2nd UPDATE: Sanofi, Covance In 10-Year R&D Outsourcing Deal
30 Setembro 2010 - 3:23PM
Dow Jones News
French drug giant Sanofi-Aventis S.A. (SNY) has signed a 10-year
agreement to outsource research and development services to Covance
Inc. (CVD) in a deal that could be worth up to $2.2 billion.
The deal is the latest sign of increased outsourcing by
pharmaceutical companies as they seek to cut the costs of searching
for new products in the face of looming generic competition for
top-selling drugs in coming years. For Princeton, N.J.-based
Covance, the deal marks another long-term partnership with a
leading drug maker and allows it to expand its European
presence.
Under the leadership of Chief Executive Chris Viehbacher, Sanofi
has significantly cut back on internal R&D projects, instead
favoring alliances and licensing deals with drug developers to fill
the product pipeline. He has said it is difficult for a company as
large as Sanofi to make efficient use of internal R&D
resources.
The move will save "hundreds" of jobs, Sanofi said, as Covance
will maintain employment on the sites for at least five years.
In a conference call, Covance Chief Executive Joseph Herring
called the Sanofi deal "the largest and most comprehensive
drug-development alliance in industry history." It comes as "the
pharma industry needs to challenge traditional thinking in order to
improve productivity," he said.
Shares of Covance recently rose 11.1% to $46.88. Sanofi shares
closed down 1.2% at EUR48.88 in Paris.
Under the deal, Covance will provide services in the fields of
toxicology, chemistry and all stages of clinical study development.
Payments over the course of the deal will range from $1.2 billion
to $2.2 billion. Covance had revenue of $1.96 billion last year,
compared to Sanofi's sales of about $40 billion.
Sanofi is also selling R&D sites in Porcheville, France, and
Alnwick in the U.K. to Covance for $25 million. The sale is
expected to be close by year-end.
The acquired sites give Covance excess capacity for toxicology
testing on a company-wide basis, but they will fill a lacking
presence in France and southern Europe for such services. Herring
expressed hope that the location of the sites will attract
increased business with local drug developers.
The deal is Covance's second major partnership with a large
pharmaceutical company. In August 2008, it struck a $1.6 billion
deal with Eli Lilly & Co. (LLY) to provide broad
drug-development services over 10 years and assume control of
Lilly's early-drug-development facility and related workers.
Herring said such deals with contract research organizations, or
CROs, like Covance will drive research and development outsourcing
from the current level of 30% in the pharmaceutical industry to 50%
to 70% in coming years.
The biggest CROs, which include Parexel International Corp.
(PRXL), Pharmaceutical Product Development Inc. (PPDI),
Ireland-based Icon PLC (ICLR, IJF.DB) and privately held Quintiles
Transnational Corp., are also involved in strategic relationships
with large drug makers. The top five CROs control about 50% of the
global market, according to estimates from Wells Fargo.
Covance's purchase of the two site includes $350 million in
guaranteed business over five years, which the company will record
as a flat $70 million per year over the period. The sites will be
profitable immediately, Herring said.
Covance received about $35 million in services revenue from
Sanofi last year, but it expects that to rise to $55 million next
year at a minimum, meaning total revenue from Sanofi will be at
least $125 million.
A "significant ramp" of services revenue is expected for 2012
and 2013, Covance spokesman Paul Surdez said, as clinical trials
begin to become active. He declined to elaborate on the level of
revenue growth, but said "it has to multiply".
The company will recognize $1.2 billion from the deal in its
third-quarter order backlog. Herring expects Covance to realize the
full $2.2 billion value of the deal over its life. The remaining
billion will be recognized as the underlying work is actually
ordered from Sanofi.
Despite the deal's size, Herring expects Covance to maintain a
diverse customer base with no single client exceeding 10% of its
total annual revenue.
-By Thomas Gryta and Mimosa Spencer, Dow Jones Newswires;
212-416-2169; thomas.gryta@dowjones.com
(Jennifer Cummings contributed to this story)
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