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UPDATE

Covance's flagging early phase biz puts downer on net profits in Q2

By Natalie Morrison , 26-Jul-2012
Last updated the 27-Jul-2012 at 20:35 GMT

Covance has reported a net loss of $12.7m in this year’s Q2 as what it says is the result of facility closures and restructuring costs, particularly for its early phase development section.

The firm has suffered several blows following this year’s sizeable cuts for its tox business – including its Arizona facility and one third of its plant in Munster, Germany – as well as the closure announcements for two pharmacology sites in Basel and Honolulu.

Charges largely associated with the chops means this year’s $0.23 per share figures barely touch last year’s net income share price $0.61 per share.

At the end of FY2011 year, the CRO (contract research organisation) threatened to reduce its early phase development unit if sales remained flat in 2012, with CEO Joe Herring saying: “We are prepared to make announcements and decisions.”

In its latest results, the firm said further early phase restructuring will continue in the last half of the year.

Herring said: “In early development, we continued to drive our cost reduction and capacity rationalisation actions in order to better align supply with demand and improve margins.”

“In addition to the $20m of annualised profit improvement announced in May, today we are announcing an incremental $15m, bringing the total annualised impact of these actions to approximately $35m from the cost reductions and capacity rationalisations, with approximately one-third expected to be realised in 2012.”

The plans seem to support suggestions that the firm has sold its shares in preteomics biomarker and drug target discovery specialist Caprion , though nothing specific was mentioned in the earnings report.

Late phase looking up

Taking out one-time charges however, the loss was much less drastic, with net income at $36.3m compared to $40.6m last year.

Analysts are largely of the view it is the late phase development sector that is the CRO’s saving grace.

Wells Fargo senior analysts Tim Evans said: “Performance for Covance is increasingly bifurcated with late-stage outperforming and early development underperforming.”

He said the central lab biz in particular is a success story, with a $3m improvement year-on-year and a four per cent overall growth for the first half of 2012.

John Kreger from William Blair also noted the clinical development section is continuing to grow well above industry levels, with 25 per cent growth in the quarter when excluding its market access company, and is currently booking record amounts of new business.

“Similar to the strong bookings reported by Icon this quarter, Covance reported a very strong net adjusted book-to-bill ratio of 1.30 times, with $701 million in total bookings, nearly $80 million above our model,” he said.

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