August 4, 2011 / 2:40 PM / 8 years ago

Covance sees more big-ticket drug R&D alliances

LONDON (Reuters) - Joe Herring, the chief executive of U.S. contract research group Covance Inc, finds a lot of drug companies are knocking on his door these days offering deals.

After striking major collaborations with Eli Lilly in 2008 and Sanofi in 2010, he is “pretty confident” of adding fresh research and development (R&D) alliances with other big drugmakers at the rate of one every 12 to 24 months.

Those tie-ups could super-charge Covance’s revenue growth to an annual rate of 12-15 percent over the next few years, Herring told Reuters on Thursday.

The template for such deals would see Covance taking over R&D sites and staff, in exchange for a commitment from the drugmaker to provide a steady stream of research work.

He is not interested in simply picking up laboratory space abandoned as a result of Big Pharma’s wave of cutbacks, such as the shuttering of Pfizer’s huge research base in Sandwich, southern England.

“Since we did Lilly, we’ve turned down 15 arrangements because the deal terms were unilateral in nature and not something that made sense for us,” the head of the Princeton, New Jersey-based group said during a visit to London.

Herring wants a commitment to five years of partnership work before taking on a facility.

Negotiating such big-ticket outsourcing alliances is a delicate affair — but Covance is currently in discussions with a number of large pharmaceutical customers on both sides of the Atlantic.

“I’m pretty confident ... right now we have a reasonable pipeline but it is hard to project the timing,” he said.

The potential prize is large. The 10-year tie-up with Lilly is worth $1.6 billion while the one with Sanofi is valued at $2.2 billion. Herring said he had also been within a week of signing another $2 billion deal with Wyeth in 2009, before it was acquired by Pfizer.

“Our underlying growth as a company is going to be in the 7-10 percent range over the next five years and if you drop one of these in every year or two then our growth rate is probably more like 12 to 15 percent per annum,” he said.

“And we can grow earnings a lot faster than revenue because of the marginal profitability of new work in a lab-based business.”

Disruption from a spate of Big Pharma mergers and the adverse impact of the credit crunch on many research-stage biotech companies have hurt the contract research organization (CRO) industry in recent years, but Herring said things were improving.

In the long term, he is convinced that the need to make previously fixed costs more variable will fuel increasing use of CRO outsourcing services by large drug companies.

“Pharmaceutical companies are going to really have to focus on what’s core and what’s non-core,” he said.

“When everything is going great, everything is core. But with the uncertain future they are facing now and their sagging pipelines, they are going to have to make some hard decisions.”

Editing by Erica Billingham

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