Credit Suisse Sees Big Biopharma Upside in Top Contract Research Outfits

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While biotech and certain aspects of the pharmaceutical sectors had done very well up until recent weeks, many health care and biopharma investors seem to have skimmed over or forgotten about the contract research organization (CRO) segment in health care. These outsourcing companies help biotech and pharmaceutical companies, and other research institutions, of all shapes and sizes, navigate through all steps of drug and treatment developments and studies.

It is always hard to assign serious upside in a new sector call when an analyst leaves a firm, but a new round of ratings is highlighting value now in the CRO sector. Credit Suisse assumed coverage with handy upside in the CRO leaders, and on average the firm is calling for upside of about 15%. All but one of the companies covered here have upside price targets calling for better than 10% gains.

The drug discovery and preclinical development cycle is highly dependent on the CRO leaders. Some of these stocks have risen handily from their 52-week lows, and some have pulled back from highs with the latest pullback.

ICON PLC (NASDAQ: ICLR) was started as Outperform and with a $90 price target at Credit Suisse. ICON has a market cap of almost $5 billion, based on its $82.45 share price, and the implied upside here is almost 10%. ICON also has a consensus price target of $83.72 and a 52-week trading range of $49.51 to $84.14. ICON is valued at 21 times expected 2015 earnings.

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PAREXEL International Corp. (NASDAQ: PRXL) was started as Outperform at Credit Suisse. Its market cap is $3.75 billion. PAREXEL trades at about $68.00 and Credit Suisse gave it a $75 price target, implying upside of over 10%. Its 52-week range is $52.19 to $72.69. PAREXEL is valued at 21 times expected 2015 earnings.

PRA Health Sciences Inc. (NASDAQ: PRAH) was started as Outperform with a $47.00 target price in the Credit Suisse call. With shares trading just under $41.00, it has a consensus analyst price target of $46.40 and a 52-week range of $19.10 to $44.02. Credit Suisse’s target implies roughly 15% upside if the price target proves accurate, and it is valued at 23 times expected 2015 earnings.

Quintiles Transnational Holdings Inc. (NYSE: Q) was started as Outperform with an $88 price target. Quintiles has a share price very close to $75.00 and a consensus analyst target price of $87.63. Quintiles also has a 52-week range of $51.09 to $80.45. This implies upside of over 17% to Credit Suisse’s price target, although Quintiles is valued at closer to 24 times expected 2015 earnings.

Charles River Laboratories International Inc. (NYSE: CRL) is one of the better known CRO companies, but it was given the lowest official rating in this sector coverage. Charles River was started with a mere Neutral rating. Still, its $84 price target sounds better than most Neutral ratings considering its $75 share price given an implied upside of 12% or so. The consensus price target from analysts is $77.77, and its 52-week range is $55.47 to $84.69. Charles River has a $3.5 billion market cap and is valued at about 20 times expected 2015 earnings.

INC Research Holdings Inc. (NASDAQ: INCR) has a $2.5 billion market cap, and it was started as Outperform with a $54 price target. INC’s share price of $44.50 implies 21% upside to Credit Suisse’s price target. That target is just above the $52.60 consensus analyst target price, and it is higher than the $19.61 to $51.69 range over the past 52 weeks.¬†While this has the best implied upside to the price target, INC is valued at close to 25 times expected 2015 earnings.

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While valuations are high in pharma and biotech, these CRO outfits generally do not pay dividends. That may change, or it may not, but valuation is between the growth biotech and old-school big pharma giants. As you can see, some of these have pulled back handily, and there may be some substantial upside ahead. What these companies have now is severe pricing power. Drug giants have scaled down their workforces, and outsourcing R&D functions or certain aspects of clinical studies is just a fact of life in the current climate. All those future blockbuster drugs might not come about with in-house teams working to solve the big problems alone.