CROs To See More Growth, New Moody's Report Finds

Moody’s Investor Service has released a new report stating that contract research organizations (CROs) are expected to grow their sales in the mid-single digits over the next several years, The Wall Street Journal blog reports. The growth mirrors the pharmaceutical industry’s stability and rising fortunes.

Moody’s analyst Jessica Gladstone states in the Wall Street Journal that since big pharma is increasingly well funded and is developing robust pipelines, companies are increasingly turning to CROs for services and clinical trial assistance, which bodes well for CROs. She says that over the last 12 months, the pharmaceutical industry has experienced an 8.6 percent revenue growth and “the trends represent a significant reversal from slumping performance in 2009 to 2011.”

Moody’s CRO Report

Moody’s new CRO report chronicles the recent rise and fall of the big drug makers and the CROs that serve and support them. As fortunes rise, so do opportunities for CROs, which the report states is the current climate. Indeed, the climate for CROs is expected to get better. The report’s author says that revenue is actually up approximately 20 percent, when calculated before interest, taxes, depreciation, and amortization. CROs have earned 11 percent growth just from running late-stage trials. The trend is positive and reflects a reversal of the economic storm that hit the U.S. and the worldwide economy 2009 to 2011. That period saw funding reductions, project cancellations, cost cutting, and R&D restructuring.

Ms. Gladstone says that she forecasted CRO growth in the single digits because double-digit growth is difficult to sustain, as well as forecast because of potential future mergers and acquisitions and the chance of reduced biotech funding. Additionally, CROs with debt are vulnerable to slowdowns or disruptions and pharma clients may be less likely to contract with a company with a risky credit profile. An antidote to debt is for CROs to go public and use the proceeds to pay debts. She cautions CROs to spread their business among multiple companies in case any one company should withdraw business.

In a recent press release, Moody’s affirmed its position that the pharmaceutical industry is doing well. The agency upgraded a CROs rating and stated, "The change in outlook to positive reflects our view that favorable industry fundamentals will support strong EBITDA growth.”