Pharma's Outsourcing Elixir

Ever wonder how pharmaceutical companies such as Pfizer (NYSE: PFE  ) , Merck (NYSE: MRK  ) , and Eli Lilly (NYSE: LLY  ) develop and test their drugs? I mean, somebody has to do some of the lab work on all those naked rabbits, right? To be more specific, somebody out there must "provide a range of research and development and consulting services in the development and discovery sciences segments... and provide services that include preclinical programs and Phase I to Phase IV clinical development."

That's how Pharmaceutical Product Development (Nasdaq: PPDI  ) describes what it does. It is, in essence, outsourcing at the highest skill level possible. The point of outsourcing is generally to save the parent company a lot of money over doing certain tasks in-house.

The company has been extremely successful with its business plan, and its recent earnings report demonstrates it. Year over year, net revenue increased almost 20%, operating income almost doubled, and operating cash flow popped up $179 million, up from just $14 million in 2003. Add to this that the company booked record levels of new business authorizations -- $360 million vs. $310 million for the comparable quarter -- and that the company is trying to create royalty streams for itself, and the result is a company that has clearly won the attention of the health sciences world.

Investors have noticed, too, bidding the stock up 50% over the past year. This kind of outsourcing, if done right, can be a real boon to shareholders of both the parent company and the client. A dollar saved at one is a dollar earned, literally, at the other. Investors who do their due diligence may also find a few dollars earned in their brokerage accounts as well, if they choose the best outsourcers to invest in.

For more on PPD, see:

Fool contributor Lawrence Meyers owns no stocks mentioned in this article, but he does outsource his housecleaning to qualified professionals.


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