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Executives

Simon Holmes - Executive Vice President of Investor Relations & Corporate Development

Brendan Brennan - Chief Financial Officer and Member of Execution Sub-Committee

Ciaran Murray - Chief Executive Officer, Director and Chairman of Execution Sub-Committee

Steven A. Cutler - Chief Operating Officer

Analysts

Timothy C. Evans - Wells Fargo Securities, LLC, Research Division

John Kreger - William Blair & Company L.L.C., Research Division

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

Douglas D. Tsao - Barclays Capital, Research Division

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Steven Valiquette - UBS Investment Bank, Research Division

Stephan Stewart - Goldman Sachs Group Inc., Research Division

Michael P. Ward - Sterne Agee & Leach Inc., Research Division

Declan Morrissey - Davy, Research Division

Todd Van Fleet - First Analysis Securities Corporation, Research Division

Elizabeth Anderson - ISI Group Inc., Research Division

ICON Public Limited (ICLR) Q4 2013 Earnings Call February 20, 2014 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the ICON Fourth Quarter 2013 Earnings Conference Call. Today's conference is being recorded. At this time, I'd now like to turn the conference over to Simon Holmes. Please go ahead, sir.

Simon Holmes

Thank you, Suzanne. Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended 31st of December, 2013. Also on the call today, we have our CEO, Mr. Ciaran Murray; our CFO, Mr. Brendan Brennan; and our Chief Operating Officer, Dr. Steve Cutler.

I would just like to note that this call is webcast, and there are slides available to download on our website to accompany today's call. I would now make the customary statement in relation to forward-looking statements. Certain statements in today's call are or may constitute forward-looking statements concerning the group’s operations, performance, financial condition and prospects. Because such statements involve known and unknown risks and uncertainties, depend on circumstances and events that may or may not occur in the future, actual results may differ materially from those expressed or implied by such forward-looking statements. Given these uncertainties and as forward-looking statements are not guarantees of future performance, investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This presentation includes selected non-GAAP financial measures. For a presentation of the most directly comparable GAAP financial measures, please refer to the press release statement headed Consolidated Income Statements Unaudited U.S. GAAP. While non-GAAP financial measures are not superior to or a substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes. [Operator Instructions] I would now like to hand over the call to our CFO, Mr. Brendan Brennan.

Brendan Brennan

Thank you, Simon. Net revenue in quarter 4 2013 was $345 million. This represents year-on-year growth of 15%. On a constant dollar organic basis, year-on-year growth was 10%. For the full year 2013, net revenue was $1.336 billion, up 20% compared to 2012. On a constant dollar organic basis, full year revenue growth equated to 15%. For the full year 2013, our top client represented 26% of revenue, compared to 18% for the full year 2012. Our top 5 clients represented 53%, compared to 48% last year. Our top 10 represented 64%, compared to 63% last year, while our top 25 clients represented 78%, compared to 76% last year. Our headcount remained steady during the quarter and we ended the year with approximately 10,300 staff. In quarter 4, group gross margins were 37.7%, which compared to 37.1% in quarter 3 and 36% in the comparable quarter last year. For the full year 2013, group gross margin was 36.7%, compared to 35.6% for the full year 2012. SG&A for the quarter was 23% of revenue, which compared to 24% in quarter 3 and 24.4% in the comparable quarter last year. For the full year 2013, SG&A was 23.5% of revenue, compared to 25.2% for the full year 2012. Operating income for the quarter was $38.7 million, and operating margin of 11.2%, which compared to 9.8% in quarter 3 and 8.1% in the comparable quarter last year. For the full year 2013, operating margin was 9.7%, compared to 6.6% for the full year 2012. The net interest income for the quarter was $40,000, and the effective tax rate was 14%. The effective rate was impacted by the positive resolution of number of tax authority audits instead [ph] of our primary operating locations. Net income for the quarter was $33.5 million, equating to earnings per share of $0.53, which compared to earnings per share of $0.45 in quarter 3 and $0.34 in the comparable quarter last year. On a full year basis, earnings per share were $1.77, a 77% increase over last year. DSOs in the quarter were 32 days which compared to 40 days in quarter 3 and 40 days in the comparable quarter last year. At the end of December 2013, we had net cash of $321 million, compared to $219 million at the end of September 2013. With all that said, I'd like to hand over to Ciaran now to talk about our progress against our strategic plan and our outlook.

Ciaran Murray

Thank you, Brendan, and good day, everyone. 2013 was another year of progress for ICON. At the beginning of the year, we guided that our revenue would grow by around 15%. Our exit margin would be circa 10% and our full year earnings per share would be in the range of $1.44 to $1.60. I'm pleased that we've achieved all of these targets. Our revenue grew 20% in total, 15% on constant dollar organic basis. Our Q4 operating margin was 11.2% and our earnings per share for the full year were $1.77. We've continued to enhance our capabilities this year in line with our strategic plan. The acquisition of the clinical trials division of Cross Country Healthcare significantly increased the U.S. presence of our DOCS group, enabling it to deliver truly global resourcing and SSP solutions. The combined organization is now a global leader in this market segment. We made further investments in our differentiating technologies, launching new services that leverage our Firecrest and ICONIK platforms. These innovative solutions are helping our customers improve the quality and the productivity of the development programs.

During the year, we integrated our central laboratory business into our Phase II to Phase IV group, reflecting our increased leverage of laboratory data and the planning and performance of clinical trials, and we are encouraged by the lab's performance in this new structure as we start to see the benefits of increased cross-selling into our customer base. We also restructured our Early Phase business this year to better align our capacity with our customers' needs and increase our focus on translational services that target patient populations. And we have continued to enhance our commercialization and outcomes offerings, which are increasingly important to customers, as they look to evaluate the economic value in new treatments. In 2013, we continue to leverage our cost base, reducing our support cost year-on-year by 170 bps and exiting the year with SG&A at 23% of revenue. In 2014, we will continue to execute against the same core pillars of our strategic plan to ensure we have an organization with the appropriate scale, services, technology, scientific and medical expertise to develop, to deliver high-quality differentiated solutions to our customers.

We ended 2013 with gross bookings for the year of almost $2 billion, and in Q4, we recorded a record level of gross business wins of $540 million. Net bookings last year grew to $1.65 billion, which means our trailing 12 months net book to bill last stands at 1.23. Our backlog has grown by 12% over $3 billion, and with 75% coverage of our 12-month forecast revenue. We expect the market to continue to grow in 2014 driven by an increase in outsourcing penetration combined with modestly increasing R&D spending. As a result of all of that for 2014, we're guiding revenue to be in the range of $1.415 billion to $1.465 billion, which is an increase of 6% to 10%, and our earnings per share to be in the range of $2.05 to $2.20, which represents an increase of 16% to 24%. Before I move to Q&A, I'd like to thank everyone at the ICON team whose hard work and commitment have contributed to another year of significant progress for the company. Thank you, everyone. We are now ready for questions, Suzanne.

Question-and-Answer Session

Operator

[Operator Instructions] We'll now take our first question from Tim Evans of Wells Fargo Securities.

Timothy C. Evans - Wells Fargo Securities, LLC, Research Division

Ciaran, nice job on the margins. I'm wondering, I think you said in the past that risk-based monitoring had started to contribute there. Is that something that you are still seeing?

Ciaran Murray

Yes, we're seeing a little bit of that. More and more of our studies are being conducted in that platform, Tim, and it does have the opportunity to enhance margin, dependent very much though on the particular study in question. So while it's something that we see as important in the future and is increasing, it wasn't the significant or a significant driver in delivering the margin performance this quarter, which really came just as a result of starting to see more of the benefits of the work we've been doing over the last couple of years around productivity and management of our costs.

Timothy C. Evans - Wells Fargo Securities, LLC, Research Division

Okay, great. And then on the book to bill, going forward in 2014, can you help us understand what your guidance implies? Is it going to be similar to your trailing 12 months book to bill for 2013 perhaps?

Ciaran Murray

It is. Our guidance implies an assumption of 1.2 for our book to bill, which is our sort of historical modeling, which is based on longer-term patterns as we look back over the history of the company.

Operator

Our next question is from John Kreger of William Blair.

John Kreger - William Blair & Company L.L.C., Research Division

Kind of a similar question, Ciaran, about your expectations in '14. If you think about your client revenue concentration, obviously that's trended up over the last couple of years. From your perspective, do you think we've hit a plateau yet? And if not, when do you think we could see those numbers sort of level out and perhaps even inch lower a bit?

Ciaran Murray

That depends, John, on what we continue to win going through the next couple of years. There are still significant and interesting conversations with a number of potential customers across the industry. But based on what we see at the minute and in the absence of making any guesses, I would say that our concentration is pretty close to the plateau, and that as the company grows over the next few years, we should see it start to decrease.

John Kreger - William Blair & Company L.L.C., Research Division

Great. And maybe a quick follow-on. I'm guessing you probably had some kind of strategic discussions with your clients as we came up to the end of calendar '13. Did anything surprise you or are the type of requests you're getting from clients pretty similar to what you were hearing a year ago?

Ciaran Murray

They're pretty similar to what we were hearing a year ago.

Operator

Our next question is from Eric Coldwell of Robert W. Baird.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

First off, on the pipeline, a couple of questions already, I'll just ask one more, which is just general commentary on what you're seeing from nonstrategic accounts, the smaller biotechs, mid-tier pharma, et cetera. Strong biotech financing for the last 2-plus years. I'm curious if you're really starting to see an increase in demand from, say, the non-top 20 pharmas. And then my follow-up question or alternative question is on the cash. I mean, just a phenomenal performance on the balance sheet and cash flow this quarter. You've got a pretty big cash position. I'm curious if you can give us some thoughts on your capital deployment strategy over the next year.

Ciaran Murray

Thanks, Eric. Maybe I'll ask Steve to talk about the biotech and on top 20 market, what we've seen, and then I'll come in and talk about how we're planning to put our cash to work.

Steven A. Cutler

Yes, Eric, I think we've seen a lot of strength in the biotech market over the last, well, 12 months, really, and been successful in our business development efforts around that segment. A number -- we're seeing a number of these companies coming to us with very significant programs that are going right through to Phase III and even beyond. So we see a lot of opportunity in that marketplace. We've been, I think, successful in that marketplace, and we see it well-funded and growing going forward, an increasing part of our portfolio. So we're pleased with the way that market's developed and the way those companies are finding access to capital.

Ciaran Murray

Okay. About the -- your question about the cash, Eric. We have had a good -- particularly a good year, a good couple of years in generating cash and the balance sheet is very healthy. If you look back -- I mean, the question for us is that we work in a market that's constantly changing. We believe there is opportunity in that market over the next number of years, as the biopharma industry continues to outsource more, look for more productivity in its R&D offering, as it develops more partnerships and partnerships of a more strategic nature. And in order to play in that market, we took the decision a number of years ago that we had to invest in having the scale and the range of services and the technology and innovation that will help our customers do that, replace human and intellectual capital that they're moving out of their organizations and give them the tools and deploy the tools to increase the quality and productivity of R&D development. So I think since probably 2008, we've made around 11 acquisitions that have all been geared at improving our capability and the service we can provide. I think we've probably spent about $300 million in that period. I think if you look at the performance of the company, particularly over the last couple of years, we're seeing the benefit of those investments. But in a market like ours that's constantly changing and without opportunity, I don't believe we have the luxury of being able to say we've built everything out, we're fit for purpose, and that's it. So in discussions with the customers and looking at the market, we've identified a number of areas where we still need to build up our capability. We like to expand further in Asia Pac around the technology agenda. I think there's still a way to go to integrate service offerings and keep improving customer offerings. And certain specific capabilities and skills as customers descale in areas of medical and scientific capability, we look to add strength. The increasing importance of market access and outcome studies lead us to want to invest more in those areas. So we have a plan, we've some targeted areas that we will invest in both organically and with specific bolt-on targeted M&A, similar to what we've done in the past. That's how we intend to deploy the cash. We deploy it with primarily with the belief that we want to add and drive shareholder value as we've done over recent years. And when we get to the point where M&A capabilities aren't as strong as the agenda, we look at other options such as in the past. Like a couple of years ago, we did opportunistically did a share buyback. We do have approvals in place so that at any given point in the future, if that is a better use of the shareholders' funds, we have the option to do that. So that's how we look at the cash deployment and strategy.

Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division

That's a great response. I'm curious, you talked about the 11 deals since 2008, so approximately 2 per annum. Is that the kind of pace that we might expect here in 2014? And given the $300 million spent on the 11 deals, would we expect deals of a similar size this year or perhaps something a little meatier in terms of the size of companies you might be looking at?

Ciaran Murray

We still -- I think they'll be bigger on average than the historical numbers that you've seen, but they're still fall within that -- they'll be meatier, but they'll be targeted bolt-on style acquisitions. They won't be large or transformational. We very much work on the structure of looking to add targeted capabilities and to manage integration risk. As to the number, well, you know yourself, Eric, sometimes you can get deals done and sometimes you can't. But 2 or 3 a year would be what we would normally target. In some years, we do that. In some years, like last year, we do less and it really just depends how the chips falls on what you're looking at.

Operator

Our next question is from Douglas Tsao, Barclays.

Douglas D. Tsao - Barclays Capital, Research Division

Okay. Just following up on Eric's question. First, just when you think about the deals you have done over the years, they have been related to sort of on the staffing side of the business as well as technology as sort of well as more regional-focused extension of capability. Just curious, when you think about your M&A targeting today, what are your highest priorities if we think about those 3 sort of broad buckets?

Ciaran Murray

It's basically a little bit more of the same, only just shaded slightly differently, if that make sense. We made acquisitions in certain capabilities, which have added to our overall ability to perform, and in some of those same areas, we're happy to continue to build scale. We've made a couple of acquisitions a few years ago with PriceSpective and Oxford and commercialization and outcomes research. They worked very well for us, and those organizations contribute greatly to our capability today. But there are opportunities in that market to grow, and we'd be happy to continue to invest in that market and to grow more so we continue to look there. And in sort of geographic and regional capabilities, we're always looking to add to wherever the market's going. A few years ago, it was Eastern Europe. We invested there mostly organically. In Asia, we did a combination of organic and M&A, and we continue to look in Asia and in another developing new regions at what we need. So there won't be a radical change in anything that we've done. We'll just keep trying to build the scale we have, and I suppose, technology is the interesting area that is constantly changing. So we have an agenda there to drive innovation and the deployment of technology to break down silos and get more integrated offerings to speed up development, improve the quality of it, so wherever technology takes us in the big data agenda in that field, we'll be looking in that sector. Do you have anything to add?

Brendan Brennan

No, I think that's -- I think that's right. I mean, certainly, on the functional side, we see some opportunity, and that's around sort of our medical regulatory expertise, and that's certainly where we're focusing on. I can't add much more to what you said.

Douglas D. Tsao - Barclays Capital, Research Division

Okay, great. And then just one follow-up, when I look at the guidance, obviously for the year, you're forecasting some very nice improvements in the operating margin. The revenue guidance struck me as a little bit more conservative. Relative to the bookings that you've seen over the last couple of years and certainly in this last quarter, which was strong again. Just curious to the extent that there is potential better top line growth, is there some impact on the margin or sort of moderation on the pace of margin improvement that we should expect or do you sort of feel that the business level is sort of hitting a level of scale that, that trade -- that traditional trade-off we've seen between growth and margin expansion could be mitigated on a go-forward basis?

Ciaran Murray

I think you may have 2 questions in there for me, Doug. I think it's fair to say, no, there will still be a trade-off between revenue growth and margin expansion or maintenance because revenue growth, really, when it gets to a certain level that you have to hire more significantly ahead of the curve and build your capabilities faster, and you tend to have to do that in advance of the revenue flowing, so you're always going to get a time lag, and that will have potentially kind of have short-term impact on your ability to grow your margin. Looking at the guidance generally, your point about it being conservative, I think I would point to the fact that in Q4, we grew 10% on a constant dollar organic basis, which kind of sets the kind of initial tone. I'd further look at a trailing book to bill of 1.23. And traditionally, that supports growth in the high single-digit to touch in low double-digit numbers, which is reflected in our guidance. We have -- we've had a good year, but we have a backlog full of very interesting but large and complex studies, a lot of it in oncology. And what you find with large and complex studies is that the very complexity of the study means they are more prone to perhaps not starting off as quickly as expected, and they're more prone to delays. They can be a little bit more challenging. So we have to factor in that when we look to guidance. And of course then, the very size of the projects because they're so meaty means that if they are delayed, they have a higher impact perhaps on revenue than a few years in the past when the backlog was made up of smaller and not so many complex projects. So we have to weigh all of those factors together when we do the guidance, and that's how we come up with the number. To the extent that we're faster, then it would grow fast, it would drag on the margins. So that's -- so no real change.

Douglas D. Tsao - Barclays Capital, Research Division

And then if I can just get one more final, quick follow-up. Traditionally, we've seen a lot of investments in oncology from smaller biotech companies, but we've certainly seen in the last few years a real major investment by major pharma. Is that reflected in your backlog as well as in terms of your reference point, referencing to some large oncology projects in your backlog?

Ciaran Murray

It is, yes.

Operator

Our next question is from Tycho Peterson of JPMorgan.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Ciaran, I'm wondering if you can maybe just flesh out a little bit more color on some of the new market opportunities you talked about starting with the cross-selling opportunity around the central ad business now that, that's been integrated. And then to follow-up on kind of the outcomes offerings, how large is this business today and how much of that business is being driven by pharma, pull versus push?

Ciaran Murray

I mean, with the cross-selling, it's simple enough in the market. We've just integrated the management and the data capabilities in our lab division and brought the offering to customers that we traditionally work with perhaps in Phase II and Phase III, and we're just gaining some traction and introducing our lab services there. And we'll continue to do that just -- there's no rocket science in that one. It's just about integrating those 2 offerings together when we do RFPs for new business and going around our existing customers and showing them our capability, which perhaps we haven't made them as aware of in the past. On the outcomes business, it's a small part of our business, but it's technically very expert and adds a lot of value to those kind of drug development process. We see more of that business being integrated earlier in the planning process in the days when everyone just talked of proof-of-concept. Now you tend to sit down and think both proof-of-concept and proof-of-value earlier in the process so you can design the trial and so that it more seamlessly moves into the Phase IV arena. And I really -- there's not much more I can say on that. We have a bunch of very expert consultants who are doing a good job in that phase in Phase IV, and then taking it back into Phase II, and we continue to see it grow but off a relatively small base.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

And then follow up, you've been fairly open about kind of the renewal process, obviously kind of focused for the last couple of earnings calls. Can you maybe just bring us up to speed as to where we are in the process of going through some of the renewals? And any change in your view in terms of the pricing dynamics on the renewals or maybe the increased scope of work that is coming as you go to kind of re-sign some of these customers?

Ciaran Murray

There's nothing I can really add to what we talked about last year. I mean, I think we have a business now that's made up of a bunch of customers, and every few years the contracts come up for renewal. And it's really become just a normal ongoing feature of what we do. I think that kind of stuff got focused a few years ago when this is a newer departure in the business. Now I characterize it very much as business as usual. We talked about last year the fact that we renewed a couple of contracts, and there was no significant difference in pricing and that some of the scope on them increased. As we go forward in the future, we'll have discussions with customers about that, but at the minute, it's too early for me to say how those discussions might go. I can only point the history and say that the renewals that we've had have tended to work out pretty well for both parties.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

And then just last one, can you talk on the margin about where you maybe making incremental investment as we think about '14? I mean, obviously you had some questions earlier on M&A. But as you think about kind of organic growth, are there areas where you're kind of stepping up spending internally that you can call out?

Ciaran Murray

No.

Operator

Our next question is from Steven Valiquette of UBS.

Steven Valiquette - UBS Investment Bank, Research Division

So I was also going to ask about the top line guidance, but -- and you touched on this part of it a little bit, but the -- your backlog burn rate has been pretty consistent in the 11% to 12% range. I'm just curious whether you're anticipating any change in that burn rate in 2014 in the context of your expectation of your sales trends for guidance for this year.

Ciaran Murray

No, not within that range, Steven. If you look back, I think, last year, we had some quarters where -- back in 2012 where burn rate was 11% and 11.2%. We've seen some more recent quarters 11.8%, but it can be a little bit lumpy, and it's hard to predict exactly. But we tend to assume somewhere around 11.5% has been the sort of steady-state burn rate as we model our numbers.

Steven Valiquette - UBS Investment Bank, Research Division

Okay. And then just quickly, recognizing that CRO industry penetration rates are way more important than total R&D spend patterns, you did mention for your outlook that you do expect the client base to witness some modest R&D spend growth. And I was just curious for historical context, is your view on that a change from what you're seeing previously or is it the same view that you've had around that modest R&D spend growth?

Ciaran Murray

It's probably the same view. It can depend, I suppose, for all of us in this business, your R&D spend is a little bit dependent on the particular portfolio of clients that you have. But over the last few years, we've formed the same view that R&D spend is broadly dependent on the timing, flat to growing modestly. So there's no fundamental change in our assumptions there.

Operator

Our next question is from Robert Jones of Goldman Sachs.

Stephan Stewart - Goldman Sachs Group Inc., Research Division

It's Stephan calling in for Bob. Firstly on the tax rate, it's been pretty low over the past 2 years, below that 18% sustainable rate. I guess, what's the assumption for 2014? Seems as though there could be a headwind there, which probably implies even better EBIT growth than we were expecting?

Brendan Brennan

It's Brendan here. Just on the -- our expectation for next year, I think, that 16% would be how we've looked at it in our guidance when we've looked out at the tax rate for '14. So that's probably the right number to use, as you think about your modeling. There can be -- you're right. We have been more successful in that over the last couple of years, and taxes can -- it's a subjective area, so kind of open there, but certainly what we're focused on at the moment is 16%.

Stephan Stewart - Goldman Sachs Group Inc., Research Division

And I guess is 18% to 20% still the appropriate long-term range to look at?

Brendan Brennan

No, no. I just said 16% is the correct range for next year, and we'll see what we can do with it thereafter.

Stephan Stewart - Goldman Sachs Group Inc., Research Division

Okay, great. And then on the expense leverage, the SG&A line has been the source of the operating margin expansion. I guess, for some time up until 2 quarters ago, since then, it's been mainly the gross margin line. Should we think about SG&A expense ratio be in relatively consistent going forward with the expansion really coming in gross margins?

Brendan Brennan

Yes, we've seen a lot of success on the SG&A, as you point -- readily point out over the course of 12 months of our D&D [ph]. And so while we expect some efficiency there as we go through the course of the year, yes, I don't think a lot of the benefits have been delivered. The gross margin, as you say, in the last couple of quarters has been very, very pleasing, and again, that will be incremental progress [ph] as we go through '14.

Operator

[Operator Instructions] Our next question is from Greg Bolan of Sterne Agee.

Michael P. Ward - Sterne Agee & Leach Inc., Research Division

This is Mike Ward in for Greg today. I'm just wondering, has management noticed any change in the intensity at which their large competitors are looking for Phase III business?

Steven A. Cutler

It's Steve Cutler here. No, I don't think so. I think we've seen over the last 12 months a very competitive pricing market environment. Phase III is -- there is an intense competition out there for it, but I don't think it's any more cutthroat or difficult than it's been in the past. It remains a very competitive industry. I think what we find if we're successful in winning earlier phase work, early phase and Phase II work, we have an advantage as we move into Phase III. And so I guess the intensity of competition tends to start earlier in the phases, if anything. And I think customers tend to want to stick with providers who can take them right through the phases. So I think that we see that as an opportunity getting in early. But no, I don't think if it's the pricing environment you're looking at, I don't think the pricing is cutthroat. Occasionally, we'll see some of that perhaps smaller providers come in with some pricing, but a little under the -- well, a little more challenging. But I think customers are smart enough now to realize that they'd get a better service from the larger companies and ultimately better quality and more reliable deliveries. So that's essentially what we're seeing.

Michael P. Ward - Sterne Agee & Leach Inc., Research Division

And then just a follow-up. I think we asked this last quarter, but we wanted to ask if there -- if you guys have seen any evidence of budget flushing by big pharma?

Brendan Brennan

No, we haven't seen any evidence of that.

Operator

Our next question is from Declan Morrissey of JV Research.

Declan Morrissey - Davy, Research Division

Most of the questions have been asked, but just maybe one quick one. Let's say some of your competitors, in addition to offering CRO, might offer commercialization upstream -- or downstream services, I suppose, do you think in any way that your disadvantage versus those guys in terms of being a more focused business in terms of winning new business, maybe if you have any comments on that?

Ciaran Murray

No, we don't feel we're disadvantaged at all. They're 2 different businesses, and there's no real linkage between them, and we've never found ourselves disadvantaged by not being in that space.

Operator

[Operator Instructions] Our next question is from Todd Van Fleet of First Analysis.

Todd Van Fleet - First Analysis Securities Corporation, Research Division

Just wanted to ask about the DOCS business and are you seeing in the marketplace that sort of offering becoming of increasing importance relative to maybe some of the more traditional outsourcing models? So maybe if you could talk to that dynamic a little bit. And then thinking about the margin potential for a business like that, do you see the potential being kind of similar as other aspects of your late stage development activities in terms of margin potential and potential for margin expansion, that sort of thing?

Steven A. Cutler

Let me talk about a little bit about DOCS. In terms of the models, we're seeing, I think, significant interest from customer on the FSP type models. Yes, there are number of models across the industry, full services, obviously, well-established, the FSP, and even models that represent some sort of hybrid between the 2 are becoming more common. So we see interest in them. We see ourselves at an advantage by having a group like DOCS, who can provide that sort of service, and we see ourselves able to use those -- use that group as a backup for our full-service model as well in terms of offering that contracted resource. So I think there are some customers who tend to go towards the full service model or others who tend towards the FSP model. There are others who are sort of somewhere in between, and we see -- and in fact, in some customers, both models exist. So we see there are room for all of those models within the industry, and we see we're well-placed to be able to offer them. In terms of the margins, I don't think there's any doubt that in the more contracted resource area, the margins are lower. We would expect that. The risk is lower. In the FSP area, I think the margins are kind of somewhere in between that in the full service, and you could have a debate for hours about the pros and cons of FSP business versus full service, and some people are broadening in some areas and others in other areas. But I think the margins are generally a little lower on the FSP side of things. But then perhaps the opportunity for innovation and creativity is a little lower as well. So I think both have the strengths and both have the potential issues and weaknesses, but I think we feel good about being in a place where we can offer one or the other or a hybrid of both.

Operator

Our next question is from Ross Muken of ISI Group.

Elizabeth Anderson - ISI Group Inc., Research Division

This is Elizabeth Anderson in for Ross. I was just wondering where you see Euro and Japanese pharma versus U.S. pharma as it relates to strategic process partnerships?

Ciaran Murray

Our strategic partnerships, thus far, has tended to be with European and U.S. pharma. Japan has been slower to outsource, certainly the Japanese markets. Some of their subsidiaries in our part of the world due tend to engage in it, and we have had relationships in the past with them. But from -- in the Japanese market point of view, we don't have significant strategic partnerships there and tend to work with our European and U.S. partners in that market.

Operator

As there are no further questions, I will now hand you over back to Ciaran Murray for any additional or closing remarks.

Ciaran Murray

Okay. Thank you, everyone, for listening today. To sum up, I'd say I think that we've made good progress in 2013 as we continue to position ICON as the global CRO partner of choice in the biopharma industry, and we're all looking forward here to working hard in 2014 to build on the strong foundation that we set last year. Thank you very much.

Operator

Thank you. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation, and you may now disconnect.

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