Shares in US-based contract research organisation (CRO) Covance slumped by as much as 20% last week after the company lowered its financial guidance for the second time this year on muted results for the second quarter.

Operating income for the three months ended 30 June 2010 was down by 29.1% year on year to US$42.5 million, on net revenues that were 2.0% ahead at US$475.2 million. Net income was 26.3% lower at US$31.7 million, while diluted earnings per share (EPS) fell by 27.3% to US$0.49, in line with the analyst consensus cited by Thomson Reuters. Analysts were expecting revenues of US$478.1 million on average.

Operating income in Covance’s Early Development segment was affected by a one-time charge of US$6.7 million for facility rationalisation and other cost-reduction measures, falling by 16.9% to US$22.5 million. The Early Development operating margin was 10.8% in the latest quarter versus 13.6% in Q2 2009. It is expected to be in the 11-12% range for the third quarter, mainly due to lower demand and profitability in toxicology services.

Without the one-off costs, Covance said, the Q2 margin would have been 14.0%, a sequential improvement of 280 basis points on the first quarter. Early Development revenues rose by 4.2% to US$208.2 million on better performances in chemistry and discovery services, the CRO reported.

In Late Stage Development, second-quarter revenues were almost flat (+0.3%) against the same period last year while operating income dived 13.7% to US$56.5 million. The operating margin was 21.2% compared with 24.6% for the second quarter of 2009.

On a quarter-to-quarter basis, Late Stage Development revenues declined by around US$9.9 million, Covance noted, citing around US$5.5 million in foreign exchange headwind and the impact of previously announced delays in three Phase III clinical trials. The operating margin was down by 270 basis points on the first quarter of the year.

It will likely remain in the 21% range for the third quarter, due to “the typical seasonal impact across the segment, the current mix of tests and kits received in central laboratory services, and the impact of the three large clinical trial delays”, Covance believes. “We expect to see margin expansion in the fourth quarter as revenue ramps,” it added.

Covance’s backlog as of 30 June 2010 was US$4.83 billion compared with US$4.66 billion one year earlier and US$4.79 billion at 31 March 2010. Adjusted net orders in the second quarter were US$590 million, representing an adjusted book-to-bill ratio of 1.24 to 1 and a 14% increase over the second quarter of 2009.

Of the delayed Phase III studies, one started in the second quarter, one launched on a reduced scale in July and the third is still expected to begin enrolling in 2011.

2010 guidance

Covance now expects earnings per share in the third quarter to come in at around US$0.50, including approximately US$0.02 in costs related to previously announced site closures.

Announcing its first-quarter results in April, the company adjusted its guidance for revenue growth in 2010 downwards to a range of 5%-8%, while earnings per share were expected to reach US$2.40 to US$2.65.

The latest forecast is for revenue growth of 2-4% this year and EPS of US$2.10 to US$2.30 at 30 June exchange rates, including costs of US$0.11 per share from facility rationalisation and other cost reduction efforts but excluding any benefits from “potential strategic transactions”.