Pharmaceutical Product Development, Inc. Q4 2007 Earnings Call Transcript

Feb. 7.08 | About: Pharmaceutical Product (PPDI)

Pharmaceutical Product Development, Inc. (NASDAQ:PPDI)

Q407 Earnings Call

February 7, 2008, 9:00 am ET

Executives

Fredric N. Eshelman - Chief Executive Officer

Daniel G. Darazsdi – Chief Financial Officer

William J Sharbaugh – Chief Operating Officer

Analysts

Robert Gilliam - UBS

Dave Windley - Jefferies & Company

Steven Halper - Thomas Weisel Partners

James Kumpel - Friedman, Billings, Ramsey

John Kreger - William Blair

Eric Coldwell – Robert W. Baird

Hari Sambasivam - Merrill Lynch

Douglas Tsao - Lehman Brothers

Operator

Good morning, ladies and gentleman. My name is Tina and I will be your conference operator today. At this time I would like to welcome everyone to PPD's 2007 Fourth Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions). Thank you. Dr. Eshelman, please go ahead sir.

Fredric N. Eshelman – Chief Executive Officer

Okay, good morning and thank you. As usual I’ll begin by saying that except for historical information all of the statements, expectations, and assumptions discussed in today's call are forward-looking statements and involve a number of risks and uncertainties.

Actual results might differ materially from those in the forward-looking statements. Information about taxes that could cause actual results to vary is disclosed in the press release announcing our results and in the SEC filings for PPD, copies of which are available free of charge from our Investor Relations Department.

In our comments today we will refer to selected non-GAAP financial measures. For all periods discussed today, unless specifically noted, net revenue, income from operations and margins exclude reimbursed out-of-pockets and stock-option expense under FAS 123(NYSE:R).

For a quantitative reconciliation of all non-GAAP numbers discussed in today's call to the most comparable GAAP financial measure, please see the GAAP, non-GAAP reconciliation information that is posted on the investor presentation webcast section of the corporate page of our website at www.ppdi.com.

While we had a few hiccups in 2007, on balance it was full of positive events that should bout well for the future of the company. I'll discuss calendar year 2007 first, followed by Q4 results.

In 2007, net revenue grew to $1.295 billion a 13% increase over 2006. Development services revenue grew 14.6%. GAAP EPS of a $1.36 was up only $0.04 over 2006, but was effected by a 13.8 million increase in R&D spend in '07, plus the lack of a partnering milestone such as the one received in '06.

Development segment EPS contribution grew 15% in 2007 versus '06. Gross margin remained slightly over 50% and essentially the same as 2006. Operating margin rose slightly to about 20.9% in development.

We retired the headquarters building construction debt in '07 and still finished the year with more than $500 million in cash equivalence in short-term investments with no long-term debt.

Backlog on 12/31/07 stood at $2.655 billion up 19% over 2006. The market remained hot with RSP volume in dollars for the clinical development segment up 23% over 2006.

For full year 2007, 66% of revenue was included in North America and 34% rest of world. Our business unit that was 81% Phase II through IV, 14.1% labs, 3.3% phase I, and 1.6% discovery. By client, revenue was 59% Pharma, 29% biotech, and 12% government and other.

Backlog was split 49% Pharma, 9% biotech and 12% government and other. We ended the year at 10,213 FTEs. PPD open new facilities in Athens, Greece; Sydney, Australia; Copenhagen, Denmark; Lima, Peru, Lisbon, Portugal; and the second office in Mumbai, India adding to our geographic reach. We also opened the new building in Scotland, as well as our headquarters in North Carolina.

Yesterday, you may have seen our announcement regarding an agreement to purchase a 300% CRO in Russia and the Ukraine, further extending the geographic reach under the PPD brand. For Q4 of '07, revenue of 341.3 million rose 15.2% over Q4 '06. GAAP EPS of $0.34 was down a penny over Q4 '06 due to higher R&D cost, increase share count, foreign exchange losses, and increased SG&A as a percent of revenue. Development segment revenue grew at 15% over Q4 of '06.

After a disappointing second quarter of '07 in terms of new authorizations, Q3 picked up nicely. We are now pleased to report a new record for non-government authorizations of $613 million in Q4. The cancellation rate was 19.7% for the quarter. While DSO increased slightly to 51 in Q4, we have had very good collection thus far in Q1 ‘08 and expect this to improve.

In the fourth quarter, we had a internal forecast shortfalls in Phase II through IV revenues, but missed operating income targets primarily due to spikes in SG&A, in the US and Europe. The largest miss to our internal forecast was GsL, which missed revenue badly due to project delays. However, there were positives at Gcl. Consecutive quarter growth and revenue and income was very good. We ended the year with record backlog of 75% over Q4 of ‘06. Here is the good news from 2007, which we believe provides the solid base for the future. We now have a great management team with tremendous experience who are working together very closely and very cohesively.

We expect to make more announcements about additional managements in the coming months. Revenue growth picked up in Q4 despite missing some internal targets. We had record commercial authorizations in Q4. Many internal improvements were in progress. We are working very hard to rein in SG&A growth and we tripled our dividend rate.

On the discovery and compound partnering side the pre-clinical oncology unit beat expectations in Q4 and biomarker loss is narrow. Dapoxetine was filed in Europe and Alogliptin was submitted in the U.S. Accentia is expected to announce SinuNase TM Phase III result next month. We now have preliminary results from the first part of an ongoing study and patient's comparing a 160 mg of 10558 or our statin with 80 mg doses of two marketed establishment in Placebo

Here are the notable points. High-dose 10558 was well tolerated based on adverse event and clinical lab data. Preliminary analysis of the efficacy of PPD 10558 with respect to lowering of LDL cholesterol compared to the other statins demonstrated that 10558 was above the mid point in efficacy between these marketed in statins.

Importantly the reduction of the ratio of total cholesterol to HDL cholesterol with 10558 was comparable to the highest dose of a major competitor. This is one of the primary risk assessments for morbidity and mortality. A 10558 effectively lowered total cholesterol, triglycerides, and LDL cholesterol with blood levels that were four to six fold lower than those of competitors.

This is consistent with our previous preclinical and clinical data and the hypothesis that 10558 may be less likely to cause muscle toxicity. I am very encouraged by our progress and our team. We will now have comments from COO and CFO respectively.

William J Sharbaugh – Chief Operating Officer

Thank you, Fred. Development Services had solid performance for Q4 ‘07 with net revenue increasing 15.1% versus Q4 06. As Fred mentioned, full year of 2007 development services revenue growth was 14.6% versus prior year. The Phase II through IV segment which accounts for 81% of development services revenue showed good results versus Q4'06. Revenue worldwide grew 20%. Authorizations were strong and ahead of target. Book-to-bill was over 1.4 for the quarter. Back log increased 16%, and revenue per FTE was up 4%.

Total proposals for Phase II through IV worldwide continued to increase reflecting strong demands for outsourcing services. Both the quality and size of proposals exceeded Q4'06 levels. We continue to add headcount in all regions and we're expanding our footprint in all of our Latin American locations as well as Turkey, Germany and Korea.

As we announced yesterday February 6th, PPD has signed an agreement to purchase InnoPharm, an Independent Contract Research Organization based in Smolensk, Russia. The acquisition will expand PPD's global footprint and its overall presence in Eastern Europe.

InnoPharm employs more than 300 professionals and has offices in Smolensk, Moscow and Saint Petersburg in Russia and one office in the City of Kiev in the Ukraine. They provide services in the conduct of clinical trails, data management and biostatics which fits nicely into our development services business unit. The acquisition is expected to close in the second quarter after the closing Sergey Sudilovsky, M.D., Ph.D, currently Director General of InnoPharm will oversee operations in Russia and Ukraine for PPD.

Dr. Sudilovsky has more than 15 years of experience with InnoPharm having spent the spent the past 10 years as Director General. PPD has a long history working with InnoPharm and is confident the acquisition will expand our ability to work in the region.

As I mentioned during the guidance call in January, Dr. Sebastian Pacios joined PPD on January 2nd as Senior Vice President of the Phase II through IV business in Europe Middle East and Africa. Dr Pacios has extensive international clinical research experience and is a solid addition to our management team.

Now moving on to the clinics and labs. For the full year of 2007, Phase I clinic revenue growth was flat. However, new authorizations came in ahead of target on both the gross and net basis for Q4 2007, which should bid well for 2008. If you look at the Phase I clinic on a margin basis it continues to contribute nicely to our bottom line. We continue to see demand for highly technical procedurally demanding Phase I study.

All three labs GMP, Bioanalytical and The Central Lab exceeded net authorization targets for the year, which should set a solid base for growth in 2008. The GMP lab had a very strong quarter. Net revenue increased 27% over Q4'06 and 11% over Q3'07. Authorizations were on target for Q4'07. Our GMP laboratory increased capacity and added new technologies during 2007. The Bioanalytical lab had an outstanding quarter again with revenue increasing 16.5% over Q4'06.

During 2007, our Bioanalytical lab completed construction of a new amino chemistry module to support growth in large molecule testing services. Central Laboratory net revenue was 19% above Q3'07 and operating profit exceeded Q3'07, but was below Q4'06 revenue level and our internal targets.

As mentioned in our guidance call, we had a contract away which resulted in a revenue shortfall. However, The Central labs backlog currently stands at record levels.

That concludes my comments on development segment and I'll turn it over to our CFO Dan Darazsdi.

Daniel G. Darazsdi – Chief Financial Officer

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

With a strong finish to new authorization in `07, our fourth quater book-to-bill was 9.44. Backlog increased nicely by quarter end to 2.7 billion and breakdown by client type as follows; 39% pharmaceutical, 39% biotechnology, 9% government, and 3% other.

PPD's foreign operations generated approximately 34% of PPD's total revenue of $1.295 billion for '07. Both revenues and expenses were impacted in '07 by currency translation. Translating fourth quarter and full year '07 non-dollar revenues and operating expenses at 4Q and full year '06 average exchange rates, the net effect on total operating income for fourth quarter and full year '07 would be a net increase in operating income of $2.8 million and $10.9 million respectively.

Our fourth quarter development segment revenue of $334.9 million was up 15% and breaks down by service area as follows; 81.5% from Phase II through IV, 15.2% from labs, and 3.3% from Phase I.

Development segment gross margin for fourth quarter '07 was unchanged compared to fourth quarter '06 at 50% consistent with our gross margin objective. Income from operations for 4Q'07 was 64.3 million or 19.2% of revenue.

Fourth quarter '07 operating income including the charge for specific bad debts. Excluding this charge the operating income rate would have been 19.9% close to our targeted 20% level, excluding stock option expense.

Development segment income from operations for full year '07 was 266.2 million compared to 229.3 million for same period in '06. Excluding stock option expense in both periods, development segment operating margin for '07 was 20.9% compared to 20.6% in '06.

For the quarter ended December 31, ‘07 capital expenditures were $14.9 million. Capital expenditures included $6.6 million for new building in Scotland and our headquarters building at various leasehold improvements.

Other key capital expenditures included computer software and hardware of 4.4 million and scientific equipment for labs. For the fourth quarter, net cash provided by operating activities was $80.5 million and free cash flow was $65.6 million.

For the full year of '07, net cash provided by operating activities was $226.7 million. This strong cash flow performance raised our cash position to over $500 million at year-end. The year-to-date DSO at December 31, ‘07 was 51 days, compared to 49 days of September 30,'07.

Total gross revenues which include all out-of-pocket expense and passthrough costs were $455 million for the three months ended December 31, ‘07 and $1.75 billion for the year ended '07.

Unbilled services totaled $186.1 million at December 31, ‘07 and decreased as a percentage of total receivables to 39% compared to 42% at September 30, ‘07. With 90% of our total accounts receivable as of December 31, ‘07 aged less than 90 days. Our collection efficiency remained solid.

Although the year ended with an increase in New York with several large clients, we expect solid collections in 1Q'08. The effective tax rate for the fourth quarter '07 was 33.75% compared to 33.25% for the same period last year.

As reported through our guidance call, we are forecasting effective tax rate of 33% to 34% for '08. But these rates will likely vary by quarter in '08. That concludes my remarks at this time. I'll now turn things back to Fred. Thank you.

Fredric N. Eshelman - Chief Executive Officer

Okay. Thanks Dan. Tina, we're now ready for questions and comments please.

Question-and-Answer Session

Operator

(Operator Instructions) The first question will come from the line of Robert Gilliam with UBS.

Robert Gilliam

Couple of questions? Just first to start of Fred, I think you mentioned that you'll be taking some steps to SG&A growth in 2008, I was just wondering, if you could be anymore specific and then perhaps comment on where you are as far as hiring and if you take maybe a little bit ahead of the curve given some of the positive booking some of you had or if you are maybe behind the curve or kind of comfortable with where you are?

Fredric Eshelman

Okay. As far as the specifics of the SG&A, I will let Dan comment on that. As to the hiring is why I am cautioned that we are pretty much on the hiring line that we should be, in others words we are not greatly ahead, we are positive of where we should be. And Bill is shaking his head, so I assume that’s correct. Dan, you want to comment on SG&A?

Daniel Darazsdi

Yeah, just a couple of quick comments on SG&A, well, if you look at the fourth quarter kind of an isolation, '06 was actually very positive results, it came in at about 20.4%, although the average was about 21.8. So the comp in the fourth quarter is all challenging. Having said that, we suggested 22.9% and they had couple of factors and one of which was foreign exchange impacted year-over-year with up $3.3 million. The rest of it, is that we just have to really beat the May shift in terms of SG&A and we’re matching that on a week to week basis. We've got some immediate actions in place where Bill and I are reviewing together every G&A replacement, not just new hires, but replacement. So it’s getting a tremendous amount of operational scrutiny. In addition to that we are looking at profit changes oriented at changing, making more efficient opportunities on a go forward basis, including from automation strategy. So, we are on this, we are managing it tactically, we’re also thinking about strategies for a longer term and better performance.

Robert Gilliam

Okay. And then it is also fair to say that you know, in the fourth quarter, obviously for the whole company bookings were very good, I also think you said for the full year that even within the last authorizations exceeded expectation for the whole year. So is it kind of safe to say that that partly uptick in the fourth quarter was due to some of the strong bookings and so as such the compensation that you pay to the sales teams?

Daniel Darazsdi

I think, our compensation was actually pretty much inline with our expectations and we had I think, enough visibility that we had appropriately factored that. And from an uptick basis there might be a little bit of that, but I don’t think in the grand scheme of things, but I would hang our head on. We have to go after some more operational efficiency.

Fredric Eshelman

I would also comment here that the hiring that we are talking about has to do with SG&A acquisitions, it does not have to do with direct billable people, we are hiring those as fast as we can find them.

Robert Gilliam

Okay. And then if you could just give little bit commentary around RFP volumes so far in 2008, and then, stepping back and looking at 4Q '07 was the impressive new authorization, it’s more a factor of better hit rate, you know, better RFP flow or maybe just common issue of both?

Fredric Eshelman

Although, I don’t have a number right in front of me, I am not impressed that we had a huge increase in hit rate, it might have crept up a little bit, I think it was primarily due to great efforts by our business development plans and their operational colleagues, supported by the continued shock updraft in the amount of RFP's that we are seeing. I don’t have a quantitative number for thus far in Q1 of '08, but I am struck that the number of very large opportunities continues to be at a rate that we have not seen in proceeding years.

Robert Gilliam

Okay. Thanks a lot for comment. I will let somebody else hop in.

Operator

Your next question will come from the line of Dave Windley with Jefferies & Company.

Dave Windley

Again the questions, Dan could you – I think your quarterly margins and then your comments to Rob on SG&A, I think you are excluding stock comps even in terms of the SG&A line as percentage of revenue, could you quantify the stock comp in that line?

Daniel Darazsdi

Yeah, if you can give me a second. Do you have any follow on questions?

Dave Windley

Yeah. So one other question would be, what is the basic financial profile at InnoPharm, can you give us a sense of revenue and margin, and I assume since you are not changing guidance on the call and the release, but it’s essentially neutral to earnings in '08?

Daniel Darazsdi

Yeah let me get back to the start comp impact was 5.1 million for fourth quarter `07.

Dave Windley

Okay.

Daniel Darazsdi

Alright. In terms of InnoPharm, as we see that Bill indicated earlier that the closing will hop in hopefully toward the end of the first half we see there has been slightly accretive and had understood that our expectation and oriented guidance would likely include that. So, I would say, now it’s very well positioned strategically and we are looking for good things in `09 and project a very slight accretion factor as we go into `08.

Dave Windley

Okay. And as a followup on this SG&A line. As we look at 2008, would your expectation be from some of these efficiency initiatives you’re looking at, that SG&A could actually pullback or would it be safe to assume that we are going to see sequential increases, but hopefully there is a stronger rate?

Daniel Darazsdi

I would tell you tell you sequential increases, but our preferred rate is or likely – lot of things we are doing, we will be looking at those tactical operational things to running SG&A and also looking at some things to from an automation efficiency, we plan to improve that overtime, but they will think they need a little bit more time to really opponent you to the financials.

Dave Windley

Okay.

Daniel Darazsdi

And I think at this point – several time our targets of GP50 up, income of 20R, you were really targeting with (Inaudible) we are going to operate kind of G&A in the bandwidth, we have done until we can make some fundamental changes.

Dave Windley

I guess the clear bottleneck up income of 20, is that target Xor including stock?

Daniel Darazsdi

X.

Fredric Eshelman

X.

Dave Windley

Okay. And then finally in terms of backlog and (Inaudible) et cetera. Fred, you commented about the significant ramping activity and so forth in the industry. Are you still seeing a fairly consistent duration in the backlog or you are seeing that moving with larger, larger contract?

Fredric Eshelman

I don’t have that number (Inaudible) do you have the number?

Daniel Darazsdi

If anybody else kind of follow-on, we will look for that number.

Dave Windley

Okay. And then, thank you very much.

Unidentified Company Representative

Okay.

Operator

Your next question will come from the line of Steven Halper with Thomas Weisel Partners.

Steven Halper

Okay. On that bad debt charge that was included in the quarter and do you have some color on that?

Daniel Darazsdi

Yeah really, because its client specific, I don’t go into a much color, the only thing I would say is that it was onetime event, we are having it, its over, and so, just going forward I don’t think it’s a fact in terms of our financial performance.

Steven Halper

And how much was it?

Daniel Darazsdi

Just around – let me check the number. I will comeback on – the weighted average backlog increased slightly based on the size and the similar project that we booked in the fourth quarter to play uptick in that duration.

Steven Halper

So, I think the average duration that we have now is about 34 months?

Daniel Darazsdi

And we have got that number was 2.2, I just wanted to clarify that before I give you the exact number.

Steven Halper

Does the company still do business with PPD, is that?

Daniel Darazsdi

I think its – (Inaudible) very well.

Steven Halper

Okay, thank you.

Operator

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

James Kumpel

Fred, can you comment about what kind of timeline you expect in terms of your negotiations and discussion with pharmaceutical manufacturers to potentially license your statin content?

Fredric Eshelman

We are enacted discussion with the compound, with a couple of potential licensees. We just got to look at that data that we shared with you today. We have not had a chance to share those data officially with the prospects. So all I can say is we are in active discussions, but where those discussion will go, I have no idea.

James Kumpel

And, in the meantime, in the interim, are you incurring any kind of incremental R&D expense, now that you to got the data and are you experiencing any kind of incremental expenses and allow your percentage?

Fredric Eshelman

Well, nothing outside of the guidance that we’ve given you. As I said, this is the first part of a two part study that we reported to you today. So the second part is in progress and of course, we are still incurring expense there. We are also incurring expense on preclinical work and CMC work, but again most of that is in the guidance and we would not proceed that changing dramatically and if so we would get back to you, but I don’t think that is going to happen.

James Kumpel

Can you remind us of what the specific milestones are that required to be hit for dapoxetine to trigger milestones payments to you guys?

Fredric Eshelman

The only development milestone remaining is that an approval in Europe. I don’t think we have disclosed specifically the numbers we would have to hit or they would have to hit with sales to trigger a sales base milestone, but my recollection is that there are three specific levels for the possibility of such payments.

James Kumpel

And again this can be redundant from the last quarter. But, I just want to see again if you have seen any sort of change in the dynamics or the market opportunities or the increase with you, as a result of (Inaudible) and the FDA having well authorization to do punish pharmaceutical, and in fact if you don’t actually act on the approach to provoke not going it that’s been imposed on them?

Fredric Eshelman

I am not aware that people are suddenly acting on the backlog of suppose FDA with no activity. I have no idea what is happening there. In terms of the size and scope of Phase III trials and indeed the number of Phase 3B trials, whether that’s directly related to that or not, I don’t know, but it certainly appears that they continue to go up.

James Kumpel

Great. Okay. Thank you very much.

Operator

Your next question comes from the line of Douglas Tsao with Lehman Brothers.

Douglas Tsao

Going back to the InnoPharm acquisition, you noted in the press release that you’ve been working with them on a subcontractor basis. I was wondering was that an exclusive relationship with InnoPharm working with your competitors as well?

Fredric Eshelman

It was not an exclusive relationship. We have four years of history with InnoPharm and contributed some percent to their backlog, but clearly not all of its, so they were working with other clients and customers.

Douglas Tsao

And it should have also -- could you provide a little more detail, you obviously said that you expect to be modestly accretive on the EPS standpoint. Could you provide some color in terms of the revenue contribution that might be expected on a full year basis from the acquisition?

Daniel Darazsdi

We have got just a kind of full amount of revenues, as Bill indicated earlier, we had been doing business with them over the course of the year, so we will actually get some additional revenue. I can’t -- quantify until we get in and look at the updated forecast, but also we see additional margin opportunity there to. So, I think by the way time to talk to that more detail is after we get a closing and get a good reforecast on the business.

Douglas Tsao

Okay great. And then, Fred, you commented that RFP volumes were up 23% in the year. I was wondering if you could provide some detail regarding the contributions of volume of studies versus the size of studies that like to had an increase?

Fredric Eshelman

I do not have the number for the average size of RFP in front of me. So I can’t comment on that. But, again I am struck by the number of very large opportunities that we saw in ‘07 and apparently we’re going to continue to see in ‘08, I mean these are really needle moving opportunities if they signed, and again, I would have to get back to you on the average size to see what that one up done or sideways and I think (John) is looking for that number.

William Sharbaugh

Fred, we have these numbers and I will just elaborate on what the Fred said. By every cut of the data whether its average, median et cetera, the size of the RFPs is growing, it is bigger, and the number of RFPs itself is also bigger. So, there was an increase.

Douglas Tsao

And, could you sort of directionally you say, what’s quick perhaps the volume or size that was greater contributor of that 22% growth?

Fredric Eshelman

I don’t know the answer to that question.

William Sharbaugh

Having looked at the average numbers, I would have to say on average basis, it was driven more by volume.

Douglas Tsao

Okay great. And then, finally, you obviously are looking to expand your geographic capabilities, is this a strategy that the company plans on following a little more in going into other regions, where perhaps you want to expand your presence?

Fredric Eshelman

Well we our obviously looking at the world in its entirety, and looking at various countries of the world, with respect to disease prevalence, medical infrastructure, government stability, currency stability, XYZ, all of the factors that you would look at to try to come up with a cohesive plan of where, if anywhere, in addition to our footprint would we go, and where would we expect to grow more so in one region than another. You know, I believe now that we are in Russia by ownership, sort of in for a penny, in for a pound, so we will probably put the accelerator down on growing in Russia to the extent that we can, because there are a lot of opportunities there, particularly in oncology, large population. We will have to decide what other offices we would open in Russia because we are dealing with 12 time zones which makes travel a little bit difficult for CRAs. So a lot of that has to sort itself out, but Bill and Dan and others are very actively involved in the strategy.

Douglas Tsao

Okay, great. Thank you very much for taking my questions.

Operator

Your next question will come from the line of John Kreger with William Blair.

John Kreger

Thanks. Fred or Bill, can you just speculate about what you think might be behind the big surge in these very large opportunities that you are seeing?

William Sharbaugh

Alright, I'll take a crack at that first. Obviously there is patent exploration point only companies and I think they realize to fill some of those gaps, they've got to swing for the fences, and if you are going to do that, specialty kind of compounds aren't going to do it, so some of the bigger opportunities are sort of primary care-based, so I think that is a piece of it. And they are not holding -- While they are containing costs across their companies, it is not really an R&D. From an R&D perspective, they're maintaining their R&D budgets or increasing them. So therefore they are going after more and more compounds.

Fredric Eshelman

You know, a lot of these are also outcome trials, they are bis-driven into Bill's point, I think a lot of our customers continue to convert costs to variable for them, versus fixed, which would tend to push out more stuff. I personally don't think that there is any question that the atmosphere around safety is driving this as well because it appears that people are just trying to slam these studies to be sure that they don't run into a pulse or at the time that they file, or go to an advisory committee, and that they've got a very robust data set at that time. So, anyway that’s just our opinions.

John Kreger

That's helpful. And if you kind of look back over the last three or four quarters, I believe in the summary you talked about your hit rate, slipping a bit in the June quarter, you have now had two good solid quarters of bookings, has that hit rate kind of come back into a more typical zone for you, or is it still depressed in your opinion/

Fredric Eshelman

Well as you know, in my opinion it is always depressed. I don't care what it is, but I am looking for the specific number right now to tell you which direction it went. I think Jim will have it in just a second if you've got a followup question.

John Kreger

The followup question, I know the numbers are small, but it seemed like in your discovery business, revenues were better and the gross profit contribution was also better. What was really behind that, was it the preclinical business performing stronger?

William Sharbaugh

Well the preclinical business certainly had a very good Q4, and as I said, the losses in biomarker narrowed with a couple of things that we were working on. We also have a large bit of outstanding with that group, and if we were fortunate enough to win that particular opportunity, I think it would offer the economics in that lap. So we’re a little bit more optimistic than we had been in the past for biomarkers.

To your question on the hit rate, on a dollar basis, in '07 the hit rate was up over '06, but again I think it was more volume-driven than it was hit rate.

John Kreger

Great. And then a final question for Dan, the fluctuations in currency rates, I am guessing you got a revenue benefit in the fourth quarter. Can you quantify that for us? I think you also referenced foreign currency loss. Can you tell us what that was, and I am guessing that was near the income line.

Daniel Darazsdi

Yeah. I think, to get back to my earlier comments where I talked about the currency. We have actually got, if you recall the revenue line they haven’t moved very much from foreign currency, particularly because most of our contracts are denominated in US dollars. So, when I think about currency, we can’t tell, “look here what is happening on an up income line and that is where in the fourth quarter it was down about 2.8 and then about 10.9 million. And that’s one of our challenges, can you recall that, we got most of our contracts in US dollars in the initial and then there was still lot of cost base in foreign currency.

John Kreger

Okay. So the 2.89 hit is the right number to think about and there were not additional losses in the interest in other line?

Fredric Eshelman

I think that is principally correct.

John Kreger

Okay, great, thanks.

Operator

(Operator Instruction). And your next question will come from the line of Eric Coldwell with Baird.

Eric Coldwell

Thanks, I think most of my questions have been answered already, but just a couple of housekeeping items. Dan, you mentioned the affective tax rate will fluctuate through the year as we have seen in the past. Can you give us any clues on what magnitude of fluctuation we might be looking at and any specifics around the quarters, do we start the year higher or lower than the average?

Daniel Darazsdi

Yes, I did say, we are challenging to call off by quarter at this point, again its going to move on somewhat and I think at this point we got be into the year before we can give you a better assessment in terms of where its moving by quarter.

Eric Coldwell

The only other followup I have is can you give it some time where your cash is allocated today, what kind of instruments you are in, and what kind of effective tax rate you expect in calendar 2008 based on those instruments. Alright, not effective tax rate, interest rate, excuse me?

Unidentified Company Representative

I felt most of the cash is under mattress.

Eric Coldwell

I thought – whether you have been putting gold in the basement of the new building there. So…

William Sharbaugh

That’s correct.

Daniel Darazsdi

Yeah, we’ve got a very conservative investment policy which we’re adhering to very closely. We’ve actually got a interest rate in `08 of about 3.25%. Though our treasury team has very belligerent to check, double check, and recheck to make sure that our instruments are all being conservatively positioned for a policy.

Eric Coldwell

And Dan, I would assume at that rate many of these instruments are tax efficient, tax free?

Daniel Darazsdi

Yes, many of them are.

Eric Coldwell

Okay, thanks guys.

Daniel Darazsdi

However, we are just – from a policy hint point, leaning way towards security versus trying to get an extra couple of debt basis points out of interest rate at this point.

Eric Coldwell

Good, thanks.

Operator

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

Hari Sambasivam

Just a quick question about the Central labs as well as the biomarker strategy; the revenue, I guess the performance in these businesses have been sort of somewhat, you know, I would say inconsistent over the past or the while, and I am just wondering in terms of in the central labs is a (Inaudible) simply a high fix cost structure and you just have an abundant flow of revenues or it is something about the business development aspects of that business that causes this inconsistency. And the second question I am wondering is, in terms of biomarker strategy, is this again a broadly applicable sort of services that taken off of the people or is this more of a niche business that is targeted at sort of a specific client. I guess the question I am wondering is that how leveragable is the biomarker strategy for you in terms of revenues and also controlling the cost in that business?

Fredric Eshelman

Okay, let me address the central lab question first. We certainly do have a conferment that is fixed cost and the more volume we drive over it efficiently, one would expect margin expansion there is no question there. Having said that, even with the shortfalls in some of these quarters, we had very respectable margins and therefore we would anticipate that if we can get some of the lumpiness out of this, there might be additional opportunity there. We’ve gone back and looked at this and indeed much of the erratic performance, I would say, is in fact related to the preceding period sales. And as reported out we had pretty good sales in '07. We've got record backlogs in GCL; so barring something unforeseen that should pretend well for the future.

In terms of the Biomarker business, we believe in fact it is broadly applicable. Biomarkers are certainly a piece of the FDA's Critical Path Initiative going forward. If you read the pharmacology literature, almost everything you pickup now has some component of biomarker in it.

So I think our job is to, let's define our market a little bit better, increase our BD efforts a little more than we have, and maybe convert more over to a development or production mode from the research mode that we've been in the past, because I think the research mode clearly, probably is reasonably limited where as the development or production mode has a much wider application.

Hari Sambasivam

Thank you. Just one quick followup question, I may have missed this, but did you mention the cost of the InnoPharm acquisition and the revenues from that business?

Fredric Eshelman

No, we didn't and we prefer to wait till after the closing, if and when it occurs to comment specifically.

Hari Sambasivam

Thank you.

Operator

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

Douglas Tsao

Keeping questions, on the tax rate Dan, I was just wondering is this a function of as revenues move abroad that your tax rate should come down a little bit?

Daniel Darazsdi

Well, we've taken into consideration our geographic footprint for our business as we projected the guidance. So I think that, as we look at what we communicated in guidance, we took that into consideration. And I think it's principally just a natural role of where we're doing business today. So, I guess the answer to your question is yes.

Douglas Tsao

Okay. And then, I don't know, I might have missed it, did you provide FX impact on the operating margin and operating income for 4Q.

Daniel Darazsdi

Yes 2.8 million.

Douglas Tsao

And that was negative?

Daniel Darazsdi

Right.

Douglas Tsao

Okay. Okay great, thank you very much for taking the followup.

Daniel Darazsdi

Okay.

Operator

Your next question will come from the line of Randall Stanicky with Goldman Sachs.

Unidentified Analyst

(Amy Low) on behalf of Randall Stanicky. Congratulations on the good quarter. I actually had a followup questions on the Central Lab. You had previously mentioned the delayed contract back in 3Q. I just wanted to check, is that just, do you know, on track to be recovered and basically there will be no longer any delays beginning in '08. And my second question is regarding your R&D expense. It was really good, it was low in the quarter. But how much we should be thinking about it in first quarter of '08? Will it be similar to the last quarter, or shall we be looking at something a bit higher? I know you guys still have to complete a part of study, the comparative study. What would you be guiding us to?

Fredric Eshelman

Yeah. Let's address the delay situation in the Global Central Lab. We fully expect the large program that's been delayed to eventually kick in and perform as advertised. Exactly how that will roll out, I can't tell you. We have obviously made a guess and it's in our forecast but there is always the possibility that it wouldn't turnout exactly as we thought it would.

As far as the R&D expenses are concerned, they are in our guidance both for the quarter and for the year. We don't expect any major departure from that unless we get back to you and as we've said before, we really have no expectations of jiggling that very much in '08. And if we came upon opportunities that we thought we should signup for, if they're very early on, then the expense is deminimus because it's pre-IMD. If it was some other situation then we would have to entertain a different structure as we've talked to you before.

Unidentified Analyst

Yeah.

Fredric Eshelman

So, I guess all in all what I'm telling is, there is no departure from the guidance at this moment on R&D spend for '08.

Unidentified Analyst

Okay that's what I wanted to hear. Thank you very much.

Operator

And we've no further questions at this time. Sir, do you have any closing remarks.

Fredric Eshelman

Thank you all very much for being on the call and for your questions and comments. As always you can follow up with Craig or Dan or Bill. So have a good day.

Operator

Ladies and gentleman, this does conclude today's teleconference. You may all disconnect.

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