ICON PLC (ICLR) 2019 Q3 法說會逐字稿

Ladies and gentlemen,

thank you for standing by, and welcome to the Q3

results 2019 conference call. (Operator Instructions) I

also must advise you that this conference is being

recorded today.

And I would now like to hand the conference over to

your first speaker today, Mr. Jonathan Curtain. Thank

you. Please go ahead, sir.

Thanks, John. Good day, ladies and gentlemen. Thank you

for joining us on this call covering the quarter ended

September 30, 2019. Also on the call today, we have our

CEO, Dr. Steve Cutler; and our CFO, Mr. 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.

And 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 statements headed consolidated --

Condensed Consolidated Statements of Operations (U.S.

GAAP) (Unaudited). 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.

From January 1, 2018, the revenue recognition standard

ASC 606 became effective for ICON. Consequently,

current and prior year comments made by both Brendan

and Steve incorporate the impact of this revenue

standard. All business win and backlog-related

financial measurements comprise both direct fee and

pass-through components. This is consistent with

financial measurement presented in quarter 1 and

quarter 2 of this year.

We will be limiting the call today to 1 hour and would

therefore ask participants to keep their questions to

one each with an opportunity to ask one related

follow-up question.

I would now like to hand over the call to our CFO, Mr.

Brendan Brennan.

Thank you, Jonathan. In quarter 3, we achieved gross

business wins of $1.079 billion. We recorded $148

million worth of cancellations. Consequently, net

awards in the quarter were $931 million, resulting in a

strong net book to bill of 1.31. On a trailing 12 month

basis, our net book to bill was 1.32. With the addition

of these new awards, our backlog grew to $8.4 billion.

This represents a year-on-year increase of 12%.

Revenue in quarter 3 was $710.4 million. This

represents year-on-year growth of 8.5% or 9.5% on a

constant currency basis. On a constant dollar organic

basis, year-on-year revenue growth was 8.4%. Year-to-

date revenue in quarter 3 was $2.080 billion. This

represents a year-on-year growth of 8.5% or 10.3% on a

constant currency basis. On a constant dollar organic

basis, year-on-year revenue growth was 9.4%.

Our top customer represented 11.4% of revenue for the

quarter compared with 14.1% in quarter 3 2018. We

expect revenue concentration from our top customer to

remain in line with our previously stated guidance of

11% to 13% of revenue for the full year. Growth outside

our top customer on a trailing 12-month basis remained

robust. Our top 5 customers represented 36.2% compared

to 40.5% last year. Our top 10 represented 49.1%

compared to 55% last year, while our top 25 represented

67.9% compared to 71.2% last year.

Gross margin for the quarter was 29.7% compared to

29.4% in quarter 2 and 29.9% in the comparable quarter

last year. As revenue growth continues, we continue to

leverage our global business support model. As a

result, SG&A was 12% of revenue in the quarter. This

compared to 12% last quarter and 12.3% in comparable

period last year.

Operating income for the quarter was $110 million, a

margin of 15.5%. This compared to 15.3% last quarter

and 15% in the comparable quarter last year. The net

interest expense for the quarter was $1.5 million, and

the effective tax rate was 12%.

Net income attributable to the group for the quarter

was $94.8 million, a margin of 13.3%, equating to

diluted earnings per share of $1.74. This compares to

earnings per share of $1.69 in quarter 2 and $1.54 in

the comparable quarter last year, an increase of 13%.

On a comparative non-GAAP basis, days sales outstanding

were 56 days at September 30, 2019. This compares with

61 days at the end of June 2019. The primary reason for

our improvement this quarter can be attributed to the

conversion of billed receivables into cash. During the

quarter, cash generated from operating activities was a

strong $160.7 million. We remain focused on all

elements of our DSO, particularly the transition of

unbilled revenue to build debt. And we feel confident

that our full year cash from operations will be in the

range of $320 million to $360 million.

As you all have seen from the press release last night,

during the quarter, the group completed the acquisition

of Symphony Clinical Research. This was for an initial

payment of $31.6 million. In addition, during the

quarter, capital expenditure was $13.7 million and

$76.5 million worth of stock was repurchased at an

average price of $151.80. At September 30, 2019, the

company had net cash of $121.7 million compared to net

cash of $81.8 million at June 30, 2019, and net cash of

$142.3 million at September 30, 2018.

With all of that said, I'd now like to hand the call

over to Steve.

Thank you, Brendan, and good morning, everyone. Quarter

3 was another quarter of excellent progress for ICON.

During the quarter, we delivered record growth and net

business wins leading to a very healthy quarterly book

to bill of 1.31 or 1.32 on a trailing 12-month basis.

ICON's continuing positive business development

performance means we grew our backlog by 12% year-on-

year to nearly $8.4 million and recorded a robust

revenue increase year-over-year of 9.5% on a constant

currency basis.

As with recent prior periods, we continue to expand

relationships and revenues from customers outside our

top 10, which grew by over 20% on an annual basis.

As we develop these new customers, we expect to see

further revenue growth from them as we move into 2020.

We believe this diversification leaves us well-

positioned for a consistent and sustainable future

growth.

The backdrop of a strong outsourcing landscape and

continued biotech demand offers possibilities to

broaden our existing customer base, and we are pleased

to see new strategic alliance opportunities opening up

across our clinical research, functional solutions, and

laboratory service lines. These customers are looking

to leverage ICON's operational excellence, flexible

partnership model and depth of therapeutic expertise

across our global footprint, all underpinned by our

differentiated patient, site and data strategy.

In anticipation of our operational delivery

requirements, a significant proportion of our 2019

headcount hiring occurred during the earlier months of

this year. This meant that during quarter 3 we were

able to improve utilization and expand our gross margin

to 29.7% of revenue. Moving forward, we will continue

to closely assess our hiring requirements in line with

our project pipelines and will ramp our recruitment

accordingly in line with project needs.

As we balance revenue growth with our requirements for

additional project resources, we continue to leverage

our global business support model.

During the quarter, we saw further evidence of this

with SG&A remaining in line with the prior quarter of

12% of revenue, down from 12.3% last year.

As we have demonstrated over the years, our SG&A

leverage remains a key industry-leading strength. We

have developed a strong positive culture within our

support structure that is focused on best-in-class

service delivery and appropriate cost-saving

initiatives.

As we move forward into 2020 and beyond, we will

continue to balance our investment needs with savings

opportunities in these areas. This continued focus on

operational excellence and the proactive management of

our cost base resulted in an operating margin of 15.5%,

up from 15% last year. This led to an EPS increase of

13% year-over-year to $1.74.

We continue to develop our patient, site and data

strategy. At this time I'm delighted to announce the

acquisition of Symphony Clinical Research, a provider

of site and patient clinical trial support services.

This acquisition, concluded in late September, further

enhances our ability to help solve our customers' key

challenge of getting patients into clinical trials

faster and more efficiently.

The acquisition of Symphony complements ICON's existing

PMG and MeDiNova site networks in the U.S. and Europe.

Importantly, it means ICON can now offer patients at-

home trial services, which will make it more convenient

and accessible for patients to participate in clinical

trials. This patient-centric approach helps reduce the

travel burden for patients, broadening ICON's

recruitable population and providing patients access to

clinical research studies in which they may not have

otherwise been able to participate.

At-home trial services will improve our ability to

recruit and retain patients in traditional studies, and

crucially, it will also enhance our ability to conduct

virtual trials as we move forward. Innovation and the

ability to execute effectively in this emerging area

will be a key differentiator in the future. In quarter

3, we repurchased $76.5 million worth of shares at an

average price of $151.80. This means in total we have

spent just under $141.6 million year-to-date

repurchasing a million shares at an average price of

$141.57.

During the quarter, we also generated strong cash

collections, helping us to achieve cash from operating

activities of $161 million. This helped drive our DSO

down to 56 days from 61 days last quarter. While the

industry trends of customers looking for fewer billing

milestones and elongated credit terms remain, we are

committed to working with our partners to proactively

improve our cash conversion cycle and lower this metric

further over the medium term.

As we look forward with optimism on the business

environment and confidence in our ability to continue

to execute our strategy, I want to take this

opportunity to update our full year guidance. We expect

2019 revenue to increase to a range of $2.79 billion to

$2.83 billion, an increase of 7.5% to 9% year-over-year

and earnings per share to increase to a range of $6.81

to $6.95, an increase of 11.8% to 14.1% year-over-year.

Before moving to Q&A, I would like to welcome all the

Symphony staff to ICON. And of course, thank the entire

ICON team for all their hard work and commitment during

the quarter. Thanks, everyone, and we're now ready for

questions.

(Operator Instructions)

And we'll now take our first question, and this comes

from the line of Elizabeth Anderson.

Congrats on a good quarter. I just had a question. How

should we think about the acquisition contribution from

Symphony going forward?

Elizabeth, welcome back to the (inaudible) group.

This is very much a strategic acquisition. So it will

be relatively, relatively small in terms of quarterly

contribution. So really, you're really looking at a

couple of million dollars on a quarterly basis. So we

do see it as very, very important from a strategic

perspective and obviously being there to really augment

the patient experience, but it is relatively small in

absolute terms.

Okay. Perfect. And then one sort of more broader

question. Have you -- could you comment a little bit on

the -- any changes and perhaps like site network

competition in the quarter or any sort of changes in

your offerings and the -- for future margin opportunity

there?

From a site network point of view, Elizabeth?

Yes.

No real changes. We're bringing the PMG and the

MeDiNova site network together. And then we'll overlay

that with the services that Symphony offers from a

patient point of view. So that whole patient and site

network is coming together. We're in the process of

doing that. We're starting to see some good traction in

terms of the increase in the proportion of patients

recruited and the numbers of patients recruited into

our trials, but there's no particular changes in terms

of the cost base. At this point, we anticipate we'll

get some efficiencies as we complete those

integrations. That's certainly the aim. But really it's

around how we get patients into trials faster. That's

the focus of that group.

And we'll now take our

next question, and this comes from the line of John

Kreger.

This is Jon Kaufman on for Kreger. I realize that you

haven't completed budgeting for 2020 yet but do you

have any broader observations on how you're thinking

about next year?

Jon, no, we're looking at our business. We're actually

just starting to go into our budgeting season. So we're

going out to our business, looking at the markets,

getting some input from various parties, and we've got

nothing to announce right at this stage, although we

expect our business to continue to grow as we outlined

into 2020 and beyond.

Okay. And then if you look across all of your client

segments, are you seeing any signs of caution? And if

so, is that coming from large pharma, midsize clients

or perhaps the smaller biotech cohort?

We've seen -- I mean demand for our services across all

those segments continues to be very solid. Certainly in

the biotech space, if we look at our year-to-date

trailing 12-month numbers, the dollars are there, the

dollars are up on a sort of mid-single-digit basis. So

we feel good about that market. I recognize that as we

look at the -- we look at the same data review from a

funding point of view. And probably, the growth there

has come off a little bit from where it was perhaps a

couple of quarters or a year ago, and we see that. But

in terms of the opportunities we're seeing in that

segment, over the period of a year or so, we continue

to see opportunity, we continue to see growth, and

certainly our backlog has benefited from that.

And we will now take our

next question, and this comes from the line of Tycho

Peterson.

I'm wondering if you can talk to the DSO improvement.

In the past, I think you've talked about longer time

and extended credit terms. So can you maybe just talk

to some of the drivers of improvement in DSOs and how

sustainable do you think that trend is?

Tycho, it's Brendan here. Yes, no, it was a good --

very good quarter in terms of the improvements. We

would say we still have a lot of work to do and a lot

of folks to put on there. I think we were particularly,

as I mentioned in my prepared remarks, good at getting

cash in on bills are out the door in the current

quarter. So it was very much focused on making sure

that we were collecting as efficiently as we could, and

that's where a lot of the improvement came from.

As we have spoken about it in the past, those

commercial pressures are still there around folks

looking for those fewer milestones and milestones being

pushed out further into the contract, and that is

something that is still a pressure point as we look at

our DSO and the make up of our balance sheet. But as

we've said, it is something that we're very focused. It

is something that we're working with our customers on

particularly to ensure that we are seeing a good level

of traction and pull-through of our cash conversion

cycle. But that said, it was a good quarter. We are

very happy, as I said, $161 million of cash from

operations this quarter gives us a very, very good cash

conversion ratio of nearly 90% year-to-date on net

income. So good pull-through from that perspective, but

still work to be done, particularly on that on build

debt side.

Okay. And then one more for you, Brendan, before I hop

over to Steve. Just plans for further share repos, now

that you've hit kind of the target for the year?

Yes. We'll keep our eyes to the market. It's been funny

trading patterns over the last little while. I think

opportunistically, we'll still look at the market in

the fourth quarter. And if the opportunity presents

itself, we will go beyond the 1 million shares already

done by end Q3 and get back in the marketplace if the

need arises.

Okay. And then Steve, we're seeing a little bit of a

resurgence on the Alzheimer's front here with the

Biogen news. Can you just talk a little bit about your

pipeline in CNS more broadly? How robust that is?

Tycho. I'm not sure I'd get too carried away with as

you (inaudible) there coming back into the

submission stakes. I think there's certainly still some

challenges there with regard to that. So I'm not going

to get too carried away about the resurgence in the

Alzheimer's market based on one sort of resubmission.

However, if I look at our CNS portfolio, it continues

to grow. It's in the neurology space and psychiatry

space. It's an area we're continuing to invest in, in

terms of bringing in new medical experts and project

managers. We feel we have a good network of sites that

can do these sort of trials, a number of the sites than

we have in our network are also skilled in the CNS

area. So we feel we're well placed to be able to

benefit from any uptick in Alzheimer's trial or any

other sort of neurological conditions or psychiatric

conditions as they come through. It's -- I think it's a

strength of ours and one that we are looking to bring

forward.

And your next question

comes from the line of Robert Jones.

I guess, Steve, just to go back to where maybe some of

the growth or what you're seeing in the different

cohorts on the demand side, clearly, bookings, very

strong in the quarter as you guys highlighted.

Cancellations, I know you guys characterized as normal.

But I mean, maybe just to parse those out a bit, did

you see anything in particular from the smaller biotech

cohort that either, a, drove the incremental booking

strength in the quarter? Or maybe you had a

disproportional contribution to the cancellation side

of the equation?

No. There was -- I mean some of the growth as we

mentioned outside our top 10 is very strong, very

substantial. But sometimes you kind of naturally think

that outside of our top 10 customers are typically a

biotech customer. That's actually not the case. So the

growth we drove in that cohort, that outside top 10,

was across the spectrum. Certainly, there were some

smaller customers in there, but there were also some

large and midsized customers in there as well. And

that's what I was particularly pleased. 1 or 2 of the

partnerships that we've been able to win over the last

year, 18 months or so, moved into that and are moving

up the league table, so to speak. So we got to -- I

think we got growth across the segments in that space.

They were all biotech, although, of course, the biotech

business has grown recently substantially within our

portfolio over the last -- really over the last couple

of years, I suppose 18 months or so. Certainly, they

are a larger part of our backlog now than they were a

year ago, although still very much a minority, around

20%, 25% of our backlog. So the growth -- what I'm

pleased about was the growth was fairly broad-based

across the segments of our customer segments, and that

is I think that's good for us and certainly gives us

plenty of optimism in the future in terms of

establishing or continuing to develop the relationship

with companies who have a portfolio and have a budget

that is not just around 1 or 2 projects, but around

something much more sustainable of it.

Maybe just to add to that quickly, Bob, I think

specifically on your point around cancellations in the

quarter, I don't think we really saw a skew towards

small biotech or large. It was a pretty normal mix.

Some of the reasons for operational pieces, some for

non. So there was nothing there I think from a

therapeutic or a company size perspective that would

indicate anything specific.

No. That's helpful. Good to hear. I guess just on -- I

know you guys are not in a position yet as you

mentioned, to give specifics around 2020 but just so I

can think about the way things have trended so far this

year, it looks like you're pointing to about somewhere

north of 8% top line growth this year. You're on pace

to grow the backlog in a similar range to what we saw

last year. Is there anything unique or different about

the type of wins or the progression of the type of wins

that you've seen this year that we should think about

as we look forward as far as it relates to conversion

from backlog?

I think broadly speaking, no. Bob, the portfolio that

we've won, as I just said, it's been -- the last 12, 24

months has been I think a larger proportion of biotech

working there. But we have I think a good spread of

work right across the segments. Large pharma remain a

core foundation of our backlog. That will continue.

Midsized pharma is very strongly represented as is

biotech. So there's been nothing I think in the win

profile over the last quarter or 2 that's going to mean

we'll drive a different sort of profile as we get into

2020 and beyond.

And your next question

comes from the line of Juan Avendano.

Regarding the point on the cancellations, I mean, I'm

calculating a 1.8% cancellation rate in the quarter,

which is at really low on historical terms. Am I

looking at it correctly?

That's a opening backlog, Juan. Yes -- no, that sounds

like it's around the right percentage.

It was low teens I think with growth. Yes, I think it

was around our expectation. I don't think it was a bad

effort in Tier 1.

Yes, yes. That was sure.

Okay, got it. Now I just wanted to clarify that. And so

cancellations are actually historically low. I guess

staying on the backlog, could you share with us what

your gross win growth rate on a reported basis was

year-over-year in third quarter and what it's been

year-to-date?

Gross wins were in the low double-digit range from a

growth point of view, Juan. You're happy enough with

that. It's a little higher on a net basis, but we got

back to some comparisons that we didn't provide that

both the comparisons at the end. So we were happy with

the sort of low double digits on a gross basis.

Good. All right. And then have you noticed any changes

at all in recent months in the pace of bookings from

Bristol-Myers Squibb?

We don't comment on specific bookings from specific

customers, Juan. So I'm not going to talk about any

specific customer. We've seen continued progress across

our large pharma a cadre of customers. It is a matter

of public record that we are a supplier to Bristol-

Myers. We continue to have a good relationship with

them. We continue to work hard with them, and that

relationship is ongoing but I'm not going to comment on

specific customers and specific bookings.

All right. Last -- and lastly, if I may, can you give

us an update on the percentage of patients that you're

recruiting within your integrated site network in the

quarter?

Yes, it was -- we certainly increased that on a year-

on-year basis. It's up around 30% from last year. So

we're happy to see the input. It did come down a little

bit in terms of the proportion of patients recruited,

that was partly because there were more -- fewer

vaccine studies in this quarter. So it came down a

little bit to closer to around 20%, 25% but only on a

year-to-year basis, it's gone up. So we're continuing

to see traction in that and I think with Symphony

coming on board, we'll get more traction around that

because of the -- of these guys, our Symphony folks

will be helping to support and helping to expand that

integrated SMO network. So I'm really pleased to see

those 3 companies, essentially 3 acquisitions come

together with our site and patient recruitment group to

really solidify that offering and really make that key

part of what we do.

And your next question

comes from the line of Dan Brennan.

Great. I wanted to start off with strategic alliances.

I think it was mentioned during the prepared remarks,

you see some new opportunities. Maybe could you just

elaborate a bit outside of your top client, how much of

your business today is made up of what you would

consider to be strategic alliances? And any light of

sight -- or excuse me, any line of sight on these new

opportunities which you mentioned?

Sure. we're not going to -- I mean we're not going to

comment on specific negotiations, Dan, that we're

having at the moment. But I've been delighted with the

opportunity that things like the MeDiNova acquisition

have allowed us or got us into some discussions with

some large pharma potential strategic alliance customer

on the lab front. So we continue to have those

discussions and were ongoing. And as we all know, these

things take some time to come to fruition and certainly

take some time before revenue starts to flow, and wins

start to open. So we're still in the discussion,

negotiation phase, but we have a good reason to believe

that we are very well-positioned on the lab front.

Our Functional Services group, we're also in discussion

with a couple of large, very large providers of the

larger alliance partners, one of which would be a very

much a new customer to us. So we are very optimistic

about that. But again, I don't want to get too far

ahead of us on that front. And then the ICR, our Phase

II, Phase III business has also been able to make some

progress in that area and again I think we see some

opportunity there.

So these strategic alliances, I would say, make up

around about 1/4 of the revenues that we do in that

sort of vicinity. I'd like it to be a little higher

than that. We certainly see some opportunity to be --

for that to be a bit higher going forward. It might be

up to 30% I think as we go forward. It's not a figure

I'm actually holding my head. And so I'm sort of

thinking a little bit off the top of my head. But I

think it's around about a 30%, 25% to 30% mark, maybe

1/3. And we see some opportunity I think to move that

upwards, and that's certainly what we are looking to do

as we go forward.

I wanted to ask a second question on kind of your

customer breakdown and understanding that customers

move in and out of the buckets that you kind of define

when you release. But nonetheless, I think, clients

numbers 2 through 5. I think those were growing nearly

30% the last 2 years and year-to-date I think, they are

up low single digits. So anything specific to call out

there? I know you're not going to mention the customer.

But just to kind of understand that bucket, which

looked like it was a meaningful driver in the past.

Yes. No, I think on that one, we're -- I think,

slightly up in terms of the last quarter or so. But

these things, they tend to go, wax and wane a little

bit, customers jump in and out of them. I think where

we've seen most of the progress is on the, as I say,

beyond our top 10, which is really where I want to see

most of the progress. We were moving some of those

customers up, as I say, up the league table. But 2 to

5, remain obviously an important component of where we

are.

(inaudible) obviously, a more mature relationships

and they're kind of in that more mature relationship

phase. You probably wouldn't expect to see quite the

levels of growth. We've done well, as you've said, with

then accelerating over time. But as Steve said as well,

we want to see more balance in our organization. So

that's what we're looking.

And then -- and maybe just maybe just a few more quick

ones just on the backlog burn. Looks like it was

reasonably stable. I think it was down maybe 10 bps I

think if I kind of look at the model right now on the

slide. But how do we think about that? I mean is it --

is this the right Zip code do you think from here given

the backlog and kind of how things are progressing?

Yes, I don't -- I think it's one we constantly look at.

And to the extent that we win more biotech and small

pharma business, Dan, we have the opportunity typically

to increase the burn. So the biotech business is a

tailwind from a backlog burn point of view, less so

with large pharma and less so with the sort of mid

pharma, and that remains the bulk of our backlog and

the bulk of our wins still. So I would anticipate that

we'll probably continue at around about the level we're

at, 8.7%, I think was the percentage this quarter. I

don't, we're trying to push that up. I'd like to think

we could push it up over the next 12 months or so, but

with the proportion of oncology business we're getting,

that's such an important part of such a large part of

the landscape at the moment, and that's always a

headwind for us. So this puts and calls on this, I

would say, we'll be looking to maintain maybe as these

opportunities slightly increase, but I'd say, at this

stage, I wouldn't expect too much of an increase in the

burn rate.

And your next question

comes from the line of Jack Meehan.

This is Andrew Wald on for Jack. Just looking at the

quarter, how would your growth have compared under the

old accounting standard? And were there any notable

changes from reimbursed expenses?

Andrew, I think as we mentioned in the past, there's

only one type of revenue, Andrew, and that's the 606

revenue reported, and that's why we talk about it

year-over-year in percentage terms. So I don't think

it's useful trying to parasite the revenue into

different elements. We have to look at our projects in

totality and work our percentage completions on that

basis. So we're happy with the progress we've made. As

we've said, 8.5% year-over-year, and I think that's the

number we should probably stick to and think about as

we think about revenue growth.

Okay. Understood. And on the deal environment, in what

areas are you looking to add additional assets for the

site network?

I mean that's -- we're looking to round that. I mean

obviously, the Symphony acquisition moves us more

towards patients, which has been a very specific and a

very considered move. We do believe the virtual trial

environment is going to be important going forward. So

we want to be able to position ourselves well to not

just follow and take advantage of that, but to actually

get ahead and innovate in that area. So as we look at

M&A, we'll continue to look at organizations that

facilitate the connection with patients. We're

continuing to look at how we develop our data

resources, particularly in partnership with the various

groups we've talked about in the past. That's certainly

an area. But around recruitment directly to patients,

there's limited opportunities there I think to perhaps

acquire. But it will all be around -- most of it will

-- sorry, will be around our patient, site and data

strategy. That's what we've done certainly this year

with the acquisitions we've made, MeDiNova, the lab was

a little bit out of that but the PMG and the MeDiNova

and now Symphony very much in line with our patients

under, and there are organizations around there that

we'll continue to look at, in order to fulfill that

particularly that patient connection going forward.

And your next question

comes from the line of Sandy Draper.

A lot of my questions have been asked and answered. So

maybe just a quick one. I missed it, Brendan. The

constant dollar organic growth number, I got the

constant dollar but I missed the constant dollar

organic?

Sandy, the constant dollar organic in the quarter was

8.4% year-to-date, constant CDO, same basis was 9.4%.

Okay. Great. And then maybe for Steve, a follow-up to

one of the earlier questions about the broader dynamics

in the market. Just more specifically, have you heard

any feedback from customers on their discussions around

the DC issues around drug price controls, et cetera?

There's certainly some uncertainty there. If I look

back to 2016, there was some noise around the election

that caused some people to pause. I'm just curious if

customers are bringing that up or if you had that and

you hear that out there in the market, people are

saying, "Hey, drug price controls come in, we have to

sort of rethink how we do business." I'm just curious

any thoughts on that.

Yes. Sandy, we don't get much of that feedback from

customers, to be honest. It's not to say that they

don't have a wish to do things more efficiently and

more cost effectively. That's certainly the case. But

it's not really on the basis of, at least, not

expressed to us on the basis of drug pricing. I know

it's a topic of conversation within your pharma

industry, a constant topic of conversation of how that

can potentially evolve going forward, but it really

doesn't. They don't say it to us, at least not to me.

So from my -- and it was one point of view. I'm sorry,

I can't give you much joy there, at least much

information there.

And your next question

comes from the line of [Michael Pollard].

I was going to ask for more detail on where we stand in

the patient engagement site network evolution. But

Steve, I think you've addressed a lot of that. So I

will shift gears to a couple of others that I had. So

one for Brendan. We infrequently talk about debt with

ICON because you have a net cash position and generate

a lot of cash. The debt you do have is due December of

next year. A note, I'm curious what opportunities you

see. Rates have, obviously, continued to grind lower

for the most part. Should we consider that refinance as

opportunity for accretion, roll it over, pay it down,

pay some of it down, any initial thoughts would be

useful.

I think, Mike, we'll certainly be looking to, at least,

roll over. So we had good experience. As you know, it's

a private placement last time out, and that's a market

we're well familiar with. So we'll certainly roll it

over. We haven't, I suppose, completed our

conversations around whether we extend or decrease. I

think, at the very least, we'll keep it at the similar

levels and look opportunistically again with what we

could do with those dollars as we go into, I suppose,

really it's -- as you say quite rightly, at the end of

2020. So it's really more of a tough conversation of

what we might do at nearly late '20, early '21. So roll

over, good PP market is there, good interest rates at

the moment. So we're pretty happy that we'll do at

least that and then we'll explore, I suppose, further

opportunities as we go to 2020 as to whether we extend

that debt position or not.

Maybe a follow-up also for you, Brendan. So you've been

asked and answered the question on DSO many times, and

I think the response has been consistent and makes a

lot of sense. You are presenting a non-GAAP DSO now.

Can you remind us why it's a non-GAAP DSO? What are we

missing? What are the pieces that we can dig up every

quarter to align our calculations, which we were doing,

say, last year and the years previous to the new

calculation?

Sure, Mike. I mean the reasons we're doing it that way

is purely because part of our direct cost space now is

something that previously would have been included in

getting to our net revenue position, which is obviously

investigator accruals. But investigators are an element

of a direct cost now, and as a result, don't go into a

DSO calculation and are kept as separately on the

balance sheet. So that's where it is different. That's

now sitting in a different line in the balance sheet.

So it doesn't impact and doesn't decrease our DSO in

the same way we would have done in the calculation

previously.

I think that's appropriate from an accounting

perspective, but obviously, it does have this impact.

We're showing the DSO on a like-for-like basis to give

people more historical comparison of where we were in

the past and where we are now. We're going to continue

to work on it. But I think working from a calculation

of the balance sheet now that would give you a higher

number of days is equally valid. I think what we're

focused on is making sure that the trajectory of where

both of those numbers are going continues to be in the

right direction. And so we're very focused on making

sure that if we bring a non-GAAP DSO down by 1 day, the

GAAP number is down by 1 day as well. So we're very

focused on actually making sure that we're moving in

the right direction regardless of what the number is.

But the number what we quoted at the moment is very

comparable to what we did in the past to give people

some context given that it changed.

And your next question

comes from the line of David Windley.

I'm catching up. I'm reading notes. I don't think this

question's been asked. Your gross margin has been under

some pressure for a little while and ticked up

sequentially in the third quarter, still down year-

over-year, but maybe at a slower rate. Wondered is that

just a tremble of the needle? Or is that actually a

signal that some pressures have abated and maybe gross

margin can stabilize or even turn higher?

Dave, it's Steve here. Yes, I think from our point of

view, gross margin has been under a little bit of

pressure. And as I said in my prepared remarks, we

recruited fairly actively, particularly in the second

quarter to prosecute the work that we've won really

over the last couple of quarters, 12 months or so. And

that had a bit of an impact on our gross margin. I

think we attenuated or mitigated a little bit the

hiring rate in the third quarter and very actively look

hard at that, and that was what led to the uptick, I

think, by 20 bps in our Q3 margin.

I would expect our gross margin to remain at around

that level over the next sort of in the immediate

future. We continue to see some challenges as we've

recorded our book to bill at 1.3 for the last, I think,

3 or 4 quarters. And so we've got work to do, and we

need to recruit people to do that, and we want to make

sure we do a really good job because a lot of this work

that we're doing, doing it well, brings us repeat

business, of course, or even more than that, brings us

the opportunity to form strategic alliances and

partnerships with these customers. So it's important,

obviously, that we do this. Well, that's a trite

statement.

So -- and I do think, as I say, I think we've said

publicly for quite a while. The gross margin is about

where it's going to be. We may go up or down a little

bit, 10, 20 bps on a quarter-to-quarter basis, but I

don't see much long-term progress in terms of that

going back to 30-plus percent. I think that will be a

challenge. Where we're seeing an opportunity to improve

our overall operating income, of course, is we'll

continue to leverage the SG&A and our global business

services group, and we're able to do that. This

quarter, we see some continued opportunity there in the

medium to longer term, and we certainly intend to keep

pushing down that road whether it'd be continued off

shoring, robotics, process reengineering, all of those

good things we've talked about quite extensively in the

past.

That's fair. I appreciate that, Steve. And you kind of

stole the thunder on my next question which was to ask

how much runway do you think you have. I think ICON's

increasingly viewed as one of the best, if not the

best, operating manager of its SG&A. You mentioned

robotics and off shoring. Is this -- I hate to ask the

trite baseball analogy, but still a lot of innings left

in that path?

I haven't had a lot of innings, but I don't think we're

at the eighth or ninth. I would characterize it, if you

use your baseball term, I'm more a cricketer, Dave,

than a baseballer. But I'll use your baseball term for

a minute. You know I would say we're the top of fifth

or top of the fourth round, into the fourth. So I think

we're halfway through. I think there's still plenty of

opportunity to continue to do that. And who knows,

maybe there's a double header here as well, a further

analogy, and I think as we see further opportunities,

we'll keep driving it.

And one last one before I drop, the -- I think, you

declined to answer questions about any specific

clients. But as you think about maybe by client cohort,

bookings and demand in your large pharma, your larger

clients versus the small mid, is it kind of

consistently balanced? Or are you seeing some rotation

there?

I would characterize that as saying in the large pharma

cohort, it's stable. We are seeing plenty of demand or

stable demand, I would say. I think you'd have to say

that most of the growth has been in the biotech, the

smaller customers, but certainly, the midsize ones are

also I think (inaudible) I think I alluded to some

of the partnerships that we brought on in the last 12,

18 months are now starting to really ramp up from a

growth point of view. So that growth outside of the top

10 is not all biotech customers, it's significant

number of more midsize, I would say, customers. So I'd

say, let me -- to paraphrase it all, I would say large

pharma, pretty stable; biotech, certainly moving on the

up; and midsize sort of somewhere in between.

No further questions had

came through, sir. You may continue.

Okay. Thank you, everyone, for listening in today. We

are very pleased. This quarter 3 was another strong

quarter for ICON. We look forward to building on this

progress throughout 2019 as we consolidate our position

as a CRO partner of choice in drug development. Thank

you, everyone.

Thank you. That

concludes our conference for today. Thank you all for

participating. You may now disconnect.