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Cramer: This Fresh-Faced IPO Still a Buy

Monday, 13 May 2013 | 6:15 PM ET
What's Working in Pharma
Monday, 13 May 2013 | 6:15 PM ET
Of the new drugs approved from 2004 through 2011, Quintiles was involved with 85 percent of the central nervous system drugs, 76 percent of oncology drugs and 72 percent of cardiovascular drugs. Mad Money host Jim Cramer explains why the stock is a buy.

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Cramer doesn't ordinarily recommend fresh-faced IPOs immediately in the aftermarket. This one, however, is an exception.

"I'm talking about the IPO last Thursday of Quintiles Transnational Holdings, which now trades under the symbol Q," said the Mad Money host

Although the business is somewhat complex, Quintiles is essentially a firm to which Pharma companies outsource their clinical trial work.

"You should know that Quintiles is the largest player in this space. They've helped to develop or commercialize all of the top 50 best selling drugs out there," Cramer explained

And Quintiles is best known for the work on phase 2,3 and 4 clinical trials – "that's the sweet spot of where the big pharma players are spending their R&D budgets right now," Cramer added.

As always, Cramer has done his homework and he's discovered that by 2015 total R&D spending could total $25 billion across the industry. Largely he doesn't think Quintiles' shares reflect all of that potential.

Kick Images | Photodisc | Getty Images

"Quintiles is expected to generate $4.3 billion in service revenues this year, and it has a market capitalization of roughly $5.5 billion. If you look at Covance and Parexel, two other contract research plays, and you gave Quintiles the same price to sales multiple, then this would be a $6.5 billion company," Cramer said.

In other words, if Quintiles merely traded in-line with the competition, Cramer thinks it will be a $50 stock.

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However, Cramer doesn't think Quintiles deserves to trade in-line with competition, he thinks it deserves a premium valuation.

Quintiles is growing faster than its peers, which Cramer likes, and he said the company has a terrific track record. Also Cramer said founder and Chairman Dennis Gillings owns a substantial amount of stock. "There's only one reason for an insider to own that much stock, and it's because he believes it will go higher," Cramer said.

However, the biggest driver behind the stock may be its growth potential.

"During the last five years the company's book-to-bill ratio, which measures how much business it has versus how much business it can handle, was between 1.19 and 1.27. Anything above one means that Quintiles has been getting more orders than they have the capacity to fill," Cramer said.

And Cramer believes his 'growth' thesis was confirmed by commentary made by the CEO of Charles River Labs on Mad Money.

"Charles River told us that they were seeing weakness in their preclinical business," Cramer said. Because spending industry wide appears to be increasing, "if Charles River is losing, then somebody else has to be winning," he said. "That's why I think this fresh faced IPO is still a buy. Just remember, do your homework and limit orders only, please!"

Call Cramer: 1-800-743-CNBC

Questions for Cramer? madmoney@cnbc.com

Questions, comments, suggestions for the "Mad Money" website? madcap@cnbc.com

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