The big deal is the 10-year services relationship between Covance (Princeton, NJ) and sanofi-aventis (Paris). The arrangement, which has a potential value of as much as $2.2 billion, has several key components. The key aspects are:
The Porcheville and Alnwick sites host a variety of early-development activities, including drug metabolism, toxicology, and bioanalytical testing. The sites also have capabilities for CMC development, including early-phase small-molecule active pharmaceutical ingredient (API) development and manufacture, preformulation, formulation, and radiolabeling.Bottom-line impact
The deal with sanofi-aventis is certainly a big one for Covance. In two to three years, when the deal fully kicks in, Covance could generate $200 million or more in revenue. That gain represents a sixfold increase in the revenues that Covance will generate from sanofi in 2010 and is equivalent to 10% of Covance's total revenue for all of 2010.
Moreover, the deal protects Covance's preclinical margins at the two acquired sites by guaranteeing $350 million of billings for the first five years. That guarantee is extremely important, as there is a glut in preclinical testing capacity, which has hurt pricing and forced preclinical contract research organizations (CROs) to operate facilities with high fixed costs at low levels of utilization.
In fact, what has been particularly impressive in both the sanofi-aventis deal and the deal Covance struck two years ago with Eli Lilly (Indianapolis, IN) has been Covance's apparent ability to negotiate extremely favorable terms for itself. For one, it has been able to get very large take-or-pay or exclusivity agreements for relatively small initial outlays and very low risk. In good times, these arrangements often yield greater-than-guaranteed volumes, and in bad times they provide a degree of revenue certainty.
Covance has also used these deals to leverage the relationship beyond its core strengths in preclinical toxicology and central laboratory services to other R&D services where it is not necessarily a standout player, including Phase II–IV clinical research and other analytical services. In addition, the facility acquisitions have enabled Covance to gain valuable new capabilities, including API development and formulation capabilities in the sanofi-aventis deal.