ICON PLC (ICLR) 2017 Q1 法說會逐字稿

Good day, and welcome to the ICON plc Quarter 1 Call covering the quarter ended March 31, 2017. Today's conference is being recorded.

At this time, I'd like to turn the call over to your host today, Mr. Jonathan Curtain. Please go ahead, sir.

Thank you, Sarah. Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended March 31, 2017. Also on the call today, we have our CEO, Dr. Steve Cutler; and our CFO, Brendan Brennan. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call.

Certain 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. The 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 GAAP financial measures, please refer to the press release statement headed Consolidated Income Statements Unaudited U.S. 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'll be limiting the call today to 1 hour. (Operator Instructions) I would now like to hand over the call to our CFO, Mr. Brendan Brennan.

Thank you, Jonathan. In quarter 1, we achieved gross business award of $580 million and incurred $59 million of cancellations. As a result, net awards in the quarter were $521 million and net book to bill of 1.21x.

Net revenue in quarter 1 was $432 million. This represents year-on-year growth of 7.8% or 8.3% on a constant currency basis. On a constant dollar organic basis, year-on-year revenue growth was 4.5%.

For the quarter, our top clients represented 24% of revenue compared to 29% last year. And our top 5 customers represented 45% of revenue in both this quarter and the comparative quarter last year. Similarly, our top 10 customers represented 58%, same as last year, while our top 25 customers represented 74% compared to 75% last year.

We grew operation margin in quarter 1 while effectively leveraging our existing headcount and ended the quarter with approximately 12,300 staff. Group gross margin for the quarter was 42%, which compared to 42.2% in quarter 4 and 42.9% in the comparable quarter last year. We continue to leverage our global business support model, and as a result, SG&A was 18.8% of revenue in the quarter. This compared to 19.2% last quarter and 20.2% in the comparable period last year.

Operating income for the quarter was $85.7 million, a U.S. GAAP operating margin of 19.8%. This compared to 19.5% last quarter and 19% in the comparable quarter last year. The net interest expense for the quarter was $2.62 million and the effective tax rate was 14%.

Net income for the quarter was $71.4 million, a margin of 16.5%, equated into diluted earnings per share of $1.29. This compares to earnings per share, excluding a one-time tax benefit in Q4 of $1.26 and $1.12 in the comparable quarter last year, an increase of 15.2%.

DSOs in the quarter were 47 days, which compared to 50 days in quarter 4 and 47 days in the comparable quarter last year. Cash generated from operating activities for the quarter was $159 million and capital expenditure was $8.3 million. During the quarter, we spent $96 million on share repurchases with a further $12 million to date in quarter 2. This means to date, we have spent $218 million of the $400 million share repurchase program we announced in July 2016.

At March 31, 2017, the company had net debt of $30 million compared to net debt of $100 million at March 31, 2016 and net debt of $88 million at the end of December 2016.

With all that said, I would like to hand over to Steve.

Thank you, Brendan, and good morning or good afternoon to all of you.

Quarter 1 was another positive quarter for ICON and an encouraging start to 2017, driven by our operational quality, differentiated technology platforms and strong therapeutic capabilities, we continue to win business across all customer segments. Record quarterly net business wins of $521 million, representing a net book to bill of 1.21, resulted in year-on-year backlog growth of 9%. Particularly encouraging was this strong growth in our backlog, while our top customer concentration reduced by 500 basis points.

In addition, and outside our top customer, year-over-year revenue increased by over 15% and new business award levels remained very strong, delivering a trailing 12-month book to bill of over 1.4. As we transition through 2017, we believe this diversification will leave us well positioned for consistent growth.

CRO market demand fundamentals remain healthy, driven by R&D pipeline spending expectations, a strong biotech funding environment and increasing outsourcing penetration. These trends were reflected in the mix of our business wins in the quarter, which included increased awards from large customers as well as good activity within small and midsized specialty pharma. Both new and existing customers are seeking to leverage ICON's operational excellence, depth and breadth of therapeutic expertise, flexible partnership models and our global footprint. All these capabilities are underpinned by our differentiated technology platforms ADDPLAN, FIRECREST and ICONIK, which are enhancing sponsor develop programs by reducing development time and costs and improving data quality.

We continue to make good operational progress across our service areas, as evidenced by the continued progress in our margins. ICON's clinical research business continues to benefit from our commitment to innovation, which encompasses ongoing investment in our core data and analytics platforms and collaborations with partners who can help us address the industry's key challenges. We are particularly focused on how we can expedite study startup and employ more data-driven and scientific approaches to identifying the right sights and patients. Recent examples of our work in this area are our collaborations with goBalto, TriNetX, and EHR4CR, which are being used in conjunction with our internal study feasibility tools to tangibly drive our project execution.

We are also seeing a significant amount of customer interest in the field of wearables, and specifically, how data from these devices can be used to provide new insights into the impact of treatments on patients in both the trial process and real-world settings. We have significant expertise in this area and our dedicated team is working with our customers on some very interesting proof-of-concept work to evaluate the suitability of wearables across various therapeutic areas.

ICON's ability to successfully manage a project under a variety of flexible and hybrid outsourcing models has led to further new opportunities for our functional services business. This service area has grown strongly year-over-year and we are well positioned to benefit from further growth during 2017 and beyond.

The quarter also saw strong performances from our central lab and commercialization and outcomes group, whilst our medical device group continues to make excellent progress in this burgeoning field of outsourcing.

Year-on-year growth of 7.8% and careful management of both our direct and SG&A costs enabled us to expand our operating margin to 19.8%. This, combined with good use of our balance sheet, resulted in earnings per share of $1.29, which is a 15% increase over the same quarter last year.

We continue to invest our available capital to maximize shareholder value. We remain focused on our M&A pipeline at executing our strategy of bolt-on, string of pearls acquisition targets to enhance and broaden our service offerings. In conjunction with this, we are continuing to repurchase shares under the previously announced $400 million share repurchase program. We completed a further $96 million in the quarter, which together with repurchases completed in 2016 and those completed to date in quarter 2, meaning we have spent overall approximately $218 million or 55% of the $400 million total. Depending on market conditions and appropriate M&A activities, our intention is to continue to opportunistically repurchase shares throughout 2017.

In light of this share repurchase update, we are increasing our 2017 earnings per share guidance to a range of $5.06 to $5.26 and reaffirming the full year revenue guidance in the range of $1.7 billion to $1.75 billion.

As I look forward to rest of the year, we will continue to transition the business, further reducing our client concentration and building a more diversified and balanced business that will deliver future growth.

Before moving to Q&A, I'd like to thank the entire ICON team for all their hard work and commitment during the quarter. And in particular, I'd like to recognize the efforts and dedication of the ICON vaccines team who were recently awarded Best Clinical Research Organization at the Vaccine Industry Excellence Awards.

Thank you everyone. And we're now ready for questions.

(Operator Instructions) We'll now move to our first question today from Robert Jones of Goldman Sachs.

Just thinking about the progression of the Pfizer revenue. Obviously, as expected, it was down as a percent of revenue, but it did pick up sequentially. And if I look at the drop-off implied in the full year Pfizer guidance, certainly, would call for a pretty big drop off from the starting point. So I guess, just curious how the quarter played out relative to your expectations as far as the roll off of the large cancel versus new business? And then maybe you could just walk us through the cadence of that for the balance of the year?

Yes, sure, Robert. It's Steve. The quarter played out exactly as we planned. We didn't expect to have much impact of the large cancellation on our first quarter revenues. That will play into the remainder of the year. And we have that well scheduled into our forecast. We expect to be at an overall concentration for the year of around 15% to 17%, that hasn't changed. And so there will be a ramp down on the Pfizer revenues, but it will -- and it will be in line with what we've said before. Brendan, do you want to add to that?

Yes, I think, Bob, just to maybe to give an overall color to the sequential revenue pattern for you during the course of the year, obviously, we're very pleased with our revenue as we started off in the first quarter. I think the market expectation is that we'll be in the same ballpark in Q2, with the drop falling in Q3. And that's really, obviously, as a result of that big cancellation. And I think that pattern that the market has several on at the midpoint is still pretty solid as we look at our revenue over the course of the remainder of the year.

That's helpful. And I guess, just to follow-up on the cadence of revenue, where it's coming from. Not that this is new, but clearly, you're calling for a lot of growth from the clients outside of the top 5. It seems like a lot of your peers are also focused on kind of that small- to mid-sized biopharma cohort. So I'm just curious maybe you could share a little bit about the competitive landscape you're seeing in that group given that it seems to be a focus for many of the clinical providers?

Yes, I'm not sure we're seeing any more competition within that group than we are across the other segments of the industry, Robert. We work in a very competitive business. And the pricing environment is competitive but not cutthroat. We believe we're able to differentiate with our service offerings and offer good solutions. So while it's competitive, it certainly not silly. We were very pleased in the way we've been able to make progress outside of our #1 customer in terms of the business wins year-to-year. We're up close to 18% on business wins. We're up over around 15% in terms of revenue. So I think, actually, good evidence that we're accessing those customers well and providing them with solutions that they can buy. So we're pleased with (inaudible) and we don't see the market being overly price competitive in that area if you have a good, strong differentiated solution to offer.

Our next question now comes from Ross Muken from Evercore ISI.

Can you just expand a little bit on your commentary on FSP and sort of how that piece of business is trending and sort of the client preferences there? And whether that's garnered incrementally more interest, more recently, and if so, why, in your opinion?

Sure, Ross. We're certainly seeing interest in the FSP market and we feel we're well positioned to able to take advantage of that. I don't think we're seeing -- I'm certainly not being able to -- seeing a fundamental shift in the industry. We've been able to pick up a number of contracts and we've been successful in that business over the last 12 months through accessing a further look within customers who traditionally have that sort of model. And it's well known within the industry, the companies who advocate and who have that model, we've been successful with those companies. But I don't see companies transitioning or transferring from more of a full service business to a FSP business. We do see most companies, in fact, employing some sort of hybrid model, most of them have some sort of FSP component and some sort of full service component. Even the companies who are well known in the industry as being FSP-top companies also have full-service capability or full-service outsourcing. So we're seeing good trends in those -- in that part of the business. Our [IFS], our functional services component of our business is benefiting from that and they are certainly performing extremely well. We're very pleased to see that. We feel as an organization, we're well positioned to be able to benefit from, if there is a trend, from that trend, and because our service areas work well together. And so if we have resource opportunity, I'll put it that way, in one part of our business, we're often able to transfer that across to our functional services business and gives us the opportunity to very quickly ramp up the sort of projects that we get in those areas. So it's a -- we feel, as I said, very, very good about that market and pleased to better benefit from it.

And maybe in terms of some of the chatter that's happened in industry just on consolidation and a number of nontraditional players in the industry also looking at potentially moving into the space. You guys obviously have had a view of being more independent. What's the conversation like with the clients around those sort of discussions? Just because I would think, if I was a customer, it would be relevant to me if I thought my 0 or getting acquired or we're having a new owner. So I'm just curious how much you think that sort of kind of gotten in the client level, and how, if at all, that's affecting any of the conversations you're having, given you guys have been more in the camp of sort of remaining, obviously, independent?

We haven't heard from our customers any sort of reservations or concerns around external providers or external competitors traditionally outside of the industry coming in. I think they recognize it. Just because it's FSP, it doesn't mean it's sort of simple or straightforward. There are certainly nuances within that business. And understanding the business, understanding the roles, these are the domain knowledge, I guess, is what I'm trying to say here, is very important from an FSP point of view, as it is, of course, from a full service point of view. So we still believe that we have an advantage in terms of that domain knowledge. We may not always have the scale of some of the players outside of the industry, but we have the domain knowledge. And so we have a significant advantage over there, I believe, and our customers, I think, understand that and believe that, and that we've been able to deliver well for them. So while we're always aware of external players and other organizations and we look to collaborate with them as appropriate and look to put the best solutions forward, we're not overly concerned about that. And we do believe that the offering we're able to put forward is still very compelling from a customer point of view.

We'll now move to our next question from Tim Evans of Wells Fargo Securities.

Brendan, did I hear correctly that you expect your top client revenue to still be somewhere in the same neighborhood as Q1 and Q2?

We expect -- what I said, to be very clear, was we expect, obviously, our top customer, we said will be in the range of 15% to 17% of full year revenue -- for the full year. That's what we talked about last year. And that's what I'm reiterating this time. Obviously, if you look at that in terms of quarter-over-quarter, there will be a sequential decline, as we would expect, with the cancellation from last year. So no, I mean, the dollar certainly (inaudible) won't be the same as it was in Q1, but it's 15% to 17% is the guidance we're giving for the full year.

Okay. I'm just trying to get a sense of the -- is the big step down coming in Q2 or Q3?

I think it'll be -- we're seeing, over the course of the 2 quarters, Tim, where I see some elements of it certainly in Q2 and that will continue in Q3. So I think if you're doing your math on your model, I'd spread it over to 2.

Okay. So with that in mind, let me try to frame the debate that I think everybody's having a little bit and get your response to this. If we just look at the run rate of your revenue outside of your top client from first half of 2017 to what would seem to be implied in the back half of 2017, it's got to step up something on the order of magnitude of about $100 million from first half to second half. And looking back historically, I don't think revenue outside of your top client has ever seen that kind of step up in 2 sequential half-year periods. What is it that gives you confidence that you can do that? Is it that the business is sitting in the backlog? And if so, are you confident that it will burn out this year?

I mean, we -- Steve called it out at the beginning of the call, and we've been talking about that strength outside of our #1 customer in terms of our business win for quite some time. We've developed a lot of very, very strong, new strategic relationships. And you can see that very meaningful in our -- meaningfully in our top 2 through 5 customers. If you look at their increase year-over-year, it's been very, very significant. So we are comfortable that we're doing a good job in expanding and diversifying our backlog and that, that growth that we've seen in the backlog will flow through to our revenue during the course of the year. I wouldn't like to be probably going to ask about this and say it's going to be a easy transition, it is a year of transition. However, we feel we've got a strong customer list and a strong backlog that can help us deliver on this. Maybe I'll hand over to Steve.

Yes, no, I would concur. I think the evidence is we've grown our backlog outside our top customer at over 20% over the last 12 months. And it's now contingent upon us to get those projects moving, and we have a number of initiatives in place to make that happen, Tim. So no one's pretending it's going to be easy. There will be plenty of challenges there, but we are confident in our guidance and we are confident in our ability to make that happen.

We now move to our next question from Jack Meehan of Barclays.

I wanted to ask about some qualitative commentary around the new business awards in the quarter. Are you seeing any longer-duration trials coming through? And just how does that impact the quarterly pacing of revenues through the remainder of the year?

Jack, I think the short answer is I don't think we're seeing any particular trend in terms of long duration trials. We continue to see -- we continue to win large-scale complex trials. That's not a new trend. That's been in the industry for some time. Oncology is a large part of our portfolio. We have some large cardiovascular trials also in there, some opportunity, of course, to replace the cancellation with some of those trials. It's also something we're very focused on in order to help us to drive the business wins. But no, there's no -- I don't -- don't see any particular trend towards longer-term trials at all, no.

Great. Thanks for the color. And then just one for the guide. You talked about the commitment to share repurchase, still a lot remaining on the authorization. Does guidance include any future deployment of capital, or is that still expected to be upside?

There's no -- the share buyback, any future share buyback is not included in guidance. So that -- if that happens, that would be upside, yes.

The next question now comes from John Kreger of William Blair.

Steve, could you go back to the FSP commentary from a few minutes ago. When you are getting a new opportunity to go after, from your perspective, is that sort of work that would have been previously been done in house? Or is it more of a kind of a vendor replacement type of opportunity? Or is it maybe work that would've typically been traditionally outsourced, to now, the clients thinking more about an FSP-type of structure? Just sort of curious where that spend is coming from.

Yes, John, I would answer that in saying that in our experience, certainly, over the last 12 months -- 12 to 18 months in terms of the work we wanted, it's really been replacement of vendor. So in other words, we've won work from other FSP providers, albeit on our model and our competitive offering. We -- that's the bulk of it. We occasionally see work coming to us in that area that has been done in-house. It's not going the other way. We certainly don't see any trend to do things more in-house. And of course, the full service to FSP, not really seeing any particular trend there either. Our full service tends -- is still a very vibrant and we see growing part of the market. FSP is also that. As I sort of indicated in my commentary, the hybrid model is probably -- if there's anything, the companies are doing both and looking at, certainly, their more centralized services as being key components of FSP; data management, statistics, programming. But the monitoring, project management, those sorts of various study management startup still tends to be done in many of those models on a multiple service basis or a more project program-oriented basis. So if there is a trend in the market, it's possibly towards more of those hybrid models. But as our experience and our success, I think, in that market has really been through replacement of vendors.

Great. That's helpful. Just one other last question. If you think about your largest client, it's obviously trending down because of the cancellations this year. If you think a little bit more long-term, '18, '19, do you think about that as being sort of a flattish dollar volume or continuing to decline? Do you have any visibility on that yet?

That's a question we're asking ourselves internally. I would say that our top revenue customer continues to be an important and a very significant -- one of our new wins, our top echelon, if you like, of new business wins, so they continue to be a very important part of that. So on the basis of that sort of cadence of wins, we expect that the revenue run rate will, by the end of the year, essentially reach steady-state. And we'd like to think it will continue in that sort of frame. So we don't see further dramatic declines. We see it reaching a solid steady state. Certainly, a little lower than where it is at the moment, but they continue to be -- they will continue to be our top customer for some time to come.

We'll now move to our next question now from Eric Coldwell of Baird.

OpEx down 130-plus bps year-on-year, about 40 bps quarter-to-quarter, headcount down 2 to 300 over the last couple of quarters. I'm not really sure how that splits between direct and indirect account, but maybe could speak to that. And then also, just talk a little bit about, maybe give us some anecdotes on tools you're using to get this OpEx down and to control it the way you have? And also, maybe the impacts of things like FSP mix or currency or anything exogenous that might be relevant to the good performance you're showing on controlling operating expenses?

I might weigh in on that one. First, Eric, obviously, you can see when you look at the margin profile on OpEx, that it is continuing -- a large chunk of it is continuing to lever SG&A base, which is very much around our global business services model. We've seen that being something where we've really successfully brought in centers of excellence there and obviously used our geographical footprint to leverage the average salary cost there. But it's the continuing theme that's probably the biggest driver -- in terms of our SG&A leverage that we're seeing. Also, I think we've been very smart over the last number of years in terms of our facility footprint. We have really utilized the space that we do rent extraordinarily well. That continues to be the theme. I think it will continue to probably to be one of the margin drivers as we go forward through the course of the year. And so that's probably one of the biggest pieces. I think the -- you referenced the headcount drop quarter-over-quarter. Obviously, we're coming into a period where we need to be very focused on our margin profiles. That was through attrition, that headcount drop. And I think the split was probably -- it was probably weighted equally in terms of our existing proportions of headcount, which is probably about 80-20, billable-nonbillable. So I think that our headcount drop was probably weighted equally and that 200 headcount drop is weighted equally in that same proportionality, 80-20, billable-nonbillable. So I'll hand over to Steve maybe on some of the technology pieces that we used in our direct costs...

Yes. I think on the direct costs, Eric, gross margin, we've been able to mitigate any reduction in the gross margin on the basis of a couple of these. One is, we are using increasingly the technology that's available. We find -- our customers like it because they get a better quality review of their data, or they get better early access to their data, they can check the quality of it. I think that's good. And where -- and they get a lot of -- essentially, a reduced price. But we can maintain or even occasionally improve our margins in that area. So that's another thing. The other thing, I think, for us is we've been successful over the last 12 months or so, in winning some larger projects. And so the portfolio that we have has shifted a bit more towards larger projects, and with larger projects, you do get an opportunity to gain those sort of efficiencies and economies of scale. So any sort of press down from the mix of business changing FSP-wise full service is being mitigated by some efficiencies we're generating through technology and through those larger projects. And then as Brendan says on the SG&A side, we're also able to -- we've been successful in moving that along, and I think there's still opportunity for us, particularly on the SG&A side going forward. And that's an area that we continue to be focused on and plan to impose the benefit from.

That was fantastic. Could you, maybe last follow-on, just give us a sense on how low can it go if we're doing the game here, a little game of limbo. How low are we going to go on OpEx over the next, I don't know, 3, 5 years? What's the ultimate target?

Brendan's looking very nervous (inaudible). I don't think we're ready to put out a specific target on that one, Eric. Suffice to say that our margin, we believe, on a GAAP basis, is industry-leading, and so we're very proud of that, and that's something that we want to continue. I think maintaining that will be -- will have its challenges, but will be something that we're certainly very focused on doing, and I think we can do it. If there is a such(inaudible) through the combination of continuing to drive the technology and continuing to leverage our SG&A. So I'm not going to set a target, but at least not publicly. We will be continuing to look at that very hard. And I do think we want to maintain at least that overall operating income margin, and hence, we'll do that in a combination of ways as I think I've outlined.

We'll now move to our next question from Donald Hooker from KB Bank.

Kind of I wanted to echo a question from an earlier questioner. You had a wonderful free cash flow and a great balance sheet. Do you think that you will complete your share repurchase authorization before your next shareholders' meeting, I guess, this summer?

No, we don't, Donald.

You don't?

Sorry, I'll just give you -- I'll give you a straight no on that one. I think that's not going to happen. We have approval from our shareholders to spend that $400 million over another 15 months or so well into 2018, so I certainly don't think we'll be completing by the June meeting.

Okay. Okay, that's great. And then I guess you all commented on your capabilities in the area of informatics and you gave a few examples. I was wondering where over time you see sort of the line between what you're doing internally with software and analytics versus what you're procuring from third-party vendors.

We constantly ask ourselves that question. And our philosophy, certainly, is where there's a strong third-party vendor who can provide us with the sort of technology software applications that can get us the data and can get us the analysis of data that we want, we would certainly go to them. We are not a software development house and we have no intention of becoming one. However, we are at the cutting-edge of Big Data in this industry and we need to reflect that. We need to reflect that, at least the need to provide these optimal solutions to our customers in a way that allows us to deliver those solutions effectively and in a timely manner. And so where there's competitive advantage in us delivering or us developing the sort of software, the analytics piece, we will do it, and we have that. And ICONIK's a good example of that. It's a very, very well-accepted and very strong piece of software application that we're benefiting from on a risk -- particularly on a risk-based monitoring point of view, but not just in risk-based monitoring in terms of review of data and ability for our customers to get access to their data on a real-time basis. So we look at each of the areas on the -- not in isolation, but we look at them in a way that we make the decision as we see what's out there in the marketplace. And that is to say that's -- so it's a hard question to answer in terms of just one straight answer. We're not a software house, we're not going to be one. But we do believe that there is a need to develop these solutions quickly and effectively. And we have a lot of very good people and a very strong IT group. We've done this in the past and can do this in the past, and they're able to offer these sort of solutions. So I hope that answers your question.

We'll now move to our next question from Michael Baker of Raymond James.

I was looking for an update on labor rate inflation, particularly at the CRA level, if you're seeing, what type of change, if any, you're seeing there?

You want to answer that one?

Yes, I think we've been -- we're pretty disciplined around that, Michael. We've seen kind of in that ballpark of 2.5% to 3% being our kind of global inflation rate from a salaries perspective. Obviously, there are pockets where you see that being higher, but also areas where you see it being lower. I think what is important to us as an organization in controlling our overall salary cost is the overall number in that 2.5% and 3% range over the last couple of years, and I think probably towards the 2.5% range in the current year. As you say, CRA, sometimes, in pockets can be a little higher, we've seen that over the, certainly, probably going back some 6, 9 months ago now, you should've seen a little bit of a pocket of that, particularly in the U.S. But these trends do come and go, and I think for us, really, merging the overall position is what's important.

Yes, I agree. I mean, and -- as Brendan says, it's the pockets of inflation do get above that occasionally, particularly in certain functional areas, CRAs being a good example. But we look to broaden out how we retain our people. It's just not around salary, career path, opportunities to develop, particularly in a CRA, to a clinical trial manager or to a project manager. That's at least as important, I think, as EMA and CRAs for most forward-looking young professionals these days. And we're working very hard on that within our organization.

We'll now move to our next question from Erin Wright of Crédit Suisse.

Can you speak to your opportunities with your med device customers? Do you being a more meaningful driver for you with any sort of larger projects there? And what would be the typical profit profile of a med device project for you and what are you competitive advantages in that category?

Sure, Erin. We've -- I mean, as you probably know, we developed our medical device group through the acquisition of Aptiv a year or 2 ago now, and we have a strong group in that area. And what we've actually, I think, called out in my commentary, we've seen some very strong business -- new business wins in that area. We see the market growing substantially, certainly, double digits in the market aside from the devices' point of view. And increasingly, we're seeing some of the big medical device customers become much more attuned to the outsourcing environment. I wouldn't suggest they probably -- I don't mean to be dismissive, but 10 years behind the pharmaceutical, the drug industry from an outsourcing perspective, but they learn fast. And they're I think increasingly embracing the outsourcing mantra, and we're the beneficiary of that. And we have a strong, as I said, medical device group. Our advantage, really, is around the people that we have. Some very experienced people have been doing this for a number of years who have an excellent track record. They're able to combine some technologies that we have and the customer relationships that we have to put forward a strong case. And so customers, and perhaps non-traditional customers, so to speak, who haven't done much outsourcing are very much intrigued and very much interested, and we're engaging in a number of conversations with those sort of customers about the outsourcing of their device requirements. I would -- I don't want to overhype this, so I would say it's still a relatively small part of our business, albeit one that's growing nicely. I do see reports in the industry, around the industry, that the market is a substantial one, and I would fully concur with that. I think it is one that's essentially fairly underserved, and we intend to put ourselves in a position where we can benefit from that. As I say, it's a burgeoning industry, a burgeoning market and one that we feel we're well positioned to take advantage of.

That's great. And how would you characterize the current pricing environment? Are you seeing any sort of shifts or outliers in the space? Or is everyone behaving relatively rationally out there?

Are you talking medical device specifically, or just in general?

No, more broadly.

Broadly? I would say in general, rational behavior is the norm. We're not seeing any crazy stuff. Having said that, project to project, that can change; or relationship to relationship, that can change. But overall, I would say pricing environment is it's normal competitive itself, I would say. But that certainly doesn't mean it's cutthroat or silly.

We'll now move to the next question from Dave Windley of Jefferies.

Wanted to tie a couple of earlier questions together. I guess, it's our understanding that as part of a broader shift or evolution, that your top customer is kind of rebuilding an internal clinical ops team. And so as that becomes a reality, that creates, say, a fifth CRO or a fifth execution team for them to look to do work. It's also our understanding that their number of projects to let (inaudible) right now is relatively low. And so I wanted to come back to the earlier discussion, kind of Tim's question about the run rate. If I assume that Pfizer drops off a little in the second quarter and then kind of completes the leveling in the second half, it would look like you'd be at a, roughly, maybe a $200 million run rate. Steve, I know you've mentioned that you think that, that's a reasonable run rate going forward. But in light of kind of low award opportunities and kind of the possibility that some of that work stays in-house, how should we think about how that progresses? I'd appreciate if you could comment on these things.

So thanks, Dave. I would say the Pfizer model continues to evolve and continues to develop, and the folks there have an approach that we are able to work in well with, and we have worked in well with really over the last 5 years. So we don't see any huge fundamental shift in what they're doing. It'd be the first point I'll make. There's no, I think, particular push to bring work back in-house. As such, they have a strong team within their organization that oversees their partners. That, I know, is a fundamental tenant of their outsourcing strategy, as it should be. We work well with that. So I don't see a great change in what they're doing. In terms of run rates for work, we see plenty of opportunity still coming from our top customer. They are open to us. We continue to have very strong relationship with them. We look to continue to build that and to make that as good as it possibly can be. A number of our business wins that we reported this quarter were from them. As I've mentioned, really, our echelon of new business awards. So we feel that there's a -- we're getting to a steady state. We're getting to a solid run rate that we believe is sustainable and substantial, quite frankly. So the figure that you mentioned, I would say, is within the ballpark of what we believe is likely to be the case. Obviously, for us, we need to continue to deliver well. We don't expect to win much work from them if we don't deliver well, and we would expect to win just a little bit more if we deliver way ahead of expectations. So our focus, really, is on delivering the work that we have from them as effectively and as cost-effectively and as fast as we can. And we believe we're in a good position to do that. The relationship continues to grow. It continues to get better. And we -- as I said, we feel very optimistic about that long term future. Specifically, no pessimism around this place in terms of what that is likely to look like as we really get that steady-state position.

Excellent. I appreciate that. And then I think Eric asked kind of a cost question. As you think, about this transition, and particularly, as earlier questions have tried to put a finer point on how it progresses through the year. And some of your answers have been around using technology to kind of mitigate business mix shift pressure on gross margin and things like that, is there anything we should know about the kind of quarter-to-quarter progression of margin, which, heretofore, has been very stable and consistent in its path upward. Is there any disruption to that as you see a more, say, major shift in the revenue contributions from your top customer to your growing non-Pfizer portfolio?

I'd say broadly speaking, no major shifts. We don't see any sort of cliff approaching or a particular transformational issue that's going to drive any sort of major change on the margins. As with everyone in the industry, we continue to see a pressure and a requirement to drive efficiencies. And then part of that, as the shifting portfolio, slightly shifting portfolio of our business, our FSP business, is going to put a little pressure on our gross margin, but we believe we're able to mitigate that through, as I mentioned, to Eric,(inaudible) technology and around continued leverage of our SG&A. And so maintaining that OpEx is certainly our goal and I believe a very achievable one. So the short answer, David, we don't see a major shift coming, whether it be from our top customer or anybody else for that matter. The business, as long as we continue to work hard and we continue to drive the efficiency in our business and challenge ourselves to maintain the sort of margins we have, we anticipate that, that will happen.

And we'll now move to our final question today from Tycho Peterson from JPMorgan.

We've heard a number of comments from your peers on delays that have come up, pipeline re-prioritization, even some hints around maybe some more in-sourcing. You guys have largely avoided that. Obviously, you have the Pfizer cancellation. But can you maybe talk to why you think you've avoided some of those pitfalls in the market? And as we think about your mix shift, moving more towards mid biotech, is there more risk there?

How we've -- well, I guess it all works out in a wash. Tycho, it doesn't -- I mean, we've had our share of cancellation, particularly last quarter, so I think we'll -- I'm not sure we've been totally lucky in that respect. It's -- it works out. I think there's an element of fortune with these sorts of things. We -- of course, we see the larger -- some of the larger projects not as fast to start up as we'd like them to be. We've been able to mitigate that to some extent through some of the initiatives around our startup group, and again, some of the technology that we've been able to usefully employed to get studies moving and get them going. That doesn't mean that we won't have, potentially in the future, those sorts of issues. We are doing more and more complex trials, no question about that. Large-style oncology trials that are looking for patients that are very hard to find these days. That's a fairly common refrain within the industry, and I know our peers have said that, and that would certainly be something that we would concur with from that point. We've been able to avoid it to some -- to a large extent up until now, but of course, we've copped a couple of others on our hits, which we're all very familiar with. So it's a matter of how you manage your business. And I think we have a very strong operational team within our clinical research business and within our ICONIK business, and they're very much on top of these things and able to move them forward as appropriate.

And then, as we think about FDA dynamics, are you hearing anything from your customers just in terms of FDA adding a lot of resources, trying to accelerate approval timelines. I mean, how do you think that plays out vis-à-vis your relationship with your customers?

I think we're hearing the same thing you're hearing in terms of FDA. The mantra from the new administration around reducing bureaucracy and regulation, and we're hopeful that, that would lead to increased approvals and reduced times for approvals of new trials as well as new drugs. It's obviously in all of our benefits. I think the evidence, certainly come last year, with the FDA, was that the number of approvals was a little down, but the evidence this year so far is that they're up, at least on a first quarter basis. So it seems to be moving forward. We're very optimistic about the benefits the 21st Century Cures Act could bring, particularly on a real-world evidence, real-world databases. We believe we're going to be -- we are well positioned to be able to benefit from that. We do see the clinical trial environment moving, shifting over, and this is not going to happen over the next few months, but shifting over the next few years to being much more within that naturalistic real-world evidence type of environment. And a lot of drugs, I believe, will be approved based on -- more based on evidence in that. So we're preparing ourselves for that sort of shift. We want to make sure the organization is able to essentially get ahead of and benefit from that sort of shift. But I think the feedback we're getting from FDA and the regulators is really along those lines, and these things, as you well know, don't happen overnight. It's a question of trying to anticipate them and then skate the way the park's going to be, and we think we're in the process of doing that.

Okay. And then just last one on backlog conversion. It's held pretty steady at about 10.2, 10.3, is that kind of a normal run rate, you think, going forward? Or any reason that would kind of deviate from that as you shift more towards mid cap biotech?

I think -- Tycho, it's Brendan here. If you kind of excluded our, obviously, our cancellation impact of the bogo (inaudible) cancellation, that will obviously have an impact as we look forward to the next couple of quarters. I think that's kind of really what's played out in the Street, that sort of numbers there. So it will probably come a little closer down into the 10 number as we go through the next couple of quarters. That said, I mean, it's that kind of a one-off event, so there is a possibility we'll be able to be back up there afterwards.

Thank you. Ladies and gentlemen, that concludes today's Q&A session. Dr. Steve Cutler, I'd like to turn the call back over to you for any additional or closing remarks. Thank you.

Thank you, operator. We've made a positive start to 2017. And we look forward to building on this during the rest of the year as we build on our position as the CRO partner of choice in drug development. Thank you, everyone. Appreciate your questions.

Thank you, sir. That will conclude today's conference call. You may now disconnect.