PAREXEL's New Risk

The U.S. may be the biggest drug market in the world, but the pharmaceutical business has long been global in scope. For drugmakers, regulatory clearance in the U.S. is usually the first priority, but Europe and Asia are often close seconds. Further, testing drugs abroad may be cheaper than doing so in the U.S. As a result, clinical trials for experimental drugs are often conducted in a number of countries.

Contract research services provider PAREXEL International (NASDAQ:PRXL) should be well aware of the global dynamics of drug testing. And yet the company was apparently caught off-guard by a growing shift away from U.S. trials. The firm reported in April that as a result of this change, all of its operating profit in the third quarter came from non-U.S. activities -- in other words, U.S. operations were a drag on the business. PAREXEL announced earlier this month that it is addressing this problem through office closings and layoffs.

Even with the reduction in U.S. expenses, the company's domestic business may still be resting on a weak foundation. PAREXEL is experiencing intense competition for contracts with pharmaceutical giants such as Inside Value pick Pfizer (NYSE:PFE) and Eli Lilly (NYSE:LLY). To fill the void in its U.S. business, the firm may have to turn more to biotechs and small to mid-sized pharma companies. PAREXEL noted that most of its request-for-proposal (RFP) growth last quarter came from North America, and smaller drug outfits accounted for much of the RFP dollar growth.

For PAREXEL, reliance on biotechs and smaller pharma firms could pose new problems. While lesser-known players can certainly grow into successful companies and long-term clients, it's important to note that for every Amgen (NASDAQ:AMGN), there are a whole lot of broken dreams. Investors should be aware that PAREXEL's future could be on shakier ground.

Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.