Restructuring costs, asset impairment charges and losses from facility closures took a heavy toll on Covance’s financial performance in the second quarter of 2012, leaving the company with an operating loss of US$3.9 million compared with operating income of US$48.8 million for Q2 2011.
Nonetheless, once these special items – mainly occasioned by continuing slackness in Covance’s Early Development segment – were removed from the equation, the US-based drug development services provider delivered net profit and revenues slightly ahead of the analyst consensus.
Covance has lowered its forecast for revenue growth in 2012, though, and has tightened up its earnings per share (EPS) guidance for the full year.
The Q2 special items in full were:
• Restructuring costs of US$9.7 million versus US$4.6 million in costs for the second quarter of 2011. In the latest quarter, US$9.2 million and US$0.2 million respectively of the costs were levied in Covance’s Early Development and Late Stage Development segments.
• A loss of US$3.8 million from facilities currently being wound down in Honolulu, Hawaii and Basel, Switzerland (Phase I clinics), as well as in Chandler, Arizona (preclinical facility). Covance is also reducing toxicology capacity at its facility in Muenster, Germany by one third.
• Charges of US$38.7 million in total for impairment of goodwill and inventory, with US$17.9 million levied to write off goodwill associated with the Basel clinic and $20.8 million to write off excess preclinical inventory resulting from a re-assessment of toxicology demand in the light of current and projected market conditions.
Covance has also written off the remaining US$7.4 million book value of its investment in a toxicology research-product supply company.
Restructuring measures
The company had already announced, but not put a price on, its latest restructuring measures in the first quarter of 2012. These were aimed at squaring capacity with weaker demand for preclinical services and further improving profitability in the Early Development business.
The initiatives highlighted then included closing the three year-old toxicology facility in Chandler, Arizona and a tighter cost structure for Early Development. Excluding associated costs and charges, the actions were expected to boost profit by at least US$20 million on an annualised basis, with around one third of that benefit realised during 2012.
With its latest results announcement, Covance has hiked that figure up to around $35 million per year from cost reductions and capacity rationalisations, again with approximately one-third of the benefit expected to be realised in 2012.
“The 2012 savings are largely expected to offset a slower ramp in Early Development earnings this year,” the company noted.
Revenue growth
Net revenues for the second quarter of 2012 were US$542.8 million, up by 4.7% over the same period last year and just ahead of the consensus estimate of US$542.72 million from analysts polled by Thomson Reuters.
Excluding revenue from the facilities where closure activities have started, pro forma net revenue for the latest quarter was US$538 million.
Net revenues in the Early Development segment were US$219.7 million, down by 5.2% year on year and including revenues of US$4.3 million from facilities in wind-down. In late Stage Development, net revenues were up by 12.8% on the second quarter of 2011, to US$323.1 million.
Operating losses
The operating loss of US$3.9 million for the latest quarter translated into an EPS loss of US$0.23 compared with earnings per share of US$0.61 in the second quarter of 2011.
Without the various charges, Covance recorded diluted EPS of US$0.65 (US$0.66 in Q2 2011), which was above the analyst consensus of US$0.64 quoted by Thomson Reuters.
At the operating level, the Early Development Segment sustained a loss of US$33.1 million against a US$30.9 million operating profit in the second quarter of 2011. In Late Stage Development, operating income was 20.3% higher at US$68.0 million.
Record orders
Among the brighter spots in Q2 2012, Joe Herring, Covance’s chairman and chief executive officer, pointed to “another record order performance” in clinical development, driving a third consecutive quarter of adjusted net orders totalling at least US$700 million.
This represented a year-on-year increase of 14% and gave the company an adjusted book-to-bill of 1.30 to 1 for the quarter.
Covance has moderated its forecast for revenue growth in the whole of 2012 to the “low- to mid-single-digit” range, citing primarily foreign exchange headwinds and more modest sequential growth in Early Development. At the first-quarter stage, it was expecting full-year growth in the mid-single digits.
