As R&D spend drops, CROs face tough times

The economic mess plaguing the biotech and pharma industries is spreading to CROs. North Carolina-based CRO PPD lowered its annual forecast late yesterday after the company posted lower-than-expected first quarter results. And shares of Kendle International, a smaller CRO, nose-dived on word that its first quarter revenue would be well below the $121 million Wall Street had anticipated.

Both companies blamed economic conditions for their bleak earnings. Many companies--small developers in particular--are taking whatever steps they can to preserve cash for as long as possible. This includes suspending or cutting non-core drug development programs, and that's wreaking havoc on CROs' bottom lines. "In this challenging economic environment, we have experienced unprecedented cancellation levels, significant rescheduling of existing backlog, and lower-than-expected authorizations for the first quarter," said PPD CEO Fred Eshelman.

At Seeking Alpha, Alan Brochstein further explains the situation. "The real problem now is that we have an environment with falling prices. There is apparently excess capacity now, but this isn't an industry that enjoys much price elasticity, so any cuts will go right to the bottom line." He adds that since CROs rely heavily on labor, it will be difficult for them to control costs beyond implementing layoffs to match decreased industry demand for services.

- check out PPD's release
- here's the WSJ report on Kendle
- read Alan Brochstein's overview of the CRO market from Seeking Alpha

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