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Executives

Dr. Fredric N. Eshelman - Vice Chairman of the Board, Chief Executive Officer

William J. Sharbaugh - Chief Operating Officer

Daniel G. Darazsdi - Chief Financial Officer

Dr. Paul Covington - Chief Medical Officer

Analysts

Robert Gilliam - UBS Securities

Alex Alverez - Goldman Sachs

Jon D. Wood - Banc of America Securities

James Kumpel - Friedman, Billings, Ramsey

David Windley - Jefferies & Co.

Eric W. Coldwell - Robert W. Baird

Doug Tsao - Lehman Brothers

Sandy Draper - Raymond James

John Kreger - William Blair & Co.

Hari Sambasivam - Merrill Lynch

Alan Fishman - Thomas Weisel Partners

Pharmaceutical Product Development, Inc. (PPDI) 2008 Financial Guidance Call January 9, 2008 9:00 AM ET

Operator

Good morning. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the 2008 guidance call for Pharmaceutical Product Development conference call. (Operator Instructions) Dr. Fred Eshelman, you may begin your conference.

Dr. Fredric N. Eshelman

Thank you, Jennifer. Good morning and I will begin by saying that except for historical information, all of the statements, expectations, and assumptions discussed in today’s call, including revenue and earnings guidance and compound partnering activities, are forward-looking statements that involve a number of risks and uncertainties. Actual results might differ materially from those in the forward-looking statements. Information about the factors that could cause actual results to vary is disclosed in the press release announcing our guidance and in the SEC filings for PPD, copies of which are available free of charge from our investor relations department.

Our net revenue forecast excludes reimbursed out-of-pockets. Although this non-GAAP financial measure is not superior to or a substitute for GAAP net revenue, we exclude reimbursed out-of-pockets from our forecasted net revenue because they are difficult to accurately forecast and are immaterial because they do not affect operating income, net income, or earnings per share.

We also believe this non-GAAP measure is useful to investors because it more accurately reflects the net revenue that PPD will generate from its services and because it is useful in making period-to-period comparisons.

As you’ll recall, we postponed our guidance call from our usual timing of early December in order to have a better handle on certain potential events. We are pleased to report that we do indeed have more information. Having said that, please recognize the assumptions that we are making and risk adjust accordingly.

Let’s begin with discovery, which includes compound partnering. In early December, JNJ announced that the Dapoxetine application had been made and accepted under the decentralized procedure in Europe, with more filings to follow in other regions. This is obviously good news.

We believe that the ex-U.S. markets could be substantial. Remember that an additional milestone is due upon EU approval and double-digit royalties increasing with sales would begin upon launches. PPD would also stand to receive sales based milestones.

JNJ have not announced an expected approval date so we have not included any revenue in the ’08 guidance but would hope for early ’09, if not before.

Accentia has been very bullish about blinded SinuNase data and say that they hope to finalized a commercial partner after unblinding Phase III trial in March of ’08. They expect to immediately run another Phase III trial, file the NDA in late ’08, and receive a Q1 to Q2 approval in ’09.

If SinuNase is approved and launched, we will receive a 7% royalty on sales. We have not included any revenue in ’08 guidance. Accentia’s market forecast is for sales of SinuNase to rise to almost $600 million by 2011.

We are continuing to work on the statin compound 10558. The anticipated 2008 spending includes CMC, pre-clinical, and clinical. We expect to have the results from a high dose comparative trial in February of ’08 and will decide a course of action at that time. We have included these expenses in the ’08 budget to cover this work.

Now, for the Takeda DPP4 program. The Alogliptin NDA was submitted on December 27 of 2007 and we expect the NDA for the compound to be filed by the FDA in Q1 of ’08, triggering a milestone payment to PPD. We believe that the timing will allow for a U.S. approval in late ’08, triggering another milestone and a very small contribution from sales royalties.

PPD also stands to receive additional development milestones if and as filings and approvals are made and obtained in other regions of the world. Besides royalties, there are also sales-based milestones.

Another DPP4 inhibitor, compound number 472, is in Phase II and if continued will be developed as a monotherapy. We also expect the fixed dose combination of Alogliptin with [pioglytozine] to progress quickly through development in 2008.

We had two other potential partnering deals in late stage negotiations in 2007. One fell apart on economic terms and one on the patent situation as we saw it. We will continue to evaluate opportunities but have nothing in the 2008 expense budget at this time for new projects.

Remember that this segment also contains the pre-clinical oncology unit and the bio-marker business. The latter is expected to continue to lose money in 2008 but the pre-clinical oncology unit should be nicely profitable.

Roll-up for the full discovery segment 2008 forecast looks like revenues of $60 million to $65 million and an EPS contribution of $0.18 to $0.20.

Turning to the development services segment, we expect revenue growth of approximately 17% in 2008, ranging in absolute terms from $1.475 billion to $1.525 billion. We are forecasting segment EPS growth of around 15%, resulting in EPS contribution from the segment of $1.64 to $1.72. This assumes that gross and operating margins excluding the stock option expense revolve around our targets of 50% and 20% respectively.

Our projected unit growth rates will likely continue to shift revenue ex-U.S., resulting in a 65-35 revenue contribution from North America and rest of world respectively. Revenue per FTE is predicted to be essentially flat. CapEx is forecast at $80 million to $90 million, with the majority for facility improvements and expansions and for IT, with the remaining for equipment in the labs and clinic.

The overall rollup for the company looks like this: total net revenue should be $1.535 billion to $1.590 billion, representing around a 20% revenue growth over 2007. EPS for the full year of 2008 should be $1.82 to $1.92, representing approximately a 36% growth in EPS versus 2007.

By quarter, we believe that the numbers for EPS may be: for Q1, $0.42 to $0.44; Q2, $0.39 to $0.41; Q3, $0.42 to $0.45; and Q4, $0.59 to $0.62.

So we are quite bullish about both segments of our business and hope to achieve these outstanding results.

Bill Sharbaugh, our COO, will now make a few comments, followed by our CFO, Dan Darazsdi. At the end of Dan’s comments, we will take your questions and comments. Bill.

William J. Sharbaugh

Thank you, Fred. While we are anticipating positive results from our discovery segment in 2008, primarily due to the maturity of our compound partnering strategy, the development segment is forecasted to grow at a robust 17% while continuing to deliver the best operating margins in the industry.

We expect strong demand for outsource services to continue in 2008 and we expect to see increasing numbers of RFPs that are global in scope and larger in size. Biotech development activity and funding appear to be strong and with increasing cost pressure on pharmaceutical drug development, our customers continue to evaluate activities to outsource.

We continue as always to evaluate acquisitions that would enhance our service offering in terms of geographic scope or technical capability. I am referring to smaller, bolt-on or niche acquisitions that would fill a gap or lend us a competitive advantage.

Turning specifically to our labs in 2008, we expect controlled growth in our GMP lab, bio-analytical labs, and Phase I clinic, while we see our global central lab unit making the largest contribution to revenue growth and operating margin for these businesses.

Stepping back to 2007 briefly, we had a global central lab contract delay which resulted in a revenue shortfall. Despite this delay, we remain bullish about our central lab business and continue to make improvements in work flow, technology, and data integration that will improve efficiency.

For the Phase II through IV business, we expect to see continuing growth acceleration in emerging markets, so our focus will be on building the supporting infrastructure while ensuring high quality. Therefore, we have split Asia-Pacific and Latin America into separate, strategic business units with dedicated management teams.

I would like to mention several operational leadership appointments which reflect the world-class Phase II through IV management team. During the second half of 2007, this was a primary focus for the company.

First, Sebastian Pacios joined PPD on January 2nd as Senior Vice President of Europe, Middle East, Africa Phase II through IV. Dr. Pacios has extensive international clinical research experience. Prior to joining PPD, he co-founded and rapidly grew a regional CRO, sold it, and then held various senior management positions within a top 10 CRO, most recently serving as Vice President responsible for clinical research operations and project management.

In Q407, Paul Colvin joined from Ely Lilly as Senior Vice President of North America Phase II through IV. He has 15-plus years experience from big pharma with a significant focus in oncology.

In Q307, Simon Britton joined as VP of our Asia-Pacific business and he has 15-plus years of combined experience from GFK and a top five CRO.

Latin America is led by a PPD veteran, Wendy Buckland, who has significant experience in this important region, and as I mentioned previously, in two high growth markets, India and Mexico, we have hired MDs with significant pharma or CRO experience to run our operations. They are in place now.

By the end of Q108, I expect to name an executive vice president of global Phase II through IV operations and currently, I am doing significant work to reorganize and realign our operations to improve our ability to execute.

That concludes my comments and I’ll turn it over to our CFO, Dan Darazsdi.

Daniel G. Darazsdi

Thank you, Bill. All net revenue numbers, gross margins, and operating margins included in my remarks today exclude reimbursed out-of-pockets and stock option expense.

Before discussing our ’08 guidance, I would like to comment briefly on our revised ’07 guidance range for EPS. While we have maintained our overall EPS within the previously released guidance, we have narrowed the range for total company EPS and updated the expected EPS contribution for each segment.

The projected ’07 development segment EPS range is lower due to a project delay in global central labs, an increase in bad debt reserve to address several specific issues, and negative impacts from foreign exchange. These declines were partially offset by positive developments in other areas.

Now, turning to our ’08 guidance, first I would like to comment on each segment’s revenue and EPS guidance and then provide some additional insight into the assumptions underlying our ’08 development and discovery segment forecasts.

Net revenue for our development segment in ’08 is expected to grow at approximately 17% compared to the midpoint of the ’07 revised guidance. Income from operations is projected to grow by 17% and remains strong at our targeted 20% margin rate.

Our projected operating margin rate demonstrates continued focus on operational excellence to deliver gross margin rates at 50% and continued tight management of overhead. For full year ’08 EPS per diluted share for the development segment we’re expected to grow by 15%, comparing the midpoint EPS numbers for both periods. EPS growth is negatively impacted by an increase in stock option expense and share count, which takes the development segment EPS growth to 15%.

The discovery segment has the potential to have a breakthrough year from a financial viewpoint with revenue in the $60 million to $65 million range and earnings per share for this segment in the range of $0.18 to $0.20 for ’08. The increase is driven to a large degree by the expected $40 million in milestones in connection with the Takeda DPP4 program, with $15 million expected in the first quarter and 25 anticipated in the fourth quarter.

Combining the two segments yields top line growth for the total company of approximately 20% over our revised net revenue guidance for ’07. Full year ’08 earnings per diluted share for the company are expected to be in the range of $1.82 to $1.92. This includes stock option expense for ’08 net of tax of $0.13 to $0.14 per diluted share compared to a range of $0.10 to $0.12 per diluted share for ’07.

Our ’08 forecasted net revenue is based on an estimated overall cancellation rate of 25%. Our cancellation rate for the first nine months of ’07 is approximately 23% but our historic cancellation rates have varied from period to period.

The percentage of revenue from backlog for our ’08 forecast is slightly higher than the percentage we used for the initial ’07 forecast. Utilization levels across the company are forecasted to be on par or slightly better than the ’07 performance. FTEs are expected to increase at approximately the same rate as development revenue growth for ’08.

PPD's foreign operations are expected to generate approximately 35% of PPD's total net revenue. Historically, the majority of contracts that generate revenue for our foreign operations are denominated in U.S. dollars. However, we generally incur expense in the local currency of each country where we perform service. As a result, we have exposure to foreign currency movements. We enter into foreign currency hedging activities in an effort to manage our potential foreign exchange exposure.

Our European Phase II through IV operations represent our largest net currency exposure. Due to the growth in our Phase II through IV in Latin America operations, we also have exposure to the Brazilian real. For ’08, our forecast is based on an average exchange rate of $2.02 for the sterling, $1.40 for the Euro, and $0.565 for the Brazilian real. If the U.S. dollar weakens resulting in exchange rates of two-tenths of a sterling and $1.47 for the Euro and all else remains equal, the impact on our EPS guidance would be a reduction of approximately $0.02.

Cash flow from operations for ’08 are anticipated to be in the range of $275 million to $325 million. We will continue to drive initiatives aimed at improving DSOs during ’08 in support of our strong cash flow delivery.

For the full year ’08, we are forecasting an effective tax rate of 33% to 34%, compared to an expected tax rate of 34% for ’07. We are forecasting approximately 122 million weighted shares outstanding for ’08.

Finally, I would like to congratulate Craig Eastwood on his appointment as PPD's new Director of IR. Craig is replacing Steve Smith, who has left to pursue other interests.

This concludes my remarks. I will now turn the call back over to Dr. Eshelman. Thank you.

Dr. Fredric N. Eshelman

Thanks, Bill and Dan. Jennifer, we’re now ready for Q&A, please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Robert Gilliam with UBS.

Robert Gilliam - UBS Securities

I just have a couple of questions. First, I was wondering if you could address business wins in 4Q, or potentially RFP activity?

Dr. Fredric N. Eshelman

We’d like to reserve that for the fourth quarter call, which I think is February the 7th -- Craig, what’s the date? Yes, that’s right, so we’ll be glad to comment at that time.

Robert Gilliam - UBS Securities

Okay, just moving on to a couple of other things, I think you mentioned there was a bad debt issue in 4Q07. I was wondering if you could just give us a little bit more color and elaborate on that.

Daniel G. Darazsdi

We’ve identified a potential risk with one of our client projects and we’ve determined that it’s appropriate at this time to take a reserve for that risk. I won’t go into the client detail but it was isolated, principally the largest one being a Brazilian or Latin America client but that’s about all the detail I think is appropriate.

Robert Gilliam - UBS Securities

Okay, and you think that’s just going to impact 4Q07 and won’t impact --

Daniel G. Darazsdi

Yes, it’s just a one-time reserve that we think is appropriate from an AR viewpoint.

Robert Gilliam - UBS Securities

Okay. I guess just one final question on the compound partnering program; obviously it looks like you are including the $25 million potential payment in 4Q08 and I guess given historical approval rates, I guess what was the deciding factor in determining to include that in 2008 guidance? It looks like you put that there’s no probability weighting. I was just wondering, is there anything specific about the package you put together that gives you increased confidence? I was hoping you could just give us a little color on that.

Dr. Fredric N. Eshelman

Well, I think the fact that the submission went in in ’07 and therefore theoretically the filing will occur very early in ’08, in January specifically. That would essentially give us almost a 12-month run-rate for the initial approval. Given the usual PDUFA dates and so forth, we thought that was a reasonable assumption. Obviously we have seen the data and I’m not going to try to comment on behalf of Takeda but as far as we are concerned, it was a very good NDA. Anything can happen, as you know, but we certainly did not see any red flags.

Robert Gilliam - UBS Securities

Okay, thanks a lot. And then just one final question; I just want to make sure, because you know, revenue risk is growing at 17%, EPS was at 15%. I just want to make sure that’s not coming from any pressure on EBIT margins but instead is more below the line items.

Daniel G. Darazsdi

Yes, as picked up from my comments, when you look at the development side and you look at the operating margins, the operating margin rates are being maintained on a year-over-year basis. What we are getting compared to the revenue growth is some dilution based on stock option expense and traditional share count, so our gross profit rates and margin rates in development are being maintained at our targeted 50-20.

Robert Gilliam - UBS Securities

Okay. Thanks a lot. I’ll let somebody else hop in.

Operator

Your next question comes from Alex Alverez with Goldman Sachs.

Alex Alverez - Goldman Sachs

Good morning. I just wanted to start off with the central lab. It seems like you are expecting an improvement in 2008. I was just curious in terms of what is driving that improved outlook, particularly with the large delay, which I think was not expected to resume until 2008, and then I think there was another mention about another small delay that is going to impact Q4 a little bit.

William J. Sharbaugh

I’ll go ahead and take that, Fred. As was mentioned, this big contract that’s been delayed, we expect it to pick up at the start of 2008 and that’s certainly going to be positive. In addition, there’s lots of work going on inside the labs themselves to make them more efficient. We are always looking for new assays and new tests. We’ve repositioned some of our equipment and improved work flow.

In terms of data integration where there were some technology solutions that are very positive and upgrades to our [LIN] system, some data acquisition activity, so we are doing a lot of internal work in our lab unit to improve their capability and ultimately the flow of blood through them.

Alex Alverez - Goldman Sachs

Would that be then more of an expected improvement in operating income from the lab as opposed to just all being driven by top line?

William J. Sharbaugh

There’s also been strong sales this year and as you know, in our business when sales are relatively strong a couple of quarters out, that kicks in from a revenue perspective.

Alex Alverez - Goldman Sachs

Okay, and then I think the third quarter conference call, there was some talk about potentially expanding your post-approval study capabilities. I was just curious in terms of what the plan is for 2008, whether there were any amounts budgeted to hire some new individuals if that might be what’s needed, or what the overall plan is around expanding those capabilities for PPD.

William J. Sharbaugh

Well, the first thing I would say about that is we have relatively strong capability already and have a rather solid book of work there, so we are a knowledgeable, capable company in that realm.

Secondly, yes, we are in ongoing discussions with some talent, both internally and externally, that we think will bolster that particular business unit. I think you could expect to see some activity in that area in the not-too-distant future. And we are making a lot of internal improvements as well that position us to serve that particular market.

Alex Alverez - Goldman Sachs

And just one last one; Fred, although you mentioned that there is nothing in the pipeline right now for new compound partnering agreements, would you still plan to restructure that business if you were enter into any new agreement in 2008?

Dr. Fredric N. Eshelman

I think if we enter into anything that would be materially dilutive to the overall company, we would certainly seriously consider putting that into some kind of different structure where we would take much less dilution.

As you know, historically we have picked up compounds that were pre-clinical -- i.e., the IND had not even been filed, so that it would be possible for us to sign such a deal and have some de minimis spend on it prior to putting it into another vehicle but I think the effect, if any, on EPS for the entire company just wouldn’t be terrifically material, or at least that’s our plan as of today.

Alex Alverez - Goldman Sachs

Okay, great. Thanks for the detail.

Operator

Your next question comes from Jon Wood with Banc of America Securities.

Jon D. Wood - Banc of America Securities

Thank you. Has there been a structural change in the contracting terms on the core development business?

Dr. Fredric N. Eshelman

I’m not quite sure I follow you. What specifically are you driving at?

Jon D. Wood - Banc of America Securities

I’m just looking at the DSO. It looks as if the top end of the cash flow guidance has some DSO improvement built into it and I’m wondering the risk to your ability to improve that metric -- anything going on in the industry that would suggest a structural change in contracting terms -- payment terms, basically?

Daniel G. Darazsdi

I think if we look at our DSO performance, comparing ’08 to ’07, a couple of key factors I would just highlight. One is as you know, in ’07 we did have a couple of clients which we struggled with from a collection viewpoint and that put some negative pressure on ’07, so from a comparable view year over year, that’s one factor.

The other factor is we continue to look to drive DSO improvement by both very close monitoring of the billed balance -- monitoring the aged receivables and getting better and earlier escalation to -- that’s one area.

On the un-billed side, which really gets at the contracting, we’re endeavoring to make sure that we get in place with the initial contract good milestone payment terms, both trying to get cash early and making sure that we’ve got appropriate milestone payment terms in the contract.

So I don’t think there is an industry change going on there. I think we are endeavoring to put a lot of focus here and hopefully that will help improve our cash flow performance.

Jon D. Wood - Banc of America Securities

Okay, great. Dan, what are your views on the capital structure of the company? I mean, is there any sense of urgency from the board level to address the large net cash position on the balance sheet?

Daniel G. Darazsdi

Well, we’ve talked about the disposition of our cash in the past and the way we are looking at our cash is one, trying to drive strong cash flow performance from an operational viewpoint. To me, that’s foremost of importance. And the question that you are really getting at is the disposition of the cash. As we look to bad cash, break that into a couple of areas -- one, we are looking at how can we support best the organic growth of the business and making sure that we are strongly supporting the organic growth of the business. Two, we will look at selected or niche M&A activity, which we’ve talked about where we think it’s a positive augmentation to either geographic or to the solution set for the client, but obviously that would be specific and kind of niche related. And then finally, we are evaluating share buy-back at this point as one alternative to cash disposition but we’ve also increased the dividend recently.

So I’d say it’s under evaluation, it is getting good discussion and visibility with the management team, and we will inform you as decisions are being made.

Jon D. Wood - Banc of America Securities

Okay, great and then -- I don’t know if I missed this but what’s the expectation for the shares outstanding for the year for ’08?

Daniel G. Darazsdi

Shares outstanding for ’08, we’ve got weighted average shares of about $122 million and that’s up, as you know, against the weighted average ’07 direction.

Jon D. Wood - Banc of America Securities

Okay. Thank you.

Operator

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

James Kumpel - Friedman, Billings, Ramsey

Just in the guidance assumptions, can you just state whether or not you are including some of those unnamed tuck-in acquisitions in your ’08 outlook?

Dr. Fredric N. Eshelman

No, there is no assumption in there for a new acquisition to my knowledge.

James Kumpel - Friedman, Billings, Ramsey

Okay. Can you maybe distinguish, Fred, for us some of the factors that would lead you to assume the milestones on Takeda upon FDA approval in the fourth quarter but not to assume approvals from Europe at some point in 2008?

Dr. Fredric N. Eshelman

Well actually, that question goes to the filing strategy for Takeda, so I guess I’d have to refer you to them for that. I just really can’t comment on that. There are other potential territorial filings, including Japan, but we’ve not been released to discuss that at this moment and therefore, we haven’t put it in the guidance.

James Kumpel - Friedman, Billings, Ramsey

Okay and then just on the core CRO business, can you comment as to whether or not you’ve essentially experienced the same sort of improvement in win rates and sales focus in your performance in the second half of the year that you initially had been seeing in 3Q?

Dr. Fredric N. Eshelman

Well, that would go to fourth quarter results and we had a previous question on bookings for Q4, which I am going to have to wait until our Q4 call in February. But I would say that as we commented, the market remains very strong as reflected on the business that we have bid on. We have worked very hard to improve the lackluster results from Q2 of ’07 and I think that our BD folks are making progress and I guess I’ll have to leave it at that until February.

James Kumpel - Friedman, Billings, Ramsey

Okay, and just a last one; Fred, if you could comment on what you guys have done as an organization in preparation for some of the expected increase in post-approval monitoring and Phase IV type studies?

Dr. Fredric N. Eshelman

We’re in the process of doing some restructuring internally to address those kinds of things. I personally believe that a lot of the activity is actually going to be reflected in larger Phase III trials and in Phase IIIb trials being launched almost at the time of submission of the NDA, so in other words we wouldn’t really wait until we were farther down the regulatory pathway. That’s just my view.

In terms of pure Phase IV, which by our definition means there is no change in dose or indication from the label, I just don’t know how much of that is going to happen, with the possible exception of registries and those types of trials which, why they are extended over a number of years actually tend not to be in the -- what we’d call the mega trial range which some of the safety trials are.

James Kumpel - Friedman, Billings, Ramsey

I appreciate it. Thank you very much.

Operator

Your next question comes from Dave Windley with Jefferies & Company.

David Windley - Jefferies & Co.

Good morning. Thanks for taking the questions. Fred, I wonder in your thoughts on what your marketing [inaudible] looks like now -- and I’m not asking you to tell me what it looks like but just what you know about it and some comments I think you made recently about the surprising number of contracts that are out there now that are in -- that are now nine figures, in excess of $100 million. What are your expectations in 2008 in terms of movement of the average size of contract in backlog and what influence does that have on how quickly you expect those things to convert into revenue? In other words, should we assume that burn rate will continue to drop because the average size of the contract is probably going to continue to get bigger?

Dr. Fredric N. Eshelman

I’m not sure there’s a direct correlation there. As you recall, at one point our average length of contract for Phase II through IV had stretched up to 36 months in some quarter. I’ve forgotten which one it was. Then it dropped back to 32. The following quarter it stabilized around 32. I’m not sure exactly what it will be for Q407 but I am not struck that it is going to jump back out again.

So until we know otherwise, we are running under the assumption that the 36-month thing was an anomaly and we are going to settle back to somewhere around 30, 32, somewhere in that range.

David Windley - Jefferies & Co.

Okay. Following up on an earlier DSO question, Dan, you answered and kind of addressed billed and un-billed on the up-fronts. I’m wondering, is your expectation that from a contracting term standpoint, that the up-fronts are going to continue to be under pressure? If you commented on that, I missed it. I apologize.

Daniel G. Darazsdi

I think it’s always a challenge. What I would say is we are going to be paying particular attention to the cash flow on a project-by-project basis for all of our contracts, big and small, and try to get that more visibility and discussion as part of the contracting process. So there’s always -- obviously that’s always a challenging area but it’s one where we think looking at the difference in contracts over the course of the last number of months, we think there is some opportunity there and we are focused on it.

David Windley - Jefferies & Co.

Okay. As I am just looking at some stats on pharma growth in your revenue versus biotech and I think for most of 2007, it’s kind of pushed back towards pharmaceuticals and that’s consistent, Fred, with you’ve been talking about kind of a resurgence in big pharma outsourcing for a while. Is that something that -- is that evident in the backlog and is that something that you expect to continue, that big pharma kind of reverses and becomes a bigger part of your revenue growth? And does that put pressure on contracting terms?

Dr. Fredric N. Eshelman

We’ll see. I mean, I really don’t expect a precipitous change in the balance of pharma versus biotech business in our backlog and I would comment that although we do feel that the big pharma outsourcing has up-ticked, there has been quite a change in our view in the biotech sector over the last two or three years and by that, I mean I was talking to somebody the other day and talking about five very large opportunities that we had seen recently. And two of those came from smaller biotechs; in other words, they were not of the Amgen, Genentech, Biogen, [Metomune], [Carron] kind of size and so therefore when you’ve got very well funded by smaller biotechs who are putting out $100 million RFPs, you’ve got a change in the market there which one could speculate would at least maintain the biotech percentage if not creep it up a little bit.

David Windley - Jefferies & Co.

Okay, and finally, on that bad debt reserve, you mentioned it’s a one-time. Is the exposure on those one or two clients, is it now fully reserved?

Daniel G. Darazsdi

I would say it’s been identified specifically and adequately reserved for.

Dr. Fredric N. Eshelman

It was not what I would call a key client in our link-up.

David Windley - Jefferies & Co.

No, but it is fully reserved?

Daniel G. Darazsdi

When you say fully, we’d say it’s adequately reserved. We’re not expecting -- obviously when we do an analysis of the requirements, we reserve for it so in that context, I would say our expectations are it’s fully reserved and I would use the term adequately because --

Dr. Fredric N. Eshelman

I think what that means outside the CFO double-speak is we would not expect it to have a material effect in ’08.

David Windley - Jefferies & Co.

Okay, thanks.

Operator

Your next question comes from Eric Coldwell with Robert W. Baird.

Eric W. Coldwell - Robert W. Baird

Thank you and good morning. I guess my first question gets to the revenue guidance in development. Looking back for posterity for the last I believe five quarters, PPD's revenue has missed street targets. You’ve cut the fourth quarter revenue target and yet you’ve delivered pretty strong guidance for 2008 in development and if I heard you correctly, it sounded like you are putting in a larger burn rate out of backlog and also baking in some of the central lab contracts that you’ve recently won with the anticipation that they start on time. Recent experience has not proved to be the case though. Cancellations have been running above norms.

Where do you get the confidence that after a year-and-a-half, revenue guidance is now more projectable, you can be more comfortable with an acceleration in 2008?

Dr. Fredric N. Eshelman

Well, I think several factors. As you point out, we have a little bit more coming out of backlog than we’ve had in the past. We have to look at the market as reflected on the dollar volume of RFPs that we’ve seen over the last year and our expectations for how those would continue and the expectation that our hit rate would remain at least as good as it is, if not go up.

We are expecting some improvement in GCL, as you point out, and we’ve maintained all along that although we did have a soft spot in ’07 that we thought that was recoverable and a 15% to 20% top line growth rate was still within the realm of what we thought we could produce based on the market. So as always, we’re doing our best.

Eric W. Coldwell - Robert W. Baird

I guess as a follow-on, have there been any -- with Dan joining the firm and some change in management, has there been any change in how you look at the backlog or how you analyze, forecast, project? Have you done any retrospective analysis on where you fell short over the last year-and-a-half and changed your policy in terms of how you do the build-up for guidance?

Dr. Fredric N. Eshelman

I don’t think so. I think our policy has always been fairly conservative. The fact that we were a little short of revenue was dependent on a whole lot of things, including a sales shortfall that we could not have necessarily projected before. So I think that our -- the way we go about this remains conservative. It does not stray over into the sandbag territory but it is our best shot and we’ve been doing this a long time and I think if you look back historically, we got it right a whole lot more than we got it wrong, so no change, in other words.

Eric W. Coldwell - Robert W. Baird

Shifting gears, looking at the discovery segments, your 4Q07 guidance implies that you are going to be doing something north of $6 million in the division in the quarter, which would be about a 30% to 35% increase Q-to-Q following three quarters where growth was negative 16%, 3%, and 4% sequentially. Again, now we’re looking at 30% to 35% type growth in the fourth quarter. What happened in that division? Were there any one-time milestones? Is there a step-up in PRC’s activity that you think is permanent? How should we be thinking about this discovery sciences group?

And how were you able to reduce your discovery dilution by $0.02 to $0.04 for the quarter, effectively cut it in half to two-thirds in discovery? I mean, we were looking previously at $0.075 of dilution for the first nine months. You were targeting I think $0.11 to $0.13 of dilution for the year. Now you are targeting $0.09 of dilution for the year, so effectively a penny-and-a-half in the fourth quarter. It just seems like a major change in the dilution profile and I guess what I’m driving to, is there something phenomenally different in discovery revenue streams or was the statin spend in compound partnering materially lower?

Dr. Fredric N. Eshelman

The statin spending, based on the numbers that you just threw out, was lower. We changed some of the development plan and program sort of on the fly, if you will, represented by the high dose comparative study, which is underway and we’ll report in February. So that was not quite up to the level of what we were planning originally to do in Phase III and that would have included more basic material. It would have included a little bit different clinical program and so forth, and so as we indicated it was lower in Q4.

We will continue to spend in Q1 of ’08 on all the things that we talk about and that’s fully in the guidance and then in February thereabouts, hopefully we’ll have the data, upon which we will make a decision as to exactly what we are going to do with the compound. In other words, either we’ve got the data to out-license it or it’s not favorable enough to go forward.

But either way, at this point in time we would not anticipate a material dilution from that compound post Q1.

Eric W. Coldwell - Robert W. Baird

And just a final question; following the statin, assuming that either you out-license it or you kill it after the first quarter, which is I guess the assumption here, what is the run-rate internal R&D with no additional compounds brought in? What would we be looking at on a quarterly phasing after Q1?

Dr. Fredric N. Eshelman

Somebody will come up with that number here right quick. Can we go on to the next question and I’ll come back to that for you?

Operator

Your next question comes from Doug Tsao with Lehman Brothers.

Doug Tsao - Lehman Brothers

Good morning. So just to follow on Eric’s questions, it sounds, Fred, just to confirm, that basically in terms of R&D spend on the Ranbaxy compound, you will finish the Phase II proof of concept study in the first quarter and then basically make a go or no go decision in terms of finding a development partner, but it does not sound like you would continue down the development path without a partner?

Dr. Fredric N. Eshelman

I think that’s a reasonable assumption, unless we were in very serious discussions with one or more partners. But we couldn’t close something as rapidly as we wanted to and we also did not want to delay the program. That would be a possible scenario under which we continued to spend in advance of an out-licensing. But I think again what we are shooting for is to have the data to either say okay, we’ve got a live one here. Somebody’s going to take it and so forth pretty quickly or, based on the data we see, we just can’t see our way clear to spend anymore on this compound.

Doug Tsao - Lehman Brothers

And then in terms of a development partner, would you be looking for a partnership similar to what you have with Takeda, in which the partner would bear all of the late stage development costs? Or would you consider an agreement in which you would bear some of the costs?

Dr. Fredric N. Eshelman

I don’t know. We’d have to look at that at the time and in the context of the overall terms and the overall prognosis for the compound in terms of market research. We have had contracts in the past where in theory, we would have split Phase III costs with people and so forth, but that was generally under the assumption that we’d never get there. Somebody would pick it off before that, so barring something very unusual I think the likelihood of PPD taking on late stage dilution for a compound is just not likely.

Doug Tsao - Lehman Brothers

Okay, and then you’ve touched on it a little bit in the call so far but obviously the number, the deepening of your management bench and an additional layer of very high quality people in terms of regional vice presidents has been significant. I was just hoping you could provide some comment on what led to that change for the organization, which in the past seemed to be a much flatter organizational structure.

Dr. Fredric N. Eshelman

Well, we are anticipating a lot of growth and even though you say well, it’s only 17%, which we think is pretty robust, in actual dollar terms and numbers of new hires and numbers of offices and expansion and this and that and the other, it’s actually quite significant. It requires a lot of management time. It requires a lot of professional management and so I think we’ve inferred in the past that what we are trying to do is put a team in place here that can take PPD to the next level and the level of complexity is not necessarily linear. I think it gets more complex the bigger you get, in other words.

We’ve also determined that we are going to be the standard of excellence. We cannot do that without the very best talent in leadership roles and that’s what we are attempting to do.

Doug Tsao - Lehman Brothers

And can you provide some comment, because it’s been noticeable, for the most part a lot of the new hires have come from big pharma rather than the CRO world. I was just wondering if you could provide some comment as to what drove you to go in that direction.

Dr. Fredric N. Eshelman

Well, a couple of things. Obviously we are after very good management who are accustomed to managing at a big scale. But I think importantly, the situation in big pharma is such that it’s not quite the place that it used to be for some of these talented individuals to work. In other words, it may be brighter on our side of the street than it is theirs. Going forward, there may be more opportunity here, more excitement, more opportunity to move up and so forth and so on. So I think that the environment is quite different than it was two or three years ago.

Bill, why don’t you comment? You’re directly out of big pharma.

William J. Sharbaugh

I understand your comments. I would say two things; number one, PPD compared to our competition is still a lot flatter from a management perspective and that’s the way we run the business here. We give people responsibility and hold them accountable.

Secondly, I would say there’s actually been a fair balance between pharma experience and CRO experience. If you look at North America, we have a big pharma guy there, Paul Colvin. If you look at Europe, Middle East, Africa, we actually have a guy with a lot of CRO experience there. If you look at the Asia-Pacific role, Simon Britton, he has a mixture. He had seven, eight years in a CRO and a similar amount of time in a big pharma company. And if you look at our Latin American region, we have a PPD insider there with CRO experience.

Now, in other positions throughout the company, we’ve also brought a similar mixture of CRO and pharma experience. But as Fred notes, I think we are better served by having a diverse management team, so I would say there’s actually fair balance between the kind of experience we have.

Doug Tsao - Lehman Brothers

Okay, great. Thank you.

Dr. Fredric N. Eshelman

Let me just take the opportunity also to go back to the question I think it was asked by Eric on R&D spend post Q1, and while I don’t want to necessarily address a specific number, the amount of absolute dollars in R&D projected for Q2, Q3, Q4 is de minimis.

Operator

Your next question comes from Sandy Draper with Raymond James.

Sandy Draper - Raymond James

Thank you. Most of my questions have actually been asked. Just maybe one quick thing; Fred, do you -- and I may have missed it -- did you give a sort of targeted book-to-bill, or are we still sort of looking at that 1.2 to 1.3 as a reasonable range to be thinking about for 2008?

Dr. Fredric N. Eshelman

I don’t think we’ve even calculated it on that basis. I mean, obviously we come up with our internal forecast for new sales based on the market and based on what we think we can do with close rates and all the rest of that, and then obviously we have to pair that up with some assumption on the burn rate to come up with what we think our projections are.

I think the safe assumption would be that we will have to continue to increase authorizations in a similar manner as we have over the last three, four, five years.

Sandy Draper - Raymond James

Okay, that’s helpful. And then maybe a different way to ask Eric’s question, if I look back at 2Q, 1Q07 into ’06 and exclude any milestone payments, is there a reasonable point it looks like you are running it, I mean, on average, say a negative 40% margin discovery sciences, so on the $4 million to $5 million of discovery sciences revenue, losing say a couple of million dollars, is that sort of a reasonable base to go forward? Is there anything that you are going to be cutting back where, excluding any additional R&D on development or any milestones that would reduce those expenses, or is that another way to maybe look at that question? Thanks.

Dr. Fredric N. Eshelman

I think the losses in the discovery compound partnering segment outside of R&D dilution itself are totally ascribable to the biomarker unit because the PRC pre-clinical oncology unit as I said is nicely profitable. We are projecting continuing losses in biomarker. They are reasonably substantial. We did see an up-tick in sales and a little bit of an up-tick in performance in biomarker in Q4 of ’07 that gave us a little bit more optimism. Maybe the time is coming for biomarker to be a creditable commercial undertaker, so we’ll have to see.

But we do have it in at a reasonably sizable loss for ’08. If that would deepen, obviously we’ve got to take steps. If it would improve, then that leads us down another path. But I think that’s primarily the source of what you are talking about.

Sandy Draper - Raymond James

Okay, great. Thank you.

Operator

Your next question comes from John Kreger with William Blair.

John Kreger - William Blair & Co.

Thanks very much. A question on the development side of your business; it seems like ’07 turned out to be perhaps a worse year for large pharma than many expected going into the year, with lots of cost cutting news on the tape. Are you seeing any of that filter down to the interaction you are having with clients? Are you seeing it change the behavior in the way they are dealing with their clinical development programs at all?

Dr. Fredric N. Eshelman

You know, the answer is yes and no. On the one hand, yes, everybody is sharpening their pencil and it is hand-to-hand combat on contracts and all the rest of that stuff, but then you turn around and you are looking at all these $100 million plus contracts. So it’s almost schizophrenic kind of behavior.

I think all the pharma companies, and rightly so, are looking at their expenses because they can’t afford the kind of expense structure that they had in the past but they are also not losing sight of the fact that they are R&D driven. That’s what will make them successful or not and it continues to roll along, albeit with a sharper pencil. That’s about all I can say on that front.

John Kreger - William Blair & Co.

Okay, and then another development question, Fred; if you look across the portfolio of your businesses, do any of them stand out as particular weak spots?

Dr. Fredric N. Eshelman

In terms of earnings and/or revenue growth, I guess as noted the biomarker is weak on the earnings side. Phase II, we’re not putting in a tremendous amount of top line growth but we are looking for other improvements there and we think that’s a solid business. All of our Phase II through IV units are projected to grow nicely. The bioanalytical and GMP labs we believe will have nice growth in ’08 and at least maintain their profitability. And GCL, we expect the turnaround there, so in terms of weakness, I’m not sure I would characterize any of it as weakness, with the possible exception of biomarker.

John Kreger - William Blair & Co.

Great. And then, if you turn to the discovery business, I think Dan, when you talked about -- I think you listed off your use of cash. New partnering deals I don’t believe made that list. Can you just talk about where that fits in your priorities for cash?

Daniel G. Darazsdi

I would say relative to our cash and that part of the business, we will look at things from an opportunistic viewpoint. I don’t think at this point we’ve identified as part of the ’08 guidance significant cash disposition, but like all things, they are of course evaluating opportunities.

John Kreger - William Blair & Co.

And then a longer term question for discovery, if you are willing to go there, if we get to a position and it sounds like maybe this will happen in ’09, where you have got a steady royalty stream, how do you think about new partnering deals then? Do you think about going into a year with a budget, a certain amount of dollars that you’d like to spend to build up the portfolio? Or do you think you’ll continue to be opportunistic? What I’m really getting at is what do you think the drop-through rate will be on any incremental royalties that are generated?

Dr. Fredric N. Eshelman

I think that we will continue to be opportunistic. As far as having some set formula for -- we’re going to take 30% of the incoming royalties and spend that on something else, we don’t have any such formula at this time and quite frankly, I don’t anticipate that right at this moment because as we continue to save, we really would like to harvest what we’ve got before us here -- knock wood -- and anything major that comes in in the future, structure that a little bit differently. That’s certainly our thinking at this moment in time.

Now, if all of the stars aligned and one or more of these compounds just blew the roof off, then maybe we’d revisit that but that’s not our thinking at this moment.

John Kreger - William Blair & Co.

Great. Thanks.

Operator

Your next question comes from Hari Sambasivam with Merrill Lynch.

Hari Sambasivam - Merrill Lynch

Thank you. A quick question for Dan Darazsdi; in terms of the accounting for the milestones, could you explain why the milestones are accounted as lump sum as opposed to being amortized? That’s the first one.

And the second question I have is really related to currency; when you -- I guess just short of anticipating some currency moves during the year vis-à-vis the U.S. dollar, where does the company have the ability to make the requisite, I would say the expenditure reductions if the currency movements go in the wrong way? I’m just wondering, given the ex-U.S. growth, are you mostly trying to sort of deal with this by hedging or do you have some operational flexibility in your ex-U.S. growth to take out some expenditures? I’m just wondering whether you can maybe give us a bit of color into that.

Daniel G. Darazsdi

Let me try to cover both questions, because they are quite different. First of all on the milestones, the milestones really get after the cash flow dynamics of each project. So when you look at the project and you look at the milestones as they are being delivered, what that is really an indication of is the actual cash coming in, which is not reflective necessarily of precisely where the project is from a revenue and margin delivery viewpoint. Because when we go to project revenue recognition, then we are based on a percentage of completion basis, so you are principally looking at cost incurred to date against your total estimate complete, generating your revenue and margin delivery for the project. So a little bit of decouple there.

So as we try to improve cash flow dynamics, we’ll focus on the milestones. As we think about how we are performing against any individual project, then that’s when we’ll look at the cost curve on a percentage of completion basis.

Any other comment on there before I --

Dr. Fredric N. Eshelman

Yeah, just as a further comment from a non-GAAP person, the milestone payments are one-time events and they are to mark an explicit occurrence that will not recur, so I think as a non-accountant, maybe that’s some more color on that. And we actually have our Chief Accounting Officer here who can run you through the GAAP, if you’d like.

Hari Sambasivam - Merrill Lynch

No, I can do that offline. And the second question was on your ability to take down expenditures. I’m just wondering whether it’s through hedging primarily or are there operational aspects you can trim off in the event of a U.S. dollar decline?

Daniel G. Darazsdi

Principally what we work to do is to one, identify what our currency exposure is by country and our two biggest areas of exposure are the sterling, because of our presence in the U.K., and the Euro. We really don’t address currency to any large degree based on operational changes because our cost base is basically where it is and it’s growing based on our revenue requirements there, so what we’ve elected as an approach is to look at hedging opportunities to help us mitigate the fluctuation in the currencies.

Hari Sambasivam - Merrill Lynch

That’s great. Thank you.

Operator

Your next question comes from Alan Fishman with Thomas Weisel Partners.

Alan Fishman - Thomas Weisel Partners

Thank you very much and good morning. I just had two quick questions; the first one, I missed the cash flow guidance number for ’08.

Dr. Fredric N. Eshelman

Operating cash flow I believe was 275 to 325 -- is that right? Yes, that’s correct.

Alan Fishman - Thomas Weisel Partners

Great. Thank you. And then the second one follows up on the R&D question being de minimis. I guess we’ve seen it tick up in 3Q. Would that be the run-rate for first quarter and then we could expect to see R&D tick back down to the first quarter and then 2006 levels?

Dr. Fredric N. Eshelman

Well, as we said before, we expect all of the -- or the vast majority of the remainder of the 10558 costs to be accrued in Q1 of ’08 and the R&D charges as we see it now for Q2, Q3, Q4 would be de minimis. I mean, very, very small and so that’s how we see it right now.

Alan Fishman - Thomas Weisel Partners

Okay, so more like prior to what we would have seen before the Ranbaxy statin compound?

Dr. Fredric N. Eshelman

I don’t want to get too general with it because as you well know, it’s gone up, down, and sideways by a quarter over the years, so all I can tell you is that at this moment in time, Q1 encompasses the majority of what we expect to spend on the 10558 and since we don’t have anything else on the plate at this moment, then what we have forecast for the rest of the year is very small.

Alan Fishman - Thomas Weisel Partners

Okay, great. Thank you very much.

Operator

Your last question comes from Doug Tsao with Lehman Brothers.

Doug Tsao - Lehman Brothers

Thanks for taking the follow-up question. In terms of the Takeda compound, I know that a competitive compound has run into some trouble in terms of getting approval, given the lack of safety data being done in renally impaired patients. I was wondering if you could provide an update whether these types of studies have been in the Takeda compound.

Dr. Fredric N. Eshelman

Let’s drop back all the way to the beginning, if we might, and when we first looked at the compound, which was then a Syrrx compound, the Takeda bought Syrrx, the in-vitro and preclinical data that they had at the time, and they had comparative data for 322, for Januvia, for Galvis, and for one other competitor’s compound. And it looked as though 322, or Alogliptin, was very much more Januvia like in terms of its specificity for DPP4 as versus DPP8 or 9 or any other thing.

So we believed at that time and we continue to believe that it’s more specific for the receptor [inaudible] -- that’s number one.

Number two, on the renal issue, I’d like to bifurcate that into a pharmacokinetic issue in renal insufficiency versus some sort of manifestation of renal toxicity. As far as I know, there is nothing in the database with Alogliptin which would make us think that there is inherently renal toxicity and therefore need to have thousands of patients with renal failure to see if we are exacerbating that.

The other issues, as I said, is a pharmacokinetic issue where if you’ve got a portion of your compound that is renally excreted, then it is reasonable to look at people with varying stages of renal failure to see if you need to make a dosage adjustment because the compound would accumulate theoretically in those who have a diminished excretion of the compound because their kidneys are failing.

So there are two different issues and certainly the pharmacokinetic piece of this Takeda addressed very well with very specific studies in patients with all sorts of renal failure going from mild all the way to severe.

So as far as I know, and I have Dr. Covington here, our Chief Medical Officer who can also comment on this, there just does not appear to be an issue. Paul, if you want to add anything, please do.

Dr. Paul Covington

Nothing to add. That’s exactly what Takeda has released and exactly what we feel about the --

Doug Tsao - Lehman Brothers

Okay, so just to confirm, so you are indicating that specific pharmacokinetic studies were done in patients with varying stages of renal impairment?

Dr. Fredric N. Eshelman

Absolutely.

Doug Tsao - Lehman Brothers

Okay, great. Thank you very much.

Operator

There are no further questions at this time.

Dr. Fredric N. Eshelman

Thank you all very much for the lively questions and debate and we look forward to talking with you in the future. Good day.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.

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Source: Pharmaceutical Product Development 2008 Financial Guidance Call Transcript
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