Exceptional revenue growth of 24.3% from its Early Development business in the fourth quarter helped US-based contract research organisation (CRO) Covance to strong double-digit increases in net revenues and operating income for both the quarter and the year ended 31 December 2007.

Excluding reimbursable out-of-pocket expenses, revenues were up by 19.8% to US$411 million in the final quarter of 2007 and by 15.4% to US$1,546.4 million in the full year. Covance’s operating income for the quarter was 18.8% higher at US$61.0 million, although the operating margin, at 14.8%, was slightly behind the 15.0% recorded in Q4 2006. Operating income for the whole of 2007 was US$228.6 million, 18.3% ahead of the previous year.

The CRO’s net income and earnings per share (EPS) for both periods benefited from a gain of US$6.59 million, or US$4.15 million net of tax, from the sale of Covance’s centralised electrocardiogram (ECG) business to cardiac safety specialist eResearchTechnology during the fourth quarter.

Without this boost, net income for the quarter was US$46.8 million, rising 22.0% over the same period of 2006, and diluted EPS grew by 21.8% to US$0.72. In the full year, net income excluding the one-off gain came in at US$171.8 million, up by 20.5%, and EPS improved by the same measure to US$2.65.

It was the Early Development segment, including preclinical toxicology, analytical chemistry, clinical pharmacology services and research products, that really kept things moving in the latest report period.

Net revenues for Q4 jumped 24.3% to US$207.9 million, delivering operating income of US$51.5 million (+33.3%) and an operating margin of 24.8% (23.1% in Q4 2006). Full-year revenues were US$777.7 million, an increase of 22.9% year on year, operating income was 27.6% higher at US$195.9 million, and the operating margin widened from 24.3% to 25.2%. Covance expects continued expansion in its operating margin on a full-year basis during 2008.

Toxicology demand remained strong and discussions continue on dedicated space for the business, the CRO reported. The toxicology expansion programme is moving forward in the US, where a site has been purchased for future development in Virginia; the Chandler, Arizona facility is on track to open in 2009; and a newly completed shell is now open in Madison, Wisconsin.

The impact of the additional space in Madison will largely be offset in Q1 2008 by renovation of older toxicology capacity, Covance noted. The CRO is also expanding its toxicology services in Harrogate, UK, where extra capacity is on schedule to open in late 2008.

In terms of Programme Management, the Early Development business reported 60% growth to 255 molecules from 103 different clients, helping to generate more than US$200 million in revenues during 2007.

Late-Stage Development
Revenue growth in the Late-Stage Development segment, which includes central laboratory, Phase II-III clinical development and commercialisation (pre-approval and market access) services, was more subdued despite a 15.6% increase to a net US$203.1 million in the final quarter. Operating income for the quarter dropped by 0.4% to US$32.6 million, however, and the operating margin was 16.0% versus 18.6% in the year-before period. Covance blamed “an issue within a large clinical development study” for the margin contraction.

The impact was also felt in the full year, with the operating margin tightening from 17.5% to 16.7% as operating income for Late-Stage Development crept up by 3.6% to US$128.1 million. Net revenues for the year were 8.7% higher at US$768.8 million. Revenue growth in 2008 will be diluted by the sale of the centralised ECG business – which will remain in the base of the comparison year – to the tune of around 350 basis points, Covance predicted.

More gratifyingly, Late-Stage Development saw both clinical development and central laboratory revenues grow by more than 20% in the fourth quarter of 2007. The book-to-bill ratio for the segment was 1.45:1 as of Q4, compared with 1.41:1 one year earlier. On a full-year basis, the operating margin for Late-Stage Development services is expected to improve in 2008.

Overall, the picture looks healthy for 2008 and Covance has stuck to its forecast of revenue growth in the low- to mid-teens and 20% growth in EPS year-on-year to US$3.18 per diluted share.

The order book is stacking up nicely, with a backlog of US$2.68 billion as of 31 December, 20.6% more than at the end of 2006. Net orders were US$502 million in Q4 2007 against US$477 million in the same quarter of 2006, while net orders for the year were US$1.99 billion compared with US$1.84 billion for the whole of 2006. The book-to-bill ratio across Covance’s businesses in 2007 was 1.28:1.

Covance’s shares had been pushing up strongly since the beginning of 2007, which may explain why they dipped 5.8% to US$83.01 on 31 January, in the wake of results that were generally in line with or ahead of analysts’ expectations.