ICON PLC (ICLR) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to the ICON plc third-quarter 2009 earnings conference call. My name is Faye 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 September 30, 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 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 third quarter ending September 30, 2009. Please 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 quarter two 2009 amounting to $4.2 million. These charges related to lease and asset write-offs, headcount reduction costs, government incentive payments and one-off tax credits.

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 will hand the call over to John.

Thank you, Ciaran. Good day, ladies and gentlemen. We are very pleased to report another quarter of solid performance by ICON in 2009. The group's net revenue amounted to $220.3 million compared to $225.5 million in the same period last year. On a constant organic dollar basis, revenues were at a similar level to prior year. Year-to-date, net revenue was up 2.3% from $645 million to $660 million. Again, on a constant organic dollar basis, revenues were up 5% on the same nine months of the prior year.

Operating income for the quarter grew 12% to $30.4 million compared with $27.1 million in the same quarter last year. Year-to-date, operating income grew 19% to $86.6 million from $73 million in the same period last year.

Group operating margins for the quarter increased to 13.8% compared to 12% in the same quarter last year. Year-to-date, the group operating margin improved to 13.1%, up from 11.3% in the prior year.

Group net income rose to $24 million from $21.4 million last year, representing a 12% growth. EPS grew 14% from $0.35 per share to $0.40 per share. The effective tax rate for the quarter was 19.4%. Year-to-date, net income increased by 19% to $67.7 million from $57.1 million last year.

EPS grew from $0.93 per share last year to $1.13 per share, a 22% increase. The effective tax rate for the year-to-date was 19.8%, down from 20% in the same period last year.

DSOs at the end of September were 39 days compared to 49 days at the end of June '09 and 69 days at the end of December '08. As a result, cash flow provided by operating activities was a strong $70 million in the quarter. We invested $9.6 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 $198 million compared to $81 million in all of 2008. Year-to-date, capital expenditure was $26 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 Sciences.

At September 30, the Company's net cash amounted to $145 million compared to a net debt of $4.3 million at December 31, 2008. At this point, I would like to hand you over to Peter Gray who'll give you an update on the business outlook.

Thank you, John. And good afternoon, good morning, folks. As you have seen from the press release, gross business awards for the quarter were $296 million, which continues the pattern of approximately $300 million of awards in each of the last four quarters on a gross level.

During our most recent quarter, we experienced a higher-than-normal level of cancellations, including one single cancellation in excess of $50 million, which led to total cancellations of $110 million, or 37% of gross awards and 5.9% of opening backlog. Accordingly, the net business wins were $186 million, which represents a book-to-bill of 0.8.

As we have been saying for some time, RFP flows, which represent incoming new business opportunities, continue to be encouraging. In volume terms, year-to-date volumes are as high as last year; although values are still lower. But for quarter three, volumes are actually up 7% while values continue to lag those of 2008.

As a result of these business [close], our overall book of outstanding new business opportunities continued to rise through the quarter and is now back to levels last seen around the middle of 2008. However, sales cycles continue to be somewhat slower than they were in 2008.

Gross business awards for the year-to-date are $934 million. Cancellations were $217 million, or 23% of gross awards. And net business wins were therefore $717 million year-to-date, which represents a book to bill of average of 1.1.

As a result of all of this, our total backlog at the end of September was $1.85 billion, which is a 6% increase over the same quarter last year. Of this backlog, we are expecting $700 million to convert to revenue in the next four recorders. With three quarters of the year now complete, we are raising our earnings guidance. We now expect earnings for 2009 to be in the range of $1.48 to $1.52 compared to our previous guidance of $1.38 to $1.44.

That completes the formal part of the presentation. Before we go to questions, I just would like to take the opportunity again to acknowledge the tremendous work put in by the whole ICON team across the globe. In this challenging environment, their loyalty and dedication is ICON's greatest asset. Faye, we can take questions now.

(OPERATOR INSTRUCTIONS). Robert Jones, Goldman Sachs.

Thanks for the question, guys. Looking at the cancellations, I know you mentioned this one single large cancellation. Was that from an ongoing project? And then just on cancellations in general, across the board, if you could maybe share with us how much of them were related to the ongoing pharma merger activity?

Robert, on the first question, the answer is no, it wasn't an ongoing project. It was a project that was awarded to us during the first quarter of this year, but never -- it never operationalized. The background to it is the client involved had another major project that was canceled internally. They had internal resource and decided they would redeploy that internal resource from this project and hence, it was canceled for us. So I think it is a relatively exceptional one and I wouldn't read too much into it.

In relation to other cancellations, I don't think any of them related to ongoing pharma merger activity.

No, that's helpful. And then just to switch gears a little bit on the margin side, obviously margins were again strong this quarter. Could you give a little update on the cost reduction project ongoing and how sustainable are these margins going forward? Thanks.

Hi, Robert. It's Ciaran here. Since the last call when we announced the cost reduction project, we have executed sort of the basic scope of what was involved. A number of staff were let go in the US operation, four of our offices there are either closed or almost closed with the staff there working from home or in the case of a couple of them with consolidation into other offices that we had in the same cities. So we have seen some of the benefit of that in Q3.

If you recall, in the scheme of our overall cost base in the overall operation, the cost reduction plan was relatively modest. So I think it would be fair to say that we have seen most of the benefits now. The margins going forward are sustainable in this range. We have seen a very steady progression and improvement in our margins now going back a couple of years.

During this year, we have seen it peak now at 13.8%. We have done that in an environment, which doesn't look any different as we go forward to that that we have now. We continue to win the business and staff appropriately. We will, of course, always be hostage to some extent to foreign exchange movements, but we have seen historically in our margin that foreign exchange movements don't tend to have a significant difference or impact on our margin, even at times of great volatility.

We looked back at last quarter and we had a little bit of a benefit to our margins. This quarter, the rates were reasonably flat. There was a very small drag, but not significant and as we look forward, there is no fundamental change into the directional behavior that comes from our foreign exchange patterns. As we look into Q4, the margin will be affected either slightly up or down depending on where the dollar goes from $1.49 now. If the dollar continues to weaken, we get a benefit in revenue as we always have offset by a drag in margin. But there are no significant factors around the current margin that I see changing in the medium term. Does that answer your question?

Yes, it does. Thanks for the questions.

Tycho Peterson, JPMorgan.

Hey, good morning. Wondering I guess if you can talk just a little bit maybe qualitatively about your discussions with pharma and the interest in broader strategic deals akin to what you did with Lilly to monitor trials in Europe and are you just seeing an interest in larger and I guess, to that point, more strategic deals at this point?

Hi, Tycho, yes. I suppose strategic is now a word that is becoming a cliche and perhaps has been overused, but there is an ongoing trend in the industry for relationships between CROs and pharmas to be developed and turned more to partnerships than to tactical relationships. This is something we have all talked about for years and years, that this is the way it will go, this is what we are expecting to happen. It is now happening.

Deals of the nature of that which we did with Lilly are somewhat -- they are visible and there is a particular transfer that takes place. A lot of the other types of deals that we would see are just developments in the relationship and perhaps a decision by a client for example that a particular compound will be developed in partnership with only one CRO to try and achieve efficiencies of knowledge and of resource utilization for both parties. Nobody is going to announce those types of deals and yet it is a significant change and a significant deepening of the relationship between a pharma and the CRO.

So there is lots of different types of relationship development activities taking place. I am beginning to feel embarrassed about continuing to use the term strategic to describe such a wide variety of relationship developments, but they are certainly there.

And in terms of kind of your capabilities, are you still looking, from an M&A perspective, to bring on additional Phase I assets or potentially Phase IV and can you comment on how you're balancing that with your own geographic expansion?

The short answer is yes. Obviously, in times like these, there are opportunities out there. So yes, we are looking for opportunities to expand our Phase I footprint and capacity and to build up our late phase postmarketing capabilities as well. Balancing that with our global footprint, we have a pretty [damn] global footprint right now. We expanded as we see demand increasing in different geographies. And I would see that as separate from Phase I and from postmarketing activities because the two don't necessarily go hand in hand.

Okay. The medical imaging business is still relatively small today, but seems interesting. Anything in terms of the trends that you can highlight here and how do we think about how you are competitively positioned versus Charles River and some of the other companies that have built out capabilities here?

I think there is a difference. The specific reference you make there to what Charles River is doing. Charles River have looked at imaging and are applying imaging in the preclinical, particularly the preclinical arena, which is actually therefore having a facility that has imaging cameras and applying that technology to preclinical activities.

Our imaging laboratory is effectively a central lab for the processing of images coming from later phase clinical trials. Now we are doing some work in Phase I, but again, we don't have cameras; we have project managers and technology that can capture the images from hospitals or units where the images are being taken, process the images and ensure that the interpretation of those images is done in a standardized way so that the data in the clinical trial is truly comparable.

So there is a difference I think between what we are doing and what our imaging business does and what Charles River is doing, as far as I am aware of what Charles River is doing. In time, those two things may converge; there may be some convergence between them. At the moment, that is not seriously the case.

Okay, and then just one last one. We had a number of questions following this FDA warning letter in conjunction with J&J. Can you just comment on how we should be positioning them and thinking about that?

I am not sure what you are referring to, Tycho.

This was back in August. The FDA basically sent a warning letter to J&J on one of their Phase III trials and I think it was the trial in which you were involved, but the presumption here is that the FDA may start to crack down on CROs a little bit more.

First of all, we don't comment on individual client relationships. The letter you are referring to clearly has some serious issues raised in it and would be, in our view, indicative of a stronger stance the FDA is taking in general. And of course, CROs need to listen to that and make sure they respond to that. John, you would like to say something here?

Tycho, that is a very good question. There has been a shift and it would be good -- perhaps you have already looked at it. Dr. Hamburg gave a speech quite recently in August to the Food and Drug Law Institute and though she speaks of the FDA needs to be transparent and all that stuff, the safety of the American people is what she seemed to be focused on. And that is very much linked to the way FDA I believe will change in terms of enforcing matters in relation to their findings.

In the past, FDA warning letters were very slow. 483s were normally given and depending on the response of the 483s, a warning letter was produced. Now the shift is becoming much more urgent. Warning -- you would probably see more and more warning letters being produced and this is something we've seen in the manufacturing industry, but we will see this as, I believe, as a trend in the clinical trial arena.

Sometimes, and if you go through her speech, she even makes it very clear sometimes action will be taken even without warning letters. But the nice thing about the whole -- the positive aspect of what she is trying to do is that there is now an opportunity for [closure]. So as long as you fix the issues, they will give you a closeout letter and then move on.

So they are trying to be very efficient and I think all this is good news for the CRO industry because we are there together with the pharma companies to make sure that the drugs that are administered to patients are safe. And I think this will be something of a trend in time to come and what you'll probably see with J&J is just a start of something that you will probably see more of in the near future.

Okay, that's helpful. Thank you very much.

John Kreger, William Blair.

Hi, thanks very much. If you are willing, I had a question about the 2010 outlook, realizing that you are not yet ready to provide formal guidance. But as you have talked about in your presentation, I think the gross awards have been relatively stable at about $300 million for the last three, four quarters. Therefore, should we be thinking about 2010 at this point as kind of a flattish revenue year with potentially higher margins or would your view at this point be something higher or lower than that?

John, you will understand that I would hesitate to give any indications in relation to 2010 at this stage. And I won't directly answer the question you have just asked me. I think it is too early for us in that regard.

I think what is encouraging, as I said in my comments, that RFP flows in volume terms are actually up in quarter three and that our list of outstanding opportunities is back to the sort of levels in value terms that we saw in mid-2008. It was late in 2008 that that metric began to show a serious decline. So I would be -- as we said in our comments that we remain optimistic for the future, but I would hesitate translating those words into a comment to you that says think about revenues in this term or that term. It is too early for us to give you that.

Okay, fair enough. I thought I would try at least. That is helpful, though. As you just said, with the RFP flows now improving, yet your gross bookings flattish, do you think about that as a declining hit rate and should we interpret that as any change in the competitive landscape or is this really just about an extended decision-making cycle on the part of your client?

First of all, our hit rate has held up very well this year. So it is not indicative of a declining hit rate based on our analysis on a year-to-date basis. So it is indicative of a longer sales cycle. It is indicative of opportunities that are being put to us that we are pricing what the client is hesitating and going ahead with or in some cases deciding they won't go ahead with them.

Certainly, I see a trend in things being postponed out into 2010 that perhaps were being planned to start in 2009. So again, those are the macro things that are happening within the number, but I suppose the important message to you is our hit rate isn't declining and therefore the competitive landscape from our perspective is remaining -- has remained pretty stable.

Excellent. Thank you. Just one last question. You have had pretty impressive operating margin improvement over the last two or three quarters. Can you just speak a little bit more specifically about what has allowed that to happen and do you think that is sustainable in the coming quarters?

I think, John, when we were growing at an incredibly fast pace in 2007 and 2008, people were always concerned about the fact that our margins weren't expanding. And we used to explain that we were investing a lot in our infrastructure, making sure we had the structures in place to support that growth. And we suggested that if we were not growing so fast, our margins would expand. So I think what you are seeing is actually we were right. We were kind of pleased to discover that we weren't just spinning you a line.

So I think what you are seeing is, when the business is moving at a more modest pace -- in fact, it is moving -- obviously, revenues haven't expanded significantly this year -- that enables us to tailor our infrastructure and our cost base to the level of business we have and therefore enables us to broaden the margins as we have been doing.

So therefore, is it sustainable? Yes. Obviously if growth rates massively accelerated again, the same pressures would arise and whether that would create margin pressure or not, I won't predict. But we certainly believe that if revenues remain stable or even resume growth at a modest pace, we believe we can sustain these types of margins.

Excellent. Thank you very much.

Ross Muken, Deutsche Bank.

Thanks. So I want to just of dig into one macro thing that everyone seems to be discussing and there is sort of two [divergencies] on the CRO marketplace as it currently stands. So one looks at sort of the big picture issue around what pharma is doing, particularly to their R&D line and obviously with much of what is going on over the next few years from a generics perspective, you're seeing both the players involved in M&A and those not kind of pay particular attention to investment and in turn, look to take down R&D as a percent of sales somewhat significantly in some of the firms.

So that as sort of the backdrop, sort of how that kind of factors into your overall view in the market and sort of the level that conversation you are having to either help them accomplish that via more outsourcing or you view it as a threat as to the pie shrinking versus sort of your discussion on RFP fee flow, which continues to be encouraging and sort of put those two things together. I mean how kind of do we get to kind of a consensus on what is actually going on in the end market?

We would all love to have certainty around that. I think what you described as the pharma backdrop is right to a point. Although, in the last quarter, I think I saw IMS data that said pharmaceutical sales overall globally, and even in the US, were higher in growth terms than they had forecast earlier in the year. So that pharma's growth sales across the industry was still modestly upwards in the United States and more strongly upwards on a global basis. And we are still talking about single digits I think. But the pharma backdrop is there is still growth taking place in pharmaceutical and biotech sales.

There are individual companies and quite a number of them obviously that face patent headwinds and those companies are looking at their research and development spending and seeing how they can tailor their spending to their needs. And part of what they are doing is looking to see whether outsourcing can play a bigger part in their cost base and overall improve their efficiency and enable them to get more for less, which is clearly what outsourcing is all about.

So what we would believe that the macro trend is the overall spending is going to continue -- R&D spending is going to continue to rise across the industry as a whole on a global basis and that outsourcing is going to achieve greater penetration.

From a quarter-to-quarter basis and even on a year-to-year basis, there might be some -- there might be some bumps along the way in that macro picture, but that is our view of the next number of years in the industry. John?

Ross, you should not -- we do not consider generics as a competition. In fact, there are a lot of opportunities in the generics environment too. If you take the biosimilars or what the Americans call follow-on biologics, there are about $25 billion worth of sales that will come out of patent very soon in the next seven years. And there are a lot of companies who would have to do a good number of trials and they are opportunities for us too. So I believe that the market will grow and as Peter said, there is -- with the experience in these kind of areas, we will have a greater share of those opportunities.

And just sort of as a follow-up to that, so I guess to just dive into a little bit deeper. We had discussion with some pharma CFOs and R&D heads who talked about the CRO model helping to lower the cost of developing a new molecule by anywhere in the 10% to 20% range depending on what level of service was provided. So if you are talking about a new entity costing $1 billion, now it can cost $800 million, or $900 million all in to kind of get to commercialization.

So as we think about that and we think about what pharma is trying to accomplish and we try to triangulate to your RFP volumes, which still seem quite healthy, I mean is the belief that, at some point, the level of discussion around how you help them right-size their cost base and get more productive, do you think we will see an increase in that over the next six months? I mean we are kind of getting into the sweet spot of when they really need to focus on what they want to be when they grow up. So I think to kind of get to a new budget plan and they are obviously turning the page to TAM like you are, do you feel from a business development perspective that is happening? Is that kind of accurate?

Again, I would love to give you a great optimism and say the next six months is going to see the world turn over. Nothing happens in six months in this industry and I mean the pharmaceutical industry generally. So I would not want to overexcite expectations. I was talking to our head of business development last night and her comment to me was the number of relationships that we have catalyzed -- there has been a catalyst for them to be developed into a new level in the last year -- has been very impressive, but we haven't yet seen that convert into a significant uptick in the business from more than one or two of those relationships. She hopes, expects that in 2010, we will begin to see some momentum there. She is paid to be optimistic. That is what business development is all about.

I think our belief is we will begin to see that happen in 2010, but these things grind very slowly, particularly in the pharma industry. So I would not want to make predictions and if I go back to my comments that I made to John Kreger, around our outlook for 2010, we are not giving any guidance or indications or suggestions that we are predicting big revenue increases in 2010 at this stage. But the macro picture is, as we have described and I think you are describing is, the timing is what's more uncertain.

Perfect. And then one last thing I just want to connect the dots on. So you talked about again RFP volumes still being strong, new business opportunities at sort of mid-'08 levels. The gross bookings in the quarter was roughly in line, but a little below, sort of the level of what you had been doing and you made commentary around sales cycles continuing to be somewhat slow.

So can we kind of triangulate to think that the -- again, to the timing that you see the opportunity, pegging it down to 3Q is fairly challenging. So maybe we could have seen some awards that you might have thought would have fallen in the 3Q timeframe come in the 4Q timeframe and so long as things kind of continue from a business activity perspective to the degree that you are seeing, we should start to see some recovery over the next call it 12 months. Is that fair?

I am going to give you a very simple answer to that. Yes. Yes, that would be fair and you made reference particularly to the lengthening of the business cycle. We certainly had, during the quarter, expectations of some things coming in in the quarter that spilled -- have spilled into Q4 and we hope they will come through in Q4 and so on. But I am sure therefore things that we think are going to happen in Q4 will spill into Q1. So again, I don't want to overexcite expectations, but we think the market is in a reasonably good shape and we are confident and optimistic that that will convert into business in due course.

And just to -- I just want to make sure I have this clear. Maybe this will be the easier way to ask it. So instead of it being an issue of it sort of disappearing or there being a change or more projects being drawn in-house, it is more a function of timing than anything, correct?

Correct.

Perfect. Thank you, guys.

Doug Tsao, Barclays Capital.

Hi, thanks for taking the questions. Just looking through the slide deck, I am seeing that in terms of the backlog forecast to be recognized as revenue in the next 12 months it increased sequentially from the second quarter despite seeing sort of a disappointing level of new business wins and certainly the cancellation as well. I am just sort of curious how much of the sequential increase is related to FX in terms of the weakening of the dollar?

Not a lot of that, Doug. What you have seen there is we have been winning business throughout the year. We took some substantial wins back in Q2. When we go and do the forecast, these large studies, they are slower to start off; they are harder to forecast. What you're seeing is just a change in the profile of how we think some of the large studies will flow to revenue.

So are you trying to suggest that some of the studies that were perhaps forecasted to be a little slower burning in the second quarter, now you have an expectation that they are going to ramp up a little more quickly?

Yes. But I mean, that said, that is a 12-month forecast, so they will ramp up more in the next 12 months than we expected when we did the 12-month forecast a quarter ago.

And is that based on a change in terms of client urgency around the study or is it just a reflection that perhaps we had seen such a significant sort of slowdown in terms of patient enrollment recently, which had been sort of one of the reasons that studies were extending in length that perhaps the enrollment environment has gotten a little better and so you are able to hit revenue recognition targets a little easier?

I think there is a danger we overanalyze here, Doug.

C'mon, we're analysts; we are supposed to do that.

A couple of different things. Large studies, by their nature, take longer to get started and often a lot of Is to be dotted and Ts to be crossed before you really hit the project off. As you know, ICON has traditionally been a conservative company in terms of forecasting and therefore what Ciaran is referring to is as we get greater certainty about some projects, we become a little bit more positive in our view as to how revenues will flow.

Another aspect is, and this goes to quote, unquote strategic relationships. Part of what strategic relationship means, if for example a client is saying I want you to develop my pipeline in this indication or this compound, is you start working with them much earlier in the design phase. So you have a piece of business, but the size of the study, the value of the study, when it will start is still an uncertain thing. So we would have something in our backlog, but we would not -- again, we would not be aggressively forecasting when that would start to flow. So you are seeing a combination of those two things.

Okay. And then just, Ciaran, in terms of the operating margin for the quarter, was there any benefit from balance sheet adjustments this quarter that we should just think about in terms of our modeling on a go-forward basis?

No.

Okay, thank you very much. Thanks for taking the questions.

Eric Coldwell, Baird.

Thanks and good afternoon. I think most of our questions are covered. I have just two housekeeping items. First off, you are signaling this morning that your RFP total opportunity is nearing the levels of the summer of last year, which were, at the time, close to all-time highs. I think in September you said $1.4 billion of RFP opportunities. I am wondering if you can tell us now whether that is $1.5 billion or $1.6 billion or if it is still at $1.4 billion just to be a little more specific.

That number is still approximately $1.4 billion. What we saw was that we started the quarter with $1.2 billion in opportunity. It rose during the quarter. Obviously then some of that actually did convert into business wins in September so that comes out of that number. So at the minute, I would estimate that it has all been steady in the region of $1.3 billion to $1.4 million (sic).

Billion with a B?

With a B.

Yes. Second question and I will drop off here is, on slide 11 that talks about your backlog forecast to be earned in the next 12 months, unless there is something with my printer, I don't see the backlog visibility percentage; though you typically show that on this slide and I know you gave that number last quarter. So the $700 million, what percent of your in-team forecast does that represent?

Again, we are getting really coy in our old age, Eric. At the end of the third quarter, obviously, we are giving a figure here of $700 million to be earned in the next format quarters. Therefore, one can imply what you might be expecting our revenues to be in the first three quarters of 2010 if we gave you a percentage. So we have decided we won't share that percentage with you at this point in time because it could begin to imply guidance for next year and we do not want to do that at this stage.

Peter, I thought I was being sly as a fox on that one, but you caught me. Darn. Okay, thanks very much. I will drop off.

Sandy Draper, Raymond James.

Thank you very much. Just a couple questions and Eric just stole my trick question, so I can't ask that. If I missed it at the beginning of the call, did you give any -- an organic number on acquisitions and FX impact on the revenue?

Yes, Sandy, we did. Revenue is flat. It is similar to last year on a constant dollar organic basis.

Okay, great, thanks. And then most of my other operational questions have been asked, so maybe a balance sheet question. Obviously, a dramatic turnaround in terms of going to a substantial net cash position from net debt. It's prudent certainly to stay conservative in this type of environment, but at some point, if you guys keep building up the cash like this, what would you look at? You have done small acquisitions, but at some point if you start to get a couple hundred million plus in cash, do you have thoughts about either stock buyback, dividend? How do you think about what you're going to do with the cash on the balance sheet?

I suppose what we have always said. At the minute, the cash we have and the balance sheet hasn't fundamentally altered our view of the world. We have successfully put cash in by taking the DSO down from sort of an above-average 69 days back in December to frankly what I believe to be below average 39 days in Q3. We have been very successful in the timing of some of our collections. I would love to say that it was our fantastic ability, but we had good luck in that everything that was supposed to come in and that doesn't usually happen in a quarter. We had a fair increase in the level of contract prepayments in our balance sheet from good housekeeping and good practices and closing out contracts and getting the money and the advances closed in.

So I would say to some extent, our balance sheet cash on the high side as a result of the prepayments in the collection. We have always held that we still believe there is growth opportunities in the sector. As a company, we feel that while we have got an excellent global footprint, we alluded to earlier in the call, we can do some work around building up scale of Phase I, our late-stage business. We have talked about the fact that we believe imaging to be a key part of the future of our business and that we will be looking to -- at some point in the future, we would be happy to opportunistically increase scale there.

So we think we have plenty of things to invest the funds in in the medium term. We wouldn't consider a share buyback. We have always stated that historically ICON had liquidity issues around the stock. It was a concern to some investors and a deterrent for them to invest in a company that they felt stuff wasn't liquid enough for them. We have done a lot of work over the years from the secondary offerings, the founder stock to the share splits to help the liquidity and get it to a point where -- albeit in the last year, there were some days when I wished it hadn't been quite so liquid. But it is I think at the right level and I think the share buyback wouldn't be the way to go.

And we have always been candid and said if, in the future, and we have built out the Company to the point where it should be and invested in what we should invest in, if we do have cash on the balance sheet, we have no philosophical or moral objections to a dividend policy to give money back to the shareholders. But that will be at the time when we have not been able to deal with the cash.

Thanks very much, Ciaran.

I suppose I would add to that, Sandy. It is not that long since we all got a hell of a fright. So ensuring that we have good liquidity in the business and the ability to capitalize on opportunities that may arise. In the context again of strategic relationship development I think we need to be alert and alive to looking for opportunities to expand our business and add services to our business that meet the needs of our clients.

Great, thank you.

Todd Van Fleet, First Analysis.

Hi, good afternoon, guys. I wanted to ask about the thinking behind not tightening the revenue guidance range for the full year. You are giving just one quarter left and then I have one or two follow-ups, maybe.

Gosh, you are assuming that there was actually thinking behind that particular point. We are still looking a little bit at foreign exchange volatility as we go forward. We have seen the dollar move quite a lot over the last few months. It has hit sort of $1.49 just in the past few days. We don't profess to be currency experts, so where that exchange rate goes tends to add a little bit of volatility to our revenue number. And so we are going to have to see how that plays out and again, we have significant backlog of business that converts every quarter with a lot of large studies in it.

And the larger the studies are, both in terms of revenue recognition and of course, we saw it this quarter with new business, net new business award, you get a little bit of volatility. So we just felt that nothing had changed significantly in our universe from when we did it the last time to consider changing the range.

Okay, so you are not happier with either the lower or the upper end of that range?

No, no. You could -- that? No.

And then with the cost management efforts that are underway, just thinking about the different leverage points in the business moving forward. So let's assume that the business or the top line does return to some sort of I think what most would consider to be kind of a more normalized growth rate heading into 2010 and beyond, do we have good leverage above the gross profit line at this point? Is there anything to be -- I hate using the phrase read into -- but what are we to infer by the fact that the gross margin has come down quite a bit here or at least has kind of trickled down.

You obviously have taken a lot of overhead costs out, reducing the SG&A. But as we -- as some of us anticipate that maybe we will see a bit of a rebound here on the revenue side in 2010 and beyond, is the kind of cost of services line, is that a leverage point? Are you holding on to more clinical services personnel now because you don't necessarily want to trim in that area because it is more difficult to recruit those people, that sort of thing? Could you give us a sense as to how we should think about the leverage points in the business as we see growth return?

I think we really have to look to history, Todd, to see what our experience was in the past and the gross margin has softened, trickled down a little bit. It wouldn't read too much into that. In any given quarter, we have teams that come off studies and ramp up on to new ones and sometimes the changeover isn't as smooth as you would like.

We have been building up our capacity in Omaha that we have talked about for the clinic, has been operationalized and obviously it is going to take some time for revenue to come in there. So over the last quarter, we have seen the gross margin get squeezed a little bit by that with costs going in, but no revenue going in yet until later in the year. We have sought to maintain our operational capacity during the environment of the last year. And it's in good shape.

And it is in good shape, but I mean historically what we have seen is that when growth comes, you hire a little bit ahead of the curve, you always try and take the balance to hire as close as you can, but there are times when you have to hire ahead of the curve. You move into more costs around contract staff as you ramp up projects, recruitment costs. You are increasing your training and your orientation and your quality focus. So I would think that there is no significant point of leverage to look to in a business where 85%, or 80% of our staff are basically a variable cost as we increase every dollar of revenue.

If we double our revenue, it means we have added 85%, 90% to our headcount when you take in the actual billable staff and then the level of increased support that they need. So I don't see a big upside in terms of a leverage kicker off our cost base as growth comes to normalized levels and then we will have -- we will see some of the drags to margin that we saw in the past.

The question that isn't answered yet is that when we expanded in the past we expanded from a much smaller base to where we were now. That might be different; it might not be quite as acute in terms of what we have to invest expanding from the current footprint, but we will have to see what happens and the nature of the growth from the returns.

Thanks. Wanted to also give you an opportunity to talk about the central labs business, the performance in Q3 and the outlook there. Thanks.

Yes, as we talked about on the last call, we are now reporting as a single segment, but happy to say that the lab continued to perform reasonably well. Bookings in the lab alone were in excess of $20 million. Revenues fell a little. Last time, I think we reported lab revenues -- they were in the high teens. They went back a little; there are still in the high teens. Margins are still single digits, but we still are in an investment phase in the lab and we are pleased with the progress it is making and its bookings are, as I said, at a level that is good and will position it for further growth. We would love them to be stronger and we are pushing for that.

Thanks.

Jack Gorman, Davy.

Thank you. Thanks, guys. Three very brief questions and I joined late, so apologies if these have been answered already. Firstly, just, Ciaran, on that more recent question, if you can give us any color on headcount expectations going forward. Secondly, whether you have identified or seen any changes to the competitive pricing environment in the market. And thirdly, just wanted to get some color on how the contract staffing business is performing in the current environment. One suspects that should be doing quite well during these times. Thanks.

I will go with the headcount. That is easy, Jack. It has seemed broadly flat for the last four quarters in line with the revenue. So the expectations are that we continue to manage the same algorithm between revenue and headcount.

In relation to competitive -- the pricing environment in the marketplace, it remains, I think as I mentioned earlier, stable. There is no signs of bad pricing to call it by a blunt name. There is no signs of irrational competitive behavior, so pricing is pretty disciplined.

And the contract staffing business, Jack, you are correct. The contract staffing business is growing, has been performing well through this year. There are two elements of the contract staffing. The major element of it is providing staff on contract to pharmaceutical companies. But when you are doing that, there is inevitably some requests for some sort of permanent placement activity. So the old permanent placement activity, the revenues at least from permanent placement are down year-on-year as you would expect, but more than compensated by improved revenues from contract staff activities.

And that, Peter, just to confirm, that is in line or maybe better than your original expectations for that particular unit?

A little better than our original expectations for that unit.

That's great. Thanks guys for those.

Greg Bolan, Wells Fargo.

Actually all my questions have been answered. Thanks, guys.

Dave Windley, Jefferies.

Lucky for you, I have got several more for you. We didn't want to end too soon. The late phase business, Peter, you mentioned that that is an area that you would be interested in building up. Do you view that strategically as important to keep as a separate business, i.e., different people, different costing structure, etc. and different branding than having it folded into a broadly based Phase II to IV business? Just curious kind of strategic positioning on that?

That's a difficult question to answer, Dave. The typical Irish answer to that would be it depends. Late phase business, there are unique aspects to late phase postmarketing business and those unique aspects naturally are separate. It is a separate line of business to our classical project management and monitoring of Phase II to Phase III clinical trials. So in that respect, there is a difference and a separation.

Strategically, whether one keeps it as a separate -- whether one has it as a separate brand or whether one calls it under the same brand is really just about marketing and about positioning in the marketplace. So there isn't a right answer to that question. It is all a matter of choice and of market position.

Okay. In the revenue commentary, Ciaran, you quantified or John quantified the constant dollar organic revenue. I think you probably had both FX impacts and acquisition impacts on the other amount. Can you break those out for me?

Sorry, Dave. I was distracted there; I missed your question.

So the question is, in the portion of the revenue that is not constant dollar organic in the acquired and/or FX impacted part, can you break out the FX and the acquired impacts on that?

No, I don't have those data points in front of me. Sorry.

It's very small.

It's small, yes. Again, I can't give you an exact number, but it is not significant. If it were significant, we would probably have the data in front of us I suppose. That would answer the question.

Right, okay. (multiple speakers)

If you look at it in terms of year-on-year, the acquired revenue is about $3.5 million in the quarter coming from the bioanalytical business. So the FX portion on the acquired revenue isn't going to be very big.

So the bioanalytical, so there is Qualia and Vida and --?

Qualia, there is no revenue.

There is no revenue on Qualia.

Okay. So $3.5 million pretty much captures the acquisitions?

It does, it captures the acquisitions compared to Q3.

Okay and then Doug asked the questions fairly specifically on margin and balance sheet. I guess I wanted to ask it more generally. Was there a change sequentially given the change in the dollar, kind of the ongoing changing of the currency exchange rates, was that change quarter-to-quarter reflected in the change in margin. Did it have a contribution to the change in margin quarter-over-quarter?

Quarter-over-quarter, it had a very, very small negative impact on the margin. When we retranslated the balance sheets this time, I think there was a negative hit of a couple hundred thousand dollars went to the P&L, but that is all. It wasn't significant in any way.

Okay, and when we think about 4Q, you said the margin, and you were speaking I think more generally, but the margin going forward is generally sustainable around this level. I guess I am assuming that a continued weakening dollar is going to continue to have a little bit of pressure on margin and so should I interpret that your comments mean that you have also got some efficiency things that will effectively offset that? Is that the right interpretation?

No, it's not. In the interest of clarity, what I was trying to say is that the underlying operational margin is sort of more predictable and sustainable. And I have no idea what the foreign exchange rate will do to it because I can't tell the quantum of what it is going to be, but you are quite correct to say directionally we get -- a weakening dollar will give us an uplift in revenue depending on the mix of the many projects that we have and that will put a little bit of pressure then on the margin.

But it depends what the quantum of that foreign exchange movement is. If it doesn't move significantly as we saw between Q2 and Q3, it didn't move significantly; therefore, it didn't have a significant impact on margin. But if it were to move significantly, it would have an impact on margin and there would not necessarily be operational efficiencies to offset that.

Okay. Peter, are you seeing clients move toward a -- I will call it a firmer fixed fee pricing structure and if so, is that actually a positive for ICON?

Again, a generalization would be wrong here, Dave. Various -- when we talk about these quote, unquote strategic discussions, there are various shapes and sizes and there are discussions with some entities around how could a cost of a clinical trial be more predictable and how could change orders be reduced, the level of change orders in clinical trials be reduced, which, of course, is trying to get to a pricing environment where there is greater certainty, greater fixedness about the price.

So to that extent and with all those qualifications, the answer is in some cases, yes, people are trying to do that. Do we regard it as a positive? Yes, because in order to achieve a fixed price, you have to be involved from the beginning and you have to have control over the key aspects of delivery, which haven't traditionally been the case in clinical trials.

When ICON began many years ago, a lot of our studies, a lot of our projects were fixed price because we had control over the key variable elements in running the studies. And that has changed over the years as outsourcing has tried to bring efficiency to the outsourcing paradigm, but in fact have added other -- we believe have added other inefficiencies to the outsourcing paradigm. So people are looking again at how can we work more effectively together with an objective of making pricing more certain.

Are there -- in your business development efforts and thinking again using this now cliche term strategic outsourcing, are there specific opportunities that are going to come into your -- come into your revenue stream that we might not be able to -- we, as analysts, might not be able to anticipate by looking at your outstanding RFPs by maybe even backlog? I guess I am wondering if some of the structures of these strategic deals are such that -- I guess kind of gets into the situation that Covance is grappling with and giving their bookings versus adjusted bookings and things like that.

Lilly for you in Europe and deals of that ilk, are they ones where there is kind of a constant refreshing of revenue that contributes to your visibility, but doesn't help us because it doesn't run through the normal metrics?

Not really. Even -- and again, I think I alluded to this earlier. Even where we have relationships where we are involved very early in the design phase of studies, perhaps we are involved overall in the development of a compound or a therapeutic area for the client. As soon as a particular project reaches certainty then we have a project plan and a price and that goes into our backlog in the same way as a piece of business, an RFP that we win goes into the backlog.

So in terms of impact on the backlog, no, the strategic relationships should deliver business awards into our backlog similar to the historic methodology. So don't think we are getting to a new level of -- or some new confounding factor coming into the visibility of the business.

Having said that, if you think of a consulting business, in a consulting business, you often have lots of relationships where the client calls you up and asks you to do something for them on short notice and that is not in backlog.

So in terms of providing support to clients in early stages of development of compounds, we may well have pieces of business coming in that we (inaudible) predict and were never in backlog. But you are talking about very small dollar values relative to the cost of running any one clinical trial and therefore, it is not a material confounding impact on backlog.

Okay, very good. And the last question, I am going to try Eric's in a different way. In the past, I think your percentage coverage has been largely based on the consensus. If we were to look out four quarters at consensus expectations and calculate your $700 million on that to get a percentage, would that be -- would that still be a fair representation of that percentage?

The percentage actually hasn't been based on consensus when we have done that calculation in the past, David. If it has happened to be at any time the same as consensus that has been purely coincidental. What it was always based on is we know what our backlog is so we can forecast that out with the normal deviation of forecast errors and to give us a 12-month number. And then we have our own internal process for coming up with our revenue forecast and we divide one by the other. But it hasn't been consciously geared towards consensus in the past.

Okay, all right. Thank you.

Sandy Draper, Raymond James.

Sorry about that. Just one quick follow-up. Ciaran, can you give me comments on the D&A stepped up by about $1 million. Is that primarily related to the acquisition and sort of normalizes now or are there things coming -- we would expect that to keep going up because obviously general CapEx is not going as much as it was. Thanks.

That particular step-up this quarter was related to amortization and it was related to some of the deals we did at the back end of last year when we had the Prevalere deal; and we had the Beacon, the purchase of the rest of the Beacon. There is a fairly sophisticated sort of level of GAAP around that. In this quarter, we had a slight catch-up on the three quarters. You get a certain amount of time to work out the value of your intangibles and their life and you amortize them over the useful life and things like that. So there was a little bit of catch-up for a few quarters there. It was a little bit higher than the run rate. So maybe $1 million was three quarters worth of stuff, so it should be $300,000, $350,000 in one quarter.

Okay, great. Thanks.

Thank you. There are no further questions, so I will hand you back to John Climax to conclude today's conference. Thank you.

Well, thank you very much, ladies and gentlemen. In this current environment, we are rather pleased with ICON's performance in Q3 2009. Operating income, net income, margin, EPS and cash all grew. We therefore, remain cautiously optimistic as 2009 continues. With that said, thank you again.

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