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Morningstar | PRAH Updated Forecasts and Estimates from 18 Mar 2019

PRA Health reported fourth-quarter revenue of about $730 million, slightly below our expectations and up 4.2% from last year, excluding the impact from new accounting standards, foreign exchange rates, and reimbursed revenue. Operating expenses were in line with our expectations, and slightly lower-than-expected tax expense and transaction-related costs led to fourth-quarter net income above our expectations at $71 million. On an adjusted basis, operating margin improved nicely by 100 basis points from last year to 17.2%, largely in line with our expectations.

PRA Health attributed weaker fourth-quarter sales to previously discussed cancellations after a key client reprioritized its pipeline. While the canceled trials have been replaced with new business, the longer duration impacted sales in the back half of fiscal 2018. Full-year revenue of nearly $2.9 billion represents a healthy 15% increase from last year, excluding the impact from new accounting standards. We don't expect any major changes to our model and remain comfortable with our long-term outlook, which includes a five-year revenue CAGR of over 8% as well as our fair value estimate of $81 per share. We continue to believe that PRA Health, as one of the largest, global, late-stage CROs, merits a narrow economic moat underpinned by intangible assets and high client switching costs.

We believe PRA Health has recently benefited from a robust operating landscape, with strong biotech funding and continuing innovation from Big Pharma. While fourth-quarter sales were tepid, quarterly net book to bill ratio of 1.30 was solid and in line with the past several quarters. Further, full-year backlog grew about 19% from last year to over $4.2 billion. Quarterly net new business of $667 million was below our expectations, representing only 3% growth from last year. We note that quarterly CRO metrics are often lumpy due to the size and duration of clinical trial deals, but even on a trailing 12-month basis, net new business growth and billings growth seems to be slowing slightly. on a trailing 12-month basis, cancellations were up by just 3.5%.

We're maintaining our 2019 outlook, with revenue growth of about 10% to $3.2 billion. This includes contribution of nearly $2.9 billion from the clinical research segment, and these projections are in line with recent backlog growth and backlog conversion rates. Sequential backlog growth hasn't changed significantly, largely staying in the mid-single-digits. However, backlog conversion continue to slow for PRA Health, with 13% in the fourth quarter down from 14.9% in 2016. This is consistent with the industrywide dynamic as CROs book deals with longer, more complex trials, especially in oncology, but it's still unclear where this rate bottoms.

Unfortunately, management delayed providing much detail on the impending integration of the Symphony data solutions business, acquired in 2017. PRA Health's integration capabilities were constrained by payouts to the previous private equity owner since the acquisition through 2018. We had anticipated a more detailed outlook from management following 2018 year-end, particularly how the data asset would inform the company's strategy in real world evidence solutions. At this point, we model mid- to high-single-digit growth from the data solutions segment in our forecast, but we'd like more transparency from management as to the plans for extracting value from the $530 million acquisition over a year ago.