Drug Researcher Quintiles Moves Upstream

Posted by: Nanette Byrnes on October 09

From the look of things, Quintiles Transnational is having a pretty good run despite the economic turmoil of the past year and a half. The Durham, North Carolina-based company specializes in performing research for drug and biotech companies as a contract research organization (CRO), and though it’s privately owned, it is widely thought to be the biggest player in that game. They have staff in 60 countries, including a shiny glass and chrome high rise headquarters opened in May where CEO and founder Dennis Gillings and his staff have their desks. Over the past few years a number of private equity players have taken stakes in the company. Investors now include high profile firms Bain & Co and Texas Pacific Group.

But despite the flush appearance, CROs including Quintiles have not been completely immune to the economic downdraft or to the many problems large pharma companies, their major clients, are enduring. As weak product pipelines, expensive infrastructure and more challenging regulation, force drug giants to consolidate, their suppliers have been squeezed too. Barath Shankar, senior industry analyst with Mountain View, Calif –based market research firm Frost & Sullivan, expects the industry will continue growing between 12 and 14% a year, but that the US market, which had been tracking at 14% a year, he predicts will grow 11% a year through 2016.

To compensate for the industry slow down and continue to build on its own growth, Quintiles management is trying to move from a contract-based sub contracting role, toward partnerships with drug and biotech companies. In these deals, Quintiles invests money or labor, or both, into the final stages of an individual drug’s development. The payoff: a share of its long term profits.

Quintiles’ move is not entirely unique, says Frost & Sullivan’s Shankar. Rivals Covance and PPD have made similar moves, he says. For one thing, it opens a far larger potential market. While Shankar estimates the worldwide CRO market is between $20 and $23 billion a year, global pharmaceutical sales are expected to hit $825 million next year. That’s according to IMS Health, another consulting firm.

Quintiles Executive Vice President Ron Wooten has been incubating this strategy within the company for several years. His division, called NovaQuest, will have closed $3 billion worth of these deals by the end of this quarter and his pipeline of potential deals has never been so full as it is right now, he says. A few years ago, he was doing deals valued at $30 million. Now the average size is closer to $250 million. His annualized return on investment: over 25%. The business has grown so large and integral to Quintiles’ strategy that the company is going to phase out the NovaQuest name, using Quintiles instead.

In a world where a blockbuster drug can cost $1 billion to get to market, pharma companies are looking to slim down their costs. Getting Quintiles to pony up a share spreads the risk, says Wooten. “It’s simply hedging their bets,” he says. For Quintiles it can leverage expertise they already have, and increase their own efficiency. When Quintiles paired with Eli Lilly on Alzheimer’s research, for example, it was Lily’s first foray into that category, while Quintiles had done CRO work on 40 phase 3 drugs aimed at the ailment.

Part of the payoff of the strategy has been a halo effect on Quintiles’ traditional CRO businesses, Wooten says. When NovaQuest launched, Quintiles had only 1 customer with billings of $100 million a year. Now that’s grown to six, many NovaQuest partners. But the CRO business has also helped NovaQuest. When Wooten was weighing a partnership with Eli Lilly on its anti-depression drug Cymbalta, the numbers looked tough. To justify the large financial commitment the company would have to make, the drug would have to be a block buster. But Wall Street analysts were predicting $800 million in sales of the drug, not enough to justify the deal.

Quintiles’s researchers, however, had conducted five of the seven trials of the drug to that date, and its project managers and physicians were very bullish on its prospects. Their enthusiasm was what convinced Wooten and the board. And it proved right. Cymbalta’s one of only four drugs to ring up $1 billion in sales in its second year on the market.

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