Covance in Tune with Zacks Est. - Analyst Blog

Covance (CVD) reported an EPS of 45 cents for the fourth quarter of fiscal 2010 compared with 64 cents of the year-ago quarter. However, considering some adjustments, the EPS came in at 56 cents, beating the Zacks Consensus Estimate of 53 cents. For fiscal 2010, the adjusted EPS was $2.15, beating the Zacks Consensus Estimate of $2.13 although lower than $2.60 of the previous year.

Covance reported net revenues of $491.5 million, 1.3% higher than the year-ago quarter and surpassed the Zacks Consensus Estimate of $483 million. For the full year, revenues came in at $1,925.6 million, up 3.1% from the previous year and almost in-line with the Zacks Consensus Estimate of $1,926 million. The company derives revenues from two segments, Early Development and Late-Stage Development, which generated sales of $220.6 million (annualized growth of 8.6%) and $270.9 million (down 3.9%), 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 due to inclusion of two full months of results from Alnwick and Porcheville sites and modest improvement in toxicology services. The inclusion of two additional sites also had a positive impact on operating margin (post adjustment), which improved by 70 bps from the year-ago quarter. Additional factors responsible for improved margin are better toxicology services, partially offset by a decline in clinical pharmacology profitability, which was impacted by delay in studies.

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 delayed revenue generation for a project, project cancellations and a shifting mix of central lab tests performed and kits returned. These factors led to a 14.2% decline in adjusted operating income to $54.7 million with a 240 bps decline in margin.

At the end of fiscal 2010, backlog of Covance increased 27.3% year over year to $6.2 billion. The primary reason for the huge increase in order backlog is its 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 $377 million, down from $389 million at the end of September 2010. The company also repurchased $250 million worth of stock and had $133 million of debt during the quarter.

Outlook

Covance provided guidance for both the first quarter of 2011 and fiscal 2011. The company expects marginal increase in revenues during the first quarter on a sequential basis primarily driven by higher business order under the alliance with Sanofi. The company expects to report adjusted EPS of 56-59 cents, much below the Zacks Consensus Estimate of 65 cents. For the full year, Covance expects adjusted EPS of $2.50-$2.90 with revenue growth in single digit. The Zacks Consensus Estimate of $2.78 is already within this range.

 
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