Project cancellations continue to plague US-based contract research organisation (CRO) PharmaNet Development Group following encouraging trends in new business wins during the second quarter of the year.

The company has significantly lowered its financial guidance for 2008, citing mainly the cancellation or postponement of clinical development projects in its late-stage segment and a lower than expected sample volume of early-stage business.

According to Reuters, PharmaNet’s share price dived by 61% to a five-year low after the company cut its 2008 outlook for the second time. Analysts believe the delays and cancellations, well above the average CRO industry rate, are more than just bad luck and suggest lax control of the business and customer relationships.

PharmaNet’s previous guidance for the full year, confirmed at the second-quarter stage in late July, was for direct revenues of US$390-US$399 million. That range has now been adjusted downwards to US$358-US$366 million.

The forecast for PharmaNet’s operating margin in 2008 has been lowered from 5.8%-6.2% to between 0% and 1.0%. Diluted earnings per share are expected to show a loss of US$0.25-US$0.58 compared with previous guidance for income of US$0.53-US$0.63.

PharmaNet said the main reasons for the adjustment were:

- A reduction of around US$10 million in expected late-stage direct revenues during the second half of 2008, reflecting primarily the recent cancellation of ongoing projects sponsored by biotechnology and small to mid-size pharmaceutical companies. These cancellations will shave about US$58.3 million off the company’s backlog. As of 31 August, the resulting late-stage cancellation rate for the year to date (as a proportion of year-to-date written new business authorisations) was 32.7%.

- A fall of around US$9 million in expected late-stage direct revenues during the second half, related to “the postponement of certain aspects of a project sponsored by a large pharmaceutical company”.

- Adjustments to PharmaNet’s forecasting model to reflect the potential for additional cancellations and postponements in the late-stage segment and the impact of foreign currency translation.
- A reduction of approximately US$6 million in expected early-stage direct revenue during the second half, mainly related to a postponed laboratory project worth US$1 million, lower sample volumes and the impact of foreign exchange.

The late-stage backlog at 31 August 2008 was around US$465 million and the early-stage backlog was roughly US$67 million, compared with a late-stage backlog of US$387.9 million and an early-stage backlog of US$69.5 million as of 31 December 2007.

For the period from 1 July to 31 August 2008, written new business authorisations came to about US$55 million in the late-stage and US$27 million in the early-stage segment. Cancellations of early-stage business were around US$2.6 million in the same period.

First-quarter slump

A spate of project cancellations had already sent PharmaNet back into the red in the first quarter of 2008, slashing margins in the late-stage business that has been crucial to the CRO’s rehabilitation following a stream of negative publicity in 2005 and 2006.

PharmaNet’s share price plunged by as much as 30% after the company reported an overall operating loss of US$7.48 million for the quarter ended 31 March 2008, compared with operating income of US$8.61 million in the first quarter of 2007. Direct revenues for the first quarter were US$86.8 million, just 2.4% more than in the year-before period.

In the second quarter, though, the picture had started to look a lot healthier, with PharmaNet reporting earnings of US$5.50 million from continuing operations compared with a US$3.75 million operating loss one year earlier. Direct revenues jumped by 13.0% to US$96.8 million in the second quarter.

Backlog in the early-stage segment fell to US$77.6 million at 30 June from US$82.0 million at 31 March 2008, as US$46.7 million in new business authorisations registered a cancellation rate of 11.8%. But in the late-stage segment the backlog rose quarter-by quarter from US$400.9 million to US$501.6 million, reflecting US$168.7 million in new business authorisations and a cancellation rate of 8.4%.

Commenting on the revised guidance, PharmaNet’s president and chief executive officer Jeffrey McMullen said: “We were able to recover in the second quarter 2008 from earlier cancellations and we are confident that our determined business development efforts and existing backlog will drive us to profitability in 2009. In the interim, we continue our ongoing efforts to improve operational efficiencies and reduce costs.”