Despite Pharma Risks, Jefferies Likes 4 Top Contract Research Stocks

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In a world where a political tweet about price gouging can wreck 10% of the value of a pharmaceutical or biotech stock, some investors might wonder if they should be in any of the areas in or around pharmaceuticals and biotechs. It turns out that the contract research organizations, or CROs, may offer a lot of value as companies look to bring in help from the outside in drug studies and development.

Jefferies has issued an upside report on Tuesday, January 24 in favor of the CRO model. The notion that these companies support the pharmaceutical and biotechnology sectors on a contract basis could actually help many of these companies keep their costs under control in the hunt for that next big drug.

Where the Jefferies team is positive on CROs is in those with higher exposure to faster growth areas. These would be targeting preclinical, Phase 4 and small to mid-cap biotech.

It was shown that the small and mid-cap biotechs continue to drive biopharma research and development growth, and that these areas support strong top-line growth from midsize CROs. The firm’s analysis of net bookings growth also indicates midsize CROs are better positioned for continued 2017 growth.

These are the four top CRO stock picks listed by Jefferies.

Charles River Laboratories International Inc. (NYSE: CRL) is rated as Buy and is a top CRO pick at Jefferies. It has a $93 price target, versus a recent share price of $79.42. This implied upside of 17%, if Jefferies is right, and that compares to a Thomson Reuters consensus analyst target price on Charles River of $86.04.

PRA Health Sciences Inc. (NASDAQ: PRAH) is rated with a Buy rating at Jefferies, and the firm has a $66 target, versus a $54.49 closing price and a $58.39 consensus price target. This implies 21% upside.

INC Research Holdings Inc. (NASDAQ: INCR) is also one of the top CRO picks from Jefferies, and the recent price of $50.35 comes with a $59 price target, which implies upside of 17%.

Patheon N.V. (NYSE: PTHN) is another top CRO pick from Jefferies, and the recent price of $27.27 compares to a price target of $33. This Buy-rated stock would have 21% upside, if Jefferies is right, and that target is more or less in line with the consensus target price of $32.27.

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Here is how Jefferies sees the late-stage outsourcing penetration maturing:

We continue to believe the total CRO market is 46% to 50% outsourced. When we examine end markets, though, CRO’s core market (Phase II/III) is more mature (55% to 60%) than the consensus view (Mid-40% range). Our recent sponsor survey suggests that “peak” outsourcing is declining as sponsors re-evaluate the strategies around late-stage outsourcing. This ultimately is decreasing the outsourcing penetration runway and signals CROs will need to expand services sooner rather than later.