Shares in Parexel International took a dive after the US-based contract research organisation (CRO) reported healthy gains for the second quarter but lowered its revenue and profit guidance for the full year to reflect a slower momentum in contract conversion associated with the company’s shift towards strategic alliances.

It is “apparent that the backlog conversion rates inherent in global, complex, clinical development awards generated by strategic partnerships are different from traditional awards,” commented Josef von Rickenbach, chairman and chief executive officer of Parexel. “Our improved understanding of new business dynamics from these partnerships has been reflected in our current forward-looking guidance.”

At the same time, von Rickenbach pointed out, new business wins and a moderate cancellation rate delivered a record backlog of more than US$3 billion for the quarter, and there was “a notable increase in proposals from small and emerging biopharma clients”.

Parexel had already lowered its full-year guidance for service revenues and narrowed its earnings per share projection at the first-quarter stage, despite strong growth in both measures during that reporting period.

Operating income for the second quarter ended 31 December 2010 was US$28.2 million, up by 50.7% over the same period last year. However, both quarters included special items – specifically a restructuring benefit of US572,000 in the latest quarter and a restructuring charge of US$8.83 million in the year-ago period. Without these, operating income for the second quarter of this year was just 2.7% higher at US$27.6 million.

Diluted earnings per share (EPS) came in at S$0.28 for the second quarter compared with US$0.06 for the year-ago period. Stripping out the special items, diluted earnings per share were US$0.29 and US$0.26 respectively, which topped analysts’ expectations for adjusted EPS of US$0.28 per share in the latest quarter.

Consolidated services revenues for the second quarter climbed by 6.9% year on year to US$304.4 million, or by 8.6% without a US$4.8 million negative impact from foreign exchange movements. Analysts polled by Thomson Reuters were looking for revenues of US$302.8 million on average.

Segment sales

On a segment basis, quarterly service revenues from Clinical Research Services were US$231.4 million, 4.4% higher than in the second quarter of fiscal 2010, although gross profit slipped by 3.7% to US$76.9 million.

In Parexel Consulting & Medical Communications Services, service revenues improved by 7.7% to US$32.0 million while gross profit was 22.0% ahead year on year at US$12.9 million. The technology division, Perceptive Informatics, reported service revenues up by 22.6% to US$41.0 million and gross profit 38.7% higher at US$18.2 million.

Backlog at the end of December 2010 was around US$3.0 billion, an increase of 30.9% year-on-year.  It included gross new business wins of US$496.0 million in the second quarter, cancellations of US$100.4 million and a positive impact of US$3.7 million from currency translation. The net book-to-bill ratio for the latest quarter was 1.30.

Parexel now expects consolidated service revenues in fiscal 2011 to be in the range of US$1.22 billion to US$1.24 billion, compared with the previous guidance of US$1.25 billion to US$1.27 billion.  Earnings per diluted share for the full year are pegged at US$1.17 - US$1.23 (US$1.23 - US$1.31 previously), while the revised forecast for adjusted EPS (excluding the special items recorded in Q2 FY2011) is US$1.18 -US$1.24. 

According to Thomson Reuters, the analyst consensus was for full-year revenues of US1.25 billion and for EPS of US$1.26.

Commenting on the lower forecasts, Morningstar analyst Lauren Migliore said it appeared “the industry’s shift from a transactional approach toward strategic alliances has caused traditional revenue burn-off models to become less reliable”.

CROs such as Parexel “are being brought to the table earlier in the clinical trial design process, and trials are increasing in size, complexity, and global breadth”, Migliore noted. “While these dynamics bode well for the firm's long-term growth and profitability, an unusual amount of projects in start-up mode may weigh on results in the near term.”

Last June Parexel, along with fellow CRO ICON, signed a three-year agreement with Bristol-Myers Squibb for “joint strategic, operational and capability support of the company’s clinical development programme”.

In September came another strategic partnership, this time with Eli Lilly, under which Parexel is supporting the US company in getting clinical studies off the ground and monitoring trial sites throughout the Asia Pacific region.

The trend continued last month when Merck & Co unit Merck Bioventures formed a strategic alliance with Parexel to help accelerate the clinical development of biosimilars.