Jefferies Boosts Targets Across Pharmaceutical Service Stocks

Jefferies commented on Pharmaceutical services stocks Wednesday and expected accelerated R&D spending for 2015 and 2016.

Analysts David Windley and Sean Dodge surveyed 60 R&D decision-makers who expected “their outsourced budgets to grow in the high-teens, which would be the highest since 2005-2007,” when CRO P/E valuations were approximately 25x versus 20x currently.

“Now, both our survey results and industry modeling work affirm a brighter outlook for R&D spending growth. Combining that with sustained outsourcing penetration increases, we expect strong sector growth and are increasing our bookings assumptions for late-stage CROs,” according to the analysts.

Below are current ratings and price targets for companies highlighted in the analyst note.

• Charles River Laboratories CRL - Buy, $82 price target
• ICON PLC ICLR - Buy, $80 price target
• INC Research Holdings Inc INCR - Hold, $37 price target
• PAREXEL International Corporation PRXL - Hold, $70 price target
• PRA Health Sciences Inc PRAH - Buy, $38 price target
• Quintiles Transnational Holdings Inc Q - Buy, $83 price target
• WuXi PharmaTech (Cayman) Inc. (ADR) WX - Hold, $46 price target

The analysts chose PRA Health Sciences Inc, Quintiles Transnational Holdings Inc, ICON PLC and Charles River Laboratories as their top picks and three levers were expected to drive results.

One, R&D spending growth acceleration as survey respondents pegged 2015 global R&D budget growth at 6.0 to 7.0 percent, up significantly from actual growth of 4.1 percent in 2014, according to the analysts.

Two, outsourcing penetration expectations continued to increase at 5.9 percent for 2015 versus the prior assumption of 5.7 percent in 2014’s survey.

Three, stable vendor consolidation as strategic partnering remained “a cornerstone of R&D productivity efforts, and the preference for large CROs in those partnerships has risen markedly in the last two years,” the analysts said.

The analyst note concluded that “2015 should bring another year of attractive growth for top players. The roll forward to 2016 could bring some reckoning for a group that has outperformed the S&P 500 by 105% (that is 10,500 bps!) over the last three years.”