Last night IQV updated Q1 guidance and provided color on the disruption from COVID-19 and the company’s financial position.
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Given the highly uncertain outlook for earnings and cash flow this year as a result of COVID-19, we wanted to assess each company’s comfort level vs. financial covenants where applicable and benchmark liquidity vs. recent cash flows. In short, liquidity is 2-3x annual cash flow and the CROs average a ~45% EBITDA buffer vs. covenants.
Yesterday a trial date was set for the opioid multidistrict litigation (MDL) Track 2 bellwether case in West Virginia following a status conference. Recall that the Track 2 bellwether case consists of Huntington, WV and Cabell County’s cases against ABC, CAH, and MCK. The trial is scheduled to begin on 8/31. Both the plaintiffs and defendants will have 6 weeks to present their cases, and inclusive of breaks in the schedule the case would run through the week of 12/14. Plaintiffs wanted the trial to start almost immediately, the and defendants had argued that a trial before the summer of 2021 “would be rushed”.
On 2/20 PRAH reported earnings that were generally above expectations and issued 2020 guidance that was slightly below consensus revenue but slightly ahead on EPS. Guidance for Q1 EPS was much lower than expected and imbeds several headwinds, most of which should in theory reverse themselves for 2021. ASC 605 bookings remained weak in Q4, with net book-to-bill declining modestly from Q3 despite relatively low cancelations. PRAH expects strong revenue growth from its product registration (full service) business in 2020 to be moderated by a relatively flat topline in Strategic Solutions (FSP) as work is moved to lower-cost geographies and repriced to the new cost structure. Strategic Solutions is also a material drag on the overall net book-to-bill at present. While momentum appears to be building internally, our sense is that an inflection in booking trends is more likely to be a 2H20 story than a 1H20 story. With PRAH trading roughly at an S&P P/E 500 multiple (20% discount vs. PRAH’s 5-year average) and a 3.5x discount vs. CRO avg ex MEDP, we see the current valuation as limiting downside risk. Our estimates actually move slightly higher for 2021/2022 given 2020 headwinds that shouldn’t repeat. Our year-end 2020 target price decreases to $129 from $131, which reflects a lower market multiple vs. previous and slightly higher estimates. We reiterate our Outperform rating.
Last week (2/25/20) MEDP reported Q4 results that were above expectations and strong core net bookings despite an elevated cancelation rate. The company also introduced 2020 guidance that was ahead of expectations and downplayed risk to #s posed by coronavirus and election uncertainty. We are increasing our estimates materially and our target price increases to $115 from $97 to reflect our revised ests and higher multiple, which we justify by explicitly normalizing for MEDP’s treatment of stock comp expense for purposes of valuation. We reiterate our Outperform rating.
CROs have underperformed both the S&P 500 and XLV this week as fears of a coronavirus contagion have grown. We are quite obviously not epidemiologists and are making no predictions about when the coronavirus outbreak will be contained and impacted companies and industries can resume normal operations. Instead what we thought what would be helpful is to consolidate everything the CROs said on coronavirus during Q4 earnings calls and to summarize / compare guidance assumptions across the companies. We also note the time elapsed since these comments were made, with all but MEDP coming before the escalation of concern over the weekend.
Last week (2/20/20) SYNH reported Q4 results that were slightly above expectations, with strong bookings in both businesses. The company reaffirmed 2020 revenue, EBITDA, and EPS guidance introduced at the JPM Healthcare Conference last month. The company discussed improving momentum with large pharma post the company’s preferred provider relationship wins and expectations that SMID business would remain strong. Our EPS estimates increase by 1-2%, and we are increasing our year-end 2020 target price to $75 from $62 (details below) based on improving clinical bookings trend and expectations that bookings volatility will lessen going forward given increased contribution from preferred provider relationships. We maintain our Peer Perform rating.
Last week (2/19/20) ICLR reported mixed Q4 results. EPS was generally in line with estimates / guidance, but Q4 revenue and quarterly bookings were slightly below expectations. The company reaffirmed revenue and EPS guidance for 2020 previously issued at the JPM Healthcare Conference in January. At this point we see Q4 revenue and bookings performance as more likely to be reflective of lumpiness / noise than any meaningful inflection in trend. Our estimates remain largely unchanged. We maintain our $193 target price and reiterate our Outperform rating.
This afternoon (2/24/20) MEDP reported 4Q19 adjusted EPS of $0.85, above WR/Consensus estimate of $0.76. Total revenue and EBITDA margins were above our est, with lower SG&A more than offsetting lower gross margin. MEDP issued guidance for 2020 with revenue 1% above Consensus, adjusted EBITDA 4% above Consensus and EPS guidance in line w/ Consensus. Interestingly, adjusted EBITDA is increasing by $24.4M y/y vs. implied pretax income growth of $15.4M, a $9M spread without an obvious driver. Book-to-bill decelerated, partly driven by revenue upside in Q4. We expect stock performance will be driven by commentary on tomorrow’s call, with focus on guidance, Q4 results, and color on the business environment.
This afternoon PRAH reported 4Q19 adjusted EPS of $1.54, above Wolfe/Consensus EPS est of $1.46/$1.47. EBITDA was modestly above our est, with additional help from a lower tax rate. Bookings remained weak in Q4. PRAH introduced 2020 guidance that was generally in line with expectations, although Q1 guidance is meaningfully below – we assume coronavirus impact. No color on Q1 was provided in the release and will come from tomorrow’s call. Confidence in PRAH’s earnings cadence and ability to improve bookings growth will likely be key areas of focus on the call. At today’s closing price PRAH trades at 19.0x the 2020 EPS guidance, in line with the S&P 500 and a ~3.5x discount vs. ICLR/IQV.
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