Covance Beats Earnings, Rev, Ups View

Zacks

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%.

Revenue

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 margin.

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 spending

Consolidated Margins

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.

Balance Sheet

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.

Guidance

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 $3.14.

Out Take

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.

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