Boring Portfolio


Quintiles Q2 Call

Part 1, Chairman's Comments

By Dale Wettlaufer (TMF Ralegh)

ALEXANDRIA, VA (August 25, 1999) -- Today I include my notes from Quintiles Transnational's (Nasdaq: QTRN) Q2 fiscal 1999 conference call. Quintiles has been on the radar for some time during this flat period following the merger of the company and Envoy, which was consummated earlier this year. This company reminds me very much of the electronics contract manufacturers -- the growth rates are similar, the move of the outsourcers from being a tactical choice of their customers to being a planned strategic choice, the returns on capital, and the fertility of operating investment opportunities, among other things, are commonalities between electronics contract manufacturing and the pharmaceuticals outsourcing business.

Quintiles is by far the leader in its field and has a tremendous track record of creating customer and shareholder value. Since the stock price has been idle for three years while the business has grown smartly (both intrinsically and through acquisitions), I'd like to find out if there is value here. I'll start in on the quantitative stuff later this week or next week, but in the meantime, here's the model I'm building out on it (it's pretty early in the building stage and is based on sell-side research models that don't integrate balance sheets, therefore I'll have to homegrow that vital part of the model). Below is part one of the conference call, including some summarization and direct quotes from the CEO.

Dennis Gillings, Ph.D.
Chairman & CEO

Forex conversion understates nominal growth by two percentage points.

Business development strong in H1 1999. Net new business for H1 was $1.005 billion, up 47% over net new business of $682 million for H1 1998. New business growth strong across the board. The $1 billion doesn't include the contribution of Envoy, which is driven by a recurring revenue stream. New business projected by management was about $900 million. Co. increasing market share "as we have been doing for several years. We do believe our size gives us an advantage here..."

Although financial results for the quarter were strong, "from my point of view, the real strength in the quarter does lie underneath the financials and in the leverage our Internet investments are creating for us. 1999 is our year of full transition to the Quinternet technology platform of the next millennium. Our Quinternet now includes Envoy, together with the Web-enabled ENVOYnet; Scott-Levins market research data; Synergy, our own data mining group; our Web-enabled software, such as our ITNS territory management system and our internal business development toolbox; our alliance with in clinical trials recruitment; and SMG's health resources data."

"With respect to SMG, we also announced this morning the launch of Web MCO InSite (MCO stands for 'managed care organization'). This is an Internet product designed to offer pharmaceutical national account managers and sales reps integrated data profiles, analytical reports, and interactive applications for managed care accounts. Pharma accounts using this Internet service can integrate their sales data into Web MCO InSite to track market share and potential business by managed care account. Other features include a facility to add formulary information, direct links between Web MCO InSite and customer websites, a built-in email feature, and options to download to Microsoft Word and Excel and other programming systems."

"Most pleasing to me in reporting this quarter is that Quintiles is simultaneously delivering revenue and earnings growth as well as investing heavily in major technology advances at the cutting edge of the pharmaceutical industry and healthcare. The emerging trend of strategic outsourcing by pharma companies is empowered by our Quinternet platform, giving us considerable advantage in the marketplace and an ever-widening lead over competitors whose narrow focus cuts down their growth opportunities."

"Let me address the two themes of strategic outsourcing and our Quinternet platform in turn: 1.) Our customers are increasingly viewing their outsourcing decisions from a strategic rather than a tactical viewpoint. They want a value-added partner with a broad range of services plus solid financial strength. We believe the stature and size of Quintiles differentiates us to such an extent that we have a large competitive advantage in this strategic domain. Interestingly, the Financial Times of London published a life sciences survey [July 15, 1999] and discussed outsourcing and its strategic implications, commenting on the growth of Quintiles...."

"Our customers want a smaller number of outsourcing partners because of the logistical problems of managing a large number of disparate vendors. This trend is part of the shift to strategic outsourcing. However, the most profound change is about to occur. The Internet is going to encourage much more outsourcing because electronic connectedness will reward partnering arrangements. In other words, business-to-business connectivity enhanced by real relationships will be rewarded in the healthcare sector. So, strategic outsourcing emphasizes partnering rather than one-off project contracts. This is where our Quinternet technology platform brings huge competitive advantages. As we move more services and informatics over our Quinternet, Quintiles will be a tremendous beneficiary of the drive to strategic outsourcing, because the partnering involved will require the service breadth and globalness that our Quinternet brings."

Quinternet Platform

"...I have three other Web-enabled developments that deserve particular comment. First, clinical trials recruitment. Our alliance with has been a big success. In the short space of time since launch, 6,800 persons have completed our interested-parties survey. Currently, four ongoing clinical trials are posted. One is currently recruiting and three have an August 1 recruitment start date. 262 persons have self-screened for trials that are posted. About 50 additional ongoing Quintiles trials should be posted by mid-August. Already, nine pharmaceuticals companies have asked for additional information about posting their clinical trials."

"The second feature with [respect to Internet strategies] is the emergence of what we are calling the 'knowledge-rich sales call.' Our informatics capability enables our salesforce to make knowledge-rich sales calls that include what kinds of patients these physicians are treating, namely gender, age, diagnosis, the physicians' preferred pharmaceutical product for a given patient type or diagnosis, the physicians' preferred dose, [the sensitivity of physicians to pharmaceutical samples distributed], and [the] promotional message these physicians respond to most positively. Our sales reps use laptop computers to log on [via the Internet] to ITNS, our proprietary salesforce management system... Our system allows sales managers to access Quninternet informatics to plan sales reps' calls and analyze their success in changing prescribing patterns."

"An example of the power of our Web-enabled territory management system driving our knowledge-rich sales calls is one of our gain-share contracts. In the six weeks since we launched our own salesforce for the product using these techniques, new prescription volume has risen by 25%. Sales had been flat the previous 12 months when we were not controlling the sales calls. So, for this gain-share contract, our new projections of revenues are significantly ahead of forecast for the year 2000."

I'll continue with the call on Friday.