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