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This article provides a look at a small group of small-cap pharmaceutical and biotech research organizations known as contract research organizations. They are ICON PLC, (NASDAQ:ICLR), Covance (NYSE:CVD), Parexel (NASDAQ:PRXL), Quintiles Transnational (NYSE:Q) and Charles River Labs (NYSE:CRL).

Introduction to a small-cap buying opportunity

CROs believe their services can help expedite the drug development timeline which often takes 10 or more years in a highly cost effective manner. Global CROs have locations worldwide that enable them to design and manage parallel multi-country clinical trials to accelerate time to market.

CROs derive substantially all of their revenue from pharmaceutical and biotechnology companies' R&D expenditures. Frost and Sullivan estimates that global pharmaceutical R&D spending in 2012 was $75-$76 billion and has been growing at about 6%-8% annually for the past decade. However in the past 2-3 years R&D spending has slowed due to global economic challenges.

The CRO market is estimated to be about $20 billion representing 25%-26% of pharmaceutical R&D spending and has been growing 10% a year as pharmaceutical companies are increasingly outsourcing and biotech firms' compounds progress through development

The CRO market is fragmented with about 800 CROs worldwide; however, the top five publicly traded CROs account for about 50% of this $20 billion market.

Quintiles Transnational, the largest CRO, with estimated revenue of about $3.7 billion, recently completed an initial public offering in May 2013. There have been numerous mergers and acquisitions in this industry, and that trend may continue.

ICLR, CVD, CRL, Q, and PRXL each have developed a strategy to meet the needs in the industry and have leveraged business plans in key areas. One is strategic partnerships and alliances, another is international presence and finally the third is to define a niche in the industry that sets them apart in a highly competitive landscape.

These companies that provide services to pharmaceutical and biotech industry should see growth over the next 12 months. Pharmaceutical and biotech firms will increasingly outsource services as this will increase efficiency and lower costs. And we have already begun to see an increasing number of strategic partnerships. Sales growth will be driven by new products and the need for drug firms to advance their pipelines. We know the current scene in the US but robust growth internationally in regions like China, India, and Brazil is expected to fuel further industry growth.

The next few years as ObamaCare and the Accountable Care Act take hold of our health care in the US we may see some interesting developments in the pharmaceutical industry.

What do we mean? First there is and will be a continuing shift toward generic medication prescribing to shave health care costs. And we have also seen a trimming of the federal budget in research funding for new treatments by the National Institute of Health (NIH).

But we are also on the cusp of a revolution in the way that we deliver medicine in the bio-medical and genetic research arenas in health care. And much of the future research and technology will be funded by pharmaceutical and other medical companies.

What direction are we to take with our resources and investment strategy and what rewards or risks will we recognize?

A brief summary of peers and industry leaders

ICON PLC is a global health care services company that provides a full range of clinical research and development services to the pharmaceutical and biotechnology industries. ICLR has carried out multiple trials involving all major therapeutic areas. The company operates through 68 locations in 38 countries, and managed clinical trials in over 55 countries.

ICLR has developed an operating model based on a dedicated team approach in which a team of full-time professionals operating out of centralized offices is assigned exclusively to each project. This contrasts with the approach of many competitors that typically have staffs working on multiple projects sometimes operating from non-office bases in remote locations. The company thinks its approach offers several advantages and believes it has led to repeat business and an expanding client base.

ICLR has completed several acquisition transactions over the past several years, building a diverse base of research capabilities and embracing a strategy to grow through acquisitions. These transactions have provided expanded capabilities in Phase 1 operations and facilities, clinical research staffing in Europe, bio-marker laboratory services, and clinical research and consulting to name a few.

Quintiles Transnational Holdings Inc. is a provider of bio-pharmaceutical development services and commercial outsourcing services. The Company operates in two segments: Product Development and Integrated Healthcare Services.

The product development segment focuses primarily on Phase II-IV clinical trials and associated laboratory and analytical activities. The integrated healthcare services segment is a global commercial pharmaceutical sales and service organization and provides a range of services such as providing contract pharmaceutical sales forces in geographic markets as well as healthcare business services for the healthcare sector, such as outcome-based and payer and provider services.

Quintiles, the largest CRO, touts a team of 800+ MDs, hundreds of PhDs and thousands of clinical educators and medical reps to inform every aspect of a product's development from trial planning & design to specialty sales to observational research. Q also differentiates itself by delivering data driven solutions integrating analytics to minimize risk and gain efficiencies.

Parexel is a bio-pharmaceutical outsourcing organization provides contract research, consulting, medical marketing, and Internet-based information technology.

Clinical Research Services constitutes the core business and provides clinical trial management for all phases of clinical research from Phase I, II and III trials, as well as Phase IV, post-marketing surveillance and also provides observational studies, patient/disease registries, data management and biostatistics, clinical pharmacology related medical advisory and patient recruitment. In FY 12, this segment accounted for 74.4% (76.1% in FY 11) of PRXL's sales.

PRXL also provides technical expertise and advice for drug development, regulatory affairs, product pricing and reimbursement, product launches, and Good Manufacturing Practices compliance, information technology solutions designed to improve the product development process. And, its services include medical imaging services, electronic data capture, patient diary applications, systems integration and web-based portals.

Recent new business signings are impressive. In the past 12 months, PRXL was awarded $2.07 billion in contracts. PRXL has seen the majority of new bookings from their numerous strategic partnerships including those with Pfizer, Merck, and Eli Lilly. Also PRXL launched its Bio-Pharma unit focused on small to mid-sized companies and has also maintained good growth.

PRXL has expanded primarily through organic growth in the three-year period through FY 12, net sales increased at a compound annual growth rate of 9.9%. Backlog, which is a good indicator of sales visibility, grew at a rate of 26.4%.

Covance Inc. is a drug development services company providing a range of early-stage and late-stage product development services on a worldwide basis primarily to the pharmaceutical, biotechnology and medical device industries. The Company also provides laboratory testing services to the chemical, agrochemical and food industries. The company serves over 300 biotech and pharmaceutical companies. Services provided include early development services accounting for about 40% of revenue and late-stage development services about 60% of revenue.

The company provides a full range of drug research and development services in all major and many developing pharmaceutical and biotechnology markets. Based on this strategy, CVD has been expanding globally and now delivers its services through its offices, regional monitoring sites, laboratories and manufacturing sites in more than 30 locations in 20 countries.

CVD reports a backlog which is a good indicator of future revenue that has risen to $6.61 billion as of March 31, 2013, from $1.1 billion as of December 31, 2002. This is inclusive of a Sanofi-Aventis collaboration and an Eli Lilly deal that added about $1.3 billion to the backlog.

Charles River Labs has been supplying research models since 1947 and is currently the largest global provider. The FDA and other foreign regulatory bodies typically require the safety and efficacy of new drug candidates and many medical devices to be tested on research models, prior to testing in humans. As a result, research models are an essential part of the drug discovery and development. CRL is the leading provider of research models worldwide, with an estimated 70% market share.

The company supplies research models to the drug development industry. With approximately 150 different strains the company engages in the production and sale of research models, principally genetically and virally defined purpose-bred rats and mice. CRL offers four major categories of research models service: Genetically Engineered Models and Services, Consulting and Staffing Services, Research Animal Diagnostics, and Discovery and Imaging Services. CRL is one of the two largest providers of preclinical services worldwide, with market leading positions in general and specialty toxicology, and facilities in the U.S., Canada and Europe.

CRL risk assessment reflects the highly competitive marketplace in which CRL operates and potential contamination of its research model population damaging its inventory and reputation partly offset by its leading position and experience in the research model segment and preclinical testing market.

Here is this week's study by the numbers

Is there additional information that we can review and see what we may like to lead to a decision in the financial ratios?

Quantitative

Description

ICLR

CRL

Q

CVD

PRXL

Net Profit Margin

5.0

8.7

4.8

4.0

3.9

Debt to Equity

0.0

2.0

11.2

0.0

2.5

Return on Equity

19.5

30.3

85.2

13.0

51.5

Return on Assets

4.6

6.4

7.1

4.1

4.1

Earnings

Description

ICLR

CRL

Q

CVD:

PRXL

Earnings per Share (TTM)

1.3

1.9

1.6

2.9

1.4

Price/ Earnings

30.5

23.9

29.2

28.6

36.4

Price/ Earnings (NFY)

20.9

15.0

20.7

22.0

25.3

Price/ Sales

2.2

2.0

1.4

2.0

1.8

Price/ Earnings/ Growth

1.8

2.8

2.7

1.9

1.7

Taking them one by one; ICLR debt to equity ratio at 0.0 is something to like along with CVD. Net Profit Margins and Return on Assets are all in line with peers, as are Earnings per share and P/E ratios. ICLR current beta (one gauge for risk) is .55 versus peer averages of 1.13 to 1.34.

Covance $10K Invested 5 Yrs. Ago $9,044

Charles River Labs $10K Invested 5 Yrs. Ago $6,955

ICON $10K Invested 5 Yrs. Ago $9,792

Parexel $10K Invested 5 Yrs. Ago $17,363

Quintiles NA - new IPO in May 2013

Further Considerations

As I use more of a value approach (i.e. position within industry, industry position within the current economy, opportunity for capital appreciation, current price performance, and strategic business model). ICLR and PRLX begin to emerge as the leader in the clubhouse.

Finally, how do ICLR and PRLX fit within my current portfolio? The 0% yield is of particular interest in the current income strategy.

Conclusion

As a result then ICLR and PRLX will remain on my watch lists for news developments and signs of capital appreciation but not a current candidate to be added to my portfolio. Your opinions may vary, and I would be happy to hear your thoughts and read your comments.

Disclaimer: These are only personal opinions and all readers should do their own research. Readers are accountable for investment decisions and trades.

Source: Stocks To Consider In These Times

Disclosure: Securities prices and yields quoted are current as of August 4, 2013.

Disclaimer I do not know the circumstances, risk tolerance or investment objectives of the readers. There is no guarantee that any investment mentioned in this article will be profitable or appropriate for readers.

Source: Pharma And Biotechs Offer Rewards And Risk - Which Will You Choose?