Contract Researcher Parexel Sees Growth In Biotech

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When it comes to procuring clinical research services, small biotechs are like the average Janes and Joes who must wait in line to enter a nightclub while celebrities are whisked in like royalty the second they show up.

In this case, the celebrities are big pharmaceutical firms with the money and clout to jump to the head of the line when they need a contract research organization to manage clinical trials, compile data, conduct studies and provide marketing expertise.

Meanwhile, many biotech and biopharma firms are stuck staring at their watches, wondering when they'll get the services they need.

Parexel International ( PRXL ) r ecognized this problem a couple of years ago and did something about it.

The company provides biopharmaceutical outsourcing services to the drug, biotech and medical device industries.

It operates in three segments. The biggest unit, Clinical Research Services ( CRS ), contributes about 75% of revenue. The rest is broken down between Parexel Consulting and Medical Communications Services (PCMS), and Perceptive Informatics.

Its services range from clinical research and consulting to drug development, regulatory affairs, marketing and information technology solutions.

Although the lion's share of Parexel's business comes from large pharmaceutical firms, the company also serves smaller biotech and biopharmaceutical companies.

Broad Scope Seals Deals

Parexel established a dedicated biopharma unit in 2012 that focuses solely on helping small and mid-sized biopharmaceutical clients achieve their development goals.

This unit serves a few purposes. For one, smaller clients know they'll get Parexel's full attention without having to worry about competing with Big Pharma clients.

"It's a very important selling point for us because there's always a sense that smaller companies must be wary of those who work with larger pharmaceutical firms," Parexel Chief Financial Officer Ingo Bank said in a phone interview.

"They might ask, 'How can we be sure you won't set us aside to meet Big Pharma's needs?'" he added. "That's why we established the biopharma unit a couple of years ago."

Parexel's biopharma unit also offers a wide range of services, which is another important selling point. Unlike Big Pharma companies, which might have large staffs dedicated to regulatory affairs or other parts of the development process, many smaller biotech firms run a bare-bones operation dedicated solely to research.

"Biopharmas need more than just a company that helps them run trials," Bank said. "They need technology, data testing, data management, regulatory expertise, someone to assess the health economics of the drugs. We can offer that."

As it turns out, many biopharma firms have a lot more money to spend on such services than a few years ago, which has helped drive more business to Parexel.

"Biotech funding has certainly reinvigorated the smaller cap end of Parexel's client base," said David Windley, analyst at Jefferies. "There are a bunch more clients with cash to spend on clinical trials than there used to be."

That's mainly because investors have returned to the biotech sector after many got out following the last decade's financial crisis, he says. Shares of IBD's Medical-Biomed/Biotech group have more than tripled over the last three years.

"Biotech funding has been driven by the equity markets performing well," Windley told IBD. "The risk aversion has kind of abated. Folks are more willing to step out further on the risk curve and invest in unproven technologies. Also, the quality of the research to invest in looks better as well."

Like Bank, Windley says Parexel's dedicated biotech unit goes a long way toward convincing smaller biotech/biopharma clients that they'll get the same level of service as a multibillion-dollar drugmaker.

"A small client that knows they're not going to spend as much as aPfizer ( PFE ) might be concerned about not getting the same quality of resources," Windley said. "So Parexel created this dedicated unit to target and serve this smaller client, and that's a smart move."

Biotech still represents a small slice of Parexel's overall business. Although the company doesn't break its revenue down by end market, one estimate is that biotech/biopharma contributes 15% or less of overall revenue.

Still, CFO Bank says a "big part of our growth certainly has been in biopharma."

Healthy Growth

That growth is evident in Parexels' financial returns. It has run off 10 straight quarters of at least double-digit sales and earnings growth.

Earlier this month the company logged adjusted earnings of 65 cents a share for its fourth quarter of fiscal 2014, ended in June. That was up 30% from a year earlier and 4 cents above analyst consensus views. Revenue gained 11% to $585.1 million, in line with estimates.

The company's bottom line got a boost from higher margins during the quarter. Its consolidated gross margin rose 370 basis points from the previous year to 35.7%, topping Windley's estimate.

Margins have been helped by internal initiatives to improve efficiency. These include moving more operations to lower-cost countries such as India and making it easier for workers to access IT tools to handle tasks that used to be done manually.

Parexel's full-year fiscal 2014 earnings rose 28% to $2.17 a share. Analysts polled by Thomson Reuters expect annual EPS to rise 24% this fiscal year and 19% in fiscal 2016.

The company looks to continue its growth streak by taking advantage of a couple of trends that have changed the contract research industry -- not just for Parexel, but also for other players in the field such asCovance ( CVD ) andQuintiles Transnational ( Q ).

"From a macro standpoint, the days of blockbuster drugs are over," Bank said. "We are seeing a much larger number of molecules that address smaller patient populations, so we are doing more work there."

Another trend, he says, is that technology approaches such as informatics have become "very pervasive" in the drug and biotech fields.

"Clients are asking us to help them integrate data from different sources and systems, and help them better understand the clinical perspective and the trial perspective," Bank said. "You need a very strong IT capability on a global scale to do that, and we have one of the strongest IT offerings in the industry."

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

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

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