PPDI Pharmaceutical Prod Dev (MM)

Pharmaceutical drug research company Pharmaceutical Product Development, Inc. (PPDI) recently announced that it has entered into an agreement to be acquired by privately held The Carlyle Group and Hellman & Friedman for $3.9 billion in cash.

PPD shareholders have been offered a cash consideration of $33.25 per share, a premium of 29.6% over the stock’s closing price on September 30. The transaction has won unanimous approval of PPD’s board while shareholder approval is awaited. The transaction is expected to close in the fourth quarter of 2011, following which PPD will become a private company and will no longer trade on NASDAQ.

Four banks have committed to finance the deal. These include Credit Suisse, JP Morgan (JPM), Goldman Sachs (GS) and UBS (UBS). PPD has 30 days to solicit superior proposals from other contending bidders. Because of the buyout, PPD will not hold a conference call to discuss the third quarter results.

Our Recommendation

We currently have a Hold recommendation on PPD. 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.

PPD is a leading contract research organization (CRO) providing drug discovery and development services to pharmaceutical and biotechnology companies. Companies like PPD 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 CROs is gradually improving. The improving request for proposals (RFP) flows and key strategic partnerships secured by PPD with bio-pharma customers are a testament to such a revival, which would in turn result in bottom-line growth. However, we remain concerned about the high cancellation rates.

 
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