ICON PLC (ICLR) 2008 Q4 法說會逐字稿

Welcome to the ICON plc Q4 earnings conference call hosted by Ciaran Murray My name is Liz 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 will now hand you over to your host to begin today's conference.

Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended December 31, 2008. On the call with me today, I have Dr. John Climax, our Chairman, and Mr. Peter Gray, our Chief Executive Officer.

Before I hand the call over to John, I would 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 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 an obligation to publicly update or revise any forward-looking statement 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, 2008. Please note, in the following commentary, that the earnings per share numbers reflect the two-for-one share split that occurred in August. Also, please note that the financials for both current and prior quarters and any reference to margin is after charging stock compensation expense. Having said all of that, I would like to hand the call over to John.

Thank you, Ciaran. Good day, ladies and gentlemen. We are very pleased to report another strong performance by ICON in quarter four and overall, an excellent full year 2008 during which the Company added nearly 1400 staff.

The group's net revenue grew 22% from $181 million in Q4 last year to $220 million. Excluding the impact of HCD, the US Phase I unit which we acquired in February 2008 and Prevalere, a leading US-based specialist laboratory, which we acquired in November, the organic growth rate was 18%. Excluding the impact of currency movements, the organic growth rate was 22%.

For the full year, net revenue was up 37% from $631 million to $865 million. Excluding HCD and Prevalere, the organic growth rate was 35%. Removing the impact of currency movements, the organic growth rate was 32%.

Operating income for the quarter was $26.5 million, representing a 34% increase over the same quarter last year. Full-year operating income was $99.5 million, representing an increase of 44% over the prior year.

Group operating margin for the quarter was 12% compared with 11% in the same quarter last year. Full year, the group operating margin rose from 11.5% from 11% in the prior year.

The margin in our clinical business for the quarter was 12.3% compared with 11.3% in the same quarter last year. For the full year, our clinical business posted a margin of 11.8% compared with 11.4% in the prior year.

The central laboratories revenue grew by 43% to $19.6 million and achieved an operating margin of 8.8% compared with 7% in the same quarter last year. We are very pleased with the progress the lab is making considering the investments we have been making in India and Singapore and will continue to invest in 2009. For the full year, our central laboratory achieved operating margins of 7.8% on revenues of $71.1 million compared to margin of 6.5% on revenues of $53.5 million in the prior year.

Group net income for the quarter rose to $21 million from $15.8 million last year, representing 32% growth. EPS for the quarter grew from $0.26 per share to $0.35 per share, a 35% increase. The effective tax rate in the quarter was 21%. For the full year, net income increased to $78 million from $56 million last year, representing 40% growth. EPS grew from $0.94 per share last year to $1.30, a 38% increase. The effective tax rate for the year to date was 20%, down from 22% in the previous year.

Cash flow used in operating activities was $4.8 million in the quarter. We invested $14 million on capital expenditure, which was related to the continuing expansion of our global infrastructure, in line with our strong growth. Of this, $4 million related to the extension of our Dublin facility, which is now completed.

Full-year cash flow from operations was $81 million and capital expenditure was $68 million, of which $22 million was related to the Dublin building. In addition, we invested $12 million in the acquisition of HCD and $38 million in the acquisition of Prevalere.

At December 31, the Company's net debt amounted to $4.3 million compared to net cash of $23.8 million at December 31, 2007. DSO at the end of December was 69 days compared to 66 days at the end of December 2007. At this point, I would like to hand over the commentary to Peter Gray for an update on business outlook.

Thanks, John. Good afternoon, everyone. As you have seen from the press release, our awards -- we gave the net awards number. The gross number for awards was $296 million in the quarter. Cancellations were $35 million, which represents 12% of gross awards. Accordingly, the net wins were $261 million compared to $344 million in the same quarter last year and the $261 million obviously represents a book-to-bill of 1.2.

I think it is important to give you a little bit of color as to what has been happening. While RFP volumes in the fourth quarter were down somewhat compared to the prior year, we nonetheless priced over $1.1 billion of new business in quarter four and RFP activity levels to date in quarter one of 2009 are encouraging; although decision-making is still slower than usual.

For the full year of 2008, gross business awards were $1.5 billion. Cancellations were $206 million, which represents 14% of gross awards, which brought us to net business wins of $1.3 billion compared to $1 billion in 2007. That represents an increase overall in 2008 in net awards of 28% and a book to bill average for the year of 1.5 to 1.

As a result of all of that business development activity, our total backlog at the end of December was $1.75 billion, which is a 35% increase over the prior year. Of this backlog, of this $1.75 billion, we expect $707 million to be earned in 2009, which represents a coverage of approximately 74% of expected revenues.

Before handing the call over to questions, I would like to acknowledge that, as a people-based business, the results we achieved in 2008 were due to the contributions of every one of our 7000 employees spread over 71 locations in 38 countries across the world. It is important for us to thank them because ICON's success is down to them. That concludes the formal part of the call and we are now happy to hand over to questions.

(Operator Instructions). Randall Stanicky.

Thanks. Peter, can you hear me?

Can hear you now, Randall, yes.

Great. Thanks very much. Can you just maybe drill down -- I understand your comments on seeing still some slowing in decision-making, but can you talk about the pipeline of strategic activity and perhaps some of those discussions that you are having? And then I have one follow-up.

Well, obviously don't want to talk about specifics, Randall, and one man's strategic discussion is another man's tactical discussion. So what classifies as strategic and what doesn't I suppose is always difficult to parse. But there is -- there are multiple -- let me put it this way. There are multiple discussions in which we are engaged, which are part of a reevaluation by clients of the way in which they are outsourcing and their approach generally to outsourcing, which they would often call and would often term as strategic. So multiple would mean more than five or six. We'd be probably approaching 10 overall dialogs at the moment that would broadly fall into that category. I don't know if that is giving you the color you would like.

I mean I guess the question is are customers still willing to engage in discussions around bigger, expanded offerings despite what still feels like some fluidity around the broader pipeline?

Yes, I think they are. In fact, I think, in some respects, the current fluidity, as you call it -- the current uncertainty in the marketplace is probably crystallizing people's thinking or at least getting people to think in a more strategic and a more radical way. So if anything, I think the current economic challenges around the world are helping focus people's minds on the old ways aren't necessarily the best ways. And I think that can be only helpful to changes of strategic thinking in the long term.

Okay, great. And just one more question. If I take your 4Q earnings number and if I annualize that, I get into the lower part of your guidance range or the guidance range you put forth in January. So I guess, first, can you give us an update on your outlook here and then talk about what you have built into that range in terms of improvement throughout the year?

Well, as you know, we didn't give quarterly guidance, Randall, and we're not going to start giving quarterly guidance today. But yes, your mathematics are perfectly correct. Clearly, over the last number of years, we have grown generally and we have forecasted in our guidance that we will continue to grow and therefore, what you would expect or what we would expect to see is growth through the year. But we have given a wide range in our guidance for the reasons of the uncertainties that are around at the moment and I suppose we are not -- it is only a few weeks ago, we gave that guidance. We are not updating that guidance today.

Okay. Fair enough. Thanks.

I would just add there, Randall, it's Ciaran, that we made $0.35 in Q3 as well, which we made before we gave the guidance and there is really no change of anything that changes our view of the guidance when we gave it.

All right. Thanks, guys.

Ian Hunter.

Good afternoon, gentlemen. Just a quick question here for Ciaran on working capital management. I see your days sales outstanding jumped again -- jumped to 69 days from 54 last quarter. 66 on the same quarter last year. I am just wondering if you can give us a feel. Is this a general trend you are seeing coming through that clients are becoming less willing to pay on time, etc., longer time periods for settlement or is it end-of-year blip or one or two people are paid subsequently?

It is an end-of-year blip I suppose, except that it is a blip at every end of year. I don't know if you can describe it truly as a blip, Ian. Yes, if you look at the pattern in our DSO, it tends to be higher at this time of the year and then it falls as the year progresses. And there is always some reluctance with clients to part with cash at the year-end. They'd prefer to make their balance sheets look good and my balance sheet look bad. And they are the customer, so they get that privilege and there is no -- there is nothing in the numbers there that cause me undue level of concern, other than a slight frustration that we didn't collect more. But we had quite a high level of receipts in January right after the year-end. If I were to look at the like-for-like DSO at the end of January, they are down to about 64, which is encouraging and which tends to follow the normal pattern. There is nothing lurking in the receivables at the year-end that would cause concern. The number hasn't gone up for any other reason than cash collection and that is -- so we're comfortable with that.

Okay. And maybe, Peter, you said in your comments there in the release that some customers are under pressure. Is this coming through to you in terms of not proceeding with contracts that they have indicated they were going to give you the go-ahead or pulling out of contracts or even just not putting forward RFPs? I mean you have said, obviously, the RFP volume you think is picking up again, but I am just wondering how that customer pressure has been reflected in your business.

Well, I think the customer pressure, first of all, and maybe pressure is the wrong term for this, but certainly we are seeing it, as I said in my comments, in slower decision-making. And if you take smaller biotechs, and again we were analyzing our wins for 2008 and identified that 7% of our wins overall in 2008 came from small companies that have no revenues. So obviously that kind of customer group would be under more pressure.

When we analyze our cancellations in 2008, we see that over 20%, just over 20% of our total cancellations came from such companies. So what that demonstrates I think is that the smaller companies that have no revenues are more volatile, are more likely to have cancellations than larger companies and obviously in the current climate, those companies are particularly vulnerable. They are not a huge part of our customer base, but obviously when a part of your customer base is feeling the pressure that they are feeling, well then it affects the overall picture.

But at the same time, Ian, even large companies we see being slower in making decisions. So it would seem that everyone is certainly thinking about the implications of the current economic environment; although for a lot of them, there is no good reason why they should be postponing long-term research decisions given the strength of their cash flows and the stability of their cash flows.

Okay. Maybe just a follow-on to that. You are saying the smaller biotechs maybe who don't have cash coming through are under a bit more pressure. Are you in a position where you think they may have to take a bad debt provision? Is there any chance that any of your clients, from the 7% of the wins, maybe won't be able to come up with the cash?

Well, it's obviously something we look very carefully at whenever we are even pricing new business. We take a very careful -- that isn't new. This is something we have always done. Take a very close look at whether it is worth the effort to put it [locally] in responding to a request for proposal from such a small company. So we have been pretty good in ensuring that we have a customer base that has the cash to do the program that they have asked us to.

But nonetheless, the events of the last year and the state of the market has meant that some customers that we would have judged to be reasonably sound and that we judged had the cash to do the programs that we were (inaudible), one or two of them have got into some difficulty and we have made some provisions in quarter four to take care of any risk that we see there. Ciaran, would you agree with that?

We have, yes. We had at a fairly rigorous -- where we usually have rigorous exercise, but we have a particularly rigorous credit review and control exercise over the last number of quarters. At the year-end, we went through everything and made what I believe is prudent and adequate provision for any biotech company that we weren't sure of.

Okay, thanks very much.

John Kreger.

Hi, thanks very much. Peter, you were kind enough to give us the percent of bookings from small clients. Could you also just give a few more metrics along the same lines? Perhaps how large your largest client was in your top five and if you would be willing, the percentage that would come from a combined Pfizer Wyeth?

Well, from combined Pfizer Wyeth, I think revenues last year from combined Pfizer Wyeth was less than 3% and backlog was less than 2% as I recall. Ciaran, am I remembering correctly?

That's correct, yes, yes.

In terms of largest client, largest client was 7.4% of revenues. Top five, John, was 28% of revenues compared to 32% last year. Top 10 was 45% compared to 48% last year and top 25 clients was 64% compared to 68% last year. Have I given you enough?

Yes, that's perfect. Thank you. And the other -- you talked a little bit about where we stand at early days this year. Can you just expand a bit more on that? I know January tends to be a bit of an unusual month every year in your business. What are you seeing this year that either adds to or makes you more cautious about the outlook for the year?

Well, I suppose it's not so much what I am seeing in January; it is what we saw in the fourth quarter. As I said, volumes were down in the fourth quarter. We still priced a good amount of business, but there was a month -- about a four-week period in the sort of November, December when there was very little RFP activity and we were actually -- we were somewhat concerned about that. The encouraging thing and the reassuring thing is that later on in December and through January, RFP activity has been pretty robust. Can't benchmark it against prior year. You can't benchmark something like this on a day by day basis obviously. But just the look and feel of the RFP activity in the first five or six weeks of this quarter seems robust. The business development folks are saying that they are pretty comfortable with what they are seeing in terms of activity levels. So it seems like there was, as I say, a four-week period back in Q4 that was a little scary and that has not persisted.

Thanks. And then one last question, given that four-week period of late RFP float, did you see any changes in pricing behavior on the part of your competitors?

I mean the short answer to that is no. I think I have said in some previous discussions with people that if volumes are lighter through 2009, it would be logical to think that perhaps people would be sharpening their pencils a little. But we haven't seen any meaningful evidence of that at this stage. So the short answer is no.

Great. Thanks.

Jack Gorman.

Thank you. I have two questions, please, guys. Firstly, Peter, just trying to get a little bit more color on the remarks you made as regards to the decision-making being slower than usual. Are you seeing any distinction in what clients are doing by the type of projects that you are pitching for? And by that really I mean pivotal trials versus perhaps more discretionary spend on the part of your pharma customers.

I am not sure that I can really analyze it to that extent. I think what we have generally seen and as we look at the business development, the business development activity, the sense we have is we are doing a heck of a lot of work, we're pricing a lot of work. We have a huge number and have had in January a huge number of what are called bid defense meetings, which are the face to face pitches following up on written proposals that you have made to clients. We have seen lots of that.

Normally after you have done a face-to-face pitch, you get a decision within a couple of weeks. What we are seeing is decisions are taking much longer than that to be made and I don't think there is any particular pattern that I can identify to that as to the types of studies that are involved.

I can only surmise that the reason for that is that people -- there is a degree of caution around -- all of us are experiencing -- all of us - I know in my own family, we are being more cautious about what we spend these days than we were being six months ago. And I suspect that psychology is affecting everybody. So it is taking longer for people to get around to making decisions.

Okay. And just as a little bit more color on the breakdown of wins for 2008 and indeed maybe the breakdown for revenues for 2008. Can you give us a sense, building on what you gave us on the 7% for the new revenue businesses, can you give us a sense of what the split was for the rest of the wins and the rest of revenues for '08 by big pharma versus mid-cap pharma, etc.?

I can. Let me just find my little cheat sheet here. In terms of the year as a whole, large company, both large pharma and large biotech, would have accounted for 63% of our awards in 2008 and mid-cap, and by mid-cap -- not so much mid-cap, but midsize -- these are all companies that have revenues and have profits effectively to support what they are spending in R&D -- have presented another 30% and so you're left with a residue of 7% at these small companies that don't have any revenue.

Okay. And would the revenue profile be broadly similar, Peter?

I'm not sure I understand the question, Jack.

In terms of the split of 2008 revenues by those three categories.

I would suspect, based on the -- I don't have it here to hand, Jack, but I would suspect that based on historic wins, the large pharma presented would be a little smaller. It would probably be in the 50s. The mid-cap would be a bit smaller because the midsize companies in the market segment that we felt we hadn't penetrated sufficiently and we had a lot of effort in that in 2008 and had a lot of success there and the smaller biotech probably would have represented a larger percentage in prior years. But what exactly the breakdown of that is I don't have to hand.

No problem. That's great. Thanks for your help.

Eric Coldwell.

Thanks and good afternoon. First question is -- you have provided this in the past. Could you just, Ciaran, tell us the FX impact on operating profit for the quarter, either positive or negative at the EBIT margin level, please?

Don't know if we talk about it at operating profit. We tend to talk about it at just at margin. We posted about a 12% margin in Q4 and the uplift on that was about 50 bps coming from foreign exchange.

Thank you. Earlier in response to a question, there was a comment that you did a very thorough review of your client base in the fourth quarter, took some -- I thought the word was took some provisions for the -- I think Peter's quote was the one or two customers that perhaps were in a greater financial difficulty than previously expected. Should we read into that that there was a higher provision for bad debts in the quarter and if so, could you quantify that?

You should read into it that there was a higher provision for bad debts and should I quantify it? Well, I suppose given that you can read it in the 20-F when we file it, it was about $5 million.

And remind me what the typical quarterly experience is in the fourth quarter or in any given quarter, Ciaran?

Oh, pretty close to zero has been our recent experience, a couple of hundred thousand dollars here or there in certainly my experience over the 12 quarters. It is a significant provision for us, really reflecting the fact that we are taking a very prudent view of the state of the world and the uncertainty around funding and things like that.

Right. Got it. And then you have also provided some helpful granularity on backlog in the past, breaking out the central labs net bookings from that of clinical research.

Yes, the lab had a poor quarter of bookings, Eric. They booked less than $10 million in the quarter, which was disappointing. In their defense, they had their best quarter of revenues ever and had expanded their margins, but they had a soft quarter of bookings. Largely, they had some fairly significant cancellations, which seems to be a pattern they see at the end of each year. This is about the third year in a row that they have had relatively high cancellations in the fourth quarter. Not something we see across the rest of the business, but for some reason, the lab has shown that pattern. I don't know if it means anything. I don't read too much into it given their size, but that is certainly didn't help them. And again, giving negative news there, I suppose the piece of positive news is their bookings in the first quarter so far look reasonably healthy. So we are not getting too excited about that.

I guess, Peter, one of the things I am trying to figure out is, with a couple of your peers recently announcing sole source central lab contracts, I have been questioning whether perhaps ICON customers have consolidated their activity with one of your peers and it is causing an issue and that might be pronounced in the cancellations as well. Clearly TPD and Covance have talked about some sole source deals here recently or significantly expanded business with a couple of the -- or several of the top 10 pharmas. Without naming customers, is this something that you are seeing or is it more project by project and not really something you could attribute to a transition of business to a competitor?

I certainly wouldn't attribute -- I mean the cancellations we are talking about are pretty broadly based. So there is nothing -- there is nothing in there that suggests they are to do with the transition from our lab to other labs. Sadly, I think the two headline sole source deals that you are -- to which you are referring, sadly, the lab didn't -- our lab didn't have relationships with them in the first place to lose. So those deals aren't having an impact on the lab because they weren't there in the first place.

And I think that is the important piece of context here. We know and acknowledge that our central lab is not one of the biggest players in the industry and therefore, it is -- its customer base when you look at it, is more focused on the midsize type companies rather than the large companies; although, it does have I think four major pharmas as customers. But it tends to generate a lot of its business in the midsize area and clearly a strategic goal of ours is to expand that and to broaden their customers amongst large pharma. And some of the discussions that we are having, going back to Randall's earlier question about strategic discussions, some of the discussions that we are having would potentially include our lab as part of that deal. So we're working hard to try and achieve that.

That is fair. And thanks for the detail. And my last question is just if we could get a little more color on the contributions of Prevalere and HCD in the quarter, maybe thematically how those deals are tracking and what your initial thoughts are with Prevalere? Thanks very much.

Okay.

Thank you --.

Hello? I am going to answer that question, Liz, for Eric. Yes, HCD and Prevalere both performed well in the quarter. For HCD, it was their -- I suppose their third full quarter with the business. They posted healthy margins and revenue well above the original expectation. But it is still a small unit as we guided. So it doesn't move the dial by a very large amount, but we are very encouraged by how it is progressing against its original acquisition criteria. Prevalere was in for half of the quarter and it modestly exceeded its targets for both revenue and operating margin in the quarter. So we are happy with how that is progressing.

And there is -- there was as part of that deal an earnout, an additional payment depending upon the outturn for 2008 and because they modestly exceeded the expectations, obviously that earnout payment will be made. Liz?

Sam Farthing.

Hi, guys. Ciaran, just some specific questions to start with. On your tax rate, I saw a slight increase in the quarter. You might -- can you please I guess give us some information around that and whether your target for sort of high teens tax is still relevant moving ahead?

The first thing, our target isn't high teens tax. On our guidance call, we talked about a target of 20%, which is what we are actually targeting. High teens is perhaps an aspiration that might be better described as something we would always achieve, but realistically, we are targeting 20% in the guidance model that we have set out for 2009. You will note the effective tax rate was 20% for the year and curiously, the tax rate does tend to vary slightly every quarter and it doesn't come in bang on that number due to various timing differences and where income tends to fall.

I think if you look at Q4, you would have seen that it was probably 20.6%, something like that, which rounds through 21% in our calculations. Back in Q3, it was 19.6% or 19.7%, which rounds to 20%. So it is nothing more than that. It doesn't change the target for 2009 nor our expectation that the effective tax rate will be around 20%, so between 19.51% and 20.49% I might otherwise put it.

All right. The other thing I had a query on in the P&L was the minority line. It's something that we have seen as a charge for the last 10 or 12 quarters and you made a gain of $500,000. Can you just explain what happened there?

I think you have missed your vocation there, Sam. You should definitely be an accountant with a question like that. Yes, what you've picked up there is just the year-end balancing of the minority interest charge. It is calculated each quarter based on the quarter's results. When we got to the year-end for that line, of course, it relates to Beacon, which is our imaging business, which we own 70% of up until the 31st of December.

Prior to the acquisition, some restructuring had taken place around the tax line and the way that the business fit it into the model. The whole thing was finally sorted out in December. It impacted the after-profit tax of the unit and as you know, the minority interest is based on the after-profit tax, so when you balance the numbers off for the year, it came out at a small profit on that line. And that line won't be there going forward as Beacon is now 100% owned.

Okay, great. Just stepping up a level I guess, as you look ahead into 2009, what are your expectations, firstly, for CapEx spend? And I am thinking more in expansion of offices. And secondly, on the hiring, you have hired a lot over the last few years and I am wondering looking ahead whether you are looking at perhaps some more temporary hirings than you've seen in the past and a more flexible cost base?

Peter, you answer the CapEx. I'll do the -- (multiple speakers). I was going to do that first. CapEx for 2009, I mean our CapEx has been high for the last couple of years because of so many growth-related initiatives in terms of the Dublin campus, major systems investments, the ongoing IT investment around the headcount increase and then the sort of office footprint and what you have to do with servers and furniture and places were you take leases on.

As we go forward, the CapEx will very much depend on exactly where growth comes out, but as we go into the year, we will have around $25 million, $26 million of CapEx coming forward from projects that are already in progress at the first of January. So if we didn't sign a single new CapEx in the year, which is extremely unrealistic, we would have $26 million. So we are targeting in the region of approximately another $20 million for new CapEx and it should have -- which will relate to just the ongoing growth and maintenance of the business. So about $46 million to $48 million is the target in total for 2009.

That's a nice tight band.

And in terms of then the hiring, Sam. Hiring is really driven by growth and so we have had very high headcount growth over the last few years as we have posted 30% some growth rates each year. This year, in the guidance, we have indicated a much more modest rate of growth. So we would expect that the headcount growth would also be much more modest.

It has always been our policy as a company to have permanent employees and not to rely too heavily on contract staff. And the reason for that is we are trying to be a quality organization and a very people-based organization and hiring and firing or bringing in guns for hire is just something we have tried to avoid as an organization. So this year, there is no plan at this stage to change that. Obviously economic uncertainties make sure that we think about every decision and we are as careful as we can be, but certainly we are not planning to change our philosophy as an organization.

Okay, thanks a lot for the questions, guys.

Dave Windley.

Hi, good afternoon. Thanks for taking the questions. I have a few that haven't been asked yet. I guess the first one, Peter, I wanted to clarify your comments around RFPs in the fourth quarter. Did I understand correctly that volume was down, but value was still up a little bit or was the value also down in terms of RFP responses in 4Q? I think you said a $1.4 billion number priced.

$1.1 billion volume (inaudible) priced, yes.

Okay.

(multiple speakers). That is actually down -- that is down on a headline basis on last year as well, Dave. Although what we found last year, in Q4 of last year, we got a heck of a lot of stuff to price that never went anywhere. We think they were budgeting exercises. So I don't think that is a fair comparison. The volume was down by over 20% and I talked about how we had effectively about a four-week period in the quarter where nothing was happening. But the value is down on a headline basis. We don't know yet how much of the $1.1 billion will actually be placed and therefore, it is hard to make the exact comparison. But certainly the 2007 Q4 number was inflated by a lot of stuff that never went anywhere. So it's hard to make that comparison.

Would it still be the case that value -- in this case, it was down -- and so it would be down less, but generally speaking, value has been growing faster than volume because of increased average size of request and award? Is that still the case?

That's absolutely correct, yes, yes.

Okay. Are you finding that that is the case because of say a monitoring piece or basic clinical study award, say leaving aside lab or whatever else, is growing because of FDA or other regulatory demands? That being one potential driver, another one being that you are getting multiple, say multiple Phase IIIs in an award as opposed to just study by study and then the final driver in my mind would be the potential for more cross-selling, so more functions wrapped into a single award as clients try to streamline what they are doing. Does any one of those drivers stand out as the primary one or all contributing to the growth in average dollar value?

I would need to make sure I am politically correct here, but I would suggest that the most significant driver is the requirement for more data, longer treatment periods, no greater numbers of patients. That, to me, would be the standout driver. Now we are not party to the discussions with regulatory agencies, but when you look at the size of given trials year-on-year, they seem to be getting bigger. The numbers of patients that are required in the studies seem to be getting larger. That would suggest that there is a regulatory influence on all of that.

In addition to that, you said is it because we are awarded multiple programs in a given award or multiple studies in a given award. That is certainly not the way we count these things. We don't take in an award of $40 million or $50 million and say there was an award of $50 million. If there are three protocols involved, we price each protocol, we have a price for each one. We regard them each as separate and we would look at them and see are they likely to go ahead. And if one of them -- let's say if one of them was Phase II and there were two Phase III programs, then we wouldn't count the two Phase IIIs until the Phase II was complete because if the Phase II was not successful, you won't have the Phase IIIs. So you don't want to put those in your backlog.

So it is not a case of us taking big boluses of potential work and sticking it into our backlog. That isn't what has been driving the increasing size of awards. I think it is much more driven by the increasing complexity of studies and the increasing requirement for data from regulatory agencies. John, do you want to say something here?

Yes, there is also something else, Dave, something that we have seen over the last number of years. More and more studies are global and with that, you would see the value of these increasing quite significantly.

Okay. As a follow-on to that, I am curious if you are seeing any increase in your ability to cross-sell the central lab with your clinical business?

The short answer is yes. It is still modest, Dave. I think a few years ago, we talked about the fact that about 10% of the revenues of the lab were from studies where the CRO was involved. I haven't actually seen a more recent analysis of that, but my sense would be it might be 15% today. So we are making some progress there.

And the discussions we are having with clients, again, referencing back to these so-called strategic discussions, do include the logic of all vendors or all services being consolidated with a single vendor, or at least under the control of management of a single vendor. And that, therefore, will and should help us to increase our cross-sell success rates in the future, assuming those strategic discussions lead anywhere.

Right. As you look at your book of business, what percentage of that or how might you divide that out between, for lack of better phrases, full-service awards or study-oriented awards, that I guess has been the way that business has been done for a long time versus functional service-driven awards?

Oh, the majority of our awards are still study as opposed to FSB awards. By far, the vast majority of our activities is awards of study. Now how much of those studies we are selling lab and imaging and so on, that is where our penetration still has a long way to go. But on a full-service basis, a study means we are doing the project management, we are doing the data management, we are doing the medical management. We may be doing the IVRS as well, or not as the case may be.

So they have become more full-service in the last 10 years than they were 10 years ago. I'm using a very broad scale there, but we think that trend will continue.

And are you seeing movement by clients toward functional or toward even -- I have had some folks suggest like borrowing some of the efficiency or maybe pricing gains from functional experience over into the full-service award arena or structure. Are you seeing any movement along those lines?

The short answer is no. You know, full-service is full-service and functional is functional, and there's two different I suppose approaches involved. There are clients who are pursuing both. There are clients who have a part of their budget where they're -- let's say they have determined that they don't have particularly strong in-house expertise in a therapeutic area.

They decide that they will outsource a project or a program or a series of studies related to that therapeutic area on a full-service basis. And then where they have internal expertise in some therapeutic area, they have their own internal project management teams overseeing those. And they might use a functional approach there in that they will use CRAs for hire, an external data management group, for example, to support their own internal leadership of that program because they have the IP, if I can call it that, internally in that particular therapeutic or self-therapeutic area.

So you see we certainly see clients who pursue a parallel strategy of full-service outsourcing and FSB outsourcing, depending upon their own comfort or the depth of their own expertise in a particular sub area.

Okay, last question. Ciaran, can you remind me how much have you assumed -- in the 2009 guidance, how much have you assumed FX to contribute or take away from operating margin?

We haven't really gone that granular on it, to be honest, Dave. We did the budget at $1.40, and that is the way the budget went.

That's US dollars.

US dollar to euro, which is the principal driver. So really, if you look at 2008, to be honest, the dollar rate was all over the place in various quarters and various times. So really would be no meaningful way to sort of give that as an assumption. All I can say is, if you look at Q3 and Q4 and that sort of ForEx environment, we saw the rate of operating margin about 12%. And as we go forward, it will be the same proxy as ever if the dollar strengthens, and it is strong now at $1.25. It tends to soften our revenue and expands the margin a little bit and it is basically neutral on earnings. So those are the assumptions.

Okay. All right. Thanks.

We have no further questions coming through. (Operator Instructions). [Douglas Sessae].

Hi, good morning. Just sort of following up Dave's question in terms of the size of projects and you commented that people are typically enrolling more patients today. I was curious, it has been a little while since I took statistics, but what do you see as the key driver there in that usually you sort of determine your patient pool by sort of powering the study. I mean is the FDA looking for greater -- sort of better statistical significance in studies or are they looking for more endpoints that require more patients to sort of determine statistical relevance?

You will have to ask the FDA, Doug, rather than me. There is a number of things here as I am thinking about my answer to Dave. Some of it may be that we have got compounds spilling out of Phase II into Phase III and you have had that naturally happening over the last number of years and therefore, studies are larger because you have moved from phase. We don't measure -- we don't try to track internally whether the study is a Phase II or a Phase III or a Phase IIa or a Phase IIIb or any of that type of distinction. So that could be one element.

In terms of safety, we all know that safety is a major concern and is the major concern in the FDA today. So seeing more data in more patients where there is outcomes required, seeing more evidence of the outcomes and more sure of statistics in relation to that would be an obvious thing for the FDA to be interested in. So I am sure all of those things are contributing to it. John, do you want to say something there?

Yes, it is not that the FDA have changed their concept of the powering of the study or the statisticians have changed the outlook. The kind of studies that we are doing today are very, very different. It is not hypertension, it is not anti-infectives anymore. Where in the past there is a history of information as to what the outcome of -- what percentage of outcome would be seen as significant. So now we're looking at rather specialized studies and they are taking a very conservative view when they are looking at powering.

The other thing that is also happening with the FDA is that even though the study will probably go into a Phase III mode, but very, very soon as it goes into the Phase III mode or before it is given an approval, regulatory agencies are asking for outcome studies to be done as part of it, which then becomes a much bigger number. And quite rightly so because, as we know, there has been a lot of -- a number of drugs after having been approved have been taken out of the market and this has embarrassed both the clients and the regulators. So all these are driving the number game.

Thank you. And then one other question. I think this was the first quarter in really quite some time where ICON underperformed some of its -- underperformed its peers generally in terms of new business wins. And I was wondering if you had sort of given any thought as to what might have happened or was this simply a function that perhaps you were due or just sort of different customers were doing different things? Perhaps you were sort of more impacted by -- given who you do a lot of your business with -- by the sort of four-week quiet period as you might be characterized.

I was watching the Super Bowl there recently, Doug and the great thing -- the noticeable thing about American football is the quarterback doesn't always hit his man with his pass. Even though we have been hitting our man with the pass every quarter for a long, long time now, there is always going to be a quarter where there is a fumble. And I am not saying that our business development team fumbled, but you can't have perfect execution all the time. It is only a 13-week period and we had a 1.2 book to bill ratio in the quarter. In 2009, we've budgeted for a $1.25 book to bill through the year. And I would tell you, I'd be very happy if we could achieve that given the noise that is going on out in the general economy at the moment.

So I smile a little. We have been asked that question a few times over the last while. I smile a little. We are victims of our own success. We have had fantastic book to bills for a long time and we have had a quarter, which was a little bit more modest, but I don't think we are too embarrassed about it.

And no, I wasn't trying to suggest that you should hang your head in shame. I guess when you step back, I mean I know you sort of usually do sort of post-analysis in terms of things that you won or didn't win. Did you see any changes in terms of studies that didn't win because obviously some of it was just -- there was fewer RFPs decisions were made on, but it sounds like your hit rate was also down a little bit.

Well, obviously I think our hit rate probably was down a little bit, but again, it is on the margins. As Ciaran is once to point out that he is absolutely right, a couple of $20 million projects in the quarter and the book to bill ratio would've looked dramatically different. But that is all it takes and when each piece of business is won on the day by a client making a judgment as to whether that project manager that ICON has presented and the team that ICON has presented is as good as or better than the team that somebody else has presented, then there is always going to be a degree of variability between the decisions made and what you win on a given day and what you don't. And I think that is what happened in the last quarter. We are certainly not seeing any change in pattern; we are not seeing any change in behavior.

The thing that I would be much more attuned to is what is the RFP flow like and are clients going to hurry up and get back to the normal routine of making decisions? Are we going to have long, protracted waits after we have put a huge amount of effort into putting proposals together before clients make decisions? That is a more important issue for me than whether we did win one or two that we would have liked to have won in the last quarter or didn't as the case may be.

Doug, to add to what Peter has said, I am sure you and the others have been following the business wins of a lot of other of our competitors. And as you know in our business, business wins quarter-on-quarter is lumpy. It's never a straight line. But if you look at what we did for the whole year, it is 1.5 and if you compare that with everybody else, we are not bad. So we are quite proud of it.

Okay, great. Thank you very much, guys.

The other thing, Doug, I was pointing out to the guys today, we could have improved our book-to-bill dramatically if we would have decreased our revenue, but I am sure that is not the solution that anybody wanted to see there.

Yes, you could have booked no revenues and had a book to bill of (multiple speakers) to one.

Sandy Draper.

Thank you very much. Most of my questions have been asked and answered. Maybe just a couple of quick ones for Ciaran just to make sure I have got the numbers right. So on the central labs, am I right, Ciaran, the revenue was $19.6 million or in that range, is that correct?

That's correct, yes, yes.

Okay. And then backing into -- the acquisitions added about 4% or about $7 million and FX had the exact opposite of a negative 4%, negative $7 million?

Well, you are talking about the revenue for the quarter or the year?

For the quarter.

The quarter? Yes, the organic was 18% growth and the constant currency was 22%, which was the same as we reported. So you are correct, yes.

Okay, great. And then the final question, one thing you have been talking about for awhile is expecting the conversion of backlog into revenue to slow down. That has certainly happened and it was a lower level. When you look at your guidance, you are expecting a continued lower level, maybe even a slight deterioration. How much of that is -- as you sort of talked about nine months ago -- just trials getting bigger, more complex, taking longer to work out (technical difficulty)?

Hello?

Apologies. His line just disconnected. Do you want me to move on to the next question?

Yes, we will move on to the next question and if Sandy comes back, then you can put him on next.

Certainly. Greg Bolan.

Good morning. Thanks for taking the questions. If I take the delta between the euro you used when guidance was given in January and where the euro sits today, I come up with kind of a noticeable headwind. So just kind of a follow-up to Dave's question on FX, by sticking with revenue guidance, is it accurate to say that you are feeling a bit more confident with constant currency growth expectations in '09 or you using some of the upside originally baked into the guidance or just kind of waiting out the storm? If you could possibly comment on that, it would be great.

I can. Firstly, there was no upside built into the guidance. I know you were trying to catch me for the last six weeks and I'm not going to --. No, look, I'll give you some of the history of when we did the modeling for next year. We started our budgeting process in the fall and we were using the euro/dollar rate. I always talk about it because it is the most significant of $1.44. By the time we got to December and we were finalizing our foreign exchange assumptions in advance of finalizing the budget and the guidance call, we moved it to $1.25 because our view of the world had changed.

Shortly before the actual call on January 9, we moved it back out again to 1.40 here at the year-end because the dollar was screaming the other way. So I think you are crediting me with too much intelligence and ability to predict the future. Look, we used the best rate that we had at the time, 1.40, and it has gone back to the dollar as well at $1.25 or $1.26 when I looked at it over the weekend.

The headwind that you see -- if you remember, we have that natural hedge. So you're right. There is a headwind with revenue, but that will give us a tailwind with margin. And our history over the last sort of six quarters of turbulence has been that those two tend to offset each other and it is pretty neutral on the bottom line and earnings per share. And I am kind of holding to that. It is too early to say what the effect will be on guidance for the year. Next week, the dollar could be back out to 1.40 or certain events, as yet unknown, happen in the US or the European financial system or in Asia, the whole thing could change again.

So I am just really saying that our history is that those movements tend to be broadly neutral at earnings recently and it is too early to say anything else. Obviously we look at it very hard as we get into Q2 at the end of the quarter and see what does that mean for our guidance model, but it is too early to do anything with it now.

That seems completely fair. Which kind of leads me into my next question. So just watching the trend in gross margins and was wondering if you could talk about the contraction in those margins. A softer year should be helping, but clearly there is an offsetting headwind or headwinds. Can you just -- Ciaran, can you just help me understand -- kind of over the next I guess the last four or six quarters -- those margins have been contracting marginally, but they have been contracting. Just kind of what is driving that?

This is gross margin you're talking about?

Gross margins, yes.

Yes, yes. There is a number of things, but the biggest single thing is that we posted 37% reported gross last year and we grew in the high 30%s the year before. The big driver on gross margin is staff and it's staff utilization and recovery. And as you are growing, you are hiring people and we don't hire very far ahead of the curve. We hire just on it, but just about on it. So as you hire, people take a little bit of time to get up to speed, training, productivity, those kinds of things. So that is always going to be a drag on your margins.

So I would actually look at the -- foreign exchange. In there, we will move that. So broadly even to keep it at what I would probably characterize as flat over that period in the face of that is a decent enough performance. I wouldn't read too much into it.

All right. That's fair. And then this is the last question and I will jump out. So if my memory serves me right, I believe Prevalere's business was about 50% pharma and 50% biotech back when you -- I guess it was actually at the beginning of '08 from what I have read. But at this point, is it fair to say that the business development folks at IBS have been instructed to focus more attention on pharma or are you just comfortable with the current mix of Prevalere's business?

We will take money from wherever it comes from and I would certainly never discriminate against a customer with money just because they weren't in pharma. But no, I mean the mix of the business is fine. There's a good long-standing book of business with customer relationships. I can't recall if 50/50 was actually the split at the time.

We're talking about Prevalere.

Yes.

We didn't even own it at the beginning of 2008.

Oh, right. I was just -- from reading I have done with interviews with the CEO back at the beginning of '08. I obviously don't know what it was when you acquired it in the end of '08.

My recollection, Greg, would be that, and I don't have any of the documentation here in front of me, at the time we acquired it, it was much more large pharma concentrated than biotech concentrated. Unless he was referring to a significant portion of the business was in immunoassay, which would be on biotech-type products as opposed to biotech-type clients and the other half of the business was in typical traditional bioanalysis, which would be smaller molecules (inaudible). But I am not familiar with those interviews. But my recollection, my instinct would be that at the time we acquired it, it would have been predominantly a large pharma client based here. Am I smoking something here?

It was certainly more than 50/50 by my -- predominantly, I don't know whether that was 60/40 or 70/30, but it was certainly above 50/50. But I don't think that changes our strategy either way. We're still going to work the customer book and their relationships in particular.

They have a particular strength in immunoassay and that would be biotech-type products. But the large pharma is increasingly concentrating its pipeline in biotech-type products too.

Right. I guess the importance of my question was more strategically where you're going. It sounds like that you are obviously going after those who have the deep enough pockets to actually pay. So which is clearly still a large portion of the base of sponsors out there. So that is helpful. Thanks so much. Appreciate it.

Thank you. We have no further questions. We'll hand the call back to John Climax for closing comments.

Thank you very much. Ladies and gentlemen, we are delighted with ICON's performance in 2008. Revenues, operating income, net income, margins and business wins all grew strongly and we remain positive, though cautious, as 2009 commences. With that, thank you.