Most of the results are in; the first quarter was not a pretty one for most of the publicly held CROs that are heavily involved in clinical research. Coming on the heels of a fourth quarter that did not show particularly robust performance, it makes us wonder if the current slowdown will be temporary or long-lasting. Before suggesting an answer to that question, let’s quickly review some first quarter results.

Covance Inc.

Total revenue increased 7%. Revenue in the Late Stage segment increased 25%. Clinical development revenue rose 9% to $78 million; Central Lab revenue rose 24% to about $145 million. The company does not specifically identify the amount of cancellations in its individual business units. However, management suggested they were at the low end of the historic range in the quarter. They also noted that the strength in the central lab business reflects steady Phase II-III work directly from drug sponsors, the source of 75-80% of that unit’s revenue.

ICON plc

Total revenue increased 9%, as did clinical development revenue. Business activity was particularly slow in the first part of the quarter, but rebounded a bit in March and again in April. The value of the RFPs to which the company responded in the quarter was significantly lower than in the first quarter of 2008. Gross new business wins were $265 million, compared to levels of $321 million in the fourth quarter of 2008 and $440 million in the first quarter of 2008. The cancellation rate was a bit higher than normal in both the clinical development and central lab business units.

Kendle International

Revenue decreased 5%. New business wins were $72 million, compared to $180 million for the same period in 2008. Cancellations totaled $52 million, versus an average of $28 million in the previous four quarters.

PPD Inc.

Revenue in the Development segment decreased almost 4% to $335 million. New business wins were $580 million, versus $690 million in the first quarter of 2008. Cancellations totaled $215 million, including one $77 million project. Cancellations were $135 million in the first quarter of 2008.

PAREXEL International

Total revenue in the quarter rose 8% from the March 2008 quarter. Revenue in the Clinical Research Services segment rose 4%; that segment accounted for about 76% of PAREXEL’s total revenue. Corporate-wide, the company generated new business wins of $427 million and cancellations of $96 million; comparable figures for the March 2008 quarter were $391 million and $50 million, respectively.

On conference calls explaining their financial results to investors, the managements of each of these companies acknowledged the unprecedented slowdown in decision-making by many drug and biotechnology company customers, and the unusually low visibility of near-term results. In response to probing questions from many analysts, each of the CEOs refused to characterize the current environment as representing a brief aberration or a longer-lasting state of affairs. They were adamant in telling those analysts – who were trying to use historic financial relationships, anecdotal information from outside sources, and suppositions about the flow of research dollars from preclinical to clinical studies – that they simply did not have enough hard data on which to base the conclusions the analysts were proffering about the nature of business and financial results in the next few quarters. They acknowledged that many customers and prospects were “sharpening their pencils” on pricing, but stated that they did not expect the emergence of predatory price competition to destroy the revenue or profit growth of the CRO industry.

So what’s the answer to the question posed in this column’s sub-title? In the long run, drug sponsors of all sizes need to continue spending money on clinical research. In the short run, however, large companies (especially those involved in mega-mergers) are reevaluating their spending programs as they have not done in several years, and small companies (especially those limited by financial resources) are looking even more carefully at every product in their pipelines.

Michael A. Martorelli is a Director at the investment banking firm Fairmount Partners. For additional commentary on the topics covered in this column, please contact him at Tel: (610) 260-6232; Fax (610) 260-6285.