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As pressure mounts on pharmaceutical manufacturers to make drugs cheaper to consumers, Barron's says contract research organizations such as Covance and Pharmaceutical Product Development are poised to benefit as the drug makers increasingly farm out their pharmaceutical testing. Covance's operations are split about evenly between early-development and late-stage testing, while PPDI is heavily weighted toward late-stage human testing. Barron's estimates that pharma and biotech companies will spend two-thirds of their $90B in R&D spending this year on testing, while one analyst notes that the number of compounds in the testing pipeline has jumped to 275 today from 150 in 2000. This, they say contributes to big, long-term growth prospects for the CROs, as they are known. Consultant Frost & Sullivan notes that the global CRO business has grown from $10B in 2003 to some $15B this year, and continues to grow more than 15% annually. Covance and PPDI reflect this trend, with Covance seen posting earnings of at least $3.19/share in 2008 after an expected $2.65 this year while PPDI is projected to see profits surge 26% next year after 7% growth in 2007.

Sources: Barron's
Commentary: PPD Realigns Global DivisionsWhy I Bought Covance (Again)
Stocks to watch: CVD, PPDI. Competitors: CRL, MDZ

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Source: Covance, Pharmaceutical Product Development Good Bets - Barron's