Pharmaceutical Product Development, Inc., Q4 2008 Earnings Call Transcript

Feb.10.09 | About: Pharmaceutical Product (PPDI)

Pharmaceutical Product Development, Inc. (NASDAQ:PPDI)

Q4 2008 Earnings Call

February 10, 2009, 10:00 am ET

Executives

Fred Eshelman - Vice Chairman and CEO

Dan Darazsdi - CFO

Bill Sharbaugh - COO

Analysts

Randall Stanicky - Goldman Sachs

Greg Bolan - Wachovia Capital

David Windley - Jefferies & Company

Steven Halper - Thomas Weisel Partners

John Kreger - William Blair

Douglas Tsao - Barclays Capital

Eric Coldwell - Robert W. Baird & Company

Jon Wood - Banc of America Securities

Operator

Good morning. My name is Leslie, and I will be your conference operator today. At this time, I would like to welcome everyone to the PPD Fourth Quarter and Full Year 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions). Thank you.

At this time, it would be my pleasure to turn the conference over to Vice Chairman and CEO, Dr. Eshelman, you may begin your conference.

Fred Eshelman

Okay. Thank you, Leslie, and good morning to you all. As always I will 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, income from operations and margins exclude reimbursed out-of-pockets and stock option expense under FAS 123(NYSE:R) and the impairment of an intangible asset.

EPS numbers exclude asset and investment impairments. 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 information that is posted under Presentations and Events in the Investors section of our website at www.ppdi.com.

This morning, I'm going to spend a few minutes on high level events for 2008, but will direct most of my remarks to the future. Dan Darazsdi and Bill Sharbaugh will review in detail full year and fourth quarter 2008 results.

In 2008, we had double-digit revenue growth. Excluding impairments of investments and assets, EPS grew 24%, both gross and operating margins expanded versus 2007. Net authorizations, despite heavy cancellations grew 23% versus '07. Full year book-to-bill of 1.42 compared favorably with 1.30 for '07 and backlog grew to $3.221 billion, up 21% over 2007. RFP volume was up 9% despite weakness in Q4.

DSO for 2008 stood at 42.2 days, versus 50.8 days at 12/31/07. We still have more than $600 million dollars in cash equivalents and investments, and no long-term debt. All this was accomplished with a headcount growth of less than 1%.

Here are the takeaways from our advantage point. We will continue our global expansion for the new GMP lab in Ireland, a new GCL facility in Singapore and our recently announced agreement to acquire AbC.R.O, the clinical CRO servicing the Balkans and other countries in Eastern Europe. We will actively look for additional strategic deals such as the Merck vaccine and the GCL agreements.

We will continue our drive for cost efficiencies and quality improvements. We will focus on our core strengths. We will continue to look for compound partnering opportunities across various therapeutic areas. We will continue to drive new business wins, concentrating on large clients and large R&D spenders.

We will look for science and technology that differentiates our offering in tangible and meaningful ways. All of our strategy is directed toward driving shareholder value, and we are working hard to support this despite erratic and at times incomprehensible equity markets.

Dan and Bill will now discuss '08 results in detail, Dan?

Dan Darazsdi

Thank you, Fred, and good morning. With a strong finish to '08, fourth quarter new authorizations of $789 million were up 29%, compared to the fourth quarter of '07. Our stock authorizations in the fourth quarter included a $110 million award associated with vaccine testing and our newly acquired vaccine lab.

As well as incremental GCL business awarded in conjunction with our lab purchase. Net authorizations for the fourth quarter were $596 million excluding a negative backlog adjustment for foreign exchange.

The net book-to-bill ratio for the fourth quarter of '08 was 1.73. During the quarter, we had two project cancellations between 10 million and 20 million. Net authorizations for all of '08 increased to $2.06 billion from $1.68 billion for '07, a 23% increase year-over-year.

Backlog increased nicely by quarter end to $3.2 billion, compared to $2.7 billion at the end of '07. And breaks down by client type as follows: 60% pharmaceutical, 31% biotechnology, 6% government, and 3% other.

The weighted average backlog at the end of the fourth quarter was down slightly at 33.5 months. Net revenue for the fourth quarter of '08 was $344 million, compared to $341 million for the fourth quarter of '07. Full year '08 revenue was $1.45 billion with approximately 38% being driven from PPD's foreign operation.

I would now like to provide some information on our two reporting segments starting with the development segment. Our fourth quarter '08 development segment revenue of $338.7 million was up modestly, compared to the fourth quarter of '07 and breaks down by service area as follows; 81% from Phase II through IV; 16% from labs, 3% from Phase I.

Solid growth in Europe, Middle East and Africa was offset by continued slow growth in North America. Foreign exchange generated some headwinds in the fourth quarter. At average fourth quarter '07 exchange rates revenue would have been $7.5 million higher.

Development segment gross margins for the fourth quarter of '08 was 54.9%, compared to fourth quarter '07 of 50.0%, exceeding our gross margin objective for the quarter. Gross margins improved year-over-year due to strong gross margins in Europe, Middle East and Africa and Asia-Pacific, benefiting from volume leverage due to strong growth and diligent cost control, the gross margin improvement in North America through focused efforts on productivity in light of soft revenue growth.

Income from operations for the quarter of '08 was $82.4 million, or 24.3% of revenues compared to 19.2% of revenues in the fourth quarter of '07 as SG&A was held flat in absolute dollar terms based on productivity initiatives.

Foreign exchange had a minimal impact on operating income in the fourth quarter of '08. Development segment income from operations for the full year '08 was $300.9 million compared to $266.2 million for the full year of '07.

Development segment operating margins for '08 was 21.2% compared to 20.9% in '07. The discovery sciences segment delivered an operating income of $11.1 million for the full year of '08 including two milestone payments totaling $18 million.

Full year 2008 diluted earnings per share were $1.70 excluding charges associated with [differential] of $20.4 million and a first quarter loss in our short-term investment portfolio of $3.7 million net of a reimbursement by the investment fund manger.

For the quarter ended December 31, '08, capital expenditures were $13.7 million. Capital expenditures included computer software and hardware of $6.1 million, $3.8 million for lease hold improvements and fade outs and $3.3 million for scientific equipment for our laboratory units.

For the fourth quarter, net cash provided by operating activities was $121.7 million and free cash flow was $108.0 million. This strong cash flow performance resulted in a cash and investments balance of $608 million at quarter end. In the fourth quarter, of we invested a total of approximately $32 million for our new vaccine lab and acquisition of InnoPharm. In the fourth quarter, we also purchased 800,000 shares of PPD stock at an average price of approximately $28. For the full year of '08, net cash provided by operating activities was $380.5 million.

We delivered solid improvement in day sales outstanding finishing the year at 42 days compared to 51 days at December 31, '07. Total gross revenues which include all out-of-pocket expenses and pass-through costs were $456 million for the three months ended December 31 '08 and $1.89 billion for the year ended 2008.

Unbilled services totaled $154.6 million at December 31, '08 and decreased as a percentage of total receivables to 39% as compared to 41% at September 30 '08. With 91% of our total accounts receivable as of December 31, '08 aged less than 90 days our collection efficiency remains solid. Effective tax rate for the fourth quarter of '08 was 32.0% compared to 33.75% for the same period last year. That concludes my remarks at this time.

Our Chief Operating Officer will now provide his comments. Bill?

Bill Sharbaugh

Thank you Dan. In 2008, development services revenue increased 11% and backlog increased 21% versus 2007. However, revenue in Q4 '08 versus Q4 '07 was flat increasing a modest 1.1% due primarily to weak authorizations in second quarter and higher than expected cancellations in the latter half of the year.

In Q4 '08, several data points confirmed that there is a slowdown in biotech spending. The result is that we saw a several percentage point shift in our backlog towards pharma. However, this is not yet evident in our revenue split by client type which was 56.5% pharma, 30.7% biotech, 3.6% government and 9.2% other. These figures are similar to the last several quarters.

Our largest therapeutic area by revenue was oncology, anti-infectives, circulatory cardiovascular, endocrine metabolic and CNF. Our top client accounted for 8% of full year 2008 net revenue and the top 25 accounted for 66%. The good news is that margins are holding, average proposal size for 2008 was up slightly and bio pharmaceutical companies are continuing to outsource a significant book of work.

We remain optimistic about opportunities to develop strategic outsourcing partnerships with mid and large sized pharma and we believe that outsourcing penetration will increase. At the same time, we are focused on improving our cost structure, increasing productivity and making investment decisions aimed at growth. Recently we entered into an agreement to acquire AbC.R.O., the contract research organization in Central and Eastern Europe for approximately $30 million. When closed, the acquisition will result in the addition of approximately 230 employees, a new presence in Romania, Bulgaria, Serbia and Croatia, and additions to existing operations in Poland, Russia and Ukraine. We also expect the acquisition to be accretive to earnings in 2009 contributing approximately $0.02 to $0.03 of EPS.

Ms. Leff, Chief Executive Officer and Co-Founder of AbC.R.O will join PPD and oversee our Central and Eastern European operations. Ms. Pleasants, Chairman and Co-Founder will also join our clinical development management team as a senior director in UK. We consider the region important to our future growth and the acquisition of AbC.R.O along with InnoPharm in 2008 establishing PPD as one of the largest and most capable CROs in the region.

Now for the Phase I clinic and lab. The Phase I clinic had a respectable quarter, achieving revenue of $11.4 million which was a 5% increase over Q4 '07. Our clinic operates in near capacity each quarter and has an excellent management team.

While results can vary slightly based on client adjustments to the schedule of planned study starts, we expect demand for Phase I services to remain active, but potentially softer in the first half of 2009 as pharma and biotech prioritize preclinical candidates moving into first in human trial.

The GMP Lab also performed well in the fourth quarter. Compared to Q4 '07, revenue increased 3%, new authorizations increased 18% and backlog increased 7%. We added 11 new clients and all of our large FPE contracts renewed for 2009. Additionally, we are in discussions with several large pharma clients, about long-term strategic partnerships. And as previously announced, we expanded our cGMP Lab business into Ireland and expect completion of the lab facility in Q4 '09.

Compared, to Q4 '07, bioanalytical Lab revenue increased 14% and new authorizations increased 3%. We added 15 new clients and were selected as a preferred partner for a large pharma company.

We are expecting that contract to be finalized and work to begin in Q1 '09.Overall, we remain optimistic about the performance of the bioanalytical lab in 2009 and will attempt to increase our market share with innovative partnering models and new services. As previously announced, we acquired the Merck vaccine lab in Wayne, Pennsylvania in Q4. Expanding our global central lab capabilities into the vaccines arena. While Q4 '08 revenue for GCL was flat compared to Q4, '07. The deal with Merck provides GCL with a five year contract for vaccine testing and a significant incremental level of Merck’s central lab works.

Revenue growth will resume in 2009. Our China lab achieved cap accreditation and our US lab completed successful cap re-accreditation and plans to open our Singapore lab are well under way.

Operations in our new vaccine lab are progressing and several new clients have expressed interest in vaccine services and visited the lab. That concludes my comments on the development segment.

And I will turn it over to our CEO, Fred Eshelman.

Fred Eshelman

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

Question-and-Answer Session

Operator

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

Randall Stanicky - Goldman Sachs

Great. Thanks very much for the questions, guys. I just have two, first on the cost reductions which were pretty significant this quarter. I guess if we look at the 54 percentage range on a gross margin obviously above what you talked been a target a 50%. Which I also think excludes you so how do we think about that going forward. And then maybe Fred, how do we calibrate that with your current year targets.

Fred Eshelman

Okay Dan, why don’t you take the question on margins.

Dan Darazsdi

Okay thanks Fred. Randall, the margins as we closed up the year really demonstrated two key factors. One, in North America even with the softer revenue position, we were able to actually increase the fourth quarter margins on a year-over-year basis and principally that's through operational initiatives would be operation scheme and the finance op scheme working together and significant focus on project delivery and productivity.

In Europe, Middle East and Africa and Asia-Pacific, we started to actually get some benefit resulting from the strong authorizations that we have talked about through the year as we generated more revenue and got some volume leverage. So while we continue to talk to a 50% gross margin target rate. We closed out a little bit better, say actually significantly better in Europe, Middle East and Africa and in Asia-Pacific, resulting from some of that volume leverage.

So obviously we are going to do the best we can to keep the margins up but we think that we just had a, kind of a good result coming from some volume leverage and we will have to continue to drive productivity. But over time, we think our 50-20 rule is the one that we really are expecting to deliver again.

Randall Stanicky - Goldman Sachs

Assuming there has not anything meaningfully changed in terms of headcount additions. But it does not sound like there is near-term. We should be able to expect to take that level of run rate for 4Q at least over the next near term and in terms of how we think about the margin profile?

Dan Darazsdi

While the fourth quarter once again really benefited in EMEA and Asia-Pacific so as the rest of the world from some volume leverage and we are always trying to catching up in terms of infrastructure relative to the volume growth there. So we are looking at the total year margin rates at kind of our target rate. We do not want to start to signal that we're going to be able to consistently run much over the 50-20 rule at this time.

Randall Stanicky - Goldman Sachs

Okay, so it sounds like no change to that 50-20 rule.

Dan Darazsdi

No

Randall Stanicky - Goldman Sachs

And then last question just for Fred. You alluded to compound partnering being a continued focus here over the near term. Should we expect that there could be additional investments in compound partnering as part of the current structure or would you still be looking to separate that structure if you would find additional sizable opportunities?

Fred Eshelman

Depends entirely on the individual deal, components of the deal, the finance ability of the deal and so forth and so on. As we have said in the past, we certainly do want to harvest in coming from Dapoxetine and hopefully from Alogliptin and I hope you noted that we have begun to get country level approvals for Dapoxetine. But at the same time, we have got to get a lot more shots on goal I think and really ramp this thing up.

We have seen a definitive change in the opportunities out there, in the past, a lot of the stuff we looked at quite frankly was trash. We are now being shown stuff that has billion dollar potential good stuff that we think we could make deals on. We hope we can, and if we can not, we are not going to shy away from that stuff.

So again I do not, I had advised you on what we would or would not do in a given situation. We have other things that we are working on that if we did do something diluted, might provide some cover for some of that. So I guess all I can say in summary is stay tuned over the next two or three months.

Randall Stanicky - Goldman Sachs

Thanks guys.

Operator

Thank you, our next question comes from the line of Greg Bolan of Wachovia Capital Market. Your line is open.

Greg Bolan - Wachovia Capital

Good morning thanks for taking the questions. First can you speak about your assumptions around the growth you are expecting from the vaccines business going forward? Just looking at some industry data here and the expectation is for around 20% growth in the global vaccine market over the next five years. Does that jive with what you are expecting or maybe what you were thinking when you decided to purchase the facility from Merck?

Fred Eshelman

That was certainly part of our decision because we saw vaccines as a good growth market. We do a lot of vaccines work many times as a secondary piece of a DOD contract with the manufacturer. We noted the Pfizer acquisition of Wyeth was at least partially based on their faith in vaccines going forward. So, yes that was a component, part of the component was also as far as we know, we are the only player of scale in this type of testing. And therefore, we figured that the market would expand to outside of the relationship with Merck and indeed as Bill Sharbaugh has noted, we’ve already had inquiry from at least two clients in terms of using the laboratories. So, yes it's a growth play.

Greg Bolan - Wachovia Capital

That’s great. And then, moving on to Phase IV, Fred, this is a sub-segment that was a hot topic back in 2006, since PDUFA four, it was approved back in 2007, have you seen any noticeable pickup in business activity for peripheral studies, and is there any way you can kind of describe PPDI's Phase IV revenue growth relative to that of the core Phase II to III growth rate?

Fred Eshelman

Well, there is still lot of noise around Phase IV, but I think most of our growth, the big volume growth is still Phase III and Phase IIIb. We are looking at possibilities in post marketing safety studies some of which could be quite large. We have certainly done some of those in the past but as far as I can ascertain from what's on the table right now. The Phase IV market for us is still quite a bit smaller than our core Phase II, III or IIIb market. Bill or Dan if you care to comment on that, please jump in.

Bill Sharbaugh

Yeah, Fred I think you’ve kind of summarized it. We signed not too long ago an agreement with WHISCON, World Health Information Science Consultants. We think strengthening our position and expertise in this space in particular for Epidemiology and risk management plans and how to conduct observation on database studies. But I do not think that we have seen a major up tick at this point. It certainly is a stable component of our core development segment and we continue to see opportunities as Fred mentioned. And we move forward with those as they come in. We are running a number right now. But we have not seen super significant growth in this space.

Greg Bolan - Wachovia Capital

That's great. Thank you.

Operator

And your next question comes from the line of David Windley of Jefferies & Company. Your line is open.

David Windley - Jefferies & Company

Hi thanks for the taking the questions. I wanted to get into the North America initiatives Dan that you mentioned earlier. Just doing rough calculations sequentially here, it looks like the company took about $28 million or saw cost drop $20 million. I guess first off I was hoping you might be able to carve out how much of that would have been attributable to changes in currency sequentially. And then beyond that whatever organic costs are remaining I guess even the magnitude seems pretty large to me. And you do not talk specifically about headcount reduction, but I just wonder what were some of the more specific areas where you were able to identify costs that could be taken out of the process?

Dan Darazsdi

Yeah David, your question is around the total global number or North America because FX would only apply to the expansion margin in EMEA. Was it the total?

David Windley - Jefferies & Company

Yeah I understood so I'm looking at --

Dan Darazsdi

Okay.

David Windley - Jefferies & Company

Approximately $28 million of total cost reduction sequentially which I presume some as attributable to FX globally and then, go ahead sorry.

Dan Darazsdi

Yeah really need just talk to them. I do not think I have got the ten year sequential cost break up, but there are really just a couple of big elements to that effect. If I start with the EMEA, a part of our margin expansion and the biggest part of our margin expansion came from the Europe, Middle East and Africa region. A portion of that was based on FX so I call it, just give me the order of magnitude roughly a-third and that was some benefit in just the, from a cost view point. The balance of it is really based on productivity which is being generated as we take projects.

And we are really being careful to make sure that we are delivering them in the most operational and effective way we can scaling up the utilization which is generating some benefit for us. So in the EMEA we are just getting lower costs and volume leverage.

David Windley - Jefferies & Company

Right

Dan Darazsdi

And then in the North America segment, we have actually got some margin expansion there too. But that’s based on us really anticipating what was happening from our revenue outlook view point and getting ahead of the curve to make sure that we are managing the organization effectively and proactively, understanding how to anticipate what's happening with the volumes going forward. So I would say those are two big pieces.

David Windley - Jefferies & Company

Okay, so I am sorry if I'm drooling on that, just a little bit more so. Am I correct that, I mean I don’t think there was a formal headcount reduction, was there some in North America, was a decline in headcount a part of that anticipation of revenue perhaps through attrition or allowing attrition to take the numbers down or something. I mean it just seems to me that the magnitude of the cost drop sequentially is significant?

Dan Darazsdi

Yes, so I think that's an accurate assessment. The fact that we were forecasting out, what was happening from a revenue viewpoint early on in the year of just to make sure as we were having attrition, we are keeping that benefits from a cost viewpoint and having that play a significant role and our utilization and our ability to actually get that margin expansion in North America in a pretty tough revenue environment.

Go on if you have anything else to add?

Fred Eshelman

Yeah. I think you characterized it, Dan. We have done a really good job I think with SG&A or non-billable hiring and Dan and I and Fred have been controlling that tightly. And then as you mentioned, when it comes to attrition we have let some of those vacancies go unfilled and just manage that carefully throughout the year.

David Windley - Jefferies & Company

Okay, great. Thanks, and on the bookings number, I missed Dan you commented that the net bookings number after adjusting for FX was what?

Dan Darazsdi

The net bookings were $596 million.

David Windley - Jefferies & Company

Okay.

Dan Darazsdi

And authorizations for the fourth quarter.

David Windley - Jefferies & Company

Okay.

Dan Darazsdi

And you have a backlog adjustment for FX in the quarter.

David Windley - Jefferies & Company

And how much was that?

Dan Darazsdi

Roughly $35 million of foreign exchange adjustments, we took that against the backlog.

David Windley - Jefferies & Company

Okay, great. Thank you. I appreciate that.

Dan Darazsdi

Sure.

Operator

Thank you. Our next question comes from the line of Steven Halper of Thomas Weisel Partners. Your line is open.

Steven Halper - Thomas Weisel Partners

Yeah. Hi, two questions. First, you indicated what the Merck and InnoPharm acquisitions cost you together, could you breakdown those individually and does the Merck facility need any major capital improvements there?

Fred Eshelman

Dan, you want to take that?

Dan Darazsdi

Well, yes. In total, my comment indicated that for Merck and InnoPharm, the total was about $32 million, breaks down to about $25 million for Merck in the fourth quarter and about $7 million for InnoPharm.

While we have done an assessment to determine what kind of capital requirements will be required for Merck, we don't see any really significant requirements early on. As a matter of fact, capabilities in that lab are very strong and I'm not sure if Bill or Fred want to comment on that, but we see really great capabilities there.

Bill Sharbaugh

Yeah. There is plenty of excess capacity in that facility and we would obviously expand and make capital improvements as necessary and we're able to win the business. But the current footprint that is built out, technology-wise, is very strong.

Steven Halper - Thomas Weisel Partners

Right. And then just as a -- on an unrelated area, with respect to the Dapoxetine approval in Finland and Sweden, is it still J&J's view that if they got approval in Europe they would re-file in the US?

Fred Eshelman

I will have to refer you to J&J on that. I means certainly there is a rollout plan for approvals in the rest of the world, many of which of course were conditioned upon European approval, which we now have. We are hoping over the next timeframe, there will be plenty more approvals in the rest of world, as to the specific US strategy, again I will have to refer you to J&J on that one.

Steven Halper - Thomas Weisel Partners

Right, but didn't they say at one point that if they got the European approval then they would be considering the US filing?

Fred Eshelman

Yes, I think they said that and I am sure they would reconsider it. Whether or not they would actually trigger, I don't know, as you know the regulatory wins shift every other week.

Steven Halper - Thomas Weisel Partners

Okay. That's helpful. Thanks.

Operator

Thank you. Our next question comes from the line John Kreger of William Blair & Company. Your line is open.

John Kreger - William Blair

Hi, thanks very much. Just a follow-up question on the Merck purchase, do you expect that entity to be dilutive or accretive or neutral this year? And then, Dan, can you just expand a bit more on your priorities for cash usage this year now that you are up over $600 million?

Dan Darazsdi

Sure. We will take the Merck question first. We said Merck would be accretive in the current year and actually in line with both our 50-20 gross margin and operating income objectives.

So we have indicated that it would be accretive. And in terms of cash, always cash with rule number one, which you have to generate cash flow in the organization I think you saw that evidence pretty well with our ability to generate strong cash flow in 2008, so that's job number one.

I think we had a nice improvement in DSOs, and we are continuing to manage that very tightly and positively scrutinizing credit worthiness of our client in this fairly difficult environment. We have done some recent analysis just on the biotech sector looking at their cash position and trying to ensure that we are not going to have significant surprises from a cash generation viewpoint relative to bad debt write-off.

When we get to, how are we thinking about using the cash? I'd say, first we have always talked to investing back in our business, and I think you have seen that evidenced pretty significantly with InnoPharm, AbC.R.O, Singapore, our GCL expansion that's been communicated, the GMP lab expansion or a lab that we are putting into Ireland, so organic expansion is number one.

We are continuing to be the only CRO that is providing our shareholders with a dividend. We continue to see that as a positive movement, and we will continue to evaluate business alternatives when we did spot that. We are financially strong with no debt and we have a strong cash position and we are looking for the right strategic places for us to invest in the future growth of the company.

John Kreger - William Blair

Thank you, and then could you just expand a little bit more, Fred on the North American Phase II through IV business. Seems like that's been softening for about a year? Where does it stand now, and how soft was it in the fourth quarter and what's your game plan to get that in better shape in the coming quarters?

Fred Eshelman

Well, yes it was even softer than we had hoped in the fourth quarter. And as you point out, it has been softening for a year for a variety of reasons. We're taking definitive steps to try to bulk up that business again for obvious reasons including recruiting and training more investigator sites.

We have purchased a web address that we are putting a plan around that, we think, would be very effective in helping us to recruit additional patients very specifically. We have all of our operations people at the senior level involved in US-centric and specific selling. So we are taking a number of steps to really reinvigorate the US market and we hope to see some results in the short-term.

John Kreger - William Blair

Great, thank you.

Operator

Thank you, your next question comes from the line of Douglas Tsao of Barclays Capital. Your line is open.

Douglas Tsao - Barclays Capital

Good morning. Fred, I was just wondering, I think you commented that you saw RFP flow was relatively weak in the fourth quarter. But in the end the new business wins were very strong. I was just wondering if you had a sense of what drove, obviously your hit rate up in the quarter.

Fred Eshelman

Well, I think it was a variety of things. We had a full [court] press on, of course as you might imagine, particularly in phase of decreased RFP volume. The input from the [inaudible] of course helped the numbers somewhat, which was quite fortunate because we did have a higher than normal cancellation in Q4.

We look back at what has happened over the last four or five years in terms of RFP flow including what has been reported by our competitors and what revenues we have looked at in Q4, and so forth and so on. And across the industry as you all know, there was weakness in Q4.

We were fortunate to sign at least our share if not more and that same kind of activity is going on in Q1, I can assure you, because we are well aware that we got to get our hit rate up, particularly on the high quality programs and on the ones that have a specific US component.

Douglas Tsao - Barclays Capital

And other question I would have along the same lines, we have heard about the cost of late stage development programs increasing. Although, if we look at R&D budgets there are up more modestly, given the pressure is on pharma though to fund their late stage program and balance out their need to hit earnings target. Have you seen any change in terms of the composition or how they are sort of sequencing different clinical trials and components of their development programs?

Fred Eshelman

Well, all sorts of changes are afoot as you well know. I think money is being allocated differently in the total R&D budgets, folks are focusing not only which compounds but they are focusing on which therapeutic areas. I think the regulatory atmosphere is definitely having an effect. It seems to be quite chilling actually in the diabetes segment, because of recent prognostications by advisory committees on what you will or won't have to do in terms of disapproving a cardiovascular risk. We are certainly seeing more quality compound partnering opportunities for some of the same reason. So, it’s a very different ball game and it has been over the last few years. We also think that there will be more Merck and Lilly-type deals, not only with us but probably with our competitors as well. And we are going after those in a very focused way, we don’t know what the pitch is. So again it's not just one thing, it's changing all over the board.

Douglas Tsao - Barclays Capital

And then one final quick question. Obviously, my guess is valuations for M&A have come down. Does that make you more interested in becoming more active acquirer. Obviously, we have seen you do two deals in the last 12 months, but with the pull back, are you sort of putting out more feelers and looking at new things?

Fred Eshelman

Well we are certainly looking for opportunities in science and technology that would move the ball forward and empower our CRO business differentially. We are certainly looking at compound partnering activities.As I indicated, we are not looking at major acquisitions in our sector, for the most part we didn’t think it made sense when stuff was high priced. And therefore, it doesn't make any sense with this low priced from a business standpoint. So I guess that’s all I have to say on that.

Douglas Tsao - Barclays Capital

Okay, great. I will hop back for now, thank you.

Operator

(Operator Instructions). Our next question comes from the line of Eric Coldwell of Robert W. Baird & Company. Your line is open.

Eric Coldwell - Robert W. Baird & Company

Thanks very much. First off, regarding the authorizations there were a lot of observers wish that on your guidance call you had provided your outlook for the bookings profile in 2009, now that the quarter is wrapped up and we are a little deeper in the year, I am hoping you can give us some sense on what you are targeting?

Fred Eshelman

Dan?

Dan Darazsdi

The question is around targeting for 2009 on total year authorization?

Eric Coldwell - Robert W. Baird & Company

Net book-to-billing cancellations?

Dan Darazsdi

Yes, we have not provided that couple of details. And I think we've provided our outlook for revenue growth which was provided in the guidance. We did not come back and give you target authorizations. So, you can take a look at our 3.2 billion of backlog, we have provided the cancellation rates and think that’s appropriate.

Eric Coldwell - Robert W. Baird & Company

Yes I guess as an industry observer, we have most of your peers in clinical health provided an outlook, so it makes it a little bit more difficult to know what your anticipation is and it’s also more difficult when you did provide revenue guidance in late October, but wound up missing that adjusted revenue guidance in development by $14 million to $34 million on the range for the quarter. So it’s hard for us to use your revenue and marry that against the 1.7 book-to-bill and try to figure out what kind of numbers you are actually targeting. I guess this is the challenge?

Fred Eshelman

Yes, I think obviously ast Dan has been referring, we are modeling pretty good growth in new authorizations for 2009. We think that will be driven primarily by penetration rather than necessarily the year-over-year R&D absolute number increase in spending. We would also hope to scale a little bit of market share perhaps so while our sales targets are robust we don’t think that they are ahead of line with what we can accomplish, number one. And I am certainly not flashing any signal here whatsoever by the next remark, but remember that we are a bottom-line focused company and we are going to do everything we can to hit EPS and cash targets. And while we will try to grow the top line as best we can. The top line is just not something that makes us crazy like the other two measures do.

Eric Coldwell - Robert W. Baird & Company

I can appreciate that. Shifting gears, the bioanalytical segment continues to have pretty impressive performance up 14%, a lot of new deals, I suspect that the margins are pretty healthy there as well given the growth rate and the leverage in that facility. I have had some anecdotal evidence from the channel that some competitors in bioanalytical actually are considering raising prices this year given fairly strong market demand from branded pharma. I was hoping you could share with us your view on overall market demand, pricing in bio-a and anything that could add some color in terms of the kind of profit contribution that group is contributing?

Fred Eshelman

I think certainly and Bill jump in here if you would like. We believe that our bioanalytical lab is strongly driven by technological excellence. We continue to make investments and cutting edge instrumentation. I think they do a good job of anticipating the market in terms of assays that we get up and validate it before there is a need for that which of course you have to do. So, if we can maintain a technological edge and we could have the right assay available at the right time, I think yes that might invite some pricing opportunity. I would not put that comment at all in the context of what our competitors are or are not doing.

Eric Coldwell - Robert W. Baird & Company

Great. With AbC.R.O, obviously they would have backlog, I am curious where the backlog got added to your bookings profile in the quarter? Did you flow it through growth in net wins or is it an adjustment straight to backlog?

Fred Eshelman

Yeah, actually the first quarter '09 transaction?

Eric Coldwell - Robert W. Baird & Company

You are right. I said ABM, I meant to say InnoPharm from the fourth quarter?

Fred Eshelman

InnoPharm impact was really not very significant. It had a fairly high content of PPD contracts, we will have to get that number up, but it was not a very good number.

Eric Coldwell - Robert W. Baird & Company

Great. And then, as we look to the first quarter of '09, I guess, adjusting my question, what would be the planned procedure with AbC.R.O. and if you can give us some sense of their backlog profile?

Bill Sharbaugh

This is Bill, Eric. The backlog profile of InnoPharm and AbC.R.O. is different. And we are really comfortable with AbC.R.O and the mix and the volume of that backlog, which I think is indicative of the different purchase price. We have experience with both companies over a period of years and that’s what made us comfortable moving forward but, we also see Central and Eastern Europe as high growth areas where we want to dominate the market and we have two excellent companies that we have acquired and are integrating into PPD. And based on our conversations with customers, strategically, but then also observing project-by-project, we think there is great opportunity to expand our service offering and grow our revenue in that region.

Fred Eshelman

Yes. I think specific to your questions well I don’t think that we would expect a materially impactful change to our authorizations number in Q1 based solely on that received from AbC.R.O.

Eric Coldwell - Robert W. Baird & Company

That’s very fair. Last question, as it relates to PRILOGY, in the beginning signed this country approvals on the product. I don’t yet know when J&J plans to shift product or what the reimbursement profile if any will look like in those markets. But how does the company intend to update the analyst community regarding the potential for milestones now that we have a success in compound partnering. What would be your strategy for providing guidance on that and what benchmark should we look for going forward.

Fred Eshelman

Well as you know, these first two country approvals have triggered to $2.5 million milestones or the $5 million milestones that was in our guidance has now been realized for Q1 of '09.

Eric Coldwell - Robert W. Baird & Company

I am sorry Fred, I guess I am a little jumbled this morning I said milestone but I meant royalty, for royalty streams going forward, not milestones.

Fred Eshelman

Okay. Well the royalties of course, will start, when they start shipping drug. I am going to have to refer you to J&J for their launch date and also for what they expect to take place in terms of reimbursement. We have a pretty good idea about those two things but we are handcuffed in terms of, really making any public statements, so please if you wouldn’t mind contact J&J for that information. In terms of plotting out royalties, as we stated in the guidance, there is nothing in our '09 guidance for royalties from Dapoxetine because we want to see what the early uptake was. We are continuing with that, so this has not made us think about changing guidance at this moment. So in other words, we think whatever it is, it's an upside to where we are.

Eric Coldwell - Robert W. Baird & Company

Yeah great thanks a lot.

Operator

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

Jon Wood - Banc of America Securities

Thanks guys. Dan, any updates on operating cash flow guidance for the year?

Dan Darazsdi

No we have not updated operating cash flow guidance for 2009. We have factored it in as we came with our initial guidance discussion.

Jon Wood - Banc of America Securities

Okay so it’s still expected I guess about $250 million next year.

Dan Darazsdi

No.

Jon Wood - Banc of America Securities

Okay you also you conducted an analysis of your smaller undercapitalized client base. Can you give us a sense of what percentage of your DSOs and/or revenue might be attributable to those smaller clients?

Dan Darazsdi

Well the analysis we did was to really effectively take a look at what kind of potential bad debt, kind of risks we have so just to give you a couple of points around that based on some outside reports we use, PPD does not have any active projects or backlog with the top 50 biotech companies frankly below its cash level. So we are using reporting, the companies with the lowest cash flow levels. We did not have any projects at all there so that mitigated risk on an torch-end view point. We have worked with about 10%, or less than 10% of the top-line under development biotech companies with less than one year of cash. So it's a very small portion and even if we take that up to development companies with one to two years of cash, that's only 15% of our total biotech work outstanding. So we think we are in pretty good shape there.

Jon Wood - Banc of America Securities

Dan would you be willing to provide a revenue contribution expectation for the AbC.R.O acquisition and what portion of Ab's revenue were you attributable for?

Dan Darazsdi

I think that we are not communicating at this time.

Jon Wood - Banc of America Securities

Okay and I guess lastly total FD headcount for the period. If you got a hard number.

Fred Eshelman

It’s right at the 10,500 level.

Jon Wood - Banc of America Securities

Okay great thanks a lot.

Fred Eshelman

Yeah let me just add on that, there were some previous questions there was natural attrition because we had been up to 10,500 I think in late '08. So there was some attrition that took us down below that and then we brought on AbC.R.O. with their 230 people, it went back up over 10,500. So that's how that math worked.

Operator

Thank you our next question comes from the line of John Kreger of William Blair & Company.

John Kreger - William Blair & Company

Just one follow up. Fred and Bill in your strategic discussions with pharma companies can you give us any latest thoughts on how these companies are restructuring their R&D models and how consolidation might play into that thinking?

Bill Sharbaugh

Fred, you want to start or do you want me?.

Fred Eshelman

I will take first of it and you can jump in. I think it’s different at almost every company that we talk to, having said that I think there is certainly more focus within big pharma as to what is really generating value. So any activity that’s going on in R&D has got to generate real value. And so part of our pitch to them is there are number of routine type testing services particularly in the laboratories that arguably are required for certain parts of the R&D. They are certainly required for regulatory submissions. But it would be tough to argue that they have really moved the needle on the value equation and therefore why wouldn’t you put those things outside and get rid of [sales] people and so forth and so on and contract back to the service. So, that's part of our pitch and I think it is being fairly warmly received at several companies, and Bill you can pick up the ball on that.

Bill Sharbaugh

I think that's right, Fred. If I had to sum it up in a sentence, I would say that there appears to be a trend where pharma is moving from a centralized model to a more decentralized model, meaning they are giving different affiliates or different therapeutic leadership in companies more control over the strategy and the compounds and in some cases even the P&L.

So, I think that's a trend that we're seeing and that of course creates lots of opportunities and of course, pharma is moving into this model where they have a lot of development partners and a lot of deals going on. And that sets this up, itself up well for the CROs to get in and try to handle a bulk of that work for a particular customer where there is an existing relationship or even a new customer. But I think that's the trend that you're seeing.

John Kreger - William Blair & Company

Any comment on consolidation? Do you guys have a view internally? Will we see more or less of this sort of transaction going forward?

Fred Eshelman

Let me take that, Bill. If you do not mind. In terms of big pharma and big biotech, we sort of made our internal list on who we think might be on the quite roar, who might be in the queue to be acquired and what companies are kind of floating around that, we do not know which side of the fence they might be on.

And the scenarios that we have run what indicates was that we only believed that there would be one or possibly two that would be material to us if they went in the wrong direction. So we can speculate as long as we want to, we just do not think most of it would have a huge effect on us.

John Kreger - William Blair & Company

Great thank you.

Operator

Thank you. Our next question comes from the line of David Windley of

Jefferies & Company. Your line is open.

David Windley - Jefferies & Company

Just a follow-up, Fred on thinking about the North American business, I mean you commented earlier about increasing hit rate and the high quality wins. I guess I am also wondering what impact you see potential, administration change or that's not potential, that's real but the potential from that regulatory change, pricing change in US market and what impact that may be having or may have in the future on clients R&D spending activities here in North America such that North America just may not be a growth market. I am wondering about that and then secondly the competitive nature in North America given that everybody has a pretty substantial presence here, and is there a noticeable impact on pricing in North America. Thanks.

Fred Eshelman

Was there an administration change.

David Windley - Jefferies & Company

I heard there was.

Fred Eshelman

Oh. Well actually a lot of folks that we talk to and a lot of the stuff that we are reading, indicates to us that the changes may not be as Draconian as everybody thinks that they are for a variety of reasons. We certainly do not believe that anybody is going to do any thing to kill the innovation in the pharma industry and God knows in this economic environment the last thing we need is another industry meltdown.

The Obama administration has certainly given a lot of lip-service to increasing R&D directly at the government funded level and even if there is pricing negotiation with CNS or whomever, a lot of people believe that the increase in the units would actually make the overall net effect possibly good for pharma and biotech I think in terms of people fleeing the US market, that's just not happening, because it remains more or less a free market, free pricing place at least for now.

We see people continuing to want to move their compounds into the US and even in the markets that are expanding such as Asia-Pacific and so forth as you all know, there are remaining questions about IP about can you get your capital out, what will be the margins what's going to be reimbursed and so forth and so on. So we do not see the situation as dire as some other folks.

David Windley - Jefferies & Company

Okay thank you that’s helpful.

Operator

We have no further questions at this time. Do you have any closing remarks?

Fred Eshelman

Thank you all very much for being on the call and if you have follow-ups please call Luke or Dan or myself or Bill. Thank you.

Operator

Thank you and this concludes today's conference call. You may now disconnect.

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