ICON PLC (ICLR) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ICON plc fourth-quarter 2010 results conference call. For your information this conference is being recorded.

At this time I would like to turn the conference over to Brendan Brennan. Please go ahead, sir.

Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ending December 31, 2010. Also on the call today we have our CEO, Mr. Peter Gray; our CFO, Mr. Ciaran Murray; and our Head of Investor Relations, Sam Farthing.

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

Certain statements in today's call (technical difficulty) 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, 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.

The presentation includes selected non-GAAP financial measures. For a presentation of the most 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.

Today's commentary refers to our fourth quarter ending December 31, 2010. We will be limiting the call today to one hour and will, therefore, ask participants to keep their questions to one each with an opportunity to ask one related follow-up question. I will now hand over the call to Ciaran.

Thank you, Brendan. For the full-year 2010 net revenue was $900 million compared with $888 million in 2009. This represents an increase of 1.4%. In constant currency terms full-year revenue increased by 3.1%.

In the fourth quarter, net revenue was $232 million compared with $227 million in the same period last year; this represents an increase of 2.2%. And in constant currency terms Q4 2010 revenue increased by 5.6% over last year.

For full-year 2010 our top client represented 9% of our total revenue compared to 7% last year. Our top five clients represented 33% of revenue, up from 30% last year. Our top 10 clients represented 50% of revenue compared to 48% last year, while our top 25 clients accounted for 71% of revenue which was the same as in 2009. We continue to expect client concentration to increase given the shift towards more strategic relationships.

We continue to see global expansion of our business. In 2010 58% of all of our revenue was generated from outside the United States, this is up from 54% in 2009. In Europe, Middle East, and Africa revenue grew 2% to 47% for total and in Asia-Pac and Latin America revenue grew from 9% last year to 11% of the total this year.

Operating income for the quarter was $22 million compared with $29.6 million last year. Excluding the losses in central labs, operating margin in Q4 for the clinical business was 12.1% compared to 13.2% in Q4 2009. Reported group operating margin was 9.5% of revenue in Q4 2010 compared with 13% in the same period in 2009.

For the full year operating income was $92.1 million compared to $116.2 million last year. Excluding the losses in central lab, operating margin for 2010 in the clinical business was 12.5% compared to 13.6% in 2009. Reported group operating margin for the year was 10.2% compared with 13.1% in 2009.

Net income for the quarter was $22.1 million compared to $23.9 million last year. Earnings per share was $0.36 compared with $0.40 last year. As a result of one-off tax write-backs, the effective tax rate in the quarter was 1.8%. However, we maintain that our longer-term tax rate will be in the range of 18% to 20%. In the first half of 2011 it's likely to be in the top end of the range due to the tax effect of the continuing losses in the lab.

Our guidance for 2010 indicated that it would be a year of investment for future growth. Throughout the year we invested in facilities and hired additional staff in Asia-Pacific and continued to invest in our new strategic relationships. These factors impacted earnings by $0.08 each.

Repositioning of our Phase I business, which included investment in our Manchester and Omaha facilities, resulted in a further $0.08 reduction in Group EPS as that market continues to be challenging. The underperformance in our labs discussed in the Q3 conference call added a further cost of $0.24 to the year.

These were somewhat offset by improved performance in other areas of the business which resulted in an operating EPS of $1.25. A further $0.19 of earnings per share rose from one-time tax write-back benefits giving total earnings per share for the year of $1.44.

At the end of December 2010 our DSO was 37 days compared to 33 days at the end of December 2009. Operating cash flow was $31.9 million in the quarter. We invested $7.1 million in capital expenditure and at the end of December we had net cash balances of $255 million.

Having said all of that, I would like to hand over to Peter now to give you some overview in the quarter, to talk about the business environment, and to provide guidance for 2011.

Thanks, Ciaran. As you will have seen in the press release, net new business awards for the quarter were $237 million representing a book to bill of just 1-to-1. This was made up of gross awards of $288 million and $51 million of cancellations, which is 2.6% of our operating backlog. For the year overall, net awards were just over $1 billion, which represents a book to bill of 1.16 for the year.

Drilling down into those bookings, our central lab bookings were strong again in quarter four. Overall they recorded a book to bill of 1.6 for 2010. As we know, that hasn't reflected into their revenues as yet, I am told, but we do expect that it will begin to reflect in the second half of 2011.

As we review 2010 in business development terms it's clear that a lot of change has been taking place in our market. Pipelines, our customers' pipeline are being reviewed and renewed. Strategic relationships are being explored and forged and at the same time biotech funding has began to flow again.

We don't think ICON took full advantage of all the opportunities 2010 presented and as a result we have made some adjustments, have been making some adjustments to our go-to-market approach as we respond to our customers' desire for more expert and innovative input from CROs into their developed program. Simultaneously, we continue to engage actively with major companies who are seeking to reengineer their approach to development and we are revitalizing our focus on biotech opportunities.

As 2011 has commenced, our pipeline of opportunities is expanding and so far new business trends have been encouraging. At the end of December our total backlog has grown to $1.93 billion, which is a rise of approximately 9% compared to the comparable figure a year earlier.

Of the $1.93 billion backlog that we had at the end of December we are expecting $720 million of that to be converted to revenue in the next four quarters, which is 75% of the revenue implied in our guidance. This is a continuation of the positive conversion trend we projected in quarter three when the percentage of forecast revenue visible in the backlog rose to 73% from 71% the prior quarter. So we are seeing a trend of 71% conversion to 73% conversion to 75% conversion of our total backlog, which we think is encouraging.

Overall we are pleased that revenue in 2010 crossed the $900 million barrier. It's another milestone for our company. Our Phase II to IV business performed well, as did DOCS, our staffing business, and our medical Imaging business, while our Development Solutions business, excluding the Phase I facilities, improved further.

In Asia we continued to add staff during the year and our clients continued to see the region as an important area for future clinical trial activity. We are, therefore, building our staff levels and forging alliances with indigenous players in the region. We have seen an increase in the percent of revenue coming from that region in 2010 and we expect it to grow more significantly in the coming years, hence the investments we are making in that region.

With that as the backdrop, let me move on to our guidance for 2011. We anticipate that revenue will be in the range of $945 million to $980 million. This will represent revenue growth of between 5% and 9% for the year.

We expect earnings per share to be in the range of $1.10 to $1.25, which at the upper end represents flat earnings on an operating profit basis. The reasons for this are twofold. Firstly, in the early weeks of this quarter two major programs, one on behalf of large pharma client, have been discontinued or significantly downsized due to safety and efficacy issues. This will impact on our profit performance in 2011, particularly in the first couple of quarters.

Hence, we have departed from our normal practice of not providing guidance on a quarterly basis to show that these initial two quarters will be soft. Before anyone gets really excited about what I have just said, the two cancellations or changes that I alluded to are in the public domain. The companies involved have made announcements in these regards in the early weeks of 2011.

Secondly, we continue in 2011 to invest to build further scale in Asia-Pacific and overall to ensure that we have sufficient skilled resources to capitalize on other emerging strategic opportunities. As you all know, there is a lot of discussion about strategic relationships. There is also a lot of activity taking place in the background in that regard, and we are ensuring and going to make sure that we are positioned to take advantage of those as they emerge and realign.

In addition, we have recently separated our late phase and outcomes research activities into a new business unit. And at the beginning of January we acquired a company called Oxford Outcomes, which is a specialist in this area, to further strengthen our capabilities. We plan in 2011 to invest further in this segment, including through staff and skilled additions, and hopefully through further acquisitions.

We are also heavily investing in information systems and process improvement initiatives designed to streamline our operations and to link to our customers in an efficient and innovative way. We are certainly getting feedback that some of the things that we are doing our being very positively received by our customers.

We think the future outlook for the industry and ICON is very positive despite the disappointing guidance we are giving you for the 2011, and particularly the first half of 2011, although the challenges that our customers are encountering and the changes they are adopting in response to these require us to adapt the company to ensure we are positioned to meet their needs in the appropriate ways.

Despite concerns about shrinking R&D spend in the future, which may or may not be realized, we think the changes our customers are making will accelerate outsourcing penetration to global CROs and we remain focused on ensuring that ICON competes and wins our share and more of that business. We are confident that the second half of 2011 will demonstrate our progress in this regard.

That concludes our opening remarks. I would like to hand the call over to questions now.

(Operator Instructions) Greg Bolan, Wells Fargo.

Thanks for taking the question. So several comments here, but would it be correct to say that central lab backlog was up nearly 30% in 2010? Secondly, would it also be correct to assume that central lab backlog conversion has dropped to around 35% to 40% from, say, 50% to 55% per annum several years ago?

And then lastly, Ciaran, would you characterize incremental operating margins within the central lab to be around 50%? Could you maybe give me some color there?

On the first question, yes, I think it would be fair to say that backlog has increased in the region of 30% over this year, Greg. The conversion rate, yes, is currently at the levels you suggest.

I don't know about how far you have gone back to compare it to, but I think it is fair to say that what we saw over the last year in business wins were larger trials and more complex. They don't start up as quickly and they are all of longer duration due to the complexity, so we have seen a reduction in conversion compared to [starting rates].

On the incremental operating margin, we are doing a lot of restructuring in the lab at the minute, so I probably won't drill into that specific figure, but we are happy that the cost actions we take should drive incremental margins such that the revenue does converge according to plan. We will hit the targets that we talked about in the second half of the year.

Okay, that is helpful. Thanks. So it's not out of the realm of possibility or plausibility that over the next several years, assuming the backlog conversion within central lab begins to pick up, that we could get back to or towards -- and I understand these are numbers here so you are probably hesitant to comment on it -- but towards, say, $100 million mark for central lab revenues with, call it, low double-digit, mid-teen type operating margins? Is that within the realm of possibility?

Greg, Peter here. Yes, and I believe that implicates -- to your revenue number, the actual bookings number, net bookings number in 2010 for the lab was in excess of $100 million. So obviously if they can maintain and continue to improve the bookings history that they have had in 2010, well, then they should be tracking towards $100 million of revenues over the next two or three years.

We were making -- up until just a year ago we were making high single digits. I think we touched in to double-digit margins in the lab. The causes of the deterioration in the financial performance are two-fold. Revenues declined as weak bookings in 2009 had their impact and we have been building out the footprint for the lab so that it's better positioned to compete for global business so we increased the cost base.

The bookings in 2010, I think, demonstrate that the building out of the cost base was the right thing to do and that we are winning more business now in the lab. So conversion of that backlog and meaningful increases in the quarterly revenues that we are achieving, together with the cost initiatives that Ciaran was talking about, should get us back to making meaningful profits in the lab over the next number of years.

I hesitate to predict exactly when that will be. What we said is we should get to breakeven in the second half of this year. We are not predicting beyond that but if momentum is achieved and maintained then obviously getting back to the kind of profits, at least that we were making in the past, should be possible.

That is great. Sorry, just one real quick one. Investment and cost reduction programs in 2011; clearly a bad guy by $0.05 so, Ciaran, could you characterize how much of a good guy that could be, call it, two to three years out? Are we talking $10 million to $20 million type of cost reductions within the overall business?

I think on the investor day presentation that is up on our website we characterized that over the three years we have various cost reduction programs sort of in the region of 200 to 300 bps of margin as the potential for cost savings. The timing of that will depend on how quickly the programs proceed, but this is the year of investment and planning and then we start to see those benefits flow-through in 2012 and 2013.

But 200 to 300 bps is sort of -- it's around $20 million, $25 million, $30 million a year.

Okay, got it. Thanks, guys.

Ross Muken, Deutsche Bank.

Good morning. So if we think about some of the investments being made and then we think about some of the commentary around strategic deals and the movements in the market with some of the large pharmas kind of re-taking a look at their model, to what degree can you feel confident that the capital returns you are going to get on some of these investments over the longer term are visible and to the level that you will need?

How much does prior experience or what you see in the market give you confidence as to whether or not it's kind of the if-we-build-it-they-will-come versus we know that this is the direction the market is moving and thus, strategically, for the long term we have to kind of suck it up and take the EPS hit today for the benefits in the future?

I suppose the downside, Ross, of saying build it is you don't know if they will come. But I think everybody recognizes -- I think we are certainly hearing it from clients on a pretty consistent basis that they intend to increase the number of patients, the number of sites they include in clinical trials in the east and southern hemisphere significantly over the next number of years. Not just because of cost reasons, but because of the growth in sales that they are going to experience in those markets.

So we don't think it's a Field of Dreams investment. We think it is just recognizing all the signals that we are getting and the commentary coming from our customers. That is as it relates to investments in, for example, Asia-Pacific.

We are obviously making a lot of other investments too that are effectively people investments, carrying perhaps more resource than we need for the level of business that we have at the moment. We don't think it's very clever for us to let go skilled people at a time when there are significant opportunities out there that may indeed create skill shortages in due course. So we are holding onto people despite cancellations and things like that.

We have quite a number of Lean Sigma or process improvement type initiatives going on which require teams of people dedicated to those in order to realize them, so there is cost involved there. So investment means a number of things; it's not just putting things in the ground and hoping that something will happen. Many of the investments that we are making, both in process improvement and in the IT area, are to create tangible things that will streamline our processes and reduce our cost base in the way that Ciaran just mentioned on the previous question.

Maybe I will -- just to follow-up on sort of the question Greg asked, maybe asking it just slightly differently. In the context of the $0.05, in an effort to kind of rational costs, how much of that is sort of an ongoing expense versus sort of more of a one-time nature in 2011?

Those are costs of a one-time nature in 2011, Ross. Largely around consulting and planning and project management type expenses.

So the thought to keep it in the guidance is just to reflect the numbers as close to GAAP as possible?

It is, yes. I mean, it's only I mean $0.05 by $3 million after tax. So it's not a material amount and we don't just prefer to run those kind of less material one-off costs through the P&L and keep the GAAP where we can.

Sure. All right, thank you, guys.

Bob Jones, Goldman Sachs

Thanks for the questions. Just to follow up on the same line of questions but maybe ask a little bit more broadly. Peter, obviously 2011 clearly a transition year for the Company. But if we try to look out beyond this as we lap some of these investments and when you look out to 2012, just how confident are you that the key initiatives that are ongoing will contribute to the business in 2012?

And then I guess just to get a little bit more specific, the top-line guidance in 2011 and I am imagining as we move into 2012, at least from where I sit, looks fine. But rough math on 2011 looks like we are looking at an operating margin of probably sub 10%. How should we be thinking about the long-term operating margin of the Company as we move past this transition year?

First part of the question in relation to do we think that the things that we are doing will translate into and that there will be business growth in 2012 to capitalize on these. And I suppose the answer to that is resoundingly yes.

We think the way the market is developing, we think the way our customers, both large and small, are repositioning themselves and realigning their business model is creating significant opportunity for CROs generally. And we think we will participate significantly in those opportunities.

So we are anticipating guidance -- as you say, the guidance is predicting reasonable levels of growth compared to what we have seen in the last couple of years. So we are seeing and we are expecting a re-acceleration in growth during 2011 and we think that will create momentum going into 2012.

Some of the things that we have insight into, some things that are developing that we have insight into, if they come to fruition, I think will propel the market generally. And we hope to say that we will be significant participants in that.

So through 2012 and, as Ciaran has said, in our guidance -- maybe, Ciaran, you should really respond to the operating margin question. As you have said, the initiatives that we are doing are designed to improve operating margins by between 200 and 300 bps.

Yes, you are right, Bob, to say that the high margin of the guidance is around 10% or below depending on whether you take the low point or the high point as the midpoint. That does reflect, of course, that the lab will be posting losses in the first half of the year. So the kind of core clinical business margin is expected to be around that 10% to 11% range on the year.

The initiatives we are taking this year will start to bear fruit through 2012 and 2013, that will be a positive driver to margin. And also the fact that we are investing in staff levels and resources to service what we see as a very exciting scenario in some of the strategic outsourcing that will come through this year.

We continue to soak up those resources as those accounts [bed down]. So I don't see any conceptual reason why the medium-term margin of the business shouldn't be around the historic rates of when you were running the resourcing well and you were making 13% or 14%, that kind of number.

We made 13% last year and nothing will have fundamentally changed in the way business is being done. The overall approach to driving margin from these accounts is fundamentally the same. You make savings in some places due to leverage and visibility and resource planning and then you give some of it back in terms of volume rebates and discounts.

But there is a lot of the design that when they pass through each steady state, which is of course the variable with some of our experiences, yes, you take a little bit longer than you expect. But when it reaches steady state the margin profile of the business in the medium term is the same as what it was historically.

That is helpful. And then, Peter, just a follow-up on some of the comments you made on this go-to-market approach as sponsors are looking for more expert input from their CROs. I guess how long do you think it would take to kind of get to where you need to be there? And then I guess relative to your late-stage peers, where is ICON in that structure and that process right now?

I think we are actually very well for this, Bob. For a number of years we have created special therapeutic groups within the organization which we call TAGs, therapeutic area groups, and we have hired in specialists in all the key therapeutic areas to lead those groups.

How we are expanding that is we are also creating linkages now with external academic centers so that we are tapping into their expertise as well. And we are doing a variety of different things to be anticipating what our clients need, not just waiting perhaps for RFPs to emerge. Being more proactive in talking to clients about what regulatory developments are, both in therapeutic areas and in general, and doing more in the presale side rather than concentrating on or relying on the post-RFP activity to drive sales.

So we are getting more proactive in the marketplace using our therapeutic experts and our knowledge of the regulatory changes in order to help our clients respond to the challenges that they face. We are pretty well positioned in that. Obviously, as you build a network with academic centers and so on that is a never-ending story. You continue to develop that and you continue to build that.

I think we are -- in the late part of last year we began to develop some of these and we are pleased with how that is developing right now.

Thanks for the questions.

Jack Gorman, Davy Stockbrokers.

Thank you for taking the questions. I have one question with a related question alongside it.

Firstly, just, Peter, you mentioned the investment in strategic accounts and you also mentioned that you are retaining staff ahead of the demand curve of such that you see in the back end of the year. Is it the correct assumption and that what you perhaps have -- what surplus staff you have at the moment or spare staff you have at the moment are in the correct regions to tap into that new demand? And in particular I am just thinking just in terms of any staffing issues you may have in the US versus rest of world?

Secondly, you kind of answered this to some degree already, but you outlined all of these investments through -- at your analyst day in December. I am just wondering between then and now, when we look at the other side of the coin in terms of the discussions and the progress with the strategic partnership arrangements -- I know you outlined some of them in December; you said there were plenty more ongoing -- has there been any kind of significant or material advancements gone on in those since we last talked at the end of last year?

Jack, we have got a rogue line running up and down the room here. I don't know if you guys can hear it, but let me try and answer your question and hopefully it will stop doing its thing.

You asked about spare staff and the fact that we are holding staff in anticipation of increased demand, and your question is in relation to the geographic, any geographic issues in relation to that. The short answer is no. I think to characterize where we are is we certainly aren't short of staff in Asia, that is an area where we will continue to grow and the demand is growing.

There is a skill shortage in that region. Everyone is trying to hire the few skilled people that there are out there, so Asia certainly is not a challenge. The challenge in Asia would be to ensure that we get enough suitably qualified people or train enough suitable people over the next number of years.

In the other geographies, in fact it's interesting when we look at our bookings, in the last year our bookings in the US have been stronger than they have been in the prior number of years. And it's in Europe where more capacity is developing than in the United States. It's -- again I don't want to overstate that, I don't want to sound as if it's dramatic, but the cancellations that took place in the early part of the first half were also more related to studies where the bulk of [proof] was taking place in Europe and Eastern Europe.

So if there is a place where we are seeing capacity emerging most of all it is probably in Europe, but I can guarantee you if you had that talk to our staff in Europe none of them will you that they were underworked. It shows up in the overall metrics of recovery, of peoples' time, but people are still pretty busy.

So it's not an enormous issue. I wouldn't want it to sound as if we are carrying people to an enormous extent, but obviously there are nuances -- in our kind of business getting higher level recovery everywhere is the secret to making decent margins. It's in Europe that those metrics are less strong at the moment.

I am trying to remember, I must have gave you such a long answer (multiple speakers).

You may have caught a lot of this question and just, I suppose, you have kind of alluded to it indirectly. But I suppose since we met you in early December plenty (inaudible) investments that you were acquiring then. You also outlined the progress you were making on strategic partnerships.

I am just wondering if there is anything material that has kind of pushed forward on the partnership side since then.

I can assure you, Jack, if there was something material that I could talk about I would be talking about it. But there are obviously plenty of activity in the industry, there are plenty of industry discussions taking place but I am not in the position to expand beyond that.

Fair enough. Actually maybe just a follow-on follow-on to the first part, the investment in strategic accounts then, to the extent to which -- how we should interpret that line in your bridge slides, is that just retaining additional staff ahead of demand curve or are other investments included within that?

That is retaining staff, Jack -- Ciaran here -- ahead of the revenue curve.

Super, that is great. Thanks.

John Kreger, William Blair.

Hi, thanks very much. Ciaran, what are your expectations for the tax rate in 2011 and perhaps longer term?

I think as I said in the call, John, 18% to 20% as we were saying last year is our expected long-term tax rate. In the first half of the year it would be at the higher end of that range because the lab will still be losing some money and won't have turned around, therefore, there will be nowhere to shelter those losses. But 18% to 20% is the forecast for next year and beyond.

Great, thanks very much. The slide where you were kind enough to give us some thoughts on the quarterly progression in 2011, can you just clarify a bit more what will drive what looks like a pretty significant step up sequentially from Q2 to Q3? Is that merely is some of those cancelled programs being scheduled to roll off anyway around midyear or is there something else driving the improvement in the second half?

A couple of things driving the improvement, John. The cancellations have led to some excess capacity in the second half of the year. That capacity will then be soaked up by new awards and some of the traction we are getting from the strategic accounts, so it will improve our recovery and our utilization.

The lab is forecast to turn around in the second half of the year, so that is going to drive the profitability towards the back end of the year. So those are the fundamental things that I would point to.

Great, thanks. And then perhaps longer term, if you look at some of the key sources of margin pressure that exist at this point, if you think about perhaps towards the end of 2011, how much visibility do you have that those things will be turning and perhaps giving you some tailwind as we move into 2012?

This was the cost reduction programs, John, sorry? Is that what you were asking?

I am thinking about the cost reduction programs, I am thinking about the lab, perhaps some of the investment in those strategic accounts that you have talked about. How comfortable are we that these issues are not going to persist into 2012 and beyond?

We are looking to see which of us will answer this, John, so I will take that one. How confident are we? We are confident. Can you ever be absolutely certain in predicting? No, you can't.

If we take the lab, we have talked about the backlog. We have talked about how the backlog has grown. We have talked about how the bookings are there. We have seen in the past it takes a long time for that backlog to convert into revenue.

By the end of 2011 strong bookings achieved from the beginning of -- late 2009, beginning of 2010 don't begin to show significant revenue improvement. Therefore, once again, (inaudible) that financial improvement in the lab the mathematics don't work anymore. The whole theory of [math] has clearly broken down, so we would expect to the lab to see improvement, as we have said, in the second half 2011.

And we are going to be very vigilant on it. Obviously we are very, very disappointed ourselves that we allowed this to happen and we are doing everything we possibly can to -- and we are taking every initiative we can in order to rectify that.

Phase I business; that has been a long story of repositioning. Only in the middle of 2010 did we move into the translational medicine unit in Manchester. We have had a fantastic reaction from customers. They all love to come and see it.

Loving to coming and seeing it and talking to us about how exciting it is and placing business seem to be two different things, but the trends of business and the backlog for the Manchester unit has been steadily growing. And steadily they are projecting that their performance will improve in the second half of the year.

In the middle of 2009 we bravely decided to take on an asset in Omaha in Phase I from bankruptcy. We cost that because it had a customer base that had been used to it that that would mean that they would come back quickly. They didn't come back quickly, but again we have seen steady improvement in Omaha during the year. Still losing money but it's getting closer and closer to a breakeven position.

So gradually our Phase I businesses are improving. 2010 was much slower than we hoped, but 2011 we think we will continue to see improvement. We are having very encouraging dialogues with clients about strategic relationships in clinical pharmacology, so we think it doesn't take too many of those to change the picture dramatically in Phase I. We think we will make significant progress in 2011 in that regard.

And I am giving you a lot of detail and going into this on a lot of bases because I think your question is very valid. Here we are selling you hope for tomorrow and we think there are good substance behind what we are saying. We have a lot of cost improvement initiatives currently taking place. We have hired people who are tasked with making those happen.

We have significant -- we are significantly advanced with some of the IT initiatives that we are doing that will also help streamline costs and improve our offerings in time. So I would be hugely disappointed if by the end of 2011 we aren't very advanced in this. But as I said at the beginning of my comments, you can never guarantee, you can never be certain but we are doing everything we can and we are very focused on it as a management team.

Great, that is very helpful. Perhaps just one last one. If you think about your net bookings, Peter, over the last couple of quarters I am guessing they are perhaps a bit below what you were hoping for.

If you look back on that do you think that is more of a reflection of perhaps just less opportunities out there to win or perhaps did your hit rate go down? And if so, do you think that is a pricing issue or perhaps something else?

Our hit rate is actually not bad through 2010. What is noticeable is the RFP volume and RFP volume is down in 2010 versus 2009. I think one of the things that I alluded to in my opening comments, the biotech client is back. And perhaps in 2010 didn't really go after that as much as we had in the past and perhaps as much as we should have.

And I think for that reason we may have missed opportunities. We may not even have seen opportunities in the marketplace because we were concentrating on large pharma clients and strategic relationships and seeing those as the big opportunities. And perhaps missing opportunities at a less strategic scale in a market segment that had gone very quiet what seems to have re-awoken.

So hit rates, as I said, actually for most of 2010 were surprisingly good. We may not have been hitting all the clients we should have been hitting. Our whatever -- certainly I uncritical of our business development team, as I said, because we have had good hit rate.

But we think that maybe we were overly focused on large clients and missed opportunities with midsize and smaller clients in the course of 2010. We are certainly focused on addressing that now and we are seeing an increasing numbers of opportunities from such clients.

Great, thanks very much.

Tycho Peterson, JPMorgan.

This is (inaudible) setting in for Tycho. Thanks for taking the questions. Just first on -- I know you have plans for Asia-Pacific maybe longer-term. You talked a little bit about the number of employees you are going to add in the region or hope to add in the region in 2011. Is that still, I guess, reflected in your slide in terms of investment in Asia-Pac?

And then also, kind of longer term ideally where you would like to be. And then if you could just comment a little bit more about the character of some of your customers in biotech. Are they smaller or sort of larger biotech companies? And kind of what the length and duration of projects and [if they are kind of in] anyway different as you mentioned on the opening comments would be great.

Ciaran, would you take the first part of the question? Because I didn't quite (multiple speakers) and your line was breaking up for a minute, so we are not sure we got a quite right.

As I understood your question it was about headcount in Asia-Pac and how much of the impact that we are talking about in 2011 being due to headcount. Is that what you asked?

Yes. If it's still in line with kind of what you mentioned at the analysts day. And then also assuming you do make those investments in Asia-Pac in 2011 what your view is for 2012 and beyond, so far as you have visibility.

Yes, our investment is in line with what we have talked about at the back end of last year. And on our slide show today that we put up on the website we sort of quantified next year's investment at about $0.10 in relation to staff in Asia-Pac which is in the region of 150 incremental heads for there. Plans for 2012 will pretty much be dependent on the state of our revenue forecasts and our impression of how quickly business is transferring into Asia-Pac.

We hired, I suppose, approaching 200 people in the region there last year. We have almost 1,000 people now in Asia-Pac on 19 sites. So we have a very wide geographic footprint; three labs and 16 other clinically related sites. It's wide; we just want to increase the depth a little bit.

So another 150 people adds depth in terms of staff and resources and management. It gives us what we think is a decent offering, albeit a little bit lighter than one or two of our competitors, but certainly a very specialized and good offering.

Then taking it up from there, we will be approaching a respectable level, the 1,200 people almost, by the end of this year of critical mass. And then from there on it's going to depend on how quickly we are placing work there, how revenue is flowing in, so I wouldn't commit to a number for next year at this stage. We will just have to see how this year plays out and how attractive our offering is to bringing revenue into the region for us.

And then I just was going to ask you in terms of any other color you could provide in terms of your biotech clients that seem to be improving? Are those larger biotech clients or is it a mix and (inaudible) duration or characteristics of those projects would be helpful?

Again, I am not sure what you are referring to. My comments were that we are -- certainly see the biotech opportunities are increasing and I am talking about from small, midsized biotechs as opposed to the large guys. The large guys have been the large guys and behave like pharma companies in many respects, and we treat them as such.

There isn't really any difference in the types of projects that they have as opposed to other companies. If it's a clinical development program, it's a clinical development program. If it's in oncology it will be of a duration of 2.5 to 3 to 3.5 years. If it's in other therapeutic areas it will depend on the therapeutic area. So I wouldn't separate out biotech projects as somehow different to other types of projects.

This is Ciaran here. Just on a housekeeping point, we ask people to restrict it to one question and one follow up in order that everyone gets a chance to ask a question. We have moved close to the hour with a few questions so I would ask that people if they could keep it to a question and a related follow-up, unlike the multiple questions we have been having so far on the call. Okay, thank you.

Douglas Tsao, Barclays Capital.

Good morning. When we think about the evolution of the business towards strategic partnerships, one of the obvious goals on the part of clients is to [very realize] their cost base. To what extent do you see the lower margins you anticipate this year in terms of building out some resources for those clients ahead of programs ramping up?

Then obviously your expectation is that 2012 will be much better. But do you have a sense that there is some risk or do you structure deals to mitigate any risk that in subsequent years that those clients' volumes could come down again but you continue to need to maintain resources? And so we could see margins improve but then sort fluctuate even at a material level.

Obviously, the whole rationale of the CRO business is portfolio management. The advantage for pharma companies is they are putting their activity into us. We have a very large portfolio of clients, a very large portfolio of projects, and therefore as one client perhaps declines in their activity levels another, we win new business, and so we balance out our resource utilization.

We are in a period, I think, in the industry of a little bit of discontinuity in relation to that model as significant shifts are taking place in large chunks or certain planned large chunks by some of the major companies. So that model is a little disruptive partly for us as we position ourselves to take advantage of them and partly as they plan to do things and maybe their plans don't come forward as fast as they had anticipated but they still will do them.

I think that will even itself out in due course. Obviously, the risk is larger chunks of business with individual companies means that the portfolio effect isn't quite as perfect, because you have got large chunks in the portfolios. So we will have to see how that plays out. But obviously our solution to that in the long term is through ensuring that our cost base remains variable and that we are able to adjust our resources to meet demand.

Again, what we are alluding to today is we are not using those levers at the moment because we think there is growth coming. Therefore, it doesn't make sense to be thinking of moving down our resource in the short term when we think we are going to have to move it up again in the near term.

So there is discontinuity at the moment; I think that will even itself out in due course. Hard to predict when exactly that will happen, but it will even itself out in due course.

Okay. And then just a quick follow-up, Peter. Generally, when clients are pursuing these strategic deals are they asking you do you have dedicated resources?

Are they generally what?

Asking you to have fixed resources within the Company?

Very few of them. Very, very few of them ask that. In one or two cases they ask us to have a certain layer of fixed costs and then everything else is variablized. Each -- as I have said in other calls, each one of these so-called strategic relationships is a different flavor.

There is no one strategic relationship model; every single one of them has a different shape and a different perspective. But there is some evidence assuming clients wanting us to have a thin layer of fixed costs dedicated to them.

Okay, great. Thank you very much for taking my questions.

Stephen Unger, Lazard Capital Markets.

Hi, good morning. I will be quick. Just in terms of the cancellations, could you discuss the impact that you are expecting to see I guess starting in the first quarter? Are we -- could we be seeing like sequentially flat revenues and sequentially down gross margins? Is that really what the impact is and then are those cancellations (multiple speakers)?

Yes, that is the impact, Steve. In our guidance on the slideshow that we posted today on slide 15 we have broken our tradition and pointed to some quarterly numbers to give people a feel for the impact. We have talked about revenue for quarter one being in the $220 million to $225 million. That compares with the $232 million that we posted in Q4.

So we are seeing a sequential decline arising from the cancellation. And we are seeing earnings then around the $0.20 to $0.22 mark, which reflects the impact on the gross margin from having the resource available.

Got it. And those contracts are out of your backlog?

Yes, they are.

Okay. And then just a follow-up on central lab. What were the central lab revenues and what was the operating loss?

The lab did revenues of about $16 million, just under $16 million and it lost just under $4 million.

Great, thanks.

Eric Coldwell, Baird.

Actually Steve asked my question. I just want to reconfirm that the cancellations from the two larger programs were reported in the fourth-quarter cancellation rate, if that is precise?

No, that is not correct, Eric, no.

So they are not out of your backlog?

They are out of our backlog now, yes, as we speak today but maybe there is a misunderstanding there. They aren't out of the backlog numbers as at the December 31 that we are talking about. They will come out in the Q1 cancellations number.

Any potential that we could get those sized so we know what we are working with in terms of book-to-bill projections?

I think combined they are somewhere in the order of $40 million to $50 million at the top side.

Okay. Thanks for the additional details.

Dave Windley, Jefferies & Co.

Thanks for sneaking me in here. You guys to some pretty significant lengths to describe how you are viewing -- well, two things. One, to kind of elaborate on your list of strategic deals. I am referring to the analyst day.

And then how you are viewing business percolating out of those strategic deals, the early upfront work that you might do blossoming into a more fully scoped piece of business. I think with the point being that when you put it in backlog you have had your hands on it for a while.

I guess I am curious whether -- I am curious how much visibility you have to projects that you have your hands on now that have not yet arrived in backlog, but that you would expect to very soon as business that I would think to you would be pretty tangible. I was hoping you could give us a sense of how much of your confidence about 2011 relates to work like that.

Backlog that isn't backlog, is that what you are saying?

Essentially, yes. Well, I think Ciaran has gone to great lengths to say that you are kind of booking late rather than booking early under strategic deals. And if that is the case, we should start to see the book-to-bill improve pretty substantially.

That implies that somehow we have been holding stuff, some sort of a lag in between that will then flow through and accelerate book to bill in the future, Dave. I don't know. I am thinking out loud here; I probably shouldn't be. They would probably stick a knife in me. Yes, Ciaran is nodding at me. He is going to stick a knife in me, yes.

We have a fair degree -- okay, the answer to your question is we have a fair degree of visibility of nascent projects within a number of our strategic relationships that should come to fruition in the course of this year that are not in our backlog. And so they give us a degree of confidence of an underlying level of bookings that will occur through the year from those relationships.

But they are not any different, in many respects, to the past when they came to us as RFPs. We know about them earlier than we would have known about them if they were doing the RFP game, but we know that because of our relationship that they will likely come to us.

So slightly different twist for my follow-up then. If I understand correctly, you are keeping these staff, both in Asia-Pac as well as the 150 or so more across the business, as investments that you believe or resources you believe you need to have in place in order to secure additional strategic relationships.

Once those -- so I am thinking about the duration of this investment. So you secure the strategic relationship then there has typically been, if history holds, some governance structure set up and things like that before bookings even start to flow. And then there is a lag to the conversion from the bookings to the revenues.

So I guess I am wondering, again, how long is the, quote-unquote, investment -- not just in the resources to win the strategic deal but also in the ramping up of the strategic deal -- before we really start to see some leverage on this.

I think there is two different pieces to answering your question. Asia-Pac is a special case. We all know that clients are talking about, the world is talking about Asia and it's important that we are not perceived as the industry develops to be sub-scale in Asia-Pacific. So we are willing to make investments in Asia-Pacific to have people there in order to be at proof points that we have what it takes in order to execute on global projects and have sufficient scale in Asia-Pacific to be a credible player in that regard.

So that is a build it and they will come; it's about ensuring that nobody thinks that ICON is somehow not sufficient, of sufficient scale in the Asia-Pacific region that we shouldn't be considered in these major opportunities.

Outside of Asia-Pacific we are deliberately not adjusting our resource levels for the simple reason that we know there is a lot of things in the pipeline, a lot of new relationships in the pipeline. It wouldn't take too many of them or more than one of them to significantly change the picture and ensure that the resources as we -- the excess resource that we are effectively deciding to carry is no longer excess resource.

I understand your point that you have seen that these relationships take a while to mature and come to fruition in meaningful ways in backlog. But 150 people isn't a heck of a lot of backlog to be honest with you, so therefore we are not talking about vast amounts of overcapacity here. We are confident that even strong book to bill without strategic relationships would use up this resource pretty quickly.

But we are anticipating that through this year there will be some -- we will continue to carry some because we believe that will be the smart thing to do given all of the opportunities, strategic opportunities, that are hanging out there.

Okay. (multiple speakers)

I hope we win three big strategic opportunities in the next few months and suddenly we use up all the resource and we are telling you about better news in four or six months time, but obviously this guidance is not based on that. This guidance is based on a reasonable degree of experience in terms of how these things play.

Got you. Okay, thank you.

We have no further questions at this time. I would like to hand back to your host, Mr. Peter Gray, for any additional or closing remarks.

Thanks, everybody. Thanks for all the questions. Obviously, we are a little disappointed with the guidance we are giving you for 2011. We would like it to be stronger, but we hope we have explained to you the reasons behind it.

We think the future outlook for the industry and for ICON is very positive, although the challenges that our customers are encountering and the changes they are adopting in order to respond to that are requiring us to adapt ICON to ensure we are positioned to meet their needs.

Despite concerns about shrinking R&D, we think the changes that are taking place in our customers are going to drive strong growth in outsourcing. We are, therefore, confident that in the second half of 2011 we begin to see the fruits of that and we will be able to demonstrate significant progress in that regard.

Look forward to talking to you over the rest of the year.

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