Covance's big IT budget gets thumbs down from analysts

Covance ($CVD) wants to reduce annual increases in its information technology budget, but the big CRO told investors Wednesday that it was going to have to make some major investments in the short term to save money in the long term. Yet the dour outlook on earnings for this year weighed on the company's stock price, which sank more than 8% during regular trading Thursday.

This year, Covance plans to pump $90 million into revamping its IT, a 17% increase in spending on such technology according to its annual report. The CRO plans to boost that budget 18% in 2013 as the IT overhaul continues, but the new systems are expected to keep increases to that budget below 10% for several years afterward--lower increases than in the past several years. The major IT initiatives on its plate include consolidating its data centers and infrastructure, adding end-user productivity tools and updating the systems for its central labs.

The IT spending illustrates the growing importance of tech in the research and development of drugs, and Covance is among large CROs that have been plowing money into new IT systems to streamline operations in their labs and clinical trials. And drug developers have been adopting web-based software and cloud apps that promise to help them reduce investments in managing software on their own hard drives.

Nevertheless, Covance and its publicly traded counterparts are, of course, under pressure to deliver strong financial results in the near term, making long-term investments in technology a tough sell in some cases.

Covance's increased investment in IT in part and "further spending growth in 2013 throws cold water on the normal ebullient thesis" that "next year will be better," David Windley, an analyst at Jeffries & Co., wrote to investors, as quoted by Outsourcing-Pharma.

- download Covance's investor presentation here
- read more about the IT spending in Outsourcing-Pharma