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Parexel International Corporation (NASDAQ:PRXL) is a company with huge upside in the nearest future. This mostly stems from the fact that with the shift in business model embraced by the large pharmaceutical companies, the company stands to benefit from the increasing revenue projected to be accrued from it. Also, with the huge estimated growth in the Clinical Research industry and the company having expanded its services through acquisitions of smaller entities over the years, Parexel has a larger market share when it comes to various research-related services constantly needed by large pharma and biotech companies. It would be a huge investment mistake not to invest in Parexel now.

The clinical research industry

According to research carried out Industry Standard Research, the Clinical Research industry was projected to achieve estimated revenue of $33.6 billion in 2012 and $37.4 billion in 2013. Over the years, clinical research companies have become highly valuable to Biotech, Pharmaceutical and Medical Devices companies, especially the large corporations. With the help of CROs, most of the large Bio/Pharma and Medical devices companies have been able to cut down on the time it takes to conduct clinical trials on their products.

From a research carried out by independent Tufts Center for the Study of Drug Development, CROSs complete clinical trials 30% more quickly than when the trials were carried out in-house. This translates to a difference of four to five months and based on this, these large corporations are able to increase their products' revenue potential by $120-$150 million. Not only do clinical research companies carry out therapeutic clinical trials in areas like infectious diseases, central nervous system (CNS), oncology, cardiovascular diseases and metabolic disorders, they have also added vaccine development, data management, clinical monitoring, pharmacovigilance, project management and statistics to their list of services.

A higher percentage of the top selling biopharmaceutical products available in the global market passed through developmental stages carried out by CROs. Companies that operate in this industry get a good chunk of their business from the pharmaceutical industry, followed closely by biotech. The smaller chunks come from the medical device companies and government agencies. In terms of global market size, over 40% of the industry's business come from the United States, about 30% comes from Europe with the remaining 20%+ coming from Asia, Africa, Middle East and Latin America.

In a nutshell, large pharma, biotech and medical device companies have come to understand that it is extremely cost-effective and maximizes efficiency when their clinical trials are carried out CROs, especially when they choose the right company. This is where Parexel comes in.

A little about the company

A clinical research provider with its headquartered in Massachusetts, Parexel is strategically operates from 78 locations scattered in approximately 52 countries. With the services it renders, Parexel carries out Phase I to Phase IV drug development clinical research for other companies. Its services also extend to data management, trial management, advisory services, biostatics and others. It operates in two segments - the Consulting and Medical Communications Services segment and the Perceptive Informatics segment.

The CMCS segment handles clients' regulatory, product pricing, and drug commercialization needs. The PI segment takes care of the improvement of given products' development. It also handles issues pertaining to regulatory submissions processes. In a recent research covering the Top 10 CROs in the Pharma and Biotech industries, Parexel was ranked number two.

Maintaining a strategy of expansion by acquisition after a failed merger and the recession period

There is a saying that what does not kill one makes it stronger. I want to relate this saying to the failed merger between Covance, Inc. (NYSE:CVD) and Parexel in 1999. As at then, the two companies ranked as the second and largest clinical research companies and the management of both companies believed that a merger would further accelerate both businesses' bottom line. However, the opposite became the case as both companies' shares suffered a decline following the decision. The deal was immediately scraped and the failure opened the management's eyes to other means of growing the company.

In order to regain its feet and increase its market share after the failed merger, the company's management started expanding its operations through acquisitions. With the acquisition of CEMAF in 1999, the company was able to further enhance its Phase I capabilities. In October, 2004, it went further to acquire Integrated Marketing Concepts, a specialty professional marketing and communication services company based in Pennsylvania. Other strategic acquisitions followed suit with the company's latest acquisition being HERON Group LTD., a leading commercialization consultancy firm based in United Kingdom. The deal took place in April 30, 2013. With this bevy of acquisitions, Parexel was able to strengthen its operations, both in the US and internationally, while at the same time broadening its clinical research capabilities which has helped in increasing the company's earning potentials.

It is also important to point out that Parexel is a company that has weathered many storms, especially the recession of 2008-2009. Due to the effects of the recession, a good number of large pharma companies cut down on their R&D expenses which in turn, negatively impacted on Parexel's revenues and earnings as the number of cancelled bookings increased even as new bookings became hard to grab. The company's stock, which was trading at a high of approximately $36 fell to $6. It was really a tough time for the company and investors but with good management and top-notch services, the company was still able to continually increase its revenue on a fiscal YoY basis.

Shift in large pharma companies' business model to influence growth

With the recession ended, the revenue and earnings tide started turning for the better as the large pharma companies initiated gradual increase in R&D as the need for new products became enormous. Thrown into the mix to make Parexel's growth more viable is the recent shift in large pharma companies' business model.

With this model, the large pharma companies now partner with reputable clinical research companies in terms of development of new products. This way, these large companies are able to limit the risk associated with investing in plants and personnel in developing products that may not see the light of day. This is a far contrast from their former model of targeting smaller biotech companies with successful new products for acquisitions. This is a change that, knowingly or unknowingly to the large pharma companies, has and will continue to benefit Parexel and other reputable clinical research companies as they get to charge these pharma big players a price for taking certain risks away from them.

With this trend and the reputation Parexel has built for itself in terms of diverse research capabilities, the company was able to get new and juicy contracts from larger pharma companies. The contract Parexel was awarded in June 2010 by Bristol-Myers Squibb (NYSE:BMY) included site management, data handling and clinical monitoring. This was followed by contract from GlaxoSmithKline (NYSE:GSK) as the company , worked towards broadening its initiative in R&D for simpler clinical development and increase in the company's productivity.

Within the same period, Parexel was awarded a contract by Eli Lily (NYSE:LLY) to provide clinical development support in the company's Asia-Pacific region project. By the following year, 2011, Parexel was awarded a five-year contract by Pfizer (NYSE:PFE) that will see Parexel offering a range of clinical development services to Pfizer. Merck (NYSE:MRK) is also among the large pharma companies that have awarded contracts to Parexel, especially those that required diverse research capabilities.

Since the company's entry into the clinical research industry in 1995, aided by its diverse capabilities and huge international footprint, Parexel has been able to grow its revenue at a solid clip almost every given year. Add this to the existing and potential contracts from the largest players in the pharma, biotech and medical devices industries and you have a company with huge upside as far as its upward revenue and earnings growth journey is concerned.

Current financial standing

Recently, Parexel released its fourth quarter fiscal 2013 earnings report which showed revenue of $463.1 million, beating analyst estimate by $7.87 million. This indicates 18% growth when compared to the same quarter of the previous fiscal year. The company also reported diluted EPS of $0.50 which indicates a beat by $0.07 and 47% growth. The company's GAAP operating margin stood at 8.3%, up by 180 basis points in comparison to the same quarter of the previous year. Parexel reported operating cash flow of approximately $185 million for full year 2013 and over $4.6 billion in ending backlog.

Conclusion

From the above thesis, there is no doubt that Parexel is currently well-positioned to benefit from the new modus operandi of the big players in the biotech, pharma and medical devices industries. Parexel management's decision to buy back shares is a good way of returning capital to shareholders even as the decrease in share count has significantly boosted investors' earnings per share. Add all these to the fact that the company maintains a solid balance sheet and is generally in a good shape, there is no doubt that investors in this stock will be rewarded handsomely in the near future.

Source: Paraxel To Benefit From A Shift In Large Pharma Business Model