CROs Face Stagnant Preclinical Market Growth
Evidence of growth in the preclinical market is not apparent and ongoing pricing pressure and anecdotal evidence point to pharma companies’ budgets continuing “to be weighted toward late stage for the foreseeable future,” Tim Evans of Wells Fargo wrote in an analyst note downgrading CRO Charles River’s (CRL) stock to “Market Perform” from “Outperform.”
“While we continue to believe that more preclinical outsourcing may restore the industry to growth (albeit low-single digit growth) in 2013, our recent industry checks show a market that remains stagnant for now,” Evans wrote. He notes that CRO Covance “continues to call the market as flat, and several private competitors echo this sentiment.”
James C. Foster, chairman, president and CRO of CRL said earlier this month at the Barclays Global Healthcare Conference that he expects the company’s preclinical growth will be in the range of 4% to 6% this year. That growth would be a slight improvement as the company as recently as February 2012, saw a string of 13 consecutive quarters of preclinical sales decreases.
Example of AstraZeneca
Large pharma companies may not all be looking to increase preclinical outsourcing spending in the near future. For example, AstraZeneca recently announced that it plans to shrink its early development budget from 38% of its spending in 2013 to 32% in 2016, which represents about $300m in cuts, Evans noted.
“AstraZeneca is a large client and recently-signed partner for CRL. Importantly, we do not think AstraZeneca’s plans bode negatively for CRL as we think that even under the most optimistic scenario, AstraZeneca will spend less than $50 million per year with CRL, which would be ~3% of AstraZeneca’s early development budget,” Evans added.
Wells Fargo also calls attention to the impact of the across-the-board government cuts, known as sequestration, on CROs. CRL, for instance earns 24% of its revenue from government and academic sources, though the company “has downplayed the threat posed by sequestration, and indeed, our checks do not indicate models have yet seen pressure from funding cuts.”
Foster also said during the company’s quarterly earnings report in February that sequestration will have a “very modest” impact on the company.
However, Evans notes that there could be an increased risk of an impact from sequestration in the second half of 2013. Sigma-Aldrich “recently indicated that sequestration was causing more pressure than management anticipated in Q1. While Sigma’s products are different than those of CRL, the product profiles for both companies are similar in that they both sell lower-priced but higher-value consumables,” Evans said.