AlbanyMolecular Research's (Nasdaq: AMRI ) third-quarter results show that the chemistry services outfit continued to slog through some tough times. The company is taking another painful step that should improve profitability in its core operations. Even so, heightened activity in its riskier side business suggests that 2007 might not bring a fatter bottom line.
As was the case in the past few quarters, year-over-year revenue again declined in the third quarter. However, the drop was tiny, which is heartening considering that Albany Molecular's royalty stream from sales of Sanofi-Aventis' (NYSE: SNY ) Allegra allergy drug fell 50% to $6.3 million. The company compensated for plummeting royalties with robust growth in contract services revenue, which rose 20% to $37.9 million.
Unfortunately for Albany Molecular, revenue from chemistry services doesn't drop to the bottom line to the same extent as royalties. The company's operating earnings crashed 88% compared with last year's third quarter to $780,000. Operating earnings were also affected by an increase in selling, general, and administrative expenses, although these expenditures are arguably prudent given the firm's need to bolster its services area.
In addition to slumping Allegra royalties, Albany Molecular's profitability also was hurt by continued sluggishness in its largest service line, Large Scale Manufacturing, which saw revenue decline 2% to $18.2 million. Given softness in this area, the company's decision to begin restructuring the unit is welcome. The move will hit fourth-quarter results with a $3 million to $4 million charge. It's worth it, as Albany Molecular expects to realize $5 million in annual savings beginning in 2007.
Ultimately, though, at least part of these savings will get eaten up by the firm's plans to initiate preclinical trials for an experimental oncology compound. It's a risk for Albany Molecular, considering that profits currently are pretty meager.
At the same time, the longer-term payoff could be substantial. The company already has generated some revenue from an out-licensing deal with Bristol-Myers Squibb (NYSE: BMY ) . Albany Molecular could receive more if the compounds involved advance in development, and, if any are commercialized, it will get royalties, just as it currently does from Allegra. Albany Molecular likely will seek a similar licensing deal for the oncology molecule if it can provide more validation for the drug.
Albany Molecular looks poised for an improved showing in its core business in 2007. However, the company will remain a somewhat speculative play due to its dabbling in drug development.
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Fool contributor Brian Gorman does not own shares in any of the companies mentioned.