Covance (NYSE:CVD) doesn't operate in the most cutting-edge business. While pharmaceutical giants like Pfizer (NYSE:PFE) and Eli Lilly (NYSE:LLY) get the glory for creating new medicines, Covance and its peers in drug research carry out much of the grunt work of drug development for pharmaceutical clients. Still, a recent deal shows that Covance continues to change drug outsourcing in a way that will help it remain a leader in the industry.
The company announced Wednesday that it had landed the largest contract in its history. Under the deal, which has a minimum value of $187 million, it will provide dedicated toxicology space for an unidentified customer from 2007 to 2013. In terms of value, the deal is admittedly not huge. Covance pulled in about $1.2 billion in revenue last year, after all.
The agreement is nevertheless important, though, because it could serve as a paradigm for future contracts. The research business can be very volatile. Major drug companies and biotech firms have generally seen research service providers as excess capacity rather than as true partners. As a result, drugmakers have been known to cancel or delay contracts on very short notice, which then disrupts the operations and profitability of their chosen research services provider. Charles RiverLaboratories (NYSE:CRL), for example, recently suffered from reduced profitability last quarter because a study was delayed.
Through this recent deal, Covance is signaling that drug outsourcing can be done over an extended period and in a collaborative way so that disruptions are minimized. The arrangement appears to offer advantages for both parties. The client has the flexibility to run a range of preclinical trials using Covance's capacity, and Covance has a greater ability to plan for the future, maximize the efficiency of its resources, and ensure that the client gets the best service.
The agreement shows that the company has become savvy at forming strategic "win-win" partnerships. With pharmaceutical companies under continued pressure to optimize operations, Covance may have an opportunity to seal more such deals and cement its leadership.
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Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
