ICON PLC (ICLR) 2010 Q1 法說會逐字稿

Good day and welcome to the ICON first-quarter 2010 earnings conference call. At this time, I would like to hand the conference over to Mr. Brendan Brennan, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Tara. Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended March 31, 2010. 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 cautionary statement 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 conditions 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, 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 March 31, 2010 and with that said, I would like to hand you over to Ciaran.

Okay, thank you, Brendan and good morning and good afternoon, everyone. In the first quarter, net revenue was $219 million compared with $220 million in the same period last year. Our top clients in quarter one represented 7% of our revenue, which is the same percentage as last year. Our top five clients represented 30% of revenue, which is up from 26% last year. Our top 10 clients represented 44% of revenue compared to 43% last year while our top 25 in total accounted for 60% of revenue compared to 66% of revenue in quarter one 2009.

The increased percentage of revenue generated by our top five clients reflects the increasing importance of our strategic relationships, a trend that is likely to continue into the future. In quarter one, 44% of our revenue was generated in the US compared to 47% last year. While in Europe the proportion of revenue grew from 45% last year to 46% this year and in Asia PAC and Latin America combined, the proportion of revenue grew from 8% last year to 10% this year. This continues the trend in the past number of years of increasing amounts of our revenue being generated outside of the US.

Operating income for the quarter was $26.8 million compared with $26.9 million last year. Operating margin was 12.2% of revenue in both quarter one 2010 and quarter one 2009. SG&A in the quarter was $52 million, which was only 24% of revenue. This compares with $57 million of SG&A in quarter four, which was 25% of revenue and $61 million, or 28% last year. During quarter one, SG&A benefited from a number of one-off credits. Looking forward, I would expect run rate quarterly SG&A to be in the region of 25% to 26% of revenue, which still represents a significant improvement on historical levels.

During the quarter, there has been a lot of commentary on foreign exchange impacts between the US dollar and the euro in particular. In quarter one, the FX impact was negligible. As we had planned a euro/US dollar rate of $1.40 in our guidance. The actual average rate for quarter one was $1.39.

Net income for the quarter grew 6% to a total of $22.2 million from $21 million last year. Net margin for the quarter was 10.1%, up from 9.5% last year while our EPS also grew 6% from $0.35 in quarter one 2009 to $0.37 per share in the current quarter. The effective tax rate was 16.5%. We expect our effective tax rate to be approximately 18% for the remainder of 2010.

At the end of March, our DSO was 33 days, which was the same number as at the end of December, but a significant improvement on the 59 days reported at the end of March 2009.

We continue to generate cash under operating cash flow with $16.8 million in the quarter, of which we invested $9.5 million in capital expenditure resulting in free cash flow of $7.3 million in the quarter. We now have $200 million of cash in our balance sheet. I would now like to hand over to Peter to give you some overview in the quarter and to talk about the business environment and the outlook.

Thanks, Ciaran and good afternoon, morning, folks. On our last call, we talked about how we saw 2010 as a year of investment in a number of areas and as highlighted in Ciaran's comments on Asia-Pacific and Latin America -- sorry -- as highlighted in Ciaran's comments, Asia-Pacific and Latin America are our fastest growing regions. And reflecting that in the first quarter, for example, we opened a new office in Manila, which follows the significant expansion of our operations in Korea a short while ago.

Overall, we added 50 new staff in the Asia-Pacific region in quarter one and it is worth highlighting that we now have over 800 employees spread across 14 countries in the Asia-Pacific region and we expect strong growth to continue in that region as 2010 progresses.

In the last few weeks, we also announced our strategic alliance with Tigermed, a CRO in China. Through this agreement, ICON and Tigermed will collaborate to offer biopharmaceutical clients better access to Chinese patients utilizing our global reach and experience and Tigermed's in-depth knowledge of China. With its headquarters in Shanghai, Tigermed currently operates in 21 offices across China and has over 300 clinical development staff.

Elsewhere, growth also continued in Europe and we added over 200 people there in the quarter. But even as we continue to grow in Europe, Asia-Pacific and Latin America, we saw revenues decline in the United States and as a result, we have some resource imbalances there. However, with visibility on some good upcoming opportunities in the US, we are retaining resources there in anticipation of a strengthening in demand as 2010 develops.

A couple of other points that I will make before I talk about the business development environment. We talked about the investments in our central lab facility in Singapore over the last couple of quarters and we expect shortly to be announcing the commencement of operations in a joint venture lab in China.

Overall, our central lab business generated lower revenues in quarter one and weak margins, but bookings were strong again and we anticipate reacceleration in performance in the second half. Our Phase I business also had weak revenues in quarter one, but like the central lab, had its second successive quarter of strong bookings.

Our new unit in Omaha executed its first study since we reestablished it and we are beginning to see some traction with that unit. Our new hospital-based clinic in Manchester is a little behind schedule, but we still expect it to open before the end of quarter two. Overall, the outlook in our Phase I operations is looking more positive as 2010 progresses while our bio-analytical and biomarker labs continue to grow and perform well.

Finally, on the overview on what is happening in the businesses, our clinical contract staffing business, DOCS, and our core imaging lab each made further good progress in the quarter and performed well ahead of the previous year.

Turning now to the business development front. As you will have seen from the press release, we recorded $265 million of net wins in the quarter. That was made up of $320 million of gross awards and cancellations of $55 million, which represents about 17% of gross awards and 3% of the opening backlog, which is within our normal range. As a result of this, business wins were $265 million, which represents a book to bill of 1.2, which is a nice improvement over the last few quarters.

RFP volume in the clinical business was up again in quarter one with volumes 14% higher than the same quarter last year. Values were also up, but by a more modest 3%, but again that is an important change I suppose in direction in that we have been seen for some time that values were down year-on-year. So to see the value is up on a year-on-year basis is indicative of what we think is an improving market environment.

At the end of March, our backlog was $1.83 billion, a 3% increase over the same quarter last year and of this, we expect $670 million to be earned over the next four quarters, which is 72% of expected revenue in that 12-month period.

As we discussed on the quarter four earnings call, we expect 2010 to be a challenging year. We are encouraged by the business wins in quarter one and we can see signs that the closer so-called strategic relationships, which are in place, are starting to bear fruit while at the same time other relationship development discussions continue to progress.

And I am using the term relationship development discussions I suppose advisedly because I think there is too much debate about what is a strategic relationship or otherwise. Relationships are definitely being reviewed by clients on a very broad basis across the industry at the present time and I suppose I got tired of debating whether something is strategic or otherwise and therefore think it is better just to call it a relationship advancement or relationship development-type discussion. We currently expect that revenue growth will reemerge in the second half of this year as we again had indicated in our guidance call in February.

I would like to pause there and let us stop talking and let you start asking questions. So, Tara, perhaps you could take the first question?

(Operator Instructions). Ross Muken, Deutsche Bank.

Good morning, gentlemen or I guess good afternoon for you. In terms of sort of the business trends, if you wanted to sort of compare and contrast Europe versus US in big pharma, do you think, if you look at sort of the differential and what you are seeing today in the business, is it driven by some of the merger activity we saw from last year or do you just feel like different companies are at sort of different points in letting the budgets go and getting back to more of a normalized business stance? Or maybe some of the euro guys are approaching outsourcing today in a bit more of an aggressive fashion maybe than some of the US folks?

I think maybe your question is based on a misunderstanding of the way in which we are reporting the numbers, Ross. When we talk about revenues being up or down or whatever, it is where the work is being executed. It is not the origin of the work and therefore, it is unrelated to the companies involved. I think it is -- as we have talked about for quite a while, it has been a trend in the industry that more and more of the execution of clinical trials being done by clients, wherever they happen to be located, is migrating to less developed areas of the world. Eastern Europe continues to be a very high growing area. I mentioned Asia-Pacific and Latin America and so on. So the trends that I am referring to are, I don't believe, are related to any difference in view of the world, our view of outsourcing by European versus US companies.

Well, can you then compare and contrast what you are seeing in the two regions from the differential players and sort of give us a bit more color on kind of what the various larger players are sort of doing in terms of where they are, in terms of their outsourcing potential as you currently see it?

I suppose the relationship development discussions, as I am now calling them, are happening right across the industry. And I don't see any particular geographic bias in that. I think companies across the industry are challenged by the patent cliffs and the other factors that are pressing on their profitability. The lack of productivity and research and development is not biased towards one region or another. So there isn't any more color I can give you.

It is a pretty broad-based worldwide phenomenon and as I say, where revenues are arising is related to the migration or the search for more patients and the greater success in recruiting patients in the less developed parts of the world. And in Europe, we include Eastern Europe. I would say Western Europe is pretty flat, but Eastern Europe, there is growth taking place because of the nature of those countries and the large untapped patient populations there.

And on sort of the Tigermed relationship, given some of the M&A we have seen, particularly in that region in the space, can you talk a bit about how you thought about your Asia strategy, organic versus inorganic and sort of how you came to sort of that being the best approach versus how some of your peers have treated the region?

I suppose history will judge what is the best approach, but we have grown ICON on an organic basis almost entirely in the core business, the Phase II to Phase IV clinical research arena. And we have grown geographically I suppose helped by the fact that we are European-based. We had to be -- and the fact that we are Irish-based meant we had to be international almost from the second day of operation.

So we have always adopted a strategy of growing the business on an organic basis, perhaps beginning to execute work in countries before we actually have an office there through home-based people or flying people in and out of the country and eventually running enough critical mass, we open an office and we begin to grow there as demand arises.

China is, I think, something of a special case. It is obviously a huge internal market. Companies are going to emerge from China that will ultimately be world leaders in this industry I suspect, in the pharmaceutical industry I mean. But there are still significant barriers to, including China, in global clinical trials, although those barriers are beginning to be eroded or changed by the government in China.

So we feel that there is merit in having linkage with a strong partner within China so that we can support adequately any major global trials that come along. But we are not seeking yet as a company to try and tap into purely local trials in China, of which there are very many. But we have taken a view that trying to compete against local CROs in that marketplace is not a part of our strategy. The Tigermed alliance gives us flexibility -- gives us, if you like, capacity on tap as we need it if the market develops more quickly than we expect, but it doesn't change our strategy in any way.

Great. Thank you.

[Robert Jones], Goldman Sachs.

Thanks for the questions. I just wanted to dig into the new business wins in the quarter a little bit just to understand the composition of those wins. Were there any single large wins or was this more the result of increased -- just increased wins across the board?

Robert, this was increased wins across the board. The largest single item in there is a bit over $20 million, but there is nothing -- there is no knock it out of the park award in there that skews it. We are actually quite pleased with the composition of the wins this quarter because it is very broadly based.

That is helpful. And then I will just be a little careful here, but I was wondering if there was any color you could add on the ongoing FDA concerns and if at all that had any impact on the ability for you to win business within the quarter. And then if there was any update on timing around resolution of that issue, that would be very helpful. Thanks.

Sure. I think we would be naive if we didn't think that there may have been some impact on business in the quarter. There were only two relatively small clients that transparently to us that they had made decisions that were negative for us because they were standing on the sidelines while they awaited resolution of any FDA issues.

But one doesn't know how transparent other clients have been and therefore, I think, as I said, it would be naive of us to believe that it hasn't had some impact on our business. But we are very pleased with the awards that we have achieved. As I said, it is very broadly based and we have had very positive response from all of our major clients in relation to how we have dealt with the issue and how we are dealing with the issue.

The timing of resolution is a more difficult question to answer, not because I want to be coy, but because I don't have an answer to give you. We submitted a response to the FDA in January, in the middle of January and we have had no formal response from the FDA since. We have had some dialogue with them, but we have had no formal response as such. Because they didn't issue a 483 to us, we understand that there is no timeline by which they have to respond to us. We are obviously anxious to achieve resolution in whatever way we can on the issue, but that's as much as I can tell you at this stage because I don't know anymore myself.

Greg Bolan, Wells Fargo.

Thanks for taking the question, gentlemen. Ciaran, gross margin for the quarter was basically I think the lowest we've seen it in a number of years and really the gross margin has been in a sequential decline for the past four or five quarters. Can you help us understand what is causing this? Is there anything to read into this?

We could read into it that it is down. I think I would draw you to Peter's comments where he talked about the factors around business in the quarter. We mentioned that we have seen revenues decline in the US although we were growing in other regions that we were maintaining our infrastructure in the US because of the strength of the pipeline and prospective business. So there was a fall-in recovery in the US clinical business. That was the principal driver.

I think we commented too that the lab was weaker than it had been for a number of quarters in terms of its revenue and margin. Albeit it was very strong in new business awards, so the lab was a bit of a drag on the gross margin and Phase I continued to drag the delay of the Manchester clinic for a few months that sort of meant that we had to have some scheduling issues around that business. And they posted a weaker gross margin than they had over the last couple of quarters.

So it is those three sort of issues. I don't think it reflects any broad-based change in the fundamentals of our business or our model. I think it is just tied to those specific issues and it is really all around -- 2009 was a challenging year. Wins were weaker in some places than in others. It starts to come through at some point, but they are all issues that are identified and as I say, we have seen the strengthening of the business wins across all of the divisions in the quarter. So if that continues for a number of quarters then you should see that sort of five-quarter decline reverse and then it start to creep back up to where it was this time last year.

Okay, that's helpful. Thanks, Ciaran. And then (inaudible) sorry, I was a little late to the call, but I don't know if you commented on SG&A, but given the number of investments you guys have made this year and the fact that headcount actually rose in the quarter, I was a little surprised to see such a big sequential decline in the SG&A line. Can you provide a little bit more color on the sequential decline?

Yes, I did comment in the text just to say that we did a number of one-off credits and that is it really. It was quarter one, we made some savings compared to what we expected to be paying in bonuses this year. So primarily we picked up a little bit of benefit there coming out of the accrued bonuses. We also had lower costs than we expected in relation to certain professional fees and things like that. So specifically, those two items gave us an unusually good number in the quarter. I did say on the call then that I would expect sadly that is not the run rate, don't model it. I would expect SG&A to be back at the sort of 25% to 26% of revenue as we go forward.

That's great. And then last one here, just looks like central lab bookings has shown some improvement these last few quarters, but could you maybe just -- if we could narrow down kind of the landmark Long Island facility. Is that facility performing kind of relative to your expectations? Can you share any, if you can, any color around that facility and how that is performing relative to what you had been expecting?

Well, as I said in my comments, the lab reported lower revenues than this time last year. So overall, our central lab has had a disappointing few quarters and it made -- its margins were down as well. Its net margins were well down as well this quarter, but with strong bookings in quarter four and again strong bookings in quarter one and indications being that bookings are moving in the right direction this quarter also. We are pretty confident we are going to see growth reemerge.

I wouldn't focus in on Long Island. We have done a lot of investment across the lab platform in the last year or two. Dublin is now a pretty big facility as well and we have upgraded Singapore and so on. I won't bore you by going back through all of that, but I don't think there is any particular reason to signal in on Long Island. I think we need to talk about the business as a whole and as I said, its revenues were down year-on-year. We are hoping we're going to see that turn around as the year progresses.

That's great. And sorry, just if you could just, as you put it, bore me just for a second on Prevalere. How are you all doing there? I know that was an exciting asset that you guys got your hands on. I would be interested to hear any comments you could make.

Again, in my opening comments, Greg, I said that the bio-analytical and biomarker labs had performed well. They grew and we were very pleased with their performance. So Prevalere and our other bio-analytical biomarker labs in the UK continue to grow, doing very well on the business wins front, good investments for us. We are very pleased with that.

All right. Thank you.

Todd Van Fleet, First Analysis.

Hi, good afternoon, guys. As you think about the recovery in the gross margin, I am thinking about the three aspects of the business -- the late-stage clinical development just broadly, the Phase I and then the central lab. Could you kind of rank them in terms of operating leverage potential as we move throughout the course of the year? Do you expect to get potentially a big impact from the central lab piece and then Phase I and then the clinical development? How would you kind of segment those for us?

I think, Todd, if we cast our mind back to our guidance call at the end of February, we had suggested really that sort of 12% -- a range of 12% to 12.5% was our sort of margin expectation -- our operating margin. That is a combination, of course, of gross and SG&A, but I mean nothing that is happening there has sort of been a surprise. I mean a great benefit of a business like ours is that we have a $1.8 billion backlog and it churns on for a long time and gives you good visibility.

So we could even see through last year and a number of challenging quarters when business throughout the sector was down, we were able to continue. We come into it with a lot of momentum and we continue to go through each quarter with decent revenue and profit numbers. But at some point, the kind of softer business wins start to tell and we have expected that.

So I would say -- I don't expect to see a great change in the fundamentals of those businesses in the shorter term and I would think, looking at it broadly, each of them have about the same impact. But I wouldn't be saying to you that there is going to be a change in sort of -- over the next couple of quarters. It is going to take two or three quarters to rebuild the backlog in those businesses and get your volume through it so you improve your recovery.

So I don't know if there is any perfect sort of -- or I could give you a meaningful ranking in operational leverage. I think the business will continue to perform as we expected around this kind of profitability level for the rest of the year. Certain parts will move differently, but between the three of them, they are all broadly about the same and it is just a question of getting more volume through there to soak up the capacity.

How about the quality of the backlog that is being won at this point. Is there anything different about the quality? Again, I'm probably thinking more of the Phase I business than anything at this point. It would seem that your customer base has largely made it through a pretty turbulent period and so maybe the work that they are looking at, the molecules that they are looking at developing, maybe they can say with a greater degree of certainty that they are going to move forward. Are we potentially -- I don't want to get too far ahead or be too promotional -- but are we potentially moving into period where cancellation activity should be relatively light I guess?

Todd, I would love to say yes. It is very difficult to know, particularly when you refer to Phase I. What I can tell you and I think you and I met down at the partnerships conference in Florida there a couple of weeks ago and I may have shared this with you already. What I can tell you is that our business development team in the Phase I business are feeling pretty upbeat about what they are seeing. They are basically saying to me that, since Thanksgiving -- I don't know what was magical about Thanksgiving -- but since Thanksgiving, there has been a noticeable improvement in RFP flow in Phase I.

As I said, their bookings in the fourth quarter were pretty good. Their bookings in quarter one were very good. They are talking still about a good pipeline of opportunity and an improving pipeline of opportunities. Whether they are good quality projects, whether there is less likelihood of cancellation of those, we really need to have our scientists reviewing that and looking at that and analyzing that. And to be honest, that is not a productive use of their time. What we are concentrating on is capitalizing on the increased level of RFPs, upping our win rate, building a backlog and hopefully insulating ourselves against the inevitable cancellations that do take place in Phase I.

Great. Ciaran, I am hoping maybe you can give us the revenue breakdown by geography if you have that?

I gave that on the call, Todd.

Oh, is that right? Was that on percentage terms then I guess?

Yes, no, we talked about that. I'll have to go back to the text. We had 44% in the US, 46% in Europe, at least Africa and 10% in Asia PAC and LatAm.

Great. Thanks, guys.

Dave Windley, Jefferies & Co.

Hi, thanks for taking the questions. Peter, as you were talking about some of these complementary business segments like bio-analytical and biomarker in central lab and so forth, I am wondering where your business development efforts have advanced from a cross-selling standpoint. Are your investments in biomarker, for example, helping to capture business into the Phase II through IV because of a differentiated expertise? And I focused in on biomarker, but any comments as it relates to lab or other complementary businesses would be welcomed.

Yes, I think the biomarker one, Dave, the answer is no, too early. We have connections. We do get cross-sell, but often the biomarker work is being done at a different phase by a different group and creating cross-sell opportunities there is something we aspire to, but that will take longer and particularly as our pure biomarker lab was an acquisition we made last year and therefore it is still being -- it is really still being built into our organization. We haven't really had an opportunity to capitalize on it in terms of that type of cross-sell at this point.

On the more broad question of cross-sell, there is no question that we are seeing a greater willingness on the part of a lot of customers to contemplate multiple service awards. And whether that is our core imaging lab, whether it is our central lab, whether it is our IVR business or so on, we are seeing more interest in that. I haven't run the numbers, I haven't seen the numbers as to whether we have upped the percentage in practical terms yet, but I believe we have if my anecdotal view of the award information means anything.

So it is a kind of a woolly way of saying to you, yes, we are seeing much more interest in it. Part of this so-called strategic relationship-type discussions is and contemplates a single vendor for services wherever that is possible and so we are seeing more of those types of awards.

Okay, great. Thank you. Drilling in on the last mention you made there on the strategic partnerships. I am curious, in the concentration of the top five that came out in the prepared remarks, is that the depth of the formalized strategic relationships? Is that kind of the magic number at this point, five, or how might you quantify the number of clients that have advanced to some type of formalized MSA around a more advanced relationship development to use your term?

Out of our 800 clients, probably about 563, Dave. I am kidding, obviously. It is very difficult to characterize what's strategic, what isn't. But I wouldn't narrow it to five. There are, and I chose my words carefully in the prepared remarks, relationship developments. There are a lot of relationship development activities taking place. That generally means that the number of vendors are being narrowed down. There's a smaller number of vendors and the client intends or aspires to having a deeper relationship, which may include cross-selling and certainly is likely to include involvement at an earlier stage in the planning of programs and of projects.

What you call that and whether there is three such partners or five such partners or whatever the number is, it all begins to get very nebulous. And I am not sure it is hugely beneficial to say it is five, it is 10, it is 57 or 463 or whatever number I threw out there. MSAs are certainly pretty actively being rediscussed across the industry and new ways in which we work with clients has happened on a pretty broad basis. How much that translates into additional business, only time will tell with how many customers.

Okay, and to round out this part of the discussion, I guess where I am ultimately getting the numbers is your backlog coverage ratio number has been fairly consistent in the mid-70%s for a while with the Q1s on your chart -- on your slide being the low points to the 71% and 72% in last year and this year respectively. Wondering if that is a seasonal thing or if that is a reflection of the changing nature of relationships and how they are projecting revenue into the future and when that comes into backlog or if it is a shift in mix or none of that or all of the above?

Yes, I think it could be a little bit of that because -- one element of -- an important element of the newer relationships is involvement at an earlier stage. There may be an element here of awards coming through early when the planning is still unfulfilled or uncompleted for projects and therefore, the revenue run on the project may arrive later than it would've done in the old transactional RFP environment. So I am speculating. Again, I haven't analyzed -- we haven't analyzed the backlog in that way, but it is a reasonable hypothesis.

Okay. And then the last question I guess is really for Ciaran and Ciaran, you talked about the reasonable level for SG&A a little bit higher than what we saw in this quarter. There were prior questions about gross margin. I guess I am wondering if the timing works out well that when SG&A pops back up, gross margin will respond as well. Do you have any thoughts on near-term cost trends on those two lines that would keep the operating margin relatively constant?

I think when I was speaking about that, I said I expect our operating margin to be relatively constant as we look forward at the next couple of quarters. Exactly what moving pieces move up and down, time will tell, but there certainly -- I think it would be hard to parse it down exactly into saying will we expect SG&A to go up and pieces will move, but if (inaudible) I expect SG&A to go up a bit and I expect operating margin to stay constant and I suppose I am implying that I expect a little bit better gross margin in the next quarter, aren't I? So without being specific, I have just been specific.

Right. Okay, thank you.

John Kreger, William Blair.

Hi, thanks. A couple of questions about the environment. Peter, how do you feel about pricing now versus three months ago and any movement there better or worse?

Neither, John. I would call it neutral. As we have said for the last while, the environment is more competitive in the last year than it was in the years before that, but it has been reasonably disciplined and that continues to be the case. I wouldn't characterize the last three months as better or worse.

Great, thanks. And another broader question, given your recent interaction with the FDA over the warning letter, do you have a perspective on -- is that becoming a broader trend out of the FDA, more aggressive enforcement around clinical trial activity or should we view that as more of a one-off? Again, the question is not meant to ask are you having other issues with trials, but more as you talk to clients, are they seeing a more aggressive (technical difficulty)?

Well, the answer to that is yes, the indications we have from various sources is there is a perception that the FDA is paying greater attention to GCP matters, good clinical practice matters. So at the risk of saying more than I want to say, the answer to your question is yes, there is an indication in the industry that the FDA is more vigilant on this or is paying more attention and is more concerned about GCP than perhaps it has been or has shown itself to be in the past.

And strategically longer term, should we view that as a good thing or a bad thing for your industry?

I think for our industry, I would say neutral. I think like GMP -- GMP has been around a long time and the FDA's focus on GMP has been a feature of the pharmaceutical industry for a heck of a long time. And the industry has to learn to live with that, learn to work with it and up its game. And I guess the same is true of -- may be true of GCP. It may be that we have got to recognize a greater level of attention that the FDA wants to pay to GCP and ensure, as an industry, not just CRO industry, but as an industry across pharmaceuticals, that it is something we have to ensure that we are on top of.

I think CROs are specialists. We are companies that specialize in conducting clinical research and that should enable us to be good at responding to these things. And perhaps will help convince pharmaceutical companies that the conduct of clinical research is not a core competency and doesn't need to be a core competency of theirs. So it could be beneficial to the CRO industry, but obviously we have to learn -- listen carefully to what the FDA is saying, learn from that and make sure we are applying it.

And a number of people have asked me over the last number of months, is this likely to increase the cost of clinical research. I don't believe it has to increase the cost. I think it just means that we have to make sure we have the right processes and the right operational methodologies as between sponsors and ourselves to ensure that we do the job that the FDA expects.

Great, thank you. And then a question about the strategic discussions that you were talking about earlier. Are you seeing a typical duration around those discussions three years, five years and as a result, might we expect that there is sort of a flurry of activity and then things would quiet down or should we expect these discussions on a rolling basis to just kind of continue into the future?

I think no one is talking less than three years, John and some are talking about agreements that would last longer than that, but no one again that I am aware of is talking about more than five. So it is in that sort of range. So you could see a flurry of activity and then maybe a fallow period for a year or two. Although the reality is there was a phrase -- a period over the last number of years, up until about a year and a half ago, two years ago, when companies were talking about reducing the number of their vendors from, in some cases, hundreds of vendors down to the 20s or 30s. And no sooner had they finished that than the strategic relationship cycle started.

The industry doesn't tend to do this all at once. Obviously, the noise around it tends to cause more companies to think about it and discuss it and movement in the industry causes that to happen as well. So I think these types of reevaluation of how relationships work between CROs and pharma companies have some time to go yet. I'd say we could still be talking about this in two years time because all companies will not have moved in sync and simultaneously.

And some of the early agreements will probably be coming up for reevaluation at that point and maybe a new thing will come along and the consultants will sell another great idea to the pharma companies and there will be a new way of deeper, stronger, whatever types of relationships. So change is something that is constant in any industry and I think what we are seeing here is the latest wave of change and there will be another one after this.

Great, thanks. And then lastly, Ciaran, those SG&A credits that you mentioned, could we assume that they are in the ballpark of $3 million or more or less?

I am not going to comment on that. I think I have said enough on it for intelligent fellows like you, John, to work it out.

All right. We will do our own math. Okay, thanks.

Tycho Peterson, JPMorgan.

Hey, thanks for taking the question. Peter, I appreciate some of the color you provided on the US business. I just wanted to dig in a little bit deeper. Was the weakness there mainly on the kind of the Phase II and III and can you talk about what gives you confidence that that comes back versus just this reflecting kind of the broader globalization of trials and maybe some of that work moving overseas?

What gives me confidence that it will come back is I think everyone in the industry, and down at the partnerships conference in Florida two weeks ago, people were talking about this. Everyone in the industry recognizes that it is important that US patients remain an important and large element of the data for large clinical trials. So I think the industry has an interest in ensuring that the US continues to be an important feature.

CROs wanted to be so as well. We have good infrastructures, we have great people, great project leaders and project managers very experienced in the US. Whereas getting experienced people outside of the US, particularly in the developing regions, is more challenging. There is a mutuality of interest for everybody to ensure that the US doesn't shrink away to be an insignificant part of clinical research. That is the broad answer to your question.

When I look at the RFP activity as it picks up, we are seeing more opportunities that have a significant US element in them. So I think the short-term anecdotal data tells us that whatever we have seen over the last year looks like we might be -- have an opportunity to reverse some of that in the coming quarters.

Okay, that's helpful. And then with regards to your comments earlier on on the Tigermed deal, can you just talk about whether this is something that you were getting interest from from clients or were you kind of trying to be proactive here? And just talk about whether this is more strategic or whether you think there is potential meaningful revenue contributions in the near term.

A number of different angles to the question, Tycho. It was very much -- it wasn't prompted by our clients; it was prompted by good strategic thinkers within our organization saying this is something that we should do. And obviously, you don't sign an alliance overnight, so the discussions on this have been going on for quite a long time.

In terms of revenue potential, as I think one of my earlier answers alluded to, we see Tigermed as an important partner that we can develop a stronger relationship with over time. We are not going to try and compete with them for local Chinese clinical trials. We are going to have them as our partner as we conduct global trials where the sponsor wants to include China as one of the country's recruiting patients.

So we think this will be a build over time. We are going to be sharing training with the Tigermed folks. We are going to be seeing what other ways we can collaborate together. But the nature of the relationship is intended to be one where they will be a special, an additional resource for us in the largest population country in the world as we see whether clients really embrace it as a location for clinical trials.

Okay. Can you comment on Japan, either with regards to the Lilly deal from last year or just more broadly how you are looking at the market opportunity in the near term?

Well, we have a burgeoning operation in Japan. It continues to grow. We have about 100 people there now. It is still relatively small by Japanese standards, but is growing nicely. We added data management into that operation about two years ago. In the Lilly deal we did last year was a good endorsement of that. Still a relatively small number of people. Obviously, data management -- the numbers of data management people out of a staff of 100 is relatively modest, but we are supporting more of the Japanese work out of a facility in Australia and our facility in Chennai.

So we are broadly, on the data management side, growing and supporting our organization across the globe. In terms of clinical research in Japan, the interesting feature of Japan has been the opening out of the regulatory authorities there to the acceptance of data from more than Japan for registration within Japan. And that has been very influential in the growth of our Korean operations.

And I mentioned earlier in my comments how we had significantly expanded our office in Korea last year and that is directly as a result of the use of Korea more and more in tandem with Japan for clinical trials that will be used for registration in Japan. So again, Japan is not a single -- it is not part of a single country strategy on our part. The growth of our operation in Japan is about supporting our capability in supporting global clinical trials.

Okay, and then just one last one. Can you talk about priorities for use of cash this year? I think you talked about $200 million on the balance sheet in the comments earlier.

Well, the priority is to invest that in good opportunities for further growth in the organization. And we have -- there is plenty of ideas as to what we would like to and how we would like to invest and where we would like to invest and what sort of acquisitions we would like to make. There is an increasing number of interesting acquisition opportunities coming back on the radar.

I think last year with everyone stressed, companies either were looking for unrealistic prices for their businesses or they just didn't put their businesses on the market because they reckoned that the market was too depressed and they wouldn't get interesting valuations. We are seeing more such opportunities and we have been very open about saying we are looking for acquisitions in the Phase I area. We are looking for acquisitions in the lab area. We're looking for acquisitions in the imaging area and we continue to look for service add-ons in our clinical research area, particularly in late phase, but also therapeutically and geographically, we have an interest in those. We wouldn't be long burning through $200 million if a few of those came along.

Okay. Thank you very much.

Ian Hunter, Goodbody.

Good afternoon, gentlemen. I think most of my questions have been answered, but Peter, being rather coy, I was thinking there on the strategic relationships and the number that are actually in place at the moment, I am just wondering again -- I maybe echoing another question earlier -- if we can take it that maybe you have got about between five and 10 in place given the concentration you have in client revenue. Would we be right in assuming that kind of number? I am kind of asking that because I am feeling that peers are starting to give details of these kind of numbers in their quarterly reports just to get a feel of how the main CRO companies are stacking up in that area.

Which is why I said we had 563. I am not sure how anyone measures what isn't strategic or nonstrategic, but in what we would consider to be a strategic relationship, which is by its nature is a deep one and one that is going to contribute significant revenues. Yes, between five and 10 is probably the right number of ones that could truly be characterized as such.

Okay, that's great. Thanks very much. And maybe more a housekeeping question, I saw your book to bill is 1.2 to 1. But I saw the total backlog has actually come down by $11 million. I have seen it going up by about $46 million and I am just seeing -- just wondering what the difference is?

As in every quarter, Ian, when you reconcile the opening backlog and the business wins and the closing backlog, there is always a slight difference due to foreign exchange. This quarter, we closed the quarter I think in the sort of region of $1.33 to euro rate. I think probably when we closed it at year-end, it was $1.41 thereabouts, so we just saw the retranslation of one of our euro and non-US dollar-denominated contracts of a larger delta than usual.

Okay, that's great. And can we take it -- you gave us an idea of the staffing levels that you had and I remember in the last conference call, you were kind of guiding that it would stay flat, but you have actually increased the staffing numbers and I know you are alluding to the Asia business. Is this kind of an indication that you feel that business is picking up quite dramatically in those areas?

I'm not sure I understand the question, Ian. Could you repeat --?

Okay. At the end of Q4, you gave a guide going forward that staffing levels would be flat and yet I have got them from my numbers here up about 130 and you then said yes, your staffing numbers are up in Asia, etc. in your commentary and wholly in the US. Would we be seeing further increases in staff going forward or would you hold that for the rest of the year?

We have budgeted that staff would continue to increase in the Asia PAC area. We have been surprised at the growth -- at the level of growth we have had in staffing and we have had to have in staffing in Europe. And as I said in my commentary, we are holding onto resources in the states in anticipation of an uptick there. So a balancing out that might otherwise have taken place hasn't taken place because we see the future as positive. So that may mean we will see headcount growth this year.

Okay. And finally, I am a great man for my DSOs and I see, Ciaran, you were guiding 40 to 45 for the year and yet you've still come in at a very commendable 33 this quarter, same as the quarter before. Are you changing that guidance or is it again circumstances have just led to having a good outcome this quarter?

I just look forward to disappointing you next time, Ian. I am not changing the guidance. There is a million moving pieces in DSO and each day it is about $3 million when you think of the size of some of our customers and the builds that we send and the level of pass-throughs, things that go through there. A check for $20 million or $25 million wouldn't be unusual and it arrives a couple of days before the quarter-end or after the quarter-end can change your DSO by seven or eight quarters.

So our guys did an excellent job again this quarter as they have been doing for the last number of quarters. Some of the changes we put in place last year in terms of our credit management and our processes continue to work well, but there is a margin of error there in DSO that leads me to believe it would not be prudent to change the guidance at this point.

Okay, thanks very much.

Jack Gorman, Davy.

Thank you, guys. I know it has been a busy call, so I appreciate the time to take my questions. I have two, please. Firstly, Peter, on the RFP flows that you mentioned and plainly seeing solid volume growth and some value growth this quarter, I am just trying to get a sense of where that may be coming from and thinking not just from a geographic perspective, but more from the type of business. Is it big pharma? Is it biotech?

I think it is -- you have got me on the hop here now, Jack, which is most unusual. It is coming more from big pharma actually when I look at the analysis of it here. A greater proportion of the opportunities outstanding is from the larger clients this year than last year. Midsize pharma is about the same. Small pharma is down and let's see, biotech on aggregate is about the same. So it is -- large pharma is up, small pharma is down and biotech is around the same.

(inaudible) can be taken, Peter, for both volume and value?

Jack, give me a break. That is value that I am talking about there. Volume I think is less relevant.

Okay, no problem. Secondly and briefly, and you've kind of answered this to some degree in other questions, but just to look at yet again at your growth opportunities outside we'll call it the developed US and European regions and as you grow, planning your interesting in those regions, I am just trying to get a sense or if you can give us some color on what the underlying cost environment is in many of these regions such as Asia PAC and LatAm, in particular such as site costs, G&A, costs, etc. Have you seen underlying cost inflation there as more and more CROs look to exploit those particular regions?

Yes, that has always been a feature of growth in developing areas because experienced folks are in short supply and everybody is piling into the region. So yes, everyone -- I think everyone has probably heard the stories about India and what inflation, what wage inflation is like in India or was like in India over the growth years. It was hard to keep salary inflation below 15% in India on an annual basis. And that is, as I said, I think that is a feature of the developing world for services that are high skilled and therefore in short supply.

Is there something different happening today than happened in the past? No. As new regions are opened up, does the issue repeat itself? The answer is yes and I am sure China will be no different than anywhere else in that as more and more companies want to do more and more clinical research or include China in more and more clinical research, experienced people will be at a premium and that will push up the price of them.

It is also important to remember that, in a lot of these developing countries, inflation anyway is higher than it is in the West and so the cost base inflates regardless of skill shortages, but then you may have currency fluctuations that are mitigating against that if their currencies are floating currencies. So there are so many -- again, as Ciaran said -- there is a thousand moving parts in some of these things.

Latin America -- Argentina is a good case where before the big default in Argentina back in 2001 or 2002, whenever it was, Argentina's costs had crept up and up and up and were almost on a par with the US. Then there was a massive devaluation of the peso, which brought their costs down and inflation is now running, even though official inflation in Argentina is around 5%, inflation on the ground is much higher than that and so costs in Argentina are rising again.

We have to cater for that. Obviously we have to reflect reality in what we pay our people. We have to then compensate for that in the rates we charge for the work that we do in those regions. And again, there is a lot of moving parts and you don't know what currencies are going to do in the middle of all of that.

So there isn't a simple answer to your question other than, as skills become more in demand in different regions, they tend to -- the price tends to get pushed up because there is a shortage of those skills.

Great, Peter. I didn't expect a simple answer, but thanks for the color on this anyway. Thanks.

Too much color probably.

Doug Tsao, Barclays Capital.

Hi, good morning. Thanks for taking the questions. Just taking this to a little bit of a different direction, obviously, there was significant disruption in travel in Europe last week based on the ash cloud from the Icelandic volcano. I was just wondering if that had any impact on the business and could that affect second-quarter results?

No. Did it have an effect on the business? Yes. People had more difficulty in getting around. People rescheduled visits to sites and did whatever they had to do. Europe is a relatively small place compared to the states. I drove across the state of Pennsylvania the weekend before last because I was in the states for the week and I didn't even get across the entire state of Pennsylvania in 4.5 hours, which was the equivalent of me driving off one end of Ireland and through to the other end of Ireland. So Europe is a pretty small place and people are able to get around even when the airlines aren't operating other than getting off Ireland and getting onto islands like Ireland. Long answer to your question. Don't expect it to have any impact on Q2.

Okay. And so there was no disruption in central lab kit return value?

There was, yes, there were challenges in terms of getting samples in, the kit returns as you say got delayed. There were some challenges associated with that. Some samples would have been lost, but we are not expecting that that will have any material impact in the quarter.

Okay, great. And then just quickly, you have commented over the last quarter's earnings that you expected to make some investments in terms of quality initiatives through the year. Just would those be more front-end loaded or is that going to be sort of an ongoing expense throughout the full -- the balance of the quarter?

It is an ongoing expense. There are a number of different initiatives that will grow through the year. In fact, some of the gross margin, some of the additional costs that impact gross margin would be quality related. Ciaran didn't specifically refer to those, but that would be a factor in there as well.

And would some of that be related to possibly a little bit of a higher staffing level for projects?

No, it would be in relation to taking staff out of the field for specific projects and training assignments and so on.

Okay, great. Thank you very much.

Sandy Draper, Raymond James.

Well, unfortunately, my final question is they have all been asked and answered, so I don't have anything else for you guys. Thanks.

What a relief, Sandy. Sorry that you ended up with the tale.

That will conclude today's question-and-answer session. I would now like to hand the call back over to your host for any additional or closing remarks.

Yes, Peter Gray here. Before we finish up, I would just like to acknowledge all of our staff worldwide who make all these numbers that we talk about possible. Ours is a people business and it is very important to acknowledge the importance of those people in achieving what we achieve.

We are very pleased with ICON's performance in the first quarter of 2010 and especially the growth of EPS that was achieved in difficult circumstances. We are encouraged by the stronger bookings in what appears to be improving market conditions and we remain positive, although cautious, as we look forward to the remainder of the year. Thanks, everyone, for taking the call and talk to you next quarter.

Ladies and gentlemen, that will conclude this conference call. Thank you for your participation today. You may now disconnect.