Earnings at US-based contract research organisation (CRO) Parexel International took an expected blow in the second quarter from a payment default by a biopharmaceutical client. However, Parexel’s shares rose by nearly 30% as it reported revenues and earnings ahead both of analysts’ estimates and the CRO’s own revised guidance for the quarter.

For the three months ended 31 December 2008, Parexel recorded consolidated service revenues of US$275.8 million, up by 15.6% on the second quarter of fiscal 2008. Stripping out a US$25.9 million negative impact from currency translation, revenues would have been 26.4% higher.

The revised guidance given on 12 January had been for consolidated service revenues of US$268-US$273 million, down from the previous forecast of US$265-US$275 million. Analysts polled by Thomson Reuters were expecting revenues of US$269.7 million in the quarter.

Operating income for the second quarter dived 62.4% to US$7.7 million, reflecting the US$15 million in pre-tax reserves recorded by Parexel for anticipated wind-down costs and bad debt expenses related to the payment default and contract termination flagged up earlier this month. Net income was US$5.2 million, or US$0.09 per diluted share, compared with US$11.5 million, or US$0.20 per diluted share, for the quarter ended 31 December 2007.

The revised guidance in light of the contract termination was for diluted earnings per share of US$0.04-US$0.07, compared with US$0.18-US$0.20 previously. Analysts had been looking for profit of US$19 per diluted share excluding the US$15 million charge; Parexel reported that, ignoring the contract termination, its earnings per share were US$0.23, a rise of 15.0% on the year-ago quarter.

Earlier this month the CRO said “a small biopharma client” with a service contract for a large Phase III clinical trial had “encountered funding difficulties when one of its major investors defaulted on a contractual investment commitment as a result of the current financial crisis”. As Parexel noted, the client subsequently filed for bankruptcy protection, still owing the CRO a total of US$12.8 million. Parexel also made reserves for US$2.2 million to cover the orderly wind-down cost of the trial.

Media reports have identified the culprit as Palo Alto, California-based Cogentus Pharmaceuticals, which filed for bankruptcy on 16 January, scrapping the 4,000-patient COGENT-1 study of the combination therapy CGT-2168. Developed by Cogentus, CGT-2168 was a single-tablet combination of clopidogrel (Plavix) and omeprazole designed to reduce the gastro-intestinal side-effects associated with dual anti-platelet treatment.

Segment by segment

Segment by segment, service revenues in Parexel’s core Clinical Research Services (CRS) business were US$200.9 million for the second quarter, 10.0% more than in the same period last year. Gross profit for the CRS segment showed the impact of the US$15 million reserve, dropping 21.4% to US$55.2 million. Gross margin was 27.5% against 34.9% for the second quarter of fiscal 2008.

Service revenues for Parexel Consulting and Medical Communications (PCMS) were once again slightly down on the year-before period, dropping 1.9% to US$31.9 million. Gross profit edged up from US$11.1 million to US$11.2 million while the gross margin for the PCMS business improved from 34.2% to 35.0%.

The technology division Perceptive Informatics reported service revenues of US$43.0 million, up by 83.6%, and gross profit 2.3% ahead at US$83.6 million. The gross margin narrowed to 30.3% from 34.2% a year earlier.

Parexel’s backlog at the end of the second quarter was around US$2.0 billion, showing an increase of about 13% year-on-year. It included gross new business wins of $459.0 million, cancellations of $121.0 million (including $44 million from the Cogentus contract termination) and a negative impact of US$116.5 million from foreign exchange. The net book-to-bill ratio was 1.23 for the quarter; it would have been about 1.39 without the Cogentus pull-out, Parexel added.

Chairman and chief executive officer Josef von Rickenbach said he remained “cautiously optimistic” about Parexel’s outlook for the current calendar year.

“While we may experience a slow-down in the small biopharma client segment due to the current condition of the financial markets, I believe that this impact may be offset by an increase in outsourcing levels from larger clients,” Rickenbach commented. “In this regard, many large pharma companies are approaching clinical trials outsourcing more strategically, and look to benefit from our depth of expertise in the drug development process."

In line with this sentiment, Parexel has raised its guidance for fiscal 2009 from the forecasts given earlier this month. Consolidated service revenue is now expected to be in the range of US$1.095-US$1.115 billion, compared with the previous guidance of US$1.080-US$1.110 billion. The revised forecast for earnings per diluted share is US$0.80-US$0.84, up from US$0.75-US$0.82 previously.

Consolidated service revenues for the third quarter ending 31 March 2009 are projected at US$273-US$283 million and earnings per diluted share at US$0.23-US$0.25.