Credit Suisse has initiated research coverage on the so-called contract services organizations, or CROs. The firm's Jeffrey Bailin started the sector with a Market Weight rating, but the reality is that three of the firms are listed as Outperform with upside targets. In fact, all the firms are responding well on Tuesday as the price targets are all higher than the current share prices.
Charles River Laboratories International Inc. (CRL) was the cautious call at a Neutral rating. Covance Inc. (CVD), Quintiles Transnational Holdings Inc. (NYSE: Q) and PAREXEL International Corp. (PRXL) were started as Outperform by Bailin.
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The report stated that the CRO group as a whole has handily outperformed the market over the past 18 months after a recent acceleration of growth. Bailin believes this signals the increased traction and benefits of outsourcing. He also believes that the high-single-digit market growth is sustainable as demand for CRO services should remain robust. Three drivers are a modest return of growth to R&D budgets, steady increases in outsourcing penetration, and a necessity for innovations and efficiency in drug development.
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Charles River Laboratories International Inc. (CRL) Neutral rating. After closing at 445.46 on Monday, Bailin assigned a $50 target despite the Neutral rating. He thinks this one's animal research models and services support the preclinical functions of biopharmaceutical manufacturers. Bailin also pointed out that its shares have lagged peers in 2013 due to a more modest growth outlook weighing on its valuation.
Covance Inc. (CVD) was given an Outperform rating and the $101 price target compared to a recent close of $85.02. Bailin signaled that Covance's outsourced services support the R&D functions of biopharmaceutical manufacturers. It was listed as the only large global player in preclinical (pre-human) and clinical (human) end markets.
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PAREXEL International Corp. (PRXL) was given an Outperform rating and the $58 price target compared to a recent close of $49.29. Bailin called PAREXEL a global CRO that provides outsourced services for clinical R&D functions of biopharmaceutical manufacturers. Its shares have outperformed due to strong revenue growth from strategic partnerships translating into stronger earnings growth.
Quintiles Transnational Holdings Inc. (NYSE: Q) was given an Outperform rating and its $44.86 closing price compares to a price target of $52.00. Bailin said that Quintiles is the largest global contract research organization for outsourced services supporting the clinical R&D functions of biopharmaceutical manufacturers and that it is one of the largest providers of contract sales services.
All four CRO providers were trading higher in mid-Tuesday trading with an average of 1% gains.