Cardiac Controversy

04/01/2005 12:00 am EST


Michael Murphy

Former Editor, New World Investor

Sometimes, "uncertainty" may be a temporary factor that creates a buying opportunity. Such is the case with e-Research, according to tech expert Michael Murphy. Here, he looks at the out-of-favor play on cardiac testing, and sees exciting long-term potential.

"eResearch Technology (ERES NASDAQ) is the leader in cardiac safety testing in the clinical trial process. By using the Internet and electronic processing, ERES collects, analyzes, stores, and organizes the digital data that will ultimately support an application for FDA approval or tell a company its drug isn’t safe.The big pharma customer just plugs that data into their safety package to file with the FDA. It’s usually faster and cheaper than the drug companies could do it themselves.

"The FDA had been worrying about cardiac safety for some time, and finally ruled last year that virtually all drugs needed to be tested for their effects on the heart—even those in Phase III, that previously had a clean safety record. Merck pulled Vioxx off pharmacy shelves after learning that patients who use the drug have a much higher risk of heart attack - confirming the FDA’s decision that it is essential to include cardiac safety data in every drug approval application. This regulation caused drug developers everywhere to scramble.

"At the time, eResearch’s customers (drug developers) were hesitant to commit to cardiac safety trials under the new rules because there was some confusion about which trials might qualify for the less costly, computer-evaluated process the FDA blessed and which would require the traditional ‘thorough’ or human-evaluated process. eResearch provides both the semi-automated cardiac safety trials (which typically cost around $1.3 million) and Thorough trials (which typically cost around $1.8 million). Drug developers weren’t sure which one they needed to commit to.

"As a result of this confusion, the company recently preannounced a disappointing March quarter and the stock fell sharply to a new 52-week low near 10. There will be FDA meetings in April and May to clarify the rules regarding whether or not a particular trial can be done under the less expensive semi-automated protocol, or must be done with humans reading the EKGs instead of computers, and once the FDA position is clarified, there is a huge market opportunity for eResearch.

"Overall, in my view, nothing that’s happened changes our lomg-term thesis on ERES. Their available market is exploding while Wall Street is selling the stock. A $200 million haircut for a $5 million miss is a ridiculous overreaction. If you don’t own ERES, buy it now.  Over the next five years, our ERES position will benefit tremendously from this new FDA regulation. If Wall Street realizes what’s happening this year, my 2005 target of $25 should be in the bag."

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