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PPD shares rise on takeover rumors

Monday, July 18, 2011

Shares of CRO Pharmaceutical Product Development (PPD) rose 16% to levels not touched in more than two-and-a-half years on Monday, a day after a Wall Street Journal report said the company was looking to sell itself, reported Reuters.

The company could fetch around $4 billion, or about $35 to $37 a share, industry analysts said, adding a private equity deal is more probable than a strategic transaction.

PPD, which mostly provides late-stage drug research services, has a market capitalization of $3.15 billion, according to Reuters data.

While the entire sector was badly hit during the credit crunch with several research-stage biotechs going belly up or halting certain drug programs, the industry is finally seeing a resurgence in bookings.

However, PPD’s valuation has taken a hit over the past quarter and its shares lost 12% of their value since the company posted a weak quarterly profit in April, hurt by higher cancellations.

“PPD has been trading at a fairly noticeable discount to its peer group—10-15%–despite having the best balance sheet,” Robert W. Baird analyst Eric Coldwell said.

“I don’t put high odds on a possible deal, but it definitely makes a lot of sense for PPD,” he added.

The Wall Street Journal said PPD could see interest from private equity or other CROs. Acquisition by a private equity firm would fit with recent activity, which has seen a number of mid-tier CROs taken over by investors. PPD is significantly larger than other firms recently bought by private equity.

According to Fierce Biotech, analysts expect the big CROs dominating the business to control nearly half the market by 2015, giving private equity players like Genstar—which bought PRA International for $700 million in 2007—an opportunity to capitalize on the buyout trend. According to the Wall Street Journal, PRA could be sold again if a bid of more than $1 billion is received.

Wilmington, N.C.-based PPD has more than 11,000 staffers scattered around the globe in a business that brought in close to $1.5 billion in revenue last year.

According to Outsourcing-Pharma, market share estimates by Jefferies & Co. put PPD as the third largest CRO, behind Covance and Quintiles. The size of PPD limits the number of CROs that could acquire it, and analysts have doubted the likelihood of CRO mega-mergers.

Last year, rival CRO Charles River Laboratories had to shelve its plan to buy Wuxi PharmaTech of China for $1.6 billion after investors and proxy advisory firms opposed the deal.

In recent months, INC Research has bought Kendle, inVentiv has acquired PharmaNet and Medpace has been taken over by private equity.

This week the remaining public CROs begin reporting their financial results. PPD files its forms next week for what is expected to be the last quarter before revenues ramp up. Strategic deal wins will play a role in the ramp up, but PPD has also suffered some losses in this area.

“PPD’s prior inflexibility does continue to haunt it in strategic provider competition currently,” said David Windley, equity analyst at Jefferies & Co. “In addition to incumbency losses at Bristol-Myers and Takeda, PPD was also a rare full-service provider doing work for Pfizer.”

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