Covance Q2 soaring thanks to Sanofi acquisitions
The contract research organisation (CRO) released its positive figures for the second quarter yesterday, showing an impressive GAAP operating income growth of 37.4 per cent – from $22.5m (€15.7m) to $30.9m– year-on-year.
And the triumph comes despite the falling revenue from its Virginia toxicology facility in Vienna, which is being closed after falling demand led to overcapacity and pricing pressures.
In its press release, Covance attributes its success in-part to good foreign exchange basis points as well as stronger results in clinical pharmacology.
But the firm largely puts the results down to its newly acquired development sites in Alnwick, UK, and Porcheville, France; part of the $2.2bn strategic alliance with Sanofi in September.
A spokesperson for Covance said: “Net revenues in the second quarter of 2011 grew 11.4 per cent year-on-year to $231.8m, driven by the results from our new Alnwick, UK and Porcheville, France sites, foreign exchange tailwind of 230 basis points, and stronger results in clinical pharmacology, which more than offset a decline in revenue from the wind-down of our Vienna, Virginia toxicology facility.
“Sequentially, revenues increased $7.8m on broad-based revenue growth.”
Steeper incline for late stage
However not all sectors of the business were such a success story – late stage development posted zero per cent operating income.
Still, with net revenue up by 7.3 per cent it is fair to say the culprit for this was central lab issues, and perhaps the savior a ‘tailwind’ in foreign exchange as well as an increase in sales this quarter.
Financial analyst Eric Coldwell, MD at Robert W. Baird & Co, said: “Central lab revenue was challenged by delays, cancellations and contract maturities.
“However the Swiss Franc afforded a modest upside.”
Negative impact
In its report, Covance said backlog was impacted by the removal of $141m remaining from a contractual minimum volume (CMV) commitment for early development services with an unnamed company.
The deal is now set to be replaced with a non-CMV relationship with the same client.
A spokesperson for Covance said: “The CMV contract, which was initiated in 2006, was due to expire at the end of 2015.
“The client has now committed to place a number of studies in excess of the remaining value of the CMV contract for services spanning both early development and late-stage development.
“The studies under the new arrangement are expected to be included in future orders as the individual project study documentation is prepared, and are expected to generate revenue of at least $170m over the next four years.”
Jefferies & Company equity analyst David Windley believes the unnamed company to be Amgen, who are believed to have struck an un-publicised deal with Covance back in 2006.
Windley said: “The unnamed company,we think Amgen,removed $141m worth of dedicated early-stage work from the CMV pipeline. It plans to send – though it isn’t guaranteed - $170m of both early and late-stage work to Covance over the next four years.
“The new projects will hit backlog as awarded and, therefore, will not be booked into backlog all at once. If the client follows through with the full amount, the outcome could be a net improvement; however, the client's desire to exit the CMV commitment is notable.”
