‘The CRO Sector Looks Appealing,’ Says Goldman Sachs — Here Are 2 Stocks to Consider

The biotech stocks get a lot of attention, from both stock analysts and investors, but the companies don’t exist in a vacuum. We are all familiar with their famously high overhead, but we might be less familiar with the companies behind the scenes that streamline the process.

CROs, contract research organizations, are firms hired by healthcare-related companies – the biotech researchers, the pharmaceutical companies, and the medical device companies – to bring efficiencies of scale to research, development, and marketing activities. The CROs can work for multiple clients, providing lab expertise at preclinical and clinical levels, gene and cell therapy services, AI expertise – all essential skills that might be in short supply in any one small biotech.

In a recent note, Goldman Sachs analyst Matthew Sykes lays out the case for CROs, saying, “We believe the CRO space as a whole benefits from the secular drivers… and that large, full-service CROs are positioned for outsized benefit as clients consolidate their vendors… We consider margin expansion combined with revenue growth a measure of operational excellence and believe they are some of the most important fundamental drivers of valuation in the sector.”

Sykes also points out this sector’s potential for continued growth, adding, “CROs currently trade at the mid-to-low end of their 5 and 10 year historical valuation and when compared to the S&P 500, where CROs tend to trade at a premium due to higher growth characteristics. We would note that CROs actually trade at a slight discount to the S&P 500 today, which is well below the historical average premium of 18%.”

So let’s take a closer look at two of Sykes’ CRO picks, while adding in the broader view with data drawn from the TipRanks platform.

Charles River Labs (CRL)

The first stock up, Charles River Labs, has been in business since the 1940s. From its Massachusetts headquarters, the company administers facilities around the world – in the US and North America, the UK, across Europe, in Asia, and in Australia and South America. Charles River has over 150 facilities and offices in 21 countries and has worked on more than 80% of all the drugs approved by the FDA over the past five years. The company describes its main strength as the ability to coordinate worldwide resources and apply multidisciplinary perspectives to problem-solving in the biotech space.

Charles River Labs works with customers across a variety of sectors, including government agencies, academic organizations, biopharmaceutical firms, agrobusinesses, and chemical companies. The firm’s services include research models and discovery services, safety assessments, biologics testing, laboratory services, cell sources, QC microbial solutions, and even administrative-oriented services such as scientific staffing and regulatory advising.

Cell therapy is a big deal in biotech, as it offers the prospect of individualized treatment for disease conditions with high unmet medical needs – and Charles River Labs is moving into that space as a CDMO, a contract development and manufacturing organization, offering collaborative, end-to-end services for cell therapy research companies. The company has conducted more than 1,000 studies in this area and supported the development of 20 FDA-approved cell and gene therapies.

The CRO segment is a profitable niche within the biotech research realm. Charles River, in its last set of financial results, reported $1.01 billion at the top line for 1Q24; while that was down 2% from the prior year period, it was over $16 million more than had been expected. The company’s earnings, at $2.27 per share by non-GAAP measures, were 21 cents per share better than the forecast.

All of this – a set of services that are in demand, a strong customer base, and a profitable business – lies at the core of analyst Sykes’ view of CRL. The Goldman analyst writes of this stock, “We see CRL as the dominant company in the preclinical space, allowing for effective pricing and direct leverage to innovation/biopharma spend… The depth of expertise has created barriers to entry for the competition and aligns them with increasingly complex trials. Additionally, we see CRL has having the highest leverage to a potential recovery in the emerging biotech sector as funding levels return to pre-Covid levels.”

Sykes goes on to explain why this company has sound growth prospects ahead, adding to the above, “While the challenges surrounding the CDMO integration has been a drag on both growth and margins, we believe these issues are largely behind CRL allowing them to realize faster growth and margin improvement. Additionally, CRL’s comprehensive product offerings allow for cross-selling into the CDMO business from new Biologics Testing clients, supporting further growth.”

For Sykes, these factors justify a Buy rating, and his $290 price target indicates potential for a 39% share price gain in the next 12 months. (To watch Sykes’ track record, click here)

Overall, CRL shares get a Moderate Buy consensus rating on Wall Street, based on 8 reviews that include 5 to Buy and 3 to Hold. The shares are priced at $208.41, and their $260.63 average price target implies a one-year upside of 25%. (See CRL stock forecast)

IQVIA Holdings (IQV)

The second stock we’ll look at, IQVIA, brings modern data technology to the healthcare realm; that is, the company provides technology solutions, including advanced data analytics, to support clinical research services in the life sciences field. The company can create intelligent connections and provide the analysis needed to transform healthcare research, including big data resources and extensive domain expertise. IQVIA does all of this through its proprietary Connected Intelligence, an AI platform designed for the healthcare sector. The company’s services bring customers accurate and relevant data insights with speed and agility.

Using these services, IQVIA’s customers are empowered at all levels of the biotech world, including clinical development and post-approval commercialization. The end result is a faster pathway to new, innovative medical treatments – with the end goal of improving healthcare outcomes across the board. IQVIA has operations in more than 100 countries around the world and employs 87,000 people.

Some numbers will show the scale of this company’s work. IQVIA’s platform processes over 120 billion healthcare records annually, for more than 1.2 billion unique – and anonymous – patients. In all, the company handles over 61 petabytes of proprietary data. Looking at the firm’s connection to the clinical side, IQVIA can boast of contributing to more than 500 studies, in over 75 countries, on more than 30 indications.

These activities generated sound results in the company’s recently reported 1Q24 financial results. IQVIA reported $3.74 billion in revenue, growing more than 2% year-over-year and beating the forecast by $30 million. The company’s earnings, the non-GAAP EPS of $2.54, were 6 cents better than the estimates had predicted.

Checking in again with Sykes, we find him upbeat on IQVIA, particularly noting that the company holds a strong position and is easily capable of generating both growth and profits even as COVID-related sector distortions fade into the background. Sykes says of this stock, “We see IQV as a well diversified business well positioned for share gains with a market leading position in data and technology. The scale end to end capabilities make IQV a partner of choice along with the differentiating technology and data capabilities that make them a unique service provider. While IQV has dealt with the headwinds associated with significant Covid related revenues, we see those headwinds dissipating revealing a solid underlying core growth rate. At the same time we see the recently underperforming TAS division as an area of upside for IQV as we enter 2025, boosting both growth and margins for the group.”

Unsurprisingly, given his upbeat view here, the Goldman analyst has a Buy rating on IQV while his $270 price target implies a 26.5% upside potential on the one-year horizon.

That’s in line with the Street’s consensus view of IQVIA, which is a Strong Buy rating based on 11 reviews that split 10 to 1 in favor of Buy over Hold. The stock’s $213.32 trading price and $275.20 average target price combine to suggest a 29% one-year upside. (See IQV stock forecast)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.