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Pharmanet Is A Quality Player In A Segment Of
Healthcare That Is Growing Very Rapidly On An Organic Basis With Some
Opportunity To Improve Margins And Drive Earnings Growth Faster Than Revenue
Drug Development Services
Analyst Interview Covering
PharmaNet Development Group, Inc.(Nasdaq-PDGI)
Jefferies & Company, Inc.
2525 West End Avenue, Suite 1150
Nashville, TN 37203
Interview conducted by:
Lynn Fosse, Senior Editor
Published - November 9, 2007
Dave Windley is a managing director in the Equity Research Group of
Jefferies & Company. He joined Jefferies’ Healthcare team in August 2000.
Dave follows companies in the pharmaceutical services and specialty
pharmaceutical sectors. Prior to joining Jefferies, Dave was a senior
analyst at J.C. Bradford & Co. from 1998 to 2000 following healthcare
services and pharmaceutical services companies. Dave is a three-time Wall
Street Journal Best on the Street selection.
Mr. Windley earned his Masters of Business Administration
from the Owen School at Vanderbilt University, graduating Beta Gamma Sigma.
Prior to attending Vanderbilt Dave worked for Coopers & Lybrand, LLP. in the
firm’s healthcare practice. Dave graduated from Transylvania University,
summa cum laude, with a BA in Accounting. Dave is a chartered financial
analyst and certified public accountant.
Mr.Windley, please tell us about the universe you cover and why you have
“I cover the contract research organization group; there are fifteen to
twenty publicly traded companies in that group of which Pharmanet is one. I
cover about a dozen of those and focus on the companies that are
multi-capability service providers and multinational service providers based
on our expectation that customers will continue to go to vendors from which
they can buy services that will cover most of their clinical trials needs.”
Please tell us about the clinical trial industry.
“It is actually quite large and still very fragmented. We think development
spending by the biopharmaceutical industry amounts to about $60 billion in
spending. Of that, probably ⅔ or more would be clinical spending, $40
billion clinical trial and ancillary type work. So it is a very large
industry. Development spending is growing in the neighborhood of 10% each
year. It is funded by or supported by the top twenty pharmaceutical
companies all the way down to virtual biotech. The spending is aggregated in
the normal 80/20 rule, where 80% of the spending is probably done by the top
20 pharmaceutical companies. Nonetheless, the number of clients continues to
grow and now probably numbers in the five hundred plus range around the
globe with all the numerous biotech companies that are out there. The
service and outsource industry probably executes about 25-30% of the trials
that are done annually and most of that goes to the top five to ten
providers in the industry.”
Where does Pharmanet fit in?
“Pharmanet is in that higher quality multi-national, multi-capability public
company group. They would rank about seventh or eight in terms of size and
from a quality standpoint, from a customer list standpoint; they compete
with most of the top players in the industry. They probably do not get as
many mega contracts because of their smaller size, but they have certainly
gone head-to-head with Pharmaceutical Product Development or Icon or
Quintiles, and PharmaNet is pretty highly regarded for the quality of their
What do you like about Pharmanet?
“Jeff McMullen, the CEO of Pharmanet, has been in this industry for a long
time, he is very insightful and balanced in his views, very level-headed in
his management style and has great perspective having been in the industry
in senior roles in three different organizations and was one of the founders
of this company. He has strong views about the quality underpinning that the
company needs to have to be successful, regulatory expertise and also
building the company largely organically to ensure that the culture is
fairly consistent from the east coast to the west coast to Europe to Asia.”
You have recently upgraded Pharmanet to buy; what has happened to cause that
“We had an opportunity to re-evaluate a couple of factors that negatively
affected margins for the company in their 2nd Quarter and got
more insight into the direction of those margins or the rebound that we
might see in this margin in the 3rd Quarter and beyond. We were
able to get greater comfort with margins rebounding in the 3rd
Quarter and then continuing to move up from there and that influenced our
earnings expectations. We also did a lot of channel checking with regard to
general industry demand with the feed-back from those checks coming back
extremely positive. In addition to company specific issues for Pharmanet
that we thought could recover, we also believe and expect that backlog and
revenue trends should be good for Pharmanet along with a lot of the other
players in this place. Better revenue and earnings is the bottom line.”
And your target price is?
“The target price is $39.00.”
What might potential investors miss about Pharmnet when they first look?
“They are relatively smaller. They also have historically run at noticeably
higher margins than the industry, but have gone through a rough patch last
year and are climbing up out of that hole. As we look at 2008, the current
consensus expectations for earnings is about $1.56. That is the analyst
consensus. The stock looks relatively expensive on that number, but we think
that is too low and as that becomes more clearly recognized we think the
stock will move up on higher expectations. In other words on $1.70, it does
not look nearly as expensive as it is on a dollar $1.55.”
What should people take away from this interview about Pharmanet?
‘I think investors should look at Pharmanet as a participant in a very
rapidly growing space. One of the factors that I didn’t mention earlier was
that in addition to the underlying growth of development spending at about
10 or 11%, an increasing percentage of that spending is being outsourced, so
the outsourced industry is growing closer to 15 to 20%. Pharmanet is a
participant in that industry growth. Because of their issues in 2006, they
have trailed the industry averages and have the opportunity to trend up
toward industry averages. They are run by a very seasoned management, with
Jeff McMullen and his team, a very large part of which have been with him
for years. So from a take-away stand point I would look at Pharmanet as a
quality player in a segment of healthcare that is growing very rapidly on an
organic basis with some opportunity to improve margins and drive earnings
growth faster than revenue growth.”
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