ICON PLC (ICLR) 2007 Q4 法說會逐字稿

Good morning and good afternoon ladies and gentlemen and welcome to the ICON plc results for quarter four fiscal year 2007 and the December 31, 2007. My name is Wendy and I'll be your coordinator for this conference. Throughout the presentation you will be on listen only, however at the end of the call there will be an opportunity to ask questions.

(OPERATOR INSTRUCTIONS)

I will now hand you over to Mr. Ciaran Murray, chief financial officer, to begin today's conference. Thank you.

Good day ladies and gentlemen. Thanks for joining us on this call covering the quarter ended December 31, 2007 and the year ended on December 31. With me today on the call I have Dr. John Climax, our chairman and Mr. Peter Gray, our CEO.

Before I hand the call over to John I'd like to note that this call is webcast. There are slides available and the comments will follow the slide show.

I will now make the customary statement in relation to forward-looking statements. Certain statements in today's call may constitute forward-looking statements concerning the company's operations, performance, financial condition and prospects. Because such statements involve known and unknown risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.

Given these uncertainties, investors and 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.

Today's commentary refers to our fourth quarter and full year ending December 31, 2007. Please note in the following commentary that financials for both the current and prior quarters and any reference to margin is after charging stock compensation expense and the effect on diluted shares on the adoption of SFAS Number 123R.

And with all of that said, I am going to hand the call over to John.

Thank you Ciaran. Good day ladies and gentlemen. We are very pleased to report another excellent performance by ICON for quarter four and for the full year.

The group's net revenue grew 40.1% over the comparable quarter last year from $128.9 million to $180.7 million of which 53% was earned in the U.S. and 47% in Europe and rest of the world.

Excluding the impact of DOCS, the European contract clinical staffing business which we acquired in July, the organic growth rate was 34%.

For the full year net revenue was up 38.4% from $455.6 million to $630.7 million. Again, excluding DOCS, the organic growth rate was 35.1%.

Operating income for the quarter after taking an SFAS stock compensation charge of $1.8 million was $19.8 million, representing a 43.4% increase over the same quarter last year.

Full year operating income after taking SFAS stock compensation charge of $5.7 million was $69.2 million, representing an increase of 44.8% over the prior year.

Group operating margin for the quarter was 11%, up from 10.7% in the same quarter last year. For the full year, the group operating margin rose 11% from 10.5% in the prior year.

The margin in our clinical business for the fourth quarter was 11.3%, up from 11.2% in the same quarter last year while for the full year it was 11.4% unchanged from last year.

Excluding the DOCS acquisition, clinical margin was 11.6% in the fourth quarter and 11.6% for the full year.

Our Central Laboratories operating margin in quarter four was 7% on revenues of $13.7 million, compared to a margin of 5.9% on revenues of $12.9 million in the same quarter last year.

In the full year, our Central Laboratory has achieved operating margins of 6.9% on revenues of $53.5 million compared to a margin of 3.5% on revenues of $46.7 million for the previous year.

Net income rose to $15.8 million from $11.4 million last year, representing 39.7% growth. EPS grew from $0.39 per share to $0.53 per share, a 35.9% increase. The effective tax rate for the quarter was 22%.

Full year net income increased to $55.9 million from $38.3 million last year, representing 46.1% growth. EPS grew from $1.33 per share last year to $1.88, a 41.4% increase. The effective tax rate for the full year was 22% compared with 25.1% last year.

Cash flow from operating activities was $23 million in the quarter. We invested $25.7 million on capital expenditure of which $11.5 million related to the expansion of our Dublin facility. To date we have invested $55 million in this development and anticipate that we will spend another $20 million to complete the project by the end of 2008. The balance of the capital expenditure in the quarter was related to the continuing expansion of our global infrastructure in line with our strong growth.

Full year cash flow from operations was $42.9 million. Capital expenditure was $75.4 million and we invested $40.6 million in the acquisition of DOCS International.

At December 31, 2007 net cash and short-term investments less debt amounted to $23.8 million compared to $97.9 million at the end of December 2006.

DSOs at the end of December were 66 days compared to 65 days at the end of quarter three and 53 days at the end of December 2006.

Gross business awards for the quarter were $366 million. Cancellations were $22 million or 6% of gross awards. Accordingly, net business wins were a record $344 million compared with $171 million in the same quarter last year. This represents an increase in net awards of 101% and a strong book-to-bill of 1.9.

Gross business awards for the year to date were $1.12 billion. Cancellations were $94 million or 8.4% of gross awards.

Net business wins were $1.027 billion, a new significant--new and significant milestone for ICON, compared to $665 million in the year ended 2006. This represents an increase in net awards of 54.4% and a book-to-bill for the full year of 1.6.

As a result our total backlog at the end of December was $1.3 billion, a 49% increase over last year. Of this backlog, we expect $589 million to be earned in the next four quarters, a coverage of approximately 77% of expected revenues.

2007 was another great year for ICON. Revenues, operating income and net income all grew strongly and business wins continued to be buoyant. As a result we have strong confidence in the outlook for 2008. We will continue to expand our overseas presence in 2008. In 2007 we established offices in a further six countries making a total of 36 countries where ICON is present.

This international strength is a competitive advantage as major pharmaceutical companies engage in more global clinical trials.

I would like to take this opportunity to thank our 5,700 staff in our 36 countries for their consistent contribution to our continuing success. Thank you.

Can we now have the first question, please?

Thank you. (OPERATOR INSTRUCTIONS) Our first question comes through from the line of Ian Hunter from Goodbody Stockbrokers. Please go ahead with your question.

Good afternoon gentlemen. Of course my question has to be on that great level of net new business wins that you've recorded this quarter. I'm just wondering if there's any large contracts within that or whether you've just got your usual contract sizes and there's been a large number of them coming through. And then maybe if we could get an idea of this split of those contracts between our usual ones-biotech, large cap, small cap, and maybe an idea of the split in the therapeutic area. Is there any shift away from oncology or something else coming into the picture that's caused this surge in business wins, and also on client concentration.

(multiple speakers)

The scale of the wins, Ian, as I think we've indicated in previous quarters has been on a pretty steady basis over the last year or two a couple of wins every quarter that are above the normal size and we've been doing about above $20 million and so on.

In the current quarter as you'd expect with the size of the wins, we had three wins over $30 million in the course of the quarter so that I think answers one of your questions. The rest are broadly based across, as always with the usual sort of mix.

In terms of the breakdown between large pharma and biotech in the quarter it was actually biased toward large pharma. It was about 60/40 in favor of large pharma, maybe a little more than 60/40 in favor of large pharma.

In terms of therapeutic areas oncology would continue to feature reasonably strongly but not in a completely unbiased or a completely biased way, skewed way. I haven't--we haven't broken down the wins for the quarter by therapeutic area but a rough estimate for you would be that oncology represents around 20% to 25% of the awards for the quarter.

And you had one other one, which is client concentration; that continues to broaden. I haven't got--

I do have the figures here. The largest client represents only 7.8%.

All right.

And if we look at the top five clients, it's 30% versus 35% last year; the top ten, 47% versus 52% last year and our top 25, 66% versus 72% so it's come down significantly.

Excellent. Now maybe just a quick drill down. The three big wins you said are over $30 million. Can we take it they are fairly well bedded down? I remember before, a good number of years ago you had one big contract and it started to come through. Maybe there was some difficulty in bringing the whole of it through into the system so--

--long memories.

Oh dear. It's getting shorter every year.

Yeah, they're all--they're all projects that are started. Obviously they're recent wins, so where it beds down, you could hardly call them that. But they're all started and we're pretty comfortable as to how they're going to run and we are comfortable in the forecast we have in relation to how the revenue from those will run over the coming year.

Okay, that's great. Thanks very much.

Thank you. Our next question comes through from the line of John Friedman of William Blair. Please go ahead with your question.

Hi, this is Natalie Friedman in for John. I was hoping you could talk a little bit more about the Healthcare Discoveries acquisition that was announced a couple of weeks ago in terms of what sort of revenue contribution we should expect from this acquisition. And then also now that you've made a phase I U.S. acquisition, can you talk about what areas you would now rank on the top of your list in terms of acquisition priorities?

I'm not going to answer the last one at all, Natalie, because I think I was talking about the phase I acquisition for three years and you all kept giving me a hard time about it, so.

But in terms of HCD, Healthcare Discoveries, revenue run rate we expect this year is around $10 million maybe up to $12 million. We're expecting it to be earnings neutral. Last week when I was at the UBS conference I was sharing with people that the business did make money in the second half of 2007, although it lost money overall in 2007. We expect it to be modestly profitable as they say during 2008 and, but to be earnings neutral for us.

There is--we have to integrate it; we have to help develop business development skills and so on, so that's why we think it'll be neutral for us in 2008.

Okay, great. And then can we also get the lab bookings in the quarter?

Lab bookings were $24 million, Nat, in the quarter.

Okay, okay, thank you.

Thank you. Our next question comes through from the line of Douglas Tsao from Lehman Brothers. Please go ahead with your question.

Hi, good morning. Just to start, could you provide the--I might have missed it--the Central Lab revenues in the quarter?

They were $13.7 million.

And are you expecting--you know the book-to-bill in the lab has been pretty strong in recent quarters but it hasn't necessarily translated into top line growth quite yet and I was just wondering if you could provide a little color around that.

I might ask Ian Hunter who has such a long memory to answer that one because if you remember, Doug, back three or four years ago when the lab was struggling, that was the great conundrum. We were getting very good bookings numbers and the revenues didn't seem to grow. So our experience generally with the lab is you get bookings, you get strong bookings for a number of quarters before it shows through in growth in revenues.

We are forecasting revenues will grow in 2008. We should see some uptake in revenue growth even in this quarter so I think we begin to see it flow through through 2008.

And when you think about the bookings in the lab, are you seeing any geographic changes?

No. We are obviously on a mission to expand the business and the--as you know our lab in the U.S. is much bigger in terms of size than our lab in Europe so we are trying to drive higher business wins in Europe and we're having some success with that. So there's a little bit more of the wins coming from Europe than in the past but I don't want to mislead you; still a significant majority of the bookings that we get in the lab come from the United States, are derived from our sales force in the United States.

And then turning to the cash flow from the quarter, it looked like DSOs were up sequentially by day. I mean it looks like it was largely driven by unbilled--the unbilled revenue account. Is that simply a function of contracting terms and when you're allowed to recognize--invoice clients? And do you see a need to perhaps change your contracting terms to get some--a little more forgiving revenue recognition?

I suppose the short answers are yes and no. It is a function of the contracting terms, the unbilled. We tend to bill on milestones; a lot of the, you know with this kind of revenue growth, a lot of large projects in there are the projects in startup and we go on the quarter like that. You can be working on them and recognizing the revenue and it just takes a while to get to the milestone. So we're not overly concerned for that.

And consequently, no. I mean we look at every contract when we negotiate it and we look at milestones and cash flow but contracts with two parties involved in the negotiation (inaudible) Doug and that we may not always get it exactly the way we would like to have it but there's no underlying problem in the structure of the contracts or in the way that we do it.

Okay. I wasn't trying to suggest there was a problem. I was just wondering if you thought there was--saw a need to perhaps to change the milestones to make the increments perhaps a little smaller or tighter perhaps that would--

If it were up to me, I'd look for 50% of all contracts in advance, you know. That's not going to happen. I think where I get comfortable when I look at this, if you look at the larger companies in this sector, our larger competitors, their DSOs are around the 66 to 70 mark in the most recent quarters that they've published and I think looking at the poll, the average DSO, the CRO poll and the most recent data points we've looked at is actually 66 days.

So it is a competitive market out there as well in terms of contracts and pricing and payment and milestones tend to have that element involved in it so we don't think we're significantly out of kilter with our significant competitors in the market so we'll always try where we can to get more cash more quickly but that would just depend on the issue of any contract.

Okay, great. Thanks. Congratulations on the quarter and the year.

Thank you.

Thank you. Our next question comes through from the line of Mark Healy from Davy. Please go ahead with your question.

Hi, gentlemen. Just two quick questions. First was the dollar impact. How do you think that affected the Q4 results and just the full year results? And secondly, the lab margins for Q4, you're saying they're around 7%. How do you think they're going to develop as we go into the current year (inaudible)?

On the ForEx, I mean the second half of the year we did have wins in foreign exchange but we won't overstate the significance. They drive the margins back a little bit. At the same time we do have contracts with clauses in them with certain elements around exchange protection, which kicks in when certain thresholds or parameters are reached, you know the exchange rate goes beyond a certain amount. So it had a negative effect on the quarter and it dragged the margin back by maybe 30 or 40 or 50 bps, but certainly it's not anything significant and nothing that we would overstate.

And in relation to your question on the lab, on our guidance call in December we talked about the fact that we see 2008 as an investment year for the lab. We are making further investments in Singapore. We're going to be making investments in setting up a lab in India. So as a result we're--we gave guidance that we expected margins for the lab to exit 2008 between 8% and 9% so the--we expect to make progress in the course of the year but modest progress relative to where we are because of the investment phase we're in with the lab.

Okay and just finally, how do you see trading conditions so far this year in the first quarter?

Well, the business environment, obviously as the bookings for quarter four demonstrates, has continued to be very strong. RFP flows this quarter continued to be very encouraging as well so we're pretty comfortable and confident about the outlook, the continuing outlook for 2008.

Okay, great. Thanks guys.

Thank you. Our next question comes through from the line of Sandy Draper from Raymond James. Please go ahead with your question.

Thanks and good afternoon and congratulations on a great quarter and a great year. My question has really been somewhat asked but maybe it's a little bit more detail in terms of the, what I look at as sort of the backlog pull through or how fast you're converting revenue. You actually, while a few quarters don't make a trend, seem to be one of the few CROs that are actually converting backlog at a stable to an accelerating level and while obviously you can't comment on the specifics at your competitors, is there anything you think you do better or you're focused on in terms of turning backlog into revenue? Thanks.

Thanks for the congratulations and the answer again, taking the cue from Ciaran, the short answer is no. I don't think it's a function of us being better than our competition in this regard. Running clinical trials is a complex--is a complex and time consuming and somewhat unpredictable exercise. And what's in your backlog can be very different from company to company in terms of the duration of projects, the mix of therapeutic areas and so on.

So one CRO's burn rate of X percent can be another CRO's burn rate of Y percent because of those differences in the composition of the backlog. I don't think they are comparable; they're not apples to apples.

We obviously to satisfy our clients put a lot of focus on trying, when we get awarded a project, to getting it up as quickly as possible, getting patients recruited as quickly as possible, but I'm certain all of our competitors are trying to do exactly the same thing and I wouldn't dare to claim that we are superior to the competition in that regard.

It's a tough, tough market out there. It's very difficult to recruit patients today. That's why everyone is globalizing and I suspect the difference is in the composition of backlog.

Great, thank you.

Thank you. There are no further questions at this time. (OPERATOR INSTRUCTIONS).

I have a question coming through from the line of Eric Coldwell from Baird. Please go ahead with your question.

Thank you. Can you hear me?

Can indeed.

Great, good job. Nice quarter. First question relates to the Central Lab. I'm just curious if we can get an update of the facility move in Dublin, where you stand with that process?

We are in June, Eric--and let's clarify that. We're not moving the lab but what we are doing is through the completion of construction on the new extension, we'll be moving people out of the building the lab currently occupies, which will be freeing up space and the lab will be then taking over some of that space and expanding its capacity. So that--

Right, right.

The space gets vacated in June and the lab will begin to build into it in the June to September time frame.

Great. Thank you. In the past I think not that it's overly material but we've had some questions on phase I and in Europe and Japan, our Japanese profitability, you've given updates in recent quarters on how those two divisions are tracking. Can you give us an update on 4Q?

Good progress again; both were profitable, phase I and Japan were profitable in the quarter, not at the margin levels that we would aspire to, that we believe they're capable of achieving, but we've made good progress and we expect as part of our--as part of the factors, they're going to help us to continue to expand margins. In 2008 we expect them to continue to improve.

That's great. Any guidance on the company's expectation for a net increase in head count in the calendar year?

Well, again guidance is for top line growth of around 22% to 26% or something I think is the range; would expect head count to grow at close to that without you know, being more specific, Eric. I wouldn't expect there to be enormous leverage so we would expect head count to grow somewhere in excess of 20% this year.

Okay. Thank you. Final question, there has been increasing commentary among the clinical CROs that perhaps some sponsors are looking to again revisit how they outsource, how they think about their product development activities and we've had this theme of increasing strategic outsourcing for years but we're now hearing cases of pharmas actually looking to perhaps transition their clinical teams over to a CRO and strike a long-term deal where the CRO would perhaps take the sponsor's staff and maybe get a 50% or 75% guarantee on revenue from that sponsor and then be able to use that staff for other sponsors as well.

Are--we've seen one of those deals recently with one of your competitors. Are you guys getting involved in these discussions? What's your view on those discussions, if they're occurring?

I think if you recall, again Eric, on the guidance call I specifically referred to the fact that we were seeing an increasing incidence of major companies engaging in such dialogue--

Right.

--with us. The specifics that you refer to would be I think an exception rather than the rule. The people are talking about outsourcing more strategically but not all, in fact I would say not even many are talking about it in the terms that you've mentioned there of transferring staff over, etcetera.

Those kinds of deals have been done in the past. There were two or three of them done back in the 90s so it's--that's not a new concept. I think what is new is that strategic thinking and strategic talking is taking place on a broad basis across many large pharma companies concurrently whereas in the past it tended to be a single company perhaps thinking that way and not necessarily being followed by its peers.

So I think the climate has changed; the methodology by which people are trying to achieve that may be different on a case by case basis.

Okay. Thanks very much for the comments.

Thank you. Our next question comes through from Steve Unger from Bear Stearns. Please go ahead with your question.

Hi, good morning.

Hi, Steve.

Quick question just on the--or a couple of questions actually--the Central Lab backlog, I just want to true that up. Is that $125 million?

There's a technical and detailed question for me. I think it was last, the previous quarter I think it was around that level so with 14 or 13 or whatever it is, $14 million of revenues and roughly $24 million of bookings, roughly, that means it's probably up around [135].

It was 114 the last time so it should be around 124--

Oh, I'm sorry, okay.

--or 125 this time.

Okay.

Awesome, great. And then in looking at the P&L, the interest, the net interest income, could you split that out between interest income and interest expense?

Not really, Steve. I don't have those figures at hand. We just look at it on a net basis to be honest.

Okay, but it just seems a little strange to me that that level would go up and the cash level didn't really go up but the interest income went up. Is there something on there that I should know?

No, there's not. I mean, that debt, remember, you're looking at the debt level at a point in the quarter, you know. They've been up and down at various times during the quarter and the interest rate would be calculated based on the average daily debt balance, not necessarily what was there at the end of the quarter. So, and I wouldn't read too much into that.

Okay. And then last question, just in terms of the new business that you're generating, could you talk about where that's coming from geographically and how you're structuring the contracts? Are you--could you give us maybe a percentage of new business that's being booked in foreign currencies, the euros and pounds?

Taking a lead from Ciaran's book, the answer is no, I can't. I certainly don't have the details. I wouldn't have the data to--off the top of my head the currency the contracts have been booked in and in fact those are matter--sometimes we bid in one currency but then when it becomes clear that the majority of the work is being done in Europe for example, perhaps we would agree with the client that the contract would be denominated in euros rather than dollars as originally--

So that moves around a bit and we're obviously because of the movements in currency, highly--we're a lot more sensitive to it now than we were 12 months ago and we're having more negotiations with clients about currency.

In terms of where it's booked, I almost regard where it's booked as irrelevant because it's not where it's booked, it's where is the work going to be done that matters to us. So I would estimate that 60% of our contracts are from awards made by decision makers in the United States, but probably the way the business is tracking at the moment, 60% of the work is being done outside of the United States.

Okay. And then is there any estimate you could give me of how much of your bookings are being booked in a foreign currency?

No, I can't. I don't--

You can't--not even--okay. All right. Thank you.

Thanks Steve.

Thank you. We have a follow-up question from the line of Douglas Tsao from Lehman Brothers. Please go ahead with your question.

Good morning again. Thanks for taking the follow-up. In terms of the Japanese business, is this a function of simply driving more volume through the same cost structure or are you--do you continue to add head count in Japan?

We continue to add head count in Japan, Doug. Obviously we were building a critical mass in Japan because you have to have a certain amount of infrastructure to support any clinical business. And then what we're adding is productive head count; billable head count is being added and that's what turns us or has brought us from loss making to profitability is the number of billable staff. And the recovery on those billable staff has been improving since mid last year.

Okay, and then along those same lines, I was wondering if you could provide an update on the operating margin for the U.S. clinical business?

No. We don't break down the operating margin by them. I think your question may be as directed as in the past we had indicated that we were a little disappointed with the margins in the U.S. business and felt that they could be improved. They have been significantly improved over the last year. Unfortunately, at the same time, currency fluctuations have meant that the margins in the European business haven't been as good.

So the gains made in the U.S. have been offset by the challenges in Europe but that's not to indicate that the margins in Europe are bad but just to say they're not as good as they were a year ago largely because of currency fluctuation issues.

And the improvement in the U.S. business is largely due to sort of better capture on the billable hours?

It's--yes, again the short answer is yes. That would be a major factor. There would be other factors as well.

Okay, great. Thank you very much.

Thank you. I also had a question come through from Stephen Shankman from Natixis. Please go ahead with your question.

Thank you and good afternoon. Maybe I missed it but could you please confirm 2008 guidance?

Ah, we gave it back in December and if you can listen to it I think on a recorded conference call on our website.

Right, but I was saying there was no--I didn't see--

Oh, sorry. Can we confirm it is unchanged? Yes, we can confirm it is unchanged.

Okay and just to be clear, that does not include the contribution on the revenue side from HCD?

That is correct.

Okay, great. Thanks very much.

Thank you. There are no further questions now so I will hand you back to your host to conclude today's conference call. Thank you.

Well thank you very much for joining us today. We are delighted with our performance in 2007 and we look forward with confidence in 2008. Thank you once again.