) reported adjusted earnings per share (EPS) of 87 cents in the
fourth quarter of 2013. The results beat the year-ago figure by
18.6% and was ahead of the Zacks Consensus Estimate by 3
cents. The upside was driven by an improved top line.
Including the impact of certain one-time items, reported earnings
in the quarter came in at 80 cents, registering a 9.6% beat over
the year-ago figure. For the full year, adjusted EPS surged 19.6%
to reach $3.23.
Net revenue increased 10.8% from the year-ago quarter to reach
$623.1 million (up 11.1% on an adjusted basis), beating the Zacks
Consensus Estimate of $622 million. For the full year, net
revenues were $2.4 billion, up 10.2% over the prior year (or up
10.6% on an adjusted basis).
Covance primarily derives its revenues from two segments,
Early Development and Late-Stage Development. During the reported
quarter, solid sales performance was seen in Late-Stage
Development backed by accelerated revenues in central
laboratories. On the other hand, after several quarters of drag
in sales, Early Development segment is gradually returning to a
positive growth trajectory.
Net revenue from continuing operation in Early Development
rose 5.0% year over year on a reported basis (up 5.7% from
adjusted revenues in the year-ago quarter) to $228.3 million in
the quarter. The increase was driven primarily by growth in
clinical pharmacology services and improved results in
toxicology, which were partially offset by decline in discovery
support and certain pharmaceutical chemistry services.
Early Development pro forma operating margin was 12.1%, up 10
basis points (bps) year over year.
Net revenue from Late-Stage Development surged 14.5% year over
year to $394.8 million on the back of continued strong
performance in central labs and clinical development, where net
revenue were up 17% and 13% year over year, respectively. Pro
forma operating margin expanded 140 bps on a year-over-year basis
to 22.7%. Year-over-year increase in profits in both clinical
development and central laboratories neutralized the increase in
strategic IT spending.
Gross margin contracted 24 bps to 34.8%. Adjusted operating
margin improved about 100 bps to 10.4% with 23.2% rise in
adjusted operating income to $64.7 million.
Covance exited 2013 with cash and cash equivalents and
short-term investments of $729.0 million, up 47.9% year over
year. Operating cash flow of $405.6 million and capital
expenditure of $58 million in second-quarter 2013 resulted in
free cash flow of $134 million.
Covance initiated its guidance for 2014. It expects 2014
revenues to grow in the range of 6% to 10%. Adjusted earnings per
share is expected to remain within $3.65−$4.00 (assuming foreign
exchange rates remain at the current level). Currently, the Zacks
Consensus Estimate for 2014 EPS is pegged at $3.82, well within
the guided range. However, the Zacks Consensus Estimate for
revenues of $2.65 billion remains ahead of the projected
For the first quarter of 2014, Covance expects sequential
growth in revenues. It also expects a rise of around 2 cents on a
sequential basis. The company estimates this quarter to show an
increase in Late-Stage Development net revenue and earnings,
partially offset by seasonally weaker first-quarter Early
Covance has managed to post better-than-expected
fourth-quarter results with modest top- and bottom-line beats on
healthy growth across both its segments. 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. Over the past few quarters, Covance was
suffering from sluggish early-stage research and development
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 owing to robust growth in clinical pharmacology and a
substantial increase in toxicology orders.
The stock presently carries a Zacks Rank #2 (Buy). Other
top-ranked medical stocks such as
) are also expected to do well. While AFFX carries a Zacks Rank
#1 (Strong Buy), COV and SYK hold the same Zacks Rank as
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