Covance (CVD) reported net loss per share of 49 cents during the third quarter of fiscal 2010 compared with an EPS of 79 cents in the year-ago period. However, after adjusting for certain items, the company reported an EPS of 50 cents, meeting the Zacks Consensus Estimate and surpassing the year-ago quarter’s 67 cents by 25%.
Net revenues (excluding reimbursable out-of-pocket expenses) were $477.0 million, marginally above the Zacks Consensus Estimate of $476 million and 0.4% higher than the year-ago quarter. Covance derives revenues from two segments, Early Development and Late-Stage Development, which generated sales of $206.5 million (annualized growth of 5.1%) and $270.5 million (down 3%), respectively.
While the Early Development segment deals with preclinical toxicology, analytical chemistry, clinical pharmacology services, research products and discovery services, Late-Stage Development caters to central laboratory, phase II-III clinical development and commercialization services.
Revenues of the Early Development segment increased annually on robust performance of the chemistry services, although foreign exchange had a 190 bps negative impact on growth. However, sequentially revenues derived from toxicology declined, which more than offset growth in chemistry and clinical pharmacology. Operating margin (post adjustment) was lower by 70 bps from the year-ago quarter due to lower level of new orders, delays of scheduled study starts and pricing mix in toxicology.
Earlier, Covance had suffered from delays in some large phase III studies. However, a majority of these studies started in July. This segment continues to suffer due to several factors such as longer duration for a project to generate revenue, project cancellations and a shifting mix of central lab tests performed and kits returned. These factors led to a 19.9% decline in operating income to $55.2 million with a 430 bps decline in margin.
At the end of the third quarter, backlog of Covance increased 25.6% year over year to $6.02 billion. The primary reason for the huge increase in order backlog is its recent agreement with Sanofi-Aventis (SNY). Under the agreement, Covance will provide drug-development services to Sanofi for payments of $1.2 – $2.2 billion over a period of 10 years.
Covance exited the quarter with cash and cash equivalents of $389 million, up from $266 million at the end of September 2009. The company remained debt free at the end of the quarter.
Outlook
Covance provided guidance for the fourth quarter of 2010. The company expects revenues to remain flat sequentially with an EPS of 50-55 cents, much below the Zacks Consensus Estimate of 58 cents.
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