ICON PLC (ICLR) 2009 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the ICON plc fourth-quarter 2009 earnings conference call. My name is Dave 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 Brendan Brennan to begin today's conference. Thank you.

Good day, ladies and gentlemen. Thank you for joining us on the call covering the quarter ended December 31, 2009. Also on the call today we have our CEO, Mr. Peter Gray, and our CFO, Mr. Ciaran Murray.

I would just like to note that this call is webcast and that there are slides available to download on our website to accompany today's call. I will now make the customary statements in relation to forward-looking statements.

Certain statements in today's call are or may constitute forward-looking statements concerning the Group's operations, performance, financial condition and prospects. Because such statements involve known and unknown risks and uncertainties and depend on circumstances and events that may or may not occur in the future, actual results may differ materially from those expressed or implied by such forward-looking statements.

Given these uncertainties and as forward-looking statements are not guarantees of future performance, 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 fourth-quarter ending December 31, 2009. In addition, the following commentary specifically excludes one-time net charges taken in quarter two 2009 amounting to $4.2 million and exceptional tax credits taken in quarter four amounting to $7 million.

These items, which combined amounted to a net credit of $2.7 million for the year related to lease and asset write-offs, headcount reduction costs, government incentive payments, and 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 statement, 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.

With all of that said, I would like to hand over the call to Peter.

Thanks, Brendan. Before getting into the meat of the day, I just wanted to note this is the 47th quarterly conference call that ICON has done since our IPO in May of 1998, but it is the first in which John Climax, one of our founders, has not participated.

As you know, John decided to retire as Chairman last year and I would like to take this opportunity to acknowledge the huge contribution he made to the Company since its foundation. He remains on the Board. We look forward to continuing to benefit from his experience and his wisdom in the years ahead.

So our lineup is a little different this time. We're going to start with Ciaran giving a few financial highlights of quarter four and of 2009 overall, and then I will come back to discuss the general industry and business background, which will segue into our outlook and guidance for 2010. Ciaran?

Thank you, Peter. In the fourth quarter our net revenue was $227 million. This compares with $220 million of revenue in the same quarter last year, so we recorded an increase of just over 3%.

For the year of 2009, net revenue was up 3% from $865 million in 2008 to $888 million in 2009. In constant dollar organic terms, this represented an increase of just under 6%.

Our operating income for quarter four grew 12% to $29.6 million compared with $26.5 million in the same quarter last year. This represents an operating margin of 13% in the quarter, up from 12% in the same quarter last year.

For the full year of 2009, operating income grew 17% to $116.3 million from $99.5 million in 2008. For the year, our operating margin was 13.1%, which is up from 11.5% in 2008.

Net income in quarter four grew 14% to $23.9 million. That's up from $21 million last year, while our EPS grew 14% from $0.35 per share to $0.40 per share. For the full year 2009, net income grew by 17% to a total of $91.6 million from $78.1 million last year. Our full-year EPS grew 18% from $1.30 per share last year to $1.53 per share in 2009.

Our effective US GAAP tax rate for the year was 10%, however during 2009, we received a benefit of certain R&D credits relating to prior years which we do not expect to reoccur necessarily at that level in the future, so adjusting for this, our underlying effective tax rate was 19%.

Days sales outstanding at the end of December was 33 days. This compares with 69 days at the end of December 2008.

The cash flow provided by operating activities was $56.7 million in Q4, of which we invested just under $8 million in CapEx resulting in free cash flow in Q4 of $49 million. For the year of 2009, cash flow from operations was $255 million compared to $81 million in 2008.

Our capital expenditure for 2009 was $34 million. We invested $26 million in acquisitions and we had free cash flow for the year of $221 million. As a result of this, our net cash at the end of December 2009 amounted to $194 million, which compares to net debt of $4.3 million at December 31, 2008.

With all of that said, I would like to hand over to Peter now. He will give you an update on the business environment and on the outlook. Thank you.

Thanks again, Ciaran. As you will have seen from the press release, gross awards -- business awards for the quarter were $262 million. During the quarter, cancellations moderated somewhat from what we had been seeing in the earlier part of 2009 and were $33 million, which is 12.6% of the gross awards and 1.8% of the opening backlog. Accordingly, net wins were $229 million, which represents a book to bill of 1 to 1.

For the year, gross awards were $1.19 billion. Cancellations were $250 million of that, which is 21% of the gross awards, and the net business wins were therefore $946 million, representing a book to bill for the year as a whole of 1.1 to 1.

Obviously 2009 was a challenging year for the industry and for ICON compared to the preceding three years. The economic crisis at the end of 2008 accelerated the pharmaceutical industry's need to reevaluate its strategy in the light of disappointing research and development productivity and looming patent expiries. The results on the negative side was significant pipeline review leading to much higher cancellations in 2009 than we have traditionally experienced.

But on the positive side it resulted in new thinking in relation to pharma and CRO relationships and an acceleration in the discussions about a more strategic approach to outsourcing. This process is ongoing. We expect 2010 to also be challenging although as more of the new style relationships -- these new strategic relationship that we talk about -- gain traction, we are optimistic that the second half of 2010 will see growth resume.

Of course, ICON needs to successfully resolve the concerns of the FDA, which they expressed to us in the warning letter they sent to us in early December. As we previously announced, this letter related to two studies which we conducted between 2004 and 2006. We responded to the FDA in January and we expect to meet with them in the near future.

Despite the challenges of 2009, we saw RFP volume, that's RFP stands for requests for proposals. We saw RFP volume increase by 8% in 2009 overall and by 30% in the fourth quarter of 2009. However, the cumulative value of the opportunities for the year were lower by almost 20% compared to 2008, although by the fourth quarter, the value was the same as in the comparable quarter in 2008.

So the rate of dis-improvement if you like moderated as the year went on and we got to quarter four, the volume is up significantly, but the value is on a par with 2008. We hope and expect that we will see those sorts of trends of improvement continuing in 2010.

As 2010 has commenced, the activity, the RFP activity is encouraging. It appears that larger value, later stage projects are reappearing with greater frequency and that should be positive for the RFP value metrics and ultimately for our awards.

With that as a backdrop, let me move onto the guidance for 2010, which again you've seen in the press release. We anticipate that revenue would be in the range of $890 million to $940 million. This represents growth of up to 6% at the higher end of the range.

At the end of December, our backlog was $1.84 billion, which was a 5.5% increase over December of 2008 and of this backlog, we are expecting $689 million to be earned during 2010, which represents coverage of approximately 73% to 77% of the revenue guidance, depending on which end of the range of guidance you take.

We expect the earnings per share for 2010 to be in the range of $1.44 to $1.60, which again at the higher end represents growth of 4.5%.

During 2010, we plan to invest further in our global footprint by opening additional offices in India and in Turkey and expanding facilities across the world, Asia-Pacific, Europe, and Japan. In addition, we will invest further in our lab, with a new joint venture facility in China planned while completing the investment in our new hospital-based Phase I unit in Manchester.

In IT, we have a number of major systems under development, all of which are designed to improve efficiency and facilitate the linkage and exploitation of the rich data sources that exist in our various businesses. We also intend to make considerable additional investments in quality and training, for obvious reasons.

As I said earlier, we expect 2010 to be a challenging year, but we are anticipating that the second half will see growth resume.

That ends the formal comments we have to make. Before handing over to questions, I want to acknowledge all of our 7000 staff worldwide who make these great numbers for 2009 possible and no doubt will make our success in 2010 also possible.

Can we take the first question, please, Dave?

(Operator Instructions) Greg Bolan, Wells Fargo.

Thanks for taking the question. You know, I will use the dreaded coined phase strategic, but can you elaborate on interesting strategic RFP opportunities out there? I mean I guess the impetus for my question is that in our conversations with large pharma sponsors, it seems that some are gearing up to dramatically bolster their Phase IIb/III pipelines via in-licensing. But their internal R&D headcount is expected to decline or remain flat.

So to clarify my question, are you seeing sponsors move to secure either one or several strategic partners that might issue large sums of works and are there any novel stipulations tied around those?

When you started to question first, Greg, the novel stipulation that occurred to me was that you said are there any large, strategic RFPs out there? Well, the nature of a lot of these -- the potential nature of a lot of these strategic relationships is there are no RFPs that they have a strategic relationship with a particular CRO let's say in a particular therapeutic area. And they are working closely with that CRO in the design and early design and implementation of a program for a particular compound or suite of compounds. And they may -- they often do not have a second CRO involved, so therefore the process is not the typical RFP process.

A long answer, it is a long preamble into your question, but I think the important point here is RFPs may no longer be as important an indicator. And yes, there are some interesting opportunities in our pipeline that are not going through the typical RFP process in those strategic relationships which we have established over the last year or 18 months.

You made reference to the fact that you are hearing that people -- companies are trying to bolster and build their pipeline in Phase IIa -- I'm sorry -- in Phase IIb and III with alliances with other companies. I think when you look at the funding into biotech data, which is quite surprising for 2009 where the overall picture on funding to biotech has actually reached a record level, but when one drilled into that you see that a lot of it is related to partnering.

So that would seem to support what you were saying, that those kind of partnering deals are indicative maybe of the large companies partnering with smaller companies who have innovative drugs in their pipeline.

That's helpful.

Did that answer the question?

That does. That actually does. Thank you and I will just move on here. So with the FDA warning letter and the backdrop, have you seen any impact or meaningful impact on your RFP win rate?

I suppose the warning letter came to us in early December, so we didn't see any meaningful impact or didn't observe any meaningful impact in the fourth quarter. Obviously we are in the first quarter now. I think it's probably fair to say that our established clients, we have been very proactive in working with them and communicating with them in relation to the FDA letter. And because they have a long history of working with us, we are very heartened by the response we have from them and their reaction.

With less established clients, I think it's more challenging and there probably are a couple of pieces of business, smaller pieces of business that have on balance gone against us because of the uncertainty created by the FDA, smaller companies who don't know us, who haven't worked with us. Probably it's more -- a safer decision to make to perhaps choose somebody else rather than choose ICON.

But at the moment, we are not seeing it having a material impact on our award activity.

Thanks, Peter. That's helpful. And then I guess my last question and I'll get out of the way, Ciaran, as you are budgeting your 2010 sales guidance, is it safe to say that you are using, call it, a trailing 12-month book to bill experience of slightly above 1 times? And I realized the budgeting process incorporates many other variables, but if you could just give me a sense of your assumptions around expected backlog trajectory and whatnot, that would be wonderful.

Around backlog, the first thing is we're assuming backlog conversion at the same rates in 2010 that we saw in 2009.

So in the low 12s?

Yes, and so with the second big assumption then and it depends where you look in the range at the lower end of the revenue range we are using sort of trailing 12 months book to bill and really around 1, I suppose would be the assumption to hit the bottom end of the range.

And then depending on how business comes and when things turn, book to bill of around 1.2 or 1.25 would bring us to the top end of the range.

Okay, that's very helpful. Thanks, guys.

John Kreger, William Blair.

Hi. Thanks, it's actually [Natalie Nadler] in for John today. Ciaran, I was just hoping you could give us some more information around the operating margin assumptions in your 2010 guidance.

Yes, we are assuming operating margin for 2010 will be in the region of 12% to 12.5% at the bottom and at the top of the range. And that represents a softening of the margin that we've seen through 2009. I think to understand that we kind of have to look at the history of how our margin has performed in relation to revenue over the past number of years.

And what we have tended to find is that in periods where we're looking at growth, the additional pressure on hiring and training, the knock-on effect on how quickly you could start utilization, the money that you invest in increasing your geographic footprint all tend to put a little bit of pressure on the margin. Then as growth moderates, what we saw in 2009 is we got the benefit of previous investments in this year's margin and it justified those investments.

When we look at 2010, you have noted in Peter's comments we talked about a fairly significant level of investment as we look forward this year. We built our guidance model showing that that's towards the top end. We expect to see a reacceleration in revenue growth and therefore to be consistent with that, we have to invest in the business to be ready to support that.

As I say, Peter referred to the examples such as a new lab going into China as a joint venture, a new phase one facility in Manchester in the UK, a number of clinical sites throughout Asia Pac, Japan, and Europe are being expanded. And as we see growth accelerate in Europe and particular Asia Pac, we have to go to the market and hire, so we have taken the decision to invest in the infrastructure and the staff that we will see in the growth areas.

So those things as we look forward and the things that we need to do to support the ongoing growth of the footprint and the business and to invest in the quality that underpins our business is having a slight, slight drag on our margin forecast for 2010.

Okay, thanks. Then in the past you've given us the total RFP value opportunity. Do you have that figure as it stands today?

As it stands today, Natalie, I think it's at about $1.2 billion. We did -- that may be lower than a number we gave in a previous call, but we did a major cleanup of that -- of our proposal list in the last quarter, so that may not sound like a good comparison. We actually think it's a very solid number.

Okay, thank you.

Jack Gorman, Davy.

Thank you very much. A couple of brief questions, if I may. First two really are relating to housekeeping more than anything else, guys. Just, Peter, you mentioned that growth would resume -- as you look at 2010 growth would presume in the second half of the year. I'm just wondering is that off the Q4 base that you just reported or is it off the year-on-year comp?

Second question just on backlog and again you mentioned and much of the current year or the backlog is included for the next 12 months. Is the profile of that backlog use for the next 12 months kind of broadly similar to its normal profile, i.e., very front ended?

Then finally just a more broader question really on margins, if you look back over the business in the last two years, we've seen about 200 bps gain in margin from 11% up to about 13% and I appreciate absolutely the points you make in terms of managing growth and growth expectation. And I'm just wondering if you looked at that 200 bps gain and could you identify how much of that gain in the last year or two has been structural, i.e., should we be thinking about this business having a base operating margin of maybe 11% plus going forward or maybe higher rather than perhaps the figures of 10% to 11% we would've seen a couple of years ago before growth really accelerated?

Jack, the first part of the question, I've got the profile of the backlog and I've got the margin. What was the first part of the question?

The margin in the backlog -- sorry -- yes, just in terms of you talked about growth, Peter, in 2010.

Yes, yes, whether was off Q4.

Q4 or year-on-year.

I think year-on-year growth is what I am talking about but essentially, Jack, if you look back over the last 12 months, the revenue per quarter has been pretty steady, pretty flat. So we are basically talking about seeing growth off the base, the average base that we have been looking at for the last year.

In relation to the profile, the profile of the backlog, the $689 million that we expect to be burned out of the backlog in the next 12 months, the profile would be very much the same as it has always been with a significant -- the highest percentage in the quarter we are now in, a slightly lower percentage coming in the quarter after that, etc., etc. So it is normal profile of the backlog burn.

And in relation to the margins, I don't think there's a structural change. We don't believe there is any structural change that says margins go back down to 11%, which is I think what I heard you asking. We are making some particular investments this year, as Ciaran has said, in the infrastructure of the organization. I think it's also important to say that the FDA letter is a fairly serious event for us and we are not taking it in any way lightly and we have decided and committed in our budgets for 2010 to spend significant amounts around the quality area to ensure that we are not just responding to a letter from the FDA but really challenging ourselves in relation to our quality across the organization.

That means we would be making significant -- we will have significant spend on quality initiatives during 2010. I hope that having done those we will be in a position in 2011 to get back to a more normal level of spend.

Peter, sorry, just on the final question, perhaps I misphrased it, I suppose what I was trying to get at was whether you saw much of the gain that you have seen in the last two years as being structural, i.e., that we wouldn't go back to 11%, that we would potentially have a base, a higher base than you would have had previously.

I think we've always talked to you all about the fact that we saw ourselves being able to move margins up and the progress in the last couple of years I think bears that out. There are still several opportunities within our business to make further improvements to margins.

So no, we do think we have been making structural changes, leveraging the infrastructure of the business, and the margins we are at at the present time are at least sustainable in the long term.

Great. Thank you.

Ross Muken, Deutsche Bank.

It's actually Mike Cherny in for Ross. Just one quick question on the numbers, Ciaran. Did you -- I might have missed this. If I did I apologize, give us the FX impact for the quarter?

I didn't because it was not a very significant impact in the quarter. It was minimum. It was a couple of hundred thousand dollars.

That definitely helps. Then kind of going back to the question about the larger, more strategic deals, I guess obviously it's been a big focus for pharma after the troubles of the last couple of years and moving into a period where they really need to rethink R&D. When you are having these discussions, what is this -- what is that last piece that you need to get them kind of over the hump and get them to really truly make that strategic decision-making process versus kind of doing what they had done historically?

Charm, smile, things like that. I don't know that if there's an easy answer to that question. Virtually all of the major pharma companies are engaged in or have engaged in dialogue with us and I'm sure with our competitors about how they can improve their use of outsourcing, how they can get more value from outsourcing in the value-add sense as opposed to in the pricing sense, although of course pricing always comes into the discussion as well. But virtually all of them have been engaging or are engaged in those types of discussions.

Each one has its own culture, its own structure, and therefore there isn't a one-size-fits-all strategic relationship. There are as many strategic relationships as there will be after this phase, I suspect it's going to be the same number of strategic relationships -- what am I trying to say? There will be as many flavors of strategic relationships as there are clients because each client is unique and has a unique approach and a unique structures themselves.

So what does it take to get one across the line? It takes a real engagement and an understanding we think of what their needs are and how a CRO can truly add value. The thing we are very pleased about is we have already established a number of such relationships. We have learned a lot from them. We are therefore able to share experiences and learnings from the early strategic relationships to those who are coming to the process later.

And at the end of the day like any selling exercise, it's a wide variety of things that gets you across the line and have ICON chosen as the strategic partner as opposed to somebody else. So there isn't an easy answer to your question and I suppose I waffled on long enough now. I'll let you ask me another one.

I understood, and that's helpful. That's all I have. Thanks.

Sam Farthing, Merrion.

Good afternoon, guys. Just a couple of questions. I was wondering, Ciaran, you're talking about the investment for growth for 2010. Can you tell us what sort of staff numbers you will be adding or you plan to add? I'm particularly interested in how that compares to 2009 and a geographical split if possible.

I suppose the first thing is the investment will be contingent on revenue. In total terms, we are looking at hiring about 500 to 600 people and that will be largely centered in the traditional areas of growth, a good number of them in Asia Pac and Eastern Europe and really the areas that Peter mentioned in his comment. If we say we are opening offices in Europe and Asia Pac and Japan, well, then that's what the staff numbers will end up.

If I can interject, Ciaran, just as you will have noted I suppose over the last few years, Sam, growth in the US has been much lower than growth outside of the US and that would be reflected in our expectations for hiring in 2010 as well. That trend continues.

In the past, a lot of the growth was actually in Europe, in particularly Eastern Europe. Asia Pac is accelerating, so in fact in our budgets at the highest increase in headcount will actually be in the Asia Pac region.

And what was added this year? Sorry, the numbers added this year?

The numbers were fairly flat this year.

Fairly flat this year, yes. It might be about 100 people were added overall during the course of the year.

Okay, a couple of other questions I guess arose out of your answers there, Peter. One, you were talking about RFP and perhaps some of the strategic opportunities deflating the value of RFPs in the market. I'm wondering if the $1.2 billion that you are talking about you think might be a bit lower than what really is out there?

Putting words in my mouth, Sam. Yes, if you take my comments -- if you take my comments and extrapolate them into that number, you are correct because there are opportunities that come to us that are not an RFP and we don't run them through our normal I suppose sales management process. And they don't show up necessarily in that particular number, so you are correct.

That is as regards ICON. I can't speak to how it reflects in other people and how other people deal with those things but in relation to our numbers and how we run them through our RFPs, they would not be typically included.

Okay, just I was wondering if you could expand a bit on -- you talked about a lab -- a lab opportunity in China with a JV. Can you give us a bit more detail on that?

Not really. It's our central lab. Obviously in the last year or two they've opened in India and last year they expanded significantly in Singapore with the globalization of clinical trials and as I've alluded to in terms of how headcount will grow, Asia Pac is a higher growth region now than other regions. And China is potentially a massive market.

The central lab has entered into a joint venture agreement with a group in China and we will open a small but nonetheless a lab, a central lab near Beijing during the course of this year.

But it's a relatively small investment and it's a relatively small footprint at this stage, but it's an important flag on the map in an area in a region that is growing and will grow more.

Okay, and a couple of anorak questions. Ciaran, your expectations for CapEx and the tax rate of 19%, do you think that is sustainable going forward?

CapEx, we are expecting about the same as this year, maybe between $35 million and $40 million is our best guess at this time. And the effective tax rates we are kind of modeling 18% for this year.

Okay, thanks for taking the question.

Steve Unger, Lazard Capital.

Thanks. Hi, good morning. Peter, I'm going to try to take your temperature a little bit here, so bear with me. But in the first quarter you had -- of '08, excuse me -- you had a peak gross bookings level of around $450 million. This quarter we are down to around $250 million. I'm just curious as to what you are thinking as where we are hitting a bottom here for you? And what I'm getting at is is that you've seen two quarters now of RFPs improving -- RFP flow improving but is your hit rate now lagging? Are you disappointed in your hit rate?

Again, Steve, the answer to the question is no. Our hit rate is actually has at one point during 2009 was actually at an all-time high. We were seeing hit rates of in excess of 35%. The hit rate in the fourth quarter -- in fact in October and November, the hit rate was staying up pretty high. The hit rate in December fell off a little bit. Not for -- but month-on-month comparisons are not something that we obsess about.

So summarizing that, no, the hit rate hasn't fallen off. The hit rate is actually probably a little bit higher than it was in 2008. I think what the data you are speaking to tells us is that the RFP, the very hot market that existed in 2008 obviously isn't nearly as hot now. And we are expecting, as I said in my opening comments, that we will see activity levels improve in 2010 particularly in the back half of 2010.

Okay, but do you feel that at this point around this level is about as low as we are going to get?

Well, of course I'm going to say yes to that question. Certainly when we look at RFP activity and if you go back to the metrics I quoted at the beginning of the call in relation to RFP volume is up 30% in the fourth quarter. Value wise, it is level with the same quarter in 2008, whereas earlier in 2009, it was well below value of the comparable quarter in 2008.

So yes, I think we have hit the bottom and are perhaps beginning to come back up out of the bottom.

Got it, and then if I were to look at the mix of the type of customer that was placing business in the first quarter that allowed you to do $450 million in gross bookings and what the mix is now that you are getting in terms of large pharma or partnered large pharma deals versus emerging drug companies, could you give me a sense as to what has fallen off in the market?

I'm just looking at the data and I just happen to have a table in front of me that tells me all of that. And I have the second quarter of 2008 and the second quarter of 2008 biotech, what we would classify as biotech and smaller biotech -- I'm talking about, represented 43% of our awards in that 2009, 13% of our awards came from that type of client.

Okay, so then you are keenly watching, then, the developments in the biotech market?

Correct.

Got it. And then just --

I should add to that, Steve, the development of strategic relationships with the large pharma clients I'm keenly watching as well.

Got it, I appreciate that. And then in terms of the guidance and so forth, are we expecting gross margin compression as we begin the first half of the year? It's hard to tell from your comments as to whether these types of investments that you are making will impact the gross margin or they are in the SG&A line.

No, they are not in the SG&A line, Steve. We've done a fairly good job we think in control of SG&A. If you go back a year or so, SG&A was probably 29%, 30% of our revenue and our most recent numbers have it in the 25%. So we've made a good deal of progress there just through some leverage and some cost management initiatives.

So as we look forward, those investments to the extent that they reduce the operating margin, it is really around the fact that you are adding costs at the direct cost line and you are adding costs in advance of winning the business, you are building your footprint so your recovery is suffering a little bit, so it's softening the gross margin.

Got it, and then if I could just follow up one more question, in terms of the FDA issue, I know it's a sensitive topic, but -- and it is a customer relationship, but are you having to do some remediation work on these two trials that had an issue?

Obviously prefer not to talk about the specific cases, but the short answer to that is no.

Okay, great. Thank you, guys.

Dave Windley, Jefferies & Co.

Outstanding, thank you. Welcome back, Steve. My questions for management are as follows. Peter, I was hoping you could give us a sense along the lines of what Steve was just asking about breadth of RFPs but perhaps on that specific point that was made on your watching biotech as they come back, acknowledging you are watching the strategic relationships as well. But given the point you made and that we published about that the capital that was raised by biotech last year was heavily allocated by big pharma.

So I guess I'm wondering as you see biotech come back, is it your expectation that they will come back like they were in early 2008 or are they going to come back through -- is their volume going to come through the preferred provider relationships that you have with the big pharma that are their partners?

I think the answer is both, David. It obviously depends on the terms of the agreements that are made between the big pharma companies and the loosely termed biotechs. We certainly see some of them where the biotech retains control over the development process because they want to retain that control but there is a guiding hand perhaps being provided by their partner. And we have other cases where the partner who is paying the bills is clearly making -- is calling the shots as to who is going to do it.

So I think it will be a combination of both of those things. So will it be the same as it was back in late 2007/early 2008? I don't think so. I suspect the ground has shifted a little bit since then.

Is there a profitability preference between the two?

No, I think big programs are big programs, and we have obviously different rates with different clients. Strategic partnerships by definition mean that we have all stretched and we all -- it's a win-win relationship for both parties. But because it is a win-win relationship, the pricing might be a little tighter and there might be rebates involved or whatever, but there are obviously huge efficiencies through the way in which the partnership is structured and the fact that you are not going through the usual sales cycle.

So I don't anticipate that there is material profitability differences between either route.

Okay, thinking about the commentary around the investments being made in 2010, I was hoping to get a better understanding of kind of -- I will call it the organic trajectory of margins. So if you just take the comments on their face, it kind of sounds like if the investments weren't made that margins would be stable. The investments put a little pressure on margin and so what I'm wanting to understand is kind of the puts and takes that it would be my expectation that as the business grows, there might be a bias toward just an upwardly trending margin in general. And so I'm trying to understand why that -- if it is the case -- why that wouldn't offset some of the investments?

Obviously the investments are overwhelming that, but I'm just trying to get the puts and takes.

I don't think there are many puts and takes in the number. I think if you point to the history of growth over the years 2006 to 2008, we always tended to find that the margins struggled whenever we were reporting growth in hiring. Obviously what I would say is if we weren't planning for growth or making any investments in 2010, well, the logical and mathematical conclusion then is everything would stay the same and the margin would be in that 13.1% range that we saw in 2009.

What we look at as we go forward, every 1% in margin is what -- it's approximately $9 million, you know? You're talking about here how we choose to invest $9 million in the footprint. It's not a lot of money for the kind of growth we are supporting. If you were to look back at our Q4 numbers, we picked up an extra $1 million in our SG&A line just from additional recruitment towards the back end of the year.

So you quickly churn your way through 100 bps of margin when it comes to significant expansion plans in far flung parts of the world. So you are right in that there is an underlying upward trend in the margin. It's driven just from the benefits of scale over time and getting leverage off your groups of expertise and excellence and your fixed cost support groups.

It's also driven by the fact that as we moved and integrated some of the companies we acquired a number of years ago, things like the lab used to use lose money and now it makes money, therefore that has a positive impact on the margins. Some of the other acquired companies as we invested in them and scaled them up over the last few years, have a positive impact on the margin.

So we are seeing the positive drivers underlying it, but as I say, because just of the nature of investment and slightly leading the demand curve, it's really just a question of those hiring and training and recruiting costs and the softness you get over a couple of months in your recovery that's offsetting that.

Okay. Ciaran, while I've got you, the FX rate that is baked into your guidance, what are you assuming there?

We're assuming euro to dollar is $1.40. That's the principal assumption. Obviously there's a bunch of other currencies in there in small amounts, but the $1.40 dollar euro is the key win.

Okay. And, Peter, on the staffing businesses that you have recently or more recently acquired to make it more of a global business, you made an acquisition to make a global footprint, I'm wondering how that is doing, briefly? But I'm also interested in how that part of the business is -- fits in your offerings to instantly strategic partnerships. It seems like some of them are functionally based and I'm wondering if having that element of your global platform is differentiating to the client in your ability to engage in multiple ways?

I won't call it differentiating, Dave. There is no question that -- as I alluded to earlier -- for every company, there is a different flavor of strategic partnership and strategic relationship. When we acquired first in the staffing business back in 2003 and then supplemented that in 2007 with a further acquisition in Europe, it was strategic. We were doing that for strategic reasons. We saw that the marketplace for clinical support services had many different flavors to it and providing contract staff in the clinical area in various ways was one of the things that would be important in the marketplace and is important in the marketplace.

The staffing business actually in 2009 was our best performer in terms of growth. It grew by over 30% in the course of the year and it is not surprising in tough economic times when people don't want to be hiring permanent staff, taking in contract staff is probably an attractive alternative and certainly our staffing business had a very good year and saw good growth.

In the strategic partnerships, the option of having contract staffing solutions, SSP solutions, is definitely there and having that as part of our armory is one of our ways of ensuring that we have the tools to support our clients as they try to respond to the challenges in their businesses.

Great, thanks. I'll just ask one last one here. There was some news recently that relates to the clients involved in the warning letters that the compound was put back to the smaller biotech. Does that change in any way the follow-up or outcome or activities, relationship, etc. in that situation?

You are making a cross link between one thing and another thing which I'm not going to make a cross link, Dave, in relation to letters and clients what have you. So I'd prefer not to comment on that.

Okay, all right, thank you.

Todd Van Fleet, First Analysis.

Good morning and good afternoon. Just trying to frame the nature of the investments that are being made here this year, and to exhaust I guess kind of the conversation surrounding the strategic partnerships. I guess there's a couple of different ways to go about expanding your business. One is just kind of if you build it, they will come, take that approach, which doesn't always work out so well.

But there's also another approach, which is that it's required in advance of -- you have good visibility on a stream of revenue and there's every belief that the revenue will come after you make the expansion. It is sort of a prerequisite if you will.

And given the timeframe by which a lot of these strategic partnership discussions have been kind of ongoing, can you give us a sense as to whether it's -- the expansion is kind of with respect to the late stage clinical development activities, are kind of in the first bucket, if you build it they will come versus the latter bucket, it being a prerequisite to advancing a strategic partnership?

And the reason you have or the reason you are optimistic that the revenue outlook will improve in the second half of the year is the result of these investments that are being made? Thanks.

That sound like a multiple-choice questionnaire with two choices. I will take the box on the second one, if that's okay with you. We are not a build it and they will come company. I think a couple of times. In our lab we have made some prospective investments. We needed to have a footprint, and so Bangalore and Singapore are more build it and they will come. But that's a different type of business.

In our clinical business, the only office opening that I can recall in our growth that was a build it and they will come was Sydney, Australia in 1997. In every other office opening, it is because we have had the kind of visibility that you are talking about. We've already had demand. We've probably had some people flying in from other cities or other countries to monitor in those countries and we've recognized that there was sufficient demand for activity in those countries that justified us opening offices there.

What you are seeing in the investments largely that we are planning to make in 2010 is the same. I'll emphasize again that there's also in the investments that we are talking about a relatively significant amount of investment in quality initiatives because we are not being complacent. We are not willing to be complacent about what we think were already strong quality systems. We're going to ensure that they are even stronger and hopefully industry leading through the additional investments we are going to make in 2010.

Right. So how much of the quality investment then, Peter, was -- if you can quantify for us, Ciaran, you said kind of -- you just did the math for us $9 million for a percentage of operating margin. But how much of the quality initiative, the expense, the additional investment for 2010 was derived after kind of right around December of last year and then subsequent to that?

I would say kind of rough and ready 50 bps impact would be my best guess on the quality initiatives that we foresee at the moment.

Okay, all right. Then -- so the strategic partnerships advance, I guess my initial thinking is that the book to bill activity -- let's say you land more and more of these strategic partnerships and they become perhaps a greater percentage of ICON's total book over time. Would we necessarily see a higher degree of choppiness perhaps in the book to bill activity?

Would that be a natural fallout of that sort of advancement of the strategic partnerships?

Not the way we would plan to book them, Todd. The way in which we are booking is as the opportunities mature and as I said earlier, they don't necessarily come through the RFP process, they -- in a lot of the relationships they start with a bit of planning, the development of a protocol, and so on and so on.

And that kind of work is recognized on a -- almost on a time and materials basis. There's no award associated with that in the early stages. Then if the planning leads to a project that has to be executed, we obviously have to put a budget together for that and we get going on working on it. When that happens, we include that bolus of work, that project into our backlog as a win. But it never comes through the RFP process.

So once these strategic relationships are up and operating, there will be presumably -- and in fact, I shouldn't say presumably because there are a number of them already. The way it happens is a project comes in, another project comes in, another project comes in over time just in the same way as projects were recognized as awards in the traditional RFP process. So it shouldn't lead to additional choppiness.

Right. But I guess under that scenario then, Peter, you could still see reasonable book to bills and reasonable being maybe 1.2 perhaps or better. But you would potentially see the topline performance of the Company quarter in and quarter out perhaps more closely match the activity that you see on the book to bill ratio.

I'm not sure I get that, Todd. If essentially you think about what I'm describing, in an RFP, someone has already designed the program and everybody bids on it, somebody wins it, and then they start working on it. And in the strategic relationship one we work on developing what eventually becomes the project. And then when it becomes the project, it becomes an award just like an RFP award. They shouldn't be different in character when they are executed, so the revenue from them should flow in the same way.

So I don't think it has a material impact on the correlation between book to bill and revenue flow. I wouldn't expect it would have any different -- create any difference in that.

Okay, thank you.

Doug Tsao, Barclays Capital.

Good morning. Thanks for taking the questions. Peter, I was just wondering if you could provide a little detail on the central lab performance in the quarter in terms of both revenue and margin, as well as the order performance?

As well as the which performance?

The order performance for the quarter.

Okay, revenues were flat I think on the previous quarter, pretty much. So the lab I think in 2009 was relatively flat compared to 2008. Margin-wise again about the same, just under -- for the year just under -- sorry, Ciaran, go ahead.

It is still in the mid single digits for the year in margin terms and the bookings were encouraging in Q4.

Yes, they were over $20 million in Q4. Revenues were under $20 million so the book to bill in the lab was somewhere around 1.1, 1.2.

Okay, and then in terms of the order -- last year you obviously spent at the lab in both India as well as Singapore. I was just wondering are you seeing a shift of business to those regions?

I think as we have talked about overall, Doug, there's no doubt that clinical research is shifting and has been shifting East for a number of years. So as they get awards and there are more and more -- a larger proportion of those awards are for samples that are being generated in the East. So yes, the volume of activity in both Bangalore and Singapore is rising.

And then given some of the changes you've made in terms of staffing and resourcing, have you thought about revisiting the dedicated team approach?

Revisiting it?

Or reconsidering it in terms of perhaps having people work on multiple projects in order to get a little bit better resource utilization?

We have done that over the last number of years. The dedicated team concept has been diluted significantly over the last number of years for the reasons that you have alluded to. So there would be few enough now of the projects that we run today that would be dedicated team for simple reasons that clients feel that that's an expensive model and don't want to pay for that expensive model. So we do have people working on more than one project typically now.

Okay, great, then just one final question. If you could provide little detail in terms of some of the quality initiatives that you are pursuing and you referenced?

I would prefer not to go into the detail on that, Doug. We have responded to the FDA. We have given them some indications of things that we are going to do. We are going to have further dialogue with them about those initiatives.

So I would prefer not to in this forum to go into the specifics of what we have planned to do. We are also planning to do things over and beyond what we have suggested or committed to the FDA but again, I would prefer not to get into the specifics of that.

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

Ian Hunter, Goodbody Stockbrokers.

Good afternoon, gentlemen. I'm afraid I'm going back to the strategic relationships again. I appreciate the process has been ongoing for some time and some are across the line. I'm just thinking this quarter a couple of your competitors really remarked that they were starting to see some traction and that was where they were getting greater than expected business wins and revenue coming off it. And I'm just wondering -- or maybe this is slightly difficult -- but if you could give us an idea of the probability of maybe seeing something like that coming through in your own business model either this year or next year?

And maybe an easier question on that side of things, can you give us an indication with the way big pharma are going at the moment indicating further R&D cutbacks, whether this process of developing the strategic relationships is accelerating in your experience or the experience of the CRO sector, or whether it's just staying the same? Or is it something that's being stepped back a bit until the pharmas get their own deep priorities in place?

I think in my opening comments, Ian, I suggested that that has accelerated and was accelerating. So I commented that virtually all of the major companies either have or are in the process all discussing strategic relationships with us and I'm sure with our competitors.

In relation to traction, we have traction. It doesn't necessarily show through in our book to bills, but that's -- that doesn't mean it's not happening. We have a number of live -- what I would call strategic relationships operating. The one that would be in the public domain is Eli Lilly where we made a couple of announcements during the year in relation to particular pieces of work that we're doing with them. So just continue to watch this space.

Okay, thanks very much. My other thing of course for Ciaran, a good outcome on DSOs. Is that what we can expect going forward or was there anything in particular that caused this improved performance over the last three or four quarters?

Gosh, Ian, I'm really glad you asked me that question. I thought I was going to escape the whole call without anyone noticing we kept the good wine till last. No. There's nothing in particular in -- there's nothing nonrecurring in what we've seen in the DSOs. However, it should be said it does represent a fairly exceptional achievement for the team in question here on the collection side over the last few quarters. 33 is outstandingly good. I tend to think that our natural level now is probably a little bit higher than that. I tend to prudently model something around 40 to 45 as being a normal average rate over the future. But we will still be -- it fits our target and our stated intention to still pursue what we have been doing for the last four quarters.

But it just seems particularly good. So I wouldn't want to commit, overly commit to that being a sustainable number.

Okay, and finally because you are generating this cash on business and also working capital management, I am presuming a fair bit is being held back for your additional investment that you said in your initial remarks, Peter. But I was just thinking is there anything else in terms of acquisitions, etc. that you'd be looking at and what kind of areas are you interested in? I'm thinking is it Phase I etc. still on the radar?

It's the things that we've talked about now for the last couple of years, Ian. Obviously we bought a bioanalytical lab in the late 2008. We made a small additional bioanalytical acquisition in 2009. We continue to believe that it's important for us to increase our scale in Phase I. We want to be -- we want to have a larger presence in some other markets such as the late phase market.

So there's quite a number of areas where we have an interest in expanding acquisitions is one of the ways in which we can achieve that. We have a pretty active process involved in looking for acquisition opportunities. I think one of the things I've said on previous calls is the expectations of vendors, of businesses haven't quite yet reached the levels that are commensurate with the state of the economy or the state of the industry. So it's been a case of biding one's time. I think 2010 may be a year in which expectations of vendors will become a little bit more realistic.

That's great. Thanks very much.

There are no further questions in the queue at the moment. (Operator Instructions) Todd Van Fleet, First Analysis.

Yes, Ciaran, I just wanted to see if you could give us a geographic breakdown on revenue before we hang up here?

Our revenue, it hasn't changed significantly from what we've seen in the past. It's about 45% for the US. It is about 45% from Western and Eastern Europe and it's about 10% from the rest of the world.

And that's in the quarter?

It's in the quarter and it's broadly that for the year.

Okay, thanks.

(Operator Instructions) We have no further questions coming through at this time, so I will hand back to Peter Gray to wrap up today's call.

Okay. Thanks, everyone, for taking the time to stay on the call. I guess to summarize, in the current environment, we are very pleased with ICON's performance in 2009. We grew operating income, net income, margin, and EPS and cash in the course of the year. We remain positive for about 2010, although cautious obviously given the continuing environment.

Thanks again for being with us and we look forward to talking to you in April.

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