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Biotech / Medical : eResearchTechnology - ERES

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From: Paul Lee7/15/2008 7:24:36 AM
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eResearch Technology: Outsourcing clinical trials
Tuesday July 15, 6:20 am ET
Andrea Orr

Behind the scenes of the cumbersome drug discovery and approvals process, there is a mini-industry that does not manufacture drugs but provides technologies and services to make drug testing more efficient.

One of the most promising companies in the sector is Philadelphia-based eResearch Technology Inc. (Nasdaq: ERES), whose software products automate the collection and interpretation of clinical data, particularly cardiac safety data, for pharmaceutical and biotechnology companies as well as drug device makers. After an extended period of little or no growth, eResearch is now on a roll.

The 31-year-old company in May said its revenues from a series of software products and consulting services rose to $33.7 million or 59.7% from the year-ago period while EPS nearly tripled to $0.11 from $0.04.

This sudden growth spurt reflects multiple new product launches and upgrades internally as well as the acquisition late last year of Covance Cardiac Safety Services Inc. (CCSS) from Covance Inc. (NYSE: CVD).

Conditions in the industry eResearch Technology serves can vary widely, depending on competition from a very fragmented group of players as well as government regulations covering the drug approvals process. But most existing signs point to the company’s good fortune continuing for some time. CEO Michael McKelvey recently said the pipeline of new opportunities was strong, reflecting a continued emphasis on cardiac safety in drug development.

Shares of eResearch have more than doubled over the past year and, at a closing price of $17.06 on Monday, they are just shy of their 52-week high of $18.85. Although the company is still not widely covered by financial analysts, two who do track its revenues project total sales will grow to $140.7 million this year and $163.2 million next year, compared with $98.7 in 2007. Three analysts who track earnings forecast net income of $0.49 per share this year and $0.64 per share in 2009, compared with $0.29 in 2007.

Much of that expected growth comes from the recent addition of CCSS, which digitally processes electrocardiograms, as well as the terms of the acquisition that require Covance Inc., also a drug development services company, to use eResearch Technology cardiac safety services on an exclusive basis for the next 10 years.

One reason eResearch Technology is not more widely covered by analysts is that the strong growth of recent quarters appears to have caught off guard many Wall Street types, who kept one eye on the company’s annual revenues and never saw much need to look further. Indeed, some analysts say this is a stock they monitor but do not actually follow.

The company’s strong quarterly performance recently comes on the heels of a few stagnant years. On May 5, eResearch reported net revenue of $33.7 million for the quarter ended March 31, a 59.7% increase from the first quarter of 2007. Diluted net income per share was $0.11, up 175% from the first quarter of 2007, while total revenues were $98.7 million in 2007, an increase of 14% from $83.4 million in 2006 and $86.9 million in 2005. Net income totaled $15.4 million last year, way up from $8.3 million in 2006 when the company incurred unusually high expenses, but also unchanged from 2005 earnings of $15.4 million.

That ho-hum past history and stunning performance more recently add up to a stock that is tough to categorize. It has a strong outlook, but not much of a track record. Demand for its cardiac safety testing products is strong at the moment, but it’s unclear if cardiac safety will remain a key focus of regulators and if eResearch Technology’s products will retain an edge over many small niche players trying to do the same thing.

For a company that was founded in 1977 with the same basic mission that guides it today, eResearch has had a rather erratic history, underscoring the inherent uncertainty in the industry it serves. Just like drug makers themselves, which can be celebrated one day and knocked down the next by poor trial results, companies on the periphery of this industry are also often in for a wild ride.

eResearch acknowledges that the state of competition as well as an uncertain regulatory environment are big risk factors. In addition, it generates a large portion of its revenues from a small number of clients, and says its sales cycles can be long and unpredictable.

It’s not that eResearch shares will not rise further, but that its future growth may look more like a roller coaster than a straightaway. This is probably a good investment for those who can tolerate risk and uncertainty, but not for those who prefer a calmer ride.
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