Boring Portfolio


Quintiles Call, Part 6

Q&A, continued

By Dale Wettlaufer (TMF Ralegh)

ALEXANDRIA, VA (Sept. 8, 1999) -- This is the sixth and final part of the Quintiles Transnational (Nasdaq: QTRN) second quarter conference call, which is old news for everyone else but me. As I'm picking apart the investment case here, the first order of business was to try and get a better sense of the economics of the business (contract research and contract selling are easy to understand, while the informatics portion of the business is not something I know off the top of my head), where the company is at midyear, and how the integration of Envoy is going. (Quintiles merged with electronic data interchange company Envoy Corp. at the end of Q1.)

On Friday, I'll talk about the investment proposition I see here and look at some of the basic financial characteristics of the company. In the meantime, here's the conclusion to the call, which you can also listen to via RealAudio if you have the software.

Q&A (continued)

Q: I noticed Quintiles announced an agreement with Datatrack for an electronic data capture system. I'm trying to get your big-picture thoughts on the rate of adoption of EDC systems and also if there are particular characteristics of the Datatrack system that you think are attractive and that you're going to be able to leverage.

Dennis Gillings, Chairman and CEO: I think electronic data capture is going to evolve more quickly once the Internet gets more entrenched. It has been around for some time -- I've been part of that for at least 20 years. It has a small share in the pharmaceutical data capture marketplace but not a large share. We do expect the size of that share to increase as the Internet does increase.

Rachel Selisker, CFO: Operating margins for Q2 1998 -- product development, 9.9%; commercialization, 10.3%; Quinternet, 22.2%; overall, 11.7%

I think it's safe to assume commercialization operating margin will improve somewhat for the second half of 1999. With an increase in revenue, we should see an increase in margin, with the fourth quarter showing the most improvement for the second half.

Geographic mix for Q2 1998: Americas, $192 million and 56% of sales; Europe and Africa, $142 million and 42% of sales; Asia/Pacific, $6 million and 2% of sales.

Headcount: product development, 9,058 people; commercialization, 8,593; Quinternet, 1,412; corporate level, 105; total, 19,167.

Envoy revenues grew 28% year-over-year.

Dennis Gillings: We think Envoy's market share is increasing, but we don't find the data easy to get at. My understanding of the data I see is that I don't see anyone else growing as fast as Envoy, in an organic sense [excluding acquisitions]. I interpret that to mean we're in a very good position. Our overall strategy is to develop an informatics platform to add value to our drug development and commercialization services. We think we've made a lot of progress in that, actually in a shorter span of time than we would have otherwise thought. As regards clients being turned onto ENVOYnet, that's fairly recent, but the VHA is a big group. I was very pleased to see that we won that against everyone, so we'll wait and see what does happen. But remember, we continue to emphasize we have the most expansive connectivity to payers. This is a very important feature, which we think the marketplace has not paid attention to.

Q: Why not with strategic outsourcing?

Dennis Gillings: One can see somewhat of a watershed perhaps layered in the fourth quarter of 1998, but clearly emerging by the second quarter of 1999, that many of our discussions are turning into a strategic nature and are also involving many more corporate people from our customers rather than operations people in certain divisions. We're a fairly sizable publicly traded company and we get on the radar screen. With our customers, people think of it in that manner more and more. There are also idiosyncratic characteristics of why choices are made, such as someone from one company knowing someone else at another company. Because big companies don't want hundreds and hundreds of vendors, because that's inefficient, then real attributes based not on anecdote but on real information come to the fore, and that moves all of this into a strategic setting. At some point, things become obvious that they're actually taking place but that strategic side has probably been taking place for the last 18 months.

Q: What is the nature of the contract wins for the commercialization group in the first half? For instance, are there any more risk-sharing contracts?

Dennis Gillings: On these gain-share contracts, I think I may have mentioned different numbers in the past. I can certainly comment. We are classifying three internally as "fully signed," and we're currently in discussions on 25 other products, of which one is a group of products. That's a lot of discussions -- the extent to which they may pan out is very uncertain, but we have seen a tremendous uptick in interest in the numbers of discussions.

Rachel Selisker: We currently have in the backlog two gain-sharing contracts, one of which is CV Therapeutics (Nasdaq: CVTX), and I think what we have added in for CVT is a conservative number. I think we added a third of the potential contract -- only the revenue we're certain of receiving. There are a couple components there: 1) pre-marketing, before it's launched, and then 2) for the first year after launch, we get paid on a fee-for-service basis.

Q: A question about your data mining unit -- when you added that unit in March, it had about 12 customers, I believe. Has that number changed?

Dennis Gillings: Because we are consolidating in the whole informatics group, and it's hard now to distinguish which customers belong to which bit, I think it would be a very fair statement to say that the number of customers we're talking to is dramatically increasing, but it would be unclear if that's specifically that unit or not. We're seeing repeat business as well.

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