How Did it Find Trouble?
A few months ago, some may have thought they had found a relatively safe way to bet on the growth of the biotechnology and pharmaceutical industries. Quintiles Transnational was riding high on the outsourcing trend in these vibrantly expanding industries, and was also a major force in healthcare informatics. The logic went that Quintiles would benefit from the extremely active drug discovery and testing operations happening around the globe, but wouldn't face the risk of individual drugs coming up short in the regulatory approval process. As long as pharmaceutical companies were testing more drugs and continuing to increase their outsourcing, Quintiles would do well.
Unfortunately, things haven't exactly panned out that way recently. On September 15, Quintiles warned it would fall short of expected earnings estimates, mostly due to several large cardiovascular drug trials being suspended. The company guided analysts to expect $0.27 per share in the third quarter, well below the $0.39 per share Wall Street was expecting. Fourth quarter earnings estimates were also watered down to around $0.32 per share from the $0.39 range. Not surprisingly, the stock took it on the chin after the warning, losing nearly half of its value in a single, frenetic trading session.
As is common with companies that find their stock price tanking after such revelations, the class-action lawyers have entered the fray. Lawsuits pending against the company claim that Quintiles made false and misleading statements to artificially prop up its stock price, a fairly boilerplate allegation. Whether the claims have merit is yet to be decided, but the fact that the company is being sued hints at the trouble Quintiles has had both operationally and with its stock.
Since the earnings warning, there has been little news from Quintiles. Trading above $55 per share last December, the stock is now trading at a fraction of its old highs. Certainly, more than a few investors have to be feeling sick after such a gut-wrenching drop.
Quintiles Transnational is the world's largest contract research organization (CRO). The company specializes in providing research, marketing, and a wide variety of other services for pharmaceutical firms looking to outsource portions of their operations. The services offered by Quintiles include performing clinical trials of new drugs, laboratory services, biostatistical analysis, and data management. Quintiles has more than 19,000 employees in 31 countries.
The Durham, North Carolina-based company was founded in 1982 and came public in 1994. Quintiles is a member of the Nasdaq 100 Index and is in the process of being added to the S&P 500.
How Could You Have Seen it Coming?
This portion of the Daily Double and Daily Trouble is always the hardest to write, since our vision is almost always 20/20 when looking back. However, trouble is not always as easy to see coming as we make it seem here.
Nevertheless, there were a few warning signs with Quintiles ahead of time. The most obvious risk factor that became real was the fact that the company was susceptible to profit problems after having drugs fail in the development process. This should have become especially apparent when Quintiles' peer, Covance (Nasdaq: CVD), had a similar blowup a few weeks before Quintiles' problems became widely known. While Quintiles and other CROs perhaps aren't as exposed as the drug companies themselves to the consequences of compounds falling short in clinical trials, recent events clearly show that successful drugs are much more profitable to service than ones with problems.
Another factor that investors should have considered is that the pharmaceutical companies themselves may not wish to give up control of the testing process. After all, the pharmaceutical industry is one where intellectual expertise is a closely guarded asset. The drug companies may be willing to outsource nonessential portions of their operations, but may be reluctant to have their valuable data in someone else's hands.
Finally, Quintiles represents the perfect example of why it is important to stay within one's circle of competency. The company does not exactly sell products and services that the average investor would be familiar with, and this means that investors need to study the company and its market much more carefully than they might normally.
Where to From Here?
Investors are left to wonder whether Quintiles' recent trouble is merely a temporary snafu or something more serious. Will pharmaceutical companies continue to outsource more and more of their operations? Will these same companies trust Quintiles with their essential data and expertise? How one feels about Quintiles going forward largely depends on how one answers those two questions. They aren't questions with obvious answers, either.
Looking at earnings, the market seems to have priced in much of the anticipated weakness. Even after the company watered down future expectations, analysts still expect Quintiles to earn $1.48 per share in FY 2000, which puts the stock at not much more than 10x forward estimates. There are certainly questions to be answered with Quintiles, but at these prices it is worth keeping on the radar while studying further. The company may just prove to be a compelling value if some of the fundamental questions can be answered.
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