After warning investors two weeks ago that first quarter 2009 revenues would be significantly lower than expected, Cincinnati-based contract research organization (CRO) Kendle released its first quarter earnings late last week—reporting a 78% drop in profit compared with the same period last year.
The company’s net income for the first quarter 2009 was $886,000 or $0.06 per share, compared with net income of $4.1 million or $0.27 per diluted share for the same period last year. Net service revenues for the quarter fell 5% to $108.1 million, down from $114. 1 million in the first quarter 2008.
“Over the recent weeks, many observers have commented on the state of the biopharmaceutical and CRO industries. While there’s a sense of optimism around long-term CRO growth, we and others have expressed a certain level of caution around the potential for short-term volatility as a result of [merger and acquisition] activity in our large customer base and funding difficulties for some of our smaller customers,” said chairman and CEO Candace Kendle in an analyst call last week.
While last week’s call was intended to deliver the CRO’s first quarter financial results, many financial analysts focused their questions during the Q&A on Kendle’s comments from another conference call earlier this year.
The call in late April warned shareholders that first-quarter revenues would be significantly lower than original forecasts. Kendle attributed the shortfall to pricing pressures and “unprecedented biopharmaceutical industry conditions.”
“There has been significant price pressure in our market. We have seen pressure on price as increasingly important in the second half of 2008 with a rapid move to a primary predictor in Q1 2009,” Kendle said on that call.
The CRO’s shares plummeted more than 50% in the hours after the earlier call.
Following Kendle’s first conference call, other CROs released earnings statements that disputed Kendle’s comment about pricing pressure in the industry. One caller pointed this out in last week’s call, and Candace Kendle downplayed her previous comments.
“I wouldn’t want to give you the impression that this is all about slashing prices. There certainly is price pressure in the market—our qualitative research says that pricing has become more important to customers—but this is more about realigning our operations delivery and our infrastructure than it is about price cutting,” Kendle said.
Kendle’s investor confidence seemed renewed following Thursday’s call, as the company’s share price shot up 4.5% to $10.04 at press time.
Kendle also outlined cost-cutting measures, including strict controls over discretionary spending, a hiring and wage freeze and “workforce optimization initiatives.” The company will reorganize its leadership structure, ultimately saving between $17.5 million and $22.5 million in the second half of 2009.
Senior vice president and chief financial officer (CFO) Karl “Buzz” Brenkert III abruptly left the CRO last week, after six years as CFO. He was replaced by Kendle’s vice president of accounting Keith Cheesman.
Company executives delayed guidance discussions until its Q2 2009 earnings call.
“We believe Q1 sales results are unique and should be viewed as a near-term, manageable event,” Kendle told investors.