US-based contract research organisation (CRO) Covance extended its robust first-quarter performance into the second quarter ended 30 June, posting net revenues up by 14.6% year on year to US$436.9 million and operating income 21.5% higher at US$67.5 million.

That compared with increases of 15.1% and 20.6% respectively for net revenues and operating income in Q1. Covance also hit a record operating margin during the second quarter, rising to 15.4% from 14.6% in the same quarter of 2007.

Earnings per diluted share (EPS) reached US$0.80, 24.2% ahead of last year’s quarter and including a US$0.01 gain from the sale of Covance’s centralised electrocardiogram (ECG) business to cardiac safety specialist eResearch Technology during the fourth quarter of 2007. Without this gain, second-quarter EPS would have been 22.7% higher at US$0.79.

Given the strong market demand for its services, Covance continues to believe it can deliver 20% annual growth in EPS to US$3.18 per diluted share (excluding the ECG gain in both periods) this year.

Early/Late Development

The Early Development segment, which includes preclinical toxicology, analytical chemistry and clinical pharmacology services as well as research products, recorded year-on-year growth of 11.5% to US$213.1 million in net revenues (which exclude reimbursable out-of-pocket expenses), while operating income for the second quarter was 10.7% higher at US$54.2 million.

Early Development revenues were 5.5% ahead of the first quarter and the operating margin widened by 40 basis points from Q1 2008 to 25.4% as new toxicology space started to come online and a number of Phase I projects kicked off after being delayed in the first quarter. The operating margin was slightly below the 25.6% achieved by the segment in the second quarter of 2008.

Capacity has begun to ramp up at Covance’s US toxicology facility in Madison, Wisconsin, while a new US unit in Chandler, Arizona is on track to open in the first half of 2009. The clinical pharmacology business saw a new clinic open in Evansville, Indiana during the second quarter as scheduled.

In the Late-Development segment, which embraces central laboratory, Phase II-III clinical development and commercialisation services such as market access, net revenues jumped 17.8% to US$223.8 million in the latest quarter. Without the sale of the ECG business, which was divested in November 2007 but remained in the comparison year, revenue growth from Late-Stage Development services would have been 21.6%.

The revenue increase was again led by outstanding performances from the central laboratory business, which lifted its net revenues by nearly 30% during the quarter on the back of higher kit volumes and a stronger Swiss franc, and from clinical development, where there were substantial year-on-year increases in both revenue and profit. In the commercialisation business, performance continued to be dampened by a lack of new biological launches.

Operating income improved by 34.8% to US$43.0 million and the operating margin reached a record 19.2% compared with 16.8% in the second quarter of 2007 and 18.5% in Q1 2008. Covance expects its operating margin in Late-Stage Development to widen on a full-year basis during 2008.

Record orders

Record net orders worth US$611 million – a book-to-bill ratio of 1.4 to 1 – drove Covance’s second-quarter backlog up by 21.3% year on year to US$3.01 billion, 5.2% more than in the first quarter.

Among the Q2 orders were two Phase III wins totalling US$70 million from the top-ten pharmaceutical company that awarded the CRO a primary provider relationship earlier in the quarter, as well as a previously announced US$66 million dedicated toxicology capacity agreement. In addition, central laboratory services won record new business awards “by a wide margin” during the quarter, Covance noted.

Assuming growth of 10% per annum in research and development spending by the pharmaceutical industry – which has been more or less the trend over the last three decades – and outsourcing penetration of 37%, Covance believes the CRO industry will show a compound annual growth rate (CAGR) of 17.6% to US$40.5 billion in 2012.

Alternative scenarios are 16.2% CAGR to US$36.5 billion in 2012, based on a 5% annual increase in R&D spend and outsourcing penetration of 42%; or 13.8% CAGR to US$33.6 billion, based on a 1% R&D increase and 47% outsourcing.