Covance toxicology capacity use still suboptimal despite improvements

By Staff reporter

- Last updated on GMT

Covance toxicology capacity use still suboptimal despite improvements

Related tags Covance Better

Covance has reported capacity use at its preclinical toxicology business is in the 70% range, meaning it is still well below optimal levels despite recent improvements.

The preclinical toxicology sector as a whole has bounced back from the post-recession slump that led Covance and its peers to shutter facilities, but there is evidence the recovery has happened faster at some contract research organisations (CRO) than others.

Charles River Laboratories has pursued a policy of bidding aggressively to win substantial, long-term deals with large pharma companies, leading to its capacity use returning to the optimal level of 85%.

Covance is still some way short of the optimal level. “Globally, we’re at about 70s as far as capacity​,” Deborah Keller, CEO of Covance, said on a quarterly financial results conference call with investors. “Utilisation in the U.S. is slightly higher and Europe is a little bit lower​.”

Capacity numbers

The release of details of capacity use at Covance explain why David King, the CEO of Covance’s parent company Labcorp, was able to confidently say the CRO has no need to open an additional facility.

In previous quarters, Keller’s predecessor as CEO of Covance, Joseph Herring, made no mention of numbers when discussing utilisation, saying only that capacity was “filling​.” The trend identified by Herring is still happening.   

We’re glad to see our capacity filling. It’s a much improved situation versus a few years ago​,” Keller said. Despite this, there is a gap between capacity utilisation rates at Covance and CRL, a fact that has implications for pricing in the sector.

In August, CRL reported a 5% increase in its prices, although three to four percentage points of the rise were accounted for by change orders clients made to add extra endpoints and other revisions to the original study. Covance reported low single digit price increases this week.

The ability of either company to enforce further price increases is dependent, in part, on capacity use across the toxicology testing sector as a whole. If there is an industry-wide excess of capacity, it is harder for any individual company to ratchet up its prices.   

Sales growth

While any improvement in the preclinical testing business is welcome for Covance, the unit has less of an impact on the business than the central lab operation, which is the largest and most profitable component of the CRO.

As a whole, Covance posted year-on-year constant currency revenue growth of 6.3%, an uptick it attributed to strong volumes at its central lab operation and the gradual recovery of its early development business. 

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