Contract cancellations and adjustments were worse than expected for PPD in the fourth quarter of 2009, dampening the impact of a financial performance that came in ahead of analysts’ forecasts.

The US-based contract research organisation (CRO) lost US$284.9 million from cancellations and adjustments in the three months ended 31 December 2009, including three large project cancellations that together made up around 4% of PPD’s year-end backlog.

This was a higher level than anticipated, noted chief executive officer David Grange. Nonetheless, “we delivered strong operating cash flow during the quarter and we are continuing to establish new strategic outsourcing partnerships”, he added.

“We remain committed to combining our financial and operational strength with our unrelenting focus on creating efficient solutions for our clients to maximise value for our shareholders.”

PPD also managed to deliver net revenues at a marked premium to analysts’ estimates, although they were 1.6% down on the fourth quarter of 2008. Fourth-quarter revenues were US$357.4 million. According to Thomson Reuters, analysts were looking for net revenues of US$314.3 million.

The consensus forecast for earnings per share (EPS) in the quarter was US$0.23, which usually excludes any special items. PPD reported diluted EPS of US$0.16 compared with income of US$0.40 one year earlier.

However, the 2009 figure included impairments of an intangible asset and equity investments totalling US$10 million net of tax, which related to the CRO’s dermatology programme in its compound partnering business and to its investment portfolio respectively.

Operating income for the fourth quarter of 2009 was US$23.9 million, 66.7% lower than in the same period of 2008.

Core development

In PPD’s core Development segment, net revenues dipped 3.2% to US$328.1 million in the fourth quarter, while operating income fell by 31.9% to US$49.4 million.

Discovery Sciences revenue was US$0.5 million, up from US$0.1 million in the final quarter of 2008. The segment recorded an operating loss of US$25.5 million compared with a US$0.9 million operating loss one year earlier.

For the full year, PPD reported net revenues of US$1.42 billion, 8.7% behind the previous year but above the company’s own revised guidance for net revenues of US$1.28 billion to US$1.31 billion. Diluted EPS for 2009 were US$1.34, down from US$1.56 and in this case falling short of PPD’s revised guidance (US$1.38 to US$1.40).

New business authorisations totalled US$465.6 million in the fourth quarter. PPD’s backlog as of 31 December 2009 was US$3.0 billion.

Executive chairman Fred Eshelman said the company had made “significant progress on several strategic fronts in 2009”, as evidenced by acquisitions and investments in emerging markets, expansion in new service areas, and the planned spin-off of its compound partnering business.

“We continue to believe in the fundamentals of the market for CRO services, and we intend to continue to focus on sales execution, operational performance and building strategic partnerships with clients in the year ahead,” he added.

Morningstar analyst Lauren Migliore described the cancellation rate in the fourth quarter – more than 60% of new authorisations – as alarming. “Although management explained that the bulk of cancellations came from three large projects, we would seriously consider lowering our fair value estimate if we see evidence that the firm will continue to hemorrhage business going forward,” she commented.

On the brighter side, Migliore said, “we were encouraged by the fact that the firm landed several new strategic partnerships this quarter. These deals are becoming increasingly common in the CRO industry, and we see them as a pathway for industry leaders with global scale to gain share at the expense of smaller competitors”.