Garen Sarafian of Citi Research recently hosted Parexel CFO Ingo Bank in Europe, saying in a note to investors: “The single biggest area of concern from last quarter was its net book to bill below one. To us the issues genuinely appear short term: the fundamentals of the market including strong RFP [request for proposal] flow remain intact, with no indication of any larger unfavorable macro trend impacting the company.”
The book-to-bill is generally a good indicator of a CRO’s strength in generating new strategic partnerships. Analysts grilled Parexel in the conference call for last quarter’s results, noting that no other major CROs seemed to be seeing a similar downturn in its relationships with large pharma or biotech companies. Parexel CEO Joef Von Rickenbach also emphasized in the call that the issues with partnerships was not just limited to the company’s biggest client relationship with Pfizer.
“Net, we get the sense it’s business as usual, leading us to believe the company’s net book-to-bill for the Dec-end quarter should bounce closer to its prior average above 1.1x,” Sarafian wrote.
Market Expectations
With the recent acquisition of Covance by LabCorp, and a flurry of IPOs from PRA Health Sciences and INC Research, the industry seems to be burgeoning.
“The overall tone was that the CRO environment remains healthy, with good explanations to the areas of concern posed by investors,” Sarafian wrote.
And although Parexel’s margins are below industry averages, the company sees more opportunities possible from “ongoing offshoring of shared services; consolidating functions as staffing into regional or centralized levels, and apps to automate routine tasks,” Sarafian says.
Bank also noted that it’s unlikely Parexel will see a major merger in the near future, although small acquisitions in technology or consulting could be possible.
“Mergers among peers are less likely, partly due to clients’ desire for two CRO partners where client overlap leads to value destruction,” Sarafian says.