ICON PLC (ICLR) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the ICON results for quarter two fiscal year 2008 conference call, hosted by Ciaran Murray, Chief Financial Officer. My name is Louise and I'll 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'll have the opportunity to ask questions. (OPERATOR INSTRUCTIONS). I'm now handing over to Ciaran to begin today's conference.

Good day, ladies and gentlemen. Thank you for joining us on this call, covering the quarter ended June 30, 2008.

On the call today, we've Dr. John Climax, our Chairman, and Mr. Peter Gray, our Chief Executive Officer. 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 slideshow.

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 operation, 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 second quarter, ending June 30, 2008. And please note, in the following commentary, the financials for both current and prior quarters and any reference to margin is after charging stock compensation expense.

And having said all of that, I will now 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 two 2008.

The Group's net revenue grew 48.5%, from $147m in quarter two last year to $218.3m. Excluding the impact of DOCS, the European contract clinical staffing business which we acquired in July 2007, and HCD, the US phase one unit which we acquired in February 2008, the organic growth rate was 41%. Excluding the impact of currency, the organic growth rate was 37%. Year to date, net revenue was up 48.2%, from $283m to $420m.

Operating income for the quarter was $24.4m, representing a 51.9% increase over the same quarter last year. Year to date, operating income was $45.9m, representing an increase of 49% over the prior year.

Group operating margin for the quarter was 11.2%, compared to 10.9% in the same quarter last year. Year to date, the Group operating margin was 10.9%, unchanged on last year.

The margin in our Clinical business for the quarter was 11.5%, compared with 11.3% in the same quarter last year.

The Central Laboratory's revenue grew by 29.1%, to $16.6m, and achieved operating margins of 7.8%, compared with 6.6% in the same quarter last year. Net business win in the quarter was $21.8m, representing a book to bill of 1.3. We are very pleased with the progress being made and we are continuing to invest in this division. Year to date, our Central Laboratory has achieved operating margins of 7.7% on revenues of $33m, compared to margins of 6.9% on revenues of $25.9m in the prior year.

Group net income rose to $18.8m from $13.3m last year, representing 41.3% growth. EPS grew from $0.45 per share to $0.62 per share, a 37.7% increase. The effective tax rate for the quarter was 20%. Year to date, net income increased to $35.7m from $25.6m last year, representing a 39.6% growth. EPS grew from $0.86 last year to $1.18, a 37.2% increase. The effective tax rate for the year to date was 20%, compared to 22% in the previous year.

Cash flow provided by operating activities was $40.7m in the quarter. We invested $18.9m on capital expenditure, which was related to the continuing expansion of our global infrastructure, in line with our strong growth. Of this, $8.3m related to the expansion of our Dublin facility. Year to date, cash flow from operations was $28.4m. Capital expenditure was $35.4m, of which $12.1m was for the Dublin facility. In addition, we invested $12m in the acquisition of HCD, our new phase one facility in San Antonio.

As a result, at June 30, the Company's net cash amounted to $6.9m, compared to a net debt of $20.2m at March 31, 2008. DSOs at the end of June were 58 days, compared to 67 days at the end of March 2008 and 66 days at the end of December 2007.

At this point, I would like to hand over the conference to Peter Gray, who will give you an update on the business outlook and our revised guidance. Peter.

Thank you, John, and good afternoon, folks. Overall, the business development environment continues to be strong, with RFP volume up approximately 16% year to date and the value of RFPs up approximately 20%.

As we said in our press release, net business wins in the quarter were $337m, compared with $230m in the same quarter last year. This represents an increase of about 47% and a strong book to bill of 1.5 for the quarter. These net wins break down as follows. Gross awards were $393m. Cancellations were $56m or 14% of the gross awards. And that also -- another way of expressing that is the $56m represents 3.8% of our opening backlog for the quarter.

On a year to date basis, gross awards were $833m. Cancellations were $127m, which is about 15% cancellation rate through the first six months. Overall, net wins were $706m in the first six months, compared to $453m in the same period last year, which represents an increase of 56% year on year and a book to bill, on average in the first six months, of 1.7.

As a result, at the end of the quarter, at the end of June, our backlog was over $1.6b, a 56% increase over last year. Of this $1.6b backlog, we expect $752m of it to convert to revenue in the next four quarters, which implies -- sorry, which is a coverage of approximately 79%, the current implied forecast.

As a result of this high level of coverage, we've decided to revise our guidance. We now expect revenues for 2008 to be in the range of $870m to $890m, which brings our coverage ratio back down -- for the next four quarters back down to about 77%. We expect our earnings per share for 2008 to be in the range of $2.46 to $2.52.

That concludes the formal remarks on the call and we'd like to now hand over to questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from the line of Randall Stanicky. Go ahead.

Great. Thanks very much, guys. Peter, this is the third quarter in a row where you guys have put out a bookings -- a gross bookings number of roughly an average of $400m. Is this a new level that we should be thinking about? And then, maybe, can you characterize for us what's driving that and anything that might be sizeable in there, as you've done in the past?

Sure. Is this -- the first part of your question, is this is a new benchmark of about $400m gross? Well, I suppose, Randall, I'd love to say yes, but one can never predict these things. Obviously, as our revenue number continues to rise, the bar rises for us and we have to continue to achieve good numbers. But I think, as we've said in the past, our forecasts are based on achieving a book to bill on average of somewhere around 1.2 to 1.4.

And who knows how the volatility and the variability that takes place in awards, how that might play in any given quarter? But clearly, we feel pretty comfortable, with the flow of RFPs that I mentioned, that business awards can continue to be reasonably strong, over the next couple of quarters at least. And that's about as far out as we can see at any point in time.

In terms of particular awards, I think what we've done in the last few quarters is talk about awards over $5m. We're 12 awards over $5m in this most recent quarter, continuing the trend of -- we see a continuation, at least, of the trend of some reasonably large awards in that mix, as -- and as we've talked about, that's a feature of more phase three programs going on and the amount of data required in those programs, meaning that the size of any given program is certainly larger than it used to be in days gone by.

Let me maybe just ask you a bigger picture question. Obviously, the industry bookings and backlog growth has been big. And we've seen a couple of different scenarios, with either broader healthcare services companies looking to move into the space or others looking to roll up some smaller assets. But the barriers thus far have been, I guess, a little bit difficult in doing so. What do you think those barriers are, in terms of additional competition coming in and at some point impacting your guys' ability and others' to put up these bookings numbers?

I think I'm understanding your question being what are the barriers to entry and is that -- am I right?

Yes. What's not -- what's to say, in two to three to four years, we're not going to see some other broader services companies coming into the space and obviously compete, given what's obviously continued very strong industry bookings?

I think, to compete in this space -- and remember, ICON is essentially and largely a phase two to phase four focused CRO. And if you'd asked me and if you'd told me five years ago that we'd have 71 offices in 38 countries today, I would have thought that you were drinking too much, Randall. So the world has changed and has developed quite a lot.

And that's creating, in itself, a very significant barrier to entry, because if other companies, if other entrants, want to be credibly able to compete against the four or five, now, maybe six, large CROs, the infrastructure that they have to create, the platform they have to have, in order to compete is a very expensive thing to build. We've been fortunate in that, over 18 years, we've been able to grow ourselves into a platform this big. A new entrant is going to have to make an incredibly heavy investment to build a platform that can compete. I think that's the biggest barrier to entry. Would you agree, John?

Yes. And on top of that, Randall, you need a track record. You can't build a track record overnight. And clients, when they do award large contracts, they're looking for, as what Peter says, a track record to be able to do these programs over a vast number of countries and regions. And that is not something that you can just put money in and enter into the marketplace.

Okay. Fair enough. Let me just finish with just obviously the news-flow around Roche/Genentech. Anything that we should be thinking about there as it pertains to ICON?

No, there's nothing you should be thinking about, Randall, pertaining to ICON.

I suppose there's an underlying question there, Randall - is Genentech a significant customer of ours?

I was going to let you ask that question, Peter.

Well, obviously, we don't talk about individual customers. We're comfortable to say that we have a large number of biotech customers, but I wouldn't like to comment about any particular one.

Okay, fair enough. Thanks a lot.

Thank you. Our next question comes from the line of Douglas Tsao. Go ahead, Douglas.

Hi, good morning. (Technical difficulty) quarter. Was this a function of a shift in the business mix or was this --?

Doug, it's Ciaran here. We just lost you for a second there.

Am I back?

Yes, you are.

Yes.

Okay. Just in terms -- just starting with the margins, we saw a pretty nice sequential improvement this quarter. Was this a function of strength in the Central Lab or was it largely -- although we did see some nice improvement in the Clinical business as well. Was that a business mix issue within Clinical or is this just simply a function of increasing the utilization rate and making sure that everybody was -- the billable hours were up?

I think it's a nice improvement because margins in both the Clinical business and the Lab showed improvement, Doug. Sad to say, it's not as good as we would have liked it to have been. If you remember, last quarter, we said that without the impact of foreign exchange the margin would have been 12%, so we would have hoped that we'd be up closer to 12% at this point. But as I think I may have spoken to you in the course of the quarter - we certainly talked about it at a number of conferences - our phase one business had a more difficult quarter this quarter and that held back the margin from improving further. But it is very satisfying to see the beginnings of an upward trend there.

And what were the problems in the phase one business? Was that largely the studies delays or --?

Yes. We've now two phase one units, obviously, one of which is a very recent acquisition and we indicated, I think, when we acquired it, that the thing it was lacking was business development. We felt it a very good unit technically, but it had not had a very strong business development support. So building its backlog is going to take us some time and we factored that into the equation when we were acquiring it.

At the same time, our unit in Manchester suffered some cancellations in the quarter, which is very disappointing. So both units had a difficult enough quarter, but we're reasonably confident that they're going to be able to make progress as the year progresses.

And then, what was the FX impact on operating margins this time?

It was pretty flat, Doug.

Okay. And then, do you find, in the large studies that you're winning now, any particular therapeutic concentration? Is this focused more towards oncology or cardiovascular or CNS, or is it pretty much ranged across the spectrum?

What we've seen over the last few years - and again, I think we've talked about this - is that our backlog has been steadily increasing in the oncology field, as I think everyone else's has as well. So oncology would be the biggest portion of our backlog, with cardiovascular next, CNS next and then all of the other key therapeutic areas coming --

But I was asking specifically to the large studies in the backlog. Is there any particular therapeutic concentration there or is that -- or do the large studies basically reflect your overall business mix?

They would reflect pretty much our business mix, I would say. If I think of the larger studies we have, oncology and cardiovascular would be where those lie.

Okay. And then, finally, building a little bit off of Randall's question, do you find -- in trying to gauge the competitive landscape, do you find that you compete with different CROs when you're bidding on large studies, just to John's point about needing the infrastructure to conduct the very global studies? Or do you find, versus when you're bidding on a smaller, maybe a phase two study, that you'll be competing with some of the smaller players in the market, who perhaps have less global scale, but it's not needed as much for -- to execute the study?

It depends on who the client is, Doug. Obviously, with the larger companies, these preferred provider arrangements exist and smaller CROs aren't necessarily on those lists, whereas with smaller emerging companies they may not have a formal list and, through relationships and so on, they may have contacts with smaller CROs.

So I think the answer to your question is yes, obviously, if a smaller -- if there's a smaller study that is in a very limited geography, well, then smaller CROs have an opportunity to compete in those -- to compete in the competition for those opportunities. But they're not necessarily -- we don't necessarily see them where large pharma companies are concerned.

Okay, great. I'll just hop out for now. Thanks.

Thanks, Doug.

Thank you. The next question comes from the line of Jack Gorman. Go ahead, Jack.

Thank you. I have two questions, please, one for John and one for Peter, perhaps. Firstly, just, John, maybe if you can give us a little bit of a flavor for your current views on how ICON is developing in the emerging markets, in India and the Far East. Are you still comfortable with a broadly greenfield strategy there? And is there a scenario that you see where you may need to accelerate development there via acquisition?

My second question is really focused on the contract staffing businesses, just to see how performance was in the quarter. And I think you may have mentioned in Q1 that DOCS was, not suffering, but certainly had maybe a little bit more of a challenging quarter, and how that has recovered and responded since then. Thanks.

Jack, in terms of the emerging markets, we see emerging markets as Asia and Latin America and perhaps a little bit in Africa. In these countries, with the exception of Japan, there aren't a lot of potential CROs, big CROs, of any size for us to make acquisition. And as we all know, that acquisition brings with it its own headaches.

We have been very, very successful in the organic growth that we have initiated from the beginning of the Company, start of the Company, in 1990. It keeps the culture and does all the good stuff that we are benefiting today from. Having said that, we are growing our presence in Asia and we are growing our presence in Latin America. I don't think, when I compare ourselves -- when we compare ourselves with our competitors, Asia and Latin America, we are sub-scale. We are as good as most of our competitors.

Japan is another scenario, where we have -- where I think we could probably have a larger presence and there are perhaps potential opportunities, but they -- then again, we'll have to be very careful in going into these new geographies, particularly with rather insular cultures, in making acquisitions. We've -- our preference would be to go on the organic growth rate -- growth route.

And in relation to the staffing business, Jack, in the US, again, it's continuing to perform well. It's growing nicely for us. The margins are very satisfactory there. DOCS, as we said last quarter, was behind plan. At this stage, we were expecting its margins to be expanding and they're not, so we're disappointed with its progress in terms of margin.

The reason the margin isn't expanding is the top line is not growing in DOCS as quickly as had been projected. But we're fairly comfortable that we're going to see that improve as the year goes on. It's a case of we're behind the plan, but the plan is still a valid plan.

And Peter, what's your own sense of that? Is that a function of the market overall or is it something that you can change or alter specifically within DOCS itself?

I think it's -- we've been making some changes in DOCS in terms of their focus on segments of the market and putting more focused business development in place. I think the market's in reasonably good shape. All the indications we have for the underlying trends are reasonably good. So I think it's a case of now executing and focusing on some aspects where I think we can get more leverage out of the business and therefore grow the top line a little faster.

Fantastic. Thanks very much.

Thank you. The next question comes from the line of John Kreger. Go ahead, John.

Thanks very much. Could you give us just a bit more information on how your revenue breaks down, perhaps by client type, geography and also your client concentration statistics?

Sure, John. Client type, we've been pretty steady that biotech is representing about 20%, a little over 20% of our revenues. That was last year's percentage and it's continuing at about that level this year. And obviously, the rest is pharma companies, both mid and large.

And Peter, on that statistic, where do you put large biotech? Would that be counted in pharma or in biotech?

Large biotech is in biotech, John, just over 20% when I include the large biotech.

Got it. Thanks.

Okay. The next question comes from the line of Eric Coldwell. Go ahead, Eric.

Hi, good morning. Some of my questions have been answered, but I guess just a few kind of technical ones. Ciaran, I think there'd been a process in the Company to focus on foreign currency risk mitigation through a combination of natural hedging, but also perhaps putting collars in contracts. Can you give us an update on the status of that?

There's no change, really, since the last time we spoke about it, Eric. Our contracts have collars, as we -- yes.

Can I just? That's not new, Eric. I think you're suggesting or the implication of your question is that we didn't have that and now we're putting it in place. We've always had it.

No, no, that's actually not the implication. My prior understanding was that you had about 80% of your contracts with foreign currency collars and you were trying to move that to 100%.

That is absolutely correct, yes.

Okay and --

I was picking it up differently.

No. And can you give me a sense on how that's progressing and if you're getting any push back from customers?

Well, it's progressing fine and we deal with it as we sign new contracts. Any time in the past where we didn't have language, now we'll put various language into the contracts. So I suppose, where you're saying that we'll move to 100%, there will be some legacy contacts which didn't have language, which we've agreed to put language in with the sponsors, but there are others where we haven't. But certainly all of the new ones we're dealing with it, so as we move forward that percentage will change, but it will have to change over time. It won't happen all at once, where we move from 80% to 100%.

That's fair. I'm just trying to get a sense on -- obviously, foreign currency's been mitigating your operating margin expansion and we all understand that. But I'm trying to get a sense on when the comparisons might start to ease or slight improvements in your contracting could alleviate some of those pressures.

Well, a lot depends on how the rate goes, Eric. You've got to remember collars work two ways. We will have a collar in the contract whereby, when it moves beyond a certain rate, we can re-price the contract, but of course if it moves the other way and moves too much against the interest of the sponsor, we would sit down and we would re-price it and pass on some of the benefits. So I'm not sure that I can really answer your question, given the uncertainties around where the rate will go in the future.

That's fair enough. Have recently met with a handful of applied technology companies, including some in the imaging and in cardiac safety and EDC arenas, and we have heard a little bit about some pricing challenges in the market, maybe for some of the smaller vendors in those areas. With your investment in Beacon and ownership of a fairly robust imaging platform, can you give us a sense on what you're seeing? Are there pricing challenges in the applied technology market or is your scale and scope and ability to cross-sell with Clinical not making that relevant to your model?

I suppose the honest answer to the question, Eric, is I'm not aware of any -- certainly not getting reports of any pressures in the business. The imaging business has been -- has had a couple of extremely good quarters in terms of both its bookings and its top line growth. Some of that is coming through cross-sell. Some of it is standalone success, which is what we encourage in all our divisions, that they try to feed themselves and not be reliant on others feeding them. And imaging is doing a super job in that regard. And I don't believe, but I haven't checked, I think I would have heard from them if they felt that there were pricing pressures, but I have not heard any signals from them of any pricing issues.

Yes. My belief at the moment is that some of the larger vendors may be taking share and causing some pricing pressure among the smaller startup companies, but what you're saying is good to hear.

In terms of electronic data capture, can you give us a sense on how many of your new contracts and new study starts are rolling out with EDC, and to the extent that you're controlling the vendor selection in EDC versus being given the provider name by your sponsor on contract initiation?

I think in the majority of cases we are being given a provider name by the sponsor, where the sponsor is an established company. Where the sponsor is not an established company, they look to us for guidance as to which system we would recommend or we would prefer to work with.

In terms of what percentage, I don't actually have that data as to how many of our new wins are in EDC. But I can say to you, as I think we've given in previous presentations, over 50% of the pages we processed last year were done in EDC, about 35% of our studies last year were in EDC and that percentage is growing strongly. So I would hazard a guess that we're heading up towards 40% of our current studies using EDC, but I haven't got that exact data to hand.

Thank you. And the final question, a little bit difficult to know how to ask this and hoping for a good response, but business development obviously has been absolutely phenomenal for ICON and for most of the large CROs. I guess kind of a twofold question. First up, can you talk a little bit about your hit rate versus competitors when the RFP gets to the final stages?

And then, secondarily, I've heard some feedback from smaller clinical CROs that there have been situations where they believed they were awarded the contract and in some cases had put a contract into their backlog, and then subsequently found that the contract went to ICON such that some of your peers have booked cancellations. And I've heard that you've actually taken some business away from companies that were incumbent providers to the sponsor. Are you seeing that trend or are these a few one-off situations that may be anecdotal evidence but not really a signal that some of the smaller clinical companies have actually lost contracts in backlog because they don't have the global reach that you speak to early in the call?

I'm not aware of what -- to what you're referring, Eric. I'm not aware of those instances myself. Obviously, I'm very proud of the work that our business development team are doing and they don't give up easily on any opportunity. And if they are succeeding in getting people to change their minds when apparently they've made up their minds, well, then I applaud them for that, because that's clearly them doing a wonderful job.

But I'm not aware of specific instances of that. You've now prompted me to go and talk to our business development team and see if they can enlighten me with those instances. But I suspect you're talking about a few isolated anecdotal instances. I think most companies are very careful about making their decision and once they make their decision they stick with their decision. So I'd be surprised if this is a widespread event.

Great. And could you speak to the hit rate at all? Do you -- are you tracking those metrics or would you be able to provide that?

It's actually not possible to track. When we get down to the final whatever, we don't know how many others are in the fray. And therefore tracking it as a hit rate against others is actually not -- I don't think it's possible. I can say that our hit rate as an organization, we do track that against the RFPs that we are know are decided. We track our hit rate against RFPs that we know get outsourced. And that has been consistently above 30%. It fluctuates between 30% and 35% in different quarters, but it's staying up in that level.

That's great. Thanks and congratulations on another very strong result.

Thank you very much, Eric.

Thank you. We have a follow-up question from the line of John Kreger. Go ahead, John.

Hi, thanks. Just wanted to come back to the revenue mix. I was also hoping to get your geographic breakdown in the quarter. And can you let us know if the concentration of your revenue among top clients has changed at all?

There's been no significant change in our concentration, John. I'll just -- here are my favorite (multiple speakers) if anything, it's improved a little bit. Our top five clients have -- the ratio's improved from 32% to just above 30%. Out top 10 has remained unchanged and our top 25 has improved from 68% to 67%. Our largest client does not represent more than 10%, as was the case in previous quarters.

And as for the geographic split, the US is - I'm just having a look here - 51%, approximately, of revenue and 49% then in Europe and rest of world.

Great. And a question, given that ICON's always been know as one of the higher quality vendors, if not the highest quality, given the kind of growth that you've been able to accomplish in bookings and therefore staffing, how are you measuring to make sure your quality remains at an acceptable level? How are you tracking that on an ongoing basis?

To keep our margins low. We track a number of things, John. The most -- quality is measured in a number of different ways, but clearly a very important one is customer satisfaction and client satisfaction. Client satisfaction is generally measured by whether you bring their project home on time and within budget. And the metrics on that have actually improved a little this year compared to 2007, so we're comfortable that we're not seeing any deterioration in our performance.

In terms of other aspects of quality, our quality assurance department are constantly doing audits and our clients are constantly doing audits, and we are reviewing the outcome of those audits and how they score the audits. And again, the scoring on the audits has improved somewhat in 2008 versus 2007. We don't think that's bias in the scoring. We believe that's genuine, because our QA group are very independent. And in terms of client audits of our operations and our projects and so on, again, we're getting clean bills of health on all of those. So we're pretty comfortable that we are maintaining our quality standards.

Great. Thanks very much.

The next question comes from the line of Dave Windley. Go ahead, Dave.

Hi, thanks. A little late in the Q&A here, but John covered one of the questions I had. Peter, I was wondering if you could maybe drill down a little bit. You talked about phase one and some of the issues there. First question there would be I believe some of the UK-based phase one operations did feel some of the impact a couple of years ago, when the TeGenero study hit the news. I'm wondering if there's any concern about this recent similar but not quite as severe event in Charles River's Edinburgh phase one facility might have any impact on phase one flow in the UK.

I think, whenever there's an event in phase one, in a phase one unit, David, one has to be concerned. And patient safety and volunteer safety is something that would concern everyone, including the regulators, in a given country. I can't predict whether or how the regulators in the UK will respond or will react. There was a very strong and very positive response from the regulators in the UK to the TeGenero event, and a very rational one in the sense of putting additional safeguards in place for certain types of compounds, but still making the conduct of phase one studies in the United Kingdom very feasible, very possible, in a timely manner. So I'm not anticipating that it's going to cause any significant disruption to our business or damage to our business.

A more fundamental issue for us in our phase one business is getting a better mix into the backlog. We've a lot of science in Manchester and we're very proud of the science there, but we need to get a better mix of studies because we have too high a risk profile in the backlog of that business. That's traditionally been the case. I know we've been talking about that now for a while. We haven't managed to make as much progress as I hoped we had, but we're continuing to focus on winning a broader mix of studies in the unit and we think it's very well placed to win those.

Okay. And as a general statement, is the phase one operation profitable?

It was just about breakeven. It was slightly profitable in the quarter, but let's call it breakeven in material terms.

Okay. And then the Japan business is one that you've talked about moving into profitability and I think has some decent momentum, but wondered if you again provide a more granular update there?

It's a done deal, David. It moved into double-digit margins about two quarters ago and it's solidly there now. So we can't use it as an excuse any more.

All right. In the staffing operation, could you talk a little bit -- it seems like certainly demand for staff is pretty high across the industry, whether it be within the CRO group or sponsors themselves. I guess I'm curious about your comments about building the top line and margins not moving as aggressively or as positively as you would hope, because top line was not growing. Perhaps provide some additional color on -- top line would seem to be the easy part, I guess, and finding the staff would be the hard part, but that doesn't jibe with what you said earlier, I don't think.

No, we're seeing plenty of opportunities. It does jibe a little bit with it. We're seeing plenty of opportunities. We're not converting those opportunities into revenue. And that may be because we're not finding the people quickly enough or we haven't got the right candidates to show to the people who have the opportunities. I'm not saying that's the case. I'm speculating that that might be one of the issues.

The top line, if we can grow the top line, the cost base is relatively fixed in the internal sense. The internal cost base is relatively fixed. So the margin impact of better top line is reasonably steep and improves the margin quite quickly. So it is about improving our conversion of the opportunities that we're seeing.

Okay. Is there -- could you speak to how the recruiters within DOCS operate? Are they incented on a commission basis or are they paid just basically salary and bonus or --?

A combination of both, David.

A combination of both. And is there any sharing or leverage in terms of the recruiting activity for DOCS or for the staffing business in general, versus the recruiting for ICON project-oriented work?

When you say sharing, what do you mean?

Like do recruiters recruit for both parts of the business.

Well, there is now a commercial arrangement in place between DOCS and the Clinical business, where DOCS is one of the providers that we would use to help us in meeting our recruitment needs. But remember, we also have an internal team in the Clinical business and our goal is to use that internal team as much as we possibly can, so we don't incur recruiter fees.

Right.

Obviously, if we do incur recruiter fees, I'd prefer to incur them with DOCS than with other recruiters. But we don't put those handcuffs on our Clinical group, because with the rate of growth that we have what's important for them is to get the right people, not to just keep the bread in the family.

Right. One other thing. From our checks, one of the pieces of feedback that we've gotten has been that the significant number of layoffs at the pharma level have contributed to some easing in the labor market. Have you seen the same?

I'm going to answer that question in an obtuse way. I think we've been saying for quite some time that we haven't been finding extraordinary difficulty in hiring people. That continues to be the case. Can't say that I'm getting reports that it's easier now than it was. The reports that I'm getting from within the organization is we continue to be able to meet our needs in terms of hiring.

Okay. And my last question is getting back to the quality question that John touched on. But what area of your non-billable headcount is growing the fastest? Where are you making the most significant investment in the infrastructure of the business?

In management, I would say, in the management structures to support 71 offices and increasing numbers of operational staff. It goes to John's point about, when John Kreger asked about quality, that there's a cost to our margin of what we're doing. It's in management supervision, who don't get recovered in the billable rate to clients, but are very important to overseeing projects and overseeing the people who are running those projects.

Super. Congratulations, great quarter.

Thanks a lot, David.

All right. Bye, bye

Thank you. The next question comes from the line of Sandy Draper. Go ahead, Sandy.

Thank you very much. Most of the questions have been asked and answered, I appreciate that. Just maybe a couple of quick questions. On the Central Lab side, it looks like if you follow up the rest of the year around $16m to $17m you'll do over 20% growth. Is that a sustainable growth rate and what does it take to keep growing that business at a nice double-digit rate?

It all comes down to bookings, Sandy. As John said in his opening remarks, we booked just short of $22m of business for the Lab in the most recent quarter, with a book to bill of 1.3. They've been consistently over $20m in bookings for the last five quarters. So they have -- they're building a backlog that will continue to support that rate of growth for, I think, at least another year. And if they continue to be successful in their bookings and continue to maintain a good book to bill, that should sustain beyond a year. But it's the backlog and the bookings, really, that will be the indicator.

Okay, great. And then, one just high level question, maybe for you, Peter, or possibly John. I just would like to hear your thoughts on, either from ICON's perspective or just from the industry perspective, about the consolidation in the industry. There was a question asked earlier about smaller players and some other players moving in. But just generally, what are your thoughts over the next three to five years? Is consolidation broadly -- we obviously see small acquisitions, but is this something you think needs to happen, hurts the industry, is helpful for the industry? Just some broader thoughts on that would be very helpful. Thanks.

I have -- John, you'd perhaps like to contribute to this as well. But I have -- and I've been open in saying this, that at a time when we're achieving the kind of growth that we're achieving, and I'm not just talking about ICON, I'm talking about all of the significant CROs, all the ones that we publicly see, it makes very little sense to think of making big acquisitions and trying to integrate them. Because the process of integration will distract us, the management teams, away from what's a fantastic opportunity to create value for shareholders through organic growth and get us instead focused on figuring out who's going to keep what job and which people are going to stay and take us away from the success of the business.

So I don't think there's any compelling logic to making significant acquisitions in our core business at this point in time. Who knows, if growth rates slow down, when inevitably growth rates slow down in this industry, maybe consolidation begins to make sense at that stage. But I think we're a long way away from there. John?

Agreed, yes. I concur with that.

Great. Thank you very much.

Thank you. (OPERATOR INSTRUCTIONS). We have a question coming through from the line of Sam Farthing. Go ahead, Sam.

Hi, guys. Congratulations on a great quarter. I just -- most of the questions have been asked -- answered. I just wanted to know, of the new business wins, how much -- if you could give a breakdown, as you do on the revenue of the different segments that those new business wins are coming from, but particularly what percentage of the new business is coming from big pharma?

The breakdown year to date, Sam, is that about 23% of the wins came from biotech companies, 20 -- another 25% or 28% came from mid-sized companies and the balance came from large pharma. So it's about 50% from large pharma, about 25% or thereabouts from -- a little bit less -- sorry, a little over 50% from large pharma, a little over 25% from mid-sized pharma and the balance coming from biotech companies.

And that's the backlog, not the revenue, yes?

That is the awards.

Deal awards coming in. Okay. Great.

(Inaudible), yes.

Okay. That's it. Thank you.

Thanks, Sam.

Thank you. There are no further questions coming through, so I'll hand back to your host to wrap up for today's call.

Well, thank you very much, ladies and gentlemen. We're delighted with ICON's performance to date in 2008. Revenues, operating income and net income all grew strongly and business wins continued to be buoyant.

Before we conclude, I would like to take this opportunity to thank all our 6,500 people in our 71 offices in 38 countries for their magnificent contribution to our continuing success.

Ladies and gentlemen, thank you.

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