PDI Management Discusses Q1 2013 Results - Earnings Call Transcript

May.14.13 | About: PDI, Inc. (PDII)

PDI (NASDAQ:PDII)

Q1 2013 Earnings Call

May 14, 2013 8:30 am ET

Executives

Paula Schwartz - Senior Vice President of Investor Relations

Nancy S. Lurker - Chief Executive Officer and Director

Jeffrey E. Smith - Chief Financial Officer, Principal Accounting Officer, Executive Vice President of Finance and Treasurer

Analysts

Bradford Alan Evans - Heartland Advisors, Inc.

John Kreger - William Blair & Company L.L.C., Research Division

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Jack Wallace - Sidoti & Company, LLC

Operator

Good day, ladies and gentlemen. Welcome to the PDI 2013 First Quarter Financial Results Conference Call. [Operator Instructions] Please note that today's call is being recorded. I would now like to turn the call over to Rx Communications Group.

Paula Schwartz

Good morning, everyone. This is Paula Schwartz with Rx Communications Group. Thank you for participating on today's call. On the call this morning from PDI are Nancy Lurker, Chief Executive Officer; and Jeff Smith, Chief Financial Officer.

Yesterday, after the market closed, PDI released financial and operational results for the first quarter ended March 31, 2013. If you have not received the news release or would like to be added to the company's distribution list, please call my office at (917) 322-2568.

Before we begin, I would like to caution that comments made during this conference call by management will contain forward-looking statements that involve risks and uncertainties regarding the operations and future results of PDI. I encourage you to review the company's filings with the Securities and Exchange Commission, including, without limitation, the company's Forms 10-K and 10-Q, which identify specific risk factors that may cause actual results or events to materially differ from those described in the forward-looking statements. In addition, certain non-GAAP financial measures, specifically adjusted EBITDA, which management uses to measure cash flow of the ongoing operating business, will also be referenced on the call.

The content of this conference call, information that is accurate only as of today's date, March 14, 2013. The company undertakes no obligation to revise or update any statement to reflect events or circumstances after the date of this conference call.

With that said, I would now like to turn the call over to Nancy Lurker. Nancy?

Nancy S. Lurker

Thank you, Paula, and welcome to everyone on the call. Let me start by addressing a few key metrics of our financial performance for the quarter. As we noted in our press release, first quarter revenues increased 36% to $42.9 million compared to the same period in 2012. The significant increase was due to the timing and execution of several new contracts signed in the second half of last year.

As previously discussed, in 2012, we won more than $250 million in new multi-year contracts and renewals, of which only $40 million impacted 2012 revenue. Given the strong first quarter revenue and assuming a reasonable level of new business wins for the remainder of this year and no early termination of contracts, we still expect 2013 full year revenue to be at least 25% higher than 2012.

First quarter gross profit of $8.5 million was $1.1 million higher than last year, due in large part to the much stronger revenue. As anticipated, our gross profit percentage has begun to trend lower due to intensified competitive pressure as new wins with lower margins are executed. We expect our gross profit percentage to continue to decline over the course of 2013, as last year's contract wins become a larger percentage of our revenue, resulting in gross profit dollars for the full year being at or below last year's levels.

We continue to aggressively pursue ongoing operating cost improvements, which are reflected in a reduction of first quarter expenses by $1.4 million compared to last year. As we previously disclosed, we expect ongoing cost to support the business to be up modestly for the full year. Additionally, we have discussed that 2013 would be a year of investment aimed at strengthening our core capabilities and infrastructure, our competitive positioning and improving our longer-term margins. I will address these initiatives and their financial impact later in the call.

Finally, as a result of higher revenue, higher gross profit and lower operating expenses, we achieved an operating income of $2.3 million compared to a loss of $200,000 last year. Relative to new business, in March, we announced a new sales contract, which could generate total revenues of up to $17 million over its multi-year term.

We estimate that $5 million to $6 million of revenues will be recognized this year, beginning in the second quarter. Under this new client agreement, PDI will provide a dedicated team to promote a CNS therapeutic product to neurologists and pain specialists. Going forward, we are confident we will continue to win additional contracts.

I'll now turn the call over to Jeff for a more detailed review of the financials, after which, I will review our strategic initiatives for the remainder of the year. Jeff?

Jeffrey E. Smith

Thank you, Nancy. Before we get into the results, I'd like to reestablish adjusted EBITDA, the non-GAAP measure that we referenced in the press release and on the call. Adjusted EBITDA for us is the measure of operating cash flow from the ongoing business. The current calculation is operating income adjusted only for depreciation and amortization and noncash stock compensation.

With that established, let's get into the results. 2013 revenue of $42.9 million was over $11 million or 36% higher than 2012. Overall, revenue in Sales Services increased significantly and was slightly offset by decreases from both Marketing Services and Product Commercialization. Sales Services revenue of $38.2 million was almost $15 million or 64% higher than the first quarter of 2012, as revenue from new contract wins significantly exceeded expiration of certain other contracts.

As Nancy pointed out, while we did achieve over $250 million of multi-year new contract wins and renewals last year, only about $40 million was recognized in 2012, resulting in a substantial carryover into 2013. Marketing Services revenue of $1.5 million was about $1.5 million lower than last year. This decrease was primarily a result of fewer contract signings by Group DCA, and Product Commercialization Services revenue was $3.2 million, about $2 million lower than the first quarter of 2012, due entirely to the internalization of selected commercialization activities by our customer as of October of last year.

Here, if you recall, we previously disclosed that the success of Interpace BioPharma's full commercialization program enabled our customer to accelerate their stated long-term plan of building a U.S. presence. We allowed them to internalize certain commercialization activities and in exchange, they extended other services through June of 2014.

First quarter gross profit of $8.5 million was over $1 million higher than the first quarter of 2012 but at the same time, however, the gross profit percentage decreased to just under 20% in 2013 from 23% in 2012.

Sales Services gross profit of $7.3 million was $2.4 million higher than last year. Our gross profit dollars were higher in 2013 due to high revenue. We are realizing lower margin percentages on new business. Marketing Services gross profit of $400,000 was $900,000 lower than last year, primarily due to lower revenue, and product commercialization services gross profit of $800,000 was $400,000 lower compared to 2012, as a result of lower revenue, resulting from the internalization of commercialization activities by our customer.

In 2013, operating expenses were $6.2 million, a decrease of $1.4 million compared to last year. The decrease is primarily a result of the company's continuing focus on cost reductions and rightsizing of the business, as well as the absence of amortization of acquired intangible assets in 2013.

For 2013, operating income was $2.3 million compared to an operating loss of $200,000 in the first quarter of last year. The $2.5 million improvement in 2013 operating income was the result of higher revenue, higher gross profit dollars and lower operating expenses.

In terms of liquidity and cash flow, adjusted EBITDA for the quarter was $2.9 million compared to $700,000 last year. Cash and equivalents at year -- at the end of the first quarter was over $53 million, up $600,000 from last year end. The increase in cash from December of 2012 is primarily attributable to the operating income associated with the significant increase in first quarter 2013 revenues. Cash and equivalents did not increase in line with adjusted EBITDA, primarily due to a net increase in working capital.

As of the end of the first quarter, the company's cash and equivalents were predominantly invested in U.S. Treasury money market funds, and the company had no commercial debt.

That concludes our comments on results. And I'll now turn the call back over to Nancy.

Nancy S. Lurker

Okay. Thank you, Jeff. I'd now like to discuss more regarding our go-forward plans. Just to be clear, we remain very committed to our core CSO business. And as mentioned on previous calls, we are investing in infrastructure upgrades in 2013 to strengthen our position as a leading CSO. In addition, we have undertaken strategic initiatives aimed at adding more predictable, higher-growth, higher-margin business that can buffer the natural volatility of our current CSO business.

In this regard and as mentioned on previous calls, we are pursuing full commercialization opportunities for products that can leverage our current PDI infrastructure and the capabilities of Interpace BioPharma, our specialty biopharmaceutical division. By leveraging our existing infrastructure, we believe that this strategy is a natural extension of our CSO business, given our proven core sales and marketing and commercialization capabilities. We are prepared to use a limited portion of our cash, supplemented by additional financings, if necessary, to further this strategy. Finally, we plan to launch a new Group DCA product offering that can connect health care providers, sales reps and other promotional channels in a new and unique way.

So in summary, just to review, we are focusing on 3 key areas. First, investing in our core infrastructure to upgrade, further differentiate ourself and strengthen our position as a leader in the CSO market; second, leverage and extend our CSO infrastructure in order to capitalize on our proven expertise in product commercialization to improve revenues and margins for PDI; and lastly, leverage our Group DCA asset base to support a new and exciting product we're offering and we plan to launch in the latter part of 2013.

In total, we are prepared to commit $4 million to $5 million to support our three-pronged initiatives in 2013. This $4 million to $5 million does not include any amounts we may invest in actual products. While we will capitalize some of these expenses initially, we expect that at least half of what we spend will be expensed during this year. You should know that we have received a good amount of feedback regarding our initiatives, particularly related to our product strategy.

I would like to conclude by reiterating that we will be prudent in any deal structures that we pursue and consider only those opportunities that leverage our current infrastructure with modest to minimal upfront payments. The board and management believe that this approach plays to our strengths and will build shareholder value in the face of increasing margin pressures on our core CSO business.

And with that, we'll now open the call to your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Brad Evans with Heartland.

Bradford Alan Evans - Heartland Advisors, Inc.

Can I just ask you the results of the first quarter? How that -- how do the results compare to your internal forecast as it came in, in the first quarter?

Jeffrey E. Smith

They were better, Brad, to be honest. I won't get into the specifics, but we had pretty clear visibility, but we got a few upside fees from performance last year, which could not have been predicted when we put the budget together; and there's timing of some of the expenses that helped the first quarter that will be spent later in the year, which is why we're still talking about the full year, looking roughly the way that we said a few months ago.

Bradford Alan Evans - Heartland Advisors, Inc.

So a little bit better top line performance, coupled with slightly lower expenses than anticipated.

Jeffrey E. Smith

Correct.

Bradford Alan Evans - Heartland Advisors, Inc.

Okay. Just was curious with respect to -- could you just give us some additional -- I was surprised that the gross margins on the Sales Services side, the CSO side, held up a little better sequentially. Can you -- where do think you'll exit the year in terms of gross margins on that line of your -- that side of your business?

Jeffrey E. Smith

I don't want to get that specific, but I think if you take what we said and if you use the 25% revenue increase for the year for the whole company and then apply last year's gross profit dollars at or a little bit below, you're going to get a full year gross profit for the company. And I think that will give you a pretty good idea directionally where it's going. But it's definitely going down and you will definitely see further deterioration in the second quarter.

Bradford Alan Evans - Heartland Advisors, Inc.

Got it. The -- and the expense run rate in the first quarter should not be -- we should see that rise as we move through the year as it's supporting some of the investment spending?

Jeffrey E. Smith

Yes. The significant investments that Nancy was talking about, while a lot of it got started, honestly, it got -- most of it did not -- not much of it hit the first quarter, so there will also be a noticeable increase, certainly relative to the first quarter, of expenses in the second quarter and then continuing through the rest of the year.

Bradford Alan Evans - Heartland Advisors, Inc.

Would you hope to be breakeven on the operating income basis in the second half of the year?

Jeffrey E. Smith

I think if you do the math, that's not possible.

Bradford Alan Evans - Heartland Advisors, Inc.

Okay. Could you just speak to the CSO pipeline that you're seeing today?

Nancy S. Lurker

Yes. Brad, I'll comment on that. Our pipeline right now is slightly down from where it's been in the past. So we are seeing, on the CSO side, the pipeline being somewhat weaker than we normally have seen in the past.

Bradford Alan Evans - Heartland Advisors, Inc.

Is that timing or what's happened there, do you think?

Nancy S. Lurker

No, we don't think it's timing. Well, look, first of all, let me say this. It is very hard to predict where things are going to go, as you know, and that's part of the reason why this business is difficult to forecast. Some of it -- there are some macro things that are causing that. As you know, Pharma has continued to go through even more downsizing. You've probably seen some of the announcements, I won't name specific companies, but there's multiple companies that have announced downsizing over the last several months. When that happens, people just pull back. And so pipeline flow from the FDA remains modest. It's not bad, but it's modest. And coupled with the downsizings, you're just not seeing the uptick going on in CSO RFPs that we have normally seen. Could we see it pick back up again in the latter half of 2013? That's always a possibility. Little hard to predict right now, but right now, as I said, the pipeline definitely is down to where it has been historically. I would comment, though, that on our Interpace BioPharma pipeline, both on what we would call sort of the traditional fee-for-service side, as well as, as I mentioned, obviously some of the opportunities that we're looking at where we would invest, that remains fairly strong.

Bradford Alan Evans - Heartland Advisors, Inc.

Okay. I'll -- let me ask one more question, I'll get back in the queue. I just -- the product commercialization strategy, I think, has a lot of shareholders on pins and needles and due to the past efforts in that space where at least tangentially, the company has had very mixed results and I just had to be honest with you, Nancy. I don't know what's happened with DCA, but the performance there has been troubling as well. So I -- the company's M&A track record and its -- some of these growth initiatives in the past have been disappointing. So I just think the board needs to be very, very disciplined in terms of how you're allocating capital on the M&A front. And I'm very disappointed to see that the company hasn't bought any stock on it's 1 million share repurchase plan that's been in force since 2006. So with the stock at this level, it's very hard to understand the board's thought process in terms of not buying back stock versus perhaps looking at M&A opportunities where we've had very, very, very poor track record, at least historically from prior administrations. And frankly, DCA has been a disappointment as well. So I don't know if you want to respond to that, but that's a view from our perspective.

Nancy S. Lurker

Yes. Brad, I will respond to that. So first of all, thank you for your comments, and they are appreciated. So let me just go through those point by point, make sure I capture all of them. First of all, let me just say in Group DCA. It absolutely has been disappointing to us. I will say, we missed on that one. We did not predict the downturn in the overall market on a digital side. Even though digital as a percent of overall marketing revenues is going up, in the absolute number, it's going down because marketing across the board has gone down, and that hurt the business. I will say, we recently have just put in place a new general manager for that division, which I do think is going to help, coupled with the fact that, as I mentioned, we are getting ready to launch a new product, though this product is going to take some time to get traction as all new products do. We are relatively optimistic about that product as a way to leverage the asset base that we have there and expand the offerings of DCA. So we continue to believe that the digital approach is crucial to our overall offerings as a company. It certainly is important for the CSO side of the business as well, as we look at nonpersonal promotion continues to grow as a percent of the total go-to-market spend in the industry. So that addresses on Group DCA. Now let me switch over to product commercialization. I recognize in the past that the company went into several deals that -- where a large amount of capital was deployed. In both those deals, I believe we were putting anywhere between $20 million to $30 million into various products, and they did not go well. Now I will say this, what I believe has changed and certainly how we're going to manage things going forward are probably 2 key things: one, in the time period when we did those prior product deals, there really was no one in the company that had product commercialization experience. The company at that time was populated with executives who came strictly from the CSO side of the business, and it never really launched in any way a full product commercialization offering. Always have done sales, but not all that goes into understanding patents, marketing, strategy, FDA, et cetera. And some mistakes were made because of that. If you were to look into PDI today, we have numerous executives and mid-level managers who have got very, very significant biopharmaceutical product commercialization experience. So I will say that from that standpoint, we certainly feel much better suited than in the past. The other issue is that we did commercialize a product for one of our partners on a fee-for-service basis, but we did everything. From soup-to-nuts, we managed the entire product commercialization effort, which went very well. So we certainly have a proven track record with one product as recent adds last year. The third comment I want to make is that how we go about these deal structures, and I can't emphasize this enough. We are not going to go in and do any deal where we put a substantial amount of capital at risk on day 1. Lesson learned from the past and lesson learned from Group DCA. So what we do envision is that we will take a graduated approach in some of these deals where we go out and do a small commitment and then only after we have seen how the product uptake is will we then engage in a larger commitment. So I want to reiterate we are going to be judicious about this and careful. I also want to say this, what I see is that we take a string-of-pearls approach as to a going out and do one big deal. We're not going to do a bet the ranch on one major deal, that would be foolish. And instead, what we're going to do this do multiple smaller deals to spread our risk and increase our odds of success. Obviously, the uptake will be slower, but that's well worth it to protect our downside. And as I said, we will remain very transparent with shareholders as we begin to go down this path.

Bradford Alan Evans - Heartland Advisors, Inc.

I appreciate that color. I just -- if I were on the board, just based on the track record of previous management and then to be brutally honest, I mean, the DCA transaction has been a massive disappointment. So I just I think the board has to have a very extremely high hurdle for any deals that get consummated and it has to be weighed against the underlying intrinsic value of the business as it stands today, as it relates to both strategic alternatives, as well as deploying the buyback that you have available to you with ample liquidity you have at the balance sheet to support long-suffering shareholders.

Operator

Your next question comes from line of John Kreger with William Blair.

John Kreger - William Blair & Company L.L.C., Research Division

Nancy, can you give us a better sense about what the new Group DCA will look like when you relaunch it later in the year?

Nancy S. Lurker

Well, I'm not going to go into a lot of detail, John. I'll go into some just because of competitive proprietary nature of the product. However, let me say this, that it is -- it will utilize our 400,000-plus physicians in our current panel and capitalize on that group of physicians that we currently have a fairly deep and ongoing Internet relationship with. It also is more along a software product where it is going to be a -- we see recurring revenues occurring from it rather than a project-based product, which is what we have today. And that's probably all I'm comfortable sharing at this point.

John Kreger - William Blair & Company L.L.C., Research Division

How about timing? Can you give us be a little more specific of when you'll bring that back in the market?

Nancy S. Lurker

Definitely the second half of this year.

John Kreger - William Blair & Company L.L.C., Research Division

Okay. And then just coming back to the kind of market updates, what is your sense about where we are? It sounds like maybe we're still in the downsizing phase. I'm thinking about sales and marketing budgets of your clients. Can you just give us your updated views on how much farther that has to go? I think in the past, sometimes, you quantified the amount of RFPs that are outstanding. I think a year ago, looking back at our notes, it was something like $350 million. I know you said it was down. Can you give us a sense how far that has gone down in your view?

Nancy S. Lurker

Yes, we -- it's right now running right around between $200,000 to $250,000 on a pipeline basis.

John Kreger - William Blair & Company L.L.C., Research Division

Okay. And what is your view about how much farther these sales force downsizing has to go?

Nancy S. Lurker

John, again, it's a little hard to predict. As we've said in the past, we've often said we believe that the number of sales reps in the industry would settle in somewhere between 50,000 and 60,000. Based on our current calculations, we think we're somewhere between 55,000 and 60,000 right now. Now that's including the recent announcements, which I don't believe have all taken effect. So there are some announcements, as you know, that have come out very recently. So if you include those, which will occur over the next probably 6 months, we think we're trending right around between 55,000 and 60,000 reps in the United States. So we do not see a lot more downsizing. Will you see some sporadic ones? Yes. But as I said, we don't foresee anything. Certainly, we don't envision going below 50,000 sales reps, and the pipeline in the FDA is rather strong. Certainly, it will never return to historical standards. But as you see the flow coming out of the FDA, it's certainly been better in the last 12 months than I think it has been historically over the last 3 years. So based on that, we do think we're going to hit somewhat of an equilibrium, though there might still be a slight downdrift over the next 12 months based on that.

John Kreger - William Blair & Company L.L.C., Research Division

Great. How about competitive pricing on the Sales Services side? Is it getting worse or better in your view?

Nancy S. Lurker

No, it's moderated now. We're not seeing certainly anyone -- we're not seeing pressures going below where we already have. And so again, we certainly -- again, it's hard to predict what our competitors will do. But at this point, we don't see it trending lower.

John Kreger - William Blair & Company L.L.C., Research Division

Great. And then last question, if you look out longer term, let's say 3 or 4 years from now, in a perfect world, what percent of your revenues would you like these partnerships to occupy? Do you envision a small portion, 5% or 10%, or more like 50-50?

Nancy S. Lurker

John, actually, over time and again, I'm looking out to a 3- to 5-year horizon, I would see, roughly within 3 years, we probably would be looking at 30% coming from this, 5 years out, probably up to 50% coming from this.

Operator

[Operator Instructions] Your next question comes from the line of Scott Henry with Roth Capital.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

I guess from a big picture standpoint, it does seem like PDI learned a lot of lessons. So I mean, at some point, you'd probably rather not learn as many lessons when it comes to, I guess, value destruction. Any thoughts on shaking up the board in the near term? I know I've asked you about this before, Nancy, but any thoughts on perhaps adding some new players to the mix, perhaps removing some of the old ones, but just in an effort to perhaps learn less lessons?

Nancy S. Lurker

Yes, so let me say this. Since I arrived over the past 4 years, we've downsized the board from 11 members to 6. So we've almost cut it in half in size, and some of that was due to obviously trying to manage costs, coupled with -- as you said, people have been on the board for a very, very long time, opting to retire. So we certainly right now are evaluating adding, in a prudent way, 1 to 2 more board members who can bring different skills to the board.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay. In what kind of timeframe would you expect for that?

Nancy S. Lurker

2013.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay. Excellent. And then Jeff, you made a statement that gross profit would definitely be down in 2013 versus the press release that says at or below the level achieved in 2012. I'm just wondering if you could just clarify. Is that below kind of -- assume [ph] plus or minus 5%?

Jeffrey E. Smith

Yes. I apologize if I said gross profit would be definitely down, I meant the gross profit percentage. So I think it was Brad's question about what would margin be as we exited the year or closer to the end of the year. And the guidance I gave was if gross profit dollars are at or below last year's level and revenue was up 25%, mathematically, that's got to give you a much lower margin.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay. That's helpful. Now first quarter was very good. Obviously, things will get worse. As you said, it would be unlikely you would have operational profit in the second half. Is there any possibility that second quarter could be a profitable quarter, in your opinion?

Jeffrey E. Smith

I think I don't want to get that specific, but we are definitely giving guidance that the gross profit will continue to trend down, second quarter revenue is always -- is actually always the lowest quarter in terms of revenue and we'd expect that to continue and we also expect expenses to be higher, so unlikely that the second quarter would be profitable. Closer to -- yes, I'll just leave it at that.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay. That's helpful. And now, other SG&A of just over $2 million was a little lower than traditional. Is that a good go-forward number or will that start to climb in the second half?

Jeffrey E. Smith

That also will climb for the reasons Nancy talked about. A lot of the investments that we're talking about will actually wind up on that line. So it's not compensation that will increase per se, but some of the other expenses related to these projects.

Nancy S. Lurker

But if you take -- if you were to take those out, our ongoing...

Jeffrey E. Smith

Yes. The ongoing will increase modestly for the year and then you've got to overlay the investment in these 3 initiatives, 3 general initiatives we talked about.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

And then when you look at the Sales Services business, it jumped significantly sequentially. When I model that out, I mean, there's 2 levers that make that number go up, either you have more reps or you have more revenue per rep. What do you think is driving that sequential gain?

Jeffrey E. Smith

Well, again, those contracts that we talked about that we signed last year fully kicked in, in the first quarter.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

So I guess you're saying, are reps becoming more profitable or did you add a significant number of reps from Q4 to Q1?

Nancy S. Lurker

No, no. We added -- Scott, we added a significant number of reps.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay. All right. That's helpful. Now I guess when I look at the model, you've added a lot of kind of business units. And I'm wondering, for instance, PC Services -- as far as I recall, that is only one customer and I think that customer is, at some point, going to wean off of PDI. When do you anticipate adding another customer to PC Services, or does that unit kind of just fade away?

Nancy S. Lurker

No, that unit won't fade away. That is where we will be doing our product deals, Scott.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay. So the product deals will flow through PC Services?

Nancy S. Lurker

Yes, yes.

Jeffrey E. Smith

Yes, correct.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay. Any sense if you'll bringing any nondeal-related customers through that unit? I know your one customer was very profitable or at least...

Nancy S. Lurker

We could. No, we could. As I mentioned, we continue to pursue what I would call a fee-for-service, partial reshare. And by reshare, again, let me reiterate, it's not putting our cost structure at risk. It's looking at different ways that we can put a little bit more of our potential profit margin at risk in those kinds of deals. And those -- we continue to have several opportunities in that space.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay. And then Engage, anything going on there, or is that still a very modest number...

Nancy S. Lurker

It's modest. We have won several pieces of business this year and late last year and we expect that to continue to have modest growth. Remember, those representatives are very expensive. Those typically are a combination of either nurses or PharmDs. And as such, the industry as well has pulled back there, but that business unit remains slightly profitable. It is a slow-growing piece, we knew that. But it's critical to our overall offerings.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay. And then final question for me. I always ask you what would you estimate your current RFP success rate is in the risk-adjusted pipeline? I think you might've answered one or both of those questions, but I didn't take it down.

Nancy S. Lurker

Well, I generally don't give broad numbers on our win rate, other than to say, our win rate remains very high on the CSO business. We continue to win. If you assume there's 4 major players, 25% would be our fair share. We're doing much better than our fair share.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

And the risk...

Nancy S. Lurker

I will reiterate though, there's always room for improvement and we continue to look at other ways that we can drive excellent customer first and customer service, which is key, as well as performance.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Okay. And the risk-adjusted pipeline?

Nancy S. Lurker

As I mentioned, Scott, it's just north of $200,000.

Scott R. Henry - Roth Capital Partners, LLC, Research Division

Do you mean $200 million?

Nancy S. Lurker

$200 million, I apologize.

Operator

Your next question comes from the line of Jack Wallace with Sidoti & Company.

Jack Wallace - Sidoti & Company, LLC

Just 2 quick ones for you. One, I just wanted to get a little bit more color on the -- both the revenue and the gross profit numbers in the quarter. Revenue was up obviously because of some of the new contract wins. '12 have fully materialized this year. And the talks obviously going forward, as that -- the margin will decline on that, but it looks like, sequentially, the margin's state pretty flat. Going back to the previous analyst question here, are the reps getting more profitable or there's more reps? It looks like, at least initially in the first quarter, that the existing reps had done a pretty good job at keeping their profitability there. Can you just maybe give a little more color on that?

Nancy S. Lurker

Let me just make sure I understand the question. Your question is what the relative split between productivity per rep and volume of reps?

Jack Wallace - Sidoti & Company, LLC

Well, I guess maybe even just more broadly, as the revenue went up pretty significantly this quarter on talks of what would've been lower margin revenue, but the gross margin actually stayed relatively flat from the fourth quarter to the first quarter, I was wondering why that may have been in light of supposedly lower margin sales.

Jeffrey E. Smith

Yes. Jack, I think you shouldn't -- I hate to say it this way, you shouldn't read a tremendous amount into the first quarter. As I mentioned, there was some -- we got some benefits in the first quarter from earning some fees, upside fees for 2012, and those get calculated for the year and fall into the first quarter, those go away. And starting in the second quarter, we lose some of our seasonal business and there's a few smaller clients, but very profitable ones that will expire naturally. So I think you just have to believe that as we move into the second quarter, you will see a very clear downward movement in the margin, and that will be more representative of the business that we are now carrying forward.

Jack Wallace - Sidoti & Company, LLC

Got you now. That's certainly helpful, I just wanted to understand why the first quarter number didn't exactly sit at that trend, but now it makes sense. And then just kind of falling back up on another caller's questions about buyback. I mean, the stock is very, very cheap, it's been the lowest level in a while. Is there any more thought to going ahead and buying back shares, even on top of some of these other capital outlook programs you've described earlier in the call?

Nancy S. Lurker

Let me say this, sir. We have not, at this point, however, given where the stock price is. It's something that the board is going to continue to take under consideration. That is why we ensure that we have the ability to do that, and I'm going to take your comments and Brad's comments and we will discuss it further internally with the board.

Operator

Your final question is a follow-up from the line of Brad Evans with Heartland.

Bradford Alan Evans - Heartland Advisors, Inc.

Yes, I just wanted -- you had mentioned $200,000 a couple of times in the wanted to clarify, that was $200 million for the pipeline?

Jeffrey E. Smith

Yes.

Nancy S. Lurker

It is. I apologize, Brad. $200 million.

Jack Wallace - Sidoti & Company, LLC

Okay. And then what percentage of the industry's reps are outsourced today, do you think, of the 55,000?

Nancy S. Lurker

Yes, we think -- actually, it's probably around 10%. Again, it's a little hard to always project, but we're -- right now, it does look like it's about 10%.

Bradford Alan Evans - Heartland Advisors, Inc.

Has anything changed in terms of your view that at over time, 20% to 30% of reps will be outsourced?

Nancy S. Lurker

Yes. It's no doubt, Brad, it is going slower than we anticipated. I will tell you, we thought that by this point in time, we would be somewhere closer to 15% to 20% would be outsourced. That has not happened. All I can comment on is that the pharmaceutical industry remains extremely conservative and somewhat reluctant to outsource I think what they believe is their -- a key part of their commercialization arm. The only comment I would make again is that there are several big pharma companies and certainly numerous small companies that are becoming more aggressive about outsourcing, but that does not seem to have yet materialized across the industry. We do continue to think at some point, as the cost pressures continue to build, it becomes increasingly difficult for companies to look at a cost reduction of 30%. As you know, our ROI, when you layer in our efficiencies, is 30% higher than it is for an internal pharma company to deploy a field rep. And given the fact that field forces today are extremely constrained about what they can say and do and have to operate within very, very narrow bounds, the ability to differentiate your field force in the marketplace is declining. Therefore, it makes the case for outsourcing, we believe, even more compelling. But as I mentioned, we thought, by now, the industry would've done more than they have. We continue to believe at some point they will.

Bradford Alan Evans - Heartland Advisors, Inc.

May I ask, you made a comment that the FDA pipeline is improving. Can you quantify that?

Nancy S. Lurker

No, I am not going to -- Brad, that's not -- all I know is from reading industry reports that it seems to be, but that's not an area that we spend a lot of time focusing on. So I would be remiss if I was to go into any kinds of details.

Operator

And we do receive an additional question from the line of John Kreger with William Blair.

John Kreger - William Blair & Company L.L.C., Research Division

Nancy, a quick follow-up again on the partnering. What therapeutic areas do you think you guys bring a particular level of expertise to? Can you just lay out where you think you might be most likely to focus in the next year or 2?

Nancy S. Lurker

Yes. Well, first of all, let me say this, on the CSO side, we truly are experts in every therapeutic category. If you go back historically with the company, we have participated literally in every single therapeutic category. Because really what we are good at is we are very, very good at hiring excellent sales representatives who have experience in whatever area the particular client wants that expertise in. So we know how to go out, recruit those representatives who have that skill set and then deploy them effectively. On the Interpace BioPharma side where we are considering looking at investing, I would rather actually not disclose at this point what we're looking at, but there are a few areas that we have zeroed in at. And at this point, I'd rather not go in to where those are.

John Kreger - William Blair & Company L.L.C., Research Division

Could use tell us, specialty versus primary care?

Nancy S. Lurker

Yes. Let me say this. The ones that we have on our screen right now are almost all specialty. They have some spillover into what I would call very high decile PCP. Those are the PCPs that would be extremely productive. But it is highly unlikely we would get into an area where we would have a very, very broad PCP category or drug. Why is that? Because just like Pharma, it's moving out of the primary care space. You're a mile wide and an inch deep, and the go-to-market cost per unit is significantly higher.

Operator

We have no further questions in the queue at this time. And this concludes today's conference call. You may now disconnect.

Nancy S. Lurker

Thank you very much.

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!