ICON PLC

NASDAQ:ICLR

Earnings Call Transcript 2018-Q3

[Jonathan Curtain, Investor Relations]

Good day ladies and gentlemen. Thank you for joining us on this call covering the quarter ended September 30, 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, Chief Financial Officer]

Thank you, Jonathan. As a reminder from January 1, 2018, the new revenue recognition standard ASC 606 became effective for ICON. Having adopted cumulative effects transition method, prior year comparatives have not been restated under this new standard. Instead, we feel that providing comparable Q3 2018 international results on the previous revenue recognition standard is the best way to evaluate performance during this transition phase. Whilst my comments may incorporate the impact of ASC 606, Steve will focus his comments in our performance excluding the impact of ASC 606.

In quarter three, we achieved strong gross business winds excluding the impact of ASC 606 of $716 million and cancellations of $111 million. As a result, net awards in the quarter were new record, $605 million resulting in a net book-to-bill of 1.27 times. This means our trailing 12 months book-to-bill is very healthy 1.28 times. With the addition of these new awards, our quarter three 2018 backlog, excluding the impact of ASC 606, grew to $5.3 billion representing a year-over-year increase of 10.5%. Our top customer represents 9.8% with this backlog then from 11.4% at the end of quarter three last year. Reported revenue in quarter three was $655 million excluding the impact of ASC 606, revenue was $476.4 million. This represents year-on-year growth of 8.2% or 8.3% on a constant currency basis and 6.6% on a constant dollar organic basis.

Excluding the impact of ASC 606, our customer concentration with our top customer in the quarter represented 13.1% of revenue, compared to 16.6% of revenue last year. Our top five customers represented 38.3% of revenue compared to 38.2% of revenue last year. Our top 10 represented 52.9% of revenue compared to 54.2% of revenue last year, while our top 25 customers represented 69.2% of revenue compared to 72.2% of revenue last year.

In quarter three, reported gross margin was 29.9% compared to 30% in quarter two, excluding the impact of ASC 606 group gross margin for the quarter was 41.3% this compared to 40.9% last quarter and 41% for the comparable quarter last year. Reported SG&A for the quarter was 12.3% as compared to 12.6% in quarter two. Excluding the impact of ASC 606, SG&A was 17% of revenue, this compared to 17.1% last quarter and 18% in the comparable period last year. This was a result of our continued leverage of our global business support model.

In quarter three, we reported operating income of 15% or $97.9 million, this compared to 14.7% or $94.4 million in quarter two. Excluding the impact of ASC 606, operating income for the quarter was $98.8 million and operating margin of 20.7%. This compared to 20.2% last quarter and 19.3% in the comparable period last year. As reported net interest expense for the quarter was $1.9 million and the effective tax rate for the quarter was 12%.

Reported net income was $84.5 million or 12.9%, this equated to $1.54 – sorry, $1.54 diluted earnings per share. Excluding the impact of ASC 606, net income was $85.3 and margin of 17.9% equating to diluted earnings per share of $1.55. This compares to earnings per share of $1.51 in quarter two, which excludes the $0.03 tax benefit last quarter and $1.35 in the comparable quarter last year an increase of 48.8%.

DSO in the quarter was 49 days, which compared to 49 days last quarter and 50 days in the comparable quarter last year. Cash generated from operating activities for the quarter was $128.1 million and capital expenditure was $11.2 million. In September 30, 2018, the company had net cash of $142.3 million compared to net cash of $23.9 million at June 30, 2018, and net debt $56.3 million at the end of September 2017. As a reminder, I have dealt with the new revenue standard. Steve will focus his comments on our performance excluding the impact of ASC 606.

And with all of that said, I would like to now hand over the call to Steve.

[Steve Cutler, Chief Executive Officer]

Thank you, Brendan and a good day to everyone. During the quarter, we continue to see a strong demand for our services in the market. Our backlog in the quarter grew nearly 11% year-over-year, driven by another record net business awards level of $605 million. This deliver the net book-to-bill of 1.27 times for the quarter or 1.28 times on a trailing 12 month basis. Our overall P&L performance was again very solid with revenue increasing by over 8% year-over-year to $476.4 million, gross margin improving to 41.3% up from 41% last year. And further SG&A improvement to 17% of net revenue from 18% in the prior year. In conjunction with the 12% tax rate, this meant that earnings per share grew 15% year-over-year to $1.55.

In addition, since the end of quarter two, we’ve repurchased nearly $38 million worth of shares. Year-to-date, we have repurchased $92 million worth of shares overall at an average price of $125.58 per share. Our intention is to continue to opportunistically repurchase shares, as we move towards the year end.

Looking to the future and the overall market for CRO services, the key growth drivers remain in place. Biopharma R&D spending continues to strengthen at an estimated 3% per annum, while increases in the number of trials and outsourcing penetration rates will affect further increases as customers look to improve the productivity and efficiency of their drug development programs. Consequently, we estimate the CRO industry will expand by around 6% per annum over the next four to five years.

Market share continues to shift towards larger CROs that have the global footprint, breadth of services, and patient access necessarily to run increasingly complex global trials. ICON is well positioned to capitalize on this growth, given our breadth of capabilities, scientific and therapeutic expertise and global scale, operating as we do across 37 countries from 93 locations.

To enable this growth, a core component of ICON strategy is our focus on partnerships. And becoming the industry’s trusted partner of choice, we differentiate our services by listening to, understanding and providing solutions to our customers key challenges. To do this, we need to not only understand our customer needs, but also the market environment in which we operate.

In recent years, there has been an exponential growth in the amount of data available in clinical development, but the acquisition of and the access to large volumes of patient data by customers and competitors, simply it hasn’t translated into better outcomes for clinical trials, particularly in key areas such as patient enrollment, patient participation, and the overall speed of trials.

We believe the transformation from data to actionable insights and ultimately improved outcomes will happen in phases through targeted analytics and an established infrastructure of receptive and supported sites and informed patients. We believe data will be democratized and ubiquitous, so as the cost of acquiring data will not be a barrier to insights and opportunities. And we believe in leveraging analytics capabilities through people, who truly understand the need for efficient drug development and patient centricity will drive this transformation.

ICON has a tripartite approach to its patient recruitment strategy. First, technology and data analytics, our OneSearch platform helps us analyze a variety of key performance data to identify the right sites for the trial. In addition, our partnerships with a number of leading-edge organizations including TriNetX, EHR4CR and practice fusion allows us to access EMR data and real world evidence to provide key feasibility study information and help identify relevant patients in a confidential manner, which improves the flow of patients to sites conducting in our trials.

These sites on the basis of a second component of our strategy, which is our integrated PMG site network, these sites have dedicated trial support teams and their own patient databases to help maximize recruitment. Engaging and educating patients at our sites on the benefits of clinical trials as a care option is also a key part of the site’s role in achieving outcomes, which are meaningful for patients.

Finally, our patient recruitment services team uses traditional and non-traditional digital methods such as advertising in social media to attract patients to our trials. We believe that as we scale up this integrated approach to the patient recruitment problem, we will materially impact the speed, which we can conduct that trials.

Over the past year, we have seen a 60% increase in the number of patients recruited into ICON trials, within our PMG site network, and we expect such growth to continue. We are also starting to see progress in the reduction of sight startup times and improved data quality across our network.

ICON’s partnership focus also encompasses mobile or wearable technology, enabling the move towards more virtual trial capabilities that enhance the patient experience and help to build trusted relationships throughout the study and beyond. The use of wearables and mobile technology during clinical trials and observational studies helps patients to manage their medication and collect data by a structured instruments in a manner, which is more convenient to the patient.

The use of mobile health technology has been shown to improve the overall quality, consistency and availability of data between site visits, enabling greater compliance and trial protocol, and leading to better overall outcomes. Mobile health blends seamlessly into the goals of ICON’s data strategy to provide patient-centric convenience and care that can improve patient retention, while giving access to large volumes of real world data for the trial.

We are in to be a differentiator in the way in which we collect patient data and partnered with Intel on the Pharma Analytics Platform to enable continuous data capture from any wearable device or sensor. This platform has already proven it’s use on over a dozen clinical trials, comprising more than 1.2 million hours of data collection and over a thousand patients. It should be noted, however, the collection of data is only one component of the mobile health data strategy. The data also needs to be visualized, analyzed, and shared appropriately to maximize its value and provide actionable insights.

With such a wealth of data available to ICON, its processing must be efficient and provide intelligent analytics that enable better decision making throughout the lifecycle of the trial and beyond. The ICONIK Informatics Hub plays a key role in ICON’s data strategy by integrating a diverse range of technologies and data sources within one all encompassing platform that includes EDC, Central Labs, ADDPLAN, goBalto, FIRECREST, OMR and eCOA.

ICONIK leverages clinical research, patient, community, and real world data to enhance the development of new treatments from initial design of the protocol to delivery of the trial. The ICONIK Informatics have also enables the delivery of feature rich analytics capabilities and through leveraging our relationships with industry leaders such as Saama Technologies, we continue to develop new ways in which we can enhance our engagement with patients and investigators, as well as unlocking the real value of real world data to provide deeper insights into our products can achieve better commercialization outcomes.

We firmly believed that this integrated approach to data in union with our patient recruitment strategy provides ICON with a clear and differentiated position on the key industry challenge of reducing development times.

Before moving to Q&A, I’d like to thank the entire ICON team for all their hard work and commitment during the quarter. Thank you, everyone, and we’re now ready for questions.

[Operator]

Thank you. [Operator Instructions] Our first question comes from Robert Jones from Goldman Sachs. Please go ahead. Your line is open.

[Robert Jones, Goldman Sachs]

Great. Yes, thanks for the questions. I guess just looking at the quarter across the industry, only a few CROs have actually reported so far. So don’t want to make too much of this, but there has been some divergence in what we’ve observed in bookings growth in book to bills. So I just wondering, Steve, if maybe you could share, what you’re seeing as far as RFP flow, how the win rate for ICON has been performing relative to your expectations?

[Steve Cutler, Chief Executive Officer]

Sure, Bob. Yes, thanks for the question. I think as we said backlog is up 10% year-on-year. We’ve certainly seen a positive progress from the RFP point of view on a year-on-year basis. We’re up in the low double digits, from RFP. We’ve seen net new business again, on a year-to-date basis will be off at about 8%. So we’re seeing a positive business environment. And I think it had trailing 12 months book to bill at 1.2. I think that’s the way to measure these things. I think you can get some fairly volatile quarterly book to bills, but we’ve been fairly consistent at across that level and across the last 12 months, we were at about 1.20. So I think only indicators across the industry in the various segments that we work in large pharma, midsize and biotech’s, a positive and we’re seeing the benefit that in terms of our win rate hasn’t changed dramatically, but it’s at a good level. I’m pleased with that level and I think even the opportunities we’re seeing, we’ll be able to continue that.

[Robert Jones, Goldman Sachs]

No, that’s great. And then, Brendan, if I could just ask one follow up on gross margins. $605 million basis looks like you kind of expanded margins pretty nicely in the quarter. I know you guys had been talking about, thinking about gross margins in the near and long-term more on a flattish basis. So just curious, what drove the expansion in the quarter and anything in there that we should think about as being more sustainable as we look forward?

[Brendan Brennan, Chief Financial Officer]

Thanks Bob. Yes, we were happy with what our margin progression during this phase of the quarter. Really what you were seeing there, really in terms of quarter-on-quarter progression was just good utilization of our existing headcount and resource. Again, I suppose, we look at our head count resource on a year-over-year basis, Bob. So we’re kind of thinking in the mid-single digits for year-over-year growth and we continue to think that’ll be the way it will be it. We pan out into the fourth quarter. But yes, we’re happy with our progression from Q2 to Q3 for gross margin. And as I said, that was really around utilization. I think the probably the level that we saw in Q3 is not a bad way to think about it for Q4. I think, it is certainly something that we can sustain as we go into the quarter, as we look out further I think what you’ve indicated that possibly down a little bit from where we are at the moment, but certainly as we go into Q4 sustainable at Q3 level.

[Robert Jones, Goldman Sachs]

That’s great. Thanks so much.

[Operator]

Our next question comes from Ross Muken from Evercore ISI. Please go ahead.

[Ross Muken, Evercore ISI]

Good morning, guys or good afternoon for you. So maybe just in terms of the mix of business and momentum in some of the different segments, how would you kind of characterize, I don’t know, if you want to base it on size or disease state kind of – what areas right now are the most active and we saw some details recently just on the number of CAR-T and gene therapy drugs coming through the pipeline and it was obviously a pretty unique characteristics. So just give us a feel maybe in some of the areas whether it’s immunotherapy or gene therapy or CAR-T where you’re sort of seeing activity and how it’s differing amongst the different types of players, I guess?

[Steve Cutler, Chief Executive Officer]

Sure, Ross. It’s Steve. So I think as we see the opportunities come through the pipeline, obviously oncology is going through something of a revolution, scientifically with the PD-1 inhibitors and the whole immuno-oncology sort of – as I said, processes and new drugs coming through. A lot of trials going on in that segment, a lot of combination trials are starting up in those segments and that segment – and those are really coming out of the variety companies or it is just some of the larger companies are doing those. But many of the biotech’s, of course, the focus in their oncology space, perhaps it’s a good example of where we’ve had some early success in terms of a winning work there, getting some experience. These are very complicated logistical trials where you’re taking a sample of blood from the patients taking it away to a manufacturing facility and then bringing it back and reintroducing it to the patient. So you can imagine the logistics around that.

And we’ve been able to secure a number of wins in that area through experience that we’ve gained early on in that space and that’s been helpful. As I said, the biotech environment, it continues to be strongly funded. There are many opportunities coming out of that area. We’ve been successful in that space. And also in terms of opportunities around partnerships, we’re seeing a number of those playing out in the space, the abundant number, I mean, this take a while to secure, and then, of course a while to ramp up, but there are a number of opportunities in various stages, particularly in the late-stage area at the moment, in terms of partnerships. So as I said, overall the oncology space is strong, vaccines of course is strong for us as well. But there’s plenty of opportunity out there.

[Ross Muken, Evercore ISI]

Very helpful color. And maybe just in terms sort of the M&A or tucking environment. Obviously it’s a good time, did not have a lot of leverage on your balance sheet. Although, I’m sure, you’d like to be a little more active than you’ve been. I know, you’ve been intending to do some tuck-in deals. It’s been a bit now since we’ve seen anything of consequence. How would you kind of characterize that environment and then sort of your ability to execute on something in the medium term?

[Steve Cutler, Chief Executive Officer]

Yes, we have been active in that space, as you noted, we’ve been looking hard at a number of assets really across the year. We haven’t executed anything certainly in 2018 so far with others, as I said. There is a few things we’re looking at. I would say, certainly up until now, and with the recent volatility around the share market and the environment, number of the assets we’ve looked at that have been at a – sorry to say very full valuations, perhaps that’s an understatement. And so, we are pretty disciplined in terms of how we want to deploy that capital. We’ve got a very strong balance sheet. We recognize there is an opportunity there and advantage today. We want to make sure, we deploy that capital in a way that’s obviously adds clear value, but we’re not going to pay crazy prices for assets that we’d like. We will certainly be aggressive, when we find an asset that we particularly want and that really fits our strategy and tucks into our organization well in a way that really adds really strong value.

But as you said, given the volatile environment rising interest rates certainly in the United States and very frothy valuations, we’ve maintained our discipline and I’m happy that we’ve maintained our discipline, that means, we do have some capital to deploy and we’ll be looking to actively do that as we go forward, but we’re going to maintain that discipline as we consider those opportunities.

[Ross Muken, Evercore ISI]

Great. Thanks guys.

[Operator]

[Operator Instructions] Our next question comes from Donald Hooker from KeyBanc. Please go ahead. Your line is open.

[Donald Hooker, KeyBanc]

Great. Good morning, good afternoon. So question on Pfizer, I think in recent quarters you guys have talked about that relationship stabilizing in terms of the revenue that’s represents for you. I guess it was about 13% of revenues in the quarter, if I heard you correctly, but it’s a little under 10% of backlogs. So does that sort of suggests that maybe there’s another leg down as we go into 2019. And I guess with respect to maybe just when you’re talking about Pfizer in your thoughts there any kind of thoughts around the change in leadership there and how that might affect how you guys interact with them. Is there any update there? Thank you.

[Brendan Brennan, Chief Financial Officer]

Hey Don, I might take the first part of your question which was around the percentages and I’ll let Steve maybe talk more strategically around the Pfizer leadership piece. Yes, you’re correct, we’re 13% in the quarter. We’re just under 10%. Now it’s a proportion of a backlog. I suppose we’re in the happy situation that it’s not really because Pfizer’s backlog has decreased, because the rest of the backlog is increased of that percentage and it has decreased in absolute terms. So we still see that going forward, being in that ballpark of 10% to 12% of our business. And that’s probably not hugely off in terms of dollar amounts, what we’re seeing coming from that business on a quarterly basis at the moment. So still good strong customer, certainly, and we’ll certainly be in top customers for the foreseeable future.

[Steve Cutler, Chief Executive Officer]

And in terms of the changes of management, Donald, with Albert Bourla taking over from Ian Read as the CEO, we’re looking that and monitoring that, we obviously have a number of key contacts within Pfizer. We’re talking to them about any change in strategy. They obviously recently announced some layoffs. That could be opportunity for us. But on the other hand, we’re looking to continue to work with them to make sure we can, as I said, listen to them, understand what their needs are and continue to deliver for them. So we’re developing and continuing to develop our relationships, right across the Pfizer group, but particularly with Albert and his new team coming in. We have a MSA in place. It’s in place until the middle of next year. We then have an opportunity to extend west. We’re just starting to get into those discussions. It’s very, very early in that area. So again, we’ll be meeting with our Pfizer colleagues over the next few months to start that sort of discussion, but we feel we’re in a good place. And we feel the relationships are very positive and we think the new change in management will not have a material impact on that.

[Donald Hooker, KeyBanc]

Great. And I guess speaking of these strategic relationships, did you have in your emphasis there, I don’t know if this is possible, but is there a way to think about what kind of a percent of your revenues that are now kind of through these relationships versus kind of one-off kind of study opportunities? Is there a percent that kind of think about?

[Steve Cutler, Chief Executive Officer]

We don’t tend to think of it in those terms. Donald, we have some internal targets with a number of partnerships and alliances, we want to develop obviously for our point of view, it’s helpful to have a good proportion of our sales and revenue coming in through these partnerships, and to be able to drive the sorts of efficiencies, we’ve been able to do over the last few years and the relationships, of course, with these partners. And then investment and deploy capital, et cetera, in relation to improving the efficiency without those. So, but we don’t have any particular target we’ve done specifically disclose that those sort of numbers anyway.

[Donald Hooker, KeyBanc]

Okay. Thank you.

[Operator]

Our next question comes from Tycho Peterson of JPMorgan. Please go ahead. Your line is open.

[Tycho Peterson, JPMorgan]

Hey, guys. So Asia has been a big source of funding for U.S. biotech and I think the Trump administration recently issued new rules that will heighten scrutiny of foreign investment in U.S. biotech sector. So I’m just wondering have you picked up any sort of customer thinking on how this might impact the funding environment recent activities in U.S. biotech going forward? Thank you.

[Steve Cutler, Chief Executive Officer]

Sorry, could you repeat the question? Just I think we called it was Asia specifically. You were asking about it and maybe new rules from government in China. Was that correct?

[Tycho Peterson, JPMorgan]

No, new rules on both sides the Trump administration that will heighten scrutiny of foreign investment in the U.S. biotech sector, as it’s considered, technologically sensitive. If any early customer conversations you’ve picked up, how might have this impact the funding environment of U.S. biotech. You went back to Asia is a big most of the funding of U.S. biotech.

[Steve Cutler, Chief Executive Officer]

No, we haven’t. I haven’t had any sort of communication from customers around any issues or anything related to trade wars or anything like that, that might impact the funding of U.S. biotech’s, we’ve seen that funding be on very good footing for really the last – soon as the last couple of years now. And of course, it might not continue, who knows how that will go. But at the moment, it’s going good, it’s been strong and we’ve seen no impact from China. I mean, China represents, however, significant opportunity for us. We’ve grown there to round about 50% over the last year or so, because of – some of the new regulatory changes that the Chinese FDA are making, so almost that relates to your question. But there are certainly some opportunity out there and we’re seeing a significant opportunities for growth and we’ve been recruiting very actively out there in China to do more trials.

[Tycho Peterson, JPMorgan]

Great. Thanks for the color.

[Operator]

Our next question comes from Jack Meehan from Barclays. Please go ahead. Your line is open.

[Jack Meehan, Barclays]

Hi, thanks. Good morning. Just wondering, if you could just provide an update in terms of the lifecycle of your backlog as it pertains to revenue burn and whether you think we’ve started to reach a point where that can stabilize, as far as the outlook for going into next year might concern that?

[Brendan Brennan, Chief Financial Officer]

Thanks Jack. Yes, I’m going to say, it was down a little bit this quarter. We know, we’ve set out a target of keeping it in the mid-9s. We are very active on really ramping a lot of new business that’s coming into the organization over the last year to 18 months really. And our particular focus there on study startup on a patient recruitment. I think Steve has been outlined a lot in some of his comments, but also at our September 10 day. So we are very active and really focusing on how we can really mobilized sites and most of our patient recruitment that much faster and we able to get that metric back into the nines. It’s not easy. There is a huge amount of our work now that is oncology due to our longer trials. They do take longer to recruit patients. So it is a tough task and it’s so fast, but we’re using our technology and our site, a specific organization to really help us on that. Steve, do you want…

[Steve Cutler, Chief Executive Officer]

No. I think just to add to that, Jack, we do analyze as part of our business pretty active in it and really it’s – when we talked about the oncology trials, there is a complex oncology trials impacting. And I do believe that is the case, that’s still the case from historical basis. But we’ve also got other areas of that business that we’re working on it as well. And really if I look at the clinical group in overall actually they’ve been pretty stable in terms and even starting to sort of move up a little bit in terms of burn of backlog. So the large part about our group, although it’s lower than our average, is starting to move in the right direction, despite the overall dropping just slightly quarter-to-quarter. And some of the functional services business stuff, which is sort of pushing down a little bit and even in data management. So as we analyze that across our business, we’re looking at strategies for improving it. But I was pleased to see that overall in the clinical side of things, it is pretty stable and even starting to track up slightly to get back to where we’d like to be as Brendan said in the mid-nines.

[Jack Meehan, Barclays]

Great. And follow-up into that is you think about ramping up some of this work, wanting to get your updated thoughts on hiring? And it seems like the entire industry has been doing pretty well in terms of the funding environment, so are you finding it, the hiring environment is getting tighter at all and what are the plans for you to ramp up some of the resources there?

[Steve Cutler, Chief Executive Officer]

I think, certainly there were certain pockets in the organization and across the globe that is very challenging around hiring. I mentioned China. That’s certainly been challenging to get experienced people in that part of the world. Japan has also been challenging to get experienced people, We’ve gone to new graduate programs there, we’re making investments, very significant investments in new graduates in both those parts of the world to bring in new people. The U.S. has its hotspots as well. CRA is a challenging, Project Managers particularly with oncology experience can be challenging to find. However, we have a pretty strong talent acquisition group within the organization and we met with our resource needs with our business pretty effectively, over the – I guess the summer quarter, but I’ve seen it, that the head count growth wasn’t quite as much as we expected, but then you probably think that’s the case with, as I say through August – July and August. We’re ramping that up now and certainly, over the last month, we’ve seen some significant increases in our head count when we needed to do the work that we need to get done.

So, overall I’m happy with it. We obviously having to pay market salaries and we’re doing that. Our attention remains very strong that will over 85% of our organization. So while we need to recruit people, we’re also retaining people. And particularly in our CRA ranks and Project Manager ranks as well, which again, I’m very pleased to see that we’re able to keep those people in. So overall there are hotspots, there are challenges, but I think we’re doing pretty well.

[Jack Meehan, Barclays]

Great. Thank, Steve.

[Operator]

Our next question comes from John Kreger from William Blair. Please go ahead. Your line is open.

[John Kreger, William Blair]

Thanks very much. If you can just talk a little bit more about the PMG site management business, just curious how clients are – how receptive they are to this type of offering. Maybe if you think about study starts in the last quarter or two, what percentage of those would you say are using the site management infrastructure that you’ve built?

[Steve Cutler, Chief Executive Officer]

John, I don’t have that figure on top of mine, but I would say that we are obviously actively promoting our PMG site and it worked out for all of our new full service studies. However, as I’ve indicated previously, this is a – it’s not a network that we do much oncology at the moment. Although, of course, the new DuPage part of that network will be and we are ramping oncology in that site. So up until now most of the work that the PMG network have done and as I said, it’s increasing very nicely, has been in the non-oncology space.

But with DuPage coming on board, we will be ramping up the oncology – oncology capabilities there. So I would expect that all of our new work in oncology would have representation within the DuPage network, DuPage part of the PMG. I think across the board, I would say around 60%, 65% of our work. So the vast majority of our non-oncology work goes into the PMG network. There are projects, sometimes if they say, they aren’t able to do, they can’t participate in, that tends to be the exception rather than the rule. Because whatever they do, it tends to be at least as good and usually significantly better than the ad hoc sites that we use.

So as I said, we’re significantly ramping up the number of patients that we’ve recruited this year into our PMG network. It’s really materially now contributing to our patient recruitment in the U.S. of course. And so we found our customers are increasingly interested in and satisfied by what they can get and what they can receive. And it’s not just in terms of patient recruitment rates, which significantly better, but it’s in terms of startup times, which is of course always – as always more work to do.

But we’re already faster, much faster in starting up sites – starting up our PMG sites and the ad hoc site. We do believe, however, there is more opportunity, we’ve improved on that as well. We have some fairly ambitious targets as we go into next year, if not just patients recruited, but the startup times as well. So overall I’m really pleased with the way that’s really getting some traction now with our customers and of course within our own organization.

[John Kreger, William Blair]

Great. Thank you. And maybe a follow-up on your data remarks from earlier in the call. I thought it was interesting how you said, there’s plenty of data out there, but figuring out how you use it and translate into trial performance is the hard part. Where do you stand on that front? Do you feel like you’re delivering meaningfully better metrics at this point around things like patient enrollment? Or is that something that you’re hoping to achieve in the next year or two? Thanks.

[Steve Cutler, Chief Executive Officer]

I think to be very honest, I think we’re making progress in that. We’re clear, we’re not where we want to be. And I think, what I was trying to outline in our strategies, we have those insights and we have through our partners, particularly in that access to data. But it’s applying those insights into a receptive site network that is where we’re differentiating. And we’re starting as I’ve indicated in terms of the numbers of patients that are increasing through – they’re coming through our network. We’re starting to see some real traction there.

So I believe we’re making progress in that area. I do as I say, I think there’s still some way to go there. But the access to data that we’ve had and particularly the insights that we’re getting from those partners is allowing us to make sure we’re getting the right sites and that we’re finding where the patients are and ultimately we’re moving those patients and giving those patients the opportunity to get to those sites to participate in the trial.

So those insights, and they vary across the various therapeutic areas that we work in. But those insights are really starting to come through and we’re starting to be able to play. There’s a lot of learning going on here as we roll this strategy and as we do it for every trial, we do, we learn something from them, we can then apply it to the next one. And that’s really the obligation we provide. That’s the expectation that our customers have as well as we move this forward.

[John Kreger, William Blair]

Great. Thank you.

[Operator]

Our next question comes from Juan Avendano from Bank of America. Please go ahead. Your line is open.

[Juan Avendano, Bank of America]

Hi. Thank you. Can you give us an update on the European pharma R&D spend and outsourcing environment? And what are your thoughts on any potential impact to ICON from Brexit given your exposure there?

[Steve Cutler, Chief Executive Officer]

Yes. We don’t tend to look at European pharma as a separate segment, we tend to look at pharma is a global industry. So I don’t know that I see a significant differences between the segments. I mean, we have the global numbers, we talk about the business as a global business. Perhaps we see probably more decisions made within the United States, I would say. But in terms of spend and company, all of the major companies, work in Europe and I have decision makers in Europe and in the United States. And so we don’t really differentiate the numbers across the European pharma segment and U.S. segment.

In terms of Brexit. We’ve looked at our business, we don’t see any material change in terms of the number of clinical trials being set up or being started over the last 12 months in the United Kingdom. So that would seem to indicate that our customers don’t see Brexit as being a major issue. I understand through our association of CRO, the ACRO that’s also the case with one or two of our competitors. I haven’t seen too much of a decrease in the number of sites being set up for trials.

So that was into indicate that Brexit is not a major. Now, I’d say that our business is very much focused on services and clinical others going to move in samples in and out. We do that a little bit, but it’s a less of an impact on our business and perhaps it might be on others. So the movement – the shipping and movement of drugs and samples maybe impacted. But at the end of the day, if the UK steps out of the European Union even if it – even if it crashes out of European Union, it would become another country within which we do a clinical trial. Not every country we work, we’re just in the European Union. We got many different countries and we work with them, as they demand and as their regulations require. So we don’t see Brexit being a major issue for us.

[Juan Avendano, Bank of America]

Got it. Thank you. Appreciate the color there. And a follow-up on PMG on your site network strategy. I’m just wondering how scalable that strategy could be and what are your plans for expanding your site network internationally at this point?

[Steve Cutler, Chief Executive Officer]

Well, we’ve been fairly up front about that from the start. We’ve been actively looking to expand that site network. The DuPage is a network, we broadened into in the United States and that’s actively being brought into the family, into the fold. Now we would like to expand it to Europe, and we see on the horizon some opportunities. We’ve had one or two full starts in terms of getting a quality asset in Europe. But we see there are some further opportunities on the horizon and we would like to think that we’ll be able to make some progress on that in the next 12 months or so.

The challenge with this businesses, there aren’t very many sort of large site management organizations that are available. And so, you end up starting with a fairly small one and then you have to grow it organically. That’s certainly an option. The larger ones are at a premium and as I say, not as available. But we continue to be vigilant, our plan is to expand to Europe and that would be particularly Western Europe. So Western Europe and North America will be really the focal point for our integrated site network going forward. And we are looking to make progress on that actively over the next 12 to 18 months or so.

[Juan Avendano, Bank of America]

Thank you.

[Operator]

Our next question comes from David Windley from Jefferies. Please go ahead. Your line is open.

[David Windley, Jefferies]

Hi, good afternoon to you guys. Thanks for taking my questions. On the cost side, I wondered on two fronts. First of all, apologize for question’s already been asked, but labor environment and kind of cost of service related – direct costs related trends and opportunities are pressures. And then on the SG&A line, you’ve talked and I think been among the first to talk about robotic process automation and some things like that that could help your efficiency further – further extend your efficiency in your regional service centers. I’m wondered what – is it still very, very early on that or are you actually implementing some things live from an RPA standpoint? Thanks.

[Steve Cutler, Chief Executive Officer]

Yes. David, let me take the SG&A and the RPA and maybe Brendan will comment on the labor service costs. You’re certainly, right, from an RPA point of view, robotics. We are pursuing a number of pilots in a number of areas, around eTMF, some of our IT systems, help desk areas, information sort of gathering and providing. But it is pretty early and I’d have to say in terms of a reduction in our SG&A until now it’s been very little of any it has been due to our robotics. That is a program that is starting to roll out. As I say, piloting [Audio Dip] we do believe we can roll a couple of those programs, particularly obviously the successful pilots out over the next six months or so.

And so by the middle of next year, I think we’ll have a better answer for you in terms of the impact that’s having on our SG&A. We do believe it can be significant. We still – as you probably are aware, have some opportunity and I’m moving through the off shoring side of things and we’re making progress on that and we continue to make progress on it. So, if I look at our SG&A, although it’s come down nicely in terms of our proportion of revenue. Actually we are spending a little bit more. We’re spending about 5% more in our SG&A year-on-year. So it’s going up a little bit – obviously less than our revenue growth. And our headcount is going up and in the vicinity of 100 people in that area mainly, in an offshore space.

So, we’ve been able to leverage that model offshore and model pretty well. Thanks to the capabilities of our GBS, particularly at GBS team and the management that have in place. And so we’ve got more to go in that area. I think some more opportunity in that area, but our robotics is fairly early stage and I believe that in 12 months time we’ll probably have a better answer for you in terms of that contribution. Do you want to talk about labor?

[Brendan Brennan, Chief Financial Officer]

Yes. As you know, Dave, in terms of our direct cost, the vast majority of the cost that are included there are actually salary costs. There’s not a whole heap – a lot of cost in there, it’s a little bit of live, but it’s predominantly salary costs. So it is – I think Steve alluded to earlier in the conversation. We do have pockets where we’re looking to see – it’s a little more demand in the marketplace like North America, like China and we’re paying competitively in the marketplaces to ensure that we’re getting the people in.

So there you got some hotspots in terms of salary inflation in those particular markets. But then we’re also balancing not as we said, with our onshore and offshore methodology even in our direct cost base. And also, there are parts of the world where Western Europe still at the same kind of inflationary levels as never we see in North America and APAC. So overall we try to balance it as much as possible. We tried to keep our annual basis and that again, we do look at it these things when annual basis in that 3% to 3.5% range and that will be – as we go forward that will be our focus as well.

[David Windley, Jefferies]

Okay, great. Thank you.

[Operator]

Our next question comes from Sandy Draper from SunTrust. Please go ahead. Your line is open.

[Sandy Draper, SunTrust]

Thank you. Sorry, I apologize for my voice. Thanks very much. I think most of my questions have been asked and answer. But maybe one just follow-up on the comments you made in the prepared remarks about some of the – I’m not sure if it was digital marketing for patients or sort of going directly to patients. I’m just trying to get a sense of how you think about the relative impact of trying to market directly to patients for clinical trials versus can you leverage really working on site and then getting them to then go out. And you market the one site, they’re good, they’re going to touch a lot of patients. Just the cost benefit and I may have misunderstood that you’re not actually going directly to the patients. But just any further details on that. This is like a Facebook digital marketing strategy there or just any comments would be great. Thanks.

[Steve Cutler, Chief Executive Officer]

Sure, Sandy. We’d been going directly to patients in terms of marketing clinical trials for many years now. Television advertising, radio advertising, internet advertising has been a relatively common part of how we’d make patients aware of trials, I mean, to them to site. So whether it be the site doing that and we brought them, provide them with a budget to do it. Or whether our patient recruitment group, which I mentioned, is the third part of our patient recruitment strategy. We have an in-house group. We can use the various media to make patients aware if you like of clinical trials particularly and much more effective of course, when we know where those patients are having used some of the technology through TriNetX et cetera, to find out where these patients exist in what parts of the – particularly the United States, those patients exist.

So we can then target that advertising to those sorts of areas and drive them to the sites that we have in that area. So that’s been a pretty common. I think as we move into more of the social media, that’s probably the new area. And that’s an area where we are starting to become active in. We have some people who have some expertise in through our patient recruitment group. And so the digital marketing directly to patients, again traditional trial is starting to happen there.

What I was kind of also alluding to is that as we move forward, the virtual trial where we have less involvement from a site and there’s more direct to the patient in terms of providing them with medication, doing electronic informed consent. We do see that as an important component of the evolution of clinical trials going forward. Predominantly, I think in the late phase area, we are increasingly, as we go forward, we’ll have I think opportunity to deploy those types of trials in the post. There always be some involvement with the site. I’m not suggesting for a minute that will be doing trials directly to patients without the involvement of investigator recite.

But what we’re looking to help to do is as we make trials more patient centric to make the burden for them to be in a clinical trial to much less than it has been up until now, where they had to visit, perhaps every month, perhaps even more often over a six, 12 month period. If we could take that down to maybe a visit at the start, visit in a middle and a visit at the end and connect with them through – as I say, social media and through the various apps and wearables that they have, it would make the whole trial experience. I think much less of a burden and we believe would make patients much more amenable to being part of a clinical trial. We can all relate to the busy lives that we lead in to be part of a clinical trial is a burden many people. I think it’s going to work and very difficult. We’re trying to make that burden less, we’re leading the way in doing that.

[Sandy Draper, SunTrust]

Great. Appreciate that’s really helpful. Thanks.

[Operator]

Our next question comes from Daniel Brennan from UBS. Please go ahead. Your line is open.

[Daniel Brennan, UBS]

Hey, Steve and Brendan, thank you. Thanks for the question. Just a high level question on, there’s news out today regarding renewed efforts by the administration to bring down drug prices. I’m just wondering, regardless if the administration will have any success. The risks around drug pricing show up during discussions with sponsors today and how should we think about the potential impact on R&D activity going forward?

[Steve Cutler, Chief Executive Officer]

Drug pricing doesn’t come up in our discussions with customers, Daniel. It’s something that they obviously deal with the payers and with the regulators and the governments particularly not just in terms of United States, but particularly in Europe and other parts of the world. However, having said that, we do recognize that when our customers are under pricing pressure, it means that they have to be more careful with the way they spend their money. And so it behooves us to be more efficient and more effective with the development dollars that they spend.

And so that’s, while we say, we don’t get directly involved in drug pricing discussions. We do feel their pain. And so we do recognize that we have to be more effective in the way we spend our money. And we provide value to them. So yes, that’s how I guess the indirect impact of the drug pricing for us.

[Daniel Brennan, UBS]

Great. Thank you. And then maybe just a follow-up just on trends in the market or even with your results this quarter regarding full service work versus FSP. Can you just give us an update on what trends look like in the quarter and just remind us how you think this mix evolves going forward and how does that impact ICON? Thanks.

[Brendan Brennan, Chief Financial Officer]

I think the question was particularly around the FSP versus full service model.

[Daniel Brennan, UBS]

Exactly, yes.

[Brendan Brennan, Chief Financial Officer]

We still see strong demand for both to be honest. We’ve seen over the last – I suppose over the last year and a half, it’s been a good really strong market for our full service work. It’s been where we’ve been doing really well. And the last little while I think the FSP market has shown that it actually veins a little bit that marketplace, but it’s still a very valid part of our marketplace. I think we put it in growth rate terms in a similar position to the full service. So we see 6% to 7% annual growth rates in our full service business. But not a dissimilar number in our functional service offering and it is definitely a very valid part of the marketplace, probably in around $4 billion of the total market.

So I think both are still – our customers are certainly both – interested in both of those service lines and we continue to grow demand. So yes, very happy with the mix that we’re seeing there at the moment.

[Steve Cutler, Chief Executive Officer]

I think Daniel just to add to Brendan’s comments. As we get engage with partners and with customers around new partnership opportunities our ability to bring different solutions in terms of an FSP solution and the full service solution. And I know some of my guys hate it, but a hybrid, a more hybrid model is also I think an advantage that we have. Because we’d been used to working in that model and we do deploy that sort of model for customers as well. So I think we see opportunities in the marketplace, not just around pure FSP or pure full service, but it’s more integrated hybrid model is increasingly something that customers want to talk to us about.

[Daniel Brennan, UBS]

Great. Thank you.

[Operator]

It appears there are no further questions in the queue. Mr. Steve Cutler, I’d like to hand the call back over to you.

[Steve Cutler, Chief Executive Officer]

Thank you everyone for listening in today. We’re very pleased with our performance in quarter three and we’re looking forward to working hard for the rest of the years. We continue to enhance our position as the CRO trusted partner of choice in drug development. Thank you everyone.