ICON PLC (ICLR) 2013 Q2 法說會逐字稿

Thank you, Deirdre. Good day, ladies and gentlemen, thank you for joining us on this call covering the quarter ended June 13, 2013. Also on the call today we have our CEO, Mr. Ciaran Murray; our CFO, Mr. Brendan Brennan; and Dr. Steve Cutler, Group President of ICON Clinical Research Services.

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

Certain statements 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 no 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 Statements 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 information 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 over the call to our CFO, Mr. Brendan Brennan.

Thank you very much, Simon. Net revenue in quarter two 2013 was $334 million; this represents year-on-year growth of 21%. On a constant dollar organic basis year-on-year growth was 17%. Year to date our top client represented 23% of revenue compared to 18% for the full year 2012. Our top five clients represented 53% of revenue up from 48% for the full year 2012. Our top 10 clients represented 66% of revenue compared to 63% for the full year 2012, while our top 25 clients accounted for 80% of revenue compared to 76% for the full year 2012.

Our net headcount for the quarter was approximately 10,200 staff which was broadly flat quarter on quarter; the new staff members that we added during the quarter being offset by planned headcount reductions across certain areas of the business. These headcount reductions resulted in a restructuring charge of $4.6 million in the quarter.

In quarter two group gross margin was 35.9% which compared to 36.1% in quarter one of 2013 and 35% in the comparable quarter last year. We continue to make good progress in our Phase II to IV business; however, this is somewhat offset by weaker than planned performance in our early phase business and Ciaran will comment more on that when he gets to his remarks.

We continue to leverage SG&A which was 23.2% of revenue in quarter two 2013 compared to 23.9% in quarter one and 25.1% in quarter two, 2012. Operating income excluding restructuring charges for the quarter was $30.9 million, an operating margin of 9.3% compared to 8.7% in quarter one and 6% in the comparable quarter last year.

The net interest charge for the quarter was $100,000 and the effective tax rate was 14%. This tax rate added $0.02 to the quarterly earnings compared to a normalized 18% effective tax rate. Net income excluding restructuring charges in the quarter was $26.5 million equating to EPS of $0.43 compared to EPS of $0.36 in quarter one, 2013. Excluding the tax benefit that I just mentioned of $0.02, EPS would have been $0.41 in the quarter.

DSO's in the quarter were 33 days compared to 33 -- again compared to 33 days in quarter one, 2013 and 36 days in the comparable quarter last year.

At the end of June 2013 net cash was $184 million compared to $201 million at the end of March 2013. During the quarter we had a number of earn-out payments relating to prior acquisitions which amounted to $26 million and CapEx for the quarter was $7.8 million. With all of that said I would like to hand over to Ciaran now to talk more about performance in the quarter and the outlook for the rest of 2013.

Okay, thank you, Brendan, and good day, everyone. Our encouraging start to 2013 continues during quarter two. Gross bookings for the quarter increased to $496 million which equals the highest level that we have ever recorded. However, as cancellations in the quarter were $132 million our net book to bill was 1.1. Our backlog, however, remains healthy at $2.87 billion and this gives us 77% forward coverage of the next 12 months revenue expectations.

Overall we were happy with our progress against plan for the year. In the first half of the year revenues increased 23% on the same period last year and our operating margin was 9% compared to only 5.4% in the first half of last year. Some of you have been commenting on the gross margin in the quarter. So before discussing the outlook for the second half of the year I will make some specific comments on our performance in the quarter.

Gross margin was flatter, possibly down about 20 bps quarter on quarter, but that was really as a result of one specific factor. Looking across the business I would have to say I'm very happy our Phase II to Phase IV business had another strong quarter. We continue to develop new client relationships and have positive discussions with sponsors around the adoption of new outsourcing approaches. Our Phase II to Phase IV operating margin continues to improve and we expect this business to perform well during the rest of the year.

During the quarter we also integrated the management of our Central Laboratory business into our Phase II to Phase IV Clinical Services group under the leadership of Dr. Stephen Cutler. This change reflects that our customers are increasingly looking for more integrated clinical and lab service to better leverage laboratory data to support the filing and performance of clinical trials. And the Lab continues to perform to plan.

The integration of our DOCS staffing and FSP business with the ClinForce and Assent acquisitions that we made during Q1 continue to plan and we are happy with the progress that we have made this quarter.

The gross margin suffered because of performance in our early phase business. The early phase market continues to evolve and we are seeing an increasing trend for more targeted studies that go directly into patient populations rather than the traditional healthy volunteer studies. So this means we need to adjust our service offering to meet client needs in the future.

On our last call you may remember we talked about how we add closed our Omaha Phase I facility and consolidated all of our North American capacity into an expanded facility in San Antonio. And this quarter we have also reacted to market conditions and we have reduced activity in our Manchester Phase I CPU in preparation for the transition of that business into the new translational medical unit we're developing on the site of Manchester Royal Infirmary that we announced last year and which we expect to open early in 2014.

As a result of these changes and the transition to the new business model revenues for our early phase business were below plan in the quarter and we posted a loss, hence the impact on gross margin. We expect early phase revenue to continue to be weak for the remainder of 2013 while we complete this transition and we have reflected this in our forecast.

I would like to conclude with some comments on the outlook for the rest of 2013. In the first half of the year our performance was stronger than expected and this has been driven by strong revenue growth. As we move into the second half of 2013 some of our strategic accounts will move from ramp up into steady state. So while we expect revenue to continue to grow in the second half of the year, it will not grow quite as quickly as we have seen during the first half.

A result of this growth is that we expect to continue hiring in the second half of the year to have sufficient resources to service our backlog. So we expect margin to continue to expand in the second half of the year, but at a lower rate than we have seen in the first half of the year. Consequently we are raising our revenue guidance to the range of $1.3 billion to $1.32 billion and our EPS guidance to the range of $1.54 to $1.64 for the full year 2013.

Before we move on to questions I would like to thank all of the ICON team. This has been another encouraging quarter, so I'd like to thank everyone for their continuing commitment and dedication and for helping us achieve what we have achieved in the first half of 2013. So having said all of that, operator, we will take questions now, please.

(Operator Instructions). John Kreger, William Blair.

Can you just talk about where you stand, Ciaran, with some of the key renewals that have been a frequent topic on the last couple of calls?

Yes, I can. Since the last call one of those renewals has been renewed -- as you know, I am not going to call out names on these calls -- and the second one is at a very advanced stage. And we have largely concluded agreement and it is going through the process of signing. So we would hope to move that forward during the course of this quarter.

Excellent and then I guess my one quick follow-up. As these relationships have renewed are you seeing the structure change at all or just pretty much status quo?

We are seeing certain changes, but nothing revolutionary I think. Everybody learns through these relationships as you go forward. And what has worked and what hasn't worked; I think when you look at some of the assumptions that were made originally around the structure of the deal and the pricing of the deal and where the economic benefit comes, we have all learned from that.

So I think the nature of these partnerships is that there's been a lot of commitment from both parties and it is in everyone's interest that we continue to help our customers take out time and cost from the trials and improve the quality of the trials by closer arrangements and deployment of technology. And it is in their interest that they have healthy CRO partners who are able to invest in a relationship and be viable financially and have a good future and good resources.

So we've actually found the process so far to be encouraging and that the scope has been altered and modestly, but the assumptions have all been reviewed and we have all learned from experience. So if anything I think they're sounder deals for everyone than they would have been on the first time that everyone did this. So I think we are think the continuing maturing and learning from these deals that started in the first strand and I think we'll continue to see that for a number of years yet as everyone goes forward in these.

Great, thanks much.

Todd Van Fleet, First Analysis.

I just wanted to talk about Phase I, so maybe kind of your holistic thinking, Ciaran, on the outlook for that in the context of ICON how you guys view the business. I know your guidance includes I guess some improvements or not so much of a operating loss in that business. So maybe just a little bit more detail on how you guys are thinking about that business, not just this year but beyond. Thanks.

I suppose I will just repeat what I said for clarity. When I said the revenues were below what we expected in the quarter due to transition. And we expect the revenue to continue to be weak for the rest of this year. So I wouldn't characterize our forecast as having shown improvement there. But I am not concerned about that.

I mean the holistic thinking on Phase I is that it's a very important part of the whole development of the drug process and it's important to our clients. We are in that business and we intend to continue in that business and we are very committed to Phase I.

I think what we are seeing though as medicine develops and trials change we're just seeing the market change, we are seeing more targeted studies and more working patient populations rather than the traditional healthy volunteers. So we are committed to being in that space, but it is our job to make sure that we have a high-quality relevant service offering for our customers that best service those needs.

So as a result of that, during the course of this year we have been looking at what is the best service offering that we can have, what is the best way to position our clinics for quality and performance for us. And we have taken some actions in that and we are reviewing it to see what else we can take. We have a good offering there in San Antonio in North America with a Phase I clinic and I think it was last year we announced that we are moving to a translational medical unit in Manchester.

That plant goes ahead; it's going to happen next year. It is a sign of a -- sort of a closer move towards those patient populations that our customers are asking for. And what we have really seen in the interim period is at some point you have to start your transition from an old facility to a new one. So we started the transition now and it has meant reduced activity in one facility sooner than we would have anticipated when we did the original plan.

But it is just an important part of the change to our new model and to make sure that we have the service offering that is relevant to the market and puts us -- makes us well positioned for the future. So that is really where we are thinking. So the rest of the year is just pretty much a work in progress and a repositioning our business for 2014.

So, Ciaran, just to follow up on that then. It doesn't sound like you are contemplating any changes to your existing footprint just in terms of geographic footprint, but rather just maybe shoring up the assets there a little bit. And is there a belief that that market is going to come back more in your favor after you have made these transitions in 2014? I'm just trying to -- it doesn't sound like -- go ahead.

Yes -- no, I would hope so (inaudible) we're making those transitions. No, we are not changing our footprint; we are just changing the nature of our offering in terms of what we are providing to customers. And it is still our intention that the new clinic in Manchester will cover the European footprint. We do in that business constantly look at as business globalizes we constantly have the footprint under review.

I suppose as I look to the future increasingly we have to consider what footprint we will want to keep a relevant service offering in Asia. And we look at options there in the future, but for now the footprint remains unchanged in that we are in North America and Europe and albeit with a slightly improved and more relevant offering for the market. And when that gets up and running in 2014 we expect the market to be there for it. That is the feedback that we have got when we made this decision.

Thanks.

Tim Evans, Wells Fargo Securities.

Now that you have worked through some of these contract negotiations -- renegotiations, I should say -- how do you feel about your long-term margin guidance? Do you feel easier or harder to get to that 12% target?

No, I think the same, Tim. We have renewed these contracts and people have been asking about them for a long time. But they haven't come out any differently from what we would have expected six or 12 months ago. I mean, you always have to consider the possibility of unforeseen events. But based on the experience we had over the years of working through those contracts we expected them to go the way they did. So that would have been factored into our original thinking on our long-term guidance range. So I would say there is no change to that as a result of these renegotiations.

Okay, and I think I heard you mention some modest scope adjustments, is that pertaining to Central Lab or could you just elaborate on that a little bit maybe?

Oh, no, it's just a bunch of detailed things that are the elements of clinical trials where certain things get included that weren't in before like maybe safety or a different kind of technology service. So nothing like that. I mean, Steve, do you want to comment on that?

No, I think we are able to add some of the technology that we are developing that we talked about at the Investor Day last year. And we have been able to add back to some of the partnerships and show the value of that. And I think we are able to do that and to show that value and that has been to the benefit of both parties.

Okay and just to be clear, the net effect of the scope change is it's positive and not negative?

Well, I mean the net effect is that there is more in scope of the contracts, but I have explained this a number of times, I'm not sure -- we signed these contracts and these agreements and it is good and it establishes the framework that we work with customers. But of course as the future goes on the amount of work that gets placed under a contract depends on the activity and the customer and the robustness of their own pipeline.

So these are MSA agreements, they are not volume commitments or revenue commitments. So what we have are MSAs that provide an expanded range of services, which you could suggest that if more of the work is placed under the MSA then it is an increase in scope. But there are no guarantees of that. I want to be clear of that. It depends how much work comes in under the MSA depending on the activity and the client and the exact nature of what they choose to do.

Right, I understand. Thank you for the clarification.

Tycho Peterson, JPMorgan.

Can you maybe just talk a little bit about some of your strategic initiatives, in particular the IT investments, how those are tracking relative to your expectations? Is ICON starting to drive larger wins? And maybe can you also just touch on pricing in the market overall as well?

Yes, we think our technology investments have been successful in positioning what we can provide to our customers. I think this quarter we booked $496 million of business wins which is the joined highest quarter in of the history of ICON. I think over the last seven or eight quarters probably five of them have been a record for that time and continue level of business.

And it is some of our differentiators and services and investments. Amongst the other investments we have done in market access, consulting and late phase and fire crests and site management and the whole portfolio offering. But those technology investment specifically have been a significant part of that. I think the results have pointed to the fact that we are happy with the pay off and -- you had a second question then?

Just on pricing trends. I mean tying into that are you able to extract the better pricing with some of the better analytics? And then can you just talk about whether you are getting more pushback on pricing from some of your larger customers?

No, pricing is largely unchanged. If you look at the nature of what we do, pricing isn't the primary driver in our market of why people choose CROs. And if you look, the overall value that is delivered -- that should be delivered from these partnerships and partnerships at a more strategic level than the transactional business in the past is that together we improve the quality of clinical trials.

We deploy data which -- and technology tools which CROs have developed with the aim of taking a significant amount of time and therefore cost from the trial and getting it done quicker to a higher level of quality, getting data that can be used for improved signals on safety or performance during the course of the trial that can permit risk-based monitoring and significant changes to past practice that allow trials to proceed more quickly and at a lower cost.

So it is a complex formula, a complex cocktail. And when it comes to choosing partners for these trials, obviously we have to be competitive with competition in the market. But price isn't the main driver of choice in our opinion; it comes down to the relationship with a customer and trust and past working conditions and what you have to offer now. So I would say within the complexity of all that goes on that results in these decisions, that the pricing accretion isn't any different now from what it was 12 months ago.

Okay, thank you very much.

Dave Windley, Jefferies.

Thanks for taking the questions. I wanted to ask about generally client concentration and your comments, Ciaran, about seeing some of your strategic relationships ramp and soon level -- get to a more steady-state level. If you could just kind of talk more broadly about maybe how mature those signings are and, more specifically, about where they stand. And then when do you expect that client concentration will flatten and can it then turn back around and go back down?

I suppose comments on client concentration; I think we flagged it quite some time ago that over time we expect it initially to increase. I think we are all happier with the last concentration we have. I won't pretend to be happy with client concentration, but what it reflexes there are big deals around. And as you are good enough to win them and then digest them, it's going to spike your concentration.

So where it comes down is that as the market continues to expand and there are more significant strategic deals, the best way for us to reduce our client concentration in a preferred way is to win more of those deals, drive the revenue. There is a sort of a natural limit to the size of any particular account that will track the pipeline and the robustness of that pipeline. I mean it might go up and down and fluctuate over time and over the medium-term depending on the customer's activity.

And what we have seen is that it takes a couple of years to get up to full speed and running on these deals. So as you are on boarding work you are driving significant growth, I mean had 23% growth the first half of the year. As we move forward on some of those accounts, on the more recent ones, we have ramped up to levels of work.

So our forecasts show that revenue -- significant revenue still comes from those and it grows, but it is just logical that it can't grow to the extent that it has been where you are starting from close to zero and ramping up to a significant level of opportunity.

So as the question to when exactly concentration will fall, David, I just wish I knew. So we just have to make sure that we keep booking new work. And we have been successful in that. If you look at our business wins over the last year, they are pretty broadly based and we have added a number of new significant new clients to our roster. And certainly since probably Q4 of last year a number have come on.

So they will come up to speed over time and they are in that earlier stage of on boarding. But it will take a while; I don't expect to see a concentration fall significantly in the course of this year. And then depending on what we win and what we can achieve over the next number of quarters will give us a chance to have a look at what it might be next year.

Thanks for elaborating. So moving on then. On cancellations, could you comment a little bit on the nature of those? Were they a lot of small ones or was there a large one that caused the higher level in the quarter? And were those studies that were canceled or scope reduced -- were those ongoing revenue generating projects or were they more further out in the backlog such that they don't have immediate revenue impact?

Yes, I can. Firstly, I'm happy to say there's nothing systemic in there. That number is actually driven by one large study that accounts for nearly -- well, the vast majority of it. And it's one study that got canceled due to safety issues with the drugs that were actually identified in a different study. But it was the same drug, so it had knock on effect to us.

It was an ongoing study this one. It had started and it was -- we were working through it. So there will be a wind down period involved as we follow up on it and it does mean that revenue that would have been in our forecast for the second half of the year won't be in our forecast. However, our new guidance that we have issued today does reflect all of these factors.

So I think that the high level is that it was ongoing, we factored that into our numbers that it will wind down and that it was just one of those reasons that studies get canceled in drug development. And I think when I look back we had two $100 million plus cancellation quarters back in Q1 and Q2. At the time they were higher than we had seen in some time. It was then followed by three really low quarters.

And I think recently on -- either it was a conference or maybe it was on this last earnings call someone said, given that the cancellations have been low for three quarters does this mean we are living in a different world? Is this a paradigm shift in cancellations? And of course once you are asked that question it is like (technical difficulty). So at the time -- or when I answered this I just kind of said I really don't see any shift and the nature of cancellations.

Generally they happen, client change minds, projects get delayed, there are regulatory issues in designing them. Or sometimes they start and there are safety or efficacy issues later on that change the approach of the project. And all we are really seeing now is that we are much bigger company than we were in the past and we do a lot more big trials.

So unfortunately, I mean the good news with big trials is when you win them they go into bookings, those big trials credit but when they go for the normal reasons that they have always gone for it is big studies that are coming out of the backlog and that is all we have seen this quarter.

So when somebody asks you that question you need to not answer your phone after that.

Yes, (inaudible).

Right. If you could call out -- just one more thing. If you wouldn't mind calling out kind of round numbers, lab revenue and margin and the quarter, that would be helpful. Thank you.

Yes, we've integrated the lab into our -- more closely into our clinical business. So we don't have the same -- we have changed the way we (inaudible) sort of the rationale behind this is really twofold. We have seen strategic accounts develop and just generally as the big data agenda has developed in our business. More and more of our lab business is tied to other clinical projects and accounts.

So the dividing line between where -- wins and revenue fall is a bit more blurred than it was in the past. And then of course the other benefit of integrating it into the kind of main or core clinical business is the benefit of certain shared costs in certain synergies. So as we go forward we won't have the same kind of information on that than we had in the past. It wouldn't be as meaningful.

So for this quarter we are still roughly tracking some of them and the business wins were -- the gross wins were up pushing $20 million, which is a little bit lighter than we have seen in the past. But there is nothing there that we believe is indicative of other than a quarter where some things closed and some didn't. And the profitability sort of -- we used to measure the net profit, now we look at a contribution margin because of the niche of shared costs. But if we were measuring it under the old way it probably made about 5% in operating profit.

I'm looking at Brendan to (multiple speakers) mid single-digits. So there is no fundamental change there. What you are seeing again is our ongoing effort to make sure that we reflect the changing market and demands of customers as everybody moves forward to partner up and to make sure that the industry together is driving a service offering and a change that improves the efficiency of clinical trials. So there is no significant change there numbers wise. But we are seeing it integrated for market purposes and that integration process will continue.

Great, thank you. I appreciate it.

Eric Coldwell, Robert W. Baird.

I think everybody's questions are in the same mindset, so I will pick up some scraps here at the end. Headcount target at the end of the year?

I suppose it depends how quickly revenue comes through. I would say it will be somewhere around 10,500, 10,600.

Yes, (inaudible).

Well, we will try somewhere around 10,600 is the consensus of the people at this table.

Okay, fair enough. Tax rate, a little bit of a benefit this quarter, obviously still a nice beat at the operating level. But what happened with the tax rate and should we be looking for that to carry through for the rest of the year? Or will you have to play catch-up over the next two quarters to get us back to that 18% area?

High, Eric, Brendan here. Just to comment on the tax rate in the current quarter. I suppose -- we look at our business on a quarterly basis and obviously we are always striving to get that tax rate as low as possible. This quarter we were -- we took some benefits from some legislative changes in the UK from their new R&D structure that they are talking about. We'll see how that pans out over the rest of the year, 18% is still what we are guiding for the full year. But there may be some opportunities to take some nicer numbers in the back end of the year, but we will only know as we get closer to it. So say 18% is still what we are talking about for the full year.

Okay, and a couple of quick ones here. Certainly no surprise in what -- your comments regarding the early phase unit. I think you and everyone else have pretty much had the same issues. That is a relatively small piece of your business. And obviously given the recent growth in the other lines compared to shrinkage in early phase, it has to be even smaller than I used to think about. So I am just curious if you can put this in perspective for some terms of percent of total revenue in the most recent quarter, kind of in the ballpark.

Oh, gosh, you are right, it is really small, Eric. And I am now staring at Brendan who is fumbling with a calculator. So do not take silence as anything other than fumbling here.

Just specifically, I mean --.

Yes, early phase.

Early phase would be less than -- less than actually 4%, in that ballpark. So a very small part of the overall organization.

That is exactly what I was thinking. Last one --.

That's the whole early phase offering, Phase I clinics and bio analytical labs and services and all of that, the pure Phase I (multiple speakers) itself is smaller than that again.

Maybe even less than half that number again.

Yes, and last one, very squishy numbers here; just more of a qualitative commentary. When you look at these record gross wins what percent of them came from what you would deem to be your larger strategic clients versus say more traditional tactical kind of activity in the marketplace? Just trying to get a sense on momentum with newer accounts perhaps smaller accounts?

Yes, I mean, if you look at our sort of -- our traditional market segmentation and our performance over the last couple of years, about 70% to 80% of our business is usually in large and midsize pharma, the rest is biotech. And when we stratify that further our kind of smoothing out the average quarterly it is usually 60% to 70% that comes from large pharma and that goes up and down in any given quarter. And it depends.

Recall that we have about five strategic accounts, our top five accounts account for about 53% of our revenue. I think when you look at the wins this quarter it was pretty much in line with that -- kind of the top accounts were driving somewhere between 50% and 60% of the business and the rest then was coming from traditional transactional accounts and large pharma, mid-sized pharma and then we made some interesting progress with some biotechs and some of those numbers have been in there for the last couple of quarters too.

That is great. Congratulations on strong performance so far.

Declan Morrissey, Davy.

Just one question maybe on -- I think you might have touched on this already, Ciaran, but the competitive landscape and your -- I suppose your out turn in terms of how much of it is growing your market share versus how much is the market growing overall?

I think anybody that has been in this business a long time knows that the debt on market share and size is nebulous at best. I think when you look at it -- every CRO, when it comes to terms of market and market share, every CRO has to some extent got its own ecosystem. And the drivers of our volume will often not be the specifics of the market, but the robustness and activity of the pipelines and the customers with whom we deal.

So when we look at the market we can see that it is increasing because there is more outsourcing. But that outsourcing is concentrated in the hands of the top global CRO's as large partners are looking to choose people with a full range of services, full geographic footprint, resources to invest in leading edge technology and to deliver on significant projects and volumes. So that is what is driving our market are those general factor supported by our individual customer relationships. I don't know, Steve, if you have anything on the market that you want to say or --?

We see a positive outsourcing environment. I think we see mid to high single-digits as the market grows sort of level. And I think we feel in a good position to be able to either take market share and benefit from increased penetration. I think that is the way we see the market. So we see our growth similar to the top echelon of organizations and we feel good that we are taking market share from those smaller mid-tier organizations.

Okay, thank you very much, gentlemen.

Ross Muken, ISI Group.

So in terms of maybe the tuck-in M&A environment, it seems like there has been a lot of activity around outcomes-based firms, some of the IT oriented entities. You guys were sort of at the forefront of that. What is sort of the next area or what other areas do you feel like are a fairly good interest in terms of natural places, maybe just bigger picture, not specific companies, where you think folks will look next?

And maybe from a bigger picture perspective, how competitive are some of these processes getting? You have had a number of your competitors change hands either back to the public market or to other private equity players. How much does that sort of influence folk's activity from a BD and M&A perspective?

Ross, you have about six questions in there and you are going to -- if I don't answer any of them just remind me. I will take what I think you asked me first about the M&A activity and the kind of bolt-on sector. Because that is very different, the discussion around private equity buying some of our competitors, our larger CRO's. And the rationale behind our acquisitions has always been we want to have the right service offering for what we think the market and our customers need.

And so it involves our sort of strategic planning process, involves identifying the market requirements and then assessing our own organization. We identify the market through talking to our customers and looking at it. And we assess our own organizational gaps then to see where it fits and where it doesn't.

So a recent acquisition has been driven by fairly simple -- look, we have a gap in our service line, it was perhaps something that we traditionally weren't required to do as much by customers such as the outcomes and the IT. And if we can't grow it organically or don't have enough of it internally we make acquisitions. So we will always be looking for certain infill to build our services.

So some of it might be traditional areas and stuff that we do, but it's -- it beefs us up in a geographic area hence the rationale behind the BeijingWits acquisition some years ago. Other ones are about adding things that traditionally we didn't do that our customer now wants. We bought Oxford, PriceSpective, [Prevalier] when we got into the bio analytical space more significantly, Firecrest and then things like [Iconic] we have just developed organically ourselves.

So it is hard to say where it will go on in the future. I imagine we will continue to add bolt-ons and of course our most recent ClinForce and Assent acquisition was around building scale for that business to make it more globally balanced as it was weighted too much towards Europe. So looking forward it will depend to some extent where the market goes and we will still be interested in making sure that our service relevant range is relevant and perhaps scaling up on specific areas of that.

As for asset prices and the competitiveness of the process, we are very disciplined on what we are prepared to pay and in the bolt-on acquisition space that discipline has stood as well. And the market is no more or less competitive than it was. I think when you look at some of the larger transactions you referenced some private equity and that what it does to asset prices. But traditionally private equity are prepared to pay more than strategic purchases and that probably still endures. And we haven't changed our view on that. And that is all I remember you asking me. So was there anything else there, Ross, that I didn't answer?

I try to build all my follow-ups into a single question. So I think you did a great job. Thanks, guys.

It's my old memory, it's not as good as it used to be, you know.

Greg Bolan, Sterne, Agee.

I was little late getting on the call, so I apologize if you already addressed this. But did Cross Country Clinical come in a little bit below plan? Because if I recall it contributed about $7 million for less than one month in the first quarter and it looks like it is around what -- I guess $11 million for the second quarter?

Just to -- hi, Greg, it is Brendan here. I think that was more or less more close to two months and you are probably looking at FX movement there as well. So I think FX movement offset Cross Country. So, no, it didn't come in off plan at all. We kind of -- I think the market knew the numbers in terms of revenue for that business in the first -- as we came into and we acquired the business.

So we were happy with our progress during the quarter and actually thought it was a very good quarter from a first full quarter integration point of view. So anything else that you are seeing in the dip there is more FX than it is Cross Country.

Okay, got it. And then this is probably a non-starter at this point given the weakness in first in man study activity. But can you talk about your experience so far with partnering with the preclinical CRO and if this might be an area you might move into given kind of current valuations?

We haven't really done much and the preclinical space at all traditionally. We don't intend to.

Right, but just kind of a current I guess unofficial JV that you guys have out there with a preclinical CRO, is that helping at all on the early phase side of things just given the weakness in study -- first in man study activity?

I don't think -- firstly, I am not sure what you are asking me because maybe we have sort of an insignificant partnership arrangement that is in the portfolio, some of the consulting group services that that would work, more at a strategic consulting level -- some of our consultants will engage in certain preclinical discussions. But we don't work in it in a significant way.

And so, I suppose the short answer is, no, it's not contributed anything to what we are doing. And preclinical isn't really a significant business at all. But to be honest I'm not even sure what you are referring to. It is not something that is significant enough to percolate up through the structure onto my radar anyway. Apologies.

Understood, I will address it off-line. Thanks so much.

Robert Jones, Goldman Sachs.

Most of my questions have been answered. I guess, Ciaran, just one question more strategically I was curious if you could weigh in on. You have given an update on your current strategic relationships, I am wondering if you could maybe comment on the RFP environment for other more broadened or more strategic deals that you see out there? Thanks.

I suppose I can weigh in -- probably say the same thing that I have been saying now for a long time. So I don't know how helpful you will find it. But it is healthy, there are a number of ongoing discussions -- a number of organizations both traditionally and large pharma, and increasingly in midsized Pharma, look at ways to get leverage and stabilize cost base and to do what we are doing and what I have talked about as the rationale for driving these strategic partners.

But these discussions can take a long time, some of them there is a lot of work. There is a huge change management projects transformational for a customer. And indeed for ourselves at times. So there is a healthy level of discussions, quite a few of them ongoing. But I wouldn't want you to think that because we are engaged in a healthy level of discussions I can actually forecast when they might actually arrive.

I suppose it is fair to say the good news is they have been going on ongoing sometimes, so the longer they go on there must be some of them reaching the endpoint or towards the end point. And certainly it would be fair to say that we are talking to some people who are well down the track.

But it is very, very healthy is how to characterize it, albeit it is competitive and they're are big projects. So our customers have to work through their process and we will work through them with our potential customers as the case may be. We will work through them with that and then we will see where it all goes. And I'm looking at Steve again who might be closer to this than me.

No, I think you have said everything.

Okay. So I'm not sure that (inaudible) Bob, but it is the best I can do.

No, that is helpful. Thanks.

Sandy Draper, Raymond James.

As Bob said most of the questions have been answered. I will maybe through a couple to Brendan to give you a breather here, Ciaran. Brendan, can you specifically call out what the FX impact was in the quarter or was it not meaningful enough to specifically pull that out?

It wasn't meaningful. You know that is my stock answer but it wasn't actually a mean that dollar euro rate has been hanging around 130 for a long time so that is the main mover.

Okay, great. That is the first one. And then the second one and this may be being slightly too nitpicky, but if I look at your guidance and sort of take the midpoint of your revenue range and split it it would look like you would actually expect to see probably a decline in net revenue in the third quarter then maybe rebuilding up. That maybe due to -- I'm not sure -- maybe Central Lab, maybe to the cancellation. But I'm just trying to get a sense of is there any reason why you would actually expect total revenue to be down sequentially? Or I am just trying to -- maybe I am just parsing numbers to finely there.

Yes, I think that's I would view it generally more flatter in the midpoint then dipping down and then going back up and obviously Ciaran made reference to there's a bit of a dip down in the Phase I revenue, not significant though. So I would just say it is probably more of a flatter teen on the midpoint of the revenue guidance.

Yes, I think too, to share your thinking there, Sandy, firstly I would agree with you wholeheartedly, you are parsing numbers. And you know, you can parse away. I think what you have looked at is we have a complex business here. We have a lot of big customers now and a lot of big studies. And so in the old days when it wasn't as concentrated and studies were smaller you had a bigger population of things within the sample of what could go right or what could go faster or slower as you looked at guiding in the future.

Now some of the events are sort of binary, if something starts on time it can contribute significantly to revenue in the quarter. And if it doesn't or if there is something ongoing that is delayed it can move the numbers a lot.

So we look at the trends in the first half of the year and there are things that have made us happy. Revenue has grown very strongly, our trailing book to bill is good, the tone of business is good. And then we turned that into financial models and look at it towards the rest of the year. And we start to -- as I always say, we do a range for reason, we start to stress test it and we say well, what if. And as I mentioned, we had one large cancellation so that will take some revenue out of the back end of the year.

But it is too early to tell exactly how much it will take out just to work through a wind down process. The Phase I clinic business is in transition with the changes in North America and looking at our plans for the new future Manchester. So we are kind of assuming that revenue will still be weak there. So things like that we factor in and then we just generally sort of try and give a range to give a prudent view and cover the bottom end.

So I think what we are trying to give is a sense of where we think things should turn out. But we wouldn't parse it that clearly in terms of taking the specifics of what does it mean at the bottom and the midpoint and the top vis-a-vis revenue and margin, it's a more holistic view of where we think things will go.

Great. That is really helpful, guys. Appreciate it.

Douglas Tsao, Barclays.

The operating margin improvement has been impressive. When I look at it, it largely comes through leverage at the SG&A line. We've seen some consistency or certain stability at the gross margin level in the 36% range in recent periods, although which is still several -- a few hundred basis points below the peak margins, but gross margins that we saw a few years ago. I was just curious in terms of perspectives on the opportunity to get the gross margins back to where they were in the 2008-2009 time period?

Yes, I suppose I will take that initially and then Steve and Brendan can weigh in if they have views, which I'm sure they do.

I think the first thing to sort of say is that the improvement in the operating margin has been driven by SG&A control, but it is not accidental nor was it unforeseen. And if you go back to that 2008-2009 period, the way I kind of seek to understand it in my own head and the way would I would have characterized it in how we approached our business model and our plan is that it was after sort of 2009 that we started to see a shift in the market. And we started to see more talk of strategic partnerships with ranges of service and more volume.

And so when we approached the change in the market and we aligned our strategy to say we believe we should play in this market and we believe we should win at least if not more than our fair share. Our pricing model sort of reflected the fact that we knew it was significant volume if we controlled our costs and managed them properly -- which still took hard work, I'm not diminishing the fantastic contribution of our managers and finance team who have done that.

But we knew that was there, so we were able to model a situation in which our pricing model reflected we were trading a little bit of gross margin for the fact that we would get more volume and get more leverage. That therefore made us competitive and helped us to win significant amounts of business and has driven our growth over the last sort of couple of years as I say 23% in the first half of the year.

So I would kind of say that you nearly have to look at the two together to get a balance of what we were trying to achieve. So when I look back at the 2008-2009 gross margins, I mean at one point -- and I am not sure if it was then I mean we were doing 44%-45% gross margin. I think the changed nature of our business means that you can never say you will never see those numbers again, but I don't expect to see them in my lifetime or even in the distant future. But what we have seen over the last two years is I think our gross margin probably troughed at 32% or 33%.

At 33%.

In the back end of 2011, quarter three. And we have seen steady improvement in that. But we have seen more improvement in the clinical services part of the business and it is still being dragged back by, for instance, the changes we are making in the early phase business. And again, that is not accidental, this is a good time if you want to change your business model, if you want to invest we think it is an area we are very committed to, Phase I and early phase we think it is important part of our portfolio.

So now is a good time for us to suck up any pain while the business is growing robustly, while we are growing at the top line and we are growing our bottom line significantly this is the time to do these things rather than wait too late.

So I see further gross margin recovery and I just see it coming from slowly improving our operational efficiency, growing the business, getting more leverage. Also as you invest in new accounts there is a time lag; you are kind of loading the staff a little bit ahead of the curve. So every quarter that we book a book to bill that is higher than our revenue that's 1 point something means another quarter where we are going to be hiring staff and we are going to be doing better little bit ahead of our revenue growth.

And I think if I were to look back it would be safe to say the highest margins that we achieved were generally at times when our revenue growth was not a significant. So that is how I would think about it. Steve, have you anything you want to --?

No, I think that is right. We certainly see different parts of our business having greater or lesser opportunity in terms of the gross margin business. And I think the clinical business is one that does have continued opportunity to improve our margin. So we are very focused on doing that, but there is a lot of hard work involved and we think we can make progress but it will be over the longer term rather than the shorter term.

Just as a couple of follow-ups to that, and thank you for all the detail but just to clarify. So, Ciaran, should we interpret that that in the core clinical research business that the gross margins have largely recovered to close to where they were and that some of the -- the contraction versus where you were several years ago is in the early phase business or is it a reflection of just sort of the tradeoff between the volume and -- that you got through some of the new relationships and pricing? Just to get some clarity.

I suppose -- and there I thought it was crystal clear, Doug, and (multiple speakers) your question. So I will try again and this time with more clarity. It depends firstly where you think when you say margins where they were. I'm always nervous when nobody says exactly what the number is. But I think what I'm trying to say is that now and over the next few years I don't foresee gross margins at 45%, which I am assuming is what you mean is where they were in 2008 or thereabouts.

So what I am saying is that the clinical business has been recovering. Obviously we have been driven off the trough by recovery in the clinical business and those margins are higher than our group margin, therefore they are gradually moving back towards the level that we've seen in the past. But I don't necessarily expect them to get to mid 40s because of that tradeoff between -- we have new pricing models where our deals tend to be at a lower gross margin than they were in the past.

But we are seeing the benefit of that and the leverage of the cost base. So I still expect the operating margins -- I mean we have talked about our kind of short/short medium term 10% to 12% target. We set that target at a time when we made nothing in Q3 2011 and we've made pretty steady progress towards that with 9.3% in the last quarter. So the clinical business margins are recovering towards historic levels, but I don't think they will necessarily go to that peak. (Inaudible) any clearer?

Yes, no, no, absolutely. And do you think over the long term there are opportunities for you to optimize your staffing model to potentially recapture even additional ground even given sort of the change in the pricing model?

Yes, I mean, it depends. You can recover some ground in terms of we continually drive efficiency with the way we run the business and adopt say more centralized monitoring practice leveraging technology or more efficiency at the site with tools like Firecrest or better project management information with the [Iconic's] of this world. And we drive efficiency.

However, in the business that we are in we are very closely allied to a relatively small number of partners and potential partners. I mean our top 25 customers are 80% of our business. So what we tend to find, that the pattern of our business is that it is our job to be competitive and to help our customers take out cost and time and that is the value of the ongoing long-term strategic relationship.

So when we do find ways to increase margin or improve productivity performance, we tend often after some time to pass this benefit or some of this benefit on to our customers. And that becomes part of what makes us competitive, what makes us a valued partner, what makes us a valid long-term CRO that people have wanted to work with and continue to want to work with. So there is some potential there, Doug, but it is limited by the nature of our business.

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

That will conclude today's question-and-answer session. I would now like to turn back the call to Mr. Ciaran Murray for any concluding remarks.

Okay. Well, thank you, everyone, for listening today. I'll just conclude and summarize by saying we are very pleased with the progress we have made in the first half of 2013 and we expect to be working very hard during the remainder of the year to continue to position ICON as the global CRO partner of choice for the industry and delivering the best in class information and solution and performance. So thank you, everyone, and good afternoon from Dublin.