Have CROs Been Great Investments?
Asking because I really did not know. The last five years have been a blur between 1) Solid pre-COVID growth, 2) Adverse COVID impact in the 1st half of 2020, 3) Post COVID boom, 4) Recent biotech cash funding slow down and 5) Rising interest rates putting pressure on the overall economy. I decided to pull together some data and take a look.
Assumptions
Utilized Yahoo.com's stock price history tool to grab stock prices from August 2018 through August 2023 to get a 5 year compound annual growth rate (CAGR)
Historical market capitalization data was hard to come by, so I multiplied the percentage change in stock price with the current market capitalization to calculate historical market capitalizations. Not perfect by any stretch but a useful proxy. (For example if today's stock price & market cap is $100 and the historical stock price is $50, then the historical market cap is $500)
2022 reported revenue from annual reports utilized to compare market cap to revenue multiples
Analytics
The schedule below contains an annual (August) closing stock price for the past five years for CROs across the U.S., Europe and Asia. Obviously, Fortrea (recently spun out of LabCorp) will not have five years of data (like Wuxi Apptec, R&G Pharma Studies, Pharmaron and Tigermed).
Observations
Whoever had Ergomed on their bingo card as the CRO with the highest returns for the past five year - made some good money. Ergomed is a smaller mid-size CRO, but has done a nice job expanding revenue and margins (and its stock price)
Medpace was my guess to have the highest average return and a 35.6% CAGR is a fantastic performance
Wuxi Apptec, IQVIA and ICON all posted double digit % returns - solid outcomes for sure
Fortrea and R&G Pharma Studies - both have recently gone public and have time horizons that are too short too gleam anything substantial
Syneos (soon not to be a public company), Pharmaron and Tigermed shares lost value. Pharmaron and Tigermed - 20%+ declines!
We now know how our CRO peer group performed against each other - how about against a few key indexes. The schedule below adds the 5 year performances for the Nasdaq, S&P 500, Dow Jones and Russell Indexes.
Observations
Putting your money over the past five years into Ergomed (44.7% CAGR) and Medpace (35.6% CAGR) would have been spectacular investments.
Wuxi Apptec, IQVIA and ICON would have provided solid returns a few points above the indexes.
Syneos, Pharmaron and Tigermed performed lower than all the indexes
We know the market has been a rollercoaster over the past several years so I thought I would take a look at current closing prices compared to previous five year highs. I also split the CROs into two geographic buckets (North America/EU and APAC).
Observations
Medpace's recent run has its five year high just about even with its 8/14/23 closing price
I knew Syneos stock had fallen but I did not realize the magnitude (-58.5% off its 5 year high)
IQVIA, ICON & Ergomed all had declines not far off the -24.2% average for the NA/EU peer group
Fortrea just spun out so its decline is misleading
The average APAC CRO decline was a whopping -64.5%
Tigermed & Pharmaron are -77.9% and -80.5% off their 5 year highs
Wuxi Apptec is -57.1% - remarkable considering their 5 year CAGR is 15.9% - the only APAC CRO with a true positive 5 year CAGR (R&G Pharma just went public in 2022)
Below is a different viewpoint - instead of stock prices, I pulled together current and five year high market capitalizations. Market changes in the billions really put things into perspective.
Observations
Tigermed, Wuxi Apptec and Pharmaron each shed more market cap value than the entire NA/EU peer group
The APAC peer group cumulative 5 year highs were 40%+ more valuable than the NA/EU peer group
On 8/14/23, the NA/EU peer group flipped the narrative and is 60%+ more valuable than the APAC peer group
THE APAC peer group has shed 67% of his 5 year high market cap
One last schedule to try to understand the market cap volatility within the APAC peer group. I pulled 2022 full year revenue for each CRO and converted to USD using 8/14/23 exchange rates. I then calculated current and 5 year high market cap multiples of revenue.
Observations
APAC CROs due to high expected growth were valued at 17x+ revenue multiples - today that is down to slightly below 6x
NA/EU CROs peaked at 3.05x and are now at 2.34x - or currently 60% less than APAC peers and 83% less at 5 year highs
What really jumps out is that APAC CROs were worth more than 40% than the NA/EU peer group even though the NA/EU peer group have 4x the amount of revenue
Individually Tigermed's market cap has a 5 year high multiple of 32.5x while IQVIA's 5 year high was 3.54x and IQVIA has 14x more revenue than Tigermed in 2022
Wrapping Up
Lots to digest, but I think the correct takeaway is that valuations matter! CROs have been great investments over the past five years when valuations are reasonable. Syneos was the only true underperformer out of the NA/EU peer group and that performance does not appear to be market driven. I am not sure if it is safe to say APAC CROs greatly underperformed - the reality seems to be that unreasonable multiples were applied to that peer group based upon unrealistic assumptions. Based upon current multiples and the economic slowdown in China, it appears that APAC CROs have room to shed additional value before getting closer in line with NA/EU CRO peers. Will be interesting to see how biotech funding, continued consolidation and future election/geopolitical activities impact future CRO performance market performance.
Jason Monteleone joined Ancillare as President in October 2022, bringing extensive expertise in the clinical trial pharmaceutical outsourcing services sector. A recognized health care and life science leader with 25+ years experience, most recently as CEO of Clinipace (now Caidya), a global mid-size Clinical Research Organization (CRO). Under Jason's leadership, Clinipace merged with dMed, an Asia-Pac based CRO, creating at the time, the mid-size CRO with the largest Asia-Pacific presence. Jason is also on the Board of Directors for the Drug Information Association (DIA), a global association that mobilizes life science professionals from across all areas of expertise to engage with patients, peers and thought leaders in a neutral environment on the issues of today and the possibilities for tomorrow. Prior to Clinipace, Monteleone founded Pivotal Financial Consulting LLC, was Executive Vice President and Chief Financial Officer of Theorem Clinical Research, was Chief Financial Officer of Omnicare Clinical Research and held executive finance positions at MDS Pharma Services and VIASYS Healthcare. Jason can be reached at jason.monteleone@ancillare.com & jmonteleone@pvtfinance.com. Follow me on Twitter @JMPivotal and sign up for Jason's latest blogs and updates at www.pivotalfinancialconsulting.com.