Avondale Downgrades PAREXEL To Underperform, Cites MSA-Laiden Backlog Concerns

• Avondale Partners downgraded PAREXEL International Corporation PRXL to Underperform on Monday.
• The experts also reduced their estimates and price target from $60 to $49.

In a report issued Monday, Avondale analysts Greg Bolan and Steven Couche downgraded PAREXEL to Underperform, trimming their price target from $60.00 to $49.00.

According to the report, the firm’s industry research suggested “risk to large biopharma strategic master services agreement (MSA) renewals.” The experts pointed out that investors should expect several large partnerships to be renewed in 2016 – adding that they “have found over the years that large biopharma sponsors tend to move in a herd-like fashion.”

Consequently, if one large renewal generated meaningful, favorable CRO billable rates to a sponsor, others would probably aim for similar terms.

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Majority Of Backlog Likely MSAs

Bolan and Couche said they believe that roughly three quarters of PAREXEL’s backlog is “comprised of strategic MSAs, the largest exposure in the CRO group.” However, they do not expect the company’s management to affirm this call.

As shown above, a billable rate reduction on a strategic MSA can have quite a negative impact on revenues and operating profits. Currently, PAREXEL’s largest MSA is generating around $275 million per year in revenues, while the example above is based on $100 million in annual revenues.

Implications Of Such A Backlog

Although Avondale described a renewal where the number of hours worked would surge by 5 percent and billable rates would fall by 10 percent, they can envision other scenarios where billable rates might fall by approximately 15 percent.

“The most concerning piece of this analysis is that if around 75 percent of PRXL's backlog is comprised of strategic MSAs and we use the most recently reported backlog of $5.4 billion, then around $224 multimillion in operating profit may be at risk (5.4*0.75*0.055) over an assumed 3-year backlog life,” the experts elaborated.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.