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Quintiles, Covance upbeat on further pharma consolidation

By Zachary Brennan , 06-May-2014

Quintiles and Covance have re-iterated previous CROs’ upbeat stances on the prospect for further pharma M&A as they both reported revenue growth for the quarter.

Quintiles CEO Thomas Pike said that his company expects “more outsourcing after this kind of disruption,” referencing the recent potential for a merger between Pfizer and AstraZeneca .

But Pike also added some caution, noting “it's very difficult the near term versus long term. If there is something, it'll be around new business potentially freezing a little bit in some of these. But you even look at the rumors beyond Pfizer, AZ, and you -- people are talking about AbbVie. They're talking about Amgen. They're talking -- you just look at the rumors, and it's just very difficult to have a clear view of whether this is a few months or a couple of quarters.”

Joe Herring, CEO and chairman of Covance, echoed those sentiments, noting in his company’s recent call: “If anything there's opportunity based on how a couple of our largest services are positioned with those two companies.”

Pike also seemed to stress that the largest CROs might benefit the most from these mega-mergers. “I think, generally, what's going to happen here is, once again, the larger the companies get, the larger the CROs need to be to service them,” he said.

Herring also deflected some of the attention away from the prospective merger, noting that the merger may not impact CROs as much as some seem to anticipate . “If you look back over the history of Covance, we've never really been impacted in a major way by pharma M&A,” he added, noting that over the last seven or eight years Covance has seen “extraordinary growth and margin expansion through a bunch of pharma M&A.”

Quintiles Q1 Results

The upbeat stance on the potential for more pharma M&A comes as Quintiles reported more than 8% growth in service revenues. And for the first time ever, Quintiles eclipsed the $10bn mark in backlog.

We continue to see strong strength in the Phase II to Phase IV pipeline and more opportunities in the Phase I early clinical development area,” Pike noted.

Biotech funding continues to be a strength for the largest CRO worldwide. Pike added that “there was another real record over the last number of quarters in terms of biotech funding. And so that continues to be an underlying strength. You might recall, about 51% of our net new business last year was outside of the top pharmaceutical firms.”

That diversity could help Quintiles if any new mergers in the pharma world halt progress on clinical trials in the near-term.

With 10 customers at over $100 million of revenues, and then as we looked at it just in advance of the call, we looked at our net new business, interestingly, the new business top customers don't overlap entirely with the top 10 customers,” Pike added.

Quintiles CFO Kevin Gordon also sounded upbeat on the call, noting Q1 results “continued the consistent performance in Product Development, with good service revenue growth offset by the impact from the completion of our largest clinical project, increased margins from our continued focus on operational productivity and over $1bn of net new business.”

Covance Q1 results

Covance, meanwhile, posted almost 7% revenue growth when compared to the first quarter of 2013.

Based on already scheduled studies we expect both early development segment revenue and income to increase sharply in the second quarter from these levels and continue to increase throughout the remainder of the year assuming our current business momentum continues,” Herring said.

He noted rising demand in both toxicology and clinical pharmacology, as well as a continued interest among sponsors to go after only the most promising compounds.

We believe the level of high quality molecules is growing and will continue to grow at roughly a 2% compound annual growth rate and form a growing high quality base of work for preclinical companies,” Herring said.

For 2014, the company re-forecast its revenue growth to about 69%. The midpoint of the prospective range “assumes high single digit growth in late-stage development and mid-single digit growth in early development,” Herring said.

He also expressed increased optimism for the top CROs. “I think it's a really interesting time for the CRO industry where the top companies, including Covance, are moving from sort of arms and legs to actually having bigger scale, bigger capability, more investments in automation global scale than even the biggest pharmaceutical companies,” Herring added.

Garen Sarafian, analyst at Citi Research, also sounded upbeat on Covance, telling investors in an analyst note that the company “remains positive on its outlook for growth, despite some signs of weakness in both early and late stage segments. We remain cautious on early stage, but constructive on late stage and central lab, the latter of which grew a healthy 11% in the quarter.”

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