Bookkeeping: Creating a CRO Basket

I've been talking about these healthcare contract research organizations (CROs) for a long time, but aside from WuXi PharmaTech (WX) have not taken the plunge - to my chagrin. With the lack of market leadership ex-healthcare, this is one sector where I can at least believe in sustained growth over the long run unlike most of the groups being run up the past 5 weeks which are nothing more than a rotational trade, which will be abandoned once the hedge funds are done with it. So for our time line which is longer than that, we want to be focusing on items we can actually hold for the longer term, unlike say auto companies which are a current flavor of the day.

I'm adding 3 names to WuXi and considering this as "1 position" (4 stock basket) - since these stocks have had a huge run, I am not going in large to begin with and hoping for pullbacks - I'm cognizant of "chasing" here so don't want to overdo it to begin. I have a 8 names watch list (I forgot to add Charles River Labs (CLB) to the chart below; it is one of the larger players) and here is a simplistic chart of their stock prices, 08 estimates, 09 estimates, 08 forward PE ratio, 09 forward PE ratio and 1 year growth rate (09 vs 08)


So in green shade are the 3 names I am adding today. Please note we are starting small and hoping for pullbacks in all these names. These are not identical companies - they all specialize in different parts of the clinical trials, and have different strengths and weaknesses - but I'm a generalist (expert in nothing) so hence I take a basket approach. Some of these names I have followed for years - others are newer to me.

ICON (ICLR) - simply the best company operationally; I've owned this on and off over the past half decade. Irish firm. Highest valuation but they deserve it. $2.5B market cap.

"Can't Touch This" - every fall to the 50 day moving average is a buy on this chart

Kendle International (KNDL) - really surprised me last quarter with a heck of an earnings report - surprised the Street as well judging by the stock reaction. Bought on valuation since I can get similar growth rates for far lower prices. $700M market cap.

"Surprise Surprise" - I'd like to be a buyer on a pullback to the mini gap at $42 if plausible


Life Science Research (LSR) - this is my "reach"; a newer name for me and I am still doing work on this name as I am not as familiar with it as the rest, only on my radar for the past month but it's dirt cheap compared to peers. I was not "super" impressed with their last quarter but without access to research reports I am going off of future analyst expectations and they seem to have growth in line with the sector for 2009. This is the smallest in the group @ $500M market cap.

"We're Young, We're Tough and We're Cheap"


I also like Covance (CVD) and Parexel International (PXL) - the growth rate on the former is misleading - again I am not sure why exactly 2009 growth is so low over 2008 without access to institutional research, but it most likely is some anomoly associated with taxes or some one off type of situation. Their results have been very good of late, but I went with ICLR - and all things being relatively equal I always like the smaller company because they are easier to grow faster. (CVD $6B market cap versus ICLR $2.5B) Parexel just took off like a moonshot post earnings so I would like to buy it if it comes back to fill the gap.

"Another Powerhouse"
"Earnings Darling" - gap at $29 we'd love to buy


Pharmaceutical Product Development (PPDI) did not blow me away with the last earnings but a rising tide lifts all boats and it has upticked along with the group despite striking me as "eh".

"Eh - someone please notice us; we're in this sector too"


Some of our earlier posts in this group

1. [Aug 8: ICON Gets Some Love from Investors Business Daily]
2. [Jul 22: ICON - they Never Miss and Give us a Chance at Cheap Shares]
3. [Apr 14: Keep an Eye on... Parexel International]
4. [Mar 12: WuXi PharmaTech - Very Good Earnings]
5. [Feb 21: ICON with a Solid Report]

• Net service revenues for the three months ended June 30, 2008, were $127.0 million, an increase of 30 percent over net service revenues of $97.8 million for the same period a year ago. et service revenues from the June 2, 2008, acquisition of DecisionLine Clinical Research Corporation (DecisionLine Clinical Services) accounted for approximately 2 percent of the growth in net service revenues.
• Net income per diluted share for the second quarter 2008 was $0.52 per share, up 79 percent from net income per diluted share of $0.29 for the same period of the prior year.
• Income from operations for the three months ended June 30, 2008, was $16.1 million, or 12.7 percent of net service revenues, compared to income from operations of $10.9 million, or 11.1 percent of net service revenues, for the same period of the prior year.
• Net service revenues by geographic region for second quarter 2008 were 45 percent in North America, 44 percent in Europe, 8 percent in Latin America and 3 percent in the Asia/Pacific region.
• New business awards for second quarter 2008 were $204 million, which represents a 24 percent increase over the same quarter last year.
• The net book-to-bill ratio was 1.4 to 1 for the three months ended June 30, 2008.
• For the full year 2008, Kendle is now projecting net service revenues in the range of $490 to $500 million and earnings per share on a diluted basis of $2.00 to $2.15. Kendle previously had projected net service revenues in the range of $450 to $460 million and earnings per share on a diluted basis of $1.90 to $2.07.

• Revenues for the quarter ended June 30, 2008 were $64.3 million, 10.5% above the revenues for the same period in the prior year of $58.2 million. Excluding the effect of exchange rate movements, revenues increased 11.1%
• Operating income for the quarter ended June 30, 2008 was $10.0 million, or 15.6% of revenues, compared with $7.5 million, or 12.9% of revenues for the same period in the prior year.
• Net income per common share was $0.58 for the quarter ended June 30, 2008 compared with $0.43 for the quarter ended June 30, 2007. Net income per fully diluted share was $0.47 for the quarter ended June 30, 2008 compared with $0.36 for the quarter ended June 30, 2007.
• Net new orders totaled $70.2 million for the second quarter of 2008. This represented a book to bill ratio of 1.09 for the quarter.
• At June 30, 2008 backlog (booked on work) amounted to approximately $202 million.
• Most exciting now is the prospect of needing to consider facility expansion beyond our current footprint, which we believe will support our near term growth to the $320 million level, as we strive to match the longer term business growth expectations of our customers.”