Covance operating income down & forecast below estimates

By Nick Taylor

- Last updated on GMT

Related tags Covance Revenue

Covance posted a drop in operating income in the fourth quarter and forecast first quarter earnings considerably below analyst estimates.

Quarterly operating income, excluding restructuring costs, fell 14 per cent year-on-year to $47.2m (€34.4m) despite slight revenue growth. Late-stage was responsible for much of the slip, as issues that have challenged the sector in recent quarters continued.

Delays, cancellations and conversion of backlog to revenue continue to have a detrimental impact on late-stage. These factors contributed to a dip in late-stage revenues, as well as lower margins, which resulted in unit operating income, excluding restructuring charges, dropping 14 per cent.

Early-stage performed better, with nine per cent revenue growth underpinned a double-digit increase in operating income, when restructuring costs are excluded. Including restructuring charges total operating income at Covance tumbled 47 per cent to $28.9m.

Covance predicts first quarter earnings per share (EPS) of $0.56 to $0.59, well below the $0.65 average of analysts polled by Thomson Reuters. Despite this Covance shares closed up 1 per cent at $57.22. Covance predicts 2011 EPS of $2.50 to $2.90, compared to $2.82 for analysts.

EPS estimates exclude the impact of restructuring charges. In the fourth quarter restructuring costs totalled $18.4m, split fairly evenly between early-stage, late-phase and corporate, and a further $18m is expected in 2011.

$125m tox deal

In the fourth quarter, but excluded, consistent with practice, from net orders, Covance inked a five-year $125m toxicology renewal. Doubling the size of the contract moves more of the client’s toxicology work to Covance and adds to the upwards trend experienced at the end of 2010.

Despite this good news, we are not yet calling in an upturn in toxicology demand. Since we have experienced several false starts in the recent past, we continue to forecast toxicology as sequentially flat​”, said Joe Herring, CEO of Covance, in a conference call with investors.

Toxicology could be disrupted in the first quarter as Covance moves from its Vienna, Virginia, US site to Greenfield. Herring acknowledged competitors will attempt to capture business while Covance transitions but believes retention of 50 Vienna employees at other sites will help.

Retaining some employees ensures continuity for clients and adds to toxicology expertise at a number of sites. Some employees are moving to work in the China toxicology laboratory which, Herring thinks, is now the only such site operated in the country by a western company.

Central lab

Covance has an established central laboratory business in China that “is growing very rapidly​”, said Herring. Central labs, as a whole, has also benefited from recent shifts in clinical trial geographies.

For example, trials in Russia have dipped, said Herring, and this has helped the business by reducing the “huge transportation costs​” associated with shipping between clinics and labs.

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