Simon Christopher Holmes - ICON Plc Brendan Brennan - ICON Plc Ciaran Murray - ICON Plc Stephen A. Cutler - ICON Plc.

Tim C. Evans - Wells Fargo Securities LLC Eric W. Coldwell - Robert W. Baird & Co., Inc. Sandy Y. Draper - SunTrust Robinson Humphrey, Inc. Donald H. Hooker - KeyBanc Capital Markets, Inc. John C. Kreger - William Blair & Co. LLC Mark Wallach - Credit Suisse Securities (USA) LLC (Broker) Greg Bolan - Avondale Partners LLC Tejas R.

Savant - JPMorgan Securities LLC Robert Patrick Jones - Goldman Sachs & Co. Michael J. Baker - Raymond James & Associates, Inc. Ross Muken - Evercore Group LLC Mitchell Petersen - Barclays Capital, Inc..

Good day and welcome to the ICON Q4 and Full-Year 2016 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Simon Holmes. Please go ahead, sir..

Thank you, Sylvia. Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter and full-year ended December the 31st, 2016. Also, on the call today, we have our CEO, Mr. Ciaran Murray; our CFO, Mr. Brendan Brennan; and our COO Designate, Dr. Steve Cutler.

I would like 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 substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes.

We'll 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 follow-up question. I would now like to hand over the call to our CFO, Mr. Brendan Brennan..

Thank you, Simon. In quarter four, we achieved gross business awards of $605 million. Cancellations in the quarter, which include the Pfizer bococizumab program, were $171 million. And as a result, net awards in the quarter were $434 million, a book-to-bill of one times. Net revenue in quarter four was $435 million.

This represents year-on-year growth of 7.9% or 8.4% on a constant currency basis. On a constant dollar organic basis, year-on-year revenue growth was 4.2%. For the full-year 2016, net revenue grew 5.8% to $1.66 billion. This represents 6.4% constant currency growth and 3.2% constant dollar organic growth year-on-year.

For the full-year 2016, our top client represented 26% of revenue compared to 31% last year, and we ended quarter four with our top client representing 24% of our revenue. Our top five customers represented 45% of revenue for the full-year compared to 49% last year.

Our top 10 represented 58% compared to 63% last year, while our top 25 customers represented 75% compared to 78% last year. We grew revenue in the quarter four, while effectively leveraging our existing head count and ended the year with approximately 12,500 staff.

Group gross margin for the quarter was 42.2%, which compared to 42.1% in quarter three and 43.1% in the comparable quarter last year. For the full-year 2016, group gross margin was 42.3%, the same level we achieved in the full-year 2015. We continue to leverage our global business model, and as a result, SG&A was 19.2% of revenue in the quarter.

This compared to 19.3% last quarter and 20.7% in the comparable period last year. For the full-year 2016, SG&A was 19.5% of revenue, a 120 bps reduction from the 20.7% reported for the full-year 2015. Operating income for the quarter was $84.6 million, an operating margin of 19.5%.

This compared to 19.3% last quarter and 18.7% in the comparable quarter last year. For the full-year 2016, operating margin was 19.2% compared to 17.9% for the full-year 2015. The net interest expense for the quarter was $3.03 million. The tax rate during the quarter benefited from a positive one-off item, resulting in a 9% effective rate.

This impacted EPS positively by circa $0.07 in the quarter. The effective tax rate for the full-year 2016 was 12.7%. Net income for the quarter was $74.3 million, a margin of 17.1%, equating to diluted earnings per share of $1.33.

This compares to earnings per share of $1.19 in quarter three and $1.11 in the comparable quarter last year, an increase of 19.8%. For the full-year, net income was $269.3 million, a margin of 16.2%, equating to pro forma earnings per share of $4.77. This represents an increase of 19.8% when compared to the $3.98 reported for the full-year 2015.

DSOs in the quarter were 50 days, which compared to 50 days in quarter three and 41 days in the comparable quarter last year. Cash generated from operating activities for the quarter was $123.5 million and $259.2 million for the full-year. Capital expenditure for the quarter was $13.3 million and $42.6 million for the full-year.

During the quarter, ICON spent $110 million on share repurchases. In addition, $54 million was spent on acquisitions in 2016. As a result, at December 31, 2016, the company had a net debt of $88 million compared to net debt of $98 million at September 30, 2016 and net debt of $158 million at end of December 2015.

And with all of that said, and indeed, a tear in my eye as I hand over to Ciaran Murray for his last quarter as our CEO..

Thank you, Brendan. 2016 was another good year for ICON. We achieved our highest-ever level of gross business awards of $2.3 billion, we grew our backlog by 8% year-on-year to $4.2 billion and increased constant currency revenue by 6.4% to $1.66 billion.

In addition, we further reduced our top customer concentration, exiting the year at 24% for quarter four. By focusing on operational excellence and leveraging our cost base, we were able to exit the year with an operating margin of 19.5% and increased full year EPS by almost 20% to $4.77. The key drivers fueling CRO market growth remain in place.

R&D budgets continue to grow. Outsourcing penetration is increasing, as our customers look to enhance the return on investment of their drug development programs.

With our experience of successfully managing strategic partnerships under a variety of models, our breadth of capabilities, our scientific and therapeutic expertise, and our global scale, ICON has been able to capitalize on these favorable market trends. We are pleased with the performance of all of our service areas in 2016.

As part of our overall strategy to diversify our customer base, both our clinical research and functional services businesses have added a number of significant new clients during the year. As a result, in quarter four, revenues outside of our top account grew by 19% compared to the same quarter last year.

And this is something which gives us confidence as we look forward to 2017. Our lab business performed strongly, as they successfully target specific therapeutic areas, and our commercialization and outcomes group continues to benefit from the growing market demand for real world evidence.

During 2016, we've advanced our strategy of applying targeted data assets to enhance drug development.

Alongside the use of ICON's proprietary data, we have developed innovative partnerships with IBM, TriNetX, EHR4CR and ICHOM, all to help address critical industry challenges, particularly the need to identify the most suitable patients for study programs. We've also continued our strategy of targeted M&A that enhances our capabilities.

At the end of 2015, we acquired PMG Research, and through their U.S.-based research sites, PMG is improving patient access to trials, which supports faster patient recruitment times for our customers. We also closed the ClinicalRM acquisition during 2016.

ClinicalRM bring to ICON significant experience as how to operate within the market for governments and NGO-sponsored research, and they will lead ICON's efforts to further grow this market segment. Alongside our targeted M&A, we've continued to return value to shareholders through share repurchases.

At our AGM last July, we received approval to buy back shares of up to circa US$400 million. And since commencing the current program on October 1, 2016, we have repurchased shares worth approximately US$121 million. Looking ahead, we have a very solid platform on which to build and we expect 2017 to be another year of revenue and earnings growth.

As we continue to build and diversify our customer base, we expect the concentration of our top customer in revenue to reduce to about 15% to 17%. We are reaffirming our full year 2017 guidance and expect revenue to be in the range of $1.7 billion to $1.75 billion and earnings per share to be in the range of $5 to $5.20.

Before moving on to the Q&A, I'd like to thank the entire ICON team for their hard work and commitments, not just in quarter four and not just in 2016, but over the past five and a half years during my tenure as CEO.

Together, I believe we've built ICON into a world-class company and I look forward to supporting Steve and the whole ICON team in my new role as Chairman. Thank you, everyone, and we are now ready for questions..

Thank you, sir..

And Sylvia, we are now ready for questions..

Yes, sir. Thank you. Thank you. And we'll take our first question from Tim Evans from Wells Fargo Securities. Please go ahead. Your line is now open..

Thank you. Revenue this quarter was a little bit lighter than we were expecting. It looks like backlog conversion was probably a little bit slower than you were expecting, and this obviously continues a trend that we've seen for a number of quarters.

Can you maybe just talk about why that's still happening and do you think that that trend will reverse at all in 2017?.

Yeah. Tim, it's Steve Cutler here to answer that one. It was a little lighter than we'd hoped for. We came in, I think, at about 10.2% on a burn from the – on the quarter point of view. We see that sort of level continuing in the sort of short to medium-term. We continue to win projects and programs that are complex.

And I think the reasons for this – for burns – in terms of complex programs that require some planning and scheduling. And we've talked about those reasons on the calls previously. So, we see it continuing at around about that level.

It may tick up a little bit as we get into the longer term, but I don't see a dramatic change in that sort of prospective revenue burn over the medium-term..

Okay. And secondly, you guys have talked about bolt-on acquisitions being a top priority for your capital at this point.

Given that you do include purchase amortization in your earnings, are you comfortable that tuck-in acquisitions would be accretive in the first year after acquisitions or is it just not possible to say that at this point?.

Hi, Tim. It's Brendan here. I think all of the acquisitions we've done, we've had a great combination of companies that have come into the organization. And in general, when we look back on those, they have been accretive.

And certainly, any of the ones we've done in the last number of years, even including the impact of amortization of the intangible assets, has certainly been accretive. So, I think we've had a good experience from that point of view..

Okay. Thank you..

I think that's one of the things, Tim, I'd say about our fairly rigorous application of GAAP accounts here. As you know, we don't tend to make adjustments. I think traditionally, the only adjustment we make to GAAP accounting is for restructuring charges, one-time restructuring charges. It kind of enforces discipline.

Apart from the fact that, I suppose being a chartered accountant, I think GAAP are the numbers that the world should look at and they're the most reliable numbers and the highest quality earnings numbers.

They also give us certain discipline and we factor that in when it comes to what price we pay for assets, so it doesn't allow us to slip into the danger of overpaying and trying to rationalize that by constantly pushing out the future timescale for shareholder return..

Thanks. I'll leave it at that..

Thank you. And now, we'll take our next question from Eric Coldwell from Baird. Please go ahead. Your line is now open..

Thanks. First off, Ciaran, really appreciated the time working with you over the years. Congrats as you start to transition to the next phase. Good luck. With my two questions – I'm going to ask two here. First off, operating margin. When I look at 2017, I guess I'm a little uncertain how to phase the year. You finished 2016 obviously very strongly.

You've had years of margin improvement. You do have a lot of revenue rolling off with your top client, as these PCSK9 studies come to an end.

So, is this a situation where, unlike most years, we start strong and finish a little on the lower end due to some de-leveraging? Or do you guys think you can actually hold that strong finish in 2016 and basically be flat through the year with things like, let's say, SG&A controls or other efforts to keep the margin up? I'm just a little worried about how the Street's going to be looking at the phasing this year..

Eric, it's Steve again. I think it's fair to say we're – we've got some work to do in that area and we're going to be looking at it very carefully. But we believe we're confident that we can hold, maintain the margins as where they are at the moment.

There is going to be a bit of a transition of our business, as you said, as that PCSK9 study leaves us towards the middle of the year. We'll work through that. And obviously, we have to watch our margins and our costs very carefully. We intend to do that. We have a good track record of having done that over the last several years now.

So, it's something we're very conscious of. We've been successful in winning business outside of our top customer, as Ciaran mentioned in his comments, something like 19% growth in that over the last year or so.

So, we're confident that with that work coming on and managing our costs carefully, we can maintain the operating margins we have and we won't slip away as we go through the year. And that's certainly our plan..

Okay, that's fantastic. Just a quick one, a follow-up here. The two largest public companies in the space, Quintiles and LabCorp now, they've both as of today taken new approaches to their bookings presentation, LabCorp following what Quintiles recently did in only showing the legally binding or the contracted awards in their bookings.

It did not look like it was a major delta for Covance.

But I'm curious, what would ICON look like? How different are you from what those two companies are doing? What do you think of the approach of only showing contracted awards? And how big of a delta would it be if you went to the approach that some of the others are starting to do?.

I suppose I'll start and then I'm sure everybody will want to chip in on this, Eric. Look, in 12 years of having been the CFO and the CEO of ICON, we've always recognized our awards the same way, and that's been based on a very firm commitment from a written reward – a written award, right.

And after we get an award in writing, there is a process that takes a month or two generally to turn that into contract, which may have a slightly higher or slightly lower value than the written award by the time you move things through. But in all of that time, it has not caused us any significant problems.

It hasn't impacted the quality of our backlog. Generally, these things work well. We then – when we put things in backlog, we review each contract every quarter and we reassess the value of it and make sure that it's tracking, and we make any adjustments that are appropriate. So, I don't know why people are moving to this particularly.

I don't think it adds any more value than a properly managed process, such as we've had for 12 years. But if you were saying there's a delta, if I looked at our backlog, generally it's all contracted, except for stuff that's been won most recently in a quarter.

So, you may have some portion of one quarter's awards that have not quite got the signed contracts yet. It's not a significant amount, and we're generally pretty happy with it. And it's our intention, I believe – I look at Steve now. I believe it's our intention to continue, but we shall hear what he says now..

Absolutely. And as Ciaran said, we are – we certainly – our target is to contract within 120 days. That's our target. And we're generally very successful in doing that. So, that's a rigorous process we go through, Eric, in terms of getting to contract. So, you can work out what that's roughly going to be from a percentage of backlog point of view.

And we are going to keep that same process. It's worked well for us for the last 20 years or so. We don't intend to change it..

Yeah. No, I completely agree, but I just wanted to hear your comments. Thanks again, guys. Good luck with 2017, and thanks again, Ciaran..

Cheers, Eric. Thank you very much. Yeah..

Thank you, Eric..

Thank you. And now, we'll take our next question from Sandy Draper from SunTrust. Please go ahead. Your line is now open..

Thanks very much. And I'll echo, Ciaran, Eric's comments. It's been a real pleasure working with you, and good luck. And hopefully, it won't be we won't hear from you at all. Would love to stay in touch. My question actually relates similarly to the – what's going on in the – more of an industry.

You've got, obviously, the Quintiles-IMS merger, and then there's some rumblings about the largest private competitor.

And I'm just curious, from a competitive perspective, how much impact are the sort of changes that are going on or potential changes having out there? Are they an opportunity for you guys and mostly an opportunity for winning business, winning people? Or is it not really changing? There's just a lot of talk on the Street about these two things.

I'm just curious, is that mostly a Wall Street focus and you guys just don't see it? Or is there really an impact and where are you feeling it? Thanks..

Yeah. Sandy, it's Steve. There is a fair bit of change in our industry, and as you say, there's a number of things moving around with some of the larger organizations in our business. Personally, I think that's a big opportunity for us, and we're seeing some of that opportunity in terms of some of our gross business wins.

Certainly, customers are talking to us about some very significant alliances and opportunities going forward. I think customers generally get a little nervous when the organizations that they're working with are acquiring or being acquired or merging or whatever else is going on.

So, that sort of nervousness often translates into business opportunities for us, and we're very happy to take those. We're also seeing some good people becoming available as well. So, there is some CVs around that we are looking to – people we're looking to hire and can certainly add value to our business.

So, I think on both of those accounts, we're seeing opportunity and we're very happy for our competitors to continue doing what they're doing..

Got it. Thanks very much. That was my question..

Thanks..

Thanks, Sandy..

Thank you. And now, we'll take our next question from Donald Hooker from KeyBanc. Please go ahead. Your line is now open..

Great. Good morning. So, of course, we have your full year revenue guidance, you reiterated. Just a review, with this large cancelation, I guess an earlier question on the revenue line, kind of how does that break down quarterly through the year. Just to make sure we're oriented going into 2018.

How does your full year 2017 revenue guidance kind of break out quarterly through the year?.

Well, yeah, Don, it's Brendan here. You can see how we exited Q4. So, you start off from that point. The real impact of that quarter will start to really play on the numbers in Q2 and Q3 particularly.

So, from a revenue point of view, I think the Street's estimates are not bad at this current stage, where it kind of ticks up and – or it ticks down, but it's going in the low-430s in Q1 and Q2, ticks down a little in Q3 and then back up in Q4. So, I think that trend overall is not a bad way to think about it..

Okay. And then, my follow-up question would be on the gross margin line. I think you mentioned or I'm seeing that gross margins year-over-year for the full year are kind of flattening out now.

As we go forward, kind of ignoring the impact of the cancellation, but just generally speaking, should we sort of assume stable gross margins from here on out? Or what kind of levers can you pull there around perhaps like risk-based monitoring or the things of that nature to get that gross margin higher?.

Yeah. Don, it's Steve. We'd like to think we can maintain the gross margin levels we've been able to get to. We see some opportunities with some of the technologies that we're working with, notwithstanding some pressure. There's always a competitive price pressure in our business.

But notwithstanding that, we believe we can maintain again those gross margins. The risk-based monitoring is getting more traction within the industry. There is opportunity to be more efficient there.

Some of the technology around the patient access and the work we're doing with our integrated site network is allowing us to recruit patients faster, and that helps us as well. It helps our customers, which is a good thing.

So, we think that the efficiency of our operations certainly can be maintained and notwithstanding, as I say, some the challenges we have around. We always have around a very competitive pricing environment..

Okay, thank you. Thank you so much..

Thank you. And now, we'll take our next question from John Kreger from William Blair. Please go ahead. Your line is now open..

Hi, thanks very much. A question – I'm curious what you're seeing, if anything, in terms of changing client attitudes about spending, given some of the uncertainty we've been watching coming out of Washington, some of the kind of drug pricing rhetoric? Are you seeing that translate at all into different client behavior? Thanks..

John, it's Steve. It's a bit early at the moment. Dare I say it, there's a fair bit of different sort of talk coming out of Washington in terms of where that's going. And we recognize our customers, I think, are also looking at that and looking at some of the challenges that that's presenting to them.

And as they go, so shall we, maybe with some year or two in terms of a lag, I think they see some opportunity perhaps in terms of some of the regulations changing a little bit and perhaps becoming a little less onerous, but I think they're all under pricing pressure as well.

So, I think there's opportunity and challenge in terms of potentially down the track for our customers. And hence, for us, we go the same way. But I think it's a little early really for those pressures, such as they are, to be tangibly translated into our environment and our industry.

So, we'll see how that works out during the year, but we remain optimistic that the market is solid and strong, and that R&D remains a very – a central part of our customers' platform. And in fact, more importantly, outsourcing of that, particularly those development dollars is an important component of it.

So, we see a solid, optimistic, confident pharma industry that is allowing plenty of new drugs to come through and be developed, and we're the beneficiaries of that..

Great, thanks. And maybe a quick follow-up.

If you think about some of the kind of experiments or strategic bets you guys have made in the last year or so around some data partnerships and site management, what do you see gaining the most traction in terms of helping drive your share over the next year or two?.

Yeah. I think there are a number of them. I mean, we've been engaged with a number of – IBM Watson is one that we're starting to see some traction with. The EHR4CR Consortium, a number of our customers are also involved in and I think very enthusiastic about, and we're seeing some opportunity coming through there.

The PMG site network as well, we're really starting to see some traction there in terms of recruitment of patients, albeit more in the chronic ambulatory trials that we do rather than some of the oncology trials. So, we're working to build that sort of network. But I think we're seeing some good traction around those areas.

TriNetX is another partner we're working with and seeing some benefits of that. I don't think we're ready to sort of hitch our horse to one of those wagons at this stage. I don't think we're ready to declare victory on any one. And I think actually, in the end, it will continue to be a multiple – a multivariate approach to how we recruit patients.

And it will depend upon the trial, to some extent the region, and to some extent, obviously, the drug and the therapeutic indication. So, we'd like to have a number of options as we look at the technology and the technology available.

We continue to evaluate not just the ones that we're working with, but others in the industry as well, because there's plenty out there and there's – we want to be able to bring the best solution to our customer every time..

Great. Thank you..

Thank you. And now, we'll take our next question from Erin Wright from Credit Suisse. Please go ahead. Your line is now open..

Hi, this is Mark in for Erin. Thanks for taking our question. On M&A, I know you gave a little bit of color on it, but any details you can give us on what the tuck-in pipeline looks like currently.

And are there any particular areas where you're looking at closer than others? And what do prices for assets look like?.

Our M&A strategy remains as we've outlined previously. We're tucking in. We're bringing in – we want to bring in assets that add to us or that bring us up to better than market. And so, we have a pipeline of assets that we're looking at.

We're actively engaged with several, but we're not ready to declare who they are or in fact even what area they're in at the moment. Our strategy continues as previously in that area. We have devoted some further resource to it, because we think it is an important part of our growth plan going forward and we continue to execute in that way.

In terms of pricing, the quality assets are always on the more expensive side. But we have to play in that space, and we recognize that, particularly in the technology area, some of these assets are relatively expensive.

But I think we assess each on their merits in terms of what they bring to our business and how they – not just bring to – what they bring to our business, but how they synergize both on a cost and particularly on a revenue point of view with the rest of our business, how they help us to deliver overall solutions and large programs better.

And if they can do that, then we obviously want to bring them into the fold. So, that's the way we're approaching it, but it's really not different to how we've been doing it in the past..

Okay, that's helpful. And then, one quick follow-up.

Would you be willing to break-out what portion of cancellations was the Pfizer project and should we expect any future cancellations from this project? And then, can you clarify on guidance what's embedded from a tax rate and share repos?.

Well, I'll take the first couple and I'll hand it to Brendan for the tax rate. The Pfizer – we don't anticipate any further cancellations on that particular program. We believe that we've been able to move that out. It's in the vicinity of $100 million from evocatious (31:07) and that point of view. That's out and that's been taken off our backlog.

And so, we feel that's the number and that's done. From a tax point of view, do you want to....

Yeah. On what's included in the guidance, particularly around buyback and tax, for our effective tax rate, what we've included for the guidance is 14%. We were a little under that this year. But as we mentioned, that was somewhat one-off in nature. So, our run rate is about 14% as we look forward to the guidance.

And then, in terms of buyback and again, in relation to the guidance that has been issued, the buyback that we completed of $110 million, that I mentioned, in quarter four 2016 has been figured into the guidance, but no additional buyback is included in the current guidance.

So, obviously, we're open to opportunistically buy back stock during the course of the year. But any upside from that will be in addition to the existing guidance..

Okay, great. Thanks..

Thank you. And now, we'll take our next question from Greg Bolan, Avondale Partners. Please go ahead. Your line is now open..

Hey, thanks guys. And echoing my congrats to you, Ciaran, and best wishes.

So, I guess as you think about how the organization is constructed today relative to, call it, 2009, when we saw the last wave of very, very large pharma M&A, how do you feel the organization would be prepared, if there would be – or were to be another wave of mega M&A? Just kind of philosophically, how do you guys feel about your preparedness for that type of another wave? Thanks..

I'm not sure how you prepare for M&A within your sponsors. That's a difficult thing to do.

We believe we have a large group of very solid companies that we work with and we believe we're delivering well for those companies, so that if one takes over another, if we're working with one or the other, we believe we'd be in a good position to be able to continue to work with the combined organization, I think is the way we look at it, Greg.

But there's always risk in those sorts of areas. And we have – although we have a number of partnerships around the industry and they tend to be with significant companies, probably more acquiring companies than companies that would be acquired. So, from that point of view, I think we're probably in a good place, perhaps a better place than others.

But it's very difficult to predict these sorts of things, and you have to be flexible and aware. I think the other – perhaps, the other point is that we've made a lot of progress within the biotech and small pharma space. So, companies that are in that area, they're well-funded in that area, we've been able to make some nice progress with.

And so, we have a number of good customers in that space who we believe we can continue to work with. So, I think that's what I'd like to say about that..

Yeah. I'll just say, Greg – it's Ciaran here. In the past, it's tended to work out well for us, the M&A.

And the only sort of thing that we've had to be cautious about in the previous experience is that sometimes for a quarter or two, there's some short-term disruption, and whether it's your customer that's the acquiree or the acquirer that might be figuring out a strategy.

So, it doesn't affect our online business, but it may slow down some decisions in new business. But beyond that, it's always worked out well in the end and led to more outsourcing and more work for us. And I would imagine that would be the same in the future, so far as you can tell what the future brings, you know..

Sounds good. Thanks guys..

Thank you. And now, we'll take our next question from Tycho Peterson from JPMorgan. Please go ahead. Your line is now open..

Hey, guys. This is Tejas on for Tycho. Thanks for taking the question. I just had one on client portfolio reprioritizations.

One of your peers suggested that, given the more challenging pricing and reimbursement landscape, that we might see over the next few quarters some of their clients were focusing more on reprioritizations and that's leading to more disruption in terms of their backlog.

And are you seeing any of that? And how much of that is driven by a shift towards smaller sort of biotech clients, which in some sense are more exposed to this pricing dynamic?.

I think at this stage, no, we're not seeing that really. I think – and again, our customers have been under pricing pressure for some time. I don't think that's necessarily changed in the recent past, irrespective of what President Trump has said.

And as I said before, I think there may – while there's always pricing pressure, there may be some opportunity in terms of some regulation changes. So, I'm not – we don't see that. We certainly haven't seen that from our customers. We work, obviously, in a very competitive pricing environment.

We need to provide the best pricing for our customers to give them the best value. That battle continues. That hasn't changed, and I don't see it changing certainly in the short to medium-term..

Got it. And then, one quick follow-up on capital deployment.

How should we think about the cadence for the remainder of the $290 million that you have under the buyback authorization? And given that you're the only CRO with investment-grade debt out there, could we see you do or perhaps even consider a more meaningful sized deal beyond tuck-ins?.

Well, I'll take the second part of that. I think we've been fairly direct and public in our assertions that large-scale deals tend to be more value-destroying than value-creating in our industry. We perhaps have even seen some of the benefits of – at least even the rumors of large-scale deals that are within the industry at the moment.

So, we are not great advocates or believers of large-scale transformational deals. Notwithstanding that, our approach has been the tuck-ins, the add-ons in areas where we're sub-par or sub-scale. We'll continue to do that and get the best value assets for our organization and ultimately for our shareholders.

So, that's the way we approach the M&A aspect of it..

So, maybe just to add to that, obviously, one of the reasons why we're investment-grade is our discipline around our balance sheet and making sure that we're not doing things that throw huge multiples on there in terms of debt for M&A purposes. That said, we throw-up a huge amount of cash on an annual basis.

I think I read-out around $260 million this year of cash from operations. We have a free cash flow target of closer to $300 million next year. Steve's point is absolutely correct. Our primary use of our cash is around M&A. And so, as we look towards the year, that's what we'll be focused on, but very much in that tuck-in space.

And then, we'll look also opportunistically. There are lots of assets you would like to acquire. Sometimes, they get away. Sometimes, the pricing isn't right. So, we'll take an opportunistic eye in terms of the remainder of the buyback authorization that we have during the course of the year. But our primary focus will be around M&A..

Thanks guys. And Ciaran, all the best for the future..

Cheers. Thank you..

Thank you. And now, we'll take our next question from Robert Jones from Goldman Sachs. Please go ahead. Your line is now open..

Thanks for the questions. Just thinking about the implied non-Pfizer revenue growth in 2017, looks like it's about 17% to 18%. It's certainly an acceleration of what that cohort contributed in 2016.

Could you maybe just give us a sense of your line of sight into that growth? Maybe is there any way to think about how much of that is in backlog today versus what needs to be won to meet that type of level of growth?.

Well, I mean in terms of line of sight, we have – that's in the backlog, at least up till what's been declared now. So, we feel very confident that that – it's actually 19% quarter-on-quarter, in the year-to-year basis. We're seeing very solid growth and interest in our services.

Our largest customer, from a gross sales point of view and from a net sales point of view, was not our largest customer from a revenue point of view in the last quarter. So, we're making a lot of progress, I believe, in that space.

And we have good line of sight, not just in terms of our backlog, but in terms of opportunities and RFPs that are coming through from alliance partners that we have and they continue to want to outsource an increasing amount of their business to us. So, we feel confident that that's going to be a nice area of growth for us.

And we – between our entire portfolio, we manage it in a way that allows us to, as I say, meet the targets we've set for ourselves this year..

Got it. And I guess just a follow-up clarification. Sounds like you commented on the large cancellation in 4Q, but I was wondering if you'd be willing to give us a sense of what the actual net book-to-bill would have been in the quarter, if you excluded that one large Pfizer PCSK9 cancellation..

I think you can probably work it out for yourself, Robert. We indicated it was in the vicinity of $100 million. If you put that back in, we're going to be – we would be around our normal 1.2-ish times sort of net book-to-bill. That would have been the one – but the one decision, that's where we would have been, I think, on a net book-to-bill basis..

Good to hear. And Ciaran, best of luck. It's been a pleasure..

Okay. You too, Robert. Cheers..

Thank you. And now, we'll take our next question from Michael Baker from Raymond James. Please go ahead. Your line is now open..

Yeah. Thank you. I'm wondering what you guys are seeing from a labor inflation standpoint, particularly as it relates to CRAs, given some of the dynamics that you mentioned earlier. And any specific color would be helpful to kind of get a sense of a matter of degree of change..

Mike, nothing out of the ordinary from an inflation point of view. We've been able to bring our retention of – not just CRAs but our organization, up over the last 12 months or so. The retention of our CRAs a year or two ago was at a much, much higher level than it is now. We're down well under 20%. And I think that's a very strong number.

From an industry point of view, it tends to average in the high-20s or even 30% from a CRA point of view. So, we feel it's not just the labor market or the salary component of it.

We feel that our managers are doing a nice job in terms of encouraging and managing our CRA work force, not just in the U.S., where we typically and I think the industry typically has a fair bit of pressure, but in Europe and Asia as well.

So, as I say, we feel that that group of people, CRAs is what you mentioned, we're actually doing very well with from a retention point of view. And that's helping us to consistently execute projects and programs and helps keep our customers happy with us..

Okay. And then on a different note, wanted to get a sense of whether or not you're seeing – I'm hearing that one of the larger players is getting more aggressive on price. I understand pharma makes decisions on other factors as well.

Just trying to get a sense of if you're starting to see a move-away from the discipline that we've seen – relative discipline we've seen recently..

We haven't seen any material change in the pricing environment over the last (43:35). As I think I mentioned a couple of times on the call, we work in a very competitive pricing environment. And that's okay. That's as it should be.

We expect our customers to want value for the work that we do and it constantly keeps us on our toes and helps us to remain efficient and to get more efficient to bring in new technologies, to bring in new processes, to look at the way we do things, to look at ourselves. And so, the pricing environment remains competitive.

And I think our customers are pretty smart people. They know that price is a component and it's an important component, but it's certainly not the only component. And they look to organizations who consistently deliver for them.

And I would venture to say that consistent execution and delivery on time with the appropriate quality and on budget is a much better way of selecting a CRO than just going down price. And really, it's – our customers are very sophisticated. They understand that. And in the vast majority of cases, those are the criteria they apply.

Price is one, but it's only one of a number of key criteria..

They would also question why. I mean, I'm not familiar with the specifics, if that what you're talking about, Michael. But I think our customers are savvy enough, as Steve said, that if someone starts reducing price for no particular reason, they're bound to ask the obvious question as to why they're doing that and how desperate they must be.

And it must be a signal they have issues around delivery or quality or ability to execute on their business. So, it's not something we've seen and it's not something that I think sends a good message to your customers..

Thanks for the color and thanks for the thoughtful management transition..

Cheers..

Thank you. And now, we'll take our next question from Ross Muken from Evercore ISI. Please go ahead. Your line is now open..

Good morning, guys. And again, Ciaran, congrats. Just quickly, at – in the U.S., there's been a lot of noise at FDA just on changes to the approval process and maybe expediting or making the clinical trial sort of success rate maybe go up.

Just is there any way to think through what that could mean for your business and how any of the policy changes could influence sort of your – maybe pharmas investment or how they're going to ramp up sort of new trials?.

Yeah. Ross, I think the implications for our business, we are listening and hearing what's being said. And I think the day of the Phase III clinical trial is a long way from over yet. I don't think we're declaring that that one's gone, and I don't think that's a viable scenario that – essentially that we remove that sort of process.

However, I think it is – potentially there are going to be changes or there could be changes around the regulations, which lead us to work in a more real world evidence sort of environment.

And we are preparing ourselves and actively engaging in that area to make sure that we're able to provide that sort of service, whether it be through our IBM Watson, through our EHR4CR and some of the other technologies and access to medical records sort of technologies and approaches that we take.

I think that's probably the area that I'm thinking about most, and how we do trials in a much more naturalistic setting and how we do that in a much larger number of patients, potentially with a much softer touch. So, we're thinking about how we do that.

We're putting – we already have a strong late-phase group within ICON who does those sorts of trials, albeit in the current environment. It may be that they become a significantly greater component of our business. That's where the market has been trending. The growth rates, as you would know, in that area are higher than they are in the II-III space.

And so, perhaps we're looking at an acceleration of that sort of process, and that's what we're trying to do..

Very helpful. Thanks..

Thank you. And now, we'll take our next question from Jack Meehan from Barclays. Please go ahead. Your line is now open..

Thanks. This is actually Mitchell Petersen filling in for Jack this morning.

I know it's a smaller piece of your business, but I was hoping to get some more detail around your central lab performance in the quarter, and specifically, if you were seeing any changes in the competitive environment as a result of some of the consolidation efforts at your peers? Thanks..

Yeah. Jack (sic) [Mitchell], we don't usually call out the individual groups. But I'd suffice to say that our central lab business and our bioanalytical business is doing very well, and it has done over the last couple of years. And I think we probably have been the beneficiaries of some of the industry changes in that area. I'll just leave it at that.

And I would think that that potentially could also be the case on a larger scale, as other sort of industry consolidation potential transactions happen as well. So, that's why we quite enjoy when customers talk about or get together, whether it be on a lab basis or on a large-scale basis. I think it only gives us opportunity.

So, our lab business has probably benefited from that over the last couple of years, but they've also put together a good compelling offering, particularly the way they've integrated with our clinical business as well and taken out some of the white space that perhaps was there a few years ago.

And I think our customers are seeing the benefits of working with us on a clinical basis and also with our lab business as well. So, it's been a very solid part of our business and a strongly growing part of our business..

Okay, that's helpful. And then looking at revenue guidance, of the 2% to 5% revenue growth expected in 2017, could you call out your expected contribution from acquisitions for the year? Thanks..

Yeah. Just on that number, if you like, that doesn't include any new acquisitions in that number. So, any additional acquisitions that we make will be obviously on top of that..

Okay, thanks..

Well, thank you. And that will conclude our Q&A session. So, I would like to hand the call back to Ciaran Murray for any additional or closing remarks..

We're pleased with the continued progress that ICON has made in 2016. And so, once again, I'd like to thank the entire ICON team for their hard work and the commitment that it takes to achieve these results. I'd also like, to all of you on the call, I'd like to thank you all. It's been a pleasure working with you over the years.

I haven't gone away, as they say in this part of the world, and I do look forward to seeing you in a way that's appropriate to my new role as we go forward in the future. So, you won't have to put up with quite as much of me, but I do look forward to staying in touch. So, thanks very much, everyone. And that concludes our business today..

Thank you. So, ladies and gentlemen, that will conclude today's ICON Q4 and full-year 2016 conference call. Thank you for your participation. You may now disconnect..