Company Spotlight: Healthy prognosis for drugs testing specialist

How many PhDs does it take to change a light bulb? Four: one to screw it in and three to co-author the paper.

How many PhDs does it take to change a light bulb? Four: one to screw it in and three to co-author the paper. And how many PhDs does it take to run an up-and-coming pharmaceutical research organisation? Well, there are at least five of them among the list of directors and key managers at Premier Research, which came to the AIM market this month.

Premier is a contract research organisation (CRO). It is not in the high-risk business of developing its own drugs. Instead, it organises and conducts clinical trials for the big drugs companies. It has more than 40 clients, including the likes of Aventis, Wyeth, Roche and the US government agency the National Institute of Child Health and Human Development (NICHD).

The fact that it is top-heavy with PhDs should not put investors off buying the shares, which have already come up 10p from their 40p float price. There is nothing airy-fairy about the chief executive, Dr Simon Yaxley, or his two co-founders, all of whom are in their forties and have held senior management and development posts in the drugs industry.

They all came together in 2002 and proceeded to assemble Premier by way of a series of acquisitions in the UK, US and Europe. They were backed by a wealthy private investor who put up big loans to fund the deals. Having now raised £7.35m net in a placing organised by the broker Evolution, Premier has repaid most of those loans and is raring to buy up more competitors in what is a fragmented industry.

One thing is certain: the contract research business is booming. The big pharmaceutical companies have increased their research and development budgets by about 10 per cent a year since 2001. But the amount outsourced to CROs such as Premier is reckoned to be growing faster still - at about 14 per cent a year. Nearly two-thirds of all clinical trials now involve a CRO.

Last year, the drug companies spent about £1.9bn on third-party contract research in the middle to later stages of drug development, which is the part of the market on which Premier focuses. The broker Goldman Sachs estimates that will rise to £3.2bn by 2007. One reason for the increase in outsourcing is cost. The drive to accelerate clinical trials in the US and European Union, combined with a tighter regulatory environment and competition for fewer patients, is pushing costs higher. Drug companies find they can control costs better by using a CRO.

Premier concentrates on three treatment areas: cancer, diseases of the central nervous system and anti-infectives. Rated by the number of projects under way, these are three of the four biggest areas of drug development at present. But the company has another string to its bow. It is one of the few CROs capable of conducting paediatric trials. This promises to be an area of huge growth.

A lot of medicine packaging carries the warning "not suitable for children under 12". In many cases that is simply because it has never been tested on them, largely for ethical reasons. But the US government introduced legislation in 2002 designed to boost the evaluation of medicines in children. The EU is moving towards new guidelines and the UK has set out a framework for collecting data on paediatric medicines.

The value to Premier of being able to conduct paediatric trials is already evident. Its biggest contract is with the NICHD and involves 15 to 25 paediatric trials over a five-year period. It took 12 months to win and work is billed on a cost-plus basis, reflecting the time expended. It provides a solid base to Premier's workload for years to come.

Premier has about £20m of forward orders extending to 2007. That compares with estimated sales of £9.3m in the year to the end of January 2005. Two new customers in the US and two in Europe were won in the third quarter, and Yaxley hopes that going public will raise Premier's profile and improve its credibility with big pharma.

The company made a small loss in the first half of this year, but that was down to high interest costs on its founders' loans. Evolution calculates that, after allowing for repayment of the loans following the recent cash-raising, profits are running at £1.6m a year before writing off goodwill. That compares with a £20m market value at 50p.

Premier is set to grow quickly. Not only is its marketplace expanding at a rapid rate, but it intends to expand through acquisition. With some of the best technology in the industry for collecting data and a good record of improving rates of client retention in newly acquired companies, Premier can argue it has a lot to offer target companies. It has a lot to offer investors, too.