First off, thanks for posting a counter-view to debate against in a constructive manner and help us in figuring out chinks in our investment rationale.
Like u, i too am still digging to find out any contarian perspectives which to negate the investment rationale, even though i am invested and have very high conviction on the company's potential.
Final word of caution before i state my views, is that i am most likely heavily biased.
There are 2 templates against which one can analyse TSL.
1. Quintiles - CRO with a good data analytics platform (Infosario).
2. Medidata - Clinical Trial Delivery solutions (Rave, Clinical Cloud, ePRO, mHealth).
Both are successful in their own niches but with very different business models. And TSL's business model had very little in common with either of above 2 prior to EA acquisition.
TSL primary focus in Life-sciences is Regulatory Compliance as stated multiple times by the mgmt, with their flagship PharmaReady Suite catering to different stages of regulatory compliance. It would be safe to assume that majority of their life-science segment revenue is coming from either the application suite or Consultancy(Medical Writing/Data Validation).
While they do have bio-statisticians and presence in Clinical Data Standards and Safety segments, they are primarily accelerators or as 3rd-party System Integrator as in case of Oracle Argus implementations for Drug Safety requirements of the customers.
This $15 Bn USD opportunity while true and corroborated by multiple sources is only half the story. As most of us know, the longest and most expensive phases of in drug discovery lifecycle is the Phase I-IV clinical trials phase. Thus, by extension CRO which actually perform Clinical Trials like Quintiles and Ecron Acunova stand to gain the major portion of this outsourcing pie.
Regulatory compliance while being important becomes critical post the trial phase (i.e. typically 10-12 yrs into the life cycle) and hence would not be a significant expense in the large scheme of things. Sure, the clinical data from each of the clinical trial phases would need to be updated to the different modules of the eCTD, but that is most likely a small effort compared to the heavy duty lifting actually done by CRO's like Quintiles.
So, having Big Pharma clientele is not necessarily a good thing in terms of faster revenue recognition. There would be milestone payments, say at end of each clinical phase but major chunk would be recognized after the regulatory submissions.
In that context, having more Generic companies will be a big plus given that they file at least 1 ANDA and/or DMF per quarter.
Medidata on the other hand is primarily a technology solutions company whose primary focus is on Clinical Trial Delivery which as explained above is the most expensive and thus lucrative space for a tech vendor. So, their platform provides solutions related to Clinical Trial Management, Electronic Data Capture, Patient Management (eCRF, EHR, EMR) and so on...
Medidata Product Portfolio: https://www.mdsol.com/sites/default/files/MCC_Medidata-Clinical-Cloud_20150217_Medidata_Fact-Sheet.pdf
IMHO, TSL cannot compete with Medidata(see below for reasons) on Clinical Platforms and hence with their EA acquisition gives me an impression that that they may be following the Quintiles Template.
Navitas v/s Medidata
* Record full-year revenue of $392.5 million, a 17% year-over-year increase
* Provides 2016 revenue guidance of between $450 and $474 million
* Medidata added a record 201 new clients in 2015, an increase of 52% over 2014, including 59 new clients in the fourth quarter. Medidata's client base grew to 611 by the end of the year, up 26% from the end of 2014.
* Medidata's Contract Research Organization (CRO) program continued to expand in 2015 with 18 new partners joining. Medidata's CRO partners now total over 90.
* Medidata's overall revenue retention rate for the full year was 99%. The retention rate for all Medidata's large enterprise customers over the past several years was 100%.
Medidata was started in 1999, five years before TSL and their focus was on the much more lucrative clinical trial delivery segment. Based on your assertions they seem to have not done so well either.
TSL on the other hand started out mainly as an SCM domain company and later got into Life-sciences in 2004, but they had captured a good rep pretty quickly and self-evidently as captured below and posted very good growth despite recession.
And considering that their focus was on an unmet need (CTD/eCTD) where the revenue recognition takes longer, the growth has been impressive.
So all things considered, TSL acquisition of EA is a game-changer and now can legitimately aspire to capturing the $30 billion USD pie. I am happy with a 25% CAGR and it will take time, but mgmt has shown they are capable enough and have good pedigree.
IMHO, prior to the EA acquisition i don't think there was any functionality lacking in their offerings given their target segments. As an Life-sciences functional solutions provider, they covered the necessary areas in terms of technology -
- Regulatory Information Management: PharmaReady Suite
- Clinical Data: SAS, Bio-statisticians, Trial Planning, Trial Management, Data Standardization, etc.
- Drug Safety and Pharmacovigilance
I think what was lacking was their viability to be selected as a vendor for managing clinical trials as they were not a CRO (before EA)
Say, if you are a Big Pharma co. and u have a choice to select a vendor for doing a clinical trial between -
1. CRO like Quintiles
2. CRO using Medidata platform
3. TSL + CRO (with no CTMS or Analytical Platform)
It most likely ends up between options 1 or 2.
If Navitas+EA follow the Quintiles template, then they could take it to the next level given the complimentary capabilities they bring together, the low-cost pricing by having trials in India, and hopefully much more conducive regulatory environment.
What are the gaps for the future?
- RBM: Risk Based Monitoring which requires emphasis on real-time data for drug safety during and post clinical trials.
RBM Infographic a better approach to risk based monitoring.pdf (105.2 KB)
- EDC + EHR/EMR: Patient focus to help create data repositories for faster and more efficient recruitment (This is a differentiating factor for Quintiles to win customers confidence)
- Mandatory eCTD submission from May 2017
The Electronic Common Technical Document (eCTD) is CDER/CBER’s standard format for electronic regulatory submissions. Beginning May 5, 2017 submission types NDA, ANDA, BLA and Master Files must be submitted in eCTD format. Commercial IND submissions must be submitted in eCTD format beginning May 5, 2018. Submissions that do not adhere to the requirements stated in the eCTD Guidance will be subject to rejection.
- Much more favorable regulatory environment for clinical trials in India.
As explained above, Medidata would not consider Regulatory Compliance as lucrative as Clinical Trial Delivery solutions.
While CRO's such as Quintiles do support Regulatory submissions, they primarily use Medical Writers or Consultants. In fact Quintiles is a customer of Navitas.
You would find the same situation with the IT biggies such as Cognizant, Infosys, etc. They have professional writers to help validate/make the submissions.
They do not have an application suite/platform like PharmaReady dedicated to Regulatory compliance.
Hence, it is not a "Winner takes all" market. There is room and niche for each of the players to grow comfortably.
As it was much publicized, they had taken a conscious decision to let go the low-margin SCM customers and focus on higher margin Life-sciences segment.
Two things which stand out:
1. "Capacity to Suffer": Willingness to take short-term pain and report lower numbers.
2. Capital Allocation: Recognize the higher growth opportunity and traverse the path accordingly.
If nothing else, the Shriram Group connection gives them that benefit of doubt (not that i need any convincing)
On Management Ethos - Shriram Group Connection - Where they are coming from?
In November 2006, Thyagarajan did something that he always wanted to do. He made good his promise of sharing his wealth with his management team who had contributed to the group’s growth. He floated a trust to govern the holding company, Shriram Capital, which houses the promoter’s shareholding. Through the trust, 75 per cent of the promoter’s holding would be transferred to the management team upon their retirement, thereby making them owners of the group.
Thyagarajan himself will get only 2 per cent along with others in top rung. The remaining 25 per cent, currently valued at Rs 500 crore, has been reserved for entrepreneurship development.
S. Abhaya Kumar (also Founder of Shasun Pharma), Vice Chairman, LifeCell International (56), was both excited and worried. He was excited because TRIcell, a company that he recently floated to do clinical research and trials on the therapeutic usage of stem cells, was an excellent business proposition. But with the world just about getting to know about stem cell research and the typical long drawn process of clinical researches, funding the project was proving to be difficult.
He approached the Shriram Group, whose Founder-Chairman R. Thyagarajan readily agreed to take 20 per cent stake and fund Rs 7 crore. “As a partner, the Shriram Group never interferes in the running of the organisation. It offers valuable inputs on regulations, taxes, governance and on anything we ask,” Kumar says. Manipal Accunova, a contract research organisation and a leading player in biotechnology and the clinical structure space, also has a similar story to tell.
For instance, H.R. Srinivasan, currently planning the group’s foray into infrastructure development, headed Sembawong Shriram, a joint venture company in the logistics field in 2001. He expressed a desire to be on his own after the Shriram Group exited the JV. He decided to foray into the IT product space with funding from the group. Today, the company, Take Solutions, which is into life science products and supply chain management products, with many intellectual properties in its name, is seeing better returns than most other IT product companies. Srinivasan has since handed over the reins to others and re-joined the group.
Is the promoter following in his mentor's footsteps?
Take for instance, H R Srinivasan, the MD of Take Solutions. He has built a Rs 800-crore software products company in 12 years and is now giving back his support to innovative ideas. He has funded over 10 startups and has already infused $500,000 in just ideas. “My job is to support ideas and not trouble them over success,” says Srinivasan. He adds that the best way to build a startup ecosystem is to fund ideas that can have an impact on businesses and consumers alike. His portfolio companies include InnoWatt, a smart energy firm, research organisation Solaris Pharma and Spectrum Medics, a data analytics platform, among others.
Above report seems to suggest so. Though one needs to validate if the investments are in a personal capacity or not?
Couple of additional points:
- Based on AR 09, management had taken a voluntary pay-cut.
- Admirable humanitarian services provided during recent Chennai floods and providing additional financial assistance for rehabilitation.
The shareholding is along the similar lines explained in the Shriram Group article above, which is through a trust/holding companies.
IMHO, their incentives are good enough for me.
Mgmt had stopped giving Product Licence/AMC revenue contributions in recent AR's unlike during AR 07-09.
Also, below point highlights that domain expertise and SME's play a more vital role.
I think u may have missed reading the Quintiles presentation which i had shared in earlier post.
Do visit their official site and watch the below links to have a feel about the role of technology and data is playing to enhance clinical trial delivery.
Since u made me put in this much of effort I have earned the right to give a friendly bit of advice.
The way u had framed ur query in Point 2 could be construed as condescending. I hope u will be more circumspect with ur queries in future.