Covance (NYSE:CVD) delivered a strong second-quarter performance as demand for early-phase trial capacity continues to heat up among biotech and pharmaceutical companies.
The company, which provides drug development services, reported that its revenue rose 7.3% to $251 million, while earnings jumped 24% to $0.36 per share. In addition, the firm increased its earnings guidance for 2004 to $1.51 from $1.47 per share.
Covance's business is nearly evenly split between its early-stage business, which covers preclinical toxicology studies, analytical chemistry, and Phase I trials, and its late-stage segment, which includes central laboratory offerings, later-stage and post-commercialization trials, and certain specialty areas. The firm's early-stage side performed superbly, showing solid gains in revenue and operating income. The late-stage area, however, actually faltered, as both sales and operating income declined.
These results seem to reflect a larger trend in spending in the biotech and pharmaceutical industries. PPD (NYSE:PPDI) likewise indicated its early-stage segment is seeing heavy demand. In addition, Charles River Laboratories' (NYSE:CRL) planned acquisition of Inveresk Research (NASDAQ:IRGI) has a lot to do with clamor for preclinical and Phase I services.
The outlook seems reasonably sunny for the near-term, but investors should always be on the lookout for oversupply or a falloff in demand. A good part of the popularity in the early phase might be due to biotech's newfound wealth. Contract research companies tend to perform well when biotech companies are able to freely raise cash and suffer when financing is tight. Big pharmaceutical companies, though, are more reliable customers, so courting them is critical.
Covance, for its part, seems to be doing a respectable job of capturing big pharma's dollars. The company announced in April an innovative deal in which it will set aside capacity over three years for an unnamed "major pharmaceutical company" in exchange for at least $45 million. Signing more contracts like this would go a long way toward keeping revenues stable.
Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
