Pharmaceutical Product Development, Inc. Q3 2008 Earnings Call Transcript

Oct.22.08 | About: Pharmaceutical Product (PPDI)

Pharmaceutical Product Development, Inc. (NYSE:PPD)

Q3 2008 Earnings Call

October 22, 2008 9:00 am ET

Executives

Fred Eshelman - Vice Chairman and CEO

Dan Darazsdi - CFO

Bill Sharbaugh - COO

Analysts

Randall Stanicky - Goldman Sachs

John Kreger - William Blair

Douglas Tsao - Barclays Capital

Tim Evans - Jefferies & Company

Jon Wood - Banc of America Securities

Greg Bolan - Wachovia Capital

Sandy Draper - Raymond James

Operator

At this time, I would like to welcome everyone to the Pharmaceutical Product Development quarter three 2008 Earnings Call. (Operator Instructions)

Dr. Eshelman, you may begin your conference.

Fred Eshelman

Okay. Thank you. Good morning to you all. As usual, I'll begin by saying that except for historical information, all of the statements, expectations and assumptions discussed in today's call are forward-looking statements that involve a number of risks and uncertainties. Actual results might differ materially from those in the forward-looking statements.

Information about factors that could cause actual results to vary is disclosed in the press release announcing our results and in the SEC filings for PPD, copies of which are available free of charge from our Investor Relations department.

In our comments today, we will refer to selected non-GAAP financial measures. For all periods discussed today, unless specifically noted, net revenue and margins exclude reimbursed out-of-pockets and stock option expense under FAS 123(NYSE:R). For a quantitative reconciliation of all non-GAAP numbers discussed in today's call to the most comparable GAAP financial measure, please see the GAAP/non-GAAP reconciliation that is posted under Investor Presentations and Events in the Corporate section of our website at www.ppdi.com.

Net revenue was $366.4 million for the quarter, up 12% over Q3 of '07, but below our original models for 2008, due to continued weakness in North America and the new authorization shortfall in Q2 of '08. GAAP EPS, up $0.43, was within the guidance range and up 34% over Q3 of '07. Overall margins were 52.5% gross and 21.2% operating, both up nicely over Q3 '07.

New authorizations of $705 million represent a good recovery over Q2 '08 and demonstrate continued market demand. Cancellations and adjustments, excluding a $37 million foreign exchange adjustment to backlog came in at 24% for the quarter. Backlog stands at a little over $3 billion, up 20% over Q3 '07.

Our balance sheet remains very, very strong with $612 million in cash and investments and zero long-term debt. DSO continued to improve at 41.6 days for the quarter, looking pretty good these days. Our top client accounted for 9% of revenue, top 25 for 67%. The largest therapeutic areas by revenue were oncology, infectious disease, cardio vascular, endocrine metabolic and CNS.

Revenue by client type was 56% pharma, 30.8% biotech, 3.6% government and 9.6% other. The Japanese NDA for alogliptin was filed, and the alogliptin/ACTOS product NDA was filed in the United States. Takeda received verbal notification that the PDUFA date for the US NDA for Alogliptin would not be met due to resource constraints within the FDA. No estimate was given for a new date. Obviously, we and Takeda intend to follow those very closely.

With respect to guidance, as previously disclosed, we no longer expect to receive the $25 million Alogliptin NDA approval milestone in the fourth quarter of 2008. In addition, we are lowering revenue guidance slightly and tightening the EPS guidance range for the development segment based on actual year-to-date performance.

As noted in our earnings release, total company net revenue, excluding reimbursed out-of-pocket expenses, is now expected to be in the range of $1.465 billion to $1.490 billion for the full year of 2008. Total company earnings per diluted share are now expected to be in the range of $1.70 to $1.74 for the full year 2008.

Naturally, we are very upset and perplexed by the hammering our stock prices suffered. We have grown steadily with strong client demand for our services. We are maintaining target margins, have improving DSO, enjoy strong cash flows, have $612 million in cash and investments and have no long-term debt.

We also recently increased our annual cash dividend rate by 25%. We believe that these attributes characterize a defensive stock opportunity in unsettling times. In any event, we will continue to work hard and trust that the equity markets will correct themselves.

We will now have comments from Dan Darazsdi followed by Bill Sharbaugh. Dan?

Dan Darazsdi

Thank you, Fred, and good morning. On that revenue number, income from operations and operating margins included in my comments today exclude reimbursed out-of-pockets and stock option expense. For reconciliation to GAAP, please see the GAAP/non-GAAP reconciliation Fred referenced earlier.

Gross authorizations of $705 million were up 23.6% compared to third quarter of '07, delivering a book-to-bill of 1.36. Net authorizations of $497 million included cancellations and adjustments to backlog higher than normal with five projects cancelled between $10 million and $20 million and a backlog adjustment for foreign exchange up $37 million, reflecting the strengthening of the US dollar.

Backlog exceeded $3 billion for the first time in PPD history and breaks down by client type as follows: 54%, pharmaceutical; 35%, biotechnology; 6%, government; and 5%, other. The weighted average backlog at the end of the third quarter was 35 months, up slightly due to a few large authorizations in Europe, Middle East and Africa at slightly longer durations.

Revenue of $366.4 million was up 11.6% compared to 3Q '07 with the development segment up 10.8%. PPD's foreign operations continue to expand in the third quarter and generated approximately 38% of our total revenue. Third quarter development segment revenue of 358.7 million breaks down by service area as follows: 82% from Phase II through IV; 14.6% from labs; and 3.4% from Phase I.

Foreign exchange had a positive impact on revenue in the third quarter. And if we converted at average third quarter '07 rates, revenue would have been $3.1 million lower.

Income from operations increased 35.8% to $77.5 million in the third quarter of '08 compared to the third quarter of '07, resulting in a 21.2% operating margin. Foreign exchange negatively impacted operating income in the third quarter of '08. Converted at average 3Q '07 rates, operating income would have been $800,000 higher.

Development segment gross margins for the third quarter of '08 was 52.2%, up compared to 3Q '07 of 50.1% and above our overall gross margin objective of 50.0%. Development segment income from operations for the third quarter of '08 was $75.4 million or 21.0% of revenue compared to 20.1% in the third quarter of '07. Our operating income rate for the quarter was up largely due to strong performance in Europe, Middle East and Africa and our labs.

SG&A rate was up compared to 3Q '07 largely due to an increase in our bad debt reserve of $2.5 million to ensure we've taken appropriately conservative position, given specific collection risks. The entire management team is focused on driving SG&A down.

The discovery segment delivered an operating income of $2.1 million in the third quarter of '08, including a $3 million compound partnering milestone in the quarter. We also took a mark-to-market adjustment for our alternative investment of $2.1 million in recognition of the share price decline in the third quarter of '08.

Third quarter net cash provided by operating activities was strong at $81.8 million. Free cash flow was $63.4 million. The strong cash flow performance resulted in a cash and investment balance of $612 million at quarter-end after using $42 million in cash during the quarter to pay our dividend and repurchase 769,000 shares of PPD stock.

Capital expenditures were $18.4 million in the third quarter of '08. Of this amount, 19% was for the new building in Scotland and various leasehold improvements, 61% for information technology and the remaining 20% for scientific equipment for our labs and miscellaneous capital expenditures.

We continue to improve DSOs, which moved down to 44 days compared to 51 days at the December 31, '07. Total gross revenues, which include all out-of-pocket expenses and pass-through costs, were $1.43 billion for the nine months ended September 30, '08.

Unbilled services totaled $189.2 million at September 30, '08, consistent with $186.1 million at 12/31/07. With 89.4% of our total accounts receivable aged less than 90 days at September 30, '08, our collection efficiency remains solid. The global finance team working with global operations delivered a strong third quarter, and we intend to keep the focus going forward.

We had another solid quarter in '08 with great indicators for growth and clear management focus to drive operating performance.

That concludes my remarks at this time. Bill will now provide his comments. Thank you.

Bill Sharbaugh

Thanks, Dan. On a total company basis, PPD performed well for Q3 '08. Our management team is focused on delivery, working well together and driving toward better operating efficiency.

Development services gross margin was 52.2%, higher than gross margin for Q3 '07 of 50.1% and 111 basis points higher than Q2 '08. In addition, our global revenue profile is shifting to international markets. For Q3 '08, our ex-US revenue stands at 38% of total revenue versus 34% for Q3 '07. This shift reflects the continuing globalization of clinical trials by large biopharmaceutical companies. And I expect it to continue.

On October 1st, we closed our acquisition of InnoPharm and continue with integration efforts. We remain bullish on Eastern Europe as a location to conduct clinical research and will focus on expansion of operations in that region.

As was stated earlier, development services performance was moderate for Q3 '08 with net revenue increasing 10.8% versus Q3 '07. At this time, I would like to add some color around those results.

In total, the Phase II through IV business showed continued strength. The following comments highlight results versus Q3 '07. Revenue worldwide grew 10%. Authorizations increased 35%. Backlog increased 20%, despite higher than expected cancellations for the current quarter, which Dan addressed. We are experiencing slower growth in the US compared to rest of the world.

However, we had a strong quarter for new authorizations and total proposals for Phase II through IV worldwide remain solid, and the average proposal size is up 22% over Q3 '07.

Now for the Phase I clinic. The Phase I clinic had another strong quarter, achieving revenue of $12.1 million which was higher than our internal targets. They added three new clients and enrolled over 1,000 volunteers during the quarter, which was a double-digit percent increase from the average quarterly levels.

Backlog increased 50% over Q3 '07 and 19% over Q2 '08. New authorizations increased 12% for Q3 '07 and 22% over Q2 '08. Demand for Phase I services remains active and volunteer recruitment remains strong. PPD has an outstanding management team running the Phase I clinic and it shows.

Our labs performed well for the quarter. The GMP lab had a good quarter. Net revenue increased 11% over Q3 '07. We added 12 new clients and continue to see inhalation services as well as formulation and development testing driving our growth. However, new authorizations were below target for the quarter due in part to a shift away from STE-based contracts. Our sales force is responding with an aggressive plan to get back on track for Q4 '08.

Turning to the bioanalytical lab, third quarter revenue was good. Net revenue increased 11% over Q3 '07 and 16% over Q2 '08. New authorizations for the third quarter were below target, but we added six new clients, four new Sciex 5000 instruments and 14 new proprietary methods, which are all indicative of continued growth.

The central labs also had a solid quarter with net revenue growth of 14.3% above Q3 '07. We saw the largest sample activity of any single quarter during the year. We are discussing several unique opportunities with clients that could drive significant volume.

I am pleased to announce our plan to expand our global central lab services into Southeast Asia in response to growing client demand. The new lab will strengthen PPD's global presence and provide clients with a comprehensive range of highly customized lab services. We look forward to opening the lab in mid-2009. This lab will supplement our presence in the region where we have a current partnership with Peking Union Medical College in Beijing, which is aimed at offering central lab services exclusively in China.

That concludes my comments on the development segment, and I'll turn it over to our CEO, Fred Eshelman.

Fred Eshelman

Okay. Thanks, Bill and Dan. Jessica, we're now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Randall Stanicky with Goldman Sachs. Your line is open.

Randall Stanicky - Goldman Sachs

Great. Thanks a lot. Fred, just as a first question on cancellations, can you just maybe walk us through? If we look at the $705 million in gross bookings, it looks like the cancelled was 169. And I think you said the FX adjustment on backlog was 37. Is that the right way to think about it?

Fred Eshelman

Yes.

Randall Stanicky - Goldman Sachs

So the book-to-bill on a non-FX impacted net would have been closer to 1.46. If we think of it that way, the way you previously booked, were you booking, I guess, an FX gain in prior quarters in that reported cancellation number?

Fred Eshelman

Yes, I think we were.

Randall Stanicky - Goldman Sachs

So is it fair to --?

Fred Eshelman

I don't think it's been this magnitude in the past, and so it was really not particularly material.

Randall Stanicky - Goldman Sachs

So I guess that 24% relative to the 22%, 23% we've seen over the last couple years is probably a little more in line, possibly even a little bit on the lower side than average. Is that fair to say?

Fred Eshelman

No. I'd say it's actually on the high side.

Randall Stanicky - Goldman Sachs

Well, if you were booking an FX gain in prior cancellations, wouldn't that understate the reported cancellations previously?

Fred Eshelman

No, maybe I misstated what I said before. But I think we've always taken the FX adjustment into cancellations and whatever given quarter was, and the reason that we didn't call it out and particularly in the past, it just wasn't really material like it was this quarter.

Randall Stanicky - Goldman Sachs

Do you have any caps or hedges going forward in terms of protecting of the backlog or should we expect some more adjustments, currency moves?

Dan Darazsdi

Yes, this is Dan. Mostly what we've done from a foreign exchange management viewpoint and taken position to mitigate that risk. The second quarter was unusually high, and that's why we wanted to call out the cancellations against backlog for the quarter, so you had a better comp.

And I think you're thinking about it in the right way. 24% net of cancelled is about the right way to think about it. In terms of how it's run historically, 24% I'd say is on the slightly high side of the range that we would expect. We like it to be a little bit lower obviously and that's what we're targeting.

Randall Stanicky - Goldman Sachs

And then just as we look at the cancellations, just going further with that, Fred you talked last quarter on a number of $1 million to $2 million smaller cancellations. I think you referred to the reallocations of resources at big pharma. And it sounds like there were some a little bit bigger ones this quarter. But is there anything similar from what you saw last quarter in terms of the trend there?

Fred Eshelman

We haven't had a chance to fully study this minute detail. In other words, about the cancellations, is it more pharma, is it more biotech, is it related to do any particular therapeutic area, is it related to any particular reviewing division within FDA, all the things that we would look or try to figure out what's going on?

We haven't done that exercise yet. But certainly on an absolute dollar basis, it's much higher than we would like and was much higher than we expected. I think a lot of it happened in the last two weeks of the quarter actually.

Randall Stanicky - Goldman Sachs

Okay. And then my last question here, just on the revenue shortfall. Is that largely driven by the second quarter cancellations or is that something that happened post the second quarter in terms of cancellations that had revenue lower than you would have thought for the back half of the year?

Fred Eshelman

I think a lot of it was related to the Q2 shortfall, but it was also related to a number of projects that were on hold. And in fact, some of those that were on hold were cancelled in Q3 of '08, which added most to the revenue shortfall and to the higher cancellation rate.

Randall Stanicky - Goldman Sachs

Okay. Thanks. I'll jump out. Thank you.

Operator

Your next question comes from the line of John Kreger with William Blair. Your line is now open.

John Kreger - William Blair

Thanks. Fred, just to follow up on that, if we look at the new revenue guidance, it seems like the four quarter expectation is down a bit as well. Should we assume that the bulk of that is in US Phase II through IV?

Fred Eshelman

Yeah, I think that's safe assumption, because the ex-US stuff continues to grow nicely.

John Kreger - William Blair

Okay. And then as you look across your various client types, can you just talk about generally are you seeing anything unusual? Obviously, we've got a pretty severe economic situation going on. Are you seeing that drive more outsourcing? Are you seeing that perhaps cut back some spending or more cancellations? Can you generalize at all?

Fred Eshelman

It's very tough to generalize with the kind of information that we have at hand. But we're certainly going to do a lot of cost cutting of data in the next few weeks to try to get our hands around some of the very issues that you're talking about.

One might expect that biotech would be a little weaker for a while because the funding sources may have become scarcer and IPO windows have closed and all sorts of things. But in fact when I look at our marketing logs to see what's on there and where it came from, I'm not necessarily struck that that has washed through if it's going to.

And in terms of big pharma, I think we are seeing increasing evidence that big pharma wants to take new approaches to things, possibly involving some risk-sharing opportunities of the kind we've been talking about for 10 years. But certainly we're not seeing a diminution in the appetite by big pharma to outsource.

John Kreger - William Blair

Great, thanks. And then lastly, what's your current thinking on use of cash? How would you prioritize, how would you like that cash to work in the coming years?

Fred Eshelman

Well, I've been beat up pretty bad over the last couple of years for us having a lot of cash and no debt. We're looking pretty good right now with a lot of cash and no debt. In economic times like this, as we said before, we view this as a defensive stock. We hope it will be by others. We constantly look for opportunities to put that cash to work, to drive revenue, to drive cash returns and so forth.

But as you well know, we have a set of hurdle rates that if we don't get over them, we don't do the deal. And it's increasingly hard to find something that's high caliber, but within a range of acquisition costs that are feasible.

As Dan pointed out, we continue to buy back our stock and we will continue that in the future, buying on weakness. If in fact we exhaust the amount allocated by the Board, I guess we'll take another look at how to proceed from there.

So, I think with the amount of free cash flow that we throw off versus the amount of stock that we would probably buy back in any given period, we will maintain a very strong cash position unless we came across an opportunity that was just too good to be true, in which case it probably isn't true.

John Kreger - William Blair

Great, thanks.

Operator

(Operator Instructions). Your next question comes from Douglas Tsao with Barclays Capital.

Douglas Tsao - Barclays Capital

Hi, good morning. Dan, I was just hoping you could provide a little bit more color around the company's FX exposure and sort of the impact on revenues, just because I had thought that your biggest exposure was to the British pound? And given the strengthening of the dollar relative to the pound this quarter, I would have expected you to have shown a modest hit in terms of FX. Is it up just on a year-on-year basis, but was it down sequentially?

Dan Darazsdi

I think that's the right way to think about it, Doug. And the way we've identified our exposures, just to help clarify this a little bit, as you know we've talked before, our biggest exposure really comes from the pound, because we have a higher level of expenses on the pound than US, sterling denominated revenues. So, that's really our biggest one.

If you look at the euro, although it moves around a little bit just based on the size of the revenue and cost basis fairly matched up, So what we've attempted to do is to look at locking in positions on a go-forward rate that are at or better than our budget rate. And when we get into our guidance call for next year, we'll communicate with some clarity around what positions we're taking and what kind of foreign exchange rates we're using for that guidance.

Douglas Tsao - Barclays Capital

I don't know if you have the numbers in front of you. But on a sequential basis, if you look at 3Q and you translate at 2Q's rates, do you know how big the negative impact would have been?

Dan Darazsdi

No, we can try to get that. I actually just did the year-over-year, because that's what we've been talking to.

Douglas Tsao - Barclays Capital

Just to sort of provide some context around the sequential decrease in development segment revenues, just because I think it's been quite some time that we've seen this from PPD. I think it might be helpful to have some context for people to sort of understand what was simply foreign exchange and what was sort of core operational issue.

Dan Darazsdi

On a sequential basis, we're looking at operating income, it's virtually flat.

Douglas Tsao - Barclays Capital

Okay.

Dan Darazsdi

Less than $100,000 and about $2 million.

Douglas Tsao - Barclays Capital

Okay.

Dan Darazsdi

All right?

Douglas Tsao - Barclays Capital

Thank you very much. One question to Fred. You've obviously talked about the strength of your balance sheet. Given the heightened sort of uncertainty in the financial markets and broader economy, do clients talk to you much about the strength of your balance sheet? How much do you think of that as a competitive advantage versus probably not so much against some of the who can have very healthy balance sheet as well versus some of your smaller competitors who, I know, some of them have had more financial challenges recently?

Fred Eshelman

Well, I think it's an advantage across the board. I'm not aware of anybody that has quite the ratio that we have of cash and investments to zero long-term debt. And I think it certainly gives all of our clients' reassurance that we're solid and we'll be here tomorrow.

Moreover, when we engage in conversations, the likes of which we are having now, with large companies who are interested in doing different kinds of deals that might require folks to have some skin in the game, people come to us because they realize that should the right opportunity arise, we have plenty of cash to enter into some sort of undertaking of venture. So, I think going forward it will become a larger strategic advantage, perhaps even than it is now.

Douglas Tsao - Barclays Capital

And then broadly, when you talked about skin in the game, do you have a philosophy on how much skin or that you would want PPD? I mean now you are talking about 50-50 ventures with partners or more along the lines of the relationship?

Fred Eshelman

We have to evaluate everything on its own merits, as far as its structure, its tax structure, its accounting impact, and potential upside. So, I really wouldn't want to draw a line in the sand and say, we will or won't do anything. We've said in the past that if something looked like it was going to be highly dilutive, we would try to figure out a different structure for it unless it was clearly a homerun out of the park.

I mean recently, we've talked so some folks about things that on the face of them, given risk adjustments, look to be or have the potential for a pretty nice return. But my comment to them was on one in particular; although the rate of return looks like it might be pretty nice, the magnitude of return is not going to move the needle, and we are interested in some stuff that would potentially be needle-moving.

In the same context, that in '09, our two compounds make their way through the regulatory agencies, that's Dapoxetine and Alogliptin and Alogliptin plus ACTOS. As you well know, from an EPS standpoint, that's a potential game-changer. And we're looking for that same kind of order of magnitude potential in things that we do in the future.

Douglas Tsao - Barclays Capital

Okay. I'll skip out for now. Thanks.

Operator

(Operator Instructions). Your next question comes from Tim Evans with Jefferies & Company. Your line is open.

Tim Evans - Jefferies & Company

All right. Thanks for taking the question. This is Tim for David Windley. I am sorry if I missed this earlier. But would you be willing to quantify the increase in value and/or increase in volume of RFP flows this quarter?

Fred Eshelman

I'm sorry. Could you repeat that question?

Tim Evans - Jefferies & Company

Yeah, I'm just wondering if you would be willing to quantify the increase in value or the increase in volume of RFP flows this quarter.

Fred Eshelman

Versus Q3 '07 or Q2 '08?

Tim Evans - Jefferies & Company

Either one or both.

Fred Eshelman

I actually have those numbers in my office. I don't have them right here.

Dan Darazsdi

Well, I may comment that versus Q3 '07, the size of RFPs had increased.

Fred Eshelman

The main size, but we'll get that number for you before the call is over. How is that?

Tim Evans - Jefferies & Company

Okay, great. Thanks. And to follow up on one of John's questions, could I take your comments there to mean that you are entertaining ideas from big pharma concerning strategic outsourcing?

Fred Eshelman

The answer is yes and yes in the sense that we are talking to some folks about things that they call strategic outsourcing. We're also talking to some people about potential arrangements that I would not characterize as strategic outsourcing; I would characterize as a different approach to how R&D is done.

Tim Evans - Jefferies & Company

Okay. One more follow-up on the cancellations. Were there maybe one or more particularly large cancellations that you mentioned in the last two weeks of the quarter that would have affected your cancellation rate materially there?

Fred Eshelman

Well, I think we had five different programs in the range of $10 million to $20 million that evaporated. And I believe we also had one other large, which I can't bring to mind. Dan, do you remember off the top of your head?

Dan Darazsdi

From the detail we had, there are a couple of missing endpoints and they were all in the range of $10 million to $20 million.

Tim Evans - Jefferies & Company

Okay, great. Thanks for the color.

Dan Darazsdi

Okay. Just back on the RFP volume, it's actually just down slightly in the third quarter.

Tim Evans - Jefferies & Company

And that would be year-over-year?

Fred Eshelman

On a sequential basis. Year-over-year is about flat.

Tim Evans - Jefferies & Company

Okay, great. Thank you.

Dan Darazsdi

You're welcome.

Operator

Your next question comes from the line of Jon Wood with Banc of America Securities. Your line is open.

Jon Wood - Banc of America Securities

Hey, thank you. Dan, any update on the cash flow outlook for '08. I think the last I have is 275 to 325. But it appears that if you're running quite a bit ahead of that rate, the top end of that guidance range of year-to-date.

Dan Darazsdi

Yes, let me take a quick look at our cash flow projections. I tell you we're going to look to come in just at the high end of the range. We are running very strong. Our current outlook puts us just at the top end of the cash flow.

Jon Wood - Banc of America Securities

Okay. And can you offer any clarity on what you spent on the Russian CRO and/or any revenue impact that you might be willing to offer?

Dan Darazsdi

Let me just state what I communicated. We've put up about $9 million of the Russian CRO.

Jon Wood - Banc of America Securities

That's what you spent?

Dan Darazsdi

Yes, that's what we spent. We haven't commented on the revenue outlook from that, but that's what we spent.

Jon Wood - Banc of America Securities

Okay. Thanks a lot.

Operator

Your next question comes from the line of Douglas Tsao with Barclays Capital. Your line is open.

Douglas Tsao - Barclays Capital

Hi. Thanks for taking the follow-up questions. You announced, I guess it was a couple of weeks ago, winning a contract from the Juvenile Diabetes Foundation. Was that included in the three quarters' new bookings numbers or was that something that was one and will be included in 4Q?

Fred Eshelman

I think what we announced was that we had been selected as the provider of services to JDRF. I am not sure there was a specific number associated with that. Do you remember, Dan?

Dan Darazsdi

No.

Fred Eshelman

We don't think there was. And if there was, it was not particularly material. So I don't think there is a big shoe to drop either this quarter or next unless we suddenly start signing some material stuff under that agreement.

Douglas Tsao - Barclays Capital

Okay. And then going back to compound partnering and potential opportunities there, we've obviously seen a lot of partnerships done with major pharmas and not necessarily worked out recently, not specific to PPD, but just across the boarder market. How much of a concern do you have regarding asymmetry of information? Obviously, you conduct your due diligence, but there is a reason why you might want to give up some of the risks on a particular compound. What's your general approach on that?

Fred Eshelman

Our general approach is that drug development is highly risky and always asymmetric in some senses. We don't labor under any misunderstanding that a proposal out of the box from anybody is probably going to be engineered to their benefit. That's why we do negotiations and all of the rest of it to try to get some parity with respect to returns to both parties.

Having said that, it is caveat emptor always when you enter into these things. We have to risk adjust for all kinds of things. And that's why it's also extremely interesting to see the various approaches between and among companies, because without getting into stuff that's preferential or protected or whatever, we can learn from all of these things and try to figure out what is the best road down the middle for PPD to take on these kinds of deals.

So, yes, we're pretty careful on these, I think, is what you're driving at.

Douglas Tsao - Barclays Capital

And then I guess, following up into your earlier comments about the defensive nature of PPD as an investment, what would your response be, though, when somebody says, well, if you're pursuing compound partnering, you're potentially increasing the risk profile of the company, certainly relative to perhaps some of the other zeros in the public markets?

Fred Eshelman

I think it, like most things, depends on how you look at it. But I am sure you recall in years past analytical reports that emanated from your old company, showing that a significant part of the market capitalization of big pharma at that time could be accounted for by the value of their pipeline. And the more they spend on R&D, there seemed to be a direct correlation with their market cap.

In other words, people thought that there was a potential there for building great value. And I think that's part of our approach here. We think there is a potential for building great value. If you say, well, it's risky because we don't know what kind of impact you're going to have on periodic EPS, yes, that's fair enough statement. But we've also said that we would try to keep that to a minimum through different kinds of structures and arrangements. So, I guess we do it as a glass is half/full on that particular issue.

Douglas Tsao - Barclays Capital

Okay. Thank you. I'll hop out for now.

Fred Eshelman

Okay. While I have a chance, I'd just like to answer the question that came before with respect to RFP volume. Dan is correct. The RFP volume for Q3 '08 was down ever so slightly over Q3 '07. It was also down some versus Q2 '08. However, having said that, the total RFP volume through three quarters of '08 is 87% of total year '07. So, if we see anything like normal RFP volume for Q4 of this year, we will blow through the '07 numbers quite handily. So, in other words, I think the market is still growing.

Operator

(Operator Instructions). Your next question comes from [Greg Bolan] with Wachovia Capital. Your line is open.

Greg Bolan - Wachovia Capital

Thanks for taking the questions. So, Bill, you mentioned that bioanalytical lab authorizations were below target this quarter, and that's after putting up authorizations above target last quarter. Can you talk about any, call it, short-term headwinds you maybe seeing in the flow of biologic volumes? I realize you continue to invest in the business for the long haul, but can you speak about any acute weakness that you're seeing right now?

Bill Sharbaugh

I wouldn't draw correlation between the sales quarter-to-quarter with biotech, the bioanalytical lab. There is a lot of small molecule work as well. And as we've mentioned before, it's going to be choppy quarter-to-quarter, and we have a lot of exciting opportunities with the bioa lab. As Fred mentioned, we're talking to a lot of clients about the new outsourcing models that doesn't apply to only Phase II through IV, it also applies to our lab segments as well. So, we don't see this as a trend or major issue. It's a little bit choppy quarter-to-quarter. That's all.

Greg Bolan - Wachovia Capital

Thanks.

Operator

Your next question comes from the line of Sandy Draper with Raymond James. Your line is open.

Sandy Draper - Raymond James

Yes, thank you very much for taking the question. Most of mine have been answered. Fred, this is more of a philosophical question on guidance. In light of the Takeda delay, how are you guys thinking about giving guidance for product milestone revenue going forward? Is it something you probably can eventually wait until there is certainty or do you still want to try to predict the timing from the FDA, which is obviously a difficult challenge? Thanks.

Fred Eshelman

Well, as you infer, we're damned if we do and damned if we don't. But I think our approach is that we're going to continue to take our best estimate of when things will occur based on history, based on promises we have with our partners and so forth and so on.

And so, when we issue guidance for '09 in December, I would fully expect for us to address what we expect in terms of development milestones for '09. And if we are expecting anything to be approved in '09, then we would try to make some estimate of the potential for royalties and/or sales-based milestones in '09, and as we go forward into '10, '11, '12 and so forth, assuming that these products are approved, then we'll have to refine the way that we do that much the same as a pharma company might, because obviously they have to give guidance and estimates over what kind of sales they expect for their products. And we would be in the same boat to some extent.

Sandy Draper - Raymond James

Great. Thank you very much.

Operator

(Operator Instructions) There are no further questions at this time. Do you have any closing remarks?

Fred Eshelman

Okay. Thank you much, Jessica, and thank you for being on the call. If there are follow-up questions, please address those to Luke and/or Dan or myself. Thank you and good morning.

Operator

This concludes today's conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!