Shares in Parexel International slumped by as much as 22% as the US-based biopharmaceutical services organisation lowered its forecasts for revenues and earnings in fiscal 2011 for the third quarter running.
The company also announced a US$15.0 million restructuring programme focused mainly on its faltering Early Phase operations, including a 3% cut in staffing. At the same time, and in line with shifts in the contract research market, Parexel is ramping up staff recruitment in its wider Clinical Research Services business to prepare for growth currently in the pipeline.
Operating income for the third quarter ended 31 March dropped by 15.3% year on year to US$21.9 million, on consolidated service revenues that were just 3.5% higher at US$301.4 million.
The revenue figure was below the analyst consensus of US$309.29 million quoted by Thomson Reuters, while non-GAAP diluted earnings per share (EPS) of US$0.27 for the third quarter (US$0.28 in Q3 2010 on a non-Generally Accepted Accounting Principles basis) came in below the average analyst estimate – which normally excludes any special items – of US$0.30 per share.
On a reported basis, diluted EPS for the third quarter were US$0.26 compared with US$0.22 in the year-ago quarter.
Restructuring charge
The special items included a US$144,000 restructuring charge in the latest quarter, related primarily to severance costs on top of those arising from the restructuring programme announced or implemented by Parexel in the third quarter of 2010 at a cost of US$4.1 million.
In Q3 2011 there were also severance costs of US$375,000 in total associated with restructuring activities for fiscal year 2011 and included in direct costs or selling, general and administrative expenses.
The restructuring programme announced with the latest set of results will start during the current quarter and will mainly involve “capacity reductions” in the Early Phase operation.
Parexel cited a revenue shortfall in the Early Phase operating unit of its Clinical Research Services business as one of the negative factors affecting its third-quarter results, along with slower-than-expected revenue conversion from backlog in the context of strategic partnerships and client delays on some large projects.
“In addition, the Company continues to have a disproportionate number of projects in the lower revenue generating start-up stage,” it noted.
In transition
The total cost of the latest overhaul is estimated at around US$15.0 million (approximately US$0.18 per diluted share), of which about US$4.0 million is expected to be recorded in the fourth quarter, reducing earnings per diluted share by around US$0.06.
The remaining US$0.12 of the charge is scheduled to be taken in the second half of calendar year 2011. The restructuring programme should generate cost savings in the range of US$0.15 to US$0.20 per diluted share during the next fiscal year, Parexel believes.
“The Early Phase market is clearly in transition,” commented chairman and chief executive officer Josef von Rickenbach. “As industry conditions shift, our business must also adapt.”
If Parexel is to continue serving its clients effectively in the future, “is essential that we become more agile in our Early Phase business”, von Rickenbach added. “I believe that this restructuring will allow us to deploy our assets more productively. We are also strategically positioning the business to take advantage of new market opportunities.”
According to a Form 8-K filing with the US Securities and Exchange Commission, the restructuring programme is designed to reduce expenses and improve operating efficiencies, better align costs with current and future geographic sources of revenue, and help strategically to reposition the company’s Early Phase activities.
The US$15.0 million charge relates mostly to “expenses to be incurred in connection with the consolidation or closure of certain offices and the elimination of approximately 3% of current employment positions”, Parexel said. It expects to complete the restructuring drive “substantially” by 31 December 2011.
Healthy backlog
Backlog as of the end of March 2011 was around US$3.19 billion, up by about 34% year on year. It included gross new business wins of US$566.5 million in the third quarter, while cancellations amounted to US$132.4 million (4.4% of the backlog starting out). The net book-to-bill ratio for the third quarter of FY 2011 was 1.44.
Von Rickenbach took these as encouraging signs. “While revenue continues to convert out of backlog more slowly than had been expected, cancellations were within normal levels this quarter, and our opportunity pipeline and backlog remain very solid,” he commented.
In view of the new business performance and Parexel’s growth expectations, “we are accelerating recruitment of additional direct labour staff in our Clinical Research Services business to ensure that we meet the future project needs of our clients”, von Rickenbach reported.
“This ramp-up in hiring is taking place ahead of significant levels of revenue being generated from these projects, which will put pressure on operating margins in the near-term,” he warned, adding: “I believe that our future is promising”.
Based on the current backlog and outlook, Parexel anticipates revenue growth to be in the “mid-teens” during the second half of fiscal year 2012.
In the nearer term, the company has moderated its guidance for consolidated service revenues in FY 2011 to a range of US$1.202 billion to $1.212 billion, compared with the revenue forecast of US$1.220 billion to US$1.240 billion given at the second-quarter stage.
Full-year GAAP earnings per diluted share are now projected at US$0.84 to US$0.88, as opposed to US$1.17 to US$1.23 previously.
