Keeping an Eye on Parexel International

| About: PAREXEL International (PRXL)

I'm a growth investor, and frankly it is very hard to find growth in the US market - all my spare time is spent trying to find ideas outside of commodities and/or non commodities that I already own - and the pickings are slim. Even technology which many people see as a growth sector is chock full of older established slower growth companies, and aside from a handful I just don't see much growth there. Financials? Very few. Retail? hah.

I go sector by sector and see very little growth out there - even in the healthcare field. So it is hard to diversify across sectors when you are looking for growth - because most of the growth is very concentrated.

One group I have liked in healthcare are the medical contract research organizations - i.e. drug research outsourcing. No FDA approval risk, no government reimbursement risk, etc. I have one stock in this sector, a Chinese company called WuXi PharmaTech (NYSE:WX) - which after purchasing last fall [Nov 5: Two New Foreign Positions Added Today] has been a total dog despite some very good earnings reports [Mar 12: WuXi PharmaTech - Very Good Earnings]. I don't have a large position thankfully since the stock has recently fallen off a cliff but it is a perplexing situation. Most of the US companies have very high valuations so I have been reluctant to add any, and an Irish company I've been in, in the past ICON (NASDAQ:ICLR) is also pricey. [Feb 21: ICON with a Solid Report]

However, one of the US players, Parexel International (NASDAQ:PRXL), has fallen precipitously the past few days and its now on my radar - I like relative value so when a stock falters it begins to interest me. However, a few caveats - it is the only US company to be falling like this so that's a red flag, and it's temporarily fallen so hard it is now below its 200 day moving average. So it could portend something company specific is happening; with earnings on the 23rd I have been debating whether to add this name. Still debating.... one could buy here, and if there is an earnings blowup, be down 30% instantly on the 24th of April.

I always get suspicious of this type of price behavior because if nothing else, Wall Street is a game of insiders - and this sort of action might be people "in the know" getting out first... so I am going to hold off, and if the earnings report is solid and the stock remains in this level, I will probably buy then as the stock has fallen from the mid $27s to the mid $23s (15%) in just a week, which in this sort of sector is a huge move. (it would be like a fertilizer or solar stock dropping 40%) This is the proverbial "falling knife" - in fact as I type this the stock has fallen from $23.60s to $23.10s. So this is on my "hot watch list" and in a few weeks we'll have more information to see if this will be a good addition to the fund.

Here is an article with some good background on the pros/cons of the industry

  • Even though big pharmaceutical companies are stumbling and biotechs are staggering, smart investors have been making money in the sector by thinking a bit differently -- specifically, by betting on companies that conduct tests for drugmakers.
  • Large drug companies are furiously cutting costs, while biotech start-ups often lack the financial cushion to conduct a full set of their own trials for experimental products. That leaves a growing niche for contract research organizations, or CROs, to which drugmakers outsource clinical and preclinical trials. As a result, many CRO stocks have soared as major drugmakers' shares have stagnated.
  • The two largest CROs by market capitalization, Covance (CVD) and Pharmaceutical Product Development (PPDI), both enjoyed stock gains of 31% for the 12 months ended Feb. 15. Both have market caps of just over $5 billion.
  • During the same period, Ireland's Icon(ICLR), with a market cap of $1.8 billion, had a stock surge of 48%. Parexel International (PRXL), whose market cap is $1.6 billion, climbed 61%.
  • Analysts remain cheerful about CROs' future. Wachovia Capital Markets predicts the industry will outperform the overall market for the next three to five years. Pointing out that approximately 25% of drug development is outsourced, the firm issued a report in late November saying that could rise to 35% to 40% within half a decade.
  • "We believe CROs will be a particularly strong sector [in 2008], given that there is a clear mandate from Congress to increase testing of drugs both before and after Food and Drug Administration approval," adds UBS analyst Robert Gilliam in a report to clients. CROs are attractive because "they are not directly exposed to Medicare cuts, drug price controls or other government-related pricing pressures," he adds.
  • Also, investors should note that just about every major CRO has had some setback in recent years to affect the momentum of their sales, profits or stock price. Ill-fated acquisitions, management shake-ups, failed clinical trials, canceled contracts, strategic blunders or disputes with the FDA can derail a CRO.
  • In theory, the ideal CRO offers both diversity of geography and services. Clients want to control expenses and speed up the drug-development process, so it's important for CROs to operate on many continents, especially those with developing markets. This approach gives them a cost advantage as well as the opportunity to reach more patients in clinical trials.
  • For services, a CRO ideally wants to offer a mixture of preclinical trials, early-stage human trials and late-stage clinical trials, along with FDA-mandated post-marketing tests that are becoming more important for keeping drugs on the U.S. market.
  • Animal tests and the early-stage human trials take less time, and they provide less revenue per test than do bigger late-stage and post-marketing trials. But because a CRO can conduct many more animal and early-stage human trials, these tests can provide a steadier revenue stream. In addition, the impact of a single early study's failure or a client's cancellation isn't as great as it would be for a multiyear, late-stage clinical trial.
Disclosure: Long WuXi PharmaTech in fund; no personal position