On December 5, 2011, The Carlyle Group and Hellman & Friedman, two private equity firms, completed a transaction to take publicly-held CRO PPD, Inc. private for $3.9 bilion. Now that PPD is private, what’s next? From all accounts, PPD is a well run company. About the only thing one could criticize is management’s inability to paint a sexy enough picture to drive the stock price.

So what’s Carlyle going to do differently? Time will tell, but the first step was to release PPD’s recently appointed chief executive officer Ray Hill (with a golden parachute valued at a reported $3 million). Mr. Hill was at the helm for less than three months. This move is not a complete surprise; PE firms typically bring their own CEO when they make an acquisition or new investment. PPD’s next CEO will certainly have plenty of work ahead of him or her.

Whoever is selected, the first priority will be to set strategy for the new company. In virtually every large private equity deal, the basis for any strategy is to try and move the EBITDA metric quickly and, in less than five years, have an exit. In this case the exit will most likely be for the company to go public again. I don’t believe a sale to a strategic buyer or another financial buyer is in the cards for PPD at exit, due to the likely size of such a transaction.

So if Carlyle and H&F are looking ahead for an exit (and I assure you they have already begun to consider their options, as would any PE firm), what’s next in terms of strategy? I believe any strategy will consist of both organic and acquisitive elements and will center on driving both revenue and EBITDA growth towards the exit.

Organically, the company needs to improve new business wins. PPD isn’t underperforming in terms of new authorizations, but it can always do better. To do this, PPD must first focus more in the area of strategic deals with pharma, like those announced by Covance and Eli Lilly in the preclinical arena and those announced by ICON, PAREXEL and Pfizer in the areas of mid- to late-stage trial implementation services.

Second, the company needs to really focus on stealing share from the 800-pound gorilla, also known as Quintiles. Let’s face it: every dog is fighting over the same bone. Big pharma doesn’t have the pipeline depth right now to drive a significant increase in outsourcing so stealing share is key. In my opinion, the smarter dog will always eat before the bigger dog.

Third, the company should look at growing its consulting and regulatory practice in the area of biosimilars and 505.b.2’s.  

Last, the company should use some of its free cash flow to continue to invest in new technologies in the IT area, specifically with innovations in patient recruitment, data management and investigator reporting. One day we may find CROs saying, “There’s an app for that!”

As far as an external strategy, acquisitions certainly come to mind, especially with private equity backing. The natural thinking is to look for geographic opportunities. This has its merits as a strategy, but I think it mostly misses the mark. The mature markets are what got large CROs to where they are today, so any strategy needs to focus on these markets. To this end, any acquisition by PPD should look at going earlier in the development continuum, for example looking at acquisitions of animal and preclinical research companies in either Europe or North America. Let’s face it, when one thinks about preclinical and animal models, one thinks of Charles River or Covance, not PPD. Adding preclinical assets will:

1. ensure that PPD gets an early mark on new drugs and the companies conducting preclinical studies, and
2. allow PPD to use their late-phase expertise to guide how preclinical studies are conducted, leading to a more efficient drug approval process overall. This will sell to pharma in a big way.

As part of an overall strategy, I also believe PPD should sell its GMP and central lab business to raise funds to acquire the aforementioned preclinical assets. It makes no sense paying down debt with the proceeds of an asset sale. Debt can be repaid from free cash flow generated from the business and let’s face it, PPD can generate a lot of free cash flow. Further, PPD’s lab business is its only capital-intensive business and it is becoming increasingly commoditized. I believe this business will eventually become a drag on the CRO business. There’s no compelling strategic reason to keep the lab business and there are many companies that, even in today’s market, would love to have it (and pay a premium for it).

For all of you believers in the “1+1 is more than 2” theory of investing, I don’t believe there will be another large acquisition plugged into PPD. Carlyle had enough trouble coming up with the syndication to do this large deal, so I don’t expect them to throw more money onto the pile anytime soon.

In closing, the acquisition of PPD by Carlyle Group and Hellman & Friedman puts PPD in a unique position to look at the world with a fresh set of eyes and expectations. The shackles of being a public company have been cast off. If Carlyle, the new CEO of PPD, and the CRO’s management team can align on strategy quickly as well as align on expectations, the company should be poised for greater success in the future.

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L. Lee Karras is founder and president of Pharmalogx LLC (www.pharmalogx.com) an advisory services company focused in the private equity, CMO, pharma and biotech areas. Mr. Karras has more than 20 years of experience in the pharma services industry, most recently serving as chief executive officer and president of AAIPharma Services. Before joining AAIPharma, he was responsible for the Baxter Biopharma Solutions business unit. He can be reached at lkarras@pharmalogx.com.