Covance clinical issues normalize

“Cancellations happen time to time​,” Herring told the Morgan Stanley Global Healthcare Conference on Tuesday. However, he noted that he doesn’t believe the recent consolidations in the pharma market are having any material impact on the company, noting, “two companies don’t generally come together then quit their projects​.”

Covance spokesman Paul Surdez clarified that cancellations have "normalized​." 

Jefferies analyst David Windley also downplayed the fall-off in clinical for Covance, noting that’s “something that’s now a couple of quarters old​” as they’ve had three consecutive quarters in a row with higher than normal cancellations.

“It seems like companies will get in a bad string of luck, [but it] rarely lasts more than a few quarters – cancellations will normalize and reverse back the other way but the revenue impact they’ve already seen will weigh on clinical revenue growth for the rest of the year​,” Windley told us.

Herring said that more broadly, orders for pharma clients are “picking back up – keep an eye on that – [and we’ll] muddle through the difficulty we’re having in clinical and ramp back up​.”

Early Development​

Despite the fall-off in clinical, Herring said Covance is still seeing an uptick in early phase development, echoing analysts that have been tracking​ the steady increases since February.

Herring noted that the company’s margins for early development were around 13.3%, whereas “all-time high margins were roughly 30%, but we don’t have that in our forecast…there’s plenty of more room to go for early development margins.​”

Windley added: “It seems early development has improved a lot – industry has been getting better for about a year and improvement is starting to build and creating positive pressure on margins – facilities have been underutilized for a while and now capacity is building​.”

Herring also said that most of the company’s toxicology business is priced at levels from the past, “but if it drifts up, would be a nice earnings driver, but it’s a competitive market and not putting that in our forecast yet​.”

Capacity-wise, Covance is seeing higher rates in the US than continental Europe, with 70% capacity in North America. Herring said the company is sending about $20m in study starts to Europe.

Central Labs​

Always Covance’s strong suit​, Herring boasted again of the company’s prowess in the central labs arena where the company consistently ranks atop the market.

“We’ve taken market share for 10 consecutive years and have a little more than 40% of the market,” Herring said, noting the company’s competitive position is driven by its global footprint.

“We can take samples from 140+ countries and test them within 24 hours​,” he said, noting he’s “happy with how we’re trucking along this year – made substantial investments in automation – higher and higher level of esoteric testing with biomarkers – and all of that plays into our advantage​.”