ICON PLC (ICLR) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the first-quarter 2008 ICON plc earnings conference call. My name is Stephie and I will be your coordinator for today's conference.

For the duration of the call you will be on listen-only, however, at the end of the call, you will have the opportunity to ask questions. (OPERATOR INSTRUCTIONS)

I am now handing you over to Ciaran Murray, Chief Financial Officer, to begin today's conference.

Good day, ladies and gentlemen. Thanks for joining us on the call today covering the quarter ended March 31, 2008. Beside me today I have Dr. John Climax, our Chairman, and Mr. Peter Gray, our CEO.

Before I hand the call over to John, I would just 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 conditions and prospects. Because such statements involve known and unknown risks and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements.

Given these uncertainties, investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. 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 first quarter ending March 31, 2008. Please note in the following commentary financials for both current and prior quarters and any reference to margin is after charging stock compensation expense and the effect on diluted shares of the adoption of SFAS 123(R).

And having said all of that, I'm 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 in quarter one 2008.

The group's net revenue grew 48% from $136.1 million in quarter one last year to $201.3 million, exceeding $200 million a quarter for the first time. This is a significant milestone for ICON.

Excluding the impact of DOCS, the European contract clinical staffing business which was acquired in July 2007 and HCD, the U.S. Phase 1 unit which we acquired in February 2008, the organic growth rate was 40%. Excluding the impact of currency, the organic growth rate was 36%.

Operating income for the quarter after taking SFAS compensation charge of $1.3 million was $21.5 million representing a 46.4% increase over the same quarter last year.

Group operating margin for the quarter was 10.7% compared to 10.8% in the same quarter last year. However, excluding currency impact, margin would have been 12%.

The margin in our clinical business for the quarter was 11% compared to 11.3% in the same quarter last year. As a consequence of our rapid growth, we continue to invest in infrastructure, management and resources. Nonetheless, were it not for currency factors, margins would have been 12.4%.

The Central Laboratories revenue grew by 19.7% to $16.4 million and achieved operating margin of 7.5% compared with 6% for the same quarter last year.

Net business wins in the quarter were $27.1 million, representing a book-to-bill of 1.7. We are very pleased with the progress being made and are continuing to invest in this division.

Group net income rose to $16.9 million from $12.3 million last year, representing 37.7% growth. EPS grew from $0.42 per share to $0.56 per share, a 33.3% increase. The effective tax rate for the quarter was 19.8%.

DSOs at the end of March were 67 days compared to 66 days at the end of December 2007. The exceptional quarter-on-quarter gross revenue growth of 18% required significant investment in working capital, and as a result, cash flow used in operating activities was $12.3 million in the quarter.

In addition, we invested $16.5 million on capital expenditure, which is related to the continuing expansion of our global infrastructure in line with our growth. And we acquired HCD, a Phase 1 unit based in San Antonio for $11 million.

At 31st March, the company's net debt amounted to $20.2 million compared to net cash of $23.8 million at December 31, 2007.

Gross business award for the quarter was $440 million. Cancellations were $71 million or 16% of gross awards. Accordingly, net business wins were a record $369 million compared with $223 million in the same quarter last year. This represents an increase in net awards of 65% and a strong book-to-bill of 1.8.

As a result our total backlog at the end of March was $1.49 billion, a 54% increase over last year. Of this backlog we expect $690 million to be earned in the next four quarters, a coverage of approximately 82% of expected revenues.

As a result of this high level of coverage, we are revising our guidance. We now expect revenues for 2008 to be in the range of $840 million to $860 million, which brings our coverage ratio for the next four quarters back to 76%. We expect EPS for 2008 in the range of $2.35 to $2.45.

Quarter one represents an excellent start to 2008. RFP flows continue to be strong and we had record level of business awarded in the first quarter.

During the quarter we passed a further milestone, exceeding 6,000 staff for the first time. I would like to thank every one of our people in our 68 offices in 36 countries for their magnificent contribution to our continuing success.

Can we now have the first question please?

(OPERATOR INSTRUCTIONS) The first question comes through from the line of Ian Hunter from Goodbody Stockbrokers. Please go ahead.

Good afternoon, gentlemen. I was just wondering to what extent contracts are priced and/or won in euros, dollars and pounds. I can remember in the past you said most of it was in dollars and I was just wondering what the FX effect might be on the net new business wins that you have this quarter. And also maybe an idea of the operational exposure to the change effect, the currency exchange rates as they are now. I was just thinking of the euro exposure with the HQ here and your European operations.

I'm trying to decipher the second part of your question, Ian, but let me address your first one first, which is around the currencies in which contracts are denominated.

As we indicated at the time of our guidance back in December, I think because of the globalization of clinical research, a significant number of our contracts are U.S. dollar denominated even though a significant proportion of the work is to be executed outside of the United States. And that is one of the headwinds that we I think identified as a risk when we were giving guidance, and that one of the headwinds that had impacted on us in the first quarter and has held back margins a little bit.

We are obviously conscious of that and the new awards that we have been negotiating, we are endeavoring to get a better balance from a currency perspective. And where the majority of the work is to be carried out outside of the United States, we are trying to negotiate that the contracts will be in a currency other than U.S. dollars.

We've had some success with that, but it would be, I think too much detail and probably misleading, if I was to give some statistics on what the proportion is today. Suffice to say that we are endeavoring to bring more of those contracts into euro. I also I think on the guidance call in December indicated that quite a number of our contracts, even though they may be denominated in U.S. dollars, have currency fluctuation clauses that is the case.

We are negotiating with our clients around those clauses to get some compensation for the impacts of currency, but again as I think I explained at that time, typically the clauses in contracts do not compensate for all of the movement. There is effectively a collar effect where the first portion of currency movement is not recoverable, so hence some of the impacts on our margins.

That's a very detailed answer to your question but I hope it answers the question.

The second part of your question, could you repeat that, please?

I think, well, thank you very much for that part of it. I was just looking at the level of expense in the HQ side here, which would be in euros. (Inaudible) the overall expense to give an idea of the exposure of the euro here.

Well it's much more than just the--Hi Ian, it's Ciaran. It's much more than just the European head office here that's in euros and there are a whole lot of euros--

Yes.

So I mean, you wouldn't expect to see anything different from what you've already seen in Q3 and Q4 and again in Q1 in terms of just the drag on our operating margin and it very much depends on the level of fluctuation in the U.S. dollar.

Okay, that's grand. Maybe just one last question, my usual one on the business wins, but not quite so comprehensive as the last time. I'm just wondering if there's any unusual big wins in the 369 that you've recorded or are they just the usual scale and maybe just to give us an update on what the usual scale is nowadays.

I was going to say, Ian, it's not unusual to have big wins so, and of course we have quite a number of significant sized wins. I think there are something of the order of 16 wins in the quarter above $5 million.

Okay.

And I prefer not to go into greater granularity than that.

That's fine. Thanks very much.

Thank you. The next question comes through from the line of Randall Stanicky from Goldman Sachs. Please go ahead.

Hey, great, thanks very much for the question guys. Peter, just a couple here. First, given what has been extremely strong booking strength for you guys obviously, does that translate at all at some point to better clinical pricing and would that ultimately have a better impact on the margins? Or I guess, said differently, as you look at your book of backlog right now, do you feel better about the pricing dynamics around that?

It's something, Randall that we've been obviously trying to achieve. In a very strong market place, one always has the desire to get better pricing. We have tried to do that. But against that, in some of the developing economies where more and more of the work has been directed, inflation rates are quite high, so, and obviously currency fluctuations are another factor in there.

So I suppose the short answer to the question is yes, we're trying to do that. Do I feel confident that the backlog has better pricing in it? No. When I take inflation and currency factors into account, I would not be so bold as to say I'm confident that there's better margin in the backlog.

And looking at the backlog, and one of the metrics that we look at is backlog per employee just trying to get an understanding of where head count is going to support some of that future revenue translation. Is that I guess first a metric that you guys care about? And then second, obviously you've been hiring very aggressively. Do you think that hiring trajectory needs to continue to increase and is there--are there CRAs and clinical project people out there that are hirable to, obviously, to bring into the organization?

I suppose the answer, the flip answer to that, Randall, is we've added 1,200 people in the last year. We added 340 people in the last quarter. They're out there because we keep finding them and the head count continues to grow.

One of the things we've been--we've emphasized and we continue to emphasize is we're acutely conscious with the strength of bookings that we're achieving that we do not want ICON's reputation to be damaged in any way and so if anything we're hiring ahead of the curve. Our recovery in the quarter, which is our measure of recovery of billable time for our billable staff, actually declined a little in the quarter, which is indicative of the fact that we've been aggressively hiring to ensure that we have the people in place to service the commitments we're making to our clients.

So one more answer to your question is we continue to hire aggressively and we're not encountering difficulty in meeting our needs. Obviously with the bookings that we're continuing to achieve, we expect that we'll continue to hire strongly through the year as long as bookings continue to be as strong as this.

And you talked about before, hiring at--I think last quarter you talked about hiring at or above the rate or around the rate of revenue growth. Given, again the bookings have been really strong, given that rate of booking strength, do you think you need to hire ahead of revenue growth this year or is the amount of head count that you added during the quarter a way we should think about the sequential FTE adds throughout the year?

You guys are at a greater level of granularity on this than we are to be honest. We look at the commitments that we make. We look at the commitments that we think we're going to win. We measure that against the people we have available or have coming available and we make decisions almost on a weekly basis about how many hires we need to make.

So we don't try and predict that we're going to do this or that or the other in six months time. We predict what we're going to do this week and next week and probably in the next month and that's as far out as we go, because ours is a very dynamic business and we have to respond very quickly to changes in demand.

That's great. And then lastly, if I missed it I apologize, but could you talk about the margin targets for your Central Lab? I think you said 8.5% to 9% as a target before. Is that still in place?

Yes it is. We made some progress this quarter and as John said in his comments, we're--7.5% is what we did this quarter. We continue to expect that we will edge those margins upwards. The Lab is not immune from the currency factors as well because most of their contracts are in U.S. dollars and yet they've a significant and growing facility here in Dublin that has a cost base in euros. So they have a little bit of headwind against them also on the currency side but we do expect to get into that 8% to 9% range during this year.

That's great. Thanks very much, Peter.

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

Hi, thanks very much. I had a question about your latest thinking on the amount of growth that you can manage. It looks like with your new guidance this will be the third year of revenue growth above 30%. I know some of your larger peers have talked about in the past the fact that it's tough to manage growth above about 20%. Do you feel--what's the point at which you start to get uncomfortable and actually start to price at a level where perhaps you're trying to turn away business?

I suppose again the smart answer here would be, John, is this is our third year so we're getting good at it now. We've said, we've consistently said that we do try to manage the bookings to a degree and we are selective around the business that we chase. I think one of the factors you have to continue to remember is that these high book-to-bills are not always directly comparable and that there are some of the larger projects that we win, they're of long duration and therefore they don't have necessarily the same pressure impact on our ability to manage as a normal, smaller sized project might.

But our ability to manage this is something obviously we pay huge attention to. As I mentioned to Randall there on his last question, one of the things we did in the last quarter was actually see our recovery decline a little bit on our billable staff, which is indicative of the fact that we're continuing to try and hire ahead of the curve and not get ourselves in a position where we haven't got the resources to meet our commitments.

The quality systems that we have, the number of audits--. If you remember on our investor day we talked about the huge numbers of audits that we conduct internally and the huge number of audits that our clients conduct and regulatory agencies conduct, so we are monitoring very closely how well we are managing in this high growth environment.

And we're comfortable that we are doing that well. But we are being selective in the opportunities that we pursue, but we're still obviously having a very high level of success.

Thanks. Given that level of growth, has your thinking about cash flow generation this year changed at all?

Ciaran?

Everyone looked at me on that one, John. It has. I think Q1 what we saw was a particularly strong increase in the level of our growth. Revenues, they increased 18% and of course it's the gross revenue that drives how much cash we have tied up in working capital and in pass-throughs and things to the extent that they're not offset by advances.

So if we continue posting 18% numbers in quarterly gross revenue growth, it would change how we would look at cash flow. It's difficult to be too cash positive at that level, but broadly speaking, the fundamentals that we talked about at the last call haven't really changed in terms of what we expect to do with CapEx and acquisitions.

So the only variable that we wonder about is what happens to the investment in AR and it's a very simple equation this quarter. We had $170 million of net AR at the end of Q4 and it increased exactly 18%, which was what happened in gross revenue.

So I suppose it's the long way of me saying that how long is a piece of string here and we can look forward. We control what we can control in terms of the cash levers, but to some extent, we are hostages to the relationship in working capital and how much you need to fund this growth.

I suppose that's a nice problem to have.

Show me a business that doesn't need investment as it grows very strongly, John, and I'd love to be an investor in that. So I think the feature of this strong growth is we have to invest in working capital.

We do. The one thing we are trying to do are--we saw the DSO move from the 50s up the mid-60s a couple of quarters ago and we've kind of stuck there. We're still concentrating on that and we're not being complacent about it. We have objectives to move our working capital downwards by moving our DSO towards 60.

But you know, I've been through it before and detailed the amount of moving pieces and the time that it takes. It just takes a little bit of time to get there and I suppose the one sign of encouragement that I did see in the DSO this quarter, while the overall level was the same, more of it moved from the unbilled to the billed category so before you can collect it you've got to bill it. So we have made progress in that front and hopefully we see collections pick up through the quarter and see some improvement by the end of next quarter.

Great. And then just one last question on margins. It sounds like just growth and FX is the primary driver, but I think in the past you've talked about Japan and Phase 1 and even staffing as being areas where you still had room to go in terms of optimizing the profitability. Any updates there?

Sure. I suppose that it's disappointing that foreign exchange has got in the way now of really solid progress that we're making, as John indicated in his comments. If you excluded the foreign exchange impact in the quarter, we would have got the margins up to 12%, which would have been really solid progress.

And one of the contributors to that is Japan. Japan is now solidly profitable at the kind of margins that we like to see in the rest of the clinical business. So we're pleased with the progress there.

Both Phase 1 units were profitable in the quarter but still in single digits. We expected HCD to be in single digits. We hoped that the Manchester unit would get to double digits this quarter, but they had a few delays. But they're still making solid profitability. They're still making solid profits and we're pleased with the progress they've made.

And on the staffing business, as we indicated, DOCS, we acquired it at low single digits and it is to make progress into double digits during this year. It didn't quite make as much progress this quarter as they had planned. They were a little bit behind plan, but we're comfortable that they will make solid progress as the year progresses.

Thanks very much.

Thank you. The next question comes through from the line of Sam Farthing from Merrion. Please go ahead.

Hi guys. Thanks for taking the call. I was just wondering, for a bit of clarity, you've got in one of the slides there an Ex Forex adjusted margin for the clinical core business. I was just wondering if you could provide the same detail for Q4 and Q3 of last year in terms of what the margin would have been Ex Forex.

I don't have those data points to add, Sam, but if I had to guess I might say you'd see broadly the same pattern.

And I guess given Peter's comments about hiring ahead of the curve, I'm just wondering if the underlying margin is still improving?

As I said to John's question there, Sam, the answer to that is, yes, because Japan has improved, the Phase 1 businesses have improved. So the businesses that we have identified as ones which needed to make some improvement have all shown some improvement. So if we hadn't got the currency noise there, I think you would have seen improvement this quarter over last and over previous ones.

Okay. The other question is we had a share split around these levels I guess in '06. Any talk of that or what's your latest thinking on--?

If there's any talk of it, do you think we'd be talking about it on this call, Sam?

Probably not. Okay, fine. Any update on India then as the last question?

In what sense?

Sorry, the lab in India and how that's progressing.

Yes, that's--we've hired a couple of key people. We've identified a premises and I think have signed a preliminary lease agreement on that and the working on fitting it out has begun, so we're on our way. The plan is that the lab will be operational by September, but obviously this has some money to be spent between now and then to get it up and running and get the people in place.

Okay, thanks.

Thank you. The next question comes through from the line of Eric Coldwell from Robert Baird. Please go ahead.

Thank you. Peter, you actually stole my thunder. You talked about Phase 1, Japan and DOCS, and those were my primary questions. I guess just as a quick follow up, if I do the math on the revenue, it looks like DOCS generated sales in the quarter of somewhere in the neighborhood of $10 million. Can I just get maybe a verification of that?

I think it was just under that, Eric. Ciaran, can you verify that DOCS revenue is just under $10 million?

Yes, yes, just under $10 million.

Okay, and at the time of purchase, the trailing 12-month revenue run rate for DOCS was about $30 million? Is that accurate?

Just a little over, I think.

Just a little over $30 million? Okay, sounds good. Thanks very much.

Thank you. The next question comes through from the line of Jack Gorman from Davy. Please go ahead.

Thank you very much. I have two quick questions, please. Firstly, on both your business wins this quarter and the backlog overall, can you just give us a flavor for the mix of those wins and then the backlog with regard to big pharma/biotech breakdown?

The breakdown was still about 50/50. Around 50/50, Jack, between big pharma and others. And as I mentioned earlier to I think Ian as well, we had about 16 awards over $5 million in value and I'd prefer not to get into any more granularity in relation to how much above $5 million.

Okay and does that 50/50 apply both to backlog and to business wins, Peter?

That's with the business wins. I don't have that breakdown, Jack, in relation to backlog.

Okay. No problem.

I guess it's somewhere around there when I look at the pattern of business wins over the last year or two. I'd say it's perhaps 55/45 would be what the backlog would look like but that's large pharma against everyone else, not just biotech.

Understood. And secondly, can you give us any flavor if you can on the new business wins this quarter with regard to contract duration? Obviously there's an implication that there are larger and longer contracts in place, but can you give us any further color on that?

Well, it's difficult really to parse it when you're talking about gross awards of over $400 million. It's hard to generalize. But as we've talked about and I think as our competition have talked about, there's a general trend of projects being more complex, more geographically dispersed and hence of longer duration in general. But parsing it to any greater level of detail than that, I don't think I have the data to do so, Jack.

Okay.

One thing I might add there, Jack, is that in Q4 our backlog burn was 16%, our opening backlog to revenue. In Q1 it reduced to 15.5%, which is something we did talk about around the guidance call at year end. I'm just seeing a trend for longer duration, but as Peter says, I don't see that this quarter was any different from the last couple.

Okay, that's great. Thank you guys.

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

Thanks. Just a couple of questions. I want to make sure I understand the comments around the organic growth. There was I think one number that was maybe just purely organic, excluding acquisitions, and then another that was FX. Could you just run through those numbers again?

The top line obviously revenue growth, Sandy, was 48%. If you take out DOCS and HCD, neither of which were there a year ago, the organic growth rate is 40%. And if you take out the impact of foreign exchange translation on the revenues compared to last year, in other words if you do it on a constant currency basis, the organic growth rate is 36%.

Okay, perfect. That's what I needed to know. And then the second question, I just want to make sure I understand it. On the backlog forecast, it sounds like you're now increasing that up to 82%. On the slide there's a 76% and an 82% in the first quarter. I'm just trying to understand, are you trending out one, but saying you expect to be higher? I just want to make sure I've got the message straight there.

The 82% is based on the guidance, the old guidance. The 76% is based on the revised guidance that we've now issued to you today.

Oh, okay, okay, great. I missed that. And then finally, I'm not sure if--how you can comment on this, but Covance on their call this morning talked about a trend where they were actually, instead of getting a preferred provider agreement, got a primary provider agreement where they are, I guess it's five therapeutics. Basically they have the exclusivity on some deals. Is that something you would think is one off or are you starting to see those types of bids out there where pharmas coming and saying we'd like to give you all our business in one therapeutic or multiple therapeutics, I guess?

I think as we've talked, and again I talked a little bit about this on our guidance call in December, and talked about the fact that we were seeing evidence of more strategic thinking in outsourcing. That is one of the trains of thought in strategic outsourcing. So there are some companies who are looking at it from the point of view of being more strategic and perhaps selecting certain CROs for a certain therapeutic area or for a certain basket of therapeutic areas. So that would not be uncommon in our experience over the last six to 12 months.

Okay, great. Thank you very much and congratulations on a good quarter.

Thanks, Sandy.

Thank you. The next question comes through from the line of Paraic Quinn from NCB. Please go ahead.

Hi, thanks for taking my call. My question was in relation to the December guidance. At the time of the December guidance call for the clinical segment, you expected the margins of the [up] segment to exit as (inaudible) at 12% to 12.4%. I'm just wondering, in light of the currency impacts, whether that has shifted any?

Obviously implied from our comments today, yes, it is. It's implied. We would expect at least 8% or around a percentage impact on margins through the year, so exiting the year at somewhere around 11% or a little over 11% is more likely given current currency impact.

That's good. I was just trying to get a figure on that. Thank you.

Thank you ladies and gentlemen, there are no further questions in queue. (OPERATOR INSTRUCTIONS)

We've got another question coming through from the line of Dave Windley from Jeffries. Please go ahead.

Hi. It helps if I hit the right button on the phone. Thanks for taking the questions. Congratulations on the quarter. Peter, you said you don't want to elaborate on new business., so I'm going to ask you in a different way. Would you be willing to quantify the largest contract in backlog?

The largest contract in backlog. No, I wouldn't actually, David.

He might be taking lessons from Ciaran here.

I'm prepared to say it's greater than $1 million.

So you're learning how to say no? How about if not dollars, how about duration?

The longest duration project in the backlog currently is approximately five and a half years.

Five and a half years, okay. And obviously the new business wins are fantastic. Not trying to rain on that at all, your cancellations were a little higher this quarter. Certainly they normally run very, very low. Wondering if, just in terms of thinking about the gaining of the quarters in revenue and so forth, were there any of those cancellations that were up and running where we would need to account for transition of staff off of projects onto new ones in the second quarter?

I'm trying to understand what that means, Dave, but I think what you're saying is--

Utilization impact from--

Are any of those cancellations ones of immediate effect that will disrupt our revenue flow, is that--?

Yes. Yes, thank you.

I guess all cancellations, if they're up and running and if there's people working on them, potentially do that. Usually if there are patients recruited on a study, for example, you have to have some wind down, so it's not an immediate bang. And obviously in circumstance where our bookings are as strong as they are, we're in a very good position to quickly transition people across from one project to another. So we're not anticipating that there'd be any disruption that would be visible quarter on quarter.

Okay. Is there--in the increase, is there any thread of consistency among these cancellations, pipeline re-evaluation, things like that or are these just compound failures?

I understand where you're going here. Is there anything that we should be getting worried about? Are there any trends that the industry should be aware of that we should get anxious about, and I guess the answer to that is no.

Okay, okay.

I'll have you know we have historically pretty low--

Very.

--pretty low cancellations so it's really upsetting for us to see cancellations go above 15%. But I guess that happens from time to time. But nothing sinister in it, nothing that we can see in it that speaks to any new developments.

Okay, fine. And you've commented about the improving profitability and activity in the Phase 1 operation. I may have not had the luxury of hearing your comments in the past about how HCD will fit in and how your facilities will or will not work together. I'd appreciate it if you could enlighten me a little bit there and also are you satiated for the time being on Phase 1 or is that still an area where you're actively looking to add?

The last part of your question first, I don't think we're--we're certainly not actively looking for other Phase 1 acquisition opportunities currently. That's not to say we wouldn't like to continue to grow that business. We think Phase 1--there's plenty of growth available in Phase 1 and we would like to capitalize on that growth. Whether it's through organic growth and expansion of the facilities we have or through some other initiative or acquisition in the future, who knows?

But we're not satiated in the sense that this is it and we won't have any more beds. I think we would certainly aspire to expanding our capacity in a modest way over the future.

And because I've now rattled out so long in answering that part of your question, I've forgotten what the first part of your question.

Just how do we view with the UK operation and the HCD, how are they going to work together? How does that leverage?

First of all, our IDS business, ICON Development Solutions, which is our consulting and early phase clinical development group, have had a presence in the U.S. for a long time, have been advising clients on their clinical plans and have been helping them set up Phase 1 studies. And many of those clients have been more comfortable to see those studies done in the United States.

So the first point of synergy for us in acquiring HCD is we hope that the clients that we have been advising in the past on conducting their Phase 1 studies in the U.S. will now place those Phase 1 studies with ICON's unit--

Right.

--rather than with third-party units. So that's the first point to synergy.

Secondly, Manchester, as we've always talked about, is a very high science unit. It has developed quite a number of pharmacodynamic models over the years, which we are hoping we can transfer that know-how and that expertise into HCD so that we can offer those models in the United States as well.

So those are the aspirations, or a couple of the aspirations that we have for creating synergies between the two units. The management teams are very much aligned and working together. The business development teams are also aligned and sharing opportunities with each other so we're seeing, and foresee, significant synergies between the two over time.

On the tax rate, I missed comments on that if there were any, but the tax rate dropped a little bit. Is that now a new sustainable level or was that just quarterly fluctuation?

We reported an effective tax rate of 19.8%, Dave, and I think we said in the guidance we expect it to be around 20% for the year so I think that's close enough.

Okay.

20% is about the rate. Obviously some quarters might be 20.5% and others may be 19.5%, but it'll be that kind of range. But it is our long-term sustainable tax rate.

Okay and then last question, kind of dovetailing on one of Sandy's questions, on the strategic thinking and some pharmaceutical companies looking at possibly assigning a primary CRO, you've won, I guess there's really two questions in this, Peter. You're winning a tremendous amount of business and what do you think--what are ICON's winning factors.

And then if we move toward a model where individual CROs are being chosen to get 100% or nearly 100% of a basket of work, how does ICON position against those types of opportunities?

What are the winning factors? I guess we've talked about this before. In a service business, Dave, the differentiators are nebulous. But I think as everyone knows at this stage, ICON has prized itself on its focus on quality and customer service. But ultimately customer service comes down to delivering projects on time, as close to time as possible, and on budget.

And we've obviously been doing a good job on that, because customers keep coming back to us and we keep winning more business. And the surveys that have been done around the industry seem to indicate that clients have a very positive perception of ICON. So those are the winning factors.

I think that ultimately the winning factors in this business are delivery, executing on projects, excellence and that's what we try to do every day.

In terms of baskets of work and being the preferred partner for a particular therapeutic area, we're very comfortable on that as you've again will have seen from many of our past presentations. We have a very broad therapeutic base of expertise. We have strategically, as a company, always endeavored to maintain a broad range of expertise in different therapeutic areas.

So we think we're well positioned to service any client in almost any therapeutic area that they choose. And we think we have a very good story to sell and to tell as clients evaluate CROs on those bases.

Thank you very much. Congratulations again.

Thanks Dave.

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

Hi, good morning. Peter, in terms of the new business when it is certainly over the last couple of years sort of jumped sort of in a step function, and what I mean by that is, we sort of--you achieve a certain level and it stays kind of flat for a few quarters and it takes a step up and then it stays flat and then jumps up again. And it certainly hasn't been a linear increase. And I was just wondering if you could provide some commentary on what you believe explains the increase in this manner.

That's a difficult one to answer, Doug. I've looked at the graphs as well and you're right. There have been two periods of step change, a plateau and then a step up and a plateau and a step up. Don't have a simple answer to it. It's opportunities come, sometimes they're bigger opportunities that come and that help you to take that step up. Sometimes it is working hard on a particular client relationship or series of client relationships that come together at one time and bring in more business.

There isn't again a single answer to this. It's a case of relentlessly working away at executing well and a business development team that relentlessly seeks opportunities, brings them in, and hopefully, we win a greater proportion of them as time goes by.

Okay. And then also in terms of the new business wins, clearly you've spoken about the increase in size of projects and sort of at the investor day gave some comments about more patients and more geographies. I was wondering, is there an impact? Are you seeing, with particular programs that you're running, more studies being awarded in--as part of one contract win? Sort of like as in a phase 3 program comprised of several different clinical trials?

Yes, I think the answer to that is yes. We see certainly as we talk about outsourcing becoming more strategic, that's one of the ways in which you see it is that instead of a "Oh, we're running a Phase 3 program and we don't have the internal resources to do the fifth study. We need to outsource that," you've now got companies saying, "We want to outsource the Phase 3 program and we're going to talk to one CRO or we're going to talk to two CROs about that."

And so there's a book of business of two or three or four Phase 2 or Phase 3 studies that are all part of the discussion, rather than it just being one.

And then in terms of this past quarter's new business wins, was there any skew towards Phase 2 or Phase 3?

I'm sorry. Repeat the question, Doug?

Was there any skew vis--vis Phase 2 versus Phase 3 studies? Have you seen any changes in that dynamic over the last year or so, as we've seen changes in drug company's pipelines?

I'm hesitating to answer that because I suppose we don't, in our internal analyses of our backlog and of our wins, we don't put a lot of effort into distinguishing between whether something is Phase 2 or Phase 3 or Phase 4. But a quick visual that I'm doing here on our list of key wins in the quarter would say that there's lot of Phase 3 projects in the wins over the last quarter. Whether that is of significance or whether that happens to be just the way in which the cards fell in this quarter I couldn't say.

Okay, and then finally, you commented that your contracts typically have some kind of FX collar. I was just wondering if--where we sort of stand in terms of the decline in the dollar? Are you reaching a point where those collars will start to set in and the impact will begin to get mitigated, or do we potential--or is that the wrong way to think about it?

I think that's the wrong way to think about it, Doug. We have been--it's not that we've reached a point where collars are about to kick in. The way the collars are structured, some of them have now been active for the last, certainly since quarter four of last year. I suppose if you look at last year, it was really only around August in Q3 that we started to see very significant movements in foreign exchange that then prompted us to look at our contracts. And this is sort of time lag then, so we started to discuss some of them in Q4 with our sponsors, and analyze them and price them out. And we did that again in Q1.

But the way the collar is structured, in certain cases you don't recover anything until there's a movement plus or minus 5%, so it's an ongoing exercise. So for instance, anything signed last quarter in Q1 if the dollar moves more than 5% in this quarter that one will kick in. Anything that was signed back in Q4 will have a different trigger rate. Anything we sign today, we will price at 156 or whatever the rate is, and should the dollar go beyond 161 at some point during the year that one will kick in.

So it's very much a--it's a live, real-time, very active way of managing the currency and of course it brings a fair amount of work and administration analysis and then some lumpiness in timing by the time you can analyze it, by the time the trigger gets analyzed and then gets negotiated. So it's not the easiest thing in the world to track.

How difficult are those negotiations? Is this a process where you have to go back and really sort of go to battle with the sponsor or is this something where they just need a friendly reminder?

I think it's one that, Doug, where I'd like to thank our competition, because it seems like we've probably all been having the same conversations because we've been surprised at how open our clients have been to the discussions, which we didn't fully expect. So I can only assume that everyone in the industry has been tackling this issue and making plenty of noise about it and it seems like that has softened up the target for us.

Okay, great. Thank you very much.

Thank you, ladies and gentlemen. We've got no further questions in queue. (OPERATOR INSTRUCTIONS) We've got no further questions coming through so I'll hand it back to the host to conclude today's conference.

Ladies and gentlemen, thank you very much for attending this call. We're delighted with our performance in quarter one and we look forward with confidence to the remainder of the year. Thank you again.

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