Privately-owned drug tester Quintiles expands investment in pharmaceutical development

By Emery P. Dalesio, AP
Monday, February 15, 2010

Private drug tester expands stake in Big Pharma

RALEIGH, N.C. — Pharmaceutical companies previously did all their own research and testing and submitted the results to the Food and Drug Administration for approval to put a medication on the market. The agency’s review was devised to settle concerns about the drug makers’ vested interest in showing a pill was safe and effective.

Since the 1990s or so, Big Pharma has farmed out more and more of that testing to companies like Quintiles Transnational Corp., which grew quickly to meet the demand.

Now Durham, N.C.-based Quintiles is the world’s biggest contract research organization, and more than ever, it’s using its deep pockets to entwine itself with the pharmaceutical companies, fronting them cash and services for a piece of the profits once a drug is approved.

Quintiles, which was created in 1982, upped the ante last month, saying it wants to invest even more in potential drugs as pharmaceutical companies grapple with the down economy. Quintiles is hoping its new investments will produce enormous payoffs in the future, but the buffer between drug makers and testers are again blurred.

The FDA says there are well-established safeguards to protect the public.

Quintiles’ decision to become more aggressive in taking investment risks comes at a time it’s betting drug makers can use the resources it can offer, both cash and services.

“They’re both currency for managing risk and having skin in the game,” said Ron Wooten, a Quintiles executive vice president who heads the company’s capital investment group.

The pharmaceutical industry has been changing rapidly in recent years as patents on blockbuster drugs expire, generic competitors multiply and research costs balloon. The credit crunch has piled on the pressure.

The outsourced contract research sector also felt the pinch last year. Drug company spending fell by as much as 5 percent in 2009 after double-digit growth each of the previous two years, Robert W. Baird & Co. analyst Eric Coldwell said.

Controversy over creating the drug investment unit in 2000 was key in pushing Quintiles founder Dennis Gilling and several private-equity firms to buy out shareholders for $1.75 billion and take the company private again in 2003. Wall Street analysts complained they couldn’t estimate what the drug investments were worth, prompting Gilling and others to decide the company’s stock was undervalued.

The private company no longer publishes its profits. It claims revenues of about $3 billion a year. That’s also about what Quintiles has invested in other drug companies.

Wooten, the Quintiles executive, doesn’t see his company’s increased interest in bringing drugs to the market affecting its testing objectivity. Instead Quintiles is the outsider turning a hard eye on which pharmaceuticals will become profitable.

“It allows you to really get to the essence of the data that you’re looking at instead of what you hope it says,” he said. There isn’t “the natural bias that you would have with your own babies.”

Quintiles appears to be uniquely positioned to both invest in and test potential medications. None of the half-dozen major shareholder-owned contract research organizations will have a drug-investment division after Wilmington, N.C.-based Pharmaceutical Product Development Inc. spins off its unit in a few months, Coldwell said.

The payoffs for the risk of developing a drug can be huge.

In 2002, Quintiles took a chance on Eli Lilly and Co.’s antidepressant Cymbalta. Quintiles said it invested $125 million in cash, then spent another $400 million on a sales force of more than 550 after the product launch. Cymbalta is now Lilly’s second-biggest drug. Quintiles said it’s brought in more than $700 million so far for a stream of royalties lasting to 2012.

Japan’s Eisai Co. is hoping Quintiles’ money and experience helps it double the number of potential treatments it can put through testing simultaneously. Eisai and Quintiles struck a deal last fall to develop six drugs to fight solid-tumor cancers. Quintiles is paying part of the costs for designing and conducting the clinical studies.

“We aim to shorten the overall development timeline through this collaboration and to deliver new drugs to cancer patients as soon as possible,” Hideki Hayashi, Eisai’s chief product creation officer, said in an e-mail.

The FDA preserves the integrity of testing in a landscape already pockmarked with potential conflicts of interest that include company-sponsored academic research and investigators testing drugs while owning shares in companies that own the drug, said Kenneth Getz, a senior fellow at Tufts University’s Center for the Study of Drug Development.

The FDA’s view is that any company with a financial stake in a potential drug will face similar scrutiny from the agency.

“It’s assumed,” FDA spokeswoman Karen Riley wrote in an e-mail, “that drug/device/biologic companies who sponsor trials of pending products have a conflict because they will gain if the product is approved.”

Besides, pharmaceutical companies have navigated the tricky territory that comes with testing, Getz said. So have the companies like Quintiles that have taken on the outsourced work, he said.

“These potential conflicts of interest are ever-present, and the real question is how do companies manage these potential conflicts effectively,” he said. “These are massive, massive companies that have thousands of staff that are not generally aware of a conflict of interest at a corporate level. They are paid to do a quality job that meets internal and regulatory guidelines or they are not going to keep their jobs.”

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