Covance Inc.

210 Carnegie Center
Princeton, New Jersey 08540-6233
U.S.A.
(609) 452-4440
(888) 928-2277
Fax: (609) 452-9375
Web site: http://www.covance.com

Public Company
Incorporated: 1996
Employees: 7,200
Sales: $731.6 million (1998)
Stock Exchanges: New York
Ticker Symbol: CVD
NAIC: 54171 Research & Development in the Physical, Engineering, & Life Sciences

Covance Inc. ranks second in size among contract biophar-maceutical research organizations in the United States, providing a wide range of integrated product development services worldwide to the pharmaceutical, biotechnology, and medical device industries. To a lesser extent, it provides health economics and outcomes services to managed care organizations, hospitals, and other healthcare providers, and laboratory testing services to the chemical, agrochemical, and food industries. Covance was created at the end of 1996 as a spinoff of Corning Inc.’s pharmaceutical services business and now has offices in 17 countries.

Predecessor in Life Sciences Research: 1968–87

Covance originated from Corning Glass Works’ health and science activities, which were consolidated into a single operating division in 1977. This unit entered the life sciences research field by taking a small stake in Hazleton Laboratories Corp. and then purchasing the rest of the company in 1987 for about $115 million. Hazleton began in 1968 as Environmental Sciences Corp., a manufacturer of equipment for the care of laboratory animals that set up shop in the basement of an old supermarket in Seattle. In 1972 the company acquired Hazleton Laboratories Inc., a contract laboratory founded in 1946 and devoted to toxicological research. Environmental Sciences, which previously had purchased Hazleton’s animal research division, took its name and continued to grow by further acquisitions.

By 1982 Hazleton was the largest independent biological testing company and life sciences laboratory in the United States and the largest laboratory equipment manufacturer in the world. Biological research, the main segment of its business, included testing the effect of new drugs, cosmetics, pesticides, and industrial chemicals on animals and chemically analyzing new compounds for the pharmaceutical, chemical, and food industries. It also was testing chemicals for gene mutations and conducting research with monoclonal antibodies. The company’s other segments were manufacturing laboratory and medical equipment and breeding rhesus monkeys and beagles for the research departments of chemical and drug companies, government agencies, universities, hospitals, and its own facilities.

Hazleton enjoyed record profits every year between 1972 and 1983. As part of a restructuring program, it sold the equipment manufacturing unit in the mid-1980s. Its chairman described Hazleton in 1986 as the world’s leading provider of biological and chemical research services to the pharmaceutical, chemical, food, cosmetic, and biotechnology industries.

Further Acquisitions: 1989–98

In 1989 Corning Glass Works (which became Corning Inc. that year) acquired G.H. Besselaar Associates, a company serving leading international pharmaceutical companies. Besselaar was conducting clinical trials to help new drugs to gain regulatory approval and was following through with post-approval studies and marketing support. Corning Lab Services, Inc., a subsidiary established in 1990 for the parent company’s laboratory services segment of its business, included both Hazleton and Besselaar. That year Hazleton acquired Microtest Ltd., a molecular toxicology center in York, England, and Besselaar added locations in Europe, the United States, and Japan to its worldwide network by acquiring two international clinical research organizations. Besselaar was the world’s largest contract clinical research organization by the end of 1992.

Corning Lab Services expanded its clinical trials expertise with the purchase of Philadelphia Association of Clinical Trials (PACT) Inc. in 1990. In 1991 it added to its roster SciCor Inc., an Indianapolis-based laboratory dedicated to clinical trials of new pharmaceutical compounds. SciCor was known for innovative patient sampling kits and customized data presentation. Corning Lab Services’ pharmaceutical laboratory capabilities were expanded in 1992 with the creation in Switzerland of a jointly owned company, SciCor S.A., which was fully acquired in 1994. In 1993 Corning combined Hazleton, Besselaar, and SciCor into a single operating unit, Corning Pharmaceutical Services. Combined, the three businesses offered testing services that supported product development from initial stages to the marketplace.

This segment of Coming’s business had revenues of $270.9 million in 1992, $289.7 million in 1993, and $319.5 million in 1994. Its net income came to $266,000, $16.8 million, and $19.6 million in those respective years. The parent subsidiary, Corning Lab Services, was renamed Corning Life Sciences, Inc. in 1994. In 1995 this subsidiary acquired National Packaging Systems, Inc., a pharmaceuticals packaging company. The purchase of Swiss-based CRS Pacamed AG in 1996 expanded the subsidiary’s pharmaceutical packaging capabilities to Europe.

Corning Biotechnology Services was founded in 1995 as a majority-owned unit of Corning Life Sciences to offer contract manufacturing of new biological products, such as peptides and recombinant proteins, for biotechnology and pharmaceuticals clients. Armed with a $3 million state low-interest loan and a $500,000 cash gift, this unit located in Research Triangle Park, North Carolina. The plant it opened there in 1997 was the biggest biotechnology facility in the world devoted exclusively to outsourcing.

Corning Pharmaceutical Services, with headquarters in West Windsor, New Jersey, had revenues of $409.2 million and net income of $24.2 million in 1995. In March 1996 the unit purchased Health Technology Associates Inc., a Washington, D.C., consulting firm specializing in conducting cost-effectiveness studies for new drugs. With the rise of managed care, drug companies were increasingly performing cost studies during the initial stages of drug development so that they could decide whether a new treatment would be worth the cost of development.

Corning Inc. announced in April 1996 that its laboratory testing and pharmaceutical services business segments would be spun off to its shareholders at the end of the year, creating two independent companies, which were subsequently named Quest Diagnostics Inc. and Covance Inc., respectively. Covance, the former Corning Pharmaceutical Services, established headquarters in Princeton, New Jersey. The company had net revenues of $494.8 million in 1996 and net income of $12.7 million. It increased these figures to $590.7 million and $39.8 million, respectively, in 1997, and $731.6 million and $48.6 million, respectively, in 1998.

Covance, in November 1998, acquired GDXI, Inc., providing centralized electrocardiogram analysis for clinical trials, and Berkeley Antibody Co., providing contract services and custom animal research, antibody production, and applied immunology.

Covance in 1998

The contract services that Covance was providing constituted two lines of business: early development of pharmaceuticals, including preclinical and Phase I services; and late-stage development, including clinical and periapproval, central laboratory, pharmaceutical packaging, and health economics and outcomes services. The first step in the development of new pharmaceuticals involved preclinical research—animal and test tube studies to establish the basic pharmacokinetic effect and safety of a drug, including its toxicity over a wide range of doses. This phase typically lasted six months to three years and, if approved by regulatory agencies, was followed by clinical trials on human beings. During Phase I, research was conducted for six months to one year on about 20 to 100 subjects, usually healthy volunteers in a closely monitored setting.

Phase II, lasting one to two years, began late-stage development. In this phase the drug was being tested on about 100 to 400 carefully selected patients suffering from the disease or condition under study. Phase III, lasting two to three years, involved hundreds or thousands of patients at many hospitals and clinics. Upon completion, a new-drug application would be compiled. This document was, on average, about 100,000 pages long in the United States.

Following regulatory review and approval, the Federal Drug Administration might allow the manufacturer to make the new drug available to a larger number of patients through another application, which would require enrollment and data from thousands of patients. Additional post-marketing reports also were required periodically to monitor the safety and effectiveness data, and additional studies—labeled Phase IV or periapproval—might be undertaken to find new uses for the drug or test new dosage formulations.

Covance served approximately 290 biopharmaceutical companies in 1998, including nearly all of the world’s 50 largest pharmaceutical companies and most of the largest biotechnology companies. Early development net revenues from external customers comprised about 33 percent of total net revenues, and late-stage development comprised the other 67 percent. Net revenues attributable to U.S. operations came to about 68 percent of total net revenues. Operations in the United Kingdom came to 16 percent, and operations in other countries accounted for the remaining 16 percent.

Company Perspectives:

Covance’s purpose is to lead advancements in drug development through science, service, and shaping solutions.

Covance had offices in 17 countries in 1998. Major leased quarters were corporate headquarters and a clinical development group in Princeton; West Coast clinical development services in Walnut, California; a periapproval facility in Radnor, Pennsylvania; health economics and outcomes research activities in Washington, D.C.; and clinical and periapproval operations and health economics and outcomes services in Maidenhead, United Kingdom. Other leases included pharmaceutical laboratories in Indianapolis and Geneva, Switzerland, and Covance Biotechnology’s facility in Research Triangle Park.

Covance owned preclinical laboratories in Madison, Wisconsin; Harrogate, United Kingdom; and Munster, Germany. It both owned and leased a preclinical laboratory property in Vienna, Virginia. Construction of a new facility in Allentown, Pennsylvania, for the company’s domestic packaging operations, was expected to be completed in 1999. Covance also owned a pharmaceutical manufacturing facility in Horsham, United Kingdom, that was renovated to provide pharmaceutical packaging, clinical, and periapproval services. A facility to further enhance Covance’s packaging capabilities in Europe was completed in 1998 in Allschwil, Switzerland.

The former Hazleton was now a subsidiary named Covance Laboratories Inc. The former Besselaar was Covance Clinical Services Inc. PACT had become Covance Periapproval Services Inc.; SciCor, Covance Central Laboratories Inc.; National Packaging Systems, Covance Pharmaceutical Packaging Services; Health Technology Associates, Covance Health Economics and Outcomes Services Inc.; CRS Pacamed AG, Covance Pharmaceutical Packaging Services AG; GDXI, Covance Central Diagnostics Inc.; and Berkeley Antibody, a subsidiary of Covance Research Products Inc.

In April 1999 Covance announced that it had reached an agreement to acquire Parexel International Corp., the world’s third largest clinical trials company, for stock valued at $671 million. This purchase would have allowed Covance to pass its chief competitor, Quintiles Transnational Corp., in size. During the following two months, however, Covance’s stock fell by more than 25 percent on widespread investor disenchantment with the proposed transaction. The merger was called off on June 25. Wellington Management Co. LLP was Covance’s leading stockholder at this time, with 12.7 percent of the shares. Covance’s long-term debt stood at $150 million.

Principal Subsidiaries

Covance Biotechnology Services Inc. (78%); Covance Central Diagnostics Inc.; Covance Central Laboratories Inc.; Covance Clinical Services Inc.; Covance Health Economics and Outcomes Services Inc.; Covance Laboratories Inc.; Covance Periapproval Services Inc.; Covance Pharmaceutical Packaging Services AG (Switzerland); Covance Pharmaceutical Packaging Services Inc; Covance Research Products Inc.