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Tickers in this Article: MDZ, CRL, CVD, PKI, ABI, KNDL
From product conception, to development, to marketing, contract research firms provide a myriad of services for pharmaceutical companies.

It's a good arrangement for all concerned. The drug companies get to focus on what they do best, leaving the details to the testing and marketing specialists. In this article we're going to dissect three mid-cap companies who compete in the contract-research game. Like all games, there are winners and there are losers. Let's have a look.

Making a Comeback
MDS (NYSE:MDZ) is a Canadian-based life sciences firm that operates in three segments - medical isotopes, analytical instruments and contract research. With over $2.6 billion in market capitalization and over $1.1 billion in sales MDS is a leader in this industry. Demand for outsourcing of clinical research is booming. MDS is trying to cash in, but a past run-in with the Food and Drug Administration (FDA) has kept the company from gaining any real traction. The FDA issue appears resolved, but MDS' reputation suffered as a result.

Going forward, MDS has formed partnerships with lab supply companies PerkinElmer (NYSE:PKI) and Applera Corp-Applied Biosystems (NYSE:ABI). In these deals, MDS will be responsible for the research and development on spectrometry equipment while its partners will do the sales and marketing. This is a winning arrangement for all the parties as this equipment is used in everything from pharmaceutical and scientific research to industrial applications.

Financial results for MDS are somewhat mixed at this point. Growth rates in revenue and sales have been just plain awful. Revenue growth has averaged -14.1% for the last three years and moved even further south to -23.4% last year while earnings growth rates were -32.9% and -28.9 for the same periods. However, MDS manages a 12.7% net margin from a gross margin of 34.8% and has a 9.6% return on equity.

Recovering from a Costly Mistake
Charles River Laboratories (NYSE:CRL) is a leading player in animal research. With a market capitalization of just over $3.7 billion the firm generates over $1.1 billion in sales exclusively from the very early stages of clinical drug development. Charles River operates 80 facilities in 15 countries, focusing on veterinary and laboratory animal medicine. In 2004, Charles River tried to get involved in late-stage development by acquiring researcher Inveresk. This proved to be a very costly error, forcing Charles River to write off $200 million in goodwill last year. The firm finally sold the Phase IV operations to Kendle (Nasdaq:KNDL). (To learn more, read Impairment Charges: The Good, The Bad And The Ugly.)

Not surprisingly, Charles River's numbers could look better. Growth in revenue has averaged 19.9% over the past three years while last year was -5.7%. Growth rate in earnings while averaging 10.7% for the prior three years declined to 4% last year. CRL sees a gross margin of 38.8% and a net of 8.2% while returning 5.4% to equity.


Start to Finish Outsourcing

Based in Princeton, New Jersey, Covance (NYSE:CVD) offers its customers beginning-to-end solutions with its product suite. The company has a market cap of almost $4.9 billion and generates nearly $1.5 billion in sales. It operates 35 facilities in 20 countries. Covance enjoys economies of scale in every aspect of development and has been quite successful in diversifying its customer base so as not to be dependent on a few large firms. (For added insight, check out What Are Economies Of Scale?)

Drug development is a costly and time consuming process. Covance has demonstrated that it can accomplish preclinical testing, including toxicology testing and metabolism outcomes, twice as fast as its customers can do in-house. Overall this means Covance could see solid and sustained growth.

The company's revenue growth has averaged 13% for the last three years (12.4% last year). Meanwhile, growth in earnings has been 22.8% and 19.1% for the same periods. Covance manages a net margin of 10.5% from a gross of 32.9% and returns 16% to equity.

The Trend is Clear
Outsourcing in pharmaceuticals and biotech is booming. Let's take a look at share performance over the last three years:
• MDS has risen about 20%.
• Charles River has moved up about 15%.
• Covance is the clear winner, appreciating roughly 90%.

What happens over the next three years is open to some preclinical speculation.

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