Through an agreement signed with Sanofi-Aventis (NYSE:SNY), Covance (NYSE:CVD) has become its R&D partner for the next 10 years. Covance will provide drug-development services to Sanofi for payments of $1.2-$2.2 billion over the 10-year period. Additionally, Sanofi will sell two facilities to Covance located in France and the UK for $25 million. The deal is expected to close before the year-end.
Covance will also acquire chemistry, manufacturing and control services which will include pre-formulation, drug formulation, preclinical and early-stage clinical API (Active Pharmaceutical Ingredient) manufacturing and radio labeled chemistry. Subsequent to the agreement with Covance, Sanofi will have access to Covance’s services in the areas of discovery support, toxicology, chemistry, clinical phase I – IV among others, payment for which will increase over the next 10 years.
Covance derives its revenues from two segments, Early Development and Late-Stage Development, which generated sales of $208.2 million (annualized growth of 4.2%) and $267 million (0.3%), respectively during the second quarter of fiscal 2010. While the Early Development segment deals with preclinical toxicology, analytical chemistry, clinical pharmacology services, research products and discovery services, Late-Stage Development caters to central laboratory, phase II-III clinical development and commercialization services.
The Late-Stage Development segment suffered during the latest reported quarter due to the delay in three large phase III studies, as announced by Covance earlier. Of these, one trial commenced during the reported quarter, one was reduced in size and launched in July while the third is expected to begin enrollment next year. Lower clinical development profitability due to this delay brought operating margin to 21.2%, down 270 bps sequentially and 340 bps year over year.
We believe the deal with Sanofi will enable Covance to recoup some of the losses due to delay in some clinical trials mentioned above.