Shares in US-based contract research organisation (CRO) Kendle dropped by as much as 19% after a computer programme issue in a clinical study knocked around US$2.3 million off the company’s net service revenues and 18-20 cents off earnings per share (EPS) for the fourth quarter of 2008.

Not only did fourth-quarter revenues and EPS come in substantially below analysts’ estimates but Kendle’s guidance for 2009, which included the impact of a one-off tax liability and a strong US dollar, was below the analyst consensus.

The CRO reported net service revenues of US$109.2 million for the three months ended 31 December 2008, up by 4.7% over the same period of 2007. Operating income fell by 28.3% to US$10.9 million and earnings per diluted share (EPS) by 23.3% to US0.33. Analysts had expected to see revenues of US$114.3 million and EPS of US$0.54.

Kendle did not supply much detail on the programming glitch, saying only that it was “unique to one study for one customer”. The hit to net revenues came from the “required rework related to this issue”, while additional direct costs accrued at year-end bit into earnings per share. According to Kendle, most of the additional direct costs are expected to be recovered in future periods through insurance proceeds.

The CRO’s Late Stage business accounted for the vast bulk of service revenues in the fourth quarter, generating a net of US$98.5 million, 4.1% more than in the year-before period. Operating income from Late Stage operations was 16.2% higher at US$25.2 million.

The much smaller Early Stage segment delivered strong growth, with net service revenues rising by 69.8% to US$9.70 million and operating income up by 56.1% to US$2.30 million. Support and Other services were a black spot, with revenues plunging 76.5% to US$928,000 and operating losses widening from US$7.95 million to US$16.58 million.

In the full year, net service revenues across the company grew by 19.5% to US$475.1 million. This figure was at the lower end of the revised guidance for revenues in 2008 – US$475-480 million, previously US$485-500 million – given by Kendle last January.

Full-year operating income improved by 7.5% to US$56.8 million, while earnings per diluted share jumped 55.5% to US$1.96. This was still significantly below the revised guidance from January, which was for EPS of US$2.12 to US$2.20 (previously US$2.10 to US$2.25).

New business awards totalled US$163 million for the quarter and US$759 million for the year, compared with US$174 million and US$664 million respectively in the same periods of 2007. The net book-to-bill ratio was 1.3 to 1 – as forecast in January – for the fourth quarter and 1.4 to 1 for 2008. Total business authorisations as of 31 December 2008 were US$1.0 million, an increase of 18% from 31 December 2007.

Guidance falls short

Kendle is projecting net service revenues of US$510-530 million, an operating margin of 12-13% (it was 12.0% in 2008) and earnings per diluted share of US$1.55 to US$1.85 – or US$2.01 to US$2.31 on a pro forma basis – for 2009. The consensus forecast from analysts was for EPS of US$2.33 on revenues of US$521.6 million.

Kendle’s guidance was influenced by the strong US dollar – a trend the CRO expects to continue throughout 2009 – and a tax liability of US$5.8 million arising from a transaction to unwind part of the cross-currency hedge associated with inter-company notes denominated in UK sterling. This will reduce EPS by US$0.38 in 2009.