We have seen many large companies start to make cuts in there employees, but more is needed.

An effective way to minimize costs and maximize efficiency is to outsource. Well, finally, here we arrive at CRO’s. You are probably thinking “what is a CRO?” They are not in the news very often; however, if you take a look at the stock appreciation in the last couple years of many of the large players, you will want to read further.

A CRO, or Contract Research Organization is an organization that offers clients a wide range of pharmaceutical research services, including product development and formulation, clinical trial management (preclinical through phase IV), central laboratory services for processing trial samples, data management services for preparation of an FDA New Drug Application (NDA) or an Abbreviated New Drug Application (ANDA), and many other complementary services. Basically, Pharma companies outsource clinical trials to these CRO’s in order to reduce costs, and since the FDA has come down hard on companies like Merck and Schering Plough in recent months, Big Pharma want to make sure the most complex, comprehensive, and efficient tests are run to pass the drug onto consumers and not be struck with FDA infringements.

Who are some of the big players?

First, let’s break it down my market cap.

• Covance, (CVD: 95.55, +0.53 (+0.56%)): $6.02 Billion
• Pharmaceutical Product Development, (PPDI: 41.18, +0.75 (+1.86%)): $4.87 Billion
• Icon, (ICLR: 41.49, +0.83 (+2.04%)): $2.39 Billion
• Parexel (PRXL: 32.51, +1.24 (+3.97%)): $1.80 Billion

Since CRO’s provide many services, the group can easily be broken down into what area of work they specialize in. We will have a closer look now at Covance and Icon, two of my favorites.

According to Jefferies’s & Company as a % of 2007 revenue:

• Covance does 29% Preclinical, 6% Phase I, 32% Phase IIA/Phase III, 8% Phase IIIb/IV, 28% Central Lab, and 7% Bioanalytical
• Icon does 5% Phase I/Phase IIA, 60% Phase IIB/Phase III, 20% Phase IIIb/IV, and 10% Central Lab

Varying from firm to firm, each company has its niche where it prefers to specialize. Covance is heavily involved in early stage testing through Phase II while Icon focuses primarily on Phase II through Phase IV.

The CRO’s may look expensive when looking on a multiple basis; however, take into account the future expected revenue that will be coming in due to the Big Pharma Effect.