ICON PLC (ICLR) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended March 31, 2011. Also on the call today we have our CEO, Mr. Peter Gray, and our CFO, Mr. Ciaran Murray. And in addition, Mr. Sam Farthing, our Head of Investor Relations.

I would just like to note that this call is webcast and there are slides are available to download on our website to accompany today's call.

I will now make the customary statements in relation to forward-looking statements. Certain statements in today's call are or may constitute forward-looking statements concerning the Group's operations, performance, financial 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.

In addition, the following commentary specifically excludes restructuring charges taken in quarter one 2011 amounting to $5 million. These charges relate to release write-offs and headcount reduction costs. On a US GAAP basis including the above charges, operating profit in the quarter was $11 million or 4.8% of revenue. Net income was $8.3 million or 3.6% of revenue and EPS amounted to $0.14 per share.

As noted, this presentation includes selected and non-GAAP financial measures. For a presentation of the most record comparable GAAP financial measures, please refer to the press release statement headed, consolidated income statement unaudited US GAAP. While non-GAAP financial measures are not superior to or a substitute for their comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes.

As mentioned, today's commentary refers to first quarter ended March 31, 2011. We will be limiting today's call to one hour and therefore would ask participants to keep their questions to one each with an opportunity to ask one related follow-up question.

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

Thank you, Brendan, and good afternoon, everybody. In the first quarter, net revenue was $229 million compared with $219 million in the same period last year. This represents an increase of 5% or in constant currency terms an increase of 6% over last year. If we exclude revenue generated by our Oxford Outcomes acquisition which we acquired early in quarter one, constant dollar organic growth grew 4% year-on-year.

To the first quarter 2011, our top client represented 12% of revenue compared with 7% last year. Our top five clients represented 34% of revenue, up from 29% last year. Our top 10 clients represented 50% of revenue compared to 43% last year, while our top 25 customers accounted for 70% of revenue compared to 60% in quarter one 2010.

We've seen concentration increase over the past year with the development of our strategic customer relationships and we continue to expect client concentration to increase into the future.

We continue to see the global expansion of our business. In quarter one 2011, 60% of our revenue was generated from outside the US, up from 56% in the same quarter last year. Asia Pac and Latin America revenue rose to 12% of Group revenue from 10% in the same quarter last year.

Our operating income for the quarter was $16 million compared to $26.8 million last year, representing a margin of 7% of revenue in Q1 2011 compared with 12.2% last year. Excluding the losses in the central lab, operating margin in Q1 for the clinical business was 8.8% compared to 13.2% in Q1 2010.

As we guided in February, margins were impacted by two large cancellations in the quarter and our continuing investments in staff for our forecasted growth in the second half of the year.

Net income for the quarter was $12.8 million compared to $22.2 million last year. Earnings per share was $0.21 compared with $0.37 last year. Our effective tax rate in the first quarter of 2011 was 20%. We continue to expect that our longer-term tax rate will be in the range of 18% to 20%.

At the end of March 2011, our DSO was 49 days compared to 37 days at the end of December 2010. This is because a number of receipts we expected in March were not collected until the first week of April. We continue to target average DSO of 45 days over the longer term. This is consistent with our modeling in the past.

Cash used in the quarter was $5.3 million. CapEx was $6 million and we invested $27.7 million in the purchase of Oxford Outcomes. At the end of March, this meant that net cash was $232 million.

I would now like to hand over to Peter to give you some overview on business environment and outlook. Thank you very much.

Thanks, Ciaran. Let me start with talking about the business environment. From a business opportunity perspective, we are encouraged by what we have seen in the first quarter. For the first time in several quarters, both the volume and value of new RFPs -- that's request for proposal -- was up by double-digit amounts year-on-year and by an even stronger percentage compared to the last quarter.

We also saw meaningful increases in the value of opportunities coming from small pharma and biotech companies, redressing somewhat a gap we had identified in our pipeline last year.

Gross new business awards, as we mentioned in the press release, were $329 million in the quarter, the second highest achieved in the last two years. Cancellations, we concluded the two large programs, which we had mentioned on our last call in February, were $72 million or 3.7% of the opening backlog. Thus net new business wins were $257 million, representing a book to bill of 1.12.

As a result of these bookings, the backlog at the end of March reached $1.97 billion. We are within touching distance of a new milestone for us of $2 billion and I hope that in the current quarter we will see us exceed that milestone.

Of the $1.97 billion backlog at the end of March, we expect $745 million to be earned over the next four quarters, which is 75% of the expected revenue in that period.

Drilling down into the central lab, which I know is a topic that people want to hear more about, we made good progress in the quarter. Another strong sales performance was achieved with approximately $24 million of bookings, of net bookings, and the trailing 12-month book to bill for the lab is now 1.6. Its backlog has grown from $124 million in early $2010 to $164 million at the end of the first quarter.

Against this backdrop of strongly growing backlog, we have begun to see the green shoots of recovery with kit volumes and sample volumes rising and revenues increasing modestly in quarter one while losses reduced.

Based on these metrics, our forecasts see revenue accelerating as the year progresses. Meanwhile, we have taken further actions to reduce costs and expect these factors combined to return the central lab to profitability in the second half.

It is important to note that we regard this business as a strategic asset in our overall clinical trial service offering and are continuing to make progress in cross selling these services to our strategic clients and other clients.

Turning to other parts of the business, our imaging and contract staffing businesses performed well in the quarter and our development solutions unit, which includes the Phase I business, achieved some improvement. However, our clinical business, which is our largest business unit by far, had lower profits as we absorbed some significant cancellations and held excess staff levels in anticipation of stronger activity later in the year.

We also incurred costs as planned associated with building our scale and adapting our processes, structures, and systems to differentiate ourselves in the market and to take greater advantage of the strategic opportunities which we believe will continue to emerge over the next few years. As indicated in our guidance in February and as indicated earlier in my comments, we anticipate stronger performance in the second half of the year.

That concludes the formal remarks and, Michael, can we hand back to you now to take questions?

Thank you. (Operator Instructions). Ross Muken, Deutsche Bank.

Good morning, good afternoon, gentlemen. So I wanted to dig a bit in on the RFP commentary. It seems like broadly we're seeing some pretty good sequential acceleration there. As you look at sort of the types of RFPs, the structure, the kind of margin profile, what is sort of the color you could provide on sort of the different mix for where a lot of the activity is occurring and in turn vis-a-vis kind of your expectations maybe three or six months ago, what has been sort of the biggest positive surprise on that front?

I won't call anything a surprise, Ross. Obviously it's encouraging and as I said in my comments, it's encouraging to see growth in both the volume and value of opportunities, double-digit year-on-year, stronger than that quarter-on-quarter.

I think it's a dangerous to get too granular on these things and it's a 13-week period. Stuff flows in. It's the beginning of a new financial year for companies. You'd expect that there would be a good flow at this time. I think the directional aspects of it are what are encouraging. As I say, year-on-year, quarter-on-quarter up and parsing it to too great an extent I'm not sure is terribly valuable. I did mention in my comments that we have seen a better flow from small pharma and small biotech.

On the last call, I mentioned the fact that we felt we had perhaps been concentrating a little too much on the strategic type opportunities and the large pharmas and maybe not knocking on enough doors or loudly enough on the doors of smaller companies, and it's encouraging to see that the flow of opportunities from that quarter from those types of companies has upped in the quarter.

That's about as much as I think I want to say in terms of the detail behind it because as I say, it's the directional aspect of it that's the most meaningful. Granularity could be misleading.

Sure. I guess what I was striving for is if you sort of dig into the functions by which this sort of improvement has been driven by if you had to sort of put it to general market improving, maybe some of the strategic decisions you made in the business or some of the recent repositionings you've done with sort of your headcount and your geographic presence and just kind of broadening out your reach versus, say, just sort of other kind of factors that have driven sort of the overall ability --.

I'm just trying to get a sense for how much of it is just purely the market, how much of it has been your internal and sort of strategic positioning and just broadly what else is sort of driving that factor?

I suppose we are the first ones out so it's hard to judge what the market is although our sense is and the reports from our business development are the market seems to be more buoyant, seems to be stronger, in their view. But obviously we get a better view of that as some of our peers report over the next couple of weeks.

Is it down to restructuring or actions that we've taken? I don't believe so. We are obviously tightening up in the organization. We are trying to be more cost efficient. We are making changes. But in terms of business development, we've actually increase our headcount, so we have more feet on the street, so to speak.

So whether that is an aspect to us, whether it's that we are knocking on more doors and more loudly on some of the smaller company doors, again, it's difficult to pinpoint at this stage what it is. The general comment I would make to you is the sense from the business development team is the market is stronger.

Great. I'll go back in the queue. Thank you.

John Kreger, William Blair.

Thanks very much. Peter, I know in recent quarters you've talked about some of the bigger strategic relationships, we are consuming more resources and perhaps not converting into revenue as quickly as you'd originally thought. Can you just update us on what you perceive to be some of the key relationships and are those moving in the right direction?

Yes, I'll correct what you're saying there a little bit, John. I think it was about a year ago I commented that some of the strategic relationships, the learning curve associated with them, I don't think was -- I certainly wasn't intending to suggest that revenue was slower to emerge from them than we'd planned. What I was saying that as these relationships were built and as one engaged with the clients and changed business processes or adapted business processes to connect in with them in a strategic way that there was a learning curve associated with that.

I'm happy to say we're making good progress on that and maybe the ones that I -- was specifically thinking of when I was making those comments, we have got into sort of -- we've got off the curve. I'm not going to say we are at the top of the curve but we certainly got up the curve. So we've made progress in that regard. But business flows from strategic relationships are quite satisfactory.

Excellent, thanks. And then a follow-up. If we think about your guidance for the year, I think it implies a pretty material improvement in gross margin as we move through the year. Can you just talk a bit about what is going to drive that? Is it just a question of backlog conversion or something else?

Well, I think what you will have seen in the current quarter is a dis-improvement in gross margins, so it's getting it back. And as we have alluded to in our comments, a part of that is just getting our utilization levels of staff back up again. But we are carrying a cost for staff who we believe -- they are a valuable resource for us. We see in the business pipeline plenty of opportunities and therefore those people are retained. As the work comes in and the backlog -- new work comes in and the backlog converts, we hope to get those people more productive and as a result we'll see gross margins improve again.

Great. Thank you.

Robert Jones, Goldman Sachs.

Thanks for the questions. I guess touched on this a little bit but I was hoping you could share a little bit more detail on the source of the growth business wins and cancellations. I guess specifically how much of each of those were directly from strategic partnerships?

On the cancellation side, one of the large ones that we alluded to last quarter was from a strategic relationship and again when I talked about it last time, I was pointing out it was a compound that disappointed the client and so the program was stopped because it wasn't showing the efficacy that they required, nothing other than that.

And another one of the cancellations in this quarter which was around $10 million in value was from another strategic partner. So naturally, as Ciaran pointed out in his opening comments, client concentration is increasing, therefore strategic partners are forming a larger part of our backlog and our revenues. Therefore, it's likely that in the future they will perform a significant part of any cancellation activity that takes place.

But there's nothing untoward in us. In one case, as I say, there was a large program where the drug was not successful and in the other case, it was a decision that a number of studies that the client was planning to pursue. Obviously I wouldn't be educating people too much by pointing out that in oncology for example, often drugs are pursued for a number of different indications and sometimes clients make a decision not to pursue a particular indication after reflection or after getting some results from other trials.

So I think we will see that sort of thing, but that's not confined to strategic relationships. That's a feature of drug development and particularly of oncology drug development.

In relation to the wins was -- a reasonable amount of the wins, a reasonable amount, what we would expect to be a normal percentage of the wins was coming from strategic partners. Maybe there was a little bit more bias towards midsize pharma this quarter than we've seen in the past, nonstrategic midsize pharma. But overall, the balance was pretty much as we would've expected it.

That's helpful. And then just on the alliance announced last night with ACRONET, can you tell us what you or what we should be expecting from this alliance in terms of new business, both size and timing, maybe anything around the financial arrangement?

And then just broadly, where does this put you relative to your desired footprint in Asia Pac? Thanks so much.

The alliance is what I suppose what it says on the tin. It's an alliance. There's no financial aspects to it. From a business perspective, it doesn't bring with it any new business, but we have already over the last year or more been working with ACRONET and as opportunities have arisen which need specific skill sets or resources where we don't have the skill set in our own talent pool in Japan for example, ACRONET have supplemented that.

They have well over 400 employees in Japan. They have something close to 200 clinical research facilities alone compared to our own 60 or 70 in Japan. So what is does is it effectively creates a much larger pool of resources available for opportunities that arise in Japan or globally.

We are not naive enough to think that suddenly because we've announced an alliance with ACRONET that we are going to win slews of business that is for Japan in Japan. Really the purpose of the alliance is to ensure that when Japan forms part of either a global or a regional opportunity and there are more and more of those where Japan is part of the geographic participation in the study that we have sufficient resources and a wide enough pool of talent to serve those opportunities.

It's early days. It's the beginnings of a relationship with ACRONET. We don't want to over blow it, but we think it's important and it does ensure that in Japan we can compete with anyone in that marketplace because we now have a sufficiently large pool of resources to do so.

And then I guess Asia Pac in general, where does this put you relative to where you want to be?

We continue to want to grow our own resources right across the region. I think we have indicated in the guidance that we intend to grow our pool across the region this year significantly as part of the investment that we are making. ACRONET is just another piece in the puzzle, just as Tigermed in China is a piece in the puzzle. But we are also very focused on growing our own internal resources and our own capabilities.

It's important again to point out, we have 1000 people working for us in the Asia Pac region. We have -- correct me, Brendan -- 17 offices in the region?

Right.

17 offices across the Asia Pac region, so we have a fairly large footprint, but there's a lot of enthusiasm and a lot of expectation that more and more work is going to include the Asia Pac region. So we are focused on ensuring that we grow at out our footprint both through alliances, through our own organic growth, and through whatever other means is appropriate as we develop the business.

Thanks for all the color.

Tycho Peterson, JPMorgan.

Thanks for taking the question. Maybe just, Peter, the first question I would ask you to elaborate a little bit on your comments on biotech and I'm just wondering if the traction you are seeing here is a function of the funding environment getting better. I know at the Analyst Day you highlighted kind of an expansion of services into biosimilars in some adjacent areas. Or is it just kind of a function of more targeted selling efforts to those customers? If you could just elaborate, that would be helpful.

Well, I think it's always hard to identify what has caused a particular tick, but as I mentioned on our last call, we had analyzed our activity in 2010 and felt that we had not been seeing our fair share of opportunities in these types of companies. So I think the sales team has certainly been encouraged to look for more. So we've been knocking on more doors or maybe as I said earlier, knocking a bit louder on those doors.

The funding environment is difficult for us to know whether it's because of the funding environment, but presumably the funding environment does mean that projects that wouldn't otherwise have gone ahead proceed and therefore that creates a bigger pool of opportunities. So which of those is the predominant, I don't know, but both are clearly playing here.

Okay, and then can you just comment to the level of dialogue around strategic deals today? Maybe just what percentage of the discussions involve some sort of longer-term strategic component?

What percentage of discussions? Well, we have a very large sales team of overall, our business development group is well in excess of 250 people. So what all conversations they are all having I don't know, but strategic ones, strategic conversations clearly take place at a very high level. So we won't talk about it in terms of percentage of conversations that are taking place.

Our business development team is largely focused on tactical activity, making sure that they are interacting effectively with both our strategic and our nonstrategic clients and getting opportunities from them.

There is still and I'm not the only person who can comment on this, but there is still significant distance to go I believe in the development of strategic relationships and by the adoption of the pharma industry, both large and small, of greater degrees of outsourcing, whether you call it strategic or whatever you want to -- whatever name you want to put on it. Those dialogs or many of those dialogues taking place today at various stages of development.

There have been some such dialogues that have taken place that have stopped because the clients have had to go back and think about the impact of the transformation on their businesses and they are not ready to move forward yet. So different companies are at different stages of this.

You should buy stock in the McKinsey's and some of these other consulting firms I think because they seem to be all over the industry advising on exactly this, which is good because if all of the large consulting groups are out there suggesting to pharma that this is a step they should take, that's good for us. They are effectively becoming a second business development team for us and for the CRO industry.

So I don't know if that answers the question, but it gives you a bit of color anyway.

Okay, and then just one last one on the operational initiatives. There is no real kind of change in timing or impact of the initiatives in central lab or Phase I, right? Can you also talk to the view of kind of I think One ICON that you highlighted at the Analyst Day and presumably that really doesn't kick in until 2012, right? But is there a chance you could see some benefits sooner?

The timeline, we only gave guidance about 60 days ago. The timelines haven't changed, as I said, in relation to the lab, we are pleased with the progress we're making. We do expect we're going to return to profitability in the second half. We're pleased about that. We're making the progress we anticipated and planned to make. I wouldn't be making any adjustments of the timelines.

Okay, and then on the kind of just the One ICON program, that's more 2012, is that right, in terms of just streamlining the division alignments and standardizing that technology and things?

I think (multiple speakers) when he said it's 60 days since we talked about it, Tyco, we're not changing the timelines in that either. We expect to work through it during the course of this year and realign and work on the support functions and then we will see the benefits accrue through the course of 2012. So it's the same as we talked about on the Analyst Day and on the guidance call.

Yes, just I suppose the terminology piece that you used there that I was getting confused by Tycho. When I talk about One ICON I talk about integrating all of our services and having a combined sale to our clients of clinical services, data, laboratory, imaging, and so on.

I think you are referring to One ICON in terms of our creating unified service centers for -- to support the organization. Both are moving forward. Both are taking place. The One ICON that I refer to is a part of the battle every day.

That's helpful. Thank you very much.

(Operator Instructions) Jack Gorman, Davy.

Thank you. Hello, guys. Most for the major questions I had have already been answered, so maybe I just have two very easy housekeeping ones. To Ciaran, maybe can you give us a sense of the contribution this quarter to operating income from the acquisition of Oxford Outcomes, Ciaran, but also from FX please?

FX, the average rate this quarter was 1.36 and it was the same last quarter, so there was no significant impact on contribution from FX. Oxford was probably about -- it was two-thirds of a quarter and I think when we talked about it, we expected it to be mildly accretive. So I think it added $0.02 to $0.03 this quarter.

Okay, okay great. Thanks, guys.

Sorry, Jack, I'm going to correct that. That's the annual forecast I'm looking at. So it is a quarter of that amount.

That did sound a bit high.

Yes, yes, it less and of course, it was just under $0.01 for the quarter.

To the water, perfect. Thank you. Maybe just as a small follow-on, I know one quarter doesn't make a trend, Ciaran, but just on DSOs, are you happy to still stick with a 40 to 45 as a long-term DSO trend or target for you guys?

No, I didn't say 40 to 45. I said 45 and (multiple speakers) I'm happy to stick to that. Our historic -- as you know, historic DSO was really around the 60 mark and then spiked to 70 some time ago. We put a new systems and changed things about and it came down for a while into the 30s which during that period I think we recounted and saying that we consider that they were just a series of fortuitous events in certain quarters that brought it down there in connection to timing of receipts and things like that.

It was our feeling that just the right number would be between 40 and 50, so we're using 45 as being the modeling number and that's the one we've always used internally.

When you look at the size of some of our accounts and the amount of money we collect every quarter, a $3 million roughly is about a day on our DSO and we receive multiple checks towards the end of a quarter for $10 million or $20 million and the difference of five days is just one check arriving on the day before you close the books as opposed to the day after. So this quarter the variability came from that.

But we are sticking with 45 as our modeling number. Obviously we do our best every quarter to collect everything quicker than that and beat it, but I think we have the right number in our target there.

Thank you.

Greg Bolan, Wells Fargo.

Thanks for taking the questions. Can you give us an update just on how the clinical pharmacology business is doing? Just thinking about the Nebraska operation as well as the Texas operation?

Greg, you broke up on the -- I heard the part about how the clinical pharma business is doing and then I didn't hear what the second part of the question was.

Sorry about that. Sorry about the bad connection. Just give us an update on the quality at the Nebraskan operation?

(multiple speakers) How the clinical pharma business is doing as I mentioned in my comments, is an improvement. We're still making losses overall in Phase I, but there was an improvement in the first quarter. The pipeline of opportunities there has got significantly stronger. There is one strategic relationship that is being finalized at present, which is going to be I think important to that business in giving it a solid base of business.

They are in discussions with a number of other potential partners. So the outlook there is encouraging. But I will caveat that by saying we have built and our focus is on clinical pharmacology, which is high science, first in man, more complex studies which unfortunately are also more prone to cancellation because in the development, in the early development of compounds, things arise either from laboratory or tox work and so on that weren't anticipated. And so we've always seen in this business a volatility that we wish were not there.

Our mission is to build a backlog that is strong enough to withstand those kinds of cancellations and I think we are on a path that will get us there during this year.

As regards Omaha in particular, it's continuing to make progress. It has been getting more and more clients who have audited, who have qualified it getting more work in there. It actually broke even in one quarter last year, but has lost some money in the most recent quarter. Again, it needs a more robust pipeline.

We are satisfied at how it fits into the network. We now have on a global basis about 250 or 280 beds, which is a reasonable size and gets us in the frame for these types of strategic relationships with major pharmas who are again moving in the direction of having a fewer number of vendors. So Omaha plays an important part in that. I hope that answers your question.

That's helpful. Thanks, Peter. Then just the last question, cash deployment on a relative basis, clearly ICON has one of the strongest balance sheets out there. Just could you just maybe walk us through some potential strategic moves? I guess I'm thinking about the alliances with Tigermed and now ACRONET and I'm sure probably those multiples will fairly high versus actually building out organically on your own in Asia-Pacific. But just trying to think about where you might think cash could possibly yield the greatest return.

We're looking at each other across the table here and saying how do you answer that question? I suppose in any investment that we plan to make, we look for an appropriate return and a high return for our investors. We do believe that there are important strategic steps that we have to make and sometimes strategic steps in the initial stages don't give you the highest of returns, but we generally have not made acquisitions that are not accretive or at least neutral from the get-go, and that continues to be our philosophy.

Where we are looking for strategic opportunities, a late phase business, so the Oxford Outcomes acquisition is a step but it is only one step in what we plan to be a series of steps that we will need to make to build our presence in that marketplace.

In the clinical pharmacology and our IDS business, we have laboratory assets. We continue to look for ways to increase our scale in the laboratory business both in central labs and in bio and analytical and immunoassay labs. In Asia you've mentioned we -- Asia is a place where making acquisitions has to be done carefully and can take a considerable period of time to build relationships and make something happen, but we are very focused on that.

And in therapeutic expertise, we continue to look at specialists who would add in some way to our therapeutic expertise.

Another area we have called out in recent times is the whole area of -- we call it loosely informatics. It's in the IT area and IT systems that will support clinical research, will support differentiation. We have fairly significant capital expenditure programs going on at the moment in terms of building systems and utilizing systems manufactured by other vendors, but utilizing in the way that integrates the data across the clinical trial spectrum.

So there's a variety of things and a variety of areas where we see significant opportunities for investment. We have a very active group. We have a team looking for acquisition opportunities and at the same time internally we are looking for organic growth opportunities.

That's helpful. Thanks and congrats on the sequential improvement in gross bookings.

Douglas Tsao, Barclays Capital.

Hi, Peter. I was just hoping to get a clarification on your comments in terms of the central lab and your view of its strategic importance.

Yes. Sorry, your question is --?

I am just sort of trying to get a sense of -- your sense of the central lab and your sense of its strategic importance to the rest of your business. Obviously it appears to be on the path to recovery, although the margin profile has never sort of reached the levels that you've expected in the past. But do you believe that this is an asset that isn't necessary to support your clinical development business?

We think it's an asset that can be quite valuable to the clinical development business over all because in clinical trials, some of the significant markers are indicators -- just sorry, it's not your question that has caused me to start coughing like this.

The lab data in clinical trials is a very important aspect of the data set that is used in determining both the safety and the efficacy of drugs, and therefore using the data coming from labs and integrating it with the other data that we collect as a clinical trial manager and monitor has potential to be important and quite valuable.

So we have always regarded having the lab business as part of our strategic thrust. We have also believed that as strategic outsourcing develops and maybe we were ahead of the game in buying the lab business in 2000 thinking that it was all going to happen -- but we have always believed that in time the purchasing of clinical trial services would encompass the purchasing of all of the services associated with the clinical trial from a single vendor rather than parceling out the outsourcing of clinical monitoring to one party, the data management to another, the medical safety to another, and so on and so on and so on. And believed that eventually the lab would be part of the equation in decisions to outsource projects to CROs.

That's why we have retained a lab within our family and that's why we continue to believe that having the lab as part of the offering that we make to clients is a good way and an important way to respond to the strategic outsourcing paradigm.

Okay, also in terms of the activity you are now seeing from biotech companies, do you have a sense that this is a broadening of their pipelines, meaning they are sort of trying to sort of move away from perhaps some of their core assets and develop more molecules? Or do you get a sense that they are there perhaps is some catch up or perhaps even just moving some of the compounds they have been focusing on in the last couple of years, moving them into the later stages of development?

There used to be a quiz program on television here called Mastermind for when someone was asked -- you had to answer so many questions in a very short period time and to move on the contestant said pass when they didn't know the answer to a question. I think I am going to say pass because I don't really know what's happening and what the management of biotech companies are thinking, what's driving them, and whether they are expanding their pipelines or whether they are just moving assets forward.

I suspect it's -- if the money flows are better in there, I suspect they're moving forward assets that they have probably had developing for some considerable period of time. Because if they are getting to the Phase II/Phase III clinical development stage, it has clearly been an asset that they've been developing for some time and have gone through significant early stage work with them.

But I don't really know and I'm not really qualified to answer that question in anything other than a flippant way as I just have, Doug, I'm afraid.

Okay, great. Thank you very much.

(Operator Instructions) Todd Van Fleet, First Analysis.

Good afternoon, guys. In the past you have been helpful in providing a bridge between an explanation of kind of where margins used to be and where they are kind of running to currently, so going back to the Analyst Day from the end of last year. I'm wondering if you can provide something similar regarding either the year-to-year performance, so if I look at the Q1 margin performance ex the lab, so again, I'm talking about excluding the lab performance, 8.8% operating margin this quarter compared to 13.2% last quarter. I think a lot of us are just wondering what is it on the core clinical development operations that has helped get that margin back up to the 12%, 13% territory?

It declined pretty precipitously from Q4, so Q4 I think was about 12.1%. I'm just wondering if you could talk about the factors that have depressed that margin significantly in just the sequential quarter period and then what are the factors that need to happen over the course of this year to help drive that back up to kind of a double-digit range?

Maybe you want to talk about in your answer the impact that the change in mix your overall business -- we've seen an increase in the client concentration, perhaps an increase in the number of SSP, the amount of SSP work you're doing, but it would be really helpful if you could just kind of talk subjectively about that, thanks.

Hi, Todd, it's Ciaran here. Firstly, your question is so long I think I have forgotten what you asked me at the start of it. So I will go and give it my best shot. We provided detailed bridges on two occasions on margin and they were around the back end of last year, where we looked at the margin progression and when we give our guidance for 2011. And we did that to show the principal drivers so that we'd assist everyone's understanding of what we saw going on in the business and what our plans were to address the things that we saw.

We gave the detailed bridge 60 days ago for this year and we guided this quarter and we have come out as we guided. So I would just look back at that original bridge. The margin bridge in the clinical business between this quarter and the previous quarter is what we said. In our guidance, it was increased staff in terms of investing in Asia Pac, in our strategic accounts. They are the principal drivers.

We talked about the cancellations on our guidance call, which resulted in reduced activity in the short term. So all of those factors I think we pointed to them and we have alluded to in the call today and so how we fix it is if you look at what we've talked about for the year, we have looked at our business flows, our backlog conversion, our forecast on the year. We said we expect revenue to pick up in the second half of the year. That will absorb any excess capacity within the clinical business and that will bring the margins back to where they were.

So if you look, we gave quarterly numbers and we guided the implied margin in those was around a 7% mark in the first couple of quarters, increasing back towards that sort of traditional 12% -- 11%, 12% mark at the back end of the year and it's really by soaking up any excess resource that we have and improving staff utilization.

So that's -- and of course that's supported by the fact that the lab returns to profitability in the second half of the year. So that's the first bit of the question I remember. Was there anything else that you were --?

I think there's quite a bit more but actually rather than just take up your time on the call here, I will probably just take it up with you off-line. Thanks, guys.

Andrew Hilgenbrink, Jefferies & Co.

Thank you for taking the question, (inaudible) this morning. Regarding the central lab, how much of the gains that you are seeing for an improvement have come through cross-selling to ICON's traditionally strong clinical clients?

How much of which improvement, I suppose. The lab is still -- the revenue, as I mentioned in my comments, Andrew, was up modestly on the quarter, but we see kit volumes rising. We see sample intake rising and obviously we are achieving strong levels of bookings for the sixth quarter in a row.

Strong bookings is being -- is aided by bookings from some of our strategic clients, so the strategic relationships are contributing to that strong bookings activity. But also one of the strategies we've had in the lab for a long time is to create more specialist testing. We are expert in the area of flow cytometry for example and we pick up a lot of flow cytometry business across the oncology pipeline. So we'd had a pretty broad customer base for flow cytometry services that isn't just related to our strategic accounts.

So the advance in the lab is a combination. It is certainly helped by the strategic relationships but is also contributed to by a whole host of other factors including a strong technology offering.

Following up on that, in light of the recent performance in the lab, what do you feel is a realistic operating margin that the lab can achieve once it's up fully functional?

Well, you know, I suppose those of you who have soldiered with us over the last 10 years or 11 years -- we bought the lab in the year 2000 -- will have heard us talk about a target of 15% operating margins at a minimum and how in lab businesses, it is not uncommon to make 20% margins. That would be our goal. That is our goal at the very least.

I hesitate to forecast such heady numbers when our mission at the moment is to get back to breakeven. We are on the path to achieve that, if we continue to have the kind of bookings we've had now for six quarters and we've been booking probably on average about $25 million a quarter for the last six quarters. Hence the backlog has grown significantly against our revenue run rate of about $16 million a quarter during that time.

So if we can get the revenues to start tracking the bookings number in the 20s, I suspect we would see much, much better margins than we are seeing currently. I'm not going to be rational enough to predict that that will 10%, 15% or 20%. Let's wait and see. Let's get back to profitability this year and then we'll make predictions beyond there.

Understandable. Between the Phase I, it seems to be a universally weak environment. Is it key to have a Phase I facility in the context of strategic deal discussions?

I think it's key to have clinical pharmacology capabilities if you are representing yourself to be a partner for a pharmaceutical company that wishes to outsource significant parts of its development pipeline. Because clinical pharmacology is the science front end of clinical research and I would be concerned to be a CRO offering Phase II, Phase III and Phase IV services if we did not have in our staff clinical pharmacologists who knew about Phase I research, first in man research, and therefore were able to talk to their peers and our client partners about some of the challenges in drug development.

So I think it's an important strategic asset that we need to have to be credible as a strategic partner overall. Do the strategic partnering deals that are typically done encompass Phase I to Phase IV? In a greater degree -- in a greater number of cases, the conversation is around Phase I to Phase IV outsourcing although in the context of those conversations, the Phase I is not unit-based Phase I studies. The client is generally talking about patient-based or patient-run Phase I studies and again typically in the oncology arena.

So the healthy volunteer studies that you were typically the old Phase I are separate and the discussions about strategic partnerships for them tend to be separated from the strategic partnership in patient type activities, patient type clinical development. Nonetheless, there are strategic discussions taking place and have taken place in the past around the healthy volunteer relationship and strategic partnerships in healthy volunteers.

But as I said, while the strategic discussions around those continue to be most often separate, I believe the asset of clinical pharmacology and the people and the knowledge that's involved in clinical pharmacology is an important asset for us to have to be a credible partner in clinical research.

Thank you for taking the questions.

That will conclude today's question-and-answer session. I would now like to turn the call back over to Peter Gray. Please go ahead, sir.

Thanks, everyone. Thanks for listening in to the call and for all the questions. As we indicated last year and reiterated in February, 2011 is an investment year for us. With significant change taking place in the customer base, we are positioning ourselves to be a strong and innovative partner as they transform their businesses. We are confident that we can be a significant beneficiary of this.

Before closing, I'd like to acknowledge the massive contribution that all of our staff make worldwide to our progress and to our success. We are after all a professional services business and our thousands of professionals are our major asset, so I would like to thank them. Thank you for listening to the call again.