Friday, February 06, 2009

Think Pharma!

Most investors are at a loss in the in the current equity market environment to decide the best course of action…or inaction. Buy? Sell? Hold? The dramatic economic downturn has spooked even traders with the steeliest nerves. Indeed, the dread word “depression” has entered the discussion.

So which sectors offer at least some cushion in such circumstances? Think pharma! The industry is certainly not immune from macro-economic influences, but appears to be resisting the demand erosion that has decimated the consumer durables, industrial and manufacturing sectors.

Take for example, Phase Forward, Inc. (PFWD: Nasdaq), a provider of clinical trial automation solutions such as electronic data capture. The first company in the Crystal Equity Research coverage universe to report year-end results, Phase Forward met our and consensus expectations for sales and earnings in the December 2008 quarter.

Strong performance in the final three months of 2008, brought total 2008 revenue to $170.2 million compared to $134.3 million in the prior year, representing a year-on-year growth rate of 26.7%.

Phase Foward's flagship electronic data capture (EDC) product InForm accounted for three-quarters of sales in 2008. InForm revenue grew 32.1% over the prior year to $127.9 million in 2008. New or expanded InForm customers added in the last quarter included Danone Research, Oxagen Limited, Therevance and Lexicon. The InForm EDC platform has been used for 2,850 clinical trial to date and there were 920 live product trials underway at the end of 2008. This compares to 720 live trials at the same time a year ago.

During the year-end earnings conference call management commented that “the pace of business is holding up well,” but conceded that the lack of capital available to smaller biotechnology companies could slow clinical trial activity in that segment. Yet management struck an optimistic tone for the coming year and provided sales guidance implying near 20% year-on-year growth in 2009.

One of Phase Forward’s competitors, Medidata Solutions, Inc., is counting on favorable trade winds as well. The company filed a registration statement with the SEC two weeks ago for an initial public offering of its common stock. CitiGroup and Credit Suisse are co-managers of the deal, which is expected to raise $86 million. Medidata has some of the same customers as Phase Forward such as pharmaceutical leader Bayer Healthcare and clinical research organization (CRO) PAREXEL. However, Medidata has yet to turn a profit even after over five years in the business. Phase Forward is consistently profitable and had a cash conversion ratio of 29% in 2009.

So think pharma, but think twice!

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has a Buy rating on PFWD shares.

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