Wells Fargo Securities analyst Tim Evans has a terse message for investors who fret that the recent decline in biotechnology stocks could hurt pharmaceutical services companies such as contract research organizations: “Stop worrying.”
In a research note issued Saturday, Evans writes that investors in pharmaceutical services and life science tools companies should focus on how much cash biotech companies have in their coffers to spend on research and development rather than their stock prices.
“In our view,” Evans wrote, “funding levels seem robust.”
That’s good news for local contract research organizations, or CROs, that help pharma and biotech companies test experimental drugs and analyze the results. The Triangle is home to three publicly traded CROs – Quintiles, INC Research and PRA Health Sciences – and is the epicenter of the CRO industry. In addition, the Triangle is a biotech industry hub.
Evans studied nearly 300 publicly traded pharmaceutical and biotech companies that are unprofitable and found that they had enough cash on hand at the end of the third quarter to cover 2.4 times their projected R&D spending for 2016.
“In short, we do not think earnings for pharma services or tool companies will be materially impacted by the recent pullback in biotech,” Evans wrote. “With over two years of R&D needs on hand, we believe young companies will continue to spend aggressively to bring products to market.”
Evans delved into the funding levels of biotech companies after fielding “an enormous amount of questions about the implication of the recent biotech pullback” for companies that cater to the biotech industry.
He noted that even in the wake of the recession, funding for biotech companies was weak for only six quarters. He added that “we do not think the current period is likely to be nearly as protracted or challenging as 2008-2009.”
Shares of Quintiles have fallen 8 percent since the beginning of the year, while INC Research shares have fallen 7 percent. PRA’s shares are up 2 percent this year.