US-based contract research organisation (CRO) Kendle continued to face tough challenges in the third quarter of 2010, as operating income fell by 63.9% on a 20.5% decline in net service revenues.

Both sales and earnings per share (EPS) in the latest quarter were well ahead of analysts’ forecasts’, though, giving a marked boost to Kendle’s shares. And the CRO highlighted encouraging trends such as net sales at their highest level since the fourth quarter of 2008, a healthier book-to-bill ratio than in any quarter since Q3 2007, and significantly fewer contract cancellations and adjustments.

Like other CROs, Kendle is having a particularly hard time in its early-stage business, which recorded an operating loss of US$303,000 in the third quarter. The company has launched a strategic review of its Early Stage operations, which it expects to complete this year.

Operating income for the quarter ended 30 September 2010 was US$5.6 million compared with US$15.5 million in the same period last year. Net service revenues fell from US$104.6 million to US$83.2 million, while Kendle reported net sales of US$121.0 million for the third quarter of 2010.

The net service revenues were well above the consensus estimate of US$81.5 million from analysts polled by Thomson Reuters. Diluted EPS of US$0.10 (US$0.59 in Q3 2009) also far outstripped the analyst consensus, which was for earnings of just US$0.4 per share.

Early Stage decline

In the Early Stage segment, net service revenues dived 41.9% year on year to US$6.3 million. The operating loss of US$303,000 contrasted with an operating profit of US$1.8 million in the third quarter of 2009.

Net service revenues for the Late Stage business were 16.8% lower at US$76.2 million, while operating income fell by 15.5% to US$19.4 million.

Both net service revenues and operating income across the company increased on a quarter-by-quarter basis, Kendle pointed out.

Net sales showed a sequential improvement for the second consecutive quarter, “due in part to the investments we have made this year in our worldwide sales organisation and the continued confidence our customers have in Kendle as their global drug development partner”, said chairman and chief executive officer Candace Kendle.

“We continue to expand our relationships with our existing customers while leveraging these experiences to partner with new customers, all of which should serve to drive increased sales and improved top-line performance,” she added.

New business

Kendle reported new business awards of US$131.4 million for the third quarter, down from US$231.5 million in the second quarter of 2010. Contract cancellations and related adjustments “moderated significantly” to US$10.4 million or 1.3% of the CRO’s backlog as of 30 June 2010, resulting in a net book-to-bill ratio of 1.5.

New business authorisations (i.e., backlog) at 30 September 2010 totalled US$807.4 million, 4.0% higher than in the second quarter of this year.

Morningstar analyst Lauren Migliore was more bullish about Kendle’s prospects than in the second quarter, when she noted that the CRO’s investment in its business development infrastructure had “only hastened earnings deterioration over the past few quarters”, while most of Kendle’s larger peers had significantly downsized their operations to accommodate lower demand.

Responding to the third-quarter results, Migliore commented: “While its sales force build-out and slow top-line growth are constraining profitability in the near term, it seems the company’s commercialisation efforts are paying off”.

The resurgence in bookings “bodes well for future growth, although we expect demand to remain choppy in the near term,” Migliore cautioned. “Specifically, it seems much of the firm’s improvement in earnings came from roughly US$4 million of revenue that was pushed into the third quarter. We may see softer growth in the fourth quarter before new bookings fully take effect going into 2011.”