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Morningstar | PRAH Updated Forecasts and Estimates from 02 May 2019

Narrow-moat PRA Health reported a mixed quarter, with currency headwinds and soft bookings growth. Total revenue of $722 million was below our expectations, representing 4% growth in constant currency (3% reported). Excluding reimbursed revenue, which was lighter than anticipated this quarter but is zero-margin and therefore does not impact earnings, total revenue was up 5% in constant currency, still below our expectations. We've reduced our projections for full-year revenue, and this adjustment was offset by the time value of money since our last model update. After a single-digit drop in share prices on May 2, shares continue to look slightly overvalued relative to our maintained fair value estimate of $81 per share. As one of the larger contract research organizations, we believe PRA Health continues to benefit from a narrow economic moat based on intangible assets and high switching costs among its pharmaceutical and biotech clients.

The disappointing top-line results can be attributed to both business segments. The clinical research segment contributed $667 million in revenue, up 3% from last year in actual currency, while the data solutions was down about 2% with $55 million in revenue. We trimmed our top-line expectations for 2019 for both segments. Operating expenses were largely in line with our expectations.

In the clinical research segment, gross new business was flat from last year, and due to slightly lighter cancelations in the quarter, net new business of $665 million represents 2% growth from last year. Low-single-digit growth in new business is a departure from most of the last three years--apart from last quarter--when net new business grew in the double digits consistently.

Closing backlog of $4.4 billion represents a 15% increase from last year, a healthy but slightly slower growth rate relative to prior quarters. Backlog conversion, or the rate in at which backlog is turned into revenue, continues to slow down as trials become increasingly more complex due to new therapy classes and challenging indications. Additionally, management cited slower study starts as clients take longer to evaluate clinical trial strategies.

Finally, we remain uncertain of management's strategy in the data solutions business. As a reminder, the business stems from the 2017 acquisition of Symphony Health. However, integration was restricted until payouts to the previous private equity owner completed, so this was the first quarter where management could influence the business and execute on any integration strategy. Data solutions revenue was light in the first quarter, but we don't see that as a major concern for the year as it is a highly seasonal business and management admitted that leadership changes were a distraction in the first quarter.

Our bigger concern is management's sparse commentary around long-term strategy for the Symphony business. We expected a more detailed vision for how the data sets and investments in analytics could boost the company's traditional clinical research business. Further, management cited heightened cost-consciousness among biopharma clients as a reason behind low growth expectations for business for the year. We've reduced our near-term expectations for Symphony and question the acquisition's long-term benefit given management's opaque communication so far.