ICON Public Limited Company
Q3 2013 Earnings Call Transcript

Published: 25 Oct 2013

[Operator:]

Good day, and welcome to the Third Quarter Results 2013. 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.

[Simon Holmes:]

Thank you. Good day, ladies and gentlemen. Thank you for joining us on this call, covering the quarter ended 30 of September, 2013. Also on the call today, we have our CEO, Mr. Ciaran Murray; our CFO, Mr. Brendan Brennan; and our Group President of Clinical Research Services, Dr. Steve Cutler. I would just like to note that this call is webcast, and there are slides available for download on our website to accompany today's call. I will now make the customary statement in relation to forward-looking statements. Certain statements in today's call are or may constitute forward-looking statements concerning the group’s operations, performance, financial condition and prospects. Because such statements involve known and unknown risks and uncertainties and depend on circumstances and events that may or may not occur in the future, actual results may differ materially from those expressed or implied by such forward-looking statements. Given these uncertainties and as forward-looking statements are not guarantees of future performance, investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This presentation includes selected non-GAAP financial measures. For a presentation of the most directly comparable GAAP financial measures, please refer to the press release statement headed, Consolidated Income 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. [Operator Instructions] I would now like to hand over the call to our CFO, Mr. Brendan Brennan.

[Brendan Brennan:]

Thank you, Simon. Net revenue in quarter 3 2013 was $340 million. This represents a year-on-year growth of 19%. On a constant dollar organic basis, year-on-year growth was 11%. Year-to-date, our top client represented 25% of revenue compared to 18% for the full year 2012. Our top 5 clients represented 53% of revenue compared to 48% for the full year 2012, and our top 10 clients represented 65% of revenue compared to 63% for the full year 2012. While our top 25 clients accounted for 79% of revenue compared to 76% for the full year 2012. We added around 130 new staff during the quarter to bring our headcount to approximately 10,300 staff. In quarter 3, group gross margin was 37.1%, which compared to 35.9% in quarter 2 of '13 and 35.8% in the comparable quarter last year. SG&A for the quarter was 24% of revenue compared to 23.2% in quarter 2 and 24.8% in quarter 3, 2012. Operating income for the quarter was $33.2 million and operating margin of 9.8% compared to 9.3% in quarter 2 and 7.3% in the comparable quarter last year. The net interest charge for the quarter was $56,000, and the effective tax rate was 16%. This tax rate added about $0.01 to the quarterly earnings compared to a normalized 18% effective tax rate. Net income was $27.8 million, equating to earnings per share of $0.45 compared to earnings per share of $0.42 -- $0.43 in quarter 2 2013. DSOs in the quarter were 40 days compared to 33 days in quarter 2 '13 and 38 days in the comparable quarter last year. This is in line with our expectation given the contractual terms of our key partner relationships. At the end of September 2013, we had a net cash of $219 million compared to $184 million at the end of June 2013. With all of that said, I'd now like to hand over the call to Ciaran to talk more about our performance in the quarter and the general business outlook.

[Ciaran Murray:]

Thank you, Brendan. We continue to make progress against our strategic plan and we've built on the momentum we generated in the first half of 2013 with another good performance in the third quarter. Gross bookings for the quarter were USD 471 million, cancellations were $56 million. This gives us net bookings for the quarter of $415 million, which is a book-to-bill of 1.22. Our backlog now stands at USD 2.97 billion, which is 11% higher than this time last year and the backlog is currently given a 77% forward coverage the next 12 months revenue expectations. Looking across our individual business units. I'm happy that each one of them continues to perform to expectations. Our Phase II to Phase IV business had another good quarter. Secured healthy levels of new business and continue to expand operating margins. The integration of the Central Lab into our Phase II to IV business, which we talked about some time ago is going to plan and the lab continues to improve its operating margins. The DOCS staffing and FSP business completed the integration of the ClinForce and Assent acquisitions during the quarter, and this business is performing in line with plan. On previous calls, we have talked about the changes we're making to our Early Phase business. During this year, we consolidated our U.S. capacity into single site in San Antonio. We continue to review our global capacity in the CPU in light of market conditions. And in the fourth quarter, we expect to move further reduce capacity in our U.K. CPU as we focus on our new translational services business, which was based in Manchester in the U.K. Our early phased performed in line with expectations during the quarter, which is to say that it was weak and will be weak for the remainder of 2013 where all of this is reflected in our guidance. So looking at the rest of 2013. I think during the quarter, we saw our revenue continue to grow, albeit at a more moderate pace as some of our strategic accounts matured into more steady-state, which allowed us to get more leverage on the operating model and we expect this leverage to continue into Q4. Consequently, we are raising our 2013 guidance. We now expect revenue to be in the range of USD 1.325 billion to USD 1.33 billion and our earnings per share to be in the range of $1.67 to $1.70 for the full year of 2013. Before commencing the Q&A session, I'd like to thank all of the ICON team for its continued commitment to delivering excellence has enabled us to another successful quarter. So all of that being said, I'll now hand back to Holly to begin the Q&A.

[Operator:]

[Operator Instructions] We will take our first question from Douglas Tsao of Barclays.

[Douglas D. Tsao:]

Just if we step back and think about where you're seeing demand in terms of new business, I was just curious in terms of the composition between large and small companies and also if you could perhaps provide some color in terms of the size of the awards that you're seeing from smaller companies, are they at similar magnitude? Or are they typically pursuing smaller company -- or smaller companies typically doing more limited trials?

[Ciaran Murray:]

Doug, it's Ciaran here. I think that the composition of our business between large and small companies, hasn't change substantially over the recent times. On quarter-to-quarter, there can be a slight difference certain things land and certain don't. I think traditionally, our large pharma business has been in that sort of 60% number, with a balance being made up of smaller pharma companies and midsize pharma companies and biotechs. And in Q3, we saw broadly the same pattern. It's then maybe a little bit more in that quarter in the biotech section. Our sector where we saw a little bit more activity than in the previous quarter. But I think that's just the circumstances of the deals in the market. As to the size of the deals, it doesn't really so much depend on the company as in the drugs they are developing in the phase in the trial they are in. We get many small projects from large customers, and we get large projects from small customers. So it's very much the devil's in the detail of the particular circumstances. We have won a number of large projects from smaller and biotech companies when the drug has reached the Phase III stage. And they need to conduct the trial that they need to conduct. So it's not really about the size of the company that will determine that. So we were happy with the quarter in terms of the quantum and the balance of the business and what we saw. So I think that answers your question.

[Douglas D. Tsao:]

And then just one quick follow-up along those same lines. As you noted, it depends a lot on the sort of the phase of the study and the project that you're working after the client as well therapeutic area. Just generally, are you seeing any broad trends? A few years ago, sort of a lot of topic was the sort of mega trials, elephant trials, however you want to characterize them, that seems to be a little bit less of a point of discussion recently in terms of the dialogue the company's indicating on the Street, but that could just be become the new normal or have you seen a little bit of a downtick in terms of the scope of projects, which perhaps reflects a little bit of the kinds of areas the companies are investing in right now?

[Ciaran Murray:]

I think, in general terms, I might ask Steve maybe to talk specifically. But in general terms though, I think what we're seeing over compared to what we might have said years ago, 2 things have changed. We're once bigger than we were then. We're going -- we're guiding just over $1.3 billion this year compared to legacy days, when we would have talked about larger and elephant trials. And of course, there's a lot more outsourcing now over time and we're involved in a number of exciting strategic deals, which draw large volumes. So I think what might have been exceptional a few years ago tends not to be exceptional now in the kind of macro picture. But at the most specific level, Steve, do you see anything on that, though?

[Steven A. Cutler:]

I think we're seeing a number of significant opportunities coming through, large trial opportunities in the biotech space. They seemed to be better funded, as they seem to be having access to funds and that seems to be playing through into their strategy to bring their compounds to market. So we see a number of very significant large trials coming through in the biotech space. And that's been the case over the course of this year. We're also seeing some large trails in large pharma as well. But we feel pretty happy with the way the biotech market's developing for us and the opportunities that they're bringing forth.

[Operator:]

We will take our next question from Tim Evans of Wells Fargo Securities.

[Timothy C. Evans:]

I wanted to ask a question about client concentration as it's kind of ticked up now here. I know you like to bring that down. The question is, how does that happen? Is it that the dollar value of revenue of your top clients stays the same and then everybody else below that gets bigger? Or do you actually see the dollar value of your top clients in terms of revenue going down in the future?

[Ciaran Murray:]

The future case in that -- I think the answer in broad terms, the short answer is the former. We will see the dollar value of other business increase at a quicker rate than the dollar value in our large accounts. The concentration is high, but it's not unexpected. We've been forecasting and speaking about it for some time. And really what it reflects is that as you penetrate accounts and account over the first couple of years, you will add dollars very quickly. But it reaches a natural state then and matures. And at that point activity in the future should continue to grow if the client continues to have a healthy, robust pipeline and spending money but it doesn't grow at the rate that it would have done in the early days of the account. So from here on, what will happen to dilute the concentration is adding more accounts and we've added a few new customers to the roster this year whose volume will ramp-up in the future. And it's really about growing and growing other revenue sources to reduce the dilution.

[Timothy C. Evans:]

Okay, great. And a quick one, have you seen an uptick in interest in risk-based monitoring?

[Ciaran Murray:]

And Steve, probably one for you.

[Steven A. Cutler:]

Obviously, we're seeing a lot of interest in risk-based monitoring and we feel we're well-positioned to help it. I think it's one of the reasons we're starting to see some uptick in our margins as we see opportunity in that area. We feel we have some strong technology in that area that's going to allow us to help -- to move our organization forward from an efficiency point of view. So yes, there plenty of opportunities there. It's relatively nascent within the industry. There's a lot of people talking about it. Not a lot of people doing it yet, but we feel we're in a good place with that in respect to risk-based monitoring. And it's an opportunity I think to either reduce some of the costs for our competitors without necessarily reducing our margins. So I think it could be, dare I say it, win-win for both of us.

[Operator:]

We will take our next question from Sandy Draper of Raymond James.

[Alexander Y. Draper:]

A couple of questions. I missed the beginning part of the comments. I don't know Brendan, did you talk about organic number or segment out the impact of the acquisition?

[Brendan Brennan:]

I talked about it. I did certainly talked about constant dollar organic revenue of 11% versus a top line 19% year-on-year. Just speaking specifically then on segmenting out the acquisition. If you look at just constant currency, it would be 15%. So the acquisition percent would be the difference between 15% and 11%.

[Alexander Y. Draper:]

Okay, perfect. Second question, I know, I did this last quarter. I'm trying not to split hairs too often. But just when I look at the guidance for the year implied in the fourth quarter, the low end would assume you have a step down in revenue. Was there anything sort of any one-time revenue in the quarter in terms of billings or anything that would lead to something falling off or this just sort of normal starts and stops of trials? I'm just trying to understand was there anything in the quarter that would lead to necessarily a sequentially down quarter?

[Ciaran Murray:]

So first let's try not to split hairs, Sandy. Despite [indiscernible] no, there's nothing that would lead to -- nothing specific that would lead to that conclusion. I think I've talked about it before, the kind of -- when we go to do guidance, with the big model there with little over 1,000 contracts in it and progress and much activity. And then you run the model and we make assumptions and we run it again. So it's really just a function of -- we model what might happen and what might not. And then so this time at least due to the benefit of only one quarter to look after, there's less variation in it and narrower ranges. But there's no specific items that we'd point to that would lead you to that conclusion.

[Alexander Y. Draper:]

Okay, great. And may be just one higher-level thought. We've seen a couple of the big pharma guys talk about some pretty big reductions around R&D headcount, et cetera. When you're thinking about what your discussions with customers today versus may be a couple of years ago, is there a difference sense, I think Doug talked about this a little bit that going towards a couple of years ago, the megadeals, et cetera. But just thinking about the conversations across-the-board with both Pharma and Biotech, is there acceptance or willingness to try to push more outsourcing, increasing anything changing broadly out there? Just it seems like there is another sort of shift around the mindset of pharma to change, make up, get more aggressive on change. I'm trying to understand is that changing their interactions with you at all or is it that much the same since been over the last 12 to 24 months?

[Ciaran Murray:]

Yes, I'd say, you have a point on the -- I think that that's correct. I think I'd point to the fact that the general tone and pace of change has increased incrementally over the last couple of years. I think I've always held that the shift to more outsourcing and concentration into the bigger CROs and the more strategic deals would come over a longer period of time than perhaps you would like or you would expect at the start because it's one of my hobby horses, it's really about the change management and the mindset and the culture and that kind of buy-in. So I think it's fair to say that if I were to look at our experience in the existing accounts, we are seeing customers talk a little bit more, they embrace more change. I think we're constantly driving in innovation of trying to bring more an agenda of more innovation and more to take out time and costs and improve the quality of trials and deploying new technology and as it becomes developed. And of course, based on FDA guidance on risk-based monitoring. So as we introduce this, we tend to see more appetite for change. But then when we look at the marketplace at the potential deals and customers that we're currently talking to or potential customers, they definitely arrive more armed for change now, perhaps with more appetite for than a couple of years ago at the similar point of discussions in what subsequently turned into strategic deals. So I do see that the pace of it picking up, an ability or willingness to embrace change but it still takes time because we're talking about large organizations. You're also -- we talk about one customer. You talk about pharma as if it's a homogenous block, and it's not. It's many customers and cultures. And we talk about a customer sometimes like it's homogenous single entity, but it really constitutes many hundreds of thousands of decision-makers and people with different philosophies. And you can see the pace of change go more quickly in the same customer in one therapeutic group than the other because it's just the style of management, in one place or another. But it's definitely, it's warming up but I wouldn't want to overstate the rate that it will continue to warm up above because if we have learned anything from the past, it's that these things tend to be slower than you would expect.

[Operator:]

We will take our next question from Dave Windley of Jefferies.

[David H. Windley:]

Around kind of segueing from Sandy's commentary, was wondering if you could comment after now you have signed, we believe, a couple of your bigger important renewals for this year, what have been, if any, the additional asks or the goals to be achieved in the next, in version 2 of those relationships beyond what was achieved in version 1?

[Ciaran Murray:]

Yes, we have concluded and signed 2 particular renewals that people were asking about before. There's been no significant change in the substance of the deals. I think what we've seen in version 2, I think part of the learning would be that these accounts can be sticky when both parties work on them and invest and get them right. That's been a good experience. I think what you're probably seeing in version 2 is the same principles that you saw in version 1, but now people are being people and having worked together, it comes with the level of enhanced trust and experience. So perhaps some of the things that were more theoretical in version 1 and more aspirational start to actually turn into real things. So the Holy Grail is it's around the same things. We work with our clients to do faster, higher quality and more efficient trials and reduce the cost of the developing the drugs and improve the chances of being successful. And then we also work with them earlier on to make sure that there isn't money wasted on hopeless targets and so they kind of tell it quickly if it isn't going to work, so save money that could be spent elsewhere. And those are the same things say that what technology to deploy, and how you then harmonize and streamline SOPs and work together and how you get to a faster outcome with perhaps a little bit more certainly but it's going to be [indiscernible]. Do you have anything to add to that Steve?

[Steven A. Cutler:]

No, you're right. I think the expectations go up a little in the version 2 but, I think we're open to meet them. I think, we start to generate some efficiencies and to more efficiencies and we're tangibly able to do that I think with customers. And, I think that's again increases the stickiness and that's a good thing for us. So, I think we -- version 2 is a better version for both of us, really, I think that's the way we would find it.

[David H. Windley:]

If I could follow-up on the technology investment remarks there. With just a couple of investments I have just come off a call with many data where they're investing significantly in additional tools and capabilities beyond the basic Electronic Data Capture. And you invested in some tools inside ICON or in ICONIK and those areas, Firecrest, et cetera. How are you thinking about where you want to or need to invest in capabilities that are not being satisfied by the technology vendors? And where do you think maybe, you shouldn't bother because it's going to end up being duplicative of a fully integrated, call it, medi [ph] data solutions system?

[Ciaran Murray:]

In a lot of our investment would start really with them, where we are with that -- client requirements. Some of that is it's almost account-specific in the way we look at it with larger accounts. And some of it's more general and some of it starts account-specific for client need and then we are able to make it more generic end users. And, so I mean, we would always look to the market first and see if there's something there. But what you find is a lot of what we do is so project-specific. It's so dependent on the protocol design in which we're trying to measure what you're trying to do. That -- Out-of-the-box solutions aren't as readily available and may not be as perhaps, another discipline. A lot of what we do when we talk about technology, we're really talking about -- we are -- we should probably say technology enables services might be a better way to put what we do. And a lot of it is, is really the process as much as there is a particular software, the tools that we would use and we build very specific things but we tend to use them. We recognize platforms to build them on that will come out of the box. So, I think it's about customer expectation and it's about looking at our own capabilities. We don't do too much future gazing into what technology vendors may or may not be able to deliver in the future. As many a fault [ph] down there and we've learned that what we're doing is very much geared at our projects and our programs and our processes are getting through in shorter time horizon. I want to call Steve, again, here?

[Steven A. Cutler:]

No, I think, that's right. Dave, I think the difference we bring is we have a lot of domain knowledge in these areas, and particular one with the partnership that we have. In many of these cases, we're able to bring, I think, solutions that can better fit in many cases. So, I think we have -- I'd like to think, we have an advantage in that area that we can use the knowledge that we have in developing drugs and solving customers key challenges. And wrap our services around the technology developed that we bring to the markets. So, that's really the philosophy with ICONIK where we've taken an established platform and developed a technology on it that we think solves the fundamental need and that's what our customers find.

[Operator:]

We will take our next question from Robert Jones of Goldman Sachs.

[Adam Noble:]

It's Adam Noble calling in for Bob. I just wanted to ask a little bit more around the gross margin. Definitely, very strong, I think the strongest since 4Q 2010. Are there any specific areas to call out for the performance there? And then I guess, kind of looking forward, do you see this as kind of like a baseline that we should look at for gross margin going forward? And do you think given the fact that you've been able to ramp up a lot of the strategic contracts at this point? Do you view the business as returning to sometime in the future at 40% gross margin? Do you think that's an achievable long-term goal?

[Ciaran Murray:]

Adam, there are no specific areas that I've call out. What we've seen is gross margin' been improving incrementally over the last couple of years as we go revenue and we've done various bits of work in terms of resource planning and how we do things. We've also been hiring heavily in accounts that are maturing into the head count. So, but nothing specific around expected in the current number. Really, in future gazing, I think -- if anything, we're probably got to this level of gross margin quicker than we originally expected when we talked about the longer-term or medium-term numbers a couple of years ago, or even when we did guidance last year or so. I would continue to see our gross margin to improve gently and incrementally. But, I think we've had a fairly steep recovery here. So, we'll see the pace of improvement moderate and it will be gentle going forward. Where it ultimately goes will depend on too many factors for me to opine on right now. In steady-state, I'm happy it will continue to grow. It's good. But you can't preclude the fact that, that business arrives in lumps and it just takes one fantastic new account, when which some level of investment is required over a couple of quarters in terms of loading up the staff, getting ready but we've seen that in the past. So, factors like that would recharge gross margin growth or even cause it to flatten out at some point in time. So I think the key point here is that we expect a sustained, very gradual improvement as we go into next year. And as to your 40% question, some day in Jerusalem, it could be -- how long was a piece of string. We'll always strive to have an ambition to return gross margin towards historic start level. But so much of that will be dependent on the circumstances of the market and business at that time. It's too hard to say anything specific to that point.

[Adam Noble:]

Okay, great, that's definitely very helpful. And just one quick follow-up on capital allocation, just specifically with the cash balance right now. Any thoughts on your current M&A pipeline? Any specific areas or geographies that look particularly interesting right now?

[Ciaran Murray:]

Yes, I think we've been very -- we've been active in the M&A space, indeed, over the last number of years. And our strategy has been very much in terms of adding assets when they seem appropriate that will fill out our service line and our geographical spread. I will continue to look in that area where we've seen a lot of action on our Late Phase business over the last couple of years, we'll continue to look there. We'll continue to look at our core business as well to see if there are, as you say, we'll act opportunistic if there is acquisitions that are either have geographic or therapeutic expertise that we feel is additive. We'll bring those on over time. But it's very much still that string of pearls type acquisition policy.

[Operator:]

We will take our next question from John Kreger of William Blair.

[John Kreger:]

Ciaran, I'm sure you're still in your planning process for next year but could you share any early thoughts on 2014? It looks like your fourth quarter revenue guidance implies maybe high-single digit organic revenue growth. Would that be appropriate for a longer-term trend, too? And if you think about margins, what are the biggest areas that you have remaining to continue to drive EBIT margin higher at this point?

[Ciaran Murray:]

Okay, John. We're actually going to do a guidance for next year, most likely in the first week of January 2014. But, I'll make some comments in terms of what I'd try high-level sort of outlook and very much preliminary based on where we are now. I think, pointing to Q4, if I deal with revenue first. It's probably a good place to look. I think if you look -- when it comes to us finalizing our revenue outlook for next year, we look to the fact that in our constant dollar organic growth was 11% in Q3, with a trailing book-to-bill of 1.22 over the last 12 months. And then, we'll find factor in assumptions around where the ForEx rate might be. We've seen a good deal of the dollar has weakened over the last trailing 12 the reasons you know well. And of course, through the remainder of the year, we still have our excellent BDT [ph] met there, and burrowing away trying to land another quarter of business wins. So that's still an unknown when it comes to a variable. So in revenue trends, it does have the feeling of high-single digits, perhaps very low-double digits, depending on where the foreign exchange rate goes. So, I think you're spot on in that comment, and that's where we'll start to look. That then would be changed in the course of the year by significant sort of-- if you added another particular strategic account that drove volume are indeed as we look forward and see consolidation in market share and consolidation in the industry with smaller companies, the top line might pick up again due to that. And on the profit side, I think we've done a very good job in driving the leverage of the global business model and SG&A supports the spine that we built out there about 3 years ago. And we still can see continued opportunity as the company grows to get leverage off of that cost base. We've had a number of initiatives around gross margin as well and efficiency and better deployment of technology. So as I said to Adam on the last one, I see not revolutionary gross margin growth but very gentle and incremental enhancement to the margin just through efficiencies in our organization and the way we run our footprint, the way we run our business. And so I mean, I'd look to next year and sort of see profit growing 15%, maybe more than 15% -- 15% to 20% range as we continue to get leverage compared to this year of those. That's the kind of feel of 2014 at this stage. But it is early enough and we'll do the formal guidance call in January.

[Operator:]

We will take our next question from Ross Muken of ISI.

[Elizabeth Anderson:]

This is Elizabeth Anderson in for Ross. And I just had a question. You mentioned earlier about how biotech, the biotech financing environment was expecting bookings. But, I just wondered if you would be able to comment more specifically on Phase I bookings?

[Ciaran Murray:]

[indiscernible] Sorry, Elizabeth, on which bookings?

[Brendan Brennan:]

Phase I bookings.

[Elizabeth Anderson:]

On Phase I.

[Ciaran Murray:]

Phase I bookings. Yes, I think I kind of covered it in my general comment at the start. And I specifically felt they were weaker as we've expected and as we've seen over the course of this year where we've done quite a lot of work in repositioning our Phase I business and on capacity. So, Phase I is still an area of the market that we are finding on the weak side of things.

[Elizabeth Anderson:]

Okay. And in going forward into next year, do you expect sort of a continuation of that?

[Ciaran Murray:]

It's kind of early to say. Phase I business, unlike Phase II to Phase IV, which has been very long-term projects and there's a lot of Phase I business comes in early and burns through early, they are projects of shorter duration. So it's always a more difficult area to forecast. I think, really the discussion is about the alignment of capacity and capability in Phase I. In fact, that some of -- that the market trends are shifting from traditional kind of volunteer-based Phase I activity into more translational medicine and patient populations and hospitals and that. So, I think Phase I in the early Phase, it's one of the areas that we're looking at strategically, as I said in my comment. I think, we're developing, as we said in the last earnings call, kind of a new translational services kind of approach. So at this stage, it's a question of aligning the cost base to the -- to what's in the market. And we'll see as we go into next year, the changes that we make and then the translational capability that we build, what it will do to the business when then, but you've got to remember, Phase I is a very small percentage of our business. So, it's not something that tends to move the needle.

[Operator:]

We will take our next question from Tycho Peterson of JP Morgan.

[Tycho W. Peterson:]

Just a question on pricing dynamics. And Ciaran, I appreciate your comments earlier on some of the renewals. But, particularly, as you go to renewals on some of these contracts, can you talk about some of the pricing dynamics around these deals?

[Ciaran Murray:]

Yes, I mean, they haven't changed, Tycho, is the short answer. I think, what's really driving the deals, it's not so much the price for a CRA that's going to materially impact a study. It's really about how you take out 2 things. How you take out costs from the projects and around the time and the effort and on how you deploy technology and just reduce the whole sort of the total of the work efforts. So, the discussion isn't so much about pricing dynamics in these renewals, there are experiences been. But it's about at a holistic level and efficiency and innovation and deploying technology and streamlining SOPs. I'm making a project -- a specific project shorter. It's also about enhancing the quality and maybe getting data quicker by the deployment of technology in helping your decision-making through it. So, the good thing about these strategic deals is that compared to transactional business, they tend to be as it sales in it tend to be a little bit more strategic in nature and the focus really is around the management of the totality of a portion of the client's budget rather than specific pricing issues. So, we haven't found any change in pricing dynamics and we have continued to find that as we did in the past, that it's really all about that level of managing projects and time and quality and speed.

[Tycho W. Peterson:]

And then, as we think about some of the investments you're making, you called out some of the headcount additions there in your comments. Can you just talk geographically where those are being added? And then can you talk to the level of investments that are still required for ICONIK and some of the other IT investments?

[Ciaran Murray:]

I mean, I think we added 130 heads or something to bring it to 10,300. They're just -- they're everywhere. There is no specific geographic, I think there. And then ICONIK, did you want to talk about [indiscernible], Steve?

[Steven A. Cutler:]

Yes, we continue to invest in ICONIK. We see a number of new applications coming through. We've had, I think, as I mentioned, good response from customers. The risk-based monitoring sector, there's a lot of interest there. But we have other applications that just around risk-based monitoring around safety and around lab that we're also trying to integrate into the platform, so that we'd get a really pretty much integrated service. And that's also getting some traction. So there's a lot we're doing in that area and around that BioCryst platform as well.

[Ciaran Murray:]

I think it's a natural terms, if you're wondering, Tycho, just we don't expect. I mean, our CapEx, on average, depend on the year, on to $30 million...

[Brendan Brennan:]

$35 million, yes.

[Ciaran Murray:]

$35 million. I don't expect significant variance from those run rates of CapEx over the next couple of years. And that will be sufficient to continue our investment program.

[Tycho W. Peterson:]

And then just as a follow-up to that. Are ICONIK and Firecrest driving any share shift or kind of new wins? Or should we think about them as kind of larger wins within existing customers?

[Brendan Brennan:]

I think both actually. As I say, I think they started to drive some new wins. We're starting to -- we're certainly out there in the marketplace very active. A number of our competitors are as well. So we're seeing a lot of interest and some new wins, but they're also being applied to our current partners and we're able to broaden and deepen within those partners using some of these new technologies. So I would say both, Tycho, to answer your question.

[Operator:]

We will take our next question from Greg Bolan of Sterne Agee.

[Michael P. Ward:]

This is Mike Ward in for Greg this morning. We were just hoping to get an update on your discussions with procurement into the calendar year? Do you get any sense that budget flushing will occur or is occurring at this point?

[Ciaran Murray:]

No, we haven't seen any sense of that specifically. And I'm not sure we've, particularly, it's a factor that we would have seen in the past here either. But with our customer base and with so much of our accounts coming from the strategic partnership base, you tend to have visibility into budget and spend over a longer period of time. So we haven't particularly seen any attempt to rush money through in Q4.

[Michael P. Ward:]

Just a quick question. We've heard that several of your Phase I strategic partnerships are performing well. I'm just wondering if there's been any uptick in cross-selling Phase I services into existing Phase III partnerships?

[Ciaran Murray:]

You know I'd say, Phase I is only about 2% of our business. So it's not -- our Phase II sales force strategic partnerships are performing well. And our Phase I business is more transactional than strategic. It has a small strategic element as a result of cross-selling from the Phase II and Phase III business into that. But that's of our business model.

[Operator:]

We will take our next question from Steven Valiquette of UBS.

[Steven Valiquette:]

So my question earlier about the Big Pharma cuts in R&D and that leading to more CRO outsourcing and you mentioned that with some of the large Pharma entities it just takes some time, slow changing acceptance, et cetera. I guess for me, I kind of think big picture. It would seem fairly evident by now that the potential savings for large pharma tied to grade our CRO outsourcing should be fairly clear, I would think. So I'm just curious, do you see anything changing that might accelerate large pharmas' thoughts around this? Or is it just simply a function that if they're going to do more outsourcing it involves potential shifting of employee base internally and that's why it takes a longer time? Just curious to get more color on the factors and that slowness and could that change?

[Ciaran Murray:]

I mean, part of the slowness is as you look at any clients' budget and if you look in each of our business, very long projects. They're in various states of completion, they are heavily regulated. And it's hard to switch some things over the middle. So if you make a decision today on next year's spend, 80% of the dollars spent next year are coming through from projects already in existence. So there are good reasons why people have to proceed slowly and you just combine that with normal change management and human factors hence to make it slow. I don't see anything materially changing in that regard complex task. I do think we see more focus into the clinical development side in the sea suite. And you're right, the argument to do it is compelling. So there is mind share at that level. But there has been for the last few years when these strategically have started. But I think just a function of tradition, of human factors. And our clients have thousands of patients and trials, getting drugs safety issues and that. It's not a business that you can just throw a switch on and know that you would want to, and change that quickly. So it takes time for these decisions to come through in a material way. Would you like to add anything to that, Steve?

[Steven A. Cutler:]

No, no that's pretty much in depth, we would all say.

[Operator:]

Thank you, that will conclude today's Q&A session. I would now like to turn the call back to Mr. Ciaran Murray for any additional or closing remarks.

[Ciaran Murray:]

Okay, Holly, thank you. The progress we've made in the first half of 2013 continues into quarter 3 and we're looking forward to working hard through the remainder of the year, as we position ICON as the global CRO partner of choice in the industry and deliver the best-in-class information and solutions and performance. Thank you very much, everyone. Good day.

[Operator:]

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