Covance delivered adjusted earnings and net revenues ahead of the analyst consensus for the third quarter of 2011.

However, the US-based drug development services company has narrowed its previous earnings guidance for 2011, albeit that revenue expectations are now at the high end of the forecast given in July.

Operating income for the quarter ended 30 September 2011 was US$51.0 million compared with a US$76.7 million operating loss in the third quarter of 2010. Included in the latest earnings figure were restructuring costs of US$5.3 million and a US$0.7 million gain from favourable income tax developments.

Net earnings per diluted share (EPS) were US$0.67 in Q3 2011 compared with a US$0.47 loss in the year-before quarter. Stripping out the aforementioned special items gave diluted EPS of US$0.71 for the third quarter of 2011, topping the consensus estimate of US$0.70 from analysts polled by Thomson Reuters.

Revenue growth

Net revenues for the latest quarter grew by 13.9% year on year to US$543.3 million, against an analyst consensus of US$521.5 million.

In the slightly smaller Early Development segment, quarterly revenues were 16.3% higher at US$240.2 million and operating income was US$33.2 million, compared with a US$98.5 million operating loss one year earlier. The income figure for Q3 2011 included US$1.9 million in restructuring costs.

In Late-Stage Development, net revenues rose by 12.0% year on year to US$303.0 million, while operating income – which included restructuring costs of US$2.1 million – grew by 2.1% to US$56.3 million.

Sequential improvement

Chairman and chief executive officer Joe Herring noted that Early Development revenues had improved by 3.6% sequentially in the third quarter, while the pro forma operating margin had increased to 14.6% versus 10.7% in Q3 2010 and 14.2% in the second quarter of 2011.

“We forecast another quarter of sequential growth in both revenue and operating margin for our early development services in the fourth quarter,” he commented.

Sequential revenue growth in the Late-Stage Development segment was 5.8%, while the pro forma operating margin was down to 19.3% compared with 20.4% in Q2 2010 and 20.0% in Q2 2011. According to Covance, this reflected “seasonal patterns as well as the impact from significant hiring in clinical development, which had year-on-year revenue growth of 18% through the first nine months of 2011”.

Book to bill

Adjusted net orders for the third quarter were $597 million, giving an adjusted book-to-bill of 1.1.  

“We were particularly pleased to see a significant improvement in orders in our central laboratory, which reported its highest adjusted net order quarter in over a year, as well as continued improvement in orders for our toxicology services,” Covance stated.

By comparison, though, ICON recently reported a net book to bill book to bill ratio – an indicator of growth to come – of 1.8 for the third quarter, while Parexel’s book-to-bill ratio for the first quarter of its new financial year, reported earlier this week, was 1.77.

Covance is expecting full-year revenue growth for 2011 to be “in the high single-digit range”, which is a step up from the guidance provided with its second-quarter results in late July (“growth in the mid-to-high single digit range”).  

Pro forma earnings per diluted share are projected at around US$2.70, compared with a range of $2.60 to $2.80 given in July. This excludes costs associated with restructuring activities and assumes that foreign exchange rates will remain at 30 September 2011 levels.



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