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Morningstar | IQVIA Reports Another Solid Quarter; We Like the Narrow-Moat Business, but Shares Remain Overvalued

We don't anticipate a material change to our $114 fair value estimate after narrow-moat IQVIA reported its fourth-quarter earnings. Revenue and earnings came in slightly above our and analyst expectations, with fourth-quarter revenue of nearly $2.7 billion representing 8% year-over-year growth in constant currency. Top-line growth was driven by solid results in technology and analytics (up nearly 11% in constant currency, slightly above our expectations) and research and development (up over 8% in constant currency, in line with our expectations), while the contract sales segment continued to decline, as expected. Management guidance for 2019 was slightly lower than we expected on the top line, but we are still comfortable with our long-term forecast of mid- to high-single-digit revenue growth.

The technology and analytics solution posted over $1.1 billion in revenue in the fourth quarter, driven by demand for its constantly changing portfolio of commercial offerings, including the OCE platform for life sciences client relationship management and marketing, as well as double-digit growth in real-world evidence offerings. Management noted that the company will be working on a number of single-arm trials, which are a hybrid of traditional clinical trials that use real-world data for a comparator arm. IQVIA's ability to leverage its unmatched data assets in drug development is one pillar supporting the company's narrow moat, and we expect IQVIA to maintain its leading position in the emerging space of real-world evidence.

In research and development solutions, which contributed over $1.3 billion in fourth-quarter revenue, we were pleased to see strong bookings growth of about 29% from last year, bringing total backlog to over $17 billion (including zero-margin reimbursed expenses). Further, the growth rate of these bookings has accelerated throughout the year, which we attribute to both a robust operating environment of strong biotech funding and continued biopharma drug innovation, as well as the company's sales efforts after the merger. Management noted that RFP volume in 2018 increased over 30%, and we expect this momentum to continue into 2019.

Interestingly, management said that they expect the contract sales segment to return to growth during fiscal 2019 and issued guidance for nearly flat full-year revenue for the segment. However, contract sales represent less than 10% of revenue, and we don't believe the business adds much to IQVIA's competitive advantage. While it's not entirely clear what's driving the expected improvement in the segment, we expect it's likely a combination of a favorable operating environment and better leverage of the company's established client relationships in other segments. We may adjust our forecast in the segment after more clarity from management, but it does not have a material impact on our valuation.

As we stated earlier, we're not planning to make any changes to our long-term outlook for IQVIA, and we expect over 6% expected revenue growth and incremental margin improvement in 2019. Fiscal 2019 will likely be marked by continued investment in OCE and related technology offerings, real-world evidence, and sales efforts in the clinical trial space.