Parexel sees book-to-bill bounce back as GSK strategic partnership renewal bears fruit

The recently renewed partnership comes with the addition of about 450 GSK employees​, many of whom are arriving with work already in hand, Parexel CEO Joseph von Rickenbach told investors during a conference call Thursday.

The new employees will be in addition to 550 staffers added over the past quarter. Von Rickenbach said that demand from small biopharma companies is currently healthy and the company is “detecting signals​” that larger biopharma companies are increasing their outsourcing.

Headwinds to revenue from foreign currency exchange rate movements, as well as a single, large cancellation in the Strategic Compliance business line during FY14 are still impacting the company’s bottom line.

Book-to-Bill​

Analysts seemed particularly perplexed by the massive rise in the company’s book-to-bill from .88 in the last quarter to 1.54 this quarter.

“The current quarter’s book to bill of 1.54x is the highest in 10 quarters and in our view, validates management’s commentary last quarter that partnership bookings may be volatile, but are not in decline​,” Citi Research analyst Garen Sarafian said in a note to investors.

And when asked what created this massive shift between the two quarters, von Rickenbach told investors that the “real difference was that the strategic partners came back really strongly – half of our bookings are attributable to strategic partners. Q1 didn’t go right and in Q2 everything went right​,” he said, adding that he hasn’t seen any major shifts in terms of pricing and that the market is “brisk in terms of competition​.”

But the success of Q2 doesn’t guarantee future business wins and the company has lowered its revenue guidance for the remainder of the fiscal year.

“We’ve seen a lot of our transfer studies from [strategic partner] Pfizer start to end, [which] pushes backlog maturity to a younger stage​,” von Rickenbach said. “And a lot of the projects we’ve won are long-term, big projects that take a while to get started. Ultimately the revenue associated cannot be recognized until certain milestones are hit​.”

Analysts seemed skeptical of the rosy quarter as well. The company’s “quarter appears quite good on the surface, however, when digging deeper one finds a number of trends that require further analysis​,” ISI analyst Ross Muken said in a note to investors. “With respect to revenues, core growth slowed to ~4%, which marks the lowest point we have seen since the beginning of 2012​.”

Von Rickenbach also conceded that the company’s backlog conversion rate in the quarter was “somewhat less than what we thought​,” and that the company was “awarded a significant number of de novo studies that take a while to ramp up, while our competition is in the high-revenue generating stages of their backlog​.”

But the company expects revenue to ramp back up following the end of this fiscal year. Von Rickenbach added in a statement: “The current mix of business in our backlog has resulted in a continued disproportionate number of projects in the start-up stages.  In combination with the adverse impact of recent foreign exchange movements on revenue, we expect these dynamics to have a dampening effect on our revenue projections in the short term, but then lead to rapid expansion as the backlog matures​.”