Pharmaceutical Product Development, Inc. (PPDI) reported second quarter 2011 earnings of 41 cents per share, above the year-ago earnings of 18 cents per share as well as the Zacks Consensus Estimate of 38 cents. Earnings growth was driven by higher revenue and reduced research & development (R&D) expenses.
Quarterly revenue of $407.7 million was up 10.2% over the prior-year period and also ahead of the Zacks Consensus Estimate of $375 million. Revenue growth was driven by strong performance at the Clinical Development segment and a recovery at the Laboratory Services segment from the sequentially preceding quarter.
The Quarter in Detail
The company operates through two segments – Clinical Development Services and Laboratory Services
Clinical Development Services: The segment includes global phase II-IV clinical trial management services. In the second quarter, the segment revenue was $291.5 million, up 14.1% over the prior-year period. The increase was driven by solid growth in all geographic regions, especially Latin America and Asia Pacific. The segment saw improving request for proposal (RFP) flows and order trends from biotech customers, a sure signal of a recovery in demand.
Laboratory Services: The segment includes phase I clinic, cGMP, bioanalytical, central laboratory, vaccines and biologics, and BioDuro/discovery services. In the second quarter, the segment revenue was $84.7 million, up 8.1% over the prior-year period. Laboratory Services revenues were also up 10.7% sequentially, bouncing back from the weak first quarter performance. Revenue growth at the segment was driven by strong performances of the bio analytical lab, phase I Clinic, and global central lab businesses which offset lighter results in the BioDuro and vaccines business. The segment’s revenue is expected to remain strong sequentially throughout 2011, which will lead to subsequent segment operating margin expansion in the second half.
In the reported quarter, the company posted a book-to-bill ratio of 1.29, below 1.31 reported in the first quarter. Gross bookings were a solid $752.6 million versus $640 million in the first quarter due to strong client demand for PPD’s services. Cancellations in the reported quarter were higher than normal at $268.6 million (versus $174.1 million in the first quarter) mainly owing to a $43.2 million global clinical trial contract termination.
Total backlog came in at $3.7 billion, up 14.2% over the prior-year quarter, with an average duration of 33 months.
Gross margin was approximately 50% in the second quarter, driven by strong gross margins in the Clinical Development segment. R&D expense declined 79% in the quarter following the June 2010 spin-off of Furiex Pharmaceuticals which concentrates more on pipeline development.
Our Recommendation
We currently have a Hold recommendation on Pharmaceutical Product Development. The company retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are impressed by the company’s strong bookings, stable backlog duration and sound expense control.
Pharmaceutical Product Development is a leading contract research organization (CRO) providing drug discovery and development services to pharmaceutical and biotechnology companies. Companies like Pharmaceutical Product Development and Charles River Laboratories (CRL) suffered in 2008-2009 due to a decline in demand for their services in time of a depressed economy. The environment for CRO’s is gradually improving. The improving RFP flows and key strategic partnerships secured by PPD with bio-pharma customers are a testament to such a revival, which would in its turn result in bottom-line growth. However, we remain concerned about the high cancellation rates.
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