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What’s next for clinical research firms after pandemic boom?

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Genetic research and Biotech science Concept.

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The tables have turned for Contract services organizations (CROs), with their toplines under pressure amid a post-pandemic drop in demand for clinical trial services worsened by biotech’s funding woes.

The group offers clinical trial management services for biopharma companies and medical device manufacturers. IQVIA Holdings (NYSE:IQV), ICON PLC (NASDAQ:ICLR), Labcorp’s (LH) CRO arm, Thermo Fisher Scientific’s (NYSE:TMO) PPD Inc., Syneos Health (SYNH), and Medpace Holdings (NASDAQ:MEDP) are among the leading CRO players in the market.

Charles River Laboratories International (CRL) and Inotiv, Inc. (NOTV) mainly focus on early-stage development services.

After an initial lull due to lockdown restrictions, the CRO market took off during the pandemic as biotech and pharma companies stepped up R&D efforts to develop COVID-19 vaccines, therapeutics, and diagnostic tests.

In 2021, IQVIA’s (IQV) topline grew ~22% YoY, while that of ICON Public Limited (ICLR) saw a whopping ~41% YoY growth. And PPD, before its acquisition by Thermo Fisher Scientific (TMO), experienced a ~36% YoY growth for the first nine months of 2021 compared to a ~16% YoY growth in 2020.

That led to even more competition as CVS Health (CVS) forayed into the CRO market in 2021 to capitalize on the pandemic-driven boom in clinical trials. Rivals, Walgreens (WBA), Walmart (WMT), and Kroger (KR) followed suit,

That momentum soon fizzled out as biopharma reduced R&D expenditure on COVID-19 products amid a drop in infections, and macroeconomic factors hurt biotech funding, forcing companies to rethink their development efforts.

Over the last 12 months, revenue growth for both IQV and ICLR has remained flat, while that of Medpace (MEDP) dropped to ~7% YoY from ~28% YoY in 2022. While its rivals are staying put, CVS recently announced plans to shut down its CRO business next year.

Changing fortunes in CROs are best reflected on Wall Street. After reaching multi-year peaks in December 2021, shares of IQVIA (IQV), ICON (ICLR), and Syneos (SYNH) have crashed, trailing the broader market.

However, there is hope for long-term investors. The consultancy services provider Fortune Business Insights projects the market for CRO services could reach $188.5B globally by 2030, expanding at a compound annual growth rate (CAGR) of 12.5% from an estimated $82.6B in 2023.

The firm attributes the growth to biopharma’s rising interest in partnering with independent service providers as they seek to outsource R&D activities in an effort to obtain flexible and cost-effective development solutions.

Meanwhile, the sector is coming under pressure from investors to develop medical solutions for chronic conditions such as cancer, obesity, and diabetes amid a rising prevalence and public awareness of these conditions globally.

Oncology is expected to remain the fastest-growing therapeutic area for the CROs, followed by CNS disorders, where the growth will be driven by improving diagnostic rates for conditions such as Alzheimer’s and dementia.

Despite the selloff, Wall Street analysts and Seeking Alpha contributors see buying opportunities in the CRO space. In two recent articles, SA authors Vader Capital and Zach Bristow reiterated their Buy ratings on IQVIA (IQV) and ICON (ICLR), respectively, citing potential undervaluation.

Meanwhile, Wall Street analysts indicate Strong Buy recommendations on all CROs except Syneos Health (SYNH), which trades roughly in line with the valuation it received from a private equity consortium in a recent buyout offer.

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