Fortrea Holdings (FTRE)
A "picks and shovels" play on Biopharmaceuticals
In the mid-19th century, during the heady days of the California Gold Rush, Levi Strauss found himself in the bustling port city of San Francisco. Levi was a shrewd and enterprising young man, and he recognized the unique opportunity that lay before him as prospectors from around the world flooded into California in search of gold.
One day, Levi overheard a miner lamenting his pants' poor durability in the goldfields' harsh conditions. The miner explained that the typical work trousers of the time were simply not up to the task of withstanding the rigors of gold prospecting. Levi saw an opportunity to address this need and provide prospectors with a more durable and reliable garment.
Drawing on his knowledge of textiles and his understanding of the challenges faced by miners, Levi decided to create a new kind of work pants. He partnered with a tailor named Jacob Davis, and together they developed a pair of sturdy trousers made from a durable fabric called serge de Nîmes, later known as denim. The pants were comfortable, rugged, and stood up to the demanding conditions of prospecting. Levi made a fortune without ever panning an ounce of gold.
"Invest in picks and shovels” is a metaphorical expression and the idea behind this phrase is to invest in the tools, equipment, or services that support an industry, rather than directly in the end product or commodity. Oftentimes, the picks and shovels providers are more consistently profitable than the prospectors - be it the gold mining or pharma and biotech.
We know that the pharmaceutical industry over-earned during Covid. During the subsequent downturn, and as funding dried up, the whole ecosystem saw declining revenues and profitability. The biotech index, as expressed by XBI, is at one of the lowest levels in many years. Interestingly, this is one sector that is truly reflexive. Lower stock prices mean less funding which then leads to cuts in R&D leading to fewer dollars for the picks and shovel providers.
While there are many service providers to the pharmaceutical and biotech industry, the focus of this report is on contract research organizations (CROs). A CRO is a company that provides clinical trial services for the pharmaceutical, biotechnology, and medical device industries. There are different types of CROs, but typical CRO services include regulatory affairs, clinical trial planning, site selection and initiation, recruitment support, clinical monitoring, data management, trial logistics, biostatistics, medical writing, and project management.
Clinical trials have a long history. Generally considered the first controlled clinical trial in modern times, Dr. James Lind sought a viable scurvy treatment. While working on a ship as a surgeon in 1747, he came face-to-face with the condition. Looking for a solution to avoid the high mortality rate of scurvy among sailors, he divided sailors with scurvy into different groups. He had each group follow a particular regimen. During this trial, he determined oranges and lemons (sources of vitamin C) gave the best result, creating a way to keep sailors safe from scurvy in the years to come.
Today, the clinical trial process is complex, convoluted and cumbersome!