ICON PLC (ICLR) 2011 Q3 法說會逐字稿

Good day and welcome to the ICON PLC third-quarter 2011 earnings conference call. Today's conference is being recorded. At this time, I would like to turn over the conference to Brendan Brennan. Please go ahead.

Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended September 30, 2011. Also on the call today we have our CEO, Mr. Ciaran Murray, our Vice Chairman, Mr. Peter Gray, and our head of Investor Relations, Mr. Sam Farthing.

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

I will now make the customary statements in relation to forward-looking statements. Certain statements in today's call are or may constitute forward-looking statements concerning the Group's operations, performance, financial 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 the restructuring charges taken in quarters one and three of 2011 amounting to $9.8 million. These charges relate to lease write-offs and headcount reduction costs.

On a US GAAP basis, including the above charges, operating profit for the year to date was $22.8 million, or 3.2% of revenue. Net income was $18.8 million, or 2.7% of revenue, and EPS amounted to $0.31 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 release statement headed Consolidated Income Statement, Analysis, US GAAP.

While non-GAAP financial measures are not superior to or a substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes.

Today's commentary is, as mentioned, refers to our third quarter ending September 30, 2011.

We will be limiting today's call to one hour and will therefore ask participants to keep their questions to one each with an opportunity to ask one related follow-up question.

With all of that said, I'd now like to turn to the financial performance in the quarter.

In the third quarter, net revenues were $241 million compared with $225 million in the same period last year, which represents an increase of 7%. We expect client concentration levels to continue to increase, given the shift towards strategic relationships. As a result, in the first nine months of 2011, our top clients represented 14% of revenue compared with 9% last year. Our top five clients represented 39% of revenue, up from 33% last year. Our top ten clients represented 53% of revenue compared to 51% last year, while our top 25 accounted for 70% of revenue, compared to 72% last year.

We continue to see the impact of the globalization of the CRO industry. In the first nine months of 2011, 59% of our revenue was generated from outside of the US, up from 56% from the first nine months of last year. APAC and Latin America revenues grew to 12% of Group revenue from 10% last year.

In Quarter 3, SG&A amounted to $71.6 million, or 29.8% of revenue. This represents an increase from $60.1 million last year and $56 million in Q2 when we had the benefits of one-time value-added tax rate (inaudible) of circa $6 million. The increase in Q3 results from additional recruitment, IT support, facilities, and key staff retention costs, which we are incurring as part of the cost ramp-up that we discussed in Q2 in relation to the onboarding of our new key strategic projects.

US GAAP operating loss was in the quarter was $3.7 million after restructuring charges of $4.8 million. Excluding these charges, our adjusted operating income for the quarter was $1.1 million, compared with $17.6 million last year.

Group operating margin was 0.5% of revenue in Quarter 3 2011 compared with 7.8% last year.

US GAAP net loss in the quarter was $2.7 million. US GAAP EPS in the quarter was minus $0.04. Again, excluding the restructuring charges, our net income for the quarter was $1.5 million, compared to $19.9 million last year, and our EPS was $0.02 compared with $0.33 last year.

In Quarter 3, the adjusted effective tax rate was a credit to our profit and loss account of approximately $200,000. This arose as a result of US GAAP losses reported in the quarter and a reduction in a FIN 48 provision of $2 million which were no longer required. This had a beneficial impact on our adjusted EPS of circa $0.02. We continue to expect our longer-term average tax rate to be in the region of 18% to 20%.

At the end of September 2011, our DSO was 52 days, compared to 49 days at the end of June 2011 and 37 days at the end of December 2010. Given the contractual terms of our key partner relationships, our long-term DSO target will remain in the region of 50 days.

Operating cash flow used in the quarter was $6 million. During the quarter, we acquired Firecrest Clinical Ltd. for an additional consideration -- or sorry, an initial cash consideration of $24.4 million. In addition, we invested $11.5 million in capital expenditure. At the end of September 2011, net cash amounted to $166 million.

I'd like to hand over to Ciaran now to give you some overview on the quarter's awards and to talk about the business environment.

Thank you Brendan.

In Quarter 3, ICON posted a record level of net new business awards of $431 million. This is a book to bill of 1.8 times revenue. Cancellations in the quarter were low, $28 million, or 1.4% of opening backlog.

In the clinical business, we continued the preparation and hiring for the on-boarding of the work awarded by Pfizer and the initial waves of work have commenced in early Quarter 4. As expected, the cost of adding additional headcount in advance of revenue streams has impacted profitability.

Wins from our other customers continued to be healthy and excluding our Pfizer awards, our book to bill met our traditional target and was 1.1 times revenue.

Our central lab continued to make good progress and reported record new business awards of $39 million, a book to bill of 2 times revenue. Revenue grew in the quarter to $19.5 million and a small profit of $100,000 was reported.

Our early-phase business reported a significant improvement as new management increased revenue and managed costs to reduce losses for Quarter 3 to under $900,000.

Our imaging late phase and outcomes research and docs businesses are all performing in line with plan.

Meanwhile, the Oxford and Firecrest acquisitions that we made during the course of 2011 are performing strongly and are on target to meet expectations for the year.

Overall, demand in our business is healthy with both RFP volumes and values up circa 14% on last year and in line with the last quarter, while we are also pursuing further strategic opportunities which present themselves as the secular shift towards outsourcing by the biopharma sector continues.

In the quarter, we added two significant new strategic partnerships across the portfolio of our businesses, which will drive future bookings and revenue in our clinical, central lab and early phase business units.

We continue to execute on a strategic plan to build scale, broaden our range of services and geographic coverage, enhance our knowledge and expertise, and invest in our technology solutions to ensure that we are the CRO of choice for our customers and to assist them in the efficient development of their drug pipeline and in driving a better return on investment for their R&D spend.

We continue to review interesting acquisition opportunities that fit with our plan, and we are pursuing the ongoing development of our Iconic information platform, which is generating much excitement amongst our customers.

The strong bookings recorded have resulted in our backlog growing 16% compared to last year to a total of just over $2.2 billion. Our backlog burn rate has remained consistent at 11.7% in the quarter.

Our 12 month forecast coverage ratio continues the improvement noted in Quarter 2. We expect $832 million of our current backlog to convert to revenue over the next 12 months. This is a coverage ratio of 79%, which is the highest that we've seen it for quite some time.

Since the announcement in September of my appointment as Chief Executive, many of you have been asking me about my outlook for 2012, so today I decided to share some of my thoughts with you. On our Q2 earnings call, we revised our guidance range for 2011. The range was reasonably wide and we explained that this was predicated on how quickly some of our new strategic accounts ramped up. As previously stated, the onboarding of this revenue commenced in October, so we still expect to be in our 2011 guidance range albeit at the lower end of revenue and earnings as the revenue ramp will be at the lower end of our expectations.

For 2012, we expect to see revenue growth of 15% to 20% in our business coming from the conversion of our substantial backlog, the performance of our key strategic accounts, and the development of new accounts as more biopharma accompanies outsource more work to CROs like ICON with the right range of services and global capability.

We will continue to invest in our business to execute our strategic plan. As a result, we expect earnings to recover through the course of 2012 and to be in the range of $0.90 to $1.10. We expect to see our central lab move into profitability next year and our early phase business move towards breakeven on the back of strong revenue from recent strategic awards.

Beyond 2012, as the investments we're currently making and our capability and our large strategic accounts mature, we believe that the earnings part of the business will revert towards our historical levels in the region of 12% operating margins. We will update our outlook for 2012 in more detail on our traditional guidance call when we report Q4 earnings in mid-February 2012.

The Board has authorized a share buyback program of up to $50 million. This buyback will be funded from our available cash and its forecasted impact our 2012 EPS is in the region of $0.02 $0.03, which has been reflected in our 2012 outlook. The full impact on EPS will be seen in 2013 and beyond. This decision reflects our continuing focus on shareholder returns and driving shareholder value. We believe that we have some excess capital and that our shares are undervalued, and so capital return via buyback is the appropriate course of action.

We have some legal structures to put in place and are working through the precise details of the buyback. We expect to complete this work in the coming weeks and we will commence the buyback during this quarter. ICON may purchase shares in open market purchases or privately negotiated deals at management's discretion on an opportunistic basis.

Before handing over to questions, I want to welcome the new 500 new members to our team and to acknowledge to our 800,300 staff worldwide that their hard work and commitment has helped to make us what we are and helps us to perform through this year and it's their work and commitment that will lead us into the future.

Can we have the first question please, Martin?

(Operator Instructions). Ross Muken, Deutsche Bank.

This is Elizabeth Anderson in for Ross. Congrats on a good quarter. Just in terms of your M&A comments, I was wondering if you might provide a little bit more color in terms of what types of things you're looking at.

Hello Elizabeth. It's Ciaran here. Yes, I suppose back at about this time about this time last year in Q4, we articulated a strategic plan based on our analysis of the direction of the sector. In that plan, we identified a number of acquisition priorities that were around enhancing our technology offering and making sure that we provided the Information Technology platforms that made drug development more efficient, more cost-efficient, and helped develop drugs more quickly. We looked at our scale and our geographic coverage around particularly Asia-Pac I think we articulated, and we also looked at sort of enhancing some of our skills and our knowledge sets as we go forward to strategic models where clients expect us to have increased levels of intellectual capital. We particularly focused around areas such as late-phase and outcomes research.

During the year, we made two acquisitions in those fields, specifically Firecrest which is a technology platform which enhances site management and site performance. We made the acquisition of Oxford, the late phase outcomes research business. When we look at the pipeline, again, we're concentrated around late phase and outcomes research and information and though a lot of that we're doing on our Iconic platform internally and we still concentrate on our Asia-Pac footprint and making sure that we have the scale and range of services to satisfy our customer needs. I think that's pretty much the shopping list of where we are.

John Kreger, William Blair.

Ciaran, I'm guessing it's probably too early to have changed your thoughts on the Pfizer relationship either way, but if you think about some of your other strategic deals that have been in place for longer, can you just give us an update about how they've evolved, if at all? Are you generally seeing them come in larger or smaller than what you originally thought? How has the underlying profitability evolved? Have any of these been in place long enough that you've gone through a renewal cycle yet? Curious about the cross-selling too, if these have kind of expanded beyond their core clinical roots into some of the other areas of the Company.

I think our experience to date on the strategic deals is that they tend to extend beyond the original scope and become larger than is first articulated over the course of the relationship. I think we've seen that with our existing deals and we've seen it with the Pfizer deal, although it's in its early stage. I think, when we discussed that deal back in May following the announcements, we discussed it within a certain scope and even between the announcement and the ultimate sort of plan for the initial stages of the deal, it grew quite significantly in scope. That's been consistent with our experience in all of our strategic deals.

Profitability in the strategic deals, I know it's a source of much discussion at the moment. It tends to hold to the traditional levels of our target profitability, but there is a slightly different way of getting to it. You see a pattern whereby, at the start, we have to invest, as we've seen with Pfizer. We invest ahead of the revenue flows. If you think of the complexity because of the scale of these deals and the fact that you're executing them across many countries in the world, you've got staff hiring lead times. From today that you decide to hire, it will take one, two, three months to get staff on board, depending on the region you're in, their level of experience, both generally and specifically for the SOPs of the Company or the deal in question will be variable. So, there's a training period and there's a period as you get people up to operational capability. So, you can have a lead time of two, three, four months before you can get people productive for a deal, so you have to hire quite significantly in advance of that deal, as we've seen with the Pfizer deal. Therefore, this impacts the initial profitability of the deal. The deal will ramp up to target run rate revenues over a period of time. Some of the deals have been over a year. Some of them are over 12 to 24 months. So, during that initial phase, you're continually hiring a little bit ahead of the curve, so it's only when your revenue hits steady-state (inaudible) the deal that you start to get your target utilization. In the meantime, you're saving money on business development efforts in various other parts of the business, and of course you're getting the leverage off your SG&A. So a lot of those factors go together to make the target margin ultimately in line with our historic experience, albeit it just takes a period of time to get there. That will depend on the specifics of each deal.

We find that the deals we've already done, their profitability has improved over the course of the deal, sometimes a little bit more slowly than we expected in truth, but it has generally followed the pattern and the direction that we expected and we intended.

You are right to say it's too early to have any renewal experiences on those deals. That's something that we can all look forward to down the line.

I think you're touching a good point on the cross-selling issue. Certainly, our experience so far on the strategic deals is that it has enhanced our traditional levels of cross-selling. I think some of the superior performance we've seen recently in both the lab and our early-phase business is on the back of certain strategic wins in those businesses, some of which are linked to the strategic deals in the clinical business. So, it's certainly I think as we move forward into more of the strategic outsourcing, it's holding with our thesis of that not only do you need scale and geographic coverage, you need an enhanced level of expertise and you need to have a full range of services which you can link together into a broad service offering.

I hope that answers your question.

Yes, that's very helpful. Just one other quick follow-up. Now that the lab has reached breakeven and it sounds like the Phase 1 business is moving in the right direction, if you take a longer-term view, let's say two or three years out, what is your current thinking on a more normalized level of profitability that those two businesses can attain?

I think, in my comments and my text, I said that when we look beyond 2012 into the medium term -- or is that the long term for some people, but for us it's the medium term -- the investments, particularly in some of the larger accounts, as these things mature, we would see a return to our historical sort of operating margin around 12%. Really, there would be no significant variation in the lab or in the early phase business from that target margin. So, we'd see them -- we see the lab post profit next year and IDS breakeven or perhaps make a small profit. We'll see. Those margins will progressively move into double digits towards the end of the year, early 2013. I think it's realistic to expect both of those businesses. They're both kind of fixed-cost businesses. They differ from the clinical business in that they have a higher level of fixed costs, so it's about getting leverage and volume through their capacity. So really that sort of 12% margin target would hold for them in the medium term as well.

Very helpful. Thank you.

Sandy Draper, Raymond James.

One sort of clarification, Ciaran, or maybe some more commentary. In terms of the Pfizer business ramping a little slower and coming at the lower end of the guidance, how much of that is their delays in terms of ramping up business versus any mitigating factors on your site in terms of hiring? How do we think about the way that business rolls out? Is it more of a function of how fast you can hire and ramp on business or how fast they turn stuff over to you?

It's really a combination of how fast things get turned over to us. I would be reluctant to characterize on the call that it's sort of delays on anybody anybody's part. I think what we have to recognize is the scale. It's the scale of these projects that makes them so exciting for ICON and for our sector. It's the scale and complexity of these projects that provides the opportunity for us to grow considerably over the next number of years as the shift to outsourcing comes.

We're looking at just big transformation and change projects across our client base. This is one of them. You're looking at taking on over the first five waves of projects that we've discussed between the vendors. There will be a couple of hundred projects with thousands of patients and tens of thousands of patients on thousands of sites in many countries around the world, so there's just a level of complexity that comes to the planning of these deal. That can make forecasting initially a little bit tricky. But certainly, it hasn't been through our inability to hire our staff up. The disappointment in the profit number for us this quarter is as a result of our success in hiring up and having the people ready and in line to do the work and, as I say, getting them trained up. But because of the leadtime on the hiring and the training and the importance of all of our customers' projects to us, we will always err on the side of conservatism and make sure we have the staff in place to do the work.

Great. That's helpful. Then just one quick follow-up -- it sounds like so, on the stock buyback, it's not something, just a token buyback you're putting out there. It sounds like you guys have pretty much fully committed to executing the full amount next year or by the end of next year. Is that correct?

That is correct. We've had a look at our cash in the balance sheet. We've had a look at our deal pipeline and kind of investment requirement we have. We're a business that has successfully been able to generate cash at times in its history, so we feel we have a little bit of excess capital. I feel that the full earnings part of the business isn't fully reflected in the share price at the moment when I look at the size of our backlog, at the success of our business wins, the individual performance of our smaller business units all performing well. I think we're just in an investment stage in clinical and that will work its way through the system; it has done it in the past. We've been here before.

It was only 21 years ago ICON started with five people and zero revenue. In 21 years, we've evolved into one of the top CROs in the world, a $1 billion company. So there's nothing we're seeing now that we haven't seen in some form in the past. It would just be my view that the earnings part of the business isn't fully reflected at the moment in the share price and that it's a good investment for shareholders and shareholder return to do a significant buyback of $50 million. Our plan is, when we put the legal structures in place, to start it this quarter and albeit at the right price and opportunistically we'll seek to execute that as quickly as we practically can through now into 2012.

Tycho Peterson, JPM.

This is Ramesh in for Tycho. Thank you for taking the question. Cancellations were low for the quarter and also the central lab had a nice improvement in terms of sales. Are you seeing this as a sign of pharma having more certainty in terms of their allocation? Is there any readthrough to that? Are you (inaudible) are you expecting pharma to undergo another series of re-evaluations for projects in the next couple of quarters?

Our calculations are low this quarter, but I think we only have two point back to Quarter 1 when they were fairly significant. So, I don't see this as a sign of any particular change in trend or in the approach of pharma to the projects and their evaluation of them.

I think perhaps what you might tend to see is just the natural cycle of life where you put your budgets. Budgets are generally being done by companies from sometime in early Q3. They [like ourselves] and you're working a budget through the third quarter and finalize in the fourth quarter. Things come under review traditionally once a year and then as you move into the new year, you may decide to reprioritize investments. That's always something that can happen on a customer base as they go into their budget cycle for 2013. But certainly no sense that it's any different from how it has been in the past.

Just a quick follow-up on a previous question, in terms of operating margins for clinical research business that is not central lab, do you expect, by the end of the year, that will reach kind of the levels that you had seen in 2010 or kind of what are your expectations I guess for the clinical research business by end of year in 2012?

Yes, we're not giving detailed quarterly guidance in this call, but we will give more detail as we move through next year, starting with our guidance in Q4 earnings call in February. But what I would say is you can see the margin in the business at the moment. We have our guidance out there for the rest of 2011, so we're in sort of low single digits now. Revenue will ramp up progressively through the course of next year. So I think you can sort of -- you can look and see from where the base we are now to the $0.90 to $1.10, which is sort of an implied margin of 6.5% or 7%, but you should see a pattern where we start the year in low single digits and we climb towards double digits by the end of the year. Then as I say, as the relationships mature, we move back towards our historic 12% target beyond 2012.

Next question.

Todd Van Fleet, First Analysis.

Maybe just a different angle shot on that last question, Ciaran, how do you think about ICON's ability to plan for the future today? Let's even exclude the Pfizer relationship as more kind of a significant one-off here. But how do you feel about the Company's ability to plan 12 months out today relative to, say, a year ago?

I don't think it's substantially changed in terms of the minutiae and detailed tactical planning. I mean, we work on very complex experimental medical projects where we put experimental drugs into human beings across many countries in the world, so it always comes with a level of complexity and uncertainty and protocol development, had growth over here, the regulatory and ethical angle. So, there are many variables that cause our detailed tactical planning around projects to always be challenging. But you know we're professionals and that's why people hire us to do this and they pay us to do it. We deal with the inherent uncertainties in a way we can and bring our experience to bear. So that hasn't changed in the last 12 months.

What I think probably has changed is more at a macro level. You have a greater visibility perhaps just in general terms of where your revenue is going to be. We can see the backlog is at historic levels for us. It's almost $2.25 billion; that's 16% up on last year. Some of that is driven by the strategic account wins, but a lot of it is also our normal tactical account wins.

You look forward, I think the key thing here is our forward coverage ratio that we're forecasting is $132 of revenue to come out of that backlog in the next 12 months -- 79% of our 12-month forecast, which is -- I think it's three -- that's the highest level in three years. I think that reflects some of the improved visibility in revenue streams. But when it comes down to the day-to-day of hiring teams and getting them in place, I think that's the same as last year. A lot will depend on the therapeutic area of the study that you're doing. Oncology, a lot of oncology studies are just inherently more complex and harder to start up and recruit on than certain other therapies, so it will depend on the mix of your business. It will depend on the geographic area that you're going to do work in and whether patient populations are available, how quickly you can get local or regulatory and ethical approval.

So, I think the short answer to your question is more visibility at macro revenue level and it's the same challenge that we've always had in terms of planning at a project level.

Thanks for that. Then I just want to make sure. You gave a book to bill for the quarter, ex the Pfizer impact. Is that right? Was that 1.1?

It was.

Okay. Thanks guys.

Steve Unger, Lazard Capital Markets.

I have a couple of quick questions. Just in terms of you hired 500 people it looks like. Is the -- how much I guess left do you need to sort of add incremental infrastructure to sort of get to where you want to be to leverage the revenue growth?

I'll correct that. It's Lazard Capital, Steve. We won't have you doing under Lizard Capital as an (technical difficulty).

Yes, the 500 people we've added pretty much deals with what's starting up, what has started up in early October and will take us through the rest of this quarter. In the immediate term, we're looking to add another perhaps up to 200 people over the next couple of months to prepare for growth into Quarter 1 of next year.

You know, it's how long is the piece of string kind of question. We're talking about 15% to 20% revenue growth next year. If you go back to before this wave of hiring, as we're already sort of loading up for that, at the end of Q2, our staff numbers would've been at 7800 I think. So if you were to say on a very simplistic 15% to 20% revenue growth next year means you're looking at hiring somewhere in the region of in total 1000 to 1500 people, depending on exactly where it is and the nature of the work and how much leverage you get off your support costs and your nonbillable costs.

So, historically, our headcount has tended to be kind of linear with our revenue growth, always a little bit less because we get leverage off the 20% of our people who are in support and nonbillable function. So, that's the way I would think about it if I were looking forward. So we've hired 500 of that kind of -- that number. Again, it will come down to how quickly revenue ramps up next year. It's about more than one account. We have a number and I'd say we have at least our fair share of key strategic accounts. We've added a couple this quarter, which will start to ramp up at some point early next year. Again, that will put more demand on hiring, but I think, if you follow the revenue line and take 80% of that number, you kind of get the headcount growth.

Got you. But in terms of the leverage on the gross margin, are we at a point where we're going to start to see gross margins expand, I guess starting in maybe the first quarter of 2012, or do we sort of go further into 2012?

No. I think we see them start to expand in the first quarter of 2012. The exact amount of the expansion will depend on the timing of, A, the revenue, the flows. It's a function of two things. You know, you think about what we've been doing now. We've hired 500 people probably in the quarter, Quarter 3, and we haven't got a lot of revenue to show for that. You know, but 500 people positions you to do about let's say $20 million worth of revenue or thereabouts, if they're there, in a quarter [if their] revenue generating capacity and if they're all billable. Obviously some of those heads are nonbillable and things. So you're kind of -- what we're saying is that we expect to see the strategic accounts deliver significant amounts of revenue in that kind of range.

As we go to look forward to Q1 and Q2, the question is what's the balance not just in your revenue in the current quarter and soaking up resource, but how much do you need to add because of that three-month time lag for Quarter 2? So, we'll hire for this quarter. We'll utilize those resources as we go through Q4 and then into Q1. Then it's a question of, well, the next wave of work starts up in Q2, so another couple of hundred people will come on then. But I think, in the totality of our revenue forecast from our Q2 number, you're probably talking in that 1000 to 1500 in total. We'll see the gross margin ratchet up from Q1, but progressively through the year as the revenue starts to speed up and the hiring slow down.

Then the US GAAP losses that are impacting the tax rate, when do you think that that will go away, when you break even in the US?

Sorry. It's Brendan here Steve. I think, you know, we'll certainly see -- obviously this quarter we saw the expansion that Ciaran referred to in terms of the cost base. Consequently, we saw the tax number going down. But I think you know once you go through into next year, or coming, as Ciaran has been mentioning, as the margin progressively improves, my guesstimate would be you'll see the tax line improve at the same rate. I suppose you have to kind of consider there will be bumpiness, as Ciaran has alluded to, but we hope progressively that will come back into line, so the 18% to 20% that we guide throughout the course of next year.

Got you. Okay. Then maybe if I can ask one more question. The bookings outside of Pfizer, are you guys being more selective, given sort of the resource constraints that you're under internally as to what projects you're willing to work on, or are you continuing to operate outside of sort of the Pfizer world as usual?

It's business as usual is the short answer to your question Steve. I think it's a good question because it allows me to emphasize a point to everyone that's listening. We are very proud to be working with Pfizer on this deal and we see it as a very exciting prospect for the Company to grow considerably over the next number of years, both in terms of revenue and ultimately profitability as that ramps up.

But we're more than just a Pfizer shop. The structure that we work with on the Pfizer account has a dedicated -- small dedicated management team that manages and coordinates the relationship and then pools resources from the rest of the business. The rest of the business is servicing all of our customers, and we're equally focused on all of them. We're no more selective, no more or less selective than we were in the past when it comes down to winning business. So, we tend to have our BD aligned with customer requirements in various market segments, you know, biotech or in medical devices or clinical or whatever way you want to organize things, to make sure that we always maintain our level of focus on each sector of the market, on the key customers, and then on geographic terms as well. So, Pfizer hasn't changed their approach to that.

The approach we've taken is to get the right management in place and then make sure we get the right resources in place, just as we've done this quarter and will in Q4, just suck up the short-term investment pain to make sure that we're positioned for the future growth.

Great. Thank you. Congratulations again on the new position. Thanks.

Douglas Tsao, Barclays Capital.

Just a question -- obviously you gave the bookings number, ex-Pfizer. I just wondering if you could provide a little color in terms of the bookings, ex-strategic relationships, and how much did the early-phase award with Bristol-Myers Squibb affect this quarter's bookings, if it did it all?

Okay, no, I mean, ex-strategic relationships, I can't really give you that number because you start to get into almost theological discussions on how many bookings you can get on the head of a pin. I think the key way to look at it is we've given our client concentration, and I think it was about 38% of our revenue comes from our top five customers. Your top customers tend to be more strategic based, so you can kind of look at probably something around 40% or 50% of revenue and bookings coming from strategic type accounts. The Phase 1 BMS deal isn't actually reflected in a significant way yet in those bookings numbers.

Okay, great. Then in terms of the central lab, are there any strategic relationships that require you -- or involve significant amounts of work with the lab?

There are, yes. A number of our large strategic clients that we work with in clinical we've been very successful in cross-selling into the lab and then the lab has a number of significant strategic relationships of its own, but yes, there are a number in the lab.

Okay but in terms of the large clinical deals, you're cross-selling into those deals but those deals do not encompass the lab itself, or don't have a service component with the lab, do they?

I'm not sure I'm understanding what you get at. I'm not going to (Multiple Speakers)

Well, is it part of the contract?

He seems to have understood the question, Doug, so I'm going to pass it over to him.

Typically, what has happened is -- it goes back to an earlier question. The strategic relationship starts at a particular service line. Obviously, the big ones are in clinical. Then we seek to leverage the relationship, and we have been successful in a number of instances in doing that. So, there are none that we've done so far where we've said, oh, we're doing a strategic relationship with you and we'll we get you through our clinical and our lab and our Phase 1 and whatever. That's not the way it has worked. It has tended to be we leverage off of one relationship to get another.

Jack Gorman, Davy Stockbrokers.

I have two quick questions. I joined the call late, so apologies if you've covered these already Ciaran. Just in light over the last two or three months as you've got to know the Pfizer contract in more detail, can you just update us with your thoughts on whether there are possibilities or opportunities to acquire in facilities or employees from Pfizer?

Secondly, if you anticipate that there will be additional internal restructuring and indeed costs associated with that booked over the next quarter or two. Thank you.

I think we've talked at length about Pfizer, Jack, on previous calls as well. We're starting up for it. The relationship will continue to develop. Whether it develops ultimately where we look at acquisition of staff I don't know at this stage. It's certainly not in the plan and it's not in the forecast. I think too facilities isn't something that we acquire and strategic relationships (inaudible) professional services business and the model of professionals working out of offices, so it's not -- so we just hire people that work in offices. So, it's not a question of a facilities acquisitions model.

Look, we're constantly looking at the efficiency of our business and the operational delivery and what we have to do. So, we'll keep that under review and if, in the future, any potential course of action does or doesn't come, some sort of restructuring, (inaudible) we'll deal with that the way the accounting regulations require us to deal with it.

Alright Jack. Specifically on restructuring charges, I can't see any for the rest of this year.

Okay great. Thanks.

Tim Evans, Wells Fargo.

Thanks. Ciaran, you talked about getting to double-digit territory by the end of next year, beginning of 2013. How do we get from there to the extra 200 bps up to the 12% range? I'm wondering kind of the time frame it takes to do that. Does it require your revenue growth to actually slow and your headcount ramp to actually slow in order to reach that?

I think maybe I just need to clarify, Tim. We talked about, during the course of next year, our margin would increase progressively towards double digits. I said we'll be more granular perhaps in February on the specifics of quarterly guidance. So I won't answer the question in terms of we're at double digit by the end of next year, where does this further 200 bps come from that I spoke about in the 12% target.

So I think the message here is that we get leverage from the business as we onboard the revenue, and we get leverage from our SG&A. We constantly keep our operational delivery model under review to make sure it's efficient and look to deploy technology and the standard productivity improvements you get with technology and things like that. So, as we go on beyond 2012 -- and I think my comment on the double digits was in the medium term beyond 2012 -- we will see that we climb towards 12%. That will just be a function of the leverage of revenue growth. It doesn't particularly need revenue growth to slow as such. But what we'll just see is that our revenue, it's growing significantly at the moment. It's causing us to add a certain number of heads as we go beyond 2012. That's a long time out and I think the model is revenue continue to grow and hiring will be appropriate to us. We'll just manage that as we've done in the past. I think I can't really say much more than that. It's a bit hypothetical when you look that far into the future.

Yes, okay. If I could sneak a housekeeping one in -- could you just break out the foreign exchange impact and the acquisition impact on revenue this quarter?

Brendan here, Tim. So we were 7% up year-on-year. If you take out the foreign exchange impact, we were about 3% up year-on-year. If you take out the acquisitions, we're pretty much flat year-on-year.

James Kumpel, BB&T Capital Markets.

First of all, could you talk a little bit about your initial trials that are being transitioned from Pfizer? Are these the in-process trials that you had alluded to in a previous call? If they are, can you talk a little bit about the process involved in handing off from existing CROs and existing players to you and how long essentially the parallel processing has to happen?

These are the trials that we talked about when we discussed Pfizer. We said the work that will come will be a combination of new start projects and the transition of existing projects. But we do confidential work for our customers, James, so, beyond that, I would not be either willing or able to discuss the specifics of transitioning and hand-over at a tactical level. So --

Okay. On the early -- on the early phase business, obviously the Bristol-Myers agreement was a good one, a good start. Can you talk about what kind of requirements your clients that you're pitching are looking for and what you're doing to basically advantage yourselves in these RFP processes?

I think it just comes down to the totality of your service offering. We have significant strategic relationships with BMS across a number of our services. They were looking to rationalize a lot of their sales, one, and clin-pharm work. We've just a well-established process of bad capacity and a panel of assays and biomarkers that make the capability -- we have [attractive] depending what they're doing but I might ask Peter to talk a little bit about that because I know it's close to his heart.

I bear the responsibility for the long and hard slog that we've had with this business. A couple of years ago, we opened a translational medicine unit in Manchester, which is part of Manchester City Hospital. It's -- the unit is actually right beside the A&E unit of the hospital. So, we've built some very specific facilities that are designed to ensure that the highest high science type projects can be run in our units. We've also developed particular expertise in some therapeutic areas, built some pharmacodynamic models and developed pharmacodynamic models that are specific to sort of disease states.

So what we've tried to do is rather than be a commodity provider of Phase 1 services just on a feed and bleed, we've got a hotel and just fill the beds basis, we have a number of units that have a high level of scientific expertise. So those are the selling points that we have as we try to win strategic relationships with companies.

Very good. Thank you very much.

Dave Windley, Jefferies & Co.

Good morning gentlemen. Actually Andrew in for Dave this morning.

Can you -- you guys mentioned the 1.8 book to bill compared to the 1.1, ex-Pfizer. Can you tell me how many tranches of the Pfizer work are represented in that 1.8 number?

Yes, only two. As you know, we're traditionally conservative, Andrew, on our recognition of awards, and we like to have a high level or as high a level as you can reasonably expect out of certain (inaudible) value bookings. So, the delta between 1.1 and 1.8 is a mixture of new starts and work under the contract, and it's also got the first two waves of tranches of work, which are the waves that have commenced. We have ones that have already commenced in October and we have two commence in early January. Beyond that, we haven't taken anything in.

How many tranches are you expecting total?

Look, we hope it goes on forever, but we've got to work through the plans of the customers as they go forward into next year. (Multiple Speakers)

(Multiple Speakers)

We'd probably look at putting it in backlog, but we don't have enough certainty to put it in backlog. I don't have enough certainty to talk to you about it here.

I think the client is sensitive about this, so we'd prefer not to go into the detail on that.

Okay understandable. On a different topic then, what are the targets of the $4.8 million restructuring and how much can they contribute in cost savings to 2012?

Sorry, just repeat the first part of the question. What were the targets for the $4.8 million? I didn't -- the cost of restructuring was primarily in relation to, as I mentioned in my opening comments, in relation to an owner's lease that we're writing off on a couple of account reductions. Then you're asking what the target savings will add. It's built into earnings that we've talked about and Ciaran has disclosed for 2012, so I think we'll leave it at that for the moment.

And then one last one if I can. You mentioned two new strategic partnerships this quarter. Do you expect those to have similar lead times of 9 to 12 months until they ramp to work or will they be quicker?

No, they won't be any quicker than the normal pattern on strategic partnerships.

Peter Black, Wynnefield Capital.

The first question I had, it actually relates to the first question that was asked, talking about M&A. If you found a deal that was particularly attractive, you know, larger in size, say, than the Firecrest deal, what level of comfort would you have in adding some leverage onto your balance sheet, because it's not -- it's not clear from the press release in the net cash whether you have any borrowings in there. I just wanted to know what your comfort with leverage is.

We don't have any borrowings there in our balance sheet, although we do have committed facilities of $150 million available, should we need them. Traditionally, we've been a conservative company that has not had large amounts of leverage in the balance sheet. So, I think you know I'm hypothesizing here. It would really depend on the nature and attractiveness of the opportunity that was presented and if it managed to satisfy our various M&A acquisition criteria around return and ability to integrate and scale our geographic footprint, I think we'd certainly consider taking whatever the appropriate amount of leverage was.

Okay. Then I'm wondering if you could -- you've address this on a call before, but I'm wondering if you could just articulate a little more on what -- on the level of Mr. Gray's work with the Company going forward. Obviously, he's a driving force of the Company and his relationships and skills would add a lot going forward. So I'm just wondering if you could talk about how that will work out as we transition over.

I think I'll let Peter speak for himself on that one.

I'm very flattered with how you describe me, Peter. My level of involvement continues to be quite high. I'm working very closely with Ciaran. Obviously, there's a transition taking place from myself to him. For example, I sit on a number of steering committees in some of the strategic relationships and continuing to participate in those with Ciaran. For the foreseeable future, I will support Ciaran in whatever way he finds helpful.

There are a number of different things and different initiatives that we're working on that he's asked me to assist him with. I'm doing that and, as I say, just working with him on a day-to-day basis to ensure that the hand-over is as smooth and as seamless as possible.

Okay thanks. This was a great quarter, and looking forward to next year. Thanks for everything.

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

Okay, well, thanks, everyone, for dialing in today and listening to our call.

I think I'll just conclude to re-emphasize some of the things that I've already addressed in the call and say that we believe that the outlook for ICON and our industry is positive. ICON will continue to be a CRO of choice to assist our customers in their development efforts. We have discussed the considerable investment we've made in our business and we plan to continue to invest in our business to ensure that we are in a position to capitalize on this and the growth opportunities which we've articulated to exist in our sector.

So, that's all I have to say. Thank you again for dialing in. Good day.