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PAREXEL International Corporation (NASDAQ:PRXL)

Investor Day Conference

June 26, 2013 8:30 am ET

Executives

Jill Baker - Corporate Vice President of Investor Relation

Josef H. Von Rickenbach - Founder, Chairman and Chief Executive Officer

Mark A. Goldberg - President and Chief Operating Officer

Joseph C. Avellone - Senior Vice President of Clinical Research Services

Karen Chu

Ron Kraus - Corporate Vice President and Worldwide Head of Parexel Consulting and Medical Communications Services

Xavier Flinois - President of Perceptive Informatics Division and Member of Business Review Committee

James F. Winschel - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Treasurer

Analysts

Alexander Y. Draper - Raymond James & Associates, Inc., Research Division

Jill Baker

Good morning, everyone. We'd like to get started. My name is Jill Baker, and I'm the Corporate Vice President of Investor Relations of PAREXEL. Thank you for joining us today at PAREXEL's Investor Day.

We're excited to be here and to have the opportunity to share our story with all of you today. This is an opportunity for you to hear from our extended management team and to develop a deeper understanding of our company, our industry and our growth prospects. We're grateful for your time, and we hope that by the end of the day, you will have learned some valuable information about our company.

Let me start with a quick review of our agenda for the day. You will first hear from Josef Von Rickenbach, our Chairman and CEO, who will provide a company and industry overview. Then Mark Goldberg, our President and Chief Operating Officer, will make a presentation about the Clinical Research Services business unit. Following Mark, Joe Avellone, Senior Vice President of CRS, will speak about strategic partnerships. Then Karen Chu, Corporate Vice President, CRS Asia-Pacific, will speak about our work in the Asia-Pacific region. I would like to note that we will have Q&A led by Joe after each speaker presents.

We will then take a brief 15-minute break from approximately 10:25 to 10:40. And after the break, you will hear from Ron Kraus, Corporate Vice President and Worldwide Head of our PCMS business; followed by Xavier Flinois, President of Perceptive Informatics. The final presentation will be from Jim Winschel, our CFO, and then we will have a general question-and-answer session with all of the presenters. We will conclude the Q&A session around 12:30 and adjourn for lunch, which will be held just across the hallway, where you had breakfast that you did attend right across the room there.

I'd now like to remind listeners of our standard Safe Harbor disclosure language. Various remarks that we may make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provisions under the prior Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. This includes those discussed in the company's Form 10-Q for the quarter ended March 31, 2013, as filed with the SEC on May 6, 2013.

The forward-looking statements included in this presentation represent the company's estimates as of the date of this presentation. The company specifically disclaims any obligation to update these forward-looking statements in the future. These forward-looking statements should not be relied upon as representing the company's estimates or views as of any date subsequent to the date of this presentation.

This presentation also includes references to non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with Generally Accepted Accounting Principles. Pro forma or adjusted financial information is not meant to be considered superior to or a substitute for the company's results of operations prepared in accordance with GAAP. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available on certain slides in this presentation, and additional information is also on our website.

With that out of the way, I would like to introduce PAREXEL's Chairman and Chief Executive Officer, Josef Von Rickenbach. Joe founded the company in 1982 and has been instrumental in creating what has become one of the world's leading biopharmaceutical services companies. Under his leadership, the company successfully executed and integrated a number of acquisitions, has grown to more than $1.7 billion in annual revenue and has also become a proven partner to large and small pharmaceutical and biotech companies around the world.

I would now like to turn the presentation over to Joe.

Josef H. Von Rickenbach

Good morning, everyone, and thank you for attending. Thank you, too, for the introduction. We're very happy that you could join us today, whether that's here in person in the room or on the Internet. And we're, of course, also very happy that we could do this event in Boston this year.

The goal of today's meeting is to provide you with an overview of the company's future positioning, our opportunities for growth and our financial performance. I'm also very pleased that you will hear firsthand from members of our senior management team, and they will have, in turn, an opportunity to tell you about their respective areas of responsibility in some detail.

I'll be covering 5 topics today, starting with an overview of PAREXEL. Then we'd like to share some thoughts about the current market environment and dynamics for our products and services and how we are capitalizing on them to generate growth for the company. I'll next spend a few minutes discussing how we plan to profitably execute against our backlog. And finally, I'd like to review some highlights of our recent operational and financial performance and give you our current outlook for the fiscal year and beyond.

So let me start with a quick profile of the company. PAREXEL is a strongly positioned company in a growing vibrant market. We have seized the opportunity to enhance the outsourcing model by developing a variety of partnership models to address a variety of needs that our clients have. We believe that we are a recognized leader in that arena.

We have a differentiated portfolio of clinical development products and services and can serve clients nearly anywhere in the world. Our new business wins have been solid, and our backlog should position us for ongoing revenue growth. We have an exciting opportunity in front of us to continue to drive shareholder value as we scale the business further and further leverage our global infrastructure to improve margins.

We operate the business through 3 segments, as is depicted here on this slide. For fiscal year 2013, we expect to generate revenue in the range of $1.72 billion to $1.73 billion. Clinical Research Services, or CRS, is the largest segment, with nearly 3/4 of the company's total revenue.

The core of CRS is Phases II and III. However, our services cover the full clinical development spectrum from Early Phase First-in-Man studies right through to Phase IV programs. In the PAREXEL Consulting and Medical Communications business, a large team of highly qualified professionals provides a unique combination of scientific, regulatory and commercialization expertise. In Perceptive Informatics, we're focused on capitalizing on the shift toward a greater use of information technology in drug development. And today, we have grown to become one of the world's leading eClinical technology companies. You'll be hearing from the leaders in each of these segments during the course of this morning.

In terms of our client base, PAREXEL services all the top 50 pharmaceutical companies and all of the top 10 global biotech companies as well and literally, hundreds of small and mid-sized biopharma companies in addition. We've proved ourselves in thousands of successfully managed, large, global trials that accrued hundreds of thousands of patients across virtually all therapeutic areas and geographies. In fact, we've played a role in developing over 90% of the top 200 biopharmaceutical products that are on the market today.

Although partnerships have led to a more concentrated client base, we remain focused on diversification by continuing to pursue small and mid-sized clients as well.

The market for our services continues to be very healthy. Almost $15 billion is expected to be invested in outsourced clinical development this year. PAREXEL's compound average growth rate from 2010 to 2014 is expected to be around 13.8% compared with the market growth of approximately 7%. As such, we expect to continue to capture market share.

This chart shows that global spending on medicines is expected to grow from about $950 billion in 2011 to $1.2 trillion by 2016. It is important to point out that emerging markets continue to offer biopharma companies the greatest opportunities for revenue growth. The cluster of high-growth markets for the pharmaceutical industry, referred to as Pharmerging countries, on this slide are projected to grow between 12% and 15% through 2016. This represents 70% of the industry's anticipated growth.

In addition to the biopharmaceutical market opportunity, many of the Pharmerging countries offer accelerated patient recruitment rates, often also at lower costs. For PAREXEL, our global footprint and stronghold in Asia-Pacific have allowed us to capitalize on these benefits, and you'll hear more about our capabilities in this region from Karen Chu, who is our Corporate Vice President for CRS in Asia-Pacific, later this morning.

I'd like to move on now and talk a little bit about the environment in which our clients operate. As I have just mentioned, demand for biopharmaceuticals is increasing. Fundamentally, it is in the best interest of national health care systems to have a vibrant biopharma industry. Historically, the industry has been dominated by Western companies. However, today, an increasing number of emerging countries are not only after market opportunities, but they also have ambitions to develop the necessary infrastructure to support their own nascent biopharma industries.

At the same time, aging populations in developed countries are demanding newer and better treatment so that they can live longer and healthier lives. We're also currently in a period of robust innovation, advances in stem cell research, epigenetics and other areas of biotechnology, to name just some of the major sources of discovery, continue to break ground almost daily. Regulators are generally supportive of these advances, and they want to promote further development so that safe and effective drugs can get to the market more quickly. They are also interested in improving health care economics by promoting the development of drugs that can speed recovery or even eliminate hospitalizations altogether.

Another observation that I'd like to make about the environment is that clients seem to be a little more optimistic these days and a tad more confident about the future. In recent years, the looming threat of a large number of patent expirations was extremely concerning to many of our clients. In some cases, R&D dollars were diverted out of development and into marketing activities in order to get the most profit possible out of those drugs that were still patented. And clients are now seeing their way through that period and are becoming more focused on achieving their longer-term goals by investing in research and development, which, of course, includes clinical development.

However, they don't want to return to just business as usual. Rather, they are very interested in exploring a new and different business model and ways to improve productivity and in many cases, try to achieve a tighter integration with the health care systems, for example, through strategic partnering with health care providers. So seen in this light, it is no surprise that this concept has been extended to CROs as well.

I believe that both clients and biopharmaceutical investors have a renewed bounce in their step, if you want. And in the stock market, this has been reflected in the sharp increase in the Biotechnology Index in recent quarters and also an improving outlook for the Pharmaceutical Index as well.

Another factor that has created a shift in the environment is the fact that more than 80% of new biopharmaceutical products currently in the development pipeline have originated from small and mid-sized companies. Record amounts have been invested in this segment over the past couple of years. Not only are large amounts flowing from partnering and debt issuance, but the public market also have started to open up the crack.

So furthermore, many of the emerging companies remain virtual. These companies have usually little infrastructure, which makes CROs a natural partner to take them to the development stages. The research productivity of small and mid-sized companies have started to manifest itself in product approvals as well. So for example, in 2012, 42% of the 39 new medicinal entities that were approved were granted to first-time sponsors. This was up from 37% in 2011.

The CRO industry has become a proven player in the biopharma value chain as clients trust us with increasing numbers of their projects and are also looking for us to -- for state-of-the-art development capabilities and expertise. In fact, in aggregate, the CRO industry now employs more development professionals than the biopharma industry does.

With regard to the current environment, we believe that the CRO market is growing at a healthy 7% clip. However, not all CROs are growing at the same rate. The most successful CROs are those who have a strong geographic footprint, advanced technology capabilities, broad-based expertise and quality services. The industry is still quite fragmented, but the CROs who have this strength will continue to capture market share away from those who don't. So over the past few years, "rollups" by private equity firms and CRO consolidation in general are evidence that size and broad capabilities are of importance to our clients.

This fundamental shift in the structure of the CRO industry may be similar to what happened in many other maturing industries which experienced consolidation among the leading firms. I believe that in the not-too-distant future, the top 7 CROs could make up 60% or more of the market, and this is in contrast to the top 7 players today comprising about 40%.

As I just noted, technology solutions are of increasing importance to clients. This trend is driven by the globalization of clinical trials. They're growing size and complexity and the pressure for more efficient drug development. Clients are very interested in simplifying the workflows so that there is a keen interest in integrated, single sign-on capabilities, as offered in PAREXEL's eClinical MyTrials suite.

Over the past few years, we've also seen a steady growth in demand for specialized applications that helps solve a specific problem. The technology that we acquired through the purchase of Liquent is a prime example of this. PAREXEL is clearly benefiting from these trends in the technology arena.

I'd like to move on now and describe some of the growth strategies that we are pursuing at PAREXEL. One of PAREXEL's key strategic advantages is our comprehensive, integrated global footprint. Outsourcing to a large, global CRO makes it possible for biopharma companies to conduct clinical trials and access patient populations around the world without having to invest in a global clinical infrastructure of their own.

Our global capabilities include the consulting arena, and we are able to provide clients with regulatory and commercialization expertise where needed around the world.

Having broad geographic coverage also gives us the flexibility to recruit and hire employees in multiple geographies. In some cases, this includes using our sites to host, if you want, back-office functions in lower-cost countries. Our geographic span currently covers 78 locations in 52 countries, and our site network enables us to recruit patients and run studies in more than 100 countries.

As I'll describe in a moment, we have a business model in place that I believe is very well positioned to generate benefits on a number of fronts. Within our Clinical Research Services unit, we are focused on several growth strategies. In our Phase I business, our relatively new inpatient early product development offering is starting to bear fruit, even while in-unit work continues to suffer from oversupply and diminishing demand. In the Phases II and III business, strategic partnerships with our larger clients, combined with the focus that our BioPharm unit has in working with small and mid-sized clients, are driving growth. Our Phase IV business is also benefiting from the strategic partnerships that originated in the core Phases II and III area. These relationships often expand into other areas and eventually also include peri-approval services.

And finally, our Clinical Logistics business and new Functional Services unit are also expected to drive CRS growth. Mark Goldberg, our COO and President, will be speaking in more detail about each of these topics in a few minutes.

In the PAREXEL Consulting and Medical Communications business, we are focused on expanding our client base, as well as our geographic footprint. We're also looking to expand certain service lines. An example is the acquisition of the HERON Group that we announced at the end of April. Ron Kraus, Corporate Vice President and Worldwide Head of PCMS, will provide more detail on these areas during his presentation later this morning.

In Perceptive Informatics, we expect growth to come from increasing sales of our eClinical Suite. We believe that we are a market leader in this area as clients continue to seek out one-stop integrated information technology products, like those that we provide with our MyTrials application. Xavier Flinois, President of Perceptive Informatics, will give more color on this topic when he speaks later this morning.

Over 31 years that we have been in business, we have created a company that drives meaningful synergies through the complementary nature of the products and services that we offer. This combination also serves as an important competitive differentiator when we sell our services. As I have described, each of our businesses has significant growth opportunities in their own markets. However, increasing number of our clients are taking a more integrated approach and are expanding the types of projects that they outsource to us. This creates growth and opportunities and competitive differentiation for us across the board of our company.

Another important element of our growth strategy is to pursue targeted M&A opportunities. Our primary focus in this regard is to grow current or adjacent service offerings. Recent examples include our acquisition of Liquent and HERON Group. I will characterize our approach to M&A as being one of adding to a string of pearls as opposed to sort of a big bang approach. As the chart shows, we have essentially followed this strategy for some years with considerable success. Our recent M&A focus has been in the PCMS and in the Perceptive Informatics businesses.

Perhaps even more important than revenue growth only, given the size of our existing backlog, is our keen focus on profitability improvement and EPS growth. The many operational and financial systems improvements that we have implemented over the recent past are starting to contribute meaningfully to profitability and operating margin expansion. We believe that we are very well positioned for further improvements in these areas.

Since margin improvement is first and foremost in our minds, I want to also give you some concrete examples of the areas that we are focusing on. They will be Clinical Research Services, Perceptive Informatics and SG&A.

Throughout the course of this morning, you will hear details from each of the presenters on the steps that they are taking in their various areas to improve margins in their areas of responsibilities. And so for now, I would just like to make a few brief comments on the major opportunities.

In CRS, many of the strategic partnerships that we have entered into have now fully ramped up and are operating at high levels of efficiency. We will continue to reap the benefits of these relationships. And Joe Avellone, our Senior Vice President in CRS, will expand on this topic more. With the maturing of the partnerships, we expect headcount growth to moderate, which will help to bring down hiring, training and recruitment costs. And we will also continue to replace high-cost contractors with full-time employees.

As Mark will describe in more detail, we also have a variety of continuous improvement opportunities and initiatives underway. Many are targeted at improving productivity and cycle times while ensuring patient safety and quality outcomes for our clients.

In Perceptive, profitability improvements will be achieved by increasing scale and leveraging development cost across PAREXEL. We also expect to benefit by continuing to move certain other activities to low-cost countries by growing headcount in those low-cost countries whenever possible when additional employees need to be hired. We will continue to tightly control SG&A expenses, again, partly by allocating work to low-cost locations when it's possible to do so and utilizing standardized best practices.

While revenue growth and margin improvement are clearly very important, at the end of the day, earnings per share growth is what is, in our opinion, the most representative of our success. Jim Winschel, our Chief Financial Officer, will further describe the elements of our financial strategy such as FX management, the stock buyback program, tax planning, just to name a few, all of which contribute meaningfully to EPS growth.

As most of you know, Jim announced his retirement last August, and we have signed on Ingo Bank as our new Senior Vice President and Chief Financial Officer. Jim will remain in the role until September 1, when we expect to file fiscal year-end audited financials. He will then serve as Executive Vice President until he retires in June of next year. Jim has made many significant contributions to PAREXEL during his 13 years with the company and has played an important role in helping PAREXEL to become a leading global pharmaceutical services organization. I will enjoy working with Jim in his new role, where he will focus on leading various profitability initiatives for the company.

Ingo will join us on July 8. He comes to us from Royal Philips, where he served as Chief Financial Officer and Executive Vice President of their Healthcare division. He has an impressive record overseeing financial management across a variety of industry sectors, and I look forward to welcoming him to PAREXEL and to working with him to continue driving our growth strategy and to deliver profitable results to our shareholders.

Yesterday, after the close of the market, we issued a press release with our forward-looking earnings guidance. Our guidance for fiscal year 2013 reconfirms the guidance that we issued on April 30. For fiscal year 2014, we anticipate generating revenue that will yield year-over-year growth in the 10% range. I believe that the elements that are required for growth are in place, and our focus on driving productivity and efficiency throughout all of our businesses should improve operating margins. These efforts are expected to generate year-over-year growth for fiscal year 2014 in adjusted EPS of approximately 23.5%. Jim will provide more detail about our fiscal year '14 assumptions later this morning.

With regard to our long-term outlook, we are targeting a 12% compound average growth rate over the next 5 years. This includes prospects for completing additional acquisitions. We continue to believe that achieving operating margin improvements in the 100 to 120 basis points per year is within our grasp. We expect that this focus, combined with the benefits from improved management of foreign exchange, tax planning, financial strategies and the stock buyback program, will drive 20% to 25% EPS growth for some time to come.

So in summary, I believe that PAREXEL is in a strong position to continue to take advantage of the favorable market trends that I have described. PAREXEL has been a winner in the landscape of strategic partnerships and industry consolidation and has good traction in winning business from the small and mid-sized client segments as well. The margin expansion initiatives that you will hear from each of the speakers this morning should position us well for EPS growth in fiscal year 2014 and beyond.

And so with that, I thank you, and I'd be happy to answer some questions right now. We'll also have the opportunity for Q&A throughout the morning after each speaker has presented, and then at the end, we'll collectively -- at the end of the meeting, we'll have collectively time for some questions as well.

Question-and-Answer Session

Josef H. Von Rickenbach

We have some mics also that people can speak into.

Unknown Analyst

Joe, how much of that 12% long-term target is organic?

Josef H. Von Rickenbach

We haven't specifically actually split this out, but I would expect that the majority of our growth would be organic. So once again, we are not really looking for big, mass acquisitions but rather would keep the M&A activities pretty much in the framework that we have had now for the last several years.

Unknown Analyst

Okay. So as we kind of think about the 1.2 book-to-bill that you guys have consistently talked about, it sounds like that 12% would assume that the backlog conversion actually starts to rise a little bit?

Josef H. Von Rickenbach

It actually has already risen from its low point somewhat. If you work yourself through the model, you'll probably see that we expect it to continue to come up slightly, although probably not all the way back to where it was before the financial crisis. David?

Unknown Analyst

So a little on the same line. If we impute from your prior calendar guidance and then the new fiscal guidance that you gave last night, it looks like the second half of '14 is sub-10% in your expectations. Are there some unique factors that are pressuring that second half of fiscal '14 down and then you expect that to rise back up in the longer term? Can you describe that a little bit?

Josef H. Von Rickenbach

Yes. So the quarterly progression is, in fact, a continued slowing in our growth, and then it starts to pick up again. I think partly, that is because we had such a big influx of work, more or less, in midstream from one client that really drove a lot of short-term growth, which is now starting to annualize and roll over. And basically, as that annualizes, the growth will come down and will then start to pick up as "normal projects" are becoming the norm again.

Unknown Analyst

And then on the -- if you can -- on strategic partnerships, is your longer-term growth expectation based on winning more strategic partnerships and the layering of that and largely exclusively that? Or do you expect that your existing strategic partnerships will continue to grow in their outsourcing volumes to you?

Josef H. Von Rickenbach

Well, to start with the latter part of the question, we certainly expect that the strategic partnerships will continue to yield business to us pretty much in a steady state for many years to come. But we also expect to win more partnerships over time. Now having said this, we don't really see another year where so many will happen in such a short time as happened in the '11-'12 time frame. I think that was a onetime event. But there is still a lot of opportunity out there. I think many of our clients are starting to see that this is a better and superior model, really, to engage with us. And as that kind of bleeds into the market, I think you will see that more and more of the companies that currently still have not embraced this model will do so. Don. Sorry, Doug.

Unknown Analyst

Just curious in terms of the acquisitions you made over the years. Have they generally grown faster than the overall business or sort of more in line? Or is it just simply a function that you've put things in that have had strategic value to the broader sort of clinical services portfolio? And obviously, if we think about the revenue growth in the last 12 months, it's been at sort of a very high rate, so I wouldn't expect that would necessarily be the benchmark. But if you think about your long-term target of 12% growth, have they been generally growing themselves at that rate?

Josef H. Von Rickenbach

So we are very careful in the way we track our acquisitions. We actually track our acquisitions all the way to the teaming and how they worked out and whether they were -- both from a strategic point of view and from a financial point of view, making sure basically that we have a good understanding where do we make good investment. And broadly, I'm happy to say, first of all, we made over 35 acquisitions over our lifetime. And the vast majority of them have actually been successful, successful being defined as they contributed strategically what we expected them to contribute and they were also drivers of growth, okay? So most of these acquisitions, including the most recent 2, are also going to be expected to work in that role. In other words, they are growing in their own right, but they're also strategic, strategic being defined as synergistic with the rest of the company and the rest of the business. And so yes. So going back, I would say most of these acquisitions have worked exactly in that way, not all. There were a few duds in there, which you would expect in our 35. But overall, the track record really looks pretty good. So if you kind of look at the traffic light scoring, it's pretty green, but there is some red in there also. I will have to say that.

Unknown Analyst

And then just as a quick follow-up, do you generally prioritize strategic value or financial performance in making acquisitions?

Josef H. Von Rickenbach

Well, absolutely. So as I said, they have to perform both in meeting our financial expectations, but they also have to work out strategically. So it's a 2 scoring. Sorry, I think Todd was next.

Unknown Analyst

Just maybe a 2-part question. First, on the growth, the 12% growth, do you see that being consistent across segments, or are there meaningful differences between segments in terms of how you expect them to grow? That's one part. And the second part is really related to the industry, where we're at today and the consolidated -- or the consolidation that has occurred, particularly both the low and what would seem like the top 10 CROs. Do you feel -- how do you feel about your position being one who, at this point, isn't really the consolidator? How do you feel about your relative competitive position when you're looking at the landscape over the next several years, where it seems like a lot of consolidation does have to occur at the kind of the next layer down? Do you think that that creates opportunity for you?

Josef H. Von Rickenbach

Okay, so in terms of the, if you want, the steadiness of growth across our segments, I think all our segments have growth opportunities going forward. Whether it will be exactly the same will be hard to tell right now. Needless to say, our Clinical Research business, which makes up for 70% of our overall revenue base, has to grow most importantly. In other words, if that doesn't grow roughly at the targeted rates, it will be difficult for the other 2 to make up for that. And so that's the primary focus, for sure. But also, Perceptive and PCMS really have great opportunities, and you will hear actually from the leaders of both businesses this morning, and I'm sure you will be convinced of that. And in terms of the consolidation, yes, we're expecting to take some more market share. We believe that a number of the second tier or more domestic players in our business are not quite as competitive these days, especially when it comes to the larger accounts, and so that's an opportunity for us to take market share. And I believe that will continue for some time to come. John?

Unknown Analyst

Joe, I think a few minutes ago, you were talking about the clinical pharmacology market having oversupply and diminishing demand, if I heard that right. Can you just expand upon that? And do you view that as a warning sign for the longer-term growth trends in your later-stage business?

Josef H. Von Rickenbach

All right, so it's the last question before we move on. It's an interesting question, John, because, I mean, basically, the way I would interpret your question is, is this a cyclical problem or is it more a structural problem in Early Phase.

Unknown Analyst

[indiscernible]

Josef H. Von Rickenbach

I get it, exactly. And so it's very important for us to understand that -- at this point, we don't believe it's a cyclical problem. I think what -- or we believe what is happening in Early Phase is really a recasting of how that business works. As Mark is going to talk about in some detail, in Early Phase, we're now starting to see much more of -- many more of the new molecules go directly into patients, which basically doesn't need the classical units, the Phase I units, and healthy volunteers. And so there is oversupply there. Also, what is also really happening, and it's really kind of weird, actually, even while demand for in-unit work is going down, we see more entrants coming into this business mainly from noncommercial areas. So for instance, governments are adding capacity. Asian government, for instance, has a way to get into clinical research or fostering clinical research. And so it's just a challenged business from a structural perspective, but at the same time, the pipeline per se is actually very healthy. We don't really see a dearth of compounds coming through preclinical and into the clinic. And so I think from our point of view, that's encouraging, while at the same time, of course, we have to deal with the exigencies and the challenges that that structural problem brings with it.

Okay, so why don't we move on at this point? Again, we have more opportunities for Q&A after each of the presenters and again, at the end. And I'd like to introduce now and it's my pleasure to turn over the presentation to Mark Goldberg, who is our President and Chief Operating Officer. Mark joined PAREXEL over 16 years ago in the Advanced Technology and Informatics Group, which then eventually morphed into Perceptive Informatics. In 2005, he assumed responsibility for CRS. In 2008, Mark was promoted to COO, and in 2011, he also assumed the role of President. So Mark?

Mark A. Goldberg

Thank you, Joe, and good morning, everyone. Following a brief introduction, I'll share some additional perspective regarding the clinical research environment. I'll then provide an operational overview, commenting only briefly on Perceptive Informatics and PAREXEL Consulting and Medical Communication Services, or PCMS, which will be covered in more detail by the leaders of those groups.

I'll review Clinical Research Services, or CRS, in greater detail, where I'll outline our focus on management enhancement, discuss financial highlights and summarize our future growth and profit drivers. As mentioned by Joe, PAREXEL is divided into 3 major reporting segments, which are CRS, Perceptive Informatics and PCMS.

CRS is the core clinical development business, including all aspects of trial conduct from First-in-Man to post-approval. Perceptive Informatics delivers the PAREXEL MyTrials eClinical Suite that supports trials run in-house by PAREXEL, trials run directly by clients and, I might add, trials run by other CROs. Among other things, the eClinical Suite includes Electronic Data Capture, Randomization and Trial Supply Management, which we refer to as RTSM, Clinical Trial Management Systems and Medical Imaging solutions. These offerings are supported by a fully integrated clinical trials platform. Finally, the PCMS business provides regulatory strategy, product development, strategic compliance and commercialization consulting, as well as medical communications services.

I'd now like to briefly describe some macro trends affecting clinical research that also have the potential to impact demand for services. As shown on the chart, the number of FDA submissions has been increasing. As Joe mentioned, the FDA approved 39 new molecular entities in 2012, the highest number in recent years. Of these approvals, 51% were considered first-in-class compounds, with 42% coming from so-called emerging companies, that is sponsors with no prior approval experience. Importantly, the number of first-in-class compounds and new sponsors suggest that investments and innovation are paying off despite long-standing concerns over R&D productivity. We believe that these trends, combined with an improved funding environment for small and emerging biopharmaceutical companies, or SEBPCOs, bode well for growth in clinical trial demand.

Another trend is that various regions around the world are increasingly asserting their authority over the clinical trial process. In the EU, another major piece of regulation is in the offing as a follow-up to the EU directive. It's hoped that the new legislation will encourage trial conduct in the EU region by simplifying Clinical Trial Applications.

On the other hand, India, in my view, has taken a giant step backwards, based upon a disproportionate response to concerns over a few local bad actors. Resulting legislation supports increased levels of reimbursement for patients who experienced adverse events during clinical trials. Whether related to the study drug or not, even on placebo or if the experimental drug fails to show efficacy. The rewrite of applicable rules has also introduced extraordinary delays in starting new trials. In addition, continued decisions that fail to uphold patents issued elsewhere further challenged India as a near-term destination for biopharmaceutical development.

Japan, on the other hand, continues to encourage development by decreasing review times and increasing approvals. This stimulates both clinical trial and post-marketing work. China represents a critical end market. The demand for Chinese trials, the limited number of certified investigators and a reshuffling of the regulatory authority has led to increased delays of 12 to 24 months for approvals to start new trials.

Nonetheless, the market opportunity is too compelling to ignore. Recent pronouncements indicate that for biologics, all phases of development will have to be performed within China. Karen Chu, Corporate Vice President, Asia Pacific, will discuss the dynamics in the Asia Pacific region in more detail later this morning. Taken as a whole, we believe these trends will increase clinical trial demand, particularly in Asia.

With respect to overall market growth, we believe that the largest CROs, capable of supporting global strategic partnerships, are taking share from smaller and regional players. As shown on the chart, market share for the top 10 CROs is projected to increase from 59% in 2013 to 63% by 2016. While we anticipate that clients' R&D budgets will only grow in the low single digits, we believe that outsourcing penetration, currently somewhere in the 40% range, may go as high as 60% to 80%. Overall, this implies a compound annual growth rate for leading CROs in the 9% range through 2016.

Having described some trends in the clinical research environment, I'd now like to shift gears and provide an operational overview. As shown in this graphic, our various services span the development of a therapy from preclinical through to post-marketing support and has considerable overlap in the phases of development served by our businesses. This facilitates cross SDU [ph] selling and the ability to follow a molecule through its clinical life cycle.

Strategic partnerships increasingly create opportunities to leverage the full spectrum of PAREXEL's offerings by a given client. Indeed, PAREXEL is at its strongest when we're able to bring the full breadth of our capabilities to serve a customer. As mentioned, I'll speak briefly about PCMS and Perceptive before focusing on the core clinical research business.

The PCMS business continues to perform extremely well for both the top and bottom line perspective, supporting robust growth while maintaining strong margins. We continue to benefit from a favorable regulatory enforcement environment that creates demand for our strategic compliance services. We've also continued to leverage our global footprint to strengthen our offering in key geographies around the world. This allows us to support multinational clients seeking to access emerging markets, as well as companies based in emerging regions seeking to enter global markets. Regulatory complexity around the world helps to drive our consulting business.

While growth in medical communications is more modest, that business also continues to perform well from a bottom line perspective. We recently announced the acquisition of the HERON Group, which further strengthens our offering in the increasingly critical pricing reimbursement and market access segment. This acquisition substantially strengthens our existing commercialization offering and also dovetail nicely with our late phase clinical trial capabilities. PCMS will be discussed in more detail later this morning by Ron Kraus, who leads that business.

We remain committed to the promise that technology offers to bring innovation and efficiency to the clinical trial process. Through Perceptive Informatics, we've built one of the largest eClinical companies in the industry and certainly the largest among major CROs.

The MyTrials platform, our eClinical Suite, continues to focus on the value created by offering a truly integrated solution. The value of this technical convergence is analogous to the Microsoft Office Suite, where value is created through the ability to easily navigate across and exchange information between various Office applications.

Another applicable analogy is the iPhone. You can think of the MyTrials platform as analogous to the iPhone, with our various solutions such as EDC and RTSM being apps that run on the eClinical platform.

Our technology offering has been a key differentiator in securing and delivering on strategic partnerships. Across our portfolio, we're increasingly able to dictate technology solutions that maximize efficiency for the client by leveraging our eClinical tools.

Furthermore, mastering technology is essential to enabling innovative trial designs such as risk-based monitoring or the ability to select the best investigators for a given protocol. The business continues to grow well, and we see opportunities for further margin improvement. Xavier Flinois, our new Head of Perceptive Informatics, will provide a more detailed review of the business shortly.

And now a few comments about our largest business, Clinical Research Services, or CRS. CRS actually consists of 5 separate operating units that include Early Phase; Phase II, III, Peri-Approval Clinical Excellence, or PACE; Clinical Logistics; and PAREXEL Functional Services. I'll discuss each of these briefly.

I'd also like to highlight that to support this growing business, we built a strong management team through a combination of internal development and external hires. We're committed to adding additional managerial depth at all levels to ensure that we remain positioned to continuing scaling the business successfully.

Our Early Phase business covers First-in-Man through Proof of Concept studies. This market remains relatively challenged. In an effort by biopharma companies to manage costs, we're seeing on average fewer studies per molecule. In addition, given the focus on oncology and immune diseases, many of the investigational products may not be suitable for healthy volunteers and hence, go directly to patients. We've seen some decrease in industry capacity in North America and Europe, although new sites have opened in Asia.

While we do not share operating unit level of financial detail, the Early Phase business shows modest improvement on both top and bottom line performance on a year-over-year basis but still averages us down on the bottom line. We've had excellent success securing Early Phase partnerships and have had a very positive response to our early product development offering focused on the early introduction of compounds into patients as opposed to healthy volunteers.

While we continue to believe in the strategic importance of this service line, we're committed to doing what's necessary to maximize the opportunity while minimizing any downside risk. Importantly, we intend to remain a leading Early Phase provider, positioned to capitalize on the evolving opportunity.

We believe that solid growth in the high single-digit to low double-digit range will continue in our combined Phase II through IV businesses. Partnerships continue to play a central role, and we remain an industry leader. We've continued to add to our thought leadership position, including the recent release of our first of its kind research report, entitled Strategic Partnerships 2013. We believe that more partnering opportunities exist, particularly in Europe and Asia, as well as with midsize companies globally.

Joe Avellone's presentation will focus on strategic partnering dynamics. At the same time, we launched a new biopharm unit, with separate leadership and delivery teams that are dedicated to small and midsized accounts, for whom a full-blown partnership model may not be the best fit. Creating this separate unit allows us to dedicate the same level of attention and commitment to smaller companies as we do in our larger partnerships.

For FY '14, we've created the PAREXEL functional services unit as this outsourcing model achieves critical mass. I'll provide a bit more information on this unit in a moment.

Asia Pacific remains a stronghold for PAREXEL, and we continue to benefit from the need for multinational companies to penetrate emerging markets, where they require a strong local partner. And at the same time, we're able to support the growing number of companies in Asia, including Japan, India, Korea and China, who wish to bring their products to global markets.

PACE stands for Peri Approval Clinical Excellence and refers to our Phase IIIb and IV business, where we believe we have one of the broadest offerings in the industry. We support all the types of observational research, increasingly important to address safety concerns and provide data in support of commercialization and reimbursement.

PACE business, which is often characterized by large, simple studies and less experienced investigators, benefits from our technology strengths. For example, we have a proprietary web-based platform for enrolling investigators and accelerating study start-up. Our eClinical Suite supports targeted or risk-based monitoring, which is particularly applicable in the later phases of development. Finally, the use of electronic health records and patient-reported outcomes are playing increasingly important roles in Late Phase work.

We also see growth in patient safety services consistent with increasing outsourcing trends across all functions and in particular, we've seen an uptick in Japan where products are making their way to market faster.

Finally, the acquisition of the HERON Group creates the capability to provide consultative input regarding commercialization strategy, while PACE is then positioned to deliver the prospective data needed through observational research. Another service offering within CRS is clinical logistics. Over the years, PAREXEL has organically built a clinical logistics offering to manage medicinal products, biological specimens and ancillary clinical trial supplies.

As shown on the map, we've built a global network of proprietary and partner depots to coordinate supply storage and distribution on a global basis. This business has been growing rapidly and is offered on both the stand-alone and integrated basis with our other solutions. When offered in conjunction with Randomization and Trial Supply Management through Perceptive, there's an opportunity to efficiently link logistics with study drug inventory management.

As trials become more complex and global and increasingly involved biologics and specimens, demand is increased. Expertise is required not just around basic logistics but also to navigate the array of regulatory and import-export considerations. This expertise and technology-driven offering fits synergistically into the PAREXEL clinical research services portfolio.

One of our newest offerings is our PAREXEL Functional services unit. While PAREXEL has offered services in a functional model for years, we've recently concluded that the opportunity warrants the focus of a dedicated operating unit and management team. The global functional service provider, or FSP market, is estimated to be in the $3 billion range.

Our research suggests that this will continue to grow, with an incremental 19% of clients expressing interest in adding this model to their outsourcing mix as shown on the chart.

In our view, FSP really represents a spectrum of service offerings from staffing services on one end to full outsourcing of departments in a business process outsourcing model on the other. We participated in a variety of models that cover clinical, data management, biostatistics, medical writing and pharmacovigilance. We also have the ability to bundle combinations of functions, something that not all FSP providers can offer. The new separate structure allows us to clearly segment the resources dedicated to this model from those supporting program-specific work.

Importantly, we believe that many strategic partnerships may be best served by a hybrid of programmatic and functional outsourcing, and we have such relationships at present. Through this unit, we'll continue to grow our capabilities on a global basis, and we view this as another strategic growth opportunity for the company.

I'd now like to turn my attention to CRS profitability. We have a compelling opportunity to unlock value by improving our margins in CRS, and this remains an area of intense focus. Therefore, I wanted to share some insights and provide some updates regarding our progress.

Over the last 1 to 2 years, our greatest challenge has been rapid headcount growth, in many cases, in unexpected and tight labor markets such as the U.S. And we've had a rapid infusion of new employees needing to be trained, as well as a disproportionate dependence on contractors to ensure that our commitments were met. As supply and demand for personnel come into balance, we're decreasing our dependence on contractors and increasing efficiency through improved training and time availability.

We've successfully implemented a new resourcing function that's driving higher utilization across the business.

During our accelerated growth phase, we saw employee turnover tick up in some select regions and functions. Focused retention efforts are now successfully reducing turnover, which improves margins by decreasing recruiting and training costs.

The maturation of our partnerships is also allowing us to decrease the training burden, as well as to reduce infrastructure building costs associated with ramping those relationships. All of these factors contribute to improved utilization of direct labor and improved gross margins.

As our resourcing needs have equilibrated, we've also been able to focus on driving more physicians to lower cost locations. Our geographic strategy does not put all of our eggs in one low-cost basket, but our biggest effort by far, which has been highly successful, has been in India. We are, however, also leveraging a number of locations in Central and Eastern Europe, Asia and Latin America. This slide shows our headcount growth in India, where our major location is based in Hyderabad.

We also have offices in Bangalore, Delhi, Mumbai and Gondghar. I should point out that our support functions in India are unaffected by the regulatory issues that I mentioned earlier regarding the clinical trial environment in India itself.

So I've described the number of levers per margin enhancement related to resources and resource management but through our application of Lean methodologies, we're also making a number of important process-driven improvements. At this time last year, we were talking about challenges in Study Start-Up. And through a number of targeted process improvements, the operation has been streamlined and rightsized, including the substantial reduction of contractors in that function.

We also spoke last year about improvements in project life cycle management. We've made a number of important changes. Perhaps most noteworthy was a significant reorganization of our research operations. Several previously separate departments have now been combined under a single leader. This allows better alignment of the project teams to client deliverables, while streamlining team structures and eliminating unnecessary overhead.

Using Lean mapping tools, we also concluded that several functions had become overspecialized, eliminating flexibility and increasing handoffs when executing studies. We're making a number of adjustments to simplify roles and responsibilities.

Finally, we're driving a performance culture, with more direct links between project-specific performance and client satisfaction and incentives and compensation. I'm convinced that these measures, in addition to the other interventions that I've outlined, will drive margins while also benefiting client satisfaction and employee engagement.

Technology also has a role to play on improved performance. We upgraded our financial systems sometime ago, and as part of our LEAP initiative, we implemented our eClinical Suite. We're now focusing on enterprise resource planning, or ERP, systems that will link our operational tools on the front end to our financial systems on the back end.

Operational data will be used to drive forecasting, revenue recognition and resource management, with the elimination of numerous manual and duplicate data entry steps. In addition, visibility to key operational metrics will be improved, helping to drive project performance.

These graph provides an overview of CRS financial performance over the last several years. For FY '13, we estimate that CRS revenue will grow approximately 24% to 25% year-over-year. The profitability improvement efforts that I described have already started to yield results.

While we expect that the full year CRS gross margin for FY '13 will be down on a year-over-year basis, we saw a nice reversal in Q3 with a 3.5 percentage point sequential improvement, and we believe that this is the beginning of a trend.

While it may not be completely linear, we expect to reap ongoing margin benefits for moderating levels of growth and the results of the Lean initiatives that I outlined.

I'd like to wrap up with a summary of the growth and profit drivers for the clinical research business. Our data suggests that outsourcing penetration will increase, driving our growth opportunity well above the baseline growth in R&D spending. In terms of growth in the Early Phase business, we're optimistic about the increasing demand for our early product development service line, which focuses on the early introduction of compounds into patients.

For Phases II through IV, we see new partnership opportunities and believe we'll be able to leverage our thought leadership position and strategic partnering to take additional share. Our BioPharm unit has sharpened our focus on small and midsized companies who we estimate on approximately 60% to 80% of the intellectual property in the industry and outsource a higher percentage of their R&D budgets.

We believe that the creation of our functional services unit will allow us to better capitalize on the growth opportunity presented by this offering. The excellent match between growing demand and the strength of our offering in Asia Pacific will also continue to serve as a growth catalyst. Finally, we believe that growth in observational research, in part driven by our expanded commercialization capabilities through the acquisition of the HERON Group, will benefit the PACE business.

With regard to margins, we believe we have a compelling value creation opportunity for our shareholders through improved margins and EPS growth. As discussed in some detail, we have a number of levers to drive the improved margin performance in CRS. Specifically, these include a more controlled growth environment, better resource management, Lean-driven process improvements, improved Early Phase performance, maturation of partnerships, continued leveraging of low cost locations and reinforcing a performance culture. We are focused on executing against this value-creating opportunity.

Thank you, and I'd be pleased to entertain any questions at this time.

Unknown Analyst

Thanks, Mark. Would you be able to put any bookings around the improvement in utilization that you've seen? Maybe talk to us about where it was a year or 2 years ago, where it is now, and where you think it can go over the course of the next year?

Mark A. Goldberg

Sorry ,can you say that first part?

Unknown Analyst

Utilization, on utilization, can you give us a sense of that trend?

Mark A. Goldberg

So we've seen progressive and consistent improvements in utilization, and we believe that, that will continue to grow as we go forward. And I think that a couple of things are driving that. One is that with a degree of stabilization in the workforce, the amount of training that's going on is somewhat less with the maturation of partnerships. There's another big training burden, which is also currently decreasing. So that's having a near-term impact. And then longer term, from a utilization perspective, think the Lean initiatives that we're undertaking have a longer term opportunity for continued improvement in utilization.

Unknown Analyst

[indiscernible] discussion around [indiscernible] unit. I guess historically, I would think of FSP as being a lower priced, lower margin business. So maybe you could help to understand -- help us to understand how you see that evolving in your mix of business in CRS? And does that have a margin headwind on the business?

Mark A. Goldberg

Sure. So we have experienced, of course, with the FSP business as it stands. We are engaged in FSP models. The introduction of the unit allows us to bring a bit more focus. It allows us to separate out the resources and the management team and to set clear goals and to have clear visibility for the metrics. The model itself, through a lot of detailed analysis, has convinced us that there's no reason that it fundamentally has to be less profitable than any other part of the business. It is the case that costs have to be managed closely, and the expectation is that utilization within that business is higher. And then structurally, one of the things that we're helping to ensure is that the overhead resources that get drawn upon by that part of the business are less than the programmatic part of the business. So part of the segmentation that we're doing allows us to make sure that the overall cost structure is appropriately aligned to the pricing models that are required in that market. So prices, yes, may have to be lower, but we're comfortable that we can manage the cost and utilization in the way that maintains profitability in a place we're comfortable.

Unknown Analyst

Could you give us some more detail on -- with respect to numbers around how you're replacing the contractors with full-time employees? What's the difference in the headcount there? How many contractors did you have a year ago versus now? And how many do think you're going to have in a year?

Mark A. Goldberg

So we haven't gone into details about exactly numbers of contractors. The number of contractors peaked about a quarter or 2 ago. We've seen a nice decrease over the last quarter and contractors in the current quarter, expect to see continued improvement. And my expectation is that we really should be, what I would consider to be a steady-state from a contractor standpoint by the end of the calendar year. So it's not the goal to ever be totally without contractors. Some amount of flex in the system is okay. But we got to a point where we had many more contractors and consequently, higher costs as we had a need to build very rapidly to meet some of the big demands from the big wins that we have.

Unknown Analyst

Okay. So year end fiscal or calendar?

Mark A. Goldberg

Calendar year.

Unknown Analyst

Okay calendar year '13. And what's the pricing differential roughly between a contractor and an employee?

Mark A. Goldberg

It's very variable, it's somewhat of a hard question to answer. What I would say is that the difference is significant in the Americas, particularly in North America. In some other places in the world, interestingly, the differential is not as much, but that's not so much what we're focused on. Really, the focus in terms of margin improvement is getting the contractors down to the level that we want in North America and in the U.S. specifically.

Unknown Analyst

Can you give us a sense for the timeline of growing out the ERP, how far along is that project? And both how much does it cost in total and how do those costs stagger out over the years?

Mark A. Goldberg

Right. So for the CapEx part, maybe I'll defer that to Jim's discussion when he comes to that because I don't remember all of those numbers off the top of my head. The rollout is I would say, we're sort of mid-rollout at this point. And my expectation is we're probably going to be continuing to roll that out for another 12 to 18 months. It's not my expectation this has any extraordinary impact on CapEx in a way that's not already factored into the guidance that we provided.

Mark A. Goldberg

Thank you. I'd now like to introduce Joe Avellone, Senior Vice President of Clinical Research Services. Joe Avellone's responsibilities include the oversight of all aspects of clinical trial conduct throughout the Americas, Europe, Africa and Asia Pacific. Joe also oversees the development and management of strategic partnerships to bring greater effectiveness to our clients' clinical development programs. Joe?

Joseph C. Avellone

Thank you, Mark, and good morning, everyone. This morning, I'm going to discuss strategic partnerships. They remain a strategic factor for large and some midsized biopharmaceutical companies, struggling with declining productivity of their R&D efforts and with an imperative to increase efficiency and these partnerships, as a result, are reshaping our industry.

So in particular, I'm going to focus on 4 areas: How partnerships are working for clients from their point of view, what's been the evolution and expansion of partnerships over the past several years, and given this evolution, what are the total benefits of partnerships for clients, how is the value measured, what's the status of renewals; and finally, what are the benefits of partnerships for PAREXEL.

In the fall of 2012, PAREXEL commissioned Ogilvy consulting to conduct a first-in-the-industry survey about strategic partnerships between pharma and CROs. They consisted of in-depth interviews with 26 senior level executives such as Head of Development and Procurement, representing 17 global pharmaceutical companies based in the U.S. and Europe, split 60-40.

71% of the executives were from large pharma, 12% from midsized pharma and 17% from small biopharma. Of those companies surveyed, 59% were in the top 20 by revenue, and they represented 39% of the industry R&D spend. They also represented a blend of PAREXEL clients and non-clients, so they constituted a very representative sample of the industry. And overall, 85% of those surveyed considered strategic partnerships to have a positive impact on the client CRO relationship.

In addition, they attributed the major beneficial impact of the partnerships on their operations to be reduction in the level of required client oversight, reduction of fixed costs with a higher percentage of variable costs, access to capabilities not found internally, improve global health -- reach, excuse me, and acceleration of time to market.

And as you'll see later in my presentation, these benefits evolve with the partnerships over time cannot really be achieved without collaboration, trust and mutual commitment. Partnerships continue to grow. The biopharmaceutical companies that have strategic partnerships have expanded, so that in 2012, they represent 42% of the total outsourced clinical development spend. That's up from 24% 3 years prior.

This demonstrates a very rapid penetration of this concept throughout the industry. In the PAREXEL survey, 65% of those executives and partnerships surveyed believe that outsourcing will increase beyond the current levels in the coming years.

Now let's discuss the evolution and expansion of partnerships. Most strategic partnerships have evolved in important ways since their inception. One important way is the broadening of outsourcing models within them. Most partnerships now include both programmatic outsourcing, that is full-service outsourcing of clinical trials; and functional outsourcing as well. What this slide indicates is that large pharmaceutical companies have largely adopted a hybrid outsourcing model, in which approximately 75% of their spend is for programmatic outsourcing and 25% for functional outsourcing.

This is true of PAREXEL's strategic partners as well and represents a significant area of growth opportunity for us.

Functional service outsourcing is a model in which a client contracts with a provider to provide all of the services for a particular function such as clinical monitoring across all or a portfolio of their studies. Typically, this model would be chosen for a particular function in certain geographies across their portfolio of studies.

In many cases, it's to provide lower-cost capabilities for some functions such as data management services, which can be located in low-cost locations but serve global needs. In other cases, it's used to provide a high-quality means to increase their variable cost structure in some regions while maintaining the capability of conducting trials there.

In addition to a broadening of the outsourced model, many partnerships have also expanded the range of services included over the years. As this slide indicates, the mean number of PAREXEL operating units involved in the partnerships has more than doubled in the 3 to 5 years post-inception. This has allowed for more full collaboration, which in turn creates synergies and a higher value for the client. For example, it's common to expand into Early Phase after Phase II, III. As this occurs, it's not uncommon to develop approaches to compound outsourcing, rather than trial-by-trial outsourcing, at least for some programs. This will usually involve the use of PAREXEL consulting services in the planning and design phase of these programs. And it's increasingly attractive for our partners to adopt our MyTrials Clinical Technology suite from Perceptive Informatics.

In PAREXEL, each strategic partnership is led by a vice presidential level strategic account leader, whose job is to oversee all aspects of the strategic partnership across all of our operating units, so that we become one seamless delivery organization.

Now let's discuss the benefits of maturing partnerships. Partnerships are unique in their ability to deliver substantial value, which we will be discussing. But these benefits unfold as the collaboration matures, and here are the reasons. These kinds of benefits are more easily generated across a large base of work. And most partnerships focus on new work, which can be large but have to grow over time as the study start up.

High-value investments take time to be identified, prioritized, executed, especially since they inevitably involve significant changes to processes and perhaps, the adoption of technology. Executive governance enables bilateral partnership infrastructure development and align capability development that simply cannot happen without senior management involvement from both parties in a structured decision making forum over time.

Earlier involvement with trials and programs allows more sharing of expertise, which cannot typically happen in RFP-driven transactional outsourcing but will evolve with mutual commitment in time.

PAREXEL now has a well-documented experience-based and dedicated staff deployed to bringing partnerships to maturity as quickly as possible. Let's discuss the sources of value creation in more strategic partnerships.

In PAREXEL's experience, partnerships can generate up to 30% reductions in total development costs relative to transactional approaches. This slide shows the various drivers that contribute to this kind of value. It's important to note that the kind of volume discounts or best rates that would be applied in large preferred relationships are a very minor part of the overall savings here. So most of these cost reductions are not tied to rate reductions but are in addition to them.

These partnerships create a focus on value drivers that are derived from the collaboration itself, and they're not possible in other kinds of relationships. They include significant program and work process efficiencies. Savings related to other costs of the trials beyond CRO services and value created from insight and innovation. These types of savings do not impact PAREXEL's profitability, they're all derived from the value that comes from working together in a more planned, insightful and collaborative way.

With these savings, the partner can do more at less cost and this of course, allows for more programs to be funded and for PAREXEL to work on in a virtuous cycle.

Let's review a couple of these value drivers in more detail. One major source of value is the ability to reduce the amount of client staff necessary to oversee the trials. As the slide shows, over time, significant reductions in oversight staff can be achieved, enabling utilization of those resources for other purposes. In PAREXEL's experience, the traditional 1 to 3 oversight ratio of client to PAREXEL staff can be improved to 1 to 8 in developing partnerships and 1 to 15 in the more mature relationships.

However, oversight staff reduction is possible only as trust and the means to establish trust are built into the partnership. So key components include explicit trust that verify points defined and deployed in each trial, clear acceptance criteria for deliverables, a sophisticated partnership portal to provide enhanced visibility to study metrics, targeted governance to provide a more effective escalation path, ongoing tracking of trial progress with frequent reporting against baseline and the oneness of a joint team executing a drug development program.

Another value driver is innovation. Partnerships can provide a framework for innovation that cannot readily be developed in more transactional or less committed relationship. A good example is the widespread use of Intelligence Source Data Verification, or ISDV, and targeted monitoring. In the slide above, a typical monitoring plan budget can be reduced by as much as 30%, with the implementation of sophisticated, targeted monitoring and intelligent source data verification techniques.

However, in order to deploy these innovative approaches to monitoring in a responsible way, the parties must have a current and continuously updated understanding of the evolving industry and regulatory guidelines, and they must develop a series of key processes and methods that will be utilized across their portfolio of studies not developed study by study, one at a time.

Finally, they must have enabling technologies to support these processes. These components will simply not be put in place without a significant investment by both parties in the time and the effort acquired. But as noted, they can result in significant savings.

An emerging value driver for our partners is the ability to leverage the large experience that PAREXEL has gained from running thousands of clinical trials across a wide variety of therapeutic areas in all regions of the world. We have developed a service that marries this experience and expertise with other data sets to support the optimization of protocol design. By deploying this service with our partners, we're able to develop more efficient study designs and endpoints, streamline procedures and patient visit schedules, incorporate appropriate eligibility criteria, better understand implications of global variations in the standard of care and model the cost and speed applications of various designs. This provides value that can result in lower cost and/or shorter timelines to the benefit of our partners.

Although 30% reduction in overall cost is very desirable, it's not really the full extent of the benefits of partnership. As they mature, these relationships can result in significant time-to-market savings. These kinds of results can be significantly more valuable than the actual cost of the savings themselves, as shown on the table here.

If you go to the next slide. I'd like to illustrate with an actual case study that demonstrates the power of early engagement services. In this case, the protocol was a Phase III 520-patient oncology study to be run in 235 sites in 33 countries.

The objective of the trial was to determine for patients with newly diagnosed disease whether adding the study drug to a standard front-line therapy prolonged progression-free survival compared with front-line therapy in a placebo. Our analysis showed that the endpoint target of 265 progression-free survival endpoints could be reached 7.5 months earlier than the original plan, although the total cost of the trial would be increased to $3.5 million due to increasing enrollment from 520 to 600 patients. But the improvement in time to market of 7.5 months was worth much more than the added cost.

By bringing all of PAREXEL's trial experience and expertise to bear with our partner, we could help them gain insight that they would not necessarily have had the ability to do in house. Although they would readily have the expertise, they would not have the large experience and the data derived from it or the third-party data provider relationships needed to be confident in the potential time savings.

Renewals are important for the long-term strategy of partnerships. In PAREXEL, we have a renewal mindset from day one of the partnership. If we built value throughout the first period of the partnership, along the lines we're discussing today, then the idea of renewing should not be a large binary event for either party. Our governance structures enable both parties to understand and correct problems, and our ability to identify and measure value drivers is critical to understanding the true return on investment by both sides.

Demonstrating to the partners the levers that are possible to optimize in the relationship and the kinds of value that can be achieved must be part of the dialogue early in the partnership. The keys to successful renewals are exceeding expectations on delivery, establishing trust, measuring value and identifying and demonstrating the means to achieving greater value in the future.

Now let's review the benefits that PAREXEL is receiving from these partnerships. First, there is a substantial investment on our part. In all of our partnerships, building an efficient operating model between the 2 companies requires significant time and effort. These costs are related to the scores of employees' time on work teams that is incurred throughout the first year to 18 months in order to set up infrastructure, governance, metrics, et cetera.

Then there are the ongoing costs at a lower level associated with governance and other joint activities. However, the net benefit to PAREXEL is very strong, both in financial and less tangible ways. First, without a doubt, these partnerships are delivering a significantly higher level of predictable work. The strong growth of our backlog in recent years clearly attests to this fact. This creates a much more stable planning and operating environment for our business. Lower selling costs are substantial benefit. The RFP and bid defense process for large trials is very expensive and are much reduced in partnerships. Resourcing visibility significantly improves our ability to recruit and retain our staff, making sure that we have the right employees with the right capabilities in the right regions and at the right time. This benefits both parties. Technology integration and higher levels of automations benefit both parties and create value that, in many cases, can be shared by both parties. Sometimes these efficiencies can be extended to other part of our business. And process clarity and fewer friction points result in higher levels of client satisfaction, which are the lifeblood of a service company like PAREXEL. Our ability to reliably provide high satisfaction to our clients makes ours a much more stable business, and frankly, a much more satisfying experience for all of our employees. This allows us to attract and retain the best personnel in the industry, which, in turn, will result in high client satisfaction, and becomes a virtuous cycle. These benefits to PAREXEL more than offset any reduction of rates or investment in infrastructure that go along with the partnership.

PAREXEL has gained indirect benefits from these partnerships as well. As we first entered this era of partnerships, we viewed them as uniquely applicable to large pharma. We, however, have been able to extend our learnings in these partnerships to other market segments in important ways. In the past 18 months, midsized pharma has also been engaged in moving to strategic partnerships. These companies are facing many of the same pressures as large pharma to become much more efficient in R&D. They often have a less predictable and more opportunistic pipeline, they have less ability to maintain a global development footprint or the ability to maintain expertise across many therapeutic areas, and they typically do not have a consistent eClinical system infrastructure. This mid-tier pharma companies have looked to PAREXEL to provide the learnings or the playbook on how to develop and execute on these partnerships. We've developed a more standardized approach to these partnerships in keeping with their more predictable operating environment. Finally, we have the ability to rightsize these partnerships with their -- with these partner needs and investment capabilities. And we expect more growth in this market segment in the coming years.

A key learning from strategic partnerships has been the ability to take on the work of an entire compound, from planning and design to the execution of the entire program to the filing of the NDA and the post-approval work. We also have learned how to provide transparency and governance structures that allow for the kind of reduced oversight and mutual decision-making that's present in our large strategic partnerships, so these key learnings have allowed us to offer a new kind of beneficial relationship into a new segment, our small biotech plant. So we've been able to leverage many of the learnings from these early-adopter, large pharma partnerships to other key market segments in our business.

In summary, partnerships that are working to -- for our clients, they attribute the beneficial impact to reduced level of required oversight, reduction in fixed costs with the higher percentage of variable cost, access to capabilities not available internally, improved global reach and acceleration of time to market. Partnerships are continuing to evolve as the collaborations deepen, and they've been expanding to include a wider array of services. And in this evolution, the value drivers for the clients increase, resulting in the potential of up to 30% cost savings for outsourced trials, and the possibility of reduced time-to-market through better program design and execution. These partnerships have significant benefits for PAREXEL as well. They provide a high volume of predictable work in which greater value can be delivered and greater client satisfaction achieved. Thank you very much for your time, and I'd be happy to take your questions. Yes? Sorry. Yes?

Unknown Analyst

A couple different questions, I guess. With respect to strategic partnerships, I think a part of those relationships, particularly in the beginning, was that PAREXEL would onboard some portion of the sponsors, employees or the shifting of personnel. Can you talk about where we're at kind of broadly amongst PAREXEL's kind of book of strategic partnerships? Where are we in terms of that process? So is that sort of transfer still taking place, or is it kind of wound down to a bit of a trickle? Then the second aspect of it is I want to get your thoughts on the strategic partners and their embracing of PAREXEL's technology solutions. Are PAREXEL's technology solutions becoming a bigger part of the processes overall within the context of these strategic partners?

Joseph C. Avellone

Thank you. With regard to the first question, the taking on of employees or re-badging of employees had not really been a major factor in our partnerships, at least in PAREXEL's partnerships. It has been a minor factor in some regions, in some cases, but really does not drive the partnerships or didn't drive a lot of the startup activity of the partnerships. There's really been a minor event in a few partnerships. With regard to the adoption of technology, in every strategic partnership, part of the strategy with the partner is to develop a technology roadmap to define what makes sense given their current IT infrastructure and our offerings to essentially support what either are -- what are going to be adaptive work processes of the partnership. And I would say, in every case, we have brought some, to a greater or less degree, of PAREXEL technology into the relationship. In some cases, it's been almost a wholesale adoption literally of the MyTrials platform that I think we'll be talking about later. And in other cases, it's a path that involves integration with some of their internal systems, with some of our internal systems and kind of a migration over time. I think the reason I can say all of this, and because I think the facts on the ground are that increasingly, large pharma is turning the responsibility over to us, including, ultimately, the technology involved. Because it's really just to support the activities that we're doing on their behalf. However, some of them have large legacy systems, large legacy issues that require a kind of a pathway to get there. So over time, I think we'll see a continuation on our technology roadmaps and increasing adoption of our technologies.

Unknown Analyst

I have a follow-up on that one. Could you -- you kind of touched on it right at the end, but if you could talk about these technology roadmaps, and what's the duration of that roadmap of migrating to the future state?

Joseph C. Avellone

Well, there's a planning horizon for us on these things, it's typically 3 years. That doesn't mean that at 3 years, everything is completely done, but that's the horizon that most of us are planning around. And I would say in 3 years, there's usually a pretty significant movement. Once again, it really varies trial by -- client by client. So 3 years is a good marker.

Unknown Analyst

Okay. So if even in a case where a client is saying, we're going to move all to MyTrials, and those of us who are out there doing channel checks and asking about that, and we hear that, that's not the case, the answer might be, well, they're doing that but it's over a 3-year horizon.

Joseph C. Avellone

Yes, absolutely. And if you remember, most of our partnerships start up by taking on new work as opposed to a wholesale transformation of all their existing work. And so the technology roadmap also has to address that issue, are we going to just take on new work with the new existing technology and do something different with their -- in current trials that they're running or are we going to move the whole business over to our technology, it varies.

Unknown Analyst

So on a similar note, moving over to staffing, but that issue of duration and visibility, one of the highlights that we hear on these strategic partnerships pretty often is, is it getting better visibility of the pipeline and getting better client feedback about where the resourcing levels need to be, and seeing that earlier? But yet, our experience over the last couple of years has been you got surprised by the amount of staffing, you had to ramp up in the U.S. The pressure on operating margin from putting staff in place has been higher than we expected over time, and it seems like all that is getting better now, but I guess it's not obvious to me that the strategic partners are actually giving you the visibility to hire just in time in a way that would be more efficient relative to where the margin performance has been in that division.

Joseph C. Avellone

I think if you looked at us overall, you could reach your conclusion. But since I can look at these partnerships, I could tell you that most of the partnerships operate with much longer-term earlier visibility than we had before. And it allows us to be that much better, and as much around therapeutic area needs as is geographic needs. And so I think broadly, the way these partnerships work, it's significantly better. We did have one partnership in particular, but not the only one, where we had a large number of transfers in midstream. And that was a large event probably for the industry. And in doing so, that, I think, was an unusual event that didn't typical of the early visibility that we could normally get. Even though -- even in that case, we -- it was planned out over a year, but still, it was a lot. So I think that really changed the way it looks in total. But if you take that out, I think a lot of the partnerships, most of the partnerships are good with much earlier visibility and an ability to staff appropriate. And I think we're now at that point going forward.

Unknown Executive

We'll get one more question.

Unknown Analyst

Joe, if we can go back to the research product survey that you talked about at the beginning of your remarks.

Joseph C. Avellone

Yes.

Unknown Analyst

Just looking at it, looks like about half of the respondents had kind of a mediocre view of their partnerships. I think you said 5 were negative and 45% were somewhat more positive. Could you go back and look at maybe what went wrong in the eyes of the client in those situations?

Joseph C. Avellone

I think, yes, we have gone back and looked at underneath these numbers, the trends, and I think I can't say with 100% certainty that it explains all of it, but these partnerships are in various stages of development. And I think our older, more mature ones, they've seen the benefits and the -- it's obvious that their staff has seen the benefit. You have to remember, there's a large change management event that happens in our partner companies. And however they've reached this decision to do a partnership, they have thousands of people that work -- that are going to work day-to-day very differently involved. And their own view of how this was going matters on how far they are into the process. So I think as the -- in our case, as the partnerships mature, there's much greater acceptance of the partnerships across the board and we start to get to these new kinds of value that can be created when that level of trust is a fact. But in the early partnerships, we're just in the midst of that. And I think saying things are somewhat positive is probably accurate in many of those cases. I think it's more timing of -- maturity of the partnerships. Yes?

Josef H. Von Rickenbach

Now I would like to introduce Karen Chu, our Corporate Vice President of the Asia-Pacific region. Ms. Chu joined the company as Executive Director of International Clinical Operations in 2005 when PAREXEL acquired APEX International Clinical Research. And in 2009, she moved into Project Management and Regulatory Affairs first as Executive Director, then as Vice President, and finally, as Corporate Vice President. In her current role, Karen manages the region's global portfolio of directors and project leaders, and has overall accountability for business relationships and service delivery to customers. Karen?

Karen Chu

Thank you, Joe. Hello, everyone. My goal is to provide you with more detail on PAREXEL's business in the Asia-Pacific region. After a brief overview, I will discuss our market dynamics and growth opportunities. I will then drill down to 3 countries of particular interest for PAREXEL: Japan, India and China. I'll discuss the competitive landscape and our growth strategy in each country. Lastly, I will talk about PAREXEL's Asia-Pacific positioning and business outlook.

To begin, PAREXEL has long recognized the potential of Asia-Pacific market. We opened Japanese and Australian offices in 1995. We have built the industries with extensive presence since then. Today, the APAC region is a growth and pump engine for PAREXEL, and a key strategic destination for our clients. As Joe said earlier, the emerging countries are expected to account for 70% of pharma's industry growth over the next 3 years. Many of these countries are in Asia. Clients are shifting their -- toward development to the East. They are streamlining their infrastructure to maximize cost savings. In this progress -- process, they are increasing their reliance on global CROs to deliver quality results.

Our broad Asia-Pacific footprint is a powerful differentiator for PAREXEL as we compete for this new business. We're also differentiated by our history of innovation in the region. For example, we were the first CRO to develop the Japan plus Asia trial model, submitting data collected in Asia from stronger registration in Japan. This strategy has been widely adopted by the industry today. Our growing footprint and service lines clearly demonstrate PAREXEL's Asia-Pacific commitment. This commitment is driven by the region's strong growth potential. IMS estimates APAC pharmaceutical market will grow 51% over the next 5 years. Growth in the U.S. and Europe is expected to be less than 8%. 50% of the world's population resides in the Asia-Pacific region so access to patients, and specifically, treatment-naive patients, is a major factor. From a CRO perspective, this is leading to 3 developing opportunities: First, as I mentioned, global pharma companies are shifting their R&D activities to APAC countries. They are also looking to market their products in the region. As I've seen many of these Asian countries require local registration trials, navigating this path requires local regulatory expertise. This means partnering with CROs that can provide local presence, operational experience and quoter sensitivity.

The second opportunity relates to APAC pharma companies tapping into Western markets to license out their products or launch them with partners. Unless the company already has a presence in the West, this means partnering with a global CRO. Pharma companies based in China, South Korea, Japan and India are leading this trend, and were driving -- and are driving growth to us. For example, working with the Chinese clients, we will have a Chinese project leader in Beijing who can work closely with PAREXEL's regulatory experts in the U.S.

The third opportunity is growing presence of Japanese pharma companies in other Asian markets. Two main factors are driving this trend: First, the need to address the drug life; the second, the opportunity to expand into neighboring countries. Drug life refers to a term that the delay in registering a product in Japan as compared to the country of origin. For example, if a product was launched in the U.S. in 2010 and it was only registered in Japan this year, the drug life will be 3 years. The Japanese government believes this is a critical issue that affects the world being able to -- its citizens. As a result, Japan has modified its regulations. Japanese regulators now serves foreign clinical data from ethnically similar patients, preferably those with Eastern Asian ethnic backgrounds. Given PAREXEL's global geographic coverage and breadth of expertise, we're well positioned to capitalize on all 3 of these opportunities.

With plenty of dynamics I just described, Asia is now considered a first-tier region for clinical research. Traditionally, biopharma companies launch products in their country of origin first. Now, they expect registration in multiple countries at the same time, or at most, with a few month lag. In terms of end market demand, the 5 countries on the left side of this slide, Japan, China, India, South Korea and Taiwan, have now become the countries of choice. As a combined market, they are expected to grow to more than twice the size of the top 5 European countries by 2016.

Let's now turn to PAREXEL's 3 Asia-Pacific countries of particular focus, beginning with Japan. Today, the Japanese pharmaceutical markets remains #2 in the world, second only to the United States. Due to previously stringent drug registration rules, for many years, the Japanese population was unable to assess 25% of the world's newest drugs. To address this and to promote more efficient management and enhance services and healthcare, the Japanese government began deregulating the drug approval process in 2004. Among the reforms was the recent revision of the Japanese Pharmaceutical Affairs Law. These initiatives have made it easier for international firms to market pharmaceuticals in Japan. In essence, they simplified the approval process for both import and manufacturing. As a result, the biopharmaceutical market in Japan has experienced considerable growth in the past couple of years. Looking forward, as you can see on the chart, the Japanese Phase I-IV market is expected to grow significantly. We expect this growth to be driven in part by faster drug approvals. The new Japanese rules on research data requirement for drug registration now accepts data from countries such as Korea and Taiwan. So that ceased clinical development pressures and drug life. Most important, it has accelerated the overall time-to-market for new drugs. As the chart on the slide shows, the review time for priority products in Japan has shortened significantly since 2007. The number of new drugs approved per year has also increased. Looking forward, the pipeline of future registration is robust. These are encouraging signs, and a great opportunity for PAREXEL and our clients.

PAREXEL is well positioned in Japan, where we currently have 3 offices. Tokyo and Kobe are the 2 main locations, and we recently opened an office in Osaka to support the large number of Japanese pharmaceutical companies based there. PAREXEL Japan has grown organically for nearly 20 years by serving predominately, the domestic market. As in other Asian countries, brand recognition is key to success in Japan. We have earned strong Japanese brand recognition with our state-of-the-art eClinical technologies, comprehensive range of Clinical Research Services and record of success with domestic clients. With the Japanese pharma industry now becoming globalized, PAREXEL is well positioned to continue serving industry as it grows. We believe the industry can benefit greatly by leveraging our global footprint, expertise, the eClinical technology, to increase efficiency and to reduce cost in their R&D programs.

Another country with tremendous potential is India. India is on the track to become world's 12th largest pharmaceutical market by 2020. Its market for drug development and discovery is expected to grow at a CAGR of almost 19% to almost $3 million (sic) [$3 billion] by 2018. This will be up from about $900 million in 2011. The number of clinical trials over the same period is expected to grow at a CAGR of 17.4% to more than 1,200. At the same time, pharmaceutical companies based in India will become increasingly active in conducting their own clinical trials globally, especially in the U.S. and Europe.

As Mark said earlier, the regulatory outlook is clouded by a number of challenges. However, as we have a large and experienced team of regulatory experts only grown in India, they are keeping a watchful eye on this development as they progress. We maintain an ongoing dialogue with the government, as well as deep involvement with India pharmaceuticals industry. As a result, we are well positioned to support the market as it continues to grow. PAREXEL's operation in India is one of our largest in the world. It is an important end market for our business. We provide a gateway to healthcare systems and consumers in the West for a growing number of India pharma companies. In addition, India is a large -- India is a global operational hub for many of our services. The efficiency of our teams and the high-quality deliverables they produce are critical to our success worldwide. We currently have 5 offices in India. As Mark said earlier, our major location's in Hyderabad. Hyderabad provides our CRS segment with a wide range of support functions. Both of our recent acquisitions, HERON and Liquent, have established offices in India. These offices will be integrated into PAREXEL's footprint over time.

Looking further ahead, we're committed to further investment in India. We are also dedicated to developing local talent to support our continued growth.

The immense potential of the Chinese pharmaceutical market is widely recognized. It's a country of robust talent resources. Outside of the first tier cities, the cost of doing business is still low. The domestic pharmaceutical demand is growing. PAREXEL recognizes this potential is in its early stages. Over the past few years, we've been highly involved in helping foreign biopharmaceutical companies expand their drug development and -- development activities in China. As in Japan, the growth has been driven in part by an improving regulatory environment. Like many other Asian governments, the Chinese government is seeking to improve healthcare for its citizens. It's also working to realize economic benefits from foreign pharmaceutical investments. China's current 5-year plan includes measure to ensure that medical care would be available to 90% of the population by 2015. The Chinese FDA is streamlining registration regulations and guidelines. As a result, drug review mechanism and process transparency have been improved. This has been very encouraging for the multinational pharmaceutical companies that are penetrating the Chinese market. Given this improving environment, China is on track to become the world's third largest pharmaceutical market by 2016. As the chart here shows, the Chinese drug development and discovery market is currently estimated around $800 million, which is projected to grow at a CAGR of 21% over the 7-year period beginning in 2011, reaching almost $2 billion by 2018.

PAREXEL has been doing business in China for more than 10 years, and we are well positioned to establish geographic coverage, operational scale and extensive knowledge of local practices. We currently operate out of 6 offices around the country. These offices enable us to build long-term relationships with a wide range of clinical sites. They also provide us with access to larger patients and talent pools, while achieving optimal cost savings. Our newest office is in Shenyang, expands our geographic coverage in the country. Locating in Shenyang also represents a strategic move to better align our business with growing demand and more [indiscernible] China. This demand reflects Shenyang's proximity to pharmaceutical clients based in Japan and Korea.

Although I have emphasized Japan, India and China this morning, I would like to provide a broader view of PAREXEL's presence in the region. The smaller countries in Southeast Asia, as well as Taiwan and Korea, also play an important role. Our broad network in these countries enables us to access a variety of patient population, investigational sites and professional talent pools. PAREXEL places strong emphasis on standardization. Our operation in all these countries use the same systems infrastructure. They follow the same standard procedure and share the same vision and mission. They also carry through the company's culture with great emphasis on quality. Standardization and shared infrastructure not only enhance our brand recognition, but our profitability as well. Like the rest of PAREXEL, we are intentionally focused on margin improvement. Our Asia-Pacific executive team is committed to the same margin improvement goals and participate in the same incentive plans as our colleagues elsewhere in the company.

At PAREXEL, we believe we are only as good as our people. The expertise is what has enabled us to innovate and complement our clients' drug development success. As PAREXEL continues to expand in the Asia-Pacific region, we have steadily increased our headcount. Our strategy is to place strong expertise in the location that best suits the business and talent pool. As indicated by the charts, our Asia-Pacific operation had 3,600 full-time equivalent employees as of March 31, 2013. This represents 5-year annual average headcount growth of more than 26%. The competition for high-quality talents in Asia-Pacific is becoming more and more intense. This makes talent acquisition, retention and manage bench strength development a key success in the region. PAREXEL, as the industry leader, is committed to cultivating the next generation of Asian research talent. This commitment includes collaboration with various centers of excellence and key medical universities across the region. As an example of our strategy is an initiative based on PAREXEL Akademie, which originated in Germany. We recently signed a collaboration with National University of Singapore or NUS. This allows NUS and PAREXEL to run a 3-month, full-time professional program with esteemed colleagues from Germany and Asia. The program offers the students a 6-month, post-graduation internship at PAREXEL. The first class of students graduated in July last year and interned both at PAREXEL and various pharmas. We look forward to bring this type of collaboration to Japan, China and other Asian countries in the future.

The Academy and U.S. collaboration are both very important as we work to ensure adoption of universal standard around the world. In addition, we're highly involved in educational programs established by industry associations. We also frequently provide lectures to industry professionals and academic institutions in the region. These include the India Society of Clinical Research, Taiwan's Development Center for Biotechnology and Shenyang Pharmaceutical University. These collaboration demonstrates PAREXEL's thought leadership position. They also reflect our commitment to train our people in accordance to highest global standards.

Before I conclude, I would like to share a simple visual on our unique positioning. As the slide shows, we believe that PAREXEL offers the most comprehensive range of capabilities in the Asia Pacific region. We have built our global infrastructure with the notion of 1 standard and 1 brand. This infrastructure enables us to deliver the same level of quality, whether we're working with our clients in the U.S. or for example, in Argentina, in Singapore, in Italy or in any other country where we do business. It allows us to provide our clients with project management services around the clock. This reassures the client that, at any time, someone's working to ensure the success of their projects. I have emphasized the large APAC countries, Japan, India and China, this morning. I would like to reiterate, however, that PAREXEL is also well-established in 10 other countries in the region. With our geographic footprint, breadth of integrated services and comprehensive eClinical suite, we can effectively serve our clients of all sizes in each major drug development. At the same time, we can provide outstanding service to Western clients who are tapping into Asian markets, as well as Asia Pacific clients who are working to market their products outside of their home countries.

To conclude, Asia Pacific is increasingly attractive and lucrative market for the pharmaceutical industry. The industry's growth, especially in China, India and Japan represent excellent long-term potential for PAREXEL. Our competitive differentiators are strong brand recognition, critical mass, geographic coverage and complete range of services across the full spectrum of clinical research function. We're continuing to invest in the Asia Pacific region. We're continuing to attract and develop the region's most outstanding talent, enhancing our competitive position, improving our margins and delivering greater value to our clients are the goals of these investments, as we work to drive profitable growth of PAREXEL.

Thank you for your attention. I would like -- I will be pleased to entertain any question at this time.

Unknown Analyst

Karen, wondering if you could comment on the competitive environment in the Asia Pacific region. So I guess, native CROs versus more Western CROs. And then if you could talk about any dynamic that might exist amongst sponsor -- between sponsors and CROs, be it native and Western. So is there propensity for a Japan-based sponsor to prefer a Japanese CRO of some sort? If you could talk about those dynamics, that would be great.

Karen Chu

I think as I alluded in my presentation, I think previously, we've been working majority for Western clients entering into the Asia market where there's a huge market potential, there is a large patient population, treatment-naive patient population. And over the years, we have seen many, I would say, domestic companies from the Asia region coming out from Asia and wanted to go to the U.S. or the European market. They could be Korean domestic companies, Chinese domestic companies or Japanese companies as well. To answer your question about Japanese pharmaceutical companies, there is a tendency in terms of language preference, in terms of Japanese speaking. However, as I mentioned, we do have a large presence in Japan, which we can also cater to that as well. And over the years, the Japanese pharma companies have recognized that for them to do, perform Japan plus Asia trials that I've mentioned that there's -- yes, there's that an advantage in terms of that language preference, but as well that there must be a capability in countries of interest that might be in China, Korea or any other Southeast Asian countries.

Unknown Analyst

To what extent are the drugs that you work on in Asia, and then particularly Japan and China, being developed specifically for those markets as opposed to say more -- drugs being developed for more global markets? Is there a lot of activity for, if you will, in China -- for China, for instance, versus drugs being developed by big pharma for global markets?

Karen Chu

I think in terms of the Japanese companies, I think they are aiming more towards regional and global markets for sure. We see increasingly trend in the Asian pharmaceutical companies that they are also not just looking to their countries, of their own. They're more looking at the neighboring countries in Asia. They feel that in the Asia Pacific, it's easier for them to navigate, easier for them to focus on. But yes, they are also keeping a watchful eye on the European market and the U.S. market as well.

Josef H. Von Rickenbach

Okay. We're now going to take a 10-minute break. So we're going to reconvene here at 10:45. Thank you.

[Break]

Ron Kraus

[Audio Gap]

PAREXEL Consulting and Medical Communication Services, which as you've heard this morning, we call our PCMS business segment. For our discussion today, I'll provide an overview of the businesses, take a look at various market dynamics, share an update on our progress and key business accomplishments along with sample case studies. And finally, I'll conclude with a discussion of financial performance and key growth strategies.

The PCMS services complement and enhance PAREXEL's Clinical Research Services or CRS. This is important as we look to work with clients in new and innovative ways, whether we are trying to optimize the outcome of a single work product or work with our strategic partners to optimize an entire therapeutic area. For example, within our regulatory and compliance practice, we provide guidance to our clients in the design and execution of Phase I through IV studies. Our commercialization consulting practice, now enhanced with the acquisition of the HERON Group, provides additional differentiation when we talk to clients about integrating the perspective of both the public and private payers within their clinical programs. And within strategic partnerships, the integration between PCMS and CRS is even more helpful, with clients often taking advantage of our strategic advice to inform their clinical trial designs. Overall, having both strategic consulting and clinical process excellence under one company roof proves to be a compelling factor for clients to select PAREXEL as their development partner.

I'd like to take a step back and share my perspective on the company's recent acquisitions and the positive impact they have for PCMS and our clients. I'll begin with Liquent, which resides in our Perceptive business and will be covered in greater detail by Xavier later this morning. In short, Liquent is the leading supplier of software for regulatory information management and also provide services which support the compilation and packaging of regulatory submissions. These services dovetail nicely with PCMS, whereas PCMS provide strategic guidance and creates the content of the regulatory submission. And then Liquent convert these large complex documents into the proper electronic filing standard. We have a rich history of working together which dates back to the late 1990s and in fact prior to the acquisition, Liquent was our preferred partner for regulatory submissions and we routinely work together to both pursue and deliver new business. Together, we've submitted more than 500 registration dossiers, and the opportunities have continued to increase as we have better integrated our selling efforts since joining forces in December of 2012.

The second acquisition is the HERON Group, which we acquired in April of this year. This acquisition enables PAREXEL to more closely partner with its clients by advising on product development and successful market access strategies. This is important as successful product development demands that sponsors not get -- not simply get -- demonstrate safety and efficacy but also product value. Together, the PAREXEL and HERON suite of services nicely complement one another, ensuring that we develop what we call product -- developing products with reimbursement in mind.

As I introduce HERON to you more formally in subsequent slides, you'll see further evidence of the strong alignment of our services and the enhanced expertise that they add to our organization. At this point, however, I'd like to highlight that as a consultancy providing expertise, HERON is much like PCMS. It's an expertise business, and successfully integrating and growing an expertise business requires an increased focus on a range of topics. These include ensuring that individual employees understand and believe in our vision and that they further understand how they individually contribute to realizing that vision. Both HERON and PCMS have done this particularly well by creating an environment for our employees to ensure that they have the ability to be involved in innovative work assignments and have routine access to world-leading experts. This was a large focus of the due diligence process for HERON as well as the desire of the cofounders, both of whom will be staying on to run the business and to further ensure both continuity and continued growth.

The PCMS business segment is one of the key expertise institutions of PAREXEL. PCMS is one of the largest product development consultancies in the world, offering a wide range of services which span the drug development life cycle. In terms of geographic reach, it's important to recognize that PCMS is a truly global business with a presence that now covers more than 100 unique markets. In total, our 3 service lines represent a unique fusion of expertise for our clients and have often been a key differentiator in winning business not only for PCMS but also for strategic engagements across PAREXEL.

I'd like to now introduce you to each area in a bit more detail. Our largest service line is regulatory and compliance consulting. Within this business area, we help clients with a wide range of services, including overall product development planning, worldwide regulatory strategies and strategic compliance advice. Our experts include former regulators from worldwide health authorities such as the U.S. Food and Drug Administration, PhDs and medical doctors across a variety of scientific disciplines and therapeutic areas and proven industry professionals having deep expertise in product development.

Our commercialization service line provide evidence-based services to support companies with their products from development through launch and post-launch. The team has expertise in methodologies spanning a wide range of services that includes strategic market access planning, systematic reviews for evidence development, economic modeling and evaluation, pricing, reimbursement strategies, global value dossier writing and engagement with health technology assessment authorities. The acquisition of HERON further strengthens our ability to offer our clients a full spectrum of services, which aid in developing, again, with products with reimbursement in mind.

Our medical communications service line helps clients with publication strategies, scientific writing and event planning. We typically begin to work with our clients 2 to 3 years prior to product launch to help develop important product messaging and assist in generating and implementing a communication strategy aimed at prescribers. As you may recall, this business was underperforming a number of years ago. I'm very pleased to share that this business has completed an impressive turnaround, and today is both well managed and meeting our expectations with healthy financial contributions.

As I conclude the review of PCMS, I'd like to restate that we are truly a global business, providing services across the entire drug development continuum and a key expertise institution within PAREXEL. As we turn our attention to market dynamics, we see a variety of growth drivers for PCMS. First, many clients continue to face cost pressures and have begun to look at applying clinical outsourcing models to other departments. Regulatory affairs is one such area, and our clients appreciate PAREXEL's strong reputation in outsourcing and the global regulatory capabilities that are resident within PCMS.

Second, we expect the high levels of FDA enforcement to continue with the recent passing of the Food and Drug Safety and Innovation Act. This U.S. legislation enhances FDA's inspection authority. It establishes new application fees, which will be used to fund inspections of an expanding list of product categories, including generics, biosimilars and medical devices. In addition, funding will be directed to increase the frequency of GMP inspections for overseas manufacturers to bring the inspection frequency more in line with U.S. manufacturers who, on average, receive an inspection every 2 years.

And finally, payers around the world continue to increase their influence in product success. Therefore, early alignment of clinical, regulatory and commercialization efforts is now critical to successful product development. Clients must understand the needs of both regulators as well as payers if they want to achieve ultimate product success.

As we look at the competitive dynamics of the product development consulting market, we believe that PCMS is well positioned. This slide details the product development consulting landscape. The x axis gives a relative indication of a firm's geographic reach. A provider offering services in a single geography is noted on the left, while providers such as PCMS with a broader geographic reach are noted on the right. The y axis gives a relative indication of the range of services a firm has to offer, from more specialized offerings to a full suite of consulting services. And lastly, the size of the diamond give an estimate of the relative size of each provider in terms of revenue.

In analyzing the situation, there are a couple of points to highlight. The first is that the product development consulting market remains fragmented with the market stratified into 2 segments, large global CRO competitors shown at the upper right and domestic niche providers shown at the bottom left. The second point is that we are pleased with our market position as one of the largest global players with a strong breadth of offerings. Increasingly, we see that clients like our integrated suite of services as they strive to enter both established and emerging markets with their products.

In terms of a progress report on key initiative, in last year's presentation, we talked about launching a new commercialization business, integrating PCMS services with CRS and expanding our services into new geographies. I'm happy to report that we've made progress on all fronts. As I mentioned, we acquired the HERON Group, which greatly expands the depth and breadth of our commercialization services. We continue to work closely with CRS, especially in tandem with our strategic partners. Within our strategic partners, we continue to be pleased with first, the conversion of the backlog into revenue, as well as the development, as they are expanding to include PCMS services. And finally, we increased our consulting footprint to over 100 markets and saw immediate rewards as we utilize this broadened footprint to win a number of global submission projects.

I'd like to now share 3 case studies that provide a representative overview of our accomplishments in each of these areas. The first case study provides an example of helping a client align commercialization, clinical and regulatory, to aid in an important investment decision. A small pharma client wished to pursue the development of their first biologic but was hesitant of making the approximately $60 million investment without a clear understanding of the market potential. To support this effort, an expert team of product development and market access professionals from across PCMS partnered to develop an integrated product development and commercialization strategy. Our initial sales projections demonstrated that sales for their potential product could be expected to reach $500 million annually across both developed markets as well as selected emerging markets. This projection and the prioritization of the selected markets was used to generate the development strategy which span the entire drug development continuum for preclinical study design through commercial launch. In sum, PCMS helped this client align their development and commercialization strategy to ensure that they would receive an appropriate return on the client investment.

This next case study provides an example of PCMS collaborating with CRS and Perceptive to win a large global clinical trial. The client, a small biopharma company, wanted to design and execute a global development program for a novel molecule used in the treatment of breast cancer. In response to the opportunity, PCMS assigned a team of clinical and regulatory experts from the U.S. and Europe to generate a global development program. This program demonstrated our ability to acquire expertise in creating an innovative development plan for this potential customer. The combined team from PAREXEL presented a compelling solution which outlined how our global footprint, our strength in patient recruitment and the use of integrated technology would operationalize the development program and resulted in the award of the $70 million program to PAREXEL. This is an example of PAREXEL working together to provide great value to our clients and how we differentiate ourselves from our competitors.

And this last case study provides an example of how PCMS has utilized our investment in new geographies to be a partner of choice for biopharma clients. To illustrate this point, a midsized biopharma client with a portfolio of established products wanted to gain additional revenue from new emerging consumer health care markets. Based on our global footprint and capabilities, a combined team from PCMS and Liquent was selected as the sole regulatory partner to assist this client in such markets as Eastern Europe, the Middle East and North Africa. To execute the work, we deployed a strong team of regulatory strategists and local -- market experts to evaluate the registration needs of each target market and then generated a single global submission strategy. By using Liquent's suite of technology solutions, we are now generating fully compliant dossiers to support the local submissions, and the PCMS team on the ground is interfacing with the local health authorities. The ability to help clients navigate regulatory pathways across a breadth of international markets is a key differentiator for our PCMS business.

And this next slide provides an update on our global footprint for PCMS. The business has work hard to position itself as a leading product development consultancy. One element of our strategy has been to continually expand our global footprint to ensure that we are able to provide the right local expertise for our clients. In this capacity, we now offer our clients solutions which allow them to access both developed markets as well as emerging markets. This graphic provides an overview of our current global reach, which has expanded to over 100 markets.

Turning now to the financial performance. We continue to be pleased with the financial performance of PCMS in FY '13. As the chart on the left shows, we are projecting revenue growth in FY '13 of approximately 20% to 21% with revenues between $200 million and $202 million. This builds up very strong growth in FY '12 where revenue increased from roughly $130 million to $167 million as a result of strong enforcement levels by the FDA and again, the early conversion of PAREXEL's backlog from the strategic partnerships. For FY '13, investors should note that the increase in revenue has been due to several factors. These factors include solid growth in our core regulatory consulting practice, very strong growth in our strategic compliance practice and sustained revenues from PAREXEL's strategic partnerships. Equally important, as the chart on the right shows, the gross margins for PCMS has improved from 36% in fiscal year '09 to an estimate of between 40% and 40.5% for FY '13, down slightly from FY '12 as a result of certain FY '13 investments to design -- designed to support -- excuse me, future growth. These include a variety of initiatives, such as optimizing our global footprint, adding new service lines and integrating acquisition. Going forward, we remain focused on top line growth while maintaining our current high-margin levels.

To sustain the growth and profitability and momentum of the PCMS business, we'll be focusing on 3 key growth elements in the years ahead: accelerating the growth of our commercialization practice, capitalizing on the increase in regulatory affairs outsourcing and continuing to be opportunistic with merger and acquisition opportunities. I'll talk about each one of these in more detail.

The first element of our growth strategy is accelerated growth of our commercialization services following the recent acquisition of the HERON Group. With the acquisition of the HERON Group, we acquired a recognized brand and a world-class team of market access professionals with a service portfolio that nicely complement the PAREXEL and PCMS services, services including strategic market access planning, systematic reviews revenues development, economic modeling, reimbursement strategies, global value dossier writing and engagement with health technology assessment authorities. To accelerate the growth of our commercialization services, we will first drive growth at an account level by introducing these services to our existing key accounts and strategic partnerships. This element of the strategy rests on our ability to leverage existing relationships and build on our proven track record within these accounts.

Next, we will focus on delivering growth by expanding these services into new geographies. Specifically, we'll prioritize selected high-value markets that are both becoming more complex to navigate and are highly desirable for our clients to develop and sell medicines within. This is analogous to our earlier case study in which PCMS is now delivering global regulatory submissions in more than 100 markets.

And finally, we plan to develop and launch new services. These services are envisioned to be both stand-alone services such as product pricing, as well as integrated PCMS and CRS services that fully align protocol design services and trial execution. We're excited about the HERON acquisition and can now deliver on our vision of bringing a premier provider to our clients through the development and commercialization of new medical therapies worldwide.

The second element of the PCMS growth strategy is to take advantage of the growing trend in outsourcing the regulatory affairs by our clients. As our client continue to transition from a fixed-cost model to a variable-cost model, outsourcing models that were first developed to support clinical trials will be adapted and applied to regulatory affairs. We are developing an integrated offering that builds on PAREXEL's leadership position in strategic partnering and combines our global footprint, expertise in regulatory affairs in compliance and regulatory information management technology. This integrated offering will allow larger clients to outsource significant portions of their regulatory function and/or eliminate the need for smaller companies to build their own departments. Again, we plan to utilize our strong client relationships to initially pilot the integrated offering prior to full-scale rollout and then continue to mature the offering to maintain a competitive position. Again, this is an example of how the combined operational and expertise strengths across PAREXEL can be applied to provide additional value for our clients, namely, the ability to entrust PAREXEL with additional development-related activities that are more and more being described as noncore activities for sponsor companies, yet remain critical for product approval.

The third and final element of the PCMS growth strategy relates to mergers and acquisitions. We remain focused on growing organically. However, we continue to evaluate market trends and as discussed this morning, there's a lot of consolidation ongoing within our space. Therefore, we'd be keen to make additional investments in M&A should an attractive opportunity arise. So what does an attractive opportunity mean? For us, that means the potential target must support high-margin growth and broadly allow us either to enhance our geographic reach or extend our portfolio of services.

In summary, PCMS serves as a key differentiator to PAREXEL. From early-stage product development through ultimate product launch, the linkage between PCMS and other parts of PAREXEL, especially CRS, provides synergistic solutions to our clients. We are a premier product development consultancy that provides unrivaled expertise in a variety of product development, regulatory and commercialization arenas. We have a strong global position, that together with positive market dynamics, are expected to support continued growth. The PCMS unit remains in growth mode and we'll continue to focus on top line growth while maintaining our high margins.

With that, I'd be happy to take questions on the business.

Unknown Analyst

Just wondering, where is the mix of revenue today for PCMS in terms of exposure to strategic partnerships? And is that -- just thinking about the potential growth rate for PCMS, should it be potentially even stronger than that of CRS? And that kind of leads me back to, okay, well where is the revenue mix for the business segment? It seems like over the last several quarters, a large part of the strength and the growth has been driven by the strategic partnerships. So I'm just wondering, is the mix or the exposure to strategic partnerships for PCMS more or less than what we see in CRS? So maybe if you could address that.

Ron Kraus

Sure. Thank you. So I guess I would begin in general in terms of revenue mix. We're really pleased at the revenue mix across the variety of businesses that comprise PCMS, and that's both, I would say, stand-alone as well as the contributions from the strategic partnerships. If I focus specifically on strategic partnerships, there's definitely more opportunity. We clearly are embedded in some of those partnerships. And as Joe alluded to, you have to look at actually each partnership in its own way. The more mature partnerships typically engage our services as those partnerships mature. So for example, a strategic partnership may begin with a heavy focus on clinical trial operations. As it matures and they get exposed to consulting, for example, with development planning, we can quickly begin to embed our services there. So when I look at the combination of our partnerships, I see we are embedded nicely, but there's clearly more opportunity for us. Okay, David.

Unknown Analyst

How would you -- it's really specific, but how would you stack your consulting business up against the other large global players? You have a slide that kind of compared the global and niche, but I'm going to ask you to go a level deeper. Quintiles has a dedicated consulting business. They're led by a former Accenture guy. You know what I mean, how do you view your competitive positioning relative to say Quintiles', for example?

Ron Kraus

Sure, sure. We generally don't talk about competitors, so maybe what I'll do is I'll address kind of why I think we are strong in the areas that we are strong and why we've made the decisions we've made. So there were 2 aspects. I think broadly when you look at PAREXEL, you need to take a step back. We think with PAREXEL's global footprint technology and expertise, we clearly feel that expertise angle in terms of how PAREXEL differentiates itself. Within PCMS, we further then take that expertise to a level on a global scale as well. And those are both 2 primary elements where we look to differentiate ourselves from our competitor. And when I look at our growth in FY '12 which was roughly 28%, our growth in FY '13 which was roughly 20%, that's clearly well above market growth rates, so that seems to be working for us.

Josef H. Von Rickenbach

Great. So I'd like to now introduce Xavier Flinois, President of Perceptive Informatics. Xavier joined PAREXEL in January with more than 20 years of experience in the technology and health care services sector. Most recently, he was the Chief Executive Officer of Clinical Solutions, a leading supplier of flexible evidence-based decision support and clinical software solutions to the health care industry. Under his leadership, Perceptive is addressing the challenge to maximally leverage technology through its eClinical suite. Xavier?

Xavier Flinois

Thank you, Ron. So as Ron noted, I joined PAREXEL earlier this year. My background is in technology and outsourcing with a major focus on health care over the past 10 years. So during my career, I have worked for publicly traded companies and I've run very large project operations. For example, I was in charge of the IT for Athens and during the Olympic Games. Having worked for several years in Asia, on the 3 coasts of the U.S. and now for 10 years in the U.K., I consider the opportunity to drive further global expansion of the business to be particularly appealing. I bring unique insights and understanding to the company and I believe that I can be a key contributor to PAREXEL's ongoing success. I'm excited and privileged to have joined the PAREXEL team.

So today, I'm going to focus on 3 major themes, as I move through the agenda items. The growing success of our eClinical strategy, the ability of Perceptive to have synergies with the company consulting and clinical services group and Perceptive progress with respect to financial and operational performance. So our product and service offerings are directed at accelerating the decisions and the timelines of clinical trials. With innovative technologies, we reduced the complexity, the costs and the risks associated with trial data. Historically, clients and CROs have sourced task-based applications across the life cycle of compounds. Perceptive is using best-in-class credentials to deliver point solutions. We are working with 28 of the 30 -- top 30 pharma companies, other CROs and actually, a large number of small and mid-sized biopharma entity as well. We are #1 in most technology aspects, including trial workflows, operations and clinical and regulatory support. The operations side is focused on management of sites and the operational and financial execution of trials. In this area, our IMPACT offering is a very strong #1 in the critically important Clinical Trial Management System segment or CTMS.

With regard to the acquisition and management of clinical trial data, our ClinPhone Randomization and Trial Supply Management, or RTSM, offering is clear #1 in systems and randomized patients and managed trial supply. Our outstanding Medical Imaging business is also a market leader and typically serves as the market reference point. In the traditional Electronic Data Capture, or EDC, market, our DataLabs application is a strong contender in the market. And finally, with the December 2012 acquisition of Liquent, Perceptive has become the leading provider of regulatory information management solutions.

From an eClinical perspective, each of the businesses that I have just mentioned can be considered a specific application. Increasingly, these applications are sold in combination as the total convergent suite. This is why PAREXEL has introduced Perceptive MyTrials, our eClinical platform framework. A platform framework encapsulates all applications and gives the user access to various applications through the same user experience. In the background, the platform provides a strong integration capability. This makes it easy to manage and visualize the mix of data produced by all the applications. For us, Perceptive MyTrials is a structured and open environment. It can be used with third-party and client legacy system as well.

We talk about convergence because although the user interface as well as the reporting and the data repository come from multiple sources, they act as one integrated system. In concept, this is analogous to the smartphone. On the smartphone, this enabling framework and app systems provide the core platform and infrastructure to assemble the application. And just like the smartphone, the great part of our success with Perceptive MyTrials is not just the capability of the individual components but the strong user interface that engages the user and binds together the components. This important technology is becoming the cornerstone of the new generation of clinical trial operations, and Perceptive MyTrials is used extensively by PAREXEL's business to help manage this work.

Today's innovation in clinical development now revolve around IT. Product sale has a distinct advantage driven by the company's investments in technology. Effective management of clinical trial is what PAREXEL is all about. We use and test our own technology, we invent new models for getting the work done and we have critical mass. It is no surprise that there are significant synergies between Perceptive and CRS. In particular, thanks to the high-powered requirements of Medical Imaging and RTSM, we have been able to be the best-in-class global technology infrastructure. CRS acts as our proprietary innovation lab, enabling us to integrate new technologies earlier than market. CRS guides us with respect to the way we segment our offerings. As an example, we've learned that small biotech companies have different requirements from large pharma companies. This knowledge allows us to more effectively target our offering for each of the market segments.

Moving on to the market dynamics, the key trend is driven by clients wanting greater system, simplicity with their interfaces. The new complexities of product development are pushing clients to tighten the reins on the suppliers. This is leading to concentration of technology providers, with Perceptive and 2 other clinical IT companies gaining market share. In this environment, clients are seeking solution as part of long-term strategic relationships. The solution integrates technology with expert specialists and clinical services. Simultaneously, we have been seeing a concentration of technology offering and a movement to integrated suites very much like with ASAN with enterprise resource planning systems 15 years ago. With our Perceptive MyTrials first-mover advantage, we are uniquely positioned to take advantage of current market dynamics.

The clinical technology market is growing at a CAGR of 10%, 11%. The main drivers for this growth are additional client outsourcing and process automation. Clients increasingly recognize the superior capability of externally sourced systems versus existing in-house systems. The figures in this chart represent the legacy target market for Perceptive, including the regulatory segments, just to keep a point of comparison with the previous presentations. Historically, Perceptive's major business lines have been trial management, data capturing in various forms, medical imaging and randomization and trial supply management. Going forward, Perceptive's available market will expand as we enter new areas, including regulatory information management. And the very scope of the market will change with eClinical platform suites opening the way for aggregation of systems and complex data analytics, as I just described.

Let's look at the evolution of the market shares over the past 4 calendar years of various companies in the clinical development IT market. For sake of consistency, I have excluded acquisitions and for now, the regulatory information market. We've also made an assumption regarding growth at Oracle as we do not publicly split the eClinical revenue. As you can see, the top 3 have gained market share against the others, which come from my previous point about consolidation of technology suppliers. Clients are insisting on greater capability from the technology suppliers and a reduction of risk on a global basis through higher-quality data. The larger vendors are the ones able to invest heavily enough in software development and provide support to clients on a worldwide basis. As the landscape changes, most sophisticated solutions are being rolled out, and we expect bigger roles to be played by the large system integrators, including PAREXEL.

Let's now move on to discuss Perceptive strategy. The first element of our strategy is the continued development and deployment of the Perceptive MyTrials platform. Our platform approach is quite different when compared with other software competitors. We marry both applications together, while we see our competitors will assemble the point solution just for themselves. The second element of our strategy is to leverage the services, expertise and global footprint of PAREXEL. In many areas, we have an opportunity to integrate services where technology is a key enabler. The goal is to be able to support the entire outsourcing continuum related to the conduct of clinical trials. The third strategy for us is to be open for business for multiple sources and to build an ecosystem around Perceptive MyTrials. More and more CROs are using our technology, and other software vendors are integrated -- integrating into Perceptive MyTrials platform.

Trying to make a growing number of different applications work together is a real headache for clients. Perceptive MyTrials reduces that complexity. I will highlight 3 examples. Perceptive MyTrials is a Software-as-a-Service solution. It simplifies and optimizes client management of IT as infrastructure sits within PAREXEL and clients only pay for what they use. It eliminates fixed cost and risk of obsolescence as well. Second, Perceptive MyTrials has a role-based single sign on. You log in once, and depending on who you are and what data you have been authorized to see, you can then access the appropriate data in each application. Applications can be integrated in one workflow, dramatically increasing productivity. Third, Perceptive MyTrials enables convergence. Data are collected by one application and are immediately available to other applications for visualization. Example will relate to sites or investigator-related information. Data convergence is a compelling differentiator for Perceptive. With our large market share in CTMS, RTSM and EDC, we're uniquely positioned to deliver operational supply management and clinical data on a fully integrated basis.

With regard to the second element of our strategy, which is to leverage the synergies we have with PAREXEL's business, we're very well positioned. Being the first mover, PAREXEL Clinical Research Services feeds and funds innovations which, at Perceptive, we can literally commercialize. For instance, the Perceptive MyTrials team has been implementing breakthrough solutions in the very sensitive study startup and targeted monitoring areas, which we are pioneering in CRS. With strategic partnerships, the way CRO and client technologies integrate with one another is a critical aspect of efficiently developing drugs. Conversely, PAREXEL CRS is using Perceptive MyTrials as its eClinical Platform, which is fully integrated with PAREXEL's standard operating procedures.

CROs are increasingly positioned to direct technology solutions for a given trial program. Not all CROs have formed their own captive technology capability. While many of these companies compete with PAREXEL, a few respect and trust us to building solution and building strong process workflows. Several of them are likely to be called strategic partners of clients with PAREXEL. We also know that if this is an development eClinical Suite that is proprietary to a single CRO, it would be extremely limiting to clients over time. The PAREXEL open offering is actually a great solution. It is therefore important for those CROs to hear that we are interested in winning their business. Of course, this requires an appropriate structure that enables these CROs to have a trusted relationship with Perceptive. To achieve that end, we set up a partnership program with its own dedicated organization structure. Several large CROs have already become partners. The partnership program also covers potential technology partners, either business process or sourcing providers or solution specialist with niche offerings. These companies are interested in joint go-to-market strategies. They can integrate their offering with Perceptive MyTrials platform once and sell it many times.

I'd like to illustrate our approach with 2 case studies. So first one is an example of a project we are executing across PAREXEL for mid-sized clients. This study leverages the breadth of Perceptive MyTrials in a tactical single-study setting. Our CRS business is conducting a client trial using Perceptive IMPACT CTMS and our document collaboration offering. The services include EDC and RTSM from Perceptive, using integrated ClinPhone and DataLabs applications. Patients directly report outcomes using an electronic patient diary developed by Perceptive. The integrated solution is providing up-to-date information within each system, hence, the client is fully informed and in control of this important study. Finally, a single help desk support, ePRO, EDC, RTSM and total users. Data visibility is a key benefit for Perceptive MyTrials in this example. The client and the site are able to see inquiry, vital ePRO endpoint data and manage direct compliance. With the dashboard and metering reports generated through the Perceptive MyTrials portal, the client can see the full ongoing status and progress of the study.

For the second example, we're using a recent case involving newly acquired Liquent. So before I dive into the client -- the case study, let me say a few words about Liquent itself. So Liquent is a leading vendor for regulatory information management or RIM software. In the case of filing a new drug application, or NDA, the submission can be as much as 1 million pages. Using Liquent to prepare an NDA is much like using TurboTax software to prepare a tax return. One difference is scale, of course. Another is the fact that Liquent helps clients electronically prepare its compliance dossier for submission on a worldwide basis, so the agency reviewer can go anywhere in the application in less than 3 clicks. RIM is an attractive niche market where technology can really reduce the time-to-market for drugs.

So now moving on to the case study. This example showcases what we'll be able to achieve with Liquent. The program is with the top 25 client headquartered in Japan. The company has a strong development pipeline and aggressive registration objectives and timelines. The request was for a partner with local regulatory knowledge, enabling technology and the service capability to deliver against the drug-to-market target. PCMS and Perspective, through Liquent, have worked together to successfully win the business from the client. Perceptive MyTrials will be used as the end-to-end clinical development platform, integrating Liquent InSight technology over the life cycle of the products. Combined submission outsourcing, teams from PCMS Medical Writing and Perceptive Liquent Direct, will accelerate the development of the dossiers for the client. These teams will support the preparation of hundreds of clinical study reports as part of the submission that are planned over the next 3 years. The combination of technology, transactional services, together with subject matter experts, creates a unique end-to-end capability for delivering dossiers on behalf of clients.

In terms of growth opportunities, the first one I would like to discuss today relates to how Perceptive MyTrials is driving application revenue. Each Perceptive MyTrials platform acts as a magnet for other product and services offered by Perceptive CRS and PCMS. We now have nearly 200 trials under management that are conducted using Perceptive MyTrials. They range from study-by-study engagements to full enterprise solutions. The objective is to leverage Perceptive MyTrials with our strategic partnerships to expand the adoption of the growing ecosystem around Perceptive technology. The solution attracts both small and large clients. In order to make Perceptive MyTrials more effective, it must be populated with applications. They are delivered by PAREXEL, as well as other sources. The platform paradigm attracts clients to adopt additional applications over time with ready-made application -- integration. Such scalable expandability provides our clients with technology investment protection and displaces single product competitors.

The second growth opportunity relates to excellence in the various applications underlying Perceptive MyTrials framework. A good example and success story of Perceptive relates to our Medical Imaging business. Medical images are increasingly becoming pivotal in the review of regulatory submissions. Therefore, the Medical Imaging market is undergoing a transformation as a result of pressure from both clients and regulatory authorities. As a result, mid-sized players have a hard time keeping pace with the complexity of new regulatory requirements. In the case of Perceptive, we have developed a global design infrastructure with wide scientific coverage. In turn, our Medical Imaging business has become the reference provider in the industry. Clients with small trials know they can tap into our capacity quickly. Those with larger trials and heavy demand for data processing on a global basis can trust our ability to scale our service. This has resulted in fast growth and a nice contribution to our margin.

Given that clinical IT is used less and less as a core function for clients, Perceptive has the opportunity to expand its operation as we take over more and more technology core responsibilities for biopharma companies. Our platform strategy opened the possibility of rapidly growing our addressable market by adding new applications to our portfolio. While we'll be of some of these applications, we also intend to grow through acquisitions, as we did with Liquent, and through technology partnerships. PAREXEL has a track record of effectively integrating new acquisitions, and the corporate infrastructure, in my opinion, is remarkable. In that context, I have no doubt that we can develop further acquisitions to help accelerate our growth.

Beyond growth, we've been relentlessly pursuing profitability and productivity improvements. In particular, we have been working to move appropriate tasks to lower-cost countries or locations. In that regard, we have established a mature process for transferring functions from high-cost countries to lower-cost locations. This sometimes requires substantial revisions to our processes, as well as the development of additional training programs. After the investment we made and its financial impact, especially in 2012, the long-term savings opportunities are substantial, and we continue to produce significant return on investment. We are already generating considerable savings from this strategy. Over the coming years, we intend to increase the proportion of our headcount that is located in low-cost countries. This is expected to have the effect of both increasing our price competitiveness and improving our margins.

Perceptive's ability to leverage PAREXEL's corporate SG&A, infrastructure and global footprint is also rapidly becoming a decisive competitive advantage. PAREXEL is managing highly efficient SG&A functions on a global basis, allowing Perceptive to grow with very little additional cost. The cost for Perceptive of establishing a presence in a new country, quickly integrating the new acquisition such as Liquent, providing [indiscernible] to our teams in place like India or other countries, or handling a worldwide audit by regulatory authorities, are comparatively low. These processes are more seamlessly incorporated compared with the experience of several competitors who do not have the scale, scope and reach of PAREXEL.

Over the past 4 years, Perceptive revenue has grown at a CAGR of 16%. Perceptive is providing services to 93% of the fully integrated pharma companies, as well to a large number of small and mid-sized biopharma companies. Several of the top 10 CROs are also fully embracing our technology as we have demonstrated a good collaborative attitude and best-in-class offerings.

The technology team across PAREXEL, including Perceptive, has close to 3,000 employees completely focused on enabling faster, lower clinical and trial risk product lines. With regards to gross margin, we did see a dip in FY 2012 primarily as a result of changing revenues. However, our gross margin performance this fiscal year has been improving every quarter. Helped by this positive momentum, we are continuing to build the required infrastructure to develop our offerings on a worldwide basis.

So to sum up, the successful development of new drugs and medical devices over the life cycle of the client's products is all about effectively managing data. The backdrop to our growing market has 2 paradigms shifts. One is more outsourcing in a collaborative and strategic way to CROs. This model is based on developing highly integrated workflows between CROs and their clients. The other paradigm shift is the movement of trial management from paper to the digitized world. These 2 trends are reinforcing each other. Perceptive is in a privileged position, thanks to its legacy market leadership in both verticals and with a first-mover advantage with the Perceptive MyTrials eClinical Suite and platform. And our growth and synergistic working relationship with PAREXEL's other businesses have enabled us to deliver strong financial results.

Thank you, and we'll be pleased to entertain any question at this time.

Unknown Attendee

Can you just expand a bit where you think you can take gross margin in this business over the next 2 or 3 years?

Xavier Flinois

So yes, I can give you some drivers that are actually contributing to what we see the upside on our gross margins. So the first one is, we are delivering more and more to low-cost countries, which of course, has a very favorable impact. The second one is the expansion of the portfolio, which generates more leverage solutions which essentially contributes to gross margin. And the third one is just the scale. So the scale creates the benefit for the gross margin. So that's basically the drivers that are creating upside on the gross margin of Perceptive today.

Unknown Attendee

So are you comfortable that margins can start to improve at a quicker rate than we've seen in the last few years?

Xavier Flinois

Well, actually, in the past 4 quarters, on a percentage basis, on top of the growth of the revenue, we've seen improvements on the gross margin at Perceptive.

Unknown Attendee

And maybe just a quick followup, how comfortable are you that there is not a channel conflict in this business? I don’t know if you're going to share the numbers, but if you look in the last quarter or 2, what would be the percentage of CRS trial starts that are using MyTrials versus your penetration and clients that are not using CRS?

Xavier Flinois

So when you say channel conflict, it's between CRS and other CROs?

Unknown Attendee

Yes. Do you think Perceptive could be growing faster if it was not part of PAREXEL is the real question.

Xavier Flinois

Well, I think the presence of Perceptive in PAREXEL is actually a huge advantage for us because the decisions that clients are taking at the moment, especially because of the drive of strategic partnership, is actually kind of for long-term commitments to make it simpler for them. So to be part of a group that actually is already binded to them and is part of that movement is actually quite key. And the other piece is we have, as I mentioned, a scale in terms of technology development within PAREXEL at large, as we leverage, that is actually very appealing for the client. Now the CROs, very few of them, as I said, have actually made the technology investment, and so we never [indiscernible] scale that they've done in PAREXEL. So as long as we can, and I think we do, we can show them that we can have a good ethical trust-based relationship with them. They're actually embracing -- they actually accept and embrace the technology that we're offering. And actually, more of them are actually using some of our technology in one shape or form or another.

Unknown Attendee

A followup to the earlier question on the margins. I don't know, if you can comment on -- for a technology/software business, typically -- if it's really almost all software available to services that are 80-plus percent gross margin, does it include services, or typically over 50%. So maybe a different way, instead of looking at where you think you're going, when you think about where the markets are today, what do you think -- is there something structurally different about where you are, investments you've made, because it's conceptually -- I feel like this is a business that at some point, you should be a 50-plus percent margin business unless there's something in there that is really structurally different to keep it from being a technology business that doesn't have a 50-plus percent gross margin.

Xavier Flinois

So I think it's a very good question, thanks for this. So we do have a mix of service and pure software sales. Quite a bit of service, as a matter of fact. We're growing the margin as we can, so there is -- the upside is still there. And we're not very different than other businesses that have similar mix than we have in our everyday business as we go -- the mix of [indiscernible] structure business, really.

So we need to work at it. Of course, we're expanding on a global basis, so we have to compound that site as well. We're operating on pretty much everywhere PAREXEL operates today. But that business, to my knowledge, has no specific placing there that we've prevented from adding help to the margin going forward.

Unknown Executive

Okay, last question.

Unknown Attendee

As part of the question John asked, and that is, could you comment on what percentage of the trials run by PAREXEL CRS are run on the MyTrials platform?

Xavier Flinois

So in the -- MyTrials is actually part of the transformation of this relationship between the service providers and the sponsors and the way the trials are done. So every, as Joe explained earlier, every time we enter a strategic partnership with new clients today, PAREXEL operating procedures are integrated with MyTrials, we actually do present and offer MyTrials. So there's a fair bit of trials that are actually run in partnership with the various groups inside PAREXEL. But it's not the only places, right. So sometimes clients -- sometimes within the same client, sometimes clients run their own trial and they actually run some of their trial using Perceptive MyTrials. And in some other places, CRS doesn't provide the whole extent -- the whole suite of clinical services and other people participate. So we don't really speak, but we do participate in all those various cases, and actually happily so. So we don't need to have a specific configuration to have MyTrials being used.

Unknown Attendee

Can I ask a followup, short one? How important is cloud to your technology platform?

Xavier Flinois

So there's a lot of things going in cloud. What is important for the clients today is to remove all the complexities that have to do with IT. And there are 2 of them that are very well served by cloud and therefore all our offerings are moving in that direction. One is they don't really want to have the infrastructure that could become obsolete over time. So they happily let us manage that, that's a good benefit for the cloud. The other thing is they really only want to pay for what they use. So therefore, if we get an infrastructure on our side and offer our software and services -- other services based on consumption, then it's a great benefit for the clients. And we take care of the integration and things that happen in the background. So cloud is very important here in the way forward and that's basically the very method that we are engineering our solutions around. Okay?

I would now like to turn the presentation over to someone who most of you probably already know. Jim Winschel, Senior Vice President and Chief Financial Officer. Jim joined the company in June of 2000. He has over 40 years of experience in financial and general management, having worked at BTM Capital Corporation, Caremark International, Whirlpool Financial Corporation and the General Electric Company. Jim?

James F. Winschel

Thanks, Xavier. To wrap things up for the day, I'd now like to talk about some of the highlights of our recent financial performance, including elements of our income statement and our balance sheet. I'd also like to talk about our forecast for fiscal year 2013 and discuss expectations for fiscal year 2014.

Back in May 2012 at last year's Investor Day, we laid out our expectations for fiscal year 2013 financial performance in terms of service revenue, adjusted operating margin and both GAAP and adjusted EPS. And as you can see from this chart, we are now expecting to report service revenue in excess of $1.7 billion, substantially above our target. We expect to come in at the lower end of the adjusted operating margin range, and GAAP and adjusted EPS are forecast to exceed our original targets.

Fiscal year 2013 was a very busy, productive and successful year for us. In addition to delivering strong service revenue growth, generating a significant improvement in operating margin and growing EPS, we've taken a number of positive steps in terms of our financial strategy. For example, we are nearing completion of the $200 million stock buyback program. We refinanced our debt, extended the term of our borrowings and expect to generate somewhere between $120 million and $130 million in free cash flow, due in part to our success in reducing DSOs. We were also able to realize ongoing benefits from our tax strategies and therefore, drive strong earnings per share growth. And finally, we completed the acquisitions of LIQUENT and HERON, both of which are nicely synergistic additions to the company.

To be more specific with regard to service revenue, we expect to end fiscal year 2013 with service revenue in the range of $1.72 billion to $1.73 billion, up approximately 23.5% on a year-over-year basis. As indicated in yesterday's press release, we are now expecting to generate between $1.885 billion and $1.915 billion during fiscal year 2014, up 10.1% on a year-over-year basis using the midpoint of the range in each of the projected years. Assuming we hit the midpoint of fiscal year 2014's range, service revenue will have grown at a CAGR of 12.6% since 2009. The return to strong growth in the resourcing-related challenges that caused us the higher head of the revenue curve negatively impacted both CRS and the company's gross margins in fiscal year 2012 and 2013. This situation persisted through the first half of this current fiscal year, but starting in the third quarter, we began to see a rebound in margins which we expect to continue. During fiscal year 2013, PCMS continued to report strong gross margin results while Perceptive Informatics improved on a year-over-year basis. On an overall company basis, we expect gross margin to improve in fiscal year 2014, driven by improvement in all 3 business segments with the most meaningful improvement coming in the CRS business as was discussed by Mark earlier today.

As revenue growth accelerated over the past few years, we have very effectively leveraged our SG&A spending through tight cost controls. The proactive actions we have taken included restructuring activities, shipping cost at low-cost locations, various productivity and efficiency initiatives, and a number of systems projects. Acceleration of revenue growth was, of course, a big contributor as well. During fiscal year 2014, we expect SG&A as a percent of revenue to actually increased a bit as we lay the groundwork to support future growth. Examples here include an increased level of marketing investment, higher facilities costs and more spending and selling activities.

Based upon the guidance that we issued yesterday, we are expecting the company's operating margin to be in the 8% range for fiscal year 2013, up 120 basis points from fiscal year 2012. In fiscal year 2014, we are projecting full year operating margin in the 9% to 9.4% range, up another 120 basis points at the midpoint. We expect to hit a seasonal low point in the first quarter and to increase from there on a sequential quarterly basis. Longer term, we expect to improve operating margins by 100 to 120 basis points per year as we were able to do consistently prior to the world financial crisis. We remain focused on achieving operating margins in the 12% to 14% range over the next few years.

With respect to profitability, we believe that we continue to have the building blocks in place for ongoing operating margin expansion. We expect to be able to further leverage our revenue growth while concurrently increasing the profitability of our core research operations. In this regard, we plan to reduce contract staff and increase efficiency through process revisions utilizing Lean methodologies, intensive metrics-driven management approach. In addition, [indiscernible] and recruitment cost. In Early Phase, improved capacity management as a result of restructuring activities, combined with recent strategic partnerships wins for that business, should significantly improve profitability and help to improve the utilization of our Phase I units.

In the cost management side of the equation, we are continuing to make substantial progress and a variety of productivity and efficiency initiatives, as well as a number of other business process and systems enhancements that should help us to do more with relatively less in the way of resources. As an example of this latter concept, we have been incorporating agile work environments which include increased use of decentralized employees and hoteling of employees within our offices. Meanwhile, we are continuing the development of Perceptive Informatics into the high-growth and increasingly profitable business. And we have been very successful over the last 3 years in winning new business in Perceptive, while lowering costs and making changes to our model in order to make the business more efficient. And just to mention one example, we have shifted many Perceptive activities to low-cost locations, as Xavier just discussed. Also, as noted in yesterday's press release, we reconfirmed fiscal year 2013 guidance and we are expecting to generate between $1.51 and $1.55 in GAAP earnings per share, and between $1.60 and $1.64 in adjusted earnings per share in fiscal year 2013, up 47.3% from adjusted 2012 EPS. We are projecting earnings per share to be in the range of $1.90 to $2.10 for the upcoming fiscal year, and at the midpoint of the range, EPS would be up 23.5% over adjusted fiscal 2013 EPS.

I'd now like to turn your attention to the financial strategy which we have successfully executed during fiscal year '13. In this regard, we have been effectively managing our borrowings as part of our efforts to better leverage our balance sheet and reduce the company's cost of capital. These actions have enabled us to fund PAREXEL's programs and has led [ph] to a couple of acquisitions and enable us to judiciously invest in needed capital expenditures. Furthermore, the reductions in our DSO metrics have helped to support the company's growth-related working capital needs [indiscernible] we have continued to benefit from a comprehensive and successful strategy -- tax strategies that we've been employing over the last several years. The net result has been a strong cash flow story for the company and overall, we've been very pleased with the results that we've been able to achieve.

Now as part of our plan to leverage the balance sheet, reduce our cost of capital, fund the stock buybacks and pay for acquisitions, we have increased our borrowings from a consortium of banks. And this [indiscernible] at our borrowings has some various points over the past few years. In this connection, we amended and extended our existing credit facility to $500 million, including a $100 million increase in the term loan portion of the borrowing rate -- of the borrowings during this past fiscal year. We obtained a more favorable borrowing rate and we extended the term to 2018. In addition, as we announced yesterday, we are in the process of completing a [indiscernible] placement of debt with a fixed interest rate of slightly above 3% in a 7-year term.

Over the last 2 or 3 years, we have succeeded in reducing the company's cost of capital by a couple points to better leverage the company's balance sheet. We are currently projecting debt-to-EBITDA ratio for fiscal year 2013 of 1.9, well below the 3.0 threshold of our debt covenant. In addition, we have more than adequate interest coverage based upon our expected EBITDA to total interest ratio. With regard to the stock buyback, through June 24th, we completed a $193.5 million of our $200 million stock buyback program. This is updated a bit from what you see in this particular slide, which was about 1 week ago. In this regard, we used the combination of accelerated share repurchase in 10(b)5-1 open market purchase programs. We expect to complete our activities under this current program at the end of July 2013. Thus far, we have repurchased excess of 5.2 million shares and currently estimate that the net EPS impact in its activities will be $0.04 per share in fiscal year 2013 and an incremental $0.07 per share in fiscal year 2014.

As you are all aware, decreasing our DSO was a critical objective for the company over the past 3 years. We made outstanding progress during fiscal year 2013, clearly achieving the benefits of [indiscernible] more timely and accurate business and a more intense level of collection activity. And we are targeting further reductions in DSOs during fiscal year 2014. Given our extensive global footprint, tax rate management continues to be a complex and challenging task within the company. Over the last 4 years, we have seen significant benefits from the execution of strategies and expect to now settle in at around a 30% tax rate going forward. There are several areas where we may have the opportunity to generate a lower tax rate, but timing is still somewhat uncertain. Lastly, of course it will be very beneficial to us if the U.S. government would finally reduce the corporate tax rate to be more competitive with the rest of the world or enable us to repatriate cash to the U.S. without triggering higher tax liability.

In line with our strategy to acquire synergistic bolt-on capabilities, we acquired LIQUENT, Inc. in late December 2012 and the HERON Group Ltd in April 2013, as was discussed earlier. LIQUENT was acquired for $76 million in cash and assumed liability, and the group is expected to generate $3 million in annual service revenue. However, we need to be on track to exceed that initial target. And in the first year, LIQUENT is expected to be slightly, only slightly, dilutive to EPS. We acquired HERON for $24 million, however, the transaction has earn-out provisions, which would increase the eventual payout to as much as $40 million. This group is targeted to generate approximately $20 million in revenue and to be neutral to slightly accretive in the first year. As a part of our growth strategy, we have a proactive M&A function that targets and reviews a large number of potential acquisitions each quarter, and we plan to continue that activity in fiscal year 2014.

Over the past couple of years, we have been utilizing capital expenditures in conjunction with a number of key productivity and efficiency initiatives to better meet the needs of our clients and help drive current and future profitability improvements. We expect CapEx to end the current fiscal year in the $75 million to $80 million range and to increase to $90 million to $95 million in fiscal year 2014.

In general, these expenditures have been or are focused on hardware and software and expansion of facilities to either support pass growth or lay the groundwork for ongoing expansion of the business. The company's cash and marketable securities balances have had a nice trajectory over the last 3 years even as we implemented the stock buyback program. If we are successful in achieving our profitability targets going forward, these balances should continue to rise steadily, partly offset by repayments of borrowing under our lines of credit. Our biggest challenge, however, has been that our cash is primarily located outside of the United States, while our borrowings are U.S.-based. And as we improve the timeliness of our billing, especially with regard to pass-through cost, DSO was down and our U.S. cash position actually increased.

During fiscal year 2013, we are expecting to generate between $210 million and $215 million of operating cash flow. Our current year performance was helped by the substantial reduction in DSO and was achieved despite those increased working capital needs to fund growth. In fiscal year 2014, we are currently projecting $200 million to $230 million of operating cash flow. We've been using our free cash flow to fund both the stock buyback program and acquisitions over the past year, and as I noted earlier, we expect to continue to be active on the M&A front going forward.

As stated earlier, and to summarize, we expect service revenue to increase approximately 23.5% in fiscal year 2013 and another 10% or so in fiscal year 2014. In my earlier comments, I stated that we expect to deliver adjusted operating margin in the 8% range in fiscal year 2013. For '14, we are projecting operating margin in the 9% to 9.4% range. Finally, adjusted EPS is forecast to be in the range of $1.60 to $1.64 in '13, and during fiscal year 2014, EPS is projected to be in the range of $1.90 to $2.10, up 23.5% over adjusted fiscal year 2013 adjusted EPS at the midpoint.

Other key assumptions underlying our fiscal year 2014 guidance include an overall market growth of about 7%, indicating that we are continuing to gain market share given our revenue expectations. And as stated earlier, we believe that our book-to-bill ratios will remain in a more normal range at about 1.20. And as always, we use recent exchange rates in calculating our current estimates. We've estimated other expense to be in the $12 million range, consisting of interest expense and foreign exchange losses. And lastly, we're estimating that free cash flow will total somewhere between $110 million and $125 million over the fiscal year.

Now summing up, we believe that PAREXEL represents an attractive investment opportunity. Market trends are favorable and PAREXEL has been a winner in the new landscape of strategies. Against this backdrop of continued success, our strong global capabilities, as well as our clinical IT leadership and deep expertise, differentiate PAREXEL from the competition. We believe our current expansion initiatives have set the stage for increased EPS growth in fiscal year 2014. And at this point, I'd like to thank you, and I'd now be happy to answer any questions you might have.

Unknown Attendee

I heard on the strategic outsourcing [ph] deals that they require a little less SG&A or selling cost. In the past year, a few years, you've grown your revenue by 12.6%. But SG&A is compounded at 11% roughly. So to me, it seems like that's as much operating leverage as I would expect given the business and what you said. Could elaborate maybe on what's in that? And then going forward, if we're going to grow at 12%, can we anticipate SG&A compounding at more of a high single-digit rates, or would you expect it to be in that 10% to 12% range as well?

James F. Winschel

Well, PAREXEL is -- unlike some of our competitors, has pursued a policy of investing in our business on a global basis. And a lot of our competitors didn't do that, and I think today, they would regret that. We did, however, during fiscal year 2013, hold back on SG&A spending because we were having some challenges on the gross margin line in the earlier part of the year. What we did, as you saw in the March quarter, then [indiscernible] the SG&A spending. And we're going to continue to make some investments in 2014 along those lines. That being said, we believe that the operating margin improvement that we have projected to deliver for fiscal year 2014 is going to be driven on the gross margin line and across all 3 of our businesses. But obviously that contribution is coming from the clinical research services business.

Alexander Y. Draper - Raymond James & Associates, Inc., Research Division

A couple of just financial detail questions. Jim, I think -- so you have a $200 million stock buyback [ph] with authorizing assets [ph]. You stated $190 million [ph] of it, is that correct?

James F. Winschel

That's correct, $193 million.

Alexander Y. Draper - Raymond James & Associates, Inc., Research Division

Okay. And so what's the share count that you're assuming for fiscal '14?

James F. Winschel

So it's an interesting question, Sandy. In some of my initial models, I had the share count going down a bit more than it did. Of course, what happens in some ways to offset some [indiscernible] was the big increase in the stock prices for stock options, get back in the money and add it to the count. But we are -- certainly, in the current quarter, the June quarter, we're going to get a nice benefit of the accelerated share repurchase that we did back in March. And then we've done the open market program throughout the course of the year. But we'll go into the next fiscal year with a substantially lower share count than we started. I don't want to give you the specific numbers that we've got in our model, but I mean, I think with the information that's out there and the knowledge of now where we stand on the share buyback program, it shouldn't be that difficult to calculate.

Alexander Y. Draper - Raymond James & Associates, Inc., Research Division

Okay. And then last question on the -- obviously generating good free cash flow, I don't have it off hand, but I think you're going to get cash flow well above what you're mandatory payments are on the debt. I mean, would you consider maybe paying down R&D at the capability of paying down debt faster, or would you rather use that to buyback more stock? And then maybe tied into that, are you willing to give us what percentage of your cash, exceeding ex US, therefore making it harder to do either one of those 2.

James F. Winschel

So the majority of our cash is actually outside of the U.S. at this point. And I think we're not going to make any decisions about any kind of a new stock buyback program or anything until this current one is finished and we've had a chance to completely assess it. Obviously, it depends on the discussions with the board and, looking back, evaluate how it all worked out. I can remember, however, back when we first announced the program, a number of investors approached me and said, why would you want to buy your stock at such an expensive price at $30 a share? I think we delivered the answer to that.

Unknown Attendee

I just wanted to know what's embedded in the other expense line specifically for the foreign exchange fluctuations. I know in the past, you kind of built in a little cushion there for the [indiscernible]. What are you thinking about for this 12 million?

James F. Winschel

I think we're doing an excellent job of managing our foreign exchange challenges. I think we certainly have over the course of this year. I think if you look at the amount of debt on the books right now, you're talking somewhere $8 million to $9 million range. And so the remainder of what we have in our estimates there would be foreign exchange losses. If we're able to duplicate the experience that we've had in fiscal year 2013, which is foreign exchange gains, that could change the dynamics there. So you're probably right. I'm hoping and I've been conservative.

Unknown Attendee

Let me go ahead. So Jim, the margin expansion range for this [indiscernible] is a little bit higher on the top end than your 100 to 120 bps, and it kind of has been standard in the past. What drives the top end of that? And if you could also comment on what if any impact this kind of slowdown in revenue growth in the fiscal second half before it ramps back up. Does that have any impact on margin in the second half of the year?

James F. Winschel

The analogy that I'd like to use, David, and what I think is going to be happening with the gross margin is it comes back to sort of the DSO situation. You remember the DSO went pretty wildly in the wrong direction back when we implemented the new system and everything. And we had a number of initiatives then to get that back in the right place, and actually to eventually achieve the objectives that we had set for ourselves. In some quarters, the progress is a little slow, and then there were other quarters where it dramatically [indiscernible]. I think we'll see the same thing, various things that we've got going on within -- for example, within the CRS business, there's a number of things that are fundamentally happening with the reduction in contractors and improvement in productivity of our employee base. But there are a lot of other things that we're working on there as well. And so we think overall, we're going to see a very nice year-over-year improvement in the gross margin, not only for CRS, but actually for the other business as well. But [indiscernible] is going to be the biggest impact and there'll be periods that will see a bigger improvement. Then there'll be other periods where there'll be smaller improvement. But I think the trend is going to be [indiscernible].

Unknown Attendee

Taking in recent FX rates, we had some pretty dramatic movement recently. So I assume we're annualizing some of that at least for the first couple of quarters of the year. Can you help us to understand how much FX -- or how FX is impacting the guidance as it stands right now? What that imputed rate does to the numbers?

James F. Winschel

Yes, so interesting question. I mean if you look at Euro for example. [indiscernible] coverage rate that we've experienced over fiscal year 2013, and then you look at the rate that we used for the budget, they're almost exactly the same. On the other hand, [indiscernible] looking at the yen, more recent times substantial strengthening of the dollar with the yen, although it's been a little bit volatile. And in the case of the pound, which would be the second biggest currency that impacts PAREXEL, we've seen a strengthening of the dollar by, I think it's about $0.03, the average rate for fiscal year 2013 compared to the rate that we've got into our forecast in around [ph] of $1.54. So there -- the dollar will have strengthened. So this is something else that, in that particular case, that hurts us a little bit on the revenue side because right now, the numbers that we're -- that we project, we have a stronger dollar when it comes to the pound. Correct.

Unknown Attendee

Joe, a few hours ago, you gave some pretty impressive longer-term growth goals. Just to kind of go back to that slide. Can we dig in a little bit more? I think it's a 12% revenue growth target. How much of that is organic? What's your long-term organic revenue growth goal?

Joseph C. Avellone

Well, [indiscernible]. So spend is the jumping off point, right? And it's going to be variable year-by-year depending on what kind of acquisitions we make. So we only nail ourselves down exactly to a precise number every year. But over time, it should amount to about 12%. And how much of that would be acquisition, or the other way around, organic? I would expect that we would be in the high single digits without organic growth.

Unknown Executive

[indiscernible] fiscal year, we have the acquisition [indiscernible] and LIQUENT that will have an impact on the revenue growth in those other years and even in this year, you always have a certain amount of new business that you expect to win. And that can either be, one, because we're out in the marketplace and successful, or we may have done an acquisition and fill whatever the identified amounts are in that way.

Unknown Attendee

And a quick follow-up, same slide. The 100 to 120 basis point margin goal here, I think, in the past, when you got within shouting distance of about 10% EBIT, it's been tough to break through that barrier. And I think a lot of that has been voluntary with some of the investments you've made. Can you help us understand what would be some of the things that would prompt you [indiscernible] going to invest and extra, why, and give up on that margin goal at any given year? In other words, how comfortable are you that you can really break through 10% and be up at 11%, 12% in a few years?

James F. Winschel

The last time we were on that brink, of course, the world financial crisis hit, which one would hope not in that particular way. But in the end, we're always going to do what we think is the right thing for the company. And if that -- if we have an opportunity that we see to be -- to take advantage of, it's going to -- ultimately, it's going to drive higher EPS growth. I think that's the one thing I would like to say to everybody, [indiscernible] kind of focus on this operating margin line and everything. But our strategy is a complete strategy. And in the end, it's EPS growth, I think, that should be important. And let's not forget that in fiscal '13, EPS was up 47.5% on a year-over-year basis. [indiscernible]

Unknown Executive

First of all, it's clear that we have an ambition, really. Not even an obligation, certainly an ambition to get to our ultimate margin target. And we have said now for a number of periods that we eventually the range of 12% to 14% over the year, over time. That will take several years, of course. And right now we don't really see a reason why we should not be able to achieve that over time, the plan that we have right now, barring new unexpected circumstances that Jim basically alluded to with the crisis. I would also say, even without the crisis, if the opportunities with the strategic partnerships had come up, margins probably would have taken a dip in the short term. And I think that was clearly in the best interest of the shareholders. So once again, right now we don't see anything like that on the horizon. But if something like this were to come along, which clearly would give us an opportunity, an unprecedented opportunity, we will do that again. But it have to be really extraordinary.

Unknown Attendee

I want to try one more time to try to extract a quantitative thought on Perceptive out of you. Once you get to that 12% operating margin target, what would you foresee the gross margin in Perceptive being?

James F. Winschel

[indiscernible] healthcare conferences and things. And our target is in the 50 -- so 50% or higher.

Unknown Attendee

Perhaps, I've got a question about sort of the structuring of contracts, in particular for strategic relationships. So more broadly, I think, just in the kind of research that [indiscernible] in terms of the assumption of risk for CROs today. And I was just wondering if you could characterize how much of your business is exposed to some type of execution risk [ph] and how does that affect your thinking in terms of your ability to hit your margin target?

Josef H. Von Rickenbach

So typically, when we engage contractually, obviously we're very careful and prudent about looking at the risk profile of any relationship. And to the extent that we take on risk, any risk that we ever take on, is really operational execution risk. We don't take on intellectual property risk, risk that the drug doesn't work, that sort of thing. To the degree that we take up some operational execution risk, we typically, in our contractual constructs, also look for upside opportunity. And so our experience to date has been pretty good that, occasionally, you get some downside, occasionally you upsides. And overall, it -- I think our approach has largely worked [indiscernible] sort of lumpiness of the terms of the way word.

Unknown Attendee

Do you interpret that most of your contract has some type of operational risk?

James F. Winschel

I don't think you could say most. But certainly, a number of our strategic partnerships do.

Unknown Attendee

Just 1 bigger picture question. I think -- I forget who it was [indiscernible] but you said your customers, sponsors are by and large more optimistic. Just curious, what are they more optimistic about? That they made it through turbulent period that -- and they're still standing, that they're happy just to be standing? Is it -- what is it that they're optimistic about? Because I think many of us see challenges still out there for them.

Josef H. Von Rickenbach

Right. Of course I don't know exactly what they're optimistic about. That's a relatively a personal thing. But just an observation, now the tone seems to be better. And I think partly, that's because they are starting to see their way through the statute [ph] of patent expirations. The worst years which are '13 -- '12, '13, '14. And it's starting to abate, going forward. But there is also a realization and we actually have done a little bit of analysis on this. Now you could basically say that about 5% of the global [indiscernible] base of pharma goes off-patent, okay? And so I think in the big scheme of things, that's starting to sink in overall, so it's not actually that far out. The other thing is also innovation is happening. And there used to be some worries that the pipelines we [indiscernible], and we talk about that earlier today, so that's not the case. And finally, I would also say that they are starting to think through their business models is better. For a long time, we basically have seen a whole bout of the blockbuster model. And I believe actually that that has prolonged the pain in some case, and more and more of these companies are now realizing that they need to change the model itself, and they are starting to become comfortable with that. Now if you listen to many of the talks of the leaders in these companies, most of them now are starting to talk about the change either underway or envisioned in the relatively near-term future. And so I believe all this in combination puts a different input to the discussion compared to, let's say, 2 or 3 years ago [indiscernible] ways we're really looking at this mountain [indiscernible]. So it's objective. It's just an observation. Sandy?

Alexander Y. Draper - Raymond James & Associates, Inc., Research Division

A follow-up to that question. Because I would agree, in the conversations on pharma or people selling into pharma does seem better. I think I went to a presentation yesterday and there were 5 or 6 pharma executives. And one of the comments was, there [indiscernible] more optimism, but there's an understanding if we keep trying to develop drugs [indiscernible] the next 20 -- the next last 20 years over the next 10 years. So how do you think about PAREXEL [indiscernible] industry being a solution to doing it differently when how much do you see if they really start to change things and really get innovative and not look forward, not backwards, is there an area where we can say they changed so radically and how they developed drugs that it actually becomes bad for the CRO industry?

James F. Winschel

Well, I think that's a radical statement, that we're dead. I don't think we're going to be dead. But at that the same time, I would say, you heard this morning that we have tangible evidence that we can reduce the cost of clinical development by as much as 30% [ph]. It's a lot. And I'd also say, as we are moving away from the big blockbuster programs into more targeted programs, that's coming down more. By the way, that's not bad for the CRO industry. We are exactly on the same side as our clients. And also, as Joe said, to the extent that dollars are not being used for any one drug, they recycle and come back onto new compounds. And so basically, the overall spend is not going to go down and that's because the cost per 1 development is coming down. So it's a win for us as well and we are highly motivated to work with our clients to get those costs down, because we see the same problem. Now that the economics don't work right now and the reductions have to happen in order to make basically the business, the pharmaceutical business more viable. And I would say, we have a lot to bring to the table, whether it's in consulting or whether it's in our operations. [indiscernible]

[Audio Gap]

Unknown Attendee

[indiscernible] several surprisingly. The comments about reducing, recruiting and training, in the general context of gross margin being the driver of margin expansion, so at least in the coming year, can you help us to understand like how much is the contractor replacement or the contractor switch to FTE, how much does that contribute? Could we size that? And similarly, how much in 2013 or over the last couple of years has been spent on recruiting and training such that if you reduce that by 10%, what difference -- what, amount of [indiscernible] make [indiscernible] bookings around that?

James F. Winschel

So I don't know if I can put specific figures to it. I think that we saw a nice improvement in the most recent quarter, that these factors all clearly contributed to that. I think that as we talked about earlier, our expectation is that, and you've sort of seen some [indiscernible] going forward, that in terms of contractors, we'll probably be where we want to be by the end of the calendar year. When you talk about the large number of employees we brought in [indiscernible] in the last 12 months, you bring literally thousands of employees in the organization. These are folks who, you have to assume, [indiscernible] to get to the point of being fully global. So you have a large number of employees who are on board. You're paying their salary. [indiscernible] going to be billable for some period of time. We've certainly worked hard to try and reduce the time from walking through our front door to being fully billable, we've made progress there, and that's been one of our Lean initiatives. But if you sort of just come back to that into your thinking, multiplied by very large number of employees, it's not hard to understand how that has a fairly dramatic impact on having a lot of direct labor cost. It's really not contributing to the gross margin.

Unknown Attendee

If I were to follow on that though, if even though your growth is slowing, a 12 percentage point-ish growth rate on a bigger piece of revenue today still is going to require a lot of people, right? So why is that different in 2014 and 2013?

James F. Winschel

Because one of the things -- again in terms of continuous improvement, one of the things to look at is how do we on-board people more efficiently so that -- just to pick a number, let's say if that took 3 months to get people to billable before, if we can reduce that to 8 weeks or some shorter period of time, that obviously has a contribution. And the reality is the numbers are just going to be meaningfully smaller. When you sort of do the math, I mean you start talking about tens of thousands of hours that are being spent in training, and that definitely adds up. The other piece here is that there's also a fairly remarkable amount of training involved that is incurred when you ramp strategic partner relationships, particularly the large ones. As there's a lot of negotiation [indiscernible] what processes you're going to agree to, once you've agreed to those processes, everyone [indiscernible]. And so that's another big hurdle that we're now getting beyond and it's going to be a tailwind for us.

Unknown Attendee

I could ask 1 more and I'll pass it on. So obviously, in your guidance, you are making some assumption, some forecast about strategic partner relationships, I think we all know that there are some that are renewing in time for 2013. I'd be interested if you could comment without naming specific clients, but if you could comment on status [indiscernible], how much visibility do you have around any term changes that will be included in those renewals? If any are done at this point, et cetera.

James F. Winschel

Thanks for the question. I think, yes, as I did say in the [indiscernible]. But certainly within this fiscal year, we'll start to see a renewal or renewals. But as I also said, we don't really expect it to be a large binary event. I do believe we have a fair amount of visibility of course how our relationship is, of course, and how our performance has been. So we're not unduly worried that any of these things might change in a material way. I think they've been -- but I think we have been able and will continue to be able to show a significant benefit. And I would add 2 other things. If something bad happens, if we did lose a partnership, it wouldn't be a cataclysmic immediate event on our financials because there would be a long -- what would more likely happen is we would run out all the trials we're doing over some long period of time, years. And maybe, maybe not, they would bring in another partner. So I think a downside of renewals would be the addition of a potential partner and a slowing of work to us, not some kind of a big binary event where they moved all the work away from us. And so I don't think any of that's going to happen, but just to give you -- if we're worried about renewals, and I don't think we should be, it's not because it would be some cataclysmic big immediate negative [indiscernible] on our financials. In fact, I would like to leave you with the idea that the reverse is true, that in fact, we're showing significant benefits. The renewals are really not something that's highly worrisome. We fully expect that we are going to renew successfully and they are really not time for remaking the relationship in a big way. There are more times that kind of renew the relationship, almost out of the existing arrangements.

Unknown Attendee

Words that suggest the future, not the past. Can you say -- have any of these been renewed as we stand here today already?

James F. Winschel

No, we have not had the renewals, but we will within the year.

Unknown Executive

Okay, we have time for 2 more questions.

Unknown Attendee

Mark, you mentioned logistics is another growth opportunity. I don't recall you guys talking about that before. Could you just size that for us, what sort of growth opportunity do you think it is? And I'm guessing that's all outsourced already. So who -- what entities are providing that service to clients now?

Mark A. Goldberg

So, we've been in the clinical logistics business now for really a number of years. It was sort of [indiscernible] where we saw an opportunity to provide some support to our clients that they just didn't seem to be getting from sort of the typical core logistics vendors. And that came in a few different categories, one was around investigational product or comparators. Sometimes, and increasingly in today's world, you're dealing with biologics, so you have concerns about maintaining temperature ranges and other things that are very sensitive with those, dealing with specimens or samples that are biologic in nature. It also has unique sort of import, export considerations that a typical just logistic spender wouldn't necessarily be experienced with. And so there was an increasing sort of expertise component to what was required and we saw that as an opportunity. So we've been building that up and we built that up through a combination of organic growth of depots around the world and we've also partnered with other players who have facilities that we can then turn into appropriate facilities to use as depots. And so we're using that again for products, we're helping clients move specimens around. And also other ancillary clinical trial supplies. So for example, in the respiratory study, you might need a spirometer or an EKG study. You might need an EKG monitor. All those other supplies are also part of what we offer in the logistics program. It became really fully an operating unit only recently within the organization which is why we haven't really talked about it as much, which means that it's -- while still small-ish, it's achieved critical mass and we wanted to have dedicated management and a little bit more clarity around managing the P&L and giving it the attention that it needs in order to grow it. When we look at that business, I would say relative to CRS overall, it probably is beneficial from a margin standpoint. And the growth rates are at the level of the rest of the business or higher.

Unknown Executive

Okay, thank you very much. The webcast, we look forward to updating you again at the next conference call which is also going to be our year-end call. And so this now concludes our webcast. And for those of you who are in the room, please stay on for 1 second, we have a few housekeeping items that are now going to be covered by Jim.

through ultimate product launch, the linkage between PCMS and other parts of PAREXEL, especially CRS, provides synergistic solutions to our clients.

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