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From the Survey: PAREXEL International Corp.
Clinical Research provider PAREXEL International Corp. (PRXL) has overcome many obstacles during the span of its history as a publicly traded entity. To wit, it was the subject of a failed merger and suffered a massive downturn in its stock price and a weakening in its business fundamentals during the 2008-2009 recession. However, by purchasing many smaller entities during those years, PAREXEL now stands in a good position to offer its many research-related services to the big pharmaceuticals companies.
As noted, PAREXEL is a clinical research organization or CRO, which means it conducts clinical research from Phase I through Phase IV of drug development for other companies. It also provides clinical trial management, biostatistics, data management and advisory services, in addition to other services. Its PAREXEL Consulting and Medical Communications Services segment offers its expertise in regulatory, product pricing, and commercialization of the drugs, while the Perceptive Informatics segment helps to improve the product development and regulatory submissions processes.
In April of 1999, a deal was struck between Covance (CVD) and PAREXEL to merge their operations. This would have combined the second and third largest CROs, creating what would have been the largest such entity. Under further examination, both managements’ due diligence found that there wasn’t enough bottom-line acceleration to justify the deal. The proposed combination was quickly scrapped after the shares of both companies began to fall.
In the aftermath of the failed union, PAREXEL started to add additional capabilities by doing much smaller deals. The Company acquired CEMAF, which enhanced its Phase I capabilities in late 1999. It also expanded its reach with a deal in South Africa. In the UK, the company purchased a smaller provider of customer relationship management services, which helped to strengthen its operations in 22 countries. It also purchased an online U.K. medical network, which improved its recruitment of local physicians. Much later, the company purchased a provider of Phase I neurology and psychiatry in California. All told, the purchases helped PAREXEL to establish 56 locations in 43 countries with broad clinical research capabilities.
The last recession was a painful one for the company. Many big pharmaceuticals companies had to scale back their research and development expenditures. PAREXEL was hurt by the cancellations, as new bookings were hard to come by during this period. Thus, revenues and earnings took a hit during the winter of 2008 and the spring of 2009. Even with such setbacks, revenues increased on a fiscal year-over-year basis. Meanwhile, earnings only took a slight step back. The stock took a far worse beating, falling from a high of $36 to a low of $6 during the recession.
After the downturn’s conclusion, the big pharmaceuticals houses had an increased appetite for new products, and PAREXEL slowly started to win new contracts, partially owing to its high level of research capabilities. It first won a large Pfizer (PFE -Free Pfizer Stock Report) contract. Then Eli Lily (LLY), GlaxoSmithKline (GSK), Bristol-Myers Squibb (BMY), and Merck (MRK - Free Merck Stock Report) joined in, adding contracts of various sizes and requiring diverse research abilities. PAREXEL’s large-scale international operations with sizable capabilities have allowed the company to build its revenues at a solid clip almost every year since its entry into the market in 1995. By adding contracts with the largest firms, PAREXEL has enabled itself to continue its revenue growth.
PAREXEL will likely be boosted by the shift in the business model of the big pharmaceuticals. They no longer are waiting for smaller biotechnical companies to create a new product, and then buying the company. The big houses are now working with CROs at a much larger scale, allowing them to limit risk by not investing in plants and workers in a drug that may have little efficacy. This change in the modus operandi should benefit PAREXEL and other CROs, as they allow pharmaceuticals giants to outsource risk for a price.
The company is currently well positioned. The backlog in potential revenues is the equivalent of three years’ worth of current revenues, so PAREXEL should be in much better shape should the conditions surrounding the recent recession recur. The company’s balance sheet is in a solid shape and buybacks are management’s preferred method of returning capital to shareholders. Meanwhile, the large decreases in the share count are boosting earnings per share. Overall, the company is in good shape, and the trend of having the large pharmaceuticals houses working with established CROs will likely bring PAREXEL notable success going forward.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.