The US-based contract research organisation (CRO) reported a 64 per cent leap in sales to $86.4m (€65.8m) during the quarter but still managed to make a loss on operations of $1.8m, in contrast to the comparable 2005 period operating income of $5.2m. The pre-tax loss was even more stark at $6.9m, compared to the Q4 pre-tax profit of $5.2m – meanwhile, direct costs as well as selling, general and administrative expenses both soared by 67 per cent and 64 per cent respectively. Much of the carnage to the company's bottom line was caused by the acquisition of the Phase II-IV Clinical Services unit of Charles River Laboratories, under a $215m cash deal that closed in the third quarter but did not hit the balance sheet until the fourth quarter. Specific financials related to the acquisition include an $8.2m impairment charge on a customer relationship asset as well as charges for stock-based compensation expense, amortisation of acquired intangibles and severance, said the firm. The number of affected jobs has not been disclosed. The sale also dragged Kendle's entire year's performance down. Yearly operating profit only increased by 16 per cent, while pre-tax profit dropped 25 per cent. It is not known when the company's profitability will bounce back from the acquisition – Kendle was unavailable to comment prior to publishing. The purchase gives Kendle new expertise in several lucrative therapeutic areas such as oncology, infectious disease, respiratory, cardiovascular and ophthalmology; a new and diverse customer base; and an increased capacity to deliver global clinical trials - elevating the company's competitive position to the world's fourth largest provider of Phase II-IV clinical services. Only the top three CROs, Quintiles, Covance and PPD have been really dominant in this space so far. At the time of announcing the deal last year, Candace Kendle, chairman and CEO, said that the move was "an important step in our overall growth strategy, designed to significantly enhance our global competitive position and accelerate Kendle to a $500m organisation." However, investors at the time greeted the news with less enthusiasm, and the company's stock fell after the announcement. Buying part of a CRO is challenging, as the two cultures of the companies need to be assimilated effectively in order for the acquisition to start working in the company's favour. In addition, in this services-focused type of business, the workers and the backlog that come with the new company aren't necessarily guaranteed - technically they could leave at any time - so there is an element of risk involved with such an investment. In fact, Charles River's Phase II-IV Clinical Services unit stemmed from its acquisition of Inveresk in 2004, and the company has since struggled to effectively manage all the parts of the merged business, prompting the sale to Kendle. The Clinical Services segment only saw revenue growth of 1.9 per cent to $32.3m in Charles River's 2006 first quarter results, announced shortly before the sale. However, according to a research note published last week by analysts at Robert W Baird, Kendle is expected to achieve above 40 per cent sales growth this year, driven by the Charles River acquisition and above-industry organic sales growth.
