Is IMS Health Holdings Inc (NYSE:IMS)’s Merger With Quintiles Good For You?
IMS Health Holdings Inc (NYSE:IMS) outpaced consensus expectations in 1Q2016. The company is now in the process of combining with Quintiles Transnational Holdings Inc (NYSE:Q) in what has been termed as a merger of equals, thus creating a combined entity with enterprise value of more than $23 billion. But the proposed merger that has already received the backing of the boards of both companies has elicited mixed market reactions.
So, where do the facts lie? This IMS analysis article takes a look at the proposed merger and also the risks and opportunities for IMS. But first is a quick recap of the 1Q2016 earnings.
IMS Health Holdings Inc (NYSE:IMS) posted 1Q2016 adjusted EPS of $0.42 compared with the consensus estimate of $0.38. Revenue of $774 million outpaced the consensus estimate of $749.5 million.
Management is hoping for the current quarter (2Q2016) revenue to grow 7.5% to 8.5% over the corresponding quarter last year. Analysts on the average are looking for revenue of $780.3 million for the current quarter.
The chart below shows IMS’s quarterly revenues for the last five quarters:
What’s exciting about IMS?
The merge with Quintiles
IMS Health Holdings Inc (NYSE:IMS) and Quintiles agreed to merge in an-all stock transaction valued at $9 billion and the resulting entity will maintain dual corporate headquarters in North Carolina and Connecticut.
As part of the merger deal, shareholders of IMS will receive 0.384 shares of Quintiles for every share of IMS they own. That will give IMS shareholders a majority of 51.4% ownership of the combined company while Quintiles shareholders will own the remaining 48.6%. Boards on both sides have approved the deal, but shareholders and regulators will have to weigh in on the proposed merger before it closes.
IMS and Quintiles are anticipating closing the deal in 2H2016 if all goes according to plan. The pending merger seems to stem from the success of the global collaboration that the companies announced late last year.
What’s the benefit in the deal?
IMS Health Holdings Inc (NYSE:IMS) and Quintiles hope to save $100 million in costs annually by the end of the third year after they combine. Merger-themed boost to the bottom-line is expected to be felt starting in 2017. But what is of note is that the companies didn’t provide specifics about what amount of bottom-line boost they expect courtesy of the deal.
The combined revenues of IMS and Quintiles totaled $7.2 billion in 2015. But after they combine, there is a strong chance of revenue improving beyond the 2015 levels because the companies hope to leverage their expanded scale to win more market share and grow topline faster. Combining their unique commercial capabilities should also add to topline growth.
What question is the merger answering?
By pursuing a merger, IMS Health Holdings Inc (NYSE:IMS) and Quintiles are hoping to benefit from the trend in which drug companies are trying to lower R&D costs at a time of increased risks in drug development. The combined company is expected to become richer source of information for the pharma industry, thus attracting more customers and locking in those who are already inside.
IMS Health Holdings Inc (NYSE:IMS)’s CEO, Ari Bousbib, will become the CEO and chairman of the combined company while Quintile’s CEO will become the vice chairman of the company. The board of the combined entity will consist of 12 directly with IMS and Quintile appointing six directors each to the board.
Pullback in merger stocks
What can clearly be seen is that investors on both sides are skeptical of the deal. Both shares of IMS and Quintile pulled back following the announcement of the merger deal. While the merge appeared to be the central issue in the stock movements, there was something more. For example, Quintile’s mixed 1Q2016 may have played a role in the downward movement of its stock. The company posted 1Q2016 adjusted EPS of $0.89, easily beating the consensus estimate of $0.86. But revenue of $1.11 billion fell slightly short of the consensus expectation of $1.12 billion.
On the merger side, the pullback may have been triggered by investor concern that the $100 million cost-saving is too little. Perhaps the issue of the deal only being accretive to earnings in 2017 also made some shareholders skeptical.
What’s worrying about IMS?
IMS Health Holdings Inc (NYSE:IMS) tries to combine internal efforts with acquisition of strategic acquisitions to drive topline and bottom-line improvements. However, while most acquisitions have been integrated successfully, all acquisitions do not end in success and that is a risk that IMS faces as it merges with Quintiles. Particularly in merger of equals, integration challenges seemed to be heightened.
Patent expiration risk
Patent expiration risks are particularly more pronounced in the U.S. and it is characterized by loss of subscription for IMS’s information services. The adverse impact on information services business comes from drug companies curtailing their marketing spending on drugs that have lost marketing exclusivity and become open to generic competition. When that happens, demand for information services that IMS provides to drug companies cools, thus limiting growth in the segment. The year 2012 is a classical case. There was a wave of patent expiration during the year and IMS took a serious hit on its information services arm and such problems are never far from surface for the company.
Drug industry consolidation
Merger and acquisitions in the pharmaceutical industry are never in the best interest of IMS Health Holdings Inc (NYSE:IMS) because they somewhat lead to loss of business. When IMS’s clients combine, they tend to cut in areas where there are overlaps and one of those areas that typically see cuts when pharmas consolidate is subscription for information services. As such, aggressive consolidation in the drug industry can result in a serious headwind for IMS.
IMS itself acknowledges the existence of the merge risks, but claims that in the worst case scenario, drug industry consolidation can only take out 0.5% of its growth.
Information security risk
Because IMS handles large amount of sensitive information, a data security breach could cause serious dent on client confidence in the company’s services, thus leading to loss of business. Additionally, it is usually costly to restore a damaged information system in terms of the direct expenses involved and fines that such loss of data could attract from federal and state regulators.
As much as there are challenges that IMS Health Holdings Inc (NYSE:IMS) has to cope with, its planned merger with Quintile is a major positive, mainly in term of the direction the industry is moving.
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