Covance Inc. ( CVD ) reported adjusted
earnings per share of 75 cents in the first quarter of 2013,
beating the year-ago results by 25% and the Zacks Consensus
Estimate by 4.2%. Earnings improvement was driven by top line
growth and margin expansion.
Including the impact of the one-time items (losses from
facilities in wind-down, restructuring costs and other charges),
reported earnings in the quarter came in at 86 cents, beating the
year-ago earnings by 43.3%.
Revenues in the first quarter increased 10.5% to $634.3 million,
sailing past the Zacks Consensus Estimate of $580 million as solid
sales performance in the Late Stage development segment offset
decline in the Early development business.
Covance primarily derives its revenues from two segments, Early
Development and Late-Stage Development.
Early Development Stage
Net revenues from Early Development declined 2.1% year over year
to $207 million in the quarter. Growth in clinical pharmacology,
research products and nutritional chemistry was offset by reduced
toxicology and discovery support services.
In the reported quarter, Early Development pro forma operating
margin was 9.7%, up 440 basis points (bps) year over year, despite
the revenue shortfall. Restructuring activities which took place in
2012 is largely responsible for the expansion in the operating
Late Stage Development
Net revenues from the Late-Stage Development surged 16.8% year
over year to $372.9 million. Growth in this segment was
driven by of central laboratories and increased clinical
development. Favorable foreign exchange also impacted the revenue
by 10 bps.
Pro forma operating margin expanded 10 bps on a year-over-year
basis to 22.8%. Year on year increase in profitability in the
central laboratories offset the increase in the strategic IT
For 1Q13, gross margin expanded 80 bps to 35.2%. Operating
margin of the company decreased about 40 bps to 7.6%. Reimbursable
out-of-pocket expenses increased 25.7% year-over-year to $54.1
million while the selling, general and administrative expenses
increased 10% year over year to $89.2 million.
Covance exited first-quarter 2013 with cash and cash equivalents
of $430 million, down 2.3% year over year. Operating cash flow of
negative $54 million and capital expenditure of $30 million in
first-quarter 2013 resulted in annual free cash flow of negative
$84 million in comparison with free cash flow of about $15.6
million the previous quarter.
Covance increased its guidance for revenue growth to a
high-single digit range from previously guided mid- to high-single
digit growth for 2013. Based on current foreign exchange rates, the
company expects adjusted earnings to be in the range of $3.00 to
$3.20, up from previously guided range of $2.85 and $3.15.
Currently, the Zacks Consensus Estimate for 2013 is pegged at
Though Early Development franchise continues to decline, the
Late-Stage Development continues to drive the revenue of the
company single-handedly. Moreover, the company looks forward to
2013 with optimism and expects to accelerate growth in the future,
due to which Covance raised it guidance for 2013. This is primarily
due to several patent expiries in the pharmaceutical industry which
might improve market conditions for Covance. With the ongoing
'patent cliff', the company expects higher demand from its
customers in the pharmaceutical and biotechnology industries as
they develop their pipeline.
With positive industry trends, estimates continue to move higher
for Covance. Accordingly, the stock carries a short-term Zacks Rank
#2 (Buy). Other Zacks Rank #2 medical stocks are MedAssets,
Inc. ( MDAS ),
Omnicell Inc. ( OMCL ) and
ICON Public Limited Company ( ICLR ) which also
warrant a look.COVANCE INC (CVD): Free Stock Analysis ReportICON PLC (ICLR): Free Stock Analysis ReportMEDASSETS INC (MDAS): Free Stock Analysis
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