Record net orders, an encouraging book-to-bill ratio and an 11% increase in revenues distinguished Covance’s business and financial performance during the fourth quarter of 2009.

But operating profits at the US-based contract research organisation (CRO) were down by 14% year on year, the operating margin shrank from 14.5% to 11.3%, and earnings per share fell slightly short of analysts’ expectations. Moreover, the company’s earnings guidance for 2010 was well below the analyst consensus.

Covance reported net revenues (excluding reimbursable out-of-pocket expenses) of US$485.1 million for the quarter ended 31 December 2009, 10.6% higher than in the fourth quarter of 2009. Operating income was US$54.9 million, a fall of 13.6% against the year-before period, while diluted earnings per share (EPS) dropped 10.3% to US$0.64.

Analysts polled by Thomson Reuters had been looking for EPS of US$0.65 on net revenues of US$481 million.

Strong Late Stage

The CRO’s Late-Stage Development segment put in another strong performance during the fourth quarter, with net revenues 25.6% ahead at US$281.9 million and operating income up by 45.0% to US$63.8 million.

The operating margin for Late-Stage Development widened to 22.6% from 19.6% in the fourth quarter of 2008. As forecasted, though, it declined sequentially from the record 24.7% margin reported in the third quarter of 2009, which Covance attributed to staffing increases and a shift in the mix of central laboratory kits.

During 2010, operating margins in Late-Stage Development are projected to remain at roughly the Q4 2009 level, due to “increased hiring to support growth and a more traditional testing mix in central laboratory kits”, the CRO noted.

In the Early Development segment, net revenues fell by 5.2% to US$203.1 million, while operating income plunged 49.6% year on year and the operating margin narrowed from 21.4% to 11.3%. Early Development margins during 2010 are expected to be flat against last year.

Record orders

The latest quarter saw record adjusted net orders of US$643 million, driven by a strong trend in clinical development and central laboratory services. This gave an adjusted book-to-bill ration of 1.33 to 1.

The adjusted book-to-bill ratio for Early Development was more than 1.0 to 1 for the second consecutive quarter, Covance pointed out. On a trailing 12-month basis, adjusted book-to-bill for Late-Stage Development was around 1.45 to 1.

Net revenue growth for the full year was 8.1% to US$1.96 billion, hitting Covance’s target of revenue growth in the mid- to upper-single digits for 2009.

At the third-quarter stage, the CRO had adjusted its guidance for diluted EPS in 2009 to “the low end” of its previous forecast, which was for EPS of US$2.60 to US$2.80.
This excluded gains on the sale of Covance’s centralised electrocardiogram and its Interactive Voice & Web Response Services businesses, as well as favourable income tax resolutions.

On that basis, full-year earnings per share came in at US$2.60, rising to US$2.73 (US$3.08 in 2008) if the special items were factored in. Operating income for 2009 declined by 13.3% year on year to US$228.6 million.

For 2010, Covance is forecasting revenue growth of around 10% over 2009 and earnings per share in the range of US$2.50 to US$2.75. The current analyst consensus is for full-year revenues of US$2.04 billion – which would be an increase of 4.1% over 2009 – and for EPS of US$2.90.

Morningstar analyst Laura Migliore expects the CRO’s profitability to improve over the course of the year “as demand comes back online and the form is able to spread costs over a larger revenue base”.