With its Early Development segment performing “significantly below” expectations in the first quarter of 2012, Covance has announced another batch of restructuring measures, aimed at squaring capacity with weaker demand for preclinical services and further improving profitability in the Early Development business.
Covance has not yet put a price on these moves, which include closing the US-based drug development service company’s three year-old toxicology facility in Chandler, Arizona facility and a tighter cost structure for Early Development.
Excluding associated costs and charges, the actions are expected to boost profit by at least US$20 million on an annualized basis, with around one third of that benefit realised during 2012, while bringing Covance’s toxicology-room capacity in North America down to near-2007 levels.
With no restructuring costs in the three months ended 31 March 2012, the company reported operating income up by 10.1% year on year to US$46.1 million. Operating income for the first quarter of 2011 included restructuring charges of US$5.9 million.
Diluted earnings per share for Q1 2012 were US$0.60, in line with the reported consensus from analysts polled by Thomson Reuters and 11.1% higher than in the same period of 2011.
Net revenues in the latest quarter came in at US$530.8 million, a 5.7% improvement on Q1 2011 but slightly below the reported analyst consensus of $531.9 million.
Along with its restructuring plans for the Early Development segment, Covance has announced a couple of executive management adjustments designed in particular to beef up its finance and information technology organisations.
In the final quarter of 2011, the company said it was making strategic investments in its information technology infrastructure and applications to increase the productivity of its drug development services, drive operating efficiencies and “arrest the long-term rate of growth of our information technology spending”.
Capital expenditure on IT during 2012 was pegged at around US$90 million, compared with about US$60 million in 2011.
Bill Klitgaard, currently corporate senior vice president and chief financial officer, has been appointed corporate senior vice president and chief information officer at Covance. He replaces John Repko, who is moving to another company.
Alison Cornell, Covance’s vice president, global financial planning and analysis, will fill Klitgaard’s position as corporate vice president and chief financial officer.
First-quarter net revenues in the Early Development segment were US$211.7 million, 5.5% below Q1 2011, while operating income plummeted 52.0% to US$11.3 million, even taking into account the restructuring costs of US$2.9 million levied in Early Development during the year-before quarter.
According to Covance, the Early Development performance reflected “very soft results” in January and February, with signs of recovery in March including a strong rebound in toxicology orders.
The company is still determining the overall costs and charges associated with its latest restructuring programme in Early Development. Covance has, however, found a buyer for its environmental services offering (part of the Early Development), which will bring in cash proceeds of around US$0.9 million.
It is also looking at other cost actions, “some of which are contingent on pending decisions regarding several large commercial opportunities under discussion”, the company stated.
Even it reduces its footprint in this area, though, “our Early Development services remain an important differentiator for Covance and are a key component of our integrated drug development alliances”, the company stressed.
If the Early Development segment continues to give cause for concern, Covance’s first-quarter showing in Late-Stage Development was “significantly better than expected”, enabling the company to meet its Q1 financial targets on a consolidated basis, it noted.
Net revenues from Late-Stage Development services were US$319.2 million, a 14.8% increase year on year, while operating income jumped 31.1% to US$72.4 million (the Q1 2011 figure included restructuring costs of US$0.9 million).
The year-on-year improvement in profitability was driven by both clinical development and central laboratory services, Covance said.
Backlog as of 31 March 2012 was US$6.28 billion compared with US$6.14 billion at 31 December 2011 and US$6.29 billion one year previously.
Covance reported a 25% increase year-on-year in adjusted net orders and an adjusted book-to-bill ratio of 1.33 to 1.
The company is sticking with the revenue and profit forecasts it made at the Q4 2011 stage – namely, year-on-year revenue growth in the mid-single digits for the whole of 2012 and diluted earnings per share in the range of US$2.50 to US$2.80.