PDII Gets Promoted
Board: Falling Knives

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By TMFKitKat
April 25, 2007

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PDII provides product detailing to pharmaceutical companies. Sales teams may work exclusively for one company on one product or provide nonexclusive service to several customers who share the costs resulting in lower costs.

Marketing is the second business segment (Pharmakon, TVG Vital Issues in Medicine) that designs "peer persuasion programs" The programs are marketing strategies designed by PDII and presented in different venues such as teleconferencing, dinner meetings and Webcasts. Vital Issues is a continuing medical education service

The PDI Products Group exists to promote biopharmaceuticals but is entirely inactive.

Dedicated sales teams account for most of the revenue

Contracts can be terminated without penalty or at times minimal penalties. In 2006, 3 major contracts were terminated. The three companies accounted for 57% of the revenue.

Effective as of April 30, 2006, AstraZeneca terminated its contract sales force arrangement which accounted for 18.0% of service revenue during 2006.

December 31, 2006, the contract sales agreement with GlaxoSmithKline 28.2% of service revenue during 2006, expired and was not renewed.

October 25, 2006, Sanofi-Aventis announced its intention to terminate its contract sales contract effective December 1, 2006. The contract, which represented approximately $18 million to $20 million in revenue on an annual basis, was scheduled to expire on December 31, 2006.

The termination of the AstraZeneca contract affected approximately 800 field representatives. The revenue impact was approximately $63.8 million in 2006.

Additionally the losses of both the GSK and sanofi-aventis contracts for 2007
represent a loss of approximately $85.7 million in revenue for 2007.

In 2006 PDII had 1,100 employees, including approximately 700 full-time employees. Approximately 80% of employees comprise field sales representatives and sales managers. Almost 800 of these employees worked on AstraZeneca

It seems likely that revenue may be less than half 2006 levels in 2007. The company reduced the sales force in 2006 to cut costs. If they lay off more, losses could be lessened but they have not said they will in the 10K. It did remark the intention of retaining and motivating key employees. Maybe non-key employees will be fired or laid off. Of course there comes a point where they lose their investment in the capital expenditure to train the employees they let go. And end up with insufficient trained staff to take on new contracts. Hard spot to be in.

There are several lawsuits against them. There is $5 million insurance for product liability.It may not be enough to cover all claims. Ongoing legal expense was more than $3 million in 2006

Range of share prices

               2006              2005
               HIGH    LOW       HIGH     LOW
First quarter  $ 15.00  $ 9.70 $ 21.45 $ 19.00
Second quarter $ 14.59 $ 10.14 $ 20.77 $ 11.27
Third quarter  $ 15.50 $ 11.01 $ 15.99 $ 12.36
Fourth quarter $ 11.57  $ 9.53 $ 15.24 $ 12.38 

At around $9, it is near a two year low.

PDII capitalizes training costs and the expense is deferred and amortized. This is not something I see commonly the other contract sales organizations I looked at. Makes it look a bit aggressive although entirely defensible as a capital investment.

Comparison of 2006 and 2005
Revenue (in thousands)

                                Change     Change 
                2006     2005       ($)       (%) 
Sales Svs.     $202,748 $270,420 $(67,672) (25.0 %)
Marketing Svs. 36,494    34,785      1,709   4.9%
PPG              -         -          -      - 
Total          $239,242 $305,205 $(65,963) (21.6 %) 

Total revenues for 2006 were $239.2 million, a decrease of $66.0 million or 21.6% from revenues of $305.2 million for 2005. The decrease was primarily related to the termination of the AstraZeneca sales force effective April 30, 2006 which consisted of approximately 800 representatives. The Astra Zeneca termination resulted in a decrease in revenue of approximately $63.8 million.

Cost of services for 2006 was $183.4 million, which was $69.4 million or
27.5% less than cost of services of $252.8 million for 2005. The sales services segment had a reduction of $68.0 million in cost of services, which is primarily attributable to the reduction in the size of the sales force including the AstraZeneca termination mentioned above. Cost of services within the marketing services segment decreased approximately $1.4 million, or 6.5%.

The PPG segment had no costs of services expense in either 2006 or 2005.

Revenue in 2005 declined from 2004. The company has been on a downward trajectory for at least two years

Revenue (in thousands)


                                       Change     Change
                        2005      2004 ($)        (%)
Sales services     $ 270,420 $ 313,784 $ (43,364)  (13.8 %)
Marketing services    34,785    29,057      5,728  19.7%
PPG                        -     2,956    (2,956) (100.0 %)
Total              $ 305,205 $ 345,797 $ (40,592)  (11.7 %)

Total revenue for 2005 was $305.2 million, a decrease of $40.6 million or 11.7% from revenue of $345.8 million for 2004. The decrease was primarily related to the reduction in the AstraZeneca sales force for 2005 by a monthly average of approximately 375 sales reps as compared to 2004. Service revenue was $305.2 million, a decrease of $42.1 million or 12.1% from revenue of $347.3 million in 2004. Product net revenue for 2004 was negative $1.5 million primarily as a result of a $1.7 million increase in the Ceftin reserve related to litigation

The sales services segment generated $270.4 million in revenue for 2005, a decrease of $43.4 million compared to 2004. This decrease is primarily related to the AstraZeneca sales force reduction for 2005 mentioned above. Sales services revenue from the AstraZeneca contracts in 2005 was approximately $45.8 million less when compared to the comparable prior year period.

The defection of the three large accounts is not explained. Were the customers unhappy with PDII's performance? Reasons for declining business were given in the 10K and may shed some light on the reasons for contract cancellation:

A decrease in incentive payments ($2.6 million) received in 2005 as compared to 2004;

Higher amount of net penalties accrued in 2005 ($2.0 million) as compared to 2004;

Lower contractual margins for some of our 2005 contract renewals;

Market conditions that led to increases in field compensation and other field costs (i.e. gas, travel) that were, in some cases, higher than the rates specified in our contracts

High penalties and lower incentive payments sounds like poor service.

The company has had a high rate of management turnover lately. It has been expensive. The departure of so many is no doubt related to the poor performance since 2004.

On October 21, 2005, Charles T. Saldarini vice chairman of the Board and chief executive officer resigned. Mr. Saldarini was entitled to approximately $2.8 million in cash and stock compensation,

On August 10, 2005, the PDII announced that Bernard C. Boyle, the Chief Financial Officer would resign from his position effective December 31, 2005. The cost was approximately $1.6 million in additional compensation expense in the third quarter of 2005

The company also announced the resignation of three other executive vice presidents during 2005 and one other executive vice president during 2006.

The last two years history is not pretty and raises questions. Why did PDII lose more than half of its business? Why the massive management turnover? Can they recover? Do they have any useful services to offer especially in such a competitive sector up against respected companies with solid customer relationships? Does the business really matter since they are selling at nearly the net asset value?

NAV roughly

in thousands

Quarterly calculations

                12/06   9/06   6/06   3/06   12/05

growth in cash  16%    -31%   - 28%   -14%    --
cash per share $8.26   $2.81   $4.06  $5.66   $6.58

assets       172,074  170,546 170,587 170,720 169,742
liabilities   68,452   79,563  81,309  77,457  81,194
NAV          103,622   90,983  89,278  93,263  88,548

NAV/share    $7.40      $6.50   $6.40   $6.70   $6.42 

A discounted cash flow is difficult since it is nearly impossible to know what the business is going to do. For example, a two stage model starting with half the current EPS and allowing a total of only 25% growth in 5 years gives a -$29--completely useless. Current free cash flow at averaged capex spending was -$6.33. In the model, PDII does not get cash flow positive in 5 years. A couple of things could happen

PDII lands a few very large contracts
PDII stops capex spending except at maintenance levels
PDII gets acquired

IMHO acquisition is unlikely because it's not a very attractive business with negative cash flow in spite of the zero levels of debt.

They could clamp down on spending to ride the storm out and hope to pick up new business. There is a point where employees cannot get cut further and still hope to maintain enough personnel to do business. hard call on PDII's part

Is there life in PDII? With new management and new product in the pipeline, they may survive.

Should we buy based on the nearly book value price? Does this provide any assurance of some return on $9 spent? PDII is increasing the cash burn rate to $15 million. As of 12/06 there was $114 milion in cash. Until the burning stops, there will be no free cash flow

Any ideas appreciated

Recent news

PDI Inc., a provider of contract, outsourced services to drug companies, on Wednesday said a large customer will not renew its contract sales engagement, worth $35 million in annual revenue.
The one-year contract with the large unidentified pharmaceutical company expires May 12, although PDI had expected an extension until the end of 2007.
The news comes less than a month after PDI announced British drug maker AstraZeneca PLC ended its fee-for-service agreements with the company. This lost contract affected about 800 PDI field representatives and resulted in the loss of about $65 million to $70 million in revenue for 2006.

The company posted 2006 revenue of $239.2 million.

On Wednesday, Chief Executive Michael Marquard said in a statement, "This new development is disappointing and underscores the importance of our strategy, which focuses on diversifying our revenue stream."

PDI said it will now have an estimated cash burn rate of $15 million, from a previous burn rate of $10 million.

A burn rate is the rate at which a company uses up venture capital to finance overhead before generating positive cash flow from operations.

Shares fell 92 cents, or 8.8 percent, to $9.52 during aftermarket electronic trading, after closing up 19 cents at $10.44 on the Nasdaq Stock Market.

Thursday March 29, 8:50 am ET

PDI, Inc. (Nasdaq: PDII - News), a provider of commercialization services to the biopharmaceutical industry, today announced that it has signed an agreement with a top-10 pharmaceutical company for a new contract sales engagement for a cardiology drug. The initiative will utilize PDI's exclusive Select Access team to reach primary care physicians and cardiologists. The contract, which will begin on April 2, 2007, is expected to generate approximately $13 million in revenue for PDI over its one-year term.

Mr. Michael Marquard, PDI's CEO, commented, "The selection of PDI for this contract underscores our strategy to provide innovative on-demand solutions to meet the industry's growing need for flexible sales service offerings. We are very pleased to have been selected for this program and are excited about the opportunity to build our relationship with this important customer."

Select Access is a unique selling model in which multiple, non-competitive clients can access a fully operational sales force with established physician relationships, in high potential zip codes, while providing each client with primary position calls approximately 80% of the time. Since the sales team, and its cost, are leveraged across multiple clients, Select Access is effective for established, seasonal, specialty prescription and over-the-counter products.

Nancy Connelly, Senior Vice President and General Manager of Select Access, commented, "We believe that our track record of building and managing high-quality, results-oriented flex-time teams was particularly important in the selection of PDI. Select Access, the only leveraged sales team in the industry, is a powerful asset that can help our clients maximize their return on investment."

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