The drug outsourcing business has been good to PPD
The Wilmington, N.C.-based firm announced last week that first-quarter net revenue surged 25% to $244.1 million. With regard to the bottom line, earnings shot up 44% to $35.6 million. The lion's share of PPD's business rests in the company's traditional phase 2-4 development area, which accounted for about 76% of the top line.
PPD has plenty of work ahead of it. Backlog at the end of quarter amounted to $1.35 billion, a 16.2% increase from the same period in 2004, and a 5% increase from the fourth quarter of last year. Interestingly, however, PPD may be relying more on biotech dollars going forward. While biotech clients contributed 28% of revenue in the first quarter, such companies comprise 34% of PPD's backlog. This is significant because biotech firms may be less reliable clients because many of them have not achieved profitability and thus must rely on funds from investors to stay afloat.
To counteract this risk, PPD has embarked on a strategy of compound partnering, under which it obtains rights to certain drugs that it helps develop. Its success story to date has been the compound dapoxetine, which the company licensed to Johnson & Johnson's
But PPD is not resting on its laurels. Research and development expenses, primarily related to the compound partnering, shot up 577% to $8.8 million in the first quarter. PPD is now partnering with Syrrx, which was recently purchased by Takeda Pharmaceuticals, in a program for type II diabetes that includes a drug that has advanced to phase 2 trials. Before investors get too excited, though, PPD also recently suffered a setback, as it terminated trials on implitapide, an atherosclerosis drug that it was testing under a deal with Bayer
Given the risks involved with its client base, PPD has to be commended for diversifying its business. However, its method of diversification carries its own risks. While dapoxetine looks to be a winner for the firm, investors should keep a close eye on its track record with other partnering arrangements.
Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.