Icon has high hopes for its previously struggling central labs business, due in part to the $200m backlog of business it reported in its Q2 results.
Speaking on a conference call with investors, CEO Ciaran Murray said that efforts have been focussed on making the business – which offers laboratory services from study setup to data lock – more efficient since it lost around $7m in 2010.
And though lab margins were down to 2.5 per cent from eight per cent last quarter - something Murray said had impacted the firm's clinical business - the CEO insisted that it is normal for progress in labs to be "lumpy".
He said that lab costs work “in steps,” and that to gain new customers, expenditure – like adding more staff, or more expertise with additional assays – has increased the set up costs.
"The backlog is up 22 per cent year-on-year, burning at a healthy rate, and its converting into profit," he added.
Murray is now positive that investment will be worth it in the long run. “The backlog was $150m when we started this, and that’s grown to $200m now,” he said. “That’s a fairly significant level of revenue growth.”
Murray added that growing the backlog would be the big focus for the coming year, and that payers shouldn’t expect any drastic growth for the business in the short term.
William Blair analyst John Kreger predicted the business' profitability would even out at around five per cent by the end of the year.
The firm also took a $5.6m “restructuring” hit partly related to the integration recent acquisitions such as value strategy consultancy PriceSpective, and site management specialist Firecrest.
CFO Brendan Brennan said that Icon has taken a “step back looking at the organisation and making sure that we were appropriately staffed in terms of standard of control and that management structure was appropriate.”
The firm took on 250 staff in the past quarter – exceeding William Blair’s expectations of around 200 – bringing the total hire count since last year up to over 1,000.
Murray said if growth continues on the same path, staffing will rise in parallel.
Both men remained cautiously optimistic about growth in the coming quarter, with Murray adding that restructuring is an ongoing battle, and that charges such as the ones for Q2 can’t be ruled out.
However analysts seem somewhat more confident in growth potential. Tim Evans, senior analyst for Wells Fargo Securities, said: “Our broad thesis of continuing double-digit revenue growth and solid margin expansion remains intact. The slightly more conservative tone on margin this quarter was influenced by pressure on the central lab margin and integration costs for recent acquisitions – issues that we view as somewhat temporary.”
Kreger added that though he has concerns for the “unpredictability” of the strategic deals Icon is now leaning towards, “the fact that the company has maintained a strong bottom-line growth trajectory into the second half bolsters our confidence level for the full year.”
In coming quarters, the company will focus more efforts on its health economics, outcomes research, late phase trial offerings and market access, Murray said.
In particular he noted the Docs staffing business is strong, with middle double digit growth in year on year revenue and continued expansion into the Asia Pacific region.
"I’m happy with the progress we’ve made over the first half,” he said. “We’ve recorded strong bookings, grown revenue, and operating rev in each quarter, our backlog continues to provide 76 per cent of next 12 months revenue expectations.”
Looking to the future, Brennan also spoke about the firm's new-found preference for longer term strategic partnerships when he said: “We continue to expect client concentration levels to increase in the short to medium term given the shift towards deeper partnerships with our clients.”