The drug-approval process is getting more and more expensive for Big Pharma these days. The Food & Drug Administration is requiring more clinical trials, and that’s driving already sky-high development costs even higher. But a company like Covance exists specifically to help Big Pharma save money, and that’s why the stock has rallied 20 points in the last three months.
Safety and efficacy testing for new drugs is a very high fixed-cost business, Covance Chairman and CEO Joe Herring told Cramer Tuesday. There was a time when a pharmaceuticals company could handle that as long as it had a good pipeline and a robust profit-and-loss sheet. But nowadays, these companies are looking to lower costs, and Covance, the CEO said, can help them do that by as much as 20%. Plus, Covance’s development process is two to three times faster than the company’s clients.
While Big Pharma is focused on its late-stage pipeline and how those drugs will be positioned in the market, Covance focuses on those studies where a product won’t see the store shelves for 10 to 15 years. It’s a business model that works well for both customer and client.
“When we do this work,” Herring said, “they’re freed up to focus on more value-add activities in other parts of their companies.”
Cramer likes CVD. As long as FDA approval continues to cost Big Pharma big money, this stock “could make you some money.”
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