ICON PLC (ICLR) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the third quarter 2005 ICON plc ADS conference call. My name is Andrea, and I’ll be your coordinator for the day. At this time, all participants are on listen-only mode. We will be facilitating a question-and-answer session at the end of today’s conference. If at any time during the call you require assistance, press * followed by 0, and a coordinator will be happy to assist you.

I would now like to turn the presentation over to the host of today’s call, Mr. Sean Leach, CFO. Please proceed.

Thank you. Good day, ladies and gentlemen, and thank you for joining us on our third quarter fiscal 2005 conference call, covering the results for the quarter ended February 28th, 2005.

On the call today, we have Dr. John Climax, our Chairman, and our CEO -- Mr. Peter Gray -- who is joining us from the Lehman Brothers Healthcare Conference in Miami. Before I turn the call over to John, I would just like to make a customary 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.

I would now like to pass the call over to John. John?

Thank you, Sean. Good day, ladies and gentlemen. Thank you for joining our conference call, covering the results for our third quarter ended February 28th, 2005. As you will be aware from our press release and as we indicated on our last conference call, during the quarter we took a one-time charge of $10.6 million after-taxation. A small amount of this charge relates to lease termination and exit costs associated with the reorganization of some of our facilities in the US. Whilst the majority of the charge related to the write-off of certain fixed assets and a recognition of an [inaudible] of goodwill on our central laboratory business. Given the one-time nature of these charges, all references to our income statement for the purpose of today’s call will be stated excluding these charges.

Net revenue in the quarter was $82.9 million -- an increase of 8 percent over the same period, last year. Of this, net revenue in the US increased by 4 percent on the comparable quarter, whilst Europe and the rest of the world increased by 14 percent over the same period. Excluding the impact of acquisition, our overall net revenue growth was 6 percent.

Year-to-date, net revenue was $240.7 million -- an increase of $0.10 over the same period last year. Of this, net revenues in the US increased by 2 percent on this last year, whilst Europe and the rest of the world increased by 24 percent over the same period. Excluding the impact of acquisition, our overall net revenue growth was 7 percent.

Now, turning to our costs. In the quarter, direct costs were $46 million -- representing 55.5 percent of net revenue -- compared to 55.3 percent in the comparable period. SG&A and D&A costs were $30.8 million -- representing 37.2 percent of net revenues, compared to 33.3 percent last year.

Year-to-date, direct costs were $132.1 million -- representing 54.9 percent of net revenue -- the same level for the comparable period, last year. Whilst SG&A and D&A costs were $86 million -- representing 35.7 percent of net revenues, compared to 33.8 percent, last year. As a result, our operating income for the quarter decreased by 31 percent over the same quarter last year, from $8.8 million to $6 million.

Year-to-date, operating income decreased by 9 percent -- from $24.7 million to $22.5 million. Our operating margins were 7.3 percent for the quarter, compared to 11.4 percent in the same period last year. On a year-to-date basis, operating margins were 9.4 percent -- compared to 11.3 percent for the comparable period last year.

Overall, the outturn for the quarter was in line with our expectations. Our clinical business recorded net revenues of $76.5 million, and operating income of $7.8 million, giving an operating margin of 10.2 percent, while our central lab business made an operating loss of $1.8 million on net revenues of $6.4 million.

Taxation was 19.8 percent of pre-tax income for the quarter -- compared with 24.7 percent for the comparable period last year. Year-to-date, taxation was 21.1 percent of pre-tax income, compared with 25.7 percent for the comparable period.

As a result, net income for the quarter was $5 million -- or $0.36 per share -- compared to $6.7 million, or $0.40 per share last year. Year-to-date, net income was $18.1 million, or $1.29 per share -- compared to $18.5 million or $1.39 per share.

Now, turning to our balance sheet. Cash flow generated from operations was $12.6 million in the quarter, while capital expenditure was $2.8 million, and we paid half a million dollars in relation to acquisitions. Our DSOs were 67 days at the end of the quarter, compared to 69 days at the end of November 2004, and 60 days at the end of May 2004. As a result of these factors, net cash at February 28th, 2005 was $70.9 million.

During the quarter, we were awarded net new business of $106 million -- up from $91 million of net awards announced for the same quarter last year. As a result, we currently have approximately $252 million of the next 12 months’ revenue in booked and awarded business. We estimate that this represents approximately 71 percent of current market forecasts. Our total growth backlog at the end of quarter was $509 million -- a 13 percent increase on the same quarter last year.

The results for the quarter were satisfactory, and in line with our expectation. Gross business awards of $115 million were good, while cancellations at $9 million -- or 8 percent -- were well in line with our historic levels. These awards, combined with a strong level of awards in the previous quarter -- have increased our total backlog to over half a billion dollars. This has also improved our near-term revenue visibility, but of course we will require continued momentum in new business awards to regain a strong level of growth.

That, ladies and gentlemen, concludes our remarks. I would like to open the call to questions.

John Kreger, William Blair.

Thank you. Guys, could you please give us an update on your client-concentration figures, in terms of revenue and backlog?

Yes. We certainly can. From a client-concentration point of view, we have only one client that is over 10 percent. We believe, going forward in the coming quarters, we may not have any clients, and thereby negating the concerns of client concentration.

In terms of backlog, we have about 90 percent of our backlog comes from our 22 clients -- and it’s a healthy spread.

I think in the past, John, you’ve given us -- I don’t believe if it’s Top 3 or Top 5 clients in aggregate… What they account for, in revenue. Do you have that figure for the quarter?

We had 43 percent coming from our top 5 clients, and 60 percent from our top 10 clients.

Then another question. Could you just review, if you look at your operating margin this quarter versus a year ago? Can you walk through the key factors that have driven the reduction?

BJ, would you like to take that?

Sure. Sean, maybe you’d supplement me. The key factors, John, are obviously as everyone knows -- the lab is not helping. But even excluding the lab, the margin in what we call the core business -- the chemical business -- has also dropped. That’s largely driven by two factors. One is the high level of cancellations we had two quarters ago, which we had projected, and had alerted you guys to, that would impact on us over last quarter and the quarter we’re now reporting.

The second factor impacting on the margin is the impact of the EU Clinical Trials Directive on our Phase 1 business -- which also hurt its backlog in both the quarter and in November -- and the quarter ended February. That business made losses. Therefore, that has also dragged down on the margin. But the good news in that particular business is that its backlog has become very strong, again. We’re anticipating a reasonably good bounce back from it, in the quarter we’re now in.

Then to circle back on the lab. What are your latest thoughts on your lab business? And the timing of getting back to [inaudible]

I don’t think our view has changed since we last spoke, John. We do anticipate it’s going to be a slow road back. The good news, again, is that in the quarter that we’re reporting here, the lab had net wins of -- Sean, am I right? -- $11.75 million?

$11.8 million, Peter. That’s right, yes.

Yes. $11.8 million of wins and revenues, as John mentioned in his comments, John, of $6.4 million. So a very strong booked-to-bill in the quarter. The frustrating thing about the wins -- and this continues the trend, I should add… This continues the trend of booked-to-billed, well in-excess of 1.4 on average, over the last 9 quarters. I’m actually presenting at the Lehman Conference this afternoon, and I’m showing a slide that shows over 9 quarters. We have an average book-to-bill in excess of 1.4 to 1.

The frustrating thing in the lab is that it seems to be very slow to convert into increased revenues. But we are expecting that in perhaps this quarter, but more likely… When I say, “This quarter,” the one we’re now in… And more likely the first quarter of our next financial year, beginning on the first of June. We’ll begin to see the revenues kicking up in the lab. We would hope that by late fiscal 2006, we will have at least got back to a break-even position in the lab. Assuming we can maintain these strong levels of business wins over the coming quarters.

One last question. How is the US clinical business doing versus the European clinical business?

In terms of business-wins?

In terms of utilization and overall margins.

Sean, do you want to take that one?

In terms of utilization, we’re slightly below where we would like to be, John. The average overall for the group is about 83 for the quarter, in terms of utilization. In terms of margin, obviously, I should expect given the core margin overall as a 10.2 -- slightly below where we would like to be. But that will recover as the utilization increases over the coming quarter.

But regionally, John, Europe is still producing stronger margins than the US. Because the cancellations that we had two quarters ago had a disproportionate impact on the US side of the business.

Dave Windley, Jefferies & Company.

I was hoping, first of all, if you could just detail quickly the charge. How much is related to goodwill write-down? How much “other” fixed-asset write-down related to the lab. I think I heard that right. Then how much is realignment in the 2-4 business? [inaudible] business. Excuse me.

It’s a bit of a disadvantage doing this away from base. So let me just get my papers out, here. The goodwill portion, Dave, was just over $7 billion. Other write-downs in the lab. Sean, am I right in saying they amounted to…

About $1.8 million, Peter.

$1.8 million. Is that including the write-down in association with the old leases?

Correct, Peter. Yes.

Then Dave, then balance is in the 2-to-4 business. It’s effectively a reorganization of our offices out on the West Coast, where we had two offices. We’ve downsized one of those and consolidated more of our operations into the office in San Francisco.

On the lab -- former multi-locations, I guess, on Long Island. That’s long-since been known. Was the issue that you couldn’t get those subleased, or something?

We expected to sublease them, and we have not been successful in subleasing them. So while taking this charge, we felt it was appropriate to take the charge for that, also.

Moving on. In your bookings trends, clearly one of the most-important things for you to do is refill a cancellation. The hole created by the cancellations in the US. Can you give us a sense of how the $106 million breaks out between US and rest-of-world?

Want to take that one, guys?

Yes, Peter. It breaks out again in favor of the US, pretty strongly, Dave. So almost $50 million of the wins were in the US. The US Phase 2 to Phase 4 business. So the US did well and replenished well. That was a book-to-bill for the US of… What was it, Sean -- about 1.3?

1.3 or 1.4. Yes.

Yes.

Then, Sean -- you commented on utilization to John’s question. Historically speaking, 83 percent is lower, certainly. But maybe not as low as I might’ve expected you to say. Confirm that I did understand that that’s 83 percent for the whole of the clinical business -- not just the US. Correct?

Yes. That’d be right. But we have been running at levels over 85 percent, John -- over the last number of quarters for those stages. Over the last 6 quarters, we have been in excess of 85.

That was more the level I was thinking about. Maybe I don’t appreciate the sensitivity to that number, but you’re running some -- what -- 300 basis points or more below peak margins in the clinical business. Is it that sensitive to 2 or 3 percentage points of utilization?

Yes, it would be, David. Ultimately, your profit is all made on the last number of percentage points. So it does have a disproportionate impact. Obviously, as you grow, you’re putting in costs, as well. When you have a decline in that number, it does have a disproportional impact on the overall operating margin.

But also remember, as I mentioned I think on one of your earlier questions, Dave -- the Phase 1 business was profitable in the comparable quarter last year, and made losses in this quarter because of the impact of the EU Clinical Trials Directive. So that has also impacted on the margins, unfortunately.

So when you talk about utilization, you would be talking 2-4, and excluding the Phase 1.

Absolutely.

Then as a final question, maybe a 2-parter on central lab. I’m first wondering, your cancellations continue to be pretty mild. A little bigger this quarter than last, but pretty mild. Are there any cancellations in central lab? Then Part 2 of that would be your book-to-bill, as you said, has been very strong for a fairly significant period of time. Yet each quarter’s revenue is actually ticking modestly down.

I know you’ve talked a little bit about some of the issues plaguing the revenue ramp in that business. If you could maybe hit on that again… Reiterate some of those issues. Then comment to the long-term strategic position of the central lab and your business, and the necessity of that. Thanks.

Sounds like that’s my question, guys. First part of your question, Dave. I think I know where you’re going with this one. No, we’ve had no major cancellations in the lab. Nobody’s had to have any studies rescued from us.

Secondly, the backlog is now… again, Sean, I don’t have the number here beside me. The backlog in the lab is now $7 million?

Yes. $47 million, Peter. That’s right.

So obviously because of the high book-to-bill we’ve achieved. It’s upticked by 5 or more million in this quarter, Dave. The reason why that’s not flowing through is, the lab continues to win very good-quality business from large companies of big trials that are relatively long-duration.

In this quarter -- in the quarter that we’re reporting, here -- in fact, the profile of some of the projects they won is of faster run on the projects they’re won. So we’re hoping that we’ll begin to see some payback from these wins -- a little bit faster than we have on the other ones. But effectively, what’s been happening in the lab -- the quality of its backlog has been improving. The quality of the customers and the quality of the projects that they’re winning has been improving. But the downside of that is their bigger projects are of longer duration. And in several cases, they’re taking longer for the client or the CRO that’s running them to get those studies up and recruiting patients than had been projected initially. Therefore, they haven’t yet begun to generate meaningful revenues for the lab.

I think that’s going to change, as I mentioned in my comments. We’re expecting to begin to see some up tick in the revenues of the lab in the next couple of quarters. Hopefully from there, we’ll see this backlog beginning to translate into stronger and stronger revenues, going forward.

Again, another positive note is the lab has had a very good start in this quarter, in terms of business wins. So we’re confident that it’s on the right track. It’s only a question of timing. It’s not a question of “if.”

In terms of your last question, which was the strategic position of the lab for us -- I think it was, as was said on the last call -- the lab is, we believe, strategically important to us. It’s interesting that some of our competitors are also identifying that they are achieving increasing levels of cross-sell between their clinical business, their lab business, and their IVRS business. We are experiencing exactly the same thing.

We’ve acquired now an imaging lab, with the intention of also trying to leverage it, as part of a cross-sell opportunity -- right across the services required for Phase 2 to Phase 4. For that reason, we continue to believe the lab is strategically important to us, and we’re very encouraged by the progress it’s making in terms of its backlog. But we do think it’s going to take another few quarters before we actually begin to see some progress on its bottom line.

Great. Thank you for all that.

I never give you a short one, Dave, if I can give you a long one.

I love it.

Jack Gorman, Davy Stockbrokers.

I’ve got three small questions, please. Firstly, you talked a little bit about costs, already. I was just noting direct costs and their impact on gross margin. A little bit lower than last year. Looking back over a couple of years, it does seem to be a little bit of a dip in the February quarter. Just wondering if there was a seasonal factor involved, there.

Secondly, just in light of the wins and in light of obviously the fact that you’ve had another month of business since the quarter end… What’s the current status, with regard to hiring, across each of the businesses, and I suppose each of the regions?

Finally, I know you’ve mentioned before in other conference calls, some idea and some flavor on RFPs. I was just wondering if you have any data for us on that.

Sean, would you take the seasonal factors question on the gross margin?

Sure. I suppose it depends on what comp you’re looking at, Jack. If you’re comparing over the different quarters, yes. You’re going to see…

Yes. The February quarter, Sean, compared to the others. Yes.

We do have a seasonal effect on our consulting business, in the current quarter. So you can get a slight fluctuation in the gross margin. Obviously, as we referred to earlier, the under-performance in our Phase 1 would also impact on it. Although I’m questioning whether it’s grown on a comparable-year basis [it would impact] on the revenue. I don’t think it has. I think it’s broadly in mind.

Yes. It is.

But you do get some seasonality. And obviously, Phase 1 is a slightly more volatile business, in that it can skip around, depending on the capacity utilization. So you get that every quarter. Other than that, Jack, it would be small.

On the other two parts of your question, Jack… With the level of bookings that we’ve had and with the beginning of this quarter, where are we, in terms of hiring? I think the numbers would show that the headcount, Sean, grew in the last quarter. I think we’re nearly up to 2,700 people now, worldwide. Isn’t that correct?

Yes. We’re close to that. Yes.

But we’re still being very cautious, Jack. Right at the moment, we wouldn’t be aggressively hiring, at all. We’d be holding our powder dry, so to speak.

That leads me into the third part of your question -- RFP volume, on a year-to-date basis. So, for the 9 months on a global basis, volume is up 89 percent, and value is up 87 percent.

[inaudible]

89 percent. Value is up 87 percent. So it’s interesting that volume and value are actually pretty closely correlated. They’re up very strongly against the comparable period of a year ago.

In the quarter ended February, the numbers were also strong. It’s not that something funny was hidden in the third quarter that we’re giving you year-to-date numbers. I think the year-to-date numbers are probably a better proxy than just one quarter and another quarter. Within the regions, again, it was a good quarter across all of the regions, in terms of both volume and value.

The slight caution I give you is that March has been a bit slower than we would’ve expected. The more FP activity -- particularly in the US -- in the first months or not even all of the first months, but in the early weeks of March -- has been a bit softer than we would’ve expected. That’s causing us to be just a little bit careful and a little bit cautious.

Do you mean by that, Peter, “softer,” in regards to RFP flows, or as it translates into business wins?

RFP flows, I’m talking about.

Steve Unger, Bear Stearns.

First question. In terms of your business mix, are you still heavily weighted toward post-approval studies in the Phase 2 / 3 area?

I’ll take that. I think 62 percent. We don’t have the full data, but if I look at the top 5 clients, 62 percent of our revenue was gained from post-2 studies.

62 percent of the revenues from those clients, John?

Yes.

So in terms of your business, then, are you seeing the same RFP flow in post-approval? Or would you say that you’re just winning more because of your experience in post-approval?

That’s interesting. That’s a good question. We haven’t actually… I’d been analyzing on the flight on the way over here yesterday, Steve. I was analyzing the RFP flow and looking at it from a number of different… I didn’t actually look at it -- and I should have… I didn’t look at it from the Phase of those various RFPs.

The sense I would have is that the number of Phase 2 and Phase 3 -- not 3B4 -- has increased somewhat. More than somewhat. Probably it’s increasing significantly on a year-ago. I think we are seeing more of the early-stage type opportunities, currently.

I used to hypothesize and reason that during the lean times, that the pipelines of our clients that we were seeing so many Phase 3B and 4 opportunities, was because they didn’t have a lot of Phase 2 and Phase 3 opportunities -- and therefore they were directing their budgets toward the later-stage opportunities. My sense of that, having done the analysis, is that is now changing. A lot of companies have got products coming. More companies have products coming into Phase 2 and Phase 3. Therefore, we’re seeing a higher proportion of RFPs for those phases, rather than [later] phases.

That’s what I was thinking.

That’s what you were hoping!

Exactly. So you’re sensing that we are seeing some progress, then, in the pipeline.

I think what I should do is go away and analyze the RFP data, or get someone to analyze the RFP data, to confirm what I’ve just said. But Sean, would you agree that they sense we have is that there’s more Phase 2 and Phase 3 that we’re seeing?

Yes. That would be my sense as well, Peter. Absolutely.

But we probably need to go and do some analysis on that, Steve, and confirm it to you.

Then looking at the core business operating margins, the margin has eroded roughly 2 percent per quarter for the last two quarters. We’re now down around 10 percent. Can we see similar leverage? Have we seen a bottom, first of all? Then could we see similar leverage on the way back, to historical 14 percent -- roughly 2 percent per quarter? Or is it going to be a little bit slower to ramp that margin up?

I think what we’ll see in the near quarters is a full percentage increase. But then the leverage kicks in hard, as we come into the earlier part of Q1 ’06, Steve. And on back -- getting back up into the 12-14 percent bracket -- which is obviously where we like to be and where we have been over the last 4-6 quarters. But it would be very swift, I would say. It’s over 2 quarters. Two to three quarters.

Over 2 to 3 quarters. Then in terms of… It seems to me that the SG&A expense being added to the business is what’s really causing the margin decline. Could you go over again what… Are you investing in business development people or marketing or recruiting?

It’s a combination of things, Steve. What we’ve experienced over the last year and even over the last couple of quarters has been very strong growth in our European and rest-of-world business, when the US has been pretty much flat. So the US has managed to hold its SG&A flat, and Europe has seen its SG&A grow strongly on the back of 30 percent-plus revenue growth. So most of the growth in SG&A that you’re seeing is coming out of infrastructure and support that we’ve had to put in place in Europe, to support the growth of that business.

If that were the case that revenues were growing, mathematically… I know you’re going to say if that’s the case, then why isn’t SG&A growing at the same percentage as revenues are? The answer is that in the lab, where revenues have declined slightly year-on-year, but SG&A costs have gone up because of the new facility that we’ve moved into. And in our Phase 1 business -- where revenues have fallen because of the effects of the EU Clinical Trials Directive -- but SG&A has remained pretty much flat. In fact, it’s up slightly, on a year-ago.

You’ve got a decline in revenues from both of those businesses -- the lab and Phase 1. Without any decrease in their SG&A, and in fact with an increase in the SG&A. Particularly in the lab. Everything else is going pretty much in-balance. That’s therefore giving you an exaggerated appearance that costs are running out of control, and running much, much faster than revenues. It’s a more-exaggerated appearance than is really happening in the background, but it is a fact. And it is something that we are focusing on, and looking to see what we can do to control it a little bit more tightly in the quarters ahead.

Last question. How are you guys positioning the central lab versus larger competitors? Are the wins that you’re getting today more bundled wins with clinical work? Or what’s special about the lab that you’re selling to customers, in terms of, “Better, faster, cheaper?”

I think there used to be an ad on television for someone’s credit card call that you’re a “flexible friend.” I don’t know if you got that one in the States. But one of the things the lab is certainly selling itself on is being very flexible. Being able to meet the unique needs of clients. When you’re a relatively small lab, you can afford to, I suppose, offer that type of flexibility and differentiate yourself in that way. That’s one aspect.

A second aspect of differentiation is in technology. They have developed some expertise in some of the more-esoteric areas of central lab services. They’ve deliberately done that. Because when you emphasize that, we have to create some competitive differentiation. I think they’re being successful in marketing to clients, that they can send their samples to our labs and they will not have to be split -- with some of the samples going out to esoteric labs and more of them being the basic safety work being done within the labs. We’re able to offer some of the high-technology areas, but I think in particular, in oncology. We’re able to offer a complete package of all the testing being done within our own environment. That’s been part of it. I wouldn’t want to overstate that, but that’s been part of our strategy. And it’s part of the reason, I think, we’re showing success.

I’ve forgotten the second part of your question.

Well, it really wasn’t. Are these bundled wins?

Sorry. Bundled wins. We are getting some bundled wins, but that’s not the major influence on the success of the lab at this stage. We are using the opportunity every time we pitch for the clinical piece of business, to promote our lab. We’ve had some success with that, but that tends to be more with smaller and mid-sized companies, than with the larger companies. Large companies generally have already selected preferred providers for labs, separate from clinical. Therefore, they’re not going to award lab business to our lab, if it isn’t one of their existing preferred providers.

Where it is, I would say, is that there is a tendency -- a growing tendency of the major companies -- to say if our lab’s preferred provider and our clinical business preferred provider have awarded us a project, their inclination is to award us both the lab and have the clinical piece, simultaneously.

[Chris McFadden], Goldman Sachs.

Good morning, Peter. I hope the weather is agreeable, there.

It’s a lot better than it is in Dublin, anyway. I’ll tell you that.

I can imagine. First, a couple of housekeeping questions. I’ll assume that your tax rate guidance for the full fiscal year has not changed.

Correct, Chris. Yes.

Second, operationally, in light of some of the additional charges you’ve taken. Are you making any additional or planning any additional operational changes at the lab, either in context with your sales-and-marketing staff, or in the context of your clinical platform?

In the labs, Chris?

Correct.

We are not planning any major additional changes within the lab. On the business development side, we have over the last two quarters upscaled the size of the business-development team. If any of them are listening, I would credit that team with some of the success they’ve had over the last couple of quarters. I think we have a good-sized team, now with good-quality people. And the results are showing, in terms of business wins we’re achieving, there.

On the clinical platform, as I was answering one of the earlier questions on information technology -- we’ve made investments in developing particular expertise in some particular technologies. We have no major plans to make major investments or major further investments in that stage, Chris. But there will be small incremental investments in technology, obviously, as technology itself develops. But I don’t think it’s going to have any material impact on the cost base of the business, either positively or negatively over the coming quarters.

How many business-development professionals do you have now, focused on central lab?

I think it’s 9 or 10 in the field.

In terms of the bookings in the quarter, you’ve given some flavor geographically. Could you also give some context in terms of biotech versus pharmaceutical customers, in terms of composition of those bookings?

I have that information here, Peter.

The bookings of this quarter, John?

Not for the quarter. We don’t have that.

I’m just looking at the list here, Chris. It’s good. I would say that an above-average share of bookings come from biotech and mid-sized companies in the quarter [inaudible]. But we haven’t done the analysis. Again, that’s something we’ll go back and do and perhaps update you on it separately.

Just as an aside to that, should we infer that as a general question, when you see a higher contribution from bio- and mid-sized that that has a geographic propensity to it?

Yes. I suppose it would. Certainly on biotech. As everyone knows, the biotech industry clients are further-developed in the US than outside of the US. Therefore, it would be fair to assume that that creates a bias toward US bookings. As I said, US bookings were very strong in the quarter.

Mid-sized, less so. A lot of mid-sized companies in Europe, as you know. So if it’s mid-sized, it’ll probably be pretty well-balanced.

Understood. The FDA -- as a general question -- is very focused now on drug safety as an issue. There’s been congressional hearings and the like. I guess two questions. One, are you involved? Are you involved in discussions with the FDA at a high level, to help them think about alternatives relative to drug safety and post-market surveillance, and those types of questions? And then I guess secondarily, commercially. How do you kind of envision this opportunity developing? Is that something you’re keenly focused on? Do you have dedicated resources trying to plan for that? In light of your historical strength in some of the post-market studies, I’m wondering how important an opportunity that could be for you.

To the first part of your question, we are not in direct discussions with the FDA, currently. Although our consulting groups would either be supporting clients who are having some discussions, or would have contacts within the FDA where they’re having informal discussions. But we’re not having any formal discussions or being formally-canvassed by the FDA.

The FDA has asked for some interesting pieces of data from us over the last quarter. Unusual requests for data information to types of studies that we’re executing, et cetera, et cetera. We are assisting them in that, but there’s no dialogue involved in that particular request.

Is there a thread, Peter, in the request, that helps you think about what they’re trying to analyze?

At this stage, I think they’re trying to get their arms around data, Chris. I don’t think they yet…. Certainly from what they’re asking us, it would not suggest that they’re advanced in their thinking. Do we think that there’s an opportunity here? Absolutely. Do we think that we’re well-positioned for such an opportunity? Yes. We do. Both from our medical group and the technology platforms that we’ve created to support pharmaco-vigilence -- as post-market safety is referred to.

I think we have a very good platform already in place to do that. We are currently doing a number of stand-alone pharmaco-vigilence projects for various clients. Some of them on drugs that are already on the market, where we are effectively the pharmacao-vigilence of the client.

We are also separately creating a Phase 4 group within the organization, specifically to focus on non-regulatory style studies, and the opportunities that those present within our classic Phase 2 to Phase 4, as you’ve identified. We have a long history of late-stage studies. We are in dialogue with a number of our clients to how we can support them in doing long-term safety studies with the amount of experience we have in that area.

So I think it’s an opportunity for us. And if we want to capitalize on it, I think we’re in a good position to capitalize on it.

Interesting. Final question. You’ve talked on the call about cross-selling. You’ve reiterated the strategic importance of the lab. You mentioned some of the other assets you’ve added. You also have a healthy cash balance. Are you still in the hunt for acquisitions that add to the rest of the platform? Is that a hot focus, still, for you? I guess what expectations should investors have in that area?

John, do you want to take that one?

Well, as always, we are looking for opportunities. There are certain areas that we would like to go into that we’ve told you about earlier. [inaudible] and a few other things that we’re still looking at. Immediately, we do not have anything in mind.

I guess at a high level, one of your competitors you talked about -- upwards of 40 percent of their bookings are coming out of cross-sold or bundled-type offerings. Do you feel that there is a secular change here that puts more pressure on the growing from opportunity to necessity, to be able to offer more integrated capabilities?

I think we’ve always believed, Chris… And the reason we’ve made the acquisitions we have and built the range of services we have, and the reason we’re suffering through pain of our lab business and saying this is something we want to stick at is because we believe and have believed for a long time that an interoperated service is something that clients are increasingly going to want from us. I think I’ve seen various presentations over the last year. I’ve been talking about the fact that the move toward the selection of preferred providers by the major companies -- albeit on a discreet service-by-discreet service basis is a precursor, I think, to a move that they will ultimately toward trying to single-outsource projects as opposed to outsourcing different elements of the projects to different preferred providers.

So from a strategic perspective, I think bundling or selling a coordinated service across different service types within Phase 2 to Phase 4 is becoming increasingly important and will be more important in the years, ahead. But it is a slow process. Not every company is necessarily going to follow that path. But I think there is a secular trend.

Do you think we’ll get to the point where it stops being competitive advantage and starts being necessity?

If I follow the logic of what I’ve just said, I think yes. Although I think it’s going to be a slow process. I don’t think that’s necessarily going to be the case in the next 2 to 3 years. But I think ultimately, it will.

Eric Coldwell, Baird & Company.

I want to go back to one of the original comments on European Phase 1 Clin-Pharm work in a post-CTD environment. Peter, you mentioned last quarter that the wins were starting to come back. You reiterated it this quarter. I’m curious if this is more a function of overall pipelines improving so much that the work has to go back to Europe, or if it’s the clients becoming comfortable with the regulatory changes, or if it’s the fact that all of the service providers in Europe were underutilized in the last year, and therefore pricing came down?

I’m not sure about the last part of your question. I’m not sure that I’d agree with that. But on the first two, I think both of those are equally at play. I think the demand for Phase 1 services is so strong, companies that had previously worked in Europe and had previously been comfortable working in Europe have come back. Because [it was easier] to get the studies done within a reasonable timeframe. And simultaneously, they’ve achieved a comfort level with the new regulations on the CTD -- the Clinical Trials Directive.

I think they’ve found that it’s not as bad as they thought it might be. In fact, it’s a lot better than they feared it might be. Therefore, it’s safe to go back in the water.

Would you say there’s any work…? I know you’re not as close to it in North America, but would you say that there might be any work shifting from North America back? Or do you simply think there’s growth in both markets, again?

I really don’t know. I really couldn’t speculate on that. I suspect that what we saw in the middle part of last year was work that had traditionally been done in Europe, helping to fill and overfill the facilities in North America -- both US and Canada. Now I suspect that work -- and the people who are comfortable doing that work -- are now going back to where they used to go, anyway. So really I think North America has benefited from a temporary bulge from work that temporarily transferred out of Europe.

That doesn’t take away from the fact that all the signals will be here, and that Phase 1 units generally are bulging.

Absolutely. Shifting gears. I hope I’m not stepping on any toes, here. But I understand there may be some managerial changes in US-clinical. Are you willing or comfortable to talk about that?

I can only assume you’re referring to Bill [Taff], who’s been president and who founded it, effectively. John Climax, I’m being unfair to you when I say Bill [Taff] founded US operations. John Climax founded our US operations, but fairly quickly got Bill [Taff] to rejoin himself and Roman. Bill had worked with John and Roman in a previous life. Bill took over, and built our US business over the last 13 years.

Bill for some time has been signaling that he wanted to throttle back a little. He is going to do that from Friday of this week -- from the first of April. Bill moves into a corporate role, working on acquisition opportunities and strategic initiatives. And his deputy -- John Hubbard -- is taking over as president of our US operations. But that’s effective to begin a transition that we’ve been planning for over a year, and there’s no disruption involved.

Absolutely. And John’s history with the company?

John has been COO in the US since 1999, I think.

That’s great. Next question. You also, Peter, mentioned this briefly. You talked about the imaging lab, and you mentioned a future potential cross-sell between Phase 2/3, central lab, IVRS and maybe bringing imaging and central diagnostics into that. Could you tell us a little bit about how the Beacon majority stake is going? What your relationship is with that? If I do back-of-the-envelope math, it looks like that business may have done about $1.5 million in the quarter. Is that a safe assessment?

Sean, do you want to take the last question?

Just slightly more than that -- about 1.8.

1.8 -- and performance expectations [inaudible] et cetera?

Beacon has been a very satisfactory acquisition for us, I think. To use a euphemism. Their backlog has grown very strongly. The demand for their services is clearly out there and growing rapidly. They’re a very credible player in the industry. The guys who founded Beacon have been in this industry for 13 or 14 years. They know a lot of people, and a lot of people know them. As a result, they have a pretty strong traction in their business. What we’ve brought to them through our 70 percent holding is the capital for them to be able to invest in growing the business. They have done so. They’ve increased their headcount significantly. They’re increasing their business development team, currently. And their backlog, as I say, is growing strongly.

As usual, their backlog isn’t translating into revenues as fast as they had projected. But nonetheless, they’re making very good progress, and we expect over the coming year that they’re going to see significant growth.

Great. Sean, I have a very specific question for you. As I look at kind of the preliminary backlog data, I see that unbilled has actually this quarter gone higher than accounts receivable. Also, unbilled in the last three quarters has grown nearly 30 percent -- nearly 40 percent -- and now nearly 50 percent. It’s up 37 percent in the 9-month period, while gross wins and net wins are effectively flat-to-down. So I’m curious if you could give me some sense of what’s going on, on the unbilled side of the balance sheet.

I’m curious as to why you would link business wins with unbilled balances. In terms of the progress, yes. We have had an up tick in the unbilled. But if you also look at the payments on accounts, they have also gone up to the same extent. In actual fact, we would generally look at them on a net basis. Because the split between them in just whether one account is in credit and one is in debit. On an overall management basis, we would look at them, together. If you actually look at those on a net-net basis, they’ve been essentially flat over the last 2 or 3 quarters.

It’s still a bit frustrating. We’re unhappy with DSOs at 67. I had hoped that they would be significantly below that, this quarter. It didn’t work out. We are still seeking to make improvements in that. I still see the basis of where that should be. It should be routinely in the 55-60 range. We had got it into that range over the last 2 quarters. There’s nothing particularly exceptional going on, on that, other than timing. But it is frustrating, and we will have to continue to work on it.

Ian Hunter, Good body Stockbrokers.

I’ve just got maybe a couple of follow-on questions from previous questioners. Firstly, on the business wins. You’ve given us an idea of the geographic area and the biotech pharma split. But I’m wondering if you could just give us a flavor of the duration of the size of the contracts. I mean, are they in the normal [inaudible]that we expect? Or do you have any runoff in the mix?

Then on backlog. I see it’s ticked up from 70 percent to 71 percent. But I was just wondering if you could give us an idea of what kind of level you’d be comfortable with, going forward. If you could see a business win with the 120 million-plus, going forward. I mean what kind of level of backlog would you be looking for? Is it 75-80 or am I slightly optimistic on that?

Then, maybe lastly -- just to get my [TNO]. Sean, you were saying that the core business is the operating margins is 10.2 percent at the moment. But are you looking for it to tick up -- am I correct -- to about 12 percent over the next 2-3 quarters? And on the back of that then, the laboratory business. Are you basically looking to try to hold your revenues at the 6.5 million -- between 6.5 and 7? And looking to do cost-cutting, et cetera, to get your profits over the next 3-4 quarters?

I’m going to go in reverse order, if that’s all right.

Sure.

On the lab, Ian -- what I was saying earlier on the call was that we expected the revenues in lab to actually tick up over the next couple of quarters, and to continue then growing from there. Obviously, with the backlog and the lab growing as strongly as it has, and with the wins at the levels that they’re at and have been for the last couple of quarters, we’re expecting to see the revenues in lab grow. So we’re not anticipating any draconian cost-cutting measures in the lab. We’re actually expecting the revenues are going to grow, and to begin to eliminate the losses. That’s the last question.

The second-last, I think was for you, Sean.

In terms of the core margin, yes. No, you’re right. I would expect the core margin to tick up toward the 12.5 for Q1 of next year. Then, to continually improve as the year progresses.

In terms of your second question, what level of coverage in the backlog would make us feel comfortable? I think the answer to that is 100 percent. And 110 percent would even be better. But in reality, in the past, we’ve had somewhere between 75 and 80 percent. But that was before we’d made some of our more-recent acquisitions, which generally have shorter-duration backlogs. I think in particularly, the Phase 1 business. And the Globomax consulting business. So if you back those into it, I think somewhere between 74 and 76 percent, Sean, would be our comfort zone. Isn’t that correct?

Yes.

And you feel that you can achieve that -- your 110 to 120 million?

Well obviously, with a book-to-bill of 1.2 to 1.4, if we can continue achieving that, yes -- I would expect that we’d tick up to that kind of coverage level, over… But it wouldn’t happen quickly. It would happen over a number of quarters. The frustrating thing about backlog is, you can keep building it -- but the rate at which it flows into your revenues can often be slower -- as we’re proving in the lab, and as I mentioned, in the Beacon business. It often turns out to be a lot slower than you originally projected. So we have to be careful with these forecasts.

And your last question was, was there anything exceptional in the wins, particularly in terms of duration. The answer to that is no. In the quarter that we are reporting here, all of the awards were pretty normal-duration projects. We typically had somewhere between 18 months and 30 months or thereabouts.

David Marshall, NCB.

Most of my questions have gone, at this stage. But Peter, maybe if you could just expand on your comments on the Phase 4 stand-alone business. Maybe just give us a sense of what size that might be, and what timeline and your thinking there, in terms of setting that up. You’re potentially looking for bolt-ons in that areas, as well?

Yes. We continue to look for bolt-ons. We haven’t seen one yet, that’s either sufficiently interesting or at a price that would be acceptable to us. So we are taking the built-it-ourselves approach. Now obviously, with the business and the margins under pressure, we’re not taking out the checkbook and going wild. But we have built a core of people in the US over the last 6 or 9 months, whose focus is on Phase 4 opportunities, specifically. They will be able to tap into the general resources of the organization, as opportunities come for them. But I think it will be a slow build.

We have won and have been winning plenty of Phase 4 business over the years -- but creating a greater focus on a separate business unit, we hoped that we could capitalize more -- capture more of the opportunities that we see -- by being focused on it. But I wouldn’t be making any rash predictions about major revenue ramps resulting from that. I think it’ll be steady incremental business.

Just in terms of operating margins, will that be similar to the clinical? Or would it be better?

I would expect it would be similar to [inaudible]

Dave Windley, Jefferies & Company.

Just a couple more. First of all, Peter, understanding that you don’t have all the hard data right in front of you. But in the comments of strength toward biotech, and pickup in 2/3. I’m wondering if you could talk somewhat specifically -- even if anecdotally -- about whether or not biotech is really what is pushing compounds into the 2/3 area and causing that growth.

I want to be very careful of what I say, Dave. I think I was hypothesizing that the sense we had was more than what we’re coming from, there.

Right. Exactly.

To be honest, no. I think we’re seeing a reasonable number of Phase 2 opportunity, in particular, coming out of larger companies. As well as coming from mid-sized and biotech companies. So I wouldn’t hypothesize that more is coming from biotech than anywhere else.

Then the second question. In comments that you made about trajectory toward break-even in the central lab -- you kind of hung a caveat off of that. Presuming that you continue the business wins like you have been -- I guess the only thing that strikes me about that is that your business wins have been stronger than would seem to be needed to produce revenue growth, and to trend toward a $7, 7.5 or 8 million revenue number. Is it really necessary to have 1.4 book-to-bills in central lab in order to get back to break-even on the path that you set out?

Given that we’ve had 9 quarters, which is over 2 years, Dave, of average 1.4, and we’re still at the same level of revenues that we were 2 years ago -- I’m very cautious in what I say. But the honest answer is yes, you’re right mathematically. You would think that if the backlog is as strong as it is, now at 47 or 48 million -- it’s hard to believe that we can’t just based on the momentum we now have, get to certainly 8 million of revenues per quarter. But we’ve been saying that for a while. We’ve got our forecasts wrong, consistently. That’s the one thing we’ve been consistent about is getting our forecasts on the lab wrong.

Therefore, I think we are cautious about this. We’re conservative in the way we’re forecasting. Part of the reason why the revenues haven’t responded, I think, as I’ve said, is the duration of the projects is longer. So just because we win -- we won $10 million or 9 million worth of business in the quarter ended November… But there was a reasonable amount of that, that was of duration of 30 months -- whereas the typical project in the lab was a duration of 15-18 months. So it wasn’t a $9 million on a like-for-like basis. It’s gone into the backlog. It’ll be good, solid revenue platform going forward over the next 30 months, but it won’t be able to drive those to $8 million or $9 million in revenues per quarter.

Then in the quarter that just ended, there’s $11.75 or $11.8 million of wins -- the duration was actually shorter. The duration that I mentioned, earlier. So that should flow through. So that should flow through. All of those reasons are why I’m just careful and not saying, “We are there.”

I think we need to continue to have a good level of success in our wins to build a strong base under the business, so that it can return sustainable levels of both revenue and profit.

Right. I understand. My last question. It may have been mentioned and I just didn’t catch it. But in the question that Chris asked about acquisitions -- was US clinical pharmacology -- John -- did you respond that that was still a target?

It is still a target, and we’re looking at it. The problem is that as Peter said, the good clinical pharmacology groups are very pricy, at this point in time. As you can well imagine. One other opportunity is to grow it organically, and we’re looking at that. But nonetheless, we continue to look.

Ladies and gentlemen, this concludes the q-and-a portion of today’s call. I would now like to turn the presentation back to Dr. John Climax for closing remarks.

Thank you. As a closing statement, I’d like to say that overall, the results for the quarter were in line with expectations. Cash flow was strong and the level of business awards was good.

The market for our services continues to be strong, and we are very well-positioned to capitalize on the potentials. Thank you again and we’ll see you next quarter.