As I said in a recent piece on PRA Health Sciences (NASDAQ:PRAH), there's a lot to like about the contract research organization (or CRO) sector as trial complexity increases, R&D budgets continue to grow, and drug companies look to shift toward their specialties and more variable-expense models. Within this competitive space, INC Research (NASDAQ:INCR) has looked to stand out with an intense focus on Phase II-IV support, a greater skew towards smaller companies, and a more intense focus on a few specific therapeutic indications.
Whether this differentiated
strategy will work is (and/or how well), in my mind, the key question
for the stock. What INC Research is doing makes sense, but it's a
riskier strategy given how much spending is accounted for by larger
companies and the reliance of smaller companies on market-based funding.
Performance has been more erratic here of late, with soft trends in new
bookings (although the company tends to be conservative here). That
said, if INC can navigate through this tough stretch and drive long-term
revenue growth in the high single digits, with FCF growth in the double
digits, the shares look undervalued below $50.
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INC Research Looks Like A More Focused, Higher-Risk CRO Option