As you know, companies with a lot of brand recognition — like Uber, Pinterest, Levi Strauss, and Beyond Meat — tend to steal the IPO headlines because we as consumers frequently use their services or buy their goods.
However, often the little-known companies are the ones that turn out to be the real sizzlers when they IPO.
One under the radar and soon-to-IPO contract research organization, which provides services to companies within the biotechnology and pharmaceutical industry, could be one of them.
Much like Schrödinger, the pharmaceutical software company I covered yesterday, this company helps provide life-changing therapies to those in need.
The company is Pharmaceutical Product Development (PPD for short) and it plans to raise $1.5 billion in proceeds to achieve an overall valuation of over $9 billion.
And the company isn’t gigantic for no reason — it used to be public.
From 1996 to 2011, PPD traded on the NYSE. Then in 2011, The Carlyle Group and Hellman & Friedman acquired it and took it private.
To date, the company has served all of the world’s top 50 pharmaceutical companies. That’s thanks to over 23,000 employees that currently work in 100 offices in 46 countries.
Today, I want to take a close look at the company’s financials and what we can expect from its big launch this Thursday, February 6.
One important factor to keep in mind when looking at the potential of any IPO is the size of the market it plans to serve.
PPD offers a range of services, including phase 1-3 clinical services, patient access services, and lab services — all of which could meet a market size that exceeds $50 billion, according to PPD management.
While the opportunity seems large, one issue that concerns me is PPD’s steadily slowing topline revenue and gross profit growth rates.
Much like other private equity controlled companies, PPD has a whole lot of debt — $8.2 billion according to the third-quarter report last year.
The company plans to use the $1.5 billion it gathers from the IPO to pay down its debt, rather than reinvest in the company.
Although not a dealbreaker, this use of money is a bit of a red flag for me.
Not only that, one competitor called Syneos is making more money and is far less in the hole.
The bottom line for me could be that the company is private-equity controlled and especially high in debt.
But let me share a few more for thoughts about how we could potentially trade the company following its public debut.
What To Watch For With PPD’s IPO
PPD is expected to be a massive IPO, as the company plans to sell 60M shares with a pricing range between $24 and $27. Barclays, JP Morgan and Morgan Stanley are the underwriters for the IPO… and what’s interesting is Barclays has led 8 IPOs over the last 12 months, and those achieved a 3-month return of 57% after the first trade date, on average.
What’s most interesting to me is the fact that there have been some hot healthcare IPOs. For example, 1Life Healthcare (ONEM) was the most recent health care IPO and it closed up 47% on its first trade date.
With PPD, I’m going to keep it on my watchlist in the coming week. However, I’m not just going to buy shares blindly. For now, I’ll wait until the day before the IPO to see the demand.
Well, if traders want in on PPD and subscribe to shares… and they run out, that could be a signal PPD could pop right out of the gate and trend higher all day. On the other hand, if the underwriters fail to drum up demand for the stock, they could price the IPO below the pricing range, and that would be a big red flag to me.
With the upcoming IPOs during the first week of February, I’ll provide my clients with a red, green or red light pattern on the ones on my watchlist. And I will follow the same approach with PPD.
It’s really that simple. Green means buy, red means don’t trade (or potentially short, which would be tough), and yellow means slow.
Instead of “spraying and praying” with IPOs, I like to be highly selective. Of course, there are a number of IPOs I’m watching this week, but if you want to get in on the action, you may want to check out my exclusive training session here.
It could help you decipher which IPOs to get into, and which ones to just pass on and look at later.