On Aug 22, 2014, we issued an updated research report on
). Covance has managed to post healthy second-quarter results with
earnings beat and in-line revenues on healthy year-over-year growth
across both its segments.
Adjusted earnings per share of 95 cents were up 21.8% year over
year and ahead of the Zacks Consensus Estimate by a couple of
cents. Revenues were up 8% at $639.5 million, in line with the
Zacks Consensus Estimate.
Late-Stage Development continues to grow steadily. Despite
increased spending on strategic IT projects, the segment witnessed
growth on the back of better-than-estimated kit volumes in central
laboratories and the continued strong performance of Phase II-IV
clinical development services. In the last reported quarter,
Central laboratory services net revenue surged 11% year over year
while there was 4% growth in clinical development. In addition,
market access services resumed year-over-year growth, following
several quarters of decline.
Over the past few quarters, Covance had been suffering from
sluggish early-stage R&D spending by the biopharmaceutical
industry which resulted in overcapacity in this segment. However,
of late, the company is showing signs of recovery with improvement
in Early Development performance on the back of robust growth in
clinical pharmacology and a substantial increase in toxicology
ordersdespite a decline in discovery support and the impact of the
sale of the Seattle genomics laboratory.
Although capital spending environment and competitive landscape
remain as overhangs, we believe Covance is positioned well to drive
growth in the coming quarters. Another reason behind this
optimistic approach might be the expiration of several patents in
the pharmaceutical industry, which are likely to improve market
conditions for Covance, going forward. However, we are concerned
about the 5-year portion of the 10-year Sanofi (
)-Covance alliance which is about to expire in Nov 2015.
The stock currently carries a Zacks Rank #3 (Hold).
Key Picks from the Sector
Medical service stocks such as PAREXEL International Corp. (
) and Quintiles Transnational Holdings Inc. (
) are also expected to do well. Both the stocks hold a Zacks Rank
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