eResearch (ERES) 

Stock Price 7/17/2003: ($10.46)
3 to 5 year target   ($85 to $175)
Revised 3-5 year target ($48-$100) - 06/24/04
**Stock has split twice since initial coverage

Report by Rick Currin of CurrinResearch.com

Read more if you want to know why this stock is poised to go to $150 and beyond.  I put this stock in a free report to you to give you an example of the type of winning stock that you want to find before the rest of the herd discovers what is driving this kind of earnings growth.  This stock is included in the exciting growth and dominance portfolio.

“Powering the Clinical Research Evolution” is the catchphrase of eResearch.  Pretty catchy, but what does it even mean?  More than simply a catchphrase, there is indeed a clinical research evolution taking place.  From genetically engineered solutions to traditional pharmaceutical companies and device makers, the field is full of players hoping to capitalize on the aging baby boomer’s health needs.  Better yet, the data requirements of the necessary clinical research are evolving, and are directly in line with the business model and market position of eResearch. 

eResearch provides technology and services to the pharmaceutical, biotechnology, medical device and clinical research sectors.  Their roster of customers already includes Johnson and Johnson, Guidant, Wyeth, Bristol Myers-Squibb, Aventis, Pfizer, and Novartis to name a few.   The company focuses on outsourced Cardiac Safety Services and digital data capture.  Cardiac Safety is the measurement of impact on cardiac safety or possible adverse impact on the heart of drugs or medical devices.

Diagnostic tests are used in clinical trials to measure the effects of potential products on the heart and in order to ensure the product’s safety.  Much of this information has been typically collected in paper data collection.  Even before the Food and Drug Administration (FDA) and global guidelines were specifically pushing regulatory guidance toward digital collection of this data and the eResearch business model (more on that in a moment), eResearch was driving the efficiency model of doing just that anyway.  That is, digital data collection was a value proposition to its customers already as a transition to a better quality, faster, and more cost effective way of data collection for critical cardiac safety data.  Additionally, the digital data collection gives much better capabilities of transforming mere data to a collection of centralized knowledge.  eResearch has a centralized system for cardiac safety data through digital means and can deliver data for interpretation and distribution.

eResearch Already Brings Customers Value
As in many areas, digital information quite simply is a productivity enhancer to data collection and analysis.  By removing data entry errors, delay, and the inherent islands of information that result from a decentralized or paper data collection approach, eResearch enables the acceleration of clinical development.  Even slight improvements in time and development costs in this multibillion dollar field results in millions of dollars of savings especially in light of time-to-market opportunity.

Not that I have anything against the dot com bust, but don’t let the “e” in eResearch fool you.  This company is steeped in a thirty year history of the core laboratory business and experienced with building research tools for the FDA.  However, after acquiring a clinical research software company, the company has transformed itself into a technology company that uses software and services to meet a rapidly evolving industry need. The company is poised to reap the benefits of an exploding increase in the digital collection, analysis and capture of Cardiac Safety Data (CSD).  eResearch is the market leader in this field and stands to be the primary rapid growth beneficiary of a move to more utilization and digitization in the field of CSD.  But why is the outsourcing of cardiac safety data such a rapid growth market?

A Ten Fold Growth of Cardiac Safety Outsourcing Market!
Quite simply, even with natural growth, the cardiac safety outsourcing business stood to gain 10 to 15% per year.  But there is something else very beneficial going on in the global regulatory environment.

The FDA in 2001 and 2002 put forth guidance for cardiac safety in clinical trials.  To paraphrase, the guidance states that each and every compound that enters the blood should have cardiac safety testing across all therapeutic areas (not just cardiac drugs if you will) and throughout all areas of clinical trials.  A third party central core lab should be used.

I paraphrased the guideline to give you the simplicity of what it means to eResearch.  That guidance, in a nutshell, is eResearch!  eResearch has about 50% market share for the outsource core lab cardiac safety business already!  The strong suggestion of the FDA guideline is that the cardiac safety outsourcing that is currently 10% of a billion dollar market could go to 100%.  Notwithstanding that eResearch already had a strong value proposition to provide cardiac data outsourcing with its centralized system to reduce clinical development costs (with a who’s who customer base),  this guidance suggests that what is currently a 100 million dollar outsource cardiac safety  market should grow to a 1.5 billion dollar market with natural growth over the next few years.

eResearch was already a strong player in the field but with the FDA issuing eResearch business model as guidelines, eResearch stands at the cusp of a potential windfall in additional utilization of cardiac safety data and services.  Essentially every drug developed, in every phase of the clinical development is in line to have the software and services of eResearch. 

Barriers to Entry
The centralized repository of digital data gives eResearch a large leg up on late entrants.  Their longevity in the field means they were already transferring huge amounts of clinical data to digital data. Thus they already have a central repository of valuable data that is utilized in analysis of present and future clinical trials.  So despite a potential windfall in the space, there is already a strong barrier of entry for late entrants.

Additionally, the repository of information approach gives eResearch a huge advantage.  No pharmaceutical company wants to blow what could be over $500 million investment on clinical development just to later realize their phase I or phase II trials were missing acceptable cardiac safety outsource data.  There will be little excuse for cutting corners or going with an inferior outsource start-up with so much at stake.   This is the reality of the likelihood that even with an attempt at new entrants into the space; the door will not be open to riskier start-up paths with millions in development dollars at stake.

Electronic Data Capture
The second portion of eResearch’s business is Electronic Data capture. There are basically two horses in this space Oracle and eResearch.  Oracle is the larger of the two but eResearch is the fastest growing by far.  Many venture firms got into this space but have dwindled because of a lack of coordination capability and lack of a comprehensive solution.  The ‘single clinical trial’ data collection that many utilized were demonstrated to just not be an efficient or effective solution for the data needs of clinicals.  That is, if there are 35 trials going on, it is simply much better to coordinate data capture in all 35 than to piecemeal the data collection from 35 individual solutions trying to get into the market.  eResearch has grown this business 50% in the last reported quarter and is the fastest growing in this space.

Financial Performance Telling the Tale
I love recurring revenues. Nearly 100% of revenues from the Cardiac Safety business in the first quarter were in the form of recurring revenues in the form of subscriptions and per user transaction fees.  This gives a nicely predictable performance that is rapidly trending upward.  In addition, with this business model, the gross margins are improving as the business expands.  The company is positioned to grow rapidly without large expense.  I love it when rapid growth is the “problem”.  40% gross margins are the expected results of the business model.  

Take a look at the latest performance:
Fiscal 2002 Revenues were up nearly 50% from 2001 levels.  Fiscal year 2002 gross profits were up 56% over 2001.  The first quarter of 2003 revenues were up over 60% over first quarter 2002 while gross profit was up over 70% in that period.  Impressive stuff and the conversion is only beginning.

The company has raised full year earnings guidance to $0.48.  When met that will put year-over-year earnings growth in the 78% class will likely get some additional ‘year 2003 performers’ attention as well. With guidance raised so early in the year, confidence is obviously high.  It may very well be raised again.

eResearch has very little debt, an experienced management team, rapidly growing revenue and earnings, a solid roster of blue chip customers, and a potentially exploding market which they lead and which possesses significant barriers to entry.  I like the mix and am very excited that this company is in the early stages of at least a tenfold rapid growth period.

A Long and a LEAP
Long term the business was already a good one.  With the enhanced FDA guidance directly encouraging utilization of eResearch’s core business, the potential of this company is enormous.  Given the potential for this company to grab a lion’s share of an exploding market, and evidence that they will successfully be able to bring the revenue growth to the bottom line, I consider a three year price target of $150 a reasonably attainable number. With the strong growth already being achieved, the market is already taking notice.  The stock is up nearly 200% in 2003.  There was a 2 for 1 split in late May.

Considering the Cardiac Safety market alone, if eResearch were to capture 40% of the outsource market at the 40% margin, they are poised to bring over 240 million in earnings.  Applying a 30 PE to that income would yield a stock price of over $300. That may sound incredible but in fact that’s the potential. That kind of near term explosive potential resulting from a desire to “sooner than later” adhere to the FDA guidelines to ensure your drug is approved, makes long term options (LEAPS) a good choice for this stock as well.

Conclusion
Clinical research and data collection will continue to increase.  While it is difficult to determine exactly which biopharma companies will be successful in the clinical development: based on trends in the industry and FDA guidelines, we can be certain much more outsourcing of Cardiac Safety Data services will be utilized.  No matter who develops the successful therapeutic solutions, as an investment, a primary high growth beneficiary stands to be eResearch. (ERES)

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