Kendle International: Clinicial trials and tribulations
It’s hard to believe, but the average drug sitting on the shelf in your medicine cabinet costs $800 million and 10 years to develop.
Any astute investor might wonder where that $800 million goes and whether he can profit from it. A good chunk of the investment is earmarked for early pre-clinical trials and the three phases of FDA approvals, more and more of which are being outsourced by both Big Pharma and Biopharma to companies such as Kendle International (Nasdaq:KNDL), one of the leading clinical research organizations (CRO) in the world.
Founded in 1981 by Dr. Candace Kendle, PharmD, the Cincinnati, Ohio firm has a market cap of $724.7 million and has consistently demonstrated an eye for the strategic opportunity. It is one of the smaller CROs, but has positioned itself to play on a global scale. It employs nearly 4,000 people in 48 office locations in 28 countries on six continents. Scale is important for a vendor supporting the increasingly global pharmaceutical industry, as both development spending and revenue shifts out of North America and into Asia/Pacific, Latin America, and the rest of the world. With offices in Australia, China, India, Singapore, and throughout Latin America, Kendle is well positioned to benefit from this significant shift.
Size and reach are also important in the “megatrial” market, the fastest growing segment of the CRO industry. Just as the name implies, megatrials are large-scale, long-term controlled research studies that require thousands of patient participants (usually 10,000 or more), strong project leadership, and a high level of technology to collect and analyze the resulting data. Kendle’s organic growth and crafty acquisitions have built a company that is fully capable of competing for these mega projects.
In 2006, Kendle acquired Charles River Laboratories, a provider of Phase II-IV Clinical Services. The acquisition boosted the company’s size by 50% and, more important, added an array of services that dovetailed nicely with its existing clinical development expertise. The combined company’s service offerings include clinical development support for all phases (Phases I through IV) as well as regulatory support and clinical data management. On June 2 of this year, the company strengthened its early-stage offerings with the acquisition of DecisionLine Clinical Research, a Phase I CRO based in Toronto. This purchase should better strategically position the company for a projected increase in Phase I outsourcing, and subsequent pull-through opportunities from Phase I to Phases II and III.
Kendle’s excellent execution produced an outstanding second quarter. Net service revenues of $127 million and net income of $7.8 million were up 30% and 81%, respectively, from the second quarter of 2007. The company’s best ever EPS of $0.52 was up 79% for the same period. These results handily beat estimates of $115.3 million in revenues and an EPS of $0.46 by analysts who are now predicting a 25% average annual growth rate through the next five years. This optimism is supported by the fact that the company is seeing increases in large trials and in RFPs, which are growing both in number and dollar value.
As with all CROs, cancelled or deferred contracts are an exposure. However Kendle’s cancellations of $27 million for the second quarter, or 13% of gross sales, were below the industry average of 15.0% to 20.0% of bookings.
The growth of CROs is driven by the economics of outsourcing and specialization and by the powerful benefits of getting drugs to market faster. Recognized in 2008 as one of the top CROs in Europe and in 2007 as the Top CRO to work with in the United States, Kendle has established itself in reputation and in performance as a leader in a growing market.
