Pharmaceutical Product Development Inc. Q2 2008 Earnings Call Transcript

| About: Pharmaceutical Product (PPDI)

Pharmaceutical Product Development Inc. (NASDAQ:PPDI)

Q2 2008 Earnings Call

July 23 2008 9:00 am ET

Executives

Fred Eshelman - Vice Chairman and CEO

Dan Darazsdi - CFO

Bill Sharbaugh - COO

Analysts

Randall Stanicky - Goldman Sachs

David Windley - Jefferies & Company

Steve Halper - Thomas Weisel Partners

Douglas Tsao - Lehman Brothers

John Kreger - William Blair

Operator

Good morning, my name is Christy, and I will be your conference operator today. At this time I would like to welcome everyone to the PPD Quarter Two, 2008 Earnings 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 you may begin your conference.

Fred Eshelman

Okay thank you, and good morning, as always I will begin with 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 factors that could cause actual results to very is disclosed in the press release announcing our result, 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 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 that is posted on our investor presentations and events in the corporation section of our website at www.ppdi.com.

Second quarter 2008 came in as advertised with net revenue of $374.9 million, up 16.8% over Q2 '07 and GAAP EPS of $0.41, which was within guidance. Revenue growth in development was generally good, but Phase II through IV North America was again somewhat anemic, and Latin America was behind target.

Overall development segment revenue grew 17.1% over Q2 '07. With the exception of Bioanalytical Labs, all the labs had strong growth and Phase I results were outstanding. The great news from the development segment was around margins. These were pressured in Q1 '08 for a variety of reasons, and we said then that the picture should brighten going forward. It has, with gross margin of 51.1% and operating margin at 21.4%.

Total authorizations for Q2 '08 were $552 million, an increase of 16.7% over Q2 of '07. We have repeatedly said that authorizations can be lumpy on a quarter-to-quarter basis. As a result Q2 '08 authorizations were down from the record 690 million in Q1 '08, largely due to a lower hit rate.

RFP volume continues to increase quarter-over-quarter. The Q3 marketing log is strong, and we expect to ramp-up authorization over the remainder of '08 as we did in '07. Backlog increased to almost $2.9 billion. There was no news on Alogliptin or Depoxetine as they are both under active regulatory review. We continue to discuss 558 licensing with potential partners.

The balance sheet remains strong with $597 million in cash, cash equivalents and short and long term investments. Cash flow was robust despite paying the dividend and buying back stock as Dan will discuss. In addition, DSOs continued to improve. So in summary, for Q2 '08, revenue and EPS grew nicely and came in as expected. Margins improved dramatically versus Q1 '08. DSO continued to improve. Cash flow was strong. RFP volume continues to grow, and the marketing log is good.

Building on our solid foundation, all of the pieces are falling into place for executing on new sales going forward. I'm also pleased to announce the appointment of Christine Dingivan M.D. as our new executive Vice President and chief medical officer. Dr. Dingivan spent 12 years with MedImmune serving in various capacities and most recently as a senior Vice President of Clinical development and operations.

Dr.Dingivan brings extensive clinical trial knowledge and experience to PPD, and we look forward to her contributions to our business.

I will now turn this over to our CFO, Dan Darazsdi for his 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 incomes, income from operations, and operating margins included in my comments today exclude reimbursed out of pockets and stock option expense. For reconciliation to GAAP, please see the GAAP, non-GAAP reconciliation Fred referenced earlier.

We had a solid second quarter of '08 with revenue growth of 16.8%, gross profit of 51.0%, operating margin of 20.6%, and year to date DSOs of 45.7 days. As Fred noted, authorizations can be lumpy at times, and the $550 million for 2Q authorizations while down from a record 1Q results, still increased backlog to $2.9 billion.

Backlog breaks down by client type as follows, 54% pharmaceutical, 36% biotechnology, 7% government, and 3% other. The weighted average backlog at the end of the first of the quarter was 34 months, up slightly due to a few large authorizations with longer durations. Revenue of $374.9 million was up 16.8% compared to 2Q '07 with the development segment up a strong 17.1%.

PPD's foreign operations continued to expand in 2Q, and generated approximately 38% of our total revenue. Second quarter development segment revenue of $370.6 million breaks down by service area as follows; 81.0% from Phase II through IV, 14.5% from labs, 4.5% from Phase I. Foreign exchange had a positive impact on revenue in 2Q, and if we had converted at average 2Q '07 rates, revenue would have been $6.4 million lower.

Income from operations was $77.3 million in the second quarter, resulting in a 20.6% operating margin. The discovery segment had a negative operating income of $1.8 million with no compound partnering milestones in the quarter. Foreign exchange negatively impacted operating margin in 2Q '08 and converted at average 2Q '07 rates, operating income would have been $3 million higher. Development segment gross margin for the second quarter of '08 was 51.1%, up compared to the first quarter '08 of 49.7%, and above our overall gross margin objective of 50.0%.

Development segment income from operations for the second quarter of '08 was $79.2 million, or 21.4% of revenue, compared to 18.4% in the first quarter of '08. Our operating income rate for the quarter was up largely due to strong performance in Europe, Middle East, and Africa, our labs and clinic and a reduction in SG&A as a percentage of revenue from 27.0% in the first quarter of '08 to 25.7% in the second quarter of '08. The entire management team is focused on driving SG&A down as revenue accelerates from the strong authorization levels of the last several quarters, and our record backlog.

Second quarter net cash provided by operating activities was strong at $60.4 million. Free cash flow was 42.2 million. The strong cash flow performance resulted in a cash, cash equivalent, and short and long-term investment balance of $597 million at quarter end after using $48.4 million in cash during the quarter to pay our dividend and repurchase 866,000 shares of PPD stock.

Capital expenditures were $18.1 million in the second quarter of '08. Of this amount, 41% was for the new building in Scotland and various other leasehold improvements, 35% for information technology, and the remainder for scientific equipment for our labs. We had continued improvement in DSOs, which moved down to 46 days, compared to 51 days at December 31, 07.

Total gross revenue, which include all out-of-pocket expenses, and pass-through costs were $958.8 million for the six months ended June 30, 08. Unbilled services totaled $186.0 million at June 30, 08, consistent with $186.1 million at December 31, 07. With 91.7% of our total accounts receivable, aged less than 90 days at June 30, 08, our collection efficiency remains solid. The global finance team, working with global operations delivered a strong second quarter, and we intend to keep the focus going forward.

During the quarter, we liquidated approximately $43 million of auction-rate securities from our investment portfolio. Our remaining portfolio of ARS is approximately $128 million, and consists solely of municipal obligations and federally guaranteed student loans and municipal auction-rate preferred. We do not hold any mortgage or asset-backed auction rate securities. While we experienced failed auctions during the quarter, we expect to hold the remaining ARS securities until the next successful auctions or redemption at par value.

Our operating cash flow and excellent balance sheet allows us to wade up the current liquidity crisis. We have not incurred any realized losses on our ARS securities to date. As we communicated last quarter, one of the other investments in our portfolio was the AAA rated taxed advantage investment fund. This fund performed well until late '07 and early 1Q '08, when it began to be negatively impacted by the market.

As a result, we recorded a loss on this investment in the first quarter. This investment was liquidated in the second quarter and we were reimbursed for a significant percentage of our losses. This reimbursement allowed us to reverse $1.9 million, net of tax, delivering a favorable pickup in 2Q '08. We have no further position in this security.

The effective tax rate for the second quarter of '08 was 35.8%, compared to our projected annual effective tax rate of 33% to 34%, which we previously indicated would vary by quarter. The high tax rate in the second quarter reflected timing issues from a FIN 48 adjustment. We expect our full-year tax rate to be within our existing guidance range. 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

Thank you, Dan. On a total company basis our global presence is increasing. For Q2 '08 our ex-US revenue stands at 38% of total revenue versus 33% for Q2 '07. This is a trend we expect to continue. Development services gross margin was 51.1%, slightly higher than gross margin for Q2 '07 of 50.9%, but more importantly, 145 basis points higher than Q1 '08.

While gross margin will continue to fluctuate from quarter-to-quarter based on future contract terms, including volume and mix, we expect to maintain our target at 50% gross margin, excluding stock-option expense for the remainder of the year. My top three priorities for the global operations team are margin improvement, SG&A containment, and better execution. As was stated earlier, development services had solid performance for Q2 '08, with net revenue increasing 17.1% versus Q2 '07. At this time, I would like to add some color around those results.

In total, the Phase II through IV business showed continued strength. The following comments highlight results versus Q2 '07. Revenue worldwide grew 15%. Revenue per STE increased 6%. Backlog increased 19%, despite lower than expected authorizations for the current quarter. Total proposals for Phase II through IV worldwide continued to increase on a dollar and quantity basis, so demand remains strong. Leadership and business development and operations are working together closely on every large opportunity. We continue to see evidence that our customers are willing to consider more strategic outsourcing partnerships in both our Phase II through IV, and laboratory businesses.

Now to the Phase I clinic and labs. The Phase I clinic had outstanding financial performance, achieving record revenue of $16.5 million, an increase of 44% over Q2 '07. To put more color on performance, the clinic had record levels of revenue per bed and dosed over 1100 volunteers during the quarter. Representing a 22% increase over average quarterly levels. The clinic's success was a mixture of high dollar, procedurally complex trails with low cancellations and postponements.

The GMP lab had a very strong quarter. Net revenue increased 29% over Q2 '07. New authorizations were below target for Q2 '08, but Q3's outlook is strong with three large proposals in the bid defense process that totaled $9.1 million. We added 17 new clients, and continue to see increased demand for our inhalation services in the US as well as Europe.

Turning to the Bioanalytical Lab the second quarter showed revenue improvement over Q1 '08 but the lab operated below capacity. Authorizations for the second quarter exceeded our tar get, resulting in an increase to the backlog of 11% over Q2 '07. Included in authorizations for the quarter were two larger than normal projects. One, a rescue project involving over 40,000 assays across multiple studies, and the other a large program estimated between 50 and 100,000 samples over an 18-month period. Overall, I am bullish about the Bioanalytical Lab because we added ten new clients, purchased new instrumentation and we are engaged in discussions to create several long term strategic partnerships.

We are also developing plans to expand our cell-based assay services as demand continues to grow. Central lab results were exceptional, with net revenue growth of 47% above Q2 '07. New authorizations were above target and included three new clients resulting in record backlog, 46% over Q2 '07. We also launched a new client portal that makes project status reporting flexible to client needs. That concludes my comments on the develop segment, and I'll turn it over to our CEO, Fred Eshelman.

Fred Eshelman

Okay thanks, Dan, and Bill. Christy, we're now ready to take questions, please.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We'll pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Randall Stanicky of Goldman Sachs.

Randall Stanicky - Goldman Sachs

Thanks very much for the question Fredric. Can you just help us understand maybe the disconnect in revenue and headcount growth right now. Given that it looks like it was essentially flat in the quarter and maybe specifically, in the context of some of the cancellations, how do we think about your hiring needs in the back half of the year?

Fredric Eshelman

Well I think a couple of things, as we said over the past couple of quarters. The growth in the United States and North American segments has been slower than anticipated, and a little bit behind our internal forecast. We have to hire in advance of a forecast, and we overshot the mark a little bit in the US as we talked about in Q1 '08, and therefore, that gave us an excess capacity, so that we could grow revenue without any particular increase in headcount.

If we hit the targets that we've established for the last half of the year, not only in the US, but ex-US, we of course will be ramping up the hiring once again, and we are confident that we can succeed in getting the number and the quality of people that we need to drive the revenue. So I guess I would say that it might - the hiring might not ramp as fast as it has in the past but, again, if we hit the targets, which we're fairly confident that we will, then you will see the headcount go up again.

Randall Stanicky - Goldman Sachs

But it sounds like it's largely ex-US headcount that you are focusing on right now?

Fredric Eshelman

In terms of hiring?

Randall Stanicky - Goldman Sachs

Yes.

Fredric Eshelman

Yes, that's correct at the moment.

Randall Stanicky - Goldman Sachs

Okay. And just a question on the cancellations, can you maybe just help us understand, were these trials that had been started -- I'm just trying to understand where there's a potential earnings gap, or if there is one at all, as you try to think about backfilling some of the cancellations from this quarter and last?

Fredric Eshelman

Well, this quarter was a little bit unusual in terms of the qualitative description of the cancellations. We looked at this, and my recollection is that the largest single cancellation in Q2 '08 was somewhere around $15 million, then it tailed off sharply after that. So, what I'm saying is, of the total absolute number of dollar cancellations there were a ton of things in the 1 million, 2 million, and so forth, and we looked at that trying to figure out, you know, what in the world is going on here because that's a little bit different than what we have seen in the past. And we think some of it is reallocation of resources and strategy by big pharma, so that some of the smaller stuff and peripheral stuff, perhaps that have gone on in the past are being shut down and those resources reallocated to really important and first tier projects by some of these folks.

As pointed out, our RFP volume on a quarter-to-quarter basis continues to ramp nicely on a dollar basis, so I'm not inferring that there's a cut back in R&D activity by pharma, but just a reallocation.

Randall Stanicky - Goldman Sachs

But Fredric, it's not projects going to other -- maybe smaller -- that's just a reallocation of pharma?

Fredric Eshelman

That's our impression.

Randall Stanicky - Goldman Sachs

Okay. And was there anything -- I mean, is this the trend that you've seen continue post the quarter or is this a first half of the year trend that you think is more unique to Q1, Q2?

Fredric Eshelman

Well, as you know, we try to predict cancellations for many, many years and we cannot find any way to do that. It's not related to anything. It is what it is in any given quarter, and we just have to accept what it is. Now, the good news is, of course, the bigger we get, the less impacted we are by particular cancellations, and we also look at our book of business, and our backlog all of the time, so that even when we have things in backlog that have been delayed or they are suspect or whatever, we will pull those out of our internal revenue forecast, so that we don't fool ourselves about what is getting ready to happen.

Randall Stanicky - Goldman Sachs

Okay. And just as a follow-up to that and my last question, as you think about guidance, you didn't mention it in the press release. Is it fair to assume that guidance hasn't changed for 2008 and the specific components as we think about 3Q and 4Q?

Fredric Eshelman

Our policy, as you know, is we don't comment on guidance once we have given it unless we intend to change it and we have not commented.

Randall Stanicky - Goldman Sachs

Okay. That's helpful. Thanks very much.

Operator

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

David Windley - Jefferies & Company

Hi, thanks for taking the questions. Good morning, Fredric. Couple of housekeeping ones, I guess. First of all, on the face of the press release, you provide some information on the development segment, and the margin you stated 18.1%. If I take the operating income and calculate that margin by the numbers you give on the press release, I get 19.6%, and then in the commentary on the conference call, you are talking about 20.6%, which I understand excludes stock options. I'm just trying to reconcile the three numbers. So, 18.1%, 19.6%, and 20.6%.

Dan Darazsdi

Dave, you have got the GAAP including the out-of-pockets.

David Windley - Jefferies & Company

Okay. And so the out-of-pocket expenses are in the $370.6 million revenue?

Dan Darazsdi

In the revenue of --

David Windley - Jefferies & Company

For the development segment?

Dan Darazsdi

Right.

David Windley - Jefferies & Company

Okay. I guess the second question then, the head count, the 10,400, can you give the ending head count for 2Q. Is that the exact number or do you have the exact number handy?

Fredric Eshelman

Hang on just a second. We'll get it.

Dan Darazsdi

10466.

David Windley - Jefferies & Company

Okay. And then Fredric, I guess the more strategic question to your comment to Randall's question on hiring and whether you hit the targets -- I guess what I'm interested in is your thoughts around how early in the ongoing bidding process, it's probably difficult to single it out to one project, but I guess I'm just thinking you have a large opportunity that a client has put in front of you and a few other firms to bid on, and they are looking to see which firms have the available staff and the staff that have the experience. At what point do you have to kind of hire ahead of the curve to have those people on board to show to the client as opposed to, I guess I was interpreting what you said, was if we hit our targets then we'll be ramping up hiring, and it sounded kind of in reverse order to me.

Fredric Eshelman

Well, but remembering that we have some padding if you will, particularly in the US, because we hired ahead of the curve, and the authorizations came in short of forecast. We have to do this in a sense analogous to manufacturing, where your sales force says we're going to sell 500 metric tons of whatever the heck it is, and therefore you put in the manufacturing capacity to deal with 500 metric tons.

David Windley - Jefferies & Company

Right.

Fredric Eshelman

And if they don't sell that, then you have got excess capacity, and that's where we are to an extent in the US, so we can throw bodies, if you will, at new business for some period of time before we get in a bind of new hiring, so as we look at the progress of sales going forward, we can timeframe those two things and then once again get slightly ahead of the curve on our needs, which as you are inferring is what we have to do generally, because we have time to get them on board and train them and so forth and so on.

The management team, senior management team in its entirety has taken a very close look at where we are on RFPs on an individual bid basis by client, etc., etc. We have a hard-nosed strategic plan in place for Q3 and Q4 and the rest of this year, and it is our full intention to execute in this hot market, and we certainly will do our very best to show you the same kind of pattern that we did in '07, where we had some weakness in the second quarter, but then in Q3 and Q4 of '07 and continuing in to '08, we had a continual ramp-up to a record number.

So, I think the good news is that in infrastructure and financial structure and all of the rest of that we made dramatic improvements, we got a lot of this stuff where we want it, and so now all we have to do is execute on the sales side, and in theory we'll be in high cotton the rest of the year if we can do that.

David Windley - Jefferies & Company

Okay. Sounds good. I know you don't want to single out individual commercial clients. I guess I'm wondering if you can provide any commentary relative to the announcement by NIH regarding not moving forward on the HIV vaccine portion of the division of AIDS contract or program.

Fredric Eshelman

Well, as you might imagine, there’s not a whole lot of detail that we can offer there because of confidentiality and so forth. I would say, however, that given the slowness in ramping up some of these projects, this is not something that's going to cause us a whole lot of heartburn in terms of revenue ramping and forecast and guidance and so forth.

David Windley - Jefferies & Company

Okay. Is that a cancellation that would have been kind of anticipated and included in the numbers you are reporting last night? Or is that something that we should kind of know that will be part of the third quarter's reporting relative to bookings and cancellations?

Fredric Eshelman

I don't know the answer to that off the top of my head. If you'll ask Craig later, we'll try to get that out for you, but I'm not struck that it was a big number that would be of any particular relevance to anybody.

David Windley - Jefferies & Company

Okay. All right. Thank you very much.

Dan Darazsdi

We don't see it as having a significant impact on our revenue guidance going forward.

David Windley - Jefferies & Company

Okay. All right. Great. Thanks. Thanks for the answers.

Operator

Your next question comes from the line of Steve Halper of Thomas Weisel Partners.

Steve Halper - Thomas Weisel Partners

Yeah. Hi, good morning. Fredric, you had mentioned that you thought the hit rate in North America was anemic. Can you just elaborate on that? And tell us what you think the problem might be and how you are going to try to fix that?

Fredric Eshelman

Well, some of it was obviously lack of execution. Some of it was also the perfect example of a snake-bite quarter. And I can tell you that at one point, actually more than one point in Q2. I thought that we had an excellent shot at an $800 million quarter. We had a very large contract get away from us unexpectedly. We had two or three major opportunities that we thought we were positioned very well for, delayed by the sponsor into some other later time, which of course evaporated off, what we thought we were going to sell. We lost a government contract that surprised us. We lost it on what we thought was a de minimis difference in price when we had excellent technical ratings and so forth, so we really had some fairly wild swings that we could not have anticipated, and we certainly hope will not be replicated going forward. One of the large commercial losses I attended the presentation, stayed for the full thing, so I take full credit for that loss, and we'll try to do better in the coming quarter.

Steve Halper - Thomas Weisel Partners

Do you think that there's a little bit of a competitive imbalance going on with some of the other players in the marketplace, or is it price. Have the other players kind of improved their overall quality of service at this point?

Fredric Eshelman

I'm not sure what it is. I mean, we're going to take a hard look at a couple of competitors in particular. But as has been our practice in the past, we're going to focus less on competitors than we are on our customers And as I indicated, the senior management team has put together a hard-core plan for Q3. We're coming out of the blocks fast and furious, and if we have to rock some people's world in Q3, that's what we're going to do.

Steve Halper - Thomas Weisel Partners

Great. Thanks.

Operator

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

Douglas Tsao - Lehman Brothers

Good morning. In terms of the new business trends, Fredric, last year there were a couple of fairly senior positions in the sales organization that were vacated. Have those all been filled? And can you provide some context on what the turnover rate has been within the sales organization, over, say, the last two years and what the trends have been?

Fredric Eshelman

I believe that we have filled all of the current senior openings in the BD force with the possible exception of attrition, and those are generally in the middle ranks, not at the top. I think we have had some folks leave because of a very hot market and other opportunities, but some of the attrition, of course, has been self-induced by ourselves, because if people aren't performing, we're going to have to avail them of other opportunities. Again, I think we're at a pretty good place in terms of resources. We will replace a couple of folks that have left, but if you’ve got x number of people on your payroll who are not particularly effective, there's no reason to carry the expense.

Douglas Tsao - Lehman Brothers

And then.

Fredric Eshelman

To your question of, in specifically what the turnover rate has been, I don't know what that number is as a percent.

Douglas Tsao - Lehman Brothers

Okay. And then, you know, on the sort of similar vane, it was noticeable to me at the DIA conference this year that PPD had probably its most visible presence ever at one of these industry conferences. And I was just wondering if that reflected any change in the approach you, the company, has taken towards the market?

Fredric Eshelman

So you are saying that our presence was more visible than in the past?

Douglas Tsao - Lehman Brothers

Well, you certainly a had a nicer booth.

Fredric Eshelman

Well, there you go. You see our expenses are out of control (we need an answer on that).

Douglas Tsao - Lehman Brothers

Well, that made me worry about the SG&A line, but that obviously wasn't the problem this quarter.

Fredric Eshelman

Yeah. No, I think obviously we had a push on to make a good showing, and contact as many clients as we could. And our folks did set up a number of meetings there. We don't let people go there on a boondoggle. They actually have some reason for being at DIA. In other words, they either have client meetings or they are making presentations or posters or whatever. It is something we have to keep a tight grip on because everybody and their dog likes to go to that sort of thing, and I'm not always sure that the, you know, what we get out of it is necessarily worth the expense, but I appreciate the intel.

Douglas Tsao - Lehman Brothers

And then also a question I have is last year, after we saw sort of somewhat down bookings in the second quarter, we saw in subsequent quarter a little bit of an impact on, in terms of revenues. Do you think we should expect a little bit of a sort of hole in the backlog that needs to be filled this time around again, or do you think given where other studies in the backlog are ramping up, that this really won't be, there won't be an impact on results?

Fredric Eshelman

Well, as I said, we have no comment on guidance, which means that we're not making any changes at this point.

Douglas Tsao - Lehman Brothers

Okay. And then one final question, it looks like, you know, in terms of the loss in the discovery business, it seemed to be much more moderate. I mean, you know, especially given the sort of more or less in line with the R&D expense line. Should we interpret that as much-improved performance from the biomarkers business, or was it simply that the preclinical oncology business was much stronger this quarter?

Fredric Eshelman

I think we had less loss in biomarker than we had forecast. The preclinical oncology unit was a little bit weaker than we had expected, so I think by and large, it wasn't a material deviation overall in that segment from what we had expected, and of course we got no mile sense to or any of that kind of stuff, so it was purely operational. I would point out that in the biomarker segment, we have two potential government-funded contracts, where we have certainly made the first and/or second technical cut, and if we should land either/or or both of those, we hope that we would finally begin to see the light in that particular segment of our business.

Douglas Tsao - Lehman Brothers

Okay. Great. Thank you very much. I'll opt out for now.

Operator

Your next question comes from the line of John Kreger of William Blair.

John Kreger - William Blair

Hi thanks. Another question about hit rate. Fredric, what is your latest thinking about how your various compound partnerships, what sort of impact they are having on your hit rate? And I'm specifically thinking about the Takeda partnership in diabetes, is that helping your ability to win other diabetes-related studies or hurting these days?

Fredric Eshelman

I think at this point in time it's helping, and that's, you know, for a variety of reasons, one of which is people can tell from what is released publicly that we know what we're doing that segment, we're able to produce in that segment. We know the investigators worldwide, we have the capacity. It’s also stirred us internally to take very hard looks at how many investigators we actually have, what is our surplus of capacity there and so forth, because we are bidding on a ton of work in that particular therapeutic area, and we’ve got to be sure that we can actually execute. So I would say on its face overall it has been a net positive.

John Kreger - William Blair

Okay. Great. Thanks. And then as you look across the -- your marketing log and the wins that you had in the second quarter, and sort of break that down in to your larger clients versus your smaller, less well-capitalized clients, are you seeing any divergence there given the funding environment has tightened up? Are you seeing any change in behavior from your smaller clients?

Fredric Eshelman

I'm not struck that we are at this point in time.

John Kreger - William Blair

All right, great. And then on the discovery front, can we assume that you are pretty much done spending on the statin?

Fredric Eshelman

With the exception of the things we pointed out in the past which is Chronic Tox, carcinogenicity, and a little bit of CMC work to be sure that we have API certainly for the ongoing work, and I think we also have some reserves of clinical material as well, because theoretically if we out licensed this thing, whoever takes it is going to want to come out of the blocks quick. So, the spending is de minimis, but there is some trickle still going on.

John Kreger - William Blair

Okay. And then one last question for Dan, given that your cash balance was pretty stable at the first quarter, it seemed like your interest income and other income was a bit lower. Anything else in that line that we should be aware of?

Dan Darazsdi

The interest income was pretty strong in the first quarter principally because we got some positive yields in the quarter. So, there was all that activity going on with the investments out there. We did get a positive yield advantage. In addition to that we do have some -- we had some foreign exchange that actually impacts that line too, which is a little bit of the change. But I think the second quarter is pretty indicative and going forward with the exception of some of the negative impact from FX.

John Kreger - William Blair

And can you quantify was that a couple of million dollars or less?

Dan Darazsdi

It was like $1 million.

John Kreger - William Blair

Okay. Thank you.

Dan Darazsdi

Yup.

Operator

(Operator Instructions). There are no further questions at this time. Do you have any closing remarks?

Fredric Eshelman

Thank you all very much for being on the call. We appreciate your questions. Any follow-up to Craig Eastwood, and/or Dan Darazsdi, and we wish you a good morning.

Operator

This concludes today's conference call. You may now disconnect.

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