CRO market: backlog growth ‘pretty remarkable,’ says analyst

By Melissa Fassbender contact

- Last updated on GMT

(Image: iStock/Tzido)
(Image: iStock/Tzido)

Related tags: Mergers and acquisitions, Medical device, The quarter at tropicana

Contract research organization (CRO) earnings reports have been filing in over the past few weeks – and as a group, performance was positive following concerns around slowing outsourcing trends.

According to David. Windley, CFA, CPA, managing director, Healthcare Equity Research at Jefferies LLC, the standout metric in the quarter across the group was new business authorizations or bookings.

The book to bills were consistently higher than we expected and really than anybody expected​,” he told

Consequently, backlog growth was also higher than expected, pushing up towards double digits, Windley explained. “That’s pretty remarkable​,” he added.

Windley explained that outcome follows some concerning data points that emerged through the first half of the year that pointed to a slowing outsourcing trend.

One of the top five pharma companies said that they felt like the cost of CROs, pricing that they were getting, wasn’t really justified by the value of the service delivery they were getting, so they were looking at other options, including doing some of the work in house​,” Windley said, adding that he has heard a similar sentiment from a few companies.

However, the pharma companies have not released any specific details on the topic, which makes inferring trends from such big picture comments difficult.

The concerns around slower outsourcing trends would be hard to pin down​,” added Windley. Though the concerns made the bookings numbers especially surprising, he said.

Biotech and medical device

Windley also said that the biotech funding environment has improved as of late, following a slowdown of funding since late 2015 that has caused some concern.

The commentary is that the small biotech client base did show stronger bookings in the second quarter​,” he said, which shows “some initial signs of improvement​.”

There has also been commentary around medical devices, as some CROs begin to invest in and build up franchise activity in the area.

I would call that really small, but there’s a regulatory push in the medical device space that is requiring device companies to run more rigorous trials, so they are turning toward CROs. In turn, CROs are viewing that as opportunity for them to pick up little bit of business​,” Windley explained.

The standout?

The standout reaction was probably Icon, where the earnings numbers weren’t necessarily the strongest of the group but there was a higher level of skepticism about Icon’s ability to grow while Pfizer revenue is declining​,” said Windley.

The fact that they met revenue expectations in the face of that Pfizer revenue headwind is something that people reacted to very positively​,” he added.

Icon reported net business wins of $563m, a net book to bill of 1.31, and a backlog growth of 10% year on year to $4.44bn.

Continued consolidation

Addressing the continued onslaught of consolidation, Windley commented:

“[The companies] generate a lot of cash flow, so acquisitions are the area where they want to deploy that capital to grow. Their bias is to make acquisitions​,” he said.

However, due to the size of some of the deals, Windley doesn’t expect certain companies to be back in the acquisition game anytime soon – specifically, INC Research, which recently merged​ with inVentiv Health.

As per the Labcorp/Chiltern deal, Windley said there may be more room for Labcorp to “continue to be acquisitive​.”

But they’ve made it pretty clear that this checks a lot of boxes for them in the near term that takes the heat off of them to acquire in the CRO space specifically​,” he added.

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