Simon Christopher Holmes - EVP Investor Relations and Corporate Development Brendan Brennan - Chief Financial Officer Ciaran Murray - Chief Executive Officer & Executive Director Dr. Steve A. Cutler - Chief Operating Officer.

John C. Kreger - William Blair & Co. LLC Tim C. Evans - Wells Fargo Securities LLC Sandy Y. Draper - SunTrust Robinson Humphrey, Inc. Robert Patrick Jones - Goldman Sachs & Co. Donald H. Hooker - KeyBanc Capital Markets, Inc. Eric W. Coldwell - Robert W. Baird & Co., Inc. (Broker) Steven J.

Valiquette - UBS Securities LLC David Howard Windley - Jefferies LLC Ross Muken - International Strategy & Investment Group LLC Greg Bolan - Avondale Partners LLC.

Good day, and welcome to the ICON Q3 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Simon Holmes. Please go ahead, sir..

Thank you, Rhonda. Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended September the 30th, 2015. Also on the call today, we have our CEO, Mr. Ciaran Murray; our CFO, Mr. Brendan Brennan; and our COO, Dr. Steve Cutler.

I would just like to add – to note that this call is webcast, and 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.

I would therefore ask participants to keep their questions to one each, with an opportunity to ask one related follow-up question. I would now like to hand over the call to our CFO, Mr. Brendan Brennan..

Thank you, Simon. Net revenue in quarter two was $395 million, up 1.8% on the same quarter last year and 1.6% on last quarter. Year-on-year constant dollar revenue growth was 7.5% and constant dollar organic growth was 4.1%. We are pleased to report that we have made further progress in improving client concentrations.

For the quarter, our top clients represented 31% of revenue compared to 34% in the comparable quarter last year. Our top five clients represented 49% compared to 54% last year. Our top 10 represented 62% compared to 66% last year, while our top 25 represented 77% compared to 80% last year.

We added around 400 staff during the quarter three and as a result, ended the quarter with approximately 11,700 staff. We continue to see good gross margin expansion, driven by efficient management of our global project teams.

For quarter three, group gross margin increased to 42.6% compared to 42.1% in quarter two and 40.7% in the comparable quarter last year. SG&A in the quarter was 20.9% of revenue, the same as last quarter, and 90 bps lower than the 21.8% achieved in the comparable period last year.

Operating income for the quarter was $71.4 million, an operating margin of 18.1% compared to 17.5% last quarter and 14.3% in the comparable quarter last year. The net interest expense for the quarter was $647,000 and the effective tax rate was 13%. We still expect our full-year effective tax rate to be circa 14%.

Net income for the quarter was $61.5 million, a margin of 15.6%, equating to earnings per share of $1.02. This compares to $0.95 last quarter and $0.79 in the comparable quarter last year. DSOs in the quarter were in line with our expectations at 46 days compared to 45 days in quarter two.

During the quarter, we generated $74 million of cash from operating activities, had capital expenditure of $12.2 million and bought back $230 million of shares as part of the $400 million share repurchase program announced in July.

As a result, at September 30, 2015, the company had net debt of $33 million compared to net cash of $132 million at June 30, 2015. With all of that said, I'd now like to hand you over to Ciaran..

Thank you, Brendan, and good day, everyone. Quarter three was another strong quarter for ICON. We continued to win business across all customer segments and as a result, delivered a book-to-bill of 1.2 and grew our backlog year-on-year by 8%.

Our operating margin expanded to 18.1%, which meant we reported $1.02 of EPS, which is a 29% increase over the same period last year. That's also the first time that ICON has exceeded $1 of earnings in a single quarter.

Overall, market demand remain healthy, with R&D spending growth remaining in the low to mid-single digits and outsourcing penetration continuing to increase across all market segments.

Large pharma customers continue to look to ICON's innovation to help them reduce development time and cost, and we're benefiting from the trend of mid-tier pharma and biotech firms reducing their supply base through partner-type models.

Demand from smaller biotech and specialty pharma firms also remains healthy as they leverage the global footprint and the breadth of capabilities that ICON can provide. By continuing to target growth from these sectors, in quarter three, ICON posted gross new business awards of $518 million and net new business awards of $475 million.

That's a net book-to-bill of 1.2 As a result of these bookings, our backlog increased 8% over last year to over $3.8 billion. Of these business wins, a high proportion have come from new customer relationships. And this will continue to drive a reduction in customer concentration, which for our top clients, reduced by 300 bps year-over-year.

Over that period, revenue growth outside a top customer has increased 8% in constant dollar organic terms. ICON's differentiation across our technology and service platforms is helping us to deliver this growth.

Through our market-leading ICONIK, ADDPLAN and FIRECREST technologies, we're driving the adoption of risk-based monitoring, adoptive trials and real-time site and patient engagement. These solutions are enabling our customers to reduce both the time and the cost of development.

We're building market leadership in the application of data to address key development challenges, including investigative site selection and access to patients.

During the quarter, we announced the partnership with IBM, Watson, through which ICON is leveraging Watson's cognitive computing power to help identify patients for inclusion in selected oncology trials.

In addition, we're in discussions with several other groups to secure access to key data assets to drive continued improvement in clinical trial delivery. A very positive feature of this year has been the performance of our Central Lab.

By strongly integrating the lab with our clinical processes and expanding its offerings in therapeutic areas, such as oncology and anti-infectives, we have added a number of significant new customers. Revenue in the quarter was $395 million. This was an increase of 4.1% over last year in constant dollar organic terms and up 1.6% on quarter two.

We're beginning to see the work awarded earlier in the year convert to revenues and expect this trend to continue in quarter four. We continue to make good progress in expanding our operating margin through a combination of gross margin expansion and disciplined SG&A cost management.

Our operating margin in the quarter increased to 18.1%, which is a 60 bps increase from quarter two and a 280 bps increase from quarter three 2014. This delivered earnings of $1.02. Capital deployment is an important part of our strategy to create shareholder value and during the quarter, we completed $230 million of our buyback program.

We now expect this program to be substantially completed by the end of quarter four. We also remain focused on executing our string-of-pearls strategy to acquire capabilities that can enhance and broaden our service offerings. Before moving to Q&A, I would like to thank the entire ICON team for their hard work and commitment during quarter three.

Thank you, everyone, and we're now ready for questions..

Thank you. And we'll take the first question from John Kreger of William Blair. Please go ahead..

Hi. Thanks very much. Ciaran, you mentioned just a few minutes ago that you're starting to see awards convert that you had earlier in the year.

When do you think the backlog conversion rate will start to climb, based upon what you're seeing in your current backlog?.

I think we'll see it start to climb a little in Q4. I suppose the question is, how far does it climb compared to historic rates.

I think if you look at the profile of our backlog in terms of the length and the complexity of the projects in the various therapeutic areas, I don't think we'll see it back at sort of the 11.8%, 11.9% rates that we saw a year or two ago, but we'll see it start to tick up again in Q4 and Q1, back towards – very gradually towards that high 10% mark..

Great. Thanks.

Any early observations you could give us about 2016? I'm guessing you're not through your budgeting process yet, but for example, as we sort of lap some of the pressures in the dollar, would it be reasonable to assume a bit of a pickup in organic revenue growth?.

It's really a bit early to say. We're right in the middle of budget. I mean I would expect, broadly – I mean it's hard to know where the dollar's going to go, to be honest, John, I mean looking at it. But I would expect we'll continue to see organic growth rates in that mid to high single-digit range.

That's certainly what the shape of things look like at the minute, albeit we'll refine that as we go through the process. And then, of course, we'll see the pattern that we've seen every other year, some modest bolt-on accretive acquisitions. So it's kind of hard to give you too much clarity now, other than to say that that's how it feels generally..

as you look across your work force, are you seeing any signs of a pickup in wage inflation or any difficulty in recruiting and hiring?.

I mean – depending, I suppose, on the kind of staff you're looking at and the region that you're in, there're always some challenges. I think it's fair to say the market is tight for some staff in certain areas, and there you tend to see a little bit of wage inflation.

But at the same time, you know we operate in 40 countries and you can kind of mitigate and hedge these things by where you do work and where you locate support functions. So in specific cases, we are seeing that, but nothing that would translate into a change in the shape of our profile of our cost base..

Great. Thank you..

Thank you. We'll take the next question from Tim Evans of Wells Fargo. Please go ahead..

Hi. Thanks. Ciaran, by my calculation, this was the first quarter since early 2012 that you saw your head count grow year-over-year faster than your constant dollar revenue growth. Just wondering why the pickup in hiring there.

What we should think about as – in terms of your pace of hiring going forward and what impact that might have on how we think about gross margin expansion..

I mean what you're saying there, Tim, you're right, is good news. And we hire ahead of the curve to execute future revenue.

So I think what you're seeing is that during the course of this year, we've been saying that since I think the end of Q3 last year, we added a significant number of customers and we won a lot of business outside of our top couple of accounts. That has continued to be the case.

We saw the revenue pick up in quarter three over the last couple of quarters where it was for various reasons around FX and other things, but it was not growing as quickly. So you're kind of seeing us gear up for the revenue that we expect to see over the next quarter or two.

And that sort of pattern, it's not different from the past and it won't be different in the future as we do our forecasts. And I think we're kind of saying that our business outside of our top customer grew 8% year-on-year.

On the last call, I talked about the fact that our kind of book-to-bill – and this was outside our top number of tradition accounts – was 1.4. We're kind of seeing that pattern continue. So as we forecast each quarter's growth, we probably see that we're adding heads Q4, maybe into Q1.

But it doesn't mean anything for gross margin because we have it well under control in terms of resourcing and bringing people on and the timeline between training. So it won't fundamentally alter the margin picture because we're seeing the revenue come in and we're seeing the costs go up. And we have a reasonable handle on it..

Okay. And maybe if I just can throw one at Brendan.

Can you help us think about the foreign exchange impact on your operating margin this quarter?.

It wasn't meaningful, Tim. We had a an average rate of about a 1.09, 1.10 last quarter. This quarter was – it was a little higher. It was 1.11, but it didn't have a meaningful impact. I mean I think it was a couple of hundred thousand dollars of a hit to the P&L account in the quarter, but nothing worth really calling out separately..

Okay. Thank you..

Thank you. We will now move to Sandy Draper of SunTrust. Please go ahead..

Thank you very much. Just a quick question. I know it's probably early, Ciaran, to make any definitive statements, but obviously, one of the concerns or issues out there is from biotech and with the biotech market pulling back.

Just curious, as you're having discussions with the biotech companies, have you just noticed any change in their sort of behavior, how they're thinking about the business? Just any commentary along those lines would be great.

And again, recognizing it's really early, so you probably haven't seen specific impact, but just curious what your sense of in talking with those customers, has their mind changed due to the overall pull-back in the market and potential lack of funding there? Thanks..

Yeah. I think the fairest comment to say is that everybody's wondering to what extent this is going to have a real impact. The customers we're talking to tend to be fully funded. Their compounds are moving into later phase and that, so it's probably less pressing in the medium term. And I think everyone's just adopting a wait-and-see argument.

A lot of this has been politically driven commentary that's looked at it. So it's election season and that's going to be going on for a while, so I think the feeling here is that there'll probably be some volatility for the next while. But it's too early to say exactly what it means.

But as I say, we're talking to a cohort of people that are more advanced maybe than certain other companies in the market..

Great. That's really helpful. Thanks for the answer..

Thank you. We'll now move to Robert Jones of Goldman Sachs. Please go ahead..

Yeah. Thanks for the questions. I guess kind of related to Sandy's question, you guys mentioned, obviously, having a lot of success outside of the Pfizer account. And this momentum, obviously, I think is evident in the book-to-bills that you've been sharing ex-Pfizer.

Within that mix, can you give any more insight into kind of what the customers are as far as small and emerging biotech versus, Ciaran, some – maybe that maybe mid-pharma client that you've been talking about?.

We don't really look at it that way, Bob, because to us, they're the same. It's the same development channel and challenge. It's the same kind of staff and profile, the technologies you deploy. So – but there's nothing significant about it that would lead us to need to stratify it any more.

Now we look at large pharma; we look at our kind of biotech, midsized, specialty pharma in the same bucket because that's how it's managed and controlled and executed..

Got it. I got it. I guess just one follow-up on the IBM, Watson collaboration that you mentioned; interesting relationship there. Could you maybe just give a little bit more perspective or details around the collaboration; kind of what your vision is of how this could help with trial start-ups and other things.

Just any more perspective on the scope of that relationship would be helpful..

Yeah, Steve..

Yeah, Robert. So it's Steve Cutler here. In terms of the IBM, Watson, what we're doing is focusing in the oncology space. And what it's going to allow us to do is to identify patients much more easily for clinical trials.

Clinical trials tend to be a match-up of patients' medical records, what disease they have with a protocol and what patients you're looking for in a protocol. And that can be a very manual exercise.

What the IBM, Watson technology allows that to do is to make that a much more automated exercise through the cognitive computing, allowing us to look at physicians' notes and writings and actually match that up with the clinical trial.

So we see the opportunity to bring patients into clinical trials, albeit at this stage, at a relatively limited number of key centers in the U.S. and bring those patients to the – bring the trials to the patients. And so have every patient who comes in the door at those key centers be a candidate for our trials.

So we think it's going to be a very exciting opportunity to increase and make much more systematic the approach to patient recruitment with our trials, which really is the area that gives us most opportunity for being more efficient; faster, better, cheaper basically. So it's a pilot we'll be doing over the next six months or so.

A number of key oncology indications. Oncology only at this stage, but we think it's going to give us a lot of horsepower going forward to recruit our trials faster..

Thanks for that, Steve.

Is it exclusive?.

It is at this stage. But obviously, IBM – as the product gets rolled out, IBM will be, I'm sure, selling it across the market. But we have a, what we call a first mover advantage in terms of doing the pilots and moving things off exclusively, at least for the pilot stage..

Okay. Got it. Thank you..

Thank you. And we'll take the next question from Donald Hooker of KeyBanc. Please go ahead..

Great. Good morning or good afternoon.

I just want to be clear and – did – I think somebody mentioned that the book-to-bill outside of Pfizer was 1.4 times? Is that the number you all threw out?.

1.4 times outside our kind of top traditional large accounts, not just Pfizer..

Okay. Okay. Got you. And then just follow-up, you made the acquisition of MediMedia earlier this year.

And my impression was one of the – and it's a nice little business but also, there's potential cross-sell or some revenue synergies potentially between sharing relationships between the two companies? Is that playing out or is that a bit early now? Can you talk about kind of the cross-sell opportunity and the growth of that company?.

It's probably a bit early. I'd say we're very happy with that acquisition and it's integrating very well. But you understand, you've been through a lot of kind of hard-charged integrations. So introducing customers, aligning things. So too early to have any concrete numbers for you, but sufficient to say we're happy with the progress.

And it's hitting the milestones that it's supposed to hit as part of the post-integration or post-acquisition integration plan. Do you want to add anything....

Well, I'd just say that they're certainly – maybe you're certainly working with a number of different customers, and so they represent an opportunity. As Ciaran said, it's too early to say and it's too early to have taken advantage of the potential there is there to engage with some new customers.

So potential, but we'll I think give it a little bit more time, Donald..

Okay.

And then maybe, can you elaborate a bit on sort of the growth of that area, particularly MediMedia, like what the trends are, kind of year-over-year growth; and now that you have a couple quarters under your belt, kind of thinking about over time what we should expect from that portion of your business that you just bought into?.

We see that market growing nicely in the sort of low double-digits. So we see significant opportunity to take that forward. And the MediMedia guys, as we've said, we're just really integrating them. So it's too early to sort of say we've taken huge advantage of that. But I think we've bought ourselves a good company.

They're coming into the organization well. They're contributing. They're giving us some access to new contacts and new customers, and we feel optimistic about what they can bring us. It'll be another six to 12 months before we can really I think say what they've been able to bring and what those growth rates are..

Got you. Maybe one last on, just follow-up. I guess in the medical device area, you had commented in previous quarters that that's an interesting new area, I guess, that you all are exploring.

I was just curious if you could maybe elaborate as to what your exposure is to that area and kind of maybe give us a sense of how growth there compares to the clinical trial area – the traditional pharma kind of area?.

Yes. Steve again. And again, we see strong growth in that market in terms of sort of double digits and great opportunity. Again, it's a smaller market, but with some of the regulatory changes that are happening and that are starting to flow through and we're seeing customers increasingly look towards organizations like ours to do that work.

So we're having good discussions with a number of customers around more strategic relationships on the device side. But as always, we're moving it forward. This was the group that came in through our Aptiv acquisition, and we've been able to bring that in, to consolidate it, I think to bring some revenue forward with it.

But it's again still relatively early, and the market isn't moving quite as fast as we always like it to. But we see again significant opportunity in that devices space, particularly with those regulatory changes and interest from customers..

Okay. Thank you very much..

Thank you. We'll now move to Eric Coldwell of Robert W. Baird. Please go ahead..

Thanks very much. I think most of the topics have been covered. I just wanted to run quickly through Central Lab. Didn't hear a lot about that on the call today. The largest player in the space is showing a nice recovery in their growth. Others seem to be pretty upbeat about the market.

I'm curious if you can give us an update on your labs and then perhaps talk a little bit about if you've seen any changes in the environment, given the two big partnerships announced over the last year. Thanks so much..

Hi, Eric. It's Ciaran here. Yeah, I mean, I suppose we might have said a little bit more about the lab than we've said recently because of the way that we operate it in such an integrated fashion over the last couple years. But we've been very encouraged by what we've seen in the lab, I think.

We took a position here where we've gone to a model which has allowed very integrated intra-clinical processes. It's very customer centric and focused on a high level of customer delivery over some very high-quality kind of testing updates. Think we specifically said we had added to a range of oncology and anti-infectives.

And we have a very good offering there that brings the data across to and from our clinical trials. So we've seen very strong performance in the lab this year. I think it'd be fair to say that in the nine months to date, our book-to-bill for that sector, just the Central Lab, is well over 2x, which is well in excess of its target.

Now, that's – won't be like that every quarter in the future, but it's still very significant and it reflects that we have been very successful in adding a number of new customers. So I think when we look at the broader market, it has come down to two very large players.

But we feel we've got a very strong – I wouldn't want to use the term niche because it's bigger than that – but a very strong tailored, customer-centric offering. And we've been getting a lot of very positive feedback from it.

And to say we've added a number of significant new customers, and I think that reflects the fact that there is a lot of space in the market for what we're bringing to the party. So all in all, we're very happy with this.

Would you add anything, Steve?.

No. I think you said it perfect..

That's actually pretty impressive on the bookings. My follow-up I guess would be over the years since you made the first investment back in 2000, there was always a sense that the lab would have to hit a certain scale, level, volume of kits, what have you, before you would really get aggressive on automating.

And I'm curious where you are at that point.

Are we looking at some point down the road and maybe some CapEx to do more automation in the lab versus human involvement in kit ascension and in packing and things of this sort, or is it not quite at that level yet where you would really want to go out and make a big investment in automation?.

I think I'm happy to say that since the days are more challenged in the lab. They've been performing pretty well now for probably two or three years. Their kind of gross margin is up there close to target. It used to be spiky, and at times, as you well remember, low.

But they've been performing in kind of 40%s and on a very consistent basis now for a long time. And over the last two or three years, we have taken a number of initiatives around automation, efficiency improvement. Some things you mentioned around kit assembly we outsource, some things of that.

So all of these things have helped drive it to a much better place. So the short answer, I suppose, is it's going very well and we're very encouraged, but we don't foresee a particularly heavy or unusual level of CapEx over the next couple of years, other than what we've been spending on the last few, which you've seen reflected in the numbers.

So no, there's no big bolus of CapEx that's going to be needed to make a transformational shift in the lab. And the scale it's quite good. If you remember, too, over that period, we've integrated our Central Labs, the bioanalytical labs.

And we've done a lot of work in gaining efficiencies and in broadening the integration between those parts of the business with each other and then with the broader clinical business as well..

That's all very encouraging. Thanks so much for the details..

Thank you. We'll take the next question from Steven Valiquette of UBS. Please go ahead..

All right. Thanks, and good afternoon in Dublin. So I think that probably the good questions have been asked already.

But one thing that might be worth just checking in on a little bit is from what I recall historically, I think among the various CRO partners with your largest customer, there was maybe a spirit that this large customer was going to perhaps ration out a fairly amicable split of business over time among some of the CRO partners.

And just curious if this is still perhaps the spirit of that agreement and whether this is something that you guys actually still pay attention to, or is this simply not really relevant anymore now that we're four-plus years into this relationship and maybe now it's just a meritocracy? But just curious if this is something you focus on at a high level.

Thanks..

Hi, Steven. I think you kind of summed it up there when you said it's four years in, it's sort of not that important anymore. Various assets are awarded on capabilities and merit to various providers. And off it goes, and you tend to stick with developing those assets. So that isn't something that concerns us.

I think it'd be fair to say we have been very happy with the business that we have on it in the last four years. And if anything, the extent of it as we've seen in the concentration numbers in there where it peaked last year. I think in this quarter last year, 34%, we've certainly taken at least our fair share of the business.

But it's not something that would be at the top of – how it's divided up is not something that currently would be at the top of my list of things to do each week..

Okay. Yeah. That's helpful to get that color, so okay. Thanks and congrats on the results..

Okay. Thanks..

Thank you. We'll now move to Dave Windley of Jefferies. Please go ahead..

Hi. Good afternoon. Thanks for taking the questions. So a follow-up there, Ciaran. I'm wondering if you would be willing to comment on whether renewal negotiations have begun with the top client; how you expect that to play out.

And maybe as a corollary, how has ICON competed with PPD in relation to Bristol-Myers Squibb since Bristol-Myers swapped PAREXEL out for PPD in that relationship? I guess I'm thinking that's an interesting parallel to what this other might be..

Hi, Dave. How are you? I think in our business when you're working with a client, renewal negotiations begin on the first day of every contract because you're pretty much having to prove yourself in every project and every time to do the work. So then you get down to the more formal aspect. Yeah. I mean we've active discussions.

I think we've been through a number of these renewals before in the past, and you can kind of point to that past experience and this one's very much following that. As you go on through the years of the contract, everybody learns things.

You get to that point where we're sitting down together with a customer and trying to capture the learnings, trying to look forward to the future and see what can be done better; where your efficiencies can begin; how the shape of things should happen. So all of those discussions we have on a regular basis.

The contract's due up in the middle of next year. And past experience has always been that the formal renewal, A), it has occurred; B), it usually occurs in and around renewal dates. It doesn't happen earlier. Sometimes it happens a couple weeks later, even as – by the time that the lawyers get together and dot Is and cross Ts.

So all of those discussions are happening at that level, and they'll play out over the next six months. And we've done a good job. The relationship's good. I can't say more than that but that it's going as we'd expect it to go. As regards to the PPD and BMS, I suppose they actively. It's not something that's – Steve, you're closer to that..

Oh, we feel we're in a good place with BMS, Dave. As you know, they're going through and have gone through a number of sort of organizational adjustments and changes over the last few months. And so they've been looking at their portfolio and looking at that.

But we were recently renewed there and we feel in a good spot with the BMS relationship, and it's all go from here for us.

I can't comment specifically on what they are, what they do and whether with PPD or with PAREXEL because as far as ICON's concerned, we feel we have a good partnership, a good relationship and we're looking forward to continuing that..

Okay. Great. And if I can ask a follow-up on just kind of the mix in the portfolio more broadly, I think – and I apologize if something along these lines has been asked. But a fair amount of consternation about the pressure on the equity capital markets activity for smaller cap drug developers.

And you've commented, I think, about that small cap area and the funding flowing to them being a nice stimulus to your backlog. But we're also aware that the large 25 to 50 clients make up a vast majority of global R&D spending.

And so I wondered if you could just help us with perspective on what your mix of business really looks like and how dependent you are kind of the recently funded biotech environment or client base..

Yeah. I mean, the recently funded biotech environment has been a good place to win business. And I think that funding – now it goes from smaller companies right up. There's a healthy environment. There's a lot of confidence in that sector, a lot of good compounds in development.

So if you look at our traditional business, Dave, over recent years we were probably – as a shop, we split 65% to 70% at times with large pharma, 30% with specialty and biotech.

And some of those biotech are big companies, as well, you know? So when we look at the way our business splits down, our gross has been higher, as you'd expect in this market, over the last number of quarters in what we'd call our kind of non-traditional base. But that's a range of large biotech companies and specialty pharma, smaller ones.

And the smaller ones we deal with tend to be funded. By the time they get to us, they have the money in place. They're starting on their programs. So our business, if I had to say, it probably splits about 50%/50% between large pharma and the rest.

And within the rest, most of that would be larger biotech and solid mid-pharma companies that are adopting partnership models in some specialty. And some new ones, even exciting and it's nice to work in these exciting therapies.

So I don't feel we have a particular exposure to that and a small fundraising sector, and the people we have on the roster at the minute and the ones we're talking to have money at this point. So we're just going to have to wait and see how that plays out. It's very early to say, and everybody's just watching us with interest.

But the current exposure, there's nothing that's keeping me up at night..

Okay. Thank you..

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

Good afternoon, guys. So just curious on the capital allocation side.

For yourselves, can you maybe characterize sort of the tuck-in environment in terms of breadth and opportunities and how you're prioritizing that versus obviously, the substantial share repo that you have out there? And then secondarily, a lot of (37:05) industry on sort of consolidation as a whole amongst the bigger players.

Any change in thought regarding what could happen from an industry structure perspective and how you think about your role in that?.

Hello, Ross, and you've asked me so many questions they're all running together. I'm going to try and answer them as they came up. So do please feel free to put me on course if I wander off. I'll take tuck-in environment versus our kind of string of pearls versus our share buyback.

Yeah, we've a healthy enough pipeline of sort of smaller deals that add capabilities. As you know, our M&A strategy has always been, look at things that are good businesses on their own but have a – more than that, that they bring something to the whole of ICON.

They expand the capabilities or the geography in the past or the technology that we have at our disposal. So we're looking at a couple of things there in the areas where we've always kind of said are growth areas for us. In that kind of price range of $50 million to $150 million, $200 million.

I think if you look, MediMedia last year was $120 million or thereabouts. Aptiv was approximately $140 million the year before, so – and they were the two largest deals we've ever done.

So we're kind of in that sort of space, and we're looking at very targeted things that'll either bring a new technology or a new skill or capability that we don't have that will add to our customer offering. Wasn't aware that there was any more chat on consolidation and the bigger players in the industry over the last while.

No, we're still pretty much of the view that based on experience, consolidation amongst large players is a good thing to destroy shareholder value, if that's what you want to do. That's still the integration challenges and risks and the time that it would take to put things of that complexity together. Have a lot of downside.

And I don't know what it adds significantly in terms of upside. If you look at our own company and at some of the larger players, they have good suites of offerings to the customers. I don't think there's anything that we would get that would help us with the customer by engaging in some of the consolidation that you talk about.

It comes with too much risk. Customers like choice. I think our lab's a good example where we have by far a record level of business wins in a year when choice in the market has been reduced by some of the activities around the lab market.

I think looking at the CRO space, certainly, the top three or four companies have enough scale and enough financial firepower without engaging in risky strategies that have been unproven at that level in the past.

So that's pretty much been our view, that we can drive more shareholder value by focusing on the customers, by focusing on new technology, by improving our service offering, by helping customers take time and costs out of trials and improve all the bits that go into that.

That strategy has served us well over the last sort of four, five years and probably over our history of 25 years. And we think we have the plan and the resources to make sure it serves us well in the foreseeable future, so that's what we think about it..

Well as always, Ciaran, you outperform. Thanks for covering the questions..

Okay. Thanks, Ross..

Thank you. We'll take the next question from Greg Bolan of Avondale Partners. Please go ahead..

Hey. Thanks, guys, for taking the questions.

Could you talk a little bit about the DOCS business; how that's performing these days? Has there been an increase in demand among your larger pharma or even newer larger pharma clients to bring – to kind of outsource or re-badge some staff there?.

Yeah. Greg, it's Steve Cutler. I can comment a little on the DOCS business. We're seeing strong demand for our DOCS resources and DOCS solutions.

It's a business that we invested in couple years ago when we bought Cross Country in the U.S., and that's given us I think some firepower in terms of being a global organization, allowing us to take advantage of a market that we see is growing.

We're getting interest from not just smaller customers but large customers as well, not just in terms of contract placement but more FSP-type relationship – functional service provider-type relationships. And our revenue in that business has been progressing nicely over the last year or so, certainly from the start of this year.

So we see further opportunity there. We see further opportunity for gaining the synergies across our II-III business as well, as that DOCS business also provides resource on a contractual basis to our ICON Clinical Research business, which we think has some nice synergies and some nice operational advantage for us as well.

So all in all, it's a business that we're seeing lots of opportunity, more on the FSP area going forward. And revenue opportunity and growth going forward is something we feel good about and feel like we can benefit from..

Thanks. That makes a lot of sense.

And then, Brendan, just thinking about FTE utilization, I mean to the question earlier about head count growth, where would you characterize utilization today?.

Hi, Greg..

Hi..

We don't really talk about it in percentage terms. But I think we still have capacity there to continue with our plans, as we outlined earlier on, to bring in those staff and to still see gross margin develop over time, as we've said before. So we don't split out the percentages of absolute utilization, but we still think we have capacity..

So I guess to that point, is it fair to say that – without calling out the numbers, that given the growth in head count as of late, that there's still some room for upside in terms of utilization and, therefore, one of the drivers gross margin expansion going forward?.

I think that head count and utilization; head count will always be a driver of gross margin in this service industry..

Sure..

So that's definitely part of the puzzle, all right. Not the only part, but certainly on the levers we will pull as we go forward..

Okay. Great. Thank you..

Thank you. We'll take the next question from Tycho Peterson, of JPMorgan. Please go ahead..

Hey, guys. This is Steve Ephron (44:08) for Tycho. Thanks for taking the question. Just one quick housekeeping one for me to start things off.

There was no mention of guidance in your press release or in your prepared remarks, so should we assume that what you said previously about $1,570 million to $1,600 million and $3.90 to $4.00 in EPS is still the right way to think about it?.

Absolutely. When we don't comment on guidance, it means that the guidance that we gave in the last call is still what we're looking at..

Okay. And then just a quick follow-up on the IBM Watson partnership for you. How long do you think it will be before we begin to see some of that reflect in the backlog conversion rate because that's been a trend that's been declining? Seems to have kind of bottomed out a little bit this quarter but still sequentially down 10 bps.

So will IBM play a role there? I assume it will.

And then how long do you think it will be before it begins to have a meaningful impact?.

I don't know. I'm struggling to see how the IBM Watson relationship, specifically it would tie to backlog conversion. Backlog conversion is a function of how quickly projects that we have across all therapies and all geographies and all customer sub-segments are executed and convert to revenue.

And that's dependent on things such as how far in advance a study start-up – you book a study and the regulatory process that you go through, the protocol design. So it's a very complex equation, and what we've seen is that it has gone down in recent years. But that's been a function of having a very large, complex backlog of increased duration.

I mean slower backlog burn rate isn't necessarily a bad thing because it means your backlog's going to last longer in the future. It means you want longer-term projects, you know? It's about consistency. And if you look at our backlog in terms of the market and other companies, it's pretty much buying in the middle.

It's not that it's significantly off. So what we've said about the backlog is that we've seen a considerable amount of new work for new customers in this year, and there's been a lot of therapies there. It's going to get a little bit higher over the next quarter or two.

But the IBM, Watson deal has absolutely nothing whatsoever to do with how the whole totality of our $3.8 billion of backlog converts to revenue. What the IBM, Watson deal does do is very specifically around giving us access to data assets which will improve some of our trial execution. And, Steve, maybe you can reinforce that point..

No, I think the potential within those therapeutic area – within the four indications we're doing with oncology can help us to speed up those trials. But I think as Ciaran says, Tycho, that's a relatively small part of the overall backlog. So I don't think that IBM, Watson specifically is going to change that 10.6% as it was last quarter.

But within oncology, I think we can get some benefit within those specific indications. So I think we've got to just be careful on expectations there..

Got it. Thanks, guys..

Thank you. That will conclude the Q&A session. I'd now like to turn the call back to Mr. Ciaran Murray for concluding remarks..

Okay. Well thanks for listening in, everyone. Q3 was another strong quarter for ICON, and we're looking forward to working hard for the rest of the year, what remains of it, as we continue to enhance our position as the CRO trusted partner of choice in drug development services. Thank you, everyone..

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