ICON PLC (ICLR) 2005 Q2 法說會逐字稿

Welcome to the ICON plc second-quarter 2005 earnings conference call. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded for replay purposes. And I would now like to turn the presentation over to your host for today's call, Mr. Sean Leech, Chief Financial Officer. Please proceed, sir.

Good day, ladies and gentlemen, and thank you for joining us on our second-quarter fiscal 2005 conference call covering the results for our quarter ended November 30, 2004. On the call today we have Dr. John Climax, our Chairman, and our CEO, Mr. Peter Gray. Before I hand over the call to John I would decide to make 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 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 prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

And with that out of the way I'd like to pass the call over to John. John?

Good day, ladies and gentlemen. Thank you for joining our conference call covering the results for our second quarter ended November 30, 2004.

Net revenue in the quarter was $79.5 million, an increase of 9 percent over the same period last year. (indiscernible) net revenues in the U.S. decreased by 2 percent on the comparable quarter while Europe and the rest of the world increased by 28 percent over the same period. Excluding the impact of acquisitions our overall net revenue growth was 6 percent.

Year-to-date revenue was $157.8 million, an increase of 11 percent over the same period last year. Of this, net revenues in the U.S. were flat on last year while Europe and the rest of the world increased by 30 percent over the same period. Excluding the impact of acquisitions, our overall net revenue growth was 7 percent.

Now turning to our costs, in the quarter direct costs were $43.7 million representing 54.9 percent of net revenue compared to 54.8 percent in the comparable period. SG&A and D&A costs were $28.8 million representing 36.3 percent of net revenues compared to 33.8 percent last year. Year-to-date direct costs were $86.1 million representing 54.6 percent of net revenues compared to 54.7 percent last year. SG&A and D&A costs were $55.2 million representing 35 percent of net revenue compared to 34.1 percent last year. As a result our operating income for the quarter decreased by 16 percent over the same quarter last year from $8.5 million to $7 million. Year-to-date operating income grew by 3 percent from $16 million to $16.5 million.

Our operating margin was 8.8 percent for the quarter compared to 11.4 percent in the same period last year. On a year-to-date basis operating margins were 10.4 percent compared to 11.2 percent for the comparable period last year. Our clinical business performed well in the quarter with net revenues of $73 million and operating income of $8.9 million giving an operating margin of 12.2 percent. Our central lab business, however, continued to under perform with net revenue for the quarter of $6.5 million and an operating loss of $1.9 million.

Taxation was 18.2 percent of pretax income for the quarter compared with 25.8 percent for the comparable period last year. As a result net income for the quarter was $5.8 million or 41 cents per share compared to $6.3 million or 45 cents per share last year. Year-to-date net income was $13.1 million or 93 cents per share compared to $11.9 million or 92 cents per share.

Turning now to our balance sheet -- capital expenditures in the quarter were $2.9 million and we paid $1.1 million in relation to prior year acquisitions. Our DSO's were 69 days at the end of the quarter compared to 59 days at the end of August 2004 and 60 days at the end of May 2004. As a result of these factors net cash at November 30, 2004 were $61 million.

During the quarter we were awarded net new business of $120 million, up from $43 million of net awards announced last quarter and $67 million announced the same quarter last year. As a result we currently have approximately $248 million of the next 12 months revenue in booked and awarded business. We estimate that this represents approximately 70 percent of current market forecasts. Our total gross backlog at the end of the quarter was $488 million, a 14 percent increase on the same quarter last year.

Overall the results for the quarter were in line with expectations following the very high level of cancellations we experienced in the first quarter. As expected translations in the second were minimal being less than 2 percent of gross awards, concerning that the scale of cancellations in the previous quarter was an anomaly. We are pleased with the level of new business won which we believe has given us a good foundation for a return to solid growth rates although this will take a little longer than we previously anticipated. We therefore EPS for the full year to be in the $1.68 to $1.70 range for fiscal 2005 with a return to historic levels of earnings growth in fiscal 2006.

This revision to our expectations is due to the poor performance in the lab and the timing of the return to revenue growth in our U.S. clinical business. In context of the lab performance it is important for us to highlight that in line with good accounting practice we will be carrying out an impairment review and carrying of goodwill relating to our lab and some associated assets which may lead to a onetime charge. This review will be completed before February 28, 2005. If determined to be required such a charge will be taken in the current quarter.

That concludes our remarks and we will now open the call to questions.

(OPERATOR INSTRUCTIONS) Chris McFadden, Goldman Sachs.

In terms of the central lab, on the most recent call we talked about some cost initiatives that you were undertaking to begin to offset what had been slow revenue growth. Could you update us generally on the efficacy of those cost initiatives. And in addition to the impairment review, John, that you highlighted for the current quarter, can you talk prospectively about other strategies operationally that you might be undertaking to try to increase performance there? Thank you.

I think Peter will take that question.

Cost initiatives, about a year ago we undertook a significant cost reduction exercise in the lab which included pretty painful headcount reductions. We highlighted also at that time, however, that we had already in place a commitment to expand the facilities at the lab and we moved into a new facility in February of 2004. And the impact of that move was impacted to not only cancel but to actually uptick the overall cost base of the lab. So we reduced costs insofar as we could a year ago -- or we believed that we could a year ago -- but at the same time we were moving into a new facility which significantly increased our cost.

The commitment to that facility had been made a long time previously and it is -- that investment or that move into that facility is based upon an expectation that we will grow the sales of the lab significantly over the coming years and that the additional capacity was needed. A long way to answer your question, but the net net to take from it is we reduced cost to some extent, but long-term decisions that had been taken also increased cost and the overall effect was, in fact, an increase of cost which we've been seeing for the last couple of quarters.

In the quarter just ended we are obviously very disappointed with the results of the lab. We had been predicting an improvement and what we have seen is a significant disimprovement in the performance at the lab. The factors relating to -- the factors driving that are -- there are quite a number of different factors at play, but the primary ones are some changes in technology in the lab and the costs associated with those changes in technology. A change in mix in the type of business the lab has been doing and, Sean, and -- those of the two primary (inaudible).

So we don't believe that the lab is going to have as bad a quarter in the quarters ahead, but it does look as if the path to profitability is further away than we had projected and is going to be a hard road (inaudible). And revenues in the quarter in the lab were flat in comparison, in fact were down marginally on the previous quarter. Contrary to our expectations we had actually expected the lab to increase its revenue. So all in all, the lab is not going in the direction that we had forecast and has been a significant disappointment to us -- and has been a significant downward drag on the numbers in this quarter and will be a significant downward drag in the next couple of quarters which is one of the reasons why -- a primary reason why we revised our guidance for the next couple of quarters.

I think on the impairment review -- your question was in the context of that impairment review strategies that we're adopting. The strategy we're adopting is we are obviously going to look again at the cost base -- insofar as we can. We have a viable business we believe; we do not want to make costs which actually undermine the viability of the business. In the long term (inaudible) an ever decreasing -- an ever descending spiral. So there's a limit, I think, to any further cost initiatives that we can take.

We are looking at -- well, we've examined our backlog very closely and a positive that has to be brought out here is that our backlog has grown from 28.9 million 2 years ago to 41.9 million currently; that's an increase of 45 percent over 2 years. And yet at the same time revenues have only grown by 5 percent on a quarter-by-quarter basis. So we have a conundrum where the backlog is growing but the revenues aren't. And the rationale and the reason behind that is that the projects we're winning are bigger projects of longer duration and the revenues are not flowing in the same way as revenues have flowed in the past.

What that requires is continued high levels of business wins, continue building the backlog and -- I hate to use the word "eventually" -- but eventually that will lead to higher levels of revenues and a return to profitability in the lab. It's not the picture that I'd like to be painting for you, but, as I said, I think the road is a long and tough one for us, but it is one where we believe it still is the right path for us to take and that's been the course on which we are embarked.

I understand, Peter. And as a short follow-up, you talked about obviously flattish growth in the U.S. clinical market. What's your sense of the market growth in the U.S. market?

Extremely good. The slower growth and the slower recovery in our U.S. business is really a function again of those exceptional cancellations that we incurred. And the discontinuity that that created in our backlog in terms of the ending of some projects and start-up -- the seamless start-up of other projects. We've had a very good quarter of wins in the quarter at the end of November. The timing of when those projects will come in and the ramp up of the flow of revenues from those projects is not as fast as we'd love it to be, but it's not out of the ordinary. But what it means is the return to growth in the U.S. is going to take a little bit longer than we had hoped-for.

The RFP flow in your question really is about the health of the market. The RFP flow in the quarter was outstanding. In Europe RFP volumes were up 106 percent in the quarter, an open value by 78 percent. And in the U.S. volumes were up 39 percent and value was up 53 percent. So again, we're seeing a continuation of the trend of very, very strong RFP activity, big increases in volumes and value of those RFP's and obviously it's that type of volume and value growth that is underpinning the strong wins we had in the last quarter and we would be pretty confident that in the next couple of quarters we'd also have (inaudible) with the caveat of saying -- and unfortunately I hate putting in caveats on a day like today but the caveat has to be put in.

The current quarter, which is December/January/February for us, is a tough quarter because December and January are not months in which a lot of decisions necessarily get made. But the bookings of this quarter will be determined really in the second half of the quarter haven't been bad so far and the pipeline of opportunities that are outstanding for decision are very good, but we are being a little bit cautious in terms of predicting a repeat of the high levels that we had in the last quarter. In this quarter -- although overall we expect in the next couple of quarters bookings will be very solid.

Very helpful. Thank you.

John Kreger, William Blair.

Peter, a follow-up question on the lab. Can you give us a sense now what the new breakeven point is for that business on a quarterly revenue basis?

Sean, will you take that?

Sure. In terms of revenue, John, the breakeven point is probably somewhere between $8.6, $9 million, it's somewhere in that range. Obviously it's difficult to tie it down precisely, but that's about right, a little over the $8.5, $8.6 million range.

And do you have a revised target for when you could hit that point now? Are we talking another 1 or 2 years?

John, we're talking -- in our view, as I said, this is going to be a much longer, slower road than we had anticipated. So we think it's at least a year before we can get to breakeven in the lab base on what we see today.

Great. One other question, changing gears. How is your Phase I business doing? I know other European Phase I operators have had some pressure over the last 6 to 9 months.

The European clinical directive has caused a problem to a lot of Phase I groups in Europe. Having said that, this is all over in the UK and our bookings are getting very, very healthy. And I believe the backlog in Phase I has been one of the best that we've seen so far.

As of the end of December, John, the backlog in our Phase I business is the second strongest it has ever been. And it's only marginally off its peak. So the bookings activity, basically since September/October of 2004, has been extremely robust and the pipeline is very good. I think the disruption caused by the EU clinical trials directive (ph) certainly is behind us in our unit and what we're hearing is generally in the UK the environment has improved significantly.

That's great to hear. One last question. Can you help us understand in the quarter that you reported today -- at least for us -- it's our expectation that the revenues were quiet a bit better, yet the margin was less. Can we attribute all of that to the U.S. lab or is there something else behind it?

Obviously, John, a significant disappointing result on the lab is obviously having a significant impact on the margins. Our SG&A, John, you'll not is up on a sequential quarter basis as well which is having an impact. But there are businesses growing very strongly there. And as John said in his opening remarks, our Europe -- or our (indiscernible) business is growing strongly. So that's obviously upticks in terms of our SG&A. And some of that expenditure relates to new facilities which obviously we haven't brought in the headcount of the revenue that would pay for that. And don't get me wrong, our European and (inaudible) performance is very good, but ultimately we have to keep on growing that business. There's good growth opportunity there, but we've seen some of the expenditure in the current quarter to facilitate that.

I think as a supplemental to your question, John, and the lab -- we made expectations for the quarter in terms of earnings per share -- as you rightly point out, revenues are actually ahead of expectations. The lab came in well over a million worse than we had originally anticipated. So I think it's fair to say that reason the margin didn't -- wasn't better and the reason why the results weren't better than expectations given the revenues were better than expectations was entirely attributable to that.

Okay, thanks very much.

Ian Hunter, Goodbody Stockbrokers.

Good afternoon, gentlemen. Maybe just carrying on from the last question as well. For your guidance going forward for the next 2 quarters, are we seeing the kind of pull back in numbers because of the laboratory affecting the margins or would you also be seeing maybe the top line not growing through the next 2 quarters?

It has substantially to do with the lab. As you'd expect a swing of over $1 million on the loss in the previous quarter is obviously going to have a significant impact on that. Having actually tweaked the revenues that considerably, if you like, for non lab issues, there is some downward tweak and I suppose the substantial effect here is from the lab.

Okay. And maybe one more (indiscernible). I wonder if you can just give us an idea of what the make up of the 120 million in business wins is. Is it the usual kind of mix of duration, pricing declines and the geographical areas it covers?

A large number -- obviously with a figure of that magnitude, Ian, it's a large number of awards. There one award of significant size, it's a project in excess of $20 million in value. Geographically the U.S. was where we needed to have a very strong level of wins and we achieved that. We had wins in the United States alone well in excess of $60 million. But well spread across the rest of the geographies and across the rest of the businesses. There wasn't a business or a division with the organization that didn't have a good quarter for (inaudible).

And I know you've guided that Q3 may be slightly below the 120, but do you feel that the 100, 120 is at a sustainable level going forward?

Yes, we do. I think what we would expect in the current good is towards the lower end of that range and in the following quarter toward the upper end or perhaps touching over the upper end of that range. I think that's doable and based on the robustness of the flow of opportunity we certainly think that's doable.

Okay, thanks very much.

David Marshall, NCB.

Can I just confirm that the reduction in guidance is purely lab related and this was, as I work it out, it's somewhere in the region of 4 to 5 -- 4 to 4.5 million of a reduction in operating profit? And just in terms of EPS guidance for Q3 and Q4, how will that turn out? Are you giving (indiscernible) and splits moving forward for your guidance? And then maybe a general question just in terms of critical the lab would be strategically for the clinical business. And I know it's probably in the region of 20 percent of lab contracts come from intercompany business. Is that correct?

In terms of the reduction in guidance, David, if you take the midpoint of the revised, and the original are our guidance from a couple of quarters ago, about three-quarters of the reduction as to do with lab and the rest is just the slightly slower timing on the recovery in the U.S. clinical business. Sorry if (inaudible), apologies. In terms of the specifics -- in terms of the quarterly flow of that, David, I'd expect revenues in Q3 of between 80 and 82 million, revenues in Q4 between of 82 and 84 million and EPS in Q3 of between 34 and 36 and in Q4 of 40 to 42.

Really in terms of the strategic impact of the lab to the clinical business, at some point if it doesn't recover would it impact the clinical business if the lab is divested? I know you're committed to it at this point. And just how much of the clinical business is intercompany within the lab clinical overlap?

The amount of overlap is, as you say, about 20 percent -- about 20 percent of the projects the lab is working on are coming from clinical projects -- clinical leads, and we are working in tandem with the client on both the clinical side and on the lab side.

I think it's fair to say, David, that at the moment in the state of the market at present -- in the state of the market at present if we were not in the lab business it would not seriously harm us in the winning of clinical business. Longer-term we think having a lab asset and having other assets such as imaging and URS (ph) and the other services that we have developed or have added through acquisition over the last number of years will become increasingly important.

So the honest and straight answer to your question is today it's probably not critical to the health of our clinical business, but tomorrow -- somewhere in tomorrow we think it will become increasingly so and that's one of the reasons why we are committed to the business and believe it's important for us to remain committed to this (inaudible).

And David, can I also add that over the last 14 years we've come from a position where we were a pure player in Phase II and III and today we're among the very few CRO's that provide a full-service operation globally. And as Peter has said, we today have (indiscernible) Phase II and III, we're Phase I by analytical, IBRS (ph) pharmaco (indiscernible) and the list goes on.

Outsourcing is moving in the direction of farming out projects today rather than services and we are very well positioned to capitalize on this. I do believe we should not overreact to the issue at hand. We will have to fix the problem and failure here is not an option.

Okay. Could I just as one quick follow-up in terms of the business wins for the lab in the quarters? Did you give that split?

We didn't, but I'm happy to give it to you because it was -- 9.1 million was the net business awards for the lab in the quarter and revenues were 6.5. So again, the book to bill is very healthy. Continuing the trend -- I know I sound like a broken record at this stage -- but continuing the trend of good business wins which are building the backlog in the lab and which will ultimately translate into better revenue for the lab.

Okay, super. Thank you.

Terri Powers, Robert W. Baird.

I just had a question about this quarter's results. I'm wondering how much of performance this quarter was -- the margin decline, etc. -- was really due to last quarter's high cancellation rates versus the rather poor business development that occurred in the prior year period in November of 2003?

Terri, I'm not entirely sure of your question. Could you rearticulate it for me, please?

Sure. Well, in November 2003 you guys reported 67 million in net business wins. So it was a 0.92 net book to bill. And when you guys first gave your fiscal '05 guidance and cited that this quarter's results were likely to be lower than we were expecting at that time, that was one of the inputs into that was November of 2003 business wins. And then all of a sudden last quarter on top and that we had obviously very, very high cancels. So I'm trying to get a sense of performance this quarter in the U.S. clinical being -- relative to historical expectations -- clearly less -- underperforming. Is that more to last quarter's poor business development than anything or is there still an effect occurring from November of 2003?

Okay, I understand your question. When we initially guided to the quarter we just reported being down and our first down quarter in 5 years, it was primarily -- we were primarily focusing on at that stage the cancellations that we were already seeing in that quarter. We gave that guidance in July of 2004 as we announced our financial year-end results and gave guidance or headline to the fact that we had suffered a high level of cancellations already during that quarter and we thought that was going to impact us and bring down the results of the quarter we've now reported.

Subsequently, even after we'd announced that the cancellation experience continued to be bad and we had, as you know, a very, very high level of cancellations in that quarter and that is the primary reason why we've had the down quarter this quarter. When we were talking about that, when we were giving that guidance we did allude to the fact that obviously a softish bookings quarter of 67 million in the same quarter last year that we're now talking about didn't help because our backlog was not as robust going into that cancellation experience as it might otherwise have been. And therefore we went in weak, we got hit and that was going to make it impossible for us to recover.

I wouldn't say that I'd be blaming the bookings of 67 million a year ago for the down quarter. I would really be saying that our explanation was it didn't put us in a robust position to be able to withstand the cancellations that hurt us.

Okay. That's a great reminder and clarification and sort of the reasoning behind the question here is obviously with last quarter's anomalous cancellations affecting this quarter, I'm trying to figure out how far that's going to continue to impact the results. Is it just through '05 or do we need to be worried a little bit about the beginning of 2006? Or, as you said, as you continue to have strong business development expectations, that would clearly help mollify that somewhat?

Terri, I delighted -- you've given me a chance to be positive at last. In John's comment you will -- I hope nobody has missed the fact that we said our forward 12-months revenue picture is $248 million which is 70 percent of the current market forecast for revenue. That's a relatively strong position and in the past whenever we've had 70 percent or in excess of 70 percent in the next 12-months revenue we've been guiding that we expect to meet market expectations. So it is somewhat anomalous that with the 70 percent coverage of telling you that the next couple of quarter we need to revise downwards, obviously that (indiscernible) a factor in that -- an important factor in that.

But also, the profile of the backlog currently is different to the profile that we normally see. It's -- the way that profile is running out is stronger in the back 2 quarter, which would be quarter 1 and quarter 2 of fiscal '06 and a little weaker in the next 2 quarters. And that is a nice lead-in to saying that gives us some confidence that fiscal '06 will see us recover and recover strongly. And that the tail from the cancellations that we had last quarter will not extent into 2006.

Excellent. Thank you very much for your comments.

Dave Windley, Jefferies & Co.

A couple of smaller details. Sean, do you have headcount by U.S. and non U.S. and by lab and clinical?

Sure. I never expected you to ask that one, Dave.

I've got more.

The U.S. headcount is just a little over 1,400. In terms of split between clinical to lab, we currently have -- I think it's nearly exactly 200 -- yes, it is, it's 200 of the balance -- that the split between lab and clinical is 200 versus 2,400.

Okay. Peter, in the new business you mentioned that RFP's are obviously very strong and it sounds like U.S. is part of that pickup. How competitive is it? I'm hoping you can provide some context around the breadth that your clinical competitors now with a couple of additional companies now being concerned about reporting quarterly new business numbers to the public. What's the competitive landscape look like, is it too early to tell?

It probably is too early to tell. If your hypothesis is that being now public we've changed the way in which those companies behave in a pricing sense I think it would be too early to call that. I don't think that's likely to happen, Dave, to be honest with you because those companies have always been there. They've always existed, they didn't suddenly materialize when they became public (multiple speakers) had companies and competitors for a long time. And I would say good competitors, sensible competitors from a pricing point of view and therefore I would not see any change in the pricing environment.

And obviously in an environment where in the U.S. alone volumes are up 39 percent and values are up 53 percent, albeit that's only an ICON snapshot of what it's looking at from its customer base, there would be no reason for people to be cutting one another's throats on pricing when it looks like the market is as robust as it is.

Do you think that those -- it seems like ICON is forever increasing its profile with clients and getting yourselves into RFP invites that maybe historically you wouldn't have qualified for, is that still the case? Or do think you are now to more of a level same-store look on RFP volumes?

No, I do think you're right. I do think some of that volume and value increase is a function of continuing to open new doors and seeing opportunities that we've not seen in the past. I can't quantify to you how much that is, but it would not be all of it by any means. I'd be pretty confident, and again listening to what our competitors were saying in their calls when they last reported, it sounds that they are experiencing a robust market environment too, which would tend to support the idea that the market in general is robust. It's not just ICON that is seeing market share potentially increase.

Okay, great. Can you break that down for me two more ways, and then I will jump off. And those are within the business wins, you did mention that all your different business units did have solid quarters. Does anything stand out in terms of like are you seeing Phase 4 or safety-related activities spike up this quickly after the Vioxx and related issues?

No.

The answer no?

The answer is no.

Okay. Then with regard to say major pharma versus smaller and emerging pharma and biotech, what does that mix look like?

I am scanning the list here. I wouldn't think there is any significant change in the mix, and in terms of now our revenues were, John, between big pharma and biotech.

Biotech represented about 31 percent of revenues in the quarter, compared to 27 percent last year. The top 20 pharma companies was 42 percent.

Okay, that's not a proxity (ph) of what's happened on the wins days, but --.

Right. We're not seeing anything dramatically different happening on the wins side, that there's a spate of new opportunities coming out of biotech or that there's a shift towards the large pharma companies. It looks pretty balanced as I go down through the list here.

Okay. And then, gentlemen, I'm going to ask one more. In a prior question -- I think Terri was asking you questions about the impact and in the context of the down quarter. But in reality, as you said earlier in the call, it really wasn't as down a quarter on the top line as we thought and -- I guess I'm just trying to reconcile that with lower expectations going forward and a slower clinical ramp when it doesn't seem like things on the clinical side are as bad and the lab is an awfully small piece of business to have that impact you as much as it does.

Is it just that in the lab you have a certain amount of fixed infrastructure that you just cannot go below and still continue to operate and because of the revenue outlook there you're going to continue to lost money for a period of time? Is that basically it?

Unfortunately the short answer to that is, yes. As I said to the initial question from Chris McFadden, we did -- we were fairly ruthless in cutting headcount and expenses in the lab a year ago. And we would be very concerned that our ability to service our existing clients and therefore to be able to grow the business out of its current challenges would be compromised if we were to repeat that exercise. It is a service business and it's important to say that.

The vast majority of those 200 people that you asked about, how many people are working in the lab -- it's 200 people. The vast majority of those are actually providing service to clients as opposed to doing tests in laboratories. And the logistics of building kits, shipping kits, bringing in samples, getting data out to clients and the important aspect of providing a service as a central clinical trial laboratory need people. And by cutting out those people and reducing our cost we could find ourselves in the position where we can't even service the existing revenue stream let alone handle the revenue that we do believe will come.

So there's a limit to the cost reductions that we can achieve and, therefore, there is a level of loss that we will have to absorb in the lab as we try to turn it around.

Okay, great. Thanks.

Steve Unger, Bear Stearns.

Just to start off with -- excuse me for maybe sounding a little confused, but your gross margin in the quarter was above 45 percent, so you had a pretty good gross margin. When I look at your SG&A expense it looks like you added sequentially 2.2 million. That seems to be your biggest increase in SG&A expense that I've seen historically on a quarter basis. Could you explain that, what is that sequential increase?

Yes, we've -- and I think I referred to this earlier, Steve, and maybe I didn't elaborate enough -- our European businesses and (indiscernible) most of our other businesses are growing very well and obviously associated with that you've got growth in SG&A as these facilities, etc., have to expand to build in growth. The contrary to that is as that business just grows as you would expect a business that's grown close to 30 percent -- the contrary to that is that the U.S. clinical business did not grow yet, its SG&A base did not decline or did not change proportionately to that. So therefore on an overall basis, yes, the SG&A is going to take up with what looks like a very small incremental increase in revenue.

I think it's important to reiterate again, these businesses have been seeing strong growth for a number of quarters -- in fact, a number of years at this stage, and therefore you cannot prohibit that growth just because our U.S. clinical business is not performing as well as we would like it to. It's coming through from the growing businesses, David, is the short answer.

Okay. So you're investing for growth. So should the SG&A line then continue to grow at this pace or hold at this level for the next couple of quarters? How should we look at SG&A expense for the next --?

I would expect to see it -- I don't think it will quite creep up in the same extent that it did in the current quarter, Steve, but I would expect it would be somewhere north of $1 million a quarter sequentially, go up over the next 2 to 3 quarters.

So more normal.

Yes.

Okay. And then moving on to just new business development. Was there any new preferred provider arrangements that you guys entered into in the quarter? And then, how are you doing in tapping into business in the new preferred provider relationships that you've entered into over the last couple years?

On your first question on were there any new preferred provider -- in the quarter itself I don't think so. There were a couple that closed out probably in the previous quarter, and I'm not absolutely certain of the timing, but I don't think there were new ones in this specific quarter, Steve. How we're doing on the ones that we've closed out, we're doing quite well and that's -- the increase in the RFP volume that we're seeing and the value of those and the increase in awards are all helped by the fact that those new preferred provider awards are filling in opportunities and are in some instances already throwing in good wins (inaudible).

Okay. So you wanted business in those arrangements?

Yes.

Good. And then thirdly, how is the labor market now both in Europe and the United States?

I would characterize the labor market in the U.S. as probably being quite competitive. Given our business hasn't been growing we haven't been out there actually trying to hire too many people. So we're probably not best place to give you a true vision or view on that. But given the robustness of the market given, given the level of wins, given what our competitors are saying, I suspect and what we're hearing from our HR people is it is competitive out there and it's going to continue to be competitive out there.

It has been so for as long as I've been in this company, so I don't think that's a new environment. In Europe, as John has said -- and again, it's been all positive, this nicer piece -- we've seen 30 percent growth in the last quarter again, so obviously we're hiring people in Europe. We're succeeding in hiring people with the right skills and the right background. So it's not a non-competitive market, but the people are available and they are anxious to join a company such as ICON.

In Europe is this business that you're signing locally or is this business that you're signing in the United States and working on in Europe?

It's a combination of both. We have a very active and quite a significant side business development team in Europe chasing opportunities within Europe. But of course they turn up opportunities from time to time that are also executed in the United States, so says the team in the United States throwing up opportunities that constantly have European or rest of world components within them. The balance is that more opportunities that come in the United States have international components in them than vice versa. So a reasonable proportion of what we get in Europe comes as part of international programs.

Okay. And then fourthly -- I think this might be my last one but there might be one more after -- but in terms of the EPS growth (indiscernible) for fiscal '06, what you guys are saying is that you are targeting then normalized growth, which is historically you've targeted 20 percent plus EPS growth, absorbing central laboratory losses. Am I correct in that statement?

That is correct.

Okay. So that's somewhere around $2.00 or higher for fiscal '06 is what preliminary you would want to target?

That is correct.

And then in terms of the tax rate, should we assume 22 percent going forward or what?

I think in Q3, Steve -- Q3 and Q4 will be in or around the current range which is the 20 to 22 mark. I would expect as the U.S. profitability comes back on top in early fiscal '06 for that to return to the 26, 26.5, probably 27 percent range.

So we would start -- start at the 20 to 22 and ramp it to 26?

Yes, over the next 6 quarters.

Okay, thank you.

(OPERATOR INSTRUCTIONS) George Hill, Thomas Weisel Partners.

All of my questions have been addressed, thank you.

(OPERATOR INSTRUCTIONS) John Kreger, William Blair.

Could you give us the revenue concentration statistics in the quarter?

Sure. As -- I think we've said this before, 42 percent of our revenue came from the top 20 pharma companies and -- sorry, the non top 20, my mistake. And then from biotech was 31 percent.

I think it's the top 5 John is asking about, John.

The top 5 and perhaps the top 1.

The top 5 clients contributed 43 percent of our revenues.

43 percent. And that was in the quarter or year-to-date?

Both, John.

Both, yes.

Great. And then how about your largest client, John?

We have 2 clients that we would classify where they contributed revenues in excess of 10 percent. One is AstraZeneca and the other is Pfizer. Pfizer at 10 percent -- around 10 percent and AstraZeneca at around 13 percent.

Great, thank you.

(OPERATOR INSTRUCTIONS) And gentleman, there are no further questions at this time. I'd like to turn it back to the ICON plc management team for any closing remarks.

As there seems to be no more questions, thank you all for joining us today. One final comment before I close. Overall the results for the quarter were in line with expectations and the level of business wins achieved were very encouraging. The business environment continues to be strong and we are confident that performance will improve as we move into fiscal 2006. Thank you again.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your presentation and you may now disconnect. Have a wonderful day.