The problems faced by small biopharmaceutical companies in raising funds for clinical trials in a tightening economic climate have taken their toll on US-based contract research organisation (CRO) Parexel.

Echoing other CROs (e.g., Covance) that have warned about the knock-on effects of a more constrained financing environment for biotechnology companies, Parexel has moderated its financial guidance for the second quarter of fiscal 2009, as well as the second half and full year, after learning from “a small biopharma client” that the client cannot continue making payments due to Parexel in connection with an ongoing service contract for a large Phase III clinical trial.

The default is expected to hit Parexel’s diluted earnings per share for the second quarter particularly hard, reducing guidance from US$0.18 to US$0.20 to US$0.04 to US$0.07. This reflects the reserves of around US$15 million that the CRO plans to set aside during the second quarter for anticipated wind-down costs and bad-debt expenses related to impaired accounts receivable (for service fees, pass-through costs and investigator fees).

Consolidated service revenues in the second quarter ended 31 December 2008 are now expected to be US$268-273 million, compared with the guidance for revenues of US$265-275 million given last October.

Parexel said its client had “encountered funding difficulties when one of its major investors defaulted on a contractual investment commitment as a result of the current financial crisis”. The client had held “substantive discussions” with two potential commercialisation partners, its remaining investors and Parexel, “but to date the discussions have not yielded a definitive agreement with regard to additional funding for the trial”.

Parexel remains “a major creditor of the company and will pursue recovery to the extent possible”, it added. The CRO has cancelled the US$44 million balance of the aforementioned contract from its second-quarter backlog but still expects to record a net book-to-bill ratio (i.e., gross new business minus cancellations and divided by service revenues) of around 1.2 for new business authorisations during the quarter.

Had these issues not arisen, Parexel “believes that it would have met or exceeded the guidance for the second quarter”, the CRO noted. On a pro-forma basis, excluding the impact of the contract termination, earnings per diluted share for the second quarter are forecast at US$0.20 to US$0.21.

Second-half adjustment

For the second half of the financial year, Parexel has lowered its guidance for consolidated service revenues by around $6.0 million and for diluted earnings per share by about $0.04. The company has also issued revised guidance for the full year, taking into account “the timing of new business wins, the strengthening of the US dollar, and the adverse impact of the contract termination on the tax rate for the fiscal year”.

Consolidated service revenues for fiscal 2009 are now expected to be in the range of US$1.080 billion to US$1.110 billion, which would represent an increase of 12-15% on a year-to-year basis. Earnings per diluted share are projected at US$0.75 to US$0.82. Parexel’s previous guidance was for consolidated service revenues of US$1.100 billion to US$1.130 billion in fiscal 2009, and for earnings per diluted share in the range of US$1.07 to US$1.13.

The company aims to report financial results for the second quarter on 26 January 2009. It does not foresee any restructuring charges or lay-offs related to the contract termination.

“We have worked with this client for the past eighteen months, and have been running a large global Phase III clinical trial without incident since September 2007,” commented Josef von Rickenbach, Parexel’s chairman and chief executive officer.

“The client appeared to be adequately funded, had been paying their bills, and indicated to Parexel that it had secured venture-backed financing to cover its commitments. However, their financing syndicate unravelled as a result of the global financial crisis, and they were unable to close a planned financing round under their committed capital agreements.”

After conducting a thorough review of the projects and clients in its current backlog, “we believe we do not have any material exposures of a similar nature with other small biopharma clients”, von Rickenbach added. “On the new business front, we are pleased with the level of wins we achieved in the second quarter … The demand for our services remains strong, and we continue to be positive with regard to the future prospects for the business.”