Covance Retains Balanced View on Steady Growth

Zacks

On Aug 22, 2014, we issued an updated research report on Covance Inc. (CVD). 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 (SNY)-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. (PRXL) and Quintiles Transnational Holdings Inc. (Q) are also expected to do well. Both the stocks hold a Zacks Rank #2 (Buy).

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