ICON PLC (ICLR) 2016 Q1 法說會逐字稿

Good day, and welcome to the ICON Q1 2016 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Simon Holmes. Please go ahead, sir.

Thank you, Sylvia. Good day, ladies and gentlemen, and thank you for joining us on this call for the quarter ended March 31, 2016. Also on the call today we have our CEO, Mr. Ciaran Murray; our CFO, Mr. Brendan Brennan; and our COO, Dr. Steve Cutler.

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. The statements in today's call will be forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the Company's business, and listeners are cautioned that forward-looking statements are not guarantees of future performance. Our Company's filings with the Securities and Exchange Commission discuss the risks and uncertainties associated with the Company's business.

This presentation includes selected non-GAAP financial measures. For a presentation of the most directly comparable non-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, the GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes. We will be limiting the call to one hour and, therefore, ask participants to keep their questions to one each, with an opportunity to ask one related follow-up question.

I'd now like to hand over the call to our Chief Financial Officer, Mr. Brendan Brennan.

Thank you, Simon. Net revenue in quarter one 2016 was $401 million. This represents year-on-year growth of 3.2%, or 4.9% on a constant-currency basis. On a constant-dollar organic basis, year-on-year revenue growth was 1.2%.

For the quarter, our top client represented 29% of revenue, compared to 31% for the full-year 2015. Our top-5 clients represented 45%, compared to 49% last year; our top 10 represented 58%, compared to 63% last year; while our top-25 clients represented 75%, compared to 78% last year.

To support new customer projects, we added around 300 new staff in the quarter, which meant we ended the quarter with approximately 12,235 staff. For quarter one, group gross margin was 42.9%, compared to 43.1% in quarter four, and 41.3% in the comparable quarter last year.

Leveraging our global business service model, we delivered further operational efficiencies in the quarter and, as a result, SG&A was at 20.2% of revenue. This compared to 20.7% last quarter and 20.5% in the comparable quarter last year.

Operating income for the quarter was $76 million, operating margin of 19%. This compared to 18.7% last quarter and 16.4% in the comparable quarter last year. The net interest expense for the quarter was $2.9 million and the effective tax rate was at 14%.

Net income for the quarter was at $63 million, a margin of 15.7%, equating to earnings per share of $1.12. This compares to earnings per share of $1.11 last quarter and $0.90 in the comparable quarter last year, an increase of 24%. DSOs in the quarter were 47 days, compared to 41 days last quarter, and 47 days in quarter one 2015.

During the quarter, cash generated from operating activities was $59.4 million, capital expenditure was $7.7 million. As a result, at March 31, 2016, the Company had net debt of $100 million, compared to net debt of $158 million at December 31, 2015, and net cash of $172 million at the end of March 2015.

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

Thank you, Brendan. Good morning, and good afternoon, everyone. Our backlog in the quarter grew 9% year on year, driven by solid business spends, which delivered a net book to bill of 1.1 times. We felt particularly strong demand from mid-sized specialty pharma and biotech customers, remain well funded, and I'm happy to say that our net book to bill in these segments remains around 1.4 times, which offset lower bookings from some of our larger clients who were slow to confirm orders in quarter one due to other priorities.

It's an important part of our strategy to diversify our customer base, reduce concentration, and create a platform for future growth, as some of our traditional larger accounts mature. Our differentiated technology and service solutions are enabling us to win this new business. By leveraging our ICONIK and Firecrest platforms, we are successfully taking time and cost out of our customers' development programs. Our recent acquisition of PMG is helping us address the significant industry challenge of attracting patients into clinical research, and we continue to advance the unique data assets that enhance our development.

Alongside our partnerships with IBM Watson and Genomics England, we recently announced a partnership with the International Consortium of Health Outcomes Measurement to create the world's first global health outcomes benchmarking program. This assessment of treatments in real-world settings is an important part of the growing late-phase market in which ICON is building a leading position through our commercialization and outcomes group.

As we transition our business to a broader mix and successfully add new customers, we are replacing faster-burning files with more complex studies in emerging therapeutic areas. These are slower to start up and to convert to revenue. In quarter one, 60% of our clinical studies were in sign-up phase, compared to last year when around 49% of our studies were in start-up phase. This reduced our backlog conversion in the quarter to 10.3% against our expectations of conversion of 10.6%, and that all resulted in our clinical services business unit having less revenue than forecast.

This was, however, offset by higher operating margin as a result of lower SG&A costs. Operating margin was 19% in the quarter, and we grew our earnings per share by 24% year on year, to $1.12. I expect our strong operating margin performance to continue during the year, and earnings will remain within the guided range of $4.60 to $4.80 as the impact of this margin overperformance will be offset by the slower revenue conversion.

We continue to deploy capital to maximize shareholder value. This will be done, as we have done in the past, through a combination of share repurchases and bolt-on M&A that enhance capabilities, differentiate our services, and support growth. Over the past 15 months, we've spent $459 million in share repurchases. And, at our forthcoming AGM in July, we attend to seek approval for a further share repurchase program of circa $400 million. If approved, this program would be executed over the remainder of 2016, and into 2017, depending on the timing and cash requirements of our M&A pipeline.

Before moving to Q&A, I would like to thank the entire ICON team for their hard work and commitment during the quarter. Thank you, everyone. We are now ready for questions.

Thank you.

(Operator Instructions)

Tim Evans, Wells Fargo.

Hi. Ciaran, would you be willing to comment on the Pfizer renewal process, where you stand with that? And, particularly interested in whether you see anything in that renewal process that might change your overall margin outlook.

Hi, Tim. I can give you some commentary on that. What we're seeing here is pretty much in the process of what we expected and what our experience is in past renewals of this nature. The contract is due to renew at the end of May. We are in a good place and working well with the clients.

We are working as we usually do when we you get this close to renewal under signed letters of intent which are, of course, non-binding. And then, where we are going through draft MSAs and looking at how we define the model, the scope of the contracts, how we changed it. All of those things are proceeding according to plan.

At this stage it wouldn't be, I don't think, constructive to talk about margin. There is no indication that there will be any significant change in our outlook in the medium term. Of course, you don't know what happens long term. You have to remember that we're working on $1 billion worth of backlog with the customer, and most of that is work in progress, terms and pricing is agreed, it's at various stages of completion. After we sign our -- if we sign the new MSA, we will continue to take the new projects under the MSA, and all of those terms and conditions in the course of negotiations and finalization. I can't really say too much at this point.

Okay. Thank you.

Robert Jones, Goldman Sachs.

Thanks for the question. Given the 1Q revenue, looks like the midpoint of guidance implies about 9.5% top-line growth for the remainder of the year. I think, Ciaran, this would indicate a pickup in the conversion levels from 1Q. Is there any sense you could give us for what could drive that expected acceleration? And, within that, would it come more from the top-five clients or is this -- would you expect this to come more from the smaller biopharma cohort?

Firstly, we gave a fairly broad range of guidance this year to reflect the fact that we are in a situation where we have won a lot of new customers, a lot of new business over the last year, and a lot of more complicated challenging therapeutic areas. The conversion rate had more complexity attached to it when we forecast it.

I talk about broadly within the range, and I look at the forecast for the rest of the year and we can see that quarterly we're expecting business to pick up $10 million, $15 million a quarter. That will drive revenue into the range. And what (technical difficulty) will be, that the new work that we've won will start to burn more quickly as it moves through the start-up phase.

What has impacted on the conversion -- and it's nothing, there's nothing wrong with it, it's just a function of the fact that we're dealing with a lot of new therapies, they're more complex. We're dealing with a lot of new customers. We're working with some of our smaller and midsize customers earlier in the process.

So, as you do more work, say, finalizing the protocol and getting investigators signed up, ethics committees, it just takes a little bit longer from when you book the business compared to when you're working with larger customers who maybe have more mature and developed processes there. You're joining later in the process and it's closer to that start-up point. So, it takes a little bit longer to get through some of these things and start up. And it's a little bit harder to forecast. What will happen is that, it's in start-up, it will start to converge at some point, and that's what will drive the revenue when we look forward for the rest of the year.

And then, just one quick follow-up on the top five, it sounds like the smaller folks -- Ciaran, if I heard you correctly, you are still north of a [1.4]-type book to bill with the smaller biopharma, mid-smaller biopharma. Maybe on the top five would obviously indicate things pretty -- have slowed down pretty much, considerably there. What is the thought process around getting that business to kind of re-accelerate? Is this the new norm, kind of just hope for replacing trials as they burn off on a one-for-one basis, or is there an expectation you re-accelerate growth in that top-five customer base?

I think I wouldn't characterize it as a slow-off across the top five. I think if you look at the growth of the business and our commentary over the last long time, you can see that, particularly the top customer, there has been an expected maturing in that business and in that model.

Where we are is in a transitional phase, as that business matures and new businesses replacing it, new business is more in startup. I don't think there's any great challenge for us to do with our top five and I wouldn't characterize it as a slowdown across all of the top five. What we're doing here is dealing with the expected maturing of some of our larger accounts. The successful replacement with it, with new accounts, but just new accounts because of the nature of the work and not necessarily the customer mix, it's a little bit slower to converting.

So, there's no big picture (inaudible) top five. It is not unusual with larger customers I think to look at circumstances, and they, at times, have different priorities, their bookings are not linear. If I were to go back to the last 20 quarters over our top-five customers, some quarters you get hundreds of millions, or tons of awards, other quarters they are lean. They are not the same every quarter. They tend to even out generally over the course of a year.

And that's all we're seeing in Q1. As I said, some of our larger customers have other priorities, and so those bookings were light. I would expect and that experience has been, when they refocus on different priorities, those bookings come back again and there's nothing more to it than that.

Got it. Got it. Thanks, Ciaran.

Eric Coldwell, Robert W. Baird.

Thanks. Just have a few here. First off, on the share repurchase that you mentioned, Ciaran, is there any impact of that expectation in guidance or is current guidance based on no repurchases for the year? Stated differently, all else constant, would you have to update your guidance if you do get approval on the AGM?

There is nothing in our guidance, Eric, in relation to the share repurchase, so to the extent that we would reduce the share count it would increase EPS over the current guidance. We will look at that if we get -- what the implications are, if we get approval, which I would expect to get at our July AGM. It's really going to come down on the timing of when we do it.

The last time we did the share repurchase, we weren't using cash for a lot of M&A. We had a few bolt-ons, but nothing significant. So we were able to do it pretty quickly, and I think we ended up doing all of last year's repurchase over Q3 and Q4. My expectation, this time, is that it will take a little bit longer because we will -- we do have a couple of our usual tuck-in, bolt-on M&A opportunities in the pipeline, so we will be kind of juggling those. So, in some time we'll update when we get approval and when we look at our cash forecast and look at where any potential M&A deals are in the pipeline.

Okay. And a quick follow-up on -- or a new question on foreign currency. Sorry if I missed it, but could you update us on the revenue impact you are expecting this year, perhaps in percentage terms, and also the expected impact on EBIT and EPS?

Hi, Eric, it's Brendan here. We are coming from a forecast position where we have the dollar out a bit and we're paying at about $1.10, it's been $1.12. We think that it will probably be a couple of percent to the tune of 1% or 2% on revenue and a fairly minimal impact on EPS at this stage. But, obviously, we'll keep an eye to our major currency pair, which is the euro/dollar rates, and update as we go.

Okay. Last one, a little more fundamental. Over the last year -- the last 12 months, your headcount, as you cited, it's up, it's actually up about a little over 9%, CRO revenue this quarter, due to the factors you cited, only up about 1%, a little bit of a mismatch here. I guess the question I have is, in the context that you've done a phenomenal job with margin expansion, so you've got the benefit of the doubt from us. But we have seen, in the past, companies going out and hiring in anticipation of revenue growth that doesn't come, and then we wind up in a margin shortfall period. How do we gain confidence that growing headcount nine times faster than revenue grew this quarter is sustainable? And what is the read-through on this?

The good news is that you have to look at the business units involved to see where the headcount growth is coming from, Eric. The bulk of that hiring is our DOCS FSP division, which has been growing very quickly and has added a number of significant contracts over the past three to six months. So they are actually hiring to a plan where we see the revenue coming through. And maybe ask Steve to talk a little bit about that, because it is an interesting area.

Yes. Certainly on the FSP front we're seeing some significant demand, and that has driven headcount growth in our DOCS business quite significantly and continue to do so. And I think we're well positioned, because we're able to move people around from our two-three business to our FSP and DOCS business. So that's a positive.

The other thing around our headcount is we have been successful in shifting a number of people to more low-cost locations -- India, Manila, and The Philippines, et cetera. So we have had some increase in headcount, although the cost of those heads is actually significantly lower and, hence, we have been able to maintain and improve our margins.

So, there's a number of things happening within the business around headcount that don't necessarily reflect the cost -- improve the cost base, even though the headcount goes up. And headcount is somewhat of a -- not a perfect surrogate, if you like, for cost here.

Okay, and that's fair. And, just to confirm, I think I heard you say you expect sequential revenue growth of about $10 million to $15 million quarterly, is that correct?

Yes.

Thanks very much, guys.

John Kreger, William Blair.

Hi, thanks very much. Ciaran, just to follow-up on Eric's second-to-last one. What sort of hiring to expect through the balance of the year?

It'll depend, John, really on how things start to come through. I think what I would point to is, and it sort of links back to Steve's commentary on the headcount, we think we've got a good handle on our productivity and our ability to ratchet cost up and down, in line with revenue. I think that has shown through in our margin. Our gross margin was pretty stable. It was very marginally down, at 20 bps.

We saw a growth, we get the benefit then in the SG&A line where we don't have the [gross rated cost]. Over the course of the year, it will depend on -- for that conversion, it goes from 10.3% to our desired 10.6%. We are well staffed for the growth, but we continue to see more staff added in DOCS as the FSP grows. The clinical business did not hire that many people in Q1. Revenue was not quite on target. It might be a couple hundred people here or there, but certainly I don't expect it to be significant and I'm pretty happy that it's going to flex with our revenue [pattern].

Okay, thank you. And then, you mentioned conversion rate, does this feel like a cyclical issue to you that just ties to your efforts to diversify the customer base, or does it seem like more of a longer-term trend as the whole industry pipeline shifts to the more rare diseases and oncology?

I think it's a little bit of both. I think it is a longer-term trend, but it's accentuated, in our case, by the confluence of having added so much new business. It's a long number of quarters now where we're booking lower business out of some of our top accounts, which was expected. And have got great book to bill of 1.4 in specialty and biotech and midsize and in our newer accounts. So, I think the long-term trend is there and more complex therapies specifically around oncology.

If I look at our numbers, oncology is 41% for backlog now; this time last year it was probably 35% or 37%. But more significantly it was 37% of our backlog, it was 33% of our revenue, because the burn was quite close. At the minute, it's 41% of backlog and so probably only about 33% or 34% of revenue, reflecting the slowdown and the fact that we have a disproportionate amount of our business at the moment in that earlier phase.

That being said, we're winning well in that market, we plan to continue to do that. So, that proportion is something that will continue for some time. So, a long-winded way, John, of saying an industry trend and we are feeling it a little bit more acutely as some of our business mix transitions, as we expected. And we're happy about that because then we see customer concentration reduce.

Thank you. And, maybe one last one. You may want to refer this to Investor Day, but, as you think about longer-term margin trends in the business, what are the key factors that you think will enable you to drive it higher, perhaps, or might be a headwind to that? Given you've done so well on this metric, just curious how much more upside you think remains.

We've reached target levels higher -- higher target levels or term levels more quickly, I suppose, is a better way to characterize it, than we expected. I think there's three things that will ultimately decide margin in the longer term. That's kind of top-line growth. We've seen fairly controlled and modest rates of top-line growth, they are easier to manage. I think if that is to accelerate in the future, that causes more investments and an impact on margin.

I think, secondly, foreign exchange. There have been some significant swings in the past few years. It tends to wash out to fairly neutral on our margin. No big volatile changes. However, it can impact 50 or 100 bps in one direction or the other.

And then, the last thing would be business mix. We are seeing some areas of the market grow faster than others. We have an M&A strategy to bolt-on more services and broaden our service offering. If your business makes changes, say, more FSP, if that is where the market is going, that's traditionally at lower margin.

So, those factors will tend to shift our thinking on where longer-term margin is. The medium-term, I don't see any fundamental change. I'm happy that our operating margin will stay at about 19% this year. Beyond that we can talk about it in the Investor Day.

Those are the things that will shape it. And on the upside, if margin is under pressure because top line is growing more quickly than we expected, that is not a bad thing. And, ultimately, we found in the past that the investment in growing the top line may shave some off margin, but it generally delivers more earnings and, therefore, it's favorable to the share price.

Thanks, much.

Ross Muken, Evercore.

Good morning. I guess maybe sort of more big picture question, so a lot of scrutiny -- or a lot of discussion in the US on drug pricing. One of the key questions is what that does to R&D, but, theoretically, it could actually make your business more important to the pharma companies. I just wonder if there's any high-level discussions regarding, obviously, the need to accelerate enrollment timelines and increase success, and how that all plays together in terms of maybe you being more useful to them in terms of the productivity of their R&D pipelines. I'm just curious if there are any discussions at all.

To be honest, no particularly significant discussions, Ross. I think if you look over the last 5 or 10 years, the discussions for pharma -- and a lot of it started with the top (technical difficulty) revenues going away for that. That led to the focus on productivity and more outsourcing and more management cost (inaudible). The drug pricing is really just a continuation of the same discussion, where our customers' revenue streams and profitability's under pressure.

We have, with all of our significant customers, pretty much a laser-like focus, both of us -- them and us -- on productivity, on timelines, on enrollment, and all the things that improve the quality of trials, improve the chance of successful outcomes, and deliver it more quickly at better cost. That's kind of, day-to-day, part of our business, and I can't recall any change in the tone or significant change in discussions as a result of the drug-pricing discussion, specifically.

Fair enough. And, maybe just relative to the RFP tone overall, was the consistency of RFPs and the different groups level over the quarter, did it have a bias? I'm just trying to get a sense for if there was any seasonality difference or if maybe some of the big headlines we have seen from a number of different companies that have either been involved in M&A or other types of events, maybe drove a little bit of volatility just in terms of close rates or the like?

I think from where I look at it, the overall pattern remained unchanged compared to last year, which was a lot of interesting new therapies and a lot of interest from biotech and specialty pharma and midsized, as I said in the comments. A number of some large clients had their own issues with shift, the RFP. If you set aside explainable and understandable, and then add the soon-to-be-reversed consideration from some of our large customers, everything else is unchanged. I'm looking at Steve here to see if he wants to add anything to that.

I think the other thing I'd add is we pointed out the trend, we seem to be seeing some greater interest in the FSP space, not ready to qualify that too much at the moment, but that does seem to be of interest to customers. Biosimilars are also an area that we've seen quite a bit of interest in, and we continue to see, not just in the last quarter but over the last maybe 12 to 18 months.

We see significant opportunity in all those areas -- the biotechs, the midsized -- particularly those well-funded companies that are willing to take compounds through to Phase III, and that is great. In past, they would partner, they would sell. Now they're taking right through to Phase III, but the whole process is they're coming to us much earlier and we're helping them with protocols and plans, et cetera, which is, as we've already indicated, impacting on our conversion rate.

But we see plenty of opportunity in segments of the market. Customers are very concerned about drug-pricing challenges, and I think that's likely to offer us more opportunity going forward as we get better at delivering our projects. Currently, we deliver 90% of our projects on time. And so we feel we are able to focus on our execution and delivery, and then also be creative in terms of our innovation.

And that, I think, can help them to reduce their cost, but also could help us to maintain or even possibly improve our margins going forward. So I think it's a win-win if we can move that forward with the sort of technology around risk-based monitoring, Firecrest, adaptive, and those sort of things. So there's certainly opportunity out there in the marketplace.

Great. Thank you guys.

Michael Baker, Raymond James.

Thanks a lot. I was wondering if you could give us some color on what you're seeing in terms of labor inflation, particularly as it relates to CRAs.

We're seeing a mixed bag, Michael. In the US, it's relatively high, probably in the 5% region. Sometimes a little more, depending on experience, or if you're looking for specific skills you have to go above that. But that is offset, too, by productivity gains driven by technology, by the spread of the workforce around the world and where the work is conducted. Overall, taking the basket of our global footprint, it's at our normal levels of around 3%.

Okay. I appreciate the update. Thank you.

Sandy Draper, SunTrust.

Thanks very much. Good morning on my side and good afternoon on your side. Most of my questions have been asked, but just one quick clarification and then a follow-up. It is a right to think about, in terms of acquisition contribution for the rest of the year, it looks like to me sort of ballparking it would be coming in the $15 million to maybe $20 million range for the rest of the year, from the acquisition, is that about the right number to look at?

If you're using a quarterly run rate, Sandy, I think you just bear in mind that we're including in the number the first quarter, our MMPS acquisition, which we acquired in the second quarter of last year, so that will drop off then once we get through that point. So it'll just be PMG that will be the difference between third and fourth quarter.

Right, I guess what I'm saying is $15 million to $20 million total, so probably more, quarterly, running somewhere around $5 million to $7 million it looks like.

Yes. That's about $5 million, yes.

Okay, great. And then, nuancing on other questions that have been asked a lot around the trial, slower starts, et cetera. When you guys gave your projected coverage as 75% and looked at what's coming out of backlog, did you use a different methodology at this point or just fine-tune it based on what you saw in the quarter? Because obviously it was a slower start, as you mentioned, Ciaran, this quarter, did you do anything to sort of protect against another negative surprise like that or is it the same methodology, you just feel like you got better input now that you're seeing more how these trials are going to start up? Thanks.

It's [broadly] the same methodology. We are getting more used to the cadence and the rhythm of them. So we're hopeful that we've got the numbers right. I'm looking at Brendan here. Is there any fundamental changes?

No fundamental changes. Again, that's very much from the ground up to look at our timing of revenues and how they will fall over the course of the year. So, no. Same methodology as always.

We work our models off ranges, and we are comfortable that wherever we are within a range of, say, revenue, our earnings and our margin are the levers that relate to that are all inter-related, and, realistically, the forecast hangs together. So, our -- if we see conversions stay the same, [that want to track around]10.3% should pick up a bit and that won't fundamentally alter the earnings because we're growing quicker and it's coming in sooner, we hire a bit more and things like that, so realistically that 75% revenue and its implications on margin and earnings is hanging together pretty well.

Great. Thanks very much.

Greg Bolan, Avondale Partners.

Thanks for taking the question. First question, on the smaller end of the spectrum, just in terms of sponsors, Ciaran, you had mentioned doing fairly well there at 1.4 or better, book to bill. Do you think that's more of the macro tide remaining fairly elevated or is it that ICON is gaining share from some of its more tier 1, tier 2 competitors, or both?

I would think it's the tide. We've seen a lot of funding into -- and when we say smaller, some of these are pretty big companies. It's just not the ones where it requires to [flows]. I just think it's a function of some of our biotech clients and larger ones in hot areas and hot therapies are in the public, and they're well funded. And then, the smaller ones has gone public, have cash in the balance sheet. I think it's more secular and where the market is than us particularly gaining market share. That's my feeling. Steve, you might have something to say on that?

I would agree with that. I do think it's the top echelon of companies that probably benefit from the funding of those companies. I think these companies are feeling like they are moving forward themselves in terms of development entities and are more sophisticated, and are willing and able to work with the top-tier CROs.

So while I don't think it's ICON-specific, I do think it's top-echelon-specific, because I think these companies want to take their companies' compounds right through to market. They want to work with an entity that is financially and operationally stable and viable, and that's an important consideration. Perhaps 5 or 10 years ago they were only going a couple of proof of concepts into Phase II and then selling the compound. Now they're going through and they're selecting an organization that's going to be with them for the long term.

Sure. That's great. And then, favorite topic of yours, Ciaran, M&A. Among the larger late-stage CROs, I think you are pretty well spoken on this topic. And, as it relates to that, I know that this is an area that you are -- this is not really an area that you've typically wanted to pursue, just given the historical experience. But, as you think about possibly some of the other larger clinical CROs merging, do you think that -- has that historically opened up an opportunity for ICON, just in terms of market share gains, as those sponsors using the CROs that are engaged in M&A maybe possibly freak out and move on? I guess my question is, is M&A among tier 1, tier 2 clinical CROs an opportunity for ICON to take share?

I think the honest answer, Greg, is I don't really know because it hasn't really happened in a significant way. There are a number of significant deals in the past, but never really at the highest level. So there's no evidence --

Sure.

But my belief, and my strong opinion, based on conversations with customers and looking at some of the impact in the past, the smaller deals and maybe with even potential and rumoured deals at times, was that customers had a very strong and visceral reaction which made them want to go with places who would not have any distractions.

The work that we all do together with our customers is pretty hard at the best of times. Clinical research is challenging, there are many variables, it requires a huge amount of focus and dedication, for both us and our customers. These are the jewels of our customers' future that we work with. And they tend to want people who are exclusively and zealously focused on their interests -- on their projects, and don't have any other distractions.

I would even point to -- I think if you go back four or five years to when we won the big Pfizer contracts, that was a huge contract at the time. We had to hire and invest, revenue ramped up pretty quickly. [We far outreached], in certain quarters, even 33% or 34% revenue, 28% this quarter, 29%. But even at that time we found in the marketplace is that one of the first questions that we got from existing customers or potential ones is: Are you guys too busy doing other stuff, are you focused on our work? Because of our relationships with existing customers and the way we organize that we were able to put their mind at rest.

But, it was always present in their minds. You always have to work to do that. And with potential new customers who perhaps didn't know us and didn't have a long relationship with us -- I think at times back then, in 2011, 2012, it was a factor in us not winning as much business outside of that account. So, it's a definite concern. But the proof of the pudding is in the eating, so we'll only actually know if and when it happens.

Sure. All right. Thanks, guys.

(Operator Instructions)

Donald Hooker, KeyBanc.

Good morning. Or good afternoon for you, good morning for us. Obviously, the big trend that continues to occur are the rising complexity in these clinical trials. I was curious how that plays to some of your investments in informatics and in information technology with ICONIK and Firecrest and whatnot. Do those more complex trials also drive greater usage of informatics in clinical trials as well?

I'm going to ask Steve to comment on that.

Thanks, Ciaran. I don't know that the two are entirely correlated. We invest in our informatics and our IT infrastructure, our innovation, around a number of aspect of trials and there are some very inefficient things that happen in the course of running a clinical trial in terms of getting sites started, getting patients recruited. Those things are still fundamental and are common, whether the study is complex, difficult, or not, as the case may be.

I don't think there is a specific correlation between the level of investment or the types of investments we're doing. We are investing in -- essentially, in moving the process faster -- faster, better, cheaper -- getting -- particularly for us, you saw our PMG investment around being much more systematic, consistent in recruiting, and faster when recruiting patients into trials: only 1% to 3% of people go into clinical trials -- we want to make that a higher number.

We also want to make that a much more rapid process because that is probably the most influenceable period of a clinical trial. And you can talk about rare diseases and increased complexity, and there's clearly a number of aspects there. The technology itself is really around some of the more fundamental processes in the clinical trials rather than specifically addressing the complexity.

Okay. That's helpful. And I will ask one other quick question, in terms of profitability and profit margins, I was inducing that the rapid growth in these smaller and midsized biopharma clients might pressure margins. I was inducing that some of the top clients I presume you work with have processes connected and tightly together, would be much higher -- much more profitable revenues. Is the rise of these smaller or midsize clients a pressure on margins over the next couple of years? Not that, that's a bad thing, but just for modeling purposes.

No, it's not, Donald. The way we price business is pretty much around time and materials, and the cost of what's involved. And some of it is in unit contracts, where you're calculating units. There's no significant difference between the profiles in larger and smaller accounts. The smaller accounts, you might have different, more value-added, higher-margin services around consulting, whereas in larger customers don't need that level. So, it all kind of -- there's a bunch of moving pieces [less I oversimplified it there], but it all pretty much comes out at the same place in the end.

Got you. That's actually really helpful. I appreciate it. Thank you.

Dave Windley, Jefferies.

Good morning. I've joined a little late so I apologize in advance if I re-ask here, but wondering if you could comment, Ciaran, on this pricing and renewal. I know you got the pricing question, you've gotten the renewal question. Last time, when we heard you going through Bristol-Myers and Lilly, you commented that you really thought that they would renew without much change to the structure. And I guess I am most curious about whether you think there will be changes to pricing terms and your agreement with Pfizer?

I can't say too much at the moment, David, you should understand we are in the middle of various negotiations. But, the structure of the drafts of the MSA that we're working on are not dissimilar from what existed in the past in that the scope of the work is the same. There will be different ways that we do business around the technology platforms that we use and the exact models. So that will have knock-on consequences in certain things, so some things will cost less and some things will cost more.

But it's too early for me to say if there will be a fundamental change in it. Our experience in the past is that there is not a fundamental change, sometimes you have to sharpen your pencil a bit here and there. We usually recover that in efficiencies, often a lot of what is around a new MSA is putting our heads together with the customer in a collaborative partnership way and jointly taking out costs from the whole development effort, rather than it being just a simple question of price to the vendor. I've no significant concerns at this point. (Multiple speakers) fundamental change in the medium term. Beyond that --

Okay. Appreciate that. That's helpful. You mentioned the scope of work, there's been -- I've heard some speculation about Pfizer itself changing the amount of outsourced work, insource versus outsource, those types of arguments. My personal view is that Pfizer outsources just about everything and doesn't really have any internal capacity to bring that back in house. I would be curious if you could confirm or deny that view?

As you said, speculation, always reluctant to comment on speculation. It's fair to say that everything changes over the course of relationships with every contract, and at times some things are done in because a particular person, maybe a partner for preference for us. None of our customers have significant excess capacity in existence, but they have some capacity. As you talk to every customer and every person in the customer, we talk with these customers as if it's one voice. They have many voices, it depends on what you're talking and various preferences.

The stuff we're working on has fundamentally the same scope of work, albeit we may do things in a slightly different way than we did in the past, and whether front-end services or back-end services, or if there's particular studies that are very specialized, maybe some of it will be done more in-house because it's a specialty element or it's got particularly high focus. But no fundamental changes by the normal things.

Okay. Thanks. Last question, I will move away from that horse. The performance, not just of Pfizer but the other top-five members of your client base, has also been sluggish the last several quarters. I wondered if you could help us to understand the dynamics that are ongoing with the other members of the top five in terms of flow of work or things like that. Or how you're thinking about where the sources of growth are going to come from outside of the top five, and how they overwhelm the weakness in the top five. Thanks.

I can't say too much about the specifics of our customers. When you look at our top five, it's dominated by one customer. So everything has to be viewed in the context of that. We have talked about the past, about our concentration reducing and reflecting the maturing of the model.

We went through -- and I've talked about it very many times, its phenomenal growth search under the new model five years ago, with Pfizer because of the fact that so many on-going studies were transitioned over, which is very unusual -- I had never seen it before, and haven't seen it since, and will probably never see it again. That can potentially distort a lot of what we're looking for.

A lot of the top five, I don't have growth concerns across it as a group. One or two of those customers have their own priorities and their own issues. And, therefore, their business wins will be lumpy, but that's always been the case. Others in our top five have -- are growing perfectly satisfactory. And we have a different top five every year, and I'm pretty sure next year's top five will reflect some of the new work and some of the significant new customers we have added.

Growth in the future, if you asking about growth, Dave, it will come from our bench of customers. It will come from the existing customers, some of whom are in a different phase. But there is nothing new here. You're doing this a long time. I go back over our records 10 or 15 years when I look at this.

There's times when customer A was your top customer because it had a number of large activity in its pipeline. Three years later it had disappeared down to number 6 or number 10 or whatever because it was doing different things or its pipeline wasn't as robust or as concentrated and other things. And then you'd see them pop up again in the future as soon as they were doing other stuff. There's nothing in there that is causing us undue concern, that we don't think is just the normal course of business. But, that being said, we're focused on those customers, we have our strategic account managers and our [biggie] people, making sure the relationships are alive and healthy, and we continue to build them to give us work.

Very good. Thank you for the answers. I appreciate that.

Douglas Tsao, Barclays.

Good morning, thanks for the questions. Just curious in terms of your comments around seeing an uptick in terms of the staff in an FSP model, what do you think is driving that? It seems to have been some number of years since we heard about that model coming back into vogue, the trends seem to have been the opposite way, moving more towards project-oriented work. Any comments there would be helpful, thank you.

Doug, it's Steve Cutler. It's a bit early to declare it a trend. I think we're seeing a lot of interest in that area from a number of companies. And, obviously, there are some companies who are very clearly strategy related with FSP, and we have some success with one or two of those I think most recently. And that's probably driving our impression I think in this market. So I think it's a little early to definitively say this is a trend within the industry.

We feel good about where we are with this, with our DOCS division, who does our FSP space. We can quite flexibly move people and resources between our two-three group and our DOCS FSP group. We feel we're well positioned in the industry to take the benefit of that sort of trend, if it is a trend. I think it's a little bit early at the moment and we will need to assess that perhaps in a quarter or two. The good thing for us is we feel like we are in a good place to benefit from that trend, if it in fact exists.

Okay, great. Thank you.

Jon Groberg, UBS.

If you look at the gap between gross and net bookings over the last number of quarters versus the prior four or five quarters before that, it seems like it's expanded a bit. You didn't really call anything out from a cancellation standpoint specifically either, in the quarter, so just curious if there's any specifics around what you're seeing from a cancellation standpoint. Is it driven more by one customer, re-prioritization of -- were there compounds, or any comments around cancellations?

Nothing specific, Jon. If you look back over the history of cancellations, they tend to average about 15%, mathematically, of the gross awards. And in some quarters you've seen them at 20%, and some quarters we've seen them at 5%. Sometimes they're low for two, three, four quarters in a row, and then they spike up again. It's usually a function just of either -- it is, I'd say, re-prioritization or you start something, the data isn't good, it gets cut.

There's nothing I would point to in the current quarter, the one we've reported on, that's any different. What you might say is, as you look forward, we've seen the benefit of technology and some of the improvements in medical and scientific technology, and then data and speed of data and how things are done, had maybe a potentially positive effect of a cancellation.

But then we also see that we've talked about the fact that we're working on a number of more complex therapies, so it remains to be seen whether that would be a factor as the complex and we move out of start up and get into the meat of the studies, potentially a risk to higher cancellations. So you have two competing forces there on cancellations; hopefully they'll offset each other, or the forces of good will prevail and keep cancellations at lower than the historic rate. It's just one that nature takes its course on it, and it's hard for us to say any more than that.

Okay. So, nothing specific. And then, you highlighted 41% of your backlog, I think you said, was oncology. My understanding, having been at AACR and other places, is a lot of oncology trials are focusing more and more on finding patients with unique genomic profiles or very targeted in terms of the type of patients they are looking for. I'm just curious, is that a part of this challenge in the early start-up phase that you've talked about, and is that an area, from a bolt-on M&A perspective, that could be of interest to you in terms of trying to do a better job of finding these patients that could be a little bit more like a needle in a haystack?

It's Steve Cutler here. It's certainly a factor in what we call out in terms of our burn rate. These complex trials in rare diseases with a number of combination therapies, which tends to be the way the industry the oncology business is going these days, do cause lots of challenges from a specialization, as finding the right sites and obviously finding the right patients.

In terms of how that impacts the technology, I don't see it as much but there's no question it's having an impact on the rate at which the trials burn. It's not to say there aren't any large-scale oncology trials. I wouldn't want to call out that every oncology study is a small 25-patient study that is looking for rare patients -- that's not the case. You still need to do your confirmatory large-scale Phase III -- and they do tend to be large, can be complex, but also relatively high revenue generated.

There's plenty of opportunity in the oncology space, notwithstanding the fact that it is -- that there are very specific approaches being developed. I think again, we are in a good place to be able to benefit from them. I'll give you an example. Around the combination trials, many combination trials going on in our adaptive ADDPLAN opportunity to look at how we select the right combination -- on how we help customers to select the right combination of compounds early in the process, allowing them to then develop that particular combination and go on to do their larger-scale trial in the right combination at the right dose. The adaptive approach that we have and the expertise that we have in that area allows us to help customers with doing that. That's a significant benefit for us.

Okay. Great. And last, just quick one for me, I've read a number of things about maybe Ireland trying to think about normalizing its tax rate, given some of the comments out of the EU. Is there anything at all there that you want to talk about in terms of tax rate? I just thought I would see what you guys are seeing from a tax-planning standpoint.

Don't know. Must not be reading the same things, Jon, because in Ireland we're pretty much of the view -- and government and public policy is very strongly around the fact that taxes are sort of an issue for Ireland. We're pretty happy with the tax model -- it works, it's fully compliant with the best international standards. No ECD. The policy, we are not seeing much there. Specifically for impact on ICON, I think it's probably -- if you want to talk about the changes in the US rather than any changes in Ireland and the debt-stripping legislation, give some color on that, albeit the conclusion is that it won't affect us.

To answer your question quickly, I don't think there's any change to anything here from an Irish perspective that should impact on our effective tax rate. (Inaudible) equally, if the US treasury changes around inversion, particularly in the last little while, will it have an impact on our ability to hold our effective rate at about 14%. I think the quick answer is, no. We do have debt structures in our organization, as is the norm for large organizations, but we feel that they are well founded and are commercially appropriate. So we feel that they are well able to stand the test. So we have no expectation in the next number of years that we shouldn't be able to maintain our 14% effective tax rate.

Thanks.

Tejas Savant, JPMorgan.

Thanks for taking the question. One quick one on Pfizer, in terms of the renewal -- in terms of the timeline, should we expect an announcement at your Analyst Day, or is that more a late May/early June event?

No, I think I've been pretty consistent at HSN that our experience is that these -- because of the complexity of the amount of legal drafts and word parsing by their friends in the legal community and -- looking at our general counsel here as I say that -- they tend to go right to the end. And that contract renews at the end of May, so my expectation is that we will be working on it and refining it until the end of May. So there's no expectation of any announcement at the Analyst Day, and there never was.

Got it. And then, in terms of your announcement last December regarding the 25% reduction in start-up times that you achieved -- partly driven by the goBalto Activate software implementation and a couple of other streamline processes you put in place -- how should we think of that within the context of your backlog conversion rate going forward? Should we expect some of those efforts to help stabilize the metric in that 10% to 11% range?

No, I think, is the short answer. The fact is that our slowing on conversion -- and to come at the start of the trial and even before you start work, it's a combination of working earlier with the client on finalizing the protocol and getting to final pre-protocol, and our last discussions with regulatory agencies and feasibility and things like that. I don't see a significant impact. But, that being said, I don't know if Steve would want to give more color on that?

I think the improvements we've made at start-up will be helpful once the trial starts. But, as Ciaran said, that challenge is, as we get involved earlier in the process, we're waiting for protocols and we're helping to develop protocols. You can't start a trial until you have the protocol completed. So, that's the sort of division if you like. The challenge that we have is pre-protocol while we're helping with registration plans, et cetera. Once we get the trial -- once we get the protocol and we can go, we will be able to go faster. But, it's getting to go, I guess, is our challenge.

Got it. And one final one here on Genomics England, any color you can give on progress since the announcement? And also, are you in the running for a similar involvement with other population-sequencing efforts around the world?

We have the one-question rule and I'm conscious that we are over time here. So, quick answer from Steve on that one?

That's proceeding well at this stage, nothing to call out in particular on the Genomics England. We're certainly interested and involved with a number of other discussions with organizations, NGOs, governments, et cetera, in that sort of area. It's an area we think we can add value to. So, yes, further discussions, but nothing specific at this stage, Tejas.

All right. Thanks, guys.

I would like now to hand the conference back to Mr. Ciaran Murray for any additional or closing remarks. Thank you.

Okay. Thanks for listening, everyone, today. I know it's busy, and it's earning season, so I hope we haven't kept you away from anything by running a little bit over time. I'm happy we've made a solid start to 2016, and looking forward to building on this during the rest of the year as we continue on our mission to be the CRO partner of choice in drug development. Thank you, everyone.

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