Increases of 15-20% in net revenues and operating profit saw US-based contract research organisation (CRO) Covance carry its strong showing in the fourth quarter of 2007 and full year through to the first three months of 2008.
Excluding reimbursable out-of-pocket expenses, revenu
es for the quarter ended 31 March 2008 rose by 15.1% to US$412.4 million. Operating income for the first quarter was US$62.7 million, 20.6% higher than in the same period of 2007 and pushing up the CRO’s operating margin from 14.5% to 15.2%.
Earnings per diluted share (EPS) for the quarter
were US$0.76 (US$0.60 in Q1 2007), which included a US$0.03 per share gain from the sale of Covance’s centralised electrocardiogram business (ECG) business to cardiac safety specialist eResearch Technology during the fourth quarter of 2007. Without this gain, EPS were 22.3% ahead at US$0.73.
In the Early Development segment, which includes preclinical toxicology, analytical chemistry and clinical pharmacology services as well as research products, net revenues for the first quarter grew by 12.7% to US$202.0 million, led by toxicology and chemistry services.
The US$5.8 million decline in Early Development revenues from the fourth quarter of 2007 was due to a soft quarter in clinical pharmacology (some studies “slipped out of” Q1), the negative impact of foreign exchange, especially UK sterling against the US dollar, and capacity restraints on toxicology testing in North America as rooms were taken offline for renovation, Covance explained.
It expects strong sequential revenue growth in the second quarter of 2008, as new toxicology capacity is brought online at the CRO’s US facility in Madison, Wisconsin and as volume ramps up in clinical pharmacology. A new US clinic for the pharmacology operation is scheduled to open in Evansville, Indiana during the current quarter. Covance is also renovating its toxicology unit in Madison, Wisconsin, where new capacity should be available this quarter, and expanding its facility in Harrogate, UK, which is on track for re-opening in late 2008.
Operating income from Early Development services rose by 15.8% in the first quarter to US$50.6 million and the operating margin improved from 24.4% to 25% year on year.
Covance’s Late-Stage Development segment covers central laboratory, Phase II-II clinical development and commercialisation services (peri-approval and market access). Net revenues for the first quarter of 2008 were US210.4 million, up by 17.5%. Stripping out the sale of the ECG business, which was divested in November 2007 but remains in the comparison year, revenue growth in Late-Stage Development was 21.3%.
The gains were led by “outstanding” performances in central laboratory services and clinical development. The central laboratory operation lifted its revenues by more than 30% in the quarter, thanks to an increase in kit volume and a stronger Swiss franc.
Operating income from Late-Stage Development services improved by 33.1% to US$38.9 million; the operating margin was up from 16.3% to 18.5%. According to Covance, there was significant operating margin expansion in the central laboratory business both on a year-to-year and quarter-to-quarter basis, while margins in clinical development “rebounded strongly sequentially”. Performance in the commercialisation business “continues to be impacted by lack of new biological launches”, Covance added.
Growing backlog
The company’s backlog as of 31 March 2008 was US$2.86 billion, 20.1% more than the US$2.38 billion recorded one year previously. Quarter-to-quarter backlog growth of 6.6% was underpinned by first-quarter net orders of US$469 million, coupled with a US$121 million boost from the weakening of the US dollar.
Chairman and chief executive officer Joe Herring described the net order tally for the first quarter as “solid” but “not indicative of the robust business environment we are currently experiencing”.
As an example, Herring noted, early in the second quarter Covance was awarded a three-year, dedicated capacity toxicology agreement with a minimum contract commitment of US$66 million. The CRO was also selected as the primary provider of clinical development services by a top-ten pharmaceutical company, with the promise of “significant” orders during 2008.
“Beyond these examples, our pipeline of opportunities is larger and more strategic than at any time in company history,” Herring stated. “Some of these opportunities are unprecedented in scope, combining multiple service lines in both our Early and Late-Stage Development segments.”
The favourable market conditions also “give us increased confidence in our ability to deliver low- to mid-teens revenue growth and a 20% annual growth in EPS to $3.18 per diluted share in 2008, excluding the gain on sale from both periods”, Herring said.
