Executives
Joseph Herring - Chairman and Chief Executive Officer
William Klitgaard - Chief Financial Officer, Principal Accounting Officer, Corporate Senior Vice President and Treasurer
Paul Surdez - VP of IR
Analysts
Rafael Tejada
Robert Jones - UBS
Ross Muken - Deutsche Bank AG
Ricky Goldwasser - Morgan Stanley
Douglas Tsao - Barclays Capital
Stephen Unger - Lazard Capital Markets LLC
Tycho Peterson - JP Morgan Chase & Co
Eric Coldwell - Robert W. Baird & Co. Incorporated
John Kreger - William Blair & Company L.L.C.
David Windley - Jefferies & Company, Inc.
Greg Bolan - Wells Fargo Securities, LLC
Todd Van Fleet - First Analysis Securities Corporation
Covance (CVD) Q3 2010 Earnings Call November 4, 2010 9:00 AM ET
Operator
Good day, everyone, and welcome to the Covance Third Quarter 2010 Investor Earnings Call. [Operator Instructions] Now 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 third quarter 2010 earnings teleconference and webcast. Today Joe Herring, Covance's Chairman and Chief Executive Officer; and Bill Klitgaard, Covance's Chief Financial Officer, will be presenting our third quarter financial results. Following our opening comments, we will host the Q&A session.
In addition to the press release, 18 slides corresponding to the commentary you are about to hear are available on our website at www.covance.com. Before we begin the commentary, I would like to remind you that statements made during today's conference call 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 of the financial measures we will discuss on this call are non-GAAP measures, which exclude the effects of events 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. Now I will turn it over to Bill for a review of our financial performance which begins on Page 4 of the slide show.
William Klitgaard
Thank you, Paul, and good morning everyone. Consolidated results in the third quarter met our expectations, with revenues of $477 million and earnings per share of $0.50 excluding special items, which I'll talk about in a moment. Adjusted net orders were a solid 1.15:1. Cash generation in the third quarter was very strong with free cash flow of $75 million and an increase in our cash balances by roughly $100 million since June 30.
So with those headlines aside, let me turn to special items in Q3. First the weakening of demand for toxicology services in the third quarter caused us to reassess our capacity. This was opened in a decision to consolidate our North American toxicology services by closing our Vienna site and decision not to build an East Coast preclinical facility on the Manhattan Virginia site we acquired several years ago. We've also taken an asset impairment charge in the third quarter of $119 million or $1.16 per share. Of this, $103 million relates to our Chandler, Arizona facility and the remainder of it is in Manhattan site.
The impairment charge results from accounting assessment of net book value compared to fair value. It's important to highlight that this is solely a non-cash accounting charge, and that Chandler will continue to remain open for operations with its current level of debt. The second special item relates to income taxes. In the third quarter, our income taxes included a benefit of $10.4 million, resulting primarily from the favorable resolution of a tax incurred.
Now the results. Net revenues for the third quarter were $477 million, an increase of 24% over the third quarter of last year. Operating margin was 8.9% in the quarter versus 12.2% in the third quarter of last year. Included in this figure is $1.3 million of costs associated with the closure and consolidation of our Kalamazoo facility. GAAP EPS in the third quarter was a loss of $0.49. If you exclude the impairment charge and the favorable tax item I mentioned a moment ago, EPS was $0.50 on a pro forma basis. This compares to $0.49 the second quarter of 2010 and $0.67 in the third quarter of 2009.
The tax rate for the quarter on a pro forma basis, excluding the favorable tax item were 23%, reflecting a go-forward impact of the favorable resolution of the tax inquiry, coupled with the further shift in the mix of earnings towards countries with more people tax rate. We expect the tax rate for the company to be in the 23% range in the fourth quarter.
In the third quarter of 2010, further development contributed 43% of our net revenues and Late-Stage 57%. Also 56% of our revenue came from the United States, 14% from Switzerland, 12% from the U.K., 6% from countries within the Euro Zone and remaining 12% from the rest of the world.
Please turn to Pages 6 to discuss segment results. In Early Development in the third quarter net revenues grew 5.1% year-on-year to $206 million. Sequentially, revenue decreased $1.7 million. The sequential decline in revenues was steeper than expected, as production in toxicology revenue more than offset growth in Chemistry and Clinical Pharmacology.
Third quarter Early Development operating margins, excluding the $119 million impairment charge and the $1.3 million of cost from the closure of the Kalamazoo facility were 10.7%. And that compares to 14% last quarter. Margins reflect the softening of the toxicology market in the third quarter.
Turning to Late-Stage development, net revenues in the third quarter were $271 million, which is down 3% versus the third quarter of last year. Revenues grew $3 million sequentially. The conversion of backlog to revenue of Central Labs and Clinical continues to be slower than we've seen historically as a result of a number of factors. These include: an overall lengthening in the duration of clinical trials; a higher level of project scope reductions and cancellations; a longer period of time between when orders received and revenue recognition begins, and we sort of amplify that. Over the last two years, we've seen a shift in mix of new orders towards larger and more complex studies. Those studies take longer to initiate.
In addition for Central Labs, we've been impacted by shifts in the mix of testing, as well as geographic mix of kit receipts, forward locations and lower transportation revenue expense. While it's hard to know for sure, at this point, we expect this trend to continue over the short to medium term, resulting in limited sequential growth in the next couple quarters. Operating margins in the third quarter in Late-Stage were 24.7% compared to 21.2% in the second quarter, and 24.7% the third quarter of last year. The 80 basis point sequential reduction in the segment was driven by performance in Central Labs.
Please turn to Slide 7. Adjusted net orders in the third quarter, which exclude our alliance with Sanofi-Aventis were $549 million, which represent an adjusted book to bill of 1.15:1. Now turn to Slide 8 to recap the backlog we recorded for Sanofi-Aventis transaction, which closed last Friday, October 29.
The total expected value of the agreement is $2.2 billion. This includes $1.2 billion in minimum buying commitments, another $1 billion above and beyond the guaranteed minimum, which is sole source for it across six different service lines. After the $1.2 billion minimum, we barely have a little over $120 million in existing backlog. And so as a result, the net order and backlog addition was $1.05 billion in the quarter.
The alliance was a primary driver behind the 26% year-on-year increase in backlog to $6 billion at September 30, from $4.79 billion at September 30, 2009. Sequential backlog grew $1.19 billion and includes $125 million from the positive impact of foreign exchange.
Now please turn to Page 9 for a view of cash flow dividends. DSO st September 30, was 45 days and that compares to 47 days at the end of last quarter and 42 days a year ago. We expect DSO to continue to moderate in the low 40-day range by year end. Cash and equivalents was $389 million at the end of September, a $98 million increase as compared to the $291 million at the end of the second quarter.
Approximately 90% of our cash is overseas. While we're currently debt free, would do expect to borrow from our bank group as we begin to execute our recent authorized $250 million share repurchase. In connection with that, we've negotiated an amendment to our credit facility, increasing the size of the facility from $150 million to $350 million, and extending the expiration date to October 2015.
Free cash flow in the third quarter was $75 million, consisting of operating cash flow of $108 million, less CapEx of $33 million. Free cash flow for the first three quarters was $89 million, which consists of operating cash flow $189 million minus CapEx of $100 million. For 2010 of the year we expect full year cash flow to be approximately $115 million and capital expenditures to be approximately $135 million.
Corporate expenses totaled $33 million in the third quarter and that compares to $37 million last quarter. Corporate expenses exclude cost from our restructuring program which Bill will talk about in a minute, and expected to continue to be in the range of 7% of revenue in the fourth quarter.
Finally, we ended the quarter with 10,380 employees, which should remain at similar levels at year end when considering the transfer of employees to Covance under the Sanofi-Aventis agreement and reduction of -- due to cost actions that we're planning to take in the fourth quarter. Now I'll turn the call over to Joe for his comments.
Joseph Herring
Thank you, Bill, and good morning, everyone. A highlight of the third quarter was our announcement of a 10-year $2.2 billion R&D alliance with Sanofi-Aventis, which is the largest contract in CRO-industry history. We believe our unique portfolio of drug development services, our service quality, our global footprint and our ability to create innovative partnership with clients continues to position Covance very well. Especially as our clients see an increasing need to lower R&D costs and improve their productivity.
While we remain confident in our long-term growth prospects, a variety of market dynamics continue to bring pressure in the near term, including aluminum patent clips facing our clients, ongoing portfolio rationalization exercises and increased regulatory hurdles. Here are some specific challenges and the impacts we're seeing. First, demand for toxicology services took a step down in Q3 and our revenues declined 9% sequentially. Second, growth in Late-Stage development is being impacted by a variety of factors that Bill highlighted, including a longer duration between project awards and revenue generation, project scope reductions and cancellations and shifts in the mix of Central Labs kits and revenues. As a result, we are taking decisive actions in two areas, which we believe position us to enter 2011 as a leaner, more competitive company.
First we're reducing and rationalizing our toxicology capacity. Second, we are taking significant actions to lower our cost structure across the enterprise. In total, these actions are expected to result in annualized savings of at least $40 million or $0.45 per share once all costs have been incurred.
Please turn to Slide 10 to review our restructuring initiatives. Each of the actions I'm about to discuss were embedded against five guiding principles. And these principles were first, to support our operational and service excellence strategy; second to streamline decision-making; third, to enable profitable market share growth; fourth, eliminate non-value-added work; and five, to sustain our company culture.
We follow these principles closely with an especially keen eye on maintaining a service quality reputation of Covance. First, as part of our initiative to reduce and rationalize Toxicology capacity, we assess the fair market value of our North American operating, which led to the $119 million asset impairment charge that Bill mentioned. This action result in a reduced depreciation expense of $4 million per year. Second, we are consolidating several of our operations. As announced in last night's press release, we will be consolidating our North American Toxicology operations by closing the Vienna, Virginia campus.
Over the next few quarters we will scale down operations and reduce debt in Vienna as we complete all ongoing studies for clients. We will transfer our dark [ph] and genetic toxicology capabilities to our Greenfield campus and consolidate our general toxicology work into Madison and Chandler. This action has no impact on our a violent[ph] Lilly co-laboratory in Chantilly, Virginia which is performing well.
In addition, we will be merging our Periapproval Services into our Phase II, III clinical development organization, which results in space reductions at our Country Hopkins, Pennsylvania site. Third, we are reducing a number of overhead and support function costs and realizing more of the savings created by the IT and laboratory automation investments we have made over the past year or so.
In information technology, we are planning to consolidate our network in data centers. We're rationalizing spends of control and reducing costs through selective outsourcing. In human resources, we are further leveraging our centralized model to deliver higher levels of processed efficiency and labor savings. In finance, we are leveraging and enterprise-wide financial system we've successfully implemented a year ago, by executing an outsourcing plan for a number of back-office transaction processes. And staff reductions will be made across a number of other corporate overhead support functions. Fourth, we've made the decision to trim some select employee benefits, as well as eliminate merit increases for all Vice President and above in 2011.
Finally, we have streamlined our executive management organization by eliminating positions, of Chief Operating Officer held by Wendel Barr and President/Commercialization Services, which was vacated a month ago. I would like to thank Wendel for his many contributions to Covance over the past 10 years, including his strong efforts the last three months to help drive many of the restructuring actions we are sharing with you today. Going forward, all of Covance's R&D laboratory operations, including Central Labs, Chemistry, Toxicology and Discovery Services, will report into Deborah Tanner. All Phase I, III, IV clinical operations will report into Rick Cimino. And John Watson will lead all commercial and strategic partnering activities for Covance.
To summarize the restructuring, we believe we have taken a considerate approach to these important actions. We made current and expected market demand and we've carefully considered potential client and employee impacts. In fact, our staff are being treated with dignity and respect that they deserve, and we are working hard to either relocate these employees to open Covance positions or provide them with appropriate severance and support benefits. We thank these colleagues for their outstanding service to Covance and to our clients.
Looking ahead to the fourth quarter of 2010, we expect total company revenue to be roughly in line with the third quarter level, reflecting market conditions in toxicology, combined with lower expectations and Late-Stage development. Netting it out, we expect to report Q4 earnings per share of approximately $0.50 to $0.55 per share, excluding site closure and other restructuring costs we just discussed. While we will not be giving 2011 guidance until the fourth quarter call, I want to share some initial thoughts as we plan for next year. For the past two years, we've had difficulty forecasting our revenue and earnings beyond the next 60 days. Despite an adjusted net book to bill of 1.2 over the past year, we believe it's prudent to think about 2011 revenue growth as roughly flat for 2010, excluding the Sanofi-Aventis volume commitments of at least $90 million. Of course including the Sanofi-Aventis revenue growth, would be approximately 4% to 5%. This is a preliminary view until we have more visibility on the revenue conversion in Late-Stage development, and the outlook for Toxicology services in Early Development. Obviously, we will work very hard to improve upon this view, including the pursuit of additional R&D alliances with our clients. However, on the earnings side, the following three actions are expected to deliver at least $0.75 per share of incremental EPS, excluding cost beginning in 2011.
First the cost reduction in capacity actions we review today are expected to deliver gross savings of at least $0.45 per share. Second, our R&D alliance with Sanofi-Aventis is expected to deliver incremental earnings of at least $0.20 per share in 2011. Third, we plan to begin executing the recently authorized $250 million share repurchase program as early as possible in the fourth quarter. This should deliver approximately $0.10 in earnings per share in 2011.
In closing, while market conditions have been more difficult than we expected, we have taken aggressive actions to position Covance as a leaner, stronger and more competitive company. Looking further down the road, we continue to see exciting opportunities for our company by depth and breadth of pharmaceutical R&D expertise, capacity and cost structure. We are absolutely determined to ensure that Sanofi-Aventis is delighted that they chose Covance as their tenure R&D partner. We believe other major pharmaceutical companies will see the value of using Covance talent and infrastructure to help them reduce the time and cost of drug development. Thank you for joining us this morning and we will now turn it back to the operator and open the telephone lines for questions.
Question-and-Answer Session
Operator
[Operator Instructions] We'll turn first to Ricky Goldwasser with Morgan Stanley.
Ricky Goldwasser - Morgan Stanley
Can you talk a little bit -- I mean obviously you gave some color on the trends that you're seeing on the Clinical business. But if you can talk a little bit about more about the product that you're seeing, and specifically about those projects where you're seeing clients nailing the scopes of the projects. Are these -- the smaller declines, the bio declines are seeing this funding or is this kind of more like endemic to the industry and indicate just the change of how trials are going to be done going forward?
Joseph Herring
Ricky, I guess the trials that we were referencing for the third quarter were clients where we have strategic partnerships. And the reality is, we're involved much early in the process, they award the study, we do our best job we possibly can of estimating the study. However, we started on both on the same side of the rope with these clients, we find ways to bring productivity suggestions. Innovate in accordance for final budget approval and sometimes, for cost actions, they want to reduce the number of sites or reduce the couple of work in some way. And so they tend to bounce around either quite a bit, but finally they get mocked down and they go. The biggest impact for us in the third quarter was the cancellations were at the high end of the range. We actually count reductions in products as part of cancellations, and half of our cancellations were actually reduction in scope. So these are studies that are on track, they're going to start, they're not canceled, they're still important to the client. But as we work with them, and they have their constraints, they were reduced in size and therefore, it impacts our forward look for revenue as, well as our short-term order total.
Ricky Goldwasser - Morgan Stanley
So suggested a thought then, if you think about strategic partnership and we think about this Sanofi relationship and the $0.20 off of incremental contribution to next years, are these $0.20 locked in or do you think that there is some risk that we're going to see the scope of the study that you're working with Sanofi on for next year, potentially evolve throughout the year?
Joseph Herring
If you remember, the Sanofi agreement has two subcomponent parts, the Asset Purchase Agreement and the Strategic Alliance Agreement. The Strategic Alliance Agreement is overwhelmingly Late-Stage, Clinical and Central Labs, and that will ramp up over the next three years. So the actual revenue estimates and profits is part of that agreement are very small part of the $0.20 that we talked about earlier. The majority of it is in the asset purchase agreement, which our fixed commitments that do not depend on clinical trials ramping up or any other contingencies.
Operator
Next we'll turn to Ross Muken with Deutsche Bank.
Ross Muken - Deutsche Bank AG
I just wanted to get sort of clarification on some of the comments you make just beating off of what Ricky was about both on Sanofi and kind of the core trajectory of the business. In How the Lilly relationship work with sort of the contract minimums, I would've thought this would be similar where we would see maybe a bit more benefit from that first $800 million in the out year, in addition to the $70 million you're getting from the asset purchase. Some I'm just trying to understand, the majority of the incremental Sanofi revenue you're expecting next year is almost solely coming from -- it looks like the acquired piece, as opposed to almost any revenue from the actual contract.
Joseph Herring
That's exactly right, Ross. And as we said on the teleconference, we expect the revenue on the Strategic Alliance Agreement to ramp pretty fast over the next three years. But that's really not part of the 2011 recipe.
Ross Muken - Deutsche Bank AG
But theoretically, is there a chance that we could see some of that trial work or lab work done in next year, it's just too early to tell, or just based on the commentary you gotten from them, it seems as if we're more likely to see some of that come in 2012 and beyond?
Joseph Herring
Actually, we're off to a good start. They actually started placing work ahead of the final signature to sort of set the tone and get people going. But we're not going to call that at this point in time. We're going to be cautious and just call the contract minimum. And sort of the way we've been handling Toxicology is we'll call it when we can show it to you in the P&L. But you're absolutely right, it's beyond theoretical, but certainly theoretically, they can do a lot more than that.
Ross Muken - Deutsche Bank AG
And in terms of the conversion on the sort of core bookings that we've seen and the assumption that we're going to kind of stay flat this year on a year-over-year basis, I mean, it would seem to me if you're still tracking, it's sort of a 115 or 12 type of book to bill, that would imply something like low single-digit growth. I mean is the delta just uncertainty in the Early-Stage business? Or is there just some other level of conservatism built into that?
Joseph Herring
Well, Ross, I would say it's both. As you well remember, our Late-Stage revenue in 2009 grew 25%. And we've had two or three quarters where we told you trials that were awarded were either canceled or delayed or reduced in scope. None of that has to do with our service quality, our commercial effectiveness, losing market share, none of that. I mean it's just really clients rerationalizing portfolio and patent gets closer, and people say, "Gee, we're going to have to conserve and rework and rethink.” And as you probably know, getting to a final protocol in a clinical development organization with medical input and site input, you end up a lot of times with trials that make everybody happy but they're too big and too expensive. And in the old days, that was sort of okay. In today's world, that's not as cool. And people are weighing in more. So we're just trying to be cautious, this is early than we normally sort of give guidance. And we're just saying we've been sort of flattish the last couple of quarters, let's continue to think about flat. We're going to work like crazy to make it better. Frankly, it'd be nice to have people bounce our way, but we're not counting on it right now, and we'll keep you close as we go forward. But the good news is, with flat revenue growth, we give you a direct line of sight to $0.75 X cost in earnings for next year, and anything that happens sort of on the organic side or additional relationships or some of these trials to get going and ramp more quickly, mix in Central Labs kits improves, any of that, we think can help. But we've been terrible forecasters so we're holding back.
Operator
Next we'll turn to Robert Jones with Goldman Sachs.
Robert Jones - UBS
So just on the Toxicology capacity front, can you give us a sense of where we are with overall industry capacity? Obviously, the announcements like today with Vienna help with overall capacity. But just trying to get a sense of where we are as an industry. And then we don't have a ton of line of sight into the preclinical capacity within pharma. I was wondering if you could just give us an update on where you think they are with capacity and maybe how aggressive they've been in trying to take capacity off-line?
Joseph Herring
I mean just about every pharma company is either considering or have taken capacity off. It tends to be facilities are highly underutilized but be careful to factor that in, into some sort of capacity model or pricing or anything like that. But clearly, it is coming down. And on the CRO side, as you well know, there's a couple of components of capacity in terms of measurement. One would be ad prunes and that number's coming down. More importantly it's staff. I think the three large toxic players all took staff out this week, so that's improving the picture. But molecules, if you look at pharma projects, are flat. But I don't think they do a very good job of pruning the list, if you look at actual new starts, new molecules going into development, it was down somewhere like 20% last year, a similar number this year, and the industry is feeling it. Biotech funding is a little bit better, but still not rolling. And frankly, the whole model for investing in Biologics, especially in small companies, is under question. So we believe the actions that we took this week are going to make us more competitive and more profitable, allow us some more flexibility. But we do think we still have enough capacity there and if there is a rapid rebound in the market, we're good to go for a number of years and could capitalize on that opportunity. But so far, I wouldn't say there's enough capacity out to dial back or change your models all that dramatically.
Robert Jones - UBS
And then just one quick follow up on the cost savings, the $40 million gross savings. It looks like a lot of the initiatives are obviously preclinical or early development related, and understanding that you're not giving guidance today. But can you just give us some sense order of magnitude on the impact to margins between the two segments from the cost savings?
Joseph Herring
Well first of all, let me just maybe give a little bit of color here. It's important to know that our number one objective was to maintain service quality. But we could've just blown these slight cost out and everybody gets the same amount, but some businesses frankly are doing better. Some support areas are strapped and haven't been take out ahead was not a good thing, and so we took a much more strategic approach. And I tell you, I was at the Vienna site, it's heartbreaking to close a 70-year-old site with great staff. But we're basically going to move volume from an underutilized facility into another underutilized facility, and that should not affect service quality. As you know, Bob, for most of the last seven years, we've been on a 2x rate. We doubled in size twice in 10 years and more on track to do it the third time. And so we're building some corporate overhead infrastructure to anticipate and stay ahead of that growth. And we took a big chunk of that out. And then finally, some benefit moves and some efficiency move based on IT investments and automation. We think that all these are moves that are going to make us a stronger and better company but does not affect service quality.
And Bill, in terms of the split between early and rate, I guess I'll ask you to comment.
William Klitgaard
I guess the rough math would be $40 million on $2 billion of revenue, be 200 basis points of margin improvement with probably a larger proportion of that weighted towards early development, but it's too early to give guidance for next year, we're going to do that after the fourth quarter as we typically would do in January. So stand by for that.
Operator
Now we'll move to Greg Bolan with Wells Fargo.
Greg Bolan - Wells Fargo Securities, LLC
Joe, on the Central Labs, I realize it's probably very difficult to determine, but do you feel like the increasing competition for patient populations is creating a bottleneck for study enrollments?
Joseph Herring
What we have seen is quite a bit of flex across geographies. For most of the last three or four years, we've seen emerging markets book up a higher and higher percentage of patients. Not only patients that are actually on the study, but expected patients. But as we said all along, there's over a billion people in China and sort of unlimited patients available for clinical trials. But the bottle neck are actually training investigators, investigator sites and people who know no GLP. And then actually are ready to go and that will change over time. But those sites saturated and some of the sites in Latin America, both for saturation Central Eastern Europe, and we're seeing some of these expected enrollments slow, and now coming back towards U.S. and Western Europe. And so it's still somewhat of a patient chase. We say for hopefully a longer period of time in these emerging markets, but that's not turning out to be the case. And some of that too is growing, is impacting kit flows.
William Klitgaard
I guess if I could just add under that, Greg. it's really kind of a rebalancing of where the growth is coming is from. It was disproportionately for international, now I think it's sort of more balanced between domestic and North and Western Europe and international. And the result of that is, if you can imagine, it's much more geography, the transportation cost in Central Labs, if it gets to kick back, the lab are quite high. If their growth rate comes back to more normal balance, then the transportation revenue we get from that is going to be impacted disproportionately.
Greg Bolan - Wells Fargo Securities, LLC
So I understand your guidance for revenue growth to be flat next year excluding Santa Fe, and you expect at least 75% of incremental EPS from the actions you have taken. As I sit here today, it would appear that for every 100 basis point delta in Early Development revenue growth, there's about a $0.07 to $0.08 of the consolidated P&L on an EPS basis. Maybe a little bit too granular, but Bill or Joe, am I thinking about this sensitivity correctly?
Joseph Herring
I guess the drops are in right and Early Development would be quite high. And I would have to sit and actually model your math to see if it holds up. I don't trust your mathematics. But it's a very high drop here right now on the increment volume in early development.
Greg Bolan - Wells Fargo Securities, LLC
And then just lastly, the base case scenario for cost savings next year is $40 million, which is well above what we were estimating. And I think those folks who are paying attention, how should we think about the variables the would drive incremental upside to these expected savings?
William Klitgaard
Greg, I'm not sure I understand. Are you saying are there more potentially savings that can be harvested? Is that your question?
Greg Bolan - Wells Fargo Securities, LLC
That's exactly correct.
Joseph Herring
We did everything we could to rip the Band-Aid off in one go. And frankly, the way we're transitioning studies, we're going to be involved in implementing these changes certainly in the first and second quarter and if it's below the third quarter a little bit. So cranking up another one right now, does necessary feel like the right thing to do, or productive use of our time. So I certainly wouldn't say on the short to medium term, we have no claims.
Operator
We'll turn next to Dave Windley, Jefferies & Company.
David Windley - Jefferies & Company, Inc.
In some of your slides from earlier presentation, do you have a CapEx slide where you had the $170 million which was the earlier target for this year and broken into three buckets? I guess I was thinking that one of those buckets could compress going in 2011. It's kind of already compressing or it appears to be. And so I wondered if you could give some color around how much savings you can see from a cash flow standpoint with CapEx from kind of current levels. I'm trying not to say 2011?
William Klitgaard
Well, I think Dave, we've been dialing down CapEx throughout the year, commensurate with the earnings. We're $100 million kind of our year-to-date basis, we're looking at like $135 million for this year. It's really too early to talk about next year, it kind of depends upon the prospects which one of our businesses. But I guess I wouldn't be expecting huge increases in capital spending, particularly with the capital intensive part of our business, being Early Development and that's not where we're looking to add capacity right now.
David Windley - Jefferies & Company, Inc.
So Bill, let me ask it this way. Of the $135 million, how would that break down into the three buckets?
William Klitgaard
I'd have to go back and look at it frankly.
Joseph Herring
Dave, we are just entering the budget process for 2011. And that Slide you're talking about is actually not in front of us, so. . .
David Windley - Jefferies & Company, Inc.
So what I also understand on the restructuring. In the press release, you say $25 million, gross amount $40 million is the $40 million -- let me ask it this way, is the difference simply the one-time charge amounts that will flow over into 2011, or is it also that some of these actions will be taken as the year progresses, and so the savings will be partial year savings in 2011? I just wanted to understand that.
William Klitgaard
The way we've tried to frame it, I guess the math wasn't as clear, it could be, so let me try again. We said $35 million to $40 million of total cost here. With more than half of it being this year, obviously that means the rest of it goes next year. So the $40 million of growth is going $25 million net is the remainder, kind of coming out next year. It's a bit slow again, there are some things that will take time to execute. Some of these changes are going to take, for example, in finance, we're going to be taking out some of the transactional work. And those individuals will be here for part of the first six months of next year, while we set ourselves up for that transition. And other examples exists. So some of these cost, we're taking them now, we're identifying them now, but they actually hit the P&L next year.
Joseph Herring
Dave, I just want to make sure you understand. These are decisions have been made, announced, and are being implemented. There's nothing speculative about it. It's just how it flows through to the P&L. And we had quite a bit of feedback from a wide range of investors that in the second quarter when we announced actions, we took it all under the P&L. And people found that's sort of difficult to analyze the ongoing business, underlying business. And so we're going to for GAAP obviously, but talk to the pro forma number, because this number is large. When it's a smaller number, we just reflected in the P&L. And because of the size of this number, we're going to report it separately and I think most people will be looking at this as $0.45 a share in EPS for next year.
William Klitgaard
Dave, before we move on to the next question, I just want to let you know, we will update that CapEx slide ahead of our next public webcast when we're on the road. So that information in the bucket will be there for you.
Operator
Tycho Peterson with JPMorgan.
Tycho Peterson - JP Morgan Chase & Co
I was just wondering if you could touch a little bit more on the competitive dynamic and talks today. More around kind of smaller competitors being rational in price. Are you starting to see kind of stabilization in price or just kind of a discount is still fairly extreme?
Joseph Herring
Well, the pricing has deteriorated since the second quarter but it's better than the lows of last year. I guess that would be how we call it, Tycho.
Tycho Peterson - JP Morgan Chase & Co
And I guess as we kind of think about the opportunity around additional capacity transfers going forward, can you just talk about what your appetite for additional deals? Obviously not to the scale of Sanofi but are there other opportunities you would look at in terms of capacity coming out of pharma?
Joseph Herring
Last time we counted, I think it was 12 that we've seen this year. And we've said no to all of them. I think this just last time we counted, I think two more had floated in the door. And so they're a lot out there. I think you know Tycho our model is that it's got to be a long-term deal, long-term commitment. It's got to float the Covance boat in order to make sense, both for the client and for Covance. And it has to exceed the return on asset, the hurdle that we have. And not every asset hits that. We've seen a lot of assets this year where the client says, no tail to work, it's a beautiful facility, great staff. It's in a high cost country with horrible unemployment law but head at it. Obviously, that doesn't make sense. Other clients have a need to want to retain that stuff and capability that we want to flip it to a different model. So we're working and I'd say fast and furious and when we find one that make sense for us and for the client, we're able to pull the trigger. I think the deal team we have now has a lot experience, they know exactly what they're doing. We can sort through them very quickly. And that you have the sanity integration is going very well. And could we take on something else. Probably so. I wouldn't say next week, but we turn the handle a whole lot faster on this than we did on Lilly, so.
Tycho Peterson - JP Morgan Chase & Co
And then just one last one on Central Lab as we kind of step back and think about the longer-term opportunity there. I think in the past you've talked about that being potentially 10% grower long-term. Can you just talk about how you think about evolving that business and how much is the growth you thing going forward is going to come from share shift versus new services like Baltimore services, in addition to obviously a recovery in demand at some point?
Joseph Herring
Our greatest sort of roll up of market forecasts is less robust than it was six months ago. And so we're thinking about CRO, industry growth being something more in the 4% to 6% range where it's before we think any of the 6% to 8% cost. And our Central Lab I think has several ways to grow certainly bio markets and more asset testing it a way to go. We are thrilled to now be a sole source for Sanofi-Aventis, one of the largest pharmaceutical companies in the world, that will help us. We are very competitive in the marketplace and continue to win great projects. So I think it's going to be about complexity, a test in taking market share. And we like our chances.
Operator
Next we'll turn to Todd Van Fleet with First Analysis.
Todd Van Fleet - First Analysis Securities Corporation
Joe, I'm hoping maybe you can kind of compare and contrast maybe the general industry environment this year as you see it kind of heading into the end of the calendar year, relative to a year ago. I think that for those that might be newer to the industry, the tone I think of the calls and the outlook, and I think of the general uncertainty that seems to exist is not meaningfully different maybe than what was in play a year ago. But I think it's more nuanced than that at a closer level, examine at a closer level. So I'm hoping maybe you can just take a sec to maybe dray your views or bring your views to bear on kind of this year, the outlook going into 2011 versus the outlook kind of coming into 2010. And if you want to segment by early stage versus Late-Stage that would be great.
Joseph Herring
I think there's a couple of key drivers. One is biotech funding continues to be relatively soft and a lot of CROs, Covance included, builds a lot of capability, capacity and expertise on that work. And we see it coming back somewhat, but certainly not roaring back. Second of all, is patent closer for large pharmaceutical clients that are getting very serious about cost. And as we talked about earlier, some of these large clinical trials, which historically would have been approved and moved right ahead, they're being rethought and tried to squeeze some of the cost out of them. I think the continued focus on this Late-Stage is very real because what CEO right now is going to spend a bunch of money on a molecule that has a 10% chance to get into the market, and if it does, it's 10 to 12 years down the road. So I think all those dynamics are in play. Our roll up is that revenue growth that we project for the industry is going to be down a little compared to what we thought before. And the lengthening of clinical trial start up and some of the other dynamics we talked about, we have placed into that as well. The good news in this is that more clients are thinking much more strategically about outsourcing and how to choose their partners and going from 10 to two are thinking about ways to transfer assets and do things much more efficiently. And frankly, we love that dynamic. If you think of three ways to save money, well let's just say in preclinical. The first thing you do is pound your vendors on price. As of this week, no Toxicology company really makes much money anymore. So there's not much more to give there. The second way is to move it all to the China or India. Frankly, there are enough toxicologists, pathologists, investigator sites to move your needle.. China's very important, obviously we've invested there, continue to invest there and grow with the performance, but we don't see it becoming more than 5% of the industry in the current horizon even. The way to really cut your cost in R&D is to get rid of high-fixed cost infrastructure in what we can show clients over and over again, is that we can do the same work that they did, as fast or faster, at the same quality or better at half the cost. So that's the issue. And the more clients see pressure, and realize we can bring any more costs out of our vendors, we can only go to the Emerging Markets so fast. We got to solve our problem, and the way to solve our problem is an alliance partner who marries our R&D, that can help us shut down much of this stuff and do it on a more variable basis. The other thing that we love about our footprint is our Central Lab gives us unique insight in how to better plan trials, getting started faster at the right investigators site and we're running over 70% of trials on time or
ahead and for partners, we're running greater than 90%. And with forecasting algorithms, we can help them reduce clinical trust supply, compared to drugs, no more winding up sites 50 grand a pop and then winding them down. There's just many, many ways that we can help our clients help themselves and the harder the platform give, the better it is for Covance, even though in the short-term, there's disruptions like we're talking about today.
Todd Van Fleet - First Analysis Securities Corporation
And just a follow on Joe, is it fair to say then that relative to what you guys we're looking at a year ago in terms of the conversations you were having with clients, that the decision-making cycles or the time to make decisions inside clients is taking much longer and then more detailed more involved, than maybe what you would've hoped or expected maybe 12 months ago. That is decisions on how much to outsource, which molecule to move to the pipeline, how much work on those molecules to push to the pipeline, that sort of thing?
Joseph Herring
I'd say on a project basis, things are slower because of all the reasons you just enumerated. But on a strategic side, I'm seeing a sense of urgency that's very different, and at a very different level. The senior most executives of every pharma company are scratching their heads going, how do we get cost out and how do we improve productivity? How do we move faster? And they are thinking of CROs as part of the solution now more than ever. Some because they feel like they have to, others I think are getting educated, and saying, "This really is not only possible, it's a very viable alternative, and we could end up in a better spot.” And that's not in every company by any stretch of the imagination, and any other group of customers that we're seeing a lot of activity are on sort of midsize pharma companies who have realized, spreading the CRO work around to 12 companies to get the lowest transaction price, is really of the head deals that they're not important to anybody, and then airing to one or two, where they can become important. I mean, midsize pharma companies that can do 150 to $200 million in revenue a year is very important to any CRO. And they're seeing the benefit of it and frankly, we're learning more and more about how to be a more comprehensive partner with a lot of those clients. And that just builds our gain for as Big pharma start to see the same thing.
Operator
Next stop, Stephen Unger with Lazard Capital Markets.
Stephen Unger - Lazard Capital Markets LLC
Joe, in terms of the -- excluding the Santa Fe revenues, for next year, you're expecting then I guess, $75 million reduction in revenues. What do you think is the area in your business where you're going to see the runoff?
Joseph Herring
Steve, I think we've confused you. What we said is flat. And if you consider the Santa Fe, then up 45%.
Stephen Unger - Lazard Capital Markets LLC
And then in terms of the total depreciation expense reduction from the cost action, what will that be?
William Klitgaard
The $4 million that Joe mentioned? That's the asset impairment charge,
Joseph Herring
$4 million less in depreciation.
Stephen Unger - Lazard Capital Markets LLC
And then what about Vienna?
Joseph Herring
Well we're not breaking that out separately, we're just giving the total number of $40 million post cost, which is about $0.45 a share.
Stephen Unger - Lazard Capital Markets LLC
And then just one last question in terms of the sites of Vienna and the other virginia site that you were planning on building in East Coast facility, are you planning on selling those sites? And if you are, what is your estimate of the fair market value of those sites?
Joseph Herring
I do know about estimating stock prices and land values and commercial real estate is pretty hard these days. First of all, Steve, it's going to take a little bit of time to wind down these in Vienna before we can even think about how we're going to market it. But keep in mind, it's 125 acres in Fairfax County, Virginia. Is a large piece of open space in Fairfax County. And our actual laboratory take up a relatively small percentage of that. So there's lots of opportunity there. In terms of the Manassas site, we will start aggressively marketing that. If you remember, we paid I think about $22 million for that. I don't know what it's exactly were today, but certainly, the Vienna campus, 125 acres, which is mostly forested, is what considerably more.
Operator
John Kreger with William Blair.
John Kreger - William Blair & Company L.L.C.
Joe, can you talk a bit about your businesses that are upstream from toxicology like Greenfield, your Discover Services business? How are those fairing? And does that give you any insight into what might be coming in the next year for your early development portfolio?
Joseph Herring
It's a good question John. I think it would be unfair to call our results fair as a leading indicator or sentinel marker because that's a very, very fragmented market. And if I told you we were booming there, I'm not sure we would plan for a bunch of Tox work, or if was collapsing, then we would necessarily see that as a bad guide. So it's a very big market and very fragmented. Having said that, the Greenfield Team is doing a fantastic job. We're pushing almost 60 clients, I mean these are smaller faster burning studies. So the revenue impact is not massive, but it's certainly helping cover weakness that we've seen in general Tox. But the clients continue to be wowed by that site, we are so proud of that team. They couldn't wait to get out and prove in the open market that they are the best in the world. And no client visits that site, at least for that time, to see those facilities who doesn't leave excited. But again, to your question, I wouldn't necessarily forecast that into toxicology. There's many ways for the car running to catch between that and the GLP Tox study.
Operator
Derik De Bruin with UBS.
Rafael Tejada
It's Rafael in for Derik. The first question I have is on the press release you mentioned that in Central Lab, that some kits were returned. Can you just comment on why these kits were returned?
Joseph Herring
I'm not sure if I still -- our business handling return kits from clinical trials So I think maybe ask the question.
William Klitgaard
I'm not quite getting the question. Maybe the geography? The shift in mix of the geography, is that what you're referring to?
Rafael Tejada
The second was on Vienna. Can you remind us again what the capacity, Tox capacity size was for that site? And just overall, any comments on optimization just for Covance on capacity? Are you there yet or do you think you may have to pull some levers depending on how '11 shapes up?
Joseph Herring
Well we pulled on a huge lever this week, which is $0.45 a share next year and their cost. In terms of Vienna, we never publicly disclosed, our capacity numbers of rooms that type of thing. There are a number of analysts models out there that are pretty close and outside refer you to those. But I guess directionally what I would tell you is, it is a meaningful action for us, but if you look at the entire toxicology, both in CRO capacity and internal pharma capacity, they're relatively small move. But a meaningful move in terms of our cost structure.
Operator
Eric Coldwell with Robert W. Baird.
Eric Coldwell - Robert W. Baird & Co. Incorporated
First off Joe, you made some comments that your revised outlook for the CRO industry is for the 6% growth, something in that range. I just want to quantify this that, are you saying that you think Covance long-term at what you're seeing today would be a 4% to 6% lower or will you still expect to be able to grow above market with new services, share captures, strategic deals et cetera?
Joseph Herring
Certainly the latter. But we like to have a base, this is how we see the industry growing. And obviously, we think we have a number of ways that we can grow faster than that, and that's what we're working on.
Eric Coldwell - Robert W. Baird & Co. Incorporated
Could you quantify the savings from the benefit reductions that you're taking at the VP level and higher next year?
Joseph Herring
Eric, we're not going to break it out with that level of detail. But I mean you could estimate how many VPs are at the company and no merit increases. It's not a massive number by any stretch, something less than $0.01 a share.
Eric Coldwell - Robert W. Baird & Co. Incorporated
On the kind of quantitative discussion of 2011, you talk a couple of times about revenue being flattish, x the Santa Fe deal, up 4% to 5% with it. I realize that you're very early on the process, last year, you didn't give guidance until February I believe. But I'm just curious whether this flattish commentary incorporates foreign currency, which at the moment, is about 2.5% tailwind to next year revenue.
Joseph Herring
Yes, Eric. You're right, we're barely in the process. It doesn't include FX. And we're showing you a pretty good flash of EPS growth next year, at least $0.75 on those three actions. And we're just trying not to get too carried away, add that on top of some heroic promise, this early in the game. But as things progress, certainly, we'll be sharing updates, and when we finish our full budget process, obviously, we'll have a much more thoughtful number. But that's just how we're calling it right now because that's the trend we're on currently.
Operator
Next we'll move to Douglas Tsao with Barclays Capital.
Douglas Tsao - Barclays Capital
Joe, you noted that you say an uptick in "cancellations" this quarter that we're really not really terminations of study, but rather the downsizing in the scope. I was just wondering, what was the time lag between when you received the order or the study to when the sponsor came back to you and said, well Joe, we thought this is going to be a $20 million study, and that's actually in a given budget constraint, that's actually going to be a $10 million study. Or is this fairly quick, or is this something that took place over be it, two, three, or four months?
William Klitgaard
Doug, it's Bill. It's probably more in the sixth to nine months range from when we first guided to kind of it's pre-configuration of the trial.
Douglas Tsao - Barclays Capital
And with this one specific study had already started or is this still during the sort of planning early stages of the trial?
Joseph Herring
Yes, it's during the planning.
Douglas Tsao - Barclays Capital
-- just one in terms of we should think about obviously the closing of Vienna, beside what's standard in some revenues, I mean what should be, I don't look for some guidance, but was the site profitable?
Joseph Herring
We don't break out profitability by site, Doug. But I would say it wasn't hugely profitable so. . .
Operator
And that would conclude todays question and answer session, Mr. Surdez, we'll turn the conference back to you for any additional or closing remarks.
Paul Surdez
Thanks, everyone, for your time today. I will be available for follow up questions following this call. Thank you again.
Operator
And with that we'll conclude today's conference. Thank you, everyone for joining us today.
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