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Late-stage work will boost PPD's revs, but costs will hit margins says S&P

By Gareth Macdonald , 15-Oct-2012
Last updated on 15-Oct-2012 at 13:37 GMT

Returning demand for late-phase trial services will help PPD grow revenue in 2013 but rising labour costs will impact earnings says S&P.

Standard & Poor's (S&P) Ratings Services issued its forecast last week in one of the first assessments of the North Carolina, US contract research organisation since it became a private company after it was acquired by The Carlyle Group and Hellman & Friedman for $3.9bn last year.

S&P said: "Based on year-to-date trends and strong first-half net authorizations, we believe PPD will generate low-double-digit revenue growththis year, which incorporates our expectation of mid- to high-single-digit growth for the late-stage segment of the CRO industry and modest market share expansion by the largest CROs, including PPD."

Aside from the 'strong' business authorisations, the rating agency pointed to PPD's scale and number two position in the late-stage services sector as its most important attributes. However, it also suggested that profit margins would be impacted by rising costs.

"While we believe the company will realize some scale efficiencies as the business grows, we expect that these savings will be mostly offset by higher labor costs, resulting in flat EBITDA margins and funds from operations to total debt in the mid single digits over the next two years."

Downgrade

S&P also looked at PPD's decision to issue $500m in notes to fund a sponsor dividend and cited the move as the key driver in its decision to lower its rating of the CRO from B+ to B.

"The rating downgrade follows the company's announcement that it will issue additional debt to fund a sponsor dividend less than one year following the 2011 leveraged buyout."

Moody's issued a similar opinion on the move and also downgraded PPD from B1 to B2.

The ratings agency said: "PPD's B2 rating reflects the company's very high financial leverage and aggressive financial policies, with a significant shareholder dividend paid less than one year after the leveraged buyout.

Moody's went on to say that - in addition to the notes - the decision to downgrade PPD reflected the high level of competition in the contract research sector, particularly the spectre of project cancellations.

"We also expect pricing pressure in the industry to increase as pharmaceutical companies and CROs increasingly enter into larger partnership deals, which often trade volume for price."

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