Kendle's New Risk

KendleInternational's (Nasdaq: KNDL  ) third-quarter results show that the drug development service provider's growth remains on track. However, investors will need to pay close attention in the next few quarters to be sure Kendle doesn't stumble as it integrates its latest acquisition.

Kendle's third-quarter net services revenue rose an impressive 46% to $75.2 million. However, a healthy portion of this growth -- 22% of it to be exact -- stemmed from Kendle's acquisition of Charles RiverLaboratories' (NYSE: CRL  ) Phase 2-4 clinical services business.

By comparison, bottom-line growth was less explosive. Net income rose 17.8% year over year to about $4 million, as interest on the debt that Kendle took on to finance the Charles River acquisition took a big bite out of earnings. Interest expense rose a whopping 2,382% versus last year's third quarter. Kendle's bank borrowings jumped to $200 million as of September 30 versus just $3.8 million in December 2005.

The large increase in debt is a new risk to future earnings. At the moment, the climate for outsourced services looks good. Kendle received $148 million in new business awards in the third quarter, an increase of 76% from last quarter. Total business authorizations, comprising signed and verbally awarded business, totaled $590 million at the end of September.

Nevertheless, the contract research sector is notorious for sudden cancellations. If some of Kendle's contracts get scrapped, earnings performance could get lumpy, exacerbated by the higher interest expense. For example, if Pfizer (NYSE: PFE  ) , which accounted for 14% of Kendle's revenue in the third quarter, suddenly decided to delay or nix some contracts, the effect could be pretty dramatic.

The Charles River acquisition was probably a smart move for Kendle over the long term. As clinical trials increasingly go global, drug development services companies need to have a certain mass and geographic reach to win contracts. The Charles River purchase helps Kendle move in that direction. However, in the near term, investors could be in for a bumpy ride.

For more on Kendle, check out these stories:

Pfizer is an Inside Value selection. For more information on companies with great growth opportunities, try out the newsletter free for 30 days.

Fool contributor Brian Gorman does not own shares in any of the companies mentioned.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 516878, ~/Articles/ArticleHandler.aspx, 10/24/2016 1:25:36 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
KNDL.DL $0.00 Down +0.00 +0.00%
Kendle Internation… CAPS Rating: ****
CRL $82.13 Down -0.87 -1.05%
Charles River Labo… CAPS Rating: *****
PFE $32.18 Down -0.36 -1.11%
Pfizer CAPS Rating: ****