Growth in margins and new business put a positive gloss on Parexel’s results for the second quarter of fiscal year 2010, despite a 34% decline in net income coloured by restructuring and impairment charges.

The US-based contract research organisation (CRO) expects further margin expansion in the coming quarters and said market demand had been picking up “across all geographies” in the Late-Phase segment of its Clinical Research Services arm and in its technology division, Perceptive Informatics.

Parexel had already signalled earlier this month that the second-quarter results would be ahead of expectations, raising its financial guidance both for the quarter ended 31 December 2009 and for the full fiscal year that runs to 30 June 2010.

That was partly due to a split in the restructuring charge of around US$30 million announced by the CRO last October. Citing “delays associated with local labour law compliance requirements”, Parexel deferred around half of the charge to the latter part of fiscal 2010.

As it was, the company beat its own revised projection for adjusted earnings per share (EPS) – which excluded the restructuring and related charges – in the second quarter. On a GAAP (Generally Accepted Accounting Principles) basis, though, reported Q2 EPS were at the low end of the amended guidance given a couple of weeks ago.

Non-GAAP diluted EPS for the latest quarter came in at US$0.26 compared with U$0.23 in the second quarter of fiscal 2009. The revised forecast had been for EPS of US$0.21 to US$0.23, while the analyst consensus quoted by Thomson Reuters had been US$0.20.

On a GAAP basis, Parexel reported diluted EPS of US$0.06 for the quarter ended 31 December 2009, down from US$0.09 in the year-before quarter. The CRO had been expecting EPS in the range of US$0.06 to US$0.08, as amended earlier this month.

Restructuring charges

Parexel incurred net restructuring and related charges of US$14.3 million for the three months, including the costs of severance payments and abandoning facilities, and a US$6.1 million charge for impairment of an investment, which was partly offset by a recovery related to a previous charge.

Operating income for the second quarter more than doubled from US$7.7 million to US$18.7 million, as consolidated service revenues (excluding reimbursement revenue) improved by 3.2% to US$284.7 million. Without the positive impact of foreign exchange, though – worth US$14.0 million in the quarter – revenues would have been around 2% lower year on year, Parexel noted.

Stripping out the restructuring and related charges, operating income was US$26.9 million versus US$22.7 million in the second quarter of fiscal 2009, and the operating margin climbed from 8.2% to 9.5%. On a GAAP basis, the operating margin was up from 2.8% to 6.6%.

Another encouraging sign was the net book-to-bill ratio (defined as gross new business, minus cancellations and divided by service revenue), which was 1.41 for the quarter against a Parexel forecast of around 1.25.

Backlog was about US$2.31 million to the end of December, a year-on-year increase of 15.1%. It included gross new business wins of US$501.7 million, cancellations of US$98.9 million and a positive impact of US$33.9 million from foreign exchange.

Favourable dynamics

Parexel chairman Josef von Rickenbach said the second-quarter results “capped a solid and positive finish to a challenging year”. A “strong performance on the new business front drove substantive backlog gains, with increases across all three reporting segments”, he noted.

Healthier market demand “should continue to drive further revenue growth and profitability improvement”, von Rickenback added.

“Going forward, we anticipate that a number of broad industry dynamics will benefit Parexel, including the completion of several large pharmaceutical company mergers, increased partnering activities and outsourcing penetration rates, a return of funding to mid and small biopharma clients, and the heightened focus of our clients on moving promising compounds through the later stages of the development process”.

The CRO has raised slightly its amended guidance for consolidated service revenue in fiscal year 2010, to US$1.125billion -US$1.145 billion from the previously quoted range of US$1.115 billion-US$1.145 billion.

GAAP earnings per diluted share in fiscal 2010 are now expected to be in the range of US$0.66 to US$0.72 (US$0.60 to US$0.70 previously) and the new forecast for adjusted EPS is US$1.00 to US$1.06 (previously US$0.90 to US$1.00).

Morningstar analyst Lauren Migliore suggested that Parexel’s “excellent” second-quarter results “signalled growth may be returning” to the contract research industry. “We are putting the firm under review while we re-examine our underlying assumptions,” she commented.