US-based contract research organisation (CRO) PPD has launched a review of its strategic planning and capital structure as it moved to quell speculation that the company was up for sale.

The board of directors has asked PPD’s management to review its strategic plan and capital structure to see whether any action can be taken to unlock value for shareholders.

“We are not engaged in any discussions around a combination with other clinical research providers,” stressed executive chairman Fred Eshelman. “We remain laser-focused on executing our business and serving our customers with the quality and service they expect and deserve.”

Sale rumours

PPD’s shares jumped more than 15% after The Wall Street Journal reported that the company, capitalised at around US$3.2 billion, was exploring a potential sale to private-equity or other clinical research interests. Reuters subsequently quoted analyst estimates that the CRO could fetch around US$4 billion.

The Wall Street Journal also cited “people familiar with the matter” as saying that smaller CRO PRA International was already on the block, with its owner – private equity firm Genstar Capital, which reeled PRA back from a short spell as a public company in July 2007 – dangling a price tag of more than US$1 billion. PRA has not commented on the sale rumours.

Eshelman, who has been filling in at the helm since David Grange, PPD’s chief executive officer from mid-2009, retired on 18 May, insisted the company remained focused on executing its long-term business strategy.

“We are absolutely dedicated to performing for our customers and committed to executing the important research programmes that they have entrusted to us,” he added.

Consolidation trend

Despite PPD’s denials, some analysts and other commentators have kept the sale rumour in play.

It comes against a background of CRO consolidation in which competition for a smaller research and development pie, as pharmaceutical and biotechnology companies hone down their R&D efforts to achieve cost efficiencies, is sharpened by factors such as globalisation and strategic outsourcing.

INC Research, which was acquired by private equity firm Avista Capital Partners and Ontario Teachers’ Pension Plan last August, has just completed its takeover of Kendle, while InVentiv Health closed on PharmaNet Development Group at around the same time.

The latter deal had a strong private-equity component. PharmaNet ended a rough financial patch in February 2009 by agreeing to a merger with affiliates of private equity firm JLL Partners, valuing PharmaNet’s common stock at around US$100 million. InVentiv Health was snapped up by private equity firm Thomas H Lee Partners for around US$1.1 billion in May 2010.

Other CROs that have staked their future on private-equity investment in recent years include Omnicare Clinical Research, which in April announced it had been acquired for an undisclosed sum by private equity firm Nautic Partners; Medpace, which in May announced plans for an “equity recapitalisation” with affiliates of CCMP Capital Advisors; and, in the UK, Phlexglobal, ClinTec and Premier Research Group.

PPD is bigger

These deals have tended, though, to involve smaller or medium-sized CROs that might not have the critical mass and depth of resources to forge strategic relationships with Big Pharma players. PPD ranks among larger CROs such as Quintiles and Covance.

Moreover, it is in sound financial health. Like many of its competitors, PPD took some financial knocks in 2009 and 2010, but more recently it delivered operating income up by 66.2% year on year to US$62.9 million in the fourth quarter of 2010 and by 89.5% to US$52.4 million in the first quarter of 2011. Second-quarter results are due next week.

Morningstar analyst Lauren Migliore thinks a private-equity buyout would be the most likely scenario for PPD, should the speculation turn out to have some credence.

“Although we think the contract research organisation industry is on the road to recovery, firms are still plagued by overcapacity and slow demand, which we believe diminishes the chances of a large-scale combination among the major providers,” she commented.

“As the only CRO to pay a dividend and with no debt on its balance sheet, PPD is on strong financial footing. We think the firm’s clean balance sheet could allow buyers some flexibility with regard to financing options for the firm.”