Quintiles Transnational Holdings Inc. (NYSE:Q)
Morgan Stanley Global Healthcare Conference Call
September 9, 2013; 09:25 a.m. ET
Tom Pike - Chief Executive Officer
Kevin Gordon - Chief Financial Officer
Ricky Goldwasser - Morgan Stanley
So good morning, everybody and thank you for joining us. Its my pleasure to introduce our first company presenting here today, Quintiles. To my right is Tom Pike, Quintiles’ CEO and next to Tom is Kevin Gordon, who is Quintiles’ CFO. So good morning, Tom and Kevin.
Tom its been about four months since your IPO and for the benefit of the audience in the room that might not be as familiar with the story, can you just take a few minutes to provide us a frame work of Quintiles’ story and kind of like the recent developments since the IPO.
Okay, sounds good. Why don’t I take one minute and I’ll talk about us and then we’ll talk about recent developments. We are a 31-year-old company who’s really the innovator in terms of pharmaceutical development services. So we’re very much one of the creators of this industry, and its an interesting time for us, because if you think about 30-year-old industries, they go through transformation and growth often at that point. We feel that we’re at that point.
Our focus in primarily in pharmaceutical services, starting from the first in human. So if you think about the drug development lifecycle, you start with the pure research piece and then at a point it becomes part of a clinical trail, it becomes first in human. So from first in human Phase I clinical trails and some of the technical services before that, all the way through late phase, so approval, late phase and then we also have a segment that participates in the commercialization of pharmaceuticals.
As part of what we do, because we are so deep in drug therapy, we are so deep in medical knowledge. We have about 1,600 docs and PhD’s. That’s the size of a top five teaching hospital in the United States. We also are starting to do some work in the provider community in particular and a little bit in the payer community, because of that deep expertise and value.
If you look at us we have two segments. Product Development, which is Pharmaceutical Development Services and Integrated Healthcare Services, which primarily supports the commercial pharmaceutical customer and then some of these other segments like providers.
We went public in early May and with the assistance of Ricky and others and since then I think the good news is that nothing has really changed in terms of our thesis, with the way we run the company. We continue to have a very strong backdrop for our industry. We believe its growing 5% to 8% per year at a minimum, and we are very pleased, because there are very few industries in terms of how we serve that and grow that that way.
Two components to that tiny bit of growth in research and development, but mostly a trend towards greater outsourcing of services by the pharmaceutical firm and those drive that growth.
We are focused on the late stage clinical trials, Phase II, Phase III to 90% of our product development business and frankly that is the section that’s growing the fastest. It’s also the one that’s transforming in terms of more outsourcing, more services and then we continue all the way through the commercialization piece.
So I think the story is solid. To be honest with you, we haven’t changed much. We have the terrific five year track record of growth and we produced a significant amount more EBITDA than our public competitors combined and things are carrying on with strong net new business at about a 1.36 book-to-bill ratio in our product development segment, which competes with the other CROs in the first half of the year.
And just as a reminder, if any of you have any questions for the team, just raise your hand. We don’t have an official Q&A session. Raise your hands and we’ll get the mic to you.
So there’s been a lot of discussion this year and a lot of enthusiasm around our pharma renewed focus on innovation. Can you share with us how this filters into the conversations that you have with yours customers? Is the excitement that we are feeling -- is actually kind of like trickling through these conversations and what are you hearing from the company?
Very much so. I think in many ways I have the pleasure of meeting with a lot of the top executives in the pharmaceutical industry and I think there is a palpable excitement about the number of drugs that are in the pipeline right now and some of the indications, some of the areas of focus.
It’s quite broad. We see it both in small biopharma, where of course there’s a return to some funding models over the past years. It’s been pretty attractive. We see it in large biopharma with a little bit of rewriting based on the future pipeline and some confidence associated with their pipelines moving forward.
The way it trickles into our business Ricky is that we’ve in fact seen an increase in our e-volume. There is really two elements to a product development segment associated with us selling. One is, we have a significant volume of RFPs and that as I referred to is actually increasing over the past number of months by significant double-digit amounts and then the other thing that we see is, because of our deep expertise – we have the docs globally; we are in 100 countries; we have the leading technology. Because of those things, we are proactively going out to our customers to try to help them make development more effective.
One of the byproducts of their success is they want to be careful about how they spend their development dollars and so if the development dollars go further, because we are more efficient with them, it pays dividends for them. So the RFP business is strong and then our proactive efforts are also yielding some good results, where we help them be more successful with their drug development.
And then, is there a seasonality in kind of like pharma pending a decision. When you think about pharma budget and when you think about CapEx or trajectory for the second half of the year.
We don’t see it too much and I’ll let my good CFO Kevin comment too, so you can get to know Kevin a little bit.
We don’t see much of it. You see in our IHS business a little bit of seasonality, because of the commercial pharmaceutical organizations making decisions towards the end of the year. But Kevin, any comments on that?
I think that’s right. If you look at the commercial side of the business, we’ll tend to see stronger fourth quarter from the new business stand point. We kind of see more renewals. The decision-making process around our customers tends to come through in that quarter and adds to the net new business at that time.
So the accelerating RFP seems like fourth quarter could shape up to be a nice strong quarter.
Of course, you know we can’t do forward-looking statements, but…
But I can.
Lets just say Ricky that we’ve had four consecutive quarters of net new business over $1 billion. So we see nice growth, we see nice demand and we expect to see demand continuing.
Strategic partnership again continues to get a lot of attention in the CRO space. Can you update us on your view on strategic partnership and what does this strategic partnership really mean. Because I think the term has been thrown out there a lot and there are a lot of different types. What is the strategic partnership that really actually matter and that we should focus on?
Okay, great. It’s interesting in our industry this term ‘strategic partnership’ is used broadly. In our view, many of our competitors use it when it’s really just the preferred resourcing relationship.
Now we do enter into preferred resourcing relationships as well, but what’s really a strategic partnership for us is when we can take our defects per piece and improve the development process, improve the commercialization process.
So for instance, we’ll sit on the operating committees, the research operating committees. Just as the drug is coming out of the research phase, try to help figure out what’s the best way forward as clinically over the coming years or we’ll use our integrated drug design capability and our tool.
We have the industry-leading tool associated with visualizing how a clinical trial can run on a global basis, than actually producing what’s almost a bill of materials of how that should work. For us those partnerships are using those types of skills, the tools we have, the expertise we have, as well as the kind of preferred sourcing.
The thing for you as an investor that you see out of that is you see greater utilization of our organization. So not only do you see kind of traditional metrics associated with revenue, but you’ll see the use of our docs, you’ll see the use of our technology. I think increasingly for instance, customers are licensing our technology as we go forward.
And when I think about the evolution of strategic partnership, we’ve started to see more recently sponsors making very, very focused decisions right. So before we saw kind of how to (inaudible) and now, but in this year we saw a couple of partnerships that were really focused on one partner.
How is Quintiles’ positioned to win these contracts and do you think that this is really the way of the future? That Phase I is going from 10 to three and say two over the next five years. Your going to go from two to three to one as sponsors understand who really has the capability, that can be a true partner.
Yes, I do think we are very well positioned and I do see the same trend Ricky. I see especially in what we call the mid-sized biopharma. Many industries would call it large cap, but for us it’s all mid-cap multi billion dollar companies. There is a very good opportunity for them to use the breadth of our skills, to use our technology, so they don’t have to make a capital investment, etcetera, to be able to prosecute development in their organizations.
For instance, there may be a new indication for a compound they have, that they don’t have the skills in-house for, so they can use ours. We’re about 1.6x bigger than our nearest public competitor and so it positions us very well for these sole source or closed sole source deal.
The other thing just longer term that I think is important is our industry has traditionally been fragmented. I think when Kevin and I were preparing for the IPO, our researchers came up with about 800 CROs and we think that over the longer investing horizon for you, your going to see some deconsolidation, because a lot of those smaller players simply aren’t going to have the skills or they are not going to have the reach or breadth to be able to do what’s necessary for the clinical trial.
So part of the long-term positive secular trend is really that you’ll see some consolidation that would happen in the industry over the long term, as well as more of these – essentially more of the spoils going through the top company.
So you bring up an interesting issue. I think one of the things that we’ve been questioning about with your industry is the fact that to your point it’s a very fragmented industry. But yet we are really not seeing much in terms of consolidation.
When we think about consolidation, we can think of consolidation of share, right, where the small players can’t really make it on their own and larger companies can take share, and there’s also M&A activity.
What do think – why do you think it’s been – in the past there really hasn’t been much consolidation in the CRO. Is this because of the success of the industry or is this because of how these customers and users are thinking about it, and what is going to drive that change, if we will see that type of change.
I’ll tell you what, and why don’t I – I’ll chat a little bit about that and then maybe Kevin can talk about our acquisition strategy as part of that.
In general if you think about a clinical trail and I’m not sure how in-depth any of you have gotten into this, I’m sure some quite deeply. It traditionally when it was a paper based process, what it was a global process, it was difficult to talk one over in midstream and get incremental value out of it. Because as an acquirer, of course what we want to do is get some kind of synergies and it was difficult to get synergies out of the existing book of business in many acquisitions.
Now as we’ve become more technology intensive, so as there is more electronic data capture, as there is more use of systems for things like risk base monitoring, so these are all things that we are a leader in and we believe that over the longer term, with the technology it will allow for more acquisitions, not unlike your industry frankly, or as technology came in Ricky, banks started to consolidate. So we think the future is better than the past.
But the clear thing that we look for and then Kevin will talk about our strategies, I think we all want true synergies. If we do an acquisition, we want it to be accretive to us and be value creating and not to them just willy-nilly.
So Kevin, you want to talk a little bit about our strategy?
And just to add a little bit to Tom’s comment before going into that is, as you look at the global scale, global reach, capabilities that the larger bureaus such as Quintiles have and if you look at what our customers are asking us for and the growth around the world, you’ll see more and more business I think driven to the larger guys, have been positioning that way from the fragmentation that you mentioned Ricky.
In terms of acquisitions, we look for things that add to our capabilities. Service capabilities, service offerings. So if you take a look backwards, first, we bought a company called Expression Analysis, which gave us capabilities in the Genomics area. We bough a company called Advion, a Bioanalytical lab, biomarker capability, which will provide identification ability in certain testing and so forth.
Then we also bought a company called Outcome Sciences, which furthered our capabilities in the later phase; post-marketing approval, registries, observational research. And then most recently I think you saw us – a lot of you have been watching, we announced the acquisition of the company called Novella. We expect to close that acquisition before the end of this quarter, adding capabilities specifically in oncology, specifically in medical device and also very much targeted to the smaller and biotech customer, which we see the ability to penetrate even further.
So as we look whether it’s a capability, whether it’s an emerging market, whether it’s been more globally what we have to offer, is where we’ll go. We tend to look at acquisitions that we would characterize much more as tuck-in, bolt-on type size and all those examples I just gave I think fit that category and we’ll look to continue to do that as we go forward.
Let me just pause here and see if we have any questions and its not because we have a very shy audience. It’s early in the morning.
That’s right, we got you first, so...
So taking on to it, there is another area, another topic that’s been discussed in the industry. I don’t know if the industry periodically recently dedicated some significant time on this topic. Does Quintiles have risk sharing relationships and how do you think about the evolution of that type of model?
Let me describe a couple of things and our view on it. We do see an interest in having a shared responsibility for an outcome from our customers. So in other words, they are looking for efficiency, they are looking for certain outcomes, we see that.
In our industry, the way it works, the sponsor gets the upside of a very successful product and we really get the services revenue along the way. Now what that means to us is, we will be willing to think about operational risks. So things that we control, very much like other outsourcing industries, we’ll consider those things. But things that we don’t control are the things that we won’t take any risk on.
So if you think about it, because they have all that upside, there maybe again in our industry, we call it an endpoint. An endpoint that happens, it’s a clinical end point that cannot be controlled. That will not be something that we’ll take on responsibility for, because again, we have really taken not only for the operational things that we control.
It’s an interesting topic. I’m sure that some competitors are in different positions, but what I generally see is the maturing of our industry and somewhat like other outsourcing industries. So what you’ll see is things that we operationally control, we would take risk for. But we negotiate our contracts in a way where we have the levers to be able to control those items.
So you take something like, if you in terms of the resources we put on, will make sure that we are allowed to turnover the resources, if were expected to meet certain cost targets. So that we have that control, that lever of it.
So again, I’m getting into a little bit of depth, but I think – you generally do see an interest in shared accountability, but we are really driving to do it in areas where we can control, and in those cases we are willing to. I don’t know if you’d add anything Kevin to that.
No, I’m fine.
Do you feel, when you think about a competitive environment, if this is something that might differentiate Quintiles and gives you some sort of an advantage when you think about accountability as you sit across the table from your clients.
I think our main advantages are that we understand the development process so well and we are able to bring the technology, we are able to bring the in-depth medical expertise, the commercialization expertise.
There is none of our competitors that have – none of our significant competitors that have such a deep outcome, a science organization like ours or a deep commercialization as ours.
Well certainly, to me these types of things like risk sharing are more about expectation setting between you and your customer and its these other items, that depth and breadth of capabilities that really increases their probability of success that differentiates us.
And shifting over to Asia. So you have significant exposure in Asia. I think when you think about the trials, the work that’s done is Asia versus Asia as a percentage of your book, you really have an outside share of that market. Can you talk a little bit about the opportunity in Asia? What do you see sponsors doing there and how big can that market be?
Yes, we are very proud of our Asia business and most of it was established in the mid-1990. So we had a bit of head start on others and we in fact have an executive, who is on our executive committee who is based in Asia, driving that business.
We have the most attractive multi-national and largest Japanese business. Like many will know that Japan is actually a place right now where there is a lot of encouragement of innovation and drug development and it’s really a terrific place to be. So we are very happy to be the largest overall there, certainly of all the multi-nationals.
We also have taken a strategy in China to have kind of a duel-CRO. So we support multi-nationals with an organization that has globally harmonized standard operating procedures for the global regulatory bodies and then we have a Chinese CRO that we have really developed ourselves. So you don’t have the complications of an acquisition there, that is focused on what’s now – it used to be the SSDA now it’s CFDA standards in all Chinese language. And we think these kinds of things really give us a competitive advantage.
We do see, and in my view of Asia is, it continues to be a place where the preponderance of disease is high. It is a place where there are societal risks if the governments don’t address the need for better drug development, more drug therapy as people age, and so the macro-plus frankly the amount of funds available. So the macroeconomics of the situation are really quite attractive and that’s why we are really pleased to have the largest business there and see it as a real growth engine.
By the way, our growth in that part of the world has exceeded our growth in other areas and China is actually the fastest growing of the larger. I’ll be there in a month.
So do you see Asia as a place – you actually raised an interesting point, right, about the macro environment. But do you see Asia as a place where it’s kind of its own market. Where you think the dual CRO works to develop therapeutic, right. They are going to be sold into that local market or is there also an opportunity for pharma company sponsors who do work in Asia to drive this or have a global market opportunity.
Yes, it’s very much both. We see both more and more – as Kevin mentioned before, genetics are a key part of many of the drugs that are evolving and there are certaingeographies, certain preponderances for instance different types of cancer, and so you definitely will see the multi-nationals developing drugs for global use, using Asia as part of their study base.
But we also do see – I think there is a lot of discussion about the number of Chinese researchers who are educated for instances in the Untied States and have come back and become funded by the Chinese government and so we do think that we are kind of a blockbuster away from something very interesting happening out of China and becoming worldwide.
I’ve also mentioned, in Japan, I mean it’s a very friendly environment right now. I think the current government is becoming more friendly towards drug development and we are really pleased for instance to be celebrating our 20th Anniversary on October 4 there. So we’ve been in there for a long time. We’ll have many of the top executives or the top Japanese pharmaceuticals there at our 20th.
So we have 60 seconds left and I want to give you the opportunity. I know time goes fast right, and we’re having such a great time. You have 60 seconds left just to tell us all, what should we be kind of really focusing on when you think about the Quintile store.
Well for me, we have a great industry backdrop. There are very few industries, when you open up the Wall Street journal, that have this kind of intrinsic growth to them. This combination of a little R&D improvement, but really an outsourcing trend that supports it.
You do have us being the largest with the greatest steps of capability. It’s about 1.6x times larger and certainly I think we have about 8x as many docs that connects the largest public CRO, so very much differentiated.
You have some upside with our integrated healthcare services segment. I think that’s the return to margin, return to growth story and it’s very – to go over the next few years its very forward looking. And frankly the last things that Kevin mentioned, it is our net new business over the last four quarters has been terrific, about $4.7 billion of net new business, which really gives us a good 2014 story.
So I think Ricky, in a minute. Thank you.
Great. Thank you very much to both of you.
Thank you Ricky.
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