Covance lifted by $145m Merck deal
pharmafile | August 4, 2009 | News story | Research and Development |Â Â CRO, CovanceÂ
Covance's late-stage development services unit helped the contract research organisation to a 7% increase in second quarter net revenues, ahead of expectations.
The healthy figures, along with news of a $145 million, five-year contract to provide genomic analysis services to Merck & Co, helped to boost Covance shares.
Under the terms of the deal with Merck, Covance will also take over the pharmaceutical firm's genomics unit in Seattle, USA, which provides services such as genotyping, gene sequencing and gene expression profiling.
The agreement reprises an industry-shaping deal Covance signed with Eli Lilly a year ago, in which it bought Lilly's Greenfield Laboratories facility for $50 million, taking an expensive but underutilised asset off the drugmaker's hands, in return for guarantees of $1.6 billion in drug development contracts over the following 10 years.
For Covance, the deal provides a rapid entry into market valued at several hundred million dollars a year.
Commenting on the deal, Covance chief executive Joe Herring said: "We recognised the need to expand our footprint in the important and growing genomics testing market and this transaction provided both a superior and quicker entry point than the build or buy options we considered."
The new unit will provide a boost for Covance's early-stage development services business, which has been suffering of late.
The unit, which includes toxicology, chemistry and clinical pharmacology services, saw revenues fall back 6% to $200 million in the second quarter, while operating income was down 50% to $27 million.
The downturn was the result of both external and internal factors, said Covance. Funding issues for emerging biotech companies, delays in established pharmaceutical companies bringing new projects forward and pressure on pricing all played their part in dampening revenues.
Meanwhile, operating decisions such as overstaffing, the closure of some phase I clinics and the opening of Covance's new drug development unit in Chandler, Arizona, in March all served to peg back the unit's financial results.
The performance of the early-stage unit dragged down the entire group, with overall operating profit down 11% year-on-year to $60 million.
On the plus side, revenues for Covance's late stage unit, which provides phase II-III clinical testing and central laboratory services, seemed to shrug off the softer demand facing the wider contract research sector and rose 19% to $266 million. Operating profit at the unit leaped 52% to $65.5 million.
That performance encouraged Covance to raise its financial forecasts for the full-year. The company now expects 2009 revenue growth in the "mid- to upper-single digits", compared with a previous target of "single-digit" growth.
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