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PPD Explores Sale

By Jason Frye, posted Jul 18, 2011

PPD Inc., one of Wilmington’s largest employers, is exploring the possibility of selling the company.

In a statement from PPD late Monday afternoon it was revealed that the board of directors has asked management to review PPD’s strategic plan and capital structure with a focus on unlocking value for shareholders.

“We are looking at our long-term plan and our capital structure to see if there are any actions which might create value at this time,” PPD Executive Chairman Fred Eshelman said in the news release. “We are not engaged in any discussions around a combination with other clinical research providers.”

PPD’s position as one of the top-tier contract research organization (CRO) firms makes it an attractive target for a merger with another CRO or clinical-research company, or for acquisition by a private equity firm looking to gain market share in the pharmaceutical research industry.

“In the industry, they are seeing a lot of private equity activity,” said Lauren Migliore, equity analyst with Morningstar, Inc. “Combined with several mergers and acquisitions, and there has been a lot of movement there.”

Recently a spate of private equity and merger and acquisition deals including Raleigh-based INC Research’s acquisition of competitor Kendle international in the spring of 2010 only to be bought by Avista Capital, a private equity firm, in late summer.

“More and more often we’re seeing mergers within the industry where two smaller CRO firms join to cover a wider range of testing, services and capacity,” she said.

But with PPD’s size and market position, only a few companies are in the position to merge with the giant, so a private equity buyout seems most likely.

Within the CRO industry, Research Triangle-based Quintiles is the heaviest hitter. The company went private in 2003, so their earnings aren’t publicly available. PPD’s nearest competitors, Covance, Inc., and Charles River Laboratories International’s earnings reports for fiscal year 2010 were available.

According to filings, Covance’s total revenue for 2010 was $2.03 billion, its net income was $68 million, it had $368 million in cash available and had a market cap of $3.6 billion. Charles River’s were considerably lower, with total revenue for 2010 of $1.1 billion, a negative net income of $342 million, $178 million in available cash and a market cap of $2.11 billion.

PPD’s 2010 revenue was $1.47 billion with a net income of $124 million. Available cash reported was $638.3 million and its market cap was $3.59 billion. In PPD’s first quarter of 2011, it outperformed the first quarter of 2010 by 117 percent, indicating a strong growth in the market, according to Morningstar, Inc., which predicts that the CRO market will grow by 50 percent over the next five years.

Several factors make PPD attractive to potential buyers. Among those factors are the company’s cash on hand, industry-leading profit margin (9.59 percent as compared to Covance’s 3 percent or Charles River’s negative 28.64 percent), global reach, its  reputation for quality and its specialization in mid- to late-stage pharmaceutical testing. In addition, PPD is one of the only CROs to pay a dividend to its shareholders and it stands alone in one factor: the company carries no outstanding debt.

Another upside to PPD is its ability to develop and hold onto strategic alliances with big pharmaceutical companies. According to Migliore, PPD and Covance lead the industry with respect to strategic alliances. These alliances are multi-year, multi-billion-dollar partnerships to conduct research, development and clinical trials of a variety of pharmaceuticals.

“We have a very bullish outlook on the CRO industry and on PPD in particular,” she said. “For a long time we’ve felt they were undervalued, but things look to be headed in the right direction and a potential deal could reflect their true value.”

For PPD Eshelman and the company’s board of directors, statements such as these indicate that the potential sale of PPD could be lucrative, especially as stocks move toward what Morningstar estimates are its true value - $35 per share. Near the close of trading today, prices were $30.68 a share, a 10.14 percent increase.

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