ICON PLC (ICLR) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the ICON plc third quarter fiscal year 2003 results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time if you have a question, please press the one, followed by the four on your telephone. As a reminder, this conference call is being recorded Monday, March 31, 2003.

I will now turn the conference call over to Mr. Sean Leech, Chief Financial Officer for ICON plc. Please go ahead, sir.

Thank you. Good day, ladies and gentlemen, and thank you for joining us on our third quarter fiscal 2003 conference call, covering the results for the quarter ended February 28, 2003. On the call today we have Dr. John Climax, our Chairman, and our CEO, Mr. Peter Gray.

Before I hand the call over to John, I would like to make the customary cautionary statement in relation to forward-looking statements. Certain statements in these opening remarks constitute forward-looking statements concerning the company's operations, performance, financial conditions, 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 prospective investors are cautioned not to place undue reliance on such forward-looking statements.

With that said, I would like to pass the call to John.

Thank you, Sean. Good day, ladies and gentlemen. Thank you for joining our conference call covering the results for the quarter ended February 28, 2003.

Net revenue in the quarter was $59.3m, an increase of 50% over the same period last year. Of this, net revenues in US were up 54% on the comparable quarter, whereas Europe and the rest of the world grew by 39% over the same period. Excluding the impact of our recent acquisitions, net revenue growth was 35%.

Year-to-date net revenue was $159.7m, which represents a 41% increase over the comparable period. Of this, net revenues in the US were up 46%, and Europe and the rest of the world were up 29%. Excluding acquisitions, the year-to-date net revenue growth was 32%.

Direct costs were $33.4m for the quarter, representing 56.3% of net revenue compared to 52.9% in the comparable period. SG&A including [DNA] costs were 33.3% of net revenues for the quarter, compared to 35.4% in the same quarter last year.

Year-to-date direct costs were $87.5m, which represented 54.8% of net revenues compared to 53.2% for the first nine months of fiscal 2002. SG&A including [DNA] costs were 34.1% of net revenue for the nine months ending February 28, 2003, compared to 35.2% for the same period last year.

Operating income for the quarter grew by 33% over the same quarter last year, from $4.6m to $6.2m. Year-to-date operating income grew by 35% over the same period last year, from $13.1m to $17.7m. Operating margins were 10.4% compared with 11.7% for the same quarter last year. Our clinical business performed well during the quarter, recording an operating margin of 12.5%. However, operating performance in our lab business was disappointing, due principally to slower than expected study startups in the quarter.

Taxation was 27.1% of pre-tax income for the quarter, compared with 26.9% for the comparable period last year. As a result, net income for the quarter was $4.6m, or 38 cents per share, compared to $3.6m or 29 cents per share last year. Net income for the year to-date was $13m or 107 cents per share compared to $10.4m or 85 cents per share for the comparable period last year.

Capital expenditure in the quarter was $4m, and payment made for acquisitions was $19.2m in the quarter. Year-to-date capital expenditure was $11.2m, and payments relating to acquisitions were $38.8m. Our investment in day sales outstanding were 69 days, compared to 59 days at the end of the previous quarter, and 67 days at May 31, 2002. As a result of these factors, net cash at February 28, 2003 was $11.4m, compared to $27.5m at the end of our last quarter, and $43.1m at the end of fiscal 2002.

Growth of new business aboard in the quarter was $73m compared with $72m last quarter, and $48m for the comparable period-an increase of 52%. Cancellations were $10m, representing less than 3% of our opening backlog in the quarter. Consequentially, a proportion of our backlog is expected to be earned in the next four quarters at approximately $195m, an increase of 50% on the same quarter last year, or 35% excluding acquisitions. This represents 77% of current market forecast on a comparable basis, having excluded the effects of our most recent acquisitions.

Including the effects of these acquisitions, we have 73% of the next 12-month's revenue in booked and awarded business. At the backlog profile of these acquired entities-- it's much shorter than is traditional for existing business.

We therefore believe that we are in a good position to achieve the current revenue forecast for the next 12 months.

We are pleased with the results for the quarter, and in particularly with our continued strong revenue and EPS growth. We were disappointed with the performance in our lab business, but with the strong level of new business we expect this performance to improve in the coming quarters.

Margin performances in the remainder of our business were excellent, with margins of 12.5% achieved, and our acquisitions performed well.

That concludes our opening remarks. But before I open the call up to questions, I would like to update you on the status of our proposed share offering.

As you are aware, on January 31 we filed our registration statement with the SEC. This filing is currently under review by the Commission in the normal course, and because of this we cannot give any definitive updates as to the timing of this offer. We have also been advised that given that we are under registration we will be unable to field any questions specifically relating to the offer.

With that said, I would like to now open the call up to questions.

Thank you. Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you are using a speakerphone, please lift your handset before entering your request. One moment, please, for the first question.

Our first question comes from the line of Peter Fallen(ph) with Marion Stockbrokers. Please proceed with your question, sir.

Good afternoon, gentlemen. [Indiscernible] a significant drop in operating margin in every quarter, and [indiscernible] driven by losses in the last quarter. I wonder can you quantify that and what exactly is driving that? [indiscernible] one large project, or is it a plethora of projects that have been cancelled? And also, just trying to get guidance going forward for operating margins--Are we likely to see it around the current levels, or will it nudge back up to the 11.5% to 12% range which we currently expect?

Peter Gray here. Peter, to the first part of your question, in relation to the cause of the disappointing lab performance. The operating loss was over $400,000. That was primarily driven by, as John said in his opening comments, slow startups of studies. You will recall in the last conference call we did with you, we were disappointed then with the performance of the lab. We had expected that because of reasonable - good in fact, better than reasonable - good levels of business wins at that stage, we were expecting to see an improvement in the lab during the quarter we're now reporting. That didn't materialize largely due to the fact that many of the studies that had been awarded had been slower to ramp up than had been projected.

Obviously implied in that answer is an expectation that they will hopefully ramp up in the not too distant future, and that therefore this performance will improve. There was an added -- it's only a minor point, but there was an added impact on the lab, in that the month of February was a particularly disappointing month in performance. That was partly due to the very poor weather experienced on the east coast of the US for a couple of weeks, which meant that lab samples, etc, were delayed in coming into the lab. So they, as I say, had a particularly disappointing February. March has begun well, and awards for the lab in the quarter ended February were stronger again. And therefore we continue to have confidence, in the turnaround for the lab, albeit it's happening more slowly than we had projected last quarter.

And what impact will that have on the [RNS] for the lost business. I believe the [RNS] -- this is the third year of the [RNS] and the major project behind that [indiscernible]. I presume that [RNS] won't crystallize now [indiscernible]?

The [RNS] formula, Peter, was quite a complex one. It was based on cumulative performance over the three years. But as you've correctly identified, the way in which the formula was cast the largest weighting was given to current year performance. There's likely to be some small additional [RNS] payment due, even based on current performance. But it will be a lot more modest than was anticipated coming into this year. Currently, Sean, before we were expecting somewhere between $2m and $3m of additional [RNS] payments?

Yes.

And operating margins going forward, say for Q4 and FY '04?

Sean, do you want to take this?

Sure. We're a little restricted, Peter, as you're aware in terms of what guidance we can give. I think we can confirm that we are currently comfortable with the estimates that you and I think most have for fiscal '04, and indeed for Q4 of this year. I think the shape might be a little different, but I think in terms of EPS I think we're comfortable with the current guidance.

And in relation specifically, Peter, to the lab, as my answer I think implies, we are expecting performance to improve there, and therefore for the margins to recover.

Okay.

Over a number of quarters.

Okay. Would you have pro forma numbers? Acquisitions were included in the 2002 numbers [multiple speakers]

They will be available Peter on our 6-K filing which we file in the next couple of weeks.

Thank you.

Our next question comes from the line of Chris McFadden of Goldman Sachs. Please proceed with your question, sir.

Thank you and good morning, gentlemen. Two questions if I could. Staying on the central lab theme, Peter and Sean, you talked about some of the revenue dynamics in the business. More tactically are there other variables in the business that we should be talking about or thinking about? Whether they be cost, customer portfolio or other factors that you presumably have been focusing on, in additions to in terms of revenue dynamics that you've highlighted here? And then secondly, again a strong backlog quarter for you, and a strong revenue quarter. You've given us some geographic specificity on that. Could you talk a little bit about the customer type and where you're seeing some of the strongest factors of growth in the business? Thank you.

On the lab first of all, Chris. Your questions, are there other factors that we should make you aware of in the lab? I guess again in the last quarter's call I talked about the fact that we have a very positive outlook for this business. We are investing in it, and have continued to invest in the quarter just gone by. We will be moving it into a new facility in Long Island in the coming -- within the next 12 months. I haven't got an exact date on that, but there's something in construction at the moment. We are in the process of opening a lab in Singapore. Our Dublin lab is expanding, and as I said, the business wins were very satisfactory - better than satisfactory - very good in the quarter that has just ended.

So overall, we are very positive about the business. The dynamics of the business are the same as the broader clinical trial market that we serve in our core business. Driven by increasing spend, in particular Phase II, Phase III and Phase IV studies, which continues to be the case as we see. And therefore we believe we're operating in a growing market. And we have a business that is well positioned to benefit from that. And we've hit a couple of bumps on the road here. We're not pleased about that, but we're pretty confident as to how it will turn out.

As regards the backlog, I'm trying to recall, Sean, the specifics of Chris's question?

Chris, can you repeat the backlog question, please.

Sure, Peter. Specifically I'd just like to [indiscernible] customer base [indiscernible] geographic breakdown that you've given us. I'm trying to get a sense of where the real strengths you're seeing come up in a customer classification percentage.

I think again it's pretty broadly based. One specific answer I can give you to the metrics of the quarter is that our business, our revenues from Biotech actually dropped by a couple of percentage points in the course of the quarter. I don't think there's any significance in that. We've obviously added a couple of acquisitions, so it's a mix of business and the acquisitions would have an impact on that too.

Broadly we continue to have the preponderance of our revenues coming from large pharma companies. About 37% continues to come from what I would characterize as a combination of mid-size companies, specialty pharma companies, Japanese companies and biotech. And biotech makes up about 16% to 19% of that. We're not seeing any significant change in that. Your question may be directed to, are we concerned about the funding situation or outlook for some of these specialty and biotech companies? The answer is, not at the ones with which we're dealing.

Anyone with whom we are dealing and have any significant revenues from, we obviously review this, they are well capitalized companies. The fact that they might be generating revenues with us is indicating that they have products in Phase II and Phase III. Clearly that in itself is positive for them, depending upon the outcome of those Phase II/Phase III studies. But in general the companies with whom we have revenues are larger, more well known and certainly very well capitalized companies. And we are pleased with the business mix that we have.

Great, thank you for the detail on that, Peter. And then finally, it sounded like [indiscernible] that you're pleased with the up tick of the new acquisition. Is there any other color in terms of how that is going, [indiscernible] perhaps early stages it would be in leveraging them with a cross-selling opportunity [indiscernible] talked about it [indiscernible]? Thank you.

Yes, a general comment on cross selling in fact our Board which met last week [indiscernible] to prepare some metrics for them on cross-selling. In general we were able to report a very good picture to the Board. On not just recent acquisitions, but on acquisitions that we have done in general. As regards the most recent ones, which is the Medeval(ph) Phase I Unit in Manchester, it's very early days. We only acquired it at the beginning of February, and here we are at the end of March. But we're very pleased with how it's going. We've had very positive client reaction, both their clients and ours, to that acquisition. And the business outlook for the business appears to be very robust.

In the contract [stocking] business, the MCS business which we acquired, again we've been pleased with progress on that, and we're seeing good cross-selling opportunities emerging from that acquisition. And we talked about staffing flexibility. We're also seeing the staffing flexibility opportunities emerging for us as work with that business more closely. So in general the acquisitions are going well. I'm going to have to say that they were acquired really in the last six months, and one of them only two months ago, and therefore it's early days.

Thank you.

Our next question comes from the line of Ian Hunter(ph), with Goodbody Stockbrokers. Please proceed with your question, sir.

Good afternoon, gentlemen. My first question is really on the top line there. I see the gross revenues came off somewhat in the quarter. And also, actually, the subcontractors costs as a percentage of the revenues was somewhat lower than previous quarters. I mean it's been ramping up to about 37%, and then this quarter it has come down to 25%. I was wondering could you give us a feel of these numbers? Has this got to do with the new mix of the business?

And then back onto the question of the margins coming off. You have said, and if I'm right there it's because of [indiscernible] businesses, there's been a slower startup in the studies. Is this a reluctance on the part of your customers to commit to getting [indiscernible] work out there, given the current situation in the pharma sector?

Sean, can you --?

I'll take the first one in. As you know we don't really use subcontractor or gross revenue as any sort of measurement of growth. In [intrinsic] terms what happened was we had a very quiet period for contractor costs, which was primarily driven by investigator fees. We had very quiet periods in December and January. And that picked up again in February, and actually contributed to the increase in our DSO, by the by.

Actually you'll recall, if we go six quarters back, we had up ticks quite considerably, and we have been seeing quite a level of growth. I would expect and had expected that to moderate. It's difficult to call whether it's a trend at this stage, but in this current quarter it was primarily driven by the quiet period in December and January.

And on the second question, Ian. No it's not an indication. Just to repeat the question - is the fact that we had slow startup on some work in the lab, an indication that clients were holding back in the current environment? The answer is, absolutely not. The fact that they've placed studies with us is an indication that they're committing to projects. The lab contracts tend to come later than the actual clinical projects. Typically the lab we get, we will start working on a project a little later than the clinical project itself will start.

Slow startups generally mean that patients haven't been recruited into the study as quickly as expected, and the net results is there's less tests coming into the lab. Therefore less revenues generated by the lab because there's less tests coming to the lab in that timeframe. We are, as I said -- March looks better, and they're all picking up. If there was a hold back by the pharma industry in doing clinical trials, we wouldn't be getting awards. It wouldn't be a case that they could award you business and then slow it down, it just wouldn't be coming as awards.

I think that probably gives me an opportunity to give you a little bit of color on the general business background, which as I said for the lab has been good for the last couple of quarters, and the last quarter in particular was strong. Overall I think we saw a slow, sluggish start to the calendar year in terms of [RFP] flow. But since I would say mid to late February the flow has been very strong. And again we don't see anything in that other than that everyone seems to take longer holidays now around Christmastime. And everyone is slower at getting back in gear in the New Year. But certainly [RFP] and general apparent business flows look very strong at present.

Okay. Maybe just one other follow up here. [indiscernible] we would see the backlog is expected to be fairly low at 73%. Am I right saying that you were thinking this was a function of the new businesses [indiscernible] and a shorter term contract [indiscernible] expect this kind of level of 73% to 75%? You're comfortable with that?

Yes, in essence and the rule of thumb we would give us that the change in the business mix, and particularly with the MCS and the Phase I business now included in our numbers. They probably have about a 4% impact on our normal headline percentage. [indiscernible] we said their in John's comments that if you exclude the impact of the recent acquisitions, that the number will be about 77% of the forward 12 months. When you include those it's about 73%, and that's because of the type of businesses they are. They tend to have shorter duration backlogs.

Okay, thanks very much.

Our next question comes from the line of David Marshall(ph), with NCB Stockbrokers. Please proceed with your question, sir.

Good afternoon, gentlemen. Just to follow on from Ian's question there. In terms of Medeval and the MCS acquisition, would it be typically three to six months the backlog profile? Could you kind of quantify that in some way just to give us a better stare at that? And Sean, would you be able to outline the remaining deferred payments for '03 and '04 in connection with some of your acquisitions?

In terms of the current fiscal year we're not anticipating any further acquisition payments. All of the year now commitments have been made, and the next payment that becomes due -- off the top of my head I think it's the last payment which is due in August of next year. And I think Medeval is due in around that time. Is it calendar year you're asking, David?

No, fiscal year is fine.

Okay, so we’re not expecting any further payments in the current fiscal year. In terms of your profile, yes, you're absolutely right. Phase I and MCS is traditionally three to six months, although it probably is the back end of that six as opposed to -- i.e. close to the six than three. But I think you have to actually divide this between three and six months.

Actually, if I could just follow up and maybe get some comments from you on the client concentration. Have you seen any big change in the main client mix?

I will take that, David. Client concentration seems to be reducing all the time here. Now three clients represents more than 10%, Astrazeneca, [indiscernible] and Pfizer. But again I always say this in our announcements, we have to take this in context. Taking the three clients together you're looking at 65 projects, 28 drugs and only six of them contributing over $1m. And even you take the 65 projects, 44 of them are in Phase III [indiscernible] and Phase IV. These are drugs that are already marketed. So the revenues from this are not really at risk.

So from a client concentration point of view, we are not really that exposed.

Thank you.

Our next question comes from the line of John Kreger with William Blair. Please proceed with your question, sir.

Thanks very much. Could you just, John, expand upon that a little bit, your top five customers? Both the percent of revenues that they contributed in the February quarter?

Actually the top five clients contributed 51% year-to-date. And this for the comparable period last year it was 58%, so it's coming down.

So just thinking of February quarter, we can assume that 51%?

We don't do it by quarter, we do it year-to-date.

But if it’s coming down, presumably that would be a little bit lower?

Exactly.

If you look at the comment that you made about the lab suffering through some slower startups, do you see any trends from that in the clinical business, any slow startups?

No we didn't John, indeed the revenues in general are well ahead of I think what you guys had forecast. And that in itself would indicate that revenues [indiscernible] in the other types of business. No slowdown. And as I said, [indiscernible] it's when patient recruitment can sometimes be slower than planned, which is part of what has affected the lab. But we have not seen that in a general sense in the quarter.

One other question. If you think about metric that you’ve given us every quarter, that’s the next 12 months of revenues that are booked, will you be [indiscernible] on an adjusted basis, excluding MCS and Medeval, or should we just generally expect that number to be more like 65 to 75 going forward?

I think 65 -- I don't know what the range should be, John, yet, but 65 to 75 probably is a better range to work with now. Are we going to exclude those in the future? I think probably not, there's a lot of work involved in doing these forecasts as it is. And trying to slice and dice them for every eventuality just adds a layer of complexity to it. I think it would be better if we could [indiscernible] a different range. And maybe it's not 65 to 75, maybe it's 67 to 77 or something like that is what we should be working with.

Fair enough. Once last question. Could you give us the operating cash flow on the February quarter?

In terms of free cash flow, John, we had free cash flow in the quarter of just [indiscernible] $3m. We had Capex in the quarter of $4m. We made payments in relation to acquisitions of a little over $19.2m. That is on a [indiscernible]

Just to clarify that, operating cash flow was $7.1m, and there was a spend of $4m on capital expenditures to give the free cash flow that Sean was talking about of $3.1m

Thanks you.

Our next question comes from the line of Jack Gorman(ph) with Davy Stockbrokers. Please proceed with your question.

Thank you, and good afternoon. I just have two questions. Firstly, Peter, you gave a brief breakdown in terms of new business wins. I'm just wondering if you can give us at least a flavor of the project size, and whether there's any significant projects included within the wins this quarter? And secondly, just on the labs business again. You mentioned the expansion in Dublin, would it be fair to say that that's still in development mode, and as such isn't perhaps in as optimal a position to generate revenues as perhaps it might be over the next 12 months?

Your first question first, Jack. In the wins, there was one major project in excess of $15m in value, and that would have been a mixture of average sized projects from a range of customers as we talked about earlier. It would be absolutely correct to say - referring to your question on the lab - it would be absolutely correct to say that the lab is work in progress. Dublin was a very small operation when we acquired the lab in New York, and the Dublin is about four times the size or more than four times the size today that it was at that time. The lab in New York is about twice the size it was at that time in terms of headcount and in terms of revenues.

So we've made significant progress with the lab, but it is very much work in progress. And that's why I talk about the investments that we're making in New York moving to new premises, in Dublin they moved into additional space just in the last six or nine months. Singapore is opening [indiscernible]

And Peter, just to follow up on the first part of my question. The major project over $15m that you mentioned, can you give us a feel for what the duration is on that project?

Good question, Jack. I think it's probably average duration. I don't think it's of particularly long duration, but I'm not certain on that.

That's great, thanks.

Our next question comes from the line of Steve Unger with Bear Stearns. Please proceed with your question, sir.

Hi, good morning. I'm sorry if I missed this already, but did you disclose the amount of revenue that was generated from the lab, and what the percentage of new business was from the lab?

Hi, it's Sean here. In terms of revenues for the lab, revenues for the current quarter were $6.2m. What was your next question?

Did you disclose the percentage of new business that was from the lab?

Yes -- well we didn't, but we can. In terms of new business wins we had just approximately $9m in the quarter for new business in the lab.

Okay. Is that something you'll be disclosing for us going forward?

No, we only disclose them this quarter because they're slightly disproportioned to the rest of the organization in terms of business wins.

And obviously also because we recognize that people might be a little concerned about the lab and want to make sure that we can back up our statements about our expectations with some facts [indiscernible] performance with that group.

And then lab performance it appears to me- it seems you guys had somewhat of a surprise. Could you explain just how you're tracking the visibility on revenues for the lab in establishing your forecasts?

Obviously a big proportion of the lab is a volume business, Steve, so it's a little bit more difficult to predict than our clinical business obviously, because we have a dedicated team model, and therefore you can predict with reasonable degree of accuracy as to what the outcomes are going to be. We do track the lab on a weekly basis in terms of what part of volumes are being processed. Obviously we couldn't give guidance given the situation we're in, in terms of the registration statement. It is tracked on a weekly basis and there are varying degrees of different metrics you use to track. Be they [indiscernible], processing fees, that sort of thing. So there's a multitude of data that we look at predominantly on a weekly basis.

What about tracking study startups?

It's difficult to do, Steve, because the lab is not starting up the studies. The lab is at the receiving end of samples of studies, and therefore it is -- as it receives in samples it can predict what it's going to do with those samples. But it has more difficulty in predicting when samples will come in. John, you wanted to say something there, I think.

No, no, that's exactly right. You have no control, even if studies can be started up in time. But if the investigators do not recruit the patients at a rate they plan then it will have an impact on the lab.

Obviously once the pattern is established you can start making forecasts. Because if the site is showing that it's not bringing in the patients that were expected in, and if the samples coming from that site therefore are lower than expected, you can begin to extrapolate that forward. You say, okay, the rate of accrual of samples of this study is going to be slower than we projected. But until you have started up and a pattern has developed what it's getting, it does make forecasting in that business a little bit more difficult than in our core business.

In the core business you're running the entire study, you're not just providing service on the basis of how many patient samples came in today. It's a much fuller service, and a much greater number of activities going on that generate revenue.

So you're not getting progress reports from your customers who tell you when the investigators are ramping up [indiscernible]?

Well if a study is under out control, yes, Steve. But for studies that are not under out control, and quite a lot of our studies [indiscernible] work is carried out in the lab as standalone work. Where the studies are carried out by [indiscernible] or other pharma companies, biotech companies, their own projects manager. And they're not really duty bound to do give us recruitment information. We try and ask for it, and sometimes when we do get the data it is not accurate because time has passed.

And then just one last question on the tax rate. Is that expected to be 27% going forward?

Yes, I think that would be [indiscernible] following our recent acquisition, so we will be taking advantage of some tax legislation. We have done that obviously subsequent to both transactions, and obviously our effective tax rate has shown the benefit of that in the current quarter. And I would expect that to be consistent over the next number of quarters.

Okay, thank you.

Once again, ladies and gentlemen, as a reminder, to register for a question please press the one followed by the four on your telephone. The next question comes from the line of David Windley with Jeffries & Company. Please proceed with your question.

Thanks, and good afternoon gentlemen. First question, and you've touched round this a little bit. I wondered if you could quantify the level of lab business that is also in the [CRO] part of your business? In other words where you have [indiscernible]?

You mean cross-selling basically, David, is that what you're talking about?

Exactly. Taking lab business, what percentage of that revenue do you also have the contract management and data management pieces of it?

It varies obviously from quarter to quarter or from period to period. I don't have a breakdown of the revenues of the last quarter. What we do look at is, in any given quarter, of the business won in the lab, how much of it has also been won on the clinical side. And it has varied from between 25% and 10% on a quarter-by-quarter basis. And I think it's probably averaging - you won't be surprised to hear me saying this - somewhere between those two. Our goal, and we have various initiatives in place to try and achieve this goal, is to increase that percentage. But just to summarize the answer, it has been as low as 10%, it has been as high as 25%, and it probably averages somewhere in the middle between those two.

Okay. Following on that, are there [indiscernible] areas of expertise or of levels of traction that you're respective businesses have? Are those two units [indiscernible] CRO, traditional CRO business and the lab business, different therapeutic areas where acquisition [indiscernible] whether they have relationships with [indiscernible] or business in cardiovascular than you had historically done, for example?

If I'm understanding your question correctly, David, I think what you're exploring is, are there particular strengths or overlapping strength in both businesses that can help us achieve cross-sales, is that right?

Right, or in fact non-overlapping strengths that get each of those business respectively into new areas?

Well I'll take this one. When we look at the clinical business we are broadly spread in most therapeutic areas. We have data to suggest that it largely reflects what the pipeline is rich in. That's the same thing that's -- it's exactly how it falls out in the lab. The lab is a safety lab, and being a safety lab we don't tend to hold any kind of therapeutic richness. Now there are competitors of ours out there who may have a [indiscernible] in measuring lipids, for example. And they may get a preponderance of studies in lipids. Or they may have some specialty in diabetes. We are very broad, we will do the whole spectrum of therapeutic categories within the laboratory. We don't specialize and we don't have any one particular specialization.

Does that answer your question?

It does. But the next question that I have that I was curious about was, have you had in the last quarter or two that are in similar novel therapeutic areas, which are recruitment issues that you've touched upon a couple of other times in the conference call, are particularly challenging?

I don't think so, David. Certainly At this level we probably don't have the data to say, yes, the ones that were slow to ramp up were of a particular therapeutic class, and that's why they ramp up slowly. But certainly from our discussion with the lab, and our review of what's happened in the lab, our sense would be - and going back a little bit in history here over the last number of quarters - the lab went through a bad patch of cancellations, three quarters ago. They had very high cancellations in the first quarter, and we alluded to that I think when we were talking about the lab. They have replaced the business.

And the net result is, in the last couple of quarter you have a lot of projects that are ending for them, and a lot of new projects starting up. And in the ideal world the new ones would start up as the old ones scale down, and everything will be happy in the middle. What has happened is some of the new ones starting up haven't started up as quickly as they would have like.

I guess when you have a period when you've got a lot of things ending because of the gap that you have in your backlog, and you're working hard to bring in new stuff, you are always at risk to the inevitable vagaries of this business in terms of slow startups on studies. And perhaps the forecasts that they had were overly optimistic, and perhaps they were based on a perfect world if every study would start up and patient recruitment would be in line with plan on every one of them. And that's not really what happens in the real world.

So perhaps the forecasts that we had were based on rosy scenarios. We haven't, to be honest with you, probed deep enough into the forecasts at this point to be able to say yea or nay that that was the case. But I don't think there's any particular therapeutic area here. I think we kind of had one of these triple witching hours of studies ending and new ones starting. If everything had gone smoothly we wouldn't have had a glitch, but everything didn't go smoothly, so we've had a glitch.

Alright. Once more question. On a go forward basis, the company as a whole, not delving into any particular unit, for average ratios you talked about, what about the book-to-bill? What level of new business signings above the revenue burn in a particular quarter do you think?

We lost the end of your question there Dave, could you repeat that question, please?

At what level of book-to-bill or how big -- how much of an increment of your revenue burn do you need to assign to sustain growth?

I don't think we've ever analyzed what that needs to be. And again let's look at history here. We've grown our revenues in the last couple of years, the last seven quarters, in excess of 30%, excluding acquisitions. So if you leave out the acquisitions we've grown in excess of 30% now for seven quarters. The book-to-bill in that timeframe has been all over the place. So it's very difficult to get a correlation. And we haven't tried, to be honest with you, because I think it would be an intellectually interesting exercise, but probably at the end of it all of zero benefit to us. Because the next quarter we have another piece of data to add to the equation that would actually [indiscernible] so the equation doesn't mean a heck of a lot.

I'm being facetious, but I think I hope I'm explaining the background to this. It is difficult to get any correlation, and therefore I can't give you what is the magic book-to-bill. I can only point to, if you look back at our awards versus our revenues in quarter, and what our book-to-bill has averaged over the last while, and looked at what our revenue growth has been, maybe there's something in there that you'd be able to work out. We don't spend a lot of time thinking about it, to be honest.

Okay, thanks a lot.

Our next question comes from the line of Steve Curtis with [indiscernible]. Please proceed with your question, sir.

[indiscernible] Can you just repeat what the cancellation number was in the quarter, and also the backlog number in the quarter?

Cancellations in the quarter were $10m, which represents about 3% of our opening backlog. In terms of the backlog number at the end of the quarter we had $195m of booked and awarded business that will be earned in the next 12 months. We obviously [indiscernible] total growth backlog, because we don't believe it's a valuable metric. But our business to be earned in the next 12 months is forecasted at $195m.

Great, thanks.

We have a follow-up question from Peter Fallen's line. Please proceed with your question, sir.

Thanks, gentlemen. Just on the cancellations, can I get the profile of the actual cancellations in the quarter? Was there any particular one project that was cancelled that made up the majority of the $10m? And was it spread across a number of your business units, or was it in one particularly business unit? And what was the underlying driving reason behind the cancellations?

I'll take that one, Peter. There was one project in the $10m that was worth about $5m or $4.8m, something like that. Interestingly as of today we've just been told that it's probably been uncancelled, that it's going ahead after all. What was the underlying reason? I don't know what the underlying reason for that was. [indiscernible] looking at the various planned activity and the fact that they didn't think something was important. And now they've reviewed that decision and decided maybe it is important.

In terms of which segment of the business the cancellation came from? It's largely from the clinical side of the business. Somewhere between 70% and 80% of our revenues comes from that slice of the business, so that's not surprising. There was one other cancellation of $2m, and in fact it's not really a cancellation, I think it's an indefinite postponement on a project for a small company that is in the process of signing up a partner for the development of the drug there. And the signing up of that partnership agreement is taking them longer, and we took the decision to treat it as cancelled until we know that they've fully got as partner for the development. So $7m of the $10m is covered by those two, and there are a number of others making up the remaining $3m.

I think it's important not to overly focus on $10m. As we've said in the past, the level of cancellations is a very volatile number. And there is no pattern to it. We've seen calculation where it was higher by 30% as against the wins of the quarter, and then as low as zero percent of wins in a quarter. If you look at it in terms of the percentage of opening backlog, it has fluctuated between zero percent and 3%. And I think that's much more -- that puts it much more in context.

And with the Pfizer/Pharmacia going ahead in April, are you seeing any slowdown in decision making by Pfizer ahead of that?

I think in general -- I think we've come to this before that clearly we've seen in the past with any merger that decision-making can slow down in the pre-merger and often also in the post-merger environment. And we have found in our relationship with Pfizer, a good flow of opportunity, but there probably is some sign of it being a little bit slower than it might have been in the past. Bu it's difficult to say. It isn't causing us any concern.

And just on your acquisitions [indiscernible] over the next 12 months. Obviously you have just completed two bolt-on acquisitions over the last six months or so. Are you still looking at further bolt on acquisitions, or are you planning to bed down the ones that you have acquired? Especially in light of the experience in the last business [indiscernible]?

Well first of all I'd be defensive and say [indiscernible] on balance has been very good. We've hit [indiscernible] at the moment, but that business doubled its revenue in the two years post acquisition, and was very profitable last year. So we don't regard this as a bad experience [indiscernible].

We do intend obviously to focus on bedding in the acquisitions we've recently made. There are always opportunities being presented to us on the acquisition front. And acquisitions tend to be opportunistic. We can't afford to say that I won't do any more, because if the magic one came along tomorrow that was the right thing for us, we wouldn't want to preclude ourselves from doing that. But I think we do recognize, and have in the past recognized, that we don't want to be doing an acquisition every month. And we did four in 2000 and did none until just a few months ago. We've now done two and we're not likely to be doing multiple additional acquisitions in the foreseeable future.

Great, thank you.

Mr. Leech, there are no further questions at this time. I will now turn the conference back to you. Please continue with your presentation or any closing remarks.

As there seem to be no more questions, I would like to thank you all for joining us today. Quarter three has been a very good quarter for us, with net revenues up 50%, organic growth running at 35% and EPS growth up 31%. With these excellent business flows we are currently seeing, we remain comfortable with the outlook for the coming quarters. Ladies and gentlemen, thank you again.

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation, and ask you to please disconnect your lines.