PharmaNet Sees Profits Sink in Q1 due to Cancellations
Princeton, N.J.-based contract research organization (CRO) PharmaNet Development Group dropped out of the black with a reported net loss of $10.1 million for the first quarter of 2008, primarily due to canceled contracts. PharmaNet cut its guidance for 2008 and its stock plunged 28% on May 1 to $17.10, far off its 52-week high of $43.05.
The company reported relatively flat revenue growth, recording a 2.4% increase to $86.8 million in its first quarter of 2008.
Operating margins sank to 8.6% in the first quarter from 10.2% last year as a result of higher expenses in anticipation of a larger volume of projects.
PharmaNet reduced its 2008 guidance to between $390 million and $399 million from its previous estimate of $401 to $409 million. It also slashed its estimated earnings by more than half to 53 cents to 63 cents from $1.42 to $1.57 a share.
Responding to an analyst’s suggestion that the structure of the company may not be well suited to handle sudden swings in project cancellations, Jeffrey McMullen, PharmaNet’s president and chief executive officer, said in the conference call: “I’m not sure this is a particular reflection of our size or the way we are configured. The impact was significant and concentrated. I think for any company that would be difficult to absorb. We have reacted...we’ve started cost saving measures, but they don’t happen overnight.”
To bring the company back to profitability, it is embarking on a series of cost cutting measures to “right-size its later stage business,” including closing offices and reducing staff.
PharmaNet will reduce and reposition its workforce, saving the company $7.1 million in 2008. Part of its strategy is to allow late stage development staff to be home-based to minimize office expansions. In addition, PharmaNet will be closing its offices in Australia and Washington, D.C. Some employees from these offices will become home-based. Closing the offices is expected to cost the company $1.5 million in the second quarter of 2008...
McMullen stated the company will continue to hire in places of increased client demand, such as the emerging markets of Latin America, India and the Asia-Pacific region.
The company attributed its lackluster revenue growth to an unusually large number of project cancellations within its late stage development division. This resulted in a 10.7% drop in revenue in this business segment. These project terminations resulted in an unexpected loss of $30 million.
Approximately 60% of the cancellations resulted from the study drug showing a lack of efficacy.
“The majority of these were ongoing studies from biotech clients who decided not to continue their studies. None of the cancellations were the result of our inability to perform nor did the canceled studies go to any of our competitors,” said McMullen.
PharmaNet saw similar contract cancellations during the fourth quarter of 2007. In the last two quarters combined, cancellations will cost the company $59 million in revenue. Out of 30 clinical development projects started late last year, 15 have either been canceled or placed on hold.
The company also said higher professional fees and facility expansions in Canada and Spain caused its administrative expenses to increase to $6.6 million in the first quarter 2008, compared with $5.2 million in the first quarter 2007. The company stated that costs related to business development and staff reductions contributed to the increase.
The company’s early stage development business saw a 27% increase in direct revenue during the first quarter compared with the same period in 2007. This was attributed to higher volumes in the company’s phase I facilities in Toronto and bioequivalence testing services.