Operating losses and charges associated with the expansion of the company’s central laboratories business were blamed for a 42.0% decline in third-quarter operating income at ICON, the global provider of outsourced development services based in Ireland.

ICON reported operating income of US$17.6 million, or 7.8% of net revenues, for the three months ended 30 September 2010. Operating income in the third quarter of 2009 was US$30.4 million, or 13.8% of net revenues. Revenues for the latest quarter rose by 2.1% year on year, or by 7% on a constant currency basis, to US$225.1 million.

The central laboratories operation incurred operating losses of around US$4.6 million in the quarter and a further US$3.0 million in cost-reduction and other one-off charges. Excluding these, as well as losses of US$1.8 million from foreign exchange translation, operating income for the third quarter of 2010 would have been US$27 million and the operating margin would have reached 12.0%, ICON noted.

Net income for the quarter was down by 16.9% year on year at US$19.9 million. Diluted earnings per share (EPS) were US$0.33 compared with US$0.40 in the third quarter of 2009.

“Our clinical business had another solid quarter and gross new business awards were in line with expectations at $317 million and net bookings were $225 million,” commented CEO Mr Peter Gray.

Moreover, the expansion of the central laboratories business worldwide “continues to be validated by another strong quarter of business wins, yielding a year-to-date net book to bill of 1.8”, Gray added. “However, this growing backlog did not convert to revenue as quickly as forecast.”

This confirms a trend flagged up when ICON announced its second-quarter results in late July. Net bookings for the second quarter were US$320 million, giving a book-to-bill ratio of 1.4, while backlog grew to US$1.90 million from US$1.83 million in the first quarter of 2010 and US$1.86 million in the second quarter of 2009.

Nonetheless, Gray said at the time, ICON did not expect revenue growth “to respond quickly to these awards” and as a result the company revised its financial guidance for 2010 towards the lower end of the range (revenues of US$890 - US$940 million, EPS of US$1.44 - US$1.60) provided last February.

Total backlog for the third quarter of 2010 came to US$1.93 million.

Cost-cutting measures

“Cost reduction actions” have already been taken to address the sluggish transition from awards to revenues and further “cost alignment measures” are planned, Gray noted.

Overall, ICON “remains in a strong position and continues to invest in its business in order to benefit from the opportunities that are arising as our customers transition to new development models”, he said.

According to Morningstar analyst Lauren Migliore, the central lab losses were “unanticipated” and ICON’s third-quarter revenues were below expectations. “However, we’re keeping our fair value estimate intact as ICON’s core clinical trial business continues to show improvement,” she commented.

While bookings growth for ICON’s central laboratories business remains promising, “it seems management has overestimated the pace at which business wins will translate into revenue growth, preventing the firm from effectively managing its costs in the segment”, Migliore observed.

“ICON is taking steps to better match its cost structure with market demand, but its central lab is expected to continue weighing on earnings for the next few quarters.”

On the clinical front, though, the third quarter marked the first period in over a year in which the portion of backlog ICON expects to convert to revenue “implies top-line growth in future quarters”, she pointed out.