Sector Snap: Research cos. brace for rough market

NEW YORK - Tighter spending within the drug development industry and a decline in foreign exchange benefits likely will weaken revenue expectations throughout the outsourced clinical research sector.

Companies including Charles River Laboratories Inc. and Covance Inc. have been flying high on the outsourcing boost from big pharma and the biotech industry over the past several quarters. But many of the largest drug developers are tightening their research focus, while smaller biotech companies deal with tighter financing and tough credit markets.

Though the clinical research organizations all expect to continue gaining ground on outsourcing trends, it will likely come at a slower rate than seen over the past several quarters. Also, nearly every player has already said a stronger U.S. dollar is cutting into a prior foreign exchange benefit.

"This is a space that had a couple of very good years of growth," said William Blair analyst John Kreger.

But, he said, the yearlong downturn prompted caution from both the big pharma players and smaller biotechnology companies.

"Smaller companies are getting worried about raising money and being more cautious, while big pharma is very much in the throes of another round of restructuring," he said.

Shares of Wilmington, Mass.-based Charles River fell to their lowest point in more than five years Thursday after the company cut its full-year outlook. The stock plunged more than 20 percent to $25.65 at one point during the session.

"They (drug developers) are continuing to outsource, but due to heightened cost controls and year-end budget constraints, are spending in a more measured way," Charles River President and Chief Executive James C. Foster said in a statement.

Despite the disappointing report, analysts overall kept a positive outlook for the company and industry. Kreger said the underlying trend of outsourcing will continue, likely at a slower rate from big pharma with more caution from the biotech sector. Meanwhile, Leerink Swann & Co. analyst Isaac Ro, reaffirmed a "Outperform" rating for Charles River in a note to investors

"Near-term spending from drug companies is clearly under pressure, but we remain bullish on the long-term move toward outsourced services," Ro said.

Waltham, Mass.-based Parexel International Corp. also struggled with new business during its most recent quarter. After releasing fiscal first-quarter results short of Wall Street forecasts on Oct. 28, it cut fiscal 2009 guidance.

Shares fell more than 8 percent to a four-year low of $9.26 at one point during the trading session.

Princeton, N.J.-based Covance also disappointed investors in October by reporting weaker-than-exepected revenue growth during the third quarter. Still, the company has a lucrative $1.6 billion contract as part of a 10-year deal with drugmaker Eli Lilly & Co., and doesn't expect demand for development services to dwindle.

Shares fell $3.97, or 7.2 percent, to $50.88 in afternoon trading.

Meanwhile, Cincinnati-based Kendle International Inc. bucked the trend when it reported better-than-expected third-quarter profit on Tuesday, prompting a boost in guidance.

Still, its shares fell in afternoon trading Thursday, shedding $1.12, or 4.4 percent, to reach $24.19.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.