Drug companies seek remedy for their ailing stock prices.

• Position: North Carolina - Illustration - Statistical Data Included

Look at the numbers, and it's obvious that contract-research organizations had an off year. What isn't so obvious is why. "These companies' stocks have dropped, on average, 65% off their 52-week highs, and yet very few will actually acknowledge that they did anything wrong," says David Windley, an analyst with J.C. Bradford & Co. in Nashville, Tenn. Total innocence is hard to swallow, but many of the troubles CROs have experienced do stem from external sources. A tight labor market has led to job-hopping and training woes that have sapped CROs' ability to do their jobs - shepherding drugs through the regulatory process for pharmaceutical companies. Some customers have responded by abruptly yanking contracts.

Also, drug companies are tightening the budget screws, assigning riskier drug trials to CROs and pulling the plug more quickly on unpromising drugs. CROs have grown dramatically in the past five years - even as late as the first half of 1999, the top CROs posted revenue gains of 30% or better - but a slow third quarter is expected to cut growth in half. Because CROs work off a backlog that they roll out over six to nine months, a bad third quarter of new business signings could mean a drag on revenues into the first or second quarter of 2000. Many CROs were forced to restate third-quarter earnings projections, and stocks plummeted.

In September, Durham-based Quintiles Transnational Corp., the industry leader, saw its stock drop 42% the day after it announced that the cancellation of a large contract would cut earnings 25% in the third quarter and 18% in the fourth. That same month, Wilmington-based Pharmaceutical Product Development Inc., the nation's fourth-largest CRO, was punished with a 21% price drop the day it announced the retirement of President Thomas D'Alonzo and canceled an investors meeting because of Hurricane Floyd. "Whenever word gets around that a company was on the agenda and then cancels, a lot of times people take that as meaning that their quarter is in trouble," says John Kreger, an analyst with Chicago-based William Blair & Co.

CROs aren't relying solely on drug development to keep them busy. Quintiles continued its diversification efforts in March with the purchase of Nashville, Tenn.-based Envoy Corp., an electronic-transaction-processing company. PPD and Wilmington-based Applied Analytical Industries Inc. are branching into drug creation, a costly and risky strategy that could pit them against their customers...