US-based contract research organisation (CRO) Covance has now lowered its earnings guidance for 2008 after warning in October that the global economic downturn and the continuing strength of the dollar were cutting into its Early Development business in particular.
At the third-quarter stage, Covance predicted its revenue growth for 2008 would be “in the low-teens” but stuck with its previous guidance of 20% annual growth in full-year earnings per share (EPS) to US$3.18 per diluted share. That has now been adjusted to EPS of US$3.02 on “low double-digit” revenue growth. Both of the EPS targets exclude gains from the sale of Covance’s centralised electrocardiogram business in November 2007.
The CRO also forecast that its adjusted net book-to-bill ratio (calculated by dividing net new business by revenue for any given quarter) would be in line with the third-quarter level at 1.2 to 1.
“Despite the fact that both the volume and dollar value of proposal activity for our late-stage service offerings are increasing in the fourth quarter on a sequential and year-on-year basis, we are experiencing reduced demand for our early development services due to a combination of a lower level of new project initiations and increased project delays,” explained Joe Herring, Covance’s chairman and chief executive officer.
“In addition, as nearly 40% of our revenues originate overseas, our fourth-quarter results are being significantly impacted by the continued rapid strengthening of the US dollar, even since we last updated our outlook in October.”
Covance expects full-year revenue growth for 2009 to be in the range of 5-10% versus 2008, with earnings per share coming in at US$3.00 to US$3.20. The forecasts assume foreign exchange rates remain at budgeted levels throughout 2009, “which would negatively impact year-on-year growth in revenue by approximately US$100 million and earnings per share by US$0.27 versus the average 2008 exchange rates”, the CRO noted.
Stripping out currency translation would lift the forecast for revenue growth to 10-15% while the guidance for earnings growth would be 8-15%. “Looking to the first quarter of 2009, we expect a modest sequential decline in earnings per share from the fourth quarter of 2008, relating largely to new operations coming online,” Covance added.
The extraordinary strengthening of the US dollar “will have a significant impact on our results in 2009”, Herring commented. “Additionally, the slower project starts in early development are expected to continue into the first quarter and perhaps longer”. These two issues combined were likely to “more than offset the expected growth of our late-stage development services next year”.
Despite these near-term challenges, “we continue to remain positive on our longer-term outlook”, Herring said. “Our clients have an urgent need to develop new medicines and improve the productivity of their R&D methods. We believe Covance is the best-positioned CRO to help our pharmaceutical and biotechnology clients increase their R&D productivity, make cost structures more flexible, and reduce the time and cost of bringing a new drug through all stages of the development process.”
According to Reuters, the revised earnings outlook dragged Covance’s shares down by 14% and had a knock-on effect on rival CRO Charles River Laboratories, whose shares dropped by US$1.82 to US$23.12. The Covance stock hit a low of US$36.84 on the day of the announcement.
