Developing new drugs is time-consuming and costly. According to the National Center for Advancing Translational Sciences, the average period from therapy discovery to Food and Drug Administration (FDA) approval is 14 years and costs $1 billion. The kicker is that the failure rate of new drugs is 95%.
Clinical research organizations (CROs) and contract development and manufacturing organizations (CDMOs) are growing because the increasing price of developing, testing, manufacturing, and marketing therapies has made it more important that pharmaceutical companies speed the process along with fewer failures.
Rather than doing all the clinical trial work or manufacturing work in-house, more healthcare companies are turning to CROs and CDMOs to reduce overhead and expedite bringing therapies to market.
Fortune Business Insights puts the market for CRO services at a little over $73 billion in 2022 and expects it to have a compound annual growth rate (CAGR) of 12.1% through 2029, reaching an addressable market of nearly $164 billion. The CDMO market, according to a Market Data Forecast report, was valued at nearly $116 billion in 2022 and is expected to grow at an annual rate of 11.5% through 2027, reaching nearly $200 billion in market size.
Icon Public (ICLR -3.02%), IQVIA (IQV -2.85%), and Catalent (CTLT -0.27%) are three of the healthiest companies that assist others in clinical trials. Catalent's shares are up more than 42% this year while Icon's shares are up nearly 8% and IQVIA's are down 7%. Icon and IQVIA appear to have the most near-term upside, but Catalent may be a better long-term investment.
Flexibility is the key for Icon
Icon has roughly 41,000 employees across 111 locations in 53 countries. The company has increased annual revenue by 479% over the past decade and doesn't seem to be slowing down. Over the same period, net income rose 392%, despite a massive drop during the pandemic years, and seems to have recovered fully.
ICLR Revenue (Annual) data by YCharts.
For 2022, Icon's revenue rose by an impressive 41% from the previous year, to $7.7 billion. The company also saw a massive improvement in earnings, with diluted earnings per share (EPS) clocking in at $6.13, from $2.25 in 2021, a mouth-watering 172% increase.
The company's successful One Search Tool, which uses artificial intelligence to determine ideal trial locations, has helped it grow the business. A bigger key has been the company's flexibility. Instead of a one-size-fits-all approach, it will provide full-scale CRO services or a hybrid model, depending on the company.
This year, Icon's management guided revenue to grow between 2.6% to 7.7% to the range of $7.94 billion to $8.34 billion, representing a year-over-year increase of 2.6% to 7.7%.
With net income growth on the road to full recovery (as seen in the above chart), Wall Street analysts expect Icon to generate 14% earnings growth annually over the next five years. If the stock's price-to-sales ratio of 2.2, and price-to-earning ratio of 34 -- both relatively inexpensive from a historical standpoint -- remain constant, a 10% rise in the stock price should easily happen this year.
IQVIA demonstrates its leadership role in the industry
IQVIA is one of the larger CROs with 86,000 employees who operate in over 100 countries. The company said it processes over 100 million patient records annually. Besides its size, what sets the company apart is its leadership in decentralized clinical trials, which helps keep costs down and increases the diversity of the patient pool.
The company has three segments: research and development solutions, technology and analytics solutions, and contract sales and medical solutions. Over the past decade, IQVIA has grown revenue by 183%.
Like Icon, 2022 was a strong year of growth for IQVIA with yearly revenue of $14.4 billion, up 3.9%. Full-year EPS grew 15.6% to $5.72.
The company's 2023 guidance said it expected revenue to be between $15.2 billion and $15.4 billion, showing growth of between 5.1% to 6.9%. If the company can hit those numbers, it will be the 13th consecutive year it has improved revenue.
But more importantly, IQVIA has been hugely profitable over the last three years. While its trailing-12-month revenue increased a modest 29%, its net income shot up 407%, driving up net margins by over five and a half percentage points (or 550 basis points), to 7.6%. Despite the pandemic years, management has ensured that the business remains highly profitable amid slowing sales growth.
IQV Profit Margin data by YCharts.
From a valuation standpoint, IQVIA's shares have lost 33% of their value since peaking in Dec. 2021. But that means its shares are now trading quite cheaply despite the massive earnings growth. At 33 times trailing-12-month earnings, IQVIA's PE ratio has actually fallen over 50% in the last 15 months.
IQV PE Ratio data by YCharts.
Wall Street analysts expect IQVIA to generate nearly 12% earnings growth annually over the next five years. With shares trading relatively cheaply from a historical standpoint, once the market realizes that IQVIA grows earnings faster than its revenue, shares could rally more than 10% this year, and even more after that.
Catalent has more potential for growth
Catalent is the smallest of these three companies, with 19,000 employees and just under $5 billion in revenue in 2022.
It operates in two segments: biologics and pharma/consumer health. It is different from the other two because it is a CDMO that provides drug manufacturing technology and development solutions for pharmaceutical companies and consumer health products, including clinical trial expertise. It helped produce COVID-19 vaccines during the pandemic for Moderna, Johnson & Johnson, and AstraZeneca, among others.
It is also the only one of the three that is seeing declining revenue. In the second quarter of fiscal 2023, it reported revenue of $1.15 billion, down 6% year over year. EPS for the quarter was $0.44, down from $0.52 in the same quarter a year ago. Much of the drop is due to the declining need for COVID-19 vaccine manufacturing.
This year, the company is forecasting yearly revenue to be between $4.63 billion and $4.88, which means the company could see revenue go down as much as 4% or rise as much as 1%.
The reason Catalent's stock has gone up so much this year is it a potential buyout candidate, with life sciences company Danaher showing interest.
Over the past 10 years, Catalent said it has assisted in 50% of the therapies the FDA has approved. Even if the Danaher deal doesn't happen, the company's ability to deliver during the pandemic has shown pharmaceutical companies the potential advantages of outsourcing manufacturing. Some, like Moderna and Sarepta, seeing how well the partnership worked, have signed on to continue to use Catalent's services and the company appears prepared to increase that trend.
In the right place at the right time
While Icon and IQVIA have clear growth potential, all three stocks should benefit from the need for CROs. Their specific skill set of managing a clinical trial or, in Catalent's case, of also handling specific manufacturing needs, is crucial toward helping pharmaceutical companies become more efficient in developing new drugs, particularly for smaller or mid-size pharmaceuticals.
This is particularly true as more companies develop cell therapies or biologicals, which are more complex than standard drugs. With the failure rate of therapies so high, it makes sense to turn to companies than can speed the process along more efficiently.
