Covance Clinical Trials Business Impaired By Mergers, National Politics - CEO

Covance's late-stage clinical trials business has been negatively impacted by the slew of industry mergers and the country's uncertain political climate, CEO Chris Kuebler remarked during the company's third quarter earnings conference call.

"Political pressures, elections, mergers, patent expirations - they've all resulted in a softer marketplace for some of our services. This seems to be felt more acutely in our late-stage business," Kuebler said.

"Large clinical projects seem to be fewer in number, and rationalization of the number and size of projects occur at an increasing rate," he observed.

However, he added, "our hope is that the richness of the industry's discovery efforts, the completion of the presidential elections, and the completion of the merger efforts from many of the companies...will improve our marketplace."

Although Covance's net revenues for the third quarter increased 8.1% to $214.9 mil., the net income was down 86.4% to $1.7 mil.

The company attributed these results to losses in the clinical development and biomanufacturing sectors, as well as to investment spending in its new bioanalytical facility and its newly formed subsidiary Nexigent, launched Oct. 1 to provide Internet-enabled clinical trials services.

The clinical and biomanufacturing losses for the quarter totaled about $.08 per share, Covance said. Based on the company's weighted basic average outstanding shares, the loss comes out to approximately $4.6 mil. after tax. The late-stage development segment's operating margin was -.8% for the quarter, the company reported.

Covance indicated that it spent $3.7 mil. on Nexigent for the quarter (with $7.1 mil. year to date), and has invested about $10 mil. so far in building the new bioanalytical facility, which officially opened Oct. 30.

In terms of revenue breakdown, Covance reported that in the third quarter, 35% of revenues came from clinical support services, 33% from early development, 16% from clinical development, and 8% each from biomanufacturing and commercialization.

Kuebler pointed out that Covance needs a "return of the big $10 mil., $20 mil., $30 mil. clinical trials in volume to turn around," rather than the "greater mix of smaller trials" the company has currently.

Large trials bring in higher margins, he explained, "because setup and protocol development and all those kinds of things are not that different whether you do it for a very large trial or a very small trial."

"It feels as though" the big-trials market has shrunk for all contract research organizations, Kuebler noted. "We look at both what we pitch on and what we win. We're not happy with the wins or the win percentages, necessarily. But one thing we have a hard time controlling is what's available out there, and we know that's diminished."

"I wouldn't be terribly surprised if we're losing market share in clinical, to tell you the truth, but we never can quantify that," he said. "I don't think it's a massive erosion."

Kuebler said there is only one large CRO "I know of that's reporting good results at the moment." He added that some small private companies are doing well also, but "there are 700 of these companies out there...and no one's heard of 690 of them."

With major CROs still recuperating from the sharp drop in authorizations in the third quarter of 1999, one apparent contrast to Covance's later-stage clinical trials performance is provided by PPD, which experienced a "modest" 6% growth in its North American Phase II-IV business for the third quarter, CEO Fred Eshelman, MD, said during an earnings conference call. PPD's Phase II-IV segment made up 69.5% of the company's total revenues for the quarter.

Overall, PPD's net revenues for the quarter climbed 12.5% to $89.3 mil. from $79.4 mil., while net income increased 23.2% to $8.8 mil. from $7.1 mil. in third quarter 1999.

"We're seeing some evidence - particularly big pharma - now wanting to come to the table on more strategic type relationships which we believe would be larger in nature than some of those we've seen in the past," Eshelman commented.

Covance has announced plans to divest its clinical trials packaging and biomanufacturing businesses in order to improve margins. "While both of these businesses have strong future prospects, they don't fit with our future strategic direction to the extent that our other businesses do," Kuebler explained.

He indicated that interest from future buyers is "very strong and encouraging," especially for the packaging business, and that the company does not want to delay the sales. "If [buyers] want to deliberate about it for months and months, they probably won't get these assets," Kuebler said.

The funds from sales of the businesses will be reinvested primarily in early development, the company's central labs groups and Nexigent, Kuebler indicated. "We will additionally reduce our leverage and become a significantly less capital-intensive company," he said.

Although biomanufacturing experienced losses in the third quarter, Kuebler emphasized that the backlog for the business exceeds its $90 mil. projected run rate for the fourth quarter, and that with the necessary capital, another company would likely find it profitable.

"Their issue with the business will be getting access to capital and expand, and expand vastly. The demand is enormous," Kuebler observed.

Covance is anticipating a sizeable market for bionalytical services to sustain its newly opened Indianapolis bioanalytical facility BioLink, which is located next to the company's central lab.

The company estimated that the market for outsourced bioanalytical services has grown over 20% per year over the last three years, and that it is currently about $500 mil.

BioLink is designed to provide testing services to determine the appropriate dose amounts and frequencies for drugs from late discovery through Phase III clinical testing, Covance explained.

Covance expects the facility to initially process 200,000 samples per year, increasing to 500,000 samples per year by the fourth quarter of 2002.

The company's Nexigent subsidiary evolved from its eCRO initiative as a new brand to offer "a platform to bring the very disparate data elements of clinical trials,...[such as] case report forms, images, lab data, EKGs [and] EEGs" together in close to real time for drug company sponsors, Kuebler said.

"This will greatly enhance the sponsors ability to intervene to improve their trial performance versus the current model today in which they see that data weeks and weeks after it's generated," Kuebler maintained.

Convance's central laboratory already makes test results available the day after a patient is treated. Nexigent's first goal will be "Internet access to that lab data itself," Kuebler said. Nexigent's second goal "will be to capture case report form data electronically."

"Many people are pursuing this holy grail, but our competitive advantage is...more investigators and more trials flow through our central lab, we think, than any other entity in the world," Kuebler remarked. The company estimates its central lab is twice as large as its nearest competitor.

Nexigent also plans to offer Internet-enabled administrative services, such as trial communications with investigators, site start-up, study feasibility and investigator payment and training.

Covance is still using Phase Forward technology for electronic data capture, having licensed the necessary software from Phase Forward in June 1999 (¹ (Also see "Covance Web-Based Trial Data System Aims To Cut Time To "Clean" Data" - Pink Sheet, 9 Aug, 1999.)).

Kuebler said that more than 90 people are currently working on Nexigent, and that growth of the new subsidiary is expected to increase to double digits in 2001, with profitability anticipated the following year.

Kuebler is serving as Nexigent's president, while former eCRO Senior VP Mark Eisenach is now senior VP for Nexigent.

Two additional appointments at Covance fill positions for the company's early development laboratories. Former GM Marconi Medical Systems VP-Global Services Wendel Barr has been named corporate VP and general manager-North American operations, succeeding Joe Herring (who is now president-early development services).

Former Rhone-Poulenc Rorer/Fisons (now Aventis) VP-Pharmaceutical Operations Tony Cork has been named Covance's corporate VP and managing director-European operations. Cork will be based in Harrogate, U.K., and is taking on a position that has been vacant for over a year.