Labcorp’s spin-off of Fortrea (FTRE) has caught the market’s attention, as spin-offs have historically been lucrative investments. Fortrea, formerly known as Labcorp Drug Development, is one of the oldest and largest contract research organizations globally. With a strong balance sheet, Fortrea is well-positioned to take advantage of the growing trend of outsourcing clinical trial work.
The contract research sector has been experiencing significant growth, driven by large pharma companies looking for trusted partners and smaller biotechs focusing on discovery and outsourcing clinical development. This trend, coupled with the increasing complexity of clinical trials, has created favorable conditions for contract research organizations like Fortrea. McKinsey’s recent study projects overall growth of 40% in the contract research industry from 2020 to 2025.
Fortrea boasts an impressive portfolio of clients, including both large pharma and biotech companies. The company has demonstrated expertise across 20 therapeutic categories and operates in over 90 countries. Notably, no single customer represents more than 10% of Fortrea’s revenue share.
While Fortrea has not yet provided formal projections for future revenues or earnings, its investor presentation reveals promising figures. The company reported $3.1 billion in annual revenue and adjusted EBITDA of $405 million for 2022. With a growth rate of 8.5% CAGR for revenue over the past three years and a 26.3% CAGR for EBITDA, Fortrea’s financial performance is commendable.
Considering the spin-off, Fortrea’s valuation appears low compared to industry peers. For instance, IQVIA, with a growth rate of 16.5%, has a price-to-earnings ratio of approximately 19 and a price-to-sales ratio of around 2.7. Thermo Fischer’s acquisition of PPD at $17.4 billion further highlights the modest valuation given to Fortrea.
It should be noted that Labcorp Development reported lower numbers in the most recent quarter, attributing it to a contract loss and staffing issues affecting backlog conversion. Investors should monitor whether these issues persist in future quarters.
Fortrea’s lower margins compared to peers present an opportunity for improvement. The company aims to enhance margins through improved productivity and changes in spending on selling, general, and administrative activities. Additionally, Fortrea plans to engage in portfolio rationalization with specific large pharma partners for further optimization.
In conclusion, the spin-off of Fortrea presents an opportunity for investors to explore this robust contract research organization. While waiting for formal financial projections, it is advisable to hold onto Fortrea shares as the company’s strong balance sheet and growth potential make it an attractive investment. As the contract research industry continues to thrive, Fortrea is well-positioned for consistent revenue growth. However, investors should closely monitor future earnings reports to gauge the company’s performance and potential challenges.
