ICON PLC (ICLR) 2011 Q2 法說會逐字稿

Good day and welcome to the ICON plc Q2 2011 results presentation conference call. For your information, this conference is being recorded. At this time, I would like to turn the conference over to Mr. Brendan Brennan, Senior Vice President of Corporate Finance.

Thank you, operator. Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended 30 June, 2011. 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 customary statement in relation to forward-looking statements.

Certain statements on 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 lease write-offs and headcount cost reductions. On a US GAAP basis including the above charges, operating profit for the year-to-date was $26.5 million or 5.7% of revenue. Net income was $21.4 million or 4.6% of revenue and EPS amounted to $0.25 per share.

As noted, this presentation includes selected non-GAAP financial measures. For a presentation of the most directly comparable GAAP financial measures, please refer to our press statement headed consolidated income statement unaltered US GAAP.

While non-GAAP financial measures are not superior to our 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 second quarter ended June 30, 2011.

We will be limiting today's call to one hour and would therefore ask participants to keep their questions to one each with an opportunity to ask one related follow-up question. I will now hand the call over to Ciaran Murray.

Thank you, Brendan, and good afternoon or good morning, everyone. The second quarter net revenue was $233 million, $224 million in the same period last year. This represents an increased revenue of 4.2%.

Constant currency terms quarter two 2011 revenue was flat on the previous year. In the first half of 2011, our top client represented 13% of revenue compared with 8% last year.

Our top five clients represented 38% of revenue, up from 32% last year, and our top 10 clients represented 54% of revenue compared with 51% last year. Our top 25 clients accounted for 72% of revenue whereas last year they accounted for 73% of revenue. We expect [fine] concentration levels to continue to increase given the shift in the industry towards strategic relationships.

We also continue to see the impact of globalization of the CRO industry. In quarter two 2011, 60% of our revenue was generated from outside the US compared with only 57% in quarter two last year.

Asia Pac and Latin America revenue rose to 13% of Group revenue in this quarter, up from 10% in Q2 2010, and growth was particularly strong in Asia Pac and this is expected to continue. Our Asia Pac backlog for instance grew at almost twice the rate of the overall backlog growth for the Group.

Operating income for the quarter was $15.5 million compared with $25.7 million last year. The Group operating margin was 7% of revenue in Q2 2011 compared with 11.5% last year.

As guided, we retained some excess staff which arose due to cancellations in Q1 and an anticipation of staffing requirements for the second half of the year. Peter will comment on this in greater depth later in the call.

Our net revenue for the quarter was $13 million and this compares to $22.8 million last year. Our earnings per share, $0.21 compared with $0.38 last year.

Our effective tax rate in quarter two was 16%. However we continue to expect that our long-term average tax rate will be in the region of 18% to 20%. At the end of June 2011, our DSO was 49 days, the same as it was at the end of quarter one.

We continue to anticipate that DSOs will remain in the range of 45 to 50 days per quarter. Operating cash used in the quarter was $6.4 million.

This is primarily due to the timing of preliminary tax payments and an increase in our tax receivables. We invested $7 million in capital expenditure and at the end of June 2011, net cash balances were $215 million.

Having said all of that, I would like to hand the call over to Peter and he will give you some overview on the quarter's awards and talk about the business environment in general.

Thanks, Ciaran. Notwithstanding our near-term challenges, in quarter two we made significant progress in the business. The most significant event was the announcement of our selection by Pfizer as one of their two partners for clinical development, replacing the 17 providers they currently use and completely reshaping the way they approach outsourcing.

Different to many other strategic relationships, it is their intention to transition many current projects in progress to their new partners in stages or waves over the next 18 to 24 months. Simultaneously new work will be awarded to the two partners as Pfizer's pipeline progresses.

The scale of this undertaking presents challenges but also great opportunity which we're undertaking with relish. Given our track record, we are confident we can absorb this business and the growth it will drive by continuing to support and grow our broader client base.

Gross awards were $357 million in the quarter, the second highest gross bookings number achieved in the last three years. Cancellations were $47 million or 2.3% of the opening backlog.

This resulted in net business wins of $310 million, representing a book to bill of 1.3. Included in these awards is a modest amount of new projects awarded by Pfizer, but none of the anticipated value of projects in progress which will be transitioned to us starting in quarter four have yet been included.

Overall, we continue to see demand rising across all segments of the market. RFP volume was up a little year-on-year but RFP value was up over 10%.

The strong bookings in quarter two have led to our backlog at the end of June exceeding $2 billion for the first time, a new milestone for ICON. In recent months there's been a lot of comment and concern expressed about the impact of strategic deals on the backlog burn rates of CROs.

We would like to highlight that our burn rate has hovered consistently around 12% since the beginning of 2009 and you can see this on the slide that accompanies this commentary that Brendan referred to earlier that is available on our website. We put this down to our cautious approach to the treatment of bookings.

Another positive indicator coming out of this quarter is that the $2 billion in our backlog -- of the $2 billion in our backlog, we expect $803 million to be earned over the next four quarters which is 78% of expected revenue in that period which is the strongest reading of this metric in over three years. Turning to some of our smaller business units, our Central Lab had another excellent quarter of new business wins, booking $27 million in net awards compared to revenue of $17 million in the quarter.

This is their seventh straight quarter of business wins in excess of $20 million. Their trailing book to bill continues to be over 1.5 and their backlog now stands at a record $170 million.

They took further cost reduction measures during quarter two and reduced their losses significantly to $1.5 million. However revenue conversion continues to lag forecasts, but indications are encouraging and revenue momentum appears at last to be building. We now expect breakeven by the end of quarter four or at the very worst, in quarter one of next year.

Our bioanalytical laboratory based in Syracuse, New York and which we acquired in late 2009 has been performing very well since acquisition and helped us together with our small Veeda Labs acquisition in 2010 build greater scale in our Manchester labs. We continue to make progress in these labs in quarter two through our selection by two major pharma companies as strategic partners particularly for their large molecule programs.

In our Phase 1 business, losses were again occurred in this quarter, quarter two. Significant progress was made with strong new business awards, selection as a strategic partner by one major pharma, selection by another as a tier one provider, whatever that means, and encouraging progress being made with two further potential strategic relationships.

Success with these should secure a more predictable business base which would significantly reduce the volatility we have seen in this business in recent years. Nonetheless, we are taking further cost reduction measures in the business to improve performance.

At the beginning of this year, we created a new business unit to focus on the growing area of late-stage, primarily post marketing, and outcomes research. We transferred some activities from our clinical division and inquired in early January Oxford Outcomes, a specialist health economics and outcomes research group.

I'm pleased to say that this acquisition is performing well and is ahead of the original projections. More importantly, the new business unit is raising our profile in this area and building traction in attracting additional business opportunities to ICON.

Meanwhile our DOCS contract clinical staffing business and our medical imaging core lab continue to grow. DOCS in particular is making good progress with its first placements in Asia being achieved in quarter two following their first investment in the region at the beginning of the year.

Last week we announced the acquisition of Firecrest Clinical, a small but exciting company providing unique investigator site support technology which we believe will further advance our strategy of using technology and informatics to streamline trials and enhance quality. However, the main story of quarter two is in our clinical business.

The revenue growth was sluggish and margins came under further pressure as we invested in a series of initiatives highlighted in our initial guidance in some new initiatives as we introduced lean Sigma practices and kicked off a number of additional projects to improve additional efficiencies; and most of all, as we retained staff beyond current requirements and geared up to hire new staff in readiness to take the transfer of currently running projects from Pfizer. This process was initially projected at the beginning of quarter three and that was reflected in our original guidance but is now planned to occur at the beginning of quarter four and on a quarterly basis thereafter right through 2012.

Hiring is now aggressively underway with an expectation that we will add between 600 and 800 clinical research staff in the second half of 2011. As a result, we expect cost to continue to be added in quarter three and quarter four with mitigating revenues only commencing in quarter four.

This process will continue in 2012, but the leverage benefits of the incremental revenue should see margins improving in quarter four and that improvement continuing incrementally through 2012. As a result of all of this, we've had to revise our earnings guidance for 2011 to $0.50 to $0.70 as revenues from the Pfizer relationship arrive later than we had expected when setting initial guidance and the pattern of business transferring is more aggressive than we had planned, necessitating significant cost additions in advance of revenue generation.

Plus the pattern of earnings in the second half, we show low profits in quarter three as we incur a lot of cost ahead of revenue with a strong acceleration in revenues expected in quarter four absorbing that cost with additional costs being added in preparation for the next wave of transferred work which will come in quarter one of 2012. Our range is necessarily wide as what we are undertaking here is significant and there are many variables which may yet impact on the speed of transfer of work, not least being Pfizer's and our readiness to insure transfer takes place smoothly and without compromise to quality.

That ends my prepared remarks. Before handing over to questions, I just want to acknowledge the 7800 people who soldier away to make all of these numbers happen.

They are what has helped us make the progress we have made as a company and they are together with a lot of incoming new colleagues the people who enable us and our clients to achieve our goals. Can I hand over now for questions please?

(Operator Instructions) Dave Windley, Jefferies & Co. (Operator Instructions) Ross Muken, Deutsche Bank.

Good morning and I guess for you, afternoon. So as we think about the Pfizer relationship and sort of what it means longer term in the context of the market moving to these larger strategic deals, as you think about the financial implications of it and kind of the short-term volatility versus the long-term benefit, how does that change how you think about kind of the more regular type of business or what challenges does it create for you from a management perspective to kind of manage two different types of sort of relationships? These large-scale ones like a Pfizer where it's fairly complex and it's fairly chunky and there's upfront investments versus sort of the more regular business you do with some of the vendors who have a more traditional model and then your biotech clients?

Ross, it's not I suppose -- it doesn't create enormous difficulties other than the logistical difficulty of getting sufficient resources in place to meet the requirements and particularly to meet these -- the waves of work that Pfizer is transferring on a quarter-by-quarter basis. What we do with our strategic clients is we create specific teams, special teams to manage that relationship and to manage the logistics not only of the relationship, but of connecting in to all of the resource pools in the organizations that get drawn upon as work of this nature is executed.

For more tactical work and it will typically be an account executive and there will be a project manager or project director who owns a particular project for -- a particular one-off project for a smaller client. In these larger strategic relationships, we're putting together dedicated teams at a management level to as I say manage the relationship and insure that the resource is -- the resources necessary to execute these projects are made available when needed. So it's just good management practice, not particular rocket science involved.

And what about just to sort of extend it to the other side of the coin in terms of how you think about dealing with the investment community relative to these transactions and how you think about it in the context of value creation, because obviously we see today quite a drastic change in sort of the short-term forecast although certainly one would assume over time Pfizer would be more additive to the EPS line relative to your run rate. So clearly these larger transactions are complicated.

There's not always a perfect timing in terms of expenses and revenues. So what sort of challenge from a forecasting perspective does it sort of present to you in terms of how you're going to communicate with us and ready us for sort of these new types of transactions which have a lot more financial implications than what we were used to historically?

I suppose the honest answer to that is it creates lots of challenges in terms of communicating it because they are quite variable, the timing is quite different. And it's only when you get into the devil that you get the detail.

At the time that we were giving guidance, the discussions with Pfizer began in October, September/October of last year. So we have been anticipating this for a considerable period of time.

Some of it was reflected in our guidance. But the shape of what they were doing and even their own thinking about what they wanted to do was developing all through the process, and hence the variability we've got here.

But let me address the question of value creation. I suppose as a company we've made a lot of acquisitions over the years but on ancillary services rather than in our core business.

We have grown our core business organically. Traditionally that has happened through a smoother curve than this because we just win new business and bid projects start off slowly and gradually build and that gives us time to add our cost as and when needed. This type of relationship is obviously quite different in that regard.

But let's get some perspective here. We are hoping that this relationship will add 100 maybe even $200 million of incremental revenues to ICON over the next -- in the next year or two.

We could go out and 12 times EBITDA for a company that has that amount of revenue and we'd spend a heck of a lot more than is going to hit our P&L over the next couple of quarters as we ramp up revenues. So in terms of value creation, I would much prefer to be doing this than to be making a very expensive acquisition.

Great. I will go back in the queue.

Stephen Unger, Lazard Capital Markets

Quick question for you. As far as the hiring of the staff, it looks like -- could you comment about sort of what was hired in the second quarter and how we should reflect -- how we should think about the direct cost ramp I guess for the next two quarters? Because when I look at your third-quarter guidance, it's a very -- it appears to be a very big incremental increase in cost and expense.

That is correct, Steve, yes. In the second quarter we've really just been giving ourselves ready for this. In fact, the shape of the wave and even the timing of the wave has only become clear in the last few weeks.

So we have held resource and have been carrying excess resource. Our utilization levels are well down below average in the second quarter.

But there isn't a huge increase in actual headcount in clinical in the second quarter. There isn't a big increase in HR recruitment folks as we put the resources in place in order to turn on the tap and the tap has been turned on. The recruitment has begun in July and is going to be as I said in my comments pretty aggressive over the rest of the year.

Okay. And then as -- from an SG&A perspective, is there like an incremental that goes away after you get done hiring the 600? Is there recruiting costs or temporary (multiple speakers)

There is, Steve. There are probably two drivers at the SG&A level. There's the short-term incremental of the additional recruitment teams, recruitment cost and on-boarding.

But I suppose more importantly, there will be significant amounts of revenue driven by this strategic account. So it's really a question of getting much more leverage than the short-term cost of the SG&A base in 2012.

Okay. And then just lastly, what was the absolute dollar value for the backlog at the end of the quarter?

I think it was $2.060 billion (multiple speakers)

2.060. Thank you.

John Kreger, William Blair

Peter, do you think you've got pretty good clarity on how the Pfizer relationship is going to ramp over the next couple of years or is it still pretty fluid?

I think I said in my comments there, John, that the exact certainty around when revenues and how fast revenues will flow in the fourth quarter is still -- there's still bit of variability around that. But on the broad picture, yes, there's pretty good clarity at this stage.

We and our other partner were at a joint meeting with Pfizer last Thursday that I was personally present at where they shared a lot of information with us and gave us a fair degree of clarity as to what the waves will be, what will be included in the waves through 2012, each quarter in 2012, what their pipeline is like and when they expect or how they expect that pipeline to mature and progress from a timing point of view over the next couple of years. So we had a very specific, very helpful sharing of information from Pfizer that is certainly helping us create much greater clarity as we begin to plan 2012.

That's great. I'm sure you don't want to put too much information out there in a public forum. But if you think out over the next five years or so, should we think about this contract as kind of gapping up and then reaching a more steady-state in terms of revenue and margins or more having a ongoing improvement in years one, two and three?

If you mean an ongoing improvement, by that, margins continuing to improve from that business, yes. If you think about it in terms of what I've described as the waves -- and I'm using that terminology because that is actually the terminology that our client is using -- with a wave coming each quarter for the next five or six quarters, we will have to make sure we have a bolus of people in place in advance of each wave and therefore we will through the next five or six quarters have excess capacity going into the quarter in order to take on the wave.

So that means margins in each of those quarters will be not as strong as they could be if we were in a steady-state. But once we get through the waves of transition, then we will be in steady-state and the full margin benefit should be apparent.

But not to say we are anticipating in 2012 that margins will be awful. We think margins will incrementally improve through 2012 partly because the early waves are larger than the later waves, and partly because the sheer scale effects of the incremental revenue should help us in a number of ways, including leveraging the SG&A as Ciaran just alluded to.

Great, thanks. And then just one another one, if you think about your non-Pfizer business, I'm sure you've had some conversations with other key clients. How did that go?

And if you -- I don't off it's been long enough, if you think about your hit rate on your other key clients, has that changed at all? Has it gone down as they maybe get worried about you focusing fully on Pfizer?

No, not at all. Obviously there's been conversations. Of course other clients have asked us to talk to them about whether there will be and give them assurances that there won't be any impact on our ability to service them and service their business. We've been able to give them those assurances.

As again in one of my earlier answers, I was talking about the fact that for strategic clients, we are creating and have created separate management oversight teams and we won't be borrowing from Peter to pay Paul in that regard. Those teams all dip into our resources and that down the organization use resources as needed.

That is how us CROs have to operate. The key for us obviously is to make sure that we get sufficient resources in place to meet demand at any point in time. But that is our business, that is what we've been doing for years and that is what we will continue to do.

In answer to your question, the clients that I've spoken to have actually had to ask the question as a matter of diligence, but I've not detected any serious levels of concern coming from them. And certainly in terms of win rates or activity levels and so on, they continue to be encouraging.

Thanks very much.

Robert Jones, Goldman Sachs.

Thanks for the questions. Peter, relative to how much visibility you first had when you learned of the Pfizer win, how much of the information that you learned last week was incremental versus just clarity around timing both from a required infrastructure headcount perspective and also from potentially additional revenue contribution?

We had the broad shape of it before last week. I would hate for you to think we're only discovering the information last Thursday.

We had the broad thrust of it. The waves were being planned and so on, but we were given additional insight into their pipeline in particular so that not only do we have a vision of what the waves will be, but we also have a vision of what new projects and new work coming through is likely to look like, how many such projects there's likely to be and what the broad timing of those is likely to be over the next 18 to 24 months.

This wasn't a new additional wave of projects or these transitional projects that wasn't incremental to your previous revenue expectations?

This wasn't incremental to our previous revenue expectations as they have developed over the last few weeks. But obviously in the last few weeks since the actual award which is remember only on the 26t of May, since then there's been a lot of meetings with the Pfizer teams doing the planning for this, planning what the waves will be, identifying how that will play between the two partners, characterizing it in detail and enabling us to begin to plan for the resourcing etc. that is involved.

Okay, that is hopeful. You mentioned the burn rate at ICON obviously having not changed much over this last 12 to 18 months. As you think about (multiple speakers) three years, that's even better.

As you think about that rate as you start to take on this non-transitional Pfizer projects, is there any anticipation that that rate could change?

No. If anything, with the transitional work, it might actually accelerate the burn rate as those waves of work come in. But we don't think the underlying business that will come in as new projects will have any different characteristics to that which is already in our backlog.

Understood. And then just the last one I had just on the hiring, you mentioned 600 to 800 people. That's a lot to be adding in a short time.

Can you maybe just talk about the primary areas you expect to be recruiting from? And then are there any special measures that you guys are putting in place to train that number of people in short order?

I'm going to give you a simple metric. With 70 offices around the world, so if all of them recruit 10 people, we will have the number. So you can actually parse these numbers.

They sound like large numbers but remember, we have 8000 people, so 600 or 800 is not that huge and when spread across the geographies in which we operate, it is less daunting than it sounds. Where are we drawing them from, clinical research staff is what we will be looking for -- project managers, CRAs, support staff around those and data management people. Those will be the primary functions that we will be seeking staff in which is the pool that we have always been recruiting in.

We're pretty comfortable. We went through three years of growing at 30% plus from 2006 to 2009. So we have a track record here of being able to gear our organization up and hire rapidly when needs rise.

Okay, that's helpful. Thanks for the comments.

Tycho Peterson, JPMorgan.

Thanks for taking the question. Maybe just a lateral off that last question on the hiring.

Is it pretty clear from your perspective where you need to be geographically for the Pfizer agreement? And then maybe as a follow-up, can you just talk about as we think about projects moving through the pipeline, you're obviously one or two strategic partners for Pfizer now. Is it pretty clear how the work will be allocated going forward? Are there going to be kind of bids that you will have to go up against from (inaudible)

On the geographic question, Tycho, this is Pfizer we're talking about here. So you can imagine the geographic spread is actually all over the world which is good.

We certainly talked with Pfizer about diversifying the geographic spread even more than they have it as part of a program where we're trying to deliver value to them. So perhaps it will help us to increase our activity levels in places like Asia and Latin America where costs perhaps are lower than elsewhere.

Again the arrangement with Pfizer is one where we're trying to work with them to create value rather than being in a very tight margin situation per se. So the geographic spread -- I'm giving you a long answer to a simple question -- the geographic spread is all over.

Their current projects, the ones they're transitioning to us, are still largely concentrated in the US and in Europe as is the norm I suppose when you think about the statistic that Ciaran gave earlier, that 13% of our revenues come from outside of the US and Europe. Pfizer's pipeline or Pfizer's projects they're transferring to us don't look to be significantly different in that regard. But over time we would hope it provides opportunity to us to actually push more into some of the less developed regions of the world.

In terms of bidding, the transition projects have been effectively negotiated or parceled out based on where we and our other copartner have the best fit with the projects that are in their pipeline. There has not been any bidding process for them and they are effectively being spread on a pretty even basis.

Going forward, beginning in 2012, the anticipation is that each new asset molecule or particular indication will be evaluated with the two partners to see which has the best fit again. And then once that choice is made, that partner will carry that molecule or asset through its development phases beyond that.

So the intention -- our understanding is the intention, the broad intention is that the work will be fairly evenly split, provided of course we have the resources and the experience that is required at a given point in time.

Could you talk to your capacity or appetite for other strategic deals? Presumably there won't be others the size of Pfizer, but talk to your willingness to take on other longer-term strategic work in light of what you're going to be committing to Pfizer now.

We're in the business of growing our business. So we have the appetite to do others.

As I mentioned just on the previous question, we have a track record of growing our business strongly and being able to gear up to strong levels of growth. So we don't believe we are precluded or excluded from any new opportunities that may come along.

That's not to say that other companies that might be considering strategic partners at the moment might pause while they see that we and perhaps [Firecrest] are engaged in something of this magnitude. As far as we're concerned, we have got the appetite and we will be seeking to participate in any further ones as they arise.

And could you just touch on your initiatives in Asia, maybe just starting with Acranet and any update there and just talk about what you were from kind of a buildout perspective?

Well, from a buildout perspective, Ciaran gave some I suppose fairly encouraging and positive commentary at the beginning in terms of how the proportion of our revenues coming from ex-US and Europe has grown significantly in the last 12 months now representing 13% of revenues. How our backlog in Asia is double -- sorry, the book to bill for Asia was double what the book to bill was in the rest of the clinical business; still a small proportion of our overall business, but that is a very encouraging sign.

The Acranet alliance is really intended to ensure we have sufficient scale available to us in Japan as more projects are executed by clients on a truly global basis including Japan. Resources are very expensive in Japan.

Japanese companies themselves are very conservative. So being able to tap into a resource pool without necessarily owning that resource pool is part of our strategy of ensuring we have the scale that clients want without necessarily having to expand our cost base in order to support that in all these regions.

Overall, we're very pleased with how progress in Asia is going. We now have staff in five cities ourselves, five cities in China. So we continue to build out the footprint right across the region.

Just one last one. I think you had previously talked about the efficiency gains of about $0.10 to $0.15 this year from Central Lab and Phase 1 and obviously it looks like there's been a little but of slippage in the Central Lab profitability timeline. Is that $0.10 to $0.15 still applicable or how do we think about the efficiency gains?

No, that is not applicable, Tycho. We've had a bit of slippage in the first half of the year in our Phase 1 numbers compared to where we expect them to be.

But with the wins that Peter alluded to, the strategic awards and the tier one supplier nomination, we will expect Phase 1 to improve in the second half of the year. But certainly we aren't getting that 10% to 15% pickup that we forecast. It is halfway through the year, if I had to put a number on it, I would say possibly a $0.05 pickup looks like it's going to turn out.

Okay. And then on Central Lab, you're now saying kind of fourth quarter or first quarter for profitability, first quarter next year?

It's that the -- I suppose the clients have got a bit more positive in terms of the revenue beginning to burn from the backlog. Hope it's the fourth quarter but being burned so often at this stage, it might be the first. But the encouraging thing is the revenue is at last beginning to burn.

Yes and I think too, the cost base, quite a lot of work has been done on that. So if you look at its progression in Q3 of last year, we had run rate losses of about $4.5 million. It came down to about $4 million in Q4, further again to $2.5 million in Q1, $1.5 million in Q2.

So a lot of cost has come out. So it's really down to the revenue uptick.

So while I expect we still post losses in Q3 and Q4, I don't think they will be significant. I thinking maybe $1 million in Q3 and $0.5 million or thereabouts in Q4 just depending on the revenue uptick. So disappointed to have missed the milestone but it is not a material amount of burn that we expect in the back half of the year.

Okay, thank you very much.

Jack Gorman, Davy Stockbrokers.

Thanks for taking my questions. I had two brief ones if I may.

Firstly, related specifically to Pfizer, Peter, is there any provision or is there any possibility that there will be a transfer of Pfizer employees or indeed Pfizer facilities as you look at the oncoming waves? And the second question is a broader one.

You referred to the fact that the Pfizer deal is different. I can obviously appreciate it is different certainly as regarded scale, but as far as you can see in your own ongoing negotiations elsewhere, are others considering this concept of transitioning their existing portfolio as part of these new agreements? Just wondering how unusual or otherwise this particular part of the process is. Thanks.

I'll take the last part of your question first, Jack. I suppose the answer is I don't know, but it is unusual.

I think the -- and I have to be respectful of not talking inappropriately about our clients and what they are doing, even if I do know. In Pfizer's case, they wanted to change the model they were using.

They were using the 17 functional service providers and they wanted to go to full-service provision which is quite a dramatic change. Because they wanted to achieve that and they wanted to achieve it in a reasonable timescale, that is why they are doing these transitions, are transitioning running projects.

It would really depend for other clients as to whether they wanted to change their business model while simultaneously selecting a smaller number of strategic partners. I would not expect that that would be particularly common across the industry. Having now given you that long answer, I can't remember the first part of your question.

It was to do with any possibility of a transfer of employees or facilities from Pfizer over time.

Well, facilities, no, because again, our business is not a facility -- our core business, the running of Phase 2 to 4 clinical trials is not a facilities business. What we need is office space and computers and so on. But certainly we have -- we've talked and provided in our agreements with Pfizer significantly for the potential for us to take the transfer of Pfizer employees.

In Europe there's a lot of law around that and a lot of legal provisions around that which can create challenges. But we certainly have that as part of our objectives here.

There are some challenges associated with it, not only legal, but other factors that are involved that may mean that the ability for us to hire Pfizer folks may not be in sync with the transfer of work to us. So we would love it to be different, we would love it to be smoother and we would love to be able to take transfer of Pfizer people as projects come across to us, but the way the logistics of this are working is that may not be feasible. But we nonetheless expect that over time we will be encouraging ex-Pfizer employees to join ICON.

One very quick housekeeping follow-up for Ciaran. You mentioned, Ciaran, long-term tax at 18% to 20%. Could you give us a sense for half two tax?

It will depend, Jack, on really just on the timing of all of the moving parts that are in the tax provision. And given that we're having significant costs and we are guiding in sort of a $0.00 to $0.02 profit, what you will see from our tax model is there will still be a tax charge going against that.

So it means the effective tax rate could look high in Q3. But at this stage, I wouldn't really be able to put a number on it.

I think what is important to look at here is just the pattern of our tax rate over the last number of quarters and going forward. That is the range -- that there will be quarters when it's lumpy depending on the profitability of a given quarter.

Okay, thanks.

David Windley, Jefferies & Co.

Well, I was here and I was talking in fact, but nobody heard me; tree falling in the woods -- or in the forests. I wanted to get into the question of pricing.

You have commented that you feel pretty good about the pricing on this deal. In prior deals, I think we have come to understand that to maintain parity or your views on pricing on whether it is Bristol or Lilly, included some assumption of getting more out of your staff.

For example maybe more trips per month on a CRA. CRA rates the same, but you've got to get more trips out of them per month to make it all work.

I guess I would like to understand what kind of assumptions of increased productivity or efficiency in the underlying workforce are you having to make to get to that comfortable feeling on pricing?

Well, I suppose the -- I don't want to comment on the specific economic circumstances of a particular deal. So I'll talk in broad terms, Dave.

Yes, we have commented that in some of these strategic relationships what the objective is on both sides is to deliver a lower cost total cost to the client through both efficiencies on our side and lower cost on their side and overseeing and managing the relationship. In our case, the reason why we are making investments coming into this year and that was part of our guidance for this year was for example we're creating shared service centers, our [agility project] is designed to streamline our own internal SG&A costs so that we get more for the spend that we were making in that regard or lower the spend and get the same amount of productivity, whichever way it worked.

And we've got a number of projects in the direct line, the direct cost line which are similarly designed towards streamlining our processes and making sure that -- we use a particular example. I certainly don't want the -- if any of our clinical research staff are listening into this call, I don't want them to get the impression that they're going to be whipped out onto airplanes every morning because that's the only way we can make money on this, no.

Obviously every company has a continuous improvement process that's going on and our objectives not just related to any particular strategic deal are to streamline processes, reduce redundancy. In a company that grew as fast as we did, we recognized that we have built some processes and procedures that are actually suboptimal and we've got a number -- I mentioned in my comments, a number of lean Sigma projects running currently to try and take out some of that redundancy so that our folks can be more productive.

We haven't made in this most strategic -- in this most recent strategic deal, we haven't made any aggressive assumptions about enhancing productivity beyond levels that we currently are capable of achieving. I suppose maybe that is the short answer to your question, that there is not a requirement in this particular relationship for us to do things beyond anything we have ever done before.

Okay, that is helpful. Thank you.

To some of the questions that have been asked around your other clients, the ones that perhaps are not in strategic deals that rise to the level of the press release, if I look at your top client last year versus top client in this year's second quarter, that increase in concentration in rough number seems to represent about $25 million in revenue increase compared to total revenue increase of $20 million. So everybody but the top client assuming that top client is even the same one declined by about $5 million.

And so I would love to understand or hear your perspective on again just the balance -- the management of the balance between the attention that the top one, two or three are going to get and then the continued push on the remainder of the client base.

Your mathematics I think are correct. I suppose the human nature is that -- human nature and business sense is that the client who gives you a continuous flow of repeat business is the client you most want.

And in every business book I've ever read says love the customer you have because the cost of acquisition of new customers and the cost of acquisition of little pieces of additional customer activity is much greater than repeat business from existing, well-established customers. So you're probably seeing an element of that.

I think at the beginning of the first quarter, I reported -- on our last call I reported that we have seen at last a significant uptick in RFP volume and value. So through last year, RFP volumes and values were pretty anemic.

In fact, they were down on the previous year. So it's not really surprising that our broad customer base stayed pretty static and the growth that we achieved came from one or two of the strategic relationships.

With RFP volume and particularly RFP value up reasonably strongly so far this year, I suspect we will see that won't necessarily be the metric next year. Although as this Pfizer relationship takes hold and drives revenue growth, it's going to become -- it will be a fairly dominant feature of the growth in the business over the next 12 months I suspect. That's not to say we're not (multiple speakers)

Okay.

Again, going back to a question I answered earlier, that's not to say that we'll be not paying attention to capturing other business. It's going to have a pretty significant drive -- it's going to be a pretty significant driver of growth and other smaller relationships are less likely to have much influence on the growth rate.

One last follow-on to that. Thinking about top client Pfizer probably soon to be that getting your A-team or however you want to characterize it, as you are hiring these new people, either you've got to go out and hire experienced, highly qualified people or if you are going to layer that a little bit, it would seem that you might have to dip into your existing staff base.

Is it going to require you to pull staff off of other clients' projects or just -- I'm interested in you manage getting the appropriate quality of staff to service this massive wave of business that Pfizer is going to transition to you while not sacrificing quality on any of the other projects.

We're running -- if you think about it this way, Dave, we are running about 400 clinical projects at the moment. If they were all average size and average duration and so on, that means whatever that is, eight a week coming to a close, and hopefully eight new ones starting every week. So experienced staff are coming available all of the time through the natural progression of the pipeline and the natural attrition in the pipeline.

We certainly don't intend pulling staff off other live projects. That would be very provocative to our other clients and it would be very damaging to our business.

Of course we will apply experienced staff that come available. We will apply them to opportunities as they arise in our pipeline. And as we are hiring a lot of new people, obviously we will be seeking to hire good experienced people.

I hate the term A-teams and B-teams and C-teams. I happen to think all of our teams are wonderful in this Company. Some are more experienced than others but as far as I'm concerned, they are all A-teams.

Gotcha. Thank you very much.

Eric Caldwell, Robert W. Baird.

This is actually Nick in for Eric this morning. Just a quick point of clarification, was there any Pfizer contribution to the bookings this quarter and if so, could you quantify it?

We didn't quantify it, but in my opening remarks, Nick, I did say that there was a modest amount of bookings of new projects from Pfizer in the quarter.

But none of the transitional work that's coming in (multiple speakers)

None of the transitional work has been put into backlog at all, hasn't been fully quantified yet.

Thank you very much.

Douglas Tsao, Barclays Capital.

Good morning. Thank you for taking the question.

Just, Ciaran or Peter, in terms of the revenue guidance that you are maintaining, from what I take it, this includes some contribution from the transfer work that will take place in the fourth quarter. Is that correct?

It's correct, in the fourth quarter, that is correct, yes.

And so does that -- in terms of the -- that seems to be a little above and beyond what you expected initially when you gave guidance in February. So can you please explain or sort of give us a sort of perspective on where the shortfall if you will or the delta is from the original guidance?

Two things that are driving the shortfall from the original guidance, Doug. We did the original guidance, we guided Q1 and Q2, where they came out and that with a number of investment initiatives that we highlighted and principally that we were carrying a level of staff that would otherwise be surplus requirements in anticipation of significant strategic deals.

And of course foremost in our thinking there was we would have staff ready for the Pfizer account when it ramped up. We did that guidance back in January and early February.

We expected to see revenue coming through in Q3 and we expect to be with the -- absorbing quite a number of the surplus staff that we had. And two things changed really in the shape of this guidance.

One, we didn't get the revenue in Q3 that we expected. It slipped into Q4. That gave us about a $10 million shortfall there on the revised guidance.

And then of course with the structure of the deal that we have discussed at length already, so I won't go into the waves and the ramp-up, the ramp-up is that much steeper than we originally expected, therefore in addition to -- we had expected to soak up existing resource and to hire some level of resource. As we now have to ramp up for the waves of Q4 and Q1, we're ramping up much more quickly than we expected, so there's a much higher number of staff in the hiring plan for Q3 and that is [hiring] somewhere from $10 million to $15 million of direct cost in the quarter.

Then we get to Q4 and the staff we have hired in Q3 will start to generate the revenue in Q4. But we have another hiring plan then to get people on board to be ready to drive the further increase in revenue that we expect in Q1 and that is adding another $5 million to $10 million in Q4 in direct costs. So those are the principal drivers and the difference from the original guidance.

And obviously you're not going to provide guidance for 2012. But when we think of that -- perhaps flesh out a little bit of some of the mechanics as we think about the transition that we see into the first quarter because obviously the revenue or the earnings ramp from 3Q to 4Q is fairly steep, should we expect some plateauing in terms of that trajectory as you sort of get through a second wave of projects getting transferred?

I think you can expect as we are hiring again in Q4 -- and that is baked into those guidance numbers -- there will be further uplift in revenue in Q1. I think Peter mentioned in his comments there would be a number of waves over the next four to six quarters albeit they won't be necessarily to the same scale as wave one and wave two and therefore won't have this sort of D Day approach to having everyone hired and ready, set, go on the day. So I would expect to see revenue to continue to grow throughout 2012 each quarter on quarter.

And in earlier comments I made on the call here in response to some earlier questions, I did allude to the fact that as there are these waves that the long-term margin that's available will not be visible because there will be people being put in place in advance of each wave and therefore we won't be able to reach optimal margins in 2012 because of those waves. But I did indicate that we did nonetheless expect there to be good leverage on the margin progressing through 2012.

That's what you guys get paid for. You are the analysts, so instead of asking us to give you guidance, it's time for you to run your models now.

And then just finally, if you could provide a little bit more detail if you can in terms of the revenue ramp that you are seeing in the Central Lab. What is necessarily causing the increase in revenues which obviously you've done a very good job on the cost side (multiple speakers)

Increasing the revenue ramp, Doug, is the backlog. As I said in the comments, we have now had seven quarters of bookings in excess of $20 million. In fact the last six quarters have been in excess of $25 million and we have been recording revenues of $15 million and $16 million.

So funnily enough, that means the backlog has grown and mathematically sooner or later, that backlog starts to convert and that drives revenues up. And we have been I supposed disappointed that that hasn't happened sooner.

But there's been a lot of work being done on the forecasting, a lot of detail gone into talking to clients about what they are expecting and then discounting what the clients are telling us and forecasting therefore how revenues will flow. There are indications -- in just talking to the president of the lab before the call today, and he was saying that activity in July is better than they expected.

Normally in the summertime, July/August particularly in Europe, that activity would be a little bit weaker but July is showing stronger than they anticipated. So the revenue is beginning -- the backlog is beginning to convert and our expectation of improvement through the second half is through revenue moving from $17 million in quarter two up to in excess of $18.5 million thereabouts in quarter four.

Thank you very much.

Sandy Draper, Raymond James.

Thanks very much. Just a quick question and, Ciaran, I apologize; I jumped on the call late, so if you already mentioned this -- I know you just mentioned not a big contributor in the quarter from Pfizer, but going forward as you get bigger contributions, are you going to either break those out or are they just going to be treated any differently than other deals or is it all going to be pretty much the same? Thanks.

Breaking it out, Sandy, in what sense? In terms of -- are you talking about bookings? Are you talking about -- I'm not sure what you are referring to.

Bookings, yes, sorry; bookings, not revenue. Are you going to be willing to break out sort of the contribution of Pfizer bookings going forward? I know that's not (multiple speakers)

That would qualify as TMI, too much information. No, that would be competitively unattractive for us to reveal that.

So we won't be breaking it out. We would certainly be willing to give some broad indications and as these waves hit and we incorporate them into backlog, it is likely that we will have to give some explanation for what looked like big numbers at particular points in time.

Okay, that is helpful. And so, is there any difference in terms of the way timing -- you'll put them in either sooner or later versus others? Because your visibility and your communications are going to be earlier.

So maybe before it was the ink was dry on a contract [so as in] bookings here, I don't know if it changes any or what the methodology is if it is different and maybe it is just all the same. Just wanted to know if it would maybe change a pattern of how you book the business.

Well, as we said in the current quarter, there are -- there's a modest amount of bookings from Pfizer in relation to projects that are new, haven't started yet. They've been awarded to us and they will ramp up in the way that projects normally do.

The waves of transferred work, our intention would be that when it is transparent as to what the value of that wave is, it will go into the backlog in the quarter before the wave begins. So that would mean in quarter three, we anticipate -- at the end of quarter three, we anticipate there would be an amount of backlog award related to the wave of work that is transferred to us beginning on the 1st of October, the beginning of quarter four.

Similarly in quarter four if another wave is starting in quarter one, at the end of quarter four, we will have quantified that and we will put that into backlog and the revenue should begin to flow in the subsequent quarters. So that is the way we are anticipating the mechanics of this will work.

Great, thanks a bunch, guys.

Todd Van Fleet, First Analysis.

I'm wondering if you could just quickly identify for us, of the $0.55 to $0.65 of guide down in EPS, how much is attributed to Pfizer, how much is attributed to Central Lab, how much is attributed to kind of Phase 1 activities? Thanks.

The principal driver -- I think we've been over this, Todd -- is really Pfizer. We have about $10 million of revenue that slipped out of Q3. We have added $10 million to $15 million of costs.

We have talked about another $5 million to $10 million of direct cost in Q4, so that would be $40 million. I indicated that the Lab will lose modest amounts of money in the second half of the year compared to breakeven.

But that is a couple of cents. IDS I said would probably be a 5% uptick instead of the 10 to 15. That we talked about in our guidance. So there is a $0.05 to $0.10 slip on the range.

So we said 5 to 10 for IDS and 2 or 3 for the Lab. The balance would be around cost investment ramp-up in Pfizer and the $10 million that slipped out of Q3.

Thanks.

Okay, as there are no further questions in the queue, that will conclude today's question-and-answer session. I would now like to hand the call back over to you for any additional or closing remarks.

Thank you, everyone, for listening. There was obviously a lot of information to be shared today. We hope it was helpful.

We think the long-term outlook for the industry and ICON is very positive. We are very encouraged by the developments in quarter two despite the disappointing guidance we are giving you for the second half of the year.

Challenges our customers are encountering, it's changed their adopting and response to the market are quite variable and creating variability on a quarter-by-quarter basis, but the trends are all positive and generally good for our industry. Our award of the Pfizer relationship has given us enormous encouragement in relation to our positioning in the market and our ability to deal with the largest companies in the industry and support them in their needs. I look forward to talking to you all over the next quarter. Thanks.

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