Executives
Paul Surdez - VP of IR
William Klitgaard - Corporate Sr. VP and CFO
Joseph Herring - Chairman of the Board and CEO
Analysts
David Windley - Jefferies & Company
John Wood - Banc of America Securities
Alejandro Alvarez - Goldman Sachs & Company
Douglas D. Tsao - Lehman Brothers
Eric W. Coldwell - Robert W. Baird & Company Inc.
Sandy Draper - Raymond James
Covance, Inc. (CVD) Q1 FY08 Earnings Call April 29, 2008 9:00 AM ET
Operator
Good day and welcome to this Covance First Quarter Earnings Conference Call. Today's conference 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 - Vice President of Investor Relations
Thank you, operator. Good morning, and thank you for joining us for Covance's first quarter 2008 earnings teleconference and web cast. 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 brief Q&A session. In addition to the press release, 20 slides corresponding to the commentary you are about to hear are available on our website at www.covance.com. Before we begin the commentary, I would like to remind you that statements made during today's conference call webcast which are not historical facts might be considered forward-looking statements. Such statements may include comments regarding future financial results and are subject to a number of risks and uncertainties, certain of which are beyond Covance's control. Actual results could differ materially from such statements due to a variety of facts, including the ones that outlined in our SEC filings.
Now I will turn it over to Bill for a review of our financial performance, which begins on page four of the slide show.
William Klitgaard - Corporate Senior Vice President and Chief Financial Officer
Thank you, Paul. Before I dive into the first quarter results, I would like to point out that year-on-year comparisons for the first quarter are affected by the sale of our Cardiac Safety business, which occurred in the fourth quarter of last year. That sale increased our 2007 EPS by $0.06 per share. It also included contingent consideration related to the transferred backlog some of which was resolved in the first quarter giving rise to an additional $0.03 per share in the quarter.
Please note that there maybe gains in future quarters, as well as more of that contingent consideration is resolved. My discussions and comments around net income and earnings per share will be the result excluding the impact of gains recognize in connection with the sales of this business. The sale also affects compatibility of revenue in growth between periods and I will highlight those factors in my presentation as well. Please referred to reconciliation in slide show on slide 14, and now let me move to the numbers.
Net revenue for the first quarter was $412 million an increase of 15.1% over last year excluding the impact of the sale of the Cardiac Safety business revenue growth was 16.9%. The impact of foreign exchange on revenue growth was 3.4% in the quarter primarily relating to the substantial appreciation of the first Franc and the Euro against the dollar. The FX impact was disproportionately weighted towards Late-Stage Development services.
Operating income in the first quarter was $63 million, which is up 20.6% in the first quarter of last year. Operating margins were 15.2% which is up 70 basis points year-on-year and 40 basis points sequentially. Depreciation of the Swiss, Franc, and the Euro also help to generate foreign exchange transaction gain to 1.1 million this quarter. Net income was $47 million which is up from the first quarter of last year.
The tax rate in the quarter moved up slightly to 29.6% reflecting the mix of earnings in various geographies. And finally earnings per share was $0.73 per share in the quarter, up 22.3% compared to the first quarter of 2007.
Please turn to slide 5 of the slide show. In the first quarter of 2008, Early Development delivered 49% of our net revenues and Late-Stage Development contributed 51%. On a geographic basis, the impact of our rapid growth outside the United State is clearly evidence, as the rest of the world contributed 41% of our first quarter revenue, while U.S contributed 59%.
Now, please turn to page 6 to discuss segment results. In Early Development, net revenues in the quarter grew 12.7% to $202 million. A $5.8 million sequential decline in revenues attributable to a soft quarter in clinical pharmacology where some slipped out of the first quarter, the renovation and conversion of a large chuck capacity in labs North America and it was also impacted to some extent by weakening of the British Pound against the U.S Dollar sequentially.
Operating income in the quarter was $51 million, an increase of 15.8% over last year. Operating margin was 25%, which is up 60 basis points year-on-year and 24.4% in the first quarter of last year.
Now turning to Late-Stage Development, net revenues in the quarter were $210 million, which is up 17.5% over last year. Including the impact of cardiac safety, by the sale of cardiac safety business revenue growth would have been 21.3%. The impact of foreign exchange on the revenue growth in this segment was approximately 5.6% for the quarter.
Operating income in the quarter was $39 million, which represents 33.1% growth over the first quarter of last year, and operating margins were near record levels of 18.5% in the quarter and compared very favorably to 16% last quarter and 16.3% a year ago.
Now please turn to page 7, to recap the backlog numbers. Backlog at March 31, 2008 grew 20.1% year-over-year to $2.86 billion compared to $2.38 billion at March 31, 2007. Sequential backlog growth of 6.6% was driven by the first quarter net orders for $469 million coupled with the substantial $121 million positive FX impact on backlog, from a leasing of the U.S dollar primarily against the Swiss, Franc and the Euro. While we don't count this FX impact on backlog in orders as some others do, they will convert to revenue overtime just as orders do.
Now please turn to page 8 for the review of cash flow data. DSO on March 31 was again strong at 39 days, seven day improvement over the first quarter of last year. This is the second consecutive quarter of DSOs under 40 days and reflects... and continues focus by our finance leadership and their staff on improving cash flow. Cash at the end of the quarter was $233 million was up $51 million from this time last year, but down $87 million from the year-end 2007 balance of $319 million.
During the quarter, we borrowed $43 million under our revolving credit facility. Reduction in cash balances and borrowings since year-end and are primarily attributable to the company's repurchase of 1.5 million shares of its common stock during the quarter for $127 million.
In the First quarter, operating cash flow was $36 million, which includes payments of annual bonuses. Capital expenditures were $63 million and resulted a free cash flow of negative $27 million in the quarter. In 2008, we continue to expect capital spending to be approximately $250 million as we continue to invest to take advantage of very favorable industry fundamentals. A substantial portion of our 2008 expenditures related to the new preclinical facility we're building in Arizona, other toxicology expansions and several key IT systems projects. We expect 2008 free cash flow to be approximately 40 million.
Finally corporate expense totaled $27 million in the quarter or 6.5% of revenue, which is within our target range. This reflects the continuation of investment and infrastructure that will continue to enhance our ability to manage future growth.
Now I'd like to turn the call over to Joe for his comments, which begin on page 9 of the slide show.
Joseph Herring - Chairman of the Board and Chief Executive Officer
Thank you, Bill, and good morning, everyone. Covance begin 2008 was another strong, balanced, first quarter financial performance. We posted strong revenue growth of 15.1%, record operating margins of 15.2%, and grow our EPS by more than 20%.
First quarter net orders of $469 million and book-to-bill of 1.141 were solid although not indicative of the robust proposal for the Covance or the orders we expect to realize in 2008. Looking forward what we do see is strong evidence some of the world's largest pharmaceutical companies are looking outsourced drug development in substantial greater volumes and with far more strategic content then in the past, as away the patent exploration strat more than 60 billion of pharmaceutical sales over the next few years, forward thinking clients are reassessing their R&D business model. They are asking for help, CROs like Covance resides, reach and scale in drug development helps to accelerate their outsourcing, create more flexible cost structures, and speed their time to market.
As an example, a very senior R&D executive at a major pharmaceutical company recently called and asked us and I quote, bring me a big solution as a good deal for us, a good deal for you, and makes our cost structure more flexible overtime. This comment is indicative of the conversations we are beginning to have with other pharmaceutical executives who are looking to drive transformational change in R&D productivity. These conversations are in a different level in the organization then in the past, and they represent a big departure from tactical outsourcing.
Based on the combination of both tactical and strategic outsourcing of R&D, we see outsourcing rates increasing from 25% today to more than 50% in the coming years. Sponsor companies are increasingly seeing the value of replacing their high fixed cost structure with a more variable cost model of drug development. We've already began to see evidence of these trends and I'll provide two recent examples.
First a top 10 pharmaceutical company who has not traditionally utilized CRO capacity, the size that begin outsourcing significant portions of their clinical trial activity. After a comprehensive evaluation of the world's leading CROs, earlier this month they named Covance as their primary provider of clinical development services across five therapeutic categories, as well as the preferred provider for the whole outsourced portfolio. We are preparing to outsource significantly more work in the future, and are well-positioned to capture a large... a real well-positioned to capture a large portion of those projects. This is a new client for Covance and new demand for the CRO industry.
The second example also occurred early in the second quarter. We were awarded a three year dedicated capacity toxicology contract worth of minimum of $66 million by a top pharmaceutical company. This company also has not been a traditional outsourcer of toxicology services. Using the quite terms this committed volume contract is for comprehensive first-in-human enabling packages, which we historically refer to as program management. In addition, ramping up to the signing of this $66 million agreement for program management, we have also been winning significant amounts of general toxicology projects from this client on a transactional basis.
As in the previous example this is new demand for the CRO market and the program management award is new business for Covance. We believe there are broad-base service portfolio across drug development uniquely positions Covance to compete effectively in this emerging market paragon. We are especially well equipped to help clients who want expedite early safety and efficacy testing in order to fully characterize the potential of their new products.
This is certainly prudent before making very large Phase III clinical trial commitments. Where the clients call this Translational Medicine, to learn phase, a proof-of-concept, what they are describing is a rapid integrated sweet of services across toxicology, chemistry, clinical pharmacology, biomarkers, and the early clinical development. This emerging market is tailor-made for Covance's unmatched compliment of early developments, early clinical and central lab service offerings and make such an obvious choice as a strategic partner, a partner who has the platform which can both help reduce costs and speed development.
Now let me comment on the segment results this quarter, which begins with Early Development on slide 10. In the first quarter our Early Development team delivered revenue growth of 12.7%. Operating margins expanded both year-on-year and sequential basis to 25%. As Bill mentioned a few items worked against this in the first quarter. However, as our new toxicology capacity in North America opens and sale and Phase I study that slipped out Q1 initiate, we expect to see strong sequential growth throughout the balance of the year.
During the second quarter we will be opening our brand new 80 bed clinic in Evansville, Indiana. This purpose built first-in-human center of excellence positioned us to capitalize on our historically strong medical team and operational team like there in Evansville. As well as the deep pool of volunteers and special patient populations developed there over the past 20 years. This new facility is on a campus of a hospital complex, which allows us to provide co-blue coverage, which is a critical plant requirement for many first-in-human studies.
We will have some downtime in Q2 as we transition from the old Evansville clinic to the new facility. However, we expect sequential revenue growth in global current pharmacology in Q2 as clinical pharmacology remains one of the hottest areas of drug development. The others we want toxicology and as anyone that can in the test who attended the recent Society of Toxicology meeting in Seattle. Demand for high quality GLP toxicology services has never been stronger. We believe large pharmaceutical companies will continue to move away from investing in fixed internal capacity to more flexible outsourced capacity, which gives us continued confidence to invest in this core part of our service portfolio. As most of you know, we have several ongoing toxicology facility expansion to support future growth.
The new renovated rooms in Madison adding four new capacity which would be generating revenue from study starts in the second quarter, including projects for our rapidly growing safety pharmacology offering. Construction in Chandler also remains right on track in respect to open the initial phase of that facility in the first half of 2009.
Finally in Harrogate we are building new toxicology capacity to come on line by the end of this year. All of these construction projects are on or held of schedule. Chemistry services continue to post pane tactic results in both revenue and profit. As a reminder, our chemistry service offerings include bioanalytical metabolism, which are very closely align and often integrated with our toxicology and clinical pharmacology service offerings. We also compete effectively in nutritional chemistry and pharmaceutical analysis, which are standalone service line. All four of these chemistry services are experiencing robust demand. In addition, we are now building a state-of-the-art bioanalytical chemistry laboratory adjacent to our central laboratory in Shanghai, China.
Please turn to slide 11 to discuss Late-Stage Development. Revenue growth for the Late-Stage segment accelerated for the fourth consecutive quarter to 17.5%, and would have been over 20% excluding centralized ECG services from our 2007 base. Central laboratory services made an outstanding contribution to Covance result this quarter. Revenue growth exceeded 30% against an easier compared to last year and revenue grew sequentially for the four straight quarters. We also saw a very nice increase in profitability this quarter over all periods in 2007.
Clinical development revenue and operating margin rebounded strongly from the study issue, which impacted its financial performance in the fourth quarter. In addition, continued reduction in employee turnover rate to historically low levels combined with several 100 new hires, position us well for continued growth this year. We continue to invest in our clinical development capability, which is becoming an increasingly important growth engine for the company, both in revenue and profit.
In commercialization services a continued lack of new biological product launches continues to impact revenue and margin in market access services. Before proceeding to the company's outlook, I am pleased to announce that we reached an important milestone on the talent management front, which is the most critical element of our operation and service excellence strategy.
This quarter Covance's consolidated employee voluntary turnover rate was in the single-digits for the first time in our 11 year history as a public company. I attribute this to successful execution of our compelling offer strategy, which embodies our commitment to effectively recruit, train, and retain key talent. Effective talent management is the cornerstone of all Covance strategic plans.
Please turn to slide 12. here you can see a list of our key earnings drivers including as I mentioned earlier, the acceleration of outsourcing being driven by our client substantial needs to increase the speed and efficiency of drug development. Favorable market conditions and these key earnings drivers give us increased confidence in our ability to deliver our target of low to mid-teen revenue growth and 20% year-over-year growth in EPS to $3.18 per share.
Thank you for your time this morning. Now I would like to turn the call back over to the operator for the Q&A session.
Question And Answer
Operator
Thank you. [Operator Instructions]. Our first question will come from Dave Windley with Jefferies & Company.
David Windley - Jefferies & Company
Hi, good morning. Thanks for taking the questions. If you the... Joe on the new clinical agreement congratulations on that it sound interesting, what visibility do you have or what confidence do you have that in addition to go into this exhaust search process they actually are in their kind of a internal processes are in place to begin pushing business out given that they are a company as you describe that hasn't done a lot of outsourcing in the past, how quickly will you see revenue basically?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Well David, it's hard to answer that question precisely again we were just given the award a few weeks ago, number one. Number two as you point it out they are not a traditional outsourcer, but this decision to move in this direction was driven from very, very, very high in the organization and was presented to the Board of Directors as a key strategy for the company. They estimate that they are going to be outsourcing between 50% and 60% of their entire portfolio. In terms of the time how soon that will happen, how convert the revenue is difficult to say at that this point in time, but we do have five very nice RFPs in-house right now that we're working on that, that we feel very good about.
David Windley - Jefferies & Company
Okay. Okay. So that... you do have RFPs in-house, so they do have a sourcing group or some type of contracts, management, and group in pace to deal with this?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Absolutely not only they have that in place, this has been bought in and socialized with the very senior people in the organization, medical regulatory leadership and it's a command performance.
David Windley - Jefferies & Company
Okay, does the... does the choice of Covance is a primary provider, does that have a duration on it has the company as the client stated, how long they intend to keep the decisions from this review in place?
Joseph Herring - Chairman of the Board and Chief Executive Officer
What is like to do is try this for a period of the year and assuming that those will, they want to enter to a very long term agreement.
David Windley - Jefferies & Company
Okay, moving on the toxicology business demand is obviously very strong as you indicated lots of in terms like the catch by... headline catch by pharma are in fact positive indicators for outsourcing to CROs, I'm wondering about the biotech side of the equation is your mix of RFP flowing in early development still pretty balanced or have we seen basically big pharma take over a the diversity in terms of demands for early development services.
Joseph Herring - Chairman of the Board and Chief Executive Officer
Revenue in early development is still about 60% biotech so it's clearly not being swapped by large pharma although if we look at some of the items that are in our... our proposal backlog right now... some pretty substantial stuff that's actually could come from pharma but its still 60% biotech.
David Windley - Jefferies & Company
Okay, and then in late stage as you're seeing central lab perform well and some leverage there and clinical balance back nicely... how do you... how do you view margin expansion opportunity in the future seems like the majority of this is going to come from late stage and I guess I am wondering how can the late stage margin improvement be as pretendable for the next several years as early development margin improvement was from say 2003-2006?
Joseph Herring - Chairman of the Board and Chief Executive Officer
I think there is couple of things to look at there, first of all central lab is obviously a volume based business and we get incremental margins on the upside and they are driving six sigma with abandon, that is some what needed by obviously the switch in geographic mix which puts in a higher component of transportation which is inherently less profitable, so where would sky rocket, probably not but we continue to see margin expansion opportunities in central lab. Moving on to clinical, obviously margin expansion opportunities there remain robust not only they-- are they adopting six sigma but not adopting their driving six sigma but also we are retaining or getting repeat work from 3 or 4 very large clients and the more efficiently we work with them the better margins that come. But the really big item I see in terms of margin expansion in clinical development are the big IT investments we are making that will allow us to automate a lot of what we do and those projects will start rolling in late this summer and really over the next 24 months.
David Windley - Jefferies & Company
And Joe clarify we'll start to be complete and rolling in to online operations or we'll begin to ramp in terms of their implementation then.
Joseph Herring - Chairman of the Board and Chief Executive Officer
Well, they were going to productions so we will be using them in the business.
David Windley - Jefferies & Company
So seeing the benefits of them by them.
Joseph Herring - Chairman of the Board and Chief Executive Officer
Yes.
David Windley - Jefferies & Company
Okay, thank you.
Joseph Herring - Chairman of the Board and Chief Executive Officer
Thank you, David.
Operator
Our next question would come from John Kreger with William Bair.
Unidentified Analyst
Hi, good morning, this is Rodney [ph] in for John Kreger today. George just to elaborate on one of David's questions about biotech, would you be able to breakdown the amount in revenue or backlog or both, the amount that's coming from smaller biotech as opposed to the larger players?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Actually, I did not have that break up but substantially, or I guess directionally, the majority of that revenues are from large biotech companies or biotech companies, who actually have revenue earnings and they are internally funding R&D, it is not from companies who are waiting for next round of DC funding, we have some of that business but it would be relatively small percentage.
Unidentified Analyst
Got you. Okay thanks and one other question on the phase one that is coming on mind in the second quarter, given that we're pretty far end of the second quarter at this point, has that capacity come on line yet or are we still waiting for that?
Joseph Herring - Chairman of the Board and Chief Executive Officer
No, it's not open yet
Unidentified Analyst
Not open yet, okay
Joseph Herring - Chairman of the Board and Chief Executive Officer
Yes, I'm sorry, you threw me for a loop.
Unidentified Analyst
Okay alright, that's all I got. Thank you.
Joseph Herring - Chairman of the Board and Chief Executive Officer
Thank you
Operator
We go next to Banc of American Securities, John Wood
John Wood - Banc of America Securities
Hey, thanks, Joe I know you guys want to stay away from providing too much detail on essential lab, can you at least qualitatively comment on the direction of the backlog duration for that unit?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Its such a stable, it's still longer than it was a couple of years ago John as you well know and you know the reasons very well that's all I can say.
John Wood - Banc of America Securities
Okay, does the backlog there still stand at over 1 billion?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Yes
John Wood - Banc of America Securities
Okay and then Bill what's the rational for John when the revolver in the quarter, it seems as it that your cash position would be pointed enough to cover the buybacks?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Right, a lot of our cash in Europe and bring it back we have sort of adverse tax impacts for the company but sort of by good fortune. Actually right now the interest rate we're earning on the money we have in Europe is about equal to the rate we're paying on the revolver so there is for once in your life a positive career as suppose to negative career, on that differential and so it really kind of didn't matter in the sense where the cash came from this quarter.
John Wood - Banc of America Securities
Understood, Is the buyback accretive at current interest rates and valuation?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Yes, we looked at it and we kind of calculate it inclusive of the interest income forgone or the interest expense incurred and the net impact was only around about a 0.5% in Q1 out of accretion.
John Wood - Banc of America Securities
Okay thanks a lot.
Joseph Herring - Chairman of the Board and Chief Executive Officer
Thanks John.
Operator
We'll move to our next question Alejandro Alvarez with Goldman Sachs.
Alejandro Alvarez - Goldman Sachs & Company
Hey, thanks guys for the question, just a follow up on essential lab, obviously this is a key area of operating leverage going forward and so as they may suspect, did you talk about the I guess out of the current trailing 12 month that book-to-bill or the how about the duration in terms of where that backlog essential lab is currently at.
Joseph Herring - Chairman of the Board and Chief Executive Officer
We have duration and just trying to dig out the trailing, it's over 1.4 to 1
Alejandro Alvarez - Goldman Sachs & Company
On a trailing 12 month basis?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Yes
Alejandro Alvarez - Goldman Sachs & Company
And in terms of duration, just trying to get a sense of when that's going to come through?
Joseph Herring - Chairman of the Board and Chief Executive Officer
I don't have that information; you can check back with Paul and see if we have that available. Okay One of the things you talk about in historical periods here is that the conversion to more foreign geographies that has impact on the central lab keep volumes, where should be, went through that first quarter and second quarter of last year and that seems to have stabilized but I think as clinical trials continue to move overseas and the shift and proportion of backlog which is overseas, you'll probably see still some of that in terms of performance of trials. Those locations aren't just familiar with clinical trial processes and so there is a little bit a hit when it comes with that.
Alejandro Alvarez - Goldman Sachs & Company
I understand it and its the last question... other question that I had was... Joe you talked about... I think you addressed that last quarter in you prepared comments, you addressed in the presentation with earnings this quarter in clear retention about being lower than the industry average and obviously hiring as a big stream right now on the space, given what's been very strong booking strength across the entire space can you... may be talk a little about that and quantify year retention rate and... what you think the industry pattern... higher look at hiring going forward to step up for what obviously industry growth and backlog?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Yes, well Alejandro your... first of all as I said talent management is really the corn stone of any strategy that we have as a company for couple of reasons. One is as we do complex regulatory [ph] work and the longer someone stays without the... the more accurate they are... that's also critically important for client attention if they like a particular study director or clinical trial project manager or essential lab, even sales executive they are comfortable calling back and continuing to do a repeat work so its very critical to what we are trying to do. As I said in my comments, we were under in single digits in terms of employee turn over for the first time in company history and it is been dropping... substantially quarter and quarter out of the last three or four quarters. I think a part of that is attributable to the work that we've been doing on our compelling offer strategy, I think the other thing is happening is that working in large pharmaceutical companies and even in biotech companies has been more challenging in the past with equity values not going up, CapEx going down, the 50,000 jobs eliminated in the industry last year and a company like Covance that has basically a portfolio that mirrors the R&D function of a pharma company and with a growth and the investments that we are making, we are becoming a very attractive employer, so now where we haven't really a historical sort of recruiting success, we are also having record retention success and frankly, we can build on that
Alejandro Alvarez - Goldman Sachs & Company
What part of the business are you seeing the most industry stress in terms of retention on?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Our retention rates are strong across the board and we have record retention even in clinical development which I think if you just look at the trade press suggestions there just hard to keep people and how to find people we're just not having that problem
Alejandro Alvarez - Goldman Sachs & Company
That's great, thanks very much for the color
Joseph Herring - Chairman of the Board and Chief Executive Officer
Thanks
Operator
We'll go next to Lehman Brother, Douglas Tsao.
Douglas D. Tsao - Lehman Brothers
Hi, good morning. Joe, I was just hoping you can provide a little more color about what you think were the keys to winning the primary provider deal in terms of your service offering. Was it perhaps your central lab or was it something else?
Joseph Herring - Chairman of the Board and Chief Executive Officer
I think it was a couple of things Dough and first of all the valuation process many times, in many of the meetings there were 25 to 30 people from the sponsor company. Medical regulatories sort of across the board. I think one of the key things right up front was their complete buying and understanding of our advanced feasibility models and the understanding that if you pick the right investigator side that proven track records of the formats write-up front then almost everything else should do in the clinical trial makes a lot of sense and that clearly understand that Covance's data base and pressure kept to that, this specific examples and thought that, that was an asset that they want to access so that is sort of a combination of clinical in central lab.
The second thing is in these therapeutic category they took some of the lead compounds and asked our medical regulatory team for the drug development strategy that they would have to that molecule and what came back from our medical scientific team not aligned either very closely but their concept or how to run that trial. All brought me thinking about how either position that product or going after a label in a way that was new thinking for them, so that before the second peg of the momentum.
And the third thing was Chemistry, we continue to get calls throughout this process that we're sort of that channel and saying look out I shouldn't be calling and telling you this but our team loves your team and I know what's going to happen, I don't want to make a commitment, but your team did a great job today and after that 8 or 10 of those meetings over 5 or 6 months, they came to conclusion if they want Covance to have all five therapeutic bundles so the way this process were as they said, there's five therapeutic categories that we're going to outsource 50 plus % of our work. Each CRO could build on either of all five or each one or just one and at the end of the process, Covance was chosen as the primary provider for all five and then added as a preferred provider for any other outsourcing that would occur in another therapeutic category, so it was a very substantial process that we went through.
Douglas D. Tsao - Lehman Brothers
And would you define these 5 therapeutic areas as this company's core franchises or are they the secondary sort of therapeutic focus?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Doug, right now, they are schedule meetings to sort of open the commoner on that portfolio that will allow us to then to determine that more specifically, but if you step back from this particular company, the therapeutic categories are substantial ones for the average pharmaceutical company.
Douglas D. Tsao - Lehman Brothers
And then how many CROs competed for... in this process?
Joseph Herring - Chairman of the Board and Chief Executive Officer
I think they started with 10 and sort of went to 5 and went to 3 and then they choose us and then a secondary for the preferred, not the primary, but the preferred component.
Douglas D. Tsao - Lehman Brothers
Okay, and then Bill, I was hoping you could provide some color on the improvement in the late stage operating margin in the quarter. How much was this related to improvement in clinical development, how much related to sort of the incremental margins from the central lab, and then finally, how much related to the divestiture of the ECG business?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Yes, I don't have those pick or pieces here I think, certainly central labs is a strong contributor in the quarter, they had very solid sequential growth in revenue and profit and year-over-year growth in revenue and profits, clinical also clearly on a winning track and had a positive sequential improvement from Q4, I can go through the pieces I guess but those are primary through primary drivers in the quarter on a sequential basis.
Douglas D. Tsao - Lehman Brothers
And to there was not that much impact from the ECG business?
Joseph Herring - Chairman of the Board and Chief Executive Officer
yes, I wouldn't say it was a huge impact
Douglas D. Tsao - Lehman Brothers
Okay and then finally, in terms of the new business wins for this quarter, Joe, I was wondering was there a skew between either clinical development and central lab, we want a little stronger than the other?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Clinical is a little stronger than central labs
Douglas D. Tsao - Lehman Brothers
Okay, Thank you very much.
Joseph Herring - Chairman of the Board and Chief Executive Officer
Thank you Doug.
Operator
We'll go next from Eric W. Coldwell of Robert W. Baird & Co.
Eric W. Coldwell - Robert W. Baird & Company Inc.
Thanks very much, many of my questions have been answered but I guess I'll step back to a more strategic question with seeing in the last few months, turnover at clinical are monitors to quintiles in a pretty strategic deal and Pfizer donate two labs in Michigan which were I guess taking over, will be taken over by a privately owned CRO. Are these one off events or are we really starting to see an uptake in pharma's asking the industry to maybe take over there own capacity and this so, what kind of consideration is Covance looking out when these discussions pop up and if you've seen anything recently that looks interesting to you, that you would actually consider bidding on?
Joseph Herring - Chairman of the Board and Chief Executive Officer
As I said in my prepared comments and as you well know pharmaceutical companies are looking much more strategically at their fix cost structure and are calling and asking 'hey there's something here that you see that fits in your portfolio that they could provide at a competitive rate or at a favorable rate provides us how we're work and then you can use that sort of unused capacity that we have to service the customary more broadly and frankly, I've been asked that more in the last two or three months when in my 12 years with Covance and so I don't think those are worn off. I think you don't see those types of things happening exactly when and how big and with which clients, it's a little bit hard to say right now but clearly burning platform in Pharma is its bringing new capacity and new demand to see our industry.
Eric W. Coldwell - Robert W. Baird & Company Inc.
If I can just get as follow up on queen farm, is it possible to quantify or give us some direction on the impact of the delays in the quarter and what does actually meant made may be from the top line perspective or are we talking about a few million dollars of revenue that was delayed into the second quarter more than that any kind of direction would be helpful?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Yes, I would say several million dollars in revenue and again these are delays Eric and unfortunately didn't help the first quarter but they are not cancellations and they carry revenue in no way in the second quarter?
Eric W. Coldwell - Robert W. Baird & Company Inc.
Jeff don't you have any sense... was there any kind of common theme across the delays on what is it lack of clinical trial supply concerns about how to manage to study regulatory concerns needing to be closer to a hospital for the cut blue studies that will... what kind of things were out there in those delay, because this isn't the first time we have heard one of the your or one of your peers talk about delays, we've actually had quite a few company is talking about this in the last six months.
Joseph Herring - Chairman of the Board and Chief Executive Officer
Yes, yes actually Eric as you well know, the phase-1 business tends to be lumpy overtime and there will be a quarter where all the studies hold on a few stage as you are not expecting command or there is a big data management component of one and the phase-1 businesses is just fantastic and very next quarter the same thing with the same geography on the same molecules have a couple of studies slip out and this is not so good, so I just see this sort of as the normal tuning in following other business and I do not see this any kind see change and frankly there are some ceros that sort of have a distinct for the space because of that I guess our commitment to this space is because we think that even tough its lumpy, it's a very good business with more importantly its really a strategic part of our portfolio as we look to really capitalize or what we see as a very substantial growing market in the area of proof for concept or learns the age of translational medicine and I think that the value that we can provide with clients and the pull through for other course, this is Covance for our scripts this sort of lumpy component.
Eric W. Coldwell - Robert W. Baird & Company Inc.
That's great, and then final question given... some I guess primarily research which is been done now by consultants and observers of the industry. It seems like the growth and pre-clinical account balances it's somewhere in the 20%v range, we're obviously hearing about a lot more activity and in toxicology and non-clinical work, does that raise any questions or concerns about the supply of products needed to perform those studies, are there any areas where there are shortages in animal models, and what's going on with the dynamics of animal models, are volumes up ticking pricing going up, are there any challenges from being unable to supply the demand in the market?
Joseph Herring - Chairman of the Board and Chief Executive Officer
No Eric, I think if you look certainly at that pharma-projects, there have been some changes in that organization and we're really working very closely within to really dig in to that 18 to 20% growth, some of that is projects are lengthening and not falling out and so you got more coming in and dropping out, but is that really a see change in demand and so, we just want to be careful with that. The second part of your question is that following on to restricted supply or over demand for the animal models, we don't see that at this point in time, I mean our research products business had a solid quarter and are looking to have a good year, but it's not driving of roll-out.
Eric W. Coldwell - Robert W. Baird & Company Inc.
That's great thanks for the answers.
Joseph Herring - Chairman of the Board and Chief Executive Officer
Okay, Eric.
Operator
[Operator Instructions]. We'll go next to [indiscernible]
Unidentified Analyst
Good morning I've one more question on the Clin-Pharm business, out if the ones that were delayed, how many have already started in the second quarter, what percentage?
Unidentified Company Representative
You know Ashley I am sorry, I don't have that information in front of me.
Unidentified Analyst
Okay, you guys did a nice job with international growth, what sectors are you seeing the best the strongest demand
Unidentified Company Representative
With geographies?
Unidentified Analyst
Yes
Central Eastern, Southern Europe, Latin America and across Asia Pacific, I mean the growth area is fantastic and obviously we have a real settle [ph] in that market place being our central lab and the four global labs in our market position there and the growth actually you ask is stunning.
Unidentified Company Representative
Just looking at the US growth, it looked like it was only about 8% year-over-year, what divisions would you say earn quite pulling that way?
Unidentified Company Representative
I guess it depends on whether you are looking at year-over-year or sequential. Year-over-year, I would say its been big movement of trial activity to other geographies. On a sequential basis, it's obviously impacted by the negative FX impact from our larger business as well as the like order in Clin-pharm and the toxicology capacity that we were converting in our Madison facility
Unidentified Company Representative
Right, the US operation, I think were impacted by big clin-pharm, the utilization that you mentioned and then the fact that we are renovating rooms in labs, North America, that's a probably two principle things for the U.S.
Unidentified Analyst
Okay. Lastly on cancellation trends in the clinical development are you seeing any changes directionally?
Unidentified Company Representative
No
Unidentified Analyst
Alright, it pretty much sums it up, thanks
Unidentified Company Representative
Okay
Operator
We hear next from Raymond James, Jake [indiscernible].
Sandy Draper - Raymond James
Hi, this is Sandy Draper actually. Most of my questions have also been answered. Just a quick housekeeping, can you remind me what is the left in terms of balance of the stock buyback, thanks.
Unidentified Company Representative
About 800,000 shares remain on the buyback authorization
Sandy Draper - Raymond James
Okay, that's it from me, thank you.
Unidentified Company Representative
Okay, thanks Sandy.
Operator
We have a follow up question from David Windley with Jefferies & Company.
David Windley - Jefferies & Company
Alright couple... the corporate overhead spending was up year-over-year more than double revenue, but obviously I think we talked on the last call about how corporate overhead was a little soft last quarter, was this quarter... did that represent some catch up and what kind of level should we be expecting on that number, thanks.
Unidentified Company Representative
Yes, I think Dave we're looking at 6.5% plus or minus 50 basis points is being kind of the range that we think is reasonable right now, a lot of what we've been investing in, in the first quarter reflects that is some of the preparation for growth, for the future and investing in IT systems in particular in order to support those so, Q4 was, to some extent, impacted by bonus calculations as you recall from what happened in the fourth quarter, so not all that was negative of certain run-rate but 6% is what I will use for modeling standpoint plus or minus 50 basis points.
David Windley - Jefferies & Company
Okay, just to make sure I heard, 6.5 plus or minus 50, five zero right?
Unidentified Company Representative
Yes.
David Windley - Jefferies & Company
Okay, and is there a point, so your investing pretty heavily in some IT systems, what's the duration of that investment, I suppose is the best way to ask
Unidentified Company Representative
What we have... I think we have 5 different investment streams going on, each one of them has different timelines so, I admire in the finance area, we're putting in an implementation of people stock, which will be running out probably to the middle of next year, but there's other ones they have shorter timelines and some have longer timelines.
David Windley - Jefferies & Company
Okay.
Unidentified Company Representative
Dave I would say if you average those out, it's probably over the next 24 months, roughly speaking. Having said that, I am not sure that's the end of the road, it's just that these 5 are really critical to our business and we really focused on them right now.
David Windley - Jefferies & Company
Okay, I kind of guess that before the question, is there a stage where the intensity of investment and things like this wines off and on the flip side, the efficiency from these systems starts to show up?
Unidentified Company Representative
Yes, I think so based on what see right now anyway is that the intensity is over the next 18 to 24 months and that after that we should be in that well one of the first things system rolls in and in the third quarter this year so hopefully we start to see the productivity gains its not the spends for 24 months, this year a pay back on that but we will have addressed a substantial portion of our entire IP portfolio in a modern integrated systems with the integration layer as well.
David Windley - Jefferies & Company
Okay and then, in the early development more of a philosophical question I suppose but I'm wondering in program management you have, you certainly talked about how you have the ability to drive some time savings for the client and drive efficiency across the portfolio where early development services is, is one of the benefits of, well I'm assuming something here but as program management grows, I'm assuming that more of your pipeline and your phase one clinics comes out of your toxicology clinics as opposed to from the outside coming in and I'm wondering if that increases the practical peak utilization levels for your phase one clinics?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Dave, I've been speculating because you know the reasons why projects get delivery in phase one, a lot of time that has to do it formulation or some finding somewhere it's pretty random at that point, and so I'm not sure whether we're pushing it through that point. So I am not sure whether we are pushing it through or whether clients doing it one-off whether that really will impact sort of those delays.
David Windley - Jefferies & Company
So it doesn't smooth it out noticeably?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Again I.... actually you think about it moreover that I don't understand very well, but that will be what I would think.
David Windley - Jefferies & Company
Okay. Last question you have talked about some opportunity from expanding the nutritional chemistry capabilities to service some of the Asian opportunity, and I wondered if you could elaborate on where that is and how that opportunity is unfolding is it all?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Well we finished and validate that facility in Singapore by the end of the year, and we have two large clients who really was driving force behind that. One has completed their full evaluation facility pass with line colors then we are starting to see samples. The other one is not... they actually haven't quite completed building their manufacturing facility and have a need for that. So it's sort of a still a drag at this point in time, but in terms of short term earnings, but we are very buoyant and beginning our marketing efforts in the region for local work as well. I think the other interesting thing on nutritional chemistry business Dave I know you been there a lot of number of times and keenly interested in and as there legislation in sub-committees of Congress right now and build that's being developed that could substantially increased the amount of food safety testing. You may or may not know, but roughly the only 1% of all the food that comes into the U.S food source pass... is required to have safety testing and it's largely falls on the... to the food companies to do that, and there is legislation that may substantially increase that requirement and would include private labs as opposed to building government labs to do it. So we are actively involved in that lobbying effort and providing and put commentary into that build, that may or may not happen anytime soon and the impact is unknown at this point in time, but it... really it's very interesting.
David Windley - Jefferies & Company
Okay. Thanks. One last question and then I skip over 121 million in FX adjustment, is it possible to round numbers give a sense of how much of that was attributable to Late-Stage business?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Much haven't exactly, but you know, disportionately weighted for Late-Stage because that's where the most the backlog is.
David Windley - Jefferies & Company
Right. Okay. Thank you.
Joseph Herring - Chairman of the Board and Chief Executive Officer
Thanks, David.
Operator
And we also have follow-up question from Douglas Tsao, Lehman Brothers.
Douglas D. Tsao - Lehman Brothers
Thanks for taking the follow-up question. Bill, the tax rate uptick this quarter and I was just wondering if you could provide some direction or guidance as to what you've expected to do for the remainder of the year?
William Klitgaard - Corporate Senior Vice President and Chief Financial Officer
Yes. I think if you kind of go on 24.5 or 29.5% range are going to be okay, it's going to move around a little bit depending upon where earnings come from and it's kind of variable from period-to-period, move 20 basis points from Q4 to Q1, I don't think that's on typical, but I think if you use 29.5% you probably, okay.
Douglas D. Tsao - Lehman Brothers
And then in terms of the dedicated capacity agreement that you announced today. Joe you've indicated that this was related to your program management capability, I was just wondering on in terms of the deal minimum basically the $66 million, what is that tie to, is that tie to toxicology only, does that include chemistry work as well, I just wondering if you could provide some contacts there?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Yes, Doug, thanks for the question, it's a very good question. It is tied just to toxicology, because the client want to make sure they had the rooms and they want to make sure they had the team. The team that was actually assigned to this client when they began to start to outsource early last year, has not the cover off the ball in terms of quality, communication, hitting the client's timelines and it's really on their backs, that this award was won. But, typical of our dedicated capacity, it's the minimum if the client would sign up for and commit to, but in fact it will pull through chemistry services, and as I said we have been ramping up pretty substantially with them and general toxicology work as well, so it really is a minimum kind of a guarantee.
Douglas D. Tsao - Lehman Brothers
And then Joe in the past you have indicated that the dedicated space deal has ultimately yielded much more revenue than the deal minimum is called for, I was just wondering if that has continued to hold through over the last year?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Absolutely.
Douglas D. Tsao - Lehman Brothers
Okay. And then the final question, sort of stepping back from a strategic law [ph], you're thinking more strategically about the Phase I business, I was just wondering Joe if you could provide some color, and some perspectives around how you've seen that market change over the past year or two, there has been a number of your competitors either gotten into the Phase I business or have expanded their capacity there, there have also been some regulatory changes, and also in context of the pressures on the major drug maker, so I was just wondering if you could give your perspectives on how you see that business evolving right now?
Joseph Herring - Chairman of the Board and Chief Executive Officer
Well Doug, the first fact which I know you know is this is really a cottage industry, if you think of the CRO capacity the leading players have a very, very small single-digit market share they are still alive these are in a small environment top Phase I clinics all around the world, they are in academic centers a little bit of this a little bit of that, so even though we are clear one of the market leaders, you know, we still see a very small percentage of Phase I and as you know European Clinical Trial Directive really had a detrimental impact. And so I think what you're seeing is really a market that is evolving and starting to grow up a bit, to me the real drivers for the future for Phase I and I shouldn't call it Phase I, the clinical pharmacology is that most pharma companies are announcing this as a incredibly strategic current point and at this point in the development of new medicines, and to the extent that we can biomarkers and all the preclinical safety data and trip over into early clinical data with patients and special populations, you can make a lot more decisions about what drugs should be killed and what drugs should be expedited and so clients were thinking about, but I think more strategically than ever without a doubt. I think they are also looking for internal capacity saying you know, G... we don't have a GMP pharmacy, we don't have data management capabilities. We can't do micro dosing. We don't have enough beds or enough staff to run to first-in-human study simultaneously and so I think they are seeing how strategic this is looking their internal capacity and saying, boy, you know, we really need a strategic partner and that's the reason why we signed two big deals last year and that's the reason why we have an additional discussions that are more strategic in nature as I sit here today. So we feel very good about clinical pharmacology and how that plays both for our clients and for us.
Douglas D. Tsao - Lehman Brothers
Okay, great. Thank you very much.
Joseph Herring - Chairman of the Board and Chief Executive Officer
Thank you, Doug.
Operator
We also have a follow-up question from John Kreger with William Blair.
Unidentified Analyst
Hi, quick question. Can you talk it all about how... what you are seeing, the effects of the PDUFA renewal last fall, are you seeing that drive any incremental demand for Phase IV pharmacovigilance type work and if you have a perspective on how aggressively the FDA is enforcing those new rules?
Joseph Herring - Chairman of the Board and Chief Executive Officer
What is driving is a lot of consulting activity to help people try to understand just what is going on there. So we are still bullish over the long term in terms of the impact of FD AAA, but how clients I think are still trying to... trying to understand exactly what they want to do there, but John if you are interested we are going to have a symposium, I think it's next week including Lester Crawford as a keynote speaker, and other industry experts are here in the Princeton area and I could have Paul get that information to you, and again what we see a strength of Covance is an integrated wins offering that combines our market access service are period approval as well from the Late-Stage clinical to help our clients really get to a fast solution.
Unidentified Analyst
Great. Thanks very much.
Joseph Herring - Chairman of the Board and Chief Executive Officer
All right, John.
Operator
And there are no further questions at this time. I would like to turn the conference back to Mr. Surdez for closing remarks.
Paul Surdez - Vice President of Investor Relations
Thank you everyone for your time and questions this morning. If you have any follow-up questions, feel free to call me, if not we look forward to seeing you on the road during the second quarter. Thanks, operator, you may end the call now.
Operator
Thank you. That does conclude today's conference call. We thank you all for your participation. Have a great day.
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