There were further signs of contraction in the market for outsourced clinical research as Parexel fell short of its own and analysts’ expectations by reporting a 26.4% increase in consolidated service revenues to US$263.0 million for the first quarter ended 30 September 2008.

The US-based contract research organisation (CRO) also lowered its guidance for fiscal year 2009, citing a “negative impact from the very substantial strengthening of the US dollar and some headwinds in the marketplace”. In response, Parexel’s stock plummeted more than 40% to hit a three-year low of around US$8.

The revenue figure for the first quarter was below the US$270-US$280 million forecast by Parexel last month in updated financial guidance that reflected the CRO’s acquisition of UK-based clinical technology specialist ClinPhone. Analysts were looking for consolidated service revenues of US$274.4 million.

Parexel’s diluted earnings per share (EPS), which dropped by 4.2% to US$0.23, were slightly above the analyst consensus of US$0.22 per share. Operating income in the quarter was 33.1% higher at US$22.0 million.

Action taken

According to chairman and chief executive officer (CEO) Josef von Rickenbach, effective cost controls and a lower tax rate helped the company to beat its own EPS targets for Q1. Addressing the revenue shortfall, he said that, after achieving “robust new business generation in the fourth quarter, we anticipated a slowdown during the summer months, and then expected an acceleration of activity in September, as has been typical in the past. Ultimately, however, sales performance for the quarter turned out to be short of target”.

Parexel has “taken action to regain sales momentum and retain market share, even in this more challenging environment”, von Rickenbach added.

Segment by segment, the company’s core Clinical Research Services business generated service revenues (which do not include reimbursable out-of-pocket costs) of US$202.8 million, a 27.3% improvement over the first quarter of 2007. The gross margin for the segment was 35.0% compared with 34.6% for last year’s quarter.

Service revenues for Parexel Consulting and Medical Communications Services dipped by 1.3% to US$30.1 million, while the gross margin widened from 31.4% to 33.0%. The technology division, Perceptive Informatics, reported service revenues 64.8% ahead at US$30.1 million but this did not stop the gross margin narrowing to 35.9% from 40.1% in Q1 2007.

Von Rickenbach noted that some “short-term acquisition-related challenges prevented us from achieving the expected quarterly results in the Perceptive Informatics business segment”, although Parexel is “pleased with the most recent progress of the business unit” and looks forward to “improved performance as we move ahead”, he added. The ClinPhone acquisition has drawn positive feedback from clients, the CEO said.

Parexel’s backlog at the end of September was US$2.061 billion, including gross new business wins of US$347 million, a US$117 million boost to backlog from the ClinPhone acquisition, cancellations amounting to around US$83 million and a US$116 million negative impact from foreign exchange translation. The net book-to-burn ratio (i.e., gross new business minus cancellations, divided by service revenue) for the first quarter was about 1.0.

The revised guidance for the full year projects consolidated service revenues at US$1.100 to US$1.130 billion, based on recent exchange rates. The previously issued revenue guidance for fiscal year 2009 was US$1.215 to US$1.245 billion. Foreign exchange movements account for 70% of the downward adjustment, Parexel noted.

Earnings per diluted share are now expected to be in the range of US$1.07 to US$1.13, compared with previous guidance for US$1.09 to US$1.17.