ICON PLC

NASDAQ:ICLR

Earnings Call Transcript 2018-Q1

[Operator]

Good day, and welcome to the ICON plc Q1 2018 Results Conference Call. This conference is being recorded.

At this time, I would like to turn the conference over to Jonathan Curtain. Please go ahead, sir.

[Jonathan Curtain, ICON plc]

Thanks, Kyle. Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended March 31, 2018. 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.

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 will be limiting the call today to one hour and would therefore ask participants to keep their questions to one each, with an opportunity to ask one related follow-up question.

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

[Brendan Brennan, ICON plc]

Thank you, Jonathan. From January 1, 2018, the new revenue recognition standard ASC 606 became effective for ICON. Having adopted the cumulative effect transition method, prior-year comparatives have not been restated under this new standard. Instead, we feel that providing comparable Q1 2018 financial results under the previous revenue recognition standard is the best way to evaluate our performance during this transition phase.

The numbers we report today are presented on a U.S. GAAP basis. There are no adjustments to reconcile to our quarterly filing. As such, the only GAAP adjustments we refer to you today will be as a result of the implementation of the new revenue recognition standard ASC 606.

In quarter one, we achieved strong gross business wins, excluding the impact of ASC 606, of $703 million with cancelations of $113 million. As a result, the net awards in the quarter were $519 million (sic) [$590 million] (2:46) resulting in a book-to-bill of 1.28 times.

With the addition of these new awards, our Q1 2018 backlog, excluding the impact of ASC 606, grew to $5.1 billion, representing a year-over-year increase of 17.2%. Our top customer represented 10.8% of this backlog, down from 13.4% at the end of quarter one last year.

Reported revenue in quarter one was $620.1 million. Excluding the impact of ASC 606, revenue was $463 million. This represents year-on-year growth of 7.1%, or 4.3% on a constant currency basis.

While year-on-year revenue growth on a constant dollar organic basis was 1% lower, outside our top account, year-on-year constant dollar organic growth was 15%. Excluding the impact of ASC 606, our customer concentration continued to improve in the quarter with our top cost representing 12% of revenue, compared to 24% of revenue last year.

Our top 5 customers represented 37% of revenue, compared to 45% of revenue last year. Our top 10 represented 52% of revenue compared to 58% of revenue last year, while our top 25 customers represented 69% of revenue compared to 74% of revenue last year.

In quarter one, reported gross margin was 30.6%, and excluding the impact of ASC 606, group gross margin for the quarter was 41.2%. This compared to 41.3% last quarter and 42% for the comparable quarter last year.

During the quarter, we delivered further operational efficiencies. As a result, reported SG&A was 13%. Excluding the impact of ASC 606, SG&A was 17.5% of revenue. This compared to the 18% last quarter and 18.8% in the comparable period last year. This was the result of our continued leverage of our global business support model.

In quarter one, we reported operating income of 14.8% or $91.7 million. Excluding the impact of ASC 606, operating income for the quarter was $92.8 million and operating margin of 20.1%. This compared to 19.7% last quarter and 19.8% in the comparable quarter last year.

As reported, net interest expense for the quarter was $3 million and the effective tax rate for the quarter was 12%. Net income as reported was $78 million or 12.6%. This equated to $1.42 in diluted earnings per share.

Excluding the impact of ASC 606, net income was $79 million, a margin of 17.1%, equating to diluted earnings per share of $1.44. This compares to earnings per share of $1.43 last quarter and $1.29 in the comparable quarter last year, an increase of 11.6%.

DSO in the quarter was 51 days when compared to 49 days last quarter and 47 days in the comparable quarter last year. Cash generated from operating activities for the quarter was $40.5 million and capital expenditure was $8.3 million.

At March 31, 2018, the company had net cash of $4.6 million, compared to net cash of $11.6 million at December 31, 2017 and net debt of $29.6 million at the end of March 2017.

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

[Stephen A. Cutler, ICON plc]

Thank you, Brendan, and good day, everyone. Quarter one represented an encouraging start to 2018 for ICON. Strong demand for CRO services seen in 2017 has continued into 2018. As our customers continue to invest in R&D pipelines and outsource more of their development needs, we continue to execute our strategic vision of being a global CRO focused on operational excellence. This is achieved by market-leading innovation and providing the best range of service capabilities and therapeutic expertise to our customers.

As Brendan has dealt with the new revenue standard, I'll focus my comments on our performance excluding the impact of ASC 606. During quarter one 2018, we were awarded gross business wins of $703 million and we saw net business wins in the quarter of $590 million, a book-to-bill of 1.28. Accordingly, our backlog grew by 17.2% year-on-year to over $5 billion and helped our revenue increase by 7.1% to $463 million.

It's particularly encouraging that not only did revenue grow by 7.1%, but revenue outside of our top account grew 25% over the same quarter last year. Consequently, our revenue concentration with our largest customer reduced to 12% in the quarter. In dollar terms, we expect this account to remain around this level on a quarterly basis during 2018.

During the quarter, our head count grew to nearly 13,400 employees, an increase in staff of over 1,000 employees, year-over-year. Our continued strong business development performance means that, as we continue to ramp up activity, we expect our future billable head count levels to grow as we progress through the year.

As this growth occurs, we remain focused on maximizing our operational efficiencies. In quarter one, SG&A was 17.5%, down from 18.8% last year. As we move forward during 2018, we expect to balance head count growth with continued leverage of our industry-leading global business support model. As a result of this proactive management of our cost base, we were able to achieve an operating margin of 20.1% in quarter one and increased EPS by 11.6% from $1.29 in the same quarter last year to $1.44.

We continue to execute our strategy of forging innovative partnerships that can help us to address the key challenges in drug development. Last month, we announced our partnership with Intel. This provides a very exciting opportunity to aggregate and analyze data from mHealth and wearable technologies using advanced analytics and machine learning capabilities.

Intel's platform can absorb an unlimited amount of data and provide near real-time analysis and insights on the data being generated. The platform and the partnership itself supports ICON's goal of delivering patient-centric trial design, and will enhance the overall patient and customer experience. These capabilities will allow us to better service our customers by helping them to reduce operational costs for clinical trials, increase patient compliance, improve the quality of data and evidence in order to accelerate drug development.

This partnership between ICON and Intel also demonstrates ICON's commitment to applied innovation and to collaborating with leading global technology organizations in order to drive speed and efficiency. Finally, Intel's selection of ICON for this partnership confirms ICON's position as the leading CRO in wearables and a trusted partner to the world's top pharma, biotech and medical device companies.

We also remain extremely focused on how we can expedite study start-up and employ more data-driven and scientific approaches to identifying the right sites and patients. Our collaborations with TriNetX and EHR4CR continue to be used successfully in conjunction with our OneSearch data platform, which helps improve our investigator site identification and selection process, thus tangibly driving project execution.

We are gaining significant traction using OneSearch and to-date this has been employed in the design phase in over three quarters of new awards. Already we have seen significant improvement in our start-up activity cycle times and productivity levels. In addition, we are continuing to enrich the number of data sources being analyzed in OneSearch to further approve its effectiveness.

We're also continuing to advance our relationship with ICHOM to support the scale up of their capabilities to build an ecosystem for health outcome measurements and real-world evidence worldwide. ICHOM continues to advance the standards for outcome measurements by continuously adding experience data to their Standard Sets. We believe this complements ICON's overall real-world evidence strategy and focus on patient reported outcomes and mHealth technologies.

We also remain focused on maximizing shareholder returns. As a result, during the quarter, we repurchased $38 million of shares under the previously announced share repurchase program. To-date we have repurchased $281 million of shares overall at an average price of $83.64 per share. Our intention is to continue to opportunistically repurchase shares throughout 2018. As a result of the share repurchase during quarter one 2018, we are increasing our earnings guidance by $0.02 to a range of $5.91 to $6.11. Revenue guidance remains unchanged in the range of $2.52 billion to $2.64 billion.

Before moving to Q&A, I would like to thank the entire ICON team for their hard work and commitment during the quarter. In particular, I'd like to recognize the efforts of the finance department for their hard work preparing for the ASC 606 transition as well as the joint team from AMAG Pharmaceuticals and ICON, which was recently voted Clinical Research Team of the Year at the recent Clinical & Research Excellence Awards.

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

[Operator]

Thank you. We will now take our first question from Sandy Draper of SunTrust. Please go ahead.

[Sandy Y. Draper, SunTrust Robinson Humphrey, Inc.]

Thanks very much and good morning, or good afternoon maybe for you guys, and congrats on a good start to the year. I guess, my question is really around the gross margin, and you guys have been talking about that being sort of flat or down.

Just curious how much of that is spending ahead of the build-out of the strong business versus wage inflation. And then maybe on the wage inflation side, clearly employee retention is critical. This is a people business. Besides just paying people more money, which is one way to keep them, how do you look at what things can you do to retain people with besides just paying more money? Thanks.

[Stephen A. Cutler, ICON plc]

Sure, Sandy. It's certainly we are having – there is a little bit of pressure on the gross margin line. And as you said, we've been forthright about that. There will be I think going forward, as we ramp up growth, some further pressure on that, but we're working very hard to make sure that we on-board people as we do for the new projects on a just-in-time basis and that we make sure that they are available to work and to bring in revenue in a highly correlated manner I suppose. So, as we incur that cost and as we bring on those heads, we get the revenues as well. And that's something we're working on and we've been reasonably successful I think on that.

In terms of wage inflation, we're not seeing dramatic wage inflation. Despite the fact that I think around the world, even certainly in the United States, employment is reaching very full levels, we're still able to recruit. We've been creative in terms of bringing on new graduates. We brought on something like 120 new graduates, particularly in the CRO ranks. These are people literally just out of school instead of college. And we're training those and we're investing in training those people and allocating the projects as quickly and as effectively as possible. But that allows us to keep our wages at a sensible level overall.

And we're also, obviously, committed to paying people at market rates. We want to do that. We believe that's the right way to do it. But we don't believe that just money or just salary is the only thing that keeps people at an organization. So we put a lot of effort into training our managers, to engaging our people, to making training available to them. We have a number of programs ongoing with various universities, particularly in Dublin, UCD, where we use those folks to work through a number of training programs. Our ICON University is very active in the training area. We engage people as well through career development.

So there's a number of things that we do to improve and to develop our people and to engage them. That means that we don't just solely rely on throwing money at them. We paid reasonable bonus each year for the last few years. We've been able to do that through the efficiencies that we've been able to generate. And we like to be able to reward particularly our high performing folks in that way. That's the culture we're developing here at ICON to reward the best performance. And we've certainly been able to do that through the performance that we put up over the last few years. I'll leave it at that from a retention point of view.

[Sandy Y. Draper, SunTrust Robinson Humphrey, Inc.]

Great. Thanks, Steve. And I'll jump back in queue.

[Stephen A. Cutler, ICON plc]

Thanks, Sandy.

[Operator]

We'll take our next question from Juan Avendano of Bank of America. Please go ahead.

[Juan E. Avendano, Bank of America Merrill Lynch]

Hi. Good morning. Thank you. My first question, I guess, is your top customer recently announced the discontinuation of five experimental Phase I trials. Wondering if you're seeing any impact from that and if that changes your outlook on your top customer accounting for anywhere between 12% to 14% of your revenue by year-end?

[Stephen A. Cutler, ICON plc]

No impact at all.

[Juan E. Avendano, Bank of America Merrill Lynch]

Thank you. And you seem to be making a push into the government and public health market, especially after the acquisition of ClinicalRM. Can you tell us more about your strategy for targeting the government and public health market and why this makes sense?

[Stephen A. Cutler, ICON plc]

Sure. Yeah. We bought CRM last year. So we've been developing that space. We believe there's a market there. It's a different market to the market that we're in, but it's still a market that we feel we're well positioned to exploit and to benefit from. And CRM has come on-board now. The integration is pretty much complete. We've recently appointed a new leader who's making very good strides in that.

We're very much in the army sort of the military sort of side of the government market. We're now making strides to move into more of the NIH part of the market. So there are various segments of the government market that we're looking at. And it's a business that we feel in the longer-term will provide solid and good returns for us as an organization.

So I think the rationale ultimately is I think organizations like us can make a contribution, can provide a very solid service and solutions in that market space. A few of our competitors are in there, but it's not perhaps as cutthroat competitive as perhaps it is in the private space, if I can use those sort of words. And we believe there's significant upside in the longer-term for us. And so we're committed to that market and I feel we're making solid progress moving forward there.

[Juan E. Avendano, Bank of America Merrill Lynch]

Thank you.

[Operator]

We'll take our next question from John Kreger of William Blair. Please go ahead.

[Jon Kaufman, William Blair & Co. LLC]

Hi. Good morning. This is Jon Kaufman on for John Kreger. Could you guys talk about the RFP flow in Q1? How much did they grow year-over-year. And then, what are you seeing thus far in Q2? Are you seeing a step-up of RFP this quarter?

[Stephen A. Cutler, ICON plc]

We don't typically, Jon, typically give out specifics on the RFPs because they do tend to vary and can vary, and you get a large ballpark for the figures out. However, having said that, we do look at it and we've seen, I'd say, a modest growth in RFPs year-to-year, quarter one to quarter one. We're pleased with that. And our win rate has been very good. Our business development group has done a very solid job in keeping our win rate high. And so, with a modest uptick in RFPs and a very good win rate, it's led to a pretty solid business development performance.

In terms of the segments, we're making more progress in our large pharma segment, but we're also seeing the smaller companies and the biotechs being extremely well-funded at the moment. So they have money to spend and they're willing to spend it, not just on early phase studies, but on later phase studies as well. So we've made some progress in that segment as well.

So, overall, I think we see a very solid market for our services right across the segments of our customer base.

[Jon Kaufman, William Blair & Co. LLC]

Okay. Great. And then kind of switching gears here. One of your competitors discussed the benefit of virtual trials on their earnings call. Do you buy into that idea long-term? Are pharma companies willing to take the risk of doing these types of virtual trials?

[Stephen A. Cutler, ICON plc]

I mean, the short answer is, yes, I think we certainly do buy into the concept of virtual trials. I think we recognize that the clinical trial environment is evolving and changing. And the virtual trial, and by virtual trial I mean trials where we're much more directly connected with patients using wearable technology, and I outlined some of the work we've been doing in wearable technology in my comments.

And we certainly believe that they will be in the long-term a very important part of the landscape. However, I would say that these sort of changes don't ever happen as fast as some people would think they're going to happen. Our pharma sponsors and customers legitimately want to make sure that the data they generate from their clinical trials is suitable for registration of their compounds.

So the first question they'll often ask me is, how many trials have you done before? How many compounds have you got to market using whatever technology, whatever sort of new device or new approach? And that's a legitimate question. So we work within a fairly conservative sort of set of industry, I suppose, instead of customers and they legitimately want to validate this technology before they use.

So, virtual trials I suspect will move forward, probably not as fast, but they'll probably start in more the post-approval space where we'll be collecting safety data and data for submission and continuation of information on drugs as they come to market. And I think that's the way it will turn. And then, again, they'll I think work back into the Phase III and Phase II space in the longer-term, but it's certainly a concept and it's certainly a practice that we're embracing and looking to move forward with as actively as we can.

[Jon Kaufman, William Blair & Co. LLC]

Okay. Great. Thank you.

[Operator]

We'll take our next question from Ross Muken of Evercore ISI. Please go ahead.

[Luke Sergott, Evercore Group LLC]

Hey, guys. This is Luke on for Ross. Just kind of to tally on to that last question. Is there kind of a client base that you see that would most likely be interested in adopting these newer technology offerings, the smaller biotechs versus the large, more conservative pharma?

[Stephen A. Cutler, ICON plc]

Luke, that's a tough one. I think perhaps at a higher level, you can make a case that the smaller biotechs might be more willing to utilize some of the technology a little earlier. For starters, they're easier to access their decision makers, I would say, and easier perhaps to put new ideas to, and to access the key decision makers for those new ideas. So there's a rationale behind that.

Having said that, there are many forward thinkers within the larger pharma space and who are willing to put certain of their development programs and to use the new technology with those programs. I think it's very difficult to make a sort of general sweeping statement that the smaller companies are incredibly innovative and are going to apply the sort of innovation they do in the development of their drugs or the research of their drugs to the development of the drugs and the use of the technology for that development, and just that all large pharma are all waiting to see what happens.

I think that's wrong to move because I think there are some very creative and innovative people in our large pharma. It really depends on the particular company in the particular circumstance, I'd just put it that way. But I think everybody recognizes we need to do trials more effectively and more efficiently, and that's certainly the case. And I think the technology, whether it'd be in virtual trials or some of the wearable technology that we're advancing, has a major part to play in that and I think everyone would recognize that.

[Luke Sergott, Evercore Group LLC]

Okay. Great. And then I guess the last one, another on the data, is just everybody has a data offering and every CRO says that theirs is better and different. I guess, how do you guys see yours as differentiated and setting it up to win share going forward?

[Stephen A. Cutler, ICON plc]

I think, for us, we're pretty public in the way we've come forward and said we're trying a number of options on the data front. Data, we don't believe we need to own the data, we don't believe that. So, fundamentally, we believe there is a lot of data around and we can access that data from a number of different sources.

Where we're trying to focus is, is the analytics of that data and using various organizations, trying out various organizations, be it EHR4CR, TriNetX, our OneSearch is our internal data analytic capability around site ID. We're also doing some pilots. I mentioned the Intel collaboration. We're doing a pilot with Pharma (26:38). So we're doing a number of pilots with a number of different organizations to identify the best approach around the analytics of the data that they have access to.

In concert with that, we're also developing our site network because, at the end of the day, there's a ton of data out there. Most of it, because of the various privacy laws, is de-identified data. We have to work with de-identified data. And so, a lot of what's going on around the industry essentially is glorified feasibility. And that's fine. It's certainly ahead of – the question is to sites, but it doesn't necessarily get the patient the last mile into the site. We're also trying to come from the bottom up and then developing our site network and the databases that our sites have to connect the data that we can gain on a de-identified basis back into the system and then actually connect with those patients through our sites.

And we find out where the patients are. We make sure our sites are in those right areas. And then we use our site databases to reach out to those patients to actually connect them to the site and bring them into the site for the trial. We've got further work to do on all of that. But our site network is developing, our PMG. We made that purchase a couple of years ago. We're developing that within North America. We're taking on some responsibility for some further sites there and built some responsibilities there. We're also in the process of moving forward with some work in Europe. We want to build that out to be a global network.

So there's a lot of work going on in that within our organization at the site level to connect to patients and, at the analytics level, to make sure that those patients through electronic medical records are available to those sites.

As I said, I don't have a crystal ball. I don't know which of the analytical capability is going to be the most successful. But I hope, as we pilot them and as we work through them, we'll be able to find out and then we'll drive down that track very actively as we find the one and all the ones that actually suit our business and give our customers most value in the long-term.

[Luke Sergott, Evercore Group LLC]

Awesome. Thank you.

[Operator]

We'll take our next question from Tycho Peterson of JPMorgan. Please go ahead.

[Tejas R. Savant, JPMorgan Securities LLC]

Hey, guys. This is Tejas on for Tycho. Just a couple of quick housekeeping ones to get things started. Do you plan to keep providing your book-to-bill metric under the old accounting standard? It sounds like under the new standard there will be a lot of potential noise in the metric based upon reimbursable expenses. And, calculated that way, it may not necessarily be too well correlated with profitability. So, just wanted to get your take on that.

[Brendan Brennan, ICON plc]

Yeah. It's Brendan here. Certainly, over the course of this year, that's our intention. We will be having our ASC 605 comparatives there for the whole year. And as such, I suppose the bookings numbers that we've traditionally given, which is, as you know, based on what was direct fees in the past, is a good correlator in terms of future growth of revenue.

I think you're correct in your assessment that, as we move away from that and include past year costs, it will become less meaningful in terms of what the economic value is to the organization. So it is something that we'll be looking at. But certainly our intention for the remainder of this year is to continue to give our business wins certainly on a quarterly basis in the old format, which lines up very nicely with the disclosures.

As we go into next year, I think the industry as a whole will have to have a lot of thinking and thought around what the right metric is for business wins. And I'm not sure, to be absolutely honest, we've arrived at that decision point yet. So I think there's going to be a bit of evolution and a bit of learning on all sides to get to that point.

[Tejas R. Savant, JPMorgan Securities LLC]

Got it. That's helpful. And then a couple of quick ones here for Steve on real world-evidence and then the Intel partnership. So, first on real-world evidence, can you just share any thoughts on your conversations with regulators outside the U.S.? The FDA seems to be increasingly more receptive to it, but just wondering if you're seeing sort of growing traction for real-world competitor arms than construct of that nature outside.

And then, in terms of the Intel partnership, what verticals do you see, early use cases in, in terms of their remote monitoring and wearable technology as it relates to your sort of current backlog?

[Stephen A. Cutler, ICON plc]

Okay. Let me take the real-world evidence. I'd have to say, initially our contact has been more with the FDA than with the European or the other regulatory authorities on real-world. However, I think the FDA is leading the thinking around the world on real-world evidence and, certainly, they've been receptive to the sorts of things you've been talking about in terms of synthetic control group. Certainly, the new FDA Commissioner is very forward thinking and I think our customers also see that and we're seeing that as well.

So I do think there's a lot of traction being gained for some of this new technology around real-world evidence and the ability to avoid some of the costs associated with placebo-controlled and control groups, et cetera, et cetera, and allow us to generate solid data via EMR records and use that as a submission point.

I think, initially, the feedback we have is it's probably more in the, obviously, post-approval space, but we do see that moving back into the Phase II, III space in the more medium- to longer-term and the FDA have been receptive to that.

Sorry, with the Intel question, I didn't quite get. Could you repeat the Intel question?

[Tejas R. Savant, JPMorgan Securities LLC]

Yeah. My question was just around where do you see sort of early use cases to leverage that remote monitoring and wearable technology in terms of the various therapeutic areas in your backlog?

[Stephen A. Cutler, ICON plc]

Okay. Certainly, from a wearable point of view, we see particularly around the CNS trials at the moment, the ability to monitor patients in sort of, well, sleep activities, CNS activities, and the other one is respiratory as well. Certainly, we're doing a small pile at the moment with Intel in a respiratory setting.

So the ability with Intel platform is for us to take data from a number of different devices, be it a wearable device, be it a sensor device, be it monitoring in a respiratory case, say, the environment or the pollution sort of levels, and have that data feed into the one platform, and then have some analytics and artificial intelligence software playing behind that to identify trends and potential issues as that data accumulates on a very real-time basis.

So I would say, initially, it's in the CNS area and the respiratory area. That's where we're trying it out. But I do think there'll be the ability and the opportunity to broaden that well beyond those sorts of areas in the longer-term. There's no shortage of data available for this. So the question is how you manage it and how you analyze it and what you do with it as it accumulates, and that's always a challenge with these sorts of things. But there's I think a lot of excitement and a lot of receptivity from our customers around this sort of innovation in technology.

[Tejas R. Savant, JPMorgan Securities LLC]

Got it. Appreciate all the colors, Steve.

[Stephen A. Cutler, ICON plc]

Thanks.

[Operator]

We'll take our next question from Jack Meehan of Barclays. Please go ahead.

[Mitchell Petersen, Barclays Capital, Inc.]

Thanks. This is actually Mitch Petersen on for Jack this morning. So it's obviously been a pretty active start to 2018 in terms of biopharma M&A. I was just hoping you could touch on some of the potential opportunities and threats that you see from some of their recent development that we've seen in the market. And then maybe just how you're thinking about M&A more broadly as risks for the business longer-term?

[Stephen A. Cutler, ICON plc]

Sure. Mitch, we're reasonably sanguine about the M&A environment in terms of how our customers are seeing it. We recognize that there's likely to be some M&A certainly in the next 12, 24 months. I think 2017 was a relatively quiet year in the pharma space, although I guess from a healthcare point of view, there was a fair bit. But in the pharma space, I think it was relatively quiet.

The recent announcement around Takeda and Shire, obviously, has got things moving. And I suspect the new tax laws and the ability to repatriate income tax dollars, obviously, is potentially going to drive. So we see the likelihood of some consolidation within our customers.

And how do we feel about that? In the longer-term, we don't worry too much about it because our experience is, in the longer-term, actually it leads to more outsourcing. Certainly, in the short-term, it can lead to some slower decision making if you happen to be impacted or if it's your customers particularly that are in consolidating.

If you have a good relationship or a partnership with a customer that is the consolidator, you potentially expand the opportunity. They become a larger company and they tend to impose or put their outsourcing strategies, their outsourcing partners across the new partner. If you're the other way around, of course, it can work certainly not so well, although you do have the opportunity if you're not with the consolidator to become a partner. So it can work both ways.

And I would certainly suggest that, in the short-term, there is some slowdown in terms of decision making, prioritization of drug pipelines, et cetera. But in the longer-term, they recognize they need to reduce costs and outsourcing becomes an important part of that avoidance of adding further infrastructure and head count. And our experience, as I said, is pretty positive from a medium- to long-term point of view. So it's something that we expect and we're prepared for and we're not frightened by at all.

And then, certainly, with the particular one that you alluded to, Takeda-Shire has a totally minimal effect on us. We are not a large provider. They are less than 1% of our backlog, I mean, the combined entity there. So it's not something that we're worried about.

[Mitchell Petersen, Barclays Capital, Inc.]

Great. Thanks. That's some very helpful color. And then, just on some of the new strategic partnerships that you, I think, announced last quarter. Could you just comment on how those are contributing to revenue and bookings growth in the quarter? And then how we should be thinking about that for the rest of 2018? Thanks.

[Stephen A. Cutler, ICON plc]

Yeah. I would say slowly ramping up. These things do tend to take some time. So I think I made it clear, last time we hadn't put anything into the backlog when we announced the fact that we'd had brought on several new strategic partners. That's starting to change as specific projects and opportunities come through.

But it's relatively slow. There's a fair bit of work to do to set these partnerships up around governance, around manuals, and working procedures, et cetera, et cetera, which does tend to take some time. And all of the partnerships we've had, there hasn't been work flipping over. In other words, there hasn't been projects that have already started flipping over.

We're really starting from scratch out of being allocated assets, working through building the governance sort of relationships, developing protocols. So I would say slowly – they really haven't had any impact on the quarter as we've just reported. We believe they'll start to have some impact at the back end of the year. But we're sort of planning that out at the moment. And it will be a modest impact for this year.

[Mitchell Petersen, Barclays Capital, Inc.]

Great. Thank you.

[Operator]

We'll take our next question from Justin Bowers of Bloomberg Intelligence. Please go ahead.

[Justin Bowers, Bloomberg Intelligence]

Hey. Good afternoon/good morning. And I definitely appreciate the transparency and comparability between ASC 606 and ASC 605.

Just wanted to talk a little bit about your approach to Asia. I know your ex-U.S. business isn't huge but it has been growing nicely. And just wanted to talk about your approach there and maybe focusing on China a little bit because there is a lot going on there. And I know you have a partnership strategy there, so.

[Stephen A. Cutler, ICON plc]

Sure. Asia business has been growing nicely. We're pleased with the way that's developed. Certainly, if you, well, take China to start with, we have around 400 people in China. Now, that's grown over the last year over 50%.

So we've been bringing on people in China at quite a clip. As you know, Justin, the regulations are changing out there. The opportunity that we see in China is very significant in terms of the CFDA really embracing, ICH taking down the times for approval of new trials, taking down the times to register new drugs, really fully much more in line with the world order pharmaceutical development, and we see lots of positive opportunity out there.

And hence, the opportunity to grow our organization has been one that we've been availing ourselves of. And as I said, there are 400 people, we've grown very significantly over the last year and we believe that that growth will continue.

If I look at Japan, we've also seen very significant growth out there, more in the line of around 25%. People in Japan are almost 300 people. In Japan, we continue to look for opportunities out there to continue to build our organization.

India is a very large operation out there for us. We have a number of our staff out there, not just in the clinical area and the stats and data management, but in our back room operations. Part of the reason for our solid performance and progress over the last five or six years on SG&A is really because of a fantastic contribution that our Indian group has made. We're over 2,000 people out there in India.

And then there are a number of other countries we're also developing. Korea is a strong hub force. Australia is also a hub, and that's been developing. We're taking on new graduates in all of those areas as a focus. It's sometimes hard to make the acquisitions that you want to have out there. So we've been going back to a more organic style of growth and investing and bringing on new people out there.

So there's no question Asia is very important region for us. We're seeing significant growth. Japan and China particularly are areas of focus for us, and we continue to make strong progress there.

[Justin Bowers, Bloomberg Intelligence]

And in those two countries, is there an interest to work beyond the global multinationals, in other words, some of the innovators in those countries too? And specifically, China, I mean, it's certainly nascent but there's definitely a lot of capital on start-ups there as well.

[Stephen A. Cutler, ICON plc]

Yeah. We look at those segments of the market and focus our priorities as appropriately on them. So I'd have to say that the large multinational pharmaceutical companies, whether they'd be based in the East or, in Japan's case, obviously, there's an inherent pharmaceutical industry; less so in China, there tend to be more local companies.

But we tend to focus on the large multinationals and where they want to do their work. That's a priority. They tend to provide the strongest pipelines, the strongest cash flow, et cetera, et cetera. But we are looking in China at the more traditional local companies.

They have some different characteristics, I would say. Some of those characteristics can be challenging at times. But there are a number we've worked with who want to do development programs in the East, so want to do work in Europe and in North America as well as in China. We've been engaging with them and developing our market and our work with them.

So it's a little bit of, not an ad hoc, but a case-by-case basis with those smaller Chinese companies and those national companies. They are companies where we feel good with and who have got a track record and who have a solid balance sheet. We feel strongly about helping them and working with them. There are others that where we take a slightly more cautious approach with them, where we essentially do a risk assessment with all of them, I would say.

[Justin Bowers, Bloomberg Intelligence]

Yeah. Makes sense. Thank you.

[Operator]

We'll take our next question from Erin Wright of Credit Suisse. Please go ahead.

[Erin Wilson Wright, Credit Suisse]

Great. Thank you. And sorry I had to hop on late, so I sincerely apologize if you've addressed these. But could you give us an update on what you've been able to accomplish to-date with the Mapi acquisition. And did you break out what that contributed in the quarter? Thanks.

[Brendan Brennan, ICON plc]

We did. You know what, Erin, we give our usual break out in terms of revenues. So let me go through each of those numbers one more time. Mapi is the only kind of acquired business there year-over-year that's making a differential.

So we said we were, year-over-year were up 7.1%. On a constant currency basis, we said it was 4.3%. So we were aided by currency. And then we said that we were 1% lower when you excluded acquisitions and currency. So, on a CDO basis, we were 1% lower. I'll let you do the math, Erin. It's pretty on that point.

[Erin Wilson Wright, Credit Suisse]

Okay. Great. So it's just Mapi in there. I guess, how much of your business today is FSP, I guess, currently and how would you kind of characterize the broader demand trend across that sort of segment? And how do you view kind of your positioning in FSP just more broadly?

[Stephen A. Cutler, ICON plc]

Yeah. It's Steve here. FSP, it's certainly not the majority of our business. Our DOCS IFS business is a very important part of our business and it's a growing part of our business, but it's certainly under 20% of our overall business. So, as I say, I would say the clinical full service is still the majority of our – certainly is a majority of our revenues and full services certainly.

But FSP remains an important part of it. It's a growing part of it. Certainly, there are a number of customers who are committed to that model and who want to develop that model. We believe we're in a good position to be able to offer both and, in some cases, a hybrid. There are a number of customers now that we offer both full service and FSP for particular partnerships or particular assets.

So we're in a good spot from that point of view in being able to offer either model depending on their preference or requirement.

[Erin Wilson Wright, Credit Suisse]

Okay. Great. Thank you so much.

[Operator]

We'll take our next question from David Windley of Jefferies. Please go ahead.

[David Howard Windley, Jefferies LLC]

Thanks for taking my questions. And similar to Erin, I did have to jump on late, so I apologize if this is redundant. But, Steve, I'm wondering if kind of at the ground level if you're seeing any change in award decision processes among customers in relation to the data technology strategy. So I think, if I look at book-to-bills, it would suggest among the various competitive players that the momentums are kind of the same. But I guess I'm wondering, in qualitative discussions, how your read of the customers' appetite and sensitivity for some of these data strategies is evolving.

[Stephen A. Cutler, ICON plc]

Yeah. It's a good question, Dave, and one I ask myself a lot and try to get feedback from our business development teams a lot. I would say, at this stage, there really isn't much change in terms of the way our customers are viewing our application of the various data analytics and data strategies that we can apply to their programs.

I think many of them have seen the heat maps and the patient maps, and they know that we can do that, and they are a little bit, dare I say it, sceptical of that because ultimately, as we all know, it's not identifying where the patients are. It's a clear and coherent strategy for getting them the last mile into the trial.

And I think that's where our customers are looking for us to really differentiate ourselves. And I think I outlined how we're trying to do that with our site network and with the analytics that we're partnering with. And I think, as we're able to deliver and as we're able to tangibly execute on those strategies, I think we'll get more traction and we'll get our customers really engaging.

I think it's early days for that. As I've said, at the moment, a lot of the data review and a lot of the data analytics out there is glorified feasibility. And that's fine, but it's not really changing the game yet. And we think we have more to do.

So I hope that sort of answers your question. I don't see much change in the way they're making decisions as yet, but I do think it will happen. I think but it's probably going to take as always a little longer than we initially thought.

[David Howard Windley, Jefferies LLC]

Yeah. That's very consistent with what I've heard as well. Thanks. In terms of partnerships, to an earlier question, you talked about some of those in the last call. You've had a nice track record for some period of time now, in fact, as you've tried to kind of rebalance the business vis-à-vis your largest customer.

Where would you say you are in terms of your capacity to win additional ones and build the governance infrastructure and on-board the business, et cetera? And am I right in thinking that there are a handful over the balance of the year that are kind of looking that re-procurement of partnership vendors in 2018?

[Stephen A. Cutler, ICON plc]

Sure. I think, in terms of our capacity to win new partnerships, I think we have the ability and the capacity. One of the things we've learned and one of the things we've developed in terms of core competency in our organization through the partnership with that number one customer is an ability to know how to on-board these partnerships and how to develop these partnerships and how to deliver on these partnerships.

So it's been I think a very valuable learning experience for us as an organization and we are now looking to apply those learnings. And in terms of things like how you work with other CROs, how you work with their partners, I think we showed a strong track record in that as well. So we're applying that sort of learning. And I think we've been able to be successful in winning new partnerships. And I think we have the capacity to take on more of them.

Not every partnership is the same. In fact, no two partnerships are the same. Some provide a very significant amount of work. Others, it's more of a less amount, but it's more consistent within a particular therapeutic area or a particular asset. There's no sort of one size fits all here.

And so we try to apply and customize our approach to those partnerships and develop our capacity, obviously, the learning and so all that (51:41) and the capacity that we have to take on those partnerships is, I think, there and certainly ready to be deployed. And as I keep saying, they rarely if ever take off at the speed we'd like and even at the speed that the customers would anticipate. And we certainly see that.

In terms of re-procurement, I think we feel we're always on the rack, if you like, for re-upping these partnerships. They formally come around every three to five years depending on which one. I don't have it in my mind right at the moment the ones coming up this year, although I'm sure there are.

So we feel we need to be on our game the whole time because ultimately if it's not working, they'll find another, no matter whether you're one year, two years old, five years into the partnership. And so it's a matter of constantly being on our game to deliver on these partnerships and that's our approach.

[David Howard Windley, Jefferies LLC]

Appreciate that. And one last question around M&A. Within the vendor industry, in particular ICON, so kind of a year ago, a little over a year ago, as you were stepping into the CEO seat, there was a perceived and, say, more aggressive, open-minded or maybe higher focused, larger focused attitude toward M&A by ICON. I think there was an appetite for maybe one particular asset that didn't play out. And then you made the allusion in an earlier answer about Asia and sometimes the capabilities you want to buy are hard to buy and so you've turned to organic. I'm sure those are probably small.

But the punch line of the question here is, we're five quarters in from hearing a more aggressive attitude about M&A and there hasn't really been that step-up in volume. Are you still thinking aggressively about M&A or might we see a more aggressive deployment of capital in share repurchase? Thank you.

[Stephen A. Cutler, ICON plc]

Oh. Dave, that's a long question and love to do it. I would just say that we remain very keen to deploy our capital in the most appropriate ways. And if that's a significant transaction, we are open to that and we would be open to that. We want to, obviously, get the best return for our shareholders and for our customers ultimately. So we're certainly willing to look at all types and all sizes of M&A.

The challenge, of course, you find out there is what's available, what's executable, what's affordable, what's sensible, and what transaction you can do where the benefits outweigh the risks. And that's an individual transaction-by-transaction decision. But we are anxious to develop our organization. We believe we've got a good base. We're executing well on the portfolio of work that we have. And we have, as you know, a strong balance sheet and we're anxious to consider all opportunities from an M&A basis.

On the share buyback, we're going to be opportunistic. We've done, I think, it's $280 million of the $400 million that we have approved. And it's something that we would certainly look – we will certainly continue in the absence of suitable targets from an M&A point of view. But I will be very honest and say, from my point of view, I'm looking to develop the business and develop and grow the company on an M&A basis. And if the right opportunities come along, we will be very active in that space.

[David Howard Windley, Jefferies LLC]

Great. Thank you.

[Operator]

And I'll take our next question from Michael Baker of Raymond James. Please go ahead.

[Michael J. Baker, Raymond James & Associates, Inc.]

Thanks a lot. Steve, I was wondering whether or not you're seeing any meaningful change on the competitive pricing front both in terms of a contracting approach and level of pricing?

[Stephen A. Cutler, ICON plc]

Michael, nothing significant that we would call out for you over the last quarter or so. This is a competitive industry. It remains a competitive industry. You need to be on your game. There's been talk around fixed pricing and those sorts of things that some of our competitors come out with.

I think that's an area we embrace appropriately, I would say, in that you can never take the entire risk. And I don't think any of our competitors take the entire risk there. But that's an area that, I think, has got some airplay over the last probably 6 to 12 months. But in terms of absolute pricing, no, I don't think there's any particular move over the last quarter or so to be more competitive. It remains a very competitive business, and that's the way it should be.

[Michael J. Baker, Raymond James & Associates, Inc.]

Appreciate the update.

[Operator]

As there are no further questions at this time, I'd like to turn the conference back over to Dr. Stephen Cutler for any additional or closing remarks.

[Stephen A. Cutler, ICON plc]

Thanks, operator. So, let me just add, the quarter one was another strong quarter for ICON and we look forward to building on this progress throughout 2018, as we consolidate our position as the CRO partner of choice in drug development. Thank you very much, everyone.

[Operator]

That concludes today's call. Thank you for your participation. You may now disconnect.