A spate of project cancellations sent US-based contract research organisation (CRO) PharmaNet Development Group back into the red in the first quarter of 2008, slashing 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.
PharmaNet’s share price plunged by as much as 30% after the company reported an overall operating loss of US$7.48 million for the quarter ended 31 March 2008, compared with operating income of US$8.61 million in the first quarter of 2007. Direct revenues for the latest quarter were US$86.8 million, just 2.4% more than in the same period last year.
The main culprit was an “unusually high” level of cancellations in both the first quarter and the fourth quarter of 2007, dragging direct revenues (excluding reimbursed out-of-pocket expenses) in PharmaNet’s late-stage segment down by 10.7% to US$49.2 million. The CRO stressed that the cancellations were not a result of “the Company’s inability to perform” but of “product performance in related studies or the client’s business decision”.
PharmaNet had hauled itself back into profit during the third and fourth quarters of last year, drawing a line under the financial battering it had sustained in its previous incarnation as SFBC International. The CRO’s credibility had been badly shaken by revelations of structural flaws at an early-stage clinical facility in Miami, media allegations of lax procedures and questionable practices at the same site, and an outbreak of tuberculosis during a trial at its Canadian subsidiary Anapharm’s facility in Montreal, Canada.
As a result, early-phase business slumped on reduced demand for bioequivalence testing, despite SFBC’s insistence that the vast bulk of the media claims were inaccurate or fabricated. The CRO eventually caved in and announced in May 2006 that it was ceasing all operations in Florida, including the Miami facility and another Phase I site in Ft. Myers.
In August 2006 SFBC changed its name to PharmaNet Development Group, trading on the reputation of the late-stage clinical development business acquired through a merger with New Jersey-based Phase II-IV specialist PharmaNet in November 2004.
Cost-cutting
The cancelled late-stage projects were worth around US$30 million in the first quarter of 2008 and US$29 million in the fourth quarter of 2007. Taken together, they shaved roughly US$6.6 million off direct revenues for the latest quarter, PharmaNet said. Foreign currency translation had the opposite effect, boosting late-stage revenues by around US$1.7 million.
PharmaNet has responded to the cancellations with cost-cutting initiatives including staff reductions and office closures, although the company will continue to hire new staff in emerging markets where demand is on the up. The late-stage business suffered an operating loss of US$3.48 million in the first quarter and its operating margin sank US$7.1% into the red compared with a positive margin of US$16.0% in the same quarter last year.
PharmaNet attributed the decline mainly to lower direct revenue, higher compensation, benefits and business development expenses, employee severance costs of around US$1.6 million due to cuts in the late-stage workforce and heavier expenses for new offices and office expansions. On a brighter note, it said backlog in the late-stage segment was worth US$400.9 million as of 31 March 2008, up from US$387.9 million at 31 December 2007.
Direct revenues in the early-stage segment jumped 26.7% to US$37.6 million in the first quarter, primarily due to incremental revenues from a clinic in Toronto, Canada that was not operational in the first quarter of 2007 and to higher volume in PharmaNet’s bioanalytical laboratories business. Currency translation lifted early-stage revenues by about US$4.6 million.
Operating profit was 48.2% lower at US$2.61 million and the early-stage operating margin narrowed to 6.9% from 17.0% in the first quarter of 2007. PharmaNet put this down to investments in clinical personnel, higher expenses for the expansion of clinics in Canada and a laboratory in Spain as well as increased business development costs. On the positive side there were lower employee severance costs – around US$0.4 million in the first quarter of 2008.
Fundamentally strong
The backlog for the early-stage segment was worth US$82.0 million as of 31 March 2008, compared with US$69.5 million at 31 December 2007. That gave a total backlog of US$482.9 million at the close of the latest quarter versus US$457.4 million at the end of last year. The quarter-to-date book-to-bill ratio was 1.3 times for the early- and late-stage segments; at the end of last December the total book-to-bill ration was 0.8.
“We believe the higher backlog clearly indicates that we continue to be competitive in the fundamentally strong market for outsourced CRO services and enjoy our clients’ confidence in our abilities,” commented PharmaNet’s president and chief executive officer, Jeffrey McMullen.
Nonetheless, the company has lowered its financial guidance for 2008 to reflect the impact of the late-stage cancellations, which it expects to knock around US$30.0 million off projected revenues for the full year. PharmaNet also expects to record a second-quarter charge of around US$1.5 million related to office closures.
The revised guidance is for direct revenues of US$390-US$399 million in 2008, as opposed to previously issued guidance of US$401-US$409 million. The full-year operating margin is now projected at 5.8% to 6.2% (previously 10.1% to 10.3%) and diluted earnings per share at US$0.53 to US$0.63 (US$1.42 to US$1.57).
