ICON PLC (ICLR) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the ICON plc second-quarter 2009 earnings conference call. My name is Fay and I will be your coordinator for today's conference. For the duration of the call, you will be on listen-only. However, at the end of the call, you will have the opportunity to ask questions. (Operator Instructions). I am now handing you over to Ciaran Murray to begin today's conference. Thank you.

Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended June 30, 2009. 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 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 no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Today's commentary refers to our second quarter ending June 30, 2009. Please take note that the financials for both current and prior quarters and any reference to margin is after charging stock compensation expense.

In addition, the following commentary specifically excludes one-time net charges taken in Q2 2009 amounting to $4.2 million. These charges relate to lease and asset write-offs, headcount reduction costs, government incentive payments and one-off tax credits.

On a US GAAP basis, including the above charges, operating profit in the quarter was $20.4 million, or 9.3% of revenue. Net income was $18.5 million, or 8.4% of revenue and EPS amounted to $0.31 per share.

As noted, this presentation includes selected non-GAAP financial measures. For a presentation of the most directly comparable GAAP financial measures, please refer to the press release statement headed Consolidated Income Statements Unaudited US GAAP. While non-GAAP financial measures are not superior to or a substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes. And 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 solid performance by ICON in quarter two 2009. The group's net revenue grew 1% to $220 million in quarter two compared to $218.3 million last year. On a constant currency basis, revenue would have been approximately $230 million, representing constant dollar organic growth of 5%. Year-to-date, net revenue was up 5% from $420 million to $440 million. Again, on a constant currency basis, revenue for the first six months would have been $456 million, representing constant dollar organic growth of 9%.

Operating income for the quarter grew 20% to $29.3 million compared with $24.4 million in the same quarter last year. Year-to-date, operating income grew 23% to $56.2 million. Operating margin for the quarter increased 13.3% compared to 11.2% in the same quarter last year. Year-to-date, the group operating margin improved to 12.8%, up from 10.9% in the prior year.

Group net income rose to $22.8 million from $18.8 million last year, representing a 21% growth. EPS grew 22% from $0.31 per share to $0.38 per share. The effective tax rate for the quarter was 20%. Year-to-date, net income increased by 22% to $43.7 million from $35.7 million last year. EPS grew from $0.59 per share last year to $0.73 per share, a 24% increase. The effective tax rate for the year-to-date was 20%, in line with prior year.

DSOs at the end of June were 49 days compared with 59 days at the end of March '09 and 69 days at the end of December '08. As a result, cash flow provided by operating activities was a strong $103 million in the quarter. We invested $8.3 million in capital expenditure on the maintenance of our global infrastructure and a number of major IT projects.

Year-to-date, cash flow from operations was $128 million and capital expenditure was $16.3 million. In addition, we invested $17.4 million in the acquisition of the remaining 30% of Beacon Biosciences in quarter one and a further $6 million primarily in relation to earnout payments for Prevalere Life Science.

On June 30, the Company's net cash amounted to $83.2 million compared to net debt of $2.2 million at March 31, 2009. Having said that, I would like to hand over you now to Peter Gray who will give you an update of our business outlook.

Thanks, John and good afternoon or good morning to everyone on the call. Gross business awards for the quarter were $317 million. Cancellations were $51 million or 16% of gross awards and 3% of the opening backlog. Accordingly, net business wins were $266 million and this represents a very solid book to bill of 1.2, which should support future growth.

Gross business awards for the year-to-date were $638 million. Cancellations were $107 million, which is 17% of the gross awards on a year-to-date basis and 3% of the average opening backlog. Net business wins for the six months were $531 million, which again represents a book to bill of 1.2.

As a result of all of that, our backlog at the end of June was $1.86 billion, which is a 14% increase over the same quarter last year. Of this backlog, we are expecting $679 million to be earned in the next four quarters, which represents a coverage of approximately 75% of the expected revenues in those future four quarters.

Just some commentary on the general marketplace as we see it. While the total sale cycle has remained prolonged and while total RFP values are still lower than last year, the value of opportunities outstanding has continued to strengthen through the quarter and currently stands at over $1.2 billion. It was down as low as $800,000 -- or $800 million at least at one stage earlier this year. So we see an improvement overall in the tone of the market. We see our pipeline in our lab business stronger than it has been for some considerable time. We are seeing the pipeline in our Phase I business improving. So overall, we would say our experience is that the marketplace is strengthening, albeit from a low base and certainly not back at the level it was at a year ago.

With half the year now complete, we are updating guidance. We expect revenues in 2009 to be in the range of 888 -- sorry -- $880 million to $900 million, which is slightly lower than our original guidance partly impacted by currency factors.

We expect earnings per share for 2009, after taking into account the Qualia acquisition, which we talked about last quarter as being dilutive, we now expect the EPS to be in the range of $1.38 to $1.44, which is a slight improvement over the indications we gave in the last quarter post Qualia.

Before we go to questions, I would like to take the opportunity to thank all of our staff across the globe for their contribution to the continuing success of ICON in this somewhat challenging environment. That concludes the formal part of the call. And maybe we can move to questions. Fay?

(Operator Instructions). John Kreger, William Blair.

Hi, thanks very much. Peter, could you please give us just a bit more clarity on where the restructuring actions impacted the Company?

I suppose, John, it was pretty broadly based would be the top answer, although the US was more -- the higher cost in the restructuring was in the US because we decided to shut a number of offices across the US and allowed the staff in those offices to go home-based. So there are lease termination costs that are a fairly significant part of the $13.4 million of gross costs.

But there are also some costs associated with some reductions in our lab business. There is a restructuring taking place at our Manchester Phase I unit, which I think you have all heard us talk about the fact that that business has been challenging and problematic for some time. So we have taken some strong action there and other small pieces across the other parts of the business, John.

So the major spend was in the US in the clinical business, rationalizing our cost base, reflecting the fact that demand in clinical research is not as strong in the United States today as it is outside of the United States. And what we are seeing affectively is some contraction in our business in the US while growth is continuing in Europe, Asia and Latin America.

Great. That's very helpful. A follow-up to that, I think the change in your revenue guidance at the midpoint was, I think, about $65 million. How much of that would you say is just foreign currency-related versus also some changed market conditions?

I think, John, you would have to say most of it would be changed market conditions. Currency impact might account for about half of that towards the midpoint.

And then finally any update on the pricing environment as you perceive it?

No change, John. Our view is that pricing in the marketplace continues to be pretty disciplined. We are not seeing any aberrant behavior. It is competitive. As we talked about on the last call, it is competitive, but not foolishly so. And I think from what we see, we are reasonably satisfied with the business that we are winning and not feeling as if it is being unduly impacted by that competitive environment.

Excellent. Thanks very much.

Eric Coldwell, Baird.

Thanks very much. I was hoping that we could get an update on progress with the Qualia unit and whether you are actually starting to book revenue in that facility or new contracts in that facility, anything you are seeing there.

Eric, we had planned that we would not actually have the units operational until during Q3 and that is still the plan. We expect that it will be about mid-August by the time the unit has been reconfigured to what we want. We are pre-selling at the moment; although the unit is not ready for clients to come and view it and audit it and so on. So we haven't booked any business yet I suppose the short answer, but we are pre-selling and we are encouraged by the response that we are getting.

That's great. Next question relates to segment mix. I apologize if I missed this. I haven't had a chance to go through the slide deck yet, but the Central Labs, could we get the operating margin in the quarter and also the bookings profile for Central Labs?

Just I suppose a piece of update for you is we are no longer going to be reporting the lab as a separate segment. It is being well less than 10% of our revenues and given that we have now a number of other lab assets and given that none of our peers who have labs report them as a separate segment, we have decided we are not going to report lab as a separate segment in the future. But nonetheless, as we have always done, we are going to give clarity on how different elements of our business are performing.

So the revenues in the lab were down a little on last quarter. They were just under $18 million in the quarter. The margin was down because of the investments that we have been making and the slightly lower revenues. The margin was between 5% and 6%, which is a bit disappointing, but not unexpected given the investments we have been making and the good new of the quarter was the bookings. The bookings were up in the early 20s, which is back up to where -- it has been three quarters since they we were anywhere close to that and their pipeline, as I said in my opening remarks, their pipeline of opportunity is stronger than we have seen it for a considerable length of time.

So we are reasonably comfortable with where the lab is going. Although, in the remainder of 2009, its financial performance is going to be -- still going to be around mid single-digit margins as the investments we are making are a drag on performance until we get some business in there.

That's fair. Would it be reasonable for us to maybe go back now and restate Central Labs into the core operation since you won't be reporting this anymore? I assume that is the model going forward.

That's correct, Eric. Yes.

Okay, great. Final question, on the other conference call from the sector this morning, there was a message that it looks like the market may be firming in the second half and that one of your big peers is seeing a bigger RFP pipeline already for the fourth quarter looking ahead a couple of quarters than they have historically seen looking three to six months out. I am curious if you can confirm that and they also made a comment that there are half a dozen or so preferred provider deals being discussed in the market. And I am curious whether you are also participating in that level or number of discussions with your client base?

Yes is the answer I suppose to the second one. Obviously don't know if there are overlapping ones, but there are always things happening in the marketplace and we are certainly engaged in quite a number of interesting discussions with either existing clients or new clients currently.

Peter, understanding that there are always deals out there, I guess the better way to ask the question would be are you seeing incrementally more during the last few months or is it a steady state of strong activity?

I think I would call it a steady state of strong activity, Eric. I think on the last call, I rue the day that I said it, I mentioned a number of strategic discussions we were having. I always get asked about it now. I think that that in itself was a very strong statement and as indicated a very strong level of discussions. And there have been a couple more come on the agenda since then. So we are pretty comfortable that the tone of the market, not just in RFP terms, but in terms of companies really engaging in thinking about how to do outsourcing to a greater extent in a more, if you'll pardon the cliche, strategic way and so on. But that progress continues and we see that as a pretty positive indicator for the future.

Now I can't say that we are seeing RFPs related to Q4 because we don't get RFPs for Q4 until Q4, but what we are getting indications of is a continuing improvement in RFP activity and good indications from our clients that the flow of opportunities in the second half is likely to be stronger than in the first half. So I think we are probably echoing similar sentiments to the other call today.

Great, thanks so much, Peter.

Ross Muken, Deutsche Bank.

Good morning and afternoon depending on where you are. In terms of the sort of overall market activity, one of the other things your peers said this morning was that there was particular areas of weakness from a therapeutic focus. They noted infectious disease and oncology. Are you seeing any specific areas that are showing any different characteristics sort of from the overall core business or is that something where you think it was probably more specific to their mix?

I can't comment on their mix to be honest with you, but you now have asked a question that I will run off and get our business development people to do an analysis and see is there anything in the numbers that says that there are particular shifts in particular therapeutic areas. But there is nothing that I am aware of -- Ciaran, anything you are aware of, John? We are all shaking our heads here. There is nothing we are aware of, of any particular weakness in any particular therapeutic area. And it is hard -- to be honest, it is hard to conceive as to why one particular therapeutic area would be suffering weakness if others weren't. So nothing we are aware of, but you have prompted me now to go and ask the business development folks to do some analysis.

Well, I'm glad I at least accomplished that. In terms of sort of uses of cash, obviously with the very, very strong cash flow in the quarter, your balance sheet profile is quite attractive currently. You have been somewhat active on the M&A front. How would you sort of characterize valuations and sort of what is available? I know for a lot of time last year there were pretty stretched valuations. Obviously that has corrected somewhat. How would you sort of paint that picture?

I think valuations have changed obviously in the public domain. I think in the private domain, they have not. I think it takes entrepreneurial and VC or PE owners of emerging or developing businesses longer to adjust to the valuation realities of the marketplace than it takes the market to adjust, the public markets to adjust. So I would say that it is probably early yet for acquisition activity to pick up because valuation expectations have not adjusted as much as they probably need to.

Okay, great. Thank you very much.

Randall Stanicky, Goldman Sachs.

Hi, good morning. This is actually Bob Jones on for Randall. I wanted to talk on the margins for a second. I am hoping you can provide some detail on what was done on the cost reduction side, maybe some specific areas that were the source of cost reductions and then how much leverage do you think you have on the cost side going forward?

I think, first of all, Bob, I would say that the cost reductions that we have taken in the course of the quarter haven't really had a financial effect yet because they were taken, many of them, toward the latter end of the quarter. So we have obviously been taking costs -- we have been very cost-conservative through the year so far because of the uncertainty in the marketplace. But the specific cost reductions that we have spent money on say occurred at the back end of the quarter and therefore we haven't seen the benefit of those yet.

No, that's helpful. And then just one more follow-up, on the strategic deal that you signed with Lilly in June, I was wondering if you could maybe help us think about how much of that deal was recognized this quarter in bookings and then maybe how we should think about that business being recognized going forward. Thanks.

It is obviously a significant piece of business that should have long-term significant revenue value for us. But the value booked in backlog is probably the equivalent of a large Phase III program. So therefore north of $50 million is what has gone into the backlog. We have earned no revenue on that as yet as there is a consultation period going on with the Lilly employees and those processes have to go through before we will actually take on any of the work. Some revenues may flow in Q3, but again, it will probably be only at the very back end of the quarter. So it won't be until Q4 that the revenues begin to flow from that opportunity.

Thanks for the questions.

Sam Farthing, Merrion.

Hi, guys. Thanks for taking the question. Peter, you are talking about RFP value increasing. I was wondering if you could give us some sort of idea of the momentum going from Q1 into where we are now in terms of -- has it been a steady growth from what you were saying, $800 million up to the $1.2 billion now. And I was wondering also if you could give us some information about how the new business signings are going. I remember in Q1, you were saying that, in January and February, there was very little sign. It all sort of fell through into March and then we saw a continuation into April and May. I was wondering if you could give us an update how that has gone throughout Q2 and into Q3.

Okay. The first part first. The RFP momentum is, I think as I said in my opening comments, RFP values are still pretty significantly lower than last year. So none of us here are jumping up and down and throwing our caps in the air saying peace in our time. There is still significant progress to be made. As one of the earlier questioners identified, there are indications that RFP activity is going to be increasing in the second half of the year. We are certainly seeing better quality and more larger RFP opportunities over the last month or so. So it is building nicely.

One of the reasons why the pipeline of outstanding opportunities has grown up to $1.2 billion is because the sales cycle remains prolonged. So things are staying longer before the decisions are made. So I don't, again, want to overexcite enthusiasm here, but I think the indicators -- what I was saying, Sam, is the indicators are encouraging, but we are not calling it the end of the game yet. And to the second part of your question, if you wouldn't mind repeating it.

Yes, sorry. I was just asking about the actual new business signings.

Yes, yes. The flow of signings was better all through the quarter. There wasn't any big gaps during the quarter where nothing was happening and the very encouraging thing was the signings in the first couple of weeks of July have been pretty strong. So Q3 has started out very well. So overall, again, the indicators are that the freeze, a bit like the credit markets perhaps, the freeze has been thawing and decisions are being made and business has been signed.

Okay, thanks for the questions.

Jack Gorman, Davy.

Thanks for letting me ask some questions. I have some housekeeping questions really if I may and four albeit very short ones. Firstly, on Qualia, just wanted to get a sense of what the impact of that was in the quarter in earnings terms, if there was any at all.

Second question, just in terms of the margin profile, whether FX had an impact on that. Obviously there is plenty of a marked increase year-on-year in your margin.

Thirdly, should we be reading the cash flow in the quarter as particularly sustainable or in DSO trends? It was particularly good in the quarter. Is that a sustainable number?

And finally, just any sense, Peter, whether, on your cancellations, was there anything particularly unusual within the profile of those this quarter around? Thanks.

Okay, maybe, Ciaran, will you take the first couple of pieces?

I will, yes. Qualia was $0.01. We got a foreign exchange benefit when we retranslated the balance sheet at the end of the quarter, which lifted the margin from being in the high 12%s to 13.3%. So looking forward, sort of 12.6%, 12.8% is where we would see the like-for-like margin.

The cash flow was a record driven by record 49 days of DSO, which arose from a particularly benign set of collection circumstances. Everything just seemed to go right. We still view 60 as being our target DSO, has been the long-term average. So while we will endeavor to keep the number as low as we can, there is a fair chance that we'll see it rise over the next quarter or two. So I wouldn't assume 49 was necessarily sustainable.

And in relation then to cancellations, I think it is -- what is noticeable, Jack, is, the last three quarters, the cancellation rate against wins in the quarter is running about 16% or thereabouts, which is higher than the average that we have had over the last couple of years. But when you look at it in terms of opening backlog, it is running about 3%, which is at the upper end of the range. We talk about 2% to 3% or 2% to 4%. 3% is a relatively high number historically. So cancellation activity is a little higher than it has been traditionally, but not worryingly so. There is no particular evidence to say that the world has changed and things are much more likely to be canceled.

I think where some of those cancellations are still fallouts from the financial crisis and people really examining their pipelines and determining whether certain projects that they plan to do they really need to do or not. And I suspect that will work itself out over the next couple of quarters and I would be hopeful we would see the cancellation rate begin to come back down into our norm of mid-teens or thereabouts -- sorry -- of low teens or thereabouts against wins and somewhere between 2% and 3% against opening backlog. But I suppose there is no particular trend that we see in cancellations other than that rather broad statement I have just given you.

And Peter, maybe if I may, just if you could provide maybe any additional color on the RFP momentum that you have talked about, answer a couple of questions and is there any particular segment of the market, be it biotech, pharma, large, small, that has been particularly driving that momentum?

I would say large pharma is more in evidence than obviously small pharma, small biotech. That is not a surprise I guess. They are the guys who have the most money. But generally, it is midsize pharma. It is the companies that have revenues, have cash flows to support their R&D activity are strongest and the companies that were relying on the financial markets and sponsors to provide them with cash to support programs are the ones that are less obvious in the market today.

Thank you very much.

Greg Bolan, Wells Fargo Securities.

Thanks, Peter. So touching on Eric's earlier question, last quarter, you talked about three specific conversations you're having with pharma on strategic deals. It looks like obviously one of those was the Lilly deal that you signed in the quarter and congratulations by the way. Assuming success with other deals, do you expect these strategic deals to follow the same structure as the Lilly deal in that they are kind of outsourced as a specific function?

No. No, I think the types of strategic discussions we have and are having with clients are pretty much unique to each client. Each client has their own approach and way of doing things and not every one of them is likely to be announced. In fact, the majority of them will never be announced because of the nature of them and because there aren't specific assets or activities that are transferred. But nonetheless, they will represent a shift in the way in which the client is approaching outsourcing. So I don't think you should expect to hear of more announcements of the Lilly type necessarily, but there might be a lot of interesting things going on in the background, which we would allude to in conversation, but we won't be announcing in press releases.

Okay, that's fair. And then excluding the Lilly deal that was signed in the quarter, any bookings in the quarter of note just in terms of maybe the $30 million to $50 million mark?

There were one or two other things that were reasonably significant in the quarter, but obviously we don't go into more detail other than saying yes, there were a couple of things in the $20 million to $30 million range.

Okay. And then, Ciaran, just a few housekeeping questions. Are you still targeting $46 million to $48 million in CapEx for 2009?

I think we will be lower than that, Greg. We started that level at the start of the year. We have spent about $16 million or $16.5 million in the first two quarters. So I would expect that the CapEx will be closer to $35 million.

Okay. All right. And then just last question, looking at the 5% constant currency growth rate in the quarter, does that include the revenue contribution from Prevalere and then if so, I am assuming it does, can you break that out if possible?

No, the 5% was the constant dollar organic growth rate.

Okay. Could you possibly provide what the contribution from Prevalere was?

No, we don't disclose that detail.

Okay. All right, thank you.

Dave Windley, Jefferies.

Hi, thanks. Ciaran, could you talk a little bit on FX? I think, from my notes, I had that you were using $1.40 on the US dollar to euro exchange in your guidance earlier in the year. Dollar is actually a little weaker than that right now. I wanted to make sure I understood which -- kind of understood the moving parts of the currencies and where your exposures are that would negatively impact revenue growth or revenue forecast as opposed to positively impact that forecast?

Yes, for the first part of the year, Dave, the dollar was down in the $1.30s and the actual numbers that we picked up for about five months the dollar was adversely impacting the reported revenues. So that is where most of it comes. As we look forward to the rest of the year, we are forecasting not at $1.40, but in at around $1.35 or $1.36 and then the actual currency flows that we have is specific to just the nature of contracts and what has been signed and where revenues are coming in. So they are just moving parts there and when you crunch them all through the model, it is coming up showing that we are about $30 million to $40 million off where the foreign exchange assumptions were when we did the guidance.

Okay. So part of that is that you are making an assumption that is of a stronger dollar than where it is trading right now?

Yes.

Right, okay. Peter, on the new business flows, is ICON's hit rate remaining relatively constant? Are you seeing that actually move up in the market right now?

Our data would suggest that our hit rate is running a little better than it was running a year ago. So a little higher is the answer.

And would you attribute that to getting some repeat business from some customers that might have been new a year ago or newer a year ago or just continuing to put the shoulder to the yolk or is there some other factor that might be influencing that hit rate?

I think you're asking me have we cut prices, Dave.

I didn't say that. I didn't say that. I'm going to ask you if others are cutting prices though.

Well, the answer is we are not cutting prices. Is it because we are putting the shoulder -- yes, it is -- if you asked our business development team and our operations teams, they would say we have upped our game in our pitches to clients, the amount of effort we are putting in, the teams we are assembling, everything. Because it is a tough market, everything and because it is a more competitive market, everything is being looked at and I think we are just playing the game a little better, a little tighter than we were a year ago, which is a great achievement. And I think we are very pleased with that, but we certainly are pretty confident it is not because we are cutting prices.

Right, okay. And are you running into different competitors these days in the bake-offs than you have seen historically or is it pretty much the same mix?

I think it is pretty much the same mix. We have been playing in the, what we call, in football in the UK, they call it the premier league. We have been playing in the premier league now for the last number of years. So the people we see are the top CROs and you wouldn't really expect them to disappear. They are all there. So we are continuing to see the same people.

And are you seeing any of your typical competitive set, which I presume includes both public and private companies, are you seeing any of them and maybe particularly the privates that can hide that activity acting differently from a pricing discipline standpoint?

As I said in my earlier comments, our observation is that there is pretty good pricing discipline in the marketplace. We are not seeing, as we saw back in 1999, some real rogue activity. We are not seeing any evidence of real rogue activity. So I think everyone, public and private, seem to be behaving in a rational way.

I think if you go back to 1999, some of the companies that did behave irrationally suffered for several years afterwards because they had to live with the consequence in three and four-year duration contracts of very poor pricing. I think everyone remembers that and has learned from that and therefore, people are not being foolish.

Moving on to the other side of that coin, the cancellation rate, you have commented about that a little bit. Obviously I am sure you have seen it. I have written about it. These mergers are kind of notorious for creating some shuffling of pipeline of activity. And I guess I am wondering when we are going to -- not if we are going to hear about that reshuffling, but when and I am wondering if you have heard or gotten indications from clients of business that they don't intend to continue to pursue as a result of Pfizer Wyeth or Merck Schering?

Yes, again, the quick answer is no. The longer answer is it's probably early yet. I don't think any of those mergers are yet consummated. So the actions that you might take as a result of those will not happen until they happen.

I think the other thing to remember is, in these mergers, it is later stage projects, particularly anything that are in Phase III are rarely, in our experience, canceled because if they have got to that stage, they presumably have been through a lot of screening and a lot of diligence and they have significant hope associated with them if they are in Phase III.

So the likelihood that significant chunks of business that are already running will be canceled I think is pretty small. The disruption that typically happens in mergers is the flow of RFPs after the merger or even before the merger slows down because people are anticipating the actions of the merger are digesting the merger and trying to use their internal resources first and outsourcing less of the pie for a period of time until the cost reduction exercises kick in and then they need to outsource more. So I don't think it is going to be a cancellation story. I think it is going to be a lag in business story if there is any such story.

Okay. And then --.

And again, remember -- and remember -- and we have been, again, open about this -- the percentage of our business with any of those companies is pretty small.

Right, right. In your comments to an earlier question about kind of referring to [PPD's] call this morning, and talking about the back half improving from the first half. When you look at the back half of '09 and expect some improvement, is that also taking into account the potential lack of flow from those companies, the merger companies?

I would love to tell you that we have analyzed it down to that level and we have done it out by company and so on and we haven't. I suppose our business development teams give us reports on what they are expecting from their clients and we amalgamate all of that. And we gauge from that what we think the tone of the market is, but it is not a scientific number. It is like looking into -- what is it in Harry Potter? They have a pan sieve or something like that is what they look into in Dumbledore's office. That's what we are looking into and hoping that we are seeing the picture of the future, but who the hell knows.

And then the last question I had was around the coverage ratio. I noticed that you guided in a way that ratcheted that number back up a little bit. Was part of the change in guidance to get to a more conservative position, vis-a-vis that coverage outlook?

Now I think you need to repeat that question. You have got me confused.

Well, your 75% coverage number I think is where you are now and it had dropped down to 71%.

Very good. Yes, that is correct.

So that obviously is a more conservative stance. I guess I am just asking was -- was that a recognition that you wanted to get that number back up into the mid-70%s just to position yourself more conservatively on guidance?

No, no. Obviously when you bring down the revenue number, it does push up that percentage number. You are correct there. But it wasn't done in order to bring the percentage back up. It was done because our revenue forecasts say that that is what it will be. And with having done $218 million or $220 million in each of the last two quarters, we are at a cumulative of $440 million or thereabouts.

At this stage, it would be quite a stretch to get to the $930 million, which is the bottom of the guidance. It would require a blowout, if I can use that term, to Q3 and Q4 and we are not anticipating that. So we had to bring down the revenue guidance number to make sense of the numbers.

Okay, great. Thank you.

Ian Hunter, Goodbody Stockbrokers.

Good afternoon, gentlemen. Given the fact that this quarter you are saying that you had one win -- well, the Eli Lilly deal was $50 million towards the backlog and you had a couple of deals in the $20 million to $30 million and I think you had a $40 million deal in Q1 '09 or in that kind of range. I was just wondering if you can give us an update on the client concentration.

Sure. The largest client is less than 7% of revenues. Let me open my little cheat sheet here. Top five clients, 24% of revenues year-to-date compared to 29% last year. Top 10 clients, 39% compared to 48% last year and the top 25 clients year-to-date, 59% compared to 68% last year. So the client concentration is continuing to dilute.

Okay, that's great. And I am just wondering -- again, can you give us an idea -- you have got your cheat sheet there, as you said, Peter. Wondering what the indications are that you are seeing the business coming through, if you have got an idea of breakdown on that and also the size of companies that you are dealing with that are in your backlog.

Oh, dear me. You are really getting into the nitty gritty now. In terms of the business wins, the concentration of clients, I think I alluded to this earlier, is largely large pharma and mid, biotech and small -- small biotech and small pharma, by which we mean companies that don't have -- that make losses or don't have revenue -- only represented 6% of gross awards in the quarter. And the other anorak question you asked me was what?

(inaudible).

Oh, therapeutic -- sorry -- therapeutic indications. At the -- in the first half of the year, oncology was 24% of revenues, cardiovascular was 22%, CNS was 16% and endocrinology, which would be diabetes and obesity, was 10%. Now that is not awards; that is revenues. I haven't analyzed or don't think we have analyzed the awards by therapeutic area.

But if you look at our backlog overall at the end of the quarter, oncology was 29% of our backlog. Cardiovascular was 17%, CNS was 16% and diabetes and endocrinology was 13%. And the rest, I can go on and on, but too much information.

No, that's fine. I mean really when I was looking for size of clients, etc. I was coming back to my old chestnut of bad debt provisions and just wondering whether you have a provision in there and whether you have been seeing any difficultly with your smaller clients. I see your percentage of small biotech and pharma has reduced somewhat from a couple of quarters ago and I am just wondering if you are seeing that they are just not coming through with the deals and therefore you are in a better position dealing with the more established pharma now than you were maybe two quarters ago?

I think, Ian, it would be fair to say, if you go back over the years, we haven't had much in the way of bad debt issues. In Q4, on a one-off basis, because of the state of the world, we took a provision of $5 million or thereabouts against a number of biotech companies, which we had looked at in terms of their ability to continue in their viability and their funding. We took that charge in Q1 or in Q4 rather. We haven't had any more significant incidences since then. We took a prudent and hard look at the numbers at the end of the year and nothing much has changed since that time.

Well, as you would expect, Ciaran. As you would expect, that provision is still warranted because some of these small companies are struggling. There are some programs we are doing where we have slowed down the pace of work because their cash flows can't support the pace of work and so on. So we are being cautious with those and we think we are well provided.

That's great. Thanks very much.

Doug Tsao, Barclays Capital.

Hi, good morning, guys. You referenced that you took a charge for the Manchester clinic. And I believe you indicated that you are moving from the clinic into an inpatient setting at a Manchester hospital. Has that move been completed and how -- excuse me?

Sorry. No, that hasn't been completed. The timing on that is that we have moved out of our old facility, but the new facility in Manchester Royal Infirmary will not be available until April of next year. So at the moment, we are continuing to work with our clients, but we are using third-party facilities. We have set up partnerships with five or six other Phase I units and we are conducting studies in their units using their facilities, but using our staff.

And do you anticipate seeing any moderation in terms of your business development efforts for European Phase I just given the fact that you are going to be sort of working with third-party providers, which might give some clients a little hesitation until you are into your new facility?

On the contrary, we have been working even harder to convince our clients they should continue to work with us. We have some unique selling points developed in Manchester and some unique models that we have developed in Manchester that we are continuing to have traction with with clients. And we certainly aren't -- we are not going to withdraw from the market though because when you withdraw from the market, it is very hard to regain your position. So we are fighting hard with all of our existing clients and with some new clients to win business even in the third-party units.

Obviously when we modeled the effect of that post the closing of the old unit, we were concerned that not all clients would be receptive to the idea. We have been positively surprised and have been winning higher levels of business than our plan had supposed. So we are very pleased with how that is going.

Okay. And then when we think about the operating margin in the quarter, Ciaran referenced that there were some balance sheet adjustments, which gave, it sounds like, about 70 basis points in the quarter. How should we think about -- I suspect your recruiting costs are down just given the moderation in your business wins. So when I think about the margin gains that we have seen, sort of 12.7% range for the year, which is probably about 70 basis points up from where we were last year, how much is just lower recruiting costs versus just improved deployment of resources and more efficient operations?

I mean it is a combination of a number of factors. We have seen significant margin gains over the past 12 months. I mean I wouldn't call it sort of -- to just categorize it as recruiting costs would probably be oversimplistic. Albeit we may be responsible for that nomenclature from what we said at the past. When we talked about growth when we were growing very rapidly, there was some downward pressure at times on margin. We would have categorized that as being growth-related costs, meaning recruitment cost induction, training, building up the associated infrastructure behind it.

So I think taking all of those things into account in a more moderate growth environment, while we are still posting growth, it is at a more moderate pace. Therefore -- we are all human. There is less suboptimization in the face of the growth rates we have now rather than the nosebleed 30% plus growth rates we had in the past. So you put all that mix together and we have seen the margin creep up into the high 12 point something. I think that is a fair run rate for the rest of the year.

Okay. And then, Peter, you have broadly sort of given comment about seeing fewer large opportunities in the marketplace right now. In your experience, are you seeing things fairly even across your entire client base or is it uneven in that some clients continue to be fairly strong, some seem -- are weaker and maybe some are strong in some quarters and some are weaker in others or has it been fairly consistent across all the quarters across all your entire client base? If I think about your key repeat clients, not thinking about the smaller biotech companies who are sort of more -- less often repeat customers?

Let me -- there are a number of different points I would like to make about that. First, I would like to clarify something that you said at the beginning, which is that I said we were seeing less large opportunity. I think that is what I said on the last call, pre quarter one. What I was indicating, and I obviously didn't communicate it very well, today, was we are beginning to see those larger opportunities reappear, which is why our list of outstanding opportunities has grown and is growing and has reached $1.2 billion at this point in time. So I think that flow, that aspect of the market is correcting would be our assessment. Now it is early yet to absolutely call it, but it is certainly better than it was at the end of quarter one.

In terms of repeat business, and are there some that are and some that aren't, the answer to that is there are always some that are and some that aren't. If you think about the number of compounds that large pharma companies have in Phase III is never as large as the street would like it to be. So therefore, there is a finite number of large opportunities any company has. And once they commit into a large molecule, they have committed a significant part of their budget probably for several years to come.

So you can see periods -- we can see years where we have a lot of activity with one particular client and much less activity with that client in the following years, but we are earning lots of revenue with them because we won some significant projects from them in a given year. And another client is in a different place in its cycle and we see a lot of activity from another client in a year.

So it is very difficult to say and very misleading to say that one client is more active than another client at a particular point in time. Given the duration of these big projects, you tend to get a staccato flow of business from these companies.

And I think another factor, which during the course of this last quarter I pointed out to people -- and I think it was a bit of a a-ha moment even for myself -- last year, we had $865 million of revenues and our largest client was 7% of revenues, 7% or 8% of revenues, which means our largest client represented about $60 million of revenue.

For companies that are spending $4 billion, $5 billion, $6 billion plus in research and development, for us only to have $60 million of revenue from them says we have got a heck of a long way to go before we really penetrate these companies. So it is not surprising that we might see ups and downs and staccato activity with any one client at any point in time.

Okay, great. Thank you very much.

Todd Van Fleet, First Analysis.

Hi, guys. I wanted to ask you if you have an annualized number that (technical difficulty) restructuring costs you incurred in the quarter.

Sorry. Can you repeat that Todd? We lost you for a second there.

Is there an annualized savings that you can attach to that $13.4 million in restructuring costs that you incurred in the quarter?

There are annualized savings that we can attach to it, but we are not disclosing that number. It is just another number in the whole panoply of numbers that go to make up and weave the fabric of the accounts.

Is it presumably greater than the $13.4 million restructuring cost?

No, I mean a lot of that $13.4 million is attached to where we consolidated certain offices where we had duplicate facilities. There were a number of cities where over the years we ended up with two offices, some as a result of acquisition and other reasons. So some of those lease termination costs would run to leases over the next five or six years. Hence the actual amount that will go forward in quarterly savings wouldn't be particularly material in the context of our accounts. If it was a material number, we might indicate it or disclose it.

Okay. Just trying to reconcile a few different things that you have given us regarding your outlook for the back half of the year in the way of EPS and I think, Ciaran, you said you really don't expect the margin run rate, ex the quality of benefits that you got in Q2, to change in the back half of the year. It seems -- is there anything apart from Qualia that is a margin headwind on the back half of the year? Perhaps maybe the Phase I facility in the UK, but apart from those two, is there anything that is a kind of headwind to margin from your perspective?

Nothing that springs to mind, Todd, no.

As I indicated, the lab margin is down a little in quarter two and we're expecting that will continue to be lower than it had been in the previous three or four quarters. So single -- sorry -- mid single digits as opposed to high single digits in the lab. I wouldn't call it a headwind because, again. The numbers aren't that big, but nothing else, Todd.

Okay. Anything below the operating line that you would like to call out for is in terms of expense in the back half of the year that maybe we didn't see in the first half?

No, we don't really have any expense then below the operating line. Interest is the only one that will fluctuate in relation to the various cash pattern and balances. It is fairly hard to forecast. It is not a significant amount. I think it was just under $1 million in this quarter. It will go up or down depending on the timing of cash flows and the interest rates and deposits. So there is nothing significant there.

Okay, good enough. On the revenue side then, just you talked about the, I guess, the increase in the number of strategic discussions. There has been a lengthening, I guess, in decision cycles that still persists. I guess from your perspective, the reason behind the lengthening of the decision cycle, is that because of the general landscape that the pharma companies find themselves in today with respect to healthcare reform here in the US? Or is it something more specific to perhaps how the customer base is looking at their utilization of outsourcing in general the types of outsourcing that they want to engage in? If you could provide some thoughts there that would be helpful. Thanks.

That's a very difficult one to analyze, Todd. Why were they taking on average three months to make a decision last year and they are taking on average about five months to make a decision this year? In different companies, probably there are different reasons within that. I think myself it is that the financial crisis was a wake-up call for everyone in every industry in every business around the world. As a consequence, everyone has become more parsimonious, more careful about how they spend money, questioning more about why they are doing certain things. And I think that is affecting the decision cycle even in pharma companies.

Now that's not to say that every decision is delayed, but on average decisions are taking longer to make because I think getting the commitments to spend is just taking longer because of the conservatism that has been brought to bear in all businesses.

That's helpful. Thank you.

Dave Windley, Jefferies.

I thought I would come back, and since you are not going to report the lab, I thought I would suggest how about reporting the staffing segment as a separate business?

They are under 10% of revenues, Dave.

Let's see. How about Phase IV? One segment just seems -- there's not enough excitement with only one segment.

You don't give anybody else a hard time about it, why us?

I don't know. Just felt like coming back on here. I got one or two others. So I don't think I have touched on Vida Labs as it incorporates into the guidance. Was there much of an influence or impact from Vida on revenue or earnings?

No, Dave, there wasn't much. It is a small facility based in the UK and it is distinguished by some of the talent that it has in its biomarker technology. It had about 10 employees, so it is not a significant number in terms of revenue or earnings and it hasn't impacted the guidance at all.

Okay. And then, Ciaran, onto I think Todd's question on influence on margin and you said you expect something in the 12%, high 12%s for the balance of the year and that is -- I am trying to compare that with your answer to my question earlier on using the $1.35 assumption euro to dollar. If the dollar is weaker than that, does that have a negative influence on that margin level as revenue and margin move in opposite directions for you, guys?

There are too many moving parts really in the whole way that foreign exchange works to oversimplify it. You really have to look at these currency assumptions more by way of an impressionist painting rather than an architect's blueprint. And I mean broadly I am comfortable in that $1.35 to $1.40 range. We'll keep posting margins in that. We had 12.4% in Q1, we've had 13.3% this quarter, which, if you took out that one-off benefit -- what makes it hard -- I'm not being coy with you -- but we talk about the average rate for the quarter, if you go back to Q1 our average dollar euro rate was $1.31. It was then an average rate of $1.35 for quarter two, albeit it finished up near the $1.40s. So it is not rate actually on the day that you translate your balance sheet --.

No, understood.

(multiple speakers) -- all your stuff comes across. Hence we got a couple of million dollars benefit. It is very hard to predict to that level and you can have the rate fence along at a particular level for 89 days in the quarter and on that last day, the day you translate your balance sheet is the one that is going to swing your margin by that 30 or 40 or 50 bps. So I wouldn't really be able to go forensic enough for you beyond what we've said.

CSI, Ciaran.

You can see me here with my microscope as you speak.

And just so I -- was the FX -- there was a specific FX benefit related to Qualia in the second quarter or (multiple speakers)?

No.

(inaudible) where that came from.

Right. I think those were consecutive statements that Ciaran made, but they are unrelated, right? That was my interpretation, they are unrelated.

I didn't refer to Qualia in any sense of foreign exchange. So they must have been separate statements.

Okay, well, I think in Todd's question, you said something about -- and maybe I misunderstood his question -- but something about the benefit to margin in the second quarter from Qualia. There wasn't one, was there?

No.

No, there wasn't.

Right.

I think you misheard something that I said. It might be an accent issue there, Dave.

All right. Got you.

Or a telecommunications one.

Got you. Okay, thank you.

We have no further questions. (Operator Instructions). Jack Gorman, Davy.

Guys, I have probably gone over my quota on questions already, but if I can, maybe just one more. Just to go back to the restructuring charge, Ciaran. Can you just give us an outline of what the cash costs are on a net basis associated with the three elements of the charge, please?

I don't have those figures to hand, Jack.

Okay, but presumably the tax effect is a non-cash item?

The tax effect, most of the tax effect in this quarter is unrelated to the restructuring costs. The tax effect on those restructuring costs is pretty de minimis. It might be about $1 million on the actual restructuring provision.

Okay, but the credit itself that you note in the statement on the tax side, the tax cut, it would be essentially non-cash. That's the way we should look at it. Would that be right?

No, that is a cash tax credit. It involves either the reduction of the payment of tax or the refund of previous tax.

All right. Well, maybe I can take that offline and get the detail on it. Thank you.

Chris Arndt, Select Equity.

My question was answered. Thanks.

We have no further questions. So I will hand you back to your host to conclude today's conference.

Thank you very much, ladies and gentlemen. We are very satisfied with ICON's performance in Q2 '09. Operating income, net income and margin all grew. An effective working capital management produced excellent cash generation in the quarter. We remain cautiously optimistic as 2009 continues. Thank you again.

Thank you for joining today's call. You may now replace your handset.