INC Research Looks Like A More Focused, Higher-Risk CRO Option

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

PRA Health Sciences' Special Mix Could Have More To Offer

It's hard enough to find undervalued stocks today, and a stock that is already up more than 40% over the last year and within a few percentage points of its 52-week high is not initially the most promising candidate. To be sure, PRA Health Sciences (NASDAQ:PRAH) is not conventionally cheap on backward-looking multiples and there are valid concerns that the CRO market could be in for a harder stretch as biotech funding dries up and Big Pharma pushes another round of consolidation. On the other hand, PRA's strong foundation in clinical trial management and its growing capabilities in strategic outsourcing and data/analytics shouldn't be ignored, and I believe there are opportunities here for the company to outgrow its addressed market.

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PRA Health Sciences' Special Mix Could Have More To Offer

Quick Follow-Up On CRO Piece

As one of my readers noted in the comments to my original CRO piece (CRO's A-OK), I neglected to mention Quintiles.

Quintiles is headquartered about two miles down the road from my home, in Research Triangle Park, North Carolina. A private company, Quintiles is the largest CRO in the game, with revenue reportedly in excess of $3B/yr. On top of that, the company boasts that of the 30 top-selling drugs on the market, it had a role in the development/commercialization of *all* of them.

So although I did not really have the space to talk about Quintiles in my earlier piece, I certainly need to give this company its due. Quintiles is clearly a major player in the CRO space, though one that is a bit harder to follow and analyze given that it is private and does not release an abundance of information about itself.