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PFWD level 02 research                                                            04/07/2010

Summary: Phase Forward fits squarely into several important Taylor Frigon growth
themes. They are also leader in the major paradigm shift taking place within the clinical
development industry from traditional forms of data entry and data management to digital
forms of data entry and data management – a transition that (strange as it may seem) is
still in its early phases of rapid adoption, due to some historic details explained below.
Therefore, they are probably sitting in a solid position in front of a fertile field for future
growth. However, there are some serious concerns, one of them being that this fertile
field may be somewhat curtailed in years to come by two powerful factors – the
maturation and consolidation of the biopharmaceutical industry, and the increased levels
of government intrusion in healthcare, which acts to suppress the rewards for developing
new treatments, altering the risk-reward decisions of potential drug developers. Further,
while Phase Forward enjoys market leadership alongside main competitor Medidata, if
third-place player Oracle were to acquire Medidata (always a possibility with Oracle), the
resulting competitive landscape could become much more negative for Phase Forward, as
detailed below. For these reasons, we would advise investors to be cautious about
deploying capital to PFWD.

Founded: 1997          IPO: 2004

Business model: Phase Forward provides an Integrated Clinical Research Suite (ICRS)
of enterprise-level software products, services, and hosted solutions, for clinical trial and
drug/device safety monitoring activities to pharmaceutical, biotech, medical device,
CRO, academic, governmental regulatory, and other entities involved in clinical trial and
medical drug and device safety monitoring activities (often collectively referred to as the
“clinical development process”). Phase Forward’s technology automates and increases
the efficiency of tedious procedures that formerly required paper-based recording and
monitoring, such as the capture of trial results, and enables easier generation of
randomization during testing and research, easier and more rapid data cleansing after
various clinical trials, and more effective monitoring of safety incidents and other data
after approval. These services are grouped into four major categories of services:
electronic data capture (EDC), clinical data management, drug safety, and interactive
response technology. Their software is available through a hosted web browser (software-
as-a-service) or through term software licenses. The company’s business model is to
provide the best integrated solution for all of these components, versus their competitors
who may add value by focusing on one or two of these areas. Phase Forward is the only
company with an integrated solution for addressing all of these particular areas (although
competitors Medidata and Oracle also address EDC, which is the main business revenue
driver for Phase Forward as well, and those competitors may address other areas that
Phase Forward does not).

Themes:
1. Telecosm: Phase Forward applies technology to the data capture and management
requirements of the clinical trials business and the drug and device monitoring
businesses, all of which involve extensive reporting and tracking which was previously
done with paper – and which still involve data capture on paper which can be made more
efficient through digitization.
2. Outsourcing -- Healthcare: Phase Forward provides an integrated system for
managing the “back office” of the drug and device approval process and the monitoring
of drugs and devices after approval. Companies and academic or government entities
involved in these activities could build such a system themselves, but doing so would
have several potential costs that effectively outweigh the potential benefits, among them
the fact that building such a system is not their core competency; the probability that a
home-grown system would not operate in the cloud and would therefore require other
non-core competencies and expenses, such as buying, maintaining, and upgrading the
servers and other data center equipment to run the system; and the fact that a home-
grown system might have difficulty interfacing with outside entities or partners they must
deal with throughout the process, including government agencies. Thus, businesses and
government and academic entities are likely to pursue the solution of an outside vendor
such as Phase Forward for the same reason that large enterprise customers select
enterprise data management solutions from outside vendors such as Oracle, SAP, and
Salesforce, rather than attempting to build such solutions themselves, in-house.

William Blair analysts believe that the biopharmaceutical companies are facing a crisis of
productivity, based on a pattern of diminishing returns over time – more dollars are being
pumped into R&D, with fewer new drugs or biologics coming out of the research
pipeline. This crisis in productivity is driving the industry towards greater and greater
outsourcing of non-core competencies, in order to focus more and more intensely on
producing new treatments. The following graph, based on FDA data and published in
March 2009, illustrates the problem:




In the graph above, the black line represents FDA-approvals for New Molecular Entities
(NMEs) and biologic licensing applications (BLAs) BLAs. The red line represents R&D
spending.

In a 2005 article in a trade publication called Instrument Business Outlook (which now
appears to be out of print), this ongoing decline is discussed, and the responses by
companies detailed. The article notes that companies such as Pfizer and Merck are
increasing their R&D spending, and trying to offset those increases by streamlining
business processes, outsourcing “non-core” activities, and utilizing software to make
themselves more productive.
Another aspect of the outsourcing theme is the fact that more electronic data capture and
data sharing by a business facilitates greater outsourcing of clinical trials to overseas
locations, where such trials cost a fraction of what they cost in the US. The more that
data can be rapidly and easily shared via integrated electronic systems, the more
companies are able to operate in the most cost-effective locations for various stages of
their drug development process.

The use of EDC rather than paperwork for data capture decreases time to market and
lowers costs (both increasingly critical concerns for clinical development companies). It
also increases the quality of the data. William Blair has a worthwhile explanation of the
history of EDC adoption in a piece of research dated 03 18 2009 (upon initiation of
coverage).

In that piece, Blair notes that traditional clinical data was recorded on paper, and only
later manually entered into a central database. This required entry of the same data two
to three times. Data was often entered illegibly, inconsistently, or not entered at all.
Therefore, the old method required an extensive (and expensive) process of “cleansing”
the data – checking for data entry errors, and going back to find data that was entered
illegibly on the paper form, or not entered at all. This required maintaining more people
on staff, and a process of getting the data from collection point to central database that
took several weeks or even months.

In the 1980s, players in the clinical development industry began experimenting with the
use of software for data entry, but without the internet, this required expensive mulitple
terminals and then the physical transport of data by discs and often re-entry into a
different operating system or programming language. The cost of hardware and software
at each site, and the difficulty of data transport, plus the questionable nature of many of
the Silicon Valley startups that tried to address the market, meant that there was low
adoption. Only when the internet arrived, and especially only when bandwidth
capabilities expanded to the point that data could be seen back at headquarters almost as
soon as it was entered, did EDC really become a value add rather than a cumbersome
novelty. This accounts for the relatively low level of EDC adoption until about the year
2000, when adoption began to ramp significantly.

The following data tables and slides clearly illustrate the value added by using EDC
versus traditional paper methodologies:
In a survey of eighteen companies conducting clinical trials in 2009, William Blair found
that 22% of their trials were not using EDC at all (still using paper), 33% of their trials
were using less than 50% EDC, 28% of trials were not at 100% EDC but were using it for
more than half of their data capture, and 17% of the trials were being conducted using
100% EDC. The same respondents estimated that, three years from now, only 11% of
trials would still be 0% EDC, and only 6% would be less than 50% EDC. In contrast,
56% of trials would be using over half EDC (but not yet 100%) and 28% of trials would
be all-EDC. See graph below:
Blair estimates that overall, only about 50% to 60% of all clinical trials use EDC, leaving
a substantial field for continued growth. Interestingly, they note that Phase II and Phase
III of clinical trials appear to be more penetrated, due to the size and complexity of the
testing in those phases of the approval process, while Phases I and IV still seem to be
using a higher percentage of old-fashioned paper data capture, due to the fact that they
are smaller in scope and shorter in duration and the industry seems to be slower to adopt
EDC systems in those segments of the clinical approval process.

Business segments:
   • Electronic data capture. 73% of 2009 revenues. 21% revenue growth in 2009.
      Electronic data capture (EDC) refers to the process of reporting clinical data using
      electronic case report forms rather than paper-based case report forms. As noted
      above, EDC has obvious efficiencies over traditional paper-based data capture. In
      addition to the lowered cost, lowered error rate, lowered data cleansing time and
      costs, and lowered time to market, EDC enables greater visibility within an
      organization of what is taking place at remote clinical trial sites, and can enable
      better integration of trials that involve participants across multiple continents.
      Phase Forward’s internet-based EDC solution is called InForm.

   •   Clinical data management. 11% of 2009 revenues. (1%) revenue negative
       growth in 2009. Clinical data management software enables customers to monitor
       and manage the various trials that they are running simultaneously at any given
       time. If EDC software digitizes the data captured within trials, CDM solutions
       digitizes the task of managing the trials, and thus operates at a level above the
       EDC. There is still a need for data to be shared across these levels, which is why
       one of Phase Forward’s value adds is the integration of these various levels of
       management in an integrated solution. The Phase Forward solution for managing
       clinical data is called Clintrial.


   •   Drug Safety. 10% of 2009 revenues. 39% revenue growth in 2009. Phase
       Forward’s drug safety solutions enable customers to comply with the complex
       global safety regulations and reporting requirements associated with clinical
       research and post approval marketing / drug surveillance. It expedites the
       tracking and reporting of adverse events to the proper regulatory agencies and
       integrates with the other data management solutions offered by Phase Forward.
       Phase Forward’s drug safety solutions are marketed under the Empirica brand
       name.

   •   Interactive response technology. 6% of 2009 revenues. 551% revenue growth in
       2009. This technology refers to the use of software to streamline the
       randomization process used in clinical trials. The Phase Forward software
       solution in this area is called Phase Forward IRT. Phase Forward built their IRT
       business through acquisitions from CVD and by acquisition of IRT market leader
       Clarix.

Competitors:
Medidata (MDSO): Founded in 1999 and private until its IPO in June 2009, New York
City-based Medidata provides electronic data capture and data management that
competes directly with Phase Forward, as well as other tools for aspects of the clinical
development process that Phase Forward does not address, such as CRO negotiation,
clinical research protocol development for a substance, and budget benchmarking versus
the spending of the rest of the industry. Medidata and Phase Forward are the two biggest
players by market share in the industry, each sharing 30% to 40% market share, with the
remainder primarily addressed by Oracle, which has been taking some market share
lately according to William Blair.

According to their most recent 10-K, filed March 2010, Medidata’s 2009 revenues were
$140.4 million. This was somewhat less than Phase Forward’s $213 million in the same
year.

Oracle (ORCL): An aggressive acquirer, there is a danger that Oracle will try to buy
Medidata, which could be a net negative for Phase Forward, creating a competitor with
greater market share and resources, with a well-regarded industry solution that could then
be matched with other Oracle resources that might produce some synergies that Medidata
could not offer on its own.

It is already apparent that Medidata addresses some business processes which Phase
Forward does not address; an added capability to integrate with other business processes
could tip the balance further towards a combined Oracle-Medidata entity. Large biotech
or pharma companies which already use Oracle for enterprise database needs but which
use Phase Forward for clinical development processes would probably look favorably on
the ability to integrate into a single platform, much as a financial company which uses
Oracle or Salesforce for contact relationship management and other needs but a different
software provider for trading or portfolio allocation management would be interested in a
way to have Oracle or Salesforce to absorb that aspect of their business and integrate all
of it.

In a survey of fifteen EDC customers in 2009, William Blair found that seven expressed a
preference for working with Phase Forward, seven expressed a preference for working
with Medidata, and one expressed a preference for working with Oracle.

While it may seem that any software company could conceivably enter this field and
compete in it, there are some barriers to entry. First, there is the necessity of creating the
proper data entry and reporting fields to comply with a complex, highly-regulated and
highly technical industry in which participants may be in various countries and speak
various languages and have to comply with various different government regulators.
Second, and more importantly, there is an issue of trust and familiarity with the
customers, many of whom are big industry players with a lot on the line and a reluctance
to deal with an unproven partner or new start-up in the field. In fact, because clinical
development and regulatory approval is the vulnerable jugular vein of the
biopharmaceutical industry, where their lifeblood flows but where they can easily be
choked off with a false move, EDC itself was originally viewed with suspicion and did
not have a rapid adoption at first, due to fears that the technology might somehow crash
and critical data lost. As the pie graphs above illustrate, that adoption is only now
beginning to pass the “tipping point,” and firms are now expressing plans to rapidly adopt
greater EDC over the next three years. Oracle, Phase Forward and Medidata have
emerged as trusted players in the field, but joining that circle might be difficult for a new
player at this point.
Customers: As of the end of 2009, the company reported over 335 customers (Medidata
reported 173 customers), including all ten of the top ten and 19 of the top 20 global
pharmaceutical companies measured by revenue. Customers, by industry, include:

Pharma -- Allergan, AstraZeneca, Bayer HealthCare, Takeda Pharmaceutical, Merck,
Novartis, and Sanofi-Aventis.
Biotech – Celgene, Atherogenics, Theravance, Morphotek, and Genzyme.
Medical Devices – Boston Scientific, Medtronic, Stryker.
CROs – ICON, Everest, Quintiles.
Academia and Government – US CDC, US FDA, UK Medicines and Healthcare products
Regulatory Agency (MHRA), Duke, Harvard, Mayo Clinic.

Phase Forward’s top five customers accounted for approximately 28% of the company’s
total revenues in 2009. By way of comparison, Medidata’s top five customers accounted
for 46% of total revenues in 2009.

While it may seem that Phase Forward’s potential field of growth is limited, since they
already have so many of the big-name industry players as customers, in fact many of
these companies appear as customers in Medidata’s list of customers as well. For
example, AstraZeneca is one of the top two biggest customers by revenue of Medidata
for each of the past three years, but also uses Phase Forward. This indicates that,
particularly in some of the larger players, some departments or some types of trials are
using solutions from one provider and other departments or trials are using another.
Some recognizable customers listed by Phase Forward and not listed by Medidata include
Medtronic, Stryker, Celgene and Merck.

Leadership: Dr. Paul Bleicher (age 55 in 2010) founded Phase Forward in 1997 and
serves on the Board of Directors. He was Chairman of the Board until 2008, when he
stepped down from the Chairman position and his executive role as Chief Strategy
Officer to found a new company, Humedica, focused on “healthcare inofmatics.”

Current Chairman and CEO Robert Weiler has been CEO since 2002, and Chairman
since 2008. Prior to joining Phase Forward as CEO in 2002, Weiler was CEO of the
Giga Information Group, a consulting company helping clients make better strategic
decisions in technology investments for business results. The Giga Information Group is
now a subsidiary of Forrester Research, since February 2003 (shortly after Weiler left –
this is somewhat notable, since Phase Forward went public shortly after Weiler arrived
there, in 2004). Prior to Giga, he was CEO of Eastman Software, formerly Wang
Software, from 1997 – 1999. Previous to that he served in Sales and Marketing for Lotus
(the software company and maker of Lotus Notes and Lotus spreadsheet applications).

CTO Tim Rochford joined Phase Forward in 2007. He has twenty years experience
developing software applications, particularly in speech recognition and natural language
processing systems, which should translate well to the development of data entry
interfaces needed by PFWD customers. Most recently prior to joining Phase Forward,
Rochford provided technology consulting services to a CRM hosting provider (possibly
Salesforce?) and a call-center platform vendor.

There are no clear scandals or red flags associated with the management team that we
have uncovered in our examination of the company. The Board of Directors is somewhat
heavy in investors/financial types (and academics) rather than businessmen with relevant
experience.
The Board:
   • CEO and Chairman Robert Weiler (see above).
   • Axel Bichara – Atlas Venture, a lead investor in Phase Forward.
   • Richard D’Amore – North Bridge Venture Partners – investor.
   • Paul Joubert – founder of a management consulting firm, EdgeAdvisors. He has
      an accounting background.
   • Gary Haroian – Chairs the audit and finance committee of the board – CFO and
      senior financial background, with some CEO experience, primarily within the
      network software industry; has experience taking a company through an IPO.
   • Dr. Kenneth Kaitin – Director of the Tufts Center for the Study of Drug
      Development, and a Professor of Medicine at Tufts University.
   • Dennis Shaghnessy – faculty member at Northeastern University (in their College
      of Business Administration) in Boston, former executive (business development)
      at Charles River Labs.
   • Dr. Paul Bleicher – the founder.


Potential Obstacles and Skeletons:
1. EDC will inevitably reach close to 100% penetration of the industry, after which
growth will depend on a) taking market share from the competition (Medidata and
Oracle), and b) the overall growth of clinical trials. At the same time, increasing
socialization puts downward pressure on the demand for clinical trials, by putting
downward pressure on the reward side of the risk-reward decision, by lowering the
potential price that can be demanded for a treatment and by lowering the potential pool of
customers who will be allowed to ask for that treatment (due to treatment restriction,
already taking place in major industrialized nations such as the UK, Australia, New
Zealand, and Canada).

2. The company relies on Oracle to supply the database component of most of their
software solutions. Oracle also competes with Phase Forward, offering Oracle Clinical,
which is designed for pharmaceutical, biotech, government, academic and other entities
involved in clinical trials and drug safety monitoring. The company’s dependence upon a
competitor could create a situation in the future in which Phase Forward would need to
find another supplier of the capabilities currently provided by Oracle, which could create
temporary inability to provide contracted services

3. The company relies on SunGard Data Systems to provide server facilities that enable
some of Phase Forward’s hosted offerings. This does not appear to be as serious a
vulnerability as their reliance on Oracle for database solutions, as replacing SunGard
would likely be easier for Phase Forward than replacing Oracle might prove. Switching
to a different hosting provider might create technical challenges for those involved in the
move, but switching a database service that is at the heart of a business (all aspects of the
business interface with it and reside in it) is much more difficult. This fact is what makes
database services so “sticky,” and in fact is a positive for Phase Forward (which itself
benefits from this “stickiness” once its own customers become used to working with their
solutions).

4. While Salesforce does not directly compete, the company’s platform-as-a-service
capabilities could prove attractive to an app developer who realizes the business
opportunity in writing an app that enables integrated “back office” functions for this
industry at a lower price than the Oracle solution or the Phase Forward solution.
5. Phase Forward offers a hosted model, which is rapidly becoming the preferred sales
model and which has been growing rapidly (now about 70% of total revenue and
growing), but switching from the high-margin software licensing model to the hosted or
SaaS model created a transition period in which there was some compression the
company’s overall margins. Software licensing margins were in the 90% range, while
hosted margins are in the 40% range. On the other hand, the SaaS revenue model is more
predictable, being based on a recurring subscription rather than on a major sale of a new
multi-year software license or upgraded software package. Further, SaaS models are
scalable, allowing margin expansion again as customers increase and fixed costs
generally remain the same.

6. As mentioned in point 1, there are reasons to suspect that increased government
intrusion into healthcare could constrain the clinical development pipeline in years ahead.
Another concern is that ongoing consolidation in the biotech and pharmaceutical industry
will cut down on the industry-wide pipeline, as there is less duplication of research and
development efforts (if Genentech and Roche were both working on substances which
could address a certain disease or medical indication, and then Roche bought Genentech,
then in the future there will only be one company working on a substance to address the
next medical indication, rather than two). Any factors which act to shrink the overall
clinical trial pool will likely be a long-term negative for Phase Forward, as will factors
which act to reduce the number of industry players (and potential customers).

Market Cap: $589 million (as of 04/05/2010).
2009 net revenues: $213 million
2009 adjusted net earnings: $8 million.
US/OUS revenue ratio (2009): 61/39
% insider and 5% ownership: 3%.
address and phone: 77 Fourth Ave., Waltham MA 02451. 781-890-4848.


David Mathisen
Director of Research
Taylor Frigon Capital Management

Daniel Landsman
Research Analyst
Taylor Frigon Capital Management

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Pfwd Level 02 Research 04 07 2010 (1)

  • 1. PFWD level 02 research 04/07/2010 Summary: Phase Forward fits squarely into several important Taylor Frigon growth themes. They are also leader in the major paradigm shift taking place within the clinical development industry from traditional forms of data entry and data management to digital forms of data entry and data management – a transition that (strange as it may seem) is still in its early phases of rapid adoption, due to some historic details explained below. Therefore, they are probably sitting in a solid position in front of a fertile field for future growth. However, there are some serious concerns, one of them being that this fertile field may be somewhat curtailed in years to come by two powerful factors – the maturation and consolidation of the biopharmaceutical industry, and the increased levels of government intrusion in healthcare, which acts to suppress the rewards for developing new treatments, altering the risk-reward decisions of potential drug developers. Further, while Phase Forward enjoys market leadership alongside main competitor Medidata, if third-place player Oracle were to acquire Medidata (always a possibility with Oracle), the resulting competitive landscape could become much more negative for Phase Forward, as detailed below. For these reasons, we would advise investors to be cautious about deploying capital to PFWD. Founded: 1997 IPO: 2004 Business model: Phase Forward provides an Integrated Clinical Research Suite (ICRS) of enterprise-level software products, services, and hosted solutions, for clinical trial and drug/device safety monitoring activities to pharmaceutical, biotech, medical device, CRO, academic, governmental regulatory, and other entities involved in clinical trial and medical drug and device safety monitoring activities (often collectively referred to as the “clinical development process”). Phase Forward’s technology automates and increases the efficiency of tedious procedures that formerly required paper-based recording and monitoring, such as the capture of trial results, and enables easier generation of randomization during testing and research, easier and more rapid data cleansing after various clinical trials, and more effective monitoring of safety incidents and other data after approval. These services are grouped into four major categories of services: electronic data capture (EDC), clinical data management, drug safety, and interactive response technology. Their software is available through a hosted web browser (software- as-a-service) or through term software licenses. The company’s business model is to provide the best integrated solution for all of these components, versus their competitors who may add value by focusing on one or two of these areas. Phase Forward is the only company with an integrated solution for addressing all of these particular areas (although competitors Medidata and Oracle also address EDC, which is the main business revenue driver for Phase Forward as well, and those competitors may address other areas that Phase Forward does not). Themes: 1. Telecosm: Phase Forward applies technology to the data capture and management requirements of the clinical trials business and the drug and device monitoring businesses, all of which involve extensive reporting and tracking which was previously done with paper – and which still involve data capture on paper which can be made more efficient through digitization. 2. Outsourcing -- Healthcare: Phase Forward provides an integrated system for managing the “back office” of the drug and device approval process and the monitoring of drugs and devices after approval. Companies and academic or government entities involved in these activities could build such a system themselves, but doing so would
  • 2. have several potential costs that effectively outweigh the potential benefits, among them the fact that building such a system is not their core competency; the probability that a home-grown system would not operate in the cloud and would therefore require other non-core competencies and expenses, such as buying, maintaining, and upgrading the servers and other data center equipment to run the system; and the fact that a home- grown system might have difficulty interfacing with outside entities or partners they must deal with throughout the process, including government agencies. Thus, businesses and government and academic entities are likely to pursue the solution of an outside vendor such as Phase Forward for the same reason that large enterprise customers select enterprise data management solutions from outside vendors such as Oracle, SAP, and Salesforce, rather than attempting to build such solutions themselves, in-house. William Blair analysts believe that the biopharmaceutical companies are facing a crisis of productivity, based on a pattern of diminishing returns over time – more dollars are being pumped into R&D, with fewer new drugs or biologics coming out of the research pipeline. This crisis in productivity is driving the industry towards greater and greater outsourcing of non-core competencies, in order to focus more and more intensely on producing new treatments. The following graph, based on FDA data and published in March 2009, illustrates the problem: In the graph above, the black line represents FDA-approvals for New Molecular Entities (NMEs) and biologic licensing applications (BLAs) BLAs. The red line represents R&D spending. In a 2005 article in a trade publication called Instrument Business Outlook (which now appears to be out of print), this ongoing decline is discussed, and the responses by companies detailed. The article notes that companies such as Pfizer and Merck are increasing their R&D spending, and trying to offset those increases by streamlining business processes, outsourcing “non-core” activities, and utilizing software to make themselves more productive.
  • 3. Another aspect of the outsourcing theme is the fact that more electronic data capture and data sharing by a business facilitates greater outsourcing of clinical trials to overseas locations, where such trials cost a fraction of what they cost in the US. The more that data can be rapidly and easily shared via integrated electronic systems, the more companies are able to operate in the most cost-effective locations for various stages of their drug development process. The use of EDC rather than paperwork for data capture decreases time to market and lowers costs (both increasingly critical concerns for clinical development companies). It also increases the quality of the data. William Blair has a worthwhile explanation of the history of EDC adoption in a piece of research dated 03 18 2009 (upon initiation of coverage). In that piece, Blair notes that traditional clinical data was recorded on paper, and only later manually entered into a central database. This required entry of the same data two to three times. Data was often entered illegibly, inconsistently, or not entered at all. Therefore, the old method required an extensive (and expensive) process of “cleansing” the data – checking for data entry errors, and going back to find data that was entered illegibly on the paper form, or not entered at all. This required maintaining more people on staff, and a process of getting the data from collection point to central database that took several weeks or even months. In the 1980s, players in the clinical development industry began experimenting with the use of software for data entry, but without the internet, this required expensive mulitple terminals and then the physical transport of data by discs and often re-entry into a different operating system or programming language. The cost of hardware and software at each site, and the difficulty of data transport, plus the questionable nature of many of the Silicon Valley startups that tried to address the market, meant that there was low adoption. Only when the internet arrived, and especially only when bandwidth capabilities expanded to the point that data could be seen back at headquarters almost as soon as it was entered, did EDC really become a value add rather than a cumbersome novelty. This accounts for the relatively low level of EDC adoption until about the year 2000, when adoption began to ramp significantly. The following data tables and slides clearly illustrate the value added by using EDC versus traditional paper methodologies:
  • 4. In a survey of eighteen companies conducting clinical trials in 2009, William Blair found that 22% of their trials were not using EDC at all (still using paper), 33% of their trials were using less than 50% EDC, 28% of trials were not at 100% EDC but were using it for more than half of their data capture, and 17% of the trials were being conducted using 100% EDC. The same respondents estimated that, three years from now, only 11% of trials would still be 0% EDC, and only 6% would be less than 50% EDC. In contrast, 56% of trials would be using over half EDC (but not yet 100%) and 28% of trials would be all-EDC. See graph below:
  • 5. Blair estimates that overall, only about 50% to 60% of all clinical trials use EDC, leaving a substantial field for continued growth. Interestingly, they note that Phase II and Phase III of clinical trials appear to be more penetrated, due to the size and complexity of the testing in those phases of the approval process, while Phases I and IV still seem to be using a higher percentage of old-fashioned paper data capture, due to the fact that they are smaller in scope and shorter in duration and the industry seems to be slower to adopt EDC systems in those segments of the clinical approval process. Business segments: • Electronic data capture. 73% of 2009 revenues. 21% revenue growth in 2009. Electronic data capture (EDC) refers to the process of reporting clinical data using electronic case report forms rather than paper-based case report forms. As noted above, EDC has obvious efficiencies over traditional paper-based data capture. In addition to the lowered cost, lowered error rate, lowered data cleansing time and costs, and lowered time to market, EDC enables greater visibility within an organization of what is taking place at remote clinical trial sites, and can enable better integration of trials that involve participants across multiple continents. Phase Forward’s internet-based EDC solution is called InForm. • Clinical data management. 11% of 2009 revenues. (1%) revenue negative growth in 2009. Clinical data management software enables customers to monitor and manage the various trials that they are running simultaneously at any given time. If EDC software digitizes the data captured within trials, CDM solutions digitizes the task of managing the trials, and thus operates at a level above the EDC. There is still a need for data to be shared across these levels, which is why one of Phase Forward’s value adds is the integration of these various levels of management in an integrated solution. The Phase Forward solution for managing clinical data is called Clintrial. • Drug Safety. 10% of 2009 revenues. 39% revenue growth in 2009. Phase Forward’s drug safety solutions enable customers to comply with the complex global safety regulations and reporting requirements associated with clinical research and post approval marketing / drug surveillance. It expedites the tracking and reporting of adverse events to the proper regulatory agencies and integrates with the other data management solutions offered by Phase Forward. Phase Forward’s drug safety solutions are marketed under the Empirica brand name. • Interactive response technology. 6% of 2009 revenues. 551% revenue growth in 2009. This technology refers to the use of software to streamline the randomization process used in clinical trials. The Phase Forward software solution in this area is called Phase Forward IRT. Phase Forward built their IRT business through acquisitions from CVD and by acquisition of IRT market leader Clarix. Competitors: Medidata (MDSO): Founded in 1999 and private until its IPO in June 2009, New York City-based Medidata provides electronic data capture and data management that competes directly with Phase Forward, as well as other tools for aspects of the clinical development process that Phase Forward does not address, such as CRO negotiation, clinical research protocol development for a substance, and budget benchmarking versus
  • 6. the spending of the rest of the industry. Medidata and Phase Forward are the two biggest players by market share in the industry, each sharing 30% to 40% market share, with the remainder primarily addressed by Oracle, which has been taking some market share lately according to William Blair. According to their most recent 10-K, filed March 2010, Medidata’s 2009 revenues were $140.4 million. This was somewhat less than Phase Forward’s $213 million in the same year. Oracle (ORCL): An aggressive acquirer, there is a danger that Oracle will try to buy Medidata, which could be a net negative for Phase Forward, creating a competitor with greater market share and resources, with a well-regarded industry solution that could then be matched with other Oracle resources that might produce some synergies that Medidata could not offer on its own. It is already apparent that Medidata addresses some business processes which Phase Forward does not address; an added capability to integrate with other business processes could tip the balance further towards a combined Oracle-Medidata entity. Large biotech or pharma companies which already use Oracle for enterprise database needs but which use Phase Forward for clinical development processes would probably look favorably on the ability to integrate into a single platform, much as a financial company which uses Oracle or Salesforce for contact relationship management and other needs but a different software provider for trading or portfolio allocation management would be interested in a way to have Oracle or Salesforce to absorb that aspect of their business and integrate all of it. In a survey of fifteen EDC customers in 2009, William Blair found that seven expressed a preference for working with Phase Forward, seven expressed a preference for working with Medidata, and one expressed a preference for working with Oracle. While it may seem that any software company could conceivably enter this field and compete in it, there are some barriers to entry. First, there is the necessity of creating the proper data entry and reporting fields to comply with a complex, highly-regulated and highly technical industry in which participants may be in various countries and speak various languages and have to comply with various different government regulators. Second, and more importantly, there is an issue of trust and familiarity with the customers, many of whom are big industry players with a lot on the line and a reluctance to deal with an unproven partner or new start-up in the field. In fact, because clinical development and regulatory approval is the vulnerable jugular vein of the biopharmaceutical industry, where their lifeblood flows but where they can easily be choked off with a false move, EDC itself was originally viewed with suspicion and did not have a rapid adoption at first, due to fears that the technology might somehow crash and critical data lost. As the pie graphs above illustrate, that adoption is only now beginning to pass the “tipping point,” and firms are now expressing plans to rapidly adopt greater EDC over the next three years. Oracle, Phase Forward and Medidata have emerged as trusted players in the field, but joining that circle might be difficult for a new player at this point.
  • 7. Customers: As of the end of 2009, the company reported over 335 customers (Medidata reported 173 customers), including all ten of the top ten and 19 of the top 20 global pharmaceutical companies measured by revenue. Customers, by industry, include: Pharma -- Allergan, AstraZeneca, Bayer HealthCare, Takeda Pharmaceutical, Merck, Novartis, and Sanofi-Aventis. Biotech – Celgene, Atherogenics, Theravance, Morphotek, and Genzyme. Medical Devices – Boston Scientific, Medtronic, Stryker. CROs – ICON, Everest, Quintiles. Academia and Government – US CDC, US FDA, UK Medicines and Healthcare products Regulatory Agency (MHRA), Duke, Harvard, Mayo Clinic. Phase Forward’s top five customers accounted for approximately 28% of the company’s total revenues in 2009. By way of comparison, Medidata’s top five customers accounted for 46% of total revenues in 2009. While it may seem that Phase Forward’s potential field of growth is limited, since they already have so many of the big-name industry players as customers, in fact many of these companies appear as customers in Medidata’s list of customers as well. For example, AstraZeneca is one of the top two biggest customers by revenue of Medidata for each of the past three years, but also uses Phase Forward. This indicates that, particularly in some of the larger players, some departments or some types of trials are using solutions from one provider and other departments or trials are using another. Some recognizable customers listed by Phase Forward and not listed by Medidata include Medtronic, Stryker, Celgene and Merck. Leadership: Dr. Paul Bleicher (age 55 in 2010) founded Phase Forward in 1997 and serves on the Board of Directors. He was Chairman of the Board until 2008, when he stepped down from the Chairman position and his executive role as Chief Strategy Officer to found a new company, Humedica, focused on “healthcare inofmatics.” Current Chairman and CEO Robert Weiler has been CEO since 2002, and Chairman since 2008. Prior to joining Phase Forward as CEO in 2002, Weiler was CEO of the Giga Information Group, a consulting company helping clients make better strategic decisions in technology investments for business results. The Giga Information Group is now a subsidiary of Forrester Research, since February 2003 (shortly after Weiler left – this is somewhat notable, since Phase Forward went public shortly after Weiler arrived there, in 2004). Prior to Giga, he was CEO of Eastman Software, formerly Wang Software, from 1997 – 1999. Previous to that he served in Sales and Marketing for Lotus (the software company and maker of Lotus Notes and Lotus spreadsheet applications). CTO Tim Rochford joined Phase Forward in 2007. He has twenty years experience developing software applications, particularly in speech recognition and natural language processing systems, which should translate well to the development of data entry interfaces needed by PFWD customers. Most recently prior to joining Phase Forward, Rochford provided technology consulting services to a CRM hosting provider (possibly Salesforce?) and a call-center platform vendor. There are no clear scandals or red flags associated with the management team that we have uncovered in our examination of the company. The Board of Directors is somewhat heavy in investors/financial types (and academics) rather than businessmen with relevant experience.
  • 8. The Board: • CEO and Chairman Robert Weiler (see above). • Axel Bichara – Atlas Venture, a lead investor in Phase Forward. • Richard D’Amore – North Bridge Venture Partners – investor. • Paul Joubert – founder of a management consulting firm, EdgeAdvisors. He has an accounting background. • Gary Haroian – Chairs the audit and finance committee of the board – CFO and senior financial background, with some CEO experience, primarily within the network software industry; has experience taking a company through an IPO. • Dr. Kenneth Kaitin – Director of the Tufts Center for the Study of Drug Development, and a Professor of Medicine at Tufts University. • Dennis Shaghnessy – faculty member at Northeastern University (in their College of Business Administration) in Boston, former executive (business development) at Charles River Labs. • Dr. Paul Bleicher – the founder. Potential Obstacles and Skeletons: 1. EDC will inevitably reach close to 100% penetration of the industry, after which growth will depend on a) taking market share from the competition (Medidata and Oracle), and b) the overall growth of clinical trials. At the same time, increasing socialization puts downward pressure on the demand for clinical trials, by putting downward pressure on the reward side of the risk-reward decision, by lowering the potential price that can be demanded for a treatment and by lowering the potential pool of customers who will be allowed to ask for that treatment (due to treatment restriction, already taking place in major industrialized nations such as the UK, Australia, New Zealand, and Canada). 2. The company relies on Oracle to supply the database component of most of their software solutions. Oracle also competes with Phase Forward, offering Oracle Clinical, which is designed for pharmaceutical, biotech, government, academic and other entities involved in clinical trials and drug safety monitoring. The company’s dependence upon a competitor could create a situation in the future in which Phase Forward would need to find another supplier of the capabilities currently provided by Oracle, which could create temporary inability to provide contracted services 3. The company relies on SunGard Data Systems to provide server facilities that enable some of Phase Forward’s hosted offerings. This does not appear to be as serious a vulnerability as their reliance on Oracle for database solutions, as replacing SunGard would likely be easier for Phase Forward than replacing Oracle might prove. Switching to a different hosting provider might create technical challenges for those involved in the move, but switching a database service that is at the heart of a business (all aspects of the business interface with it and reside in it) is much more difficult. This fact is what makes database services so “sticky,” and in fact is a positive for Phase Forward (which itself benefits from this “stickiness” once its own customers become used to working with their solutions). 4. While Salesforce does not directly compete, the company’s platform-as-a-service capabilities could prove attractive to an app developer who realizes the business opportunity in writing an app that enables integrated “back office” functions for this industry at a lower price than the Oracle solution or the Phase Forward solution.
  • 9. 5. Phase Forward offers a hosted model, which is rapidly becoming the preferred sales model and which has been growing rapidly (now about 70% of total revenue and growing), but switching from the high-margin software licensing model to the hosted or SaaS model created a transition period in which there was some compression the company’s overall margins. Software licensing margins were in the 90% range, while hosted margins are in the 40% range. On the other hand, the SaaS revenue model is more predictable, being based on a recurring subscription rather than on a major sale of a new multi-year software license or upgraded software package. Further, SaaS models are scalable, allowing margin expansion again as customers increase and fixed costs generally remain the same. 6. As mentioned in point 1, there are reasons to suspect that increased government intrusion into healthcare could constrain the clinical development pipeline in years ahead. Another concern is that ongoing consolidation in the biotech and pharmaceutical industry will cut down on the industry-wide pipeline, as there is less duplication of research and development efforts (if Genentech and Roche were both working on substances which could address a certain disease or medical indication, and then Roche bought Genentech, then in the future there will only be one company working on a substance to address the next medical indication, rather than two). Any factors which act to shrink the overall clinical trial pool will likely be a long-term negative for Phase Forward, as will factors which act to reduce the number of industry players (and potential customers). Market Cap: $589 million (as of 04/05/2010). 2009 net revenues: $213 million 2009 adjusted net earnings: $8 million. US/OUS revenue ratio (2009): 61/39 % insider and 5% ownership: 3%. address and phone: 77 Fourth Ave., Waltham MA 02451. 781-890-4848. David Mathisen Director of Research Taylor Frigon Capital Management Daniel Landsman Research Analyst Taylor Frigon Capital Management