ICON PLC's (ICLR) CEO Ciaran Murray on Q1 2016 Results - Earnings Call Transcript

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Q1 2016 Results Earnings Conference Call

April 26, 2016, 09:00 AM ET


Simon Holmes - IR

Brendan Brennan - CFO

Ciaran Murray - CEO

Steve Cutler - COO


Tim Evans - Wells Fargo

Robert Jones - Goldman Sachs

Eric Coldwell - Robert W. Baird

John Kreger - William Blair

Ross Muken - Evercore ISI

Michael Baker - Raymond James

Sandy Draper - SunTrust

Greg Bolan - Avondale Partners

Donald Coker - KeyBanc

Dave Windley - Jefferies

Douglas Tsao - Barclays

John Groberg - UBS

Tejas Savant - JPMorgan


Good day, and welcome to the ICON Q1 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Simon Holmes. Please go ahead, sir.

Simon Holmes

Thank you, Silvia. Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended March 31, 2016. Also on the call today we have our CEO, Mr. Ciaran Murray; our CFO, Mr. Brendan Brennan; and our COO, 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.

Certain statements in today's call will be forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, and listeners are cautioned that forward-looking statements are not guarantees of future performance. The company's filings with the Securities and Exchange Commission discuss the risks and uncertainties associated with the company's business.

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.

We will be limiting the calls to one hour and therefore ask participants to keep their questions to one each with an opportunity to ask one related follow-up question.

I would now like to hand over the call to our Chief Financial Officer, Mr. Brendan Brennan.

Brendan Brennan

Thank you, Simon.

Net revenues in quarter one 2016 were $401 million. This represents year-on-year growth of 3.2% or 4.9% on a constant currency basis. On a constant dollar organic basis, year-on-year revenue growth was 1.2%.

For the quarter, our top client represented 29% of revenue, compared to 31% for the full year 2015. Our top five clients represented 45% compared to 49% last year. Our top 10 represented 58% compared to 63% last year. All our top 25 clients represented 75% compared to 78% last year. To support new customer projects, we added around 300 new staff in the quarter which meant we ended the quarter with approximately 12,235 staff.

For quarter one, group gross margin was 42.9% compared to 43.1% in quarter four, and 41.3% in comparable quarter last year. Leveraging our global business service business, we delivered further operational efficiencies in the quarter and as a result SG&A was 20.2% of revenue. This compared to 20.7% last quarter and 20.5% in the comparable quarter last year.

Operating income for the quarter was $76 million of operating margin of 19%. This compares to 18.7% last quarter and 16.4% in the comparable quarter last year.

The net interest expense for the quarter was $2.9 million and the effective tax rate was 14%. Net income for the quarter was $63 million, a margin of 15.7%, equating to earnings per share of $1.12. This compares to earnings per share of $1.11 last quarter and $0.90 in the comparable quarter last year, an increase of 24%.

DSOs in the quarter were 47 days, compared to 41 days last quarter and 47 days in quarter one 2015. During the quarter, cash generated from operating activities was $59.4 million and capital expenditure was $7.7 million.

As a result at March 31, 2016 the company had net debt of $100 million, compared to net debt of $158 million after December 31, 2015 and net cash of 172 million at the end of March 2015.

With all of that said, I'd now like to hand over the call to Ciaran.

Ciaran Murray

Okay, thank you, Brendan. Good morning and good afternoon everyone. Our backlog in the quarter grew 9% year-on-year driven by solid business spends which delivered a net book to bill at 1.1X.

We felt particularly strong demand from mid-sized specialty pharma and biotech customers remain well funded and I am happy to say that our net book-to-bill in these segments remains around 1.4X. This offset lower bookings from some of our larger clients who was slow to confirm orders in quarter one due to other priorities.

This is an important part of our strategy to diversify our customer base which is concentration and create a platform for future growth but some of our traditional larger accounts mature.

Our differentiated technology and service solutions are enabling us to win this new business. By leveraging our ICONIK and Firecrest platforms, we’re successfully taking time and cost at our customers development programs.

Our recent acquisition of PMG is helping us to address the significant industry challenge of attracting patients in the Clinical Research and we continue to advance the unique data assets that enhance our developments.

Alongside our partnerships with IBM Watson and Genomics England, we recently announced the partnership with the International Consortium of Health Outcomes Measurement to create the world's first global health outcomes benchmarking program.

This assessment of treatments in real world settings is an important part of the growing late phase markets in which ICON is building a leading position through our commercialization and outcomes group.

As we transition our business to a boarder mix and successfully add new customers, we are replacing faster burn-in trials with more complex studies in emerging therapeutic areas. These are slower start-up and to convert your revenue.

In quarter one, 60% of our clinical studies were in sign-up phase compared to last year went around 49% of our studies when start-up phase. We introduced our backlog conversion in the quarter to 10.3% against our expectations of conversion of 10.6%, and that all resulted and our clinical services business unit have less revenues and forecast.

This was however offset by higher operating margin as a result of lower SG&A costs. Operating margin was 19% in the quarter and we grew our earnings per share by 24% year-on-year to $1.12.

I expect our some operating margin performance to continue during the year and earnings will remain within the guided range of $4.60 to $4.80 as the impact of this margin over performance will be obsessed by the slower revenue conversion.

We continue to deploy capital to maximize shareholder value. This will be done as we have done in the past through a combination of share repurchases and bolt-on M&A that enhance capabilities, differentiate our services and support growth.

Over the past 15 months, we have spent US$459 million and share repurchases and at our fourth coming ATM in July, we intend to seek approval for further repurchase program of $200 million. If approved this program will be executed over the remainder of 2016 and in 2017 depending on the timing and cash requirements of our M&A pipeline.

Before moving to Q&A, I would like thank the entire ICON team for the hard work and commitment during the quarter. Thank you everyone. We are now ready for questions.

Question-and-Answer Session


[Operator Instructions] We will now take our first question from Tim Evans from Wells Fargo. Please go ahead. Your line is now open.

Tim Evans

Hi. Ciaran, would you be willing to comment on the Pfizer renewal process, where you stand with that and particularly interested in whether you see anything in that renewal process that might change your overall margin outlook?

Ciaran Murray

Hi Tim. I can give you some comments on that. What we’re seeing here is pretty much in the process and what we expected and what our experience is in past renewals of this nature. And the contract is due to renew again in May.

We’re in a good place and working well with the clients and we were working as we usually do when we get this close to renewal under signed letters of intent which is off course non-binding and then where we're going through draft MSAs and looking at how we assign the model, the scope of the contract, how we changed it.

So, a lot of those things are proceeding according to plan. At this stage, it wouldn't be - I don’t think constructive to talk about margin. There is no indication that there will be any significant change in our outlook in the medium term, of course we don’t know about that.

You have to remember that we are working on a billion dollars worth of backlog with the customer. Most of that is work in progress. Terms and pricing is agreed. It’s the various stages of completion. And after we sign our - if we sign a new MSA, we will continue to take the new projects under the MSA and all of those chance of conditions on the course of negotiations and finalization. So I can’t really say too much at this point.

Tim Evans

Okay. Thank you.


We will now take our next question. And the question comes from Robert Jones from Goldman Sachs. Please go ahead. Your line is now open.

Robert Jones

Thanks for the question. Given the 1Q revenue, looks like the midpoint of guidance implies about 9.5% top-line growth for the remainder of the year. I think this would indicate a pickup in the conversion levels from 1Q.

Is there any sense you could give us for what could drive that expected acceleration? And within that, would it come from or from the top five clients or is this - would you expect this to come more from the smaller biopharma cohort?

Ciaran Murray

Well, firstly, we gave a fairly broad range of guidance this year to reflect the fact that we are in a situation where we have won a lot of new customers, a lot of new businesses over the last year and a lot of more complicated challenging therapeutic areas.

So, the conversion rate has more complexity attached to it when we forecast it. I’ll talk about it broadly within the range. Look at the forecast for the rest of the year. We can see that that’s quarterly.

We expect in business to pick up $10, $15 million a quarter. That will drive revenue into the range. And what's new it will be - that the new work that we’ve won will start to burn more quickly as it moves through the start up phase.

What is impacted on the conversion really, it’s nothing. There is nothing wrong with it. It’s just a function of the fact that we are dealing with a lot of new therapeutics, more complex. We are dealing with a lot of new customers. We are working with, let’s say, some of our smaller and mid-sized customers early in the process.

So as you do more work, say finalizing the protocol, getting an investigator signed up, ethics committees, it just takes a little bit longer from when you book the business compared to when you are working with larger customers who maybe have more mature and developed processes there. You are joining later in the process and it is closer to that start up point.

So it takes a little bit longer to get through some of these things and start up and it’s a little bit hard to forecast. Well, what happen is that within startup, it will start to converge at some point and that's what will drive the revenue when we look forward for the rest of the year.

Robert Jones

And just one quick follow-up on the top five, it sounds like the smaller folks, Ciaran if I heard you correctly, you are still north of one, four type book to bill with the smaller biopharma, mid-smaller biopharma. Maybe on the top five would obviously indicate things pretty, have slow down pretty much considerably there.

What is the thought process around getting that business to kind of re-accelerate? Is it the new norm, kind of just hope for replacing trials as they burn off on a one-for-one basis, or is there an expectation to re-accelerate growth in that top five customer base?

Ciaran Murray

I think I wouldn’t characterize it as slow off across the top five. I think if you look at the growth of the business on a commentary over the last long time, you can see that particular the top customer, there has been an expected maturing in that business under that model.

And where we are isn't a transitional phase. As business matures, new businesses replacing it, new business is more in startup. So I don’t think there is any great challenge for us to do with our top five and I wouldn’t characterize it as a slow down across all of the top five.

What we are doing here is dealing with the expected maturing at some of our larger clients, the successful replacement was used in but just new because of the nature of the works. And as I said the cost of the mix, it’s a little bit slower to convert in.

So there is no big picture of the top five. And it is not unusual with larger customers I think to look at circumstances. They, at times, have different priorities. Their bookings are not linear. If I'd were to go back to last 20 quarters over our top five customers, at some quarter you get hundreds of millions or tons of awards or the quarters they’re in. They aren’t the same every quarter.

They tend to even out generally over the course of the year. And that’s all we are seeing there in Q1. As I said some of our larger customers had other priorities. So bookings were light. And I’d expect and that experience has been when they refocus on different priorities, those bookings come back again and there is nothing more to it than that.

Robert Jones

Got it. Thanks.


Our next question comes from Eric Coldwell from Robert W. Baird. Please go ahead. Your line is now open.

Eric Coldwell

Thanks. Just have a few here. First off, on the share repurchase that you mentioned, Ciaran, is there any impact of that expectation in guidance or is current guidance based on no repurchases for the year? Stated differently, all else constant, would you have to update your guidance if you do get approval on the AGM?

Ciaran Murray

There is nothing in our guidance, Eric, in relation to the share repurchase. So to the extent that we would reduce the share time that would increase the EPS over the current guidance. We will look at that if we get, the implications if we get approval, which I would expect to get by July AGM.

And it has really going to come down on the timing of when we do this. The last time we did the share repurchase. We weren’t using cash for a lot of M&A. We do few bolt-on but nothing significant.

So we were able to do it pretty quickly and I think we ended up doing all of last year's repurchase over Q3 and Q4. And my expectation this time is that it will take a little bit longer because we do have a couple of – our usual tuck-in, bolt-on M&A opportunities in the pipeline.

So we will be kind of juggling those. So in some time we’ll update when we get approval and when we look at cash flow and look at where any potential M&A deals are in the pipeline.

Eric Coldwell

Okay. Quick follow up on or new question on foreign currency, sorry if I missed it, but could you update us on the revenue impact you are expecting this year perhaps in percentage terms, and then also the expected impact on EBIT and EPS?

Brendan Brennan

Hi Eric, it's Brendan here. We are coming from a forecast position where we kind of had the dollar out it, we are paying at about 1.10. It has been 1.12. We think that will probably be a couple of percent, maybe its tune of 1% or 2% on revenue and a slightly minimal impact on the EPS at this stage.

But obviously we will keep an eye to our major currency pair which is the euro/dollar rates and update as we go.

Eric Coldwell

Okay. Last one, a little more fundamental. Over the last year to last 12 months your headcount as you cited is up, it's actually up about a little over 9%, zero revenue this quarter due to the factors you cited only, up about 1%, a little bit of a mismatch here. I guess the question I have is, in the context that you've done a phenomenal job with margin expansion, so you've got the benefit of the doubt from us. But we have seen in the past companies going out and hiring in anticipation of revenue growth that doesn't come, and then we wind up in a margin shortfall period.

How do we gain confidence that growing headcount nine times faster than revenue grew this quarter is sustainable? And what is the read-through on this?

Brendan Brennan

Well, the good news is that you have to look at the business units involved to see where the headcount growth is coming from Eric. The bulk of that hiring in our docks FSP division which has been grown very quickly and has added a number of significant contracts over the past three to six months.

So they are actually hiring to a plan where we see the revenue coming through. And maybe Steve to talk a little bit about that because it is an interesting area.

Steve Cutler

Yes. Certainly on the FSP front we are seeing some significant demand and that has driven headcount growth in our DOCS business quite significant and continue to do so. I think we are well positioned, because we are able to move people around from our two, three business to our FSP and DOCS business so that’s a positive.

The other thing around headcount is we've been successful in shifting a number of people to lower-cost locations, India, Manila, Philippines, etcetera. So we have had some increase in headcount, although the cost of those heads is actually significantly lower. Hence we've been able to maintain and improve our margin.

So there is a number of things happening within the business around headcount is that don't necessarily reflect the cost-- well, improves the cost base even though the headcount is up. So headcount is somewhat of a, not a perfect surrogate if you like for cost.

Brendan Brennan

Okay and that's fair, and just confirm I think I heard you say you expect sequential revenue growth of about $10 million to $15 million quarterly, is that correct?

Ciaran Murray

Yes. That's correct.

Brendan Brennan

Great. Thanks very much guys.


Our next question comes from John Kreger from William Blair. Please go ahead. Your line is now open.

John Kreger

Hi, thanks very much. Ciaran, just to follow up on Eric's second to the last one. What sort of hiring do you expect through the balance of the year?

Ciaran Murray

It will depend John really on - and how things start consumer think. What I would point to is - and sort of links back to Steve's commentary on the headcounts. You think we've got a good handle on our productivity and our ability to run it cost often down in line with revenue. And I mean -- that's showing through in our margin, our gross margins is pretty stable. I think it was – where margin is down at - we saw growth, we get the benefit in the SG&A line where we don't have to go through the cost.

So I mean over the course of the year and it will depend on – I’m afraid that conversion rate goes from 10.3% to our sort of desired 10.6%. And so we're well staffed for the growth and so we've continue to see more staff added in DOCS as the FST grows.

And the clinical business didn't hire that many people in Q1. Its revenue was not quite on target. So there might be a couple hundred people here or there, but certainly I don't expect to significant and I'm pretty happy that it's going to flex with our revenue partner.

John Kreger

Okay, thank you. Then you mentioned conversion rate, does this feel like a cyclical issue to you that just ties to your efforts to diversify the customer base, or does it seem like more a longer-term trend as the whole industry pipeline shifts to the more rare diseases and oncology?

Ciaran Murray

I think it's a little bit of both. I think it is a longer term trend. But it's accentuated in RKS by the confluence of having added so much new business. I mean it's a long number of quarters as we were booking lower business out of some of our top accounts, which was expected. And we've got a book to bill of 1.4 in specialty and biotech and midsize and [indiscernible].

I think the long-term trend is that more complex therapies, specific around oncology. I mean if I look at our numbers, oncology is 41% for backlog, this time last year. It was probably 35% and 37%, but more significantly that was 36%, 37% of our backlog. It was 33% of our revenue, because the burn was quite close. At the minute it's 41% of backlog and so probably only about 33% or 34% revenue reflecting the slow down.

And the fact that we have a disproportionate amount of our business at the moment in that earlier phase instead. But when we're out of that market, we plan to continue to do that. So not proportioned is something that we continue for some time.

So how long - John, an industry trend and we're – and a little bit more acutely as some of our business mix transitions as we expected and we are happy about that, because then we see customer concentration reduced.

John Kreger

Thank you. Maybe one last one and you may want to refer this to Investor Day. As you think about longer term margin trends in the business, what are the key factors that you think will enable you to drive it higher perhaps or might be a headwind to that, given you've done so well on this metric, just curious of how much more upside remains?

Ciaran Murray

Yes. We've reached target levels higher -- higher target levels more quickly I suppose, by the way - unexpected. I think there is three things ultimately decide margin in the longer term. It's kind of topline growth and we've seen fairly controlled. And modest rates of topline growth, they're easier to manage. I think it's that it's exhilarating future. And that causes more investments and kind of an impact in margin.

I think secondly, foreign exchange. There have been some significant swings in the past few years. It tends you to fairly neutral on our margin. There are no big volatile changes. However, it can impact 50 basis points or 10 basis points in one direction or the other.

And then the last thing will be business mix. We are seeing some areas of the market growth. We have M&A strategy to build on more services and broaden our service offering. If your business mix changes, let's say more FSP - if that's where the market is going and that's traditionally a lower margin.

So those factors will kind of shape our thinking on very longer-term margin. The medium term, I don't see any fundamental change. I'm happy about our operating margin will stay at about 19% this year beyond that, we can talk about it in Investor Day but those are the things that was shaping.

And on the upside if margin is under pressure, because topline is growing more quickly than we expected, that's not a bad thing. And ultimately, we've found in the past that the investment in growing the topline may shift somewhat margin, but generally delivers more earnings and therefore it's favorable to the share price.

John Kreger

Thanks much.


Our next question comes from Ross Muken from Evercore ISI. Please go ahead. The line is open.

Ross Muken

Good morning. I guess maybe sort of more big picture question, so a lot of scrutiny or a lot of discussion in the U.S. on sort of drug pricing. One of the key questions is what that does to R&D, but theoretically could actually make your business more important, the Pharma companies. I just wonder if there is any high-level discussions regarding obviously the need to accelerate enrollment timelines and increase success, and how that all plays together in terms of maybe you being more useful to them in terms of the productivity of their R&D pipelines? I'm just curious if there are any discussions at all?

Ciaran Murray

To be honest no particularly significant discussions, Ross. I think if you look over the last five or ten years, the discussions for pharma, a lot of it started with the top revenues going away for that. That leads to focus on productivity and more outsourcing and more management cost mix.

The pricing is really just a continuation of the same discussion where our customer's revenue stream possibility is under pressure. So we have with all of our significant customers pretty much a laser-like focus, both of us, on productivity, on timelines, on enrollment and all the things that improves the quality of trials and through the chance of success well come and deliver more quickly at better cost.

And that's kind of day-to-day part of business. I can't report any change in the tone or significant change in discussions as a result of the drug pricing discussions specifically.

Ross Muken

Fair enough. Maybe just relative to the RFP tone overall, was the consistency of RFPs and the different groups sort of level over the quarter, did it have a bias? I'm just trying to get a sense of if there was seasonality difference or if maybe some of the big headlines we have seen of the number of different companies that have either been involved in M&A or other types of events, maybe drove a little bit of volatility just in terms of close rates or the like?

Ciaran Murray

I think from where I look at the overall pattern remained unchanged compared to the last year which was an a lot of interesting new therapies and a lot of interest from biotech and specialty pharma and mid-sized.

And as I said in my comments a number of some large clients have considered their own issues which shift the RFP, but they are, if you set aside explainable and understandable and then our view soon to be revised kind of consideration and some of our last customers and everything else has unchanged.

I am looking at Steve here if he wants to add anything to that?

Steve Cutler

Yes, I think the other thing I’ll add is, we sort of pointed out the trend, we seem to be seeing some, greater interest in the FSP pace not ready to sort of quantify to that too much at the moment but that does seem to be of interest of customers.

Biosimilars are also an area that we see quite a bit of interest in and we continue to say, and not just in the last quarter, but over the last could be 12 to 18 eight months. So, we see significant opportunity in all of those areas, the biotech, mid-size particularly those well funded companies are willing to take compounds through the Phase 3 and that’s great.

You know in past they would partner, that would sell, now they are taking lot through Phase 3 and that, but the whole process is coming to us much earlier and we are helping them with protocols and plans et cetera which is as we've already indicated sort of impacting on our conversion rate.

But we see, plenty of opportunities segment to the market customers are very concerned about drug pricing challenges and, I think that’s likely offer us more opportunity going forward as we get better at delivering our budget. Currently we deliver 90% of our projects on time.

And so we feel very, we're able to focus, on our execution and our delivery. And then also be creative in terms of our innovation and that I think can help them to reduce the cost but also could help us to maintain even possibly improve our margins going forward those, it’s I think a win, win if we can, move that forward with sort of technology around this space monitoring for Firecrest and those sort of things. So, there is certainly opportunity out there in the marketplace.

Ross Muken

Great. Thank you, guys.


Our next question comes from Michael Baker from Raymond James. Please go ahead. The line is open.

Michael Baker

Thanks a lot. I was wondered if you could give us some color on what you're seeing in terms of labor inflation, particularly as it relates to CRAs.

Ciaran Murray

We’ll see in the next slide Michael. In the U.S. its little relatively high, and probably in that size percent kind of region from sign that will more dependent on experience if you are looking for specific skills, we could have to go above that.

But then all set to by productive gains driven by technology by the spread of the workforce, around the world and the way work is conducted. So, overall taken the basket of sort of our global footprint it's that kind of normal levels that around 3%.

Michael Baker

Okay. I appreciate the update. Thank you.


Our next question comes from Sandy Draper from SunTrust. Please go ahead. The line is open.

Sandy Draper

Thanks very much. Good morning on my side and good afternoon on your side. Most of my questions have been asked but just one quick clarification and a follow-up. It is a right to think about, in terms of acquisition contribution for the rest of the year, it looks like to me sort of ballparking it would be coming in $15 million to $20 million range for the rest of the year, from the acquisition, is that the right number to look at?

Ciaran Murray

If you're using our quarterly run rate Sandy I think just to remind that are – we’re including in the numbers the first quarter MMPS acquisition which we acquired in the second quarter of the last year. So that will drop off than once we get to that point.

So just be PMG, will be the difference between the third and fourth quarter.

Sandy Draper

Right, I guess what I'm saying $15 million to $20 million total, so probably more quarterly running somewhere around $5 million to $7 million it looks like?

Ciaran Murray

Yes, that’s probably that's best rate, yes.

Sandy Draper

Okay, great. And then just – a lot of questions have been asked a lot around the trial, et cetera. When you guys gave your projected coverage at 75% and looked at what's coming out of backlog, did you use a different methodology at this point or just fine-tune it based on what you saw in the quarter. Because obviously it was a slower start, as you mentioned Ciaran, this quarter, did you do anything to sort of protect against another negative surprise like that or is it the same methodology and you feel like you got better input now that you're seeing more how these trials are going to start up? Thanks.

Ciaran Murray

It's broadly the same methodology and we are getting more use to the cadence and the rhythm of them. So we are hopeful that we’ve got the numbers right. Brendan was there – metal change there?

Brendan Brennan

No fully metal changes again that’s very much - the ground if you’re look at timing of revenues and finally it’s all about the course of the year. So, same methodology though.

Ciaran Murray

We work our model of ranges and we are comfortable that wherever we are within the range of that say, our earnings and margin all the levers that relate to that and holistically the forecast hangs together.

So we see conversion stay the same, 10.3% should pick up a bit and that will fundamentally out to the earnings for going quicker and its coming in sooner as we hire bit more and things. So holistically that 75% revenue under implication and margin and earning is hanging together pretty well.

Sandy Draper

Great. Thanks very much.


Our next question comes from Greg Bolan from Avondale Partners. Please go ahead. Your line is open.

Gregory Bolan

Hi guys, thanks for taking the question. First question, on the smaller end of the spectrum, just in terms of the sponsors, Ciaran, you had mentioned doing fairly well there at 1.4 or better booked to bill. Do you think that's more of the macro tied remaining fairly elevated or is of that ICON is gaining share from some of its more tier 1, tier 2 competitors, or both?

Ciaran Murray

I think it’s the time, I’ve seen a lot of funding into - and when we say smaller some of these are pretty big companies such – where reflects the floors. So I just think it’s a function of some of the clients and larger ones in hot areas as hot therapies are in the public well funded and then smaller ones has gone public of cash in the balance sheet.

So I think it's more secular on where the market is done us particularly gaining market share and that’s my feeling. Steve, so you might have something to say on that.

Steve Cutler

I would agree with that. I do think it’s the top actual loan company that we benefit from that funding of those company. I think these companies are feeling like they’re moving forward as themselves in terms of development entities in a most sophisticated and are willing and able to work with the top tier CRO.

So while I don’t think its ICON specific, I do think its top echelon specific because I think these companies volatile the company’s compounds right through the market. They want to work with an entity that’s financially and operationally stable and viable and that’s an important consideration.

Perhaps 5 or 10 years ago there are only going to couple of proof-of-concepts in the Phase 2 and then selling the compound. Now they’re going through and they are selecting an organization that’s going to be with them for the long term.

Gregory Bolan

Sure. That's great. Favorite topics of years, Ciaran, M&A. Among the larger late stage CROs, I think you are pretty well spoken on this topic. And as it relates to that I know this is an area that you are -- this is not really an area that you've typically wanted to pursue just given the historical experience, but as you think about possibly some of the other larger clinical CROs merging, do you think that -- has that historically opened up an opportunity for ICON just in terms of market share gains? As those sponsors using the CROs that are engaged in M&A and maybe possibly freak out and move on, I guess my question is, is M&A among tier 1, tier 2 clinical CROs an opportunity for ICON to take share?

Ciaran Murray

I think the honest answer Greg is, I don’t really know because it hasn’t really happened in a significant way. I mean there is a number of specific deals in the past but never really at the highest levels.

So there is no evidence there but my belief and my strong opinion based on conversation with customers. And looking at some of the impact in the past, these smaller deals and maybe they’ve been potential and more deals in time where those customers had a very visceral reaction made them want to go with places who would not have any distractions.

The works that we all do together with our customers is pretty hard at the best of the times. Clinical research is challenging, there are many variables, it requires a huge amount of focus and dedication for both us and our customers.

These are the jewels of our customers future that we work with and they tend to want people who are exclusively and zealously focused on their interests - on their projects and don’t have any distractions and I would even point to I think if you could back four or five years to when we won the big Pfizer contracts, that was a huge contract at that time.

We had to hire and invest revenue ramped up pretty quickly before our reach in certain quarters even 33% or 34% revenue at 28% this quarter 29%.

But even in that time, we found in the marketplace is that one of the first questions that we got from existing customers or potential ones is. Are you guys too busy a focused on our work? Because of our relationships with existing customers and the way we organize that we were able to put their mind at rest.

It was always present in their mind that you we always have to do works to do that. And with potential new customers who perhaps didn't know us and we didn't have a long relationship with us. I think it times back when 2011 and 2012 it was a factor in us not winning as much business outside of that account. It is a definite concern. But the proof of the pudding is in the eating so we'll only actually know if and when that happens.

Gregory Bolan

Sure. Thanks guys.


[Operator Instructions] Our next question comes from Donald Coker from KeyBanc. Please go ahead. The line is open.

Donald Coker

Good morning. Or good afternoon for you and good morning for us. Obviously the big trend that continues to occur is the rising complexity in these clinical trials. I was curious how that sort of plays to some of your investments in informatics and in information technology with ICONIK and Firecrest and whatnot. Do those more complex trials also drive greater usage of informatics in clinical trials as well?

Ciaran Murray

Good morning Donald. I am going to ask Steve to comment on that again.

Steve Cutler

Thanks Ciaran. I don't know that the two are entirely correlated. We invest in our informatics and our IT structure innovation, around a number of aspect of trials and there are some very inefficient things that happen in the course of running a clinical trial in terms of getting sites started, getting patients recruited. Those things are still fundamental and common whether the study is complex, difficult, or not as the case may be.

I don't think there is a specific correlation between the level of investment or the types of investments we're doing. We are investing in essentially in moving the process faster, faster, better, cheaper, getting particularly for us you saw our PMG investment around being much more systematic, consistent in recruiting and faster. We're recruiting patients into trials, only 1% to 3% of people go into clinical trials, we want to make a higher number.

We also want to make that a much more rapid process because that is probably the most influentiable period of a clinical trial. And you can talk about rare diseases and increased complexity and there's clearly a number of aspects there.

The technology itself is really around some of the more fundamental processes in the clinical trials rather than specifically addressing the complexity.

Donald Coker

Okay. That's helpful. And I will ask one other quick question in terms of profitability and profit margins, I was sort of inducing that the rapid growth in these smaller and midsized biopharma clients might pressure margins. I was sort of inducting that some of the top clients I presume you work with have processes connected and tightly together, would be much higher, much more profitable revenues. Is the rise of these smaller or midsize clients a pressure on margins over the next couple of years? Not that that's a bad thing, but just for modeling purposes.

Ciaran Murray

No it's not Donald. The way we price business is pretty much around time and materials and the cost of what's involved. And some of it is unit contract, calculating units and there is no significant difference between the profiles and larger and smaller accounts.

Steve Cutler

The smaller accounts you might have value added, higher-margin services around consulting, whereas in larger customers don't need that. It all kind of - there is bunch of moving pieces simplified it there. But it all pretty much comes out at the same place in the end.

Donald Coker

Got you. That's actually really helpful. I appreciate it. Thank you.


Our next question comes from Dave Windley from Jefferies. Please go ahead. The line is open.

David Windley

Hi, Good morning. I've joined a little late so I apologize in advance if I re-ask here, but wondering if you could comment, Ciaran, on pricing and renewal. I know you got the pricing question, you've gotten the renewal question.

Last time when we say heard you going through Bristol-Myers and Lilly, you commented that you really thought that they would renew without much change to the structure. And I guess I am most curious about whether you think there will be changes to pricing terms and your agreement with Pfizer?

Ciaran Murray

Its -- I can't say too much at the moment, David, you should understand here. We are in a middle of various negotiations. But the structure of the draft I'd say that we're working on. And are not dissimilar to what existed in the past and that the scope of the work is the same.

There will be different ways that we do business around the technology, platforms that we use and the exact model. So that will have knock on consequences in certain things. Some things will cost less and some things will cost more. But it's too early for me to say if there is that your fundamental change in it.

Our experience in the past is that -- is not a fundamental change. Sometimes just to sharpen your pencil a bit here and there. We usually recover that inefficiencies, off and a lot of what's around and new MSA is putting hands together with customer in a collaborative partnership way and sort of jointly taking out cost from the whole development efforts rather than it being just a simple question of price of the vendor.

So, no - I've no significant concern at this point fundamental change in the medium-term beyond that -

David Windley

Okay. Appreciate that. That's helpful. You mentioned the scope of work, there has been -- I've heard some speculation about Pfizer itself changing the amount of outsourced work, insource versus outsourced, those types of arguments - my personal view is that Pfizer outsources just about everything and doesn't really have any internal capacity to bring that back in house. I would be curious if you could confirm or deny that view?

Ciaran Murray

As you said speculation always reluctant to comment on speculation. It's fair to say that everything changes over the course relationships with every contract and at times something is going to end, because a particular person maybe a partner for preference for us. And none of our customers have had significant excess capacity and existence through that, but there have some capacity.

And if talk to every customer and every person and the customer, we talk about these customers as if it's one voice. They have many voices the times - what you're talking and various preferences.

So - we're working on as fundamentally the same scope of work or be it -- we may do think in a slightly different way and we did in the past and -- front-to-end services or if there is -- particular studies that are very specialized, maybe some of it will be done more in-house because it's a specialty element. It's got particularly high focus, but no fundamental changes by the normal things.

David Windley

Okay. Thanks. Last question, I will move away from that horse. The performance not just of Pfizer but the other top five members of your client base has also been sluggish in the last several quarters. I wondered if you could help us to understand the dynamics that are ongoing with the other members of the top five in terms of flow of work or things like that. Or how you're thinking about where the sources of growth are going to come from outside of the top five, and how they overwhelm the weakness in the top five? Thanks.

Ciaran Murray

I can't say too much about this. Let's just say, if you look at our top five, it's dominated by one at customer phase. So everything has to be used in the context of that. We have - about the past, but our concentration reducing is reflecting the maturing in the model. I mean we went through and on top of that at very many times it's phenomenal growth there under the new models five years ago.

And with Pfizer because of the fact that so many on and studies were transitioned over, which is not unusual. I had never seen it before. I haven't seen it since and probably we'll never see it again. And so -- so that kind of can potentially distort a lot of what we are looking for. So one of the top five, I don't have growth concerns as a group.

One or two of those customers have their own priorities and their own issues. Therefore their business winds will be lumpy, but that's always been the case. Always in our top five are growing perfectly, satisfactorily. And we've [indiscernible] year and I'm pretty sure that next year top five would reflect some of the new work and some of the significant new customers we've added.

So growth is in the future. If you ask them associates, it will come our bench of customers. It will come from the existing customers. Some of whom are in different phase. There is nothing new here. You're doing this for a long time. I go back over records 10 or 15 years.

There is time some customer - was your tough customer, because it had a number of large sort of activities in its pipeline. Three years later it disappeared and turned to number six and number 10 or whatever, but it was doing different things or its pipeline wasn't robust. We concentrated in other things. And then you see them pop up again in the future as soon as they were doing other stuff.

So there is nothing in there that's causing us undue concern that we don't think is just the normal course of business, but that thing said, we're focused on those customers. We have our strategic event managers and our biggie people making sure the relationships are alive and healthy. And we continue to book them give us flu.

David Windley

Very good. Thank you for the answers. I appreciate that.


Our next question comes from Douglas Tsao from Barclays. Please go ahead. The line is open.

Douglas Tsao

Good morning, thanks for the questions. Just curious in terms of your comments around seeing an uptick in terms of the staff in the FSP model, what do you think is driving that? It seems to have been some number of years since we heard about that model coming back into vogue, the trend seems to have been the opposite sort of moving more towards project oriented work. Any comments there would be helpful, thank you.

Steve Cutler

Yes, Doug, it's Steve Cutler. I think it's a bit declare to declare a trend. I think we are seeing a lot of interest in that area from a number of companies. Obviously, there is some companies who are very clearly strategy-related with FSP and we know we have had some success with one or two of those I think most recently. And that's probably driving out impression I think on these market.

So I think it's a little bit early to sort of hit definitively say this is a trend within the industry. We feel good about where we are with this with our DOCS division who does our FSP space. We can I think quite flexibly move people and resources between two, three group and DOCS as regroup.

We feel we are well positioned in the industry to take the benefit of that, that sort of trend; if it is a trend. I think we'll probably move a little bit early at the moment. And will need to access that approximately in the quarter or two.

But I think good thing for us is we feel like we are in a good place to the benefit from that trend if it in fact is just --

Douglas Tsao

Okay, great. Thank you.


Our next question comes from John Groberg from UBS. Please go ahead. The line is open.

John Groberg

If you look at the gap between gross and net bookings over the last number of quarters versus kind of the prior four or five quarters before that, it seems like it's expanded a bit. You didn't really call anything out from a cancellation standpoint, specifically other in the quarter.

So just curious if there's any specifics around what you're seeing from a cancellation standpoint? Is it driven more by one customer, re-prioritization of where their compounds, or any comments around cancellations?

Ciaran Murray

Nothing specific, John. If you look back over the history of cancellations, they tend to average about 15% mathematically of the gross awards, and in some quarters in seems that’s 20 and some quarters you seen a 5, and sometimes a low for two, three and four quarters low and then spike up again and it usually functions just a either it is as I say, re-prioritization or you start something, the data isn't good, it gets cut.

There's nothing I would point to in the current quarter, the one we've reported, that's any different which might say as you look forward and we have seen the benefit of technology and some of the improvements in medical and scientific technology and then data and speed of data and maybe potentially positive effect of a cancellation.

But then we also see that we we've talked about the fact that we're working on a number of more complex therapies so it remains to be seen whether that would be a factor as the complex and we move out start up and get into the meat of the studies, potentially a risk to higher cancellations.

So you have two competing forces there on cancellations, hopefully they'll offset each other or the forces of good will prevail and keep cancellations at lower than the historic rate. It’s just one that that nature takes its course on it, and it's hard for us to say.

John Groberg

Okay so, nothing specific. And you highlighted 41% of your backlog I think you said was oncology. My understanding having been at AACR and other places, a lot of oncology trials focusing more and more on finding patients you need to know my profiles or very targeted in terms of the type of patients they are looking for.

I'm just curious, is that a part of this challenge in the early start up phase that you talked about and that an area on from an bolt-on M&A perspective that could be of interest to you in terms of trying to do a better job of finding these patients that could be a little bit more like a needle in a haystack?

Steve Cutler

Groberg, its Steve Cutler here. It's certainly a factor in what we call out in terms of our burn rate. These complex trials in rare diseases with a number of combination therapies which tends to be the way the oncology business is going these days do cause lots of challenges from a specialization, as finding the right sites and obviously finding the right patients.

In terms of how that impacts the technology, I don't see it as much but there is no question it's having an impact on the rate at which the trials burn. There aren't any large scale oncology trials. I wouldn't want to call out that every oncology study is a small 25 patients' study that is looking for rare patients, that's not the case. You still need to do your confirmatory large scale Phase 3 and they do tend to be large - can be complex, but also relatively high revenue generated.

So there's plenty of opportunity in the oncology space. Notwithstanding, the fact that it is - there are very specific approaches being developed. I think again, we are in a good place to be able to benefit from this.

I'll give you an example around the combination trials, many combination trials going around in our adaptive opportunity to look at how we select the right combination and how we help customers to select the right combination of compound early in the process, allowing them and then developed that particular combination and go on to do their larger scale trial in the right combination at the right dose.

The adaptive approach that we have and the expertise we have in the areas allows us to help customers with doing that and so that’s significant benefit for us.

John Groberg

Okay, great. And last quick just one for me, I've read a number of things about maybe Ireland trying to think about normalizing its tax rate given some of the comments out of the EU. Is there anything at all that you want to talk about in terms of tax rate, I just thought I would see you guys are saying from a tax planning standpoint.

Ciaran Murray

Most of them reading the same things there, John, because in Ireland we're pretty much of the view and government and public policy is very strongly around the fact that taxes are sort of an issue. So Ireland, we're pretty happy with the tax model it works, it's fully compliant with the best international standards ECD.

The policy, we are not we are not seeing much there. Specifically for impact in Iceland, I think it's probably want to talk about the changes in the U.S. rather changes in Ireland and the debt stripping legislation, give some give some color on that, albeit the conclusion is that it won't affect us.

Brendan Brennan

To answer the answer question quickly I don’t think there's any change to anything here from an Irish perspective that should impact on our expected tax rate. I choose the question equally, if the U.S. treasury changes around inversion, particularly in the last it will have an impact on our ability to hold our effective rate at about 14%.

I think the quick answer is no. We do have a debt structures in our organization as is the norm for large organizations, but we feel that they are well-founded and are commercially appropriate. So we feel that they are well able to stand the test, so we don’t know expectation in the next number of year that we shouldn't be able to maintain our 14% of effective tax rate.


Our last question comes from Tejas Savant from JPMorgan. Please go ahead. Your line is open.

Tejas Savant

Hi guys. Thanks for taking the question on Pfizer this morning. One quick one on Pfizer in terms of the renewal - in terms of the timeline, should we expect an announcement at your Analyst Day, or is that more of a late May, early June event?

Ciaran Murray

No, I think I've been pretty consistent at HSN. Our experience is that these because of the complexity of the amount of legal drafts and word parsing, fans in the legal community and looking at our general counsel here as I say that.

They tend to go right to the end and that contract renews at the end of May, so my expectation is that we will be working on it and refining it until the end of May. So there's no expectation in the announcement of the Analyst Day and there never was.

Tejas Savant

Got it. And then In terms of your announcement last December regarding the 25% reduction in start-up times that you achieved, partly driven by the active software implementation and a couple of other streamline processes you put in place, how should we think of that within the context of your backlog conversion rate going forward? Should we expect some of those efforts to help stabilize the metric in that 10% to 11% rate?

Ciaran Murray

No, I think is the short answer. The fact is that our slowing on conversion the start of the trial and even before you start work, it's a combination of the working earlier with the clients on finalizing the protocol and getting them to final pre-protocol.

Our last discussions with regulatory agencies and feasibility and things like that. I don’t see a significant impact. But that being said, I don't know Steve if you want to give more color on that?

Steve Cutler

I think the improvements we've made in start-up will be helpful once the trial starts. But as Ciaran said that our challenge as we get involved earlier in the process we're waiting for protocols and we are helping to develop protocols. You can’t start a trial until you have the protocol completed.

That's the sort of division if you like the challenge that we have is pre-protocol while we're helping with registration plan et cetera. Once we get the trial, once we get the protocol, we can go, we will be able to go faster, but it's getting to go I guess is our challenge.

Tejas Savant

Got it. And one final one year Genomics England, any color you can give on progress since the announcement? And also, are you in the running for a similar involvement with other population sequencing efforts around the world?

Ciaran Murray

We have the one question rule and I’m conscious that we are over time here. So quick answer from Steve on that one.

Steve Cutler

That's proceeding well at this case, and nothing to call out in particular on the Genomics England. We're certainly interested and involved with a number of other discussions with organizations, NGOs, governments, et cetera in that sort of area we think we add value to.

Yes, further discussions, but nothing specific at this stage.

Tejas Savant

All right, thanks guys.


I would like now to hand the conference back to Mr. Ciaran Murray for any additional or closing remarks. Thank you.

Ciaran Murray

Okay. Thanks for listening everyone today. I know it's busy and it earning season, so I hope we haven't kept you away from anything. I know we ran a little bit over time. I’m happy we made a solid start to 2016 and looking forward to building on this journey rest of the year as we continue on our mission to be the CRO Partner's choice in drug development. Thank you everyone.


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

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