Parexel’s plans for margin acceleration begin with sizable backlog, hundreds of job cuts
Job cuts after a rough run, along with increased clinical research growth that offset declining consulting revenue and flat sales in informatics, has enabled Parexel International to post modest fourth-quarter revenues gains and begin its fiscal year with a strong backlog.
Parexel, one of the world’s largest CROs, told Wall Street analysts earlier this month that while it hired 2,200 people in fiscal year 2015, it also is laying off 850 workers as part of a company-wide restructuring. Eliminating those positions will cost the company between $30 million and $40 million in employee separation benefits.
At a recent Wall Street analysts’ meeting on the company’s earnings, Parexel’s top management was asked about the tradeoff in the imbalance between its recent hires and layoffs.
Parexel Chairman and CEO Josef von Rickenbach said the company’s current new business portfolio requires a substantially bigger investment of time and resources upfront.
“You can say it’s a little bit of a shift in the curve, with a move toward more biotech products, more complex products, [and] more difficult science—and that’s a little different from the past,” said von Rickenbach. “And I would expect that eventually the entire industry would see this playing out. It requires a little more training also to get these people on board and to make them productive. And once that is set, it is going to be basically just as before. We’ve had a record in the past where for different reasons we have hired ahead of the curve and then delivered the revenue, and I think it’s going to happen again this year as well.”
Some Wall Street experts, like Garen Sarafian, senior analyst at Citi Investment Research, maintain the company is in a position to benefit from an increasingly specialized clinical trial market where regulatory expertise and a global footprint are key differentiators.
“Although such complex trials take longer to convert into revenue, we believe the increase in trials moving from the startup phase to fully ramped over the course of the year will be enough to drive the burn rate higher,” said Sarafian.
As for the layoffs—which, in addition to the aforementioned 850 workers, include between 125 and 200 former GlaxoSmithKline employees who were transferred to Parexel out of a pool of 450 earlier this year— company officials cited its new Margin Acceleration Program: an effort to raise margins to the 13-15% range from the 12-14% range, in part from a payroll perspective by reducing overhead and improving the labor mix.
“We’re accelerating the shift of activities into low-cost countries and that sometimes indeed means that you run for a little while with a sort of mirror organization to phase activities from one part of the world into another part of the world,” said Parexel Chief Financial Officer and Senior Vice President Ingo Bank. “And once that is done, you have the ability to reduce the personnel and then you benefit from the wage arbitration that you basically have by doing so.”
The overseas expansion also includes the April acquisition of Quantum Solutions India, a 900-employee provider of pharmacovigilance services for its clients. Pharmacovigilance is the practice of monitoring the effects of medical drugs after they have been licensed for use and are especially beneficial for identifying and evaluating previously unreported adverse reactions.
While the company’s clinical research business continues to grow, it incurred setbacks in other parts of its business, notably consulting.
“We had some client project delays that we were still working through,” said Bank. “Our new business wins in consulting are pretty strong.”
Overall, the company’s fiscal 2015 revenues were nearly $2.02 billion versus about $1.94 billion in the prior year, an increase of 4%. Looking ahead, the company is expecting double-digit growth in fiscal 2016, forecasting $2.2 billion in revenues—a 14% increase. To achieve that level of growth, the company has a $5.3 billion backlog and work to replicate the $818 million in new business that it received in the fourth quarter.
“Our strategic partnerships are well on track and we have a promising pipeline of partnership opportunities,” said von Rickenbach. He added that Parexel’s five largest biopharmaceutical clients account for 44% of its revenue—with its largest client at 12% of revenue, compared to 17% in fiscal 2014.
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