It's easy for investors to fall into the trap of chasing markets higher and lower, especially when the media machine hypes booms and busts. However, investors that chase market pops and drops rarely come out ahead in the long haul. Instead, approaching the market with a longer-term view and considering companies that offer innovative, market share friendly solutions is a better bet.
Relying on that approach allows investors to take advantage of the market's inevitable sell-offs to pick up shares in companies that are disrupting their industry.
With that in mind, the recent market slide may make it a good time for investors to consider Quintiles (NYSE:Q), Icon PLC (NASDAQ:ICLR), Covance (NYSE:CVD), and Parexel (NASDAQ:PRXL), four contract research organizations, or CROs, that are reshaping how drug companies develop drugs.
Drug discovery game-changers
All four companies operate as outsourcing solutions to big pharmaceutical and biotechnology companies. Big pharma has come under pressure to carve out costs to offset sales lost to patent expiration. That has companies like Merck and Pfizer reconsidering their approach to discovering drugs and ushering them through trials. In an effort to reduce cash burn and target global markets, biotechnology companies are similarly turning to outsourced R&D models.
As a result, it's never been a better time for CROs. The industry has grown 10.2% to $13.6 billion since 2011, and sales at Quintiles, Icon, Covance, and Paraxel have grown even more quickly as drug companies embrace single-source global vendors rather than small, niche providers.
Quintiles is the largest CRO, providing drug development services to more than 400 drugmakers worldwide. The company IPOed last summer after being taken private in 2003 by the company's founder, Dennis Gillings.
Quintiles quarterly sales topped $1 billion for the first time last quarter as its backlog grew more than 13%. That brought its full-year sales to $3.8 billion and gave the company enough confidence to guide investors to expect sales north of $4 billion this year.
Importantly, Quintiles is leveraging growing demand for margin upside, too. Its adjusted operating margin grew more than 1% to 13.2% last year, resulting in earnings per share of $2.10, up more than 18% from 2012. That performance has Quintiles expecting to earn $2.33 to $2.46 per share this year.
Quintiles owes that solid performance in part to drugmakers' desire to expand into emerging markets like China. Quintiles gets more than 65% of its sales outside the United States, suggesting it's well-positioned to benefit from research spending targeting overseas growth markets.
2. Icon PLC
The Ireland-headquartered Icon is another global CRO hoping to capture an increasing share of drugmakers' spending on clinical trials.That spending is estimated at north of $60 billion industrywide, and given just a shade more than a third of that spending is currently captured by CROs like Icon, there appears plenty of runway to grow.
Icon's sales climbed 15% to $345 million in the fourth quarter, bringing sales to $1.34 billion in 2013, up 20% from 2012. That's pretty impressive considering sales were just $40 million when the company IPOed 15 years ago.
Importantly, Icon's earnings are growing even more quickly than sales, increasing 77% to $1.77 in 2013. That performance should continue this year given orders versus services performed, or book-to-bill, was 1.23 last year. That has Icon guiding investors to expect sales of $1.4 to $1.46 billion this year, up 6% to 10% from 2013. Earnings should be even better, climbing 16% to 24% to between $2.05 and $2.20 per share.
3. Covance Inc
Covance is another large player in the global CRO market, with $623 million in sales during the fourth quarter and $2.4 billion in revenue last year. Much like its industry peers, 2013 was a year marked by significant operating profit growth. Covance's operating margin jumped from 5.3% in 2012 to 9% in 2013, resulting in 20% earnings-per-share growth to $3.23 after backing out items.
Covance's business is well balanced, with roughly a third of its revenue coming from each of its central lab, early drug development, and mid- to late-stage drug development businesses. Similar to the other large CROs, a big portion of Covance's business is generated outside the United States. Last year, about 53% of revenue came from international markets, including 16% in emerging regions like the Asia Pacific.
Thanks to a book-to-bill ratio of 1.23 exiting its fourth quarter, Covance thinks sales will grow another 6% to 10% this year, resulting in earnings per share of between $3.65 and $4. Covance's future looks bright given that Decision Resources reports there are more than 4,000 drugs in phase 1 through phase 3 trials, up 19% from 2008.
4. Parexel International
Investors took a short-term view of Parexel this past November when they knocked shares down on news that some key clients had delayed work. However, that sell-off provided what turned out to be a great entry for shareholders given the stock marched from November's low of $40 to more than $55 two months later.
The share price recovery came as revenue from those delayed deals were realized in the most recent quarter. Parexel's sales grew more than 15% year over year to $487 million in its fiscal second quarter, bringing sales growth to 14.6% over the past two quarters. Earnings per share jumped even more quickly, increasing 36% from a year ago to $0.49 last quarter.
Importantly, order momentum finished the quarter strong as the book-to-bill reached 1.34, boosting the company's backlog to $4.8 billion. That has Parexel expecting sales a little north of $1.9 billion this year, and non-GAAP EPS of between $2.01 and $2.11.
Fool-worthy final thoughts
Growth Investors fretting over stalling sales and profit for big drugmakers and worrying over the hit-and-miss volatility of biotechnology companies may find CROs like Quintiles, Icon, Covance, and Parexel better buys. After all, CROs are less likely to swing wildly on the results of any one specific trial. Instead, they trade more on global research spending. Since drugmakers remain committed to filling their pipelines to offset expiring patents and friendly financing markets are fueling a new generation of emerging biotechnology companies, the potential for CROs may be big.
Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd also owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool owns shares of ICON plc (ADR) and PAREXEL International. Try any of our Foolish newsletter services free for 30 days.