That cumulative growth can be attributed not only to Quintiles’ 52% rise in share prices, but a 36% boost in INC Research shares, a 41% pop in Catalent shares, and a 55% increase in PRA Health Sciences shares.
But the IPO boom may not speak for the industry as a whole and may just be a sign that investors are willing and eager to bet early on a group of companies that collectively should see a larger share of the R&D work from large pharma and biotech companies.
Regardless, nearly everyone in the outsourcing industry – from Covance’s CEO to the Tufts Center for the Study of Drug Development to industry surveys – seems to think the market is poised to continue expanding, though it’s difficult to quantify how big that expansion will be or how long it will last.
David Blume, managing director at Edgemont Capital, a healthcare investment banking firm, told Outsourcing-Pharma.com that “in short, the pharma and biotech companies are having great access to capital and…relying on these service providers.” The R&D “model is much more virtual today than ever before and these companies need third party service providers.”
Another sign that these recent increases in newly IPO’d companies may just be a quick rise: In the past year, many of the other outsourcing companies on the public market are seeing smaller stock price gains. Chinese CRO Wuxi, for instance, saw its stock rise only about 5% over the past year, while Parexel saw a 19% hike and Charles River Laboratories saw 30% growth. LabCorp similarly saw 31% growth, though most of that rise came after acquiring Covance.
Blume noted that the “strong underlying drivers,” such as the amount of capital going into the sector and public markets “have provided tremendous funding to the clients” of CROs and contract developers.
As far as whether there’s a bubble that could potentially bring down the CRO/CMO industry and their stocks in a hurry, Blume noted that although “valuations are very healthy,” investors can look to a company’s backlog and pipeline – indicators of future growth – “to get some visibility in that sense.”
He also compared the idea of investing in the CRO/CMO market with the idea of investing in oil service stocks as a way to limit exposure to the larger energy industry. “It’s unlikely there’s a bubble that pops but ultimately if there is pressure, it’ll be a slowing in earnings,” Blume added.