Drug Development Goes Global in 2014

The potential for sales growth in wealthier, heavily populated emerging countries like China has pharma and biotech companies increasingly turning to outsourcing partners with experience navigating regulators in these far flung markets.

One of the most successful at leveraging its global footprint has been Quintiles (NYSE: Q  ) , a contract research organization that helps more than 400 drugmakers design, execute, and monitor trials for new compounds in more than 100 countries.

Going public... again
Quintiles, the market share leading contract research organization, or CRO, may have listed on the NYSE this past summer, but it's far from a new company.

Quintiles was founded in 1982 by Dennis Gillings, a biostatistics professor at UNC-Chapel Hill. Gillings brought the company public for the first time in 1994. However, Gillings soon soured on investors, who he believed took too short a view of his desire to develop partnerships with customers rather than ink straight-forward pay-for-services deals. As a result, Gillings became part of a group that took Quintiles private in a $1.7 billion leveraged buyout in 2003. 

It took a decade, but Quintiles became public again this past summer after Gillings, who still owns 23.7% of the company, stepped down as CEO.

Billions of sales and growing
Quintiles is the biggest player in the CRO space, generating sales of $3.7 billion in 2012. That significantly outpaces the $1.7 billion and $2.18 billion generated by competitors Parexel (NASDAQ: PRXL  ) and Covance (NYSE: CVD  ) in their last fiscal years, respectively.

But that barely scratches the surface of its addressable market, which Quintiles pegs at roughly $48 billion of the $91 billion spent on drug R&D in 2011.

Quintiles estimates that CROs have captured just $16 billion of that $48 billion in spending. That suggests plenty of room to compete for as much as 75% of the business held by mid-sized players, like Parexel and Covance, and smaller privately held niche players.

A big diversified customer list
The CRO market's fragmentation appears to be ending as drugmakers shift to global development in order to more quickly capture sales in countries like China.

That shift and the company's long-standing experience in overseas markets, has swelled the company's customer list to more than 400 different companies, including all 20 of the largest drug and biotech companies.  

That client diversity has allowed the company to post five consecutive years of having eight or more $100 million a year customers. Importantly, none of those customers accounts for more than 10% of the company's sales. That's a stark contrast to Parexel, whose five biggest customers make up nearly 50% of its revenue. 

And Quintiles customers are increasingly active, too. Combined, they've generated a book to bill, which measures new orders against delivered services, of between 1.19 and 1.27 for Quintiles over the past five years. That's driven services revenue up a compounded 7.3% annually from 2008 through 2012. 

Fool-worthy final thoughts
A two tier system of have and have-nots is being created in the industry, a bar-belling of winners and losers that provides Quintiles, Parexel and Covance with more and more opportunities to acquire best-in-breed smaller competitors.

However that opportunity has been overshadowed recently by a third quarter stumble by Parexel. As a result, the CRO industry wasn't as beloved as other industries in 2013.

But walking away from Quintiles and the broader industry may prove short-sighted. Big pharma's attempts to replenish sales lost to the patent cliff and easier financing for emerging biotechnology have Quintiles estimating drug R&D spending will climb to $139 billion in 2015 from $135 billion in 2012. That jump in spending has driven the number of drugs in human trials up 18% since 2008.

As a result, Quintiles expects the CRO market will climb to $22 billion by 2015, or 5% to 8% annually in the period. If it does, Quintiles, Parexel, and Covance may all prove winners over the coming year.

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