After warning recently that its revenues for the first quarter of 2009 would be “well below” the analyst consensus of around US$121 million, Kendle International has now delivered the bad news in full.

The US-based contract research organisation (CRO) reported net service revenues of US$108.1 million for the quarter, 5.3% lower than in the same period of 2008. Operating income for the latest quarter plunged 41.8% to US$8.1 million.

In the preliminary announcement that pushed its shares down by more than 50% late last month, Kendle talked of “unprecedented biopharmaceutical industry conditions, which are resulting in longer delays in the signing of contracts on existing awards, fewer new requests for proposals and an increase in contract cancellations and delays”. For example, the cancellation rate for the first quarter was more than 45% against a company forecast of 18%.

The CRO is now trying to repair the damage through a mixture of cost-cutting initiatives and restructuring programmes. A series of initiatives to reduce variable costs, including strict controls on all discretionary spending, a hiring and wage freeze, and workforce and capacity optimisation initiatives “to better balance our staffing levels with customer demand”, are being implemented during the current quarter.

Accordingly, Kendle expects to take a one-time charge of US$3.5-US$4.5 million in the second quarter for severance-related and other expenses. It believes these initiatives will generate savings of between US$17.5 million and US$22.5 million in the second half of 2009.

The company also announced plans to “adjust its organisational and leadership structure in order to deliver operational excellence, efficiency and cost savings for customers”. Kendle has already seen the departure of Karl Brenkert III, its senior vice-president and chief financial officer since January 2003, for undeclared reasons last week. Keith Cheesman, formerly Kendle’s vice-president for accounting, has stepped into the breach.

As well as enhancing its business development efforts, Kendle aims to consolidate positions in a number of operational groups so that, by the end of the year, “operations will be more functional in structure, driving costs from middle management and building synergies across various groups such as Phase II-III Clinical Development and Late Phase, and Clinical Monitoring and Clinical Data Management”, the CRO explained.

Chairman and chief executive officer Candace Kendle put an optimistic gloss on these measures. "Kendle is well-positioned with the leadership, financial strength and industry-leading service offerings necessary to weather the current challenges and emerge even stronger,” she said. “Over the long term we believe the fundamentals of the CRO industry will remain quite positive.”

Currency impact

Currency translation was a significant aggravating factor in the first quarter. Stripping out the impact of foreign exchange, net service revenues would have been 8% higher year on year and the decline in operating income would have been 19%, Kendle noted.

Diluted earnings per share for the latest quarter were US$0.06 compared with US$0.27 in Q1 2008.

New business authorisations as of 31 March 2009 came to US$930 million versus US$1.0 billion at 31 December 2008 and US$917 million at 31 March 2008. New business awards for the first quarter totalled US$72 million, down from US$180 million a year previously, while US$52 million worth of contracts were cancelled.