Fortrea (FTRE, Financial), a contract research organization (CRO) that became independent from LabCorp (LH, Financial) in July 2023, experienced a decline after reporting lower than expected earnings per share (EPS) and revenue for Q4. The company also announced its plan to sell its Enabling Services segment, including Endpoint Clinical and the Fortrea Patient Access unit, to Arsenal Capital Partners. This transaction is anticipated to finalize in Q2.
Key points from Fortrea's recent performance and future outlook include:
- Since becoming independent, Fortrea has released two earnings reports. The Q4 earnings miss was unexpected, especially after a strong Q3. However, the company remains optimistic, highlighting a Q4 book-to-bill ratio of 1.3x and an overall ratio of more than 1.27x for its first six months as an independent entity.
- Q4 bookings were diverse, covering biotech, large pharma, and various therapeutic areas, with notable strength in oncology. Fortrea is optimistic about its Q1 pipeline, contingent on successful execution.
- Post-separation from LabCorp, Fortrea has been working on exiting about 40% of its transition service agreements (TSAs) and transitioning to a new ERP system. The company is also focusing on building brand awareness through advertising campaigns and increased presence at industry events.
- Fortrea expects a mixed financial performance in 2024, with a projected revenue of $3.140-3.205 billion. The first half of the year may see a decline in service fee revenue, but improvements are expected in the latter half. Margin improvements are also anticipated.
- While no specific guidance for 2025 was provided, management is optimistic about margin improvements and expects adjusted EBITDA margins to reach approximately 13%, up from the 9.5% guidance for 2024.
- The sale of Endpoint Clinical is part of a strategic review to focus on core Phase 1 to 4 Clinical Services, aiming to enhance Fortrea's position as a pure-play CRO. The $345 million from the sale will be used to reduce debt.
Fortrea is navigating through a period of transition after its spin-off from LabCorp. The company is working towards financial stabilization and enhancing its brand recognition. With strategic divestitures and a focus on core services, Fortrea is positioning itself for a stronger performance in the coming years, particularly in 2025.
