CROs set for growth in 2012 on mature strategic deals and higher demand, says analyst

Morningstar equity analyst Lauren Migliore looked at contract research organisation (CRO) second quarter revenues and found that, with the exception of Charles River Laboratories, all the leading players saw increases.

“Covance and PPD were the biggest top-line gainers during the quarter​,” Migliore said, suggesting this indicates the growing importance of incremental revenues generated by strategic partnerships with Big Pharma.

The firms have been among the most active in making this type of deal. PPD, which is to be bought by two private equity firms​, has major strategic partnerships with GSK​ and Elan​ while Covance has similar agreements with Sanofi​ and Japan’s Takeda​.

Parexel, which signed a strategic accord with Pfizer earlier this year​, was also mentioned, however, Migliore used the firm as an example of the negative short-term impact such deals can have on profits.

“Despite revenue growth on both a sequential and year-over-year basis, Parexel's adjusted earnings fell steeply from the prior-year period as up-front investment in staff and infrastructure in anticipation of future demand weighed on earnings.​

This echoes the concerns equity analysts​ David Windley (Jefferies & Co) and Eric Caldwell (R W Baird) voiced about strategic partnerships’ short term impacts earlier this year. However, Migliore believes Parexel has now turned the corner.

“We believe the firm's earnings hit a low point this quarter. We also think profitability will improve starting in fiscal 2012 as strategic partnerships mature, productivity improves and restructuring initiatives begin to bear fruit.​

Backlog growth​

Migliore also cited the amount of new business CROs have received this year in support of her growth forecast revealing that, for the large CROs she covers, backlogs have increased an average of 15.2 per cent.

“Strong new bookings are a testament to our thesis that drugmakers are beginning to unfreeze their pipelines and limit cancellations​,” she said, adding that most CROs she covers have book to bill ratios of at least 1.0.

This fits with the results a survey conducted William Blair analyst John Kreger, reported yesterday​ by Outsourcing-pharma.com.