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ICON, Kendle Finish Strong 2008 on Soft Side

Monday, March 2, 2009

It was another quarter of ups and downs for the clinical trial industry as contract research organizations (CROs) struggled through project delays and customer hesitation brought on by the unstable economy. In spite of the challenges, however, two CROs—ICON and Kendle—finished the year on top.

Dublin, Ireland-based ICON closed out 2008 with revenue growth of 37% to $865 million. Fourth quarter revenues increased 22% over Q4 2007 to $220 million. Net income for the year was $78.1 million or $1.30 per share, compared with $56 million or $0.94 per share, last year, and net revenue for the fourth quarter was $21 million or $0.35 per share on a diluted basis, compared with $15.9 million or $0.26 per share last year.

The CRO completed 2008 on the high-end of its revenue guidance, which was reforecast in January to be in the range of $862 million to $865 million.

ICON acquired Healthcare Discoveries in February 2008 and Prevalere Life Sciences in November 2008. Both companies “modestly” exceeded their original acquisition criteria, said chief financial officer Ciaran Murray in an investor call last week. The company also added nearly 1,400 staff in 2008, bringing its total employee base to 7,000.

ICON felt the effects of delayed decision-making in Q4 from both small and large companies due to the weak economy, CEO Peter Gray told investors.

“Everyone is certainly thinking about the implications of the current economic environment even though for a lot of them there’s no good reason why they should be postponing long-term research decisions given the strength of their cash flows,” Gray said.

To reduce the risk of cancellations and bad debt, Murray told investors that Kendle has implemented a rigorous review and credit check process in the past few quarters and going into 2009.

“The events of last year and the state of the market have meant that some customers that we would have judged to be reasonably sound—and that we judged had the cash to do the programs—one or two of them has got into some difficulty. We’ve made some provisions in quarter four to take care of any risk that we see there,” Murray said.

Global CRO Kendle also posted revenue growth for 2008 over 2007, despite a sharp decrease in earnings for the fourth quarter. Full year 2008 net service revenues increased 19% to $475.1 million. Net income for the year rose 57% to $29.4 million, or $1.96 per share on a diluted basis, compared to $18.7 million or $1.26 per diluted share for the same period 2007.

Net service revenues for the fourth quarter were up 5% over the same period last year to $109.2 million. Net income for the fourth quarter was down year-over-year to $5 million, or $0.33 per diluted share, compared with $6.4 million, or $0.43 per diluted share, for the fourth quarter 2007.

The CRO attributed the soft fourth quarter to a programming issue for one study involving one customer. The additional work related to this issue reduced the company’s Q4 revenues by approximately $2.3 million, and additional direct costs were accrued at year-end, cutting earnings per share by 18 to 20 cents. Kendle expects to recover future direct costs related to this issue through insurance proceeds.

“Up until yesterday, we had very good reason to believe that we could get the insurance coverage into the quarter and not have to have this discussion. While we can’t promise that it will be resolved in the first quarter, the indications are strong that we’ll see a very near term resolution,” said Kendle chairman and CEO Candace Kendle, PharmD, in a call with investors last week.

For the full-year 2009, the company is projecting net service revenues in the range of $510 to $530 million.

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