Big pharma restructuring and other factors cut demand for early development services and recovery has been slow. In November 2010 Covance responded by winding down work at its Vienna, Virginia, US toxicology facility but an analyst has called for further cuts.
“Covance still has too much capacity. Retaining excess capacity today so as not to get caught short of capacity if demand returns, is no longer a valid argument”, David Windley, equity analyst at Jefferies & Company, said.
Big pharma companies have excess laboratory space, Windley said, and want to offload this capacity as part of strategic deals. As such, any sharp uptick in demand from winning a big contract could be accompanied by an asset transfer to boost capacity.
Excluding such strategic deals, Windley expects demand for early development services to return gradually and likely fail to reach prior levels. Since early development outsourcing demand reached historic highs biopharm companies have cut pipelines and delayed the timing of toxicology studies.
Cutting capacity
In July Covance said a client had ended its contractual minimum volume deal early. “With Covance’s key client in Arizona restructuring its contract, that space faces more utilisation challenges. Chandler may not be the right lab to close, but it is one of the smaller ones”, Windley said.
Eric Coldwell, equity analyst at RW Baird, said Covance seems to be faring better than its peers in a “sluggish toxicology environment”. Despite this, Coldwell lists slow early development recovery as a threat to Covance and said “performance is severely limited by capacity underutilisation”.
Windley wants Covance to take a restructuring charge of at least $20m (€15m) to accelerate recovery of early development operating margins. Cutting early development capacity and lowering corporate expenditure are recommended by Windley.