Covance CEO Says It Will Be “A Shame” If He Can’t Double or Triple Rosetta Lab Growth

7/29/09Follow @xconomy

The world’s largest company that provides contract research services to drugmakers is coming to Seattle, and its CEO has some ambitious plans to grow here (and maybe do a few Cascade hikes while he’s out here too).

That was the upshot from my follow-up conversation with Covance CEO Joe Herring, shortly after the Princeton, NJ-based company (NYSE: CVD) broke the news that it is acquiring the Gene Expression Laboratory at Merck’s former Rosetta Inpharmatics operation in Seattle.

“This is a new day for Rosetta. We plan to invest in it, and grow it,” says Herring.

For those who aren’t familiar with Covance, it’s a huge player in the field of contract research organizations (CROs) who perform all sorts of essential tasks drugmakers must do to develop new treatments—like animal testing, clinical trials, and biostatistical analysis. It is acquiring Merck’s former Rosetta operation in Seattle to make its first big move into gene expression analysis. This is an emerging field of science in which researchers seek ways to find out a genetic basis for why certain patients respond to drugs, and some don’t. As this field of science progresses, researchers hope to better predict which drugs will succeed in clinical trials, saving time and money on the majority of drug candidates that fail.

Covance isn’t disclosing today how much it paid Merck for this division of Rosetta, although that will come out later in regulatory filings, Herring says. But the company plans to retain about 75 to 80 Rosetta employees who worked in that division, and move into their modern space in South Lake Union. While Merck may have had an interest in using this facility to improve its own pipeline of experimental drugs, Covance plans to offer this service to Merck and many of its other clients, Herring says.

“If we can’t double or triple this in a few years, then shame on us,” Herring says.

Covance, as Herring pointed out, has the financial muscle to make this more than just executive boasting. It has no debt, $204 million in cash on the books, and a market capitalization of more than $3.2 billion. Even in the economic downturn, it was able to boost total revenues by 7 percent in the first half of this year, compared with the same period a year ago. It had 8,826 employees worldwide entering this year. And Covance has hired another 500 people so far this year, Herring says.

Covance’s strategy is essentially to get more mileage out of the Gene Expression Laboratory than Merck did. Demand at one big drug company for this kind of genomic analysis service tends to ebb and flow, meaning that all the expensive space, equipment, and people aren’t likely being fully utilized all the time, Herring says. By putting this asset inside a contract services organization like Covance, which can seek out dozens of clients for this work, it can make more efficient use of the existing resources, he says.

On a higher strategic level, this is essentially a bet Covance is making for the future of personalized medicine. “Everybody believes it is in everybody’s best interest—patients, payers, and pharmaceutical companies—to prescribe the right drug to people who are actually most likely to benefit,” Herring says. Demand is growing for this service in the pharma business, Herring says. At least four of Covance’s clients have specifically inquired about its ability to do gene expression analysis in the past four or five months, he says.

“This really provides us with a service that we think has growth potential, and we’re a growth company,” Herring says. “What Seattle is getting is a growth company.”

Before we hung up, Herring went out of his way to put his best foot forward with the locals. He pointed out that Covance is a “great corporate citizen,” and that its employees are active in local charities and volunteering. He mentioned that he’s been here in Seattle many times, often because of flight stopovers on his way to meetings in Asia. He’s a fan of the outdoors. “We’re a good company to have in your community,” he says.

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