'Highest ever' cancellation rate impairs Parexel's Q1 FY16 results

02-Nov-2015 - Last updated on 02-Nov-2015 at 10:57 GMT

Parexel had a bookings cancellation rate of 5.7%, equating to $305m worth of business, for its first quarter FY2016

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Parexel has lowered its revenue guidance for the year following cancellations worth $305m in its first quarter FY2016.

For the three months ending September 30, the contract research organisation (CRO) reported a bookings cancellation rate of 5.7% - equating to $305m worth of business - which was described as Parexel’s “highest ever” by Jefferies' analyst David Windley.

Parexel reported an 11.3% y-o-y increase in backlog to $5.4bn, including gross new business wins of $914 to offset the cancellations, but “did high cancels ruin otherwise strong bookings, or did strong selling save another weak quarter?” Windley asked in a note.

Parexel Chief Operating Officer Mark Goldberg, told investors in a conference call Friday the high rate of cancellations “were mainly the result of failed products or pipeline reprioritizations across a number of clients and were not performance-related.”

“Many of the cancelled programs had already moved into the higher revenue generating execution stages causing a near term dampening effect on revenue.”

Broad-based cancellations

Parexel typically has a cancellation rate of 3.5-5%. CEO Josef von Rickenbach added that this quarter’s rate was not related to one client, but relatively broad-based, and is part of the firm’s normal bookings cycle.

“If you go back two quarters, we had a relatively high cancellation rate also and it had really no impact on revenue. In this instance, it was relatively broad-based, and basically the way these projects that were affected specifically flowed through the year, ultimately yielded the pattern that we have,” he told stakeholders.

“It did impact to some extent the second quarter, no doubt,” he continued, adding the firm could recoup some of the lost business in the second half.

Pfizer M&A

Along with Icon and PPD, Parexel is a strategic partner of Pfizer and with the Pharma Giant in “preliminary friendly discussions with Allergan in relation to a potential transaction,” the CRO was asked about the impact of such a megamerger.

“We really don't expect any fallout from this, certainly not negatively,” von Rickenbach said.

“Ongoing projects are probably not going to be affected past a close. So there would be no cancellations, for instance, or anything like that for a long time, even if they were to occur,” he continued, but added he could envision some near-term impact due to possible delays in discussions or decision making.

Last week, Tim Evans of Wells Fargo said a Pfizer-Allergan megamerger could have long-term benefits to Pfizer’s strategic CROs. But Jefferies’ Windley noted potential risks include delays, cancellations and pipeline repriorizations, and questioned whether Parexel’s relationship with Pfizer is “as cozy as management indicated.”