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CROs Will Return to Relevance in 2012

Contract research organizations remain on sale as industry rebound gains steam.

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We think the contract research organization (CRO) industry is on the rebound, as evidenced by a resurgence in new business activity and revenue growth during the last year. Widespread top-line growth that began in the second quarter continued into the third; on average, the CROs we cover increased revenue 11.1% and 1.8% on a year-over-year and sequential basis, respectively. We expect growth in the CRO industry to continue accelerating into 2012, and the rise of the strategic partnership model should concentrate these benefits in the hands of a select group of narrow-moat providers.

Future Hinges on Partnerships
The emergence of the strategic partnership model, which has seen the world's largest drugmakers pair up with leading CROs as long-term partners in research and development, has helped fuel the industry's return to growth. The second and third quarters marked the first periods since the beginning of the drug development slowdown that the industry saw widespread top-line growth. Covance (CVD) and Pharmaceutical Product Development PPDI were once again the biggest top-line gainers during the quarter. These firms were a couple of the earliest CROs to sign long-term deals with Big Pharma partners, and we think their continued success attests to the growing importance of incremental revenue derived from new strategic alliances.

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Lauren Adams does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.