CRL Charles River Laboratories International Inc

Pharmaceutical Product Development, Inc. (PPDI) reported first quarter 2011 earnings of 32 cents per share, above the year-ago earnings of 14 cents per share. Earnings growth was driven by higher revenue, improved gross margins and reduced SG&A expenses. Earnings however came a penny below the Zacks Consensus Estimate of 33 cents.

Quarterly revenue of $383.2 million was up 10.5% over the prior-year period and also ahead of the Zacks Consensus Estimate of $360 million. Revenue growth was driven by strong performance of the Clinical Development segment.

The Quarter in Detail

The company operates through two segments - Clinical Development Services and Laboratory Services

Clinical Development Services: The segment includes global phase II-IV clinical trial management services.  In the first quarter, the segment revenue was $279.7 million, up 12.2% over the prior-year period driven by solid growth in all geographic regions. The segment saw strong increases in request for proposals (RFP’s) activity, the majority of which came from big pharma and mid-sized biotech companies.

Laboratory Services: The segment includes phase I clinic, cGMP, bioanalytical, central laboratory, vaccines and biologics, and BioDuro/discovery services. In the first quarter, the segment revenue was $76.5 million, up only 2.6% over the prior-year period and down 9.8% sequentially. Revenues in this segment were negatively impacted by higher-than-expected cancellations in the phase I clinic and lighter results in the bioanalyical and vaccines business.

Management is hopeful of a recovery in the laboratory services segment in the second quarter of 2011 and improvement thereafter driven by new authorizations in the phase I clinic, bioanalytical lab, and cGMP Lab. The hope of a turnaround is backed by the three strategic, outsourcing relationships that PPD established in the quarter. Of these, two were preferred provider relationships for phase 1 service and the third was a cGMP laboratory service.

In the reported quarter, the company posted a book-to-bill ratio of 1.31, above 1.20 reported in the fourth quarter of 2010. Gross bookings were $640 million and cancellations were $174.1 million in the reported quarter. 

Total backlog came in at $3.6 billion, with an average duration of 33 months (down from 34 months reported in the fourth quarter of 2010).

Gross margin was 50% in the first quarter, driven by strong gross margins in the clinical development segment. SG&A expense declined to 28.5% of revenues in the quarter compared with 33.8% in the prior-year quarter as the company continues to focus on reducing these expenses to drive productivity gains and improve revenues.

Our Recommendation

We currently have an Outperform recommendation on Pharmaceutical Product Development. The company retains a Zacks #2 Rank, which translates into a short-term Buy rating. We are impressed by the company’s strong bookings, stable backlog duration, sound expense control and improving margins.

Pharmaceutical Product Development is a leading contract research organization (CRO) providing drug discovery and development services to pharmaceutical and biotechnology companies.

Companies like Pharmaceutical Product Development and Charles River Laboratories (CRL) suffered in 2008-2009 due to a decline in demand for their services in time of a depressed economy. The environment for CRO’s is gradually improving. The improving RFP flows and key strategic partnerships secured by PPD with bio-pharma customers are a testament to such a revival, which would in its turn result in bottom-line growth.

 
CHARLES RVR LAB (CRL): Free Stock Analysis Report
 
PHARMA PROD DEV (PPDI): Free Stock Analysis Report
 
PHARMA PROD DEV (PPDI): Free Stock Analysis Report
 
Zacks Investment Research