The Triangle’s three largest publicly traded contract research organizations – Quintiles, PRA Health Sciences and INC Research – are being embraced by investors impressed by their recent performance.
As of Monday, shares of Quintiles have risen 31 percent this year – and it’s by far the laggard of the group. PRA shares have risen 75 percent. INC shares are up 95 percent.
The trio bolstered their standing with investors last week when they reported their second-quarter results. Each posted better-than-expected results. Quintiles and INC boosted their guidance for revenue and net income for the full year and PRA raised expectations for its net income.
“Everyone in the industry is doing well,” said Greg Rush, chief financial officer at Raleigh-based INC.
The CRO industry helps pharmaceutical and biotechnology companies test experimental drugs and analyze the results. The industry is centered in the Triangle, and Quintiles is by far the largest CRO; PRA and INC also rank among the largest companies.
Wall Street doesn’t foresee an end to the good times any time soon. A solid majority of the analysts that follow the three companies companies rate their stocks the equivalent of a “buy.” All but one of the 18 analysts who track Quintiles recommend the stock, according to Bloomberg News.
The overall CRO industry is benefiting from twin, complementary trends, said Jefferies analyst David Windley.
First, pharmaceutical and biotechnology companies, which have been beefing up their research-and-development budgets in recent years, have stepped on the gas even harder.
Jefferies, which surveys drug companies each year, projects that R&D budgets will rise 6 percent to 7 percent in 2015, up from 4.5 percent last year and the industry’s fastest growth rate since 2008.
Increased drug approvals by the Food and Drug Administration have triggered the increased spending, Windley said. Last year 41 novel new drugs were approved by the FDA, the most in nearly 20 years.
In addition, drug companies are outsourcing more of their clinical trial work to CROs.
Over the years, said Windley, expertise in clinical trials has migrated from the pharmaceutical and biotechnology companies to the CROs – in some cases because of layoffs and other cost-cutting efforts.
The industry’s increased expertise also has led to more responsibility.
“If you went back 20 years ago, CROs were basically just a pure outsource for biostatistics work and maybe some monitoring – i.e., auditing for a clinical trial,” Rush said. But today CROs also are designing clinical trials and developing protocols.
CRO customers overall are gaining confidence in the industry’s work.
The latest survey by Robert W. Baird & Co. found that 14 percent of CRO customers reported that the execution and quality of the CROs had improved in the last six months, versus 8 percent who saw a decline. (The great majority, 78 percent, saw no change.) The disparity was much greater in the second half of last year, when 25 percent saw an improvement versus 8 percent who perceived a decline.
Still, competition remains intense because the largest pharmaceutical and biotechnology companies – which account for about three-fourths of all R&D spending – typically are paring back the number of CROs they rely on to two or three, said Windley. So each of the CROs are vying to make “the short list.”
The reliance on a few large CROs also is hurting smaller CROs which, by and large, are losing market share to their giant competitors. The Triangle is home to a number of smaller CROs.
Still, results will vary from company to company.
“I bet a bunch of your (smaller companies) could dispute that, that they would say, ‘I’m growing faster than Quintiles. I’m growing faster than PRA,’” Windley said.