Two companies that make their living by conducting research for pharmaceutical companies continue to seek treatments for their clients', and their own, shifting strategies.
Pharmaceutical Product Development (Nasdaq: PPDI) and Parexel International (Nasdaq: PRXL) both reported quarterly earnings in which revenue and earnings lagged year-ago periods. Results were depressed by contract cancellations and delays, lower-than-expected new business opportunities, and/or mergers and acquisitions among clients.
Investors were depressed, too, sending shares down 5.8% and 8.4%, respectively, yesterday.
No wonder. For PPD's third quarter, diluted earnings per share of $0.32 were down 23.8%, after revenue dropped 13.4% to $341.1 million. Parexel's first quarter wasn't quite as severe. Revenue of $307.5 million was 3.8% less than the year-ago quarter while diluted EPS of $0.21 was 8.6% lower.
Those cancellations, delays, et al. are facts of life for contract research organizations, or CROs. After all, their business depends on the need for preclinical and clinical testing by medical companies ranging from Big Pharma to small biotechs.
The reports followed quarterly results announced earlier this week by two other prominent CROs -- Covance (NYSE: CVD) and Icon (Nasdaq: ICLR), which offered mixed results.
Strategic responses
CROs can't stop the revenue-rattling impact of Pfizer's (NYSE: PFE) takeover of Wyeth or Merck's (NYSE: MRK) impending purchase of Schering-Plough (NYSE: SGP). To protect against that, they must make moves of their own.
For instance, Pharmaceutical Product Development mentioned three Tuesday: a plan to spin off its compound partnering business, which develops and commercializes products; the purchase of a CRO based in China; and its investment in a partnership that acquires or invests in experimental compounds.
Those deals won't help in 2009, however. The company cut its full-year earnings-per-share estimates by more than 10%, following Covance's earlier lead.
Parexel will be laying off an unspecified number of employees in the current quarter as part of a restructuring plan. Pharmaceutical Product Development let go of 270 people in July.
As the drug and biotech industries reorganize and reevaluate, investors must put their companies under the microscope to see if they have the right formula to rebound.
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