Covance Inc. (CVD) reported adjusted earnings per share (EPS) of 90 cents in the first quarter of 2014. The results beat the year-ago figure by 20.0% but remained in line with the Zacks Consensus Estimate. The year-over-year upside was driven by an improved top line and strong margin. Including the impact of certain one-time items, reported earnings in the quarter came in at 88 cents, registering a 2.5% beat over the year-ago figure.
Apart from the earnings miss, the narrowed 2014 guidance also failed to boost market confidence. The company’s share price dropped 6.1% since the announcement of the first quarter results to close at $82.63 yesterday.
Total revenue in the reported quarter grossed $666.2 million, up 5.0% year over year beating the Zacks Consensus Estimate of $646 million. Net revenue increased 6.9% from the year-ago quarter to reach $620.1 million (favorable foreign exchange contributed 170 basis points to this growth rate).
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 and clinical development. On the other hand, after several quarters of drag in sales, the Early Development segment is gradually returning to a positive growth trajectory. During the quarter, sequential growth in clinical pharmacology, research products, and nutritional chemistry was more than offset by the divestiture of the company’s Seattle genomics laboratory and seasonal declines in toxicology and discovery support.
Net revenue from continuing operations in Early Development rose 5.3% year over year on a reported basis to $218.2 million in the quarter. Despite a decline in discovery support and the impact of the sale of the Seattle genomics laboratory, growth in clinical pharmacology and toxicology boosted sales in this segment.
Early Development pro forma operating margin was 9.7%, flat year over year.
Net revenue from Late-Stage Development climbed 7.8% year over year to $401.8 million. This was driven by growth of 10.9% in central laboratories and 5.7% in clinical development, which more than offset a decline in market access services. Moreover, the quarter received a 160 basis points favorable impact from foreign exchange.
Pro forma operating margin expanded 40 bps on a year-over-year basis to 23.2%.
Gross margin contracted 7 bps to 35.1%. Adjusted operating margin improved about 248 bps to 15.04% with a 25.8% rise in adjusted operating income to $100.2 million.
Covance exited the quarter with cash and cash equivalents and short-term investments of $660.1 million, down 9.5% year over year. Operating cash outflow of $71 million and capital expenditure of $35 million in second-quarter 2014 resulted in the free cash outflow of $106 million.
Covance revised its guidance for 2014. It narrowed its revenue growth expectation to the band of 6% to 9% from the earlier range of 6% to 10%. According to the company, the midpoint of this updated range implies high-single digit growth in Late-Stage Development and mid-single digit growth in Early Development. This expectation takes into account a headwind from the spin off of the Seattle genomics laboratory.
The company also narrowed its full year adjusted earnings per share to $3.70−$3.95 from the previous range of $3.65−$4.00. Currently, the Zacks Consensus Estimate for 2014 EPS is pegged at $3.82, well within the guided range. The Zacks Consensus Estimate for revenues of $2.62 billion stands at the upper-end of the guided range.
Covance has managed to post a better-than-expected top line as part of its first-quarter results owing to healthy growth across both its segments. However, on a sequential basis, revenues decreased $3 million due to the sale of the Seattle genomics lab and the seasonally weak start of the year in Early Development, which more than offset the sequential growth in Late-Stage Development.
Late-Stage Development continues to grow steadily on the back of strong central laboratories and the continued sturdy performance of clinical development services. Over the past few quarters, Covance had been 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 #3 (Hold). Some of the top-ranked medical services stocks worth a look are Air Methods Corp. (AIRM), BG Medicine, Inc. (BGMD) andBioTelemetry, Inc. (BEAT), all with a Zacks Rank #2 (Buy).