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Takeovers & tox top agendas as preclinical CROs’ results near

By Nick Taylor+

24-Jan-2012

Preclinical CROs begin reporting full year results this week, with talk of takeovers and toxicology high on agendas.

Covance starts the CRO (contract research organisation) results season and, after management gave a preview of performance at JP Morgan Healthcare Conference, familiar themes are expected. Strong performance in late stage clinical is predicted, again offset by aspects of the preclinical business.

While clinpharm, discovery and other services are faring well, European toxicology and research product demand again weakened”, Eric Coldwell, equity analyst at RW Baird, wrote in a preview of fourth quarter results at Covance.

Overcapacity remains a problem in general toxicology and this is limiting CROs’ pricing power. However, smaller CROs, notably Cyprotex, have seen demand for specialised services increase and the discrepancy between interest in different areas of toxicology is being reflected in pricing trends.

Pricing may be improving somewhat for more specialised services, while pockets of price discounting continue to appear in general toxicology”, David Windley, equity analyst at Jefferies & Company, wrote in a results season preview.

Charles River is due to release its results in mid-February. Weak demand for GLP (good laboratory practice) toxicology services, which prompted Charles River to again layoff staff in November, is predicted to continue in the fourth quarter.

However, the bigger story at Charles River is the private equity takeover reports. Management has said ‘no comment’ to enquiries from analysts at JP Morgan Healthcare Conference and Outsourcing-Pharma but questioning is likely to continue.

Talking takeover targets

Analyst reaction to the likelihood of a deal has been mixed. Windley said the probability of a deal going ahead is “maybe 50/50” and sees plenty of obstacles to a private equity takeover or split of the company. Furthermore, Windley said dealmakers may be looking at the wrong CRO.

We believe a more attractive private equity transaction would include WuXi Pharmatech. Our thesis? WuXi has delivered consistent performance, yet watched its stock drop for most of 2011”, Windley wrote. Shares in WuXi fell 30 per cent last year.

Other analysts have also discussed the likelihood of WuXi going private. “At the current valuation, there is potential for a going-private transaction either by management or private equity, in our view”, equity analysts at William Blair wrote in a top stock recommendations report in December.

WuXi shares have risen 15 per cent since William Blair published its report.

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