IMS Health Holdings Inc. may be one of the most successful investments in recent Canadian history.
It's not where IMS, a health-care information and technology company, is actually listed, since it trades on the New York Stock Exchange, not the TSX. And it's headquartered in Danbury, Conn., rather than in any burg north of the border.
Instead, what makes IMS worthy of consideration is the investment the Canada Pension Plan Investment Board made in it just over five years ago. In 2010, as the markets were shaking off the cobwebs of the financial crisis, CPPIB joined in a group of private-equity buyers to purchase the public IMS.
Four years later, in April, 2014, the owners took it public again. Since then, its shares are up roughly 75 per cent, making both CPPIB and IMS's early public investors big winners. The question now, with IMS hitting a 52-week high this week, is whether there are more gains to come.
First, though, a quick rundown of CPPIB's good fortune: The ownership group offered in late 2009 to take IMS private for $5.2-billion (U.S.), a 50-per-cent premium to where the stock had traded before news of a potential sale leaked out. The deal, which closed in early 2010, was a leveraged buyout, meaning the owners used debt in order to pay just $2.8-billion in cash for the company's stock.
Based on disclosures in IMS's U.S. securities filings, I figure CPPIB paid just over $725-million for 73 million shares in IMS. The company paid its private-equity owners nearly $7 in dividends per share while private, providing CPPIB with just under $510-million. The pension plan sold shares worth $120-million in the IMS initial public offering of April, 2014, and another $420-million in a stock offering last month. CPPIB's remaining stake is worth about $1.6-billion at Friday's close of $31.14. All told, that's about $2.7-billion from that $725-million investment five years ago. Nice.
Such gains are likely not available to you. But what might investors see from a purchase of IMS at today's levels? Analysts are positive on the shares, with 11 of 17 who cover the company having "buy" ratings, according to Bloomberg. But investors are just as positive – they've bid the stock up to levels just under the analysts' average target price.
It suggests that IMS's gains might be muted in the near term, despite the company's compelling story at the heart of two big trends: health care and data analysis. Analyst Matthew Gilmor of Robert W. Baird & Co. calls IMS, founded in 1954, "the original 'big data' health-care company." Its "Intelligence" division "is the industry gold standard for prescription drug sales and market information."
IMS says it operates in more than 100 countries and "deliver[s] information and insights" on about 90 per cent of the world's pharmaceuticals (as measured by sales revenue). The average length of its relationships with its top 25 clients is over 25 years, the company says, and its retention rate for its top 1,000 clients from 2013 to 2014 was 99 per cent.
Almost 70 per cent of the company's revenue is recurring, because it comes from subscriptions rather than one-off data projects.
Those are profoundly positive numbers. But analyst Shlomo Rosenbaum of Stifel Nicolaus & Co. notes the company's "Information" business is "not very growthy" compared with its forays into software, consulting and adapting the data to customers' computer systems, offerings all found in IMS's "Technology" segment.
IMS "wants to go upmarket on technology," says Mr. Rosenbaum, who has a "buy" rating and $32 target price on the shares. "They've been the dominant player on the information side," he says, and now IMS wants to go to the larger pharmaceutical firms "and have [them] think of IMS as more of a technology-services provider than an information-services provider."
"That is not so easy to do, you're competing sometimes with Accenture and Cognizant [Technology Services Corp.]," Mr. Rosenbaum continues. "But they've made some acquisitions, invested in capabilities, and the CEO [Ari Bousbib] seems to be a very good operator."
He will need to be, as the company's primary challenge in the near term is integrating Cegedim, a company with a robust doctor's database and some appealing customer-relationship-management (CRM) software it acquired in April. Goldman Sachs analyst Andre Benjamin cites the uncertainties of the Cegedim deal as part of his "neutral" rating and $28 target price.
"IMS will be growing its work force by almost 50 per cent, adding about 5,000 employees in 70 countries, which require integrating systems/platforms and working through contracts for those that will not be staying with IMS," Mr. Benjamin says. (Mr. Gilmor of Baird, quoted earlier, also is neutral on the shares with a $30 target price, as he's waiting to see results after the Cegedim closing.)
We can add one more caveat for the cautious investor: Debt. The "leveraged" part of the leveraged buyout means there's still a fair amount of debt on IMS's balance sheet, including borrowings taken on to pay its private ownership a dividend in 2013. Goldman's Mr. Benjamin, who covers information-services companies who specialize in a wide range of data, not just health care, says he estimates the company's net debt, or debt adjusted for cash on hand, will be four times its EBITDA, or earnings before interest, taxes, depreciation and amortization, at the end of the second quarter. That compares with a median figure of 0.6 times EBITDA for his coverage group and 3.8 times for Nielsen NV, the media and marketing information company.
Stifel's Mr. Rosenbaum says, however, "this is a business that can operate at very high debt levels." Barclays Bank analyst Manav Patnaik, whose rating is "overweight" with a $34 target price, says management said they "felt fine" when net debt was 6.1 times EBITDA in 2013. Mr. Patnaik believes management guidance on the cost savings from its Cegedim deal is conservative, which, if true, points to potential earnings surprises.
"We feel that the combination of the No. 1 data provider [IMS] with the No. 2 pharma CRM [Cegedim] could be fruitful," he says.
It may not bear as much fruit as past IMS shareholders have harvested – but there still seems to be some growth in IMS's future.
David Milstead