Covance op income down as Phase III delays hit margins

By Nick Taylor

- Last updated on GMT

Related tags: Cent, Revenue

Covance has recorded a 29 per cent drop in operating income, despite revenue growth, as cost reduction actions and Phase III delays hit margins.

Overall net revenues in the second quarter grew by two per cent to $475.2m (€364.7m) but this gain was offset by other factors. Net revenues from late stage remained flat but operating income fell 14 per cent to $56.5m, largely because of three Phase III delays which affected profitability.

Of the delayed trials, one began in the second quarter, one was reduced in size, and the third is expected to begin enrolling in 2011. The impact of the delays will carry over into the next quarter and contribute to operating margins remaining around 21 per cent.

Typical seasonal impact across the unit and the current mix of tests and kits received in central laboratory services are also expected to contribute to the low margins. Covance expects the situation to improve in the fourth quarter when revenue increases.

Early stage

In early stage, which grew revenues by four per cent to $208.2m, the offsetting factor was “facility rationalisation and other cost reduction actions​”.

These costs totalled $6.7m and contributed to a 17 per cent drop in operating income, from $27.1m to $22.5m. Operating margin fell year-on-year from 13.6 per cent to 10.8 per cent. Improved performance in chemistry and discovery services underpinned revenue growth.

Covance expects lower demand and profitability in toxicology to restrict operating margins to 11 to 12 per cent in the third quarter. This compares to 11 per cent in the third quarter of 2009 and 26 per cent in the corresponding period of 2008.

In response to the results Covance lowered its revenue growth target to two to four per cent, compared to its earlier estimate of five to eight per cent. The earnings per share target was also lowered to $2.10 to $2.30.

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