- Q4 Revenue Growth Accelerates to 19.9% and Operating Margin Increases to 15.0% -

PRINCETON, N.J., January 25, 2006 /PRNewswire-FirstCall/ -- Covance Inc. today reported fourth quarter earnings of $0.54/diluted share, up 28.6% year-over-year, after adjusting for the impact of a one-time $4.4 million repatriation-related income tax charge. This income tax charge of approximately seven cents per share was associated with the repatriation of $103 million of accumulated foreign earnings under the American Jobs Creation Act. Full-year earnings on the same basis were $1.94/diluted share, a 27.6% increase over full-year 2004. GAAP earnings for the fourth quarter ended December 31, 2005 were $0.47/diluted share and full-year earnings were $1.88/diluted share.

"I congratulate the entire Covance team for delivering a fifth consecutive year of at least 25% earnings growth for our shareholders. Outstanding project delivery for clients led to continued strong repeat work and record orders of $434 million in the fourth quarter, driving backlog to $1.67 billion," said Joe Herring, Covance's Chairman and Chief Executive Officer. "The fourth quarter's robust revenue growth of nearly 20% and record operating margins of 15.0% were broad-based and featured continued strong performances by our market-leading toxicology services and central laboratory services. Our Early Development segment achieved exceptionally strong revenue growth of 24.1% and operating margin of 25.0%, and our Late-Stage Development segment grew revenues 16.4% and increased its operating margin 50 basis points sequentially to 16.2%. Strong order flow over the past two years translated into a doubling of our full-year top-line growth rate to 16.9%. Fourth quarter orders included two dedicated capacity contracts totaling approximately $34 million, consisting of the extension of an existing contract and a smaller, new contract with a top ten pharmaceutical client."

"Looking forward, we will continue to focus on our three service-based strategies: delivering operational and service excellence for our clients; creating integrated drug development solutions that reduce the time and cost of drug development; and driving more strategic, partner-based outsourcing. Continued successful execution of these strategies leads us to raise our 2006 earnings target from at least $2.30 per share to at least $2.33 per share (excluding the impact of expensing stock options under SFAS 123(R), which we estimate to be approximately $0.16 to $0.18 cents per share in 2006)."

    Consolidated Results

    ($ in millions
    except EPS)        4Q05    4Q04  Change  FY 2005    FY 2004  Change
    Net Revenues      $322.3  $268.9  19.9%  $1,192.9  $1,020.4  16.9%
      Reimbursable
      Out-of-Pockets  $20.8  $13.5            $57.5      $36.0
    Total Revenues    $343.1  $282.4        $1,250.4  $1,056.4

    Costs and
    Expenses          $274.1  $230.6  18.9%  $1,017.8    $879.9  15.7%
      Reimbursable
      Out-of-Pockets  $20.8  $13.5            $57.5      $36.0
    Total Costs
    and Expenses      $294.9  $244.1        $1,075.3    $915.9
    Operating Income    $48.2  $38.3  26.0%    $175.1    $140.5  24.7%
      Operating
      Margin %        15.0%  14.2%            14.7%      13.8%
    Net Income          $30.0  $27.3          $119.6      $97.9
    Diluted EPS        $0.47  $0.42            $1.88      $1.52

    Tax on Repatriated
    Earnings            $4.4    n/a            $4.4        n/a
    Net Income
    excluding
    tax charge        $34.4  $27.3  25.9%    $124.0      $97.9  26.6%
    Diluted EPS
    excluding
    tax charge        $0.54  $0.42  28.6%    $1.94      $1.52  27.6%

    Operating Segment Results

    Early Development

The Company's Early Development segment includes preclinical toxicology, analytical chemistry, and clinical pharmacology services. Early Development net revenues for the fourth quarter of 2005 grew an exceptionally strong 24.1% to $150.9 million compared to $121.7 million in the fourth quarter of 2004 on robust performances across our broad portfolio of services. Full-year net revenues grew 17.4% to $562.2 million compared to $478.7 million in the prior year.

Operating income for the fourth quarter of 2005 increased 35.8% to $37.8 million compared to $27.8 million for the fourth quarter of last year. Operating margin for the fourth quarter of 2005 increased 210 basis points to 25.0%, from the 22.9% recorded in the fourth quarter of the prior year. Operating margin growth was led by continued strong performance in toxicology, chemistry, and North American clinical pharmacology. Full-year operating margin expanded to 24.9% from 23.3% in the prior year.

    ($ in millions)      4Q05    4Q04  Change  FY 2005  FY 2004  Change
    Net Revenues        $150.9  $121.7  24.1%  $562.2    $478.7  17.4%
    Operating Income    $37.8  $27.8  35.8%  $140.1    $111.6  25.6%
    Margin %            25.0%  22.9%            24.9%    23.3%

    Late-Stage Development

The Late-Stage Development segment includes central laboratory, Phase II-III clinical development, commercialization services (Phase IV studies and market access services), and cardiac safety services. Fourth quarter net revenues were $171.4 million, up 16.4% from the $147.2 million in the fourth quarter of 2004. Net revenue growth of 16.4% year-on-year and 10.7% sequentially was broad-based across the segment. Full-year revenues grew 16.4% to $630.8 million compared to $541.7 million in the prior year.

Operating income for the fourth quarter of 2005 grew to $27.8 million compared to $25.2 million in the fourth quarter of the prior year. Central laboratories, commercialization services, and cardiac safety services were the strongest contributors to the solid margin performance in the quarter. Operating margins increased 50 basis points sequentially to 16.2%, primarily as a result of improved profitability in clinical development. Full-year operating margin was 16.6% compared to 15.7% in the prior year.

    ($ in millions)      4Q05    4Q04  Change  FY 2005  FY 2004  Change
    Net Revenues        $171.4  $147.2  16.4%  $630.8    $541.7  16.4%
    Operating Income    $27.8  $25.2  10.3%  $ 104.7    $84.9  23.3%
    Margin %            16.2%  17.1%            16.6%    15.7%

    Corporate Information

During the year, the Company's backlog increased $210 million, or 14.4%, to a record $1.67 billion at December 31, 2005, despite a $63 million negative impact from the strengthening of the US dollar. Backlog increased on a year-over-year and sequential basis in both Early Development and Late-Stage Development.

The Company reported an increase of $20.3 million in cash and cash equivalents in the fourth quarter to $160.7 million at December 31, 2005 from $140.4 million at September 30, 2005.

Capital expenditures for the fourth quarter were $58.8 million and totaled $153.1 million for full year 2005. Free cash flow (cash from operations less capital spending) was $28.9 million for full year 2005. We expect 2006 capital spending to be approximately $125 million and 2006 free cash flow to be approximately $90 million.

Net Days Sales Outstanding (DSO) improved to 56 days at December 31, 2005 from 63 days at September 30, 2005.

The Company's investor conference call will be webcast on Thursday, January 26 at 9:00 am EST. The CEO commentary and presentation slides are available through http://www.covance.com. In addition, on January 26 at approximately 6:20 am EST, Joe Herring will be interviewed on Bloomberg Radio; at approximately 6:50 am EST, Joe Herring will be interviewed on Bloomberg Television's Morning Call.

Covance, with headquarters in Princeton, New Jersey, is one of the world's largest and most comprehensive drug development services companies with annual revenues greater than $1 billion, global operations in more than 20 countries, and more than 7,300 employees worldwide. Information on Covance's products and services, recent press releases, and SEC filings can be obtained through its website at http://www.covance.com.

Use of Non-GAAP Financial Information

This Press Release contains non-GAAP earnings per share information adjusted to exclude the impact of a one-time income tax charge for the repatriation of accumulated foreign earnings under the American Jobs Creation Act. This information is provided because management believes that this tax charge is not indicative of Covance's operational results and, as this non-GAAP financial measure is used by management as a basis for evaluating Company performance, investors' understanding of Covance's performance is enhanced by such disclosure.

Statements contained in this press release, which are not historical facts, such as statements about prospective earnings, savings, revenue, operations, revenue and earnings growth and other financial results are forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All such forward-looking statements including the statements contained herein regarding anticipated trends in the Company's business are based largely on management's expectations and are subject to and qualified by risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, without limitation, competitive factors, outsourcing trends in the pharmaceutical industry, levels of industry research and development spending, the Company's ability to continue to attract and retain qualified personnel, the fixed price nature of contracts or the loss of large contracts, risks associated with acquisitions and investments, the Company's ability to increase order volume, the pace of translation of orders into revenue in late-stage development services, and other factors described in the Company's filings with the Securities and Exchange Commission including its Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. The Company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the Company's expectations.

                                  COVANCE INC.

                          CONSOLIDATED INCOME STATEMENTS

        FOR THE THREE MONTHS AND YEARS ENDED DECEMBER 31, 2005 AND 2004

                  (Dollars in thousands, except per share data)

                    Three Months Ended December 31  Years Ended December 31
                            2005          2004      2005          2004
                                (UNAUDITED)

    Net revenues          $322,354      $268,857  $1,192,950    $1,020,429
    Reimbursable out-of-
    pockets                20,778        13,487      57,504        35,968
        Total revenues    343,132        282,344  1,250,454      1,056,397

    Costs and expenses:
      Cost of revenue      214,345        179,995    791,654        677,945
      Reimbursed out-of-
      pocket expenses      20,778        13,487      57,504        35,968
      Selling, general
      and administrative    47,069        38,663    178,368        155,656
      Depreciation and
      amortization          12,729        11,943      47,821        46,354
            Total costs
            and expenses  294,921        244,088  1,075,347        915,923

    Income from
    operations              48,211        38,256    175,107        140,474

    Other (income)
    expense, net:
      Interest income, net    (927)          (865)    (3,637)        (2,290)
      Foreign exchange
      transaction loss
      (gain), net              124          (476)      1,073            238
            Other (income)
            expense, net      (803)        (1,341)    (2,564)        (2,052)

    Income before taxes
    and equity investee
    earnings                49,014        39,597    177,671        142,526

    Taxes on income          19,342 (a)    12,464      58,786 (a)    45,532

    Equity investee earnings    301            177        734            953

    Net income              $29,973 (a)    $27,310    $119,619 (a)    $97,947

    Basic earnings per
    share                    $0.48 (a)      $0.44      $1.91 (a)      $1.57

    Weighted average
    shares outstanding
    - basic            62,649,863    62,382,374  62,602,454    62,474,345

    Diluted earnings per
    share                    $0.47 (a)      $0.42      $1.88 (a)      $1.52

    Weighted average
    shares outstanding
    - diluted          63,749,470    64,406,413  63,773,188    64,644,149

(a) Includes the impact of a one-time $4.4 million income tax charge associated with the repatriation of $103 million of accumulated foreign earnings under the American Jobs Creation Act.

    Excluding the impact of the $4.4 million repatriation related one-time tax
charge:

    Taxes on income          14,942        n/a          54,386        n/a

    Net income              $34,373        n/a        $124,019        n/a

    Basic earnings per
    share                    $0.55        n/a          $1.98        n/a

    Diluted earnings per
    share                    $0.54        n/a          $1.94        n/a


                                  COVANCE INC.

                          CONSOLIDATED BALANCE SHEETS

                            DECEMBER 31, 2005 and 2004

                              (Dollars in thousands)

                                                  December 31    December 31
                                                    2005            2004

    ASSETS
    Current Assets:
      Cash & cash equivalents                      $160,717        $177,712
      Accounts receivable, net                      206,098          178,518
      Unbilled services                              88,297          63,220
      Inventory                                      40,293          40,999
      Deferred income taxes                          2,062            8,042
      Prepaid expenses and other current assets      49,243          40,463
          Total Current Assets                      546,710          508,954

    Property and equipment, net                      410,665          319,747
    Goodwill, net                                    61,262          56,876
    Other assets                                      37,966          39,108
          Total Assets                          $1,056,603        $924,685

    LIABILITIES and STOCKHOLDERS' EQUITY
    Current Liabilities:
      Accounts payable                              $26,975          $24,346
      Accrued payroll and benefits                  64,226          63,143
      Accrued expenses and other current
        liabilities                                  48,298          39,722
      Unearned revenue                              96,987          87,325
      Income taxes payable                          16,242            4,590
          Total Current Liabilities                252,728          219,126

    Deferred income taxes                            45,545          46,104
    Other liabilities                                26,559          21,769
          Total Liabilities                        324,832          286,999

    Stockholders' Equity:
      Common stock                                      718              700
      Paid-in capital                              350,678          289,952
      Retained earnings                            612,811          493,192
      Cumulative translation adjustment              13,367          41,451
      Treasury stock                              (245,803)        (187,609)
          Total Stockholders' Equity                731,771          637,686
          Total Liabilities and
            Stockholders' Equity                  $1,056,603        $924,685


                                  COVANCE INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004

                            (Dollars in thousands)

                                                  Years Ended December 31

                                                    2005              2004
    Cash flows from operating activities:
      Net income                                  $119,619          $97,947
      Adjustments to reconcile net income
      to net cash provided by
      operating activities:
        Depreciation and amortization              47,821            46,354
        Non-cash compensation expense
        associated with employee benefit
        and stock compensation plans              16,595            13,473
        Deferred income tax provision                5,421            7,516
        Other                                          (80)            (420)
        Changes in operating assets and
        liabilities, net of businesses acquired:
          Accounts receivable                    (24,569)          (21,719)
          Unbilled services                      (25,077)          (19,167)
          Inventory                                  763            (1,073)
          Accounts payable                          2,114            4,217
          Accrued liabilities                      9,082            15,397
          Unearned revenue                          9,662            5,098
          Income taxes payable                    23,384            20,789
          Other assets and liabilities, net        (2,686)          (5,326)
    Net cash provided by operating activities      182,049          163,086

    Cash flows from investing activities:
      Capital expenditures                        (153,138)          (72,887)
      Acquisition of businesses                    (7,110)              -
      Equity method investment                        -            (20,741)
      Other, net                                      158              142
    Net cash used in investing activities        (160,090)          (93,486)

    Cash flows from financing activities:
      Stock issued under employee stock
      purchase and option plans                    32,417            60,783
      Purchase of treasury stock                  (58,194)        (134,188)
    Net cash used in financing activities          (25,777)          (73,405)
    Effect of exchange rate changes on cash        (13,177)            9,917
    Net change in cash and cash equivalents        (16,995)            6,112

    Cash and cash equivalents, beginning
    of period                                    177,712          171,600

    Cash and cash equivalents, end of period      $160,717          $177,712

CONTACT: Covance Investor Relations, +1-609-452-4807

Web site: http://www.covance.com//

Ticker Symbol: (NYSE:CVD)

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