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Morningstar | Syneos Health Identifies Weaknesses in Internal Controls, but Narrow Moat Still Intact

INC Research’s 2017 merger with inVentiv Health launched Syneos Health, the new entity, into the upper echelon of large, global, late-stage contract research organizations, but at the price of a significant debt load. We believe Syneos is one of a handful of CROs with the global infrastructure necessary to compete for large, multinational, late-stage trials and secure strategic partnerships with large pharmaceutical companies. However, the debt load could limit capital deployment in the near term.Most of Syneos' CRO business comes from the most lucrative area of the CRO market: long, complex trials that require hundreds if not thousands of patients across the globe and thus have ample room for missteps. Trial sponsors need a CRO, not only with strong technical know-how in specific disease areas, but also with the expertise in local country cultures and government relations. Further, clients expect CROs to consistently trim trial times and deliver quality outcomes. Late-stage trials consume a significant portion of drug patent lives, making reduction in clinical trial time a priority for CROs and their customers. We like that Syneos does not have a lot of exposure to less-moatworthy early-stage trials, but the option is there if clients need it. Legacy INC Research was a leader in late-stage clinical research from small- and mid-cap biopharma, while inVentiv Health had better exposure to large pharma. We believe the increased exposure to large pharma was a necessary strategic move because partnerships with these large clients form sticky relationships with high switching costs. The combined company has a diversified client base and provides a full portfolio of offerings, including staffing solutions and commercialization. While we don't see significant competitive advantages in the staffing and selling business, both complete Syneos' portfolio of services and offer flexibility to clients. The lower-margin commercial solutions business has been struggling in recent years but returned to growth in the last couple of quarters as management has established a cross-selling strategy, offering hybrid contracts with both clinical and commercial components.