Initiating Coverage: Can you(ED)C the Future?
Icon plc (ICLR)
Market cap: $1,199.7 mil.
Share price at
June 13, 2007
$42.43
12-month fair value
$50.50
Phase Forward
(PFWD)
Market cap: $666.6 mil.
Share price at
June 13, 2007
$16.21
12-month fair value
$19.00
Parexel (PRXL)
Market cap: $1,114.3 mil.
Share price at
June 13, 2007
$40.04
12-month fair value
$44.50
Stephen B. Shankman
Analyst
212-698-3148
Jon LeCroy, M.D.
Senior Analyst
212-698-3185
In an effort to improve data quality, shorten study timelines, and
reduce project costs, many CROs and pharmaceutical and
biotechnology companies use electronic data capture (EDC) to
collect and transmit patient data from clinical trials. EDC is
forecasted to be used in 45% of all new clinical trials in 2007, up
from 25% just two years ago. Wider EDC adoption has been
driven by increased acceptance by large pharma, as the EDC
market is expected to grow 16% (CAGR) and approach $700
million by 2012.
We are initiating coverage of Dublin-based Icon plc with a
$50.50 fair value estimate. We believe upside potential to
company operating and gross margins is possible should the
central laboratory and clinical research areas outperform
conservative forecasts — backlog levels are the highest ever and
the revenue coverage ratio is the highest in years. In our view,
Icon’s core clinical research business is one of the best operated
public CROs, led by strong management. Our fair value estimate
is based on a P/E model, using 28x our 2007 EPS estimate of
$1.80. The stock is off 17% since reaching all time highs in May
2007, and we believe Icon offers an attractive risk/reward profile.
We are initiating coverage of Waltham, Massachusetts-based
Phase Forward, a leading EDC provider, with a fair value
estimate of $19.00. As a market leader and first mover in the EDC
area, Phase Forward should benefit most from increased EDC trial
adoption, in our view. Further upside potential may be provided by
safety-focused products, which should benefit from increased
attention to post-approval drug safety. We believe Phase
Forward’s EDC and safety focus positions it in a sweet spot of the
industry and may allow it to grow revenues and margins faster
than market expectations, leading to EPS upside potential. Our
fair value estimate is based on a P/E model, using 32x our 2008
EPS estimate of $0.66, discounted by 10%.
We are initiating coverage of Waltham, Massachusetts-based
Parexel with a $44.50 fair value estimate. We believe that
Parexel’s global focus and impressive client list should allow the
company to generate the most business among small- and midsized
competitors. While margin expansion is expected, the
company’s profitability is still well below its peers, probably due to
a bloated cost base, in our view. We expect a turnaround in the
U.S. business and the strong backlog to continue to build, possibly
leading to upside potential to consensus EPS expectations. Our
fair value estimate is based on a P/E model, using 29x our fiscal
2008 EPS estimate of $1.62, discounted by 5%.
EDC AND CRO MARKET OVERVIEW
Many pharmaceutical and biotechnology companies outsource drug development
services to CROs (contract research organizations), which cost-effectively and efficiently
manage drug development and decrease time to market. Services provided by CROs
include protocol design, management of Phase I-IV trials, data management, laboratory
testing, medical and safety reviews, and statistical analysis. CROs also manage trials to
support new drug formulations and acquire marketing information.
EDC — WHAT IS IT?
In an effort to improve efficiency and provide greater value to clients, many CROs and
pharmaceutical and biotechnology companies use technological solutions. A primary tool
used for data management is Electronic Data Capture (EDC). EDC blurs the lines between
the traditional site and sponsor model, as clinical trial patient data is collected and
transmitted electronically and thus can be accessed by clinical and sponsor personnel over
the Internet.
EDC PROCESS OVERVIEW
Source: IBM Business Consulting Services, December 2005
According to Frost and Sullivan, the EDC market size was approximately $300 million in
2006, up from about $120 million in 2001. EDC is forecasted to grow 16% (CAGR) and
approach $700 million by 2012. EDC adoption is gaining traction — it was used in
approximately 33% of all new clinical trials in 2006 and is expected to be used in 45% of all
new clinical trials in 2007. These adoption rates are impressive when compared to 2005
when EDC was used in just approximately 25% of all new trials.
EDC — REASONS FOR ADOPTION
Historically, EDC has been slowly adopted due to infrastructure limitations in less developed
countries and some doctors’ preference for pen and paper style notes. Regulatory concerns,
lack of a clear vendor leader, absence of data standards, perceived cost, and difficulties in
changing established development processes were also to blame for slower than anticipated
EDC adoption.
In our view, a key driver for EDC penetration has been a wider acceptance of EDC by
large pharma. A number of factors are driving pharmaceutical and biotechnology
companies to improve R&D efficiency, especially those with the largest R&D budgets. An
increased focus on drug safety, patent expirations, fewer new blockbusters, and increased
regulatory scrutiny are a handful of the factors pressuring pharmaceutical companies. In
2004, GlaxoSmithKline, the second largest pharmaceutical company in the world, signed a
major contract with Phase Forward to use its EDC platform InForm. This contract was the
result of a top-down, companywide edict to be an early adopter of EDC. Subsequently,
Merck visited GSK to review its EDC platform and became a Phase Forward EDC client in
January 2006. More recently, Schering-Plough and Eli Lilly have begun to use InForm as
their EDC standard. EDC can improve the quality of the data, shorten study timelines,
and reduce project costs. Other advantages of EDC are better support of complex studies
(especially oncology), less time to unlock databases and produce final study reports, and
faster access to data for adaptive trials. Increased EDC adoption is expected to occur in all
phases of clinical development over the next five years. |
