by Barry Cohen | January 31, 2012 6:30 am
Before a new drug can earn Food & Drug Administration approval, pharmaceutical companies must perform extensive clinical trials to test the treatment for efficacy and safety. And the massive amounts of data generated and collected during clinical testing have created outstanding opportunities for information-technology companies in health care and, perhaps, for investors.
Among the biggest names in this market, known as clinical trial management system (CTMS) software, are Oracle (NADAQ:ORCL), Parexel International (NASDAQ:PRXL), Medidata Solutions (NASDAQ:MDSO), eResearch Technology (NASDAQ:ERT) and BioClinica (NASDAQ:BIOC). Each of these firms is bidding for a share of a business that’s expected to grow from around $570 million in 2010 to $1.3 billion by 2016, according to a study by research company MarketsandMarkets.
Given the financial opportunity, both Oracle and Medidata have made acquisitions intended to beef up their offerings. In April 2010, Oracle paid about $685 million to buy Phase Forward and its Clinical Research Suite. The deal added to Oracle’s health care IT portfolio, strengthening its position as an end-to-end systems provider in health care, according to an article on eWEEK.com.
Last June, Medidata agreed to buy U.K.-based Clinical Force, bringing “a new, different and better approach to CTMS with broad appeal to large clinical development organizations as well as the largely underserved mid-market sponsors and regional CROs,” said Tarek Sherif, chairman and CEO in a Medidata news release.
Medidata plans to invest heavily in R&D to stay on the leading edge of the clinical trials software business, according to an article in Bio-IT World magazine. In an interview with the magazine, company President Glen de Vries said Medidata will always be searching for ways to improve its platform. “The idea is to always think of what people will need in the future and to invest in things that will be useful for those clinical trial processes,” he explained. If you look at companies in a similar position to us, you’d see something like 5% revenue being put back into R&D. We put more than 15% back into R&D.”
Medidata shareholders are hoping that plowing more money into research pays off in the long haul. Short term, it certainly hasn’t — if you look at the performance of the company’s shares. In the past year, Medidata stock is down about 20% and at $21.75, is $6 under its 52-week high. Analysts appear to be somewhat neutral about the company’s prospects.
Those who have put their money into any of the in the big-time CTMS players haven’t fared as poorly as Medidata shareholders, but they’re not jumping for joy, either. Shares of both Oracle and Parexel are both down about 11% in the past 12 months, while eResearch has done even worse, declining more than 13%. The only bright spot is the shrimp of the group, BioClinica, which has gained nearly 16%.
Of course, any gains in the CTMS market are going to have a bigger impact on a company like BioClinica, whose market capitalization and annual sales are a small fraction of Oracle’s.
A word of caution here to investors seeking to capitalize on the projected growth of the CTMS market. In a bid to become more efficient in the face of revenue losses due to patents expiring on many blockbuster drugs, the pharmaceutical industry is cutting back R&D spending. That, in turn, means fewer clinical trials. And while drug testing is growing in complexity and companies are hungering for faster results, the jury is still out on what reduced R&D budgets will mean for CTMS providers.
As of this writing, Barry Cohen doesn’t hold any of the stocks mentioned here.
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