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Morningstar | PRA’s Solid Competitive Position in the Global CRO Industry Should Help Drive Growth

After cycling through several private equity owners over the past two decades, PRA Health Sciences emerged as a well-positioned clinical research organization, or CRO, in its 2014 IPO debut. As one of the top global late-stage players, we believe PRA is poised to benefit from favorable long-term industry trends, including modest biopharmaceutical research and development spending and increased outsourcing for trial services. The merger of PRA and ReSearch Pharmaceutical Services, or RPS, formerly two midtier CROs, in 2013 put the new company on the map. The legacy PRA business historically focused on clinical trial outsourcing for small- to mid-size biopharma clients, while RPS specialized in embedded staffing solutions for large pharma. Bolt-on acquisitions, including CRO ClinStar and CRI Lifetree, rounded out the company’s geographical footprint and service offerings. As a result, PRA is one of the few CROs with the global infrastructure necessary to compete for Big Pharma strategic partnerships, the most moat-worthy part of the industry in our view. Within its core business lines, we view PRA’s late-stage development services as the best positioned. Phase 3 clinical trials typically require thousands of patients and take place across multiple geographic locations. Given the asset-light nature of late-stage CRO businesses, these companies serve as consultants to clinical trial sponsors (pharma/biotech companies). A significant portion of drug patent lives are devoted to clinical trials, so the ability to shave off months from the drug development timeline can translate into millions of dollars in additional revenue. PRA’s reputation and expertise in trial enrollment and design among clients have allowed it to win and retain contracts. We view the early-stage CRO market, where PRA also operates, as a business with less sustainable competitive advantage given the difficulty differentiating services from peers. Embedded staffing services generally falls in the same bucket. However, PRA has been able to leverage the large pharma exposure in its staffing business to more robust late-stage partnerships, which sets up the company for long-term success.