Sex drug and rocky road ahead for research firm.

• Author: Williams, C.C.
• Position: Pharmaceutical Product Development Inc. - Brief Article

Pharmaceutical Product Development Inc.'s financial vital signs are good. Revenues and profits are rising. It's winning new business at a brisk clip, and its backlog of orders is growing. Yet investors have shunned its stock like the plague.

PPD (PPDI-NASDAQ) had already fallen 52% this year when news of President Tom D'Alonzo's retirement dropped the price to $14.56 in September. And it could be a while before PPD again approaches its 52-week high of $37.88.

Part of the problem is that Wall Street often judges you by the company you keep, and it doesn't like PPD's crowd - contract-research organizations. Many were trading well below their 52-week high in September, including industry leader Quintiles Transnational Corp. of Durham. Wilmington-based PPD is the nation's fourth-largest CRO, with $236 million in revenue, 3,300 employees and offices in 18 countries. CROs shepherd drugs through the federal approval process and often help sell them afterward.

The sector has suffered from poor quarterly results and an aborted merger between the second- and third-largest CROs. And growth among the top five CROs is expected to drop from 34.6% in 1998 to 19.7% in 1999, according to First Call Corp. and Market Guide Inc.

But PPD isn't just a prisoner of poor-performing peers. Its research division, PPD Discovery Services Group, lost $965,000 in the second quarter, forcing analysts to curtail earnings estimates 10 to 20 cents per share. The stock was also hit with profit taking in March after reaching its 52-week peak - aided by PPD's purchase of a Chapel Hill-based health information firm, ATP Inc., and the sale of its sluggish environmental consulting business.

Still, analysts say PPD deserves more respect. It has reported six straight quarters of earnings better than the previous year's and set a second-quarter earnings record in 1999 of 27 cents a share, up from 15 a year ago. Revenue rose 33% to $76.8 million, boosted by late-stage drug-development testing. PPD's backlog of orders was up 53% to $356 million. Edward Keaney of San Francisco-based Volpe Brown Whelan & Co. predicts revenue of $318 million for 1999. Earnings per share should grow from 70 cents in 1998 to $1.13.

One reason is the willingness of U.S. drug companies to farm out research and development. CROs got 23% of R&D budgets in 1998, up from 18% in 1995, according to a report by Richmond, Va.-based Scott & Stringfellow Inc. Total R&D spending is expected to rise 14% to $24 billion in...