Drug Studies: "A Perfect Storm"

10/07/2005 12:00 am EST


Charles Norton

Editor-in-Chief, Supernova Stocks

"On average, it takes 15 years and costs $880 million to develop a new drug," notes Charles Norton. "With so much time and money at stake, the expertise of a drug development services company is invaluable." Here, he looks at one company that provides these services.

"As the costs of developing a new drug soar, more and more clinical trials are being outsourced to contract research organizations (CRO) like Miami, Florida-based SFBC International (SFCC NASDAQ). Since its beginnings in 1984, the company has focused on early stage clinical drug development, mostly concentrated in Phase I clinical trials, small trials that aim to determine a drug’s basic safety data over the course of six months or so. SFBC is able to help develop a study’s design, conduct the trial, collect clinical data, or report results. In addition, one of the largest expenses in developing new drugs is the process of recruiting appropriate clinical trial participants. Patient enrollment is one of SFBC’s strong suits.

"SFBC broadened its offerings last year by acquiring PharmaNet, a company known for its focus on late stage drug development. And a full-service CRO was born, with offerings that encompass the entire drug development process. Phase II and Phase III trials focus on a drug’s safety and efficacy at different doses. Through PharmaNet, SFBC helps its drug-making clients navigate these advanced trials by assisting with clinical operations, data management, and regulatory issues, among other things. SFBC is now to work with a drug maker throughout the entire drug development process, from pre-clinical studies through post-approval trials.

"Since March 2000, SFBC has completed 11 acquisitions. In a highly fragmented business with several smaller players that have an expertise in different business areas, future acquisitions are sure to be a big component to SFBC’s growth strategy. One risk, however, is that the PharmaNet acquisition has left the firm’s income statement in poor shape. On the positive side, however, SFBC’s quarterly sales and earnings growth have been exceptional. In the past two quarters, for example, year-over-year sales growth was 192% and 191%, respectively. Earnings are expected to jump 58% this year and 19% next.

"Overall, in our view, the CRO industry is in the perfect storm. Costs of developing new drugs are soaring, and the stringent regulatory environment is making the process of bringing a drug to market more difficult. At the same time, new research technologies are increasing the number of viable drug candidates that need to be tested. All of these factors mean that more and more drug makers are turning to drug development services companies for assistance. SFBC seems well positioned to reap the benefits from these favorable trends."

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