The contract research organization (CRO) PPD unleashed enough news for a year this week. The company announced a long list of new directions, ominous numbers and strategic shifts, including:

• The company's quarterly earnings (not great, but not terrible);

• The planned acquisition of the Chinese CRO Excel PharmaStudies, which will make PPD a major player in China;

• The intent to spin off its compound-partnering business into a separate publicly traded company in early 2010;

• The investment of $100 million ($30 million now, the rest later) in Celtic Therapeutics, an investment fund that focuses on therapeutic product candidates.

• A new contract with the FDA to evaluate the agency's Center for Drug Evaluation and Research (CDER) post-market spontaneous adverse event surveillance system.

Wow. PPD's executive chairman Fred Eshelman told Wall Street it's all part of a plan with “so many details and moving parts” to establish the company as a dominant force in a sagging market. “The overall market and our individual results have not recovered as quickly as we had hoped,” said Eshelman.

Indeed. For the quarter ending Sept. 30, PPD reported net revenue fell by 13 percent to $341 million, compared to $394 million for the same period last year. Income from operations fell 32 percent for the quarter, to $47 million, compared to $70 million for the same quarter in 2008. Not horrendous, under difficult economic circumstances, but not stellar.

New Cancellations

PPD CEO David Grange added that “revenue was down due primarily to several cancellations in Phase I and project delays and also the down-scoping of projects in our North American Phase II to IV business.” Contract cancellations and adjustments totaled $160.3 million, an improvement from the second quarter. The two areas hit the hardest by cancellations continued to be oncology and infectious diseases, said Grange. New business authorizations for the third quarter were $425.5 million, which is also lower than expected, he said.

One upside was the company's backlog of $3.2 billion. According to Daniel Darazsdi, PPD's chief financial officer, 69 percent of that work is from pharma companies; 26 percent is from biotech; and 5 percent is government-related.

Multiple Marriages

Another bright spot for the quarter was the company's new strategic outsourcing relationships. Grange said five sponsors chose PPD as their long-term strategic provider during the third quarter, which means lots of guaranteed business. Three of the newly forged partnerships are for Phase II to IV services; one is for biostatistics; and one is for Phase I services. More such relationships are in the works, though Grange wouldn't say how many.

At the same time, the company conceded it has continued to lose business to competitors. “We have been losing market share for awhile,” said Eshelman. “I don't want to continue to blame the market because that's not all of it. We just plain out got our butt kicked there for a while, and that's going to stop.”

Development Exit

The main remedy? First, the spin-off of the 11-year-old compound-partnering arm, which had the company sharing the risks and rewards of developing drugs. “This has been a controversial part of our strategy for some time,” said Eshelman. “People have argued for a pure play [CRO] ... and worried about dilution, use of cash and so forth. We believe that now is the time to separate the business.”

As a CRO, PPD will continue to operate under its current name, and will no longer be connected with the earnings dilution from the unnamed compound-partnering business. The compound-partnering arm, said Eshelman, will have the opportunity to access external capital if needed without any of the constraints associated with being connected to a CRO. (Here's a story we wrote on the program in 2008.) PPD will capitalize the new company with $100 million in cash and the compound-partnering team with go with the new entity. Eshelman will be its initial chairman and will remain executive chairman of PPD, he said.

At the same time it's exiting that business, PPD is putting money into Celtic Therapeutics. The Virgin Islands-based investment fund, Eshelman said, is “intended to set the stage for a strategic alliance.” The investment from PPD should be viewed as coming from the CRO side of the business, not the compound-partnering division—though the compound-partnering arm may benefit from two molecules Celtic has, he believes.

Going East

As for Excel, Grange says it is the late-stage clinical development market leader in China, and one of the country's largest CROs. “The Excel acquisition will put us in the lead in terms of size for clinical development,” in China, Eshelman said. After Excel becomes part of PPD, PPD will have 750 employees (300 from Excel) across 12 countries in Asia Pacific. Eshelman also said PPD is in late-stage negotiations on other deals in China.

One major upside to pulling Excel into PPD's camp is that the CRO does lots of work with vaccines, which PPD hopes to fold into their overall strategy of being a key player in that development area, said Grange, adding that it's one of the fastest growing segments of the market.

FDA Deal

PPD's new contract with the FDA, which is to last two years, has PPD conducting an evaluation of the value of the spontaneous adverse event reports to support safety-related regulatory actions and reporting its findings to the FDA and the public. It's part of FDA's year-old Initiative for Maximizing the Benefit of Passive Adverse Event Collection throughout a Product's Life Cycle (abbreviated as "Impact"). It will pay PPD $2.7 million for the first year.

Though PPD laid off 270 people earlier in the year, chief operating officer Bill Sharbaugh said that its 10,000-employee work force is expected to remain stable now as the company launches into its new pursuits. Eshelman, for one, is bullish.“This organization is in overdrive, and the slide in market share will be reversed,” he said.

Here's a story we wrote about another divestiture-acquisition combo news release from PPD earlier this year.

—by Suz Redfearn