Fortrea Holdings Inc. (NASDAQ:FTRE) is a leading global contract research organization (CRO) providing biopharmaceutical product and medical device development services to pharmaceutical, biotechnology and medical device customers. The company offers highly flexible delivery models that include Full Service, Functional Service Provider (FSP), and Hybrid Service structures. Fortrea has a rich history of providing clinical development services for over 30 years across more than 20 therapeutic areas, first as Covance and later as Labcorp Drug Development.

Business Overview

On June 30, 2023, Fortrea completed its spin-off from Laboratory Corporation of America Holdings (Labcorp), becoming an independent public company trading on the NASDAQ under the ticker symbol FTRE. As a standalone entity, Fortrea is leveraging its global scale, scientific expertise, clinical data insights, technology innovation, industry network and decades of experience to deliver tailored solutions to its customers. With what analysts believe is a distinctive market offering, Fortrea is well-positioned to meet the growing global demand for clinical development services.

Fortrea's team of approximately 16,000 employees from continuing operations conducts operations in approximately 90 countries and delivers comprehensive phase I – IV clinical trial management, clinical pharmacology and consulting services for its customers. The company's offering is scaled to deliver focused and agile solutions to customers globally, streamlining the biopharmaceutical product and medical device development process.

Financials

For the full year 2023, Fortrea reported revenues of $3,109.0 million, a net loss of $3.4 million, operating cash flows of $167.4 million, and free cash flows of $127.1 million. In the first quarter of 2024, the company generated revenues of $662.1 million, a net loss of $101.0 million, operating cash outflows of $25.6 million, and free cash outflows of $34.9 million.

The company's revenues are diversified across geographies, with 46.3% generated in North America, 31.5% in Europe, and 22.2% in other regions during the first quarter of 2024. Fortrea's revenue mix consists of 83.7% direct costs, 18.1% selling, general and administrative expenses, and 3.3% restructuring and other charges in the first quarter of 2024.

Fortrea's backlog, which represents anticipated future revenue from business awards that either have not started or are in process and have not been completed, was $7.4 billion as of March 31, 2024. The company's book-to-bill ratio, which measures the amount of new business awards relative to revenue recognized, was 1.1x for the first quarter of 2024, slightly below the company's target of 1.2x. Management attributed the shortfall to the rescheduling of a large opportunity and the cancellation of another sizable project near the end of the quarter.

Outlook

Despite the near-term headwinds, Fortrea's leadership team remains confident in the company's long-term growth prospects. The drug development landscape remains attractive, with biotech funding showing signs of strength in the first quarter of 2024. Fortrea's pipeline of opportunities has grown significantly, both in terms of quantity and dollar value, across the clinical business. The company is also making progress in its commercial transformation, with customers responding well to its innovative offerings and partnerships.

To drive margin expansion and operational efficiency, Fortrea is implementing a multi-faceted transformation program. This includes initiatives to selectively reduce excess costs, improve productivity, and streamline the organization as the company exits its transition services agreements with Labcorp. The company also plans to benchmark its SG&A expenses against peers and build more efficient supporting organizations, with the goal of realizing margin improvement in 2025.

For the full year 2024, Fortrea has revised its guidance, targeting revenues in the range of $2.785 billion to $2.855 billion and adjusted EBITDA of $240 million to $260 million. The company's previous guidance had called for revenues of approximately $2.9 billion and adjusted EBITDA of around $250 million. The revised outlook reflects slower study start-ups due to the therapeutic mix and certain biotech programs, as well as lower-than-anticipated first quarter book-to-bill and recent pass-through revenue trends.

Recent Developments

To further strengthen its capital structure, Fortrea recently amended its credit agreement to temporarily adjust its financial covenants, increasing the maximum total leverage ratio from 5.3x to 6.0x and reducing the minimum interest coverage ratio from 2.0x to 1.7x. These changes are effective in the second quarter of 2024 and will step down over time until reverting to prior levels by the third quarter of 2025. Additionally, the company has executed a receivables purchase agreement to sell a portion of its receivables on a recurring basis, which is expected to reduce its annual interest expense by approximately $7 million.

Conclusion

Fortrea's leadership team is committed to transforming the organization and positioning the company as a leader in the CRO industry. The company's distinctive market offering, innovative solutions, and focus on operational efficiency are expected to drive margin expansion and create value for all stakeholders. As Fortrea continues to execute on its strategic initiatives, the company is poised to emerge from the complexities of the spin-off and historical challenges with growing strength and momentum in 2025 and beyond.