report) .

With thousands of health professionals, including over 800 MDs, complete data-based risk analytics, and local presence around the globe, the company's promise to these demanding customers is...

"Our unique combination of people, processes and technology will help you achieve more predictable outcomes every step of the way."

To provide professional information, sales, and R&D services to the pharmaceutical and healthcare industries, Quintiles has two primary business segments: Product Development (PD) and Integrated Healthcare Services (IHS). Here's how they help scientists and healthcare entrepreneurs navigate their way to market...

Project management
Clinical monitoring services
Strategic planning and design services
Consulting services & contract sales
Market entry/market exit
Integrated channel management
Patient engagement
Market access
Commercialization consulting
Brand and scientific communication
Medical education services
Outcome/observational services

Much of this complete solution set for healthcare and pharmaceutical companies is provided in multi-year contracts since drug R&D, information management, and marketing are such long campaigns in the commercial health sciences and require such constant and accurate interface with regulators.

Systematic Growth

While Quintiles doesn't have the explosive growth of a biotech company on the path to launching a blockbuster drug, the company has recorded double-digit revenue growth, on average, for the past decade.

On February 13, Q reported better-than-expected fourth-quarter results and gave 2014 guidance that pleased investors. Q4 results impressed with revenue above expectations, led by strength in Product Development, and also beating on the bottom line.

More importantly, the company issued above-consensus top-line guidance of $4.09-4.15B (7.4% - 9% growth) and adjusted 2014 EPS of $2.33-$2.46, with solid book-to-bill metrics across both Product Development and Integrated Healthcare Services. Analysts responded by boosting their EPS estimates for this year and next.

One of the stand-outs in the quarter was the strong new business growth for both segments at 1.24 times for PD and 1.46 times for IHS. Given the company’s size, analysts were impressed by its ability to consistently book more than $1 billion of new business and deepen its relationships with clients.

Analysts On Board

Before and after their quarterly report, Wall Street firms were out in force praising the company and raising EPS estimates that caused the stock's Zacks Rank to increase from the #2 Buy rating to a #1 Strong Buy on February 15. Here's a sampling of analyst moves...

Goldman Sachs: Upgraded to "Buy" on January 21, price target raised from $50 to $58.

Citi: Initiated coverage of Q with a "Buy" rating on February 18.

Baird: Reiterated "Outperform" rating on Feb 13, raised PT from $50 to $64.

JPM: Reiterate "Overweight" rating and increased their PT from $52 to $60.

William Blair: Reiterate "Outperform," note "attractive" valuation relative to peers.

Wells Fargo: Reiterate "Outperform" and raise valuation range to $56-60.

Institutional Support

In my screening for growth stocks, I look at SEC filings from misattribution investors to find out "who is buying what." After Q came through my initial fundamental and technical screens, I looked up the big holders to see who's been buying and selling.

The stand out owners are the private equity firms who still hold majority stakes since the IPO: Bain Capital and TPG Group. But the big fundamental buyer last quarter was Wellington Management who more than doubled their stake to 6,737,305 shares, or just under a 5% stake.

An Enormous Market

Baird analysts noted in their Feb 13 report, "Clients don't have to choose Q, but the tools and testing done are highly scripted in law, regulation and practice. Given average 10-15 year lifecycles for development, ever-expanding testing requirements, and the glacial pace of change, we think Q’s solution set will be viable for decades to come."

Considering the breadth of Q's global client base and combined product R&D and services offering, they estimate the total addressable market opportunity to be around $68B. And with the expanding breadth and furious pace of new science turning into potential pharmaceutical treatments, the new business opportunities for Quintiles should continue to grow within that pie of very little competition.

Disclosure: I own shares of Quintiles for Zacks Follow The Money Portfolio.

Kevin Cook is a Senior Stock Strategist for Zacks where he runs the Follow The Money portfolio.

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