Covance's CEO Discusses Q1 2011 Results - Earnings Call Transcript

| About: Covance Inc. (CVD)

Covance (NYSE:CVD)

Q1 2011 Earnings Call

May 05, 2011 9:00 am ET

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

Ricky Goldwasser - Morgan Stanley

Ross Muken - Deutsche Bank AG

Stephen Unger - Lazard Capital Markets LLC

Douglas Tsao - Barclays Capital

Tycho Peterson - JP Morgan Chase & Co

Robert Jones - Goldman Sachs Group Inc.

Alexander Draper - Raymond James & Associates, Inc.

David Windley - Jefferies & Company, Inc.

Eric Coldwell - Robert W. Baird & Co. Incorporated

John Kreger - William Blair & Company L.L.C.

Todd Van Fleet - First Analysis Securities Corporation

Operator

Good day, and welcome to the Covance First Quarter 2011 Earnings Conference 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 First Quarter 2001 (sic) [2011] Earnings Call Conference and Webcast. Today, Joe Herring, Covance's Chairman and Chief Executive Officer; and Bill Klitgaard, Covance's Chief Financial Officer, will be presenting our first quarter financial results. Following our opening comments, we will host a Q&A session.

In addition to the press release, 17 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 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 in this call are non-GAAP measures, which exclude the effect of events outside of our normal operations, such as items associated with our restructuring. 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 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. Net revenues for the first quarter were $502 million, an increase of 4.2% over the first quarter of last year. Growth was 2.1% on a constant dollar basis. And sequentially, net revenue increased $10 million. Operating income on a GAAP basis in the first quarter was $41.9 million, and on a pro forma basis, it was $47.8 million or 9.5% of revenue.

Earnings per share on a GAAP basis was $0.54 per share, and on a pro forma basis, it was $0.60 per share. Sequentially, pro forma EPS increased $0.04 and included the full impact of the accelerated share repurchase program, increased savings from restructuring actions and incremental earnings from higher revenue levels. This was partially offset by above-target incentive compensation expenses and higher losses incurred in connection with the wind down of our Vienna campus and the start-up costs in Greenfield. The pro forma effective tax rate for the quarter was 22.7%. We expect a similar effective tax rate as we look ahead to the rest of 2011.

Now please turn to Slide 5. In the first quarter, Early Development contributed 45% of net revenues, and Late-Stage contributed 55%. And in the quarter, 52% of our revenue came from the U.S., 14% from Switzerland, 13% from the U.K., 9% from countries in the Euro zone and remain 4% from the Rest of the World.

Now please turn to Page 6 to discuss segment results. In Early Development, in the first quarter, net revenue was $224 million, a 9.3% increase year-on-year. Revenue grew $3.4 million sequentially, driven by increased Toxicology revenue for the second consecutive quarter and a full quarter of revenue from our new sites in Alnwick, England and Porcheville, France, offset by a decline in revenues from the wind down of the Vienna campus.

First quarter operating income on a GAAP basis was $23.6 million. Now our pro forma basis was $26.5 million or 11.8% of revenue. OM declined slightly, sequentially, driven by increased operating losses in Vienna and above-target compensation expense, which more than offset expanding margins in the rest of our Toxicology services. Looking forward, Early Development operating margins are expected to expand sequentially throughout the year.

Now turning to Late-Stage Development, net revenues in the first quarter were $278 million, which is up $7 million in the fourth quarter levels and slightly higher than the first quarter of last year. Sequential and year-on-year revenue growth was driven by strong performance in Phase II for Clinical Development Services, which offset lower revenues in Central Labs caused by a continued slow rate of backlog conversion. Late-Stage operating income on a GAAP basis was $55.2 million and, on a pro forma basis, was $56.2 million or 20.2% of revenue. We expect operating margins in Late-Stage Development of approximately 20% for the next several quarters.

Please turn to Slide 7 to recap the orders and backlog numbers. Adjusted net orders in the first quarter were $564 million, which represents an adjusted net book-to-bill of 1.12:1. Backlog at March 31 grew $1.5 billion or 31% year-on-year to $6.29 billion. Sequentially, backlog increased $95 million from year-end levels, and the weakening of the U.S. dollar increased the value of our backlog by $127 million during the quarter.

Please turn to Page 8 for a review of cash flow information. We ended the quarter with DSO at 37 days, which compares to 31 days at the end of last year and 42 days a year ago. We continue to target year-end DSOs of approximately 40 days. Cash and equivalents were $368 million at the end of the quarter, a $9 million lower number than we ended the year 2010. That's due to payment of 2010 bonuses and the increase in DSO, but were the primary drivers of the sequential decline in cash. At the end of our -- at the end of the quarter, our debt was $130 million, which is down $2.5 million from year-end levels.

Free cash flow for the quarter was negative $21 million consisting of operating cash flow of negative $1 million and capital expenditures of $20 million. Full year capital expenditures are now forecasted to be approximately $120 million. Corporate expense was $36.9 million in the quarter, on a GAAP basis, and, on a pro forma basis, was $34.9 million or 6.9% of revenue. We expect the pro forma expense as a percent of revenue to trend lower during 2011, as more savings are realized from the restructuring actions we've taken. And finally, we ended the year -- ended the quarter with 10,616 employees.

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

Joseph Herring

Thanks, Bill, and good morning, everyone. Covance began 2011 by eclipsing a revenue milestone: $500 million in quarterly revenue for the very first time. We also delivered pro forma EPS of $0.60, which was slightly above the high end of the range we communicated to you back in January. Our first quarter results were underpinned by stronger-than-projected Clinical Development and Toxicology results, as well as the 3 decisive actions we took in the fourth quarter to increase our earnings trajectory.

Here's a quick update on those 3 actions: First our restructuring program is right on track to deliver the $0.45 of cost savings we were expecting; second, our alliance with Sanofi-Aventis is also right on track with a ample portion [ph] of those sites now effectively integrated into Covance. There is close collaboration between our respective teams as we prepare to manage the increased volumes across our portfolio. And third, 4.75 million shares of our company stock was repurchased under our ASR [Accelerated Share Repurchase] in the fourth quarter of 2010.

Now let's review Early Development results. Our revenues increased 9.3% year-over-year and pro forma operating margin came in, in a solid 11.8%. Remember that our pro forma operating margins include operating losses we are absorbing as we wind down our Vienna site, as well as start-up losses we're absorbing as we launch Specialty Toxicology in Greenfield and open our new preclinical facility in China.

In Toxicology, we believe the combination of reduced supply across the industry, coupled with slightly improved demand for Covance Toxicology and increased biotech funding, is creating a better market environment for us. Spare capacity, especially in North America, is not nearly as readily available as it was in the last couple of years, and our utilization rate for staff rooms is reaching levels not seen since 2008.

Based on these factors, our Toxicology team delivered improved financial performance in Q1. To add a little more context, and excluding the contribution from the acquired Sanofi sites, our Toxicology Services revenue and earnings increased sequentially, even after absorbing the impact of the wind down of the Vienna campus.

Our Chandler facility had particularly strong sequential revenue growth from the fourth quarter. In addition to increased work from our anchor client, which has Chandler commitments for several more years, we are also performing increased amounts of work from other clients there in Chandler.

Our new [ph] clinical facility in China officially opened for business in the first quarter and quickly received AAALAC accreditation. As the only Western company offering toxicology services in China, we like the timing of our entrance into this important future growth market for drug development services. To close out my comments on Toxicology, our forward look is cautiously optimistic as improved demand, particularly in North America, continued through April and into early May.

Results in our Chemistry Services were also up sequentially, reflecting a full quarter of operations from our Porcheville and Alnwick sites. We're running slightly ahead of our revenue expectations from non-Sanofi clients at these sites, particularly for radiolabel chemistry and formulation services. The employees in both of these sites are really terrific additions to Covance, and they've already helped us solve some difficult formulation problems for our program-managed clients.

Our Bioanalytical Group recently entered into a multiyear FTE arrangement with a new client, which is a top biotech company. Demand for bioanalytical services in North America is strong, and we continue to see growth in our China bioanalytical sample volume. We recently held a Biotechnology Services symposium in Greenfield to celebrate the opening of our new biotech laboratory, which became operational late last year. Twenty-six clients participated in this event, including our 2 clients with long-term FTE arrangements. Global demand for Biotechnology Services remains robust, although we're adding more staff in Harrogate to meet the demand for our biotech services there in Europe.

To round out Early Development segment, Clinical Pharmacology results were flat year-on-year and sequentially, and revenues in our Discovery and Translation Services, while up year-on-year, were down sequentially following the towering performance in Q4. Looking forward, we expect Early Development revenue to continue to grow sequentially throughout 2011. We also project pro forma operating margin to expand each quarter driven by higher volume, increased savings from our restructuring program and completing the transition of Specialty Toxicology from Vienna to Greenfield, which will allow us to eliminate the duplicate cost structure.

In Late-Stage Development, revenues grew $7 million or 2.6% sequentially, and pro forma operating margins remained at 20.2%. Results reflect a strong performance in Clinical Development, which is partially offset by lower results in Central Labs.

On the commercial front, orders were solid in the segment with clinical net orders stronger than Central Lab. A clear highlight in the quarter was Covance being selected by Tekatas [ph] as one of its 2 strategic partners for both Clinical Development and Central Lab. We will help this important client evolve towards a more virtual drug development model, and we expect this relationship to drive increased orders later this year and beyond.

Let me turn to Central Labs where inbound kit volumes continue to be impacted by slower conversion of backlog to revenue. As a reminder, factors impacting the conversion of revenue is overall lengthening of the duration of clinical trials, a shift in the mix of new orders towards larger and more complex global studies, which take longer to initiate, and project scope reductions and cancellations. As a result, Central Lab revenue was down 4% from the fourth quarter. While cancellations have been an issue for Central Labs the past few quarters, our competitive position remains very strong as gross wins continue to be good and our win rate on new proposals continues to be at all-time highs. Weighing all of these factors, we continue to expect Central Laboratory revenue and margins to be relatively flat sequentially throughout 2011.

Turning now to Clinical Development. Following numerous delays and cancellations in the middle part of last year, we were extremely pleased to see a $12 million sequential increase in revenue and over a 100 basis point increase in operating margins during the first quarter. We are projecting low double-digit Clinical revenue growth in 2011. Importantly, we enter the second quarter with another record level of outstanding proposals for our Clinical Development Services. Our Clinical team continues to deliver strong project performance for our clients.

Over the last few years, we've made investments in informatics tools, tools which help us take the time and cost out of clinical trial conduct while increasing quality. In the first quarter, we officially branded this toolset Xcellerate, and that's capital X-C-E-L-L-E-R-A-T-E. Xcellerate harnesses the power of our clinical trial knowledge base, which is not only the largest, but the most detailed and comprehensive in the industry. Xcellerate combines our Clinical and Central Lab information with data from large public data sources, including the FDA 1572 filings, ClinicalTrials.gov and other data we purchased to include.

This comprehensive data set, combined with sophisticated forecasting algorithms rhythms and expert analysis by our teams, enables us to provide our clients with superior bite selection recommendations, as well as forecasting and resource management tool that increase the efficiency of their clinical trial.

Our clients utilizing Xcellerate are seeing significantly fewer nonperforming clinical investigator sites versus the industry average. This substantial reduction in waste and improved productivity helps make a very positive impact on cost, speed and quality. A much higher percentage of our trials are running on time versus the industry average. Because of our investments in Xcellerate, ongoing investments in Six Sigma, project management and employee training, client satisfaction with Covance Clinical Development is running very high. And high client satisfaction obviously positions us well to win repeat business.

I'd now like to review our full year outlook. Our results in the first quarter were better than we expected, and we see demand for our Toxicology Services in North America continuing to improve. Our performance in Clinical Development is also running strong. That being said, the volatility we experienced over the last 2 years is not lost on us, and we still have the lion's share of the year ahead of us. At this point, we are reiterating our full year targets of $2.50 to $2.90 in EPS and single-digit revenue growth. The targeted range doesn't include any earnings from these strategic relationships, but we have a number of irons in the fire. The timing and scope of such relationships remain unpredictable.

With respect to our near-term outlook, we expect second quarter pro forma earnings per share of approximately $0.65 on continued sequential increases in revenue.

Finally, we were extremely pleased to see Covance ranked as the CRO most preferred by clients in 2 independent surveys of preclinical and clinical sponsors. We believe these results reflect successful execution of the 3 strategies that have guided Covance over the past 8 years, which are: operational and service excellence, integrated drug development and building strategic client relationships.

I want to close by thanking our employees for delivering on their commitments to our clients and by thanking our clients for their confidence in us and for selecting Covance as their CRO partner of choice. Operator, you may now open up the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question comes from Tycho Peterson with JPMorgan.

Tycho Peterson - JP Morgan Chase & Co

Joe, maybe just first question on Tox. Obviously, 2 quarters in a row of improvement here. Can you just talk to how widespread that is across the customer base, what your visibility is in the market? And you talked about utilization being back to close to 2008 levels for that business in some areas. Is that the point where we're starting to see pricing come back in Tox?

Joseph Herring

Thanks for your question, Tycho. I would say that the demand increase is fairly broad-based. I want to be perfectly clear when I say utilization rates is for staffed rooms. Obviously, we have fewer staff than we did back in the day. So we have actual physical room capacity that we don't consider available capacity right now. But in pricing, I would say, stable to slightly improving.

Tycho Peterson - JP Morgan Chase & Co

And the idea is you're projecting Tox to kind of continue to ramp at this pace throughout the year versus any sort of kind of more meaningful inflection?

Joseph Herring

Well, as we stated, it continued to run strong in April and into the first week or so of May, both in terms of bill rates, proposals and awards, and our outlook. Having said that, last couple of years, we had false starts. And so, we don't want to overcall at this time. We're hoping we'll show it to you in the Q2 P&L.

Tycho Peterson - JP Morgan Chase & Co

And then on China, just for my follow-up, are you starting to take orders for preclinical work there, and then just talk about how you see that business building out in the non-GLP versus GLP work?

Joseph Herring

We actually see the demand in China right now, much more along the lines of Discovery Support Services. And so I would think about the facility as a discovery support. It has toxicology, it has bioanalytical, and we are working with a couple of our strategic clients to add some other capabilities that are slightly different than we originally envisioned at the time. We don't see a big demand for GLP at this time. We do not have GLP certification, either Chinese government or U.S. We expect to add over the next year, which will be in plenty of time ahead of the volume. But we are excited by the activity that we're seeing, not only with Western clients who want to continue to dip their toe in China and leverage the investments they already have there, but we continue to bump into China companies who are doing drug development in China for China that are increasingly sophisticated and value the Covance brand. So we have a couple of small orders that are in there right now. We're not going to overcall it, but we do see the volume picking up a little bit later in the year. And it's a longer-term investment.

Operator

And our next question comes from Ross Muken with Deutsche Bank.

Ross Muken - Deutsche Bank AG

So obviously, on the Late-Stage business, all-in, it was sort of a good result given the sequential improvement. You sort of had to tease out kind of where we are in the evolution in the lab. Obviously, a bit of a sequential tick down there, although over versus what we've seen last year and some of the dislocations, obviously quite not as bad. I mean, how much more do you think we have before we kind of see that gradual improvement in the business as per kind of the charts you've shown and the cyclicality over the last 10 years? And then on the development side, obviously, you had some good momentum there. Sanofi helped you. Do think about outside, the sort of the Sanofi base, where you've had kind of improved momentum? Would you attribute it to the sort of business development efforts or just general uptick in sort of the market?

Joseph Herring

Ross, thanks for your question. Quite a few pieces here. First of all, I would say that our Clinical Development has not really experienced the benefit of much of Sanofi incremental volume. We had Central Lab volume, and that continues. We expect that to increase over the balance of the year, and start to win more clinical work, educator [ph] relationship. They had studies with other folks, and so we really haven't started to see that. It's really broad-based against strategic relationships that we've had, as well as new relationships with clients. A core strategy for us is operational and service excellence. Delighting clients and getting more repeat work, and that's really the Clinical Development story. The clients are using us. They're trying to find ways to give us more work. And that is better for accuracy, quality, margin and the whole nine yards. So I would say the Clinical Development story is broad-based. The issues that have really been affecting not only us but our competitors over the last 2 years are delays, cancellations, rescoping of clinical trials. And they're sort of dislocated. One company gets their fair share one year, and one gets another year. So we sort of sailed through that in 2009. And our Late-Stage business, as you well know, in constant dollars grew 25%. And then we got our day in the barrel in Clinical. In 2010, revenue growth slowed. We really are seeing delays and cancellations and rescoping, at least, in the first quarter, at the middle to low-middle end of our range. And consequently, some of those trials that were delayed are starting to pick back up, and our Clinical Development revenues and margins are getting better. Central Labs, on the other hand, continues to experience some of those delays. Let me just turn to that for a minute. As you well know, Ross, there are many subcomponent parts that comprise our Central Lab revenue, obviously new orders, the number of kits that are returned, the price of the kit, the number of tests per kit, the geographies on where the kits come from. And so you have to sort of cook that whole cauldron. So let me just comment on a couple of bullets in those. First of all, from a gross-win perspective, we continue to have good Central Lab orders. So our competitive position is not any weaker. We're not losing any share. As a matter of fact, our win rate remains right up at our all-time high. So that's sort of the order piece. Because of rescoping, down-scoping and cancellations, the net orders are not quite as strong as they've been in the last 4, 5 years, have been not strong over the last couple of quarters. In terms of kit returns, the sort of long conversion rates that you're hearing from our competitors, as well as us, is certainly impacting Central Lab and a shift in geography. The mad rush to emerging markets sort of oversaturated those markets and more and more investigator sites that are producing patients and kits are in U.S. and Western Europe. Therefore, transportation is down and we'll only make a handling fee there; that does impact revenue somewhat. And so, the most recent news I would say was that the number of kits was down a bit. The kits were a little bit richer and, net-net, roughly flattish with a similar margin percentage. So at this point, we're looking at the balance of the year for Central Lab and saying flat sequentially in revenue, flat sequentially in margin, margin percent. And having said all of that, we are sitting on sort of fresher backlog in Central Labs. And so, a lot of the projects that are building up in backlog hopefully start to work its way into revenue, and we see some acceleration later in the year and going into the next year. But it's a little too early to call that at this point in time. Having said all of that, we feel good at where we are today. In Early and Late-Stage, we increased sequentially, and we have a strong line of sight to further increases for the second quarter, and we feel our business is strengthening.

Operator

And we'll go next to John Kreger with William Blair.

John Kreger - William Blair & Company L.L.C.

So just to follow up on that explanation for Central Lab, which was very helpful. Historically, have you seen your Clinical business and your Central Lab business correlate? In other words, if we look at the strong momentum you're seeing in Clinical, can we assume that, that will translate into better Central Lab momentum perhaps a couple of quarters out?

Joseph Herring

Well, I guess the answer, John, is absolutely not. I mean, we are in the high-30s percent market share in Central Lab, and 80% of the work that we do in Central Lab is from trials that aren't even outsourced to any CRO. And I think roughly 5% of our Central Lab revenue is actually -- we're doing the clinical trial. So 2 completely different sort of sets of facts there. I guess that's the best answer I can give you.

John Kreger - William Blair & Company L.L.C.

Okay, so totally disconnected the 2. All right, that's helpful. Back to Toxicology. With the utilization rates starting to climb up, in your view, can pricing start to move higher? Or do you think there needs to be staff additions in some of those rooms that have been turned off? Will those need to kind of get turned on before we can really start thinking about perhaps rising pricing and rising margins again?

Joseph Herring

Well, there's a lot of factors that go into market pricing. And I've already sort of commented that it was stable to slightly improving. Right now, we are looking to hire new people in our Toxicology business, because we have a pretty nice bumps in demand for our services.

John Kreger - William Blair & Company L.L.C.

Great. And lastly, Bill, can you just give us an update on your expectations for cash flow for the rest of the year?

William Klitgaard

Well, we talked about the CapEx being $120 million [ph] and DSO being 40, and that's kind of the baseline for it, and then the profitability we've already outlined as well. So you just toss that in to the gamish [ph]. I think one of the problems with projecting cash flows is there's other things that go in here: accounts payable, accruals that we make for compensation and things like that. And those tend to be more volatile. So I'm trying to get out of the total cash flow guidance business and give you the pieces so you can make your own estimate.

Operator

And we'll go next to Ricky Goldwasser with Morgan Stanley.

Ricky Goldwasser - Morgan Stanley

A few questions here. First of all, if you can just help us think about normalized margins for the remainder of the year once we remove the impact of Vienna and the ramp-up in Greenfield in the Early Development margins? I know, obviously, that Vienna and Greenfield put pressure on margin, but if you can give us a little bit more color on how we should think about these margins x these 2?

Joseph Herring

Well, if you look at the first quarter and you take out the losses and the wind downs and the startups, its 200, 300 basis points higher. And as far as the rest of the year, we see those costs that we're absorbing somewhere in the neighborhood of 3% per quarter in Q2 and Q3 and then tailing off a little bit into Q4. And obviously, when those are all gone, as we enter 2012, we typically see this demand continue, then we see some nice margin expansion.

Ricky Goldwasser - Morgan Stanley

Okay, that's helpful.

Joseph Herring

And sequentially, Ricky, remember that we absorbed a big delta in bonus from Q4 to Q1, from sort of minimum bonuses in Q4 in a number of businesses above-target bonus because of their performance. And so, quite a few moving parts. But if you look at ongoing operations, we had margin expansion between Q4 and Q1 and are setting ourselves up as the cost we're absorbing go away to be in a better position.

Ricky Goldwasser - Morgan Stanley

Right, in an ongoing basis, it's about 200 to 300 basis points?

Joseph Herring

Roughly.

Ricky Goldwasser - Morgan Stanley

Okay. And then a follow-up on the pricing question. You obviously feel a lot more comfortable about pricing flat to slightly up. One of your competitors in their conference call didn't sound as positive on the overall pricing environment. So can you talk a little bit about your product mix between specialty and routine? And are you seeing some potential market share gains on the specialty side?

Joseph Herring

Well, I think the specialty, general Tox has been way overplayed over the years. A high percentage of our business is Specialty Toxicology. I'm not so sure that has anything to do with the pricing. I can't comment on really what our competitor said. What I would just say is that it's stable to slightly improving, and it's based on a lot of things. I would like to think our quality and client satisfaction has a lot to do with that. And also, as I said in my prepared comments, rooms aren't as readily available as they were even 3 or 4 months ago, and I think clients are having to make choices now that maybe they wouldn't have made 6 months ago. I'm not going to overcall at this point in time, but right now, we're sitting on a pretty good hand.

Ricky Goldwasser - Morgan Stanley

Okay, and then last question is just a clarification on the North America revenues. I think in the prepared remarks, you're talked about Toxicology on improved demand in North America throughout the first quarter and into April. How do we reconcile it with the fact that, on a reported basis, your revenue for North America were down sequentially and year-over-year?

Joseph Herring

Are you talking about total company revenue?

Ricky Goldwasser - Morgan Stanley

Total company, right. So is the decline really coming from the Late-Stage versus Early Development? And is it kind of specific projects that you're seeing just to decline?

Joseph Herring

Just the ongoing migration of our broader -- well, drug development is occurring, which is increasingly global, and our business is just following the drug development trends.

Ricky Goldwasser - Morgan Stanley

Okay. So do you expect that just to continue going forward?

Joseph Herring

Yes, I think so.

Operator

And we'll go next to Eric Coldwell with Baird.

Eric Coldwell - Robert W. Baird & Co. Incorporated

Actually, I think others have pretty much hit my questions. I guess just as a housekeeping item, could you tell us how many incremental clients you picked up in the Sanofi sites? And then as a follow-on, you mentioned that you're potentially looking to do some hiring in Toxicology. Could you maybe throw some numbers around that?

William Klitgaard

Thanks for your question, Eric. The number of clients in our Porcheville and Alnwick sites is relatively small. We're talking about something in the 5 or 6 range, and we're not talking about large projects. Keep in mind that the overwhelming majority of what we're going to be doing in those sites and what they did historically is Chemistry. It's not really a big Toxicology footprint. And we're adding services that we've always wanted to be in, but very capital-intensive and a lot of scientific expertise, as in formulations being a good example and radiolabel chemistry being another good example. These are not the types of projects that are very large in size, but how I would characterize them is they are critical for drug development. As we look at the data over the years, generally, the number one reason why a toxicology study is delayed is formulation issues, poor solubility and availability for dosing. And what really makes us happy is a couple of these early studies were very difficult formulation problems that clients had and had bounced around between a couple of other companies and came to us. And in the 2 cases I'm most familiar with, the Alnwick team really worked over a weekend, solved the issue and got the client's development project back on track. And so if you think about, Eric, and you well know our program management, which is taking sort of Late Discovery preclinical through IND or proof of concept, helping our clients by better and faster formulation is a real strategic contribution to what we do. And I think as you well know, all the costs are covered in those sites, but every little bit of client revenue in those sites is really good news for us. The other point I would say is that we have hired 4 full-time salespeople for those 2 sites and have made, on paper and interview, 4 of the best sales hires we've made in a long time in terms of good scientific credentials, a lot of industry experience and a lot of contacts. And we are planning to be very aggressive in the French and Southern European market, with the Porcheville site and globally, with the Alnwick site, particularly as it relates to these specialized chemistry services. So again, small number of clients, relatively small amount of revenue, but I think we have about $5 million in proposals outstanding, which, if you look at the number of clients that toured, the little bit of revenue we've had and the proposal volume, it's actually ahead of the pace of the Lilly transition that we experienced a couple of years ago. Eric, that's a very long answer. I apologize for going on and on there. You had a second question that's slipping out of my mind.

Eric Coldwell - Robert W. Baird & Co. Incorporated

Well, let me just add a follow-on to that. So Lilly, if memory serves, after about a year, you had in the ballpark of a couple of dozen clients and then about 50 or 60 today. So if this is ramping head of that, would you expect to get to the same kind of levels in the next say 2 to 3 years?

Joseph Herring

Well, I don't want to get too carried away. I'll just say I'm happy with where we are right now. I like -- the scientific and operational team we picked up in those 2 sites are very good. They are highly motivated to be a part of the Covance team and to prove themselves in the marketplace as world-class beyond just being capped at Sanofi Dipassi [ph]. They are inspiring. And we get a little more time under our belt, we're probably looking to have some investor tours through there so you can see these sites and meet the team. But so far, the clients that have visited have left pretty impressed.

Eric Coldwell - Robert W. Baird & Co. Incorporated

The follow-on question was just in Toxicology. You said you might actually be in a position where you need to do some hiring. Is that site-specific, global, and could you maybe throw some numbers around? Are we talking dozens of people, hundred people?

Joseph Herring

Well, first of all, the senior scientific team is largely in place. The infrastructure's in place. We're talking primarily at the technical level, and we're talking primarily in Madison and Chandler, and we're talking handfuls, maybe a couple of dozen over the back half of the year. Nothing like hundreds. And I guess while we're talking about employees, I want to make the comment that I thank we're all very proud of. They were roughly 240 employees in Vienna, and we're through some of the final waves of those folks exiting, but 66 of those employees are staying with Covance. Roughly half of them have moved to other Covance cities to stay with the company, and the other half because of the nature of their work, like topologists, we've set them up to work remotely from home. So we've retained a lot of the scientific and client facing talent that's so critical to what we do. We got rid of the infrastructure and the cost, and to have that high a percentage of the employees stay with the company, it's just really, really good news.

Operator

And we'll go next to Robert Jones with Goldman Sachs.

Robert Jones - Goldman Sachs Group Inc.

I just wanted to go back to the Sanofi contribution, and I appreciate the color you gave on what the business did x Sanofi sequentially on the top line. I was wondering if you could maybe just give us a sense of what the incremental Sanofi revenue might have meant to the margins in the quarter?

Joseph Herring

We haven't disclosed that and really don't plan to disclose that. I'm sorry.

Robert Jones - Goldman Sachs Group Inc.

I mean, was it significantly above, below, around the corporate average?

Joseph Herring

I'm sorry. We haven't disclosed that, and we're not.

Robert Jones - Goldman Sachs Group Inc.

Okay, moving on then beyond Sanofi. Can you talk a little bit about the client mix and the sequential improvement in Tox? Are you seeing some of your historical big pharma clients starting to do more work? Or has this been maybe more the small to midsized pharma driving the sequential improvement?

Joseph Herring

I would say it's broad-based. It's not a runaway rally. It's just a nice sequential improvement, and I'd say it's a little bit of all of that.

Robert Jones - Goldman Sachs Group Inc.

And then just the follow-up then would just be, there's been some discussion around lead time on Tox work and that being kind of a limiting factor into visibility. And there's also the types of Tox that is being done that might be shorter in duration, just the nature of the study. Can you maybe talk about what you're seeing specifically? Is it shorter lead times that you're actually getting from clients? Or is it in fact more the nature of the studies being started that's limiting the visibility on Tox? Or both?

Joseph Herring

Yes, well, it's just that we have reduced [ph] in the industry, and if you come in and you want a specific type of study, the room and staff may not be available. And so, they have to call around a little bit, I mean, I think pretty much being sort of self-evident. I'm struggling to give you a -- really a more fulsome answer than that.

Operator

And we'll go next to Todd Van Fleet with First Analysis.

Todd Van Fleet - First Analysis Securities Corporation

Joe, I wanted to give you a chance to plug Xcellerate a little bit more. I guess I was wondering, it seems as though this strategic advantage that Covance has had with respect to Late-Stage Clinical Development, and that advantage kind of surrounding the Xcellerate product has been around for a little bit of time. But you mentioned on the call that you highlighted on the call seemed -- gives me the impression, anyway, that this is a more full-blown marketing push-out in the marketplace with respect to this capability that Covance brings to the market. So I'm just wondering, is the Xcellerate product something that you've seen contribute meaningfully to your -- the company's ability to win Late-Stage Clinical Development business over the course of the past 12 months? Or is it something that you really think is going to -- with the push behind you here, the marketing push, that you think is really going to accelerate the growth profile for that portion of your business moving forward?

Joseph Herring

Well, now that it's called Xcellerate, it's easier to talk about. Just one word. But Xcellerate and the earlier versions have been a major contributor to the success of our Clinical business. We jumped, I think, 5 market share positions in 4 years. We did make a formal launch of it and had a webcast and other marketing efforts to get the name out there. We have been a little quieter about it over the last several years, because we basically developed it as something that was innovative and we had beta versions. It was largely co-developed with some of our strategic clients who saw the benefit and were willing to give it a try. We had some clients who had similar studies and allowed us to use Xcellerate and maybe a competitor or interim capability do it sort of the old way, and the difference is substantial. I mean if you can pick with a high degree of certainty, based on facts and data, which sites are going to enroll and which ones historically haven't enrolled, you can make an impact. I think you may know the industry average is 45% to 50% of all investigator sites who sign up for a clinical trial enroll 0 or 1 patient. And it's about $200,000 to bring an investigator site up. Furthermore, if your clinical trial timeline is based on 50% of people who you think are going to enroll patients that are never going to enroll one, then you're wasting a bunch of time, you're wasting a bunch of money. And then you end up with the work scope changed because Siero [ph] comes back and says, "Hey, we're behind these deadlines. We need to open up new countries and new sites." It's a fresh new spend and a fresh new start, and you're contracting with sites and playing catch-up ball. We don't have a large number of data points, but we do have a handful with some strategic clients that we've been in the 6% to 8% to 10% range for low/no enrolling sites. And then, on the front of that, Todd, if you think about basing-type forecasting algorithms, which is how they forecast hurricanes. Being from South Louisiana, I know all about that. You watch every day and see how it moved and then how -- where it's expected to strike landfall, and the Clinical trial is the same way. Once those Central Lab kits start coming in and patients get enrolled, you can forecast patient report forms and when the data management tsunami is going to come, and plan all of those resources. If you think about biological drugs in development, and our sponsors are buying comparator drugs to run the clinical trial, and some of these drugs are $30,000 a year. And if you're loading up investigator sites who are never going to enroll patients, then there's a big fat waste there as well. And so, we're forecasting off data of 40-plus percent of all clinical trials in the world at a granular level of detail, not what you see with ClinicalTrials.gov, but at a granular level of detail. And it's just a better way to run the company. It's a better way to run the trial. And we had finished several trials over the last 6 or 8 months, 4, 6 months ahead of schedule. One of the biggest trials we've ever run in history of the company, complete enrollment 6 months ahead of schedule. And obviously, I'll say that client was thrilled. All their bosses knew about it, and it impacted their view of Covance on a go-forward basis. So we couldn't be happier. We think it's a hard-to-duplicate capability. And we did finally decide now that the tools are robust, we've validated them, we've used them in enough trials and branding it and promoting it is probably good thing for Covance.

William Klitgaard

Todd, it's Bill. I just wanted to add just a couple of small comments here. I think there's 2 aspects to this: one is the quantity of data that you're working with, and the other one is the quality of the algorithms that you're using. Now with respect to the quantity of data, because of our Central Labs database, we actually have a richer data set to mine than our competitors will have. And we do see other competitive products out there, but I think that gives us a richer field to work. Secondly, the quality of the algorithms that we've developed, both with our clinical expertise and with our resource management team, is world-class, and I think that, that will also be apparent to any client who uses these services.

Todd Van Fleet - First Analysis Securities Corporation

That's great. So it sounds as though it would be fair to say that the senior management team at Covance expects improved performance, perhaps, from the Late-Stage Clinical Development kind of new business development team as a result of the marketing and the formalization of the marketing of this product. Is that fair to say?

Joseph Herring

Well, let me just say this, Todd. If you look back over the last 2 to 3 years, our clinical book-to-bill I think has been at the top or better than any competitor over that whole time frame. And you don't go from number 10 to number 5 in that short amount of time without winning piles of new work. So the benefit has been accruing. And we're not calling some big acceleration based on this. It's just a better way to plan clinical trials, and it's a more cost-effective way to do it, and I would argue at the same time, improve quality, because the whole process of working through investigator sites that aren't enrolling and the distraction it takes to deal with that and then winding down and go find new sites impacts quality. And if we can show the client that with 30% fewer sites, they can actually finish the trial quicker, that's a pretty good deal. I would not sit here and tell you, though, that every client sees this as crisply as I do. Some of them have their old systems and some of them, they need to see it improve. And there's all sorts of reasons to question. But what I would say is the clients where we have used this are pretty happy with the results.

Operator

[Operator Instructions] And our next question comes from Derik De Bruin with UBS.

Rafael Tejada

This is actually Rafael, in for Derik. So first question, we're just trying to understand a little bit more in terms of the sequential, I guess, progression in operating margins within Early Development. So it sounds like stock comp may have been a bit of a headwind in the overall business. But is it possible to kind of piece out what the stock comp was last quarter versus this quarter, just to get a better understanding of maybe the trends and the margin profile of that business?

Joseph Herring

I think what we said last year, I'm not sure if stock comp is the way I explained it, but I think we talked about bonus and the effective income compensation, in general. And what we talked about was kind of a $20 million or $0.20 per share kind of impact in 2011 compared to 2010. Now I think that's still roughly accurate. I think, obviously, with our performance being above target in the first quarter, it's a little bit heavier than that on a one-quarter basis that you would get from just dividing 20 by 4. But that would give you a rough sense.

Rafael Tejada

Okay. And in terms of Discovery Services, just curious to know what you saw during the quarter and kind of what kind of your expectations for -- on how this business can unfold for the remainder of the year?

Joseph Herring

Thanks. So the answer would be relative to cycling and a tough compare. So Discovery Services had a towering Q4, and it's down sequentially from that but up year-on-year. And then from a cycling standpoint, the large clients that we have there, which I think people -- the 2 larger clients being Lilly and Merck, the Genomics lab and in Greenfield, both had slower starts to the year, but the projections are that full year is going to be much better than that, and our business leaders in Discovery are projecting a on-budget or better performance for full year. I think it's just a Q1 cycling issue.

Operator

And we'll go next to Douglas Tsao with Barclays Capital.

Douglas Tsao - Barclays Capital

Bill, I just wanted to touch base with you on the tax rate, which came in down sequentially and versus what we've seen the last couple of years. You're indicating it's going to be flat. Was that baked into your original guidance? And when you think out longer-term, do you see opportunities to take that tax rate down more?

William Klitgaard

Well, I think our guidance for the year was sort of a 23% rate. So 22.7%, I'm glad it was below that. I wouldn't say it's a huge factor, and I do think it's driven by where the mix of earnings was coming from. And I don't think that's going to change. So that's why the 22.7% seems like a good rate to use from here forward. Are there additional opportunities? Our team over tax [ph] always comes up with good ideas, and I think every so often, we have to grab them by the heels and shake them and see what coins fall out of his pocket. But he's always got good ideas, and we'll continue to provide those to you through the tax rate, as we find them.

Douglas Tsao - Barclays Capital

Okay, great. And then I think, Joe, you made the comment that you expect the Central Labs to be -- for the margin to be flat for several quarters. I mean, should we interpret that as through the rest of this year? Or should we interpret that as through the rest of this year and into 2012?

Joseph Herring

The rest of this year.

Operator

And our last question comes from Stephen Unger with Lazard Capital Markets.

Stephen Unger - Lazard Capital Markets LLC

Could you guys quantify the sequential improvement in Toxicology this quarter and then what the net sequential decline was in the Vienna-Greenfield transition?

Joseph Herring

I'm not sure we want to get too specific about the sequential decline in Vienna. I think the way we framed it was if you look at, say, Toxicology in North America, which includes Greenfield winding down, we still had growth, right? And we talked about Toxicology generally on a worldwide basis, even x Sanofi, it's still showing growth, even after reflecting the downdraft from the wind down.

William Klitgaard

Tox is up sequentially for the second consecutive quarter, and even if you ignore Sanofi, it was up. And from a margin perspective, we are absorbing the Vienna wind down, the Chandler startup, the opening costs in Greenfield and some additional bonus, because they're doing well. So it's hard to slice our Tox business any way over the last 6 months and not say it's getting better organically. It's getting better because of our strategic accounts. And we have costs that we're -- costs, as well as losses we're absorbing that will go away. And if we stay on this trajectory, and again, so far in not only April but early May, it looks like it, for sure, and it will continue to improve from there.

Joseph Herring

And I guess our outlook, Steve, we highlighted it was, we expect continued growth and expanding margins from Early Development, which is also reflective of those conditions.

Stephen Unger - Lazard Capital Markets LLC

Okay, and then the U.S. dollar's gotten weaker, and particularly against the Swiss franc, and I was wondering if you could quantify the currency impact on profits in the first quarter and what your expectations are for the currency impact on revenues and profit in the second quarter?

Joseph Herring

There was no impact sequentially de minimis. And going forward, obviously, from March 31, which is where we pegged it, currency is a tailwind for us. But we've seen currency swing around pretty wildly, and we don't want to get too carried away. But the Swiss franc, I think I saw this morning, was over $1.16 in cross rate, and that's our biggest currency. So potentially, that's helpful, but we live in a strange and unpredictable world these days.

William Klitgaard

I guess I'll just add a little bit of color to that, Steve. The rates in Q1 relative to the guidance we gave at year end, we used year-end rates for the delta for the FX in Q1 was pretty de minimis on that basis. What we've just given you on a forward-looking basis is using March 31 [ph] rate. We've also given you the composition of our revenues, how much compensation from Switzerland versus U.K. versus euro and so forth. So I think we've given you the pieces to kind of do the math yourself, if you want to, but I wouldn't say it's a big factor in terms of -- I mean, it's helpful, as Joe said. I wouldn't say it's a factor that's driving our outlook.

Stephen Unger - Lazard Capital Markets LLC

Okay, I have done the math. It's pretty substantial. And then from -- was there any CMV new orders that you recorded in the first quarter? And I was wondering if you could break the sequential increase in CMV revenues between Early Development and Late-Stage?

Joseph Herring

Sure, I think the CMV increase between Q4 and Q1 was in the range of $21 million. About $9 million of that, close to $9 million of that, was in the Late-Stage Development. I'll remind you that some of what's going on here, maybe why the math is a little bit confusing is the Sanofi deal included Central Labs. In Central Labs, we were doing work for Sanofi before that, and now it drops into the CMV for 2011, as we're starting to count against the minimums for 2011. So that shifts from sort of left pocket, right pocket. From regular -- our revenue is now CMV revenue bucket. And that's part of what's underlying this.

Stephen Unger - Lazard Capital Markets LLC

Got it. And there were no new CMV orders in the quarter?

Joseph Herring

Right.

Stephen Unger - Lazard Capital Markets LLC

Yes, I think I got that wrong this morning.

Operator

We'll go next to Sandy Draper with Raymond James.

Alexander Draper - Raymond James & Associates, Inc.

I just have one quick clarification. The comments about the sequential improvement in Early Stage margin, is that off of the adjusted number or off of the GAAP number?

Joseph Herring

These all should be on an adjusted basis.

Operator

And we'll go next to Dave Windley with Jefferies & Company.

David Windley - Jefferies & Company, Inc.

I apologize if this was asked before, but wondering if you'd be willing to comment on what your, I'll call it backlog book looks like in Toxicology. It sounds like things are getting a little bit better there. Sometimes an indicator is how far out your booking studies. I wondered if you'd be willing to comment about that.

Joseph Herring

Well, Dave, as you know, we turned that backlog pretty quickly, and I'm not sure giving you a backlog number in Toxicology is all that helpful. It really matches data revenue production, and it's going up.

David Windley - Jefferies & Company, Inc.

Sure. Let me clarify the question. What I mean by that is not so much the magnitude of the backlog, but how far into the future are you booking study starts? Are you starting to get some visibility beyond a couple of weeks out into months maybe?

Joseph Herring

I wouldn't say much yet, and it's sort of site-dependent. I would say Madison's running hot right now, and Chandler has a head of steam as well. Munston [ph] lab is doing well. But we're not where we were in 2007 and 2008 or anything like that. But we definitely have a little bit more visibility than we've had for the last 2 years, probably.

David Windley - Jefferies & Company, Inc.

Okay. And you probably did comment on this. But if you would humor me with the mix of your demand there. Is it across-the-board or are you seeing a little bit disproportionate strengths in small or mid or large? I'm just curious there.

Joseph Herring

It's broad-based, David. It's not overweighted in one particular segment.

Operator

And there are no further questions at this time. I'll turn the call back to our speakers.

Paul Surdez

Thank you everyone for your participation this morning. If you have any follow-up questions, feel free to contact me following the call, and I hope everyone enjoys the rest of their day.

Operator

And ladies and gentlemen, that does conclude today's presentation. We thank you for your participation.

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