PPD Competitive Analysis


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Competitive Analysis of Clinical Trials Sector

PPD Competitive Analysis

  1. 1. Competitive Analysis of PPDI <ul><li>Company Profiled: Pharmaceutical Product Development, Inc. (PPDI) </li></ul><ul><li>By Thomas C. Lawrence </li></ul>
  2. 2. Company Profile: PPDI <ul><li>Pharmaceutical Product Development, Inc. </li></ul><ul><li>Top 10 Clinical Research Organizations (CROs) - pharmaceutical services companies that are outsourced by large pharmaceutical and biotechs to run clinical trials and related services in order to get drug candidates FDA approval process. </li></ul>
  3. 3. Business Summary <ul><li>PPDI provides a range of R&D and consulting services in the development and discovery sciences. </li></ul><ul><li>Development segment: provides pre-clinical and Phase I to IV clinical development. </li></ul><ul><li>Discovery Sciences services include pre-clinical analysis of anti-cancer therapies, pre-clinical biological services, & compound partnering arrangements w/ drug development & commercialization. </li></ul>
  4. 4. Company Overview <ul><li>Established in 1990 </li></ul><ul><li>6,600 employees worldwide </li></ul><ul><li>13 offices in the USA/CAN </li></ul><ul><li>Operates in 38 locations in 27 countries worldwide </li></ul><ul><li>Services 41 of the Top 50 Pharma </li></ul><ul><li>Listed on NASDAQ as PPDI </li></ul><ul><li>7 independent Board of Directors w/CEO as Vice-Chairman </li></ul>
  5. 5. 2004 Revenue Split
  6. 6. Strategic-bit Group Mapping
  7. 7. Competitor Map Phase I (1) Phase II/III/ IIIb/IV (1) Quintiles Parexel Covance ICON Omnicare Kendle PRA Other CROs : MDS Pharma PharmaNET AaiPharma Inveresk i3 Research SMOs : Radiant Research AmericasDoctor, Inc. SMO-USA, Inc. nTouch Research Central Labs (1) Covance Quintiles Charles River Labs MDS Pharma Large Reference Labs: Quest LabCorp AmeriPath AMCs: BRANY Harvard Duke Johns Hopkins Pittsburgh Clin Rsch Network Columbia-Cornell-NY Presbyterian PPD Discovery (2) Quintiles Pharmaceuticals : Pfizer GSK Sanofi-Aventis Others Biotechs: Amgen Genentech Others Early Stage CROs : Covance Inveresk AaiPharma MDS Pharma SFBC Intl Charles River Labs Full Service CROs: Quintiles ICON Omnicare Kendle Note: PPD is not subject to product life cycle. PPD provides services, which are not set in a particular order. For example, Phase I trial could lead to winning a Phase II, but not necessarily. CROs usually have to bid on each piece of clinical development. Central Labs could be bundled with Phase I – IV or be entirely separate business wins. Therefore, there is not clear direction like with a company that produces products . PPD Discovery does not interact with other business units. Indirect Competitors Direct Competitors PPD’s Core Markets PPD
  8. 8. Quantitative SWOT Analysis of PPD Strengths to Weaknesses : 2.3 Opportunities to Threats : 1.1 Total SWOT : 3.4, or the overall situation is positive -3.7 1 TOTAL 4.8 1 TOTAL -0.1 -1 0.1 Medical Device Market Medical device firms have tighter profit margins than pharmaceutical companies. Therefore, they may find it less beneficial to outsource clinical trials. As a result, PPD’s dedicated medical device unit and entry into this market may not necessarily pay-off. (7) -0.6 -2 0.3 Investing in Proprietary Compounds – Negative Side - External Investing proprietary compounds could be seen as potential conflict of interest. Therefore, clients that have compounds with similar properties or in the same therapeutic class/indication may not take their business to PPD. In its co-development of agreements, PPD normally buys preferred stock in its partners, which exposes it to financial volatility inherent in Biotechs. (7) 0.8 4 0.2 Phase IV /Safety Market Opportunities PPD should take advantage of the growing Phase IV market, particularly because of the growing safety concerns. This would also encompass safety surveillance and registry studies. In addition, several Phase III studies are being design with rigor for safety reasons. Furthermore, it is not uncommon for Phase IIIb studies to be given Phase III rigor. (6) -3.0 -5 0.6 Industry Evolution Decelerating phase II-IV business, patent expiration for Big Pharma, weak pipelines and TA specialization, pharma industry transition into genomics. PPD has done little to invest intro infrastructure, personnel, and technology for an industry in evolution. (6) 4.0 5 0.8 NIH Bids PPD has more experience than its peers with bids on lucrative NIH contracts. Covance, for example, has a long way to go to catch up with PPD in the government bids market. It only needs to win one bid in order to make a windfall. Government contracts currently make up about 11% of revenue. Thus, diversifying its revenue streams. (5) (7) Total Rank (05 to 5) Weight THREATS Total Rank (05 to 5) Weight OPPORTUNITIES -1.6 1 TOTAL 3.9 1 TOTAL -0.1 -1 0.1 Weakness in concentration areas of Clinical Expertise PPD has core competencies in CNS, Oncology, and Infectious Disease. However, only Oncology and ID are on the list of top six major therapeutic categories.(1)(4) 0.1 1 0.1 Medical Device Unit & Phase IV Competency PPD has a dedicated medical device unit, so it is able to target medical device companies’ business than its peers, which often overlook this segment or do not have the core competencies to make an attractive bid. PPD has significant Phase IV experience in wide variety of TAs, but few were completed in last 5 years. However, most are from large global studies. (7) -0.6 -2 0.3 Lack of Diversification in CRO business PPD is not as diversified as some other CROs like Covance. It gets 75% of its business from Late Stage, which makes it vulnerable to deceleration of the Phases II –IV markets. PPD wins 71% of its business from North America and only 29% from ROW. (1)(4) 0.6 3 0.2 Investing in Proprietary Compounds – Positive Side PPD, unlike, other CROs is investing in proprietary compounds. These compounds are potential blockbusters, which could be very lucrative for the company. It may even spin-off the pharma business. (2)(3) (7) -0.3 -1 0.3 High Employee Turnover/Talent & Service Dilution PPD has a cancellation rate for its contracts compared to peers. PPD has high growth rate (35%), if you add in the normal attrition rate for CROs, then it equals a dilution of talent. It becomes difficult to maintain quality and service, if you are growing quickly and half the people in your firm are new. (7) 2.0 5 0.4 Management, Operating Efficiencies, and Structure Profit leaders with excellent growth and little debt. It has high operating efficiencies in place and has high operating margins. It can charge premium prices to clients. It is less vulnerable to M&A activities than its peers because of its balanced client-mix. PPD would be able to initiate and survive a “price war”. PPD has a strong IT infrastructure, which strengthens its efficiency. (2) (3) -0.6 -2 0.3 Investing in Proprietary Compounds – Negative Side - Internal Investing in compounds is very expensive. CROs do not generally have the “deep pockets” of Pharma. PPD is drug development expenses can hurt it in the short term because this is money that they can not spend in other areas (7). 1.2 4 0.3 Dedicated Team Model PPD has a dedicated team model in place, which allows its clinical trial monitors to be dedicated to particular accounts, instead the regional trial monitor model used by other CROs like Covance. This gives PPD monitors the ability to be more familiar with particular clients and service them better. PPD can leverage its staff more efficiently. (1)(2)(4)(7) Total Rank (-5 to 5) Weight WEAKNESSES Total Rank (-5 to 5) Weight STRENGTHS
  9. 9. Quantitative SWOT Analysis of Covance Strengths to Weaknesses : -0.8 Opportunities to Threats : -0.6 Total SWOT : -1.4, or the overall situation is negative -4.1 1 TOTAL 4.7 1 TOTAL . -0.6 -2 0.3 Increased competition and price wars Covance is in an overall good position. However, it is vulnerable and would have a hard time surviving a price war among CROs. (11) 0.2 2 0.1 Targeting Biotechs Covance has begun targeting biotech clients with drug candidates that CVD has specific therapeutic expertise. (6) -3.5 -5 0.7 Industry Evolution Decelerating phase II-IV business, patent expiration for Big Pharma, weak pipelines and TA specialization, pharma industry transition into genomics. Covance has done little to invest intro infrastructure, personnel, and technology for an industry in evolution. (10) 4.5 5 0.9 NIH Bids Covance has recently attempted to bids on lucrative NIH bids. Covance has hired an expert in NIH bids as a consultant. It has also dedicated a VP to spearhead this initiative. Covance has a long way to go to catch up with PPD in the government bids, but it only needs to win one bid in order to make a windfall. (5) Total Rank (05 to 5) Weight THREATS Total Rank (-5 to 5) Weight OPPORTUNITIES -4.4 1 TOTAL 3.6 1 TOTAL 0.4 2 0.2 Strong in key therapeutic areas .CVD has strong expertise in infectious disease, oncology, and cardiology. It is also the leader in cardiac safety. These are 3 of the top 6 TAs.(4) -0.5 -5 0.1 Concentrates too much on low-margin CRO business Covance concentrates on its key business, but is not diversifying into high margin businesses like drug development like PPD and Quintiles. Quintiles also diversifies by having consulting services. (9) 0.9 3 0.3 Targeted Selling Initiatives Covance has broken away from its previous cold calling and used cars salesman techniques. Marketing teams have been created to support sales and identify new opportunities. CVD’s first annual global sales meeting led to sales staff being trained on the “blue sheet process”. Annual sales action plans have revamped. Services are being bundled and there is more cross-selling. (3) -0.9 -3 0.3 High Employee Turnover Covance generally pays its employees less than its competitors. For example, Omnicare and PPD both have offices close to Radnor, PA and both pay more. CVD employees are aware of this. In addition, employees view CVD as a stepping stone to get experience to go and work for Big Pharma with deep pockets. (8) . 0.8 4 0.2 Restructuring creates synergies It can get future late stage business from early stage business wins. Cross-selling initiatives have been implemented since its restructuring into early stage, late stage, and central lab business groups. Synergies in related business units can now be tapped into i.e. Late Stage has Phase II-II, Periapproval, and IVRS business units that complement each other. (2) -3.0 -5 0.6 Overpriced Bids Covance CRO units need to revamp their Bid Grids. CVD has an ongoing problem with over priced bidding. CVD is consistently ranked as the most expensive CRO among its peers. (7) 1.5 5 0.3 Diversified Revenue Streams Covance is able to leverage its scalable central labs business. CVD is also more evenly split between early stage and late stage business unit. (1) Total Rank (-5 to 5) Weight WEAKNESSES Total Rank (-5 to 5) Weight STRENGTHS
  10. 10. <ul><li>Demographic/Economic Factors: </li></ul><ul><li>Targeting specific indications and racial categories (5) </li></ul><ul><li>India & China outsourcing (2) </li></ul><ul><li>Treatment of naïve patient populations: Eastern EU, Asia, & Latin America (9) </li></ul><ul><li>Technological / Physical Environment: </li></ul><ul><li>New discovery technologies and knowledge basis i.e. genomics, proteonomics, metabonomics (10) </li></ul><ul><li>Transition from mass produced chemical based therapies to genomics based therapies (10) </li></ul><ul><li>Restructuring of Big Pharma from production i.e. blockbuster model to drug design i.e. IBM Model (10) </li></ul><ul><li>Political/Legal Environment: </li></ul><ul><li>Development of worldwide GCP standards (3) </li></ul><ul><li>EU Directive – compliance (3) </li></ul><ul><li>Ongoing changes at FDA (10) </li></ul><ul><li>FDA reactions to drug development scandals (3) </li></ul><ul><li>Possible future healthcare reform due to expensive drug prescriptions (10) </li></ul><ul><li>Social / Cultural Environment: </li></ul><ul><li>Big Pharma and clinical trials industry negative reputation on par with tobacco industry (3) </li></ul><ul><li>Recent health concerns about blockbuster drugs and recalls & lack of consumer confidence due to scandals i.e. Merck (9) </li></ul><ul><li>Too many “me too” drugs in the development pipeline (3) </li></ul><ul><li>Large global clinical trials (6) </li></ul>Kotler’s Macro-Environment Model applied to the CRO Industry
  11. 11. Economic Characteristics of the Industry <ul><li>Product Characteristics: no major distinction from the Top 10 CROs </li></ul><ul><li>Scale Economies: High = Low Cost </li></ul><ul><li>Learning & Experience Effect: major factor </li></ul><ul><li>Degree of Vertical Integration: was relatively low, but is now progressively moving to medium level </li></ul><ul><li>Ease of Entry/Exit: High/High </li></ul><ul><li>Technology/Innovation: Medium to High </li></ul>
  12. 12. Porter’s 5 Forces applied to CRO Industry Threat of Substitute products CROs controlled 22% of contract research with Academic Medical Centers (AMCs) controlling 30% in 2002. Meanwhile, Site Management Organizations (SMOs) controlled only 2% of the market and other types of organizations controlling only 1% of the market. AMCs and SMOs are viable substitutes for CROs. Therefore, AMC have gained significant market share in 2002. CROs are projected to control 81% of the contract research market. However, AMCs market share is projected to decline to 16% with SMOs and others’ market share remaining steady. One major reason the lion’s share of the contract research is being taken away from AMC is because AMC get their funding in the form of grants. CROs, in contra , offer a fixed fee arranged in the planning stage, payable upon completion, with a starting-up fee usually paid before the outset. Thus, outsourcing the clinical trail project to a CRO tends to cost a sponsor less. Another reason that AMCs are projected to lose market share to CROs is because of delays in clinical trials. Big Pharma needs to get drugs to market as fast as possible in order to make even greater profit, so any delays in clinical trials costs a sponsor potentially millions of dollars. The majority of SMOs are based in the USA and are regional, therefore, they are not going to be used for large global studies.(1) Rivalry Among Existing Industry Firms The CRO market is overall very fragment with no one firm holding more than 12% of market share. However, the Top 10 CROs do control 50% of the market. The top players are Quintiles, Covance, PPD, Parexel, Omnicare, Kendle, and ICON. These players distinguish themselves to Big Pharma clients with their respective expertise in particular therapeutic area. For example, Omnicare is strong in geriatric trials, while Kendle is strong in Asthma studies. The big players are commonly outsourced because of their ability to perform large multi-national trials and trials in foreign countries. (1) Bargaining Power of Buyers GSK, Pfizer, Wyeth, Takeda, and P&G are cutting down the number of vendors and are in the process of using preferred providers list. GSK, for example, is going from using 116 vendors to only 6 outsourced CROs. Meanwhile, Pfizer, Roche, and Schering Plough have indicated that they will increase the use of CROs. Conversely, Astra Zenecca and Novartis will rely less on CROs and do more in-house studies. Abbott has indicated that it will eliminate candidates earlier in the pipeline, which will mean less outsourced studies. In addition, mergers and acquisitions in the industry i.e. Pfizer-Pharmacia, Sanofi-Aventis, Biogen-Idec, Amgen-Immunex, and Merck-Atun will impact outsourcing. Generally speaking the M&As will slow down outsourcing as the these companies focus on integration. Big Pharma and CROs have historically had a master-servant relationship with CROs entering into low margin contracts. However, the introduction of preferred provider agreements should be greatly beneficial to CROs. (2) Bargaining Power of Suppliers Clinical Investigator Networks, Site Management Organizations, and Clinics are outsourced by CROs for quick ramp up for new wins. Generally speaking, these “supplier” negotiate with the CROs, but are subject to competitive bidding by the size of the bids won by CROs. These organizations are generally within a CROs network and will usually not turn down work. (1) Threat of New Entrants There is always the possibility of new entrants, but due to high entry barriers it would be extremely difficulty for new entrants. However, in special situations like Jasper, a new CRO, created by former Pfizer-Pharmacia employees could be an actual threat and in this case Jasper could siphon of Pfizer business. On the other hand, a more feasible scenario involves mergers between smaller (Mom & Pop) CROs to form a large CRO capable of challenging the Top 10. These small CROs are not direct competitors to the Big CROs because they have tendency to very specialized players that focus on particular therapeutic area or service. (3) L H L/M L
  13. 13. 5 Forces Analysis: Rivalry
  14. 14. 5 Forces Analysis: Substitutes
  15. 15. 5 Forces Analysis: Substitutes
  16. 16. BCG Growth Share Matrix applied to PPD Business Units Phase II-IV High9 Mid 1 Low0.2 Low 0% High 50% Market Growth Rate Phase One Central Labs Mid 25% PPD Discovery Relative Market Share
  17. 17. Competitive Landscaping: Penetration Landscape Vulnerable High Low Terrorist or Pond Life High Aggressors / Transients Defenders Market Share Company Size CVD PPDI PRXL ICON KNDL
  18. 18. Competitive Landscaping: Performance Landscape Shake Up /Potential Disposer High Low Start Up Disposer High Penetrator Vigorous Defenders Market Share Profitability KNDL ICON PRXL PPDI CVD
  19. 19. Competitive Landscaping: Dependency Landscape Fighter High Low Insignificant Large Incubator Defender Share of Revenue Company Size PPDI CVD PRXL ICON KNDL
  20. 20. Competitive Landscaping: Commitment Landscape Content Long Short/ Small Innovator Large Aggressor Traditional Time in Business Company Size CVD ICON PPDI PRXL KNDL
  21. 21. Competitive Landscaping: Innovation Landscape Investors Long Short/ Small Wannabees Large Coasters Towers of Strength R&D Spend Profitability PPDI CVD ICON PRXL ICON
  22. 22. Backlog & Client Mix <ul><li>Backlog end ‘o4 $1.292 million. Pharma 59% , Biotech 28%, & Gvmt/Other 13%. </li></ul><ul><li>Pharma 63.1% & Biotech 26.9% of 4Q revenue w/ Gvmt/Other 10.1%. </li></ul><ul><li>PPDI’s 2004 client mix: largest client 6.2% of revenue, Top 5 24.6%, Top 10 39.3%, and Top 25 64.4%. </li></ul>
  23. 23. Competitor Analysis #1: Benchmarking PPD vs. Key Competitors Sources: Van Der Ghinst, Jerome. “PPD Issues 2005 Forecast.” & “Morningstar Industry Peers Stock Grades.” Morningstar Feb 14, 2005.
  24. 24. Competitor Analysis #3: Benchmarking PPD vs. Key Competitors -$165.2 Cost Differential $275.0 Pharma R&D Expense per Employee $109.8 $99.8 $91.1 Total Average 0% 9% 6% Seq % growth $91.0 $91.4 $84.1 Per Employee in Period (000’s) Icon 10% 3% -2% Seq % growth $95.2 $86.5 $83.9 Per Employee in Period (000’s) Parexel 17% 20% NA Seq % growth $128.1 $109.4 $91.1 Per Employee in Period (000’s) Quintiles 5.8% 10.4% 5.1% Seq % growth $106.2 $100.3 $90.9 Per Employee in Period (000’s) PPD 15.6% 5.3% NA Seq % growth $128.7 $111.3 $105.6 Per Employee in Period (000’s) Covance 2002 2001 2000 R&D Employee Productivity Comparison
  25. 25. Competitor Analysis #2: Benchmarking PPD vs. Key Competitors Industry = Medical Laboratories & Research 1 = As of 2005  -811.10K 600.00K 1 27.20M 136.66M 157.12M Net Income (ttm): 5.84% N/A 5.79% 13.68% 19.08% Oper Margins (ttm): 804.30K N/A 76.50M 245.57M 273.84M EBITDA (ttm): 47.20% N/A 27.80% 32.03% 47.20% Gross Margin (ttm): 39.83M 2.40B 1 793.89M 1.39B 1.20B Revenue (ttm): 12.90% N/A 20.00% 16.00% 14.60% Qtrly Rev Growth (yoy): 264 16,000 1 5,600 6,600 8,000 Employ­ees: 105.15M N/A 844.43M 3.89B 3.83B Market Cap: Industry Quintiles (Pvt) PRXL CVD PPDI Figures as of Nov 7, 2006
  26. 26. Areas of Clinical Expertise <ul><li>Clinical Trials by Major Therapeutic Categories in the CRO Industry </li></ul><ul><li>Oncology </li></ul><ul><li>Neurology </li></ul><ul><li>Anti-Infectious </li></ul><ul><li>Cardiovascular </li></ul><ul><li>Immunology </li></ul><ul><li>Respiratory </li></ul>
  27. 27. Competitive Sales Analysis
  28. 28. Profitability Comparison
  29. 29. R&D Employee Productivity Comparison
  30. 30. Book-to-Bill Ratio
  31. 31. Market-Attractiveness / Competitive Position-Matrix applied to PPD and its market High (8-10) Mod (4-7) High (8-10) Mod (4-7) Low (0-3) Low (0-3) Company’s Competitive Position Market Attractiveness PPD Note: See 8b spreadsheet for data and sources. (7.8) (9.7)
  32. 32. Industry-Attractiveness / Business Position-Matrix applied to PPD and its industry High Med High Med Low Low Business’s Competitive Position Industry Attractiveness PPD 0 5 5 0 (3.80) (0.50) 3 3 2 3 2 1 2 1 1
  33. 33. Key Success Factors <ul><li>Efficient staff deployment, training, recruiting & retention </li></ul><ul><li>Anticipates customer needs </li></ul><ul><li>Strong management team & good financial mgmt </li></ul><ul><li>Strong project mgmt & tight integration between sales & ops </li></ul><ul><li>Rapid deployment of technological advances </li></ul>
  34. 34. Conclusions/Early Warnings <ul><li>Count on PPD leveraging relationships to win PPAs in a competitive CRO market </li></ul><ul><li>Anticipate Dapoxetine’s success and spinning-off discovery business unit </li></ul><ul><li>Expect PPD continue expansion into EU, Latin America, & Asia </li></ul><ul><li>Shift towards higher-margin business </li></ul><ul><li>Will be #1 or #2 position in Ph I-IV. </li></ul>
  35. 35. Conclusions/Early Warnings <ul><li>BD efforts to win government contracts </li></ul><ul><li>Target medical device, PMS, & Phase I markets </li></ul><ul><li>Bundling of GP or bioanalytical svcs w/LSDS </li></ul><ul><li>Expect PPD to use cash flow to invest in core business </li></ul><ul><li>Look for PPD to target biotech clients chasing specific indications – overseas infrastructure </li></ul>