Syneos Health, Inc. Investment Research Presentation NasdaqGS: SYNH Month Sector: Day, Healthcare 20XX Senior Analyst: Jose Grullon Junior Analysts: Garbis Chekerdjian, Ignacio Fimbres Spring 2018 1
Valuation Summary Recommendation Summary Company (Ticker) SYNH Current Trading Price (04-12-2018) $ 37.60 Recommendation BUY Target Price $ 57.46 Upside Potential 52.80% Recommendation BUY 2
Agenda INDUSTRY DEFINITION & BREAKDOWN COMPANY OVERVIEW REIT s INDUSTRY TREND ANALYSIS COMPANY TREND ANALYSIS RISK ANALYSIS FINANCIAL VALUATIONS SUMMARY & RECOMMENDATION 3
Industry Definition: CRO Market Contract Research Organizations (CROs) Definition: firms that provide outsourced drug development services, regulatory & scientific support, and physical & human capital to help provide fully outsourced research solutions. End Markets Pharma & biotech industries, as well as educational & government research institutions. Charles River Laboratories International, Inc. NYSE: CRL Mkt. Cap: $5.09 billion ICON, plc. NasdaqGS: ICLR Mkt. Cap: $6.48 billion PRA Health Sciences, Inc. NasdaqGS: PRAH Mkt. Cap: $5.55 billion Syneos Health, Inc. NasdaqGS: SYNH Mkt. Cap: $3.95 billion IQVIA Holdings, Inc. NYSE: IQV Mkt. Cap: $20.35 billion Sources Capital IQ 4
Industry Breakdown: CRO Market Drivers Increased Drug Development Spending & Pricing Pressures will drive demand for outsourced R&D and clinical trial services $70 $60 $50 $40 CRO Market Revenue Forecast (billions) User-Friendly & Advanced Bioinformatics Tools will drive demand for CRO services as more biometric platforms and customized data systems are needed Strong M&A Activity will continue to drive value as industry consolidates to provide more services to drug manufacturing companies Pharma-Emerging Economies will grow at a 7.5% CAGR, driving demand for clinical trial activity in Asia Strong Demand for Early Stage & Late Stage Clinical Trials will drive market penetration from 30.5% to 46.5% by 2021 $30 $20 $10 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E CRO Product Segmentation 4.9% 11.6% 8.0% 8.0% 10.6% 9.3% 13.6% 0.7% 2.2% 9.9% 21.2% Preclinical Phase I Phase II Phase III Phase IV Bioanalytics HEOR Pharmacovigilance Sources Capital IQ, Frost & Sullivan 5
Industry Breakdown: Revenue Generation Model Input Biotech / Pharma CRO Raw Materials Manufacturing Clinical Trial Testing Patient Organic/Inorganic Chemical Manufacturing Master Cell Line Production Preclinical Trial Testing Phase IV Laboratory Essentials Medical Testing Equipment Gene & Protein Duplication Protein Synthesis Biologic Preparation Phase I Phase II Phase III Increased outsourcing for clinical trial services, along with increased R&D expenditures, will drive future value in the industry Sources IBISWorld, PRAH Form 10-K, Amgen 6
Company Overview: Syneos Health, Inc. Syneos Health is the only fully integrated biopharmaceutical solutions organization. Founded in 1985 as INC Research, Inc. Merged with InVentiv Health, Inc. in August 1, 2017 Rebranded as Syneos Health, Inc. in January 4, 2018 Top 3rd CRO, #1 CCO Operates through its Clinical Solutions and Commercial Solutions segments to deliver endto-end services to its customers $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 Syneos Health Service Revenue (thousands) 2012 2013 2014 2015 2016 2017 Market Share Analysis Oncology 12% Syneos Health Central Nervous System Cardiovascular 37% 3% 4% 5% 4% WuXi AppTec Charles River Laboratories ICON PPD PRA Health Sciences Infectious Diseases 5% 6% Parexel International Covance QuintilesIMS 17% 7% Others Sources Frost & Sullivan, Company Data 7
Company Overview: Business & Financial Profile YoY Growth of 2.6% due strong bookings partially offset by higher cancellations Commercial Solutions Segment declined 16.4% due to lower FDA approvals in 2016, higher cancellations, and lower YoY new business awards Better segment integration & cross-selling opportunities will drive future growth Increasing drug approvals and lower DFA regulation will drive biopharmaceutical funding 900 800 700 600 500 400 300 200 100 0 Syneos Health Quarterly Adjusted Revenue (thousands) Q1 '16 Q2 '16 Q3 '16 Q4 '16 Q1 '17 Q2 '17 Q3 '17 Q4 '17 Clinical Solutions Commercial Solutions Customer Concentration Ending Backlog by Therapeutic Area 12% Portfolio and customer diversity, a healthy drug pipeline, and integrated solutions, give Syneos Health competitive advantage over its peers 59% 28% 13% 11% 3% 4% 16% 23% 31% Oncology CNS General Medicine CV & Met Respiratory FSP Other Top 5 6-10 Remainder Sources Company Data 8
Customer Company Overview: Revenue Generation Model CRO Product Development CCO Commercialization Consulting Phase I Full Service Phases II-IV FSP Real World Evidence Data Analysis Communications Selling Solutions Medical Adherence Better integration between both segments will enable more crossselling opportunities to customers, and will decrease operating costs in the long run Sources Company Data 9
Industry Trend: Backlog Conversion Rates have Slowed Down Increased Complexity of Clinical Trials Rising popularity of rare diseases Slow growth in R&D spending Patient recruitment challenges Syneos Health Remains Healthy Therapeutic diversity encourages stable revenue stream and backlog conversion in the future Startup time 20% faster than average Backlog conversion rate of 14.5% vs. industry average of 11.2% CRO Industry Revenue by Therapeutic Area 5% 13% Oncology Infectious Diseases 29% CNS Disorders 11% 13% 14% CVD Metabolic Disorders Respiratory & Allergy 15% Others CRO Industry Backlog Conversion Rates KEY TAKEAWAY Increasing complexity of clinical trials has reduced backlog conversion rates across the industry, yet Syneos Health is able to maintain above-average performance Sources Company Data, Credit Suisse, Frost & Sullivan 10
Company Trend: Expected Realized Synergies Drive Growth Management estimates annual cost synergies to be $125 M by 2020 Deal Value: $4.6 billion Merger Summary Current Realized Synergies: $13.2 million Expected 2018 Realized Synergies: $65 - $70 million Share Allocation: 53% INC Research / 47% InVentiv Health Expand Integrated Solutions Platform to enable cross-selling opportunities Improve commercial expertise and integrate these services across the firm to customers of all sizes Continued investments in big data KEY TAKEAWAY Rapid realization of synergies will drive costs down and fully integrate service platform to deliver more value to the firm s customers via cross-selling opportunities Sources Company Data, Reuters 11
Risk Analysis Ability to Meet Debt Obligations Total debt of $2.98 billion Debt / Equity ratio of 98.7% vs. peer average of 94.8% Debt / EBITDA ratio of 5.13x vs. peer average of 2.92x REIT s Globalization of Clinical Trials Larger currency fluctuation risks and transaction risks in the future Greater operating costs as a result of different regulations across the globe Project Cancellations Recent biopharmaceutical M&A activity may impair Syneos Health s ability to gain new customers and new business awards May result in slower revenue growth and lower backlog conversion rates Growing market penetration and peer competition, along with rising debt obligations, may threaten Syneos Health s ability to remain competitive Sources Company Data, Frost & Sullivan, MarketLine, Credit Suisse, FactSet 12
Financial Valuations: Comparable Companies Analysis Comparable Company Analysis LTM data (04-12-2018) Company Ticker EV Market Cap Revenue EBITDA Net Income P / E EV / EBITDA EV / Revenue Syneos, Health, Inc. SYNH $ 6,608.6 $ 3,946.8 $ 3,102.0 18.7% 7.70% 16.5x 11.4x 2.1x PRA Health Sciences, Inc. PRAH $ 6,349.8 $ 5,191.3 $ 1,948.5 18.6% 11.23% 23.7x 17.5x 3.3x Medpace Holdings, Inc. MEDP $ 1,484.6 $ 1,262.9 $ 386.5 28.0% 15.65% 20.9x 13.7x 3.8x Charles River Laboratories International, Inc. CRL $ 5,879.7 $ 4,905.5 $ 1,793.6 21.6% 6.89% 39.7x 15.2x 3.3x High 39.7x 17.5x 3.8x Mean 28.1x 15.5x 3.5x Median 23.7x 15.2x 3.3x Low 20.9x 13.7x 3.3x P / E LTM EPS $ 2.28 Implied Price Target $ 53.99 Upside (Downside) % 44% EV / EBITDA LTM EBITDA $580.07 Implied Price Target $58.51 Upside (Downside) % 56% EV / Revenue LTM Revenue $3,102.0 Implied Price Target $70.51 Upside (Downside) % 90% 13
Financial Valuations: Discounted Cash Flow Model Forecasted 2018 2019 2020 2021 2022 EBIT $ 558.72 $ 604.17 $ 661.29 $ 696.97 $ 748.66 - Taxes (178.79) (193.33) (211.61) (223.03) (239.57) $ 379.93 $ 410.84 $ 449.68 $ 473.94 $ 509.09 REIT s + D&A 85.20 89.93 94.60 98.23 101.56 - CAPEX (107.06) (101.15) (105.71) (106.84) (109.47) - Δ in NWC (42.81) (45.47) (58.63) (35.46) (55.34) Unlevered FCF $ 315.25 $ 354.14 $ 379.94 $ 429.87 $ 445.84 Net Present Value $ 1,521.57 Perpetuity Growth Method Growth Rate 2.50% Undiscounted TEV $ 8,492.07 Discounted TEV $ 5,811.42 DCF Value $ 7,333.00 Equity Value $ 4,671.24 Share Price $ 44.50 Implied Exit Multiple 9.99x Exit Multiple Method EBITDA Multiple 13.9x Undiscounted TEV $ 11,818.12 Discounted TEV $ 8,087.55 DCF Value $ 9,609.12 Equity Value $ 6,947.37 Share Price $ 66.18 Implied Growth Rate 3.96% Key Assumptions Cost of Debt 3.53% Cost of Equity 11.17% WACC 7.88% Terminal Growth Rate 2.50% Exit Multiple 13.9x Tax Rate 32.00% 14
Summary & Recommendation Recommendation Summary Company (Ticker) SYNH Current Trading Price (04-12-2018) $ 37.60 Recommendation BUY BUY Target Price $ 57.46 Upside Potential 52.80% Valuation Summary Method Price Weight Discounted Cash Flow Perpetuity Growth Method $ 44.50 30% Exit Multiple Method $ 66.18 30% Comparable Company Analysis P/E $ 53.99 10% P/EBITDA $ 58.51 20% EV/Sales $ 71.52 10% Target Price $ 57.46 Rising demands for outsourced drug development services, along with rapid realization of merger synergies and platform integration, will increase Syneos Health s market share in the CRO industry, placing the firm above its peers as a profitable long-term investment. 15
Appendix 16
Income Statement Historical Forecasted 2016 2017 2018 2019 2020 2021 2022 Revenue 3,241.3 3,102.0 3,478.0 3,671.0 3,862.0 4,010.0 4,146.0 % growth -4.3% 12.1% 5.5% 5.2% 3.8% 3.4% COGS (excl. D&A) (2,194.3) (2,101.0) (2,347.2) (2,475.1) (2,601.0) (2,698.7) (2,788.7) % of Revenue 67.70% 67.73% 67.49% 67.42% 67.35% 67.30% 67.26% Gross Profit 1,047.0 1,001.1 1,130.8 1,195.9 1,261.0 1,311.3 1,357.3 % Margin 32.3% 32.3% 32.5% 32.6% 32.7% 32.7% 32.7% SG&A (446.8) (419.5) (486.9) (501.8) (505.1) (516.1) (507.1) % of Revenue 13.78% 13.52% 14.00% 13.67% 13.08% 12.87% 12.23% EBITDA 600.2 581.6 643.9 694.1 755.9 795.2 850.2 % Margin 18.5% 18.7% 18.5% 18.9% 19.6% 19.8% 20.5% Total Depreciation (78.4) (76.0) (85.2) (89.9) (94.6) (98.2) (101.6) Total Operating Expenses (525.2) (495.5) (572.1) (591.8) (599.8) (614.3) (608.6) Operating Income (EBIT) 521.8 505.6 558.7 604.2 661.3 697.0 748.7 % Margin 16.1% 16.3% 16.1% 16.5% 17.1% 17.4% 18.1% Interest Expense (243.8) (144.7) (123.8) (123.8) (123.8) (123.8) (123.8) Interest Income 0.2 1.2 0.7 0.7 0.7 0.7 0.7 Net Interest Inc. (Exp) (243.5) (143.5) (123.1) (123.1) (123.1) (123.1) (123.1) EBT Excl. Unusual Items 278.3 362.1 435.6 481.1 538.2 573.9 625.6 % Margin 8.6% 11.7% 12.5% 13.1% 13.9% 14.3% 15.1% Income Tax Expense (96.9) (122.9) (139.4) (153.9) (172.2) (183.6) (200.2) Net Income to Company 181.3 239.2 296.2 327.1 366.0 390.2 425.4 Minority Int. in Earnings - - - - - - - Net Income 181.3 239.2 296.2 327.1 366.0 390.2 425.4 % Margin 5.6% 7.7% 8.5% 8.9% 9.5% 9.7% 10.3% EPS $ 1.72 $ 2.28 $ 2.78 $ 3.07 $ 3.44 $ 3.67 $ 4.00 17
Income Statement Historical Forecasted 2016 2017 2018 2019 2020 2021 2022 Cash And Equivalents 103.1 322.0 491.0 698.9 932.7 1,216.3 1,578.4 Accounts Receivable 385.3 1,016.0 1,139.1 1,202.3 1,264.9 1,313.4 1,357.9 Total Receivables 385.3 1,016.0 1,139.1 1,202.3 1,264.9 1,313.4 1,357.9 Inventory - - - - - - - Prepaid Exp. 34.2 84.2 94.1 99.2 104.3 108.2 111.8 Total Current Assets 522.6 1,422.2 1,724.2 2,000.5 2,301.8 2,637.9 3,048.1 Gross Property, Plant & Equipment 122.0 277.8 384.8 486.0 591.7 698.5 808.0 Accumulated Depreciation (63.6) (97.3) (182.5) (272.5) (367.1) (465.3) (566.9) Net Property, Plant & Equipment 58.3 180.4 202.3 213.5 224.6 233.2 241.1 Goodwill 552.5 4,292.6 4,292.6 4,292.6 4,292.6 4,292.6 4,292.6 Other Intangibles 114.5 1,286.1 1,286.1 1,286.1 1,286.1 1,286.1 1,286.1 Deferred Tax Assets, Current & LT 14.7 20.2 20.2 20.2 20.2 20.2 20.2 Other Long-Term Assets 25.9 84.5 84.5 84.5 84.5 84.5 84.5 Total Assets 1,288.5 7,285.9 7,609.8 7,897.3 8,209.7 8,554.4 8,972.5 Accounts Payable 23.7 58.6 65.4 69.0 72.5 75.2 77.7 Accrued Exp. 153.6 500.3 580.7 598.5 602.5 615.5 604.7 ST Debt 11.9 25.0 27.9 29.5 30.9 32.1 33.2 Total Current Liabilities 189.1 583.9 674.1 696.9 705.9 722.8 715.7 Long Term Debt 485.8 2,945.9 2,945.9 2,945.9 2,945.9 2,945.9 2,945.9 Capital Leases & Current Portion - 36.8 36.8 36.8 36.8 36.8 36.8 Unearned Revenue, Non-Current 277.6 559.3 559.3 559.3 559.3 559.3 559.3 Def. Tax Liability, Non-Curr. 8.3 37.8 37.8 37.8 37.8 37.8 37.8 Other Non-Current Liabilities 26.2 99.6 99.6 99.6 99.6 99.6 99.6 Total Liabilities 987.0 4,263.3 4,353.5 4,376.4 4,385.3 4,402.3 4,395.1 Common Stock 0.5 1.0 1.0 1.0 1.0 1.0 1.0 Additional Paid In Capital 573.2 3,414.4 3,414.4 3,414.4 3,414.4 3,414.4 3,414.4 Retained Earnings (230.0) (370.5) (136.8) 127.9 431.3 759.1 1,184.4 Treasury Stock - - - - - - - Comprehensive Inc. and Other (42.3) (22.4) (22.4) (22.4) (22.4) (22.4) (22.4) Total Common Equity 301.5 3,022.6 3,256.3 3,520.9 3,824.4 4,152.1 4,577.5 Minority Interest - - - - - - - Total Equity 301.5 3,022.6 3,256.3 3,520.9 3,824.4 4,152.1 4,577.5 Total Liabilities and Equity 1,288.5 7,285.9 7,609.8 7,897.3 8,209.7 8,554.4 8,972.5 18
Statement of Cash Flows Historical Forecasted 2016 2017 2018 2019 2020 2021 2022 Net Income 181.3 239.2 296.2 327.1 366.0 390.2 425.4 Add: Depreciation & Amortization 78.4 76.0 85.2 89.9 94.6 98.2 101.6 Less: Change in Net Working Capital - (285.9) (42.8) (45.5) (58.6) (35.5) (55.3) Less: Capital Expenditures - - (107.1) (101.2) (105.7) (106.8) (109.5) Operating Cash Flow 259.7 29.3 231.5 270.4 296.2 346.2 362.1 Initial Cash Balance - 38.6 322.0 491.0 698.9 932.7 1,216.3 Cash Available for Investors 259.7 67.8 553.5 761.4 995.2 1,278.8 1,578.4 Debt Additions (Repayments) (0.9) 1,780.5 - - - - - Equity Additions (Share Repurchase) (64.5) - (62.5) (62.5) (62.5) (62.5) - Historical Cash Adjustment (155.8) (1,526.3) - - - - - Ending Cash Balance 38.6 322.0 491.0 698.9 932.7 1,216.3 1,578.4 19
Terminal EBITDA Multiple Terminal Growth Rate Sensitivity Analysis DCF - Perpetuity Growth Sensitivity WACC 6% 7% 7% 8% 8% 9% 9% 10% 3.5% $ 101.12 $ 82.35 $ 68.47 $ 57.80 $ 49.36 $ 42.52 $36.88 $32.14 3.0% $ 84.10 $ 69.95 $ 59.07 $ 50.47 $ 43.50 $ 37.75 $32.92 $28.83 2.5% $ 71.46 $ 60.38 $ 51.61 $ 44.50 $ 38.64 $ 33.72 $29.54 $25.96 2.0% $ 61.71 $ 52.77 $ 45.53 $ 39.55 $ 34.54 $ 30.28 $26.62 $23.45 1.5% $ 53.96 $ 46.57 $ 40.48 $ 35.37 $ 31.03 $ 27.30 $24.07 $21.25 1.0% $ 47.65 $ 41.43 $ 36.22 $ 31.80 $ 28.00 $ 24.71 $21.83 $19.29 DCF - EV/EBITDA Exit Multiple Sensitivity WACC 6% 7% 7% 8% 8% 9% 9% 10% 15.9 x $ 83.66 $ 81.47 $ 79.34 $ 77.27 $ 75.26 $ 73.30 $71.39 $69.54 14.9 x $ 77.72 $ 75.66 $ 73.67 $ 71.73 $ 69.84 $ 68.00 $66.22 $64.48 13.9 x $ 71.77 $ 69.86 $ 68.00 $ 66.18 $ 64.42 $ 62.71 $61.04 $59.42 12.9 x $ 65.83 $ 64.05 $ 62.32 $ 60.64 $ 59.01 $ 57.42 $55.87 $54.37 11.9 x $ 59.88 $ 58.24 $ 56.65 $ 55.10 $ 53.59 $ 52.13 $50.70 $49.31 10.9 x $ 53.94 $ 52.44 $ 50.98 $ 49.56 $ 48.18 $ 46.83 $45.53 $44.25 20