PPD Develops Solid Growth

Investors celebrated Pharmaceutical Product Development's (Nasdaq: PPDI) latest earnings release today by sending the stock up more than 9% in recent trading. The jubilation appears to be warranted, since the drug research services provider's core development-services unit racked up another quarter of solid growth. Meanwhile, the company's discovery-sciences venture has yet to realize its potential, but ongoing projects still have a chance to bear fruit.

The Wilmington, N.C.-based firm saw its net revenue climb 22.7% year over year, to $299.4 million. Earnings jumped 27.3% to $41.8 million, or $0.35 per share. PPD's main development business was the major driver; revenue there climbed 21.1% to $257.7 million. Discovery sciences' top line also increased, chalking up a 47.3% gain for a total $18.9 million in revenue.

PPD's operating margin increased to 23.6% in the quarter, compared to 20.5% in the first quarter of 2005. Admittedly, the firm accomplished this feat partly through a precipitous drop-off in research-and-development spending -- R&D slumped 92% to just $0.7 million in the quarter.

But that reduction might be a good sign; it shows that the firm's discovery-sciences side continues to churn out potential drug candidates. PPD is spending less on R&D because it transferred rights to a possible diabetes treatment it was developing, dipeptidyl peptidase IV (DPP4), to Takeda Pharmaceutical. Takeda, which also provided a milestone payment that boosted revenue for PPD's discovery-sciences unit this quarter, is testing DPP4 in phase 3 trials. If all goes well, the drug will be approved, allowing PPD to enjoy an ongoing royalty stream from its sales.

Of course, PPD was also hoping for royalties from dapoxetine, a potential treatment for premature ejaculation that PPD's discovery sciences unit had helped develop. Unfortunately, Johnson & Johnson (NYSE: JNJ), which purchased the rights to the drug from PPD, failed to get Food and Drug Administration approval for the compound. Still, dapoxetine is not dead. J&J has indicated that it will continue to work toward the drug's approval, so PPD may yet get royalties from the medication.

In the final analysis, there still appears to be a lot to like in PPD. The firm has maintained its focus on its core development services side, even as it has explored a potentially lucrative new business model.

Get a monthly dose of the latest biotech news with a subscription to Motley Fool Rule Breakers . You can join David Gardner's search for the next great growth stock with a free 30-day guest pass.

Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.