Parexel Gets Sales, Profit Bump From Big Pharma

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When it comes to scoring new business wins,Parexel International ( PRXL ) has been hitting home runs.

In its fiscal fourth period, the leading global biopharmaceutical services provider reported the biggest quarterly sales and earnings growth it's seen in at least four years as major drugmakers stepped up the spending pace.

A hefty $601.9 million in net new business wins resulted in a net book-to-bill ratio -- or the amount of net new business won divided by revenue -- of 1.53. A book-to-bill ratio of 1.53 means Parexel added 153% of the quarter's revenue to its backlog, an indication of very strong demand, which bodes well for future growth.

Its 2012 backlog of $4.4 billion, at fiscal year-end June 30, was up 27.6% from the prior year.

The company's good fortune comes at a time when the stars are aligned in favor of large global clinical-trials research service providers like Parexel.

Efficiency Expert

As large drugmakers have become more budget-conscious in their R&D spending in the wake of the recession, they've stepped up outsourcing of clinical research to become more efficient, says William Blair analyst John Kreger. But they haven't been outsourcing broadly.

Instead, he adds, they've formed strategic partnerships where they outsource most of their clinical research to a small number of the larger global companies.

And Parexel, which gets roughly 75% of its revenue from clinical-trials research services, has been a key beneficiary. Parexel is one of two or three strategic partners for drugmakers such asEli Lilly ( LLY ),Pfizer ( PFE ),Merck ( MRK ) andGlaxoSmithKline ( GSK ), says Chief Executive Josef von Rickenbach.

These partnerships have helped drive a surge in the company's order backlog, which von Rickenbach says has doubled since 2009. But Parexel already had a growth strategy in place to tap into these trends.

"We anticipated many of these trends and positioned ourselves strategically to be ready when the opportunity arose," said von Rickenbach. "When the opportunity came, we were as well prepared as anybody to take advantage of a very favorable market environment for our services."

The other trend he refers to is the fact that drug-development companies are executing more on late-stage clinical trials, says First Analysis analyst Todd Van Fleet.

The reason: "Drug developers need to have new medicines approved to replace the revenue that's been lost from compounds that have gone off patent," Van Fleet said.

And many companies, especially large pharmaceutical companies, are facing "unprecedented levels of patent expiration," adds von Rickenbach.

That includes some very big moneymaking drugs, such as Pfizer's Lipitor, which went off patent in November. As a result, many of these large drugmakers are trying to get new products into the market to "backfill the revenue and profit gap," von Rickenbach says.

Most of Parexel's new business wins in the fourth quarter were for late-stage clinical trial studies from these partnerships.

And late-stage trials are Parexel's sweet spot. While its services span all phases of clinical trials, most of its studies are in the last phases of clinical development testing--phase three and phase four. The company also offers consulting services and clinical-trial technology.

Parexel, says von Rickenbach, has a lot of things going for it that have helped it tap into these trends.

"These trends tend to favor larger global companies," he said. "Not only did we grow, but we grew faster than many of our competitors. In that sense we took share in the industry."

One of Parexel's key strengths is its global prowess. It has 70 locations in 51 countries worldwide. Von Rickenbach says it's very difficult and complicated to build a clinical-trials research network around the world like Parexel's. It gets roughly 55% of revenue outside of North America and Latin America.

Another strength, von Rickenbach says, is Parexel's Perceptive Informatics subsidiary, which provides advanced technology tools, including medical imaging, to facilitate the clinical development process.

"Their key strength is they're viewed as a visionary in the industry," adds Kreger. "They've been consistently growing and gaining share. Their new business wins have been better than other companies in the industry and higher than their own revenue."

Parexel's key weakness for the investor? "They have consistently had one of the lower profit margins in the industry," said Kreger. "They opt to do the best for their clients even if it means a lower return for investors."

But commentary on Parexel's fourth-quarter conference call suggested that "sequential" margin improvement should begin in the first quarter and continue throughout the year, said Kreger in a report.

Bounding Profits

Overall, Parexel is faring handsomely on the financial front. In the fourth quarter, earnings soared 240% to 34 cents a share. Revenue climbed 26% to $457.8 million.

Analysts polled by Thomson Reuters expect Parexel to stay on the fast track. They see fiscal 2013 first-quarter earnings rising 45% to 29 cents a share. They expect full-year fiscal 2013 earnings to increase 27% to $1.40 a share. They see a 29% jump in 2014.

"Our belief is the company will probably have very strong growth over the next couple of years based on the backlog built up and the amount of activity drug companies are engaging in with respect to late-stage trials," said Van Fleet.

Still, it's not resting on its laurels. In July it launched the Parexel BioPharm unit, focused on the needs of small and midsize biopharma companies to help them achieve their development goals.

Recent data indicate that small and midsize companies are the "engine" of the biopharma industry, the company said in a press release. A hefty 81% of ongoing development programs originate from sponsors outside the top 25 biopharma companies, it said.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: GSK , LLY , MRK , PFE , PRXL

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