Covance Q3 2007 Earnings Call Transcript

Covance Inc (CVD)

Q3 2007 Earnings Call

October 25, 2007 9:00 am ET

Executives

Paul Surdez - VP of IR

Bill Klitgaard - CFO

Joe Herring - Chairman and CEO

Analysts

David Windley - Jefferies & Company

Brian - Banc of America

Todd Van Fleet - First Analysis

Alex Alvarez - Goldman Sachs

Douglas Tsao - Lehman Brothers

Eric Coldwell - Baird

John Kreger - William Blair

Robert Gilliam - UBS

Sandy Draper - Raymond James

Hari Sambasivam - Merrill Lynch

Jon Wood - Banc of America

Presentation

Operator

Good day and welcome to the Covance Third Quarter 2007 Investor Conference Call. This call is being recorded at this time. For opening remarks, I would like to turn the conference over to the Vice-President of Investor Relations, Mr. Paul Surdez. Please go ahead, sir.

Paul Surdez

Thank you, operator. Good morning everyone and thank you for joining us for Covance’s Third Quarter 2007 Earnings conference call 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 a brief Q&A session. In addition to the press release, 19 slides corresponding to the commentary you were 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, 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.

Now I would turn it over to Bill for review of our financial performance, which begins on page 4 of the slide show.

Bill Klitgaard

Thank you, Paul. Let me start by reviewing our third quarter results. Net revenues for the third quarter were $396 million year-over-year growth, accelerated to $16%. Operating income in the third quarter was $60.1 million, which is up 22.6% from the third quarter of last year. Operating margin was a record 15.2%, an increase of 80 basis-points over the third quarter of 2006 and a 60 basis-point increase from last quarter.

Net income in the third quarter was $44.6 million, which is up 24.6% from the third quarter of last year, after excluding $2.5 million of tax gain recognized in the third quarter of 2006. And finally, earnings per share were $0.69 per share in the quarter, up 17%, compared to 2006 on a GAAP basis, and up 25% after excluding the $0.04 income tax gained in the third quarter of last year.

Please turn to page 5 of the slide show. In the third quarter of 2007, Early Development delivered 50% of our net revenue, and Late-Stage Development contributed 50%. On a geographic basis, the U.S. contributed 63% of our third quarter net revenue; while the rest of the world contributed 37%.

Now, please turn to page 6 to discuss segment results. In Early Development, net revenue in the quarter was $199.5 million, an increase of 19.2% over last year. Operating income in the quarter was $51.8 million, an increase of 28.4% over last year. Operating margin was 26%, which is up 40 basis points from 25.6% last quarter, and up 190 basis points from 24.1% in the third quarter of last year. These excellent results were delivered by strong broad based performances across the segment.

Turning to Late-Stage Development, net revenues in the quarter were $196.5 million, which is up 12.9% over last year. Operating income in the quarter was $34.4 million, which is up 13.1% over last year. Operating margin in the quarter was 17.5%, which is unchanged from a year ago, but up 70 basis points from the 16.8% reported last quarter. Year-on-year improvement in clinical development and increased central lab operating margins were offset by lower OM and market access services.

Now please turn to page 7 to recap some of the backlog numbers. During the quarter, our backlog increased to $137 million, to a record $2.6 billion, driven by strong net orders as well as $40 million resulting from positive foreign exchange impact. Year-on-year backlog growth was a robust 26.5%. Net orders in the third quarter were $493 million which is up 14% from the $432 million reported in the third quarter of 2006.

Please turn to page 8 for the review of cash flow data. In the third quarter, our DSO was 47 days, which is up one day from the end of Q2, but down eight days from Q3 of last year. Cash at the end of the quarter was $260 million, which is up $52 million from last quarter. Operating cash flow in the third quarter was $84 million, capital expenditure for the quarter was $43 million, and free cash flow was $41 million.

In 2007, we now expect the capital spending to be at least $165 million and free cash flow to be approximately $80 million. We haven’t furnished the details for the 2008 budget, but we do anticipate higher capital spending in 2008, as a result of the new preclinical facility we are building in Arizona, other toxicology expansions, and several key IT systems projects.

Finally, corporate expenses in the quarter totaled $26 million or 6.6% of revenue, which falls within the range we communicated to you last quarter. We continue to expect similar levels of corporate spending for the foreseeable future, reflecting enterprise-wide infrastructure investment that supports the higher growth rate of the company.

Now, I would like to turn the call over to Joe for his comments, which begin on page 9 of the slide show.

Joe Herring

Thank you Bill, and good morning everyone. On behalf of Covance’s 8700 employees around the world, I’m very pleased to report our third quarter results.

Revenue growth accelerated for the third consecutive quarter to 16%, and operating margins expanded both on a year-on-year sequential basis to a record 15.2%. This revenue and margin expansion combination produced 25% earnings-per-share growth. Demand for our broad portfolio of drug development services continues to be very robust. We delivered strong net orders of $493 million in the quarter, a 26.5% growth in backlog to $2.6 billion.

Please turn to slide 10 for review of our Early Development operations. In the third quarter Early Development again experienced very strong revenue growth of 19.2%. Operating margin was up 26%, with an outstanding performance, and represented a 190 basis-point increase from last year. In the first three quarters of 2007, our Early Development teams have produced revenue growth in excess of 20% and a 70 basis-point increase in margin year-on-year.

In support of these long-term growth opportunities, we continue to invest in new capacity and scalable infrastructures. In the third quarter alone, we opened three new Early Development facilities across three continents. In North America, we opened a state-of-the-art ABSL-2 facility in Denver, Pennsylvania, which enhances our vaccine service offering. Vaccine research is one of the most active areas of new product development for our biopharmaceutical customers.

In Singapore, we opened a purpose-built nutritional chemistry laboratory to serve the Asian region. This facility will be processing examples for some of the world's largest infant formula producers, which are based in Asia. We are transferring other assets from our Madison Laboratory, which will prepare the Singapore team to support the product release, stability testing, and labeling data required by our clients.

We believe there is a strong market opportunity for independent and internationally reorganized safety testing for companies seeking to export food products into the United States.

In Europe, we opened another expansion of our Münster, Germany preclinical facility, which is our toxicology [scientific] excellence for highly specialized primate studies. In addition to the significant expansion of the site, we also installed state-of-the-art group housing accommodation for primates. We believe these investments differentiate Covance Münster as the first toxicology facility on the continent, and meet the recent European regulations, which went into effect this past summer.

These three facilities meet unique market needs and fulfill the capacity requirements we spelled out in our strategic plan. Each of the grand opening events for these facilities were heavily attended by client and visibly supported by local government officials. Feedback has been very positive.

Other investments in our multiyear goal of the toxicology expansion plan are also progressing according to schedule. Construction on the remaining shelf space in Madison is on track and a new space should be available to our clients in beginning of the upcoming year. In Chandler, Arizona progress is clearly visible with a specialty steel frame taking shape. We continue to achieve project milestones. That we expect for these projects. And we remain on track for opening new facility in 2009.

Finally, in Harrogate UK, we are now beginning construction of our third large toxicology expansion of this decade, which we also expect to have come online in 2009. Both our current demand and experience, and our projections for the future will need additional capacity, even beyond these current expansion plans. As we have demonstrated over the years, we have enable to sustain or expand toxicology operating margins even as we build out, and we still have a need for testing.

Return on investment for our new toxicology capacity continues to exceed our expectations and exceeds the Company's average return on investment and substantially by our cost of capital.

We continue to have discussions with clients about using our services more strategically and I expect a fair amount of the new capacity we are building will be utilized under dedicated space toxicology contracts. Either way, we continue to see very strong and increasing demand, which gives us confidence to invest.

Over the past year, we have been asked our thoughts regarding toxicology services in China. Simply stated, we see China as an opportunity, for an opportunity in the mid to long-term. We come into this conclusion after numerous exploratory businesses in China, including discussions with SFDA, the Ministry of Health, [tours] about the existing and proposed facilities, as well as significant discussions and information sharing with many executive decision-makers in key client organizations.

We see several years passing before the Chinese facilities are up to the US GLP standard, and many more years before these operations make a meaningful contribution to the global market. Operational and service excellence in our business starts getting highly specialized and GLP experienced talent are in place. And it will take time to get that right in China, India or any emerging market. Frankly only a fresher’s few companies get it right on a large-scale basis in the U.S. and Western Europe, even after all these years.

Although we do not anticipate making the toxicology investment in China in the immediate future, we do expect us to have a presence to service, what we believe will be a nice opportunity at some point. And we call that in China for China, that is, servicing the local and regional market with world-class toxicology services.

In the near term, the strongest growth opportunities in China are clearly in Late-Stage Development, and we are making investments and adding staff to participate in that growth opportunity. To help us execute our China strategy, I’m pleased to have Dr. Honggang Bi, who joined Covance as Corporate Vice President and General Manager for China, reporting to me and joining the company’s senior most executive management team.

Honggang is a well recognized world-class pharmaceutical scientist, who has held significant management positions at both GSK and Pfizer. More recently, he was the CEO of an analytical chemistry company with operations in the U.S. and China. Hong Gang is responsible for all our businesses in China and we will have oversight for the entire Asian region.

Please turn to slide 11 to discuss Late-Stage Development. Our Late-Stage Development segment continues to show improvement, as revenue growth and operating margins increased for the second consecutive quarter. Central laboratory services continue to recover from the lower kit volumes earlier this year, and both revenue and operating margins increased on a sequential basis.

As we forecasted last quarter, the sequential increase was not as large as the jump from Q1 to Q2 during the historical summer season pattern. But we continue to expect to see sequential improvements going forward. With the rolling 12 month book-to-bill ratio in excess of 1.5 to 1, and a backlog of larger than $1 billion, we continue to believe that our Central laboratory is poised to deliver strong growth.

In fact, our central lab sales team delivered another record order total in Q3 by wide margins. During the third quarter, we opened a new purpose-built 13,000 square foot central lab in Shanghai, China, which is designed to support a growing number of global clinical trials that use the China arm of a Phase III study. This laboratory uses the same technical platforms, methods and procedures as other labs in our network, to ensure high quality and combinable laboratory data, regardless of location.

Our Phase II preclinical development team delivered another strong year-on-year performance in the third quarter. Phase II preclinical trial activity tends to moderate somewhat during the third quarter as employees, investigators and patients take summer vacations. So we were also very pleased to see the sequential growth and experience in Q3 of this year, as well as continued year-on-year improvement in operating margins.

On the talent front in clinical development, we continued to attract new employees to our team at a pace to enable achievement of our project commitments to clients. Even more importantly, we have been experiencing higher than normal employee retention rates, well above our typical industry rates. And I credit these investments to new tools, process improvements, our therapeutic focus in segmentation, and execution of our compelling offer-talent strategy by our leadership team in clinical development.

In commercialization services, few biological launches so far this year, which is the key growth driver for our reimbursement hotline services, continues to impact revenue and margins in our market access services.

We remain confident that our strong market position, together with the continued record funding of the biotechnology industry, and increased proportion of biological products in the phase III pipelines, will provide opportunities for market access to resume in its growth trajectory in the future, albeit, not in the very near term.

Our commercialization service segment also includes Periapproval services, which we are investing to capitalize on the attractive growth opportunity. The post marketing studies we believe will be accelerated by the implementation after PDUFA IV. During the third quarter, we made several key hires to augment both the operational and commercial leadership of our periapproval business.

Please turn to slide 12. Based on many discussions with clients this year, we see continued robust demand for outsource drug development services continuing into 2008, and beyond. Strong funding continues to drive drug development investments by our biotechnology clients.

In addition, large pharmaceutical clients are urgently looking for ways to convert their maps and development infrastructure from fixed to a more variable cost structure. [Term] are increasingly looking to market leading CROs like Covance, which help develop and eventually execute conversion plans in the years to come.

In addition to these positive macro industry trends, a number of Covance specific earning drivers give us reason for optimism including expanded toxicology capacity; the client ship towards more strategic views of preclinical services; the strong demand for our clinical pharmacology and chemistry service offering; the conversion of our billion dollar central lab backlog to revenue; the improving growth of productivity and profitability in clinical development; the continued contribution of Six Sigma benefits as applied across on entire organization; and finally, the benefits to eye from our infrastructure investments and talent in Information Technology.

To expand on this last, it's important for us to continue building a scalable and automated IT infrastructure, which will better position us to capitalize on very attractive long-term growth prospects.

Accordingly, we expect to make considerable IT investments over the next two years. We have developed a systems architecture and integration plan for each key business line. And our support functions, including an enterprise wide implementation of People Soft finance and accounting is a significant upgrade to our central laboratory database, including enhanced automation tools and an expanded data reporting system.

The final implementation phase of our upgraded pathology and toxicology system and continued automation investments in our Phase II free service offering, we expect these investments will make our operations more scalable, top drive margin expansion and further enhance the Covance’s brand as we deliver drug development data to our clients in a faster more efficient and seamless manner. Said another way, we plan to use IT systems and talent to make Covance’s capacity increasingly feel like our clients very own, just faster and more flexible.

Moving to our outlook, our strong financial performance during the first nine months, and we just raised our full year 2007 diluted earning-per-share target to $2.65. Looking at 2008, we are again targeting revenue growth in the low to mid-teens range, and diluted earning per share growth of 20%. Achieving these targets will mark Covance’s eight consecutive year, with earnings per share growth of 20% greater.

To close, I would like to say that I am extremely proud of the extraordinary effort put forward by Convance’s employees in the third quarter. We are focused on delighting clients, whereas to deliver accelerated revenue growth, record profitability, 25% EPS growth and a strong backlog of orders to drive the future success of Covance.

Thank you for your time this morning. And I would like to turn the call over to the operator for the Q&A session.

Question-and-Answer session

Operator

(Operator Instructions). We will have our first question from David Windley, Jefferies & Company.

David Windley - Jefferies & Company

Hi, congratulations on a good quarter. Thanks for taking my question. Joe, I wonder your closing comments you talked about conversations some of the clients and outlook for growth and demand from them. I wondered what, why you will mark research might shift on clients views for function outsourcing as the approach shifting their cost structure toward variable costs and what benefits or challenge that create for Covance?

Joe Herring

Well, David on client conversation there is a sort of moderation. It seems to be going in the polarized direction in a couple of years ago were functional outsourcing was adopted heavily by several clients, other clients will fully service. Both ends can moderate more toward the middle, where even people who are using functional outsourcing on a large scale basis.

We are seeing full service needs part to be part of the arm and interior. And people who were full service are seeing opportunities to use functional resources on a case by case basis. So, I think both are going to fit in to the next to the mix on a go forward basis.

David Windley - Jefferies & Company

And I mean, Covance can serve or manage around to deal with either case?

Joe Herring

We believe, we add the most value to our clients, when we provide the integrated services bundled either leading to an IND or an NDA. We think we can get faster timelines, we can run more projects in parallel with that of series, and we can have sort of one point person from Covance that’s empowered to make decisions, and the corollary on the client side.

However, not all clients necessarily see it that way, and we are increasingly changing our service offering to meet a broader range of client needs. Having said that, we still struggle to see a pure functional service provider model creating long-term value from our clients. We worry that while there maybe some short-term gains, the long-term challenge for our client is getting clinical trials done on time and accurately and getting to market faster, and having a completely disaggregated contract trial reporting it to get back together. I think it’s still an unproven commodity.

David Windley - Jefferies & Company

Okay. Moving to Central lab you mentioned the very high level of orders in the third quarter. Could you give a sense and you also mentioned the backlog being over $1 billion. Could you give a sense for what the typical or average duration of contractors in Central lab, and do the third quarter orders move that meet with all?

Joe Herring

We do have average duration of a contract. I think, we’ve said pretty consistently over the last year that generally trials are lengthening both in total fashion and also in some of the really hard areas being metabolic oncology and cardiovascular. I guess that’s really, all I have to say.

David Windley - Jefferies & Company

Okay. But as it relates to the third quarter orders they would look a lot like what you have been seeing over the last several quarters?

Joe Herring

No. They look very different. They were 20% higher than the all-time record we’ve ever had.

David Windley - Jefferies & Company

Okay, well, other than that?

Joe Herring

But in terms of the therapeutic category and geographic spread, I don’t have that information right now, but it was a very good quarter for the team.

David Windley - Jefferies & Company

Okay. Last question in commercialization specifically market access you commented and have been commenting about the lack of biologic launches. Can you provide some insight into the steps that you are taking to mitigate the margin hit from that softness in the short run until you start to see the biologic affordable up tick?

Joe Herring

Well, I’ve commented before. (inaudible) has been with the company for 16 years always in the segment and he has a very effective model for how he ramps up staff and ramps down staff as volume changes. We also completed implementation of a very robust IT system just the Siebel System completed full implementation about last year. And we are seeing nice automation benefits would help us preserve margins.

The steps that we took at the beginning of this year to create consolidated commercialization business that leverages both our combined -- both our periapproval and our market access business has also provided opportunity to more effectively leverage the overhead of those two separate businesses, number one.

And number two is there is a lot of activity and lot of discussions going on related to post marketing studies. And frankly the extraordinary talent that US have in the current economics outcomes business risk map type of expertise is really, really helping our periapproval business in the new heights, we’ve made there.

So its sort of combination of things, but again we feel very confident that the number of biological launches has definitely got to increase. We don’t see in the first half of '08 maybe not even in '08 at all. It’s certainly '09 and '10 and because our strong market position there. We want to maintain our expertise and our capabilities.

David Windley - Jefferies & Company

Okay, I got that. Thank you.

Joe Herring

Thank you, David.

Operator

We will have our next question from Jon Wood, Banc of America.

Brian - Banc of America

Thanks. This is [Brian] cleared in for Jon. Your operating cash flow guidance suggest sequential decline in Q4. Is there any other reason for that other than conservatism?

Bill Klitgaard

I think the way to the parts, such as the kind of feel back the numbers. We said 165 or at least 165 of CapEx and we got 105 year-to-date. So that would implies $60 million of capital spending in Q4 or higher. We have talked about free cash flow of $80 million and we backup year-to-date, which we going to come back with is basically kind of the net income for the quarter consistent with the earnings per share 265.

D&A kind of the trending on current levels and the working capital if you look at working capital at the present of revenue being pretty much consistent with current levels of working capital. So as revenue grows, we get some increase in working capital some use of cash there. They are modeling. You'll see that the numbers come out and so try to get. We are not indicating any thing how the ordinary I will think for Q4.

Brian - Banc of America

Okay. One more did you saw improvements appeared to have perhaps level off a bit. Have you had a structural wall on your penny in terms of further improvements or is it reasonable to believe that the metric can continue improving in the coming periods.

Bill Klitgaard

Yes. Well, 47 days I think this favorably compares to some of the other performances you’ve seen elsewhere in the industry. I think also it down 8 days from last year. That said, there is still room for improvement. We’ve activities going on throughout all of our business units to look at this and some places are more successful than others.

But it’s an going pressure for all of our finance leadership company trying to make DSO come down overtime. And also this is a seasonal factor which should be coming into Q4, which should be favorable, I think the DSO potentially. We look forward to that happening.

Brian - Banc of America

Okay, thanks.

Operator

We’ll have our next question from Todd Van Fleet, First Analysis.

Todd Van Fleet - First Analysis

Good morning guys, nice quarter, I think, we heard you talk a little bit earlier about your ability to achieve your ROI. Obviously you spend a lot of money this year and CapEx, spent a lot of money next year, I think even more so than this.

In terms of CapEx so guys, I’m hoping you can just help us to understand is relative to may be the past couple of years and maybe as you look forward or the next two years is the ease with which you are able to achieve that ROI hurdle rate, is it becoming easier and I’m hoping you can talk about that in the context of construction costs, the rate of increase of construction cost relative to the pricing environment that you see on toxicology and Central labs perhaps?

And then somewhat related to that point, if you could tell us what percent of capacity do you need to be operating both in toxicology and Central lab in order to achieve that hurdle rate?

Bill Klitgaard

Well, although toxic capacity, which is a little, bit negative, very complex answer. We’ve to spend a lot more time to get into an understanding fully all dependent on the mix of work essentially. But in terms of capital costs, we have seen the same kind of pressure that many other companies have seen in terms of construction cost going up in the last year or so, because of demand for steel in China, other things impacting the construction cost.

So we’ve suffer to that a little bit as well. So in that regard making a high ROI is never easy and hasn’t become easier. That said, the profit margins of the company and if you look at our trend here that may increasing and so ROI by nature of being operating income divided by investment essentially later, after tax income being divided by investment.

In some respects that becomes easier as margins hit higher. But I guess the takeaway I like you to having I know there is to think about this. We’ve focused on return on capital intently and in terms of everyday, when we look at capital expenditures we make in the company, we have been kind of writing the company that way over the last few years. It’s paying off now. We are certainly not taking for granted or assuming it’s easy to get there. It’s a hard spot everyday.

That’s a kind of major driver profitability in companies, high capacity utilization. And we have demonstrated an ability to add capacity and expand ROI even as we make unpleasant capital investments. I can tell you, we turned away COGS of toxicology work in the third quarter.

And we believe that there is an accelerating outsourcing trend across the preclinical now in toxicology, blood chemistry and also in Phase I. And someway we got to step up and provide the investment in the capacity for that conversion to occur. And Covance is both well and prepared and we have a proven model, I have been able to provide that capacity it helps drive strategy outsourcing and improve ROI as we go.

Todd Van Fleet - First Analysis

Great, thanks.

Operator

We'll go next to Alex Alvarez, Goldman Sachs.

Alex Alvarez - Goldman Sachs

Good morning, guys and congratulations on the quarter. I was hoping, we could start off with the Early Stage business and as you look at the various factors that benefited margin. Just wanted to get a sense from you in terms which you felt were the most important to be a large increase, we saw in the quarter?

Bill Klitgaard

Big drivers of margin expansion, I think, Early Development it was sort of broad based. I think, I’ve mentioned that in my comments both tox and chemistry had outstanding performances in the quarter with margin improvement and strong growth. So, I really can't pin it on one particular area sort of across the board.

Actually chemistry grew faster and has higher margins and even toxicology, serve well for our base. And again another very good performance in our clinical pharmacology business as well as nutritional chemistry.

Alex Alvarez - Goldman Sachs

And I think that pricing really has not been much of an issue for sometime now. Just trying to get your thoughts in terms of where pricing sits right now in the minds of customers that they continue to increase the amount of work that they do with companies like Covance?

Joe Herring

Well, Alex, we don’t talk about pricing going up or down. The reasonable is because our models provide a premium at fair price. And we don’t vary price when capacity gets high take advantage of clients nor that we tend to drop it, we are in capacity utilization as well.

We want clients to know what they expect, when they come to Covance in terms of a high quality scientific leader that they know, a [solid] team that they are familiar with, prices seems appropriate and just pile in the work. And as they continue to pile in the work, we get more comfortable as to move to a preferred agreement into a dedicated capacity agreement. And we do not use price as a way to sort of soup up short-term results.

Alex Alvarez - Goldman Sachs

Okay. And maybe turning to other Late-Stage segment, can I ask you just discuss some of the investment that you talked about making the periapproval business to improve your ability to serve the industry. You do see an increase in post approval studies in that? Related to that have you started have discussions with clients about their plans regarding Late-Stage trails?

Joe Herring

Well, in terms of investments we have added significantly to our staff of Epidemiologist as well as other medical staff. We have been increasing the size of our project management organization. The investments are primarily in people. And I’m not sure I must say understand, the second part of your question talking with clients about clinical trials.

Alex Alvarez - Goldman Sachs

No, just wanted to give a sense obviously there is been a lot of discussions might be about the possibility that we could see a lot of post approval, the pick up in the number of post approval studies. Just was curious, whether you are having those discussions with clients and what your stands further about their plans to meet some of the requirements?

Joe Herring

Yeah, I think, everyone is still sort of trying to figure out at the AAA or PDUFA IV and exactly what that means. There is a really two segments. One are going to be both mandated post marketing surveillance studies and increased enforcement by the FDA in that area.

And that's involved was going to be a growing trend of clients, who want to differentiate their products, by showing tangible evidence, better safety profiles or longer term efficacy in some of these grab the spaces. We have seen an increase and we will talk about it, when some others orders come in.

Alex Alvarez - Goldman Sachs

Thank you.

Joe Herring

Thank you, Alex.

Operator

We’ll go next to Douglas Tsao, Lehman Brothers.

Douglas Tsao - Lehman Brothers

Thank you. Good morning. Joe, I was wondering that you’ve talked a lot about possibly expanding the Phase I business, at this point most of your Phase I capacity is located in United States. I was wondering have you thought about expanding your Phase I operations abroad?

Joe Herring

Absolutely.

Douglas Tsao - Lehman Brothers

And any particular region would interest you?

Joe Herring

I guess for competitive reasons, I don’t want to comment right now because we’re in discussions in a couple of different areas. But I just say stay tuned. I’m not implying of changing eminent. But as you well know as it sort of a sellers market in Phase I right now, and we’ve had I think, pretty good luck in finding fairly valued and valuable assets in both Radiant and [Global] Clinic and we don’t particularly want to tip off exactly what we are doing right now.

But Phase I continues to be the hardest and fastest growing area of drug development in the scenario under the leadership of Dr. Mary Westrick that we’ve fairly good model.

Douglas Tsao - Lehman Brothers

Okay. That’s fair enough. And then in terms of the margin in the Early Development, it was best margin we’ve seen since the third quarter of 2005 and at the time, I believe, Bill characterized it is sort of perfect storm of positive influence. I was wondering, if you could provide some comment on the margin that we saw this quarter and whether you think that it’s perhaps a little more durable?

Joe Herring

I think, the extraordinary margin that we saw, I think, we hit 26.1% it was at a time when research products and particularly primate business was sort of going over the moon and people are buying in early and sort of rash buying. So, that was true and extraordinary event, what we are seeing today is much more broad based, it’s not a something one off kind of an event.

Our strategy sometimes seems very boring, but it’s operational and service excellence, which retaining clients, they keep attacking in more work, high utilization of our capacity and it is broad base.

Douglas Tsao - Lehman Brothers

Okay. And then in terms of the Central lab, have you sensed, you talked about last year when we saw some deceleration you could have talked a little bit about that study mix shift. Have you seen any changes in the mix shift, has been new business wins in 2007?

Joe Herring

Last year, what we suffered here and we talked about was some of the therapeutic mix shift.

Douglas Tsao - Lehman Brothers

Yes, with that regard.

Joe Herring

Okay. Where we come back to in terms of the current order performance is more of a traditional mix of work, in other words, how much we have in oncology, how much we have in cardiovascular and so forth. That said, there was always clinical indications and their differences even within therapeutic area in terms of clinical trails in various clinical indications.

So, it's never quite as clean in answers as this is simple answer, but we are back to more traditional mix. That said, it’s important to understand that the clinical trials are moving more towards most geographies because they need to get patients enrolled. And that has got impacts on both clinical business and also on central lab business.

It takes longer to startup with studies and so in a sense with the lag time from the win to first get in, it’s about twice a longer see for example it is in the US. And so even though that the backlog high and all the factors are looking very positive for central labs, we want to be cautious about the kind of projections we’re making here, because of that general shift in the overall market place. Just want to be cautious about that.

Douglas Tsao - Lehman Brothers

And then Joe you are referring some upgrades to the toxicology IT system those wondering that you are coming out with the new version of Study Tracker? Is that what you are referring to that?

Joe Herring

No, I am sorry Doug, I was referring to there was a commercial off the shelf system called [IBN] that we’ve used for 40 years in our business or 30 years something like that. And we’ve been part of the consortium along with some the top pharma clients and helping them expand and upgrade that system. And we’ve been rolling that out over the last several years it’s a sort of a daunting project.

And we’re replacing handwritten systems that we’ve in one location, manual systems that we had in the Netherlands, and sort of the most recent version of IBN being upgraded to the new version. And we’re probably half way through with that. We’re very happy with that, this is not a risk of technical success. It shoots out, it’s to do it right, we are taking our time. Study tracker upgraded is clearly something that we’re working on and we haven’t actually launched the project yet. We’re still gathering customer requirements.

Douglas Tsao - Lehman Brothers

Just final quick question follow-up on that, do you any of your competitors have access, are they part of this consortium under IBN?

Joe Herring

Not the worse steam that I’m talking about.

Douglas Tsao - Lehman Brothers

Okay. Thank you very much. Congratulations on the quarter.

Joe Herring

Thanks.

Operator

We’ll go next to Eric Coldwell, Baird.

Eric Coldwell - Baird

Thanks and good morning. Following upon some of more recent questions. I was hoping that you could give an update on Radiant specifically yeah, I think, you had three facility moves over the last six to nine months. And I’m, just curious how those are doing and then and may be a comment on the section over all?

Joe Herring

Well, I guess first of all Eric, we are no longer than a breakout Radiant and comment separately Mary Westrick and her team have created a centralized proposal management and centralized demand management organization, such that we don’t receive quote in San Diego and respond to that [quote]. It goes into centralized function that looks at the nature of the study, which geography has the best volunteer approval for that. And its place either in anyone of the ten locations in the US and so it’s a little bit, it’s increasingly difficult for us to break that out.

And so at this point now it is fully integrated. We think that is the full pharmacology business. Having said that the clinic form business continues to perform very well and we continue to see the former Radiant size continue to move to higher levels of capability, higher levels of capacity utilization. It easier and easier for us to recruit talent into the clinic form business and clearly that acquisition is fully profitable, fully accretive. And so, at this point I think more job and stand and talk about global [pinpoint].

Eric Coldwell - Baird

Whether it would be safe to say, Joe that clinic form in aggregated is back to the margins you saw before purchasing a Radiant or is that not yet the case?

Joe Herring

Let’s see if I have that remember handy. I don’t have that number and I don’t want to be careless here. We’ll have target back to you, but its uncertain than been ramping to that number, whether it’s exactly there or the other not. I just want to be careful. If you look at the numbers and it’s fair to say that global clinic form is that margins, which are consistent with historical trends.

Eric Coldwell - Baird

That’s great. Second question is kind of two part. Central lab I know that you talked about the year-to year improvement. I am unaware, if you commented whether Central lab was up sequentially quarter-over-quarter in terms of volume, Joe, so if you could quantify that I assume it was. And then as an adjunct to that I’m curious, are you seeing increased cross sell between the lab and the bioanalytical capabilities. And can you give us an update on what’s happening in the bioanalytical facility in terms of volume and pricing?

Bill Klitgaard

Okay. First of all regarding Central lab volume was up; revenue was up a little bit sequentially. I think, seven of the eight last years. We’ve had a sequential decline from Q2 to Q3 due to the seasonal patterns that we talked about related to Phase II preclinical trial. So, the fact that it was up a little was encouraging and as we did say margins were up in Central lab. But we sort of may get through the summer and look forward to continue to see sequential improvement in our Central lab.

Joe Herring

And by the way just to, we do share a facility with the bioanalytical facility but that business has been very strong in its performance. And I’m not sure, I would, try that to Central Lab, I think they just had a very strong performance in the marketplace this time around.

Eric Coldwell - Baird

Now, when you build BioLink last five years ago, six years ago, I forget the exact time part of the top process was that maybe you could capture an increasing number of those lab samples in the facility or at least quite fill the two services on combined projects. I’m just curious, if we can get an update on how that’s tracking?

Joe Herring

Yeah, I would say Eric that was a very good theory that has improving itself out. There is a little bit of that but not as much as we’ve had in our investment case. There are other variables that have driven the success of our biomedical business. They are having a fantastic year, got a good strong year last year, but it's related to other things with our clients value more that not having the ship the sample from central lab to another biomedical house.

Eric Coldwell - Baird

Fair enough. Thanks, great quarter.

Joe Herring

Thanks, Eric.

Operator

We will go next to John Kreger, William Blair.

John Kreger - William Blair

Hi, thanks. The question about your preclinical tox business and dedicated space agreements, is your large customers kind of think about their business at increasingly global way? Do you dedicated space agreements start to expand multiple size for those discussions still very sized specific. And what I’m getting at is, do you think that there will ever be an opportunity for load balancing or cost of various facilities around the world?

Joe Herring

Well, the dedicated space agreements that we announced at the beginning of this year is with a global companies that have toxicology facilities on multiple continents. And the way that contract was written, they are using multiple locations.

Having said that, even in that environment, toxicology decisions are still made on a regional basis, it is very unusual for that study. Let’s say a general tox study for sure and even quite a few areas especially tox that have an American company place a study in Europe or vice versa.

The one exception in our portfolio was clearly Münster is the primary specialized excellence for various ocular reproductive tox and they attract work on a global basis. So that is an exception, but by in large with load balancing is less important to our clients, because they tend to have large chunks of work in both US and Europe and preferred the place to work globally, where they can be there for study startups, sometimes for interim sacrifice ought to go in and problem shoot if there is a safety signal with face to face with our scientific staff.

John Kreger - William Blair

Great, thanks. And then related question, as you bring on this space, is there a limit in terms of capacity utilization that you’ll allow to go towards dedicated space or you’re aligned to allow that to go up to 100% theoretically?

Joe Herring

I’d love to have it at 100%. I think, we’ll have to get there but it’s great for us and it’s great for our clients.

John Kreger - William Blair

Okay. And then one last question talking about the periapproval business are you seeing those decisions generally linked to the pivotal Phase III work or is that really a separate decision maker within the clients?

Joe Herring

Its client specific and some thought that it was only remodels and some thought of the others so it is not an absolute.

John Kreger - William Blair

Great, thanks very much.

Joe Herring

Okay, John.

Operator

We’ll go next to Robert Gilliam, UBS.

Robert Gilliam - UBS

Good morning. I just had a couple of questions on 2008 guidance. My first is that whether not guidance includes any acquisitions or share repurchases?

Joe Herring

No.

Robert Gilliam - UBS

No? Okay. And then just as far as anything in guidance or there any business units that used really like most of the units are performing at or exceeding expectations? I was just curious, if you have any risks or concerns, if there was any particular business that you see as a risk in 2008.

Joe Herring

Well, we called out the market access business. Again that’s market access is some fraction of our total commercialization and hotline businesses some fraction of market access. So it’s not a huge percentage of our revenue, so it would be a very modest impact. We have talked about cardiac safety services over the last several quarters.

They have had two consecutive quarters of nice volume growth and nice revenue growth in the last two quarters. Net orders have been much better than it were for the two quarters below that. Having said that, it still less than 2% of our revenue. So that’s risk that’s sort of turning around the other way.

But our risk factors are still about improving pretty clearly in our financial documents. There all sorts of regions why we work sort of 24 hours a day around here. With our broad portfolio is not like everyday we wake up and the only thing we’ll think about the toxicology. We have a big central lab business, a big global clinical business and commercialization services and research products to make IT investment.

So, all of those you could add up and say there is implementation risks I, mean there is service quality issues and frankly why that’s a reason why we guide to our revenue targeted low to mid teens. We think that in that growth ranges of sweet spot we can drive good earnings growth a lot of that with margin expansion. But also control sort of the scale of what we are doing in the quality, what we are doing. So hopefully that helps you.

Robert Gilliam - UBS

Yes, yes. So, I guess in your opinion is your guidance conservative would be 20% first half of the year the comps are pretty easy. I was hoping you can give me a read if you think this is kind of a [big dictionary] or if you feel the numbers that put out this pretty conservative?

Bill Klitgaard

When you get to $1.5 billion business that is literally composed of one project at the time with employees in 56 countries. Well, growing the top line low to mid teens and being able to get margin leverage of that, while you are making big capital investments and hiring staff. I think, it is a pretty tall order at the size and scale that we are at.

So, there are many companies that are $5 billion in revenue that can consistently post 20% EPS growth, and we just finished our guidance with say eight consecutive years. So, I feel pretty good about it.

Robert Gilliam - UBS

Okay. You had a great quarter guys. Thanks a lot.

Joe Herring

Thanks, Rob.

Operator

We will go next to Sandy Draper, Raymond James.

Sandy Draper - Raymond James

Thanks. Most of my questions have been asked. But there is a couple of quick follow-ups. On the Central lab side, you obviously commented really strong backlog. You pull through a little bit better sequentially is it backlog strong enough that you’ve good visibility for sequential growth for the next few quarters or is anything seasonal that may offset that?

Joe Herring

I think, we’ve talked about, we expect the growth to continue.

Sandy Draper - Raymond James

Okay, great. And second, just looking back historically, been a little bit newer the story. Can you just remind me in the first quarter of ’07 you obviously clinical development done a very nice job, you’ve been improving that. It would, it is better look here really at growing that sequentially that business is coming back or what point for this to come more of a normalized year-over-year growth trend?

Joe Herring

Last year certainly we had some issues, we are referring. But clinical and some of the year-over-year comps are maybe easy compared to some extent of that business. But we expect that to be kind of growth engine for the company going forward and whether that becomes -- however they will become a low hurdle. But may I think, before we start to continue growth and the opportunity is tremendous. So we expect to see growth in our business.

Sandy Draper - Raymond James

Okay, great. Thanks, a nice quarter.

Joe Herring

Thanks Sandy.

Operator

We’ll go next to Hari Sambasivam, Merrill Lynch.

Hari Sambasivam - Merrill Lynch

Hi, guys. Thank you. Just a quick question on the offshore central labs particularly the one in China. Joe what I’m wondering is that in the US you obviously had some unexpected issues in 2006 with the slowing cap returns and so on and so forth.

And I’m just wondering as you sort of expand central labs in other countries, what level of control do you have in place that you don’t run into similar issues in our jurisdiction that a little bit further away from your core market? What type of control, how you build in, what you’ve learned from the US experience?

Joe Herring

Well, first of all Hari. I would in no way characterize our central lab volumes as a lack of control, zero. Our central lab moderation kit volume has everything to do with winning a large percentage of trials in these pretherapeutic areas that tend to be long in duration and more competition in the space. The net result of that is our clients are looking to get these clinical trials back on track by opening enrollment in these emerging markets.

Therefore, our central lab is there because China is a prefect example where we can shift biological fluids and as both we and with our clinical trials, as well as our competitors and our clients enroll more patients in China. There needs to be central lab support to keep those trials moving along. And so again, it’s not a lack of control.

Both our Singapore lab and our lab in Shanghai, which was formally tied within Fudan University had grown much faster than Central labs in general it’s a profitable business with 300,000 investments. I think we've expanded our Singapore Central Lab now a third time and of course opened up the new facility in Shanghai. So, same management sustained platform with same data collection with same management oversight and that business is very much well controlled.

Bill Klitgaard

Hari, if I could just add one more thing. One way to look at this is the push of clinical trials in overseas market. You looked at the Central labs between 2004 and 2006 about 55% of the kids that went into lab were coming from North American trials. Now, if you look at the backlog right now and you look forward about 40% of the kid backlog is in the US.

So, that’s the big shift from the US to overseas. And as I mentioned before there is a longer start time between when you have the win to when you have the first kid in overseas market although things are impacting us. And it’s not because of our direction, but because of where the market is going to find patients.

Hari Sambasivam - Merrill Lynch

That’s great. Thank you very much.

Bill Klitgaard

Okay Hari.

Operator

We'll have our final question from Jon Wood, Banc of America.

Jon Wood - Banc of America

Thanks. Just one more any recent stock repurchases stopped during the quarter is it a matter of evaluation or simply a capital priority issue and as the acquisition pipeline picked up at all?

Bill Klitgaard

Well, we’ve already purchased $60 million in stock this year and we’ve, less shares then we did it a year ago. To be honest Jon, we were very, very busy this quarter and probably just didn’t get around to it. But it’s certainly not a lack of capital available.

And regarding the acquisition pipeline even though we don’t appear to be all that acquisitive as a company, we have dedicated resources that are looking for acquisitions all the time. It just, we achieved and we want to find something that’s fairly valued that we can acquire and integrate in a reasonable fashion and create shareholder value. And we continue to look for those opportunities and we keep you posted.

Okay operator, I think that was the last question we had in the queue. So, let’s turn back over to Paul.

Paul Surdez

Yeah. Thank you everyone for your time today. If you should have any follow-up questions, feel free to give me a call, and we look forward to seeing you on the road in the fourth quarter.

Operator

That does conclude today’s conference call. You may disconnect at this time. We do appreciate your participation.

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