US-based contract research organisation (CRO) Covance has stepped up its efforts to manage a challenging business environment, taking an asset impairment charge of US$119 million in the third quarter that resulted in an operating loss of US$76.7 million compared with operating income of US$57.8 million in the same quarter last year.

The net loss for the quarter ended 30 September was US$0.49 per share against earnings per share (EPS) of US$0.79 in Q3 2009. Without the charge, diluted EPS in the latest quarter would have been US$0.50, in line with analysts’ forecasts. Net revenues for the third quarter inched up 0.4% to US$477.0 million, ahead of the consensus estimate of US$473.8 million from analysts polled by Thomson Reuters.

Covance had already recorded a one-time charge of US$6.7 million in the second quarter to cover facility rationalisation and other cost-reduction measures in its Early Development segment, which is where the asset impairment charge also fell.

Announcing its third-quarter results, the CRO said it would consolidate its North American toxicology services in the face of waning demand by closing its facility in Vienna, US. The company has also decided not to build an East Coast preclinical facility on the Manassas, Virginia site it acquired several years ago.

On top of that, Covance aims to cut spending across the company, including corporate overheads; realise savings from process improvements and automation investments; and restructure its executive management team, in addition to other staff losses and reining in employment benefits. The positions of chief operating officer and president of commercialisation services have already gone.

Costs, savings

Covance expects the future cost of these actions to total US$35-US$40 million, with more than half of that sum to be incurred in the fourth quarter of 2010 and the remainder next year. The resulting savings, net of costs, are projected to generate incremental operating income of at least US$25 million in 2011.

“In order to address softer market conditions across much of our portfolio, we are taking decisive actions to reduce capacity and significantly lower our cost structure while maintaining service quality,” commented chairman and chief executive officer Joe Herring. “These actions will enable us to enter 2011 as a leaner, more competitive company.”

Despite a tougher environment for Covance’s toxicology services, the CRO fulfilled its expectations for consolidated revenues and earnings in the third quarter, Herring noted.
He also cited as “evidence of the success of our long-term business strategy” the company’s recent 10-year R&D alliance with Sanofi-Aventis, which should generate revenues of anything from US$1.2 billion to US$2.2 billion.

In the third quarter, this deal drove year-on-year backlog growth of 25.6% to US$6.02 billion as of 30 September 2010, compared with US$4.79 billion at 30 September 2009 and US$4.83 billion at 30 June 2010.

Foreign exchange translation added US$125 million to sequential backlog growth in the latest quarter. Adjusted for dedicated capacity contracts such as the US$1.2 billion order from Sanofi-Aventis, net orders were US$549 million and the adjusted book-to-bill ratio was 1.15 to 1.

Hard-pressed

In Covance’s hard-pressed Early Development segment, the third-quarter operating loss was US$98.5 million compared with operating income of US$22.4 million in Q3 2009.

That reflected the US$119.2 million asset impairment charge to absorb an excess of the carrying value of US facilities in Chandler (US$103 million of the overall charge) and Manassas over their estimated fair market value. There was also a US$1.3 million charge for cost actions taken in the second quarter of this year.

Net revenues in the Early Development business grew by 5.1% year on year to US$206.5 million, spearheaded by chemistry services.

In Late-Stage Development, Covance reported operating income of US$55.2 million, down by 19.9% on the previous year. Net revenues declined by 3.0% to US$270.5 million.

“While the previously-announced delayed clinical trials are performing largely as we forecasted in July, several factors lead us to moderate our near-term expectations,” the CRO commented.

These include “a longer duration between the time a project is awarded and revenue generation begins, a higher level of project scope reductions and other project cancellations, and a shifting mix of central lab tests performed and kits returned”.

Q4 forecast

Company-wide, Covance is expecting consolidated revenues, excluding the Sanofi-Aventis alliance, to be roughly the same in the fourth quarter as the third, “reflecting market conditions in toxicology and, in Late-Stage Development, the slower start-up, delays, and cancellations of clinical trials”, Herring said.

As a result, Q4 earnings per share are pegged in the range of US$0.50 to US$0.55, including earnings from the Sanofi-Aventis deal but omitting the site closure and other costs associated with restructuring. Analysts were projecting fourth-quarter EPS of US$0.58 per share on revenues of US$485.2 million.