Quintiles (NYSE:Q) $944.2 million in second quarter revenue certainly looks impressive and it beat analyst estimates. But the importance of that figure could be in breaking it down and seeing how it points to the pharmaceutical industry future that Quintiles is preparing for.
Durham-based Quintiles, which is the largest provider of outsourced pharmaceutical services, splits its business into two segments. Product Development encompasses the outsourced clinical trial services that have been the staple of the contract research organizations. With $724.2 million in second quarter revenue, Product Development brings in the lion’s share of Quintiles’ sales.
Integrated Healthcare Services, or IHS, is relatively smaller. This unit offers commercial capabilities for drugs that are already approved. Pharmas can turn to IHS for a contract sales force, but the unit can also help them study how doctors prescribe drugs or do research to demonstrate a drug’s value. These observational research capabilities were a key driver for Quintiles’ $177 million acquisition of Outcome Sciences in 2011.
IHS generated just $220.0 million in second quarter revenue. That total was actually down 13 percent compared to the year ago period, a reflection of currency fluctuations as well as the end of a large contract in Japan last year. But during a conference call to discuss financial results with analysts, CEO Tom Pike suggested that Quintiles sees growth opportunities in the segment.
Quintiles believes that the CRO industry is growing at a rate of between 5 and 8 percent and it puts its own growth rate at the top of that range. But the needs of pharma are changing in way that suggest greater need for the kinds of services offered by IHS. Evaluating how a drug performs after it has been commercialized could someday be just as important to a pharmaceutical company as the clinical trials leading up to its approval. In fact, pharmas are already trying to understand the commercial implications of a drug while it’s still in clinical testing.
“Over the next 4 or 5 years, I think you’re going to see the commercial pharmaceutical firms moving more and more into understanding from an observational standpoint, exactly what’s happening with their products in the marketplace, understanding better how decisions are made, what docs are making what decisions,” Pike said. “We have a number of relationships, we have some technologies that we think will play very well into that.”
Quintiles was among the industry pioneers in building a more comprehensive relationship with pharmas to cover a broader range of services across the the cycle of drug development. These so-called strategic partnerships allowed CROs to flex their muscles a bit, showing themselves to be more than just outsourced staffing and service providers.
Now Quintiles is signaling that the strategic partnership model is evolving yet again. As an example, Pike referenced a major customer win announced in May. The partnership, he said, allows Quintiles to use the “full range of our capabilities to make drug development more efficient.”
Pike declined to name the customer. But Quintiles’ only publicly-disclosed partnership in May was with Merck Serono, a division of German pharma company Merck. That five-year clinical development covers the full span of clinical development from phase I studies all the way through post-marketing approvals. Perhaps just as important, the agreement makes Quintiles the preferred provider for Merck Serono’s clinical trial services throughout the world. That means any drug that Merck Serono develops anywhere in the world will be handled by Quintiles. And Quintiles will have that drug throughout its development cycle.
At the time the Merck Serono partnership was announced in May, Quintiles billed the agreement as the “first-of-its kind” between a pharma company and a services provider. On Thursday, Pike suggested companies are approaching Quintiles expressing interest in similar kinds of deals.
Pharmas are turning to CROs for therapeutic knowledge, expertise in designing clinical trials and experience with regulatory strategies. When Quintiles acquired Outcome Sciences two years ago, the deal helped Quintiles round out its IHS offerings. Pike left the door open for more acquisitions as Quintiles evaluates how to address pharma’s needs. Unlike the recent wave of mergers that have seen CROs come together to build global scale, Pike said any Quintiles acquisitions would be “tactical, tuck-in acquisitions” that enhance Quintiles’ existing capabilities or fill a strategic need.
And don’t expect Quintiles to limit its services to pharma companies. Pike said Quintiles has 2,000 customers who are payers or providers. Of the $2.6 trillion in annual U.S. health care spending, $750 billion of that spending is viewed as inefficient, Pike said, using figures widely cited from an Institute of Medicine report.
“We do think that there are opportunities there to deepen our skills based on what both our commercial and payer, provider customers are looking for,” Pike said.
