Global capacity cuts prompt positivity at toxicology CROs
Overcapacity has placed pressures on toxicology demand and pricing but there is evidence the sector is improving. Utilisation is up at Covance and Charles River Laboratories (CRL), in part because total global capacity is down, and this has made management more confident.
Joe Herring, CEO of Covance, said in a conference call with investors: “Right now we’re sitting on a pretty good hand.” Having experienced a number of “false starts” in toxicology recovery in recent years Herring remains cautious but there are reasons to beoptimistic.
Toxicology rooms are less available than even three to four months ago, said Herring. As global toxicology capacity drops James Foster, CEO of CRL, thinks it is inevitable pricing will improve.
Pricing at Covance is at worst stable and possibly improving slightly, said Herring, and visibility is also better than in recent years. Visibility at both CROs is still limited though, with CRL attributing this to “the greater proportion of shorter-term studies in the sales mix”.
Global capacity cuts
For the toxicology sector to improve much more cuts to global capacity are needed. This is largely out of the CROs’ control and relies on pharma companies making changes to their in-house toxicology infrastructure.
“[Pharma] continue to talk about [cutting capacity] and acknowledge the fact that it’s something they need to do and intend to do”, said Foster. The situation is complicated but it would be more cost-effective to cut capacity and outsource, said Foster, so it is inevitable change will accelerate.
Capacity cuts could see the return of dedicated space. Foster said: “As the space fills and as [pharma] shut down their own space I do think there will be some clients who are forward thinking enough and financially strong enough that they will want to consider locking up some space.”
Hiring at Covance
Staff utilisation at some Covance sites is approaching levels last seen in 2008. Since then Covance has cut toxicology staffing, so overall use of space is still down, but it is a positive trend.
In fact, Covance is looking to add up to 25 technical staff at its sites in Madison, Wisconsin and Chandler, Arizona. Infrastructure and the core of the toxicology team are in place at both sites.
Analyst reaction to hiring was mixed. Eric Coldwell, equity analyst at RW Baird, said plans to hire a modest number of people in toxicology are “intriguing” but others expressed concern.
“We're less enchanted by the headcount growth, plans to hire in tox, and the additional cost savings needed to drive the [2011 earnings per share] ramp”, said David Windley, equity analyst at Jefferies & Co.
