A run of acquisitions has cut into Phase Forward’s profit outlook for 2009 as the US-based company reported a 25.6% drop in operating income for the second quarter ended 30 June.

The falling profits came despite an increase of 28.5% in quarterly revenues at Phase Forward, which specialises in data management solutions for clinical trials and drug safety. Total revenues were US$52.5 million for the second quarter, while operating income sank to US$3.1 million.

The latter figure included a number of special items, such as US$3.6 million in stock-based compensation expenses (US$2.0 million in Q2 2008), US$836,000 (US$25,000) for amortisation of intangible assets, US$968,000 for deferred revenues and backlog adjustments related to acquisitions and US$86,000 for restructuring.

On a non-GAAP (Generally Accepted Accounting Principles) basis, second-quarter operating income was 34.2% higher at US$8.6 million. Diluted earnings per share (EPS) for the quarter were down by 37.5% to US$0.05 on a GAAP and up by 8.3% on a non-GAAP basis respectively.

Better InForm

Of the total revenues for the latest quarter, 72.8% or US$38.2 million were InForm licence, application hosting and related revenues, delivering growth of 22.8% against the second quarter of 2008.

During the reporting period, Phase Forward upgraded its core Inform electronic data capture (EDC) solution by launching InForm Global Trial Management (GTM). The new model, Phase Forward said, provides “a completely redesigned interface that sets a new standard for eClinical solutions, and an integrated, unified environment for use in regional and multi-language global trials”.

With the growing adoption of EDC technology and the globalisation of clinical research, noted chairman and chief executive officer Bob Weiler, end-user requirements in the sector “have changed dramatically in recent years. We believe InForm GTM is uniquely positioned to respond to this new user paradigm and support trial management on a global basis”.

The split between service and licensing revenues during the quarter was around 72% to 28%. Service revenues advanced 36.2% to US$37.8 million while licence revenues were 12.5% ahead at US$14.7 million. On a non-GAAP basis, revenues from contract research organisations (CROs) jumped 50% year on year during Q2.

2009 forecast

Also on a non-GAAP basis, Phase Forward is expecting revenues of between US$214.5 million and US$217.5 million this year, up from the estimate of US$207 million to US$212 million given in April, when the company announced its first-quarter results.

The new figure includes a projected contribution of US$2.5 million to US$3.5 million from the acquisitions of CRO Covance’s Interactive Voice & Web Response Services (IVRS/IWRS) business and, just announced this week, of Maaguzi LLC, a US company specialising in web-based electronic patient reported outcomes (ePRO) and solutions for late-phase clinical studies.

Phase Forward’s non-GAAP EPS guidance for the full year is US$0.47 to US$0.50, taking into account expected dilution of US$0.04 to US$0.05 per share from the Covance and Maaguzi deals. In April, Phase Forward was forecasting EPS of US$0.51 to US$0.54.

GAAP EPS for 2009 is now pegged at US$0.17 to US$0.20 (US$0.26 to US$0.29 at the first-quarter stage), including expected dilution of US$0.07 to US$0.08 from the Covance and Maaguzi deals as well as other items such as purchase accounting adjustments and restructuring expenses.

According to Weiler, the second-quarter results were better than expected. He also said the company was “increasingly optimistic” about its long-term market opportunity and leadership position.

“Customers are increasingly looking for a broader, end-to-end, integrated clinical research suite (ICRS) from a single, trusted vendor,” he commented. “We believe that Phase Forward has the broadest and deepest ICRS offering in the marketplace as a result of our market-leading EDC solution, combined with our suite of safety solutions, interactive response technologies and clinical data repository and analysis platforms.”

In addition, Weiler continued, “our acquisition of Maaguzi’s ePRO and late phase solutions rounds out our ICRS offering, while our pending acquisition of Covance’s IVRS/IWRS business will add further momentum to our IRT efforts and result in the two largest CROs in the world recommending Phase Forward as their preferred solutions provider”.