US-based contract research organisation (CRO) Covance brought a little solace to the beleaguered sector by beating analysts’ estimates for revenues and earnings in the fourth quarter, as well as topping its own revised guidance for earnings per share in the full year.

Covance’s diluted earnings per share (EPS) for the quarter ended 31 December 2008 were US$0.72, down by 8.4% on the fourth quarter of 2007 but above the consensus estimate of US$0.70 per share from analysts polled by First Call/Thomson Financial.

Excluding the one-off gain on the sale of Covance’s centralised electrocardiogram (ECG) business in November 2007, EPS for the full year grew by 14.5% to US$3.03. This was above the revised guidance for EPS of US$3.02 (versus US$3.18 previously) given by Covance late last December. Including the gain on the ECG sale, diluted EPS for 2008 rose by 13.3% in the latest quarter to US$3.08.

Net revenues in the fourth quarter, which strip out reimbursable out-of-pocket costs, were US$438.6 million compared with the analyst consensus of US$419.2 million. They improved by 6.7% against the same period of 2007, generating operating income up 4.1% to US$63.5 million.

Reduced demand

In December Covance warned of reduced demand for its early development services due to a lower level of new project starts and increased project delays, exacerbated by the rapid strengthening of the US dollar. Accordingly, the Early Development segment showed sequential declines in revenues and operating income for the fourth quarter, noted the CRO’s chairman and chief executive officer, Joe Herring.

On a year-to-year basis, quarterly revenues from early development services grew by 3.1% to US$214.2 million, with Covance citing continued solid growth in analytical chemistry, offset by declining revenues in toxicology and clinical pharmacology as well as the negative impact of foreign exchange. Operating income in the segment dropped by 11.1% to US$45.8 million and the operating margin shrank from 24.8% to 21.4%.

Things looked considerably better in Late-Stage Development, where net revenues jumped by 10.5% to US$224.4 million in the fourth quarter and operating income was 35.1% higher at US$44.0 million. The operating margin for late-stage development services widened from 16.0% to 19.6%.

Revenue growth for late-stage services, which would have been 12.9% without the sale of the ECG business, was again led by central laboratories and clinical development, Covance reported. Foreign exchange shaved around 300 basis points off the revenue increase for the quarter.

Order book

Adjusted net orders for the whole of Covance in the fourth quarter came to US$567 million, giving an adjusted book-to-bill ratio of 1.29 to 1. In the Late-Stage Development segment, the CRO said, the net book-to-bill ratio was more than 1.6 to 1.

Overall backlog grew by 62% year on year to US$4.33 billion. Covance also won two seven-year, sole-source contracts from top 10 drug companies for central laboratory services in the latter part of 2008, under which “orders will be recognised as new projects are awarded”, it pointed out.

In the full year, net revenues across all of Covance’s businesses advanced 11.7% to US$1.73 billion while operating income was 15.3% ahead at US$263.7 million. The CRO has maintained its targets from December for revenue growth in the range of 5-10% in 2009 and earnings per share of US$3.00 to US$3.20.

“These targets assumed demand for early development services begins to
pick up between the second and third quarters of this year, late-stage backlog
would continue to convert to revenue at historical rates, and foreign exchange
rates would remain at budgeted levels throughout the year,” Herring commented.

“Relative to these assumptions, we are off to a somewhat slower start in Early Development services and there continues to be significant volatility in the US dollar, although central laboratory kits are running ahead of budget,” he added.

Nonetheless, Covance is sticking to last December’s guidance on the basis that the lag in Early Development will be balanced by “the ongoing strength of new orders and revenue flow in Late-Stage Development”.