Kendle still suffering as Q2 operating income drops 57%

US-based contract research organisation (CRO) Kendle reported another sharp drop in quarterly profit last week as a one-time charge for restructuring cut into earnings, the company’s book-to-bill ratio languished for the second quarter in a row, and it suspended its financial guidance for the rest of the year.

Kendle’s shares dropped by as much as 19% after the CRO announced that operating income for the second quarter ended 30 June was US$7.0 million, 56.6% below the same period of 2008. The latest figure included a one-time pre-tax charge of US$6 million for severance-related and other restructuring expenses.

Without this charge, and stripping out the impact of currency fluctuations, operating income for the second quarter of 2009 would have been down 1.9% at US$15.8 million, Kendle noted.

Net revenues for the quarter were US$107.4 million, 15.5% lower than in the year-before period. On a constant currency basis, Q2 net revenues dropped 5.5% to US$120.0 million.

Kendle registered new business awards worth US$132 million for the report period, while contract cancellations amounted to US$48 million or 5.2% of backlog as of 31 March 2009. This gave a book-to-bill ratio of 0.78, the second consecutive quarter in which the ratio has been below 1.

A book-to-bill ratio of more than one means more orders were received than filled in a given business period – in other words, demand is outpacing supply.

The CRO said it took “a series of actions” during the second quarter to “reduce its variable costs and right-size its business”. These included a “workforce and capacity optimisation initiative” whose aim was to balance better staffing levels with customer demand, as well as “certain facilities-related actions”.

Kendle expects these initiatives to generate total pre-tax savings of US$19 million to US$22 million in 2009. In May, when it reported operating income for the first quarter down by 41.8% on a 5.3% fall in revenues – and a cancellation rate of more than 45% –the CRO was expecting to take a one-time charge of US$3.5-US$4.5 million in Q2 for severance-related and other expenses.

The company has also since announced a re-alignment of top-tier executive positions to include the newly created role of chief administrative officer for former chief operating officer Christopher Bergen.

Last week, Kendle revealed it was suspending its financial guidance for 2009 “due to a combination of factors”. The company will re-assess its guidance policy in 2010.

Reuters quoted Jefferies & Co analyst David Windley as saying that Kendle was “caught between a rock and a hard place”. Given the CRO’s “cancellation rate lately, a potential to see slower activity from its exposure to pharma mergers and a sluggish environment, breaking open new client opportunities appears necessary to return the company to growth,” he added.