PharmaNet slumps on another ‘08 earnings cut

By Phil Taylor

- Last updated on GMT

Related tags Pharmaceutical industry Clinical trial

Drug development services company PharmaNet saw its share price slashed in half on Friday after downsizing its 2008 revenues and earnings forecasts for the second time this year.

The firm said that the reduction was a result of “the postponement and cancellation of certain ... ongoing clinical development projects in the late stage segment and a lower than expected sample volume of business in the early stage segment.​”

While the high-risk nature of drug development makes cancelled contracts a common occurrence for contract research organisations (CROs), PharmaNet seems to be having a particularly bad run of luck, with a cancellation rate of nearly 33 per cent, much higher than its peers in the industry where a rate of 15 to 20 per cent is typical.

The company sliced around $30m off its projected revenues for the year and said it now expects to make a loss of between 58 and 25 cents per share. Earlier, it had expected to make between 53 to 63 cents a share profit.

Investors voted with their feet, and a sell-off in shares dragged PharmaNet’s share price down more than 50 per cent to close at $11.27.

Part of that could be investor disappointment after it appeared that PharmaNet was pulling itself out of a financial mire through the efforts of a new management led by CEO Jeff McMullen.

"After the strong new business wins in the second quarter 2008, we are very disappointed with the level of late stage project cancellations and a significant project postponement that occurred in the third quarter​," commented McMullen.

The company posted a second-quarter profit this year but has been yo-yoing between the black and red for several quarters, although McMullen insists that the firm will be able to convert its backlog of contracts and reach profitability in 2009.

In a statement, PharmaNet noted that $10m of late-stage revenues has been lost in the second half because of a series of cancellations by biotech and small-to-mid-size pharmaceutical companies, with the knock-on effect of cutting backlog by around $58m.

The postponement of a project sponsored by a large pharmaceutical company – the result of a re-ordering of a series of late-stage studies - accounted for another $9m in lost sales for PharmaNet’s late-stage business, although McMullen said there was a silver lining here in that the project is now likely to be bigger.

Meanwhile, the firm’s early-stage business, which was largely responsible for the return to fortunes at PharmaNet in the second quarter, will be negatively affected to the tune of $6m in the second half of the year as a result of a postponed laboratory project worth $1m, as well as “lower sample volumes and the impact of foreign currency exchange translation.​”

It is regrettable, but unavoidable that we have had to reduce our guidance for 2008​,” he said on a conference call. “At the end of the second quarter we expected that our robust backlog would be the fast-track to our recovery to [earlier] cancellations​,” he continued. “But we could not have anticipated the magnitude of the most recent project cancellations and postponements​.”

Cancellations are a real headache for CROs, which tend to set their staffing levels in accordance with the anticipated amount of work in coming months. PharmaNet has been hiring “aggressively​” of late to handle its expected workload, particularly for the postponed big pharma contract, so expenses will be elevated for a period.

Flexible staffing

McMullen has now proposed a solution to that problem in the form of a contract staffing division to help deal with changes in demand. That structure is scheduled to be in place by the end of the year, he said.

This Pharma Consulting Group, as it will be known, will help “minimise our fixed expenses and transfer more of that to variable,​” said McMullen.

In essence it allows clients to gain access to a number of clinical research associates (CRAs) or other staff such as project managers, even if they don’t want to outsource an entire project. This model, which of course also allows PharmaNet to find productive, revenue-generating roles for surplus staff, is already operational in Russia and some other of PharmaNet’s operations, he added.

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