On July 21, 2008, the Company adopted the Employee Share Option Plan 2008 (the “2008 Employee Plan”) pursuant to which the Compensation and Organization Committee of the Company’s Board of Directors (the “Committee”) may grant options to any employee, or any director holding a salaried office or employment with the Company or a Subsidiary for the purchase of ordinary shares. On the same date, the Company also adopted the Consultants Share Option Plan 2008 (the “2008 Consultants Plan”), pursuant to which the Committee may grant options to any consultant, adviser or non-executive director retained by the Company or any Subsidiary for the purchase of ordinary shares.
Each option granted under the 2008 Employee Plan or the 2008 Consultants Plan (together the “2008 Option Plans”) will be an employee stock option, or NSO, as described in Section 422 or 423 of the Code. Each grant of an option under the 2008 Option Plans will be evidenced by a Stock Option Agreement between the optionee and the Company. The exercise price will be specified in each Stock Option Agreement, however option prices will not be less than 100% of the fair market value of an ordinary share on the date the option is granted.
An aggregate of 6.0 million ordinary shares have been reserved under the 2008 Employee Plan as reduced by any shares issued or to be issued pursuant to options granted under the 2008 Consultants Plan, under which a limit of 400,000 shares applies. Further, the maximum number of ordinary shares with respect to which options may be granted under the 2008 Employee Option Plan, during any calendar year, to any employee, shall be 400,000 ordinary shares. There is no individual limit under the 2008 Consultants Option Plan. No options may be granted under the plans after July 21, 2018.
On July 21, 2008, the Company adopted the the 2008 Employees Restricted Share Unit Plan (the “2008 RSU Plan”) pursuant to which the Committee may select any employee, or any director holding a salaried office or employment with the Company or a Subsidiary to receive an award under the plan. An aggregate of 1.0 million ordinary shares have been reserved for issuance under the 2008 RSU Plan. Awards under the 2008 RSU may be settled in cash or shares.
On January 17, 2003, the Company adopted the Share Option Plan 2003 (the “2003 Plan”) pursuant to which the Committee may grant options to officers and other employees of the Company or its subsidiaries for the purchase of ordinary shares. Each grant of an option under the 2003 Plan will be evidenced by a Stock Option Agreement between the employee and the Company. The exercise price will be specified in each Stock Option Agreement.
An aggregate of 6.0 million ordinary shares have been reserved under the 2003 Plan; and, in no event will the number of ordinary shares that may be issued pursuant to options awarded under the 2003 Plan exceed 10% of the outstanding shares, as defined in the 2003 Plan, at the time of the grant, unless the Board expressly determines otherwise. Further, the maximum number of ordinary shares with respect to which options may be granted under the 2003 Plan during any calendar year to any employee shall be 400,000 ordinary shares. No options can be granted after January 17, 2013.
Share option awards are generally granted with an exercise price equal to the market price of the Company’s shares at date of grant. Share options typically vest over a period of five years from date of grant and expire eight years from date of grant. The maximum contractual term of options outstanding at March 31, 2010, is eight years.
The Company determines and presents operating segments based on the information that is internally provided to the Chief Executive Officer and Chief Financial Officer, who together are considered the Company’s chief operating decision maker, in accordance with FASB ASC 280-10 Disclosures about Segments of an Enterprises and Related Information.
The Company's areas of operation outside of Ireland principally include the United States, United Kingdom, France, Germany, Italy, Spain, The Netherlands, Denmark, Sweden, Finland, Poland, Czech Republic, Lithuania, Latvia, Russia, Ukraine, Hungary, Israel, Romania, Canada, Mexico, Brazil, Colombia, Argentina, Chile, Peru, India, China, Hong Kong, South Korea, Japan, Thailand, Taiwan, Singapore, The Philippines, Australia, New Zealand and South Africa. Segment information as at March 31, 2010 and March 31, 2009 and for the three months ended March 31, 2010 and March 31, 2009, is as follows:
| a) The distribution of net revenue by geographical area was as follows: |
|
|
| |
|
|
| |
|
Three Months Ended |
| |
|
March 31, |
|
|
March 31, |
| |
|
2010
|
|
|
2009
|
| |
|
(in thousands)
|
|
Ireland*
|
|
$ |
28,972 |
|
|
$ |
43,680 |
|
Rest of Europe
|
|
|
70,738 |
|
|
|
55,195 |
|
U.S.
|
|
|
97,455 |
|
|
|
103,238 |
|
Rest of the World
|
|
|
21,947 |
|
|
|
17,718 |
|
Total
|
|
$ |
219,112 |
|
|
$ |
219,831 |
|
* All sales shown for Ireland are export sales.
|
|
|
|
|
|
|
|
|
b) The distribution of income from operations by geographical area was as follows:
|
|
|
|
| |
|
|
|
| |
|
|
Three Months Ended |
| |
|
|
March 31, |
|
|
|
March 31, |
| |
|
|
2010
|
|
|
|
2009
|
| |
|
(in thousands)
|
|
Ireland
|
|
$ |
9,534
|
|
|
$ |
18,818
|
|
Rest of Europe
|
|
|
7,859
|
|
|
|
892
|
|
U.S.
|
|
|
7,669
|
|
|
|
6,350
|
|
Rest of the World
|
|
|
1,716
|
|
|
|
855
|
|
Total
|
|
$ |
26,778
|
|
|
$ |
26,915
|
|
c) The distribution of property, plant and equipment, net, by geographical area was as follows:
|
|
|
|
|
|
| |
|
|
|
|
|
| |
|
March 31,
2010
|
|
|
December 31,
2009
|
| |
|
(in thousands)
|
|
Ireland
|
|
$ |
109,108 |
|
|
$ |
107,049 |
|
Rest of Europe
|
|
|
15,577 |
|
|
|
16,673 |
|
U.S.
|
|
|
37,013 |
|
|
|
45,194 |
|
Rest of the World
|
|
|
10,714 |
|
|
|
10,073 |
|
Total
|
|
$ |
172,412 |
|
|
$ |
178,989 |
| d) The distribution of depreciation and amortization by geographical area was as follows: |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| |
|
|
Three Months Ended |
| |
|
|
March 31, |
|
|
|
March 31, |
| |
|
|
2010
|
|
|
|
2009
|
| |
|
(in thousands)
|
|
Ireland
|
|
$ |
2,630
|
|
|
$ |
2,152
|
|
Rest of Europe
|
|
|
1,576
|
|
|
|
1,415
|
|
U.S.
|
|
|
3,568
|
|
|
|
3,284
|
|
Rest of the World
|
|
|
948
|
|
|
|
639
|
|
Total
|
|
$ |
8,722
|
|
|
|
$7,490
|
| e) The distribution of total assets by geographical area was as follows: |
|
|
|
|
|
| |
|
|
|
|
|
| |
|
March 31,
2010
|
|
|
December 31,
2009
|
| |
|
(in thousands)
|
|
Ireland
|
|
$ |
368,065 |
|
|
$ |
319,528 |
|
Rest of Europe
|
|
|
151,152 |
|
|
|
184,630 |
|
U.S.
|
|
|
342,601 |
|
|
|
375,682 |
|
Rest of the World
|
|
|
35,283 |
|
|
|
28,558 |
|
Total
|
|
$ |
897,101 |
|
|
$ |
908,398 |
ICON plc
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and accompanying notes included elsewhere herein and the Consolidated Financial Statements and related notes thereto included in our Form 20-F for the year ended December 31, 2009. The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States.
We are a contract research organization (“CRO”), providing outsourced development services on a global basis to the pharmaceutical, biotechnology and medical device industries. We specialize in the strategic development, management and analysis of programs that support Clinical Development - from compound selection to Phase I-IV clinical studies. We have the operational flexibility to provide development services on a stand-alone basis or as part of an integrated “full service” solution. Our preferred approach is to use dedicated teams to achieve optimum results, but we can implement a range of resourcing models to suit client requirements, and increasingly our teams are flexibly applied to minimize costs for our clients.
In a highly fragmented industry, we are one of a small number of companies with the capability and expertise to conduct clinical trials in all major therapeutic areas on a global basis. Currently, we have 7,268 employees, in 69 locations in 39 countries, providing Phase I - IV Clinical Trial Management, Drug Development Support Services, Data Management, Biostatistics, Central Laboratory, Imaging and Contract Staffing services.
Revenue consists primarily of fees earned under contracts with third-party clients. In most cases, a portion of the contract fee is paid at the time the study or trial is started, with the balance of the contract fee generally payable in installments over the study or trial duration, based on the achievement of certain performance targets or "milestones". Revenue for contracts is recognized on a proportional performance method based on the relationship between time incurred and the total estimated duration of the trial or on a fee-for-service basis according to the particular circumstances of the contract. As is customary in the CRO industry, we contract with third party investigators in connection with clinical trials. All investigator fees and certain other costs, where reimbursed by clients, are, in accordance with industry practice, deducted from gross revenue to arrive at net revenue. As these costs vary from contract to contract, we view net revenue as our primary measure of revenue growth.
Our backlog consists of potential net revenue yet to be earned from projects awarded by clients. At March 31, 2010, we had a backlog of approximately $1.8 billion, compared with approximately $1.8 billion at December 31, 2009. We believe that our backlog as of any date is not necessarily a meaningful predictor of future results, due to the potential for cancellation or delay of the projects underlying the backlog, and no assurances can be given that we will be able to realize this backlog as net revenue.
As the nature of ICON's business involves the management of projects having a typical duration of one to three years, the commencement or completion of projects in a fiscal year can have a material impact on revenues earned with the relevant clients in such years. In addition, as we typically work with some, but not all, divisions of a client, fluctuations in the number and status of available projects within such divisions can also have a material impact on revenues earned from such clients from year to year.
Although we are domiciled in Ireland, we report our results in U.S. dollars. As a consequence the results of our non-U.S. based operations, when translated into U.S. dollars, could be materially affected by fluctuations in exchange rates between the U.S. dollar and the currencies of those operations.
In addition to translation exposures, we are also subject to transaction exposures because the currency in which contracts are priced can be different from the currencies in which costs relating to those contracts are incurred. We have 17 operations operating in U.S. dollars, 11 trading in Euros, 5 in pounds Sterling, 4 in Indian Rupee, 2 each in Russian Rouble, Japanese Yen, Swedish Krona and Singapore dollars and 1 each in Polish Zloty, Israeli New Shekels, Latvian Lats, Hungarian Forint, Czech Koruna, Ukraine Hryvnia, Romanian New Leu, Lithuanian Litas, South African Rand, Australian dollars, Philippine Peso, Hong Kong dollar, Taiwan dollar, South Korean Won, Thai Baht, Chinese Yuan Renminbi, New Zealand dollars, Argentine Peso, Mexican Peso, Brazilian Real, Chilean Peso, Colombian Peso, Peruvian Neuvo Sol, and Canadian dollar . Our operations in the United States are not materially exposed to such currency differences as the majority of our revenues and costs are in U.S. dollars. However, outside the United States the multinational nature of our activities means that contracts are usually priced in a single currency, most often U.S. dollars, Euros or pounds Sterling, while costs arise in a number of currencies, depending, among other things, on which of our offices provide staff for the contract, and the location of investigator sites. Although many such contracts benefit from some degree of natural hedging due to the matching of contract revenues and costs in the same currency, where costs are incurred in currencies other than those in which contracts are priced, fluctuations in the relative value of those currencies could have a material effect on our results of operations. We regularly review our currency exposures and, when appropriate, hedge a portion of these, using forward exchange contracts, where they are not covered by natural hedges. In addition, we usually negotiate currency fluctuation clauses in our contracts which allow for price negotiation if changes in the relative value of those currencies exceed predetermined tolerances.
As we conduct operations on a global basis, our effective tax rate has depended and will depend on the geographic distribution of our revenue and earnings among locations with varying tax rates. Our results of operations therefore may be affected by changes in the tax rates of the various jurisdictions. In particular, as the geographic mix of our results of operations among various tax jurisdictions changes, our effective tax rate may vary significantly from period to period.
Results of Operations
Three Months Ended March 31, 2010 compared with Three Months Ended March 31, 2009
The following table sets forth for the periods indicated certain financial data as a percentage of net revenue and the percentage change in these items compared to the prior comparable period. The trends illustrated in the following table may not be indicative of future results.
| |
|
Three Months Ended
|
|
|
|
| |
|
March 31,
2010
|
|
March 31,
2009
|
|
|
2010
to 2009
|
| |
|
|
|
|
|
|
Percentage
|
| |
|
Percentage of Net Revenue
|
|
|
(Decrease)/
increase
|
| |
|
|
|
|
|
|
|
|
Net revenue
|
|
100.0%
|
|
100.0%
|
|
|
(0.3)%
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
Direct costs
|
|
59.9%
|
|
56.5%
|
|
|
5.8%
|
|
Selling, general and administrative
|
|
23.9%
|
|
27.9%
|
|
|
(14.6)%
|
|
Depreciation and amortization
|
|
4.0%
|
|
3.4%
|
|
|
16.4%
|
|
Income from operations
|
|
12.2%
|
|
12.2%
|
|
|
(0.5)%
|
Net revenue for the period decreased by $0.7 million, or 0.3%, from $219.8 million for the three months ended March 31, 2009 to $219.1 million for the three months ended March 31, 2010. For the three months ended March 31, 2010, we derived approximately 44.5%, 45.5% and 10.0% of our net revenue in the United States, Europe and Rest of World, respectively. The rate decrease in net revenue is a result of the global economic downturn, its impact on market confidence and the availability of funding for drug development.
Direct costs for the period increased by $7.1 million, or 5.8%, from $124.2 million for the three months ended March 31, 2009 to $131.3 million for the three months ended March 31, 2010. Direct costs consist primarily of compensation, associated fringe benefits and share based compensation expense for project-related employees and other direct project driven costs. The increase in direct costs during the period was primarily due to increased salary and related costs and travel costs for project related employees of $8.9 million and $0.9 million respectively. These increases were offset by decreases in study supplies and materials and laboratory costs of $1.3 million and $1.2 million respectively. Direct costs as a percentage of net revenue increased to 59.9% for the three months ended March 31, 2010, from 56.5% for the three months ended March 31, 2009.
Selling, general and administrative expenses for the period reduced by $9.0 million, or 14.6%, from $61.3 million for the three months ended March 31, 2009, to $52.3 million for the three months ended March 31, 2010. Selling, general and administrative expenses consist of compensation, related fringe benefits and share based compensation expense for selling and administrative employees, professional service costs, advertising costs and all costs related to facilities and information systems. The decrease in selling, general and administrative expenses arises from an increase of $0.5 million in personnel related costs, principally a result of increased recruitment expenditure, offset by a decrease in facility and information costs of $0.6 million and a decrease in other general overheads of $8.9 million. The decrease in other general overhead costs arises from a decrease in professional service costs of $2.5 million, a decrease in bad debt allowances of $1.3 million and a decrease in foreign exchange losses on the retranslation of monetary assets and liabilities of $3.4 million. As a percentage of net revenue, selling, general and administrative expenses, decreased from 27.9% for the three months ended March 31, 2009, to 23.9% for the three months ended March 31, 2010.
Depreciation and amortization expense for the period increased by $1.2 million, or 16.4%, from $7.5 million for the period ended March 31, 2009, to $8.7 million for the three months ended March 31, 2010. As a percentage of net revenue, depreciation and amortization increased from 3.4% of net revenues for the three months ended March 31, 2009, to 4.0% for the three months ended March 31, 2010. This increase arises primarily from our continued investment in facilities and equipment to support the Company’s growth.
Income from operations for the period decreased by $0.1 million, or 0.5%, from $26.9 million for the three months ended March 31, 2009 to $26.8 million for the three months ended March 31, 2010. As a percentage of net revenue, income from operations was 12.2% of net revenues for the three months ended March 31, 2009, and 12.2% for the three months ended March 31, 2010.
Net interest expense for the three months ended March 31, 2010, was $0.2 million, compared with net interest expense of $0.7 million for the three months ended March 31, 2009. Interest expense for the period decreased from $1.2 million for the three months ended March 31, 2009 to $0.4 million for the three months ended March 31, 2010. Interest income for the period decreased from $0.5 million for the three months ended March 31, 2009 to $0.2 million for the three months ended March 31, 2010.
Provision for income taxes decreased from $5.2 million for the three months ended March 31, 2009, to $4.4 million for the three months ended March 31, 2010. The effective tax rate for the three months ended March 31, 2010, was 16.5% compared with 20.0% for the three months ended March 31, 2009. The effective tax rate is principally a function of the distribution of pre-tax profits in the territories in which the Group operates.
Liquidity and Capital Resources
The CRO industry generally is not capital intensive. The Group’s principal operating cash needs are payment of salaries, office rents, travel expenditures and payments to investigators. Investing activities primarily reflect capital expenditures for facilities, information systems enhancements, the purchase of short term investments and acquisitions.
Our clinical research and development contracts are generally fixed price with some variable components and range in duration from a few weeks to several years. Revenue from contracts is generally recognized as income on the basis of the relationship between time incurred and the total estimated contract duration or on a fee-for-service basis. The cash flow from contracts typically consists of a down payment of between 10% and 20% paid at the time the contract is entered into, with the balance paid in installments over the contract's duration, in some cases on the achievement of certain milestones. Accordingly, cash receipts do not correspond to costs incurred and revenue recognized on contracts.
Net cash at March 31, 2010 amounted to $199.7 million compared with net cash of $194.0 million at December 31, 2009. Net cash at March 31, 2010 comprised cash and cash equivalents of $169.4 million and short term investments of $30.3 million. Net cash at December 31, 2009 comprised cash and cash equivalents of $144.8 million and short term investments of $49.2 million. Additional borrowings available to the Group under negotiated facilities at March 31, 2010 amounted to $154.2 million compared with $162.5 million at December 31, 2009.
Net cash provided by operating activities was $16.8 million for the three months ended March 31, 2010, compared with cash provided by operating activities of $24.7 million for the three months ended March 31, 2009. The Group’s working capital, comprising total current assets less total current liabilities, at March 31, 2010 amounted to $260.6 million, compared to $235.9 million at December 31, 2009. The most significant influence on our working capital and operating cash flow is revenue outstanding, which comprises accounts receivable and unbilled revenue, less payments on account. The dollar values of these amounts and the related days revenue outstanding can vary due to the achievement of contractual milestones, including contract signing, and the timing of cash receipts. The number of days revenue outstanding was 33 days at March 31, 2010 and 33 days at December 31, 2009.
Net cash provided by investing activities was $9.4 million for the three months ended March 31, 2010, compared to net cash used in investing activities of $9.0 million for the three months ended March 31, 2009. Net cash used in the three months ended March 31, 2010 arises principally from capital expenditures and purchase of short term investments, offset by the sale of short term investments.
Capital expenditure for the three months ended March 31, 2010, amounted to $9.5 million, and comprised mainly of expenditure on global infrastructure and information technology systems to support the Company’s growth. The Company realized $49.2 million from the sale of short term investments during the three months ended March 31, 2010. This was offset by an additional $30.3 million invested in short term investments during the period.
Net cash provided by financing activities during the three months ended March 31, 2010, amounted to $5.5 million compared with net cash used in financing activities of $2.5 million for the three months ended March 31, 2009.
As a result of these cash flows, cash and cash equivalents increased by $24.7 million for the three months ended March 31, 2010, compared to an increase of $12.4 million for the three months ended March 31, 2009.
On July 9, 2007, ICON plc entered into a five year committed multi-currency facility agreement for €35 million ($46.9 million) with Bank of Ireland. The facility bears interest at an annual rate equal to EURIBOR plus a margin and is secured by certain composite guarantees, indemnities and pledges in favour of the bank. At March 31, 2010, €21.8 million ($29.2million) was available to be drawn under this facility.
On December 22, 2008, a committed three year US dollar credit facility was negotiated with Allied Irish Bank plc for $50 million. The facility bears interest at LIBOR plus a margin and is secured by certain composite guarantees and pledges in favor of the bank. As at March 31, 2010, $50 million was available to be drawn under this facility.
On January 2, 2009, an additional four year committed credit facility was negotiated with Bank of Ireland for $25 million. The facility bears interest at LIBOR plus a margin and is secured by certain composite guarantees, indemnities and pledges in favor of the bank. As at March 31, 2010, $25 million was available to be drawn under this facility.
On May 29, 2009, committed credit facilities were negotiated with Citibank Europe for $20 million. The facilities comprise a 364 day facility of $10 million and a three year facility of $10 million. On the same day, a committed 364 day credit facility of $30 million was negotiated with JP Morgan. These facilities bear interest at LIBOR plus a margin and are secured by certain composite guarantees and pledges in favor of the banks. As at March 31, 2010, $50 million was available to be drawn under these facilities.
On July 1, 2004, the Company acquired 70% of the common stock of Beacon Biosciences Inc. (“Beacon”), a leading specialist CRO, which provides a range of medical imaging services to the pharmaceutical, biotechnology and medical device industries, for an initial cash consideration of $9.9 million, excluding costs of acquisition. On December 31, 2008, the remaining 30% of the common stock was acquired by the Company for $17.4 million, excluding costs of acquisition. Certain performance milestones were built into the acquisition agreement for the remaining 30% of Beacon requiring potential additional consideration of up to $3.0 million if these milestones were achieved during the year ended December 31, 2009. No additional consideration has been paid as these milestones were not achieved during the year ended December 31, 2009.
On November 14, 2008, the Company acquired 100% of the common stock of Prevalere Life Sciences Inc. (“Prevalere”), for an initial cash consideration of $37.6 million, excluding costs of acquisition. Prevalere, located in Whitesboro, New York, is a leading provider of bioanalytical and immunoassay services to pharmaceutical and biotechnology companies. Certain performance milestones were built into the acquisition agreement requiring potential additional consideration of up to $8.2 million if these milestones were achieved during the years ended December 31, 2008 and 2009. On April 30, 2009, $5.0 million was paid in respect of the milestones for the year ended December 31, 2008. No additional consideration has been paid as the milestones for the year ended December 31, 2009, were not achieved.
We believe the effects of inflation generally do not have a material adverse impact on our operations or financial conditions.
Legal Proceedings
We are not party to any litigation or other legal proceedings that we believe could reasonably be expected to have a material adverse effect on our business, results of operations and financial condition.
SIGNATURES