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Late-Stage Businesses Drive Narrow Moats for CROs

The top contract research organizations have opportunities to gain share in a rapidly growing industry.

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Top-tier clinical research organizations possess strong competitive advantages that should allow them to take an outsize share of the rapidly growing market for outsourced research and development. Specifically in the late-stage business, we believe CROs' global scale, depth of data, and expertise warrant narrow economic moats. Despite our expectations for low-single-digit growth in global biopharmaceutical R&D spending during the next five years, increased outsourcing penetration and market share gains by top players should drive 10% compound annual top-line growth for the CROs we cover:  Quintiles (Q),  Covance (CVD),  Parexel (PRXL),  ICON (ICLR),  Charles River (CRL), and  WuXi (WX). Margin expansion from operating leverage and better asset utilization will create an even more pronounced impact on the bottom line, where we expect a 21% five-year compound annual growth rate for earnings per share, slightly faster than the Street's consensus estimate of a 17% CAGR.

Big Pharma Partnerships Validate CROs' Value Proposition
Big Pharma's increased outsourcing and willingness to sign long-term partnerships is a validation of CROs' value proposition. We believe CROs can add value to the drug-development process for pharmaceutical firms big and small, primarily by improving on the cost, speed, or success of drug development.

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