August 1, 2001 Posted: 1601 GMT
NEW YORK (CNNfn) -- Drug companies lived up to their reputations as safe havens in tough economic times, reporting strong earnings for the second quarter. And solid numbers for big-name pharmaceutical companies is good news not only for investors, but also for a drug development company like Covance Inc., which is looking to continue its trend of robust growth.
Covance is what is known as a contract research organization (CRO) which performs testing for pharmaceutical companies, laboratories, and hospitals and managed care companies.
According to Covance Chairman, President and CEO Christopher Kuebler, the company focuses on three segments: nonclinical or preclinical services, central lab services, and human clinical trials.
Preclinical testing is involved in all stages of drug development, encompassing such tests as toxicology and biosafety testing, while lab services simply provides outsourced testing under lab conditions for client.
| Covance Chief Executive Christopher Kuebler | |
Kuebler told CNNfn.com his company is dominant in both areas. Covance is the world's leading preclinical toxicology services provider and is about four times larger than its closest competitor in central lab services.
These strong segments helped the company meet its raised second-quarter earnings target of 14 cents per share last week. Covance reported operating income of $8.4 million, with revenue rising 9 percent from the year-ago quarter.
Covance also said it was comfortable with 2002 earnings of 77 cents per share.
"The forward outlook for Covance is very good," said Eric Coldwell, analyst with Prudential Securities. "We've actually moved past a lot of the (company's) near-term challenges."
"The preclinical piece of our business has been very robust, and we just need to add capacity there," Kuebler said.
Coldwell said the key immediate issues facing Covance is the company's tendency to walk away from price-competitive contracting they have seen as less profitable, and getting some of the less profitable business off the books.
To the casual investor, human clinical trials are perhaps the most familiar segment of Covance's business, encompassing the Phase 1, 2 and 3 trials continually referred to in the process of drug development.
The Phase 1 part of new drug approval consists of short-term trials on healthy human volunteers to determine the safety of the drug on patients and does not examine the effectiveness.
Phase 2 is the first time the drug is put into patients who have the disease it is designed to treat. Phase 3 consists of thousands of tests to determine the drug's overall effectiveness.
Covance currently does not hold the dominant position in clinical testing that it does in central lab services and preclinical services – Keubler estimated the company ranks about No. 4 in U.S. Phase 3 testing – but the company is hoping the industry is ready to come out of a recent downturn.
Kuebler said clinical trials has experienced a downturn during the last 15 months or so and that downturn seems to be indicative of a slowdown in pipeline spending.
"There has been a downturn in (clinical trials) volume that this industry has never seen before, and I hope never sees again," he said.
He said mergers within the industry and caution regarding the presidential election were contributing factors to cancellations and reductions of trials, but sees volume picking up now.
While it is Covance's strategy to extend their lead in dominant areas – driving share in the fractured area of central labs and pushing outsourcing for preclinical testing – the plan for clinical trials is simply to increase profitability, which analysts agree with.
"I think they have a fair amount of operating leverage in their business, but they have some near-term revenue growth restrictions concerning their fundamentals for Phase 3 testing," said Ruby Holder, analyst with ABN Amro.
Holder said there are a lot of drugs in the Phase 1 and 2 trials, and she expects that to move to Phase 3 around 2003, boosting Covance's Phase 3 and clinical labs segment.
"They need to focus on getting their clinical CRO operations to a higher level as they have increasingly relied on lab-based business," Coldwell said. "They key going forward is managing their growth and their infrastructure."
Shares of Covance rose 5 cents to $23.95 Tuesday, just $1.55 off its 52-week high.
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