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Executives

Michael McKelvey - President and Chief Executive Officer

Keith Schneck - Executive Vice President and Chief Financial Officer

Analysts

Bret Jones - Leerink Swann

eResearch Technology Inc. (ERES) Q3 2008 Earnings Call October 30, 2008 5:00 PM ET

Operator

Thank you for your patience and welcome to the third quarter 2008 eResearch Technology earnings conference call. My name is Candice and I will be your coordinator today. At this time, all participants are in listen-only mode. We will conduct the Q&A session after management's remarks. (Operator instructions) As a reminder, today’s conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's conference, Dr. Michael McKelvey, President and Chief Executive Officer. Sir, you may proceed.

Michael McKelvey

Thank you, Candice and good afternoon. Thank you for joining us for eResearch Technology's third quarter 2008 earnings result conference call from the home of the World Series Champion Philadelphia Phillies. A press release announcing the third quarter 2008 results was released this afternoon and is available on the eRT and most financial websites. Joining me today is Keith Schneck, Executive Vice President and Chief Financial Officer.

Prior to beginning the call, I would like to read the forward-looking event statement. When used in this conference call, words such as anticipate, could, estimate, expect, intend, may, will, would, believe or other similar expressions are intended to identify forward-looking statements. As such, these forward-looking statements may involve known and unknown risks, uncertainties and assumptions that could prevent our actual results to differ materially from those that we present.

The risks and uncertainties applicable to these forward-looking statements include but are not limited to competitive factors, integration of acquisitions, technological development, market demand, our ability to obtain new contracts and estimate net revenues accurately due to the uncertain regulatory guidance and other factors, variability in size, scope, timing and duration of projects, internal issues in and external issues affecting our sponsor and clients and other risk and factors relating to our business and the businesses of our clients as discussed in our reports on Form 10-K and 10-Q filed with the Securities and Exchange Commission. Our forward-looking statements speak only as of the date made. We do not undertake and expressly disclaim any obligation to update forward-looking statements to reflect events or circumstances after the dates of the statements except as required by law. You are cautioned not to place undue reliance on our forward-looking statements.

I will first give highlights for the quarter and details on new bookings and our business lines. Keith will then discuss the detailed financials for the quarter and provide guidance for the fourth quarter of 2008 and the full year. I will then give some general reflections on our business and then open up the call to questions.

The third quarter of 2008 was another strong quarter for eRT. We continued the momentum that we built up over the past few quarters and again, demonstrated the inherent leverage in our business model. As expected, the revenue this quarter was lower than the second quarter reflecting the normal seasonality in our business in the summer months. However, despite the lower revenue, we maintained our profitability with operating margins of 31.1% and diluted net income per share of $0.13 up 85.7% from the third quarter of 2007.

eRT's leadership position in the market in quality, scientific and medical leadership, project execution and use of advanced technology gives our clients a strong reason to continue to utilize our services. We completed the integration of the Covance Cardiac Safety Services or CCSS operations in the eRT this quarter. This was a quarter ahead of schedule all of the new software systems required for the CCSS integration have been completely and thoroughly validated, all projects successfully moved into our expert to work for a system and the Reno facility closed. We believe the clients are enjoying the enhanced level of services.

We have made excellent progress preparing to move to our new corporate headquarters and for our US based core lab in Philadelphia and expect this to be completed by the end of November 2008. This new facility brings much needed additional office space and provides for our current needs and our anticipated growth into the future. The quarter saw continued significant improvements in three important areas; financial, operations and new bookings. Financially, we achieved the highest level of revenues ever recorded in the third quarter of the year for eRT, record backlog in the highest operating margins in nearly four years.

Operationally, we achieved strong transaction volumes and continued to perform exceptionally well on client projects. This was reflected in the strong growth in services revenue which is increased 51.1% from a year ago. We recorded $43 million in new bookings in the third quarter. We continue to see a stable pricing environment with the average price of new bookings increasing slightly in the third quarter. A very slight decline in the prices for bookings using the manual methodology was more than offset by a rise in prices for bookings using the semiautomatic methodology. Our business development team today reports a healthy pipeline of new business opportunities.

The revenue from the acquired backlog from CCSS continues to decline. We reported $1.9 million of revenue in the third quarter compared with $3.3 million and $3.0 million in the first and second quarters of 2008 respectively. However, cost of revenue and operating cost also came down to $2.4 million in the third quarter, this compares to $4.6 million and $3.3 million in the first and second quarters of 2008 respectively. This was the result of moving some of the operations from Reno to Philadelphia more quickly than anticipated and other cost reductions.

As I mentioned previously, we completed the shutdown of the Reno facility this quarter. The ongoing costs into the fourth quarter and into 2009 attributable to CCSS consist of depreciation and amortization and some line down cost. The revenue stream from the CCSS backlog will continue to decline in the future which will be offset overtime by other revenue from acquired CCSS backlog clients and bookings from the market in agreement with Covance. However, the revenue from these new bookings which are mostly in Phase III will take some time to be realized and will not immediately offset the revenue gained burned off from the backlog.

On the business development perspective, the marketing agreement with Covance continues to be successful and we are quite optimistic about its prospects into the future. As an example, we have been able to win new business and compete on other business from client that we have previously not done and work with. Going forward, we will not break up CCSS revenue and cost due to their total integration into the eRT systems now.

I will now discuss some of the highlights for the quarter. Unless otherwise indicated, all comparisons represent changes from the third quarter of 2007. Revenue was $33.9 million in the quarter which represented a 41.5% increase from the third quarter of 2007. Although, all significant areas showed strong growth, cardiac safety services revenue led with a 56.0% growth rate. While these results were held by the $1.9 million in revenue from CCSS in the third quarter, it still represented strong organic growth from last year. We were able to leverage this revenue growth and the significant gain on the operating income line.

Operating income for the third quarter was $10.5 million as compared to $5.4 million from the previous year's quarter, an increase of 96.8%. We were also pleased with our continued strong margins. Gross margin percentage in the third quarter of 2008 was 56.3%, up from 48.0% in the third quarter of 2007. The operating income margin percentage was 31.1%, an increase from 22.4% in the third quarter of 2007. This reflected both the incremental margin from leveraging revenue growth as well as increased deficiencies in our operations.

We had another strong level of new bookings in the quarter. New bookings were $43.0 million for the quarter, an increase of 21.1% from the $35.3 million recorded in the third quarter of 2007. This was below our record levels of bookings in the first and second quarters of 2008 but did represent the highest level of bookings that eRT has ever recorded in the third quarter of a year. The third quarter is generally our weakest quarter from the new bookings perspective.

Year-to-date, 2008 has seen a shift to an increased level of bookings from those recorded in earlier years. In the first three quarters of 2008, we recorded new bookings of a $142.1 million which is $3.4 million more than our bookings for the entire year of 2007.

I ascribe the success in new bookings to five factors: first, we are seeing a good level of activity for spending on Centralized Cardiac Safety Services. Second, eRT's leadership position in the industry and its reputation for quality, best-in-class customer service and innovative technology presents a compelling case to existing and new clients like. Third, pricing continues to be stable. Fourth, increases in new bookings from using our CRO and other partner channels and fifth, bookings from our exclusive marketing agreement with Covance and our exposure to clients from the acquired CCSS backlog are positive. However, we will keep an eye on any new developments that occur as a result of the current and future financial and economic situation.

The quarter saw seven new thorough ECG trials signed. The average booking revenue of the thorough ECG trial was just an excess of $1 million. There is a considerable amount of range in the values of thorough ECG trial contracts which reflect the complexity and design differences of the intrinsic drug properties of the particular drug under study. The distribution of bookings this quarter was focused on Phase III. Overall, Phase III trial has accounted for 55% of our bookings with thorough ECG trials accounting for 20%, Phase II trials accounting for 15% and Phase I trials accounting for 9%.

We continued to see no demand from sponsors from using the automatic methodology in our bookings number. The book-to-bill ratio in the third quarter was 1.3, down from 1.4 in the second quarter of 2008 and from 1.4 in the third quarter of 2007. The cancellation rate was an annualized 19.6% as compared to an annualized 18.1% in the second quarter of 2008. The cancellation rate we report is a fully factored cancellation rate that consists of the actual value of study cancellations plus the value of studies that are completed at amounts under the original contracted value all divided by the beginning period backlog.

The increase in the cancellation rate in the third quarter was in this latter category and due to the ending of a few long running oncology trials that ended with zero ECGs than originally contracted for.

The pipeline of new opportunities for our ePRO and eClinical are EDC. Business continues to grow although its contribution to our overall revenue remains small. Over the long term, we are optimistic about the ability of both ePRO and eClinical to contribute to our growth prospects. We have seen a good amount of interest in our Suicidality Monitoring System that we announced in the second quarter as well in our EDC Now! EDC offering. Our eClinical business saw an increase in revenue in the third quarter in contrast to the declines in revenue that we have seen in the recent past. eClinical revenue as defined as the sum of professional services, client services and license revenue increased 13.3% from the third quarter of 2007.

I will now turn the call over to Keith for some more details on our financials for the third quarter and an update on guidance for the fourth quarter of 2008 and the full-year 2008.

Keith Schneck

Thanks Mike. Further highlights for the quarter; the third quarter revenues was $33.9 million, a 41.5% increase from the $24 million in the third quarter of 2007. Our Cardiac Safety Service revenue was $23.3 million which is up 56%, site support was $8.2 million which is up 19.1% and our eClinical business which includes the licensed professional services and client services within our EDC and ePRO business lines, totaled $2.5 million, up 13.3%. We experienced a significant increase in the number of ECG's processed during the quarter with average prices up slightly. This increase came about from the impact of our prior strong bookings as they move into revenue and to a lesser extent, the CCSS contribution.

Our site revenue was up due to the increase number of units rented, a one-time billing adjustment of about $460,000 offset by a slight decrease in average rental prices and a decrease in equipment sales which is a line of business that we are deemphasizing. eClinical growth is due to more focused activity and improved contribution from our new ePRO product line. Revenue is down sequentially as expected due to a decline in the Cardiac Safety Services volume of transactions as its activity is impacted by the slowdown in summer months. Gross margin was $19.1 million or 56.3% compared to 48% in the third quarter of 2007. The gross margin included the impact of operating results to CCSS and the integration of CCSS into eRT.

CCSS generated net revenues of $1.1 million from acquired backlog during the third quarter while incurring cost of revenues of $1.7 million including depreciation and amortization of acquired assets. Gross profit margin in Cardiac Safety Services was 60.2% up from 53.7% a year ago; state support gross margin was 42%, up from 29.7% a year ago and eClinical gross profit with 65% down from 66.9% a year ago.

Margin improvement is due to the leverage within our operating model as our volume with transactions increased significantly from a year ago. As previously mentioned, average ECG transaction prices were up slightly from a year ago. Site support margins are up as depreciation on older, more expensive ECG machines has declined as these machines have become fully depreciated and the impact of the $460,000 positive billing adjustment recorded in the current quarter.

Operating expenses were up $2.4 million or 39.3% from a year ago. As the percentage of revenue, operating expenses remained relatively flat at 25.2% of revenue in the third quarter of 2008 and 25.6% in the third quarter of 2007. Operating expenses included $687,000 of mostly G&A costs related to the operation and integration of CCSS which was completed in the third quarter. We expect future CCSS related operating expenses to be around $100,000 per quarter in addition to about $900,000 in cost of services primarily regulated to depreciation and amortization of acquired assets and intangibles and some line down costs.

Sales and marketing increased $639,000 or 25.7% driven by staff additions, increased commissions consistent with new bookings and revenue growth and additional marketing costs related to our recent eRT branding and marketing activities. G&A increased $1.7 million or 68.3% including the impact of CCSS previously mentioned and also increases in staff, insurance, bonus, T&E systems etc needed to run this significantly higher volume of business.

R&D was up slightly with major projects focused on our upgrades to our EXPeRT 2 cardiac safety system, the Reno transition and work on our EDC Now! and ePRO technologies. Today, the cost of our moves has had a minimal impact on our operating expense, we will be taking possession of the new facility in November at which time our new rent and depreciation on a new leasehold improvements will commence. We anticipate the incremental cost of the new facility over our present one will be about $450,000 in the December 2008 quarter as we will have two months of rent for both facilities plus the cost of the physical move and the write off of any remaining leasehold improvement in our current facility.

The incremental cost will drop to about $230,000 per quarter in 2009. We are funding about $3 million of facility leasehold improvement and related equipment and furnishings as part of this project which will impact our cash balance when paid.

Let me move to the balance sheet, eRT ended the third quarter with $62.4 million in cash, cash equivalents and investments, an increase of $6.5 million from the $55.9 million at June 30. For the three months ended September 30, 2008, net cash provided by operating activities was $8.8 million and $26.8 million for the nine months to date. Our cash is invested primarily in liquid money funds and obviously yielding a very low rate of returns given the present economic situation.

Accounts receivable was $32.8 million and up from the $29.3 million at June 30, 2008. Our DSOs were about 90 days which is up from about 75 days over the past prior two quarters. Receivables are up due primarily to internal activities including our transition of CCSS into our eRT EXPeRT systems and an eRT upgrade both occurring in July and August which impacted our timing for billing and collection activities. These matters have been resolved in September and we would expect the DSOs to drop to more normal levels. We consider our receivable balances to be of good quality and do not have undue concern with collectability from our customers.

Now, some comments regarding the impact of the current financial situation on our business. Many companies have recently experienced wide revenue swings related to the impact of changing foreign exchange rates. We have very little revenue exposure to foreign exchange rate as less than 5% of our customer contracts are denominated in currencies other than the US dollar. We have also looked at our revenue composition from clients and assess this on a client by client basis. About 60% of our revenue is derived from the top 30 pharmaceutical companies, 30% from the smaller to medium size pharma and 10% from biotechnology companies. We also closely monitor and assess the financial risk and stability of those customers in lower tier to minimize any exposure.

Guidance for the fourth quarter of 2008 and for the year ending December 31, 2008. In press release we issued guidance for this period, for the full year 2008; the Company is narrowing its revenue range and expects revenues of between $134 million and $137 million. The Company is raising its guidance for diluted net income per share to between $0.47 and $0.50 for the full year 2008. The Company's revenue guidance for the fourth quarter is between $31 million to $34 million and its guidance for diluted net income per share for the fourth quarter is between $0.10 and $0.13 per share.

There are three reasons for narrowing the range of our revenue guidance; one, we are seeing less revenue from the acquired CCSS backlog than we had anticipated in the second half of the year. Two, in the second quarter, we saw in 15 thorough ECG trials, some of which we anticipated would start in the fourth quarter but several lease will likely start in the first quarter of next year. The establishment of the eRT consulting group has also given us an earlier visibility when thorough ECT trials will start as we are helping them to right the protocol and so our bookings of thorough ECG is generally earlier than it was in the past.

Our bookings have also included a higher percentage of Phase III studies and these have taken longer to turn into revenue than the other phases.

I will now turn the call back to Mike.

Michael McKelvey

Thank you, Keith. One of the key aspects of eRT's business model is to help the pharmaceutical and biotechnology industry ensure that the drugs they develop are safe from a cardiac safety perspective. eRT is passionate about being the leader in the ECG core labs base. The services that we offer are state-of-the-art and designed to ensure that rigorous testing is done in clinical trials not only to provide supporting data for the submission to regulatory authorities [24:01] but perhaps more importantly, to ensure that these drugs are as safe as possible when released to the general public.

One of the key drivers of the ICH E14 guidance adapted in 2005 was the realization by regulatory authorities that certain drugs that were already approved for general use exhibited adverse cardiac safety signals that eventually lead to their withdrawal from the market. The human and financial cost of having to recall already released drugs from the market are enormous. eRT's mission working closely with our sponsors, CRO partners and regulatory agencies is to strengthen the cardiac safety component of trials to minimize the chance of this happening into the future.

eRT's approach over the years has been to use technology to maximize the input of the most valuable resources in cardiac safety. Cardiologist and cardiac safety specialist were minimizing their cost. Other approaches such as the fully automatic or mostly automatic or highly automatic methodologies use technologies to minimize and in the extreme eliminate these valuable resources. We continue to work with sponsors; hardware manufacturers, algorithm developers and CROs to cost effectively provide the leading cardiac safety services to the industry.

We find in today's uncertain economic climate that our clients are more determined to work with established partners with proven track records of implementing tried and proved solutions with proven substantial experience in submitting data to the regulatory authorities.

I will close by offering some thoughts on the current economic and financial situation. We are currently in an economic and financial environment that is unlike those that we have seen. We will continue to closely monitor the economic and financial environment for its potential impacts on eRT. Our general feeling is that for drugs and development by large pharma and small to medium size pharma that we will not see much if any impact in the short term. For drugs and development by some smaller biotechnology companies who might experience funding issues, there maybe some impact for marginal drugs, drugs that are not a key part of their pipeline.

As Keith already mentioned, 60% of our revenue is derived from top 30 pharmaceutical companies, 30% from small to medium size pharma and 10% from biotechnology companies which include large cash flow generating biotechnology firms as well as emerging companies. Seventy five percent of our bookings and backlog is in thorough ECG and Phase III trials and with the current focus by our clients on late stage pipelines to try to quickly bring products to the market; we feel that this is healthy. Once the sponsor has gone to this stage of contracting with the core ECG lab to do a thorough ECG trial then they generally will do the thorough ECG trial in order to gain regulatory approval for their drug.

Accordingly, our cancellation rate on thorough ECG trial is low. Since the beginning of 2007, out of the 61 thorough ECG trials that we have been awarded, only 4 has been canceled, a cancellation rate of 5%. While we cannot accurately predict whether this trend will continue, it is some evidence of past trends. Fifty five percent of the bookings in the third quarter were in Phase III. While it may take longer to recognize revenue from this, it does provide a nice basis for future growth. We have seen one client delay a thorough ECG trial from the fourth quarter into the first quarter of the year but we cannot specifically ascribe this to the current economic and financial environment or to delays which happened even in a robust economy.

While we may see some other delays in the future due to potential funding issues, we believe that the long term fundamentals of our industry and eRT's position in the industry are strong. While we are driven by many of the same factors of these large CROs, there are some differences that are important. First, we have a much higher percentage of our business in Phase II, III and thorough ECG trials than the CROs. As I mentioned earlier, 90% of our bookings in the third quarter were in these three phases.

Second, we do not have the foreign exchange exposures that many CROs have. Third, although CROs are becoming more important as an outsourcing partner to us, the significant majority of our projects are still directly contracted with pharma and fourth, the average size to our trial is significantly less than of CROs.

eRT has a solid balance sheet with no debt and $62 million in cash. In addition, we have strong cash flows, healthy margins and good visibility to our revenue in the near term. We are the market leader and what we feel is an industry that is marked by good growth fundamentals. Our market leading position should be advantageous to us in these times. We are seeing many of our large pharma partners engaging us in strategic outsourcing discussion whereby working as partners, we can both achieve advantages.

We realize that this will position us further growth in the market share and revenue growth in the longer term. We also believed that we have an opportunity to further improve our own internal productivity and will continue to undertake initiative to do so over the next year.

With that, we will now take any questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Bret Jones - Leerink Swann.

Bret Jones - Leerink Swann.

Thank you and good evening. Mike, can we talk about the cancellation rate a little bit? I mean I know it is traded up for the last four quarters but generally it has been within your range and you did talk about some large chemotherapy trials that ended prematurely or did they end prematurely or just without as many thoroughs as you talked about or as you were expecting?

Mike McKelvey

No, these were long-term Phase III trials, oncology trials that started a couple of years ago and they just ended with zero patients enrolled and therefore fewer ECGs required.

Bret Jones - Leerink Swann

Okay, is there any way to quantify what impact that had on the cancellation rate?

Mike McKelvey

We could. I am not probably prepared to do that right now but I can certainly get back to you on that but we do have that data that would allow us to do that.

Bret Jones - Leerink Swann

That will be great. So, when we talk about the economy and I know you said 10% of your business is from small cap biotech and you talked about the thoroughs, I know Keith had mentioned that some thoroughs, some of those 15 thoroughs were expected to start in Q4 and they are now going to go in Q1 and I think Mike, you said there was only going to be one. Is that one of those trials or were there more than one?

Mike McKelvey

There is one or two right now. We know of one, there may be another here.

Bret Jones - Leerink Swann

Okay but are you seeing any other delays outside of the thorough area? I cannot imagine anything but thoroughs. Thoroughs are the ones where the clinical trial sponsors have the most leeway when they start, right?

Mike McKelvey

Right, we have not seen any delays directly related to what we are doing. I mean maybe people have delayed things that we are not aware of but of the trials that we have run or we have been awarded, we have not seen any other delays.

Bret Jones - Leerink Swann

Okay and then since you brought up the ICH guidelines, I do not know, are you familiar with the Q&A that was published in June that the ICH put out?

Mike McKelvey

I have seen some summaries but I have not seen the whole thing.

Bret Jones - Leerink Swann

Alright, if I could just read you one little section, I would just like to hear you comments on it. Part of it says when the thorough QT study is positive, fully manual or manual adjudication methods are currently recommended for an adequate sample patient in the late phase study but it then goes on to say, "When the thorough QT study is negative, routine ECG safety assessments in late phase for clinical trials using fully automated reading methods would be adequate." I just wanted to kind of get your sense of what you are thinking, what you are hearing from the regulators on this piece because this is the first time I have ever heard anybody say that that you could use fully automated for the routine studies. I have always heard from the experts I have spoken with, they said that thoroughs will be more likely of an area that would be automated.

Mike McKelvey

Right, the experience that I have had in talking with regulators or with the industry is exactly yours. It is that the automating method, if it is used in the future, would be on thoroughs and not on, because thoroughs have healthy patients as opposed to in routine trials that have basically a patient or sick patients which makes it more difficult to read an ECG. So, I cannot comment on that particular Q&A because that is not consistent with what I have heard in the industry.

Bret Jones - Leerink Swann

Okay, so you are not hearing anything from the trial sponsors speaking about when the thoroughs are negative or there is no cardiac safety signaling some of the pre-clinicals with the thoroughs that they are considering even doing a fully automated for routine.

Mike McKelvey

No, we have not heard of any sponsors looking to do a fully automated either in thorough or in routine.

Bret Jones - Leerink Swann

Okay, great. One more question and I will jump back in the queue, our gross margin was a little bit higher and I would have expect that given the, I am talking sequentially, given the lower volumes in the Cardiac Safety Services business, is that just a function of some mitigating cost within the CCSS piece or converting those trials over to EXPeRT 2 or just something else going on a gross margin?

Mike McKelvey

I think it is combination of things. One is that we have been able to move some of the CSS cost out quicker than we have anticipated and also we continue to look at how we can improve our productivity using EXPeRT 2 so I think those are the two main areas.

Operator

(Operator's instruction) You have a follow up question from the line of Bret Jones - Leerink Swann.

Bret Jones - Leerink Swann

If I am the only one asking questions, I guess I will continue. Tax rate was lower than I was expecting. I was wondering if you could elaborate on that a little bit.

Keith Schneck

Sure, we filed our income tax return for 2007 in October. We had some items that because of I guess what was recorded in the past and some of the years going past but then I open for auditing longer and with some provisions in there that were not necessarily any longer so they were taken back in appropriate manner. So, it had a nominal downward effect on the tax rate.

Bret Jones - Leerink Swann

Then would you expect the tax rate to rebound in Q4?

Keith Schneck

Yes.

Bret Jones - Leerink Swann

Okay, great.

Keith Schneck

Well, let me clarify that. We would also expect to see a slight or there is going to be some positive adjustments as well because the R&D tax credit which we previously were not allowed to record this year because it was not authorized by congress, now is authorized so we will have some pick up for that. So, it is going to be smaller than what would have normally been in the past.

Bret Jones - Leerink Swann

Okay. In terms of bookings, I know that this is a record Q3 level but is there generally the seasonality effect? You sort of alluded that there was Mike that Q3 is generally a lower bookings number, it gets kind of convoluted going back in history with some of the changes within the industry but if I just look at last year, it was up. I wanted to know, I know there is seasonality in terms of clinical trial starts and that would affect sales but generally with bookings, is that the case also?

Mike McKelvey

Yes, what we find Bret is that oftentimes especially in our European customers, July and August are relatively difficult times to deal with the outsourcing groups with their vacation schedules and the like. Last year in the third quarters, there was a particular uptick in the third quarter because of two or three compounds that really needs to get through so there was a little abnormal. If you go back to the second quarter or the third quarter of 2006, you will see a sharp decline. Generally it is a weaker quarter but as you say, there are other factors that can transcend seasonality or so.

Bret Jones - Leerink Swann

Okay, great and then on pricing, when you talk about manual pricing continuing to decline, I mean some of them are going up, I assume that similar, is that the rate of inflation that you have talked about in the past? And can you speak to what is causing the manual to come down more?

Mike McKelvey

No, I mean the manual came down very slightly and I think there is just enough of a mix shift. There is really no trend there. Some of the automatic we have talked in past about increasing at the rate of inflation, sometimes is a mix shift between clients that have large volume discounts and others, they do not. So, that is really what is causing the majority of that, also, just the general movement up in prices.

Bret Jones - Leerink Swann

Well, and then just to go back to the highly automated and this will be my last question. When we talk about highly automated or when I ask the question about the ICH guideline, you mentioned that the experts you spoken with are sort of been targeting the thorough. I guess, are those experts within the industry or are they regulators?

Mike McKelvey

I do not talk directly to regulators. I do talk to our medical folks who have certainly contact with regulators. I cannot speak directly to that but it is just the general view of number of discussions I have had with industry folks and with our own internal folks.

Bret Jones - Leerink Swann

Okay, so just I am clear, the people within the industry are always saying that they would like to see or they believe that the market is going to go to more highly automated in the thorough piece?

Mike McKelvey

No, that is not at all was that. I apologize if I intonated that but that is not what I said at all.

Bret Jones - Leerink Swann

Okay, no I guess I misunderstood and it sounded like you were saying that the people you have spoken with have said that the thorough piece is where we probably see automated as opposed to routine. I did not know if that meant but do you believe the industry participants you have spoken with are indicating that is the direction you are going to go or that is the direction I guess theoretically could go?

Mike McKelvey

I think I exclusively said in my earlier answer to that question that if it ever went that way, thoroughs are the area of more concern. I have never heard of it of automated being discussed in the routine or the sick patients or something.

Operator

(Operator's instruction)

Mike McKelvey

Alright, thank you very much. We appreciate your attention today and your involvement in the Company. We also appreciate your vote of confidence throughout the years. Keith and I as well as other members of the Company's management team are deeply committed to the Company and in continuing the Company's momentum and progress in generating results. Have a great evening and a great rest of the week. Thank you.

Operator

Thank you for your participation. You may disconnect. Have a great day.

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