Are Contract Research Organizations The Next Bubble? (CRL, CVD, PRXL, PPDI, PDG)
Contract research organizations, or CRO’s, were one great growth story. They were in the sweet spot of the drug and biotech sectors and generated massive growth for investors. The CRO companies were also set to be serious winners as biotech and drug companies pursued cost-cutting strategies which drove business straight to the CRO’s. But there is a reason all of the prior sentences are in the past tense.
Today we saw more evidence that CRO’s are not only not immune to the current economy, they are now under fire. Charles River Laboratories International Inc. (NYSE: CRL) dropped the ball that it was cutting its guidance for 2008. The trends we saw in early August appear to coming to a crashing halt.
Last night the CRO gave earnings with a 4% rise to $0.63 EPS. Outside of charges, it earned $0.76 EPS. Its revenues also grew by 9% to $342.2 million. Thomson Reuters was expecting estimates of $0.75 EPS on $347.8 million in revenues.
But guidance is what destroyed the stock. It took a prior earnings range of $2.94 to $3.00 EPS down to a new lower range of $2.83 to $2.87 EPS. The company noted that its clients continue to invest in drug discovery and development, but noted that clients are facing a range of unprecedented challenges from drugs losing patent protection to the availability of funding for small biotech companies. It also cited drug commpanies cutting jobs, cuttiung costs, shifting to later-stage drug development programs, and either outright putting projects off or pushing out current projects to 2009.
Charles River shares and shareholders are paying a major price for this today, as this stock is down 21% at $26.60. This is also a new 52-week low as the prior range had been $30.80 to $69.19.
More and more drug companies have been farming out an increasing amount of their research to firms like Charles River Labs and Covance Inc. (NYSE: CVD). Those shares are down over 8% at $50.21 in sympathy with Charles River, and its 52-week trading range is $41.65 to $99.08.
Paraxel International Corp. (NASDAQ: PRXL) is also down over 9% at $9.22, although its 52-wee ktrading range is $6.84 to $36.16.
Pharmaceutical Product Development Inc. (NASDAQ: PPDI) is down over 6% at $26.97, and its shares have traded in a range of $24.65 to $49.39 over the last year.
PharmaNet Development Group, Inc. (NASDAQ: PDGI) is one of the few up on the day, but that is just marginally. This stock has also been torn apart and trades down more than 95% from its former highs as it has been losing money.
On election day, we noticed that there were many winners in drug and biotech stocks but the CRO stocks were performing horribly.
We would also like to note that this means also may put on additional job pressures even in the CRO sector. We noted that the drug and biotech cutbacks would allow the CRO’s to hire many more qualified workers at lower rates, but now the firms may have to focus on costs to hire rather than than quality at a cost.
This could be a very sad trend if this continues. The belief is that this is a temporary event as credit is hard to get and as venture funding may be down. But what if it isn’t? We have been wondering what laid off bank tellers, mortgage brokers, real estate employees, and stock brokers will do after the next wave of layoffs hits Wall Street and Main Street. But what exactly do laid off workers the medical and clinical research sectors go do as their next career? Whatever it is, it is likely for much lower pay.
Jon C. Ogg
November 6, 2008
Election Day’s Winners & Losers in Biotech and Drug Sectors
Today’s biotech winners are as follows:
- GPC BIOTECH AG (GPCB) +80.34%
- ALSERES PHARMACEUTCL (ALSE) +32.90%
- OSIRIS THERAPEUTICS (OSIR) +18.26%
- TRANSITION THERAPEUT (TTHI) +9.68%
- REXAHN PHARMACEUTICL (RNN) +8.91%
- ANADYS PHARMACEUTICA (ANDS) +8.65%
- NEURALSTEM INC (CUR) +8.22%
- ALNYLAM PHARMACEUT (ALNY) +7.46%
- LEXICON PHARMACEUTCL (LXRX) +6.55%
Today’s Drug stock winners are:
- WYETH (WYE) +6.27%
- JAVELIN PHARMACEUTIC (JAV) +5.15%
- LILLY ELI CO (LLY) +4.41%
- SCHERING PLOUGH CP (SGP) +4.07%
- MERCK CO INC (MRK) +3.77%
- PFIZER INC (PFE) +3.03%
- BRISTOL MYERS SQIBB (BMY) +2.91%
- ASTRAZENECA PLC ADS (AZN) +2.77%
Contract research organization, or CRO,are taking it right on the chin today:
- Charles River Laboratories (CRL) -1.45%
- Covance Inc. (CVD) -6.03%
- Parexel International (PRXL) -2.65%
- Pharmaceutical Pdt. Dev. (PPDI) -4,14%
- PharmaNet Dev. Group (PDGI) -9.37%
Biotech losers are as follows:
- AMYLIN PHARMA INC (AMLN) -22.43%
- COMPUGEN LTD (CGEN) -16.15%
- QLT INC (QLTI) -10.36%
- NOVACEA, INC. (NOVC) -9.52%
- CERUS CORP (CERS) -7.01%
Jon Ogg
November 4, 2008
Bio-Pharma R&D Jobs At Risk, CRO’s Licking Their Chops
There have been two very interesting news bits today in research and development in drug and bio-health companies. The ramifications are also rather scary if you have been monitoring this segment over the last few years as one of the few havens in high-pay medical and bio-health jobs.
- Today the WSJ reported that GlaxoSmithkline (NYSE: GSK) informed employees that the drug giant may cut 850 jobs in R&D, or about 6% of that segment as part of its ongoing cost cutting measures.
- Pfizer (NYSE: PFE) is also cutting R&D. It is abandoning its early-stage work in heart disease, and is dropping research projects in obesity and bone density, but seeks for partners to carry on the work. The company is targeting 15-20 regulatory submissions in the period 2010-2012.
In the very recent past we have noted how Eli Lilly & CO. (NYSE: LLY) signed an agreement with contract research organization Covance Inc. (NYSE: CVD) in a transformation of Lilly’s current R&D model.
This may be bad for new-hire wages in the R&D arena in the biohealth sector. This all may bode well for all of the medical and bio-health contract research organization (CRO’s). Here are some stocks with CRO as their main operations or with significant exposure:
- Charles River Laboratories International Inc. (NYSE: CRL)
- Covance Inc. (NYSE: CVD)
- Parexel International Corp. (NASDAQ: PRXL)
- Pharmaceutical Product Development Inc. (NASDAQ: PPDI)
- PharmaNet Development Group Inc. (NASDAQ: PDGI)
Between this wave of cutting R&D personnel and the flood of biotech mergers, it looks as though things are changing wildly in R&D.
Jon C. Ogg
September 30, 2008
When Big Pharma Outsources R&D
There are many issues affecting Big Pharma drug stocks, and some fresh news is highlighting a trend that you will start to see more and more of. You won’t just see it from Big Pharma traditional drug companies. You will see it from biotech companies and could even see it occur at generic firms.
Eli Lilly & CO. (NYSE: LLY) has signed an agreement with contract research organization (”CRO”) Covance Inc. (NYSE: CVD) which will transform Lilly’s current R&D model. Lilly is selling its Greenfield, Indiana early-stage drug development facility to Covance for $50 million, and Covance will offer jobs to about 260 Lilly employees.
In addition, Covance signed a 10-year pact worth $1.6 billion to provide drug development services to Lilly. This will include levels of research from initial stages to studies and will include clinical services for drug studies in Phase II-IV studies. Covance will take responsibility for the following:
- Lilly’s non-GLP toxicology,
- in-vivo pharmacology,
- quality control lab,
- and imaging services.
So what gives? Are drug companies saying they cannot develop their own drugs any longer? Are they running out of ideas? Are they unable to keep within regulatory requirements? Even if this may be the case(s) among isolated cases, the real answer is far more basic. Follow the money. With this move, Lilly will fix its costs and will be able to control the perpetually higher costs of developing drugs. Keep in mind that most drugs are estimated to cost anywhere from $400 million to well over $1 Billion to just bring the drug to market after years and years of studies, tests, adjustments, development, and more.
Using a firm such as Covance should also accelerate drug development timelines, and may also improve efficiencies as well.
Biotechs are starting to be worth more and more and business to CRO’s as well. While some figures vary on just how much, the going figure that seems to be used is that about 30% of CRO’s revenues come from biotechs. This is a trend that should only become more and more of the case. At least this is keeping the clinical research ‘outsourcing’ within the U.S. For those of you who worry about overseas quality control and jobs being sent overseas, much of this work is already being farmed out in various stages or in various forms to India, China, and elsewhere.
Jon C. Ogg
August 6, 2008