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Parexel Exceeds Expectations in Q2, Analysts Skeptical About Future

By Zachary Brennan , 31-Jan-2013
Last updated the 31-Jan-2013 at 13:16 GMT

Parexel may have raised its forecast for fiscal 2013 after reporting a 26% hike in second quarter revenues this week, but analysts still have concerns about its spending.

The increased expectations for fiscal 2013 are largely due to a lower tax rate and the anticipation of increased revenue from clinical research services (CRS) operations.

However, observers are unconvinced based on the unit's recent performance. “A high level of hiring and continued elevated use of contract staff negatively impacted the gross margin in CRS,” according to Jefferies analysts. In fact, gross margin hit an all-time low, which is “not consistent with the improvement the company has been working and pointing toward,” they said.

And future guidance “implies slightly less margin improvement in the second half of fiscal 2013” than previously expected, according to William Blair analysts.

But the silver lining in the low bookings number may take pressure off of the hiring, according to Jefferies, which noted that Parexel management had expected to add about 1000 new full-time employees in FY 2013 but have already added 1300 employees.

Contractors played “a significant role” in this past quarter, which negatively impacts gross margins, but as growth starts to abate somewhat, “we expect to reduce contractors and turn them into full-time employees,” CEO Josef H. von Rickenbach said in a conference call yesterday.

Research Cancellations

In addition, cancellations “grew much more quickly than expected,” according to Jefferies analysts.

Von Rickenbach noted in the conference call that half of the cancellations were related to the efficacy failure of one drug compound involved in multiple research programs, which cost the company about $130m.

Parexel has “strategic relationships with Pfizer, Bristol and Lilly,” so this major cancellation could have been with one of those companies, analyst John Kreger of William Blair told Outsourcing-pharma.com.

Bristol Myers Squibb saw its hepatitis C candidate, which it acquired in a $2.5b deal, fail in a mid-stage study last year, and Pfizer also dropped development of an Alzheimer’s candidate.

Even with the cancellation, there’s enough in backlog to drive revenue forward,” von Rickenbach said.

The next two fiscal year quarters will also be the first two quarters that fully include Parexel’s December acquisition of Liquent, a regulatory management provider. Von Rickenbach confirmed that the company expects revenue growth will slow in the second half of this year.

An SEC filing from last week also revealed that Parexel took out $75m in loans from HSBC, TD Bank and U.S. Bank to partially pay down balances owed under a short term line of credit with Bank of America.

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