ICON PLC (ICLR) 2012 Q2 法說會逐字稿

Good afternoon, good morning, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended 30th of June 2012. Also on the call today we have our CEO, Mr. Ciaran Murray, and our CFO, Mr. Brendan Brennan. I would just like to note that this call is webcast, 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 condition, 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.

This presentation includes selected non-GAAP financial measures. For a presentation of the most directly comparable GAAP financial measures, please refer to the press release statement headed Consolidated Income Statement Unaudited US GAAP. While non-GAAP financial measures are not superior to or a substitute for the comparable GAAP measures, we believe certain non-GAAP is more useful to investors for historical comparison purposes.

We will be limiting the call today 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 would now like to hand the call over to our CFO, Mr. Brendan Brennan.

Thank you, Sam, and good day, ladies and gentlemen. In quarter two 2012 net revenue was $277 million compared with $233 million in the same period last year, which represents an increase of 19% year on year. Constant currency growth from the same quarter last year was 25% and on an organic constant currency basis year-on-year growth amounted to 19%.

Year-to-date our top client represented 14% of our revenue, up from 13% for the full year 2011. Our top five clients represented 45% of revenue, up from 37% last year. Our top 10 clients represented 62% of revenue compared to 52% last year, while our top 25 accounted for 77% of revenue compared to 69% last year.

We continue to expect client concentration levels to increase in the short to medium term, given the shifts towards deeper partnerships with our clients. Year-to-date 58.1% of our revenue was generated from outside the US, broadly in line with last year; 45.9% of our revenue was generated in the Europe, Middle East, Africa region; and 11.2% in Asia Pacific and Latin America.

During the quarter we hired 250 people and closed the quarter with over 8,900 staff. In the quarter our gross margin was 35% compared with 35.7% last quarter. Gross margin in the clinical business continued to expand quarter on quarter, but the group margin was impacted by lab and integration costs related to acquisitions. For the first half of 2012 gross margin was up 80 basis points to 35.3% compared to the second half of 2011.

SG&A amounted to $69.4 million in the quarter or 25.1% of revenue. This compares to $67.5 million in quarter one 2012 or 26.8% of revenue.

Depreciation and amortization was $10.8 million, in line with quarter one, which includes approximately $2 million related to acquisition-related amortization. We continue to expect this level of D&A through the course of 2012.

We took a charge of $5.6 million in relation to restructuring on other nonrecurring items in the quarter two 2012. $4.5 million of these charges primarily relates to resource rationalization in certain areas of the business and lease termination and exit costs. In addition, we took a charge of $1.1 million in relation to Mr. Peter Gray's retirement package in accordance provisions of his service agreement.

Operating income, excluding restructuring and other nonrecurring items in the quarter, was $16.6 million. Operating margin on the same basis was 6% compared with 4.7% in quarter one and 2.7% in quarter four 2011. The net interest charge was $231,000 in the quarter. On average, I would expect a similar level of overall interest charge in the third quarter.

The effective tax rate in Q2 2004 was 21.4%. We would expect our tax model to revert to the higher end of our targeted 18% to 20% rate in the second half of 2012. We continue to expect our longer-term average tax rate to be in the 18% to 20% range.

Net income, excluding restructuring on other nonrecurring items, in the quarter was $12.9 million equating to EPS of $0.21. At the end of March 2012 our DSO improved to 36 days compared to 37 days at the end of quarter one and 47 days at the end of December 2011. Whilst we continued to see quarterly volatility due to timing of payments, given the contractual terms of our key partner relationships, we continue to expect our DSO average over time to remain in the region of 50 days.

Operating cash flow generated in the quarter was $11.5 million, CapEx for the quarter was $9.3 million, and at the end of June 2012 net cash was $168 million.

I would like to hand over the call now to Ciaran to talk about the business environment and our strategic plans and outlook.

Thank you, Brendan and good morning or a good afternoon everyone. I am pleased to report our gross wins in Q2 were $477 million, which is a gross book to bill of 1.7x. Following on from the record quarter in Q1 we have now reported $962 million of gross bookings in the first half of the year as strategic business wins continue to be strong and our transactional business continued to perform to target.

Cancellations in the quarter were $103 million, which is 4.2% of opening backlog. Net book to bill for the quarter was 1.35 and backlog at the end of the quarter was $2.5 billion, which is up 22% on last year.

Looking at demand, the market remains healthy. We are seeing significant opportunities for both our strategic and transactional accounts, and the total level of business in our sales pipeline remains at the same level as this time in Q1. We continue to focus on the operational efficiency of our business and get the benefit of leveraging our cost base on increasing revenue. Consequently, we have seen further sequential improvement in our operating margin from 4.7% last quarter to 6% in quarter two.

And we continue to work on the central lab turnaround which is going to plan. In quarter two the lab reported very strong net new business wins of $36 million, which grew the backlog to over $200 million, and that is an increase of 31% since quarter four 2010 when we started the turnaround initiative.

In quarter two the lab reported over $21 million of revenue for the first time. And as a result of the high level of business wins and revenue growth, we had some increased costs in the quarter related to sales commissions, lab reagents for assay development, and logistics. This led to a reduction in operating margin to 2.4%, which was lower than we expected.

In Q1 we reported better than expected margins in the lab of 8%, which when taken together with the Q2 number gave us a margin of 5% for the first six months of the year, which was in line with our expectations. So I think it is fair to say we are continuing to make progress in our plan, but it won't always be as linear as we would like.

The early phase business broke even in quarter one and in quarter two it saw an increased pull-through from strategic accounts and posted a small profit. Outlook for quarter three is healthy, but it is the early phase development which can lend itself to lumpiness on a quarter-by-quarter basis.

In the late phase business this is our first full quarter after welcoming PriceSpective to ICON. We continue to integrate the business and are creating a distinct market offering in health economics and outcomes research, late phase trial services, pricing, and market access.

Our DOCS staffing business continues to be a solid performer, recording middle double-digit growth year on year for revenue and it continues its expansion into the Asia Pacific region.

Finally, we began integration of our technology offering which is going well. We continue to innovate in this division and we are excited about the prospect of progress with which [ICONic] is being met in the market towards which it drive smart monitoring of trials. As well, the imminent launch of our new version of Firecrest, which will now operate on mobile and handheld devices.

In closing, I am happy with the progress we have made over the first half of 2011. We have recorded strong bookings. We have grown revenue and operating income in each quarter. Our backlog continues to provide 76% of our next 12 month's revenue expectation and we expect our backlog burn rate to continue to be around the middle of our range, which is 11% to 11.5%.

I would like to take this opportunity to thank all of our staff worldwide in ICON who devote themselves to making ICON what it is today. We are now ready for questions, Sara.

(Operator Instructions) Ross Muken, ISI Group.

Good morning, guys. As you think about the pacing of new business and it is obviously -- you have had, even ex Pfizer, a pretty good trajectory the last several quarters. The tone seems to be quite good and the hit rate seems to be at least a bit better than where it was early last year.

Do you feel like you have got the business development organization where you want it to be? And given the environment, are you generally happy with your share outcome and what you are seeing also on the lab where it seems like you have probably been gaining a bit of share, a bit of momentum?

I don't think I could ever sit here, Ross, and say I am entirely happy with having business development where you want it to be, but I think it is fair to say we have had a strong performance in the last few quarters. We saw some of the benefits, I think, of our differentiation strategy around the acquisitions we have made over the last couple of years in bioanalytical and immunoassay labs, Oxford Outcomes, PriceSpective, the iconic platform, and of course, Firecrest, as well as our very solid, traditional performance from our core business in clinical.

So we are happy with the progress we have made this year. We are happy that it is fairly balanced across our strategic accounts and our transactional accounts, and we spoke to some of the wins we had last quarter.

Yes, I think we are certainly taking our fair share of what is in the market in the clinical business and particularly in the lab, which has had -- for some time now has been doing a good job in booking good levels of business. So far so good; I am happy with that but not complacent.

And just lastly, quickly, on the margin side. Obviously you saw a little bit of a headwind in the quarter on the lab business, but I think overall your commentary on sort of the progression is encouraging. If you think a sort of the lower end of your long-term target and sort of that low double digits, do you still feel like we are on the right guide path, even though it might not be linear? And do you feel like the new business momentum that you see at least gives you confidence in your ability to hit that trajectory?

Yes, I think so. I mean if I look back over the last three quarters, you use quarter three last year as the starting point where margin was pretty much zero, I have been happy with how it has progressed. I am happy that we have hit the milestones that we have set along the way.

I don't think anything has changed to change my view that in the longer term that this is still a 12% to 14% margin business, and we will keep it going. We are sticking to plan. The backlog is good; it is up 22% year on year, it is burning at a healthy rate. We are converting that into profit.

The business pipeline looks healthy, so we are sticking to the plan and we are still moving on that trajectory. But as you rightly say, it may not be. As we have seen with the lab this quarter, progress of this nature does have speed bumps and can be lumpy in the way in terms of it not being entirely linear.

But if we look at this quarter I think the significant point for me is that the clinical business reported 6.3% operating margin compared to 4.3% last quarter. Of course, the lab was higher last quarter and this has dragged it back. So in terms of the overall direction that we want to go and the overall plan that we have I am happy that we are hitting the milestones.

Great. Thanks, guys.

Robert Jones, Goldman Sachs.

Great. Thanks for the questions, guys. It is actually Stefan calling in for Bob. Just quickly on the bookings, you mentioned the s strong pipeline. I know last quarter there was some more transactional type business you won that you called out. Anything worth calling out this quarter?

No, I don't think so. I think this quarter we are happy just to say -- I think last quarter there were a couple of things that were significant just in terms of scale. This quarter we are very happy that it is very balanced, strong as I said, and strategic, and hitting the targets in transactional. So I think we are happy to leave it at that.

Great, great. And indeed strong pipeline. Is it fair to think of the book to bill going forward, maybe the next couple of quarters, in sort of the 1.3 range? And tying in to that is the cancellation rate -- it has been within your range but still maybe a bit high over the past couple of quarters. Anything specific in that number this quarter and how should we think of that going forward?

I think we have always said that our cancellation range is traditionally 3% to 5% of our opening backlog, so the fact that the number has been higher the last quarter is sort of the fact that the backlog is so much higher now and we have a lot of big trials. When they get pulled you get a higher number. So I wouldn't read anything into that.

I think last year they were probably a bit lower than we expected the cancellations, but you kind of have to look at the cancellation patterns over a more extended level of time. We go back and look at the start patterns over a number of years and I think we are in the range, and I would expect it to stay in that range, albeit that you might have one quarter where it is lower and one quarter that it is higher. I wouldn't read anything into that.

From the point of view of the book to bill, there is a good pipeline but it is a tough world out there and all business has to be won. We are good competitors so we won't go getting carried away making any extravagant forecasts. I think we have a good BD organization and a good product, a good company.

We will go into the quarter again and we will see where the number comes out. We still stick to our traditional number of forecasting around 1.2 for book to bill. If we get that, that is how we build our resource plan in our business. It has worked well in the past and served us well to model that way so we are going to continue to model that way.

Great. Thanks for the questions, guys.

Jack Gorman, Davy Research.

Thank you. Good afternoon, gentlemen. Well done on the numbers. Two quick questions if I may. Firstly, just on DSO, wondering if you can give us a sense whether there is any material difference between DSO trends for your strategic relationships and your transactional relationships.

Second question is kind of a longer-term question really. Wondering if you have any early comments to make on some of the proposed changes to EU trials legislation. I think the commission come out over the last week or two with some revisions or proposed revisions on those rules. Thank you.

Hi, Jack. It is Brendan here just in relation to the DSO question. I think we -- actually I indicated the opening section of the wording that with some of the larger strategic relationships we would see our DSO tending more towards the direction of 50 days. Obviously, we are very pleased with where it is at the moment, but overall, and given the mix of our overall client base, we would expect it to be more in that 50 day range.

So we will continue to do the good DSOs for as long as we can, but it is something that is part of these new type relationships.

Brendan, just as a quick on that, 50 days across group which would imply that strategic is greater than 50, is that fair?

Actually it depends on the individual negotiations, Jack. I don't think there is -- certainly when you go into strategic relationships you know you are negotiating hard and it would typically be in that range, but it doesn't necessarily mean it is specifically lower across into some of the things like a biotech company. So across the group the 50 days is a good measure.

Look, we (inaudible) our idea of the business Jack and we are used to dealing with regulations, so I have no specific comment to make on the EU trial stuff that came out a couple of weeks ago.

You don't anticipate that it may actually inspire some relocation -- not relocation perhaps, but making you more attractive for trials going forward?

I think having no specific comment on it probably means I have no comment on it.

Fair enough. Thank you.

John Kreger, William Blair.

Thanks very much. Ciaran, it seemed like your hiring -- the pace of hiring picked up a little bit in the second quarter. Can you just talk about what we should expect in the second half?

Yes, it did pick up. At the end of the day we sell to people, we are a services business, so when revenue goes up like that it is generated by the people. So as we look forward -- and we have hired over 1,000 people, I think, since this time last year net.

As we go forward there is a fairly consistent ratio between our revenue and our headcount, albeit that at times it can be lumpy and spiky and depending on whether you are -- how close to the revenue curve you get to hire or the nature of what you are doing. So I think we look towards the rest of the year we will continue to be hiring in line with revenue growth, so I think we just track the revenue growth.

If we have another quarter with revenue growth like that we will be hiring roughly the same amount of people and if revenues is a bit less it will be proportionate to that. So nothing different there than hasn't always been the case through the decade of us doing this business.

Great, thanks. I am guessing that your thoughts on guidance for the year really haven't changed, but any nuances there that you could update us on. I believe last quarter you talked about kind of a longer-term margin objective of about 12% maybe by the end of 2013. Is that still a level that you are comfortable with?

We are not updating our guidance. We are happy with the range, you know. Longer term, yes, we hold to that target. We set ourselves a challenge here back in Q3 last year to grow the business backlog and to drive profitability.

We have hit the milestones along the way, but there is a ways to go and we are not complacent about not. But certainly we have hit the milestones we have set so far and we are holding to the fact that we will get to the guidance range this year. And our target at this point in time is to drive towards that number by around the end of 2013, so nothing has changed over the last quarter that would disabuse us of that ambition.

Great, thank you. Then, lastly, Brendan, quick question for you. It looked like currency had about a 6 point negative impact on revenues. Can you just update us on what impact it had on margin and EPS, and would you expect that impact to get a bit larger in the third quarter?

If I could tell what the euro/dollar was going to do in the third quarter, John, I probably wouldn't be here. In overall terms on the margin perspective in the quarter, as you know, we have always tried to manage our cost base and the relative dollar/euro mix of our contracts so that we create a fairly viable hedge in our P&L account. Again, that has been consistent this quarter.

And so while we had, as you say, a fairly significant headwind on revenue we did have a good tailwind on our cost base. And while that pushes up the margins slightly, it does nothing much to the EPS so we wouldn't expect there to be a huge impact on the EPS line as a result of the FX movements in the quarter.

As for Q3, I don't know. It looks like the euro is going down to about the [1.20] level versus the dollar. Again that would create some headwind on a comparative basis.

Great, thank you.

A headwind more for revenue.

For revenue, yes.

We tend to be neutral on margin levels.

Great, thank you.

Sandy Draper, Raymond James.

Thanks very much and good afternoon, guys. A couple questions.

Brendan, can you maybe -- a little bit more on the charges? When you guys were looking at this was there any specific -- was it more just getting out of some things that were planned? I am trying to understand; was there any surprises that caused the charges?

Looking forward, are there any other potential things in the back half of this year that you could maybe see coming on the charge side on a one-time nature?

Sure, Sandy. On the specific charges that we had, as I said, there was one lease break there and the majority of the rest of it related to some of that resource rationalization. And that was really was just stepping back and taking a look at the organization and making sure that we were appropriately staffed in terms of spans of control and that the management structure was appropriate for the size of the organization in totality.

For the back end of the year there is nothing in the hopper as yet, but we were -- this was certainly a process, so it didn't come off as a surprise to us in the quarter.

I would add to that Sandy we have said operational efficiency is one of our goals, and that is sort of a medium-term goal. So I think it would be fair to say that while there are no significant charges that we know about, we will be constantly rebalancing our organization over time to make sure we have the right people in the right place as the market changes, as our range of services varies. So it is really -- I would just see it as an ongoing part of the maturing, of the organization and its drive for efficiency.

Okay, great. That makes sense. So obviously you're growing net heads as you hire and grow, but there may be either, as you said, shifts in geography or maybe overhead in certain areas that may not be necessary. So the overall goal is still to grow head it just may be re-jiggering that is going to cause the charges?

Yes, that is correct.

Yes, exactly.

Okay, great. Second question and I will jump off. As you mentioned, Ciaran, the lab business performed in line on the first-half basis better the first quarter, little bit lower the second.

If I look at -- you are running about $1 million of profit on a quarterly basis if you average it out. What do you think it takes to make the next step up? Is it really more pulling through the revenue, or is there anything on the cost side?

But at what point do you think you can make the step where again not necessarily every quarter, but you start averaging out quarterlies that are more than maybe $1 million of profit? Thanks.

I think when you look at the lab and go back to when we started this initiative, I think it lost about -- reported $7-odd-million of losses in Q3 2010. Probably about $4.5 million or $4 million of those were run rate. Since then it has been a question of improving efficiency while trying to drive revenues through the cost base, and the lab team has done a very good job on both of those fronts.

As we look at it now, I think you kind of get to the point where lab costs they sort of go in steps. So there has been a lot of work done in taking out costs, improving efficiency, things like outsourcing, kit building, and using certain services in some of the offshore labs.

So we have got a good handle on the cost base I think it would be fair to say, but there has been a fairly spectacular level of business wins in some of those quarters. The backlog was $150-odd-million when they started this, so in a period of structuring the lab fairly significantly and restructuring the cost base the guys have also grown the backlog by 31% to over $200 million.

So I think when you look at where it is going forward that is a fairly significant level of revenue growth. Historically we know that at times when you are on-boarding that revenue, if it is around assays that are perhaps not on your panel, there will be new work there with new customers. That level of business wins has been driven been successful and expanding the customer base and dealing with some new people. That can tend to increase setup costs, so there is kind of a step level.

So I think for the balance of this year we are probably look at continuing to drive the revenue and concentrate on growing the backlog, which probably means that the margin, that that 5% where we were at year-to-date, will become the target the balance of the year. I think it is when we go beyond that and you get revenue that is up into the mid-20s that you will start to see another kick on in leverage.

But at the minute I think it is fair to say that the turnaround is still in progress, so we don't have the same level of predictability that we might have in a steady state.

Great, that is really helpful. Thanks, Ciaran.

Greg Bolan, Sterne Agee.

Thanks, guys. Is the early phase unit profitable at this point?

We have three early stage units which we use to balance capacity in phase one. Early phase business, Greg, is made up of bioanalytical and immunoassay labs division, the phase one clinics, and then various scientific services and consulting services that wrap around the early phase.

The three clinics themselves provide capacity and taken together they are profitable, albeit that within different quarters you might be switching around capacity between one or the other so they might not all necessarily be profitable at the same time.

Got it. And is it the case where the bioanalytical lab is driving profit higher or lower at this point?

They are performing well, it would be fair to say. They are dragging the profit higher.

Okay, that is great. Then just to go back to Sandy's question on central lab margins, you had referenced obviously after you kind of get through this restructuring and building the infrastructure to size as it relates to the revenue, the bookings that are coming in on the central lab side.

I think you used to talk about, Ciaran, at a certain threshold I think the sales number was something in the magnitude of maybe $80 million annualized that there would be -- $80 million, excuse me. So something to that degree, $80 million annualized, you would be probably closer to a 10% to 15% operating margin for the central lab. Is that still kind of in line with what you had referred to earlier as it relates to getting past this restructuring, moving on to next year, assuming of course orders continue to grow at a healthy pace?

Yes, it broadly is, Greg. I think what may have changed since we talked about that in the past we have a bigger lab footprint now because of more demand in developing markets. In the past we would have thought about having our $80 million of revenue broadly going through sort of the New York and Dublin part of the footprint. Now we have labs in Bangalore and Singapore and near Beijing in China. It has added cost to our cost base.

And then, of course, we have a big panel of tests now and you have the commoditized safety tests which can be low value, $5 or whatever, and you have high-end differentiated esoteric testing for $1,000 to [$1,500]. So the mix, too, can significantly drive that.

But I think it would be fair to say, as we move through this and as we get to the end of this year and as the business stabilized and where we want it to be, I think we are kind of thinking 10% of that $80 million to $90 million range. Then as you kick on from that that is where you would pick up margin in the longer term.

Okay, great. Thanks, Ciaran.

Todd Van Fleet, First Analysis.

Just wanted to make sure my numbers are right here. So clinical research expanded, the margin expanded in that segment about 200 basis points sequentially. Is that right?

That is right.

That is correct, yes.

Okay. And then if -- on the central lab side you said it underperformed, I think you said 2.4% in the quarter was the performance. Was the amount of underperformance, I guess -- I am just kind of thinking relative to my model here and where I had you -- it looks like it probably cost you, is it fair to say it cost you $0.01 in EPS?

Probably a bit more than a $0.01. What do you think, close to $0.02?

Very close to $0.02. Yes, close to $0.02.

Close to $0.02. Okay, then, Ciaran, it sounds like the back half of this year you are kind of guiding to maybe -- not really guiding, but suggesting perhaps that we might be in the 5% range for that segment margin over the course of the back half of the year as we recover from the period.

I am certainly suggesting, Todd, I am certainly saying that is what we are going to be trying to do, but we have seen the lumpiness in the lab. I always take a deep breath and cross everything here that you can see when I am talking about that. But that is certainly where our thinking is at the minute when we are looking at the forecast and the scheduling, where we would strive for it to come out.

Okay. Would the expectation be or is the expectation at the moment then that sequentially each quarter we will see revenue improvement over the course of the rest of this year? So we are at $21 million-plus in the June quarter; will we bounce around that do you think or should we see sequential step ups here?

I expect, broadly speaking, to -- I mean you expect generally it would be taking up but there is always the possibility it can fluctuate up and down a bit towards the back end of the year. As Ciaran said, we will try our best to make sure that we are producing that 5% margin either way.

Okay. I think that is all I have. Thanks, guys.

Douglas Tsao, Barclays.

Just in terms of the revenue acceleration was it largely related to transactional deals or was this strategic deals [incurred]?

The revenue is coming off about 800 projects, Doug. I don't think I would characterize it as being one over another. We have a lot of projects there, a lot of complicated projects.

We just hit a good quarter where stuff started up and kicked in. Some of it picked up quickly and some of it was strategic; accounts transitioning over. Some of it was the transactional wins that we talked about in Q1 that started up, so I wouldn't overanalyze that and look at it too much. Certainly we haven't. It is just a broad level of activity across the portfolio.

Okay, great. Then in terms of what you saw in the central lab, if you could give some directional color in terms of what you see as costs that will perhaps persist a little bit, just given the robustness of business and especially given your specialty and strengths in esoteric testing versus costs that truly were one-time in nature. Just so we can sort of think about that when we go forward for the modeling.

Yes, we had higher costs this quarter but I don't think we characterize them particularly as one-time in nature. I think the higher costs that we saw was really a question of lumpiness. What drove the higher costs this quarter was the BD people outperforming their target quite significantly so that elevated commissions.

What is driving the costs due in the short term, as you add new customers and new testing panels there is more set up costs? That can happen in one quarter, but it might not necessarily happen in the next quarter.

So some of the costs are to do with the timing of where you recognize costs. Quarter one was a more stable quarter for the lab. They generated the revenue; there wasn't as much timing issues on new costs so they had a higher margin.

So I think as we look forward we are at 5% for the first half of the year. When we looked at a lab at budget time and the start of the year that pretty much would have been where our thinking was. It then turned out that Q1 is particularly strong for margin, which caught us by surprise.

So when I look forward, look, it will depend on how much business we win, how much of it is new, how much of it is on panels that we are adding. We constantly develop our panels in the lab and constantly add new tests to it, so I would think directionally we will continue to see the revenue at about that level. Maybe as Brent said, tick up a little bit or maybe just bounce around depending on how the pull-through happens. We know the lab can be volatile.

And we will target that 5% because some quarters we might set up a bunch of new panels and other quarters we won't, so it should all wash out towards that in the medium term.

Okay, great. Thank you very much.

Steve Unger, Lazard Capital Markets.

Good morning. A quick question just on sort of what is going on out there as far as the formation of new strategic relationships. It seems like as an industry we have sort of gone quiet in that regard, perhaps even over the last six to nine months.

Just wondering is the -- are we in a pause period here as far as the formation of new partnerships? Do you see any potential for something in the back half of the year?

It is hard to say, Steve, I suppose is the honest answer. We have our fair share of these relationships that we have signed up over the past. They take some time and you are never quite sure at what point they will accelerate.

I think at the minute we, probably in common with everyone in the industry, are involved in a number of discussions with a number of companies that are looking at this. I think, too, there is possibly the second wave of these deals we are all trying to work on learning from the first wave of the CROs and the pharma and biotech customers.

And so, yes, there are ones that potentially if you won them with a fair win would close this year, but it is sort of beyond our control. These are huge change projects for a customer, huge transformation. It is just a minefield of issues when you get to the tactical level.

The strategic decision is often made very early in the process. Then it is down to partner negotiation and choice. And then it is ultimately down to very detailed tactical change management plans with all the legal and employee issues and things that go with that.

So it is always hard to know just how quickly they will roll, but there is certainly enough under discussion now that have us heartened. You couldn't preclude that some of them will close this year, but you couldn't guarantee it either.

Got it, okay. So then the last question I have just as far as you guys set out some revenue guidance before the year really started. The dollar has gotten stronger, obviously, and the currency impact is obviously greater than what you had expected. Would you characterize the core business then right now, excluding acquisitions, really running a lot faster than where you thought you would be at this time?

As far as organic growth in the back half of the year, are you looking at 20%-plus to be sustainable now going forward?

We are happy with how the core business is running at the minute and we are happy with the way we are on-boarding some of the bigger strategic deals. I think when we did the revenue guidance -- and there is a lot of moving parts in here. I think you sometimes ascribe more gifts to us when it comes to forecasting these things than we may actually have.

So we did our best shot at the revenue guidance back -- I think we first talked about it on the October call, which was actually quite early, and perhaps there was an element to a couple of new changes in the management team or changes in roles for some existing members, so there was the caution around the revenue. So we have been able to absorb the foreign exchange impact and still post those numbers, but that is probably good fortune as much as anything else.

When we look forward to the rest of the year -- that was a strong quarter and we got a lot of stuff up and running this quarter right across the portfolio that came onboard a little bit earlier than perhaps we might have expected. So I would be reluctant to say we are going to be bumping it up 20% in every quarter from here on in.

There a lot of big studies in our portfolio now and the difference between just one or two slipping out a couple of months, or starting and not starting, can change the number quite significantly.

And then maybe could you perhaps, since you have made a couple acquisitions here, give us some sort of range as to what you think the acquisitions are going to impact the business in the back half of the year?

I think it is baked in. I have seen some commentary on that.

All of the acquisitions we have made were well in progress last October and certainly by the year-end. So anything that we saw we would have had baked into our original forecast. I think if you look at the [key] ones perspective is on this year, but it is a couple of pennies or I think we said that $0.03 or $0.04 was it --

For a full year.

-- at the full year? And it hasn't been in the full year. And the other acquisitions we have made -- if you look at them, it is not so much about what they are adding to the bottom line on their own.

What we have been doing, we have been making very targeted acquisitions of smaller, high value-added companies with enhanced capabilities and intellectual capital, which help differentiating our total service portfolio. Then are leading to us being more competitive in the traditional arena where we deploy things iconic and Firecrest, or where we add value right across the spectrum of development services by having offerings such as pricing and market access and health economics.

So there is a couple of cents in for them. They are small companies, but they would have been very much at the forefront of my thinking when we gave the original guidance back at the end of October.

As far as the top line is concerned, I mean $14 million I guess is what I'm coming up with in the second quarter. That would be the sort of expectation for the next couple of quarters, or even a little bit higher?

That is (inaudible), yes.

Okay. All right, thanks, guys. Great.

Tycho Peterson, JPMorgan.

This is Ramesh Donthamsetty in for Tycho. Thank you for taking the question.

Just first on those acquisitions within market access reimbursement -- PriceSpective, Firecrest, Oxford -- can you talk a little bit about how big your business in sort of that area is today and also how I guess penetrated within your accounts it is today? Particularly since you have made these acquisitions relatively recently.

We don't really talk about the specific numbers, Ramesh. I think we gave some indicative numbers at the time we did each of them. They tend to be businesses that are in that $10 million to $20 million range depending on what it is. And some of them are better penetrated than others; that is part of the integration process.

We brought Oxford and Firecrest on board last year. This is the first quarter of PriceSpective. We go through a process of integrating the business in a number of ways, on of them being at the BD end. So we are working through a plan but it is work in progress.

Then I think you have gotten a number of questions, obviously, on Central Lab. Just trying to parse through, obviously, the margins that you had in the first quarter. Obviously, it took a decline in the second quarter.

Is that all attributed to sales commissions and logistics with bringing on business, or is there anything else? And then is the expectation to get to that 5% just inherent in better management structure of the business or is it related to sort of lower-than-expected sales commissions in the second half?

No, the additional costs that I think we said, sales commissions and logistics, on costs of adding new -- lab costs for adding new assays and developing assays. So that is what the additional costs are as we look forward to the second half of the year.

If we keep beating the hell out of the plan in terms of business wins traditionally you have elevated costs on that. So suppose our target of 5% is assuming normalized levels of new business and normalized levels of activity, to the extent that activity is below that the margin might be higher than we expect. We saw a bit of that in Q1. To the extent that it is above that it might be a bit lower than we expect, but it will come down to the specific activity in the quarter.

Then just in terms of direct costs, I think in terms of your clinical research business it looks like it is tracing relatively flat to the revenue growth. Do you think we might see some more leverage, I guess, as you dig in further with your strategic accounts, not only in the second half, but I guess into maybe first half of 2013? Do you think you will see some more leverage on direct costs within that gross margin line? Thanks.

This recovery in our overall operating margin from Q3 to now last year is basically about getting leverage from the clinical business as it is by far the biggest part of our business. So as we look forward, and we think in line with our guidance and our ambition to increase the margin, it is going to be driven by getting leverage in two areas -- leverage off the direct cost line and efficiency from resourcing. Albeit that that can be lumpy by the nature of we are still adding staff and when do they start and that, and then getting leverage off our more fixed cost base at the SG&A line.

But we are still seeking to continue to expand margin and leverage in both of those lines is how we go about it.

Okay. Thanks, guys.

Nick Juhle, Robert W. Baird.

Most of my strategic ones have been covered, just a quick clarification for Brendan. You said that the -- I understand about 6 points of headwind from FX at the top line, and then, based on what you told us, about 6 points a benefit from M&A. Is that about right?

That is correct, Nick, yes.

Then, I am sorry if I missed this, but did you give the FX impact to backlog in the quarter?

I didn't, no, but there was an impact of about $20 million.

Then just one big picture one I guess. As you look out over the next 12 to 18 months or so, do you foresee any incremental investments that need to take place, whether it is in systems or IT or incremental headcount above and beyond what you would add just for typical revenue growth and that type of thing? Anything on the horizon we should be thinking about?

No, there is nothing on the horizon, which I would be thinking about. I mean I will just say we will add heads in line with revenue. We have been investing in our IT platforms pretty consistently for many years now, so we have continued that level of investment. I don't see anything on the horizon that is incremental.

Of course, we are constantly scanning for opportunities and keeping in touch with what people want. So something may arise in the future that will prompt us to make an investment decision, but there is certainly nothing significant of that nature that we are aware of now.

Great, thanks very much.

David Windley, Jefferies.

Thanks for taking the question. So the first one is on your cancellations in the quarter was there a bias toward one or the other of Clinical or Central Lab, or were they pretty evenly spread proportionate to the revenue base?

They were pretty evenly spread. I mean the lab cancellations were about $8 million or $9 million. The gross lab wins were something like $43 million or $44 million, so that was about $8 million. The balance was in the clinical business.

So I haven't done the sums, Dave, on the proportions there. It probably looks like more on the clinical side where you would expect it.

Okay. On the Pfizer relationship, I know you guys don't want to get into great detail about individual clients. On that one large one are you still progressing through the five waves on schedule, and are you on number four at this point with number five still expected to come before the end of the summer? Just wondering how that is tracking relative to schedule.

It is tracking on schedule at this stage. We have started -- we have four and we have five is due to start later in the summer.

Okay. The other trend obviously embedded in these strategic deals is your ability to cross-sell some of your other capabilities beyond the Phase 2/3 after you get in. We have seen that happen in a couple of cases.

Have you had enough experience with those tack-ons, those add-on services to see how that ramps the revenue within the relationship? And, moreover, how it impacts the profitability of the overall relationship?

I think it is probably fair to say we haven't had enough experience yet to answer those two questions precisely for you. What I would say is that we have -- if you look at some of the add-on services what is it we want to push through? Well, we want to push through early phase services and get people to use the phase one clinics.

I think we have had two quarters in a row now where all of our businesses have made money, which is the first time in a long time we have seen that. So I think some of that is we are seeing the benefit of some of the deals that we have done, certainly in the lab; some of our big clinical customers are using the lab in phase one. We have sold services there through our portfolio.

Then we don't have enough information then on the newer pieces that we're pushing through, for instance, our health economics and outcomes research and our pricing and market access and our technology businesses. It is quite early in the process. But the initial reaction has been very positive, particularly in some of the technology offerings where we are in discussions with a few customers about deploying them. And in some other customers we have already deployed them quite heavily, but it is early days to see the full impact in those terms.

I would say it is helping us and we are encouraged by it, but I will refrain from opining on the financial impact of those specific items for another while other than to say it is not -- the fact that all the businesses are making money is not unrelated to that strategy.

Thank you for that, Ciaran. So you have also talked about -- I think that over time the business you have moved to some more regional service centers and consolidated or aggregated some of the support functions in the organization that is leading to an expectation of kind of a broad corporate number, being flat in 2012 versus 2011. Wondering how you are viewing that, the ability to leverage that fixed cost structure as we move into 2013?

I will say that it is working so far in 2012 compared to 2011. We have more detailed plans to do before I can talk about 2013, but certainly the principal holds that we have put together models which will certainly stay flat next year or will grow at a much lower number than revenue.

I mean some of it is going to be linked to specific activity. Even though a lot of the costs are broadly fixed, there are elements that link to activity or there will be decisions we make as we finance our plans for next year around geographies and locations and range of services. But the model is holding up well so far this year and there is no reason to think that it won't when we get down to be planning for next year.

But whether it is flat in 2013 compared to 2012 or it just grows significantly less than revenue we will see as we work through our budget planning process.

Okay. Thank you for taking my questions.

Thank you, David.

Thank you, David.

As there are no further questions in the queue that will conclude today's question-and-answer session. I would like to turn the call back to Mr. Ciaran Murray for any additional or closing remarks.

Thanks, everyone, for your time. I will close by saying we continue to see opportunity in our market and we look forward to working through the rest of 2012 and continuing to progress towards our aim of being the global CRO partner of choice for the industry by delivering the best-in-class information, solutions, and performance in clinical and outcomes research.

So good day, everyone, and thank you.