Most of the strong performance resulted from solid management and efficient operations, essential ingredients in the contract services business. One area of growth, though, falls somewhat outside the traditional contract services area, and for investors, it's worth a look.
While still accounting for only 4% of revenue, PPD's discovery sciences unit showed impressive expansion, with sales increasing 144% to $7.5 million. In the coming years, the story behind this surge may transform PPD, which traditionally has run clinical trials and provided other support services for pharmaceutical and biotech clients.
The contract research business is notoriously difficult. Major pharmaceutical customers, such as Pfizer
Consequently, contract research companies have looked toward higher-margin and more reliable revenue streams. For its part, PPD has decided that drug ownership offers a compelling path to this goal.
Back in 1998, PPD licensed the essentially moribund compound dapoxetine, originally investigated as a treatment for depression, from Eli Lilly
Johnson & Johnson has been running phase 3 trials on dapoxetine in the past year, and the results so far are promising. In fact, the boost in PPD's discovery sciences unit's revenue was largely attributable to a $5 million milestone payment from Johnson & Johnson, a measure of J&J's confidence in the program.
Many analysts are projecting that if the dapoxetine is commercialized, which could happen as early as 2005, it would achieve blockbuster sales. The royalty stream PPD would receive in this case would significantly boost earnings and radically change its revenue mix. Nor is PPD stopping with dapoxetine, as it is partnering with other companies for other experimental drugs. If dapoxetine and these other partnerships pan out, PPD stock stands to jump.
Tom Gardner spends his time hunting for small, undervalued companies. To join in the fun, take a free 30-day trial to Motley Fool Hidden Gems .
Fool contributor Brian Gorman is a freelance writer living in Chicago, Ill. He does not own shares of any companies mentioned here.