Covance shocks analysts with two year IT investment plan

Earlier this month Covance dampened 2012 guidance expectations by outlining plans to accelerate investment in its IT (information technology) infrastructure​. Despite the forewarning and diminished expectations the full year guidance still contained surprises and disappointed analysts.

“The two surprises are the much weaker early development and the much larger IT investment. Further IT spending growth in 2013 throws cold water on the normal ebullient thesis..."next year will be better"​”, David Windley, equity analyst at Jefferies & Company, wrote in a note to investors.

Covance is investing in IT to consolidate its infrastructure, add clinical informatics, and strengthen its central laboratory. This year spending on IT will grow 17 per cent. In 2013 a further spending increase of 18 per cent is expected.

By making these improvements Covance expects to slow IT spending growth and give it a technological advantage in years to come. For the next two years though the spending will drag on financial results.

“Reality is two more years of weaker-than-expected earnings per share and higher confidence in the company’s ability to prosper in 2014 and beyond relative to the peer group​”, Eric Coldwell, equity analyst at RW Baird, wrote.

Early stage weak, late stage strong​

Performance at the early development unit was another lowlight. “After seeing modest improvement earlier in 2011, toxicology revenues weakened in the fourth quarter, particularly in Europe, and appear to be off to a slow start in 2012​”, John Kreger, equity analyst at William Blair, wrote.

Overall early development revenues were up year-on-year, with the Sanofi sites Covance acquired and clinical pharmacology driving growth. However, sales fell quarter-on-quarter on continuing weakness in the European toxicology market and the outlook for the first quarter is also poor.

Strong performance in late stage clinical development continued the familiar themes. The late stage development unit posted double-digit revenue growth as Covance continued to grow its presence in Phase II to IV clinical trials.

Demand for late stage clinical trials helped Covance post record new bookings in the quarter. Joe Herring, CEO of Covance, said the unit will drive “mid-single digit year-on-year revenue growth​” in 2012.

 Covance shares were down 4.6 per cent in after-hours trading and further falls could occur when the market opens. “We expect Covance to fall by ~15 per cent​”, Windley wrote.