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Covance Inc – ‘10-K405’ for 12/31/00

On:  Wednesday, 3/14/01, at 4:14pm ET   ·   For:  12/31/00   ·   Accession #:  912057-1-7596   ·   File #:  1-12213

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 1: 10-K405     Annual Report -- [x] Reg. S-K Item 405              HTML    452K 
 2: EX-10.31    Material Contract                                   HTML    320K 
 3: EX-10.32    Material Contract                                   HTML     36K 
 4: EX-10.33    Material Contract                                   HTML     61K 
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000

Commission File Number: 1-12213

COVANCE INC.
(Exact name of Registrant as specified in its Charter)

Registrant's telephone number, including area code: (609) 452-4440

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  X  No   

    Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  X 

    As of February 9, 2001, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $835,142,801 (based on the closing price of the Company's Common Stock on the New York Stock Exchange on February 9, 2001 of $14.44).

    As of February 9, 2001, the Registrant had 58,272,722 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

    The Company's definitive Proxy Statement is incorporated by reference into Items 10, 11, 12 and 13 of Part III of this Form 10-K.

PART I

Item 1. Business

General

    Covance Inc. is a leading contract research organization providing a wide range of product development services on a worldwide basis primarily to the pharmaceutical, biotechnology and medical device industries. We also provide laboratory testing services to the chemical, agrochemical and food industries. The services Covance provides constitute two segments for financial reporting purposes: early development services which includes preclinical and Phase I clinical service capabilities, and late-stage development services which includes central laboratory, clinical development, biomanufacturing, commercialization and other support services. We believe Covance is one of the largest biopharmaceutical contract research organizations, based on annual net revenues, and one of a few that are capable of providing comprehensive global product development services.

    Most of the service offerings that constitute Covance's business were initially acquired by our former parent, Corning Inc. and later by Covance, as part of a strategy to create a global and full service product development company. Covance has continued to acquire certain capabilities by strategic acquisition as well as through in-house development. We maintain offices in 17 countries.

    In February 2001, Covance sold its pharmaceutical packaging business for the aggregate amount of $137.5 million. Prior to the sale, we offered full-service contract drug packaging services in the United States and Europe for clinical trials.

Contract Research Organization Industry Overview

    The contract research organization industry provides independent product development services primarily to the pharmaceutical, biotechnology and medical device industries. In general, contract research organizations derive substantially all of their revenue from the research, development and marketing expenditures of these industries. Full service contract research organizations design and manage preclinical and clinical and periapproval studies and trials, and provide health economics and outcome services. Contract research organizations may also provide other services required to develop and market new pharmaceutical and biotechnology products.

Trends Affecting the Contract Research Organization Industry

    We believe that the outsourcing of drug development activities by pharmaceutical and biotechnology companies will increase as a result of the factors described below.

    Cost Containment Pressures.  Market forces and governmental initiatives have placed downward pressure on pharmaceutical and biotechnology companies' drug prices. We believe that the pharmaceutical industry is responding to these pressures by converting some of the fixed costs of maintaining research and development personnel and facilities to variable costs, which can be increased or decreased as needed, by outsourcing drug development activities to contract research organizations. Pharmaceutical companies may find that they do not have sufficient internal development resources when a large number of prospective drugs emerge from the research process and need to undergo development. These resource shortages increase demand for the services of contract research organizations. We also believe that many of these companies are attempting to shorten the new drug development cycle time by using contract research organizations, which may have greater expertise and efficiency. Please also see "Competition" in "Management's Discussion and Analysis of Financial Condition and Results of Operations."

    Marketplace Globalization.  Pharmaceutical and biotechnology companies are increasingly attempting to expand the market for new drugs by applying for regulatory approvals in multiple countries simultaneously rather than sequentially as they have in the past. We believe that contract research organizations with a global presence, such as Covance, will benefit from these trends.

    Revenue Enhancement Through Faster Drug Development.  We believe that contract research organizations, by providing specialized development services, are often able to perform the needed services with a higher level of expertise or specialization, and more quickly than a pharmaceutical or biotechnology company could perform such services internally.

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    Pharmaceutical Company Consolidation.  Business combinations such as mergers and acquisitions by pharmaceutical companies present opportunities and challenges for contract research organizations, as companies resulting from business combinations often seek to reduce costs. While the consolidation process may initially cause a reduction in outsourcing to contract research organizations, once combined, pharmaceutical companies may aggressively manage costs by reducing jobs, decentralizing the research and development process and outsourcing to contract research organizations in an effort to reduce the fixed costs of internal drug development.

    Increasingly Stringent Regulation.  Regulatory requirements throughout the world have become more stringent and there is a trend toward global standardization of these requirements. This has led to an increase in the need for broader, global regulatory expertise. We believe that the pharmaceutical and biotechnology industries are outsourcing to global contract research organizations to take advantage of their capabilities and geographic presence.

    Increasing Competitive Pressures in the Pharmaceutical Industry. A report issued in late 1998 by the consulting firm PricewaterhouseCoopers stated that if recent trends continue, the research and development costs of the top 20 pharmaceutical companies will more than double by the year 2005. If the growth in research and development budgets keeps pace with revenue growth, which PricewaterhouseCoopers believes is more likely, they conclude that research and development costs per drug will have to be reduced to provide their shareholders with the investment returns they have experienced through much of the 1990's. We believe that to meet these pressures, large pharmaceutical companies will have to develop drugs more quickly and less expensively and that should lead to an increasing reliance on the services of contract research organizations.

    Biotechnology Industry Growth.  The United States biotechnology industry has grown rapidly over the last thirteen years and is introducing new therapies which require regulatory approval. Many biotechnology companies do not have the necessary capital, equipment or personnel experience to conduct preclinical studies and clinical trials. Accordingly, many biotechnology companies have chosen to outsource to contract research organizations rather than expend significant time and resources to develop an internal preclinical or clinical development or biomanufacturing capability.

The New Drug Development Process—Overview

    Before a new drug may be marketed to the public, it must undergo extensive testing and regulatory review to determine that the drug has the required quality and is both safe and effective for its intended purpose. The drug development process and typical corresponding time periods for these processes in the United States are described below. Similar extensive testing and regulatory reviews are required in most countries throughout the world.

    Preclinical Research—6 months to 3 years. In vitro, or test tube, and in vivo, or animal, studies are conducted to establish the basic pharmacokinetic effect and safety of a drug including the toxicity of the drug over a wide range of doses. Pharmacokinetics is the study of how a drug is metabolized or absorbed and digested in the body. Initially, acute, or short term, toxicology studies are conducted to ascertain any noxious characteristics of the drug. In the United States, if results warrant continuing development of the drug, the manufacturer, also known as the sponsor, will file an Investigational New Drug application, whereupon the United States Food and Drug Administration ("FDA") may grant permission to begin human trials. Human trials are also known as "clinical trials". Preclinical studies may continue after the start of clinical trials to determine the longer term effects of a drug.

Clinical Research—3.5 to 6 years.

•

Phase I—6 months to 1 year. This phase involves the initial basic safety and pharmacokinetic testing in approximately 20 to 100 human subjects, usually healthy volunteers in a closely monitored setting. These studies determine the side effect profile of the drug, how the drug works, how it is affected by other drugs, where it goes in the body, how long it remains active and how it is broken down and eliminated from the body.



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Phase II—1 to 2 years. This phase involves basic efficacy, or effectiveness, and dose-range testing in approximately 100 to 400 carefully selected patients suffering from the disease or condition under study. These studies help determine the best effective dose, confirm that the drug works as expected and provide additional safety data. The trials are typically well controlled and usually involve a placebo. A placebo is an identical dosage form such as a tablet or solution which lacks the active substance under investigation.

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•

Phase III—2 to 3 years. This phase involves efficacy and safety studies in broader populations of hundreds or thousands of patients at many investigational sites. Investigational sites are the places that enroll the patients participating in the trial, where the drug is provided and where progress is monitored. Investigators are physicians treating the patients enrolled in the study. These services may involve placebo-controlled trials, in which the new drug is compared with a placebo; controlled trials, in which the new drug is compared with one or more drugs with established safety and efficacy profiles in the same therapeutic category; or uncontrolled trials, where there is no comparison to a placebo or another drug. Generally, Phase III studies are intended to provide additional information on drug safety and efficacy, an evaluation of the risk-benefit relationship for the drug, and information for the adequate labeling of the product.

    New Drug Application Preparation and Submission.  Upon completion of Phase III trials, the sponsor or contract research organization assembles the tabulated and statistically analyzed data from all phases of development into a single large document, called the New Drug Application in the United States. New Drug Applications are, on average, approximately 100,000 pages.

    Regulatory Review and Approval.  At this stage, the regulatory agency will scrutinize data from all phases of development to confirm that the sponsor has complied with regulations and that the drug has the required quality and is safe and effective for the specific use, or indication, under study. Product labeling is also approved at this stage, which serves as a guideline to the sponsor about how its product can be promoted in the marketplace.

    Post-Marketing Surveillance and Phase IV Studies—Periapproval.  United States Federal regulations require the sponsor to collect and periodically report to the FDA additional safety data on the drug for as long as the sponsor markets the drug. In some cases, it may be necessary to undertake an evaluation of specific aspects of safety. These are known as Phase IV studies and are sometimes referred to as post-marketing surveillance. If the drug is marketed outside the United States, these reports must include data from all countries in which the drug is sold. Additional studies may be undertaken after initial approval to find new uses for the drug or to test new dosage formulations. All of these studies are types of periapproval studies, or studies performed around or after a regulatory authority's approval to let the sponsors sell the drug commercially.

Business Strategy

    We believe we are one of the largest pharmaceutical and biotechnology contract research organizations, based on annual net revenues, and one of a few that are capable of providing global product development services.

    Our strategy is focused on the development and delivery of innovative drug development services that apply science and technology to capture, manage and integrate a vast array of data in near real time. We believe our broad knowledge base in drug development, our distinctive core capabilities, and our access to a global investigator network enable us to create unique value for our customers. We strive to contribute to the drug development value-chain by offering services that improve decision-making, increase success rates and reduce time and cost.

    We plan to focus on mutually rewarding strategic relationships with customers and participate in the drug development services business in areas where we can add value to our customers' core capabilities. We intend to leverage our leading market position in early development services to capitalize on the growing need for early screening and better compound selection. We will also seek to globalize processes and web-enable client data access to accelerate drug development timelines and reduce costs. Our strategy includes the utilization of our central laboratory logistics expertise to develop our new bioanalytical services business and the augmentation of our early development services business by pursuing low-cost toxicology capacity through opportunistic acquisitions.

    We believe our market leading position in central laboratory services in clinical trials will provide a platform to capture, manage and integrate data in near real time and provide simultaneous access to the diverse data components throughout the clinical trial phases. This could lead to greatly reduced time and cost and enhanced decision-making for our customers and provide the differentiation needed to optimize the central laboratory business. We plan to combine our core competencies and capabilities to provide sponsors with laboratory data and reliable transportation services with our globally standardized project management skills to augment our market share lead. We will also endeavor to strengthen our offerings of central diagnostics and interactive trial management services in support of clinical trials, utilize our common technology platforms and launch new specialty services, such as pharmacogenomics and imaging services, that leverage our core capabilities.

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    We strive to continually improve our existing services. We have implemented a total quality management system throughout our operations which assists us in our goal of producing error-free services on time and within the client's budget. Furthermore, some of our United States and European subsidiaries have received ISO 9000 and 9001 certifications based on quality standards established by the International Standards Organization. The ISO 9000 standards define the international requirements for creating a quality assurance system that is intended to result in the provision of consistent service. We have also initiated a program designed to maximize customer satisfaction and loyalty.

    We expect to continue developing services internally and making strategic acquisitions that are complementary to our existing services and that will expand our ability to serve our clients. Complementary businesses are those that will enhance our existing services either qualitatively or geographically, or add new services which can be integrated with our existing services.

    Streamlining the Drug Development Process.  In October 2000, Covance formed a wholly-owned subsidiary, Nexigent Inc. Nexigent intends to provide a set of web-based tools and services for reducing the cost and time in executing clinical trials. Nexigent plans to create and scale a "pre-wired" network of trial participants through web-enabled data and information-based services. Nexigent believes it has certain competitive advantages through its relationship with Covance including high central laboratory market share and a world leading network of sponsors and clinical investigators, which should enable Nexigent to access a large percentage of industry participants.

    We believe the major benefits pharmaceutical companies and contract research organizations will realize through the tools and services Nexigent plans to provide include quicker and better-informed trial management decision making through access to real-time data; quicker study starts through easy access to a visible network of richly profiled investigators; quick and simple process of creating, assembling, and engaging a focused clinical "team" supported by robust process standards; and the ability to conduct and manage more trials using current level of resources.

    Nexigent's current offerings include: site-oriented services focused on efficiently starting a trial; site feasibility; rapid study start-up; electronic entry and capture of case report form data through a web-based platform; and a web-based tool for real-time access to Covance central laboratory trial data. Nexigent is currently developing an array of new services and tools that will be rolled out throughout 2001.

    In continually examining ways to improve the drug developmental process, our information technology strategy is to capitalize on our computer systems by customizing them where appropriate for client specific requirements and incorporating new systems and technologies to meet changing demands in a timely and cost effective manner such as with Nexigent. Our drug supply management system based on interactive voice response system technology allows clients to more efficiently manage the distribution of their experimental compounds to investigational sites. In addition, we are pursuing the development and implementation of internet-based systems that may reduce the time and cost of drug development. In 2001, we introduced Study Tracker™, an internet-based client access program which permits customers of early development services to review study data and schedules on a real time basis. With respect to technical resources, we have over 400 information systems professionals working in 14 regional and 17 satellite information system centers. Substantially all of our employees, both domestic and international, as well as our file server and desktop computer systems, are connected by a wide area network that provides global access to the expertise, technologies and data contained in the regional information system centers. These systems help us provide integrated services and connect us to our clients.

    Geographic Expansion.  We intend to continue our strategy of establishing new or enhancing existing operations in significant pharmaceutical and biotechnology markets. We expect this will occur as a result of internal growth and through strategic acquisitions.

    We believe that it is important to provide our full range of drug research and development services in all major and many developing pharmaceutical and biotechnology markets, especially given industry trends to conduct clinical trials in multiple countries simultaneously. Through our offices, regional monitoring sites, laboratories and manufacturing sites in over 30 locations in 17 different countries and field work in many other countries, we believe we are a leader among contract research organizations in our ability to deliver services globally. Currently, approximately 30% of our employees are based outside of the United States.

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Services

    We provide a wide range of product development services on a worldwide basis primarily to the pharmaceutical, biotechnology and medical device industries. We also provide laboratory testing services to the chemical, agricultural chemical and food industries. The services we provide constitute two segments for financial reporting purposes: early development, which includes preclinical and Phase I clinical service capabilities, and late-stage development, which includes central laboratory, clinical development, biomanufacturing, commercialization services and other support services.

Early Development

Preclinical and Phase I Clinical Services

    We have four major laboratories, located in Madison, Wisconsin and Vienna, Virginia in the United States and Harrogate, United Kingdom and Muenster, Germany in Europe and a new bioanalytical laboratory in the United States in Indianapolis, Indiana. We also have an administrative and sales office in Tokyo, Japan. The preclinical services offered are wide-ranging, and include:

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in vivo toxicology studies which are studies of the toxic effects of drugs in animals;



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genetic toxicology studies which include studies of the toxic effects of drugs on chromosomes, as well as on genetically modified mice; and



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chemistry services that analyze the components of compounds.

    Our preclinical area has also been a source of innovation by introducing new technologies for client access to data such as Study Tracker, electronic animal identification, multimedia study reports and animal and test tube measures of induced cell proliferation, or reproduction. Our preclinical group also works closely with the Phase I and II operations of the early development and clinical development services groups to minimize product development time and to provide clients with early data on the safety and efficacy of new molecules. This data allows clients to make an early decision about whether to continue, modify or cease their development programs.

    As part of our preclinical services, we have duplicated in the United States the Strategic Consultancy Group program developed in Europe. This program has successfully reduced the time from preclinical testing to the first human studies and involves an integrated process and team drawn from our preclinical and Phase I and II areas. The Strategic Consultancy Group researches a compound from initial preclinical evaluation through its first dosing in humans, including the filing and attainment of an Investigational New Drug application. The process includes all aspects of preclinical services including formulation and dose delivery testing, product metabolism, chemistry, toxicology and safety testing.

    We also provide purpose-bred animals for biomedical research. These research animals are required by pharmaceutical and biotechnology companies, university research centers and contract research organizations as part of their preclinical animal safety and efficacy testing. Through a variety of processes, technology and specifically constructed facilities, we are able to provide both purpose-bred and specific pathogen free animals that meet our clients' rigorous quality control requirements. A pathogen is a microbe or organism that causes disease. Although our preclinical research facilities maintain procedures in accordance with applicable government regulations and our own policies for the quarantine and handling of imported animals, including primates, there is a risk that these animals may be infected with diseases that may be harmful and even lethal to themselves and humans.

    We are also a provider of custom polyclonal and monoclonal antibody services for research purposes and we own and operate a state-of-the-art antibody serum production facility that complies with both Good Manufacturing Practices and Good Laboratory Practices. Monoclonal antibodies recognize only one type of virus or bacteria, while polyclonal antibodies are a group of antibodies each of which recognize different parts of a virus or bacteria. In November 1998, we augmented this capability with the acquisition of Berkeley Antibody Company, Inc., which produces custom antibodies for research purposes as well as offers animal research services to the medical device industry. Berkeley Antibody Company, Inc. also provides preclinical evaluations and services in the area of applied immunology, which is research relating to the immune process.

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    We offer immunotoxicology services in which we assess the impact of drugs or chemicals on the structure and function of the immune system. In 1999, we opened a new immunotoxicology and cell culture laboratory featuring online data capture capabilities and Good Laboratory Practices compliant instrumentation monitoring systems.

    In 2000, we introduced our BioLink™ service offering. This bioanalytical testing service, which is performed in our new 35,000 square foot bioanalytical laboratory in Indianapolis, Indiana, helps determine the appropriate dose amount and frequency of drug application from late discovery evaluation through Phase III clinical testing. Covance is the only contract research organization that provides these services on a full-scale, global integrated basis. BioLink operates more than thirty mass spectrometry instruments globally, providing sufficient capacity to meet deadlines and turnaround times for large clinical sample sets. In addition to state-of-the-art technology, equipment and processes, BioLink operations are supported by an experienced staff of scientific and technical experts who advise on method design, evaluation and regulatory issues, and enhance timely and accurate communications with clients.

    We also provide laboratory testing services to the chemical, agricultural chemical and food industries. We offer a complete range of services to agricultural chemical manufacturers to determine the potential risk to humans, animals and the environment from plant protection products such as pesticides. We also offer a broad range of services to the food industries, including nutritional analysis and nutritional content fact labels. In 1998 we began offering testing services to the growing nutriceutical industry. Generally, nutriceuticals are natural products such as vitamin supplements or botanical products used for pharmaceutical purposes.

Late-Stage Development

Central Laboratory Services

    We believe that the ability to provide high quality and sophisticated central laboratory services is a differentiating advantage for Covance. We have three laboratories, one located in the United States, one located in Switzerland and the other in Singapore, that provide central laboratory services dedicated to biotechnology and pharmaceutical studies. These facilities provide clients with data in studies that can be conducted separately, or multinationally and simultaneously. We believe that our ability to capture, manage and manipulate this data provides us with a unique competitive advantage. The data we provide from these central laboratories are combinable because we use consistent laboratory methods, the same reagent manufacturers and identical equipment calibration and clinical trial reference ranges. Clinical trial reference ranges are the laboratory values that would be considered normal in a typical population. Combinable data eliminates the need for statistical correlation among different laboratories. We also employ a proprietary clinical trials management system, which we believe is unique, that enables us to enter a sponsor's protocol requirements directly into our database. This system, based on protocol requirements, coordinates many aspects of clinical trials including:

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constructing the drug kits that will go to the investigational sites and the requisition forms for additional drug kits;



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facilitating proper laboratory specimen collection from the investigational sites;



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sequencing of study participants visits and investigator ordering of additional tests, ensuring that all demographic data is complete and accurate; and



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producing the client reports that are customized to their specifications.

    The laboratory data can be easily audited because all laboratory data can be traced to source documents. In addition, the laboratories are capable of delivering customized data electronically within 24 hours of test completion and provide safety test results within 48 hours of test completion from most locations.

    As the need for central laboratory services has expanded geographically, we have expanded the reach of our central laboratory services by opening our Singapore laboratory in 2000 and through contractual arrangements, one with a leading South African laboratory and the other with a leading Australian laboratory. Each of these relationships allows us to combine the testing capabilities of the laboratory with our own proprietary systems. Also, in June 1998, we completed a significant expansion of our United States laboratory to further accommodate expanding operations and expected future demand.

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Clinical Development Services

    We offer a comprehensive range of clinical trial services, including Phase II through III clinical studies. We have extensive experience in a number of therapeutic areas, including the following:

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diseases of the cardiovascular and central nervous system;



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diseases of the endocrine and respiratory systems;



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oncology; and



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infectious diseases including AIDS.

    We have extensive experience in managing small, medium and large trials in the United States and in many other parts of the world. These trials may be conducted separately or simultaneously as part of a multinational development plan. We can manage every aspect of clinical trials from clinical development plans and protocol design to New Drug Applications, among other supporting services.

    Clinical trials are managed by a dedicated project team, which, in each case, is led by a project director or manager who supervises all aspects of the clinical trial.

    As part of conducting clinical trials, we provide the following core services, either on an individual or integrated basis, depending on client needs:

    Study Design.  In the critical area of study design, we assist customers in protocol design and prepare study protocols and case report forms. The study protocol (1) defines the medical issues to be examined in evaluating the safety and efficacy of the drug under study, (2) specifies the number of patients required to produce statistically valid results, (3) specifies the clinical tests to be performed in the study, (4) specifies the time period over which the study will be conducted, (5) specifies the frequency and dosage of drug administration and (6) sets forth the exact inclusion and exclusion criteria for enrolling patients in the study.

    The success of a study depends on the ability of the protocol to accurately reflect requirements of regulatory authorities and fit coherently with the other aspects of the development process including the ultimate marketing strategy for the drug. Marketing strategy considerations include outcomes and pharmacoeconomic concerns and reimbursement planning, topics discussed in greater detail in the description of "Health Economics and Outcomes Services" below. When study protocols are being finalized, we develop case report forms to record the desired study information and ensure that valid data are acquired in a form that is most efficient for the investigator. Individuals representing all of the disciplines involved in the drug development process, including epidemiology, data management, statistics and regulatory affairs, must work closely with the clinical trial management project team to assure that the right data are acquired, and in the form which is most efficient for subsequent data entry, management analyses and reporting.

    Investigator Recruitment.  During a clinical trial, physicians, also referred to as investigators, supervise the administration of the drugs to patients at hospitals, clinics or other locations, also referred to as investigational sites. The success of a clinical trial depends, in large part, on the performance of these investigators. We solicit the participation of investigators, who contract directly with either us or our clients—the sponsors. We maintain, and continually expand and refine, our investigator databases. Our databases contain information regarding our experience with these investigators, including factors relevant to rapid study initiation.

    Study Monitoring.  We provide study monitoring services by visiting investigational sites. These services include investigator recruitment and education, patient enrollment assistance and data collection. These visits also ensure that data is gathered according to Good Clinical Practice, the requirements of the client, and other applicable regulations. We focus, at an early stage, on quickly completing the critical steps of screening and selecting investigators, processing pre-study regulatory paperwork, obtaining institutional review board approvals and scheduling investigational site initiation visits.

    Clinical Data Management and Biostatistical Analysis.  Our data management and biostatistical analysis services assist clients in managing and analyzing the information produced in clinical trials. These services are managed by professionals with pharmaceutical and biotechnology industry experience in the design and construction of local and multinational clinical trial databases. These services are offered either as discrete products or as part of an integrated drug development program. During the design of development plans and protocols, we offer consulting services

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related to the determination of sample size for patient enrollment, and the development of data analysis plans. During the conduct of a clinical trial, we assist in the rapid acquisition of accurate study data. Following completion of the clinical trial, we assist in preparing reports and regulatory submissions. Our biostatisticians may also participate with clients in meetings with the FDA to present and discuss biostatistical analyses prepared by Covance. We have expertise in electronically capturing and using diverse study data from different locations.

    Medical Writing and Regulatory Services.  We provide medical report writing and regulatory services to our clients. We write integrated clinical/statistical reports, manuscripts, risk/benefit assessment reports, package inserts, quality assurance and environmental risk assessments. These services are fully integrated with our other clinical services and are designed to reduce overall drug development time.

Other Support Services

    Centralized Electrocardiogram Services.  In November 1998, we expanded our ability to collect and centralize clinical trial data with the purchase of GDXI, Inc. (now known as Covance Central Diagnostics Inc.) which undertakes the capture and interpretation of electrocardiograms. An electrocardiogram is a recording of electrical signals from the heart. Electrocardiogram analysis, one of the most frequently used tools in clinical trials, is included in more than one-half of clinical trials as part of the study protocol. Covance Central Diagnostics Inc. distributes a proprietary hand-held electrocardiogram device to clinical trial sites. The device can be used anywhere in the world and collects the data, performs a real-time quality check, and transmits the information by telephone to a full-time central operations center. In 1999, Covance introduced ambulatory cardiac monitoring capabilities, often referred to as Holter monitoring. Holter monitoring involves the ambulatory monitoring of cardiac activity and permits long-term monitoring—often 24 to 48 hours as opposed to the ten seconds of data typically provided by stationary ECGs, and therefore may reveal certain conditions which may not be discovered by a stationary ECG.

    Centralized Imaging Services.  In June 2000, Covance Central Diagnostics Inc. opened a centralized imaging center. The Covance Imaging Center was developed to meet a growing pharmaceutical industry need for imaging to document clinical efficacy and safety. Centralized imaging is a series of processes and procedures used to collect, read and analyze image-enabled data from clinical trials.

    Pharmacogenomic Testing Services.  In 1999, Covance entered into a collaborative agreement with Variagenics, Inc. to offer an array of technologies for the rapid discovery and detection of genetic variation to optimize drug treatments and to develop safer and more effective pharmaceutical products. We offer Variagenics' pharmacogenomic testing technologies in conjunction with our central laboratory services. In 2000, Variagenics developed a number of genotyping assays for incorporation into clinical drug designs. These technologies focus on the rapid identification of normal variance in human gene sequences and testing for these variances in clinical trial populations. We anticipate that the use of genetic variation during drug development will facilitate the adjustment of treatment regimens and improve disease definition.

    Clinical Development Technologies.  To expedite the drug development process and to help reduce costs, we created a proprietary interactive trial management system utilizing an interactive voice response system. This system uses touch-tone telephone technology for data entry purposes and assists our clients in managing clinical trials on a real time basis and in reducing product waste with just-in-time inventory processing. This system is multi-lingual and is available world-wide through toll-free numbers seven days per week, 24 hours per day. The most frequently used functions include patient screening, patient enrollment, patient randomization, drug assignments, drug inventory management, unblinding, discontinuations and patient diaries. Clients can realize substantial cost savings through this information technology, by reducing and better managing clinical supply requirements and controlling waste. In addition, real time data access expedites the clinical trial process by offering clients precise and accurate information for quick analysis. We offer this system both in conjunction with clinical trials we conduct and as a stand alone service.

Biomanufacturing Services

    We own 78% of the voting capital stock of Covance Biotechnology Services Inc. ("CBSI"), a company formed in 1995 to manufacture recombinant proteins for biotechnology and pharmaceutical clients for preclinical and clinical trials as well as for commercial sales. The remaining 22% of CBSI's capital stock is owned by minority stockholders. Our ownership in CBSI could be reduced to approximately 68% if all of the stock options granted to CBSI executives were exercised in full.

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    Our company, CBSI and its minority stockholders have entered into a capital contribution and stockholder agreement. This agreement limits the minority stockholders' rights to transfer their common stock, grants us a right of first refusal on shares of the minority stockholders' common stock, and grants us the right to purchase the common stock held by the minority stockholders in amounts of one-third each within 60 days of December 31, 1998, 1999 and 2000. On February 26, 2001, we served notice of our election to exercise our right to purchase all of the CBSI common stock held by the minority stockholders at a purchase price to be determined in accordance with procedures set forth in the agreement. In October 1997, our company and the minority stockholders entered into an additional agreement obligating us and the minority stockholders to make, upon request by CBSI, (1) additional capital contributions to CBSI of an aggregate amount of $12.0 million in proportion to our respective ownership interests and (2) at our option after these capital contributions have been made, additional capital contributions of up to an aggregate amount of $18.0 million also in proportion to our respective ownership interests. In amendments dated March 10, 1999 and March 1, 2000, our company and the minority stockholders agreed to increase this funding mechanism for CBSI from the original $30.0 million to a total of $120.0 million upon the same terms. Through December 31, 2000, aggregate capital contributions of $97.5 million have been made to CBSI pursuant to this agreement. Our share of the capital contributions has totaled approximately $76.0 million and we have loaned to the minority stockholders approximately $21.5 million in the aggregate to fund their required capital contributions. These loans are secured by the CBSI stock owned by the minority stockholders and are the only assets available to us to satisfy the loans in the event the minority stockholders do not repay the loans.

    We are actively pursuing the divestiture of CBSI and have retained investment bankers for this purpose. A sale of this capital intensive business will enable us to reduce our leverage.

Commercialization Services

    Periapproval Services.  Periapproval trials are studies conducted "around approval", generally after a drug has successfully undergone clinical efficacy and safety testing and the New Drug Application has been submitted to the FDA. We offer a range of periapproval services, including:

•

Treatment Investigational New Drug applications;



•

Phase IIIb clinical studies, which involve studies conducted after New Drug Application submission, but before regulatory approval is obtained;



•

Phase IV clinical studies which are studies conducted after initial approval of the drug; and



•

other types of periapproval studies such as post-marketing surveillance studies and prescription to over-the-counter switch studies.

    We also field and process telephone calls and inquiries relating to adverse experiences with a drug while we perform the safety services in the context of periapproval studies. We have recently increased our focus on offering these services on a stand alone basis.

    Health Economics and Outcomes Services.  We offer a wide range of health economics services, including outcomes and pharmacoeconomic studies, reimbursement planning and reimbursement advocacy programs. Pharmaceutical, biotechnology and medical device manufacturers purchase these services from us to help optimize their return on research and development investments. These services provide our clients with information as to the economic impact of drugs for the purpose of enhancing the economic performance of the providers' medical practices.

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Customers and Marketing

    We provide product development services on a global basis to, among others, the pharmaceutical and biotechnology industries. In 2000, we served in excess of 300 biopharmaceutical companies, including most of the world's largest pharmaceutical companies and biotechnology companies.

    While no single customer accounts for more than ten percent of our aggregate net revenues, we have one customer accounting for more than five but less than ten percent of our revenues, and our top five customers account for approximately 25.7 percent of our net revenues. Our late-stage development segment has one customer which accounts for approximately 13 percent of the aggregate net revenues of that segment and has two customers which each account for more than five but less than ten percent of the aggregate net revenues of that segment. The loss of any of these customers could have a material adverse effect on the business and results of operations of that segment.

    For net revenues from external customers and assets attributable to each of our business segments for the last three fiscal years, please review Note 12 to the audited consolidated financial statements included elsewhere in this Annual Report.

    For net revenues from external customers and long-lived assets attributable to operations in the United States, United Kingdom and other countries for each of the last three fiscal years, please review Note 13 to the audited consolidated financial statements included elsewhere in this Annual Report.

    Our global sales activities are conducted by more than 70 sales personnel based in our operations in the United States, Canada, Europe, Australia, Japan and Singapore. Most of our business development personnel have technical or scientific backgrounds. Our sales force consists primarily of account executives and account managers who are each responsible for optimizing business opportunities for specific clients and fostering long-term relationships.

Contractual Arrangements

    Most of our contracts with our clients are either fixed price, or fee-for-service with a cap. To a lesser extent, some of our contracts are fee-for-service without a cap. In cases where the contracts are fixed price, we generally bear the cost of overruns, but we benefit if the costs are lower than we anticipated. In cases where our contracts are fee-for-service with a cap, the contracts contain an overall budget for the trial based on time and cost estimates. If our costs are lower than anticipated, the customer keeps the savings, but if our costs are higher than estimated, we are responsible for the overrun unless the increased cost is a result of a change requested by the customer, such as an increase in the number of patients to be enrolled or the type or amount of data to be collected. Contracts may range from a few months to several years depending on the nature of the work performed. In some cases for multi-year contracts, a portion of the contract fee is paid at the time the study or trial is started with the balance of the contract fee payable in installments over the study or trial duration. Sometimes the installments are tied to meeting performance milestones. For example, in clinical and periapproval trials, installment payments may be related to investigator recruitment, patient enrollment or delivery of a database.

    Most of our contracts may be terminated by the customer either immediately or upon notice. These contracts typically require payment to Covance of expenses to wind down a study, payment to Covance of fees earned to date, and, in some cases, a termination fee or payment to Covance of some portion of the fees or profit that could have been earned under the contract if it had not been terminated early. Contracts may be terminated for a variety of reasons, including the failure of a product to satisfy safety requirements, unexpected or undesired results of the product, the customer's decision to forego or terminate a particular study, insufficient enrollment or investigator recruitment, or our failure to properly discharge our obligations.

Backlog

    Some of our studies and projects are performed over an extended period of time, which may be as long as several years. We maintain an order backlog to track anticipated net revenues for work that has yet to be earned. However, we do not maintain an order backlog for other services that are performed within a short period of time or where it is not otherwise practical or feasible to maintain an order backlog.

    Backlog usually includes work to be performed under signed agreements (i.e., contracts and letters of intent). Once work under a signed agreement begins, net revenues are recognized over the life of the project. However, in some cases we will begin work on a project once we have a legally binding agreement, but before executing a signed

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agreement, and backlog may include the net revenues expected from that project. Some of our studies and projects are performed over an extended period of time, which may be as long as several years.

    We cannot assure you that we will be able to realize all or any net revenues included in backlog. Although backlog can provide meaningful information to our management with respect to a particular study where study-specific information is known, such as study duration, performance clauses and other study-specific contract terms, we believe that our aggregate backlog as of any date is not necessarily a meaningful indicator of our future results for a variety of reasons, including the following. First, studies vary in duration. For instance, some studies that are included in 2000 backlog may be completed in 2001, while others may be completed in later years. Second, the scope of studies may change, which may either increase or decrease their value. Third, studies included in backlog may be subject to bonus or penalty payments. Fourth, studies may be terminated or delayed at any time by the client or regulatory authorities. Terminations or delays can result from a number of reasons. Delayed contracts remain in our backlog until a determination of whether to continue, modify or cancel the study has been made. Based upon the foregoing, our aggregate backlog at December 31, 2000 and December 31, 1999 was $996 million and $957 million, respectively.

Competition

    The contract research organization industry has many participants ranging from hundreds of small, limited-service providers to a few full service contract research organizations with global capabilities. We primarily compete against in-house departments of pharmaceutical companies, full-service and limited service contract research organizations and, to a lesser extent, universities and teaching hospitals.

    There is competition among the larger contract research organizations for both customers and acquisition candidates on the basis of many factors, including the following:

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reputation for on-time quality performance;

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expertise and experience in specific areas;

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scope of service offerings;

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strengths in various geographic markets;

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price;

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technological expertise and efficient drug development processes;

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ability to acquire, process, analyze and report data in a time-saving and accurate manner;

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ability to manage large-scale clinical trials both domestically and internationally;

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expertise and experience in health economics and outcomes services; and

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size.

We believe that we compete favorably in most of these areas.

Government Regulation

    Our laboratory and manufacturing services are subject to various regulatory requirements designed to ensure the quality and integrity of the testing and manufacturing processes. The industry standards for conducting preclinical laboratory testing are embodied in the Good Laboratory Practice (GLP) and Good Manufacturing Practice (GMP) regulations and for central laboratory operations in the Clinical Laboratory Improvement Amendments of 1988. Our central laboratories in Indianapolis and Switzerland have also been certified by the College of American Pathologists. GMP sets forth the requirements for manufacturing facilities. The standards of GLP and GMP are required by the FDA, by the Department of Health in the United Kingdom and by similar regulatory authorities in other parts of the world. GLP and GMP stipulate requirements for facilities, equipment and professional staff. The regulations require standardized procedures for conducting studies including procedures for recording and reporting data and for retaining appropriate records. To help satisfy its compliance obligations, Covance has established quality assurance controls at its laboratory and manufacturing facilities which monitor ongoing compliance with GLP and GMP regulations and the Clinical Laboratory Improvement Amendments, as applicable, by auditing test data and conducting inspections of testing and manufacturing procedures.

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    The industry standards for the conduct of clinical research and development studies are embodied in the regulations for Good Clinical Practice (GCP). The FDA and other regulatory authorities require that test results submitted to such authorities be based on studies conducted in accordance with GCP. These regulations require, but are not limited to, the following:

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complying with specific requirements governing the selection of qualified investigators;

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obtaining specific written commitments from the investigators;

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verifying that appropriate patient informed consent is obtained;

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ensuring adverse drug reactions are medically evaluated and reported;

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monitoring the validity and accuracy of data;

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verifying drug or device accountability;

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instructing investigators and studies staff to maintain records and reports; and

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permitting appropriate governmental authorities access to data for their review.

    We must also maintain reports for each study for specified periods for auditing by the study sponsor and by the FDA or similar regulatory authorities in other parts of the world. As with GLP and GMP, noncompliance with GCP can result in the disqualification of data collection during the clinical trial.

    Covance's standard operating procedures are written in accordance with regulations and guidelines appropriate to the region and the nation where they will be used. All clinical research is carried out in accordance with the International Conference on Harmonization-Good Clinical Practice Guidelines, and the requirements of the applicable country. Although the U.S. is a signatory to these guidelines, the FDA has not adopted all of the guidelines as statutory regulations, but has currently adopted them only as guidelines. From an international perspective, when applicable, we have implemented common standard operating procedures across regions to assure consistency whenever it is feasible and appropriate to do so.

    Our animal import and breeding facilities are also subject to a variety of federal and state laws and regulations, including The Animal Welfare Act and the rules and regulations promulgated thereunder by the United States Department of Agriculture ("USDA"). These regulations establish the standards for the humane treatment, care and handling of animals by dealers and research facilities. Our breeding and animal import facilities maintain detailed standard operating procedures and the documentation necessary to comply with applicable regulations for the humane treatment of the animals in its custody. Besides being licensed by the USDA as both a dealer and research facility, this business is also accredited by the Association for Assessment and Accreditation of Laboratory Animal Care International and has registered assurance with the United States National Institutes of Health Office of Protection for Research Risks.

    The use of controlled substances in testing for drugs with a potential for abuse is regulated by the U.S. Drug Enforcement Administration. All Covance laboratories using controlled substances for testing purposes are licensed by the U.S. Drug Enforcement Administration.

    Our United States laboratories are subject to licensing and regulation under federal, state and local laws relating to hazard communication and employee right-to-know regulations, the handling and disposal of medical specimens and hazardous waste and radioactive materials, as well as to the safety and health of laboratory employees. All of our laboratories are subject to applicable federal and state laws and regulations relating to the storage and disposal of all laboratory specimens including the regulations of the Environmental Protection Agency, the Nuclear Regulatory Commission, the Department of Transportation, the National Fire Protection Agency and the Resource Conservation and Recovery Act. Although we believe that Covance is currently in compliance in all material respects with such federal, state and local laws, failure to comply could subject Covance to denial of the right to conduct business, fines, criminal penalties and other enforcement actions.

    In addition to its comprehensive regulation of safety in the workplace, the Occupational Safety and Health Administration has established extensive requirements relating to workplace safety for health care employers, whose workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B virus. These regulations, among other things, require work practice controls, protective clothing and equipment, training, medical follow-up, vaccinations and other measures designed to minimize exposure to chemicals, and transmission of blood-borne and airborne

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pathogens. Furthermore, relevant Covance employees receive initial and periodic training focusing on compliance with applicable hazardous materials regulations and health and safety guidelines.

    The regulations of the U.S. Department of Transportation, the U.S. Public Health Service and the U.S. Postal Service apply to the surface and air transportation of laboratory specimens. Covance's laboratories also comply with the International Air Transport Association regulations, which govern international shipments of laboratory specimens. Furthermore, when materials are sent to a foreign country, the transportation of such materials becomes subject to the laws, rules and regulations of such foreign country.

Intellectual Property

    We have developed certain computer software and technically derived procedures that provide separate services and are intended to maximize the quality and effectiveness of our services. Although our intellectual property rights are important to our results of operations, we believe that such factors as the technical expertise, knowledge, ability and experience of our professionals are more important, and that, overall, these technological capabilities provide significant benefits to our clients.

Employees

    At December 31, 2000, we had approximately 7,900 employees, approximately 30% of whom are employed outside of the United States. Approximately 7,300 of our employees are full time employees, 36 of our employees hold M.D. degrees, 172 hold Ph.D. degrees, 12 hold Pharm.D. degrees, 21 hold D.V.M. degrees and 619 hold masters or other postgraduate degrees. We believe that Covance's relations with its employees are good.

Item 2. Properties

    Covance both owns and leases its facilities. Covance leases substantial facilities for its clinical development services in the United States in Princeton, New Jersey, and in the United Kingdom in Maidenhead and Horsham. Covance owns substantial facilities in Madison, Wisconsin, in Harrogate, United Kingdom and in Muenster, Germany and leases facilities in Vienna, Virginia for its preclinical services and in Indianapolis, Indiana for its bioanalytical services. Covance also owns several of the buildings in Vienna, Virginia. Covance leases substantial facilities in Indianapolis, Indiana and in Geneva, Switzerland for its central laboratory services. Covance also owns or leases other facilities in the United States, Canada, Europe, Asia and Latin America. Covance believes that its facilities are adequate for its operations and that suitable additional space will be available when needed.

    CBSI's 109,000 square-foot biomanufacturing facility, located in the United States in Research Triangle Park, North Carolina, is financed through two tax retention operating leases provided by a commercial lending institution. For additional information, please see Note 9 to the audited consolidated financial statements included elsewhere in this Annual Report.

Item 3. Legal Proceedings

    Covance is party to lawsuits and administrative proceedings incidental to the normal course of its business. Covance does not believe that any liabilities related to such lawsuits or proceedings will have a material effect on its financial condition or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

    None.

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PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

    Covance's common stock is traded on the New York Stock Exchange (symbol: CVD). The following table shows the high and low sales prices on the New York Stock Exchange for each of the most recent eight fiscal quarters.

    As of February 9, 2001, there were 7,264 holders of record of Covance's common stock.

    Covance has not paid any dividends during 2000 or 1999. Covance does not currently intend to pay dividends in the foreseeable future, but rather, intends to reinvest earnings in its business. Covance is also restricted (subject to certain exceptions) from paying dividends on its common stock by certain covenants contained in a credit agreement to which Covance is a party.

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Item 6. Selected Financial Data

    The following table presents selected historical consolidated financial data of Covance as of and for each of the years ended December 31, 2000, 1999, 1998, 1997 and 1996. This data has been derived from the audited consolidated financial statements of Covance.

    You should read this selected historical consolidated financial data in conjunction with Covance's audited consolidated financial statements and accompanying notes included elsewhere in this Annual Report. Historical consolidated financial data may not be indicative of Covance's future performance. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations."

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

    Covance is a leading contract research organization providing a wide range of integrated product development services on a worldwide basis primarily to the pharmaceutical, biotechnology and medical device industries. Covance also provides services such as laboratory testing to the chemical, agrochemical and food industries. The foregoing services comprise two segments for financial reporting purposes: early development services (includes preclinical and Phase I clinical); and late-stage development services (includes central laboratory, clinical development, biomanufacturing, commercialization and other support services). Covance believes it is one of the largest biopharmaceutical contract research organizations, based on 2000 annual net revenues, and one of a few that is capable of providing comprehensive global product development services. Covance offers its clients high quality services designed to reduce product development time. This enables Covance's customers to introduce their products into the marketplace faster and as a result, maximize the period of market exclusivity and monetary return on their research and development investments. Additionally, Covance's comprehensive services and broad experience provide its customers with a variable cost alternative to fixed cost internal development capabilities.

    Historically, a majority of Covance's net revenues have been earned under contracts. These contracts generally range in duration from a few months to two years. Revenue from these contracts is generally recognized under either the percentage of completion method of accounting or as services are rendered or products are delivered. The contracts may contain provisions for renegotiation for cost overruns arising from changes in the scope of work. Renegotiated amounts are included in net revenues when earned and realization is assured. In some cases, for multi-year contracts a portion of the contract fee is paid at the time the trial is initiated. Additional payments are made based upon the achievement of performance based milestones over the contract duration. Covance routinely subcontracts with independent physician investigators in connection with either single or multi-site clinical trials. Investigator fees are not reflected in net revenues or expenses since these investigator fees are paid by the customers to Covance on a "pass-through basis" (i.e. without risk or reward to Covance). Most contracts are terminable either immediately or upon notice by the client. These contracts typically require payment to Covance of expenses to wind down a study, payment to Covance of fees earned to date, and, in some cases, a termination fee or a payment to Covance of some portion of the fees or profit that could have been earned by Covance under the contract if it had not been terminated early.

    Covance segregates its recurring operating expenses among three categories: cost of revenue; selling, general and administrative; and depreciation and amortization. Cost of revenue consists of appropriate amounts necessary to complete the revenue and earnings process, and includes direct labor and related benefit charges, other direct costs and an allocation of facility charges and information technology costs. Cost of revenue, as a percentage of net revenues, tends and is expected to fluctuate from one period to another, as a result of changes in labor utilization and the mix of service offerings involving hundreds of studies conducted during any period of time. Selling, general and administrative expenses consist primarily of administrative payroll and related benefit charges, advertising and promotional expenses, administrative travel and an allocation of facility charges and information technology costs.

Results of Operations

    Year Ended December 31, 2000 Compared with Year Ended December 31, 1999.  Net revenues increased 4.7% to $868.1 million for 2000 from $829.0 million for 1999. Excluding the impact of foreign exchange rate variances between both periods, net revenues increased 7.9% in 2000. Net revenues from Covance's late-stage development segment grew 7.9% in 2000 as compared to 12.2% in 1999, excluding the impact of foreign exchange rate variances between both periods. The weakness in late-stage development net revenues is primarily attributable to softness in our clinical development services, resulting from weak new order generation and greater than normal cancellations of development programs by pharmaceutical companies. Net revenues from Covance's more mature early development segment grew 7.9% in 2000 as compared to 14.1% in 1999, excluding the impact of foreign exchange rate variances between both periods. The reduction in growth in early development is primarily a result of softness in certain of our chemistry service offerings. Covance's toxicology business, which accounts for approximately half of all early development revenues, experienced strong demand during 2000.

    Cost of revenue increased 13.1% to $625.6 million or 72.1% of net revenues for the year ended December 31, 2000 from $553.3 million or 66.7% of net revenues for the corresponding 1999 period. Gross margins declined to 27.9% for the year ended December 31, 2000 from 33.3% for the corresponding 1999 period. The reduction in gross

16

margins is attributable to a number of factors. One factor is our clinical development services, which experienced weak new business generation, cancellations and price competition. Another factor is direct costs in our biomanufacturing services. While the increase in biomanufacturing direct costs was planned to meet demand, net revenues, although increasing considerably over the corresponding 1999 period, fell short of budget due to a combination of factors, including facility shutdowns in the first quarter of 2000, subsequent production complications, and efforts directed toward preparing the facility for commercial scale production (resulting in lower utilization of equipment and people in revenue generating activities during 2000). A third factor is increased investment spending on internet initiatives and bioanalytical services. Fourth, we also experienced an increased mix of lower margin studies and increased program cancellations in our central laboratory services during the second half of 2000.

    Overall, selling, general and administrative expenses increased 2.5% to $131.2 million for 2000 from $128.0 million for 1999. As a percentage of net revenues, selling, general and administrative expenses decreased to 15.1% for 2000 from 15.4% for 1999.

    Depreciation and amortization increased 12.6% to $54.2 million or 6.2% of net revenues for 2000 from $48.1 million or 5.8% of net revenues for 1999 due primarily to increased depreciation expense associated with capital spending in 1999 and 2000.

    In the second quarter of 2000, in order to restructure its Phase III clinical trials unit to align its cost base with revenue projections, Covance announced a plan to close certain satellite offices, consolidate other facilities and eliminate approximately 200 positions globally. In connection with these actions, Covance recorded a pre-tax restructuring charge of $14.7 million ($8.9 million net of tax) in the second quarter of 2000, consisting primarily of $7.6 million in lease termination and other facility related costs and $6.3 million for severance and related benefits. This restructuring initiative delivered cost savings of approximately $7 million in 2000 and is expected to deliver cost savings of approximately $16 million in 2001. As of December 31, 2000, 79% of these positions have been eliminated. Severance payments began in June 2000 and will continue through 2001. In the third and fourth quarters of 2000, Covance reversed on a net basis $2.2 million of the restructuring reserve established in the second quarter. This reversal consisted of $2.5 million in favorable lease terminations offset by $0.4 million in additional restructuring provisions. As of December 31, 2000, $6.5 million of the $12.5 million net restructuring charge has been paid, while the remaining $6.0 million has been accrued.

    Inclusive of the $12.5 million net restructuring charge recorded in 2000, a $5.2 million one-time merger-related charge incurred in the second quarter of 1999 in connection with the termination of the proposed merger with Parexel International Corporation, and a $7.7 million restructuring charge recorded in the third quarter of 1999, income from operations decreased 48.5% to $44.6 million for the year ended December 31, 2000 from $86.6 million for the corresponding 1999 period. Excluding the impact of these special charges, income from operations decreased 42.6% to $57.1 million, or 6.6% of net revenues, from $99.5 million or 12.0% of net revenues for the corresponding 1999 period. Excluding the impact of these special charges, income from operations from Covance's early development segment decreased $4.7 million or 11.0% to $38.1 million or 13.3% of net revenues for the year ended December 31, 2000 from $42.8 million or 15.7% of net revenues for the corresponding 1999 period, while income from operations from Covance's late-stage development segment decreased $37.7 million or 66.4% to $19.0 million or 3.3% of net revenues for the year ended December 31, 2000 from $56.7 million or 10.2% of net revenues for the corresponding 1999 period. The reduction in late-stage development operating income is due primarily to the earnings shortfalls in clinical development and biomanufacturing services, a shift in central laboratories business mix and program cancellations and increased investment spending on internet initiatives previously discussed. The reduction in early development is primarily due to softness experienced in certain of our chemistry service offerings, and increased investment spending on our bioanalytical service offering.

    Other expense, net increased $9.5 million to $19.6 million for 2000 from $10.1 million for 1999, primarily due to a $9.0 million increase in net interest expense. Net interest increased primarily as a result of the fact that average borrowing levels and the weighted average cost of such borrowings under Covance's revolving credit facilities were considerably higher in 2000 as compared to the corresponding 1999 period. In addition, Covance completed construction of its new North American packaging facility in mid-1999 and accordingly incurred only approximately six months interest on the funds borrowed to finance this expenditure in 1999 versus a full year of financing costs in 2000.

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    Covance's effective tax rate decreased to 39.0% for 2000 from 40.1% for 1999. Since Covance operates on a global basis, its effective tax rate is subject to variation from year to year due to the changes in the geographic distribution of its pre-tax earnings.

    Inclusive of the $7.6 million after tax impact of the 2000 restructuring charge, the $3.1 million after tax impact of the one-time merger-related charge recorded in the second quarter of 1999, and the $4.6 million after tax impact of the restructuring charge recorded in the third quarter of 1999, net income decreased 66.7% to $15.2 million for the year ended December 31, 2000 from $45.8 million for the corresponding 1999 period. Excluding the after tax impact of these special charges, net income decreased 57.3% or $30.7 million to $22.9 million from $53.6 million for the corresponding 1999 period.

    Year Ended December 31, 1999 Compared with Year Ended December 31, 1998.  Net revenues increased 13.3% to $829.0 million for 1999 from $731.6 million for 1998. Excluding the impact of acquisitions and foreign exchange rate variances between both periods, net revenues increased 12.3% in 1999. Net revenues from Covance's late-stage development segment grew 12.2% in 1999 as compared to 31.9% in 1998, excluding the impact of acquisitions and foreign exchange rate variances between both periods. The slowdown in growth in the late-stage development segment was the result of a slowdown in large clinical orders, the impact of a major contract cancellation due to molecule performance, and a significant reduction in scope of another large program due to sponsor funding pressures. The slowdown was compounded by a moderation of growth in central laboratory services. Net revenues from Covance's more mature early development segment grew 14.1% in 1999, or 11.5%, excluding the impact of acquisitions and foreign exchange rate variances between both periods.

    Cost of revenue increased 14.3% to $553.3 million for 1999 from $484.1 million for 1998 primarily as a result of the 13.3% increase in net revenues. Cost of revenue, as a percentage of net revenues, increased to 66.7% for 1999 from 66.2% for 1998.

    Overall, selling, general and administrative expense increased 8.6% to $128.0 million for 1999 from $117.8 million for 1998. As a percentage of net revenues, selling, general and administrative expense decreased to 15.4% for 1999 from 16.1% for 1998. The decrease in selling, general and administrative expense as a percentage of net revenues is a result of a reduction in certain variable administrative expenses, including recruitment, relocation and variable compensation.

    Depreciation and amortization increased 27.6% to $48.1 million or 5.8% of net revenues for 1999 from $37.7 million or 5.2% of net revenues for 1998 due to increased depreciation expense associated with capital spending and the goodwill amortization associated with the November 1998 acquisitions of Berkeley Antibody Company, Inc. and GDXI, Inc. and the contingent purchase price payments made in 1999 for two acquisitions completed in 1996.

    In order to improve its global competitiveness, better optimize capacity utilization and enhance quality and service worldwide, in 1999, Covance consolidated its regionally based Phase II and III clinical services under one global management structure and formed a unified sales force for its clinical development, central laboratory, packaging and other related clinical support services. Primarily in connection with these actions, in the third quarter of 1999, Covance recorded a pre-tax restructuring charge of $7.7 million ($4.6 million net of tax) consisting primarily of $6.5 million in severance and related benefits arising from the elimination of approximately 165 managerial and staff positions. Severance payments began in September 1999 and continued into 2000. As of December 31, 1999, a total of 138 employees had been terminated and a total of $3.6 million in costs had been paid.

    In connection with the June 1999 termination of a proposed merger, Covance incurred one-time, out-of-pocket transaction and integration related costs (primarily professional fees for investment bankers, attorneys, accountants and consultants) of $5.2 million ($3.1 million, net of tax).

    Inclusive of the $5.2 million merger-related charge and the $7.7 million restructuring charge, income from operations decreased 5.8% to $86.6 million for the year ended December 31, 1999 from $91.9 million for the corresponding 1998 period. Excluding the impact of the merger-related charge and the restructuring charge, income from operations increased 8.3% to $99.5 million, or 12.0% of net revenues, from $91.9 million or 12.6% of net revenues for the corresponding 1998 period. The reduction in operating income as a percentage of net revenues is attributable to the increase in cost of revenue as a percentage of net revenues, the increase in depreciation and amortization, and higher Year 2000 project expenses in 1999 versus 1998. Excluding the impact of the merger-related charge and the restructuring charge, income from operations from Covance's early development segment increased $8.6 million or 25.1% to $42.8 million or 15.7% of net revenues for the year ended December 31, 1999 from

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$34.2 million or 14.3% of net revenues for the corresponding 1998 period. Excluding the impact of the merger-related charge and the restructuring charge, income from operations from Covance's late-stage development segment decreased $0.9 million or 1.6% to $56.7 million or 10.2% of net revenues for the year ended December 31, 1999 from $57.6 million or 11.7% of net revenues for the corresponding 1998 period. The reduction in the growth of late-stage development operating income was due to the softness in clinical development and central laboratory services discussed above.

    Other expense increased $2.4 million to $10.1 million for 1999 from $7.7 million for 1998, due to an increase in net interest expense of $2.7 million partially offset by a reduction in net foreign exchange transaction losses of $0.3 million, in 1999 as compared to 1998.

    Covance's effective tax rate decreased to 40.1% for 1999 from 41.7% for 1998. Since Covance operates on a global basis, its effective tax rate is subject to variation from year to year as the geographic distribution of its pre-tax earnings changes.

    Inclusive of the after tax impact of both the $5.2 million merger-related charge and the $7.7 million restructuring charge, net income decreased 5.7% to $45.8 million for the year ended December 31, 1999 from $48.6 million for the corresponding 1998 period. Excluding the after tax impact of the merger-related charge and the restructuring charge, net income increased 10.3% or $5.0 million to $53.6 million.

Quarterly Results

    Covance's quarterly operating results are subject to variation, and are expected to continue to be subject to variation, as a result of factors such as (1) delays in initiating or completing significant drug development trials, (2) termination of drug development trials, (3) acquisitions, and (4) exchange rate fluctuations. Delays and terminations of trials are often the result of actions taken by Covance's customers or regulatory authorities and are not typically controllable by Covance. Since a large amount of Covance's operating costs are relatively fixed while revenue is subject to fluctuation, minor variations in the commencement, progress or completion of drug development trials may cause significant variations in quarterly operating results.

    The quarters ended March 31, June 30, and September 30, 2000 have been adjusted to exclude interest income earned on notes receivable from the minority shareholders of Covance Biotechnology Services Inc. This adjustment was based upon a re-interpretation of relevant existing accounting rules and not an assessment of impairment.

    The following table presents unaudited quarterly operating results of Covance for each of the eight most recent fiscal quarters during the period ended December 31, 2000. In the opinion of Covance, this information has been prepared on the same basis as the audited consolidated financial statements included elsewhere in this Annual Report and reflects all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of results of operations for those periods. This quarterly financial data should be read in conjunction with the audited consolidated financial statements included elsewhere in this Annual Report. Operating results for any quarter are not necessarily indicative of the results that may be reported in any future period.

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Liquidity and Capital Resources

    Covance has a centralized domestic cash management function whereby cash received from operations is generally swept daily to a centrally managed concentration account. Cash disbursements for operations are funded as needed from the concentration account. From time to time excess cash balances are maintained at Covance, generally for specific cash requirements.

    Covance's primary cash needs on both a short and long-term basis are for capital expenditures, expansion of services, possible future acquisitions, geographic expansion, working capital and other general corporate purposes. Covance has senior revolving credit facilities totaling $300 million (collectively the "Credit Facility"). During 2000, Covance has amended its Credit Facility. Material changes to the Credit Facility include an increase in the cost of funds and other changes in terms, including an agreement to apply all proceeds from the sale of assets or subsidiaries, toward the payment of amounts outstanding under the Credit Facility, with a corresponding reduction in the aggregate facility size. The Credit Facility expires in November 2001. Covance intends to refinance the Credit Facility during 2001 and believes it has a variety of financing alternatives available to it that will provide sufficient liquidity for the foreseeable future. The cost of refinancing will depend upon a number of factors, including the amount funded, the type of financing and credit markets generally. At December 31, 2000, there was $224.0 million of outstanding borrowings and $0.8 million of outstanding letters of credit under the Credit Facility. Interest on substantially all outstanding borrowings during the year ended December 31, 2000 was based upon the London Interbank Offered Rate ("LIBOR") plus a margin and approximated 7.75% per annum. The Credit Facility contains various covenants which, among other things, restrict Covance from engaging in certain financing activities and prohibits certain uses of cash such as paying cash dividends on the Covance common stock. At December 31, 2000, Covance was in compliance with the terms of the Credit Facility. On February 14, 2001 Covance sold its pharmaceutical packaging business and the net proceeds of approximately $95 million were used to reduce borrowings under the Credit Facility. See Note 14 to the audited consolidated financial statements included elsewhere in this Annual Report.

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    Covance Biotechnology Services Inc. ("CBSI") has a $10.0 million short-term revolving credit facility with a bank, of which $10.0 million of borrowings were outstanding as of December 31, 2000. This short-term revolving credit facility carries interest at a rate substantially equivalent to the rate in effect on Covance's borrowings under its Credit Facility and is guaranteed by Covance.

    In 1999, Covance financed its newly constructed North American packaging facility through a five year, $20 million mortgage which bears interest at a rate of 7.72% per annum. This mortgage was repaid in full on February 14, 2001 in connection with the divestiture of our packaging business. See Note 14 to the audited consolidated financial statements included elsewhere in this Annual Report.

    In 1997, a foreign subsidiary of Covance borrowed 13.5 million Swiss Francs from a bank. This loan carried interest at a fixed rate of 2.9% per annum and was paid in full upon maturity in October 2000.

    During the year ended December 31, 2000, Covance's operations provided net cash of $48.8 million, a decrease of $30.3 million from the corresponding 1999 amount. Cash flows from net earnings adjusted for non-cash activity provided $66.7 million during 2000, down $33.5 million or 33.4% from the corresponding 1999 amount of $100.2 million. The change in net operating assets used $18.0 million in cash during 2000, primarily due to an increase in accounts receivable and unbilled services in excess of the increase in unearned revenue, while this net change used $21.2 million in cash during 1999, primarily due to an increase in unbilled services and a decrease in accrued liabilities. Covance's ratio of current assets to current liabilities was 0.78 at December 31, 2000 and 1.51 (0.77 on a pro forma basis reflecting borrowings under Covance's Credit Facility as a current liability) at December 31, 1999.

    Investing activities for the year ended December 31, 2000 used $95.5 million compared to $127.0 million for the corresponding 1999 period. Capital spending for 2000 totaled $95.8 million, primarily for outfitting of new facilities, purchase of new equipment, upgrade of existing equipment and computer equipment and software for newly hired employees, compared to $111.2 million for the corresponding 1999 period. Investing activities for the year ended December 31, 2000 included a cash payment of contingent purchase price of approximately $0.9 million in connection with a prior acquisition. Investing activities during 1999 included cash payments of contingent purchase price totaling approximately $16.8 million in connection with two of Covance's 1996 acquisitions.

    As discussed in Note 9 to the audited consolidated financial statements included elsewhere in this Annual Report, Covance has, and may from time to time in the future, enter into build-to-suit operating lease arrangements. These transactions may allow Covance to purchase the underlying facility and/or equipment or cancel the lease arrangement on various dates over the lease term. In the event of cancellation, Covance may be obligated under residual value guarantee provisions of the leases. Covance has one lease arrangement whereby it has a contingent residual value guarantee payment in the event that Covance terminates the lease and the sale of the underlying facility and equipment results in sales proceeds by the lessor in an amount less than the lessor's unamortized investment in the lease arrangement. Under these circumstances, Covance's maximum payment would have approximated $35 million at the end of 1997 (the first year of the lease) and decreases to approximately $25 million at the end of 2006 (the tenth year of the lease), assuming Covance terminates the lease and the sales proceeds received by the lessor were zero.

Competition

    Covance's Clinical Development Services participates in a competitive industry. Covance believes that this industry has experienced an increase in price competition which is having a material adverse effect on both Covance's late-stage development and consolidated net revenues and net income. Covance has taken actions, as discussed above, to mitigate the effects of this price competition; however, if this trend continues, it could continue to have a material adverse effect on Covance's late-stage development and consolidated net revenues and net income, and additional actions may be required in the future.

Foreign Currency

    Since Covance operates on a global basis, it is exposed to various foreign currency risks. Two specific risks arise from the nature of the contracts Covance executes with its customers since from time to time contracts are denominated in a currency different than the particular Covance subsidiary's local currency. This contract currency denomination issue is generally applicable only to a portion of the contracts executed by Covance's foreign

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subsidiaries providing clinical services. The first risk occurs as revenue recognized for services rendered is denominated in a currency different from the currency in which the subsidiary's expenses are incurred. As a result, the subsidiary's net revenues and resultant earnings can be affected by fluctuations in exchange rates. Some contracts provide that currency fluctuations from the rates in effect at the time the contract is executed are the responsibility of the customer. Other contracts provide that currency fluctuations from the rates in effect at the time the contract is executed up to a specified threshold (generally plus or minus a few percentage points) are absorbed by Covance while fluctuations in excess of the threshold are the customer's responsibility. Most contracts do not specifically address responsibility for currency fluctuations. Historically, fluctuations in exchange rates from those in effect at the time contracts were executed have not had a material effect upon Covance's consolidated financial results.

    The second risk results from the passage of time between the invoicing of customers under these contracts and the ultimate collection of customer payments against such invoices. Because the contract is denominated in a currency other than the subsidiary's local currency, Covance recognizes a receivable at the time of invoicing for the local currency equivalent of the foreign currency invoice amount. Changes in exchange rates from the time the invoice is prepared and payment from the customer is received will result in Covance receiving either more or less in local currency than the local currency equivalent of the invoice amount at the time the invoice was prepared and the receivable established. This difference is recognized by Covance as a foreign currency transaction gain or loss, as applicable, and is reported in other expense (income) in Covance's Consolidated Statements of Income.

    Finally, Covance's consolidated financial statements are denominated in U.S. dollars. Accordingly, changes in exchange rates between the applicable foreign currency and the U.S. dollar will affect the translation of each foreign subsidiary's financial results into U.S. dollars for purposes of reporting Covance's consolidated financial results. The process by which each foreign subsidiary's financial results are translated into U.S. dollars is as follows: income statement accounts are translated at average exchange rates for the period; balance sheet asset and liability accounts are translated at end of period exchange rates; and equity accounts are translated at historical exchange rates. Translation of the balance sheet in this manner affects the stockholders' equity account, referred to as the cumulative translation adjustment account. This account exists only in the foreign subsidiary's U.S. dollar balance sheet and is necessary to keep the foreign balance sheet stated in U.S. dollars in balance. To date such cumulative translation adjustments have not been material to Covance's consolidated financial position.

Taxes

    Since Covance conducts operations on a global basis, Covance's effective tax rate has and will continue to depend upon the geographic distribution of its pretax earnings among locations with varying tax rates. Covance's profits are further impacted by changes in the tax rates of the various jurisdictions. In particular, as the geographic mix of Covance's pre-tax earnings among various tax jurisdictions changes, Covance's effective tax rate may vary from period to period. See Note 5 to the audited consolidated financial statements included elsewhere in this Annual Report.

Inflation

    While most of Covance's net revenues are earned under contracts, long-term contracts (those in excess of one year) generally include an inflation or cost of living adjustment for the portion of the services to be performed beyond one year from the contract date. As a result, Covance believes that the effects of inflation generally do not have a material adverse effect on its operations or financial condition.

Year 2000 Issues

    Commencing in 1997, Covance planned and implemented a Year 2000 assessment and remediation plan. The plan approached the Year 2000 problem from an internal, supplier and customer perspective. As a result of this plan, Covance's information systems have been successfully transitioned into the Year 2000 and Covance's operations have not been adversely affected by Year 2000 computer issues.

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    Beginning in early 1998, Covance began to incur costs and make expenditures related to the Year 2000 project. Covance continued to incur costs and make expenditures relating to the Year 2000 project into the year 2000. These costs and expenditures can be broadly classified into two categories:

    Covance's Year 2000 project is now substantially complete. The cost of internal payroll, external consultants and the net book value of equipment to be replaced, amounts that were expensed as incurred, totaled $8.5 million through December 31, 2000. The cost of new hardware, software and other equipment acquired in replacement of existing non-Year 2000 compliant hardware, software and other equipment totaled $6.4 million through December 31, 2000.

    Forward Looking Statements. Statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as in certain other parts of this Annual Report on Form 10-K that look forward in time, are forward looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, expectations, predictions, and assumptions and other statements which are other than statements of historical facts. All such forward looking statements are based on the current expectations of management and are subject to, and are qualified by, risks and uncertainties that could cause actual results to differ materially from those expressed or implied by those statements. These risks and uncertainties include, but are not limited to, Covance's ability to divest businesses at a satisfactory price, resumption of demand for certain of Covance's chemistry service offerings, price competition in the clinical development services industry, Covance's ability to obtain credit on terms satisfactory to it, Nexigent's ability to develop effective and comprehensive internet-enabled services and tools, and risks and uncertainties set forth in Covance's filings with the Securities and Exchange Commission including without limitation this Annual Report on Form 10-K.

New Accounting Pronouncements

    In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101, Revenue Recognition in Financial Statements ("SAB 101"). SAB 101 summarizes certain of the SEC staff's views in applying generally accepted accounting principles to selected revenue recognition issues in financial statements. Implementation of SAB 101 was required by the fourth quarter of 2000 and did not have a material impact on Covance's consolidated results of operations, financial position or cash flows.

    In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. Implementation of SFAS 133 was delayed by the issuance of Statement 137, issued in June 1999, which delayed implementation of SFAS 133 to fiscal years beginning after June 15, 2000. In June 2000, the FASB issued Statement 138, which is a significant amendment to SFAS 133 and is effective simultaneously with SFAS 133. Covance will be required to adopt SFAS 133 in fiscal 2001. Covance is currently in the process of evaluating the impact, if any, SFAS 133 will have on its consolidated financial position or results of operations.

Item 7a. Quantitative and Qualitative Disclosures About Market Risk

    See Management's Discussion and Analysis of Financial Condition and Results of Operations.

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Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Covance Inc.

    In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders' equity, and of cash flows appearing on pages 26 through 41 present fairly, in all material respects, the financial position of Covance Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Covance's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Florham Park, NJ

January 30, 2001 except for Notes 6 and 14
  as to which the date is February 14, 2001

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COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2000 AND 1999

The accompanying notes are an integral part of these consolidated financial statements.

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COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

The accompanying notes are an integral part of these consolidated financial statements.

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COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998

The accompanying notes are an integral part of these consolidated financial statements.

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COVANCE INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998