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ICON plc (NASDAQ:ICLR)

Q2 2008 Earnings Call Transcript

July 22, 2008 9:00 am ET

 

Executives

Ciaran Murray – CFO

John Climax – Executive Chairman

Peter Gray – CEO

Analysts

Randal Sandeki [ph]

Douglas Dio [ph]

Jack Walman [ph]

John Creek [ph]

Derek Coldwell [ph]

Dave Windsley [ph]

Sandy Dryford [ph]

Sam Harding [ph]

Operator

 

Good afternoon ladies and gentlemen and welcome to the ICON results quarter two fiscal year 2008 conference call hosted by Ciaran Murray, Chief Financial Officer. My name is Louise and I’ll be your coordinator for today’s conference. For the duration of the call you will be on listen-only, however at the end of the call you will have the opportunity to ask questions. (Operator Instructions) I’m now handing over to Ciaran to begin today’s conference.

Ciaran Murray

 

Good day ladies and gentlemen. Thank you for joining us in this call covering the quarter ended June 30, 2008. On the call today we’ll talk to John Climax our Chairman and Mr. Peter Gray our Chief Executive Officer. Before I hand the call over to John, I would just like you to note that this call is webcast. There are slides available and the comments will follow the slide show. I will now make the customary statement in relation to forward-looking statements.

Certain statements in today’s call may constitute forward-looking statements concerning the company’s operations, performance, financial condition and prospects. Because such statements involve known and unknown risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Given these uncertainties, investors and perspective investors are cautioned not to pay 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.

Today’s commentary refers to our second quarter ending June 30, 2008 and please note in the following commentary the financials for both current and prior quarters and any reference to margin is after charging stock compensation expense.

Having said all of that, I will now hand the call over to John.

John Climax

 

Thank you, Ciaran. Good day ladies and gentlemen. We are very pleased to report another excellent performance by ICON in quarter two 2008. The group’s net revenue grew 48.5% from $147 million in quarter two last year to $218.3 million. Excluding the impact of DOCS, the European Contract Clinical Staffing Business which we acquired in July 2007 and HCD, the US Phase I unit which we acquired in February 2008, the organic growth rate was 41%. Excluding the impact of currency, the organic growth rate was 37%.

Year-to-date net revenue was up 48.2% from $283 million to $420 million. Operating income for the quarter was $24.4 million representing a 51.9% increase over the same quarter last year. Year-to-date operating income was $45.9 million representing an increase of 49% over the prior year. Group operating margin for the quarter was 11.2% compared to 10.9% in the same quarter last year. Year-to-date the group operating margin was 10.9% unchanged on last year.

The margin in our clinical business for the quarter was 11.5% compared with 11.3% in the same quarter last year. The Central laboratory’s revenue grew by 29.1% to $16.6 million and achieved operating margin of 7.8% compared with 6.6% in the same quarter last year. Net business win in the quarter were $21.8 million representing a book to bill of 1.3. We are very pleased with the progress we made and we are continuing to invest in this division.

Year-to-date our Central laboratory has achieved operating margins of 7.7% on revenues of $33 million compared to margins of 6.9% on revenues of $25.9 million in the prior year. Group net income rose to $18.8 million from $13.3 million last year representing 41.3% growth. EPS growth from $0.45 per share to $0.62 per share a 37.7% increase. The effective tax rate for the quarter was 20%.

Year-to-date net income increased to $35.7 million from $25.6 million last year representing a 39.6% growth. EPS grew from $0.86 per share last year to $1.18, a 37.2% increase. The effective tax rate for the year-to-date was 20% compared to 22% in the previous year.

Cash flow provided by operating activities was $40.7 million in the quarter. We invested $18.9 million on capital expenditure which was related to the continuing expansion of our global infrastructure in line with our strong growth. Of this, $8.3 million related to the extension of our Dublin facility.

Year-to-date cash flow from operations was $28.4 million; capital expenditure was $35.4 million of which $12.1 million was for the Dublin facility. In addition we invested $12 million in the acquisition of HCD, our new Phase I facility in San Antonio. As a result, at June 30, the company’s net cash amounted to $6.9 million compared to a net debt of $20.2 million at March 31, 2008.

DSOs at the end of June were 58 days compared to 67 days at the end of March 2008 and 66 days at the end of December 2007. At this point I would like to handover the conference to Peter Gray who will give you an update on the business outlook and our revised guidance. Peter?

Peter Gray

 

Thank you John and good afternoon folks. Overall the business development environment continues to be strong with RFP volume of approximately 16% year-to-date; the value of our RFP is approximately 20%. As we said in our press release, net business wins in the quarter were $337 million compared with $230 million in the same quarter last year. This represents an increase of about 47% and a strong book-to-bill of 1.5 for the quarter.

These net wins breakdown as follows; gross awards were $393 million, cancellations were $56 million and are 14% of the gross awards, that also another way of expressing that is $56 million represent 3.8% of our opening backlog for the quarter. On a year-to-date basis gross awards were $833 million, cancellations were $127 million which is about 15% cancellation rate through the first six months. Overall net wins were $706 million of the first six months compared to $453 in the same period last year which represents an increase of 56% year-on-year and a book-to-bill on average in the first six months of 1.7.

As a result at the end of the quarter, at the end of June our backlog was over $1.6 billion, a 56% increase over last year. Of this $1.6 billion backlog we expect $752 million of it to covert to revenue in the next four quarters which is a coverage of approximately 79% of current implied forecast. As a result of this high level of coverage we decided to revise our guidance. We now expect revenues for 2008 to be in the range of $870 million to $890 million which brings our coverage ratio back down for the next four quarters back down to about 77%. We expect our earnings per share for 2008 to be in the range of $2.46 to $2.52.

That concludes the formal remarks of the call and we’d like to now hand over to questions.

Question-and-Answer Session

Operator

 

Thank you. (Operator Instructions) Our first question comes from the line of Randal Sandeki. Please go ahead.

Randal Sandeki

 

Great, thanks very much guys. Peter this is the third quarter in a row where you guys put up a gross bookings number of roughly an average of $400 million; is this a new level that we should be thinking about and then maybe can you characterize for us what’s driving that and then anything that might be sizable in there as you’ve done in the past.

Peter Gray

 

Sure, I mean this – the first part of your question, is this a new benchmark of about $400 million gross; well I suppose Randal I would look to say yes, but one can never predict these things. Obviously as our revenue number continues to raise, the bar rises for us and we have to continue to achieve good numbers, but I think as we’ve said in the past our forecasts are based on achieving a book-to-bill on average of somewhere around 1.2 to 1.4 and who knows how the volatility and the variability that takes place in award, how that might play in any given quarter, but clearly we feel pretty comfortable with the flow of our FP’s that I mentioned, that business awards can continue to be reasonably strong over the next couple of quarters at least and that’s about as far out as we can see at any point in time.

In terms of particular awards, I think what we’ve done in the last two quarters we talk about awards over $5 million. We’re 12 awards over $5 million in this most recent quarter continuing the trend of – we see a continuation at least of the trend of some reasonably larger awards in that mix as and as we’ve talked about, that’s a feature of more of Phase III programs going on and the amount of data required in those programs, meaning that the size of any given program is certainly larger than it used to be in days gone by.

Randal Sandeki

 

Let me maybe just ask you a bigger picture question. I mean obviously the industry bookings and backlog growth has been big and we’ve seen a couple of different scenarios with other broader healthcare services companies looking to move into this space or others looking to rollup some smaller assets, but barriers thus far have been I guess a little bit difficult doing so, what do you think those barrier are in terms of additional competition coming in at some point impacting your guys ability and others to put up these bookings numbers?

Peter Gray

 

I think I’m understanding your question, what are the barriers to entry and am I right?

 

Randal Sandeki

 

Yes, I mean what’s the say in two to three to four years we are not going to see some other broader services companies coming and entering this space and obviously compete given what’s obviously continued very strong industry bookings?

Peter Gray

 

I think to compete in this space and remember ICON is essentially and largely a phase II to Phase IV focused CRO and if you’d asked me and if you told me five years ago that we’d have 71 offices in 38 countries today I would have thought you were drinking to more Randal. So, the world has changed and has developed quite a lot and that’s creating in itself a very significant barrier to entry, because if other companies, other entrants wants to be credibly able to complete against the four or five now, maybe six large CROs. The infrastructure that they have to create, the platform that they have to have in order to compete is a very expensive thing to do. We have been fortunate in that over 18 years we have been able to grow ourselves into a platform this big. A new entrant is going to have to make an incredibly heavy investment to build a platform that can compete. I think that’s the biggest barrier to entry, would you agree John?

Peter Gray

 

Yes and on top of that Randal you need a track record. You can’t build a track record over night and clients when they do award large contracts they are looking for as what Peter says a track record to be able to do these programs over a vast number of countries and regions and that is not something that you could just put money in and enter into the market place.

Randal Sandeki

 

Okay fair enough. Let me just finish with just obviously the new slow around. Like anything that we should be thinking about there as a potential ICON?

Peter Gray

 

No there is nothing you should be thinking about Randal pertaining to ICON. I suppose there’s an underlying question there Randal; is Genentech a significant customer of ours.

Randal Sandeki

 

I was going to let you ask that question Peter.

Peter Gray

 

Well obviously we don’t talk about individual customers. We are comfortable to say that we have a large number of biotech customers, but I wouldn’t like to comment about any particular one.

Randal Sandeki

 

Okay fair enough, thanks a lot.

Operator

 

Thank you. Our next question comes from the line of Douglas Dio; go ahead Douglas.

Douglas Dio

 

Hi good morning. (inaudible) was this a function of a shift in the business mix or was this.

Ciaran Murray

 

Dough, Ciaran here. We just lost you for a second there.

Douglas Dio

 

Am I back?

Ciaran Murray

 

Yes.

Douglas Dio

 

Okay, just starting with the margins, we saw a pretty nice sequential improvement this quarter; was this a function of strength in the central lab or was it largely – although we did see some nice improvement in the clinical business as well. Is that sort of a business mix issues within clinical or is this just simply a function of increasing the utilization rate and making sure that everybody was – the billable hours were up?

Peter Gray

 

I think it’s a nice improvement because margins in both clinical business and the lab showed improvement, but sad to say it’s not as good as we would have liked it to have been. If you remember last quarter we said that without the impact of foreign exchange the margin would have 12%, so we would have hoped that’ll we’ll be up closer to 12% to this point, but as I think I may have spoken to you in the course of quarter we certainly talked about it at a number of conferences. Our Phase I business had a more difficult quarter this quarter and that held back the margin from improving further, but it is very satisfying to see the beginnings of an upward trend there.

Douglas Dio

 

And what were the problems in the Phase I businesses that largely the study is delayed or …?

Peter Gray

 

Yes and it’s now two Phase I unit’s obviously, one of which is a very recent acquisition, and we indicated I think when we acquired it that the thing that was lacking was business development. We felt it was a very good unit technically, but is had not had a very strong business development support, so building it’s backlog is going to take us some time and we factor that into the equation when we’re acquiring it. At the same time our unit in Manchester saw some cancellations in the quarter which is very disappointing, so both units had a difficult enough quarter, but we’re reasonably confident that they’re going to be able to make progress as the year progresses.

Douglas Dio

 

And then what was the effects impact on operating margins this time?

Ciaran Murray

 

It was pretty flat Doug.

Douglas Dio

 

And then do you find in the large studies that you’re winning now, any particular therapeutic concentration. Is this focus more towards Oncology or cardiovascular CNF or does it pretty much range across the spectrum?

Peter Gray

 

And what we’ve seen over the last few years and again I think we’ve talked about this is that our backlog has been steadily increasing in the Oncology field, as I think everyone else has had as well. So, Oncology would be the biggest portion of our backlog with cardiovascular next, CNF next and then all of the other key therapeutic areas coming.

Douglas Dio

 

But I was asking specifically because of the large studies in the backlog. Is there any particular therapeutic concentration there or is that sort of the large studies spec reflected over all business mix?

Peter Gray

 

They would reflect pretty much our business mix I would say. If I think of the largest studies we have, Oncology and Cardiovascular would be where those lie.

Douglas Dio

 

Okay and then finally sort of building a little bit off of Randal’s question, do you find in sort of trying to gauge the competitive landscape, do you find that you compete with different see CRO's when you’re bidding on large studies and take John’s point about needing the infrastructure to conduct the very large global studies or do you find versus when you are bidding on a smaller sort of maybe a two study that you will be completing with some of the smaller players in the market and perhaps have less global scale, but it’s not needed as much to execute the study?

Peter Gray

 

It depends on who the client is Doug. Obviously with the larger companies that these preferred provider arrangements exist and the smaller CROs aren’t necessarily on those lists, whereas with smaller emerging companies they may not have a former list and through relationships and so on they may have contacts with smaller CROs. So, I think the answer to your question is yes obviously if there’s a smaller study that is in a very limited geography well then smaller CROs have an opportunity to compete in the competition for those opportunities, but we don’t necessarily see them where large pharma companies are concerned.

Douglas Dio

 

Okay, great. I’ll just have that for now thanks.

Peter Gray

 

Thanks Doug.

Operator

 

Thank you. The next question comes from the line of Jack Walman [ph]. Go ahead Jack.

Jack Walman

 

Thank you. I have two questions please; one for John and one for Peter perhaps. Firstly just John maybe if you can give us a little bit of a flavor for your current views on how ICON is developing in the emerging markets in India and the Far East. Are you still comfortable with a broadly green field strategy there and is there a scenario that you see where you may need to accelerate development there via acquisition and my second question is very focused on the contract staffing business and just to see how performance was in the quarter and I think you may have mentioned in Q1 that DOCS was not suffering but certainly it maybe a little bit more challenging quarter and how that has recovered and responded since then. Thanks.

Peter Gray

 

Jack in terms of the emerging markets, we see emerging markets as Asia and Latin America and perhaps a little bit in Africa; in these countries with the exception of Japan, there aren’t a lot of potential CROs, big CROs of any size for us to make acquisition and as we all know that acquisition brings with it, it’s own headaches, we have been very, very successful in the organic growth that we have initiated from the beginning of the company, start of the company in 1990. It keeps the culture and does all the good stuff of that we are benefiting today from.

Having said that, we are growing our presence in Asia and we are growing our presence in Latin America. I don’t think when we compare ourselves with our competitors, Asia and Latin America we are subscale, we are as good as most of our competitors. Japan is another scenario where I think we could probably have larger presence and there are perhaps potential opportunities, but then again we’ll have to be very careful in going into these new geographies particularly with rather interior cultures. In making acquisitions, our preference would be to go on the organic growth route and in relation to the staffing business Jack in the US again it’s continuing to perform well, it’s growing nicely for us, the margins are very satisfactory there.

DOCS as we said last quarter was behind plan. At this stage we were expecting its margins to be expanding and they are not. So we are disappointed with its progress in terms of margin. The reason the margin isn’t expanding is the top line is not growing in DOCS as quickly as had been projected, but we are fairly comfortable that we are going to see that improve as the year goes on. It’s a case of we’re behind the plan, but the plan is still a valid plan.

Jack Walman

 

And Peter what’s your own sense of that; is that a function of the market overall or is it something that you can change or alter specifically within DOCS itself?

Peter Gray

 

I think we have been making some change in DOCS in terms of their focus on segments of the market and putting more focus business development in place. I think the markets in reasonably good shape. All the indications we have and the underlying trends are reasonably good. So I think it’s a case of now executing and focusing on some aspects where I think we can get more leverage out of the business and therefore grow the top line a little faster.

Jack Walman

 

That’s fantastic. Thanks very much.

Operator

 

Thank you. The next question comes from the line of John Creek [ph]. Go ahead John.

John Creek

 

Thanks very much. Could you give us just a bit more revenue information on how your revenue breaks down, perhaps by client type, geography and also your client concentration statistics?

Peter Gray

 

Sure John. Client types, we’ve been pretty steady that biotech is representing about a little over 20% of our revenue, that was last year’s percentage and it’s continuing at about that level this year and obviously the rest is pharma companies with both mid and large.

John Creek

 

And Peter on that statistic, where do you put large biotech. Would that be counted in the pharma or in biotech?

Peter Gray

 

Large biotech is in biotech John; just over 20% when I include the large biotech.

John Creek

 

Got it thanks.

Operator

 

Okay the next question comes from the line of Derek Coldwell [ph]. Go ahead Derek.

Derek Coldwell

 

Hi good morning. Some of my questions have been asked, I guess just a few kinds of technical ones. Ciaran I think there had been a process in the company to focus on foreign currency risk mitigation through a combination of natural edging but also perhaps putting callers in contracts, can you give us an update on the status of that?

Peter Gray

 

There is no change really since the last time we spoke about it Eric, contracts of callers as we –

Ciaran Murray

That’s not new Derek. I think your suggesting – the implication of your question is that we didn’t have that and now we are putting it in place. We’ve all...

Derek Coldwell

 

No, no that’s actually not the implication. My prior understanding was that you had about 80% of your contracts with foreign currency callers and you were trying to move that to a 100%.

Ciaran Murray

 

That is absolutely correct, yes. I was picking it up differently.

Derek Coldwell

 

No, can you give me a sense on how that’s progressing and if you are getting any push back from your customers?

Peter Gray

 

Well its progressing fine and that we deal with it as we sign new contracts any time in the past, but we didn’t have language, we’ll put various language into the contract, so I suppose where you’re saying that we moved to 100% there will be some legacy contracts which didn’t have language, which we agreed to put language in with responses to the others where we haven’t, but certainly a lot of the new ones we are dealing with it, so as we move forward that percentage will change, but it will have to change over time. It won’t sort of happen all at once where we move from 80% to 100%.

Derek Coldwell

 

That’s fair. I’m just trying to get a sense on – obviously foreign currency has been mitigating your operating margin expansion and we all understand that but I am trying to get a sense on when the comparisons might start to ease or slight improvements in your contracting could alleviate some of those pressures.

Peter Gray

 

So I think a lot depends on how the rate goes Eric and you got to remember callers who work two ways and we will have a caller in the contract whereby when it moves beyond a certain rate we can re-price the contract but of course if it moves the other way and moves too much against the interest of the sponsor we would sit down and we would re-price it and pass on some of the benefit, so I am not sure that I can really answer your question given the uncertainties around where the rate will go in the future.

Derek Coldwell

 

That’s fair enough. Have recently met with a hand full of applied technology companies including some in the imaging and in cardiac safety and EDC arenas and we have heard a little bit about some pricing challenges in the market maybe for some of the smaller vendors in those areas. With your investment in Beacon and ownership of a fairly robust imaging platform can you give us a sense on what you’re seeing; are there pricing challenges in the applied technology market or is your skill and scope and ability to work across all these clinical, not making that relevant to your model?

Peter Gray

 

I suppose the honest answer to the question Eric is I am not aware of any – certainly not getting any reports of any pressures in the business. The imaging business has had a couple of extremely good quarters in terms of both its bookings and it’s top line growth. Some of that is occurring through cross and some of it is stand alone success which is what we encourage in all our divisions. They try to feed themselves and not be reliant on others feeding them and imaging is doing a super job in that regard and I don’t believe, but I haven’t checked – I think I would have heard from them if they felt that there were pricing pressures, but I have not heard any signals from them of any pricing issues.

Derek Coldwell

 

Yes, my belief at the movement is that some of the larger vendor’s maybe taking share and causing some pricing pressure among the smaller start up companies, but what you’re saying is good to hear. In terms of electronic data capture can you give us a sense on how many of your new contract and new study starts are rolling out with EDC and to the extent that you are controlling the vendor selection in EDC versus being given the provider name by your sponsor upon contract initiation.

Peter Gray

 

I think in the majority of cases we are being given the provider name by a sponsor, where the sponsor is an establish company. Where the sponsor is not an established company they look to us for guidance as to which system we would recommend or we would prefer to work with. In terms of what percentage, I don’t actually have that data as to how many of our new wins are in EDC, what I can say to you is I think we’ve given in previous presentations, over 50% of the pages we processed last year were done in EDC. About 35% of our study last year were in EDC and that percentage is growing strongly, so I would hazard a guess that we’re heading up towards 40% of our current studies using EDC, but I haven’t got that exact data at hand.

Derek Coldwell

 

Thank you and final question. It’s a little bit difficult to know how to ask this and hoping for a good response, but business development obviously has been absolutely phenomenal for ICON and for most of the large CROs. I guess it’s kind of a two fold questions; first off can you talk a little bit about your hit rate versus competitors when the RFP gets to the final stages and then secondarily I’ve heard some feedback from smaller clinical CROs that there has been situations where they believed they were awarded the contract and in some cases had put a contract into their backlog and then subsequently found that the contract went to ICON such that some of your peers have book cancellations and I’ve heard that you’ve actually taken some business away from companies that we’re income that providers to the sponsor.

Are you seeing that trend or are these are few one off situations that may be anecdotal evidence but not really a signal that some of the smaller clinical companies have actually lost contracts in backlog because they don’t have the global reach that you speak to earlier in the call?

Peter Gray

 

I am not aware of to what you’re referring Eric, I am not aware of those instances myself. Obviously I am very proud of the work that our business development team are doing and they don’t give up easily on any opportunity and if they are succeeding in getting people to change their minds when apparently they’ve mind up their minds, well then I applaud them for that because that’s clearly them doing a wonderful job, but I am not aware of specific instances of that. You’ve now prompted me to go and talk to our business development team and see if they can enlighten me with those instances, but I suspect you are talking about a few isolated anecdotal instances. I think most companies are very careful about making their decisions and once they make their decisions they stick with their decision. So I would be surprised if this is a wide spread event.

Derek Coldwell

 

Great and could you speak to the hit rated view; are you tracking those metrics or would you be able to provide that?

Peter Gray

 

It’s actually not possible to track. When we get down to the final whatever, we don’t know how many others are in the fray and therefore tracking it as a hit race against others is actually not, I don’t think it’s possible. I can’t say that our hit rate as an organization, we do track that against the RFPs that we know are decided. We track it our hit rate against RFPs that we know gets outsourced and that has been consistently above 30%. It fluctuates between 30% and 35% in different quarters, but its staying up in that level.

Derek Coldwell

That’s great, thanks and congratulations on another very strong result.

Peter Gray

 

Thank you very much Eric.

Operator

 

Thank you. We have a follow-up question from the line of John Creek go ahead John.

John Creek

 

Hi, thanks; just wanted to come back to the revenue mix. I was also hoping to get your geographic breakdown in the quarter and can you let us know if the concentration of your revenue among top clients has changed at all?

Ciaran Murray

 

There has been no significant change in our concentration John. If anything, it’s improved a little bit. Our top five clients have the ratios improved from 32% to just above 30% and the top ten has remained unchanged and the top 25 has improved from 68% to 67%. Our largest client does not represent more than 10% as was the case in previous quarters and as for the geographic splits, the US is I am just kind of having a look here – 51% approximately of revenue on 49 then in Europe and the rest of the world.

John Creek

 

Great and question given that ICON’s always been known as one of the higher quality vendors if not the highest quality; given the kind of growth that you’ve been able to accomplish in bookings and therefore staffing, how are you measuring to make sure your quality remains in an acceptable level, how are you tracking that in a ongoing basis?

Peter Gray

 

To keep our margins low.

Ciaran Murray

 

We track a number of things John. Quality is measured in a number of different ways, but clearly a very important one is customer satisfaction and client satisfaction. Client satisfaction is generally measured by whether you bring the project home on time and within budget and the metrics on that have actually improved a little this year compared to what’s happened, so we’re comfortable that we’re not seeing any deterioration in our performance.

In terms of other aspects of qualities, our quality assurance departments are constantly doing audits and our clients are constantly doing audits and we are reviewing the outcome of those audits and how they score the orders and again the scoring on the audits has improved somewhat into 2008 versus 2007. We don’t think that’s bias in the scoring we believe that’s genuine because the QA group are very independent and in terms of client audits of our operations and our projects and so on again we are getting clean bills of health on all of those, so we are pretty comfortable that we maintaining our quality standards.

John Creek

 

Great, thanks very much.

Operator

 

The next question comes from the line of Dave Windsley [ph]. Go ahead Dave.

Dave Windsley

 

Hi, thanks. A little late in the Q&A here, but John covered one of the questions I had. Peter I was wondering if you could maybe drill down a little bit, you talked about Phase I and some of the issues there; first question there would be I believe some of the UK based Phase I operations did feel some of the impact a couple of years ago when the De Genero study hit the news. I am wondering if there is any concern about this recent similar but not quite as severe event in Charles rivers Edinburg Phase I facility might have any impact on Phase I flow in the UK.

Ciaran Murray

 

I think whenever there is an event in Phase I unit David one has to be concerned and patient safety and volunteer safety is something that would concern everyone, including the regulators in a given country. To contradict whether or how the regulators of the UK will respond or will react it was a very strong and very positive response from the regulators in the UK to the De Genero event and a very rational one in the sense of putting additional safeguards in place for certain types of compounds, but still making the conduct of Phase I study in the United Kingdom very feasible, very possible in a timely manner. So, I am not anticipating that it’s going to cause any significant disruption to our business or damage to our business.

A more fundamental issue for us in our Phase I business is getting a better mix into the backlog. We’ve a lot of science in Manchester and we’re very proud of the science there, but we need to get a better mix of studies because we have two higher risk profiles in the backlog of that business, that traditionally being the case. I know we have been talking about that now for a while and we haven’t managed to make as much progress as I hoped we had but we are continuing to focus on winning a broader mix of studies in the unit and I think it’s very well placed to win those.

Dave Windsley

 

Okay and as a general statement is the Phase I operation profitable?

Peter Gray

 

It was just about break even, it was slightly profitable in the quarter but let’s call it break even in material terms.

Dave Windsley

 

Okay and then the Japan business is one that you’ve talked about moving into profitability and I think has some decent momentum but wondered if you can again provide a little granular update there.

Peter Gray

 

It’s a done deal there. It’s moved into double digit margins about two quarters ago and it’s solidly there and so we can’t use it as an excuse anymore.

Dave Windsley

 

Alright. In the staffing operation, could you talk a little bit – I mean it seems like certainly a demand for staff is pretty high across the industry whether it be within the CRO group or sponsors themselves. I guess I’m curious about your comments about you’re building the top line and margins not moving as aggressively or as positively as you would hope because top line was not growing; perhaps provide some additional color on – top line would seem to be the easy part I guess and finding the staff would be the hard part, but that doesn’t jive with what you said earlier, I don’t think.

Peter Gray

 

No, we are seeing plenty of opportunity. I mean it goes jive a little bit. We are seeing plenty of opportunities, we are not converting those opportunities into revenue and that maybe because we are not finding the people quickly enough or we haven’t got the right candidate to show to the people who have the opportunities. I’m not saying that’s the case. I’m speculating that that might be one of the issues. I mean that the top line – if we can grow the top line, the cost base is relatively fixed, if in the internal sense, the internal cost base is relatively fixed, so the margin impact of better top line is reasonably steep and improves the margin quite quickly. So, it is about improving our conversation of the opportunities with us.

Dave Windsley

 

Okay, is there – could you speak to how the recruiters within DOCS operators. Are they incented on a commission basis or are they paid just basically salary and bonus or?

Ciaran Murray

 

A combination of both.

Dave Windsley

 

A combination of both and is there any sharing or leverage in terms of the recruiting activity for DOCS or for the staffing business in general versus the recruiting for ICON project oriented work?

Ciaran Murray

 

When you say sharing what do you mean?

Dave Windsley

 

Do recruiters recruit for both parts of the business?

Ciaran Murray

 

Well there is now a commercial arrangement in place between DOCS and the clinical business where DOCS is one of the providers that we would use to help us in meeting our recruitment needs, but remember we also have an internal team in the clinical business and our goal is to use that internal team as much as we possibly can so we don’t incur recruiter fees. Obviously if we do recur incur recruiter fees I prefer to incur them at DOCS than with other recruiters, but we don’t put those handcuffs on our clinical group because with the rate of growth that we have, what’s important for them is to get the right people, not to just keep the bread in the family.

Dave Windsley

 

Right. One other thing, from our checks one of the pieces of feedback that we’ve gotten has been that the significant number of layoffs at the pharma level have contributed to some easing in the labor market, have you seen the same?

Peter Gray

 

I’m going to answer that question in an obtuse way. I think we’ve been saying for quite sometime that we haven’t been finding extraordinary difficulty in hiring people that continues to be the case. Can’t say that I’m getting reports that it’s easier now than it was, but the reports that I’m getting from within the organization is we continue to be able to meet our needs in terms of hiring.

Dave Windsley

 

Okay and my last question is kind of getting back to the quality question that John touched on, what area of your non-billable head count is growing the fastest. Where are you making the most significant investment in the infrastructure of the business?

Peter Gray

 

In management I would say. The management structure is to support 71 offices and increasing numbers of operational staff. That goes to John’s point about when John Kreiger asked about quality, that was a cost to our margin of what we are doing. It’s in management supervision who don’t get recovered in the billable rate of clients but are very important to overseeing projects and overseeing the people who are running those projects.

Dave Windsley

 

Super! Congratulations great quarter.

Peter Gray

 

Thanks a lot there.

Dave Windsley

 

Alright. Bye, bye.

Operator

 

Thank you. The next question comes from the line of Sandy Dryford [ph]. Go ahead Sandy.

Sandy Dryford

 

Thank you very much. Most of the questions have been asked and answered, I appreciate that. Just maybe a couple of quick questions; on the central lab side, looks like if you sort of follow-up the rest of the year around $16 million to $17 million you’ll do over 20% growth; is that sustainable growth rate and what does it take to keep growing that business at a nice double digit rate?

Peter Gray

 

It all comes down to bookings Sandy. I mean as John said in his opening remarks we booked just short of $22 million of business for the lab in the most recent quarter with a book-to-bill of 1.3. They have been consistently over $20 million in bookings for the last five quarters, so they have – they are building a backlog that will continue to support that rate of growth for I think at least another year and if they continue to be successful under bookings and continue to maintain a good book-to-bill that should sustain beyond a year, but it’s the backlog and the bookings really that would be the indicator.

Sandy Dryford

 

Okay, great and then one just high level question, maybe for you Peter or possibly John. Just we like to hear your thoughts on either from ICONs prospective or just from the industry prospective about consolidation in the industry. There was a question asked earlier about smaller players and some other players moving in, but just generally what are your thoughts over the next three to five years. Is consolidation broadly – we obviously see small acquisitions, but is it something you think needs to happen, hurts the industry, its helpful for the industry, just some broader thoughts on that will be very helpful thanks.

Peter Gray

 

I have – John you can probably contribute to this as well, but I have and I’ve been open in saying this; there was a time when we’re achieving the kind of growth that we are achieving and I am not just talking about ICON, I am talking about all of the significant CROs, all the ones that we can publicly see. It makes very little sense to think of making big acquisitions and trying to integrate them because the process in integration would distract us, the management teams away from what’s the fantastic opportunity to create value for shareholders to organic growth and get us instead focused on figuring out who’s going to keep what job and which people are going to stay and take us away from the success of business.

So, I don’t think there is any compelling logic to making significant acquisitions in our core business at this point in time, who knows if growth rate slowdown when in ever has the growth rate slowed down in this industry; maybe consolidation begins to make sense at that stage but I think we are a long way away from there John.

John

 

Agreed. I can cover that.

Sandy Dryford

 

Great thank you very much.

Operator

 

(Operator Instructions) We have a question coming through from the line of Sam Harding [ph]. Go ahead Sam.

Sam Harding

 

Hi guys, congratulation on a great quarter. Most of the questions have been asked. I just wanted to know of the new business wins, how much – could you give a breakdown as you do in the revenue of the different segments that those new business wins are coming from, but particularly what percentage of the new business wins is coming from pharma?

Peter Gray

 

The breakdown year-to-date is above 23% of the wins came from biotech companies, another 25% or 28% came from midsized companies and the balance came from large pharma, so it’s a little over 50% from large pharma, a little over 25% from midsize pharma and the balance coming from biotech companies.

Sam Harding

 

And that’s the backlog, not the revenue?

Peter Gray

 

That is the awards.

Sam Harding

 

The awards coming in, okay.

Peter Gray

 

Yes.

Sam Harding

 

Okay, that’s it thank you.

Peter Gray

 

Thanks Sam.

Operator

 

Thank you. There are no further questions coming through, so I’ll hand it back to you host for today’s call.

Peter Gray

 

Well, thank you very much ladies and gentlemen. We are delighted with ICON’s performance to date in 2008. Revenues, operating income and net income all grew strongly and business wins continue to be buoyant. Before we conclude I would like to take this opportunity to thank all our 6,500 people in our 71 offices in 38 countries for their magnificent contribution for our continuing success. Ladies and gentlemen thank you.

Operator

 

Thank you for joining. You may now replace your handset.

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Source: ICON plc Q2 2008 Earnings Call Transcript
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