Covance's Higher Performance

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Covance (NYSE: CVD) continues to enjoy positive trends in drug development outsourcing. The company looks poised to build on its success as it increases its efficiency and seals more bundled service deals.

Like its competitors PPD (Nasdaq: PPDI) and Charles River Laboratories (NYSE: CRL), Covance has enjoyed solid results, thanks to solid trends in outsourcing from pharmaceutical and biotech clients. The provider of drug development services disclosed that net income for the fourth quarter of 2004 increased 33.5% to $27.3 million compared with $20.5 million in 2003's fourth quarter. Full-year earnings also showed a nice gain, rising 28.6% to $97.9 million from $76.1 million.

The driver behind Covance's impressive results has been productivity gains. The drug development business has traditionally been above all else dependent on the people running studies. And Covance has managed to squeeze more and more from its employees. Even as it expanded with a rising head count, Covance's operating margin per employee grew 25% over the course of 2004.

Part of Covance's efficiency improvements may be due to its success in selling service packages to clients. Covance's offerings include an early-stage business, which covers preclinical toxicology studies, analytical chemistry, and phase 1 trials, as well as late-stage offerings, such as advanced and post-approval trials and central laboratory services. The company indicated that approximately 40% of its 2004 orders involved bundling of several services. Being able to integrate these different areas for individual clients likely has allowed the company to better manage employees and costs.

Looking ahead, Covance's prospects look strong. Backlog was up 29% in 2004, and the company has sealed two deals for dedicated capacity in preclinical toxicology, agreements that should provide for some stability in an environment where project cancellations are relatively common. The continued danger for Covance and all drug development outsourcing outfits remains a downturn in financing for biotech companies. For now, though, biotech is going strong, and the same can be said for Covance.

For more:

• 3 Pharma Dark Horses
• Stability for Covance?
• Charles River's Big Buy

Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.