A growing chorus of economists has been predicting a recession in the U.S. this year or next. In such an environment, finding companies with economically resilient revenue and earnings streams may be hard to do -- but not impossible. In fact, contract research organization (CRO) stocks Charles River Laboratories International (CRL -0.72%) and Thermo Fisher Scientific (TMO -0.33%) may be just what you're looking for. Here's why.
Recession-proof business models
CROs conduct the research and development process for companies trying to get new medications FDA-approved and to the market. Pharma start-ups rely on CROs to complete the highly regulated research process because doing it themselves is cost prohibitive, especially if they're only developing a single drug. And big pharma companies don't want to spend money on an internal research staff due to the cyclical nature of each company's drug pipeline.
The CROs are happy to help. With diversified stables of pharma clients, CROs are resistant to any economic environment. In addition, the research process that CROs are paid for can take more than 10 years until final FDA approval.
Charles River Laboratories
Charles River's business is far-reaching and touches all stages of the drug testing and approval process. The company boasts of working on over 85% of FDA-approved novel drugs in 2021. Those approvals included 100% of central nervous system drugs and over 90% of oncology drugs.
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About 60% of Charles River's revenue comes from discovery services. These are the earliest stages of drug research when the company identifies and selects molecules that lead to the development of next-generation drugs. Clients hiring Charles River for discovery can expect the process to take four to six years. The company estimates that nearly 60% of its discovery clients also hire it for the remainder of the drug approval process, which can lock clients in for over 10 years until final FDA approval.
While many companies are worried about inflation or a looming recession, Charles River is less concerned. Analysts expect Charles River's non-GAAP earnings per share to grow 12% in 2022 to $11.57 in 2022.
Thermo Fisher Scientific
Thermo Fisher is a leading seller of consumables to the CRO market. The company has made several acquisitions in recent years, and has done well scaling new products from tuck-in acquisitions to its vast client list. Since 2011, its revenue has increased 13% annually and adjusted earnings per share at 20%.
In December of 2021, Thermo Fisher completed its acquisition of PPD, one of the world's largest traditional CROs. The company expects the transaction to result in $40 million of synergies and a huge opportunity to introduce its consumable products to new PPD customers. Thermo Fisher expects the PPD business to add $1.98 in earnings per share in 2022.
While many companies are concerned about inflation and a possible recession, Thermo Fisher is confident about the remainder of the year. In its first-quarter earnings report, it increased its full-year earnings per share guidance by 7% to $22.65.
What now?
Charles River and Thermo Fisher are growing their businesses in the face of waning expectations for the U.S. economy. Expanding pharmaceutical and biotech industries rely on CROs and will continue to lean on them for the long run. If you have recession concerns, these two stocks may be the recession-proof answer you're seeking.
