It's All Positive for PPDI

Pharmaceutical Product Development (Nasdaq: PPDI  ) reported very strong earnings several weeks ago, as Fool colleague Brian Gorman reported. Included was the announcement that the company generated $47.4 million in cash flow from operations, something at which PPDI has become quite adept. The trailing 12 months have provided the company with $195 million in cash flow from operations, and $81 million in free cash flow (FCF).

With drug companies falling over themselves to secure PPDI's services, order backlogs continue to grow, allowing the company to amass more and more greenbacks. This past quarter, new authorizations shot up another $331 million, and the development segment of the business increased its revenues by 21.9%.

The company now has $236 million of cash on its balance sheet and only $9 million in debt. All those dollars sitting around allows the company to make forays into its own drug development segment. They've begun to partner with other companies in researching new therapies, and taking a cut of the profits. Their work with Johnson & Johnson (NYSE: JNJ  ) has already paid dividends. It's a good use of all that cash, in my opinion.

Sure, it's risky trying to move from testing other companies' drugs to making your own, but it's a risk worth taking. The two major issues:

  1. It's unclear whether or not the company can continue to parlay its intelligence in the testing realm into development expertise.
  2. Formerly, the company had the ability to translate invested capital into profits on the testing side. But drug production requires certain capital outlays that may result in no profit whatsoever -- and could even result in lost opportunities.

That said, companies like Motley Fool Income Investor pick Merck (NYSE: MRK  ) , Motley Fool Inside Value recommendation Pfizer (NYSE: PFE  ) , Amgen (Nasdaq: AMGN  ) , and Genentech (NYSE: DNA  ) can't do all of their own in-house work, can they?

The best news, though, is that CEO Frederic Eshelman just exercised 380,000 shares worth of options and did not sell them. While that's different from an outright insider purchase, he does hold 9.4% of the company's shares. Given that the total percentage of insider holdings is 13.5%, it does suggest that the CEO has a wee bit more faith in his own company than his underlings do.

That, more than the cash flow, is a reason to think the company's future is bright, indeed.

You can read more about PPDI here:

Fool Contributor Lawrence Meyers owns none of the stocks mentioned in this article and recommends you leave drug testing to the pros.


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