Parexel surprised some Wall Street analysts at a recent meeting when it lowered its revenue guidance for fiscal year 2016 due to booking cancellations worth $305 million for the first quarter that ended Sept. 30.
One analyst referred to the situation as the company’s “Achilles’ heel,” saying it is a bigger problem for Parexel than it is for its fellow CROs.
The cancellation rate of those bookings is 5.7%, which was cited as the “highest ever” by Jefferies & Co. analyst David Windley, a managing director in the company’s Equity Research Group. In the past, the cancellation rates were in the 3.5% to 5% range.
“While we have seen some uptick in cancellations from other CROs, Parexel’s was the most pronounced,” said Windley.
Other analysts such as John Kreger, a principal and pharmaceutical outsourcing analyst at William Blair & Co., also noted the cancellation rate was high, but added that the CRO had good gross booking for the quarter.
“This quarter was better than each of the first quarters in the past two years when Parexel’s September period produced very disappointing net bookings,” said Kreger.
The company reported an 11.3% year-over-year increase in backlog to $5.4 billion including new business wins totaling $914 million to offset the cancellations. Windley, however, questioned whether the hefty cancellations ruined an otherwise strong bookings result or if the strong selling staved off a weak quarter.
During a conference call, Parexel COO Mark Goldberg explained that the high rate of cancellations was primarily 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,” said Goldberg.
Parexel CEO Josef von Rickenbach stressed that the quarter’s higher rate was not related to a single client, but was relatively broad-based and part of the firm’s normal booking cycle. In looking back at the last two quarters, he said the company’s revenue was not greatly affected by the cancellation rate.
“In this instance, it was relatively broad-based and basically the way these projects that were affected specifically flowed through the year, ultimately yielding the pattern that we have,” von Rickenbach said at the meeting with analysts. “If you go back two quarters, we had a relatively high cancellation rate and it had really no impact on revenue.”
He added that Parexel could recoup some of the lost business in the second half of the year, which generally includes the company’s strongest quarters. The company’s clinical research services, which accounts for 75% of its revenue, increased 6.6%—ahead of some analysts’ expectations.
“Overall the company had a modest growth in revenues, overall margins that were good and strong gross profits, but Parexel is less profitable than its peer group of CRO competitors,” said Kreger, adding that aside from the booking cancellations, the company is getting off to a strong start.
Kreger said he viewed the cancellation issue as “noise” and not a pattern, as CRO customers—biopharmaceutical companies—can launch clinical trial projects at different parts of the year and hold back others due to budgetary considerations. He said other publicly traded CROs also have their ups and downs with booking cancellations.
“You can’t read too much in the metric of one quarterly spike at Parexel, because overall they had a backlog of $5.4 billion, that including new business wins of $914 million which offset the cancellations,” said Kreger.
Windley said other CROs have similar cancellation issues, but they are not as pronounced, adding that Parexel’s lost bookings in the first quarters is the company’s “Achilles’ heel.”
“Still, from an operating results perspective, they performed better than what is expected of them in the first quarter,” said Windley.
At the end of the analyst session, von Rickenbach was asked about what the impact on Parexel would be if Pfizer—one of its largest pharmaceutical customers—were to merge with Allergan, as both companies are in early discussions toward a potential transaction.
“We really don’t expect any fallout from this, certainly not negatively,” said von Rickenbach.
Ronald Rosenberg is a former business and science reporter for The Boston Globe. He has written features for New Scientist and Inc. magazine. His lengthy journalism career includes editing an award-winning weekly newspaper in Cornwall, N.Y. Ron also was a media relations specialist for the science faculty at Boston University, and a Knight Science Journalism Fellow at the Massachusetts Institute of Technology.
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