Johanna Bennett of Barron’s Recommends Pharmaceutical Product Development (PPDI):

a. AS BIG PHARMA INCREASINGLY OUTSOURCES its drug development, contract-research organizations such as PPDI have been on the receiving end of those projects.

b. The $19 billion contract-research organization (CRO, CROs are literally middle men who find doctors, recruit patients and compile data ) industry could double in size by 2013 as a result, and PPD (as the company calls itself) stands as one of the biggest and best-positioned players in the group.

c. The stock is cheap compared to its peers, and with earnings expected to grow 15% or better annually for the next three to five years, it’s compelling

d. Today, nearly 27% of all the preclinical and clinical-trial drug testing is outsourced to CROs. By 2013, it could reach 37%, creating a $38 billion market.

e. PPD, however, hit a pothole last month. New contract awards grew less than expected in the second quarter, overshadowing otherwise strong financial results. Even so, profits and revenue grew more than expected in the quarter. And operating margins rose from a year earlier and the previous quarter.

f. PPD’s backlog is approaching $3 billion, which will take the company three years to work through

g. PPD also may have an ace in the hole for 2009. Unlike many rivals, PPD forms partnerships with some drug makers, and receives milestone payments and royalties if drugs get approved by regulators.Today, it has deals involving four drugs.

h. As with everything connected to the drug industry, there are risks. Another quarter of weak bookings would hurt the stock.

CONCLUSION:

Still, the CRO industry remains a smart way to profit from the challenges facing drug makers. And despite recent glitches, PPD looks like it can pass the market’s test.

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