Pharma finance
QuintilesIMS reportedly exploring sale of contract sales business
Reuters is reporting that QuintilesIMS may be exploring a sale of its contract sales business (reported as Integrated Engagement Solutions on QuintilesIMS SEC filings), which has approximately $800m and $80m of annual revenue and EBIT (Earnings Before Interest and Taxes). Also included in the report is that QuintilesIMS has engaged Goldman Sachs to manage the sales process.
Speculation is purchase price could be as much as $1bn dollars, which would be roughly a 10 times multiple of EBITDA (Earning Before Interest Depreciation and Amortization). The Reuters report states that annual EBITDA is roughly $100m after adding back amortization and depreciation.
Why divest the contract sales business?
The first reason would be lack of growth. As you can see from the chart below, annual revenue has declined 10.5% from $885m in 2014 to a Q1 ’17 annualized run rate of $792m, per Quintiles SEC filings.
Quintiles has done a nice job protecting profitability during this revenue decline, as EBIT as a percentage of revenue has increased from 8.8% to 9.6% – however, the dollar gains are immaterial to QuintilesIMS on a holistic basis.
A second reason would be the drag on profitability the contract sales business has on the company. The chart below shows the EBIT for each of QuintilesIMS reported business lines.
Both Commercial and R&D Solutions have EBIT% greater than 26% in 2017 while the Integrated Engagement Solutions division EBIT is less than 10% (note that 2016 Commercial Solutions is a bit understated due to the timing of the Quintiles/IMS Health merger).
Divesting the contract sales organization will materially improve overall profitability (assuming QuntilesIMS proportionately reduce their corporate overhead). The chart below shows that overall EBIT will increase to 26.4% from 24.6% after divesting the contract sales group (based on Q1 2017 results).
Lastly, the contract sales organization isn’t a core strategic business for QuintilesIMS after the merger. Quintiles and IMS have been able to generate $400m of additional revenue (per the Reuters report) leveraging the combined capabilities of the two organizations.
However, it doesn’t appear that the contract sales organization has benefitted from the merger. Presumably, it makes more sense for management to focus more time and resources on the growing parts of the business.
Wrapping up
I don’t believe this announcement comes as a surprise, especially once you review the historical financial results. As always, it will be interesting to see who acquires the QuintilesIMS contract sales organization and the valuation paid.
As I mentioned earlier, the Reuters report states a 10 times EBITDA valuation, which would be less than the 12.5 and 12.6 multiple, reported for the recent inVentiv and Parexel transactions. Since both Parexel and inVentiv had EBITDA% around 17% vs about 12.5% for the contract sales group, the lower valuation range makes sense.
Jason Monteleone is a guest contributor to Outsourcing-Pharma.com’s Pharma Finance column.Jason is the president of Pivotal Financial Consulting, LLC, which provides divestiture assistance, acquisition advisory services, and strategic planning to the pharmaceutical outsourcing industry. He was previously CFO at Theorem Clinical Research and Omnicare Clinical Research and senior finance director at MDS Pharma Services.Contact Jason at wzbagryrbar@cigsvanapr.pbz and follow him on Twitter @JMPivotal. 
