PPD (NASDAQ:PPDI) (formerly Pharmaceutical Product Development) reported today that second-quarter income from operations declined 5.7% from the same period last year. Meanwhile, the stock has risen as much as 14% on heavy volume today.
The reaction seems strange, but investors are evidently concentrating on select aspects of the contract research company's results. For starters, revenue in the firm's core business, development services, rose more than 13% to $183 million. Expenses were up, but this was due in part to foreign exchange issues that inflated costs, but not revenues. In addition, backlog jumped 19% year over year to nearly $1.2 billion.
Still, the report was not perfect. The macroeconomic environment for pharmaceutical outsourcing appears to be quite promising. Biotech firms are flush with new cash, and large pharmaceutical companies continue to increase research and development budgets. Even aaiPharma (NASDAQ:AAII), despite recent troubles and damage to its reputation, achieved 21% revenue growth in its development services business in the latest quarter. PPD's sales are also solid, but new business authorizations have actually decelerated in recent quarters. After hitting a record $310 million in the fourth quarter of 2003, authorizations slid to $276 million in the first three months of the year, and to $266 million this quarter.
This could be just a lull, however. One very promising area is the firm's Phase 1 business, which CEO Fred Eshelman indicated is "on fire." PPD is expanding its capacity in the segment at a new facility in Austin, Texas. If PPD plays its cards right, it stands a good chance of driving clients using its Phase I services into its larger Phase 2-4 business as drugs progress up the pipeline.
In addition, investors are no doubt excited about the prospects of revenue from dapoxetine, which the company licensed to Johnson & Johnson (NYSE:JNJ) in exchange for milestone payments and royalties. PPD is also investing in the development of early stage drugs as part of its discovery sciences business.
A key challenge for PPD going forward will be keeping its services business on track even as it becomes more involved in developing its own pharmaceutical candidates. With the continued robust outsourcing environment and its potential to garner new sources of revenue, PPD remains a company to watch.
Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
