Tough times continue at PharmaNet

By Phil Taylor

- Last updated on GMT

Related tags Revenue

Clinical research specialist PharmaNet Development Group reported a decline in both sales and earnings for the third quarter but has kept its guidance for the financial year at the same level, albeit excluding an as-yet unresolved impairment charge.

Total net revenue decreased to $109m from $124m in the previous year, actually coming in ahead of analysts expectations. But net earnings declined to $1.55m - or $0.08 per share - from $6.79m or $0.36 per share a year ago.

The financial results are preliminary because PDG is still trying to work out the value of an impairment charge resulting from the dramatic fall-off in the company’s share price in recent months.

The stock rallied a little when the results came out yesterday – rising around 8 per cent to $1.25, but is well down on its 52-week high of more than $40. After hours trading indicated a further rally could be on the cards as US trading get underway today.

Excluding discontinued operations, earnings from continuing operations in the year-ago quarter were $6.89 million or $0.37 per share.

Direct revenues fell nearly 11 per cent to $89m, which the company said was “primarily to lower late stage revenue partially offset by higher early stage revenue​.” Revenues were also held back to the tune of around $1.4m by the effect of the strengthening dollar.

The impact in the late-stage segment was mainly a result of cancelled and postponed contracts. Growth in early-stage was “fairly good​” year to-date, according to CEO Jeff McMullen on a conference call this morning, but there was some signs of weakness in the response to proposals out for early-stage work (bioanalytical services, bioequivalency studies and Phase I trials). Backlog in early-stage does tend to go up and down, he said, so it may just be a quarterly variation rather than a sign of a softening market. That said the company is taking a cautious approach and boosting sales efforts in its early-stage business, amongst other elements.

Operating margins also fell - to 3.7 per cent versus 13.7 per cent a year ago - as PDG struggled to make use of its clinical capacity. Adding to the bleak picture was a steep decline in book-to-bill ratio – lower ratios mean more cancellations – which fell to 0.4x from 2.0x at the end of the second quarter.

Moreover backlog - contracts that have been booked but not delivered yet. – fell to around $522m from nearly $580m at the end of June. That is a real disappointment for PDG as the firm pointed to the increase in backlog in its second quarter results statement as evidence that its underlying business remained sound.

CEO Jeff McMullen said that “cancellations and postponements have presented obvious - but temporary – challenges in the recent quarter.​” He expects a return to capacity utilisation and profitability next year. Client companies are showing more reserve in how they spend their outsourcing budgets in light of the current economic climate, in the early-stage segment if not in late-stage.

But​ we will get through this​,” stressed McMullen. “We still have a strong backlog and we’re bringing in new business.​”

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