The healthcare industry is undergoing a large transformation and the whole landscape has drastically changed in the last few quarters. The distressed markets have created immense opportunities for large cap pharmaceutical and biotechnology companies looking to expand their business by expanding their product lines. Even though credit is hard to come by, these “cash cow” companies have been able to raise the necessary funds in order to successfully follow through with their acquisition strategy. In the last few months we saw Pfizer (PFE) purchase Wyeth, Merck (MRK) sweep up Schering Plough, Roche (RHHBY) acquire the rest of Genentech, and Gilead Sciences (GILD) acquire CV Therapeutics. This ramp up in healthcare M&A activityhas not been seen in recent years, especially at the levels and sizes we are currently encountering. Is the model of the healthcare industry changing?
What is in the pipeline? How many drugs have entered Phase III testing? These questions were originally the buzz around health care investors and analysts, but now it seems as if the tides have turned and now the real question lies in: Who has the most cash, or can borrow the most? Recent earnings reports from the large and small contract research organizations, or CROs, further provide validity to my point. CROs receive work that has been outsourced by healthcare companies and provide services that include, but are not limited to product development, formulation and manufacturing through clinical trials, toxicology and data management.
CROs really saw increased usage from the early to late 1990’s up until pretty much just recently. Covance (CVD), one of the largest players in this unique subsector reported an 18 percent drop in quarterly profit and cut its guidance severely. Covance lowered its 2009 profit outlook to $2.50 to $2.70 per share from a previous forecast of $3.00 to $3.20 per share. Mean analysts from Reuters had estimates of $2.89 a share.
A smaller CRO, Kendle International (KNDL), reported earnings a few weeks ago citing “unprecedented biopharmaceutical industry conditions,” and said it would not meet analyst expectations for the quarter because of increasing project cancellations, delays and a reduction in new business signings. They reported a cancellation rate of 45 percent in the first quarter.
