US-based contract research organisation (CRO) Covance adjusted its earnings guidance for 2009 to “the low end” of its previous forecast as third-quarter operating profit dived 17.4% to US$57.8 million.

The guidance provided at the second-quarter stage was for earnings per share (EPS) of US$2.60 to US$2.80, which excluded gains on the sales of Covance’s centralised electrocardiogram (ECG) and its Interactive Voice & Web Response Services (IVRS) businesses as well as favourable income tax resolutions.

At that time, the CRO also raised its target for revenue growth in 2009 to the “mid- to upper-single digits”. The latest results announcement did not change that prognosis, although Covance projected “relatively flat Early Development results until we see a sustained recovery in demand”.

Third-quarter net revenues, which excluded reimbursable out-of-pocket costs, were up by 8.0% over the same period last year, to US$475.3 million. This was above the consensus forecast of US$468.8 million from analysts polled by Thomson Reuters.

Diluted EPS were US$0.79 (US$0.80 in Q3 2008), which included a US$0.09 per share gain on the sale of the IVRS business in July as well as US$0.03 from favourable income tax resolutions. Without these special items, diluted earnings per share were down by 16.3% to US$0.67 but in line with analysts’ estimates. Covance’s shares fell around 2% on the back of the results.

Strong Late Stage

One encouraging note mentioned by chairman and chief executive officer Joe Herring was the “exceptional strength” of the CRO’s Late-Stage Development segment, which accounted for 59% of third-quarter revenues.

Net revenues in Late-Stage Development rose by 24.1% year on year to US$278.9 million; sequential growth against the second quarter of 2009 was 4.7%. These increases were led by better-than-expected performances from the central laboratory and clinical development segments, Covance reported.

Operating income from Late-Stage Development services jumped 55.6% over the third quarter of 2008, to US$68.9 million, generating a record operating margin of 24.7% compared with 19.7% one year previously. The operating margin for Late-Stage Development is expected to moderate slightly in the fourth quarter, Covance noted.

By contrast, Early Development results were below expectations. Net revenues dipped 8.8% year on year to US$196.4 million, Covance reported. “Clinical pharmacology revenue and operating income in the quarter were down from the second-quarter level and are expected to decline further in the fourth quarter, primarily due to lower market demand,” it added.

Operating income from Early Development services overall plunged 59.1% to US$22.4 million in the quarter, while the operating margin narrowed to 11.4% from 25.5% in the third quarter of 2008.

Year over year, operating margins were hit by more muted study activity, delays in scheduled trial start-ups, start-up losses from the new US preclinical drug development facility in Chandler, Arizona, and staffing levels “above current demand”, Covance explained.

The CRO had a backlog of US$4.79 billion as of 30 September 2009, compared with US$4.25 billion one year earlier and US$4.66 billion at 30 June 2009. Net orders adjusted for dedicated capacity contracts amounted to US$623 million in the third quarter, with Covance citing continued strong business awards in clinical development and central laboratory services.

That gave an adjusted book-to-bill ratio of 1.31 to 1. The Early Development segment recorded a quarterly adjusted book-to-bill ratio of more than 1.0 to 1 for the first time this year, the CRO pointed out. On a trailing 12-month basis, the adjusted book-to-bill for Late-Stage Development remained at 1.5 to 1.