Pharmaceutical Product Development, Inc. (

PPDI

)

Q2 Earnings Call

July 27, 2011 9:00 am ET

Executives

Luke Heagle – Investor Relations

Fredric N. Eshelman, Pharm.D. – Executive Chairman

Daniel G. Darazsdi – Chief Financial Officer

William J. Sharbaugh – Chief Operating Officer

Analysts

John Kreger – William Blair & Company, L.L.C.

Robert Jones – Goldman Sachs

Todd Van Fleet – First Analysis Corp.

Eric Coldwell – Robert W. Baird & Co.

James Kumpel – BB&T Capital Markets

Douglas Tsao – Barclays Capital

Sandy Draper – Raymond James

Stephen Unger – Lazard Capital Markets

David Windley – Jefferies & Co.

Presentation

Operator

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Good morning. My name is Steve, and I will be your conference operator today. At this time,

I would like to welcome everyone to the PPD's Second Quarter 2011 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.

At this time, I would like to turn the call over to Mr. Luke Heagle, Executive Director of Investor Relations. You may begin, Sir.

Luke Heagle

Good morning, and welcome to PPD's second quarter 2011 earnings conference call. In our comments today, we will refer to selected non-GAAP financial measures for all period discussed today unless specifically noted, net revenue, SG&A expense and margins exclude reimbursed out-of-pocket and equity compensation expense.

For a quantitative reconciliation of all non-GAAP numbers discussed in today's call to the most comparable GAAP measure, please see the reconciliation information that is posted under Presentations and Events in the Investors section of our website.

I'd like to remind everyone 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 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.

I will now turn the call over to our Executive Chairman, Dr. Fred Eshelman.

Fredric N. Eshelman

Thanks, Luke and good morning to you all. It is our pleasure to report second quarter 2011 results. The team will give you details in a few minutes. But first, I’d like to hit some highlights and make a few comments.

As Luke noted, I will be referring to certain non-GAAP numbers, which do not include reimbursed out-of-pockets or equity compensation expense.

Year-over-year total revenue grew 10.2% and operating margin improved 368 basis points. RFP flow for the first half of 2011 was up more than 40% versus the first half of 2010 and the competitive hit rate improved over 500 basis points.

The sales cycle did appear to lengthen somewhat. We had a very solid sales quarter of $753 million, and despite higher than normal cancellations we had a book to bill of 1.29. Backlog grew 14.2% year-over-year to a $3.685 billion. DSO remained in the mid 20s at 26.

Looking at the segments for clinical development sciences we significantly reduced SG&A as a percent of revenue year-over-year. Gross margin held up above our 50% target and operating margin improved 462 basis points year-over-year. Clinical revenue grew at 14.1% versus Q2 of 2010. On the lab side, revenue grew 8.1% year-over-year, but importantly grew 10.6% versus Q1 of 2011.

Gross margin deteriorated due to lower than expected performance in the Vaccine Lab and BioDuro. G&A was reduced as a percent of revenue year-over-year, but due to the gross margin fall, overall operating margin continued below that of 2010. However versus Q1 of 2011, operating margin improved 226 basis points. So the business is performing well with exception of vaccines in BioDuro and Dr. Babiss is available to share our plans and efforts there.

As to the CEO search, we have identified good candidates and the process of interviewing and selecting continues to move forward. As I have noted previously, we are focused on finding the right candidate unless so on the speed of the process.

You all saw the recent press release regarding our ongoing strategic and capital structure review. Our board including our new directors requested this review. We’ve hired a financial advisor to assist with the review including advising us on potential ways to unlock value for shareholders. As noted in our release, this review does not envision a combination with another CRO. The review continues and of course we will update you if and as appropriate.

Now, we will hear from our CFO, Dan Darazsdi.

Daniel G. Darazsdi

Thank you, Fred and good morning. Net revenue increased 10% year-over-year to $376.2 million in the second quarter of 2011. We delivered year-over-year net revenue growth of 14% in our Clinical Development Services segment, and Laboratory Services segment net revenue increased 8% year-over-year and 11% sequentially. The sequential increase in Laboratory Services segment net revenue was due primarily to growth in our bioanalytical lab, Phase I clinic and global central lab.

We expect Laboratory Services segment net revenue growth to remain strong on a sequential basis throughout the year. Foreign exchange positively impacted net revenue in the second quarter converted at average second quarter 2010 rates net revenue would have been $6.6 million lower.

Backlog increased 14% year-over-year at quarter end and breaks down by client type as follows: 77% pharmaceutical, 17% biotechnology and 6% government and other. The weighted average backlog duration at the end of the second quarter was 33 months with our backlog conversion rate to revenue increasing slightly to 10.5% of beginning backlog.

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