Covance plans job cuts and lab shutdown from stagnant Q1 performance

Covance
Covance is closing a lab in Evansville, Indiana, laying off more than 100 employees currently working there. (Covance)

LabCorp is planning a rejig of its CRO business Covance, and the short-term plan includes letting go of its Evansville, Indiana, lab along with the employees stationed there.

LabCorp slipped the cost-saving intention in its first-quarter earnings report, which in itself provides the reason behind the decision—despite a group-wide 4.9% revenue increase in that quarter, Covance’s revenue declined 1.8% to $690.3 million.

The company attributes the decrease to two large clinical study cancellations by sponsors in late 2016 and backlog of revenue turnover. As for the decline of Covance’s operating income from $103.2 million to $83.5 million, the company blames higher personnel costs.

Connect the dots and you get a two-phase, three-year business plan intended to improve operational efficiency.

In the short term, Covance will close its Evansville, Indiana-based lab and lay off more than 100 staffers local media outlet 14 News says are currently employed there. That location has 80 beds, per the company’s introduction page. All together six clinical studies are scheduled to commence there soon in May or June, as the company’s trial participant recruitment page shows. The company also operates three other similar clinical research units in the U.S., scattered in Dallas, Daytona Beach, Florida, and Madison, Wisconsin.

The company plans to complete the closure by the end of 2017, according to a company spokesperson, who also told FierceCRO that “delivery of our services will continue without interruption.”

After this first phase of overhaul, Covance expects “to generate pre-tax savings of approximately $20 million in 2017,” says the company in a release, while the second phase will focus on “long-term structural changes,” the details of which the company will provide later this year.

The project is an expansion of LabCorp’s existing LaunchPad business improvement initiative, which the company says will deliver net savings of $150 million for its Diagnostics section in a three-year period ending in 2017. That part of the business, which makes LabCorp the largest clinical lab player in the U.S., turned in $1.72 billion in revenue for the first quarter, an 8.0% increase compared to the same time last year.

The first-quarter flop has also put a dent in Covance’s outlook for the entire year of 2017. It has dialed down the expected annual revenue from the previous 3.5%~5.5% to the current 0.0%~2.0%.

Despite a lackluster first-quarter performance from the CRO branch, LabCorp is still confident that the $5.6 acquisition of Covance in 2014 works in its favor, expecting cost synergies of $100 million coming from that by 2017.

On the bright side, the business overhaul is not just about trimming down, but expansions as well. Just days before the first-quarter revelation, the company announced that it will expand its biopharmaceutical chemistry, manufacturing and control capabilities based in Harrogate, U.K. That new laboratory extension will open in late 2017 and focus on biologics.

Rumor has it that LabCorp is also looking for another possible CRO buy to strengthen its contract research presence. First it was INC Research, then in February this year, the alleged target became also North Carolina-based PPD.