Goldman Sachs Provides Color on CROs, Sell Parexel and Buy Pharmaceutical Product Development

Goldman Sachs provided color on the CRO industry. In a research report published today, Goldman states, "The CRO industry is in a time of transformation as Pharma's approach to R&D spending and outsourcing continues to evolve. Fundamentals in the early-stage and the late-stage environments appear to be stable for the most part, with some signs of improvement, but visibility into the trajectory of a broad-scale recovery in the sector remains low. However, with the group now trading at 18.8X consensus 2012E (vs. a five-year average of 19.4X), we believe valuation has gotten ahead of a still uncertain future and stay Neutral on the space." Goldman downgraded Parexel International Corporation

to Sell from Neutral. In the report, Goldman states, "We downgrade PRXL to Sell as we believe expectations are too optimistic for the stock at this transitional period for the company's business model. Three issues that should drive near-term downside: (1) even with the company disappointing on earnings and guiding down three times in as many quarters, visibility into a recovery remains low; (2) greater margin pressure from lower strategic deal pricing and an expected meaningful pickup in spending hamper the ability to adequately price the top-line growth trajectory; and (3) expectations for a 2H11 earnings growth recovery are too aggressive given slower conversion and margin headwinds – we are 9% and 8% below the Street for 2H2011 and FY2012." At the same time, Goldman reiterated its Buy rating on Pharmaceutical Product Development

. The report states, "PPDI's clinical business has been relatively unscathed by backlog conversion issues – weighted-average backlog duration at the end of 1Q was 33 months (from 34 as of 4Q). While the slow start for the Lab business gave some investors pause during 1Q, we are expecting a recovery in 2Q on the back of “record” authorization growth in 1Q that should have a positive near-term impact given shorter conversion associated with lab services. In addition, we see shares as attractively valued at 15.6X our CY2012 EPS (13.5X on a cash-adjusted basis)." On Friday, Parexel closed the day at $24.49 and Pharmaceutical Product at $28.90.