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CVD AT A GLANCE

P/E ► 18.6 AVG EV/EBITDA ► 11.4 AVG ROA ► 10.5% AVG ROE ► 14.8% AVG Debt to Equity ► 0.425 AVG Current Ratio ► 1.73 AVG Interest Coverage Ratio ► 158 HIGH

 

 

 

 

 

 

Covance is an international scientific services company and is known as a Contract Research Organization (CRO). The company is contracted by pharmaceutical, biotechnology, agricultural and medical device companies to perform needed services involving drug and chemical development.

Covance is the second largest CRO in the world in terms of revenue, earning $1.36 billion in nine months of 2008 ending September 30, 2008.^[1] In 2007 total revenue was $1.6 billion and in 2006 the company obtained 10% of the total global CRO revenue with revenue of $1.5 billion.^[2] Yearly total revenue for the company has increased between 2005 and 2007 by 23.4% due to increases in demand, capacity expansion, acquisitions and selling of one of its businesses.^[3] Revenue for Covance is driven primarily by the demand for outsourcing of research and development by pharmaceutical and biotechnology companies., Covance has also increased operating and net income margins between 2003 and 2007 by 16.2% and 29% respectively.^[4]

Amidst high development costs, companies are increasingly turning to CROs to help move through the drug development and heavily regulated process to bring products to market quicker and and at a lower cost.^[5][6] To take advantage of this trend Covance acquired three companies from 2005 to 2007 totaling $81.9 million and has increased its revenue from international deals by 10% over the past year to $85 million.

Company Overview

Covance provides drug development solutions from preclinical (before human testing) through commercialization for six main areas: biotechnology, pharmaceuticals, food and drug supplements, general research and vaccine testing.

Its services are divided into Early Development and Late Stage Development segments and include: research products, antibody products and services, nonclincal development services, risk assessment services, clinical pharmacology services, central laboratory services, cardiac safety services, clinical development and commercialization services.

Business and Financial Metrics

Covance reported $1.36 billion in total revenue in the first three quarters of 2008.^[1] The company's revenue increased by 15.4% in 2007 (12.8% when excluding foreign currency fluctuations) to $1.6 billion. This increase was partially due to currency movements, but were primarily determined by a 20% increase in the company's early development segment to $778 million (in revenue) and a 6.3% increase in its late-stage development segment to $769 million (in revenue).^[8] Strong growth in the company's clinical development services outweighed decreases in its central laboratory, cardiac safety and commercialization services.^[9] Covance also realized gains of $0.4 million due to a minority equity position (approximately 20%) in Bio-Imaging technologies and $2 million due to a minority position (approximately 47%) in Noveprim Limited in 2007.^[10] As of Dec. 31, 2007 Covance had no debt and $319 million in cash and cash equivalents. Its operating margin has increased 16.2% over the past five years to 14.8% and its net income margin has increased by 29% over the same period to 11.4%.^[4] In February 2007 Covance's Board of Directors authorized a 3 million share buyback plan and at the end of 2007 2.3 million remained for purchase under the plan.^[11]

Net Revenue by Location-2007^[12]

Net revenue increased 12.3% in 2006 to $1.34 billion. Revenue changes were partially determined by acquisitions, but were primarily due to growth in its early development and late-stage development segments. Growth in the early development segment was fueled by strong performance in its global toxicology, chemistry and clinical pharmacology services, resulting in a 12.6% increase in net revenue. Strong performance in the company's central laboratory services resulted in a net revenue increase in its late-stage development segment of 12.2%.^[13]

Net revenues increased 16.9% in 2005 to $1.19 billion. Net revenue growth was supported by strong performance across service offerings in both segments, resulting in a 17.5% growth in the company's early development segment and a 16.4% net revenue increase in its late-stage development segment.^[14]

Acquisitions and Divestitures

In November of 2007 Covance sold its Electrocardiogram (ECG) business ("Cardiac Safety Services"), which was part of its Late Stage Development segment to eResearch Technology Inc. The company received an initial payment of $35.2 million and entered into a ten year agreement under which Covance will continue to offer the cardiac safety services. The deal also stated that Covance will be eligible to receive up to an additional $14 million relating to transferred backlog and future contracts.^[15]

To strengthen its Early Development segment, Covance acquired the clinical pharmacology sites of GFI Clinical Services in 2005 for $6.2 million and the clinical pharmacology sites of Radiant Research Inc. in 2006 for $66.6 million. Also, in 2006 the company acquired Signet Laboratories Inc. for $9.1 million.^[16]

Business Segments

Percent of Revenue from Early Stage and Late-Stage Development Segments^[8]

Early Development Services (47.7% of FY 2007 Revenue, 60.5% of FY 2007 Operating Income)^[8]

Covance's early development services mainly support pre-human testing of animals and in vitro (non-animal models) experiments to develop drug and chemical profiles that if required, will then move into clinical trials. These services generated $778 million in revenue in 2007 and comprise six areas: toxicology, pharmaceutical and nutritional chemistry, bioanalytical, clinical pharmacology and research products.^[8] Laboratories exist in Indiana, Wisconsin, Virginia, Germany, Singapore, and the United Kingdom.^[17] These services range from testing the effects of compounds on immune systems to the development of research products to aid scientists in compound testing.^[17] Early development services utilize StudyTracker, an internet-based program that allows customers of toxicology, bioanalytical, metabolism and reproductive and developmental toxicology services to review study data and schedules on a near real-time basis.^[17]

Late Stage Development Services (47.1% of FY 2007 Revenue, 39.5% of FY 2007 Operating Income)^[8]

Covance’s late-stage drug development services support human testing of compounds (clinical trials) and commercialization of approved drugs. These services generated $769 million in revenue in 2007 and include central laboratory, clinical development, trial support, and commercialization services.^[8] These services range from the initial setup of clinical trials to the (domestic and international) marketing of products. The company has experience conducting clinical trials in North America, Europe, Latin America and the Asia Pacific.^[18]

Other Reconciling Items (5.2% of FY 2007 Revenue)^[8]

Revenues from other reconciling items are associated with reimbursable out-of-pocket expenses. It also includes depreciation and amortization on corporate fixed assets, as well as corporate expenses such as marketing and communications. These items generated $85.1 million in revenue in 2007.^[8]

Key Trends and Forces

High Costs of Research and Development for Biopharmaceutical Companies is Driving Growth in the Outsourcing Market

The CRO market was estimated at $15 billion in 2006 and increased by 15.7% to $17.8 billion in 2007.^[19] Predicted growth for CRO use is supported by the fact that it has been attributed on average to complete clinical trials up to 30% faster than those which sponsors conducted in-house. This resulted in average time savings of four to five months translating into increased revenue potential of $120-$150 million.^[20] It was also reported in 2006 that of phase I-III trials, that were not conducted in-house, CROs were involved in 74% of them.^[19]

Current development costs for a new drug have been estimated between $800 million to $2 billion per drug, depending on the particular therapeutic area. An example to support this estimate, Pfizer recently announced that it will spend $800 million on a set of Phase III clinical trials for just one of its drugs.^[21] Newer federal regulations have increased numbers of subjects in clinical trails, created more complex trials, created additional required testing, and increased the need for Phase IV post-FDA approval trials to monitor long term safety of products.^[22]

Government Regulations Slow New Development

Increased scrutiny over the drug development process has led to stricter guidelines with less flexibility. Following a 2005 audit by the FDA Covance was cited three times for violations concerning its good laboratory practices (GLP), which required corrective action.^[23] Covance came under scrutiny by the USDA concerning the upkeep of some of its facilities and the treatment of animals in 2001, 2003, 2004 and 2006. In 2006 the company was cited sixteen times by the USDA and settled by paying $8,720 to fix the violations. Although the amount spent on fines has been minimal, the reputation of Covance has suffered; this has led to the creation of advocacy groups against Covance and the company has been placed under a closer watch by regulatory agencies.^[24]

Trends show the US FDA (and other regulatory agencies) getting tougher and more strict on new drug approvals and the manner in which they are developed. The US Approval Trends and Yearbook 2006-2007, demonstrates that approval rates have decreased in the last two years from 38% to just 8% last year. It has also been reported that the Center for Drug Evaluation and Research (CDER), which reviews drug applications and monitors drugs post-approval, declared 30% of the standard new drug applications (NDA) and biologic license applications (BLA) not-approvable, this is an increase from 5% in 2003 and equates to a seven year high for not-approvable rates.^[25] Further decline of drug approval rates will lead to a decline in the demand for Covance's services.

International Markets Increasingly Account for Revenue Growth

Net revenue from international operations increased from 37% of net revenues in 2006, to 38% in 2007, to 41% in the first nine months of 2008.^[26][27] Covance offers clinical trial support in more than 55 countries utilizing emerging markets across central and eastern Europe, Asia Pacific and Latin America.^[28] To leverage the patient and investigator potential of emerging markets, Covance announced in 2009 that it would open offices in Kiev, Ukraine, Bratislava, Slovakia and Tel Aviv. In 2007 the company announced its intention to open a 13,000-square-foot dedicated central laboratory in Shanghai, China to meet demand for clinical trials in China. Covance invests in foreign markets to expand its global network and will add its fifth central laboratory with its new location in China.^[29] Covance plans to continue to invest all foreign earnings into investments outside of the United States to expand its global prescence.^[30]

Interest in emerging markets continues to grow due to their financial potential. For example, China is expected to become one of the top five markets for pharmaceutical development by 2010. In 2007, China's pharmaceutical market was estimated to be $22.6 billion, up 8.5% from 2006.^[31] This provides many opportunities for Covance to support companies creating therapies for this population. The company has central laboratories located in the Asia Pacific in Singapore, Sydney and Australia.^[29]

Competition

• Quintiles Transnational Corp.

Quintiles Transnational Corporation is the largest CRO in the world (21,000 employees in 50 countries) and is Covance's largest competitor. It similarly provides clinical trial management services, including patient recruitment, data analysis, laboratory testing, and regulatory filing. Similar to Covance it also offers consulting services for drugs and chemicals in all stages of development.^[34] It is a privately held company that does not release fiscal data, but given its market share, its revenues are estimated at $2.1 billion.

• Pharmaceutical Product Development (PPDI)

Pharmaceutical Product Development (PPD), is another major CRO and direct competitor of Covance in all aspects of drug development. Its 2007 performance is comparable to Covance's, with total revenue at $1.4 billion (to Covance's $1.5 billion) and operating income at $228 million (to Covance's $229 million).^[35]

• Charles River Laboratories International (CRL)

Charles River Laboratories, is the fourth major CRO and another direct competitor of Covance in all of its services. While its 2007 revenue was slightly smaller than Covance's, at $1.2 billion (to Covance's $1.5 billion), its operating incomes were essentially equal ($227 million to Covance's $229 million).^[36]

Market Share

In 2006 the total market for CRO services was estimated to be $15 billion. Of this Covance had a share of 10%, which equated to $1.5 billion.^[2]

Market Share of $15 Billion Total CRO Market-2006^[2]

References

1. ↑ ^{1.0 1.1} Covance 10-Q 2008 pg. 3
2. ↑ ^{2.0 2.1 2.2} "The CRO Market Outlook: Emerging Markets, Leading Players and Future Trends" Business Insights, May 2007
3. ↑ ^{3.0 3.1 3.2 3.3} Covance 10-K 2007. Part II. pg 38
4. ↑ ^{4.0 4.1} Covance 10-K 2007. Part II. pg 37
5. ↑ Wai Lang Chu. “CRO’s Drug R&D Contribution Never Been More Significant.” DrugResearcher. September 25, 2006
6. ↑ Jonna Dagliden. “Outsourcing Drug Discovery Market Experiencing Continued Growth, says New Report.” PRLog. July 2, 2008
7. ↑ Covance 10-K 2007. Part II. pg 17
8. ↑ ^{8.0 8.1 8.2 8.3 8.4 8.5 8.6 8.7} Covance 10-K 2007. Part II. pg 68
9. ↑ Covance 10-K 2007. Part I. pg 24
10. ↑ Covance 10-K 2007. Part II. pg 25
11. ↑ Covance 10-K 2007. Part II. pg 30
12. ↑ Covance 10-K 2007. Part II. pg 58
13. ↑ Covance 10-K 2007. Part I. pg 26
14. ↑ Covance 10-K 2006. Part I. pg 20
15. ↑ Covance 10-K 2007. Part II. pg 50
16. ↑ Covance 10-K 2007. Part I. pg 3
17. ↑ ^{17.0 17.1 17.2} Covance 10-K 2007. Part I. pg 2
18. ↑ Covance 10-K 2007. Part I. pg 4
19. ↑ ^{19.0 19.1} "The CRO Market" Association of Clinical Research Organizations, accessed on January 5, 2009
20. ↑ Arun Bhatt. “CRO Industry: Global Trends and Local Lessons.” Express Pharma, May, 2007
21. ↑ Neal Masia. "The Cost of Developing a New Drug." U.S. Department of State, Focus on Intellectual Property Rights. April 23, 2008
22. ↑ Mark Moran. “Cost of Bringing New Drugs To Market Rising Rapidly.” Psychiatric News. August 1, 2003
23. ↑ BioResearch Compliance Report. "Covance receives 3-item 483 For Protocol Violations and Final Study Report Flaws" Entrepreneur.com, March 2006
24. ↑ Vandana Sinha. "Plan to Lure Animal Testing Firm Covance has PETA Growling" Washington Business Journal, April 8, 2008
25. ↑ Emilie Reymond. "FDA Gets Tougher on New Drug Approvals" in-pharmatechnologist.com, Oct. 23, 2006
26. ↑ Covance 10-K 2006 pg. 12
27. ↑ Covance 10-Q 2008 pg. 26
28. ↑ Covance Website- Press Releases, February 3, 2009
29. ↑ ^{29.0 29.1} Covance Website- Press Releases, January 24, 2007
30. ↑ Covance 10-Q 2008 pg. 7
31. ↑ Epicom Business Intelligence, "The Market for Pharmaceuticals in Brazil, Russia, India and China 2008," January 2008
32. ↑ ^{32.0 32.1 32.2} Pharmaceutical Product Development Inc. 10-K Page F-3
33. ↑ ^{33.0 33.1 33.2} Charles River Laboratories International 10-K Page 48
34. ↑ Google Report on Quintiles Transnational Corp.
35. ↑ Google Report on Pharmaceutical Product Development, Inc
36. ↑ Google Report on Charles River Laboratories