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Covance (NYSE:CVD)

Q4 2012 Earnings Call

January 25, 2013 9:00 am ET

Executives

Paul Surdez

Alison Cornell - Chief Financial Officer and Corporate Vice President

Joseph L. Herring - Chairman and Chief Executive Officer

Analysts

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Timothy C. Evans - Wells Fargo Securities, LLC, Research Division

Ross Muken - ISI Group Inc., Research Division

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

John Kreger - William Blair & Company L.L.C., Research Division

David H. Windley - Jefferies & Company, Inc., Research Division

Ricky Goldwasser - Morgan Stanley, Research Division

Todd Van Fleet - First Analysis Securities Corporation, Research Division

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Garen Sarafian - Citigroup Inc, Research Division

Lauren Migliore - Morningstar Inc., Research Division

Sean W. Wieland - Piper Jaffray Companies, Research Division

Operator

Good day, and welcome to the Covance Fourth Quarter 2012 Investor Earnings Call. This call is being recorded. At this time, for opening remarks, I would like to turn the call over to the Vice President of Investor Relations, Mr. Paul Surdez. Please go ahead, sir.

Paul Surdez

Good morning, and thank you for joining us for Covance's Fourth Quarter 2012 Earnings Call Conference and Webcast. Today, Joe Herring, Covance's Chairman and CEO; and Alison Cornell, Covance's Chief Financial Officer, will be presenting our fourth quarter financial results. Following our opening comments, we will host the Q&A session. In addition to the press release, 26 slides corresponding to our prepared comments are available on our website at www.covance.com.

Before we begin the discussion, I would like to remind you that statements made during today's conference call and webcast, which are not historical facts, might be considered forward-looking statements. Such statements may include comments regarding future financial results and are subject to a number of risks and uncertainties, certain of which are beyond Covance's control. Actual results could differ materially from such statements due to a variety of facts, including the ones outlined in our SEC filings.

Certain financial measures we will discuss on this call are non-GAAP measures, which exclude the effect of events we consider to be outside of our normal operations. We believe that providing these measures helps investors gain a more complete understanding of our results and is consistent with how management views our financial results. For a reconciliation of GAAP to pro forma results, please refer to the supplemental schedules included in our press release issued last night.

Now I will turn it over to Alison for a review of our financial performance, which begins on Page 4 of the slide show.

Alison Cornell

Thank you, Paul, and good morning, everyone. Let me begin by covering the special items included in our GAAP results that we have excluded in arriving at our pro forma results this quarter and for the year.

First, we have excluded revenue of $1.5 million and operating losses of $2.9 million for the quarter, as well as $8.8 million and operating losses of $9.3 million for the year from the 3 facilities we wound down and closed in 2012.

The second special item is costs associated with our ongoing restructuring actions totaling $10.2 million for the quarter and $33.9 million for the year.

And third, a $3.6 million reduction to the inventory impairment provision in the fourth quarter based upon the expected disposition of the related inventory.

For the full year, asset impairment charges totaled $39.1 million. There are 3 additional special items that have been excluded that relate only to the full year. They are: the write-off of the remaining $7.4 million book value in a toxicology research product supply company; a $1.5 million gain on the sale of our ownership of an equity investment; and an $11.5 million gain related to the favorable resolution of certain tax matters.

My commentary, which follows, will focus on our pro forma results, which exclude the impact of these items. You may find the GAAP to pro forma reconciliations in the release we issued last night and the presentation we are reviewing today.

Now to the results. Pro forma consolidated net revenue through the fourth quarter were $561 million, up 5.3% on a reported basis from the fourth quarter of last year.

On a constant exchange rate basis, year-on-year growth was 5.9%. Keep in mind that year-on-year growth in comparability was affected by facilities closed in 2012, as well as the 2012 sale of our environmental services business, all of which were included in 2011 results. On a comparable basis, revenue growth was 7%, as detailed in the appendix of the slide deck.

Sequentially, revenues increased $18.8 million, inclusive of a $5.7 million foreign exchange translation tailwind from the weaker U.S. dollar in the fourth quarter.

For the full year, pro forma consolidated net revenues were $2.17 billion, an increase of 3.6% over the prior year, or 4.5% on a constant exchange rate basis. Pro forma consolidated operating income in the fourth quarter was $52.5 million at 9.4% margin. This is a 10 basis point sequential and 160 basis point year-over-year decline, both resulting from the significant increase in spending on our strategic IT initiatives in the fourth quarter of this year.

Pro forma consolidated operating income for the year was $198.2 million at 9.1% margin. This compares to operating income of $215.3 million in the prior year, with the year-over-year comparison affected by the significant increase in spending on our strategic IT initiative.

Pro forma diluted earnings per share in the fourth quarter were $0.73, up $0.01 from last quarter, driven by the very strong results in our clinical development and central laboratories services in Q4. Pro forma diluted earnings per share for the year were $2.70, consistent with 2011. The pro forma effective tax rate was 21.2% for the quarter and 21.3% for the full year.

Please turn to Slide 6 of the presentation. In the fourth quarter, Early Development contributed 39% of net revenues and Late-Stage contributed 61%. For the first time, our revenues from international operations exceeded our U.S. operations at 51% versus 49%.

Now to Slides 7 and 8, where I will review segment results for the quarter. In Early Development, pro forma net revenue was $216 million in the fourth quarter. This represents a $1.9 million sequential reduction on the decline in our discovery support services.

Year-on-year, this is a 7.9% reduction, or 8.1% at constant exchange rates, driven by a decline in revenues in toxicology, discovery support and clinical pharmacology, as well as the exclusion of revenue from the 3 facilities in closure and the sale of the environment services business.

Pro forma net revenue was $861 million for the year, a 7.5% year-over-year decline, driven primarily by a reduction in toxicology. Pro forma operating income in the fourth quarter was $25.9 million, down $1 million from last quarter and down $6.8 million from the fourth quarter of 2011. Pro forma operating margin was 12%, down 40 basis points from last quarter and down 190 basis points from the fourth quarter of 2011.

Sequentially, pro forma operating income decreased on the decline in discovery support services. For the year, pro forma operating income was $83 million, representing an operating margin of 9.6%. This compares to pro forma operating income of $127 million or an operating margin of 13.7% last year. The year-over-year decline was driven primarily by a reduction in profitability in our toxicology and discovery support services.

Turning to Late-Stage Development. Net revenues in the fourth quarter was $345 million, up $20.7 million from the third quarter level in reported dollars, inclusive of the $4.8 million foreign exchange sequential tailwinds. Revenues increased 15.7% in reported dollars versus the fourth quarter of 2011 or 17% excluding the impacts of FX. Year-on-year revenue growth was, again, driven by strong performances in clinical development and central labs, where net revenue was up 22% and 16%, respectively, which more than offset the decline in market access services.

Sequentially, the increase in net revenue was less than central laboratory, followed by clinical development and then by market access services. For the full year, Late-Stage net revenue was $1.31 billion, an increase of 12.5% in reported dollars or 15.2% at constant foreign exchange rates.

Pro forma operating income in the fourth quarter was $73.4 million at 21.3% margin. This compares to pro forma operating income of $64.8 million, or an operating margin of 20% last quarter and to operating income of $59.5 million or an operating margin of 20% in the fourth quarter of last year.

Year-on-year and sequential increases in profitability was driven by operating leverage in both clinical development and central laboratories, which more than offset increased spending on strategic IT projects.

Pro forma operating income for the full year was $279 million, an increase of 20.6% compared to the prior year. Operating margin for the year expanded 150 basis points to 21.3% in 2012.

Moving to Slide 9, I will recap the order and backlog information for the quarter. Adjusted net orders in the fourth quarter were a record $769 million, which represents an adjusted net book-to-bill of 1.37:1. For the full year, adjusted net orders were $2.87 billion or an adjusted net book-to-bill of 1.32:1. Backlog at December 31 was $6.64 billion versus $6.37 billion at the end of last quarter. Foreign exchange aided backlog by $44 million sequentially.

Please turn to Page 10 to review the cash flow information. Cash and equivalents were $493 million at the end of the quarter, a $52 million sequential increase, net of the repayment of $20 million in debt.

At year end, our debt balance was $320 million. No shares were repurchased in the fourth quarter. Free cash flow for the fourth quarter was $61 million, consisting of operating cash flow of $107 million, less CapEx $46 million. Free cash flow for the year was $108 million, consisting of operating cash flow of $260 million, less CapEx of $152 million. We currently project 2013 CapEx at approximately $160 million.

Corporate expenses on a pro forma basis were $46.7 million, or 8.3% of net revenue in the quarter, versus $40.4 million last quarter. The largest driver of the sequential increase was spending on our corporate data center consolidation, followed by increased incentive compensation accruals related to stronger business performance toward year end. And finally, we ended the quarter with 11,790 employees. This continued hiring in Late-Stage Development more than offset headcount reductions in Early Development.

Now I'd like to turn the call over to Joe for his comments.

Joseph L. Herring

Thank you, Alison, and good morning, everyone. 2012 was a pivotal year for Covance. During the year, we implemented several important actions, which helped us maintain our earnings during a period of strategic investment. These actions made us a stronger company and will help us drive earnings growth starting in 2013 and accelerating in 2014.

Let me quickly highlight these actions. First, we intensified our selling efforts. A little over a year ago, we invested in our commercial engine by adding more salespeople, sharpening our sales process and sales targeting and increasing the involvement of our scientific, medical and business leaders in our account development process. These investments continue to pay dividends, as our commercial team delivered record adjusted net orders of $2.9 billion in 2012. This was a 13.5% year-on-year increase that produced an adjusted net book-to-bill of 1.32:1 for the year.

Second, under Alison's leadership, we substantially reduced our cost structure and capacity in our Early Development segment, as well as rationalized our corporate support spending. In total, we expect to realize about $45 million of annualized profit improvement from these actions. Implementation of these initiatives ran a little ahead of schedule.

Third, we advanced our strategic IT initiatives, which are expected to drive greater employee productivity, accelerate drug development for our clients and position us to arrest the growth rate of our IT spending.

And finally, we reduced our share count by over 10% in 2012 through a $300 million stock repurchase program at an average price of $47 a share.

Turning now to fourth quarter results. Adjusted net orders increased to a record $769 million, representing an adjusted book-to-bill of 1.37:1. In addition to these orders, we also had 2 CMV orders totaling $110 million, which we excluded from this adjusted net order total.

The smaller order is a $10 million commitment from a biotech client that wanted to secure specific toxicology rooms and staff over the next 2 years. The larger order of $100 million is a small expansion of our partnership with Lilly, which now contractually runs to at least 2019.

While Lilly continued to outperform its overall commitment to Covance in 2012, as we had ever year since the agreement was signed back in 2008, there was a mix of performance, with Late-Stage services significantly exceeding the minimum and discovery support falling a little below expectations.

The collaborative nature of our relationship and the breadth of our service portfolio allowed us to accommodate the changing mix of Lilly's R&D needs and reach a mutually beneficial agreement. We are proud of our pioneering agreement with Lilly and how it has played out for both parties over the past 4 years. You can learn more about Lilly's perspectives on our R&D alliance in the case study featured in the December issue of Pharmaceutical Executive, as referenced on Slide 11.

Now we'll comment on our fourth quarter segment results. In Early Development, revenue and operating margin for most of our services were roughly flat sequentially, except for a decline in discovery support. To update you on our Early Development cost actions, we came very close to completing all activities during the fourth quarter. So while we expect strong year-on-year benefits from our 2012 cost actions, especially in the first half of 2013, the incremental sequential benefits have nearly run their course.

In toxicology, as projected, revenue was roughly flat from the third quarter level, as both the positive mix and the lower level of delays and cancellations we described to you last quarter returned to the higher levels as expected.

Toxicology orders were in a sustaining level, roughly in line with the third quarter, with more work once again coming from transactional clients than large pharma clients.

With a lot of effort, we are holding our own in a challenging toxicology market, so we will remain somewhat guarded in our forecasting until we see a sustained trend. Keep in mind that we are heading into the historically soft first quarter for toxicology.

In discovery support, business performance in 2012 and Q4 were below expectations, and we expect a sequential decline again in the first quarter. Because this is an emerging fragmented market in the early stages of outsourcing, we are taking a cautious view on this service offering for 2013.

In clinical pharmacology, results were flat from the third quarter, and we expect a similar result in Q1. We recently signed sizable new orders, which should help this business return to a modest growth trajectory starting in Q2.

Rounding out Early Development, research product performance was down from the third quarter, although they did remain profitable. And our aggregate chemistry businesses came in roughly in line with the third quarter performance, with nutritional chemistry and food safety being the outperformer in the group.

Now let's turn to Late-Stage, where performance was better than expected. First, clinical development delivered 22% year-on-year revenue growth, marking the 7th consecutive quarter of constant currency revenue growth in excess of 20%. Operating income grew strongly year-on-year and also sequentially, more than offsetting the incremental spending on our strategic IT projects. Clinical orders were up approximately 40% during 2012, which gives us confidence in our ability to continue to deliver at least mid-teen revenue growth for our clinical development services in 2013.

Moving to central labs, kit volumes continue to build throughout 2012. Comfortable with the continued favorable testing mix, this volume led to sequential revenue growth of $14 million in the fourth quarter and revenue growth of 16% over Q4 of 2011. For the full year, central lab orders were up approximately 25%. Cancellations were similar to last quarter, which is still higher than we'd like for them to be, but below the very high levels we experienced back in 2011. Assuming cancellations remain at 2012 average levels, we expect central labs to grow approximately 10% in revenue this year.

Please turn to Slide 12. It illustrates the operating income trends of our 2 business segments since 2005. The key takeaway from this chart is that the dramatic drop-off in demand for Early Development has been more than offset by our market share gains and increased productivity in clinical and central labs.

The automation, talent and geographical investments we have made to grow these businesses have transformed us into a very different company over the past 5 years.

While Early Development operating income declined by $110 million over that time frame, Late-Stage Development operating income grew by $150 million and now represents over 75% of Covance's segment operating income. With 61% of our Q4 revenues derived from our higher-margin Late-Stage segment, Covance earnings increasingly come from faster growing service lines.

While Early Development remains a very important part of our portfolio, we expect our revenue split will continue to look more like the R&D spending split of our clients, which has always been more heavily filtered to Late-Stage.

Please turn to Slide 13 to discuss the progress of our IT investments. This slide has been updated from the one we shared with you a year ago, as it reflects the actual spending in IT in 2012, which came in roughly where we projected at $201 million. We continue to expect approximately 17% growth in IT spending in -- to $235 million in 2013. And for 2014, IT spending to grow in the 2% to 3% range. This chart also reflects our updated longer-term expectation of IT spending growing around 2% in the years following the completion of our current programs though, aspirationally, we are shooting for an even lower number. This updated chart also plots our actual revenue growth in previous periods, as well as an assumed 7.5% revenue CAGR in 2013 and beyond.

From an operational standpoint, our strategic information technology projects continue to run largely on time and on budget.

Let's turn our attention to the forward look for Covance. For 2013, we are forecasting mid-to high-single-digit revenue growth. This assumes low-teens growth in Late-Stage Development and no growth in Early Development. We expect full year pro forma diluted earnings per share in the range of $2.85 to $3.15.

In terms of the cycling of these 2013 earnings, in the first quarter, we expect EPS in the range of $0.71 to $0.73. Within our view, we are incorporating historical seasonal softness we usually see in toxicology and discovery support services during the first quarter.

This seasonality, coupled with the elevated spending on our strategic IT projects, is expected to at least offset the continued sequential growth we see coming in clinical development and central labs.

Following the first quarter then, we expect to see modest sequential earnings growth as we progress throughout the year, which would deliver earnings at the midpoint of our guidance range.

In terms of bookending the full year range, one possible way to hit the low end would be for Early Development revenues to meaningful decline year-on-year. While we do not expect that to be the case, we cannot rule out the possibility of that happening, especially given the choppy nature of the demand for those services over the last few years.

Another root to the low end of the range would be unexpected large cancellations in clinical or central labs. On the other hand, we could finish near the top end of the range if Late-Stage continues to outperform expectations and/or if Early Development returned to even modest growth, given its significant earnings drop-through at current capacity levels.

Let me close by saying that we are increasingly optimistic about market conditions as we look at 2013 and 2014 for a variety of reasons. First, we believe R&D spending grew more than people expected in 2012, particularly the development component, and we see that trend continuing into 2013.

Second, we think our clients are becoming a bit more buoyant due to their successful navigation of the significant patent expiry issues over the past few years, as well as the fact that FDA approvals of new drugs were also higher than many people had expected, actually, at the highest level since 1996.

On the backside of huge patent cliffs, our clients are eager to push out new products from their pipeline and get them to patients. We see some very interesting new drug candidates in a broad range of indications that include cardiovascular, neuroscience, metabolic, oncology and inflammatory disease.

Finally, outsourcing is an increasingly proven approach for R&D success, and I believe we're going to see continued growth in the levels of outsourcing.

So Covance is well positioned to capitalize on these dynamic, but improving market conditions. By matching the investments we are making in our growth businesses with the significant cost and capacity actions we've taken in our underperforming businesses, we are -- we think we're getting back in balance and well positioned to resume EPS growth. And beyond the cost and productivity benefits of our IT investments, we perceive launching new products and services tied to informatics and using data to help transform the drug development process for our clients.

I'd like to thank Covance employees around the world who take great care of our clients and their projects and help them bring their important medicines to patients around the world.

Operator, you now may open the line up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we will now take our first question from Robert Jones with Goldman Sachs.

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Just wanted to dig into the operating margin assumptions for the segments relative to guidance. On the Late-Stage specifically, we start with that 21.3% you did in fourth quarter. Could you just remind us how much of the IT spend hits Late-Stage expense versus corporate? And then outside of that incremental IT spend, how are you thinking about the organic margin assumption for 2013?

Alison Cornell

Yes, Bob, thanks for your question. This is Alison. Before we go through the question, I wanted to clarify a number that I reported as I was going through. For full year revenue growth on a constant exchange rate basis, our growth was 5.4%, not 4.5%, as I had indicated. So let me just talk a bit about the guidance, starting at Late-Stage. So with Late-Stage, roughly, we would come in at 21% due to the increase of IT expense -- spend in 2013, as well as Q4 favorable mix in central labs returning to more normal levels. So that's how we think about Late-Stage. We ended the year at 21.3% and actually had a full year of 21.3%, but would look at roughly 21%, again, due to the increase of IT spend in 2013 and then the favorable mix in central labs returning to the more normal level. From an Early Development perspective, we'd look to come in, say, above the 2012 results of 9.6%, but below the fourth quarter level of 12%. So something in the 11% range due to Q1 seasonality. And again, I'm speaking to the midpoint here. So there's several ways to get to the midpoint, this is just one way. And then from a corporate perspective, due to IT spend, we see corporate moving closer to 8% of revenue in 2013 versus the 7.5% that we saw in 2012. As Joe had mentioned, keep in mind that these results, if these assumptions are at the midpoint of the range only, to get to the higher end of the range, we might see a mix of test and central labs more in line with the second half of 2012, for example, or some growth in Early Development. The lower end of the range would likely be characterized by decline in Early and perhaps unusually large cancellations in Late-Stage.

Robert P. Jones - Goldman Sachs Group Inc., Research Division

That's really helpful, Alison. Then, if I could just ask a follow-up, a longer-term big picture question around free cash flow. As we think about the CapEx spending beyond 2013, could you maybe just share your thoughts on your view of the company's ability to generate free cash flow?

Alison Cornell

So we see our earnings in 2013 and beyond improving and our capital spend roughly staying the same. So we would expect our free cash flow would improve over time.

Operator

And we'll now take our question from Tim Evans with Wells Fargo Securities.

Timothy C. Evans - Wells Fargo Securities, LLC, Research Division

Joe, could you maybe comment on your longer-term view for the central lab? Would you expect the growth at some point to kind of moderate back to the same levels as R&D spending growth? And if so, how long would you expect it to take to kind of normalize to that level?

Joseph L. Herring

Well, Tim, first of all, I would say there is no such thing as a normal central lab level. I mean, we really have had 4-plus years of very good order performance and at a fairly similar level. And 1 year, it stood out 30% revenue growth. Onetime, in constant dollars, it was a shrink of about 12%. And this past year, in reported dollars, up a little less than 10%. So it's multi-factorial in terms of where the kits are coming from, which drives transportation, revenue, market share gains. The richness of it gets in and all of that sort of cobble together. So again, I think if we sort of stay on the trajectory that we saw this past year, recall 2013 is 10% revenue growth. I can give you some scenarios where it can be better than that. But if we have cancellations, it would be slower than that. So I guess maybe my answer would be as we continue to take market share, a couple of bps a year, we certainly did that in 2013. So if you said, "Hey, R&D spending growth is going to be about 4%, and everything is already outsourced, maybe Covance would go 6% and maybe add a little bit for biomarkers and richness of test and global expansion and we get to 8%." I mean, I think that will be a way to model it. But to be honest with you, it's bounced around quite a bit. And last quarter, it was up substantially more than anything in the last 5 years.

Operator

And we'll take our next question from Ross Muken with the ISI Group.

Ross Muken - ISI Group Inc., Research Division

So on the IT front, what's been the feedback so far from clients in that? Are there any areas you could point to where you're far enough along in the process or where you had sort of the discussions with those, particularly on the strategic side where they swell? That's going to be a major advantage. We're glad you did this. This should help you. What's been the general sort of header or feedback you've had on some of those investments?

Joseph L. Herring

Well, Ross, thanks for the question. I think when you think of it, the biggest single item would be in the application infrastructure consolidation, going from 39 data centers to 2. They haven't seen that. I think they generally think of that as plumbing and -- however, increasingly, clients who are entering into big strategic relationships and looking longer term, they want to know about the sustainability of their CRO provider. So we expect to be, in the not-too-distant future, giving them tours. And I think they're going to see facilities redundancies, capabilities throughput that will be shocking to them. I think that will be a good guide, but that's yet to happen. If you look at the 2 -- the investments we're making on our clinical tools, largely, we're automating some things that clients benefit and have seen. So for example, our ability to mine our data depicts high-performing sites and to accelerate clinical trials, we've been doing that over the last few years without a lot of fanfare. And that's the reason why our clinical business -- or one of the main reasons why our clinical business has been growing greater than 20% for 7 consecutive quarters. The issue is, is we needed to upgrade some of our infrastructure, as well as put some of our algorithms in a more automated basis so that we can [indiscernible] more expensive. So let me put a sharper point on that. So this benefit that we've been bringing to clients is to a limited number of clients because it's done manually. And so our big 7 strategic clinical clients have been disproportionately getting that and -- but only for some of their projects. And on the backside of these investments, we will be able to do that more of a push a button, have all the data, provide analysis and consulting with it for a broader range of clients and maybe even selling that as a package product in some way, whether or not they use Covance or not. So that would be something that they're already seeing and benefiting. I think the electronic trial master file is something that very few clients have, some CROs have. But the paper chase associated with the clinical trial is getting increasingly cumbersome. So I think they've seen what we're doing and are giving us positive feedback. But I think we're going to have to have it all in place and actually start to use it on trials. So Ross, I guess, maybe the short answer is they've seen some. Most of the client benefits, we're going to have in place and have it revalidated and tested and be able to show it and demonstrate it. So I'd say most of that is ahead of us.

Ross Muken - ISI Group Inc., Research Division

Great. And maybe a quick one for Alison, on the capital deployment side. I mean, you guys bought stock aggressively at much lower levels. It's obviously been a good investment. I mean, as we're thinking about going forward with this year, sort of free cash and still having some of the balance sheet, although obviously not necessarily in the U.S. where it's as easily accessible. I mean, how should we think about where we are from that perspective? And what's sort of built into the forecast relative to any assumptions, if there is any?

Alison Cornell

So from a -- let me talk about first about our share repurchase. So we were pleased as we repurchased $300 million worth of share throughout the year at an average price of $47 per share, which was slightly more accretive than we expected. So we used the $20 million leftover that we had originally planned, if you will, from a cash perspective on debt reduction instead. And so as we've done in the past, what we would expect to do is, based on business and market conditions, use the remaining authorization opportunistically. And then from a share repurchase perspective, we do not have any share repurchase built into our planned assumptions. But once we complete the remainder of the share repurchase, we would probably just revisit that. But at this point in time, there's nothing built-in.

Operator

We'll take our next question from Greg Bolan with Sterne Agee.

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

So you guys have put up, obviously, the most impressive clinical revenue growth in the industry over the past 12 or so months. And I was just wondering how much strategic alliances with Lilly, Otsuka, Sanofi and others are contributing to the Phase III 0 revenue growth?

Joseph L. Herring

Yes, well, Greg, there are a couple of clients who people know are either are working with or starting to work with Covance, and you know what those names are. But there are several others who we've never announced and the client has never announced. The way I would characterize is there are roughly 7 top 20 pharma companies where Covance is 1 of 2, or 1 of 3, and we're increasing literally with all of them. We are not overly tilted to anyone. The large strategic deals that we've signed that are very visible took a little longer to get going because they had other agreements, but they're starting to ramp. So I would characterize it as 7 large companies that are increasingly seeing the benefit of working with Covance and trying to find a way to give us more work. And Greg, I'm delighted with how we have built the clinical business on quality, time savings for clients, high employee engagement. Now we're about to put tools in their hands, which will make it easier for them to do their work faster and more accurately. And clients see that. They feel it in our culture. They see it in our performance. One of those large clients, because of their CMV agreement, literally, the CEO forced them to use Covance for a large clinical trial and they really didn't want to. And we mined our database and look at the investigators that they thought could do the trial, and we're able to find a way to do the trial with 40 less investigators than they had planned for. And a combination of fewer investigators and other productivity we put in the trial before we started, they reported to us and back to their CEO that they were incredibly impressed with Covance's capabilities, and in fact, reported that we saved them $23 million on the trial before it ever even started. So it's really delighting these clients and growing with them as opposed to going out and taking wild swings on pitches, on studies we can't do or using commercial terms that are not in anybody's best interest. So it's more focused than you might think, but it's really -- it's a quality story.

Gregory T. Bolan - Sterne Agee & Leach Inc., Research Division

No doubt. And then just a kind of follow-on on Late-Stage. So is there a threshold where any incremental improvement in central labs revenues would cause incremental margins to accelerate? So if you think about capacity utilization in the central lab today, then if this utilization rate continues to improve, then do incremental margins accelerate? Or do they stay the same, Alison?

Alison Cornell

It's -- I'd say it's a hard call per se in that there is a lot of things that influence the margin. It's the test within the kit. It's a geographical mix. So there is no one thing you can point to, to say, as a rule of thumb, use X in terms of incremental margins acceleration. But -- so...

Joseph L. Herring

I guess, Greg, what I would say is we are nowhere close to all-time record margins in central labs. And as you know, we had a combination of things playing in our favor several years ago and constant dollar revenue grew 30%. So we were behind a little bit in hiring. But since that time, we've added a lot of automation and productivity and process improvement. So I think with higher volumes, we'll probably have higher drop-through. But Alison's pointed out it's not as perfect and linear and predictable as maybe you would like.

Operator

We'll take our next question from John Kreger with William Blair.

John Kreger - William Blair & Company L.L.C., Research Division

Joe, could you just maybe expand a bit on the thing you said right at the end of the prepared remarks. As you sit down with your key clients and talk about sort of their key objectives in '13 versus '12, how are you seeing those evolve? And I guess the underlying question that I'm trying to get at is if clients are moving a little bit back into a growth mode for their R&D spending, why do you think discovery services aren't growing at this point?

Joseph L. Herring

Well, John, as you look back over the last, say, 5 years, as you know, they have been winding down discovery facilities in a very big way, closing them, consolidating them. And still -- I still think they have as much internal capacity as they used to. And increasingly, when you ask them about discovery, they immediately tell you about a company they just bought or they're in negotiations to buy or a molecule they in-licensed or an affiliation they have with an academic center or what they're doing with the government agency. It's not about their campus that's spitting out a bunch of new products. So we're serving the client who historically has an outsourced discovery. And keep in mind, even though you're basically doing similar studies to a GLP, they're smaller, they're unregulated, they have to happen in near real-time. And it's more of a hand in glove than running a GLP study that sort of -- they already know what to expect, confirm it, so we can get a regulatory box check. Discovery support is really about taking 100 to 1,000 molecules, sort through them to pick a dozen for consideration in development. So as I said, it's in its infancy in terms of outsourcing and how we make it work and how they make it work. The clients are in complete disarray, it's too strong of a word, but their model is evolving. And so their ability to predict the number of molecules and where they're going to come from and how they're going to characterize them is difficult. And then the technologies, I mean, they're moving much more towards proteins and peptides, large molecules. And a lot of that is new for some of the large pharma companies. So I guess I'm struggling to give you a direct answer, John, but those are some of the things tumbling around as we look at this market.

John Kreger - William Blair & Company L.L.C., Research Division

That's very helpful. And maybe just a quick follow-up on that same topic. Are you continuing to see a shift in client spending patterns from Early Stage Development towards Late-Stage? Or are you seeing that starting to balance out?

Joseph L. Herring

Well, John, that's a pretty big macro number, and I don't know that we have crystal clear information on that. But I know -- I was recently at a conference and I sat with 3 heads of R&D and 3 CEOs, and all you can get them to talk about was what's in their late-stage pipeline and how critical they are and can we deliver the projects after in some way and what is the evidence they need to position effectively in the marketplace from a comparative effectiveness or from a safety profile standpoint. They're just not as focused on Early Development. And I don't see that changing in a big way in 2013, at least not in the first 6 months. But I do think their tone is more positive, and I try to say that in the prepared remarks. I think a couple of them said, "Do you realize I covered $2 billion in lost profits with the initiatives over the last 2 years, and now we're in the back side of it?" And our pipeline looks pretty well. If we can have just a couple of things hit, we're in a very, very good position. And then most of them, their stock price is up 10%, 15%, 20%, 30%. So it feels to me like back to work. And not that they weren't working before, but back to work on the pipeline, let's get some of these Late-Stage things out and then we will worry about Early Development. So that's sort of how we're seeing it.

Operator

We'll take our next question from Dave Windley with Jefferies & Company.

David H. Windley - Jefferies & Company, Inc., Research Division

Late-Stage results have been building, but yet, surprisingly, impressive nonetheless. So Joe, slightly different twist on several central lab questions. When I look back through the model, as you've kind of alluded, the central lab revenue performance has cycled up and down. In the up cycles, a couple of different times, '05, '06, in 2009. It can get to mid-20s or even 30% growth. And I guess, I'm curious, as this has accelerated each quarter in 2012, if there are structural reasons why it can't continue to accelerate from this 15% that you just saw? I know you mentioned the kind of continuing cancellation levels at what you've been seeing, but I'd just love for you to elaborate on 4 strong years of orders. And could it accelerate the way you've seen in past cycles?

Joseph L. Herring

Well, Dave, thanks for your question. And I guess the high end of the range says that it could. But we try to get some reasons why maybe not. I just think we're trying to model around something that's within a reasonable range and have some option value if that happens. If the mix could get better, the geographic could improve, fourth quarter volumes, kit volumes were up 5.3% sequentially and 12% year-on-year. I mean, those are really good numbers. And we're 3 weeks into the new year and the first quarter was running a little higher than that than those levels, the full fourth quarter levels. But I think we'd rather show it to you in the P&L when it comes. And as you well know, Dave, you've been to these facilities, they are very scalable. And if the volume comes in, we're not having to build facilities or add a bunch of stuff. We can run the samples. So we'll see.

David H. Windley - Jefferies & Company, Inc., Research Division

Okay, okay, great. And then as a follow-up, shifting over to IT. I think I've understood through your comments around this the last few times, you've talked publicly about that low single-digit growth rate 2014 and beyond, but aspirationally hoping for something better than that. I wondered if you're yet in a position to talk a little bit about what efficiencies in non-IT spending the IT projects will generate. So reductions in the rate of growth of headcount or other types of efficiencies that we should be thinking about in other parts of our P&L modeling rather than just kind of modeling out the 2% growth rate on the IT portion.

Joseph L. Herring

Well, that's a great question, Dave. The problem, at least in my historical experience, when you're talking about characterizing those productivity improvements is sort of like forecasting Six Sigma savings. You sort of give into some circular math and assumption built on an assumption, and we try not to get too carried away. A part of the savings that we announced last year contemplated these systems going in place, and we've captured a little bit down on the corporate side and a little bit on clinical. But the majority of it is ahead of us. And we could -- I would have to go through specific examples of the way the clinical team is doing their work now versus how they will do it the new world to help you see that and I don't have that prepared and well thought through for this call, but maybe will on the next call or 2. But suffice it to say, we're doing a lot of things manually and a semi-automated way that will become much more automated, which we think are going to give good benefits and ultimately, allow us to be more competitive in the marketplace. And some of those will be passed along. So I know I'm not giving you a specific answer, Dave, but that's kind of how we're thinking about it right now.

Alison Cornell

If I could add to that a little bit, I think another way to think about it beyond cost savings is cost avoidance. If we think about the efficiency that we would get from any tool where we might hit a threshold in terms of needing to add one more person, what we'll be able to do is more with fewer and thereby avoid adding the head to begin with. And I call that -- I think about that as cost avoidance. So it's the combination of cost avoidance and cost savings that will result from the investment in these tools.

Joseph L. Herring

Dave, let me just add. You didn't ask this specifically, but I think it's in your question, is benefits of this, is we are going to be bringing tools to clients that they aren't used to seeing internally or from other CROs in terms of being able to predict and forecast trials, estimate trial supplies, estimate headcount and deployment, as well as metrics and dashboards and really been able to stay on top of their trial in real time. And again, we've done this in limited fashion with a couple of our strategic clients. But to the extent that we can make that available to the broader market is pretty exciting. So I guess I'd say stay tuned, and we'll try to be a little bit more specific as things roll out. But we're excited about where we're going, that's for sure.

Operator

We'll take our next question from Ricky Goldwasser with Morgan Stanley.

Ricky Goldwasser - Morgan Stanley, Research Division

It sounds like you are seeing increased demand from your larger customers in -- but on the other hand, funding seems to be trending up in the fourth quarter as well. So what are you seeing from your smaller biotech clients?

Joseph L. Herring

Well, Ricky, we have a slide in the appendix of our deck that shows that biotech funding was up last quarter and at the highest level in quite a while. It's picking back up. And I would say that we're seeing a couple of things. One is the molecules, they have a lot of promise of getting funded, and we see more volume in preclinical from these types of clients. And that's really what drove the order success we had in the back half of the year and the fact that we were able to sort of sustain in that business. We're also continuing to see clients that I would call midsized biotech clients who aren't everyday household names who have pretty exciting clinical development projects and have been able to attract funding so they can take them all the way through clinical trial and then maybe partner after approval. So I would say modestly more encouraging than what we've seen in the last few years. And if that trend sustains, then obviously it'll be good news for our Early Development business throughout the year. And we like some of these -- a few of these molecules or companies, midsized companies that we think are highly differentiated and potentially platform molecules. So if we do a good job with them and they get -- they launched and have a successful drug, then it'll be a company maybe you haven't heard of before but can build a sustaining book of business with them. And the other fun thing about working with them for our clients is we really are in the drug development process, helping them plan trials, execute trials, make critical decisions as opposed to being arms and legs.

Ricky Goldwasser - Morgan Stanley, Research Division

Okay. And you talked about the assumptions that are embedded in the low end and the high end of guidance. Can you provide us some sense as to your backlog? What percent of your backlog is expected to be recognized over the next 12 months so we can tie it into these assumptions?

Joseph L. Herring

Well, Ricky, that's a really difficult calculation because, obviously, we got CMV and then you got regular backlog. And within that backlog -- well, that backlog is overwhelmingly clinical and central labs. And even with that -- in that bucket, there's some 7-year cardiovascular outcome studies and there's some shorter-burning anti-inductive studies that run 2 years. And then the second biggest chunk of that would be Early Development, and that's a blend of 5 days' worth of backlog in nutritional chemistry and 40 days in preclinical and maybe 6 to 12 months in early clinical Clinpharm type of study. So it's really -- that's -- we forecast based on executable backlog on an ongoing basis and on a monthly basis. But looking at it for the full year, I just think it's almost impossible math to get through.

Alison Cornell

I think that from a Late-Stage perspective, just to add to what Joe said, in any given year, and this is consistent historically, we walk into the year with 80% to 85% of our revenue in backlog. And so just to give a comfort level in terms of our revenue forecast, it's not that we need to sell a lot in order to achieve the revenue number. It's backlog that's already been sold and where we sell the remainder by the end of the year in order to achieve the revenue number.

Ricky Goldwasser - Morgan Stanley, Research Division

Okay. So basically kind of like, to your point, just pretty good visibility on the clinical side?

Alison Cornell

Absolutely.

Joseph L. Herring

I think this year, clinical has 88% of their revenue for the year already booked in backlog and the studies are chugging. So at this point, Ricky, we're selling for maybe some fourth quarter revenue and a set of 2014.

Operator

Our next question comes from Todd Van Fleet with First Analysis Securities.

Todd Van Fleet - First Analysis Securities Corporation, Research Division

I'll be quick since time is late here. Alison, I apologize if I missed it, the tax rate for 2013, did you say what that is expected to be?

Alison Cornell

The tax rate for 2013 would be consistent with 2012, so I think that was 21.3%.

Todd Van Fleet - First Analysis Securities Corporation, Research Division

Okay, great. And then, Joe, Clinpharm is overall kind of broad activity in the industry, I think pretty much tied where toxicology has been to this point. I mean, are we going to see kind of modest to no growth out of that business? Is it just too tied to toxicology? And then somewhat related to that, just curious as to your latest thinking on how long we can see -- how long will it take before the kind of stagnation in toxicology overall? Let's say, we have kind of a continued flat environment here, begins to impact the pipeline for Late-Stage activity.

Joseph L. Herring

Well, first of all, from a Clinpharm perspective, we have called it -- it was flat -- going to flat. If you look in our slide deck, we have a chart called Markets We Serve, and we won a couple of very large orders from sort of nontraditional clients that need to use those services. In my prepared comments, Todd, I said that we expect to return to modest revenue growth in that business starting in Q2. And so I would call it modest, but it's sort of protecting downside risk in that business and that feels pretty good. As it relates to the preclinical flowing through the clinical, our clients are not paid any longer for shots on goal. So piling up a bigger pile of hay to hopefully find more needles in the haystack is too expensive and it hasn't worked. So what the clients are trying to do is clear out a bunch of that hay and get down into the needles and find the needles, so to say. So fewer molecules, more characterized molecules going from preclinical into clinical. And so for them to be successful with this lower flow coming out of Early Development, success rates have to go up, and our data shows that success rates are going up. And keep in mind that a very small single-digit percentage of Early Development molecules ever make it to clinical trial and even smaller percentage ever make it to market. So you're sort of comparing apples and oranges there a little bit. It all comes down to success rates in early clinical and later stage. And if they stay on that track, I think the whole industry will be in very, very good shape.

Operator

Our next question comes from Eric Coldwell with Robert W. Baird.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

First, a couple of just tactical ones. Tax rate finished the year at a pretty good level, 21% in change. What should we be thinking about for 2013? Is there anything that disrupts that rate one way or the other?

Alison Cornell

I would think about 2013 the same way as 2012, so around 21.3% there, thereabouts.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

Great. And then, oftentimes, when a company show improved performance after a period of some pressures, obviously, there's some catch-up to get the staff back on track with compensation wages, go back into a bit of a hiring mode, et cetera, selling bonuses, obviously, up on the better bookings. Can you quantify what kind of impact that might have to the margins this year in terms of going back to a more normal Covance model for wages, inflation, things of this sort?

Joseph L. Herring

Yes, I would say, in the fourth quarter, we had the top-up bonuses. We're not forecasting anything but 1x so far. To the extent that performance exceeds expectations and gets up to the higher end of the range, then, obviously, we would be to feather that in.

Alison Cornell

So Eric, if you take a look, even at 2012, overall, from an incentive comp perspective, we're on target across the company. So while there's pluses and minuses across the different business units, across the company, we're on target. And the other thing I'm not sure that we've shared in the past, but we've consistently given merit increases and have not backed off from that despite our challenges across some of the businesses. And so those merit increases are built into our numbers this year, and we see that just really as being our normal course of business.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

That was a great response. That's what I was driving at. Last one, on the IT front, when you went through the details a year ago and talked about the various types of spending, whether it be staff mobility and productivity tools, central lab, data centers, some of the forecasting and analytics tools, I'm curious if we can get an update on where you are with those various programs. Obviously, data centers are going to be the big one moving forward. But where are you with the various initiatives in terms of timing and completion, if you could go that far?

Joseph L. Herring

Yes, for the data centers, our data center in Ireland was opened last year. And we're probably at the approximately 2/3 mark in terms of applications virtualized and moved into that environment. In terms of the U.S., we finished that data center provision that did all the validation studies and have started adding in different software onto that. And I'd say we're maybe in the 15% range, maybe 20% range. But we've got a lot of work left to do. I guess our feeling is that the project's been largely de-risked in that we found the facilities, we got the right stuff in, it's working, it's being validated. But to move as much data and as many systems as we have into those and then run them in parallel and test them and validate them, it's just a lot of work to keep that needle moving. But most -- [indiscernible] Alison and I get an e-mail and said another system is now in the data center, it was test provisioned, it worked. And so those are always good night messages on Sundays. So I think we're pretty much right on track. I don't know, Alison, do you have any other comment about the data centers?

Alison Cornell

Not the data centers, but I think from a clinical system. Those remain on time, as well as on budget. And as we roll things out, where we are at this point is we begin the rollout with new studies or small studies and progressively build on a go-forward basis. And that's where we are from a clinical perspective. And as I think we've shared in the past, from a central lab systems perspective, we continue to do a slower rollout there. Although on our project plan, that's something where we take our time, make sure that it's right and then work from there since that's one of the systems that we built on our own since we're not implementing something off the shelf. We're taking our time and doing it very prudently to make sure that everything goes properly. But again, it's -- what our time frame is, is consistent with the time that we've shared with you. It's still on track.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

That's great. Have you been able to decommission any of the, I think it was 36 or so, disparate facilities with servers before? Have you been able to decommission any? Or are all of those still up and running until you complete Ireland and the U.S.?

Joseph L. Herring

Eric, most of those were x U.S. And as we continue to build in Ireland, we're closing those down as we go. So I don't have the exact number, but we're making good progress there.

Operator

Our next question comes from Tycho Peterson with JPMorgan.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

I just have a couple of quick ones. Starting off, you had a question at the very beginning for Alison on the early stage margins, and I know you're talking about 11% for this year. Can you maybe just give us a sense of where you think you'll exit the year on early stage margins? And the real question is you've talked previously about an aspirational goal of kind of 15% margin in that business. So how should we think about, ultimately, when you can get there?

Alison Cornell

I think from a, I'll call it, modeling perspective, not we're giving guidance per se, but from a -- in developing your assumptions, I would assume flat with fourth quarter in terms of our exit margin. And the reason for that is, as we've guided to flat Early Development to the extent that our margin improves or our volume improves as we exit the year, then you'll see a higher drop-through. And that is our aspiration. But just in terms of how to think about it, I would think about a lower Q1 and even flat Q2 to Q4. And we'll bake things in as we move through the year.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Okay, that's helpful. And then just the second question, you talked a lot of the IT investments and data aggregation initiatives. Can you talk us to whether you're getting increased demand from pharma around Phase IV? And we do hear about this more in the industry so talk to your discussion with pharma there. And then also, to the extent you're talking more with payers, I mean, we hear a lot from United and others about comparative effectiveness data and health economic studies, are you building more of a dialogue with payers around some of this data aggregation?

Joseph L. Herring

Tycho, I wouldn't want to get too carried away with that. I'd say some, but I don't think it's meaningful. I wouldn't necessary build really either one of those into your model, either Phase IV or payer kind of revenue. Not where we are right now.

Operator

We'll take our next question from Garen Sarafian with Citi.

Garen Sarafian - Citigroup Inc, Research Division

Just a couple follow-ups at this point on prior questions. The first one being, Joe, I think you mentioned previously that your clients, presumably more big pharma-type partners, don't really roll out their budgets until mid-to late February of each year. But you're also sensing a more positive tone from your conversations. So I was just wondering, more at a macro level, what are you assuming in your projections for this year and how it compares to prior years?

Joseph L. Herring

I guess maybe we're mixing 2 things a little bit there, Garen. One is just their tone and attitude, particularly as I sat with them in early January, just felt like it's time to get back to work, not that they weren't working, but get back to work on their pipelines. And I wasn't saying, "Oh, well then, what's your budget?" Just -- it wasn't -- it was more of a casual partner-type discussions. And in reality, whatever budget they have has probably not been -- probably not and has not been rolled down to how much is the development spend, how much is preclinical spend and that type of thing. So I think it's -- I would call it in the normal process. And it's just a little bit too early to -- a little bit too early to call it. And if I were them, I'd probably rein it in pretty tight until we see how the year goes. There's a lot of macroeconomic factors that they're looking at right now. I'll just say it's a little too early to call that.

Garen Sarafian - Citigroup Inc, Research Division

Got it, fair enough. And then getting back to central labs, you're clearly gaining market share. Could you just elaborate a little bit as to what's going on in the marketplace that's allowing you to gain share? And maybe if -- is it more independent sales? Or is it cross-signed to current clients? Anything like that?

Joseph L. Herring

Well, if you look back over the last 3 years, we've either suggested or outright said our client went to sole source, or our client has agreed to include us in 90% of all central lab quotes, or we're going to get a minimum of 90% of all central lab business. And what happens is those clients don't immediately take every study and give it to Covance. So what you've seen is pressure building up, which is -- and what I mean by that is they say it's going to go to Covance. Well, first, you got to win the trial and then it's got to start and then kicks after -- start building and then it produces revenue and then you compare that revenue to the market. So central labs tends to have a, I would characterize it as, a long sine wave. When it starts improving, it tends to improve for quite a while. When it starts to soften, it tends to soften for quite a while. And if you stack up the order performance that we've had, again, central lab orders for the full year were up 25%. So if cancellations continue to be at a more moderate level, then we're going to take market share again this year. So we'll see. But I think it's really -- we're just seeing the benefit of the order performance. They're either sole source or nearly sole source agreements that they won over the last couple of years. And we're chasing some more now.

Garen Sarafian - Citigroup Inc, Research Division

Got it. And then if I can just throw in one housekeeping question. On the quarterly revenues, you also pointed out in the prepared remarks and the slides that non-U.S. sales now eclipsed the U.S. sales. So what's behind that shift? And how does that -- what's going to -- how is that impacting your foreign exchange strategy going forward?

Joseph L. Herring

Well, I'll comment and then I'll let Alison talk about our foreign exchange strategy. But we continue to be on a sort of patient chase around the world. I mean, where can you find quality investigators who understand western GCP and have patients that they can enroll in a clinical trial and pass our quality audits and our client's quality audits? And increasingly, it's difficult to get patients in the U.S. and Western Europe that aren't on a bunch of other medicines and doctors who have the time and the interest in clinical development. I was in 19 countries last year and I can tell you, there's a lot more enthusiasm for being involved in clinical trials in emerging markets, and this is a generalization. But more so than in the U.S., both from a patient standpoint, from an employee standpoint and a physician standpoint. They want to be part of the global community, and they're willing to work extra time and effort to credential themselves to play on the stage of the -- as a global clinical investigator. So we're taking advantage of that. And it's helping us recruit faster. Our data is as good or better. Our employee satisfaction is off the charts in these emerging markets. And I think that churn is going to continue for the foreseeable future.

Paul Surdez

Operator, I'm sorry, we have 2 folks left in queue. I'd love to get them in since we've over our time. If you could please take the next question.

Operator

We'll take our next question from Lauren Migliore with Morningstar.

Lauren Migliore - Morningstar Inc., Research Division

Just a quick big picture question. Could you provide us with your current update on the CRO market size, the current level of CRO penetration, where you expect that rate penetration to go over the next 5 years?

Joseph L. Herring

Wow, well, it depends on whose numbers you believe. We don't have a 2012 summary number yet in terms of market size. But the $25 billion-ish probably kind of a range, maybe a little higher than that. In terms of the percent that's outsourced, is it early? Is it late? Is it discovery? All rolled up together, call it something in the 45% range, something like that. Once we have final year numbers, maybe on the first quarter call, we could provide some sort of a more specific update. But if you're talking baseball game, we're in the, maybe, third or fourth inning and a ways to go.

Operator

Final question comes from Sean Wieland of Piper Jaffray.

Sean W. Wieland - Piper Jaffray Companies, Research Division

Joe, a question on your last statement in the prepared remarks, and you've touched on a little bit to the Q&A. But you said -- I think you said something along the lines of you use data to transform the drug development process. So how could you think the data platform or an analytics platform could truly transform this industry?

Joseph L. Herring

Well, first of all, it's hard to find a business process that's more bloated, broken than drug development. And I don't mean -- I've been a part of this industry for almost 17 years. It just -- it doesn't use a lot of tools that modern businesses use. It's not as process oriented as a lot of modern businesses. The list just sort of goes on and on and on. And one thing I would characterize that is the single biggest issue is that people continually don't have facts and data for decision-making and to do probabilistic forecasting and to make decisions in real time. And it's still very much a disaggregated process. And if you're in a pharma company that's been $5 billion, $6 billion, $7 billion a year in 20 countries, they just struggle to make it super-efficient. I also see that, as pharma companies are trying to reduce spending, they're no longer investing like they were, at least partially in IT system, data aggregation, decision-support tools like they thought they were going to do. And increasingly, we see clients looking at our single instance global toxicology systems and are coming single instance central lab, clinical trial. The fact that they are integrated, we can pull data, make comparisons, report things in near real-time, use algorithms to forecasting and provide decision support. I mean, we got tools coming at the industry no pharma company has ever had. And they'll be conservative, but increasingly, we use it for these smaller midterm clients and just beating the pants off of a big company in terms of clinical trial execution. And so I think we and a couple of other people in our industry are very focused on this. It's very expensive. It takes time. But I do think it's going to transform drug development in a very meaningful way. And if you can go on to portals and you're doing most of your work with Covance and see all of it in a way that you never could and then help you make better decisions, a, you look better at the executive meeting when you're reporting on R&D and what the costs are. I mean, I had dinner with the client just recently. They don't even know how many people they have in R&D and how their spend and productivity compares to their top competitors. You think, wow, you'd never survive in the CRO industry if you didn't know that almost off the top of your head. But they don't. And so I see us being a big part of the solution, and frankly, the CRO industry being a big part of the solution. And they don't have the budgets to do that internally anymore. It's just -- it's not going to come from the internal pharma largely.

Paul Surdez

Well, thank you, everyone, for all your questions today. If there are follow-ups, I'm happy to take them at my desk. Feel free to give me a call. And I hope you all have a great, non-chilly weekend.

Operator

This does conclude today's conference call. Thank you all for your participation.

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