The gloom deepened around clinical technology specialist ClinPhone last week as the UK company predicted its revenue for the year ending 28 February 2008 would be around £10 million (€14.7 million) below initial management expectations.
Gross profit margins would be approximately 5% lower than forecast, added ClinPhone, which at the end of July warned that its annual profits were likely to be “significantly below market expectations”. The company’s shares tumbled around 37% on that announcement and lost about another 8% on last week’s update.
ClinPhone has blamed operational difficulties, including telephone outages, for putting a hole in its forward order book for June and July. These two months saw an “exceptionally high” level of cancellations, amounting to 7.7% of an opening order book worth £52.4 million for the quarter. The issues that compromised the company’s Randomisation and Trial Supply Management services to some customers have now been resolved and management expects order cancellations to return to historic levels, ClinPhone noted.
As of 31 July 2007, the company’s total order book (including business authorisations) had grown to £50.4 million compared with £49.2 million at 31 July 2006, it added. This amounted to growth of 8.9% year on year. As of the end of July, ClinPhone had 536 live trials running, compared with 441 at the same time last year and 527 at the end of the last quarter (31 May 2007).
But operational difficulties were not the only factor eating into ClinPhone’s financial projections. The company also admitted it had misjudged the speed of the transition from a licence- to a service-based model in the electronic data capture (EDC) market, where ClinPhone boosted its presence last October by acquiring the US Datalabs for up to US$69 million.
In its trading update, the company noted there was further evidence in June and July that customers were “currently choosing to buy ClinPhone EDC products as a software service rather than licence the products”. Revenue for these services would be recognised over the duration of the service provision, it pointed out.
The revenue expectations for the EDC business this financial year have been “significantly” reduced, while further investment is being made in service provision to ensure there is capacity to meet the changing market dynamics.
Management now says it is unlikely the EDC segment will be earnings-enhancing in the first year after the Datalabs acquisition. It continues to believe, nonetheless, that “the strategic imperative and growth opportunity that this market represents when this technology is combined with other ClinPhone technologies is a significant and important one to the future of ClinPhone”.
The other dampener has been the weak US dollar. ClinPhone has revised its internal forecasts to take into account variations in the dollar-sterling exchange rate, cutting earnings before interest and tax by roughly £978,000 if an estimated average rate of US$2.02 to the £1 is applied for the full year.
ClinPhone is addressing these setbacks by restructuring parts of its business, continuing to retrain its sales teams and putting in place “the necessary measures” to improve the efficiency of operations and quality systems.
“We very much regret the damage done to shareholder value by the various difficulties faced by the Company over the past three months, some of which have been caused by issues outside our control but others [of which] have arisen as a result of our own internal issues,” commented chief executive Steve Kent.
Despite the recent challenges, he added, “we continue to believe that the market for technology in clinical trials is a highly attractive opportunity and we remain confident in ClinPhone’s potential to deliver future profitable growth for shareholders”.