Our thesis for the contract research organization industry remains that continued outsourcing from biotechnology and pharmaceutical companies will drive growth for the larger global CROs that help design and conduct clinical trials. After transferring coverage of the major late-stage CROs, we are maintaining our narrow moat and stable trend ratings for Syneos Health (SYNH), PRA Health Sciences (PRAH), and Icon (ICLR). We’ve downgraded market leader IQVIA’s (IQV) moat rating to narrow from wide after reconsidering the company’s long-term competitive positioning in the clinical research and data spaces. Of these four, Syneos is most attractively valued, but we note that it’s the only one with a high uncertainty rating as a result of its high debt load.
With IQVIA’s moat downgrade, we’ve lowered our fair value estimate to $114 per share from $118. While we believe that intangible assets and switching costs underpin a narrow economic moat for IQVIA, we no longer have confidence that the company will earn excess returns for at least 20 years. Returns on invested capital were significantly diminished following the 2016 merger of Quintiles and IMS Health, and we do not have high confidence that the company will maintain its monopolistic hold on aggregated patient data for more than a decade. CROs and software companies are increasingly engaging with patient data as it begins to play an increasing role in clinical research and commercialization, and we believe improving technology and interoperability could eventually lower barriers to accessing this data.
Anna Baran does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.