Better than expected preliminary results for the third quarter have pepped up the shares of troubled US-based contract research organisation (CRO) PharmaNet Development Group a little – although, trading at around US$1.65 to US$1.70, the stock is still a long way from the high of US$43.05 reached in January.

The company had already foreshadowed declines in revenue and income for Q3, sending its share price tumbling in mid-September by substantially lowering its financial guidance for 2008. PharmaNet had already lapsed into the red during the first quarter of the year. A spate of project cancellations slashed margins in the late-stage business that has been crucial to the CRO’s rehabilitation following a stream of negative publicity in 2005 and 2006.

The announcement in September, which included a reduction of around US$10 million in expected late-stage direct revenues during the second half of 2008, cited mainly the cancellation or postponement of clinical development projects in PharmaNet’s late-stage segment and a lower than expected sample volume of early-stage business.

All the same, direct revenues for the latest quarter, which dropped by 10.6% to US$89.2 million, were slightly above the analyst consensus of US$89.05. Moreover, analysts polled by First Call/Thomson Financial expected PharmaNet to report a loss US$0.03 per diluted share for the third quarter, whereas in fact earnings per share came in 78.4% lower at US$0.08.

As the Associated Press noted, analyst David Windley of Jeffries and Co even upgraded the company’s stock from ‘underperform’ to ‘hold’, although Windley is expecting a weaker fourth quarter and believes there is a 40% chance PharmaNet will go bankrupt.

As the company pointed out, the preliminary results are subject to an as yet undetermined goodwill impairment charge, which PharmaNet is working with its valuation consultant to quantify. This is a consequence of “the recent decline in the Company’s market capitalisation and is not indicative of its performance or ability to continue to run its operations”, PharmaNet stated.

Direct revenues in the CRO’s early-stage segment were up by 13.2% to US$42.6 million for the third quarter, while the segment’s operating margin narrowed to 18.7% from 21.4% in the same period of 2007. Late-stage revenues were down by 25.0% to US$46.6 million, dragging the operating margin down from 21.2% to 1.1%.

Overall, PharmaNet’s operating margin shrank from 13.7% to 3.7% in Q3 as earnings from continuing operations dived by 75.9% to US$3.3 million.

The CRO’s backlog as of 30 September 2008 was US$521.6 million, compared with US$579.2 million at 30 June 2008 and US$457.4 million at the end of last year. The quarter-to-date book-to-bill ratio, which reflects “significant cancellations and weaker bookings, was 0.4x at 30 September against 2.0x at 30 June 2008.