Operating Income

COVANCE INC.
NYSE: CVD
September 2014
Safe Harbor
Statements contained in this press release, which are not historical facts, such
as statements about prospective earnings, savings, revenue, operations,
revenue and earnings growth and other financial results are forward-looking
statements pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. All such forward-looking statements including
the statements contained herein regarding anticipated trends in the
Company’s business are based largely on management’s expectations and
are subject to and qualified by risks and uncertainties that could cause actual
results to differ materially from those expressed or implied by such statements.
These risks and uncertainties include, without limitation, competitive factors,
outsourcing trends in the pharmaceutical industry, levels of industry research
and development spending, the Company’s ability to continue to attract and
retain qualified personnel, the fixed price nature of contracts or the loss or
delay of large studies, risks associated with acquisitions and investments, the
Company’s ability to increase order volume, the pace of translation of orders
into revenue in late-stage development services, testing mix and geographic
mix of kit receipts in central laboratories, fluctuations in currency exchange
rates, the realization of savings from the Company’s announced restructuring
actions, the cost and pace of completion of our information technology projects
and the realization of benefits therefrom, and other factors described in the
Company’s filings with the Securities and Exchange Commission including its
Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. The
Company undertakes no duty to update any forward-looking statement to
conform the statement to actual results or changes in the Company’s
expectations.
2
Covance Profile
Ź Annual Revenue >$2.4 billion
Ź Market Cap ~$5 billion
Ź Only provider of preclinical and clinical services
y Market leader in central laboratory
and preclinical services
y Top five provider of Phase III
clinical trial management services
y Market leader in nutritional chemistry
Ź Operations in >30 countries
Ź Trial activity in >100 countries
Ź >12,500 employees in >60 countries
3
Markets We Serve: >$150 Billion
$ Billions
>$150
Billion
Covance
revenues can
increase through:
1. outsourcing
penetration
2. market share gains
3. growth in adjacent
markets
~$40B: Other (Private R&D, Post R&D,
Food, Environment, Government)
~$40B: Biopharmaceutical Research Spend
~$75B: Biopharmaceutical Development Spend
$2.4
Billion
4
Only CRO with Full-Range of R&D Services
Pharmaceutical/Biotechnology Research & Development
Discovery
Drug Safety
(IND)
Efficacy
(NDA)
Approval
Covance generates more safety and efficacy data
than any other entity involved in drug development
5
Diversified Revenue Base (1H-14 Distribution of Net Revenues)
By Service Offering
Early Development
*Central Laboratory
32.9%
(toxicology, food/drug chemistry, clinical
pharmacology, research products,
discovery services)
35.6%
By
y Geography
g p y
Other*
17.1%
*Phase II-IV Clinical
Development and other
31.5%
Euro Zone
9.2%
* 64.4% Late-Stage Development
Switzerland
16.8%
UK
10.9%
* “Other” includes a mix of >20 currencies;
largest is Singapore Dollar
6
USA
46.0%
Toxicology Volume Trends
2013 demand ~20%
lower than 2007 peak
Estimated Toxicology Volume
(price also ~20% lower)
2013 demand
at 2004 levels
(industry capacity
is near 2006 levels)
Assumption: “high probability compounds”
have grown/will grow at ~2% CAGR
1997
2001
2008
2013
2016
Covance toxicology revenue 15 year CAGR = ~5%
7
* Includes full testing packages, pulling work forward, dedicated space agreements, etc, due to fear of delayed filings
resulting from constrained capacity (could return if industry capacity is tight for a long period of time)
Source: Covance market analysis
Covance Core Strategies
8
1. Operational and Service Excellence
People: Talent attraction and
retention rates at historic highs
Process: Informatics investments;
hundreds of Six Sigma
projects annually; IT automation
Clients: Backlog and
client satisfaction at
historic highs
9
PEOPLE
PROCESS
CLIENTS
Informatics and Clinical Trial Transformation
Ź Significant investments in IT infrastructure and talent
y Created a Center of Excellence in Informatics
y Rapidly building an elite team of ~30 data scientists & engineers
y Leveraging recent strategic IT investments (CTMS, ETMF, SAS, PV)
Ź Xcellerate® is the world’s most comprehensive investigator performance database
y Unique data driven by leadership in central lab (touches ~40% of all clinical trials)
y Spans >11,000 protocols, >600 clinical indications, >175,000 investigators,
>15,000,000 patient visits
y Incorporates real-world evidence data
y Utilizes industry-leading forecasting algorithms
Ź A leader and innovator in RBM (Risk Based Monitoring)
Covance is dedicated to improving the quality, lowering the
risk, and reducing the time and cost of drug development
10
Independent Surveys Rank Covance Most
Preferred CRO
Ź “Covance is the clear favorite clinical CRO to work with”
y 62% vs. next CROs at 44%, 37%, 29%, 21% and 9%,
N = 104
Baird Equity Research (3/20/14)
Ź Covance received the most mentions as the best-positioned
CRO to win preclinical work (n=100)
William Blair Equity Research (4/25/14)
Ź “Covance received highest score in both preclinical and
clinical quality” N=43
Morgan Stanley Research North America (3/3/13)
Ź Covance Central Laboratory Services named most
preferred lab by investigators, by a wide margin
y 47% vs. 23% and 9% for next two preferred; N= 258
Life Science Strategy Group (7/26/13)
2. Integrated Service Solutions
DISCOVERY
RESEARCH
DEVELOPMENT
PRECLINICAL
PHASE I
COMMERCIALIZATION
PHASE II
PHASE III
PHASE IV
INDIVIDUAL SERVICES
MILESTONE-BASED SOLUTIONS
Lead Opt
IND/CTA
FIH
POC
MULTI-MILESTONE SOLUTIONS
Lead Optimization through FIH
IND / CTA through POC
FIH through Ph IV
FULL DRUG DEVELOPMENT
Lead Optimization through Ph IV
12
Ph II - IV
3. Drive Strategic Outsourcing
Strategic Service
Integration
Executive
Relationships
Operational
and Service
Excellence
= Accelerators
13
Net Revenue
$ in millions
2014
Target:
6%-8%
growth*
* Revenue growth target issued on July 29, 2014
14
Operating Margin %
$ millions
Operating Income
Operating Income and OM%
* 2010, 2011, 2012, 2013 are presented on a “pro forma” basis. See appendix for
reconciliations.
15
Segment Operating Income Trends
($ millions)
* Corporate overhead not included;
2010-2013 are presented on a “pro forma” basis.
16
Operating Margin
Operating Income
Annual Segment Operating Income and OM%*
Earnings Per Share*
2014
Pro forma
target:
$3.78- $3.92*
* Results are presented on a pro forma basis, please see appendix for GAAP to Pro Forma reconciliations;
Pro forma EPS target issued on May 1, 2014
17
Net Order Trends
$ in millions
3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14
Adjusted Net
Book-to-Bill (consolidated) 1.29
1.37
1.23
1.31
1.21
1.23
1.15
1.21
Trailing 8 quarter adjusted net BTB:
• Consolidated: ~1.25:1
• Late-Stage Development Segment: >1.30:1
Backlog
All other backlog
CMV backlog
* “CMV” represents the contractual minimum volume commitment under certain strategic and dedicated agreements
19
Balance Sheet, Cash Flow, and CapEx
BALANCE SHEET
Ź $648 million in cash/short-term investments at 6/30/14
Ź Total debt outstanding at 6/30/14: $290M
FREE CASH FLOW (FREE CASH FLOW IS DEFINED AS CASH FROM OPERATIONS LESS CAPITAL SPENDING)
Ź FY2013 Free Cash Flow was $243 million ($173M normalized)
$ in Millions
Ź FY2014 Free Cash Flow target ~$130 million ($200M normalized)
20
* Excludes $50M purchase of Greenfield campus; when including Cap Ex was $319 in 2008
Capital Deployment Priorities
Invest in the business to generate profitable
organic growth and drive free cash flow
Acquire strategic capabilities
Return excess cash to shareholders
~$685M shares repurchased since 2010
(includes $100M of shares repurchased in 2014)
21
Investment Summary
Ź Covance is well-positioned in dynamic and
growing industry
Ź Unique, integrated drug development portfolio with
emerging informatics capabilities enable biopharma clients
to reduce the time and cost of drug development
Ź Leader in creating true strategic partnerships
Ź Ability to grow revenue through increased outsourcing
penetration, market share gains and growth in adjacent
markets
Ź Revenue growth, lower cost structure, continued process
efficiencies and share repurchases to drive long-term EPS
growth
22
APPENDIX
23
Biotech Funding Trends
Quarterly Biotech Funding
Source: BioWorld, Covance analysis
24
Backlog and Adjusted Net Orders
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
CMV Backlog
All Other Backlog
$1,877
$4,489
$1,919
$4,724
$1,816
$4,792
$1,734
$4,991
$1,660
$5,171
$1,585
$5,337
$1,480
$5,423
$1,378
$5,546
Total Backlog
$6,366
$6,643
$6,608
$6,725
$6,831
$6,922
$6,903
$6,924
Net Orders
$609
$796
$628
$682
$642
$679
$618
$681
CMV revenue
less CMV orders
$91
($26)
$88
$94
$90
$90
$92
$92
Adjusted Net Orders
$701
$769
$716
$776
$732
$769
$710
$773
Adjusted Net Book-to-Bill
1.29
1.37
1.23
1.31
1.21
1.23
1.15
1.21
$ in millions
• “CMV” represents the contractual minimum volume commitment under certain strategic/dedicated agreements
• Covance believes backlog is not always a predictor of future results
25
Free Cash Flow – 2013 vs. 2014
2013
Actual
2014
Expected
Free Cash Flow*
$243M
$130M
Variance Drivers:
DSO**
VAT***
$42M
$28M
($42M)
($28M)
Normalized FCF
$173M
$200M
* Free cash flow equals cash from operations less capital spending
** 2013 DSO was 6 days under target at 34 days; 2014 expected to return to 40 days (6 day headwind)
*** $28M received in 4Q13; remitted to tax authorities in 1Q14
26
Net Revenue by Geography
United
States
United
Kingdom
Switzerland
Euro
Zone
Other*
4ಬ14
$297
$66
$106
$59
$111
Q2’13
$286
$61
$99
$54
$92
Q2’14
46.4%
10.3%
16.6%
9.3%
17.4%
Q2’13
48.3%
10.4%
16.7%
9.1%
15.5%
Q2’14 average rate
1.00
1.68
1.13
1.37
-
Q2’13 average rate
1.00
1.53
1.06
1.30
-
June 30, 2014
1.00
1.71
1.13
1.37
-
$ in millions
* “Other” includes a mix of >20 currencies
27
$ in Millions
FX Net Revenue Impact
28
Days Sales Outstanding
($ in thousands)
Period
Ended
Accounts
Receivable
Unbilled
Total
Receivables A/R + Unbilled
Client
Advances
Net
Trailing 3 Mos
GAAP Net Rev
30-Jun-14
Days
$355,272
51
$162,396
23
$517,668
74
$(202,560)
(29)
$315,108
45
$639,456
31-Mar-14
Days
$337,381
50
$159,092
23
$496,473
73
$(236,596)
(35)
$259,877
38
$620,052
31-Dec-13
Days
$331,815
48
$141,707
21
$473,522
69
$(240,398)
(35)
$233,124
34
$623,094
30-Sept-13
Days
$353,940
53
$147,355
22
$501,295
75
$(266,522)
(40)
$234,773
35
$606,722
30-June-13
Days
$396,653
61
$154,345
24
$550,998
85
$(241,681)
(37)
$309,317
48
$592,298
31-Mar-13
Days
$344,362
54
$155,754
24
$500,116
78
$(241,011)
(38)
$259,105
41
$580,199
31-Dec-12
Days
$339,558
55
$136,878
22
$476,436
77
$(255,776)
(41)
$220,660
36
$562,180
30-Sep-12
Days
$321,421
54
$141,020
24
$462,441
77
$(234,152)
(39)
$228,289
38
$544,818
30-Jun-12
Days
$313,160
53
$134,163
22
$447,323
75
$(237,220)
(40)
$210,103
35
$542,782
31-Mar-12
Days
$312,466
54
$121,315
21
$433,781
74
$(261,827)
(45)
$171,954
29
$530,841
29
Days Sales Outstanding
($ in thousands)
Period
Ended
Accounts
Receivable
Unbilled
Total
Receivables A/R + Unbilled
Client
Advances
Net
Trailing 3 Mos
GAAP Net Rev
30-Jun-14
Days
$355,272
51
$162,396
23
$517,668
74
$(202,560)
(29)
$315,108
45
$639,456
31-Mar-14
Days
$337,381
50
$159,092
23
$496,473
73
$(236,596)
(35)
$259,877
38
$620,052
31-Dec-13
Days
$331,815
48
$141,707
21
$473,522
69
$(240,398)
(35)
$233,124
34
$623,094
30-Sept-13
Days
$353,940
53
$147,355
22
$501,295
75
$(266,522)
(40)
$234,773
35
$606,722
30-June-13
Days
$396,653
61
$154,345
24
$550,998
85
$(241,681)
(37)
$309,317
48
$592,298
31-Mar-13
Days
$344,362
54
$155,754
24
$500,116
78
$(241,011)
(38)
$259,105
41
$580,199
31-Dec-12
Days
$339,558
55
$136,878
22
$476,436
77
$(255,776)
(41)
$220,660
36
$562,180
30-Sep-12
Days
$321,421
54
$141,020
24
$462,441
77
$(234,152)
(39)
$228,289
38
$544,818
30-Jun-12
Days
$313,160
53
$134,163
22
$447,323
75
$(237,220)
(40)
$210,103
35
$542,782
31-Mar-12
Days
$312,466
54
$121,315
21
$433,781
74
$(261,827)
(45)
$171,954
29
$530,841
30
Reconciliation of FY13 As Reported to Pro Forma Amounts
($ in millions except EPS)
FY13
FY12
Change
$2,402.3
$2,180.6
10.2%
$217.3
$115.9
87.6%
9.0%
5.3%
Net Income
$179.2
$94.7
89.2%
Earnings per Share
$3.15
$1.68
87.2%
-
$8.8
$2,402.3
$2,171.9
Restructuring Costs and Other Items
($26.8)
($73.1)
Loss from Facilities Closed in 2012**
-
($9.3)
Operating Income, excluding items*
$244.2
$198.2
10.2%
9.1%
$16.4
$1.5
-
($7.4)
$3.0
$11.5
Net Income, excluding items*
$183.7
$151.9
20.9%
Diluted EPS, excluding items*
$3.23
$2.70
19.6%
GAAP
Net Revenues
Operating Income
Operating Margin
Revenue from Facilities Closed in 2012**
Pro forma
Net Revenue, continuing ops*
Operating Margin, excluding items*
Gain on Sale of Investments
Impairment of Equity Investment
Favorable Income Tax Developments
* See press release for pro forma income statements for reconciliation of 2013/2012 GAAP to pro forma amounts.
** Facilities closed in 2012 include Chandler, Honolulu, and Basel.
10.6%
23.2%
Reconciliation of FY2012 As Reported to Pro Forma Amounts
LQPLOOLRQVH[FHSW(36
7RWDO5HYHQXHV
/HVV5HLPEXUVDEOH2XWRI3RFNHWV
1HW5HYHQXHV
2SHUDWLQJ,QFRPH
2SHUDWLQJ0DUJLQ
1HW,QFRPH
'LOXWHG(DUQLQJVSHU6KDUH
5HYHQXHIURPIDFLOLWLHVFORVHGLQ
1HW5HYHQXHFRQWLQXLQJRSV
5HVWUXFWXULQJFRVWVDQGRWKHULWHPV
/RVVIURPIDFLOLWLHVFORVHGLQ
2SHUDWLQJ,QFRPHH[FOXGLQJLWHPV
2SHUDWLQJ0DUJLQH[FOXGLQJLWHPV
,PSDLUPHQWRI(TXLW\,QYHVWPHQW
*DLQRQ6DOHRI,QYHVWPHQW
)DYRUDEOH,QFRPH7D['HYHORSPHQWV
1HW,QFRPHH[FOXGLQJLWHPV
'LOXWHG(36H[FOXGLQJLWHPV
)<
** Facilities closed in 2012 include Chandler, Honolulu, and Basel
Reconciliation of FY2011 As Reported to Pro Forma Amounts
($ in millions except EPS)
FY 2011
Total Revenues
$2,236.4
Less: Reimbursable Out-of-Pockets
Net Revenues
$140.5
$2,095.9
Operating Income
$180.6
Net Income
$132.2
Earnings Per Share
$2.16
2011 Charges
($46.8)
Favorable Income Tax items
$2.5
Operating Income, ex items
$215.3
Operating Margin %, ex items
10.3%
Net Income, excluding items
$165.0
Diluted EPS, excluding items
$2.70
Reconciliation of FY2010 As Reported to Pro Forma Amounts
($ in millions except EPS)
FY2010
Net Revenues
$1,925.6
Operating Income
Operating Margin %
$47.5
2.5%
Net Income
$68.3
Diluted EPS
$1.06
Impairment charge
$(119.2)
Restructuring Costs
$(18.4)
Operating Income, ex items
$185.1
Operating Margin %, ex items
Favorable Income Tax Items
Gain on Sale, net of tax
9.6%
$17.3
-
Net Income, excluding items
$138.6
Diluted EPS, excluding items
$2.15
Reconciliation of FY2009 As Reported to Pro Forma Amounts
$ in millions, except EPS
Reported Net Income
FY2009
$175.9
Reported Diluted EPS
$2.73
Less: Gains of Sales, net of tax
$6.3
Less: Favorable tax items
$2.1
Pro Forma Net Income
$167.5
Pro Forma Diluted EPS
$2.60
Reconciliation of FY2008 As Reported to Pro Forma Amounts
$ in millions, except EPS
FY2008
As Reported
$274.3
Exclude
Gain on Sale
($4.1)
FY2008
Pro Forma
$270.2
Taxes on Income
$79.4
($1.4)
$78.0
Net Income
$196.8
($2.7)
$194.1
Diluted EPS
$3.08
($0.05)
$3.03
Pre Tax Income
Reconciliation of FY2007 As Reported to Pro Forma Amounts
$ in millions, except EPS
FY2007
As Reported
Exclude
Gain on Sale
FY2007
Pro Forma
Pre Tax Income
$246.4
($6.6)
$239.8
Taxes on Income
$72.9
($2.4)
$70.5
Net Income
$175.9
($4.1)
$171.8
Diluted EPS
$2.71
($0.06)
$2.65
Reconciliation of FY2006 As Reported to Pro
Forma Amounts
$ in millions, except EPS
FY2006
As Reported
Exclude
3Q06 Tax Gain
FY2006
Pro Forma
Pre tax income
$200.6
-
$200.6
Taxes on income
($57.2)
($2.5)
($59.7)
Equity Earnings
$1.6
-
$1.6
Net Income
$145.0
($2.5)
$142.5
Diluted EPS
$2.24
($0.04)
$2.20
Reconciliation of FY2005 As Reported to Pro
Forma Amounts
$ in millions, except EPS
FY2005 As
Reported
Exclude 4Q
Repatriation
Tax Charge
FY 2005
Pro Forma
Operating Income
$175.1
-
$175.1
Net Income
$119.6
$4.4
$124.0
Diluted EPS
$1.88
$0.07
$1.94