ICON PLC (ICLR) 2009 Q1 法說會逐字稿

Welcome to the ICON plc First Quarter 2009 Earnings Conference Call. My name is Sara, 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 have the opportunity to ask questions. (Operator Instructions).

I'm now handing the call over to Ciaran Murray, Chief Financial Officer, to begin today's conference. Thank you.

Okay. Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended March the 31st, 2009. Also on the call today, we have 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 on the comments, which 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 perspective investors are cautioned not to place undue reliance on such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Today's commentary refers to our first quarter ending March the 31st, 2009. Please take note that the financials for both our current and prior quarters, and any reference to margin, is after charging stock compensation expense.

And having said all of that, I would like to hand the call over to John.

Thank you, Ciaran. Good day, ladies and gentlemen. In spite of the challenging business environment, we're very pleased to report another solid performance by ICON in Quarter One, 2009. The Group's net revenue grew 9.2% from $201.3 million in Q1 last year to $219.8 million. Excluding the impact of Prevalere, the US based immunoassay bioanalytical lab we acquired in November, the organic growth rate was 7%. Excluding the impact of currency movements, the organic growth rate was 12.2%.

Operating income for the quarter was $26.9 million, compared with $21.5 million in the same quarter last year, representing an increase of 25%. The Group operating margin for the quarter was 12.2%, compared with 10.7% in the same quarter last year. The margin in our clinical business for the quarter was 12.5%, compared with 11% in the same quarter last year.

The Central Laboratory's revenue grew by 13.8% to $18.7 million, and achieved an operating margin of 9.4%, compared with 7.5% in the same quarter last year. Group net income rose to $20.9 million, from $16.9 million last year, representing a 24% growth. EPS grew from $0.28 per share to $0.35 per share, a 25% increase. The effective tax rate for the quarter was 20%.

The cash flow provided by operating activity was $24.7 million in the quarter. We invested $8.1 million on capital expenditure, which was related to the continuing expansion of our global infrastructure. In addition, we invested $17.4 million in the acquisition of the remaining 30% of Beacon Bioscience in Quarter One. At March 31st, the Company's net debt amounted to $2.2 million, compared to net debt of $4.3 million at December 31st, 2008. DSOs at the end of March were 59 days, compared to 69 days at the end of December 2008.

I'd like to hand over you now to Peter Gray, who will give you an update of the business outlook.

Thanks, John. To paraphrase the words of Mark Twain, reports of the death of the CRO industry have been greatly exaggerated. While the market is much more difficult than in 2008, our quarter one RFP volume has requests for proposals was in line with the same period last year, although the value was significantly lower. Nonetheless, in our clinical business alone, we priced almost $800 million worth of work in quarter one, and the value of proposals outstanding continues to exceed $1 billion.

Activity levels in the early parts of the quarter were slow. And a greater than normal number of outstanding proposals were withdrawn. In other words, the clients decided not to proceed with them. And a significant number of those were from clients who had funding challenges. However, unlike the experience reported by one of our competitors, our experience has been that activity has accelerated in the latter half of the quarter, and RFP activity in April continues to be encouraging.

Gross business awards for the quarter were $321 million. Cancellations were $56 million, or 17% of gross awards, or 3.2% of the opening backlog. Accordingly, net business wins were $265 million, compared with $369 million in the same quarter last year. The $265 million represents a book to bill of 1.2 to 1.

As a result of all of that, our total backlog at the end of March was $1.78 billion, which is a 19% increase over the same quarter last year. Of this backlog, we expect $673 million to be earned in the next four quarters, which represents a coverage of approximately 71% of expected revenues in those four quarters. This is a lower level of coverage than we've seen for some time, and is a function of longer duration projects and slower startups on those projects.

Despite the challenging market, we're pleased with the performance of our business, and have confidence in the long term future of the industry. As evidence of this, and building on the success of our San Antonio unit, last week we purchased, out of bankruptcy, the assets of Qualia Clinical Services in Omaha, Nebraska, a 180 bed Phase I unit which we plan to reconfigure as a 100 bed unit. We're in the process of rehiring the key staff associated with that unit, and we hope to be operational in May. There's a separate press release going out, probably as we speak, giving more details on that particular transaction.

I noted in some commentary put out this morning, question marks about how much we paid for that unit. The actual purchase price was $380,000. So, it's effectively a minimal cost to acquire the unit. However, we will obviously incur costs as we rebuild the backlog of this business. And we therefore expect the transaction to dilute our 2009 earnings by $0.04 to $0.06.

Because of the challenges in the market, we continue to review all of our operations, and take the necessary actions to insure optimal performance. At this stage, we believe the lower end of our 2009 guidance is still achievable, excluding the impact of Omaha, although a continuation of solid business wins, strong cost control, and other appropriate measures will be necessary to achieve this.

Before we go to questions, I'd like to take the opportunity to thank all of our staff across the globe for their contribution to our continuing success in these difficult times. That concludes the formal part of the call. And maybe we can now turn to questions.

Thank you. (Operator Instructions).

The first question comes from the line of Sandy Draper from Raymond James. Please go ahead with your question.

Thank you very much. Wow, a change, I'm at the front of the line. First, just a housekeeping question, Ciaran. And I may have missed this in John's comments. Can you give the split between clinical research and Central Lab revenue again?

Yes, it was up on the slideshow there. It's on the -- the Central Lab revenue was $18.7 million, and the Clinical revenue was whatever the balance is.

Okay, great. Thanks. And then, just a second bigger picture question for Peter, I think, and John, as you said, you saw some business picking back up in the second half of the quarter, continued well in April. Some of the polls are out of some of the funding challenged companies.

Going back to your comments about the competitor you cited, they were seeing even weakness in big pharma. Is there any more commentary you can give in terms of looking sort of big pharma versus small biotech, and just how things are shaping up in terms of RFP flows, how fast they're willing to sign? What's changing across the different customer segments? Thanks.

That's a big question, Sandy. I suppose the macro comment I'd make to you is throughout the quarter -- and I think I alluded to this in my comments -- decision making was slow. The first half of the quarter in particular was slow. And we've seen RFP activity pick up in the second half of the quarter, and continuing to be reasonably robust in April.

The breakdown -- it's interesting when you look at the breakdown of this. We were looking at what's happening with small biotechs. And essentially we classify small biotechs as ones that have -- do not have revenues. So therefore, they're relying on funding. And small pharma companies, they fall into the same category, they have no revenues, they're relying on funding.

And what we saw is in quarter one, they represented 15 -- companies of that nature represented 15% of our revenue. But they only represent 12% of our backlog. And in terms of awards in quarter one, they only represent 6% of awards. So, you can see a pattern emerging there, that these -- the smaller players, the guys who've been relying on feeds from the financial markets, effectively, are playing a less significant part in our revenues as we go forward. And I presume that will continue as long as the funding markets remain difficult.

In terms of large pharma, we've seen some decline in the value of our overall outstanding opportunities from large pharma. When you look at pharma as a whole, large pharma and mid-pharma, it's pretty much the same at the end of quarter one, or during quarter one, as it was in quarter one of 2008. Maybe a little bit down. I think we -- just over 50% of our outstanding proposals were from large and mid-pharma in quarter one of 2008, and it's just under 50%, around 45%, in quarter one of 2009.

So, not as dramatic, perhaps, as maybe some of our competitors have seen it. I hope that answers your question.

Okay, great. Okay, thanks very much.

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

Thank you very much. A couple of small questions, if I may. Firstly, if you could just give us a sense, Peter, in terms of the net wins that you've announced today, just in terms of the size of the contracts within that, representing unusual in Q1 as opposed to normal quarters.

And secondly, one or two of your peers have also talked about pricing pressures. And I suppose two parts to this question. A, have you seen any pricing pressures in the industry? And B, how would you see the rest of the year in light of peers perhaps being under more pressure than they have been, whether there is a prospect of perhaps more irrational, if I can call it that, pricing coming into the market? Thank you.

On the awards, Jack, there was one significant award in the quarter. It's in excess of $40 million in value. So, it was one particularly large one. The rest was a pretty normal distribution of awards, I would say. On the pricing side, we haven't seen -- to be honest, we haven't seen any evidence of foolish pricing. It's competitive out there, there's no question about that. When there's less opportunity around, it's going to be competitive.

And therefore, we have to be really on our game in terms of how we respond and the quality of the responses we submit to clients, how we perform, and the teams we put forward for opportunities. So, it's definitely a more competitive environment. But I would not be saying that we see destructive pricing taking place.

And as how do we see it for the rest of the year? Well, I suppose we see, as the rest of the year progresses, of course it's going to remain competitive based on the comments that others have made, and obviously the experience that they're having. It's clearly going to be competitive. I think what's important in our industry continues to be the quality of the work that is done. Regulators are paying more and more attention to the quality of the work that is done and the quality of the data that is submitted to them.

So, I don't think that we're going to see clients choosing purely on the basis of price. I think they're going to be very focused on insuring that they get competitive pricing, but from CROs that are able to meet their needs and deliver the quality that's needed.

That's great. Thanks, Peter.

Sara?

The next question comes from the line of John Kreger from William Blair. Please go ahead.

Hi, thanks very much. Peter, if you could just expand a bit on the Phase I acquisition. I know you gave us the dilution that you expect for this year, but do you have any longer term thoughts? When do you think that property turns break even or starts to contribute to your income?

Our forecast at the moment, John, would be that after -- that in Q1 of 2010 we would still be making a small loss, but that we should break even by Q2 and then start making some contribution. But it will be a slow build. So again, 2010 wouldn't be a particularly significant contribution, but it would not be diluted in 2010.

Great, thank you. And then, if you'd be willing to just expand a bit more on some of the macro comments you made. If you think across the last three or four months since you provided the guidance in January -- and let's set aside the funding issue. So, just focus on your larger clients. What's really changed from your perspective? What are they doing differently? Where are they cutting back? If you could just give us any more color on that, that would be helpful.

I don't think there's a generic answer to that question, John. I think it's very specific to different companies. In some instances, companies that perhaps haven't embraced outsourcing to the same extent as others. We would see evidence that there's a strong -- what's the word I would use? A strong desire within those companies to retain work in house rather than outsource it. Putting it frankly, I suspect people are keen to protect their own jobs, and therefore are trying to insure that as little as possible goes out to the outside. I think it a very human reaction in the current economic climate.

In other companies, where perhaps there have been changes taking place, there's reevaluations of pipelines, decisions much more -- much tougher decisions being made in relation to what programs should continue, or how much should be invested in a program. While our cancellation rate is 17%, this quarter was relatively modest compared, I think, to some of the experience of others, although 17% is high by our own standards.

There was one reasonably significant cancellation. And there, where a client that was running a series of studies decided one of the studies just -- there wasn't sufficient economic payback to them from that study, for them to continue with that study. So, they decided they would discontinue it.

I think across the board, those kinds of reviews and decisions have been taking place in all pharmas -- I suspect it's not confined to large pharma, driven by the negative economic environment, and also driven by the fact that the forecast -- I saw the IMFs are now forecasting the drug sales will actually drop for the first time in, I think, it's 50 years in the US this year, by 1% or 2%. So, undoubtedly their top line is under pressure, and therefore, large pharma are examining what they're doing, whether they need to do it, what the payback is, and so on.

But I wouldn't want to overstate any of that. We continue to have very positive dialogue with all of our major pharma clients. As I said, each of them is different, each of them has a slightly different perspective. But all of them are speaking positively about the future. And maybe going through some adjustment over the last few months, and perhaps that'll continue over the next few months. But certainly, there are no signs or signals from them that this is a new paradigm. Only that there's a period of adjustment taking place.

That's very helpful. Thank you.

The next question comes from the line of Sam Farthing from Merrion Stockbrokers. Please go ahead.

Hi, guys. I guess, Peter [will take it], going -- looking into April, I was just wondering -- you discuss RFP flow there, Peter. I was wondering, in Q1 when we spoke to you before, you were saying you were seeing RFP flows at very little business being signed. I'm wondering if you've seen a continuation of that, steady RFP flow, but still a delay in signing.

The other question I had was are you seeing a significant increase in the delay between signing the contract and staffing the study? And if so, can you quantify that, maybe in comparison to an average through 2008? And then, one for Ciaran. I was wondering, the FX impact on the operating margin in the quarter, and whether you've changed your FX rate forecast for US dollar/euro for the full year for forecast?

I'll leave the anarack question for Ciaran. The first one, delays in signing, yes, we have been saying, through Q1, that decision making was much slower than normal. But also in our comments -- I hope it came across that what we're trying to say is that things began to accelerate in the second half. So, things have been getting signed towards the end of Q1. Have continued to be signed as we've come into April. Don't want to again overstate anything. But the same degree of hesitancy is not -- is not there, as far as we can see, as was there in the early weeks of Q1.

So, there seems to be a normalization and a settling back down to business as -- I won't say as normal. But business more as usual certainly taking place at the moment. As you -- regards the question as to whether there are more gaps -- bigger gaps developing between the days of signing and the date of projects starting up, there isn't a single answer to that, Sam.

In a lot of cases, and as -- the big award, that Jack Gorman asked about the size of our awards, and I alluded to one large sized one that we won at the quarter. That's effectively -- the client was keen to get that started immediately. So, within days of that being awarded to us, we were beginning to assign people to it to begin the preparatory work. But that, it's a large one. That means a few people are assigned to it. And over the coming months, more people will be assigned to it as more activities are activated, if you pardon the alliteration.

In other cases however, this goes back to a theme that we've been talking about last year concerning strategic outsourcing. One of the consequences of strategic outsourcing is that we're in a dialogue with clients much earlier in their design phase of studies. And therefore, they may be awarding us studies, but there's still an ongoing process of design taking place in relation to the protocol.

So, while we have people working with the client, it would be a few people only. As protocols are designed in detail, and perhaps dialogue takes place with regulatory authorities in relation to the appropriateness of those designs. And hence, an award can take place. And maybe it takes six months, certainly three, maybe six months, before the real substantial work on the project begins.

So, perhaps what we're seeing here is one of the consequences of the shift towards more strategic outsourcing, is that that can mean awards are coming into our backlog at an earlier stage. And therefore, the revenue flow from them is not as dramatic and is not as immediately obvious.

Okay, so there's no specific additional delays seen because of the schisms in the market in Q4, or what we've seen in Q1? It's just the natural change that we saw -- that we've seen over time, that things are, as you said, more collaborative and trials are longer? So, you've got longer tails at the beginning and the end of the trial?

That is the way that we would see it, yes.

Okay. Okay, thanks then.

The next question comes from the line of Douglas Tsao from Barclays Capital. Please go ahead.

Hi, good morning. I was just curious if you could provide some color around new business wins for the Central Lab. We saw revenues down a little bit sequentially. And I was just wondering if you had a sense of what the progression should be in future quarters.

Doug, the net wins for the lab were $17 million. They experienced a higher rate of cancellation than other parts of the business for the second quarter in a row. So, while the net number was respectable, it's less than a book to bill of 1 to 1. But largely because, as I said, of a higher than normal level of cancellations.

To be fair to the lab, for the last couple of years, they have tended to see higher levels of cancellations, either in Q4 or in Q1, although this year they've seen high levels of cancellations in both Q4 and Q1. But again, our lab is a small lab. So, we shouldn't read too much into that, and you shouldn't read too much into that. As we have gone into April, their awards have started well in the quarter. So, we're encouraged to see how they are progressing. We don't think there's any fundamental issues there.

But I think their revenues, because of soft bookings in the last two quarters, below 1 to 1 book to bill, I think their revenues will struggle to make progress through the rest of this year. If they get their bookings back up to the excess of $20 million that is their target and our target, I suspect we wouldn't see the benefit of that coming through the revenues until the end of 2009. That's typically the way in which revenues flow in lab. It tends to be an award in one quarter leads to revenues probably two to three quarters out.

And then, in that context, we saw very good operating margin from the Central Lab, despite seeing revenues down almost $1 million. Just wondering is this the fact that perhaps some of the costs that you incurred in the expansion of the lab into Asia are being mitigated by having revenues generated there?

I'd love to say that that was the case, Doug. I don't -- our costs in India and in Singapore are not yet fully mitigated. So, that would be overstating the case. I think the lab will have a challenging year, given what we just talked about in terms of their booking. I think they'll find it challenging to make progress with their margin through the rest of this year. But they're performing quite well. And hopefully, the units in India and in Singapore will gradually be -- start making a contribution to profit as opposed to a contribution to cost as we progress through the year.

So, is this quarter's margin a reflection of this good old fashioned cost control everywhere?

I think it is, yes. Yes.

Okay. And then, one more question, just in -- you noted that the number of RFPs was good this quarter, although the total value was down. I was just wondering if you saw any patterns that would lead to a decrease just since broadly -- I don't get the sense that the FDA is looking for less data in studies today. They're certainly -- their bar for approval hasn't come down. And so, that seems to run counter to a theme that we've certainly been seeing over the last few years. And I was just wondering if you saw anything jump out in terms of the RFPs that would explain why we've seen this decrease.

I think it goes back to one of the questions I answered earlier, or one of the answers I gave earlier. That I think we may be looking at a period of adjustment taking place in -- particularly in the large pharma companies. As they respond to slower sales, which I don't think was really expected this year.

But because of the economic environment, a hypothesis is that's why sales have slowed down more than people anticipated. Therefore, I think they're reviewing their pipelines, they're reviewing projects that they may have already started. And I presume therefore they're also reviewing projects that they plan to do, and have been slower to make commitments and make decisions to proceed with certain studies.

I think -- I think one of our competitors made reference to the dam bursting, and that inevitably somewhere in the next few quarters the dam was likely to burst. I hope it's a dam and I hope it'll burst. But I would suspect, certainly, and I would share the view, that it's unlikely, for the reasons that you've articulated, unlikely that we're going to see this trend continue through this year. I think programs will have to continue. And as you say, the regulators tend to want more data, not less data. And therefore, the value of RFPs going forward, more likely to increase rather than decrease.

Okay, great. Thank you very much.

The next question comes from the line of Randall Stanicky from Goldman Sachs. Please go ahead with your question.

Great, thanks. I just have a couple questions. Peter, as you look at the source of cancellations, are these -- is there any trend, or are these projects that in large part haven't started yet? Or is it a mix of projects that have started and have been ongoing into your earlier comment? Perhaps the data didn't look good. Can you just maybe give us some color there?

Yes. There's actually no color to give you, Randall. I did mention there was one above normal size cancellation that one large pharma did, where they were doing a program studies. We were running a couple of studies for them. And they decided one of them didn't have strong economic justification. And they decided that they would not proceed with it. And that may be happening on a case by case, piecemeal by piecemeal basis. But if you look at all the rest of the cancellations, I would say they all just fell into the normal routine of why cancellations occur.

In the case of smaller clients, sometimes it's because of the safety issue, sometimes it's because they don't have budget, sometimes it's because there are efficacy issues. There's no particular pattern. And I would not say that the pattern of cancellations that we've seen in the last quarter is any different to what we've seen in quarters for the last 10 years.

I mean, I guess let me ask this another way. Have you guys performed a pretty extensive backlog review? And as you're seeing some of these delays come to fruition, how confident are you that the projects are ultimately going to get started up and that that's not what I'd call heightened backlog, cancellation risk that's sitting in backlog in terms of some of these studies?

I wish I had perfect vision into the thinking of all of the senior executives of all of our clients, Randall. And I could really answer our question. But we have reviewed our backlog. We have a very good perspective on where these projects and products fit within our clients' priority line, if you like. We'd be very confident that we do not have high risk of cancellation from a complete change of view by our clients. And see again, the risk in the backlog is no different to the risk in the backlog a year ago or three years ago.

So, I don't think that has changed in any significant way. And if you go back to the statistic or the data I gave earlier about how much of our revenue and backlog is with the more vulnerable companies, the small pharmas and biotechs that are relying on external funding in order to do these programs, only 12% of our backlog is from such companies, and only 6% of our awards in the first quarter came from such companies. So, I'm -- I'd be reasonably comfortable that the hypothesis behind your question is not a particularly strong hypothesis.

No, that's great, that's helpful. And then, I guess -- I apologize if I missed it, but in terms of the pharma companies that are undergoing transactions and made transactions right now, when do you expect -- I guess are you seeing impact? And when do you expect some of that business to start spiking up a little bit?

You say spiking up a little --

Well, ramping up a little bit. Or has it not ramped down, perhaps?

Well, first of all, I suppose of those that have gone through merger, I think we've been -- we've had certainly plenty of communications with shareholders and analysts over the course of the quarter as to how significantly we're exposed to those companies. And our exposure to those companies was relatively modest. Obviously, none of those transactions have been consummated yet. So, there has been, as far as we can see, there's been no impact, positive or negative, for us from those transactions of yet.

We're not anticipating. We had an award in the course of the quarter from one of the companies -- a small award. I don't want to get anyone excited. We had a small award from one of the companies there that's involved in one of those transactions that would indicate they're continuing to take a long term view and making decisions for the long term.

So, we haven't seen any impact, as I say, one way or the other. Would anticipate for ICON very limited impact, if any, from these transactions. And a spike upwards, which you're alluding to the fact that typically post these types of mergers, the amount that they outsource increases. Given the size of these transactions, and the fact they won't consummate until later this year, I suspect it would be mid 2010 before you would begin to see a spike up if there was a spike up.

Okay. Well, that's good color. Thank you, Peter.

The next question comes from the line of Greg Bolan from Wachovia Bank. Please go ahead with your question.

Good morning. Nicely done, gentlemen. It's pretty clear that the business environment has tightened up over the past twelve months. So, a 1.2 times book to bill seems quite respectable relative to what we've been seeing. So, the question I have is how are you positioning ICON relative to your larger brethren or competitors? And in your view, what features or services of ICON are really enabling you to add value to your clients, more so than potentially your competitors?

Well, Greg, I mean, do you want to give us our secret out in public here?

[The thicker poster] that would be great.

We do not know who all is listening here.

I think, Greg, it's obviously very difficult to know what are the essential differences and what are the secret ingredients. John Kreger kindly put out a survey, or published the results of a survey, that Blair had done, that identified a few CROs as coming out very well in those surveys. ICON is one of those.

It's a lot of different things. It's track record, it's the focus on delivery, on the customer, on an execution that ICON has always had. It's a whole series of little things. I mean, one of the philosophies we have -- and pardon the cliché -- is sweat the small things. And that's what we do as a Company all the time. And I think in times when people are anxious, that's a very important attribute to have.

Sure. Well, let me narrow down, then, a little bit further than -- with regards to a question earlier on price. Can you -- Ciaran, can you talk a little bit more about -- maybe another way of going at this question with regards to pricing the projects. Is it -- does it seem like an attribute or a characteristic that might be helping you do a little bit better in terms of your win rate might be the productivity in which -- in how you're scoping these projects? And Ciaran, can you kind of just explain that philosophy and if that's actually having an impact?

Ciaran -- before Ciaran answers that question, can I just make one comment, Greg?

Sure.

You don't -- if people are winning studies just on price alone, it's a one strike wonder, because if you are going to get repeat business, it is based on performance. And if your performance is not there, you will not get long term relationships or studies from these clients. So, in the market that we are in at the moment, yes, people are looking at price. But as Peter quite clearly said, it's not silly pricing. If some of our competitors want to go out there and silly price it, it's going to be a very -- I don't think that's going to be a long term thing.

So, with that said, Ciaran, do you want to jump in?

I don't have much to say now, John. Unfortunately, Greg, I think we've answered the question. And no matter how many ways you ask it, I don't think I'm going to change the answer. Peter mentioned pricing with all these competitors. We haven't seen it to be irrational in our philosophy. Nothing we're doing there has changed from the way we ever did it. And we haven't seen any significant change in the market. So, I don't think there's anything to add to that.

Yes, and if there's an implication in your question, or if somebody is whispering in your ear, Greg, that ICON is being more cost competitive than others, I would be surprised and disappointed if that were the case, because we traditionally have won business without being the cheapest. And we would hope to continue being the company that continues to win business without being the cheapest. But we are very focused on delivering a quality product. And certainly, we're not out there trying to win business on price.

Yes, and that certainly seems to chime with what we've heard in terms of -- with regard to performance as opposed to price. So, just moving on, would you be willing to kind of quantify the sequential change in RFP volumes that you've witnessed in the first quarter?

What I said, I think, in my comments, was it's about -- it's roughly the same in volume terms as it was a year ago.

Okay, right. Versus possibly the fourth quarter. Is that plausible as well?

In relation to the fourth quarter -- I don't have that data. No, I don't have that data, Greg. I'll come back to you on it.

Sure.

My impression would be that it's probably in line with -- roughly in line with the fourth quarter as well. But I haven't got the data in front of me. But my recollection is it's pretty much the same amount.

Okay, great. And then, the last question here -- so last quarter you mentioned that ICON was engaged in multiple discussions with clients for more broad based or strategic collaborations. I think you called out possibly nine dialogues at the time. Can you give us an update on any of those discussions and kind of where you stand at this point?

They're all still going on. Strategic discussions, by their nature, don't get done in a day. They're all progressing. They're all progressing at different paces, Greg, I suppose, is the answer. A couple of them would be progressing very well. We'd be very happy with where they're heading. We feel fairly confident that they will enhance -- three of them actually I can think of.

Three of them where I would say that we're very pleased with where they are, and would be very confident they're going to lead to a deepening of our relationship or a new relationship with those clients. In the other cases, they're all at different stages and different levels. It would be much too early for us to make a judgment as to how we're progressing on those.

Alright, fair enough. Thank you.

Thank you. Your next question comes from the line of Ian Hunter from Goodbody Stockbrokers. Please go ahead with your question.

Good afternoon, gentlemen. I am just wondering firstly if I could return to your acquisition. And I was just wondering if you could give us an idea how long the unit that you've bought, the company you bought, has been shut down. I'm really trying to get an idea of how long it will take you to build up backlog and when it will start to generate revenue.

I was also wondering if you could give us an indication of whether it will need any CapEx input to upgrade facilities or whatever. You say you're going to change it from 180 to 100 beds. I'm wondering if that needs reconfiguration. And then, my traditional questions, I don't think, John, we've got a factor breakdown on business wins and client concentration over the quarter.

Okay, how long has the unit been shutdown? It shut in January.

Okay.

So, they went into -- it had went into bankruptcy protection in January. In terms of CapEx, we don't foresee significant CapEx. The change from 160 beds to 100 is effectively taking out the bunks, Ian and just putting in single beds. So, there isn't significant CapEx anticipated. There will be some, of course. We want to make sure that the unit is up to the appropriate standard. But it's actually in pretty good shape, which is why we bought it.

And we've -- part of the diligence we did before acquiring the assets was we talked to a number of their clients and got very positive feedback from the clients about the -- about the units and the quality of the people in the unit. And hence, yesterday we actually ran inductions in Omaha, and have hired back in some of the key people, you see in the press release that we put out separately. We've also made another key senior hire.

So, we're rebuilding the business. But it will take time, unquestionably it will take time. And obviously, the business didn't go into bankruptcy because it was making lots of money. So, we clearly have some work to do to build a backlog beyond the customer base that it had in the past.

Now, in terms of client concentration, Ian -- just to give you some numbers, none of them is above 10%. The largest client is only about 6%, 6.5%. Top five clients, 26% this time around, versus 31% last year. Top 10, 43% versus 50%. Top 25, 66% versus 69%. In terms of sector, broadly speaking, 75% came from pharma and 25% from biotech.

Okay, thanks very much for that. I'm just wondering, before you said that you were taking a bad debt provision. I'm wondering if that's still in place, or your -- any thoughts on increasing or decreasing it?

It's still in place. I mean, it was only -- we finalized (inaudible) audit towards the end of February. And we have reviewed all of our debts in a good deal of detail at the year end. That was eight weeks ago. So, not a lot has changed in that universe. So, I think we picked up maybe a couple of hundred dollars as additional clean up on various bad debts. But there's been no significant change to the provision we had at year end. And we will look at is as we go through the year as the circumstances change. But I would be surprised if it changes significantly in a negative way over the next quarter anyway.

Yes, okay. Thanks very much.

The next question comes from the line of David Windley from Jefferies & Co. Please go ahead with your question.

Hi and good afternoon. Thanks for taking the questions. Peter, on the Qualia redesign, did Qualia do any novel compound work, or were they mostly involved in bio equivalents?

They had a predominance in bio equivalents, Dave. But they did do some first in line work. They also did some QTC studies. So, they had good -- they had experience in the key areas. And obviously, those are the areas that we want to try and build up.

Right. And did they have any particular therapeutic call, or was it fairly broad in terms of novel therapeutic areas?

As this thing was in bankruptcy, Dave, the amount of data we have is relatively limited. But I think it was pretty broad.

Okay, okay. I think there was an earlier question on the FX impact to operating margin. And I didn't catch the answer to that if it was given.

It wasn't given, Dave. I got cut off. Peter used up all the available time for Sam's question. So now, I get the chance to apologize to Sam publicly on the line and say I was not ignoring the question. The FX impact on -- we gave it on revenue. On margin, there wasn't a great deal of impact. It was probably 20 or 30 bps that we suffered actually because of just the way the balance sheet translated at the end of the quarter compared to the sort of year-on-year constant currency.

So, not a great deal of stuff around foreign exchange. And the other bit that Sam had asked was had we changed our dollar rate looking forward. No is the short answer. We're not really -- if I was able to forecast the dollar, euro rate and things with any accuracy, I would have a different vocation. And so, we did our guidance at the rate that we talked about at the time, which, as I recall, was 1.40. As we go through the year, we do our internal forecast just at whatever the prevailing rate is when we close a quarter or a month.

Okay. Thank you for that. Peter, on building up the US-based Phase I bed count, are you -- is ICON vying for -- I understand there's a Phase I preferred provider deal floating around the market at this point. Is that something that you believe you can compete for with a somewhat larger base now? Or are you late to the game there? Or what is the status on that?

I believe there's more than one floating around at the moment, Dave.

Okay, alright.

And ICON obviously would be very focused and very interested in trying to participate. Obviously, our bed count is not the largest. So, that's something we've recognized as something we'd like to address. And we are addressing it.

Okay. Is it possible to -- without, I guess, giving away too much -- describe the nature of those deals? Will they involve some type of asset transfer? Is it dedicated capacity and minimum take or pay? What do those deals look like?

Yes.

Okay, alright. Something along those lines.

They -- I suppose the shape could be different in different circumstances, Dave. I think it would probably be inappropriate for me to get into too much detail on it.

Okay.

John would like to say something.

Dave, our interest in Phase I goes beyond those transactions out there. If we get it, great. But more importantly, our focus is in the area of Phase I. You, in your report, quite clearly indicated that people have to do -- or pharma companies have to do things smartly and cheaply. So, the whole area of initiatives that has been propounded by the regulators will slowly be taken on.

And I feel that things like critical part initiative, exploratory R&D, and all that stuff, will create a lot of opportunities for Phase I. And that's why we have taken a position in Phase I. Not because of a particular opportunity, because that will only be a foolhardy way of doing things. We're more business focused as opposed to opportunity focused.

Okay. Great. That's -- I appreciate that color, John. The last couple questions here. You mentioned in terms of meeting the -- now focusing on the lower end of your prior issue guidance, but it will require some cost cutting or cost control maybe to achieve that. I wondered if you could elaborate on that a little bit. What types of costs do you think you can squeeze a little bit to make that guidance?

And I guess I'm also interested in to what degree -- I guess to what degree might that affect the longer term growth of the business, such that it might be given the depressed valuations in CRO stocks right now, might be worthwhile to go ahead and spend the money, target a lower earnings rate, and prepare yourself for a better year in 2010?

We don't intend, Dave, compromising our ability to respond to what we think will be a robust market again in the future, and probably in the not too distant future. And cost control is actually just about looking at -- when we were growing at 30 some percent a year for the last couple of years, one of our directors refers to it as nose bleed growth.

And clearly, when you are growing at that pace, you add a lot of cost -- you put a lot of support structures in place to support that level of growth. We've talked about that many, many times in the past when you guys were concerned that we were growing too fast. So, one of the -- and we did talk about the fact that some of the costs that we were incurring to support that level of growth was not helping us to expand our margin. So, we're looking at all of the things that we do currently.

We're looking at all of the structures that we have in place, and recognizing that some of the structures and some of the costs we have were there to support a much higher level of growth. And as long as we grow more slowly, we don't need them. We don't need to incur those costs, and therefore we can cut back on those. But as we proved when we accelerated from low levels of growth up into the 30s very rapidly, we are able to deploy resources to meet and match rapid growth when the need arises. So, I think we've got a high degree of flexibility in the way in which we manage our cost space.

In addition to that, we have parts of the business -- and we've been very open talking about this in the past. We have parts of the business that don't perform as well as we'd like them to. And obviously at times like these, one looks even more closely at them and thinks about ways in which we can improve their performance. So, that's -- those are the kinds of things we're referring to. We're not talking about in any way compromising our ability as an organization to continue to outperform the industry.

Okay. And last question, Ciaran, on -- at this point in the year, are you taking full bonus accrual for the portion of the employment base that would be eligible for bonus against the P&L at this point?

Dave, I don't think it would be appropriate for us to actually answer that question on the call. Obviously, our employees are -- would be listening in or listening to recordings on this. And the decisions we make in relation to bonuses will be decisions we make as we approach the end of the year, and as targets are judged to have been reached or not reached. I don't think it would be appropriate to comment after one quarter.

Okay. My interest is more in to what extent are -- are the earnings numbers reflecting a full bonus accrual or something less than a full bonus accrual to make that number?

Maybe if I answer the question obtusely for you, we're now saying we're likely to be at the lower end of guidance. We don't set full bonus targets based on achieving the bottom of a range. We generally would set bonus targets on achieving the top end or above the top end of a range.

That's great. Thank you very much.

The next question comes from Sandy Draper from Raymond James. Please go ahead.

Thanks. One quick follow-up. And I guess it may be dovetailing on Dave's question. The commentary about the guidance and the lower end, is that revenue and EPS, or just EPS that you're focused on?

It's both.

It's both, okay. So, you still feel comfortable of getting to the -- ex the dilution, to the lower end. Okay, great. That's helpful. The second is, Peter and John, how much do you look at the results and what's going on in the pre-clinical side of the market? Peter, you obviously sound pretty optimistic about the recovery and the overall CRO market in a later stage, and reacceleration. At what point would you get nervous if the early stage pre-clinical work stayed weak for an extended period? How long would that have to be before you would say, hey, at some point that has to come back and catch us?

After about five years, Sandy. I used to talk in our presentations about the fact that from - pre-clinical really performed very strongly from 1999 onward. And it wasn't until 2005 that the later phase CROs began to see significant uptick in business.

So if you took that as being a guideline, then it would be six years, in fact. So, I don't want to be facetious. Clearly, less activity at pre-clinical ultimately means -- or has the potential to mean less confidence coming through into early phase development. But I think it would be several years before you'd really see the impact of that.

Now, a lot of money has been spent in early stage development over the last 10 years. And I think there are still many, many, many compounds seeking a home at various stages of development that will be anxiously taken up by companies who are seeking to enhance their pipelines. So, I don't see late stage being severely impacted unless the pre-clinical slowdown went on for several years.

Okay, great. Thanks, Peter.

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

Thank you. Just one very quick follow-up please. Peter, just wondering if you can talk to us briefly about the contract staffing business, as to how it's performing given the changing market conditions.

I'm glad you asked that question, Jack. This is a business whose time has come. As you can imagine, in straightened economic times when people -- when there are headcount freezes or reductions of headcounts taking place, the contract staffing business actually has an attraction to clients. And we've seen higher levels of activity in that business, particularly the European business we acquired 18 months ago or almost two years ago. Particularly in that business, we've seen an uptick in the last six months.

Now sadly, that business also has an element of its business that -- where it generates fees for permanent placements. And that part of the business has slowed down. But the contract staffing piece, which is the piece that we acquired it for, primarily, has been seeing higher levels of activity. And part of our -- a significant part of our headcount growth in the last quarter was actually related to the contract staffing business.

Brilliant. Peter, and can you just remind us, have significant studies in revenue and EBIT terms for the Group?

In EBIT terms, I'm not going to break it down, Jack, because we don't break it down out of the segment. But in revenue terms, it's about 7% -- the staffing business is about 7% of our overall revenues.

Fantastic. Thanks very much.

Thank you, ladies and gentlemen. We currently have no questions in the queue. (Operator Instructions). We have no further questions coming through, so I'll now hand back over to your host for any closing comments. Thank you.

Well, thank you very much, ladies and gentlemen. We are very satisfied with ICON's performance in Q1 2009. Revenues, operating income, net income and margin all grew. We remain positive, though cautious, as 2009 continues. Thank you again.

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