A nearly 50% sequential increase in new business awards and a more moderate cancellation rate brought some succour to Kendle in another tough quarter, as the US-based contract research organisation (CRO) saw its operating income plunge by 90.5% against the second quarter of 2009, on a 23.2% drop in net service revenues.

Operating income for the three months ended 30 June 2010 was US$664,000 compared with US$7.0 million in the year-ago quarter, bringing the operating margin down from around 6.5% to 1.0%.

Kendle said lower revenues, implementation expenses related to the roll-out of the company’s global enterprise resource planning (ERP) system and continued investment in its global business development and sales organisation were mainly to blame for the decline.

The CRO also incurred restructuring charges of US$1.15 billion in the second quarter, versus charges of US$6.01 billion in Q2 2009. The latest charges related to the consolidation of certain of Kendle’s UK offices and to unspecified “limited additional workforce action to better balance staffing levels with customer demand and sales”.

On a non-GAAP (Generally Accepted Accounting Principles) basis with the restructuring charges taken out in both quarters, operating income would have been down by 86.0% at US$1.82 billion.

Kendle registered net income of US$1.86 million for the latest quarter, 41.6% below the same period last year, and diluted earnings per share of US$0.12 versus US$0.21 in Q2 2009.

Net service revenues of US$82.4 million, which excluded reimbursable out-of-pocket expenditure, were split geographically as follows: 45% from North America compared with 48% in Q2 2009; 40% (38%) from Europe; 11% (10%) from Latin America; and 4% (4%) from the Asia Pacific region.

New business

New business awards for the second quarter came to US$231.5 million, a 48% improvement over the first quarter of 2010. Contract cancellations and related adjustments during Q2 moderated to US$30.9 million or 4.0% of Kendle’s backlog as of 31 March 2010, giving a net book-to-bill ratio of 1.2. New business authorisations as of 30 June 2010 were US$778.0 million.

“In the second quarter we saw a return to positive net book to bill, moderating cancellations and the fourth consecutive quarter of pipeline opportunity growth,” commented chairman and chief executive officer Candace Kendle.

“We continue to invest in our global sales organisation and ERP system and to bring in new leadership talent to strengthen our ability to deliver on the needs of our customers and position Kendle for long-term growth.”

Morningstar analyst Lauren Migliore was not convinced. “Most of its larger peers have significantly downsized their operations to better match diminished demand, and Kendle’s investment in its business development infrastructure has only hastened earnings deterioration over the past few quarters,” she noted.

While there are “signs that the firm’s efforts may be paying off”, Migliore added, “we think it will be several quarters before the firm sees stabilisation in its top line. We are maintaining our very high uncertainty rating for the firm”.