Pharmaceutical Product Development, Inc. Q3 2007 Earnings Call Transcript

Oct.24.07 | About: Pharmaceutical Product (PPDI)

Pharmaceutical Product Development, Inc. (NASDAQ:PPDI)

Q3 2007 Earnings Call

October 24, 2007, 09:00 AM ET

Executives

Fred N. Eshelman - Vice Chairman and CEO

William Sharbaugh - COO

Daniel Darazsdi - CFO

Analysts

Alex Alverez - Goldman Sachs

Hari Sambasivam - Merrill Lynch

Alexander Y. Sandy Draper - Raymond James

Jim Kumpel - Friedman, Billings, Ramsey Group, Inc.

Doug Tsao - Lehman Brothers

John Kreger - William Blair & Co.

Robert Gilliam - UBS Securities

David Windley - Jefferies & Co.

Operator

Good morning. My name is Casey and I will be your conference operator today. At this time, I would like to welcome everyone to the PPD Quarter Three 2007 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions].

At this time, I will turn the conference over Dr. Fred Eshelman. Sir, you may begin.

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Okay, thank you Casey, and good morning. As always, I will begin by saying that except for historical information, all of the statements, expectations and assumptions discussed in today's call are forward-looking statements that involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements.

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

In our comments today, we will refer to selected non-GAAP financial measures. For all periods discussed today, unless specifically noted, net revenue, income from operations and margins exclude reimbursed out-of-pocket and stock option expense under FAS 123R. For a quantitative reconciliation of all non-GAAP numbers discussed in today's call, to the most comparable GAAP financial measures, please see the GAAP, non-GAAP reconciliation information that is posted on the Investor Presentation Webcast section of the Corporate page of our website at www.ppdi.com.

PPD had a solid third quarter 2007, with net revenues of $328 million, up 13.3% over Q3 of '06. EPS at $0.32 was on consensus and within our guidance. Comparison with Q3 2006 is affected by approximately $6.5 million increase in R&D spending in Q3 of '07. As we continue to build for the future and reaccelerate growth, SG&A grew slightly faster than revenue on a non-GAAP basis. Without FAS 123 expense, our Development segment margins were on target with a gross margin of 50.1% and operating of 20.1%.

Gross new authorizations were $571 million with the cancellation rate of 21.8%, leading to a book-to-bill of 1.36 for the quarter. Backlog increased to $2.503 billion. Our revenue generation was 66% North America, 34% rest of world. By client type, pharma accounted for 59%, biotech 29%, government and other 12%.

The top client accounted for 9.2% of revenue, top five for 32.7% and top 25 for 67.9%. Top therapeutic areas were oncology, endocrine metabolic, anti-infectives and anti-virals, cardiovascular and CNS. We now have over 10,000 professionals worldwide.

Turning to the Discovery segment, the biomarker lab continued to lose money but had some good news in that authorizations picked up and were almost on target. The pre-clinical oncology unit had good revenue growth and exceeded the authorization target.

On the compound partnering side, J&J have restated their intentions for EU filings on dapoxitine in December of this year. The Takeda DPP4 program is right on schedule. Accentia have stated that blinded results with SinuNase caused them to be optimistic. They now expect that unblended results in Q1 of 2008.

Our statin program continues forward on the pre-clinical CMC and clinical components. As you recall, we usually give guidance in December for the following year. Since we should have more visibility around a number of issues toward year end, we are planning to issue 2008 guidance on January 8th followed by a call on January 9th 2008. Our Chief Operating Officer, Bill Sharbaugh will now review unit results followed by comments from our new CFO, Dan Darazsdi. Bill?

William Sharbaugh - Chief Operating Officer

Thank you, Fred. The Development segment had solid performance for Q3 '07 with total revenue increasing 13.5% versus Q3 '06. Phase II to IV showed good results versus Q3 '06. Revenue worldwide grew 18%. D&A as a percent of revenue was down over 120 basis points, backlog increased 26% and revenue for FTE was up 5% for the quarter versus a year ago.

While we experienced solid growth in our North American Phase II to IV net revenue for the quarter, we continue to see faster revenue growth in the rest of world and expect that to continue. Book-to-bill for the quarter exceeded Q2 '07 numbers in every region and gross new authorizations rebounded for the quarter compared to Q2 '07. Due to the lower cancellation rate in models, net authorizations were spot on target for the quarter. Total proposals for Phase II to IV worldwide, continued to grow reflecting strong demand for outsourcing services, and with the FDA Amendment Act being signed into law on September 27, I believe post-approval business opportunities for the CRO sector will accelerate.

We continue to add headcount and in all our Ex-U.S. regions it hit double-digit figures compared to Q3 '06. We are adding new offices in Sydney, Copenhagen, Lisbon and Lima and expanding our footprint in Scotland, Mumbai, Taiwan and Singapore. We've made several notable operational hires. Paul Coleman has joined us from Eli Lilly and will run our North American Phase II to IV business. Simon Britton has joined us to run our Asia Pacific business and has experience from both GSK and the CRO sector. In two high growth markets; India and Mexico, we've hired MDs with significant pharma or CRO experience to run our operations. And by year-end, I expect to fill the senior operational role in Europe.

Our Phase I clinic performed well, revenue was up 12% versus Q3 '06 and on target for Q3 '07. Operating income was in line with our expectations and demand for service remained strong. Four QTC trials were initiated and completed in Q3 and a dental center completed its first study this year, with another scheduled for Q4.

The GMP lab had a solid quarter. Net revenue increased 22% over Q3 and 15% over Q2 '07. Profitability is increasing as larger programs awarded in the first two quarters begin. Authorizations were on target for Q3, '07 and year-to-date sales are above plan. We added nine new clients, of which two are from large pharma and we are adding both office and lab space totaling 15,300 square feet and construction will begin in Q4 this year.

Bioanalytical lab had an outstanding quarter again with revenue increasing 14% over Q3 '06 and 4% over Q2, '07. Profitability is strong and we booked record authorization with a 49% increase over Q3 '06 and a 92% increase over Q2 '07. Clearly, this had a positive effect on our backlog with future record level. We signed a multi-year contract with the clients that entail dedicated lab, space, equipment and staffing. We continue to add talent, technology and infrastructure to the bioanalytical lab.

Central lab net revenue was 8.8% above Q2 '07; but continues to lag below Q3 '06 revenues level and our internal targets by an increasing backlog and selection as a preferred provider by a new client. The issue here is a delay in a large program by a client. We do not expect this to turn around until later in 2008.

That concludes my comment on the development segment and I will turn it over to our new CFO, Dan Darazsdi.

Daniel Darazsdi - Chief Financial Officer

Thank you, Bill and good morning. Our new revenue numbers, income from operations and operating margin included in my comments today exclude reimbursed out-of-pocket and stock option expense. For reconciliation to GAAP, please see GAAP, non-GAAP reconciliation information Fred referenced earlier.

Backlog increased nicely by quarter end to $2.5 billion and breaks down by client type as follows: 51% pharmaceutical, 36% biotechnology, 10% government and 3% other.

Q3 net revenue increased by 13.3% with net revenue by service area at 81% from phase III to IV, 14% from lab, 4% from phase I and 1% from Discovery and compound products. PPD foreign operations generated approximately 34% of PPD's revenues for Q3 '07. Both revenues and expenses were impacted in Q3 by currency translation. If we translate our Q3 '07 non-dollar revenue and operating expenses at Q3 '06 average exchange rate, the net effect on total operating income for Q3 '07 would be an increase in operating income of $3.2 million or approximately $0.02 per diluted share.

Development segment income from operations for Q3, '07 was $65.2 million compared to $58.5 million for the same period in '06; both exclude stock option expense of $4 million for Q3 '07 and $4.8 million for Q3 '06. Excluding stock option expense for both periods, Development segment operating margin for Q3 '07 was 20.1% compared to 20.5% for Q3 '06.

For the quarter end September 30, '07 capital expenditures were $22.7 million. Capital expenditures included $8.6 million for our new building in Scotland and for headquarters and some leasehold improvements. Other key capital expenditures included computer software and hardware, scientific equipment and laboratory units.

Net cash provided by operating activities were $61.6 million and free cash flow was $39.0 million for the quarter. We expect our capital expenditures for the remainder of '07 to be about $20 million. Year-to-date, DSO at September 30, '07 were 49 days compared to 44 days at December 31st, '06. Total gross revenue include all out-of-pocket expenses and passthrough costs were $441 million for the three months ended September 30th, '07. Some clients have negotiated longer payment terms in or delayed doing milestones which has negatively impacted our DSOs.

Selection efficiency remains good, demonstrated by our accounts receivables at less than 60 days at 86.8% at June 30, '07, compared to 89.4% for September 30, '07. We will closely monitor the timely billing and collection of receivables in accordance with our franchise payment terms. However, DSOs will continue to fluctuate from quarter-to-quarter based on future contract terms, the mix of contract performed and our success in collecting receivables across the industry.

Effective tax rate for the third quarter '07 was 33% compared to 34% in the same period last year. We expect our tax rates for Q4 '07 to be between 33% and 34%. That concludes my remarks. At this time, I will now turn the things back to Fred.

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Okay thanks, Dan and Bill. Casey, we're now ready for Q & A

Question And Answer

Operator

Thank you. [Operator Instructions]. Your first question comes from the line Alex Alverez of Goldman Sachs.

Alex Alverez - Goldman Sachs

Good morning. Fred, it was good to see the improvement in the across new business wins for the quarter. I was curious if you could walk us through any steps that you took or anything that you did here to improve the hit rate which was one of the factors that impacted the second quarter number?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Well, I think a number of things came into play. The whole organization was very focused on turning around the sales situation. We had very strong background market. I think that the increased senior management attention from the C suite [ph] was helpful. At least I hope it was and I think we just... we got over some of the misfortune and bad luck that we had in Q2 at the very end of the quarter where some stuff slipped or it got away to competitors. So all in all, I think that we've turned the ship around. Hopefully that momentum will continue into Q4 and on into 2008 because we continue to see a lot of strength in the background market.

Alex Alverez - Goldman Sachs

Okay, thanks. And then in terms of the cancellation rate, this is now the fourth straight quarter where it has been above 20% and you are still trending a little bit below, at least this quarter was below the rate that you kind of target on a long-term basis. But for several quarters... last year we saw that number in the teens rate several times and just wondering if anything has changed over the last several quarters that has impacted the cancellation rate and that might cause it to continue to be at this 20% plus rate?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Well, as we have stated many times in the past, we just have no way to predict cancellation rate, it's what it is at any given quarter. We can't plant a pattern in any sense. Having said that, I would say over the last 12 to 18 months, the volatility seems to have picked up a little bit, that may be accompanying the larger number of large troughs which is both good news and bad news of course. It's good news on the signing front and it should be on the predictability front. On the other hand, if these programs slip or they are cancelled, then it's quite visible on the cancellation rate. So while I think overall, we are below our model, we are certainly watching this very closely and it will factor into how we do our modeling for '08 if it continues at these levels.

Alex Alverez - Goldman Sachs

Okay. Then one last one, could you just walk us through the Board's decision to increase the dividend versus pursuing maybe a share repurchase or making a one-time dividend?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Sure. We... as we've often stated... often leaned more towards giving cash back to shareholders than we do necessarily repurchasing shares and I think some of that sentiment were shared again by the Board in its latest session. As far as the share repurchase option is concerned, I would not say that the elevation in dividend necessarily rules out a share repurchase. So that is still under consideration.

Alex Alverez - Goldman Sachs

Okay, thank you.

Operator

Your next question comes from the line of Hari Sambasivam with Merrill Lynch.

Hari Sambasivam - Merrill Lynch

Yes thank you. Just a follow on question on the dividend. I am just wondering in... I mean it's a substantial increase in the dividend although you know well covered by your free cash flow. Is there... I am just wondering about the actual business development opportunities that are lying ahead of you and I am just wondering in terms of the signal to the market place. Is this a signal of maybe for example more difficult than licensing opportunities or acquisition opportunities, is that the reason there's more of a dividend or is it simply a matter of additional cash generation that you are able to do this, so that's the first question. And the second question, I am wondering is that would you be able to give us a sense of your R&D trends and maybe we have to wait for your guidance in early 2008, but post the statin and I am just wondering about the in-licensing activities and what type of expenditures that we should be thinking about for your R&D or your very compound partnering program.

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Okay, let me take the first question first which had to do with the dividend. Certainly that is a reflection of management and Board's optimism I think based on market conditions that barring something unforeseen, we will continue to be successful, we will continue to generate large amounts of free cash flow and therefore pass some of that back to the shareholders. So, I would not say that it's a negative signal about our ability to find alternative investments, but rather is a positive signal on our ability to generate free cash flow.

As far as R&D trends, post the statin as you said, we continue to look at opportunities all the time. We never know whether they will come to fruition or not. And in terms of what will the spend be and what will the effect be on the P&L and the balance sheet and so forth, I guess we will wait for the 2008 guidance. But as we've stated in the past, our strategy right now is to harvest the late stage compounds where we have no additional expense, such as SinuNase, dapoxetine and DPP4 and with anything new that's of major consequence that would be very dilutive. Our current strategy is that we would somehow find a different vehicle to encapsulate these things and dampen the effect, the dilutive effect that is on P&L.

Hari Sambasivam - Merrill Lynch

Just a clarification of that point, Fred. Should we expect the statin expenditures to go through essentially the first half of '08 in that timeframe or should we expect that to continue for some more extended period, just given where it is in the stage of development?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

I think we prefer to wait till the 2008 guidance on that. It's certainly possible that some of the spending on the current program because we have to plan so far out might leak their way into '08 but that certainly will be captured in the guidance at that time.

Hari Sambasivam - Merrill Lynch

Thank you.

Operator

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

Alexander Y. Sandy Draper - Raymond James

Thank you. I have a couple of quick questions. One Fred, on the statin product, could you just help me understand without getting to real specific details which I know you don't want to do, your enthusiasm in decision to go forward on that product. Obviously, the statin market is a competitive marketplace. You're going to have a couple of high profile drugs when you go generic by the time this product probably goes to market. Can you help me understand what you saw that made you say hey, we want to take this on our own before we actually find a partner?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Well, I think the data that we had at the time we made our decision indicated to us that if that held up in the clinical situation, we would have a differentiated product. The people that we have spoken to and these are a wide variety of folks on the reimbursement side have given us some guidance as to what sort of profile are calmed down with have to have in order to be first or second tier on the reimbursement front and we think that some of those could reasonably be attained again depending on the clinical data.

In addition, as you know every 1% market share in that market is somewhere between $300 million and $350 million and in our original market forecast we did a pricing of this at the very low end of branded products. So we believe that between all of those, it was a reasonable risk and we continue to believe that it's reasonable risk. If and when we get to the point based on the clinical data of that we no longer hold that lease, should that happen, then of course we'll discontinue the program.

Alexander Y. Sandy Draper - Raymond James

Okay great. And then one... that's very helpful. One follow-up. I don't know if you've given this out before, but could you sort of highlight over the next say, 12 months or so, are there any specific milestone triggers that you can comment on for any of the four products in the pipeline that are out there that are likely to happen in the next 12 months ?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

I can't comment before our guidance for '08.

Alexander Y. Sandy Draper - Raymond James

Okay, thank you.

Operator

Your next question comes from the line of James Kumpel with Friedman, Billings, Ramsey.

Jim Kumpel - Friedman, Billings, Ramsey Group, Inc.

Hi good morning. It looks like you guys have really taken the bull by the horns in terms of pushing for more international presence. I was just curious what kind of effect that might have in the near term for particularly the next four quarters on SG&A? And also just want to get a sense of what kind of CapEx might be associated with them?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

I think the CapEx is probably de minimis and inline with what we would normally do because with the exception of Scotland, all of these are leased facilities. So it's mostly just the up tick spread over the term of the lease in terms of D&A expense and capital expenditures. I would consider de minimis so I don't think that's going to be a huge drag.

There, there is no question that the market pressure for expanded presence in a lot of these places is present and growing and we are responding to that, I think in a manner commensurate with market drive rather than build it and they will come. We generally stay away from that so, I am pretty happy with the pace of what's going on and in particular the selection of countries and regions in which we are growing.

Jim Kumpel - Friedman, Billings, Ramsey Group, Inc.

Fred, would you characterize the bookings in this quarter as a reasonable steady state kind of return to normalcy or which you identify a certain number of factors whether it was push outs in the second quarter into the third quarter that may have led this number to be a little bit bigger than a normal kind of steady state?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

No, I don't think I would characterize it that way. Certainly, as Bill indicated net cancellations, we were spot on our model numbers, so in that sense it was exactly what we'd hoped for and expected. So it's not an unusual number in other words. And going forward, as you all know, if the treadmill continues to run faster on revenue and EPS, the treadmill on the sales side will also have to increase. So, while I view this is a very solid quarter, a nice recovery over Q2 and so forth and so on, our work remains ahead of us.

Jim Kumpel - Friedman, Billings, Ramsey Group, Inc.

I guess just on the other side of the coin, I'm curious if you could give us some flavor on what's behind kind of the up tick in DSOs over the past couple of quarters in particular. But obviously, we're at really low levels a couple of years ago. And I wonder if some of the trends within certain clients that you're focusing on or just industry wide trends are resulting in this DSO pick up?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

I think as Dan indicated, more and more we get contractual pressures from clients to adjust payment terms outward. Sometimes we get different mix of payment terms versus GAAP accrual, which can obviously make the cash go one way or the other, depends on the mix of the business units at any given quarter because some by their nature have a longer DSO.

I think when we were down in the 30s we said at that time, we did not think it was sustainable and gave a sort of target for us back in those days of around 40. Clearly, we are above 40, whether or not we can get back to 40 is another issue, but as Dan said there is a lot of attention being focused on this right now. We will do our best to get it down, but no guarantees in this particular market, I don't know if Dan, do you want to expand on that?

Daniel Darazsdi - Chief Financial Officer

I will be happy to. First, let me just say that as we sort of deep dive on a whole DSO question, now I like to think about in terms the whole customer cash process. So that's where the matter of strategic look at it. If you look at the elements of it, our collection of receivables is quite good, you can see that in terms of the current level of the bills receivables. So, I think that's a space that we do particularly well.

When we start dive into the third quarter in particular, a couple of customers and these were large pharma customers really had a negative impact on DSO. So one, we are going to go after that, we are going to take a look at the unbilled part of receivables, the deferred revenue part, break it down, make sure that our teams are really proactive in managing all elements out there, the receivables and the whole customers to cash collection process, and then we will go after from that view point. But I think there is real opportunity here for us to break down the customers' cash process, claims and action plans and go after very well and we will see what kind of DSO we can generate.

Jim Kumpel - Friedman, Billings, Ramsey Group, Inc.

And Dan, this is my last one, but is there any trend that you are seeing on unearned income that the prepayments that's evolving over time?

Daniel Darazsdi - Chief Financial Officer

We have seen that go down and that's something that, we will be looking at very closely to make sure that we are considering what kind of milestone and building cornerstone we can put in on the contracts.

Jim Kumpel - Friedman, Billings, Ramsey Group, Inc.

Thank you.

Daniel Darazsdi - Chief Financial Officer

Go forward ones.

Operator

The next question comes from Douglas Tsao with Lehman brothers.

Doug Tsao - Lehman Brothers

Hi good morning. Fred, I was just wondering if you could start with sort of a philosophical question, regarding sort of international expansion. I mean you touched on little bit when you said that, you didn't want to sort of pursue... initially, you didn't want to do a build it or a common strategy. I am just wondering, because over the years you have been very consistent in talking about a 50-20 sort of, 50% growth margin 20% standard on business that you take on. I was wondering that when you think about building out your international presence, and perhaps building scale and expertise in some of those regions. Would you ever consider perhaps rolling those standards a bit in order to deal with your market presence?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Well, we have certainly done that on a market-by-market basis. In other words, sometimes when we are just getting into and or expanding in a given market, the margins for that particular country or region may be below the overall corporate margins. But we expect them to get in line with or be above the overall corporate margins before too longer period, and indeed and... knock wood... that usually has been the case and in fact we have got some regions that have been outperforming the United States, for example, and as we add more and more infrastructure as we go along those margins actually come down a little bit instead of going up, so it could go either way but we do have some flexibility on a region-by-region basis.

Doug Tsao - Lehman Brothers

Okay and then, obviously with the hiring of Simon Britton, Asia is becoming a much greater focus for the company. One sub segment of the Asian market, Japan is the place were PPD is generally not had a very large presence although you have had big customer relationships with Japanese affiliates in United States and I was just curious that your thoughts on potentially trying to get into that particular market which I know had some unique dynamics.

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Our strategy at the moment is to continue to work with a partner company in Japan; we have no plans to go in there directly at this moment.

Doug Tsao - Lehman Brothers

Okay. And then finally, you mentioned a couple of new client or some new client wins in the quarter, including with a couple of major pharmaceutical companies and I was just wondering if you could provide some color as to what to led to those wins, was it just a change in philosophy within those drug companies in terms of their efforts and strategy or was it simply better execution in term of business... by the business development team?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

I'll let Bill take that, but I think what you are referring to was in the laboratory segment if I recall correctly. So I'll let Bill take that.

William Sharbaugh - Chief Operating Officer

Yes Mike comment was referencing the GMP lab where in fact we added nine new clients, two of which were large pharma. I think it just reflect an overall trend of a particular companies asking themselves, what is our core competency, where do we want to invest in and they make different decisions. But certainly many of the services we offer in the lab space are those that our client consider good outsourcing candidate for them. And so that was the GMP lab space I was talking about.

Doug Tsao - Lehman Brothers

Okay great. And then finally on Compound partnering, you... the Ranbaxy compound is, I believe you started the Phase II study. I was just curious that your timing of potentially really going to market looking for corporate partner?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Well we look for corporate partners all the time, it just depends on what their internal diligence needs are for later clinical results and I think that's what we've been seeing. For some of the reasons that people outline, it is a credit market and so forth and so on and folks want to be sure that we can actually come up with some sort of a differentiated product here before they pull the trigger. So while we had hoped to accelerate our discussions little more, I think now that they have probably will slip into '08 as we accumulate more data to round out the diligence package.

Doug Tsao - Lehman Brothers

Okay, great. Thank you.

Operator

Your next question comes from John Kreger with William Blair.

John Kreger - William Blair & Co.

Thanks very much. Fred, I believe you've mentioned earlier in the call spending to reaccelerate growth. Can you just step back; I think if you go back to the third quarter of last year, your development revenue growth was 21%, was just over 13% this quarter. Can you just give us your impressions on what were the key drivers of that slowdown and beyond the obvious of finance more new business, what are going to be the keys to move this number up again?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Well, several factors came into play, one of which of course is the law of big numbers. The percentage growth probably would decrease over time, but besides that, I think some slower PD growth than we had expected, the signing of a number of longer term contracts which do not flow into revenue as fast as some of the ones that we had in the past and of course on a quarter-by-quarter basis, the mix might differ little bit. But certainly in the future as you point out, the most obvious thing is we got to rev up our PD engine so that we're actually coming in ahead of projections rather than on or behind. We have to watch closely the mix of the things that we're signing because obviously if the average length of contracts starts to stretch out on us again then it's going to take longer to flow it through revenue.

As you noted over the past few quarters though, we think that the average length of contract has stabilized because it did fall back from the high we experienced in one quarter, I can't remember which, but I think it jumped out almost 36 months it's now back to about 32. So, shrinking lengths of contract, more sales, better utilization rates and so forth, we are going to work on all of those to get our revenue growth back into the target arena that we talked about all these years, which is a 15% to 20% top line growth.

John Kreger - William Blair & Co.

That was my next question, I heard you say over the years various times either 15% or 20% in terms of a sustainable long-term revenue growth, is that still what you are thinking?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Yes, we are not backing off that.

John Kreger - William Blair & Co.

Great. Another question, your hit rate, is it fully recovered now from your perspective or you still have further to go there?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

I think we have further to go, I mean the market is as hard as we've ever seen it, and so we keep having discussions with our brethren in business development over that very fact the hit rate, my gosh it's... if the market is hard, all you got to do is tweak up that hit rate a little bit, and we're good to go.

John Kreger - William Blair & Co.

Great. And then just the final question; you made a number of management hires other than the head of Europe, are you done? What are the other kind of key changes we can expect in the coming year?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

I will let Bill take that.

William Sharbaugh - Chief Operating Officer

Certainly in the Phase II to IV segment there will be other hires made this year as we look to cure up our team or expand service offering. I did mention the post approval phase, which I think based on the new law that was signed by the President; we'll make that marketplace certainly harder, okay and lots of opportunities. So, we would look to bring talents there and we are always looking for technical talent across the labs and across our broad clinical trial business segment.

John Kreger - William Blair & Co.

Great. Thanks very much.

Operator

[Operator Instructions]. Your next question comes from Robert Gilliam with UBS.

Robert Gilliam - UBS Securities

Yes, good morning. First question, I was just wondering if we can get the headcount update. And then second, and Fred, this is more of a big picture question. A couple of the recent hires have come from pharma and I was just hoping you could provide some color as to how this impacts your relationships with your clients. On one hand, it seems as though you are strengthening ties, but on the other there is some risk that maybe that damages the relationships. So I was just kind of wondering if you could throw out some color on how you tow that line. Thanks.

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Well, as you point out it certainly is something that we have to be careful about because we don't want to damage our relationship any more than we would want our clients to steal key players from us, which they do from time-to-time. But certainly, we have taken the opportunity while we were strengthening our overall management to hire some very experienced key players out of the industry to bring new ideas to actually make us think more client-focused, because a lot of these folks when they come in here, in one sense are still wearing their client hat for some month as they adjust to the CRO side and I think that's very helpful to us.

They can also bring various view points on systems, approaches, all sorts of things that strengthen us. Case in point of course, when Bill joined us, we had to go pretty carefully with that particular client because he was very well thought of there, but I think both sides have come to realize that it's in one sense the best of our worlds because if you have some one from a major client actually join us, then in one sense they have a man in the plant, which is good for them and good for us. So, hopefully we're managing this appropriately while we do add a lot of strength to our management.

Robert Gilliam - UBS Securities

Okay. Thanks a lot and just the headcount number.

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Oh sorry, its now let's see, 10,035.

Robert Gilliam - UBS Securities

Alright, thanks a lot.

Operator

Your next question comes from the line of David Windley with Jefferies & Company.

David Windley - Jefferies & Co.

Hi good morning Fred. Thanks for taking the questions. I want to follow on John's question about revenue growth and fall back a few quarters and understand a little bit better. The slow down in revenue, these are the stabilizing duration of contracts. But for 2Q you bookings have been pretty solid and I think your belief was that durations were stabilizing, but yet the revenue growth rate has continued to slide, can you help me reconcile that a little bit?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Well, some of it is also have been occasioned by delayed contracts and as you recall last year this time, we were commiserating about having $200 million, $300 million $400 million worth contracts that were delayed, which of course makes a measurable difference to the revenue accrual. We still have some of that going on as Bill noted in particular in the global central lab, we have one huge contract that's been delayed which is really quacking us there. We've got some similar things going on in the Phase II to IV side. We would reiterate that one of the very large government contracts that we've signed, the task orders have been coming in much, much slower than expected and so the revenue ramp for that particular project has been way behind what we have modeled. So I don't think there is anything fundamentally horrible going on here, I think it is just a constellation of circumstances coming together at one time, but as I say, if the average length of contracts have stabilized and we continue to increase our PD efforts and we watch the mix of the kind of contracts we are signing, we should be able to get back into the 15% to 20% arena without too much trouble.

David Windley - Jefferies & Co.

Okay and then... thanks for the color. And then on that if you... as you talk about average length of contract and then a lot of these delays. Are these bigger contracts more susceptible to delay because of their complexity?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

I think that is a fair comment.

David Windley - Jefferies & Co.

So as you look forward in your forecasting and as PPDI gets bigger and as the number of large opportunities out there get more abundant, do you just build in more cushion in your forecasting of those contracts, in other words it is supposed to be 36 months you build in 40 anyway?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Exactly how we would approach that, I can't tell you right at this moment. But certainly, we would tend to be on the conservative side rather than the aggressive side because as always, we would much rather surprise you on the upside than the downside.

David Windley - Jefferies & Co.

Sure, absolutely. Okay, moving on in to pricing, I haven't heard anybody ask specifically about the pricing environment. It sounds like some clients may be coming at pricing a little bit from the cash flow standpoint; timing of cash flow standpoint. But just wondering if you could comment on... say, the general competitive landscape from a pricing standpoint?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Well, you know it's a never ending battle as you will know particularly with a very large client. I would not characterize it as a... some large change by any percent. There's always an incremental amount of pressure both on the cash payment terms as well as the pricing itself. And so we've got to be eternally vigilant about how we flow increase remittance so forth over SG&A and after we get over these spurts of increased infrastructure, hopefully we can curtail the SG&A a little bit, flow that revenue even at a theoretically lower per contract price and still be fine on the operating line.

David Windley - Jefferies & Co.

And on... on the spurts of SG&A increase as the... over the last several quarters as the revenue growth has been seeing some pressure or has slowed a little bit, the SG&A has also slowed, but again I guess but for this quarter, maybe the last couple SG&A growth had slown even deep down below the peak SG&A numbers from Q2 of '06. How many quarters do you think you have of kind of a spurt of SG&A as you call it?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Well, as you know over the years, we have told everyone that discretionary spend at PPD is a little bit ethereal in the sense that if we see that there is going to be a turn down in revenue then the so called discretionary spending evaporates and so therefore, in certain quarters you would see a diminution in SG&A spend commensurate with a shortfall in sales and/or revenue. Having said that, certainly in the past quarter, you can see that we have resumed spending on infrastructure expansion, people, the whole thing head out what we expect to be a continued strengthening in the market, continued strengthening of what we actually close and so forth. So to predict exactly where the SG&A would be as a percent in the given... sorry, in the following quarters is very difficult, but we will to the extent that we can titrate to that appropriate level.

David Windley - Jefferies & Co.

Okay, last question. Quick one, tax rate at 33%, was it a shade lower than what it's been through the first half of the year. Is 34% still the right assumption to make or where should that fallout?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

I will let Dan handle that.

Daniel Darazsdi - Chief Financial Officer

Yes, we actually had some FIN 48 liabilities which settled in the third quarter which helped the rate a little bit. As I commented earlier 33% to 34% is the right kind of number for fourth quarter.

David Windley - Jefferies & Co.

Okay great thanks, sorry I missed that.

Operator

Your next question is a follow up from Douglas Tsao with Lehman Brothers.

Doug Tsao - Lehman Brothers

Hi thanks for taking up the follow up question. I was just wondering Fred, you'd commented that about having some study delays. I was wondering if these delays were concentrated in any particular region and were related to... were they related to everything or sort of the sponsor rethinking the program or were they typical regulatory issue?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

The usual mix, certainly there was some regulatory issues; there have been marketing issues in a given therapeutic or pharmacological class. As we... I think continue to get more and more biological type of business we tend to get into more manufacturing type delays than perhaps we have experienced for small molecules in the past. So I think it's the usual mix of suspects with possibly a little more shading toward supply problems.

Doug Tsao - Lehman Brothers

Okay. And but there is no concentration in particular region?

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Not that I am aware of.

Doug Tsao - Lehman Brothers

Okay, great, thank you.

Operator

[Operator Instructions]. At this time, there are no further questions sir.

Fred N. Eshelman - Vice Chairman and Chief Executive Officer

Okay, well, thank you all very much for being on the call and as always, if you have a follow up questions, please address them to Steve Smith and/or Dan. Thank you and good day.

Operator

That concludes today's conference. Thank you for your participation. You may now disconnect.

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