Pharmaceutical Product Development Inc. Q1 2008 Earnings Call Transcript

Apr.23.08 | About: Pharmaceutical Product (PPDI)

Pharmaceutical Product Development Inc. (NASDAQ:PPDI)

Q1 2008 Earnings Call

April 23, 2008, 9:00 am ET

Executives

Fred Eshelman - CEO

Dan Darazsdi - CFO

Bill Sharbaugh - COO

Analysts

Randall Stanicky - Goldman Sachs

John Kreger - William Blair

Hari Sambasivam - Merrill Lynch.

Sandy Draper - Raymond James

Douglas Tsao - Lehman Brothers

Dave Windley - Jefferies & Company

Jim Kumpel - FBR Capital Markets

Eric Coldwell - Baird

Operator

Good morning. My name is Regina and I will be your conference operator today. At this time I would like to welcome everyone to Pharmaceutical Product Development Incorporated First Quarter 2008 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions). Thank you. Dr. Fred Eshelman, you may begin your conference.

Fred Eshelman

Okay, thank you and good morning. As always 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 that 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, stock-option expense under FAS 123(NYSE:R) and the impairment of an intangible asset. EPS numbers exclude impairments of investments and an intangible asset.

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.

The first quarter of 2008, without the write-downs, came in as advertised with net revenue of $367.6 million, up 20.7% over Q1 '07, and non-GAAP EPS of $0.44, which was within the guidance and up 27% over Q1 '07.

Revenue growth and development was generally good, but Phase II-IV was anemic in North America and behind target in Latin America. Overall, development segment revenue grew almost 16% versus Q1 '07. The laboratories had strong growth with the exception of Bioanalytical and Phase I grew very nicely.

Discovery revenue was up largely due to the Alogliptin milestone in Q1 '08, dampened partly on the income line by increased R&D spend on compound 558, which is the statin. The bad news good news from development was around SG&A. This got out of control in Q1 '08 up 31% over Q1 '07 and up 212 basis points as a percent of new revenue.

The bad news is that it has happened. The good news is that we have identified the culprits, and have absolutely shut down some of the causes, thus the picture should brighten going forward. Additional good news for the future hopefully is the signing of $690 million in new authorizations with the cancellation rate of 19.6%.

Backlog now stands at $2.838 billion with a net book-to-bill of 1.51 for the quarter and another new signings record. RFPs remained strong in Q1 '08. The balance sheet improves again with $602 million in cash equivalents and short-term investments. DSO was 46 days for the quarter, an improvement over Q4 '07.

We were disappointed in the initial Phase III results of SinuNase and the resulting down graph and Accentia's stock market value. On the positive side we have the results from the second part of the 558 trial and we are pleased to report that the VIP dosage regimen produced LDL lowering equivalent to the highest label dose of the top selling statin, with a new miracle advantage for LDL HDL ratio treatment effects, as well as total cholesterol to HDL ratio treatment effects. No news on Alogliptin or Dapoxetine, as they are both on the regulatory review as previously reported.

So in summary for the quarter, revenue and non-GAAP EPS came in as expected. We did take a mark-to-market for Accentia as the share price fell on SinuNase news. Development SG&A was much higher than it should have been, but we know the cause, and we'll turn this into upside in the future. We had another all time record in new authorizations and we saw encouraging results from the statin in compound partnering.

I will now turn this over to our CFO, Dan Darazsdi to make a few comments. Bill Sharbaugh, our COO will follow Dan and then we will take your questions. Dan?

Dan Darazsdi

Thank you, Fred and good morning. All net revenue numbers, income from operations and operating margins include in my comments today exclude reimbursed out-of-pockets, stock option expense and certain impairment charges.

For reconciliation to GAAP, please see the GAAP, non-GAAP reconciliation information Fred referenced earlier. We had a very strong start to '08 with new authorizations of $690 million and a book-to-bill rate of 1.51. Backlog increased nicely by quarter end to $2.8 billion and breaks down by client type as follows; 53% pharmaceutical, 35% biotechnology, 8% government and 4% others.

The weighted average backlog at the end of the first quarter was 32 months. Revenue of $367.6 million was up 20.7% compared to 1Q ’07 with a Development segment of a healthy 15.9%. PPD foreign operations generated approximately 35% of PPDs total revenue in the first quarter.

Income from operations in total was $75.2 million in the first quarter resulting in a 20.5% operating margin. The Discovery segment contributed 11.4 million, including the 15 million Takeda milestone.

First quarter development segment revenue, up 347.8 million was up 15.9% and breaks down by service area as follows. 81.5% from Phase II-IV, 14.9% from labs and 3.6% from Phase I. Development segment gross margin for the first quart of ’08 was down slightly at 49.7% compared to 4Q ’07 of 50.0%, and our overall gross margin objective up 50.0% excluding stock option expense.

Development segment income from operations for the first quarter of ’08 was $63.8 million, or 18.4% of revenue compared to 19.2% in the fourth quarter of ’07. Our operating income rate for the quarter was down largely due to high SG&A. The entire management team is focused on driving the SG&A down as revenue should accelerate from the strong authorization levels over the last three quarters and our record backlog.

First quarter net cash provided by operating activities was a very strong $116.6 million and free cash flow was $100 million. The strong cash flow performance raised our cash and short-term investments to $602 million at quarter end.

Capital expenditures were 16.7 million in the first quarter of ’08. Capital expenditures included our new building in Scotland, and various lease hold improvements, computer software and hardware, and scientific equipment for our labs.

We had a solid start to ’08 with PSOs moving down to 46 days compared to 51 days at December 31, ’07 and 49 days at September 30, ’07. Total gross revenue, which includes all out-of-pocket expenses and pass-through cost were $465 million for the three months ended March 31, ’07.

Unbilled services totaled 188.4 million at March 31, ’08 up slightly from 186.1 million at 12/31/07. With 91.5% of our total accounts receivable edged less than 90 days at March 31, ’08, our collection efficiency remain solid. The global finance team working with global operations delivered a strong first quarter and we intend to keep the focus going forward.

Effective tax rate for the first quarter of ’08 was 30.0%, compared to our projected annual effective tax rate of 33% to 34%, which we indicated would vary by quarter. The low tax rate in the first quarter reflected a tax benefit realized from the disposal of firm assets.

On a GAAP basis, we took a mark-to-market adjustment, and an intangible write off totaling $10.9 million during the first quarter for our Accentia investments, as they were impacted by the recently released information regarding SinuNase. The mark-to-market adjustment to our equity investment was based on the 03/31/08 share price of Accentia stock. Our remaining equity investment in Accentia stands at $4.7 million based on the share price at 03/31/08.Our portfolio of pay ARS securities consist solely of municipal obligations and federally guaranteed student loans, a municipal auction rate preferred. We do not hold any mortgage or asset backed auction rate security. While we have experienced failed auctions, we expect to hold the remaining ARS securities until the next successful auction or redemption at par value.

Our operating cash flow and excellent balance sheet provides us the ability to wait out the current liquidity crisis until stability can be restored. None of our ARS securities have incurred realized or unrealized losses.

However, one of the other investments in our portfolio incurred a loss of $7 million. This investment was an AAA rated tax advantaged investment fund, which performed well until late ’07 and early 1Q '08, when it began to be negatively impacted by the market. We have liquidated a majority of this investment and have a remaining balance of $9 million.

The Fund has announced that it is dissolving and anticipates distributing all remaining cash proceeds to investors by the end of May ’ 08. The $7 million loss includes an estimate of the loss on the remaining $9 million balance. We are off to a strong start in ’'08 with great indicators for growth and clear management focus to drive operating performance.

That concludes my remarks at this time. Bill will now provide his comments. Thank you.

Bill Sharbaugh

Thanks Dan. Development services had solid performance for Q1 '08 with net revenue increasing 15.9% versus Q1 '07. In total the IV, Phase II-IV geographic region showed continued strength. The following comments highlight results versus Q1 '07. Revenue worldwide grew 15%, net authorizations were strong and considerably ahead of target.

Book-to-bill was over $1.6 for the quarter and backlog increased 20% versus Q1 '07. On a total company basis our global presence is increasing as evident by our ex-US revenue, which stands at 34.8% of total revenue for Q1 '08 versus 31.7% for Q1 '07.

Total proposals for Phase II-IV worldwide continued to increase reflecting strong demand for outsourcing services. We continue to add billable headcount in all regions, but are closely monitoring our SG&A hiring and functional cost.

As Fred mentioned, SG&A cost spike this quarter this was due to travel, office move, recruitment and relocation, and overhead in operation. While significant portion of this cost is related to growth in mature and emerging markets, it will be contained and control going forward.

The InnoPharm acquisition is proceeding as planned. As previously announced, we expect the deal to close in late Q2 or early Q3. The new PPD Phase II-IV management team is in place at the close of the quarter. Mike will continue his name Executive Vice President of Global Clinical Development. In his role Dr. Wilkinson will leave the company's Phase II-IV operations in North America, Latin America, Europe, Middle East Africa and Asia Pacific. Dr. Wilkinson most recently served as Global Head of Internal Medicine and Vice President of Project Management for another large contract research organization.

Now to the labs. The phase I had a spectacular quarter, achieving record revenue, operating income, and operational performance metrics. Revenue was up 17% over Q4 '07 and operating income was up 30% over Q4 '07. New authorizations were ahead of target. The clinic completed three FDA inspections with no critical observations or FDA 483 citations during the quarter. The demand for Phase I services is strong, and we expect solid performance for the reminder of 2008.

The GMP Lab had a very strong quarter. Net revenue increased 24% over Q1 '07 while operating income increased 36% over Q1 '07. New authorizations were on target for Q1 '08. We added 12 new clients and continue to see increased demand for inhalation services.

Overall Q1 '08 was not a strong quarter for our Bioanalytical lab, with some weakness in revenue growth, operating income and new authorization. Later in the quarter proposals were strong which normally serves as a leading indicator of future growth and several key business development positions were filled. Expectations going forward are for improved performance.

Central Lab results were exceptional, with net revenue an operating profit of 35% and 58% above Q1 '07 respectively. We continue to diversify our client base and added new testing capabilities. We ended the quarter with record backlog 39% over Q1 '07.

That concludes my comments on the development segment, and I’ll turn it over to our CEO, Fred Eshelman.

Fred Eshelman

Okay, thanks Bill and Dan. Regina, we are now ready for questions and comments please.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question will be from the line of Randall Stanicky with Goldman Sachs%

Randall Stanicky - Goldman Sachs.

Thanks very much for the questions. Fred, just a quick clarification, given the working site, is there any change to guidance, just wondering?

Fred Eshelman

No.

Randall Stanicky - Goldman Sachs.

Okay. And then, can you just maybe dig down a little bit more on the SG&A and identifying the culprits. What have you guys done there, do you see efficiency gains that you talked at last quarter, and maybe just how should we think about that ramp quarterly going forward for the rest of 2008?

Fred Eshelman

I’ll let Dan take that.

Dan Darazsdi

Okay, thanks Fred. When we look at the SG&A, we’ve reviewed it be each contributing factor. As Bill indicated earlier, we’ve engaged the entire management team to go after this. The places where I'm working are both and those employees who from time-to-time are not billable from the operations, organizations. So, we are looking at that from a utilization view point, and Bill is working with the finance operations team and the business team to make sure that we are evaluating this at a very detailed level.

In addition to that, we have also got the corporate functions that are very much focused on SG&A actions to reduce this overtime. In my view, it’s going to take a few quarters to get this back to where we wanted, but it is a top priority across the organization at this time.

Randall Stanicky - Goldman Sachs.

So, if we think about the roughly $6 million that we’ve seen in sequential increase in absolute dollars last couple of quarters, is that, should we think about that continuing to increase, but as a more moderated rate?

Dan Darazsdi

I'd say that what we're focused on is that our rate-to-revenue to take the SG&A down quarter-to-quarter overtime. And yes, with revenue growth you do get some absolute dollar build by worth. We're of the opinion that we are going to be able to take the rate-to-revenue down quarter-to-quarter.

Randall Stanicky - Goldman Sachs

Okay. That's great, and just maybe to touch on, you talked about billable employees and just looking at employee growth in general, it's look like there has been a couple 100 full-time adds over the last each quarter. How should we think about your hiring needs for the full-year? I mean, we've heard from many furors that growth in FTEs is going to be mimicry or closely mimic revenue growth and clearly there is a, you guys have done a great job on the bookings and backlog front. So, how do we think about the needs as we think about 2008 in terms of hiring?

Bill Sharbaugh

Yeah, this is Bill I'll take that question. I think the story is the same here in PPD, in terms of our headcount growth should meet and will meet revenue growth in general. We do not intend to grow ahead of the work. There are a couple strategic locations globally in emerging markets where we maybe a little more aggressive in hiring. But, in general we are going to hold hiring inline with revenue and that is our plan going forward.

Randall Stanicky - Goldman Sachs

Does that hit I mean, I guess the billable versus non billable, we should be thinking about those ads going into both costs of goods and SG&As. Is that right, is there a concerns what we should think about?

Bill Sharbaugh

Take it, Dan.

Dan Darazsdi

Yeah, when we look at this, we are hiring for revenue generating activity and getting more efficiency on the SG&A side. So, our hiring, I mean, you've seen our strong authorizations levels over the last couple of quarters especially in Europe, we will be really targeted at billable employees to support the revenue growth.

Randall Stanicky - Goldman Sachs

That's great and then just my last question, Fred I mean obviously the bookings number was incredibly strong again this quarter. Are you seeing larger contracts north of $50 million pickup and how close do you think you are to booking some sizeable strategic type deals that are obviously multi-year with competitive dynamic around them?

Fred Eshelman

Well, we're always in discussions with various say clients about how to improve the way we do business with each other, both qualitatively and quantitatively. I don't really have anything solid one on. If something that gets out of the box right at this moment. We certainly continue to see more very large opportunities than we ever had in the past. Obviously we have to execute, close those opportunities even though our percentage of cancellations was down for this quarter at 19.6, the absolute number was up over the last couple of quarters. I don't know what's causing all this frothiness in the market. Hopefully that number will continue to decline both on an absolute and a percentage basis, which would be helpful, but overall as I indicated the total value, dollar value of RFP's in Q1 '08 continue to grow over any comparable preceding quarter, especially Q1 '07 and or Q4 '07 for that matter. So, there is no weakness that we can see in the clinical services market. We think it's growing at least as fast as preclinical, and so we're pretty bullish on that.

Randall Stanicky - Goldman Sachs

And, that duration of 34 months that we heard about last quarter, is that still the same broad range?

Fred Eshelman

Total duration of the company backlog is 32 months.

Randall Stanicky - Goldman Sachs

Okay. Great, thanks very much for the questions.

Operator

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

John Kreger - William Blair.

Thanks very much. Fred, its sounds like you are pleased with the data you are seeing on compound 558. Can you just give an update about what your plans are going forward?

Fred Eshelman

We don’t know exactly. We discussed it in some detail at a meeting yesterday on the results that we had just got in both pharmacodynamically and pharmacokinetically. We have apparently with the dosage regimens we tested, at least reached parity with the highest level dose of the largest selling statin. So that’s encouraging.

Even if we had no advantage on the safety side, and we still believe that we will have some advantages there on drug, drug interactions and so forth. We believe that there are ways that we could tweak the delivery to potentially exceed the LDL lowering efficacy of the competitors, and if that is true I think we got a pretty strong drug candidate there.

Now, the question of course is, how do we go about that in terms of future spending? The forecast and guidance that we’ve given generally include the continuing pre-clinical programs such as carcinogenicity. They include some GMP work in terms of providing more active pharmaceutical ingredient, as well as finished dosage form, so we’re in pretty good shape there. The question would be how do we fund additional clinical work for additional work on the dosage forms last delivery, and we are contemplating how to do that to advance the compound without affecting our guidance. So, that’s about all I can tell you at the moment.

John Kreger - William Blair.

Okay, thanks. Second question, what's your latest thinking on use of cash with over $600 million on the balance sheet, how do you sort of rank your priorities?

Fred Eshelman

We continue to have, thin round heavy weight box between myself and our CFO on that particular issue. Seriously, of course we couldn't institute our share buyback because we had been in either blackout periods or the program had not been initiated or whatever, but I think next week barring something unforeseen, we maybe out of those restrains, and then it will depend on where we are on share price and whether we view that as weakness or not, and Dan if you care a comment, go ahead.

Dan Darazsdi

Yeah, I think that's exactly right Fred. We will be in a position to look at the share price, and we will be in a position to begin our buyback program, if we decide to do that just shortly following this call. In addition to that we are being very rigorous around looking at a niche kinds of M&A activity, which we think could provide us some advantage from a geographic footprint or customer solution view point. And, we are also investing as we see appropriate in the labs, IT infrastructure and support of global processes across the organization.

John Kreger - William Blair.

And just one last question, I think you said earlier in the call that if you look at your backlog, biotech is about 35% of that total. Have you ever gone one step beyond and said of that percentage of biotech, how much would be smaller biotech companies that are not cash flow positive versus the larger biotech's?

Fred Eshelman

Yes, we’ve looked at that. I can't give you an exact number, how that falls out in terms of cost doing backlog, but I can certainly tell you that we are looking at that very seriously. We view that small-to-medium biotech market as a hot tropic. We've looked at growth rates there to the extend we can versus spending versus funding and so forth, and believe that to be not only a big opportunity now, but a huge opportunity in the future as they get more late stage compounds, and hopefully as some of those things become successful they raise even more money. So yes, we're looking at that a lot, but I don't have any particular breakdown on the backlog for you.

John Kreger - William Blair.

Yeah, thanks.

Operator

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

Hari Sambasivam - Merrill Lynch.

Just a couple of questions. Could you maybe address the issue as to why the North American Phase II through IV as a little bit slower? And, I am just wondering whether we can read through any thing from the recent commentaries from various pharma companies as to potential sort of a tightening of R&D budgets? Is that maybe a cause of it or are there other reasons why the Phase II-IV businesses I guess below your expectations? Second question I had was related to labor and training, and I am just kind of wondering as you sort of a go across expand your ex-US operations, how do you a sort of see the trends in your labor cost and your training cost and how do you sort of address the issue of retaining good quality people in new geographies? Thank you.

Fred Eshelman

Okay. First question on North American revenue, we do not see this as resulting from a slowdown in R&D spend. Based on the RFP volume, we say the offset is true. For North America in particular, as Dan said we had a shift from Q1 '07 to Q2’07 in terms of the percentage of revenue generated overseas of almost 4%. So, both in percentage and in actual dollars much of that growth has shifted overseas, which of course would diminish North America to an extent. Having said that, we are not happy with where it is. We are taking a number of measures to reinvigorate our North American growth and to improve our margins and so forth.

As far as ex-US training, labor cost, retrenchment, so forth that varies widely by territory. As you know, in some of the more established regions training is pretty much where it is. In the US, in some of the new growth regions training is a bigger issue in terms of how intense it is, how long it last, how much we have to mentor and so forth. And we are turning a lot of our attention as you point out to how do we retain good folks? And, that’s always an issue in a hot market. We believe that our turnover rate has pretty much stabilized over the last few quarters, higher than we like, but it seems to have stabilized. So, that’s about the best we can do. Bill, if you care to comment on US, please do.

Bill Sharbaugh

Yeah, I think as Fred said, the dynamics we talked about today simply reflect not that R&D spending is slowing down, as Fred said, it’s the opposite. But, companies tend to want to conduct larger portions of their programs overseas. So that’s just the nature and dynamic of the clinical research marketplace right now. And, I think that’s the driver. We are sitting down and analyzing the marketplace. Fred talked about the biotech sector as a hot area and one we are paying a lot of attention to and for those kinds of clients in particular, North America I think is a primary target for conduct of their studies. And, we have a bunch of other action plans in place to reinvigorate the North America revenue growth.

Hari Sambasivam - Merrill Lynch.

Thank you.

Operator

Your next question will be form the line of Sandy Draper of Raymond James.

Sandy Draper - Raymond James

Thank you, most of my major questions have been asked and answered, but just a quick question, I think for Dan. On the percentages of the development of revenue or when you gave percentages in terms of Phase II-IV, Phase I, et cetera., was that as a percentage of total revenue, which is I think how you used to give it, or you’re now giving us percentages as a percentage just of the development segment revenue?

Dan Darazsdi

Development.

Sandy Draper - Raymond James

Okay. Just on the development side. Okay, that's my only question. Thanks

Dan Darazsdi

Yeah. Thanks.

Operator

Your next question will be form the line of Douglas Tsao of Lehman Brothers.

Douglas Tsao - Lehman Brothers

Hi, good morning. Going back to the question about growth in the United States versus abroad, you had given the demand trends that we've seen in the industry and to built point increasingly and sponsors are looking to conduct cities abroad, I mean have you considered potentially redeploying your North America resources, two regions like Latin America as well as Asia Pacific where the growth rates that'll be at a smaller base, are much higher?

Fred Eshelman

No, sir we have not considered that. We from time-to-time will send U.S or European personnel into some of these regions to assist with start-up, and training and so forth and so on, but it's a temporary assignment and as we have said before on my watch there will be no net transfer of U.S jobs overseas. We will certainly try to grow in those markets with local folks, but not transferring U.S jobs.

Douglas Tsao - Lehman Brothers

Okay. And then, in terms of new business wins, which have obviously been a very strong in the last three periods now and after some very modest sort of slowdown at the end of 2006 and early 2007, was there a change in the selling strategy, and has there been any sort of changes brought on by some of the new management that was brought on early last year that has contributed to the recent success.

Fred Eshelman

Well, certainly, I think our folks in BD are doing an increasingly good job. I think they're working better with the operations folks on the cell. I think that our performance in our bids and contracts groups is improving, is becoming more efficient. We're putting up better bids, we're defending those better, and so forth, but at the same time we have to look at the rising tied and it seems to be raising a lot of bourse hours included, which doesn't mean I am not proud of what we're doing. I am, but on the other hand the market itself is growing at unprecedented rates. So, if we can maintain and or get an uptick in our close rate on a dollar basis and the market remains as it appears to be, we should be in pretty good shape.

Douglas Tsao - Lehman Brothers

Okay. And then, final question I sort of wanted to touch on vis-à-vis the lab businesses. You commented on the fourth quarter that you expected one large program to restart in the first quarter. I was wondering if that took place and if you could provide a little color on why the Central lab was so strong? And then also, if you can provide a little more color on vis-à-vis the Bioanalytical Business, which you said was weak, which although had been experiencing lot of strengthen recently. So, if you could provide some more color on that that will be very helpful.

Fred Eshelman

Yeah. On the global Central lab, your first question Dr. Covington can take that one.

Dr. Covington

There was one large program that continues to remain in backlog, but it not cranked up yet. We should anticipate seeing something along that within the next two to three quarters. In reference to the Bioanalytical lab, the Bioanalytical lab does go through cycles where they have a great sales and then slower down sales, and they are very short-term on their sale authorization and then to revenue recognition. So, a little bit slower growth in the sales and that contribute to slower growth in their revenues, anything else.

Douglas Tsao - Lehman Brothers

Okay, thanks. And then in terms of the Central lab, so that one program has not been cancelled, and you do expect that, you still expect that to restart?

Fred Eshelman

We just hardly that we do expect it to start.

Douglas Tsao - Lehman Brothers

Okay, great. Thank you very much.

Operator

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

Dave Windley - Jefferies & Company

Thanks for taking the questions. Fred, I think you mentioned that the M&A activity and looking at strategic acquisition opportunities, and then also the commentary around bigger programs and looking at I guess, bigger programs and stretching those across the development phases, and then finally your comments about the emerging biotech’s being an interesting both current and forward looking opportunity, in order to generate some total through perhaps, does it makes sense for you guys to be looking at earlier stage acquisitions, more Phase 1 capacity, for example, or even reaching in the pre-clinical?

Fred Eshelman

Let me try to take a composite response to your questions. On the M&A mentioned by Dan, we are looking all sorts of things as he said. Service components, geographic components, strategic trust and so forth. Unfortunately we are not really finding much at this point that we can execute on.

I think as we've said in the past, in terms of how we're getting into toxicology for example not going to happen barring something totally unforeseen. In terms of increasing our Phase I footprint, we also have no desire with that. I think our folks done in the Phase I unit are managing that superbly, very efficiently. We are actually getting more revenue growth than we had expected. Margins are up and so of course I am very happy with that and I don’t want to mess with it in particular.

In terms of bigger programs and bigger region to existing clients, we are talking to several clients about having a very deep and broad reach with them in certain therapeutic areas. We're encouraged by that. In terms of the emerging biotech and how we might go about bringing a number of these things together, you may or may not have noticed that we have decided to put a new location outside Sherluck, North Carolina and the North Carolina Research campus, which is a new world class research campus being put up there. It will have all of the basic science needs for discovery. We are hoping to capitalize on that with a development presence. But, also in the future we see that as a potentially good connection between our compound partnering efforts and our development efforts and, in particular a way that we can offer onsite services through someone else to those clients. So all of that strategy is supposed to be taught together.

Dave Windley - Jefferies & Company

Okay, Fred would you be willing to comment or quantify your largest program and backlog or perhaps give us an idea of how many you have above a $100 million?

Fred Eshelman

I don't know the answer to that question, but I think, I can pretty safely say that the biggest single backlog element would remain the NIH thing that we signed in third quarter of '06. Maybe if memory serves, I would suspect that we have a number of things in backlog over 50, but I don't have that list in front of me at the moment.

Dave Windley - Jefferies & Company

Okay. Were the cancellations relatively balanced across the service line?

Fred Eshelman

I didn't look at it but therapeutic area, I would suspect that it got skewed toward oncology because of a couple of cancellations that I am aware of, but I can't give you a percentage break down there. I would say that oncology does tend to be fairly frothy because of the number of factors regulatory, Phase III failures, abandoned one of the target that didn't work out, so forth so on.

Dave Windley - Jefferies & Company

Right. In terms of, like lab versus phase II-IV, you mentioned lab backlog or Bill mentioned lab backlog was pretty high, not inordinate level of cancellations in say central lab versus 2 to 4 or something like that?

Fred Eshelman

No.

Dave Windley - Jefferies & Company

Okay. Are there in relation to geographic push, I am curious as to areas where clients maybe urging you to build out rapidly and where you may have growth needs bill kind of alluded to that would cause relatively more spending in an area, where maybe you're under billed like I don't know Russia or something like that. That would force spending to continue to grow against your other initiatives to keep SG&A in control.

Fred Eshelman

No I don't think that would have, because we certainly hope to bootstrap most if not all of those territories at this point in time. In terms of somebody pushing us into a certain region that really varies by program where the client specifies. In most cases what kind of geographic breakdown they like to have, if they don’t and they ask us, what is the expected patient accrual by using a certain mix then we will certainly make suggestions that are based on our experience. But, to my knowledge we don’t any client banging the table on any particular region.

Dave Windley - Jefferies & Company

Okay. My last question. As contracts get very, very large, as we’ve start to hear, you talk about more above 50 and some above 100. Does pricing get easier or tighter, and how should we view pricing in the first quarter of '08 relative to the pressure on core development margin? Thanks.

Fred Eshelman

Well, again, that varies by situation and in a lot of those cases, we have standing master services agreements, which in many cases have rate cards, if you wills and they have a spelled out volume discount program. So, in those cases, I don’t think it particularly affects pricing, if we hit the volume points, we are very happy and so is the client. They get a discount and we get to leverage that over supposedly holding the SG&A, which should preserve our margins. So, in those cases most of the time, I think we are okay. Occasionally, there is one off situation where none of those conditions hold, and the bidding gets pretty lively. But, as you know we do have certain policies and we’re not going to give the business away.

Dave Windley - Jefferies & Company

Right. Alright, thank you.

Operator

(Operator Instructions). Your next question will be from the line of Jim Kumpel of FBR Capital Markets.

Jim Kumpel - FBR Capital Markets

Hi, good morning. Can you talk a little bit about the sustainability of the solid results you've been getting out of your lab businesses, and what we need to look for in terms of catalyst for that business on a going forward basis?

Fred Eshelman

Are you talking about GMP, Bioanalytical and GCL as a whole?

Jim Kumpel - FBR Capital Markets

Yeah. And, I mean it looked like your labs overall were doing quiet well and, I just want to see if you can offer us kind of a roadmap for other catalyst to look forward to you in the next year so?

Fred Eshelman

Well, we certainly are very encouraged by GCL and our top feeling internally. If we can latch it up the percent of clinical trials that PPD is managing, where we are also using GCL, we are going to be in right shape because we got a good market share of clinical trials. They all use the Central lab of some kind, so if we can get some conversion to ours, our growth rate should be very good. We are also looking at an overall strategic plan and in terms of where else would we want to locate throughout the world, which particular therapeutic areas do we want to specialize in and so forth, and as we've mention before, we do have excess capacity in both our Cincinnati and Brussels laboratories at the present time. So, in the near term the amount of CapEx and other expenditure should be the minimums associated with revenue gains. And, so we should be at least able to maintain margins. So that's certainly a bright spot for us. GMP growing nicely, maintaining their margins. That is a capital intensive business, so we have to watch that all the time in terms of cash-on-cash return. The same applies a little bit to bioanalytical and as Paul indicated, bioanalytical does tend to be a little bit more choppy both on the revenue and authorization side, because some of these bits of business are short-term. We also obviously have to get our way ahead of the curve in terms of picking assays to validate and our labs that have been ready when the demand comes. And obviously, we look at things going on patent. We look at new target areas, so forth. So overall, we're very bullish about labs, and if we can get the bioanalytical back to where it needs to be, then it’s a very nice contributing segment of our overall revenue.

Dr. Covington

I mean, Fred if I can just add a couple of comments, in our global central lab we added eight new capabilities from the last quarter, which clients are interested in. With some clients we are in a build mood, where we're going to take on and create dedicated labs space for particular products, either because they don't want to do it any more or it's a new capability and they rather build it out with us. And, so there is a variety of different models going on, and a variety of different needs from clients that are driving our lab business across the Bioway and global central labs, and the GMP lab as well, where again we offer some very specialized services that are competitors don’t. So, we're pretty bullish on the lab segments.

Jim Kumpel - FBR Capital Markets

In terms of your global expansion, can you characterize what the new expansions, what the new acquisitions you've made bring to the table aside from a physical presence?

Bill Sharbaugh

Well, the uniform acquisition in Russia and Ukraine obviously bring us local operating knowledge, which we think is very important. In the past, we had provided services in that those geographies through a third party and gave away some degree of margin doing that. So it make sense for us to do it ourselves and we are comfortable with the environment there and have a trusted partner moving forward. So, it just made sense for us to formalize that relationship a little more.

When it comes to other geographies, again as Fred said, we don’t want to build ahead of the curve. We want to go and support client needs wherever they are, but we want to do in a responsible way and build along with them moving forward. So, bottom line is where the clients want to go and conduct researches, where we're going and where we’re building capability.

Fred Eshelman.

Yeah, I’d add to that also in some cases, we come across opportunities in other markets, and often times people have gotten way out align with their pricing expectations in terms of selling price. And, we are just not going to do that because it’s much more financially productive for us to grow organically in most those markets. So, whether or not we’re going find much buyers is an open question.

Jim Kumpel - FBR Capital Markets

And then my final question would be can you comment a little bit about Alphametrics’s recent troubles and there comments said, there seems some softness in the R&D side. As it relates to where they are really focused versus the kind of services that you’re providing in the stage development that you’re serving?

Fred Eshelman

Well hopefully, there is no connection. I am not familiar with exactly what the problems are at Alphametrics, and whether or not that reflects a diminution in technology and or service spending in the discovery segment. I just don’t know, but as far as we can see from the level of RFPs, there is certainly robust growth in the development segments. So hopefully, it is not a carry over. I mean, I think evidence by what folks are doing including Glaxo, and Merck, and others, a lot of these companies are just going out and buying the entire company. They want to acquire technology and or target. So, to that extent there has been a little bit of a shift in the way that has occurred.

Jim Kumpel - FBR Capital Markets

I appreciate it. Thank you.

Operator

Your next question will be from John Kreger of William Blair.

John Kreger - William Blair

Thanks just a couple of detail questions for Dan. Dan can you give us the foreign currency exchange rate impact on your revenue and operating income in the quarter? Could you give us your headcount at the end of the quarter? And, just a perhaps a bit more color on the tax rate, are you still expecting 33% to 34% for the full-year, which would suggest a higher rate in the next three quarters?

Dan Darazsdi

Yeah, I will try to cover each item. The foreign currency translation is having a more minimal impact as we've been moving forward. We are principally hedged on the sterling at about 80% hedged. We've actually got Brazilian, we're coverage note about 65% and we are better than our budgeted rate. So, in terms of revenue we're only seeing these $5 million or $6 million. That operating income level, it's been pretty small. So, we're really not seeing much impact anymore at this point from FX based on our hedged strategy.

John Kreger - William Blair

So $5 million and $6 million benefit in revenue, and roughly negligible at the operating income line.

Dan Darazsdi

It was negative revenue, about $6 million and just the operating income line a $1million or two are positive. On the employee count 10,000.

John Kreger - William Blair

Yeah.

Dan Darazsdi

Sorry, operating income was negative. I was looking over our headcount schedule, were about 10,458 NFTE's. And the tax question, we did have a benefit in the first quarter. We're expecting to be at our guidance range for, both for the quarters and for the year.

John Kreger - William Blair

Okay. We can still attempt for 33% to 34% for the next three quarters or should we…..

Dan Darazsdi

High.

John Kreger - William Blair

Little bit high, okay. So, 33 to 34 is still a good number for the coming quarter.

Dan Darazsdi

Yeah. 33 to 34 is where we should run it and it should be in that range to year end.

John Kreger - William Blair

Okay. Thanks.

Operator

Your next question will be from Douglas Tsao of Lehman Brothers.

Douglas Tsao - Lehman Brothers.

In terms of the central lab, Fred you commented, I am trying to pull through some business from -- the cynical development business. I was just wondering if you could provide some comment on the match in terms of your central lab capabilities and in terms of therapeutic areas, and how it matters to the central lab capabilities or do you need to potentially make additional investments in areas like flowcytometery to work on oncology and so forth. I mean, is there pretty good lay over there or do you need to perhaps expand the central labs therapeutic capabilities a little bit.

Fred Eshelman

At the moment, I think we cover the vast majority of the assays that would begun an routine clinical development. In particular, flowcytometery, I think we're well positioned and that's growing very fast for us. It's still small, but it's growing very fast in the lab. We are always looking for opportunities for new assays as you point out to line up with our therapeutic thrust whether that's oncology or anti-infected, or who ever that maybe and maybe Dr. Covington would like to add some comments on that.

Dr. Covington.

The only thing I'll say Fred, earlier to the cost sale, and between 2006 to 2007 by having increased focus on selling simultaneous central lab and Phase II-IV development we had a several hundred percent increase in the cost sell between those two divisions. Well that will continue, and we are going to reap the benefits by the (inaudible)

Douglas Tsao - Lehman Brothers.

Okay, great. Thank you very much.

Operator

Your next question will be from Eric Coldwell with Baird.

Eric Coldwell - Baird

Thank you, good morning. I was just hoping to get some clarification on Dan’s response to John Kreger. Is it clear that revenue was aided by $5 million to $6 million by foreign currency translation and EBIT negatively impacted by 1to 2, is that your comment for the quarter?

Dan Darazsdi

The EBIT went down about $1.5 million to $2 million based on foreign currency and revenue was negatively impacted by 5 to 6.

Fred Eshelman

Okay, so both down.

Eric Coldwell - Baird

Both down, okay. And then, on just a couple of housekeeping items. Fred, in the past you’ve talked about your hit rate and needing to get your hit rate up in business development. I’m hoping you can give us some color on where you are with hit rate today, and the trends there. And, as a follow on to that, was the issue in bioanalytical more of a hit rate issue, or was it a market softness issue on the new bookings this quarter or in the prior quarter?

Fred Eshelman

Bioanalytical was market softness, it was nothing wrong with our hit rate there. The overall hit rate, we break it down by how much did we sell for the totality of the RFPs that we brought in. We further break it down by what was our hit rate versus competitors. So, in other words a lot of times on the RFPs, either no decision is made, or it’s internalized or whatever. So, you've got to take that out of the overall equation to see where you stand particularly against competitors, and then we also look at what our hit rate is in the very large programs and we track all of that all the time.

I think our hit rate for Q1 of '08 particularly against competitors was acceptable. I mean, it was a strong number. Would I like for that to go up, yes I would, would I like for us to have less churning, in other words we're spending a lot of time bidding and talking to the folks about stuff that vaporizes or gets internalized, and it really takes a lot of time to talk on upper system, but I guess that's a part of market. And, naturally on the very large opportunities, we are, we have a full core press on there and we are involving all of our senior management. They are being assigned these responsibilities. I have some myself. I am responsible force, so I hope I am able to assist PD, in closing those. So, hit rate is extremely important to us always, but in particular in a strong market because now is the time to capitalize.

Eric Coldwell - Baird

Okay. Final question is getting back to the mix of securities, and you've given a lot more detail recently on where some of your investments are housed. I'm trying to get a sense on what was the corporate decision to move into those securities in the past? Was it something that was affected by the prior management team and financial team, or where some of these securities invested in with the new management team? I guess, ultimately what I'm getting to, as I look at my coverage list, you're the only company that's had a exposure to some of these securities that are having liquidity and auction issues and have there been any lessons learned from what we have seen in the credit markets and capital markets recently.

Fred Eshelman

Let me take that and then Dan can comment. Certainly our treasury policy has been conservative and at the moment is extremely conservative as you might imagine. The write down that we took in Q1 with that particular investment preceded Mr. Darazsdi, so he has nothing to do with that other then short fall.

In terms of lessons learned, I think everybody in the world and particularly those in the financial community have learned some hard lessons over the last six months or so. I don't think, we were, I don’t know lame anywhere and I think we got burned in some of the general melt down and as Dan indicated, we'd estimated any residual effects from that one particular investment. And that's been included in what we already took. So, we are satisfied that what we have left is pretty safe unless there is another earthquake in the markets. Our go forward policy is extremely conservative now, centered on preservation to the nth degree rather than necessarily ratcheting up our returns. So, Dan would you like to comment future on that.

Dan Darazsdi

No I think that give up is exactly right, and we have focused on very conservative policy going forward and that's where we are.

Eric Coldwell - Baird

Thanks much.

Operator

Your next question will be from Jim Kumpel with FBR Capital Market. Jim your line is open. There are no further questions at this time. I will now turn the conference over to Dr Eshelman for any closing remarks.

Fredric Eshelman

Okay. Thank you all very much for being on the call. And if you follow-ups, Craig Eastwood is standing by as is Dan Darazsdi. So, thank you and good morning.

Operator

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

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