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Kendle International: Biopharma industry turnaround has begun

Updated 4:20 p.m. on Thursday, May 6, 2010. Contract research organization (CRO) Kendle International (NASDAQ: KNDL) is beginning to see a turnaround in its business as negative trends that have been affecting its drug- and therapy-developing clients taper off. Some securities analysts recently have said Kendle is in a tough spot — too small to […]

Updated 4:20 p.m. on Thursday, May 6, 2010.

Contract research organization (CRO) Kendle International (NASDAQ: KNDL) is beginning to see a turnaround in its business as negative trends that have been affecting its drug- and therapy-developing clients taper off.

Some securities analysts recently have said Kendle is in a tough spot — too small to compete in the top tier of CROs that get the most lucrative, late-stage drug development contracts, but too laden with debt to acquire other organizations to get bigger.

The Cincinnati company that manages clinical trials and data for its biopharmaceutical clients reported net income of $1.2 million, or 8 cents a diluted share, in the first quarter. That was up 35 percent from $886,000, or 6 cents a diluted share, in the year-ago quarter.

The earnings improvement came mostly from a much lower income tax rate in the recent quarter (56.4 percent) than in the first quarter of 2008 (88.4 percent). The company also took a severance charge of $3.8 million in the fourth quarter to cover job cuts aimed at saving between $16 million and $18 million this year.

Net service revenue was $90.2 million in the first quarter, down 17 percent from $108.1 million a year ago. Operating income also was down from the year-ago quarter — to $4.3 million from $8.1 million, a 47 percent drop.

A hopeful sign: New business awards for the first quarter were $89 million. That was up 24 percent from $72 million a year ago.

But compare that with new business awards of $180 million in the first quarter of 2007 — before Kendle’s customers started to feel the ill effects of a worldwide financial crisis and resulting economic downturns, drug development failures and industry consolidations. These trends have meant less development work for Kendle and its peers over the last year.

New business awards slowly accelerated as the first quarter progressed and continued into the second quarter, the company said in its earnings release.

“While Kendle has had a particularly challenging first quarter, we saw improvement throughout the period and up until today,” said Chairman and CEO Candace Kendle, in her company’s release. “Our customers would appear to be at the end of their pipeline realignments and merger-related disruptions, and are settling into selection of CRO partners.”

That’s where contract research organizations like Kendle come in. “Cost efficiency remains a top priority for our customers and outsourcing is a key strategy in achieving it,” Kendle said. “We are encouraged about the latter half of 2010 and into 2011.”

During an early morning conference call with analysts Thursday, Kendle talked about her company’s emerging “global e-delivery systems,” which may become a competitive advantage.

“An example of utilization of comprehensive technology is a study we’re conducting that requires subjects traveling around the world to check into clinics for follow-up in multiple geographic regions,” Kendle said.

“Electronic everything was essential for this study… an electronic form of medical record for clinical trials, electronic trial and after files, electronic source documents, electronic patient record outcomes, and then our TrialWatch system for entire study management.”

Kendle also said her company is reorganizing its sales force and changing its selling process, “partnering operations and objectives in a strategic selling process across the organization, she said. “We need to tighten up the way operations executives …  deliver services to the customer.”

Most experienced in late-stage drug and therapy development, Kendle International is working on its early stage business, which is subject to revenue spikes and troughs.

“We are working on kendle’s strategic position in early stage to put us in a better position in 2011,” Candace Kendle said. “We udnderstand for Kendle to be a real player, we have to make some decisions here.”

She also said her company would continue to withhold earnings and revenue guidance “until our recovery is fully underway.” Kendle shares fell more than 12 percent to $14.75 on the Nasdaq Stock Market Thursday. The company announced its quarterly earnings after the market closed Wednesday.