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Covance unveils further, ‘substantial' IT investment at JP Morgan conf

By Gareth Macdonald , 16-Jan-2012
Last updated on 16-Jan-2012 at 14:45 GMT

Covance plans a ‘substantial investment’ to consolidate its international data centres and develop clinical tools to arrest expanding IT costs.

The investment plan – which was detailed by CEO Joe Herring at JP Morgan’s Healthcare conference last week – is in addition to the $10m (EUR7.8m) IT project Covance outlined in its third quarter financial presentation.

Herring said the extra investment will focus on “building new and enhanced clinical tools to help our clinical business not only be more efficient but more highly differentiated in the marketplace,” citing a desire to improve clients’ site selection and monitoring as a key driver.

The second opportunity that we identified,” Herring continued “is a fairly substantial consolidation of our data centres and our network and move from having data centres in multiple countries to a two or three footprint configuration.”

This structure – which will employ a cloud network capable of moving data around the world more efficiently – “is a substantial investment that will drive higher capEx than you probably have in your models and higher opEx to get that in place.”

Herring – who said financial details of the new investment will be announced at Covance’s Q4 earning call on January 26 - explained that: “The end goal… is to arrest the growth of IT spending,” which has grown faster than revenue every year for the past five years.

Central labs growth in Q4?

Herring also used his JP Morgan presentation to drop a few hints about Covance's performance in Q4 2011.

"The early development segment underperformed our expectations in the fourth quarter," he said, explaining that this was primarily due to the poor performance of Covance's European toxicology and research models businesses.

He contrasted this with Covance's other early phase units - clinical pharmacology, discovery and translational services - which he said had performed well in the final three months of 2011.

Herring was similarly positive about central lab services.

"We have been calling that business flat for the foreseeable future...however in the fourth quarter, for the second consecutive quarter, we have outperformed that... we saw both revenue growth and better operating margin performance."

Herring was also upbeat about Covance's clinical services business, which he said will grow substantially this year. He also said the firm will continue to hire staff to service projects in its pipeline.

Analyst response

Citigroup analyst Garen Sarafian predicted Covance’s IT capital and operational spending will increase $29m and $2m, respectively, in 2012 and cut his earnings per share forecast by 5 per cent.

He also said that growth of Covance’s central labs business – which contributes around 29 per cent of the contract research organisation's (CROs) revenue each year – bodes well for 2012.

With a bias towards the clinical portion of development, global footprint, and superior partnership experience, we continue to expect Covance to benefit disproportionately from macro CRO trends.”

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