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Intangible Assets Give Quintiles IMS a Wide Moat

The merger between the medical clinical trial companies has created some upside for the stock.

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We are relaunching coverage of  Quintiles IMS (Q) and updating our position on the company to account for the merger between Quintiles, the largest contract research organization, and IMS Health, the dominant player in the healthcare data and analytics space. We believe the combined entity's leading positions in the late-stage contract research, development, and drug commercialization markets make it the go-to partner for biotech and pharma clients and support the firm's upgrade to wide moat and stable ratings. Our post-merger valuation for the firm is $90 per share, up from our $71 per share fair value estimate for Quintiles alone. We believe there is modest upside to the stock, as some investors remain concerned that the large size of the two companies will impede successful integration efforts, or are unconvinced synergies will materialize from the merger.

The company's intangible assets--its proprietary data sets, technology, expertise, and reputation--place Quintiles IMS well ahead of its closest competitors. IMS Health's legacy business compiles healthcare data from over 100,000 sources and consequently, has high fixed acquisition costs, limiting the attractiveness of this market to new entrants. The breadth and scale of this data, along with the firm's reputation for providing accurate and complete data, creates a barrier to entry and allows Quintiles IMS to exhibit substantial pricing power. The firm uses proprietary data adjustments, and clients are likely to stay with IMS to preserve the continuity of the data, which results in high customer retention rates.

Kelsey Tsai does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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