Annual Reports

  • 20-F (Jun 16, 2016)
  • 20-F (Mar 23, 2016)
  • 20-F (Mar 12, 2015)
  • 20-F (Mar 12, 2014)
  • 20-F (Mar 6, 2013)
  • 20-F (Mar 2, 2012)

 
Other

ICON 20-F 2009
t64807_20f.htm


United States
Securities and Exchange Commission
Washington, D.C. 20549
 
FORM 20-F
 
(Mark One)
o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
 
OR
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended: December 31, 2008
 
 
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
Commission file number:
000-29714
 
 
 
 
(Exact name of Registrant as specified in its charter)
 
 
Ireland

(Jurisdiction of incorporation or organization)
 
South County Business Park, Leopardstown, Dublin 18, Ireland.

(Address of principal executive offices)
 
 Ciaran Murray, CFO
South County Business Park Leopardstown, Dublin 18, Ireland.
Ciaran.Murray@iconplc.com
0011-353-1-291-2000

(Name, telephone number, email and/or facsmile number and address of Company contact person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of exchange
on which registered
     
American Depository Shares, representing Ordinary Shares, par value €0.06 each Ordinary Shares, par value €0.06 each
  NASDAQ Global Select Market
 
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Title of each class

 
None

 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None

(Title of Class)
 
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 58,518,195 Ordinary Shares.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as determined in Rule 405 of the Securities Act.
 
Yes x
No o
 
If this report is an annual or transition report, indicate by check mark if registrant is not required to file reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934.
 
Yes o
No x
 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
 
Yes x
No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non- accelerated filer
 
Large Accelerated filer x
Accelerated filer o
Non-accelerated filer o

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
U.S. GAAP x
International Financial Reporting Standards as issued o
Other o
 
by the International Accounting Standards Board
 
 
If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
 
Item 17 o
Item 18 o

 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
 
Yes o
No x
 


 
TABLE OF CONTENTS>
 
   
1
       
   
1
       
Part I
     
       
 
2
       
 
2
       
 
2
       
 
9
       
 
22
       
 
31
       
 
41
       
 
43
       
 
43
       
 
44
       
 
50
       
 
51
       
Part II
     
       
 
51
       
 
51
       
 
52
       
 
52
       
Part III
     
       
 
53
       
 
53
       
 
54
 

 
 
As used herein, “ICON plc”, “ICON”, the “Company” and “we” or “us” refer to ICON public limited company and its consolidated subsidiaries, unless the context requires otherwise.
 
Unless otherwise indicated, ICON plc’s financial statements and other financial data contained in this Form 20-F are presented in United States dollars (“$”) and are prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).
 
In this Form 20-F, references to “U.S. dollars”, “U.S.$” or “$” are to the lawful currency of the United States, references to “pounds sterling”, “sterling”, “£”, “pence” or “p” are to the lawful currency of the United Kingdom, references to “Euro” or “€” are to the European single currency adopted by sixteen members of the European Union (including the Republic of Ireland, France, Germany, Spain, Italy, Finland and the Netherlands). ICON publishes its consolidated financial statements in U.S. dollars.
 
On July 21, 2008, the Company’s shareholders approved a bonus issue of ordinary shares (the “Bonus Issue”) to shareholders of record as of the close of business on August 8, 2008 (the “Record Date”). The Bonus Issue provided for each shareholder to receive one bonus ordinary share for each ordinary share held as of the Record Date, effecting the equivalent of a 2-for-1 stock split. The Bonus shares were issued on August 11, 2008, to Ordinary Shareholders and on August 12, 2008, to holders of American Depositary Shares (“ADSs”). The trading price of ICON’s ADSs was adjusted on NASDAQ to effect the Bonus Issue prior to the opening of trading on August 13, 2008. All outstanding ordinary share amounts referenced in the consolidated financial statements and the notes thereto have been retrospectively restated to give effect to the Bonus Issue as if it had occurred as of the date referenced.
 
On September 29, 2006, ICON’s shareholders approved a bonus issue of ordinary shares (the “Bonus Issue”) to shareholders of record as of the close of business on October 13, 2006 (the “Record Date”). The Bonus Issue provided for each shareholder to receive one bonus ordinary share for each ordinary share held as of the Record Date, effecting the equivalent of a 2-for-1 stock split. The Bonus shares were issued on October 16, 2006, to ordinary shareholders and on October 23, 2006 to holders of American Depositary Shares (“ADSs”). The trading price of ICON’s ADSs was adjusted on NASDAQ to effect the Bonus Issue prior to the opening of trading on October 24, 2006. All outstanding ordinary share amounts referenced in the consolidated financial statements and the notes thereto have been retrospectively restated to give effect to the Bonus Issue as if it had occurred as of the date referenced.
 
 
Statements included herein which are not historical facts are forward looking statements. Such forward looking statements are made pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995 (the “PSLRA”). The forward looking statements involve a number of risks and uncertainties and are subject to change at any time. In the event such risks or uncertainties materialize, our results could be materially affected. The risks and uncertainties include, but are not limited to, dependence on the pharmaceutical industry and certain clients, the need to regularly win projects and then to execute them efficiently, the challenges presented by rapid growth, competition and the continuing consolidation of the industry, the dependence on certain key executives and other factors identified in the Company’s Securities and Exchange Commission filings. The Company has no obligation under the PSLRA to update any forward looking statements and does not intend to do so.

 
1

 
 
Part I
 
Not applicable.
 
 
Not applicable.
 
 
Selected Historical Consolidated Financial Data for ICON plc
The following selected financial data set forth below are derived from ICON’s consolidated financial statements and should be read in conjunction with, and are qualified by reference to, Item 5 “Operating and Financial Review and Prospects” and ICON’s consolidated financial statements and related notes thereto included elsewhere in this Form 20-F.

 
2

 
 
                                     
   
Year
ended
May
31
2004
   
Year
ended
May
31
2005
   
7 month
Period
ended
December
31,
2005
   
Year
ended
December
31,
2006
   
Year
ended
December
31,
2007
   
Year
ended
December
31,
2008
 
   
(in thousands, except share and per share data)
 
                                     
Statement of Operations Data:
                                   
Gross revenue
  $ 443,875     $ 469,583     $ 275,586     $ 649,826     $ 867,473     $ 1,209,451  
Reimbursable expenses (1)
    (146,952 )     (142,925 )     (73,636 )     (194,229 )     (236,751 )     (344,203 )
Net revenue
    296,923       326,658       201,950       455,597       630,722       865,248  
Costs and expenses:                                                 
Direct costs
    162,562       179,661       114,004       256,263       354,479       489,238  
Selling, general and administrative
    88,807       103,784       62,276       136,569       187,993       248,778  
Depreciation and amortization
    11,171       13,331       8,094       14,949       19,008       27,728  
Share based compensation (2)
                6,024                    
Other charges (4)
          11,275                          
Total costs and expenses
    262,540       308,051       190,398       407,781       561,480       765,744  
Income from operations
    34,383       18,607       11,552       47,816       69,242       99,504  
Net interest income / (expense)
    288       979       1,272       3,640       2,738       (1,224 )
Income before provision for income taxes
    34,671       19,586       12,824       51,456       71,980       98,280  
Provision for income taxes
    (8,929 )     (5,852 )     (5,396 )     (12,924 )     (15,830 )     (19,967 )
Minority interest
          (189 )     (10 )     (228 )     (187 )     (193 )
Net income
  $ 25,742     $ 13,545     $ 7,418     $ 38,304     $ 55,963     $ 78,120  
                                                 
Net income per ordinary share (3):
                                               
Basic
  $ 0.49     $ 0.24     $ 0.13     $ 0.68     $ 0.97     $ 1.34  
Diluted
  $ 0.47     $ 0.24     $ 0.13     $ 0.66     $ 0.94     $ 1.30  
                                                 
Weighted average number  of ordinary shares outstanding:
                                               
Basic
    53,070,124       55,440,812       55,880,424       56,629,970       57,410,544       58,245,240  
Diluted
    54,812,652       56,613,780       56,990,168       57,726,668       59,495,928       60,221,587  

 
3

 
 
                                     
   
As of May 31,
   
As of December 31,
 
                                     
   
2004
   
2005
   
2005
   
2006
   
2007
   
2008
 
   
(in thousands)
                         
Balance Sheet Data:
                                   
Cash and cash equivalents
  $ 55,678     $ 56,341     $ 59,509     $ 63,039     $ 76,881     $ 58,378  
Short term investments
    23,085       22,034       22,809       39,822       41,752       42,726  
Working capital
    113,813       125,288       132,312       160,321       193,271       185,957  
Total assets
    335,323       347,553       349,067       476,341       693,138       867,285  
Total debt
                4,856       5,000       94,829       105,379  
Long term government grants
    1,411       1,257       1,160       1,170       1,179       1,386  
Shareholders’ equity
  $ 216,760     $ 233,066     $ 241,558     $ 302,738     $ 388,400     $ 456,366  
 
 
(1)
Reimbursable expenses are comprised of investigator payments and certain other costs reimbursed by clients under terms specific to each of ICON’s contracts. See Note 2 (d) to the Audited Consolidated Financial Statements.
     
 
(2)
$6.0 million share-based compensation expensed during the period ended December 31, 2005, was recorded in relation to the transfer of 576,000 shares from the founders of the Company to the Chief Executive Officer.
     
 
(3)
Net income per ordinary share is based on the weighted average number of outstanding ordinary shares. Diluted net income per share includes potential ordinary shares from the exercise of options.
     
 
(4)
Other operating charges of $11.3 million were recorded in the year ended May 31, 2005. These charges related to the recognition of an impairment in the carrying value of our investment in the central laboratory, a write-down of certain fixed assets and the lease termination and exit costs associated with the consolidation of some of our office facilities in the US.
 
Risk Factors
 
We are dependent on the continued outsourcing of research and development by the pharmaceutical, biotechnology and medical device industries.
 
We are dependent upon the ability and willingness of the pharmaceutical, biotechnology and medical device companies to continue to spend on research and development and to outsource the services that we provide. We are therefore subject to risks, uncertainties and trends that affect companies in these industries. We have benefited to date from the tendency of pharmaceutical, biotechnology and medical device companies to outsource clinical research projects. Any downturn in these industries or reduction in spending or outsourcing could adversely affect our business. For example, if these companies expanded upon their in-house clinical or development capabilities, they would be less likely to utilize our services. In addition, if governmental regulations were changed, they could affect the ability of our clients to operate profitably, which may lead to a decrease in research spending and therefore this could have a material adverse effect on our business.
 
The current economic and financial downturn may have a material adverse effect on our results.
 
Many of the world’s largest economies and financial institutions currently face extreme financial difficulty, including a decline in asset prices, liquidity problems and limited availability of credit. It is uncertain how long this downturn will last, but many countries are concerned that their economies may enter a deep and prolonged recession. Such difficult economic times may have a material adverse effect on our revenues, results of operations, financial condition and ability to raise capital.

 
4

 
 
We depend on a limited number of clients and a loss of or significant decrease in business from them could affect our business.
 
We have in the past and may in the future derive a significant portion of our net revenue from a relatively limited number of clients. A loss of, or a significant decrease in business from any one or more of such clients could have a material adverse effect on our business. During the year ended December 31, 2008, 29% of our net revenue was derived from our top five clients. During 2008, no client contributed more than 10% of net revenues. During the year ended December 31, 2007, 30% of our net revenue was derived from our top five clients. During 2007, no client contributed more than 10% of net revenues. During the year ended December 31, 2006, 35% of our net revenue was derived from our top five clients. During 2006, no client contributed more than 10% of net revenues.
 
If our clients discontinue using our services, or cancel or discontinue projects, our revenue will be adversely affected and we may not receive their business in the future or may not be able to attract new clients.
 
Our clients may discontinue using our services completely or cancel some projects either without notice or upon short notice. The termination or delay of a large contract or of multiple contracts could have a material adverse effect on our revenue and profitability. Historically, clients have cancelled or discontinued projects and may in the future cancel their contracts with us for reasons including:
     
 
the failure of products being tested to satisfy safety or efficacy requirements;
     
 
unexpected or undesired clinical results of the product;
     
 
a decision that a particular study is no longer necessary;
     
 
poor project performance, insufficient patient enrollment or investigator recruitment; or
     
 
production problems resulting in shortages of the drug.
 
If we lose clients, we may not be able to attract new ones, and if we lose individual projects, we may not be able to replace them.
 
We compete against many companies and research institutions that may be larger or more efficient than we are. This may preclude us from being given the opportunity to bid, or may prevent us from being able to competitively bid on and win new contracts.
 
The market for Contract Research Organizations (“CROs”) is highly competitive. We primarily compete against in-house departments of pharmaceutical companies and other CROs including Covance Inc., i3 Research (United Health Group Incorporated), Kendle International Inc., MDS Inc., Omnicare Inc., PAREXEL International Corporation, Pharmaceutical Product Development Inc., PharmaNet Development Group Inc., PRA International Inc. and Quintiles Transnational Corporation. Some of these competitors have substantially greater capital, research and development capabilities and human resources than we do. As a result, they may be selected as preferred vendors of our clients or potential clients for all projects or for significant projects, or they may be able to price projects more competitively than us. Any of these factors may prevent us from getting the opportunity to bid on new projects or prevent us from being competitive in bidding on new contracts.
 
Our quarterly results are dependent upon a number of factors and can fluctuate from quarter to quarter.
 
Our results of operations in any quarter can fluctuate depending upon, among other things, the number and scope of ongoing client projects, the commencement, postponement, variation and cancellation or termination of projects in the quarter, the mix of revenue, cost overruns, employee hiring and other factors. Our net revenue in any period is directly related to the number of employees and the percentage of these employees who were working on projects and billed to the client during that period. We may be unable to compensate for periods of underutilization during one part of a fiscal period by augmenting revenues during another part of that period. We believe that operating results for any particular quarter are not necessarily a meaningful indication of future results.

 
5

 
 
Approximately 71% of our net revenue is earned from long-term fixed-fee contracts. We would lose money in performing these contracts if the costs of performance exceed the fixed fees for these projects.
 
Approximately 71% of our net revenue is earned from long-term fixed fee contracts. Revenues on these contracts are agreed on contract initiation between the Company and the customer and are based on estimated time inputs to the contract. Factors considered in estimating time requirements include the complexity of the study, the number of geographical sites where trials are to be conducted and the number of patients to be recruited at each site. The Company regularly reviews the estimated hours on each contract to determine if the budget accurately reflects the agreed tasks to be performed taking into account the state of progress at the time of review. The Company further ensures that changes in scope are appropriately monitored and change orders for additional revenue are promptly negotiated for the additional work. If we were to fail to recognise and negotiate change orders for changes in the resources required or the scope of the work to be performed the Company could lose money if the costs of performance of these contracts exceeded their fixed fees.
 
If we fail to attract or retain qualified staff, our performance may suffer.
 
Our business, future success and ability to expand operations depends upon our ability to attract, hire, train and retain qualified professional, scientific and technical operating staff. We compete for qualified professionals with other CROs, temporary staffing agencies and the in-house departments of pharmaceutical, biotechnology and medical device companies. Although we have not had any difficulty attracting or retaining qualified staff in the past, there is no guarantee that we will be able to continue to attract a sufficient number of clinical research professionals at an acceptable cost.
 
We are highly dependent on information technology. If our systems fail or are unreliable our operations may be adversely impacted.
 
The efficient operation of our business depends on our information technology infrastructure and our management information systems. Our information technology infrastructure includes both third party solutions and applications designed and maintained internally. Since our Company operates on multiple platforms, the failure of our information technology infrastructure and/or our management information systems to perform could severely disrupt our business and adversely affect our results of operation. In addition, our information technology infrastructure and/or our management information systems are vulnerable to damage or interruption from natural or man-made disasters, terrorist attacks, computer viruses or hackers, power loss, or other computer systems, Internet telecommunications or data network failures. Any such interruption could adversely affect our business and results of operations.
 
Failure to comply with the regulations of the U.S. Food and Drug Administration and other regulatory authorities could result in substantial penalties and/or loss of business.
 
The U.S. Food and Drug Administration, or FDA, and other regulatory authorities inspect us from time to time to ensure that we comply with their regulations and guidelines, including environmental and health and safety matters. In addition, we must comply with the applicable regulatory requirements governing the conduct of clinical trials in all countries in which we operate. If we fail to comply with any of these requirements we could suffer:
     
 
the termination of any research;
     
 
the disqualification of data;
     
 
the denial of the right to conduct business;
     
 
criminal penalties; and
     
 
other enforcement actions.

 
6

 
 
Our exposure to exchange rate fluctuations could adversely affect our results of operations.
 
We derived approximately 56% of our consolidated net revenue in the year ended December 31, 2008, from our operations outside of the United States. Our financial statements are presented in U.S. dollars. Accordingly, changes in exchange rates between the U.S. dollar and other currencies in which we report local results, including the pound sterling and the euro, will affect the translation of a subsidiary’s financial results into U.S. dollars for purposes of reporting our consolidated financial results.
 
In addition, our contracts with our clients are sometimes denominated in currencies other than the currency in which we incur expenses related to such contracts. Where expenses are incurred in currencies other than those in which contracts are priced, fluctuations in the relative value of those currencies could have a material adverse effect on our results of operations. This risk is partially mitigated by clauses in certain of our contracts which allow for price renegotiation with our clients if changes in the relative value of those currencies exceed predetermined tolerances. We regularly review our currency exchange exposure and on occasion hedge a portion of this exposure using forward exchange contracts.
 
Liability claims brought against us could result in payment of substantial damages to plaintiffs and decrease our profitability.
 
We contract with physicians who serve as investigators in conducting clinical trials to test new drugs on their patients. This testing creates the risk of liability for personal injury to or death of the patients. Although investigators are generally required by law to maintain their own liability insurance, we could be named in lawsuits and incur expenses arising from any professional malpractice actions against the investigators with whom we contract. To date, we have not been subject to any liability claims that are expected to have a material effect on us.
 
Indemnifications provided by our clients against the risk of liability for personal injury to or death of the patients vary from client to client and from trial to trial and may not be sufficient in scope or amount or the providers may not have the financial ability to fulfill their indemnification obligations. Furthermore, we would be liable for our own negligence and that of our employees.
 
In addition, we maintain an appropriate level of worldwide Professional Liability/Error and Omissions Insurance. The amount of coverage we maintain depends upon the nature of the trial. We may in the future be unable to maintain or continue our current insurance coverage on the same or similar terms. If we are liable for a claim that is beyond the level of insurance coverage, we may be responsible for paying all or part of any award.
 
We may lose business opportunities as a result of health care reform and the expansion of managed care organizations.
 
Numerous governments, including the U.S. government and governments outside of the U.S., have undertaken efforts to control growing health care costs through legislation, regulation and voluntary agreements with medical care providers and drug companies. If these efforts are successful, pharmaceutical, biotechnology and medical device companies may react by spending less on research and development and therefore this could have a material adverse effect on our business.
 
For instance, in the past the U.S. Congress has entertained several comprehensive healthcare reform proposals. The proposals were generally intended to expand healthcare coverage for the uninsured and reduce the growth of total healthcare expenditures. While the U.S. Congress has not yet adopted any comprehensive reform proposals, members of Congress may raise similar proposals in the future. We are unable to predict the likelihood that healthcare reform proposals will be enacted into law.
 
In addition to healthcare reform proposals, the expansion of managed care organizations in the healthcare market may result in reduced spending on research and development. Managed care organizations’ efforts to cut costs by limiting expenditures on pharmaceuticals and medical devices could result in pharmaceutical, biotechnology and medical device companies spending less on research and development. If this were to occur, we would have fewer business opportunities and our revenues could decrease, possibly materially.

 
7

 
 
We may lose business as a result of changes in the regulatory environment
 
Various regulatory bodies throughout the world may enact legislation which could introduce changes to the regulatory environment for drug development and research. The adoption and implementation of such legislation is difficult to predict and therefore could have a material adverse effect on our business.
 
We may not be able to successfully develop and market or acquire new services.
 
We may seek to develop and market new services that complement or expand our existing business or expand our service offerings through acquisition. If we are unable to develop new services and/or create demand for those newly developed services, or expand our service offerings through acquisition, our future business, results of operations, financial condition, and cash flows could be adversely affected.
 
We rely on third parties for important services.
 
We depend on third parties to provide us with services critical to our business. The failure of any of these third parties to adequately provide the required services could have a material adverse effect on our business.
 
We may make acquisitions in the future, which may lead to disruptions to our ongoing business.
 
We have made a number of acquisitions and will continue to review new acquisition opportunities. If we are unable to successfully integrate an acquired company, the acquisition could lead to disruptions to the business. The success of an acquisition will depend upon, among other things, our ability to:
     
 
assimilate the operations and services or products of the acquired company;
     
 
integrate acquired personnel;
     
 
retain and motivate key employees;
     
 
retain customers; and
     
 
minimize the diversion of management’s attention from other business concerns.
 
Acquisitions of foreign companies may also involve additional risks, including assimilating differences in foreign business practices and overcoming language and cultural barriers.
 
In the event that the operations of an acquired business do not meet our performance expectations, we may have to restructure the acquired business or write-off the value of some or all of the assets of the acquired business.
 
Failure to raise sufficient finance may affect our ability to sustain future development of the business
 
We have financed our operations and growth since inception primarily with cash flows from operations, net proceeds of $49.1 million raised in our initial public offering in May 1998, net proceeds of $44.3 million raised in our public offering in August 2003 and net borrowings of $105.4 million. Although we have not had difficulty in raising finance in the past, there is no guarantee that we will be able to raise sufficient capital, at an appropriate cost to the Company, to sustain future development of the business.
 
We rely on our interactive voice response systems to provide accurate information regarding the randomization of patients and the dosage required for patients enrolled in the trials.
 
We develop and maintain computer run interactive voice response systems to automatically manage the randomization of patients in trials, assign the study drug, and adjust the dosage when required for patients enrolled in trials we support. An error in the design, programming or validation of these systems could lead to inappropriate assignment or dosing of patients which could give rise to patient safety issues, invalidation of the trial, liability claims against the Company or all three.

 
8

 
 
We rely on various control measures to mitigate the risk of a serious adverse event resulting from healthy volunteer Phase I trials.
 
We conduct healthy volunteer Phase I trials including first-into-man trials for new clinical entities in the UK and the US. Due to the experimental nature of these studies, serious adverse events may arise. We mitigate such events by following Good Clinical Practice and ensuring appropriately trained and experienced clinical physicians are managing these trials and that internal Standard Operating Procedures and client protocols are rigorously adhered to. We also ensure that a signed contract is in place with the client in advance of clinical dosing with appropriate indemnifications and insurance coverage. We maintain our own no-faults clinical trial insurance. Following our internal review and submission, an Independent Ethics committee approves the study protocol and appropriate approval is obtained from the relevant regulatory body.
 
 
General
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.
 
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. At December 31, 2008, we had 6,975 employees, in 71 locations in 38 countries, providing Phase I - IV Clinical Trial Management, Drug Development Support Services, Data Management and Biostatistical, Central Laboratory and Imaging Services. We have the operational flexibility to provide development services on a stand-alone basis or as part of an integrated “full service” solution.
 
Headquartered in Dublin, Ireland, we began operations in 1990 and have expanded our business through internal growth and strategic acquisitions. For the year ended December 31, 2008, we derived approximately 43.8%, 47.8 % and 8.4 % of our net revenue in the United States, Europe and Rest of World, respectively.
 
During the year ended December 31, 2008, we commenced operations in Edinburgh, Scotland; Bogota, Colombia and New Dehli, India.
 
On February 11, 2008, the Company acquired 100% of the common stock of Healthcare Discoveries Inc., for an initial cash consideration of $10.9 million, excluding costs of acquisition. Healthcare Discoveries, located in San Antonio, Texas, is engaged in the provision of Phase I clinical trial management services. Certain performance milestones were built into the acquisition agreement requiring payment of additional consideration of up to $10.0 million if these milestones were achieved during the year ended December 31, 2008. No amounts have been accrued at December 31, 2008, as the milestones have not been achieved.
 
On November 14, 2008, the Company acquired 100% of the common stock of Prevalere Life Sciences Inc. (“Prevalere”), for an initial cash consideration of $36.8 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 are achieved during the years ended December 31, 2008 and 2009. Additional consideration of $5.0 million has been accrued at December 31, 2008, in respect of the milestones for the year ended December 31, 2008. No amounts have been accrued for additional consideration potentially payable in respect of the milestones for the year ended December 31, 2009.

 
9

 
 
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 are achieved during the year ended December 31, 2009. At December 31, 2008, no amounts have been accrued in respect of the potential additional consideration.
 
On July 9, 2007, ICON plc entered into a five year committed multi-currency facility agreement for €35 million ($48.9 million) with The Governor and Company of the Bank of Ireland. Our obligations under the facility are secured by certain composite guarantees, indemnities and pledges in favor of the bank. The facility bears interest at an annual rate equal to EURIBOR plus a margin. On July 10, 2007, the Company drew down €29.5 million ($41.2 million) of the facility to fund the acquisition of DOCS International. On October 15, 2007, the remaining €5.5 million ($7.7 million) of the facility was drawn down to fund expenditure on the expansion of the Company’s facility in Dublin, Republic of Ireland.
 
On January 2, 2009, an additional four year committed credit facility was negotiated with The Governor and Company of the 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.
 
On October 17, 2007, an uncommitted credit facility was negotiated with Allied Irish Banks plc, for €30 million ($41.9 million). Interest is calculated at the EUR interbank rate plus a margin. The facility is secured by the same composite guarantees and indemnities in place for the Bank of Ireland committed facility. The funds were used to refinance overdraft facilities in place to fund expenditure on the expansion of the Dublin facility. On January 8, 2008, the facility with Allied Irish Banks plc was increased to €50 million ($69.9 million).
 
On December 22, 2008, committed credit facilities were negotiated with Allied Irish Bank plc for $75 million. The facilities comprise a one year Euro facility of approximately €20 million ($28.0 million), with the balance comprising a three year US dollar facility. The Euro facility bears interest at EURIBOR plus a margin and the US dollar facility bears interest at LIBOR plus a margin. Both facilities are secured by certain composite guarantees and pledges in favour of the bank. These facilities replace the uncommitted facilities negotiated on January 8, 2008. $28.4 million of these facilities were used to fund the acquisition of Prevalere with the remaining balance used to refinance the previous drawn uncommitted facilities.
 
On February 4, 2008, an uncommitted credit facility was negotiated with Citibank N.A, for $30 million. Interest is calculated at the London Interbank Market rate plus a margin. $12.0 million of this facility was drawn down in February 2008 to fund the acquisition of Healthcare Discoveries. On September 30, 2008, the $12.0 million previously drawn was repaid in full. At December 31, 2008, this facility remained un-drawn and available to the Company.
 
The average margin payable on the above mentioned facilities is 1.70 per cent.
 
On July 21, 2008, the Company’s shareholders approved a bonus issue of ordinary shares (the “Bonus Issue”) to shareholders of record as of the close of business on August 8, 2008 (the “Record Date”). The Bonus Issue provided for each shareholder to receive one bonus ordinary share for each ordinary share held as of the Record Date, effecting the equivalent of a 2-for-1 stock split. The Bonus shares were issued on August 11, 2008, to Ordinary Shareholders and on August 12, 2008, to holders of American Depositary Shares (“ADSs”). The trading price of ICON’s ADSs was adjusted on NASDAQ to effect the Bonus Issue prior to the opening of trading on August 13, 2008. All outstanding ordinary share amounts referenced in the consolidated financial statements and the notes thereto have been retrospectively restated to give effect to the Bonus Issue as if it had occurred as of the date referenced.
 
On September 29, 2006, ICON’s shareholders approved a bonus issue of ordinary shares (the “Bonus Issue”) to shareholders of record as of the close of business on October 13, 2006 (the “Record Date”). The Bonus Issue provided for each shareholder to receive one bonus ordinary share for each ordinary share held as of the Record Date, effecting the equivalent of a 2-for-1 stock split. The Bonus shares were issued on October 16, 2006, to Ordinary Shareholders and on October 23, 2006, to holders of American Depositary Shares (“ADSs”). The trading price of ICON’s ADSs was adjusted on NASDAQ to effect the Bonus Issue prior to the opening of trading on October 24, 2006. All outstanding ordinary share amounts referenced in the consolidated financial statements and the notes thereto have been retrospectively restated to give effect to the Bonus Issue as if it had occurred as of the date referenced.

 
10

 
 
ICON plc’s principal executive office is located at: South County Business Park, Leopardstown, Dublin 18, Republic of Ireland. The contact telephone number of this office is 353 (1) 291 2000.
 
Industry Overview
 
The CRO industry provides independent product development services for the pharmaceutical, biotechnology and medical device industries. Companies in these industries outsource product development services to CROs in order to manage the drug development process more efficiently and to cost-effectively maximize the profit potential of both patent-protected and generic products. The CRO industry has evolved since the 1970s from a small number of companies that provided limited clinical services to a larger number of CROs that offer a range of services that encompass the entire research and development process, including pre-clinical development, clinical trials management, clinical data management, study design, biostatistical analysis, post marketing surveillance, central laboratory and regulatory affairs services. CROs are required to provide these services in accordance with good clinical and laboratory practices, as governed by the applicable regulatory authorities.
 
The CRO industry is highly fragmented, consisting of several hundred small, limited-service providers and a limited number of medium-sized and large CROs with global operations. Although there are few barriers to entry for small, limited-service providers, we believe there are significant barriers to becoming a CRO with global capabilities. Some of these barriers include the infrastructure and experience necessary to serve the global demands of clients, the ability to manage simultaneously complex clinical trials in numerous countries, broad therapeutic expertise and the development and maintenance of the complex information technology systems required to integrate these capabilities. In recent years, the CRO industry has experienced consolidation, resulting in the emergence of a select group of CROs that have the capital, technical resources, integrated global capabilities and expertise to conduct multiple phases of clinical trials on behalf of pharmaceutical, biotechnology and medical device companies. We believe that some large pharmaceutical companies, rather than utilizing many CRO service providers, are selecting a limited number of CROs who are invited to bid for projects. We believe that this trend will further concentrate the market share among CROs with a track record of quality, speed, flexibility, responsiveness, global capabilities and overall development experience and expertise.
 
New Drug Development Ethical Pharmaceuticals and Biologics - An Overview
 
Before a new drug or biologic may be marketed, it must undergo extensive testing and regulatory review in order to determine that it is safe and effective. The following discussion primarily relates to the FDA approval process for such products. Similar procedures must be followed for product development with global regulatory agencies. The stages of this development process are as follows:
 
Preclinical Research (approximately 1 to 3.5 years). “In vitro” (test tube) and animal studies must be conducted in accordance with applicable regulations to establish the relative toxicity of the drug over a wide range of doses and to detect any potential to cause birth defects or cancer. If results warrant continuing development of the drug or biologic, the manufacturer will file for an Investigational New Drug Application, or IND, which must become effective by the FDA before starting the proposed clinical studies.
 
Clinical Trials (approximately 3.5 to 6 years).
 
 

 
11

 
 
 
 
 
 
Post-Marketing Surveillance and Phase IV Studies.> Federal regulation requires the Sponsor to collect and periodically report to the FDA additional safety and efficacy data on the drug or biologic for as long as the Sponsor markets it (post-marketing surveillance). If the product is marketed outside the U.S., these reports must include data from all countries in which the drug is sold. Additional studies (Phase IV) may be undertaken after initial approval to find new uses for the drug, to test new dosage formulations, or to confirm selected non-clinical benefits, e.g., increased cost-effectiveness or improved quality of life. Additionally, FDA and other regulatory agencies are requiring Sponsors of marketed drugs or biologics to prepare Risk Management plans which are aimed at assessing areas of product risk and plans for managing such risk should they occur. The FDA Amendment Act of 2007 has imposed additional regulatory requirements on Sponsors which address product safety, to conduct post-marketing surveillance studies and to submit the clinical trial information, including clinical study results, of investigational and marketed products to a databank managed and maintained by the National Institutes of Health. The information is accessible to the public via the worldwide web. This action was taken as a result to increase “public transparency” of Sponsor’s clinical studies and respective clinical results.
 
Key Trends Affecting the CRO Industry
 
CROs derive substantially all of their revenue from the research and development expenditures of pharmaceutical, biotechnology and medical device companies. Based on industry surveys and investment analyst research, we estimate that clinical development expenditures outsourced by pharmaceutical and biotechnology companies worldwide in 2007 was approximately $18 billion. We believe that the following trends create further growth opportunities for global CROs, although there is no assurance that growth will materialize.
 
Innovation driving new Drug Development activity.
 
Technologies such as combinational chemistry and high throughput screening, together with improved understanding of disease pathology (driven by scientific advances such as the mapping of the human genome) have greatly increased the number of new drug candidates being investigated in early development and greatly broadened the number of biological mechanisms being targeted by such candidates. Arising from this innovation, funding for research and development, particularly by biotechnology companies, grew strongly in recent years. This lead to significant increased activity in both Preclinical and Phase I development which we believe will lead to more treatments in Phase II-III clinical trials. As the number of trials that need to be performed increases, we believe that drug developers will increasingly rely on CROs to manage these trials in order to continue to focus on drug discovery. However, this growth in Preclinical and Phase I development activity in the near term may be impacted by the current global economic downturn and the reduction in the availability of funding for research and development activities, in particular for smaller biotech companies.

 
12

 
 
Declining productivity within Research and Development programs.
 
Whilst the total number of compounds that have entered clinical development has risen over the last few years, the number of novel drugs that have successfully been approved for marketing has remained relatively stable. Pharmaceutical and biotechnology companies have responded in a number of ways including looking to extend the product life cycle of existing drugs and initiating programs to drive efficiency in the development process. One example of this has been the efforts to achieve a more seamless transition across development phases, particularly Phase I-III. In parallel regulatory initiatives such as the FDA’s “Critical Path” and the emergence of techniques such as adaptive trial design are focused on ensuring unsafe or ineffective drugs are eliminated from the development process earlier, allowing effective treatments to get to patients quicker at potentially reduced development costs.
 
Pressure to Accelerate Time to Markets; Globalization of the Marketplace.
 
Reducing product development time maximizes the client’s potential period of patent exclusivity, which in turn maximizes potential economic returns. We believe that clients are increasingly using CROs that have the appropriate expertise to improve the speed of product development to assist them in improving economic returns. In addition, applying for regulatory approval in multiple markets and for multiple indications simultaneously, rather than sequentially, reduces product development time and thereby maximizes economic returns. We believe that CROs with global operations and experience in a broad range of therapeutic areas are a key resource to support a global regulatory approval strategy. Alongside this, the increasing need to access pools of “treatment naive” patients is leading to the conduct of clinical trials in new “emerging regions” such as Eastern Europe, Latin America, South America and India. We believe that having access to both traditional and emerging clinical research markets gives global CROs a competitive advantage.
 
Emergence of the Biotechnology Sector
 
The nature of the drugs being developed is changing. Biotechnology is enabling the development of targeted drugs with diagnostic tests to determine a priori whether a drug will be effective given a patient’s genomic profile. An increasing proportion of research and development (“R&D”) expenditure is being spent on the development of highly technical drugs to treat very specific therapeutic areas. Much of this discovery expertise is found in smaller biotechnology firms. We believe that it is to these organizations that the large pharmaceutical companies will look for an increasing proportion of their new drug pipelines. Whether it is through licensing agreements, joint ventures or equity investment, we believe we will see the emergence of more strategic relationships between small discovery firms and the larger pharmaceutical groups. As the majority of these biotechnology companies do not have a clinical development infrastructure, we believe that the services offered by CROs will continue to be in demand from such companies.
 
Funding of Research and Development Activities of the Biotechnology Sector
 
The emergence of the Biotechnology sector and the increasing number of highly technical drugs being developed by these companies has resulted in increased funding for research and development in recent years. Much of this funding was aimed at small biotechniology companies who do not derive revenues from the sale of other product lines and are dependent on external funding and investment to support their research activities. The current global downturn has reduced the availability of funding to support research and development activities which may reduce the number of treatments in Phase II-III clinical trials in future years. As many of these companies are dependent on the CRO industry to manage their trials the reduction in funding may impact demand for such activities.

 
13

 
 
Cost Containment Pressures.
 
Over the past several years, drug companies have sought more efficient ways of conducting business due to margin pressures stemming from patent expirations, greater acceptance of generic drugs, pricing pressures caused by the impact of managed care, purchasing alliances and regulatory consideration of the economic benefit of new drugs. Consequently, drug companies are centralizing research and development, streamlining their internal structures and outsourcing certain functions to CROs, thereby converting previously fixed costs to variable costs. The CRO industry, by specializing in clinical trials management, is often able to perform the needed services with greater focus and at a lower cost than the client could perform internally.
 
Increasing Number of Large Long-Term Studies
 
We believe that to establish competitive claims, to obtain reimbursement authorization from bodies such as the National Institute for Health and Clinical Excellence in the UK, and to encourage drug prescription by physicians in some large and competitive categories, more clients need to conduct outcome studies to demonstrate, for example, that mortality rates are reduced by certain drugs. To verify such outcomes, very large patient numbers are required and they must be monitored over long time periods. We believe that as these types of studies increase there will be a commensurate increase in demand for the services of CROs who have the ability to quickly assemble large patient populations, globally if necessary, and manage this complex process throughout its duration.
 
A focus on long–term product safety
 
In the wake of a number of high profile recalls of previously approved drugs, regulatory authorities, such as the FDA and EMEA, are increasingly demanding that sponsors make arrangements to track the long-term safety of their products. The clinical trial approval process can only detect major and common adverse side effects of drugs; less common but no less serious effects may only become apparent after many years of use. As a result, there is an increase in the number of drugs given “conditional approvals” where further ‘post-approval’ studies are being mandated. In addition, prudent sponsors undertake similar studies to detect early warning signs of any potential problems with their products. Such studies may take the form of prospective long-term safety studies, simpler observational studies or registries where patients meeting specific criteria for disease or drug use are followed for long periods to detect any safety issues. CROs are well positioned to perform these studies on behalf of sponsors. Furthermore, a variety of healthcare databases containing medical and prescribing records can be “data mined” to collect patient data from very large populations in support of on-going safety and efficacy assessments. Again, this sort of data management and biostatistical activity is well performed by CROs.
 
Increasing Regulatory Demands.
 
We believe that regulatory agencies are becoming more demanding with regard to the data required to support new drug approvals and are seeking more evidence that new drugs are safer and more effective than existing products. As a result, the complexity of clinical trials and the size of regulatory submissions are driving the demand for services provided by CROs.
 
The ICON Strategy
 
ICON’s mission is to provide flexible, superior quality, global pharmaceutical development services, that enable clients to expedite development, reduce costs and establish the benefits of treatments that enhance people’s lives.
 
We provide these development services to clients on a stand-alone basis or as part of an integrated “full service” solution. Our primary approach is to use dedicated teams to achieve optimum results. While we believe that this operating model differentiates us from our competition in the CRO industry and enables us to deliver high quality services to our clients, we do retain the operational flexibility to implement a range of resourcing models to suit client requirements.
 
Our strategy is to continue to grow by penetrating further our existing client base and adding new clients within the Phase I-IV outsourced development services market; the aim being to ensure we will be considered by every company for every major Phase I – IV project.

 
14

 
 
We intend to implement our strategy by continuing to deliver high quality services, by increasing our geographic presence, expanding the scale and range of our services and, where appropriate, cross selling these services into clients. As needed, we intend to supplement our internal growth with strategic acquisitions.
     
 
Continue to Deliver High Quality Services and Customer Satisfaction. ICON’s core competency is project management, built up over the last eighteen years managing complex projects and underpinned by comprehensive and consistent processes which conform to the ISO9001:2000 quality standard.
     
   
We have extensive therapeutic and scientific knowledge residing in the organization and the capability to consistently solve the challenges that arise during clinical trials, each of which is the equivalent of a unique scientific study.
     
   
We believe our quality processes, extensive experience, customer focus and flexibility allow us to provide consistent high quality, timely and cost effective services. We believe that the resulting customer satisfaction and enhanced reputation in the industry will continue to enable us to penetrate our existing client base and add new clients.
     
 
Expand Geographic Presence. In a highly fragmented industry, we are one of a small group of organizations with the capability and expertise to conduct clinical trials on a global basis. We believe that this capability to provide our services globally in most major and developing pharmaceutical markets enhances our ability to compete for new business from large multinational pharmaceutical, biotechnology and medical device companies. We have expanded geographically through the establishment of 71 offices in 38 countries and intend to continue expanding in regions that have the potential to increase our client base or increase our investigator and patient populations. We have most recently been expanding our presence in Eastern Europe and Latin America as well as parts of Asia including India and Japan.
     
 
Increase Scale and Range of Services. We seek to enhance our competitive position by increasing the scale and range of our services. We intend to expand our clinical trials, central laboratory, digital imaging, IVRS (interactive voice recognition system), data management, statistical and consulting operations in order to capitalize further on the outsourcing opportunities currently available from our clients. The recent high profile withdrawal of several drugs from the market is also placing the spotlight on drug safety which will lead to greater emphasis, by all involved in drug development, on post-marketing safety monitoring. ICON’s acquisition of Healthcare Discoveries and Prevalere have increased our capability in the early phase of clinical development and will enable ICON to offer integrated Phase I/Bioanalytical services to clients.
     
 
Cross Sell Services. By building up a full range of development services, ICON can support clients through all stages of their product lifecycle. There are signs that certain client segments are looking to rationalize their supply base down to a small number of CROs who can provide this breadth of service. A core part of our business development strategy is to “cross sell” ICON’s service portfolio. By developing and maintaining close relationships with clients, we gain repeat business and achieve lateral penetration of services with the client organization.
     
 
Strategic acquisitions. Alongside organic growth, we will continue to seek strategic acquisitions that fall within and are complimentary to our existing service lines.

 
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Services
 
ICON is a global provider of outsourced development services 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.
 
Our core Clinical Research business specializes in the planning, management, execution and analysis of Phase I – IV clinical trials, ranging from small studies to complex, multinational projects. Specific clinical research services offered include:
     
 
Investigator Recruitment
 
Study Monitoring and Data Collection
 
Case Report Form (“CRF”) Preparation
 
Patient Safety Monitoring
 
Clinical Data Management
 
IVR (Interactive Voice Response)
 
Medical Reporting
 
Patient Registries
 
Outcomes Research
 
Health Economics
 
Strategic Analysis and Data Operations
 
Clinical Pharmacology
 
Bioanalysis
 
Immunoassay development
 
Pharmacokinetic and Pharmacodynamic analysis
 
Study Protocol Preparation
 
Regulatory Consulting
 
Product Development Planning
 
Strategic Consulting
 
Medical Imaging
 
Contract Staffing
 
An important element in monitoring patient safety during a clinical trial is the conduct of various laboratory tests on the patient’s blood, urine and other bodily fluids at appropriate intervals during the trial. The analysis of these samples must be standardized and the results must be promptly transmitted to the investigator. ICON Central Laboratories provides global central laboratory services dedicated exclusively to clinical trials. Specific services offered by ICON Central Laboratories include:
     
 
Sample analyses
 
Safety testing
 
Microbiology
 
Custom flow cytometry
 
Electronic transmission of test results

 
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Organizational Structure
           
 
Name
 
Country of incorporation
 
Group ownership*
           
 
ICON Clinical Research Limited
 
Republic of Ireland
 
100%
           
 
ICON Clinical Research Inc.
 
USA
 
100%
           
 
Ovation Healthcare Research 2, Inc.
 
USA
 
100%
           
 
ICON Clinical Research (UK) Limited
 
United Kingdom
 
100%
           
 
ICON Clinical Research GmbH
 
Germany
 
100%
           
 
ICON Clinical Research SARL
 
France
 
100%
           
 
ICON Clinical Research Israel Limited
 
Israel
 
100%
           
 
ICON Clinical Research Espana S.L.
 
Spain
 
100%
           
 
ICON Clinical Research Kft
 
Hungary
 
100%
           
 
ICON Clinical Research S.R.L.
 
Romania
 
100%
           
 
ICON Clinical Research LLC
 
Ukraine
 
100%
           
 
ICON Holdings
 
Republic of Ireland
 
100%
           
 
ICON Holdings Clinical Research International Limited
 
Republic of Ireland
 
100%
           
 
ICON Clinical Research S.R.O.
 
Czech Republic
 
100%
           
 
ICON Clinical Research (Canada) Inc.
 
Canada
 
100%
           
 
ICON Clinical Research Pty Limited
 
Australia
 
100%
           
 
ICON Clinical Research (New Zealand) Limited
 
New Zealand
 
100%
           
 
ICON Japan K.K.
 
Japan
 
100%
           
 
ICON Clinical Research Pte. Limited
 
Singapore
 
100%
           
 
ICON Clinical Research Korea Yuhan Hoesa
 
Korea
 
100%
           
 
ICON Clinical Research India Private Limited
 
India
 
100%
           
 
ICON Clinical Research S.A.
 
Argentina
 
100%
           
 
ICON Pesquisas Clinicas LTDA
 
Brazil
 
100%
           
 
ICON Clinical Research México, S.A. de C.V.
 
Mexico
 
100%
           
 
ICON Chile Limitada
 
Chile
 
100%
           
 
ICON Clinical Research Peru SA
 
Peru
 
100%
           
 
ICON Clinical Research Sucursal Colombia
 
Colombia
 
100%
 
 
ICON Development Solutions Limited
 
UK
 
100%
           
 
ICON Contracting Solutions, Inc.
 
USA
 
100%
           
 
DOCS International BV
 
Netherlands
 
100%
           
 
ICON Development Solutions Inc.
 
USA
 
100%
           
 
ICON Central Laboratories Inc.
 
USA
 
100%
           
 
Beacon Bioscience, Inc.
 
USA
 
100%
           
 
Healthcare Discoveries Inc
 
USA
 
100%
           
 
Prevalere Life Sciences Inc
 
USA
 
100%
 
* All shareholdings comprise ordinary shares.
 
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Information Systems
 
Our information technology strategy is built around deploying IT systems to enable the delivery of our business services in a global environment. The focus is to provide ease of access to information for our staff and clients globally. Our current information systems are built on open standards and leading commercial business applications from vendors including Microsoft, Oracle, EMC, BEA, Phase Forward and Medidata. IT expenditure is authorized by strict IT Governance policies requiring senior level approval of all strategic IT expenditure. All critical business systems are formally delivered following a structured project management and systems delivery life cycle approach. Critical clinical information systems, which manage clinical data, are validated in accordance with FDA regulations and those of other equivalent regulatory bodies throughout the world.
 
In Clinical Operations, we have deployed a suite of software applications that assist in the management and tracking of our clinical trials activities. These software applications are both internally developed and commercially available applications from leading vendors in the industry. These include a clinical trials management application that tracks all relevant data in a trial and automates all management and reporting processes. In our Data Management function, we have deployed leading clinical data management solutions including Electronic Data Capture (EDC) solutions from leading industry vendors. Our state of the art workflow technology allows us to process clinical trials data seamlessly throughout the Company. We have also developed an interactive voice response system to increase the efficiency of clinical trials. This system provides features such as centralized patient randomization, drug inventory management, patient diary collection and provides our clients with a fully flexible data retrieval solution which can be utilized via telephone, internet browser or a WAP enabled device.
 
Recognizing that each client has its own requirements and systems, we seek to ensure an entirely flexible approach to client needs. An example of this flexibility is in the provision of portal solutions that allows clients access to study related information via a secure web based environment. We also provide secure remote access to client systems for clients who require us to utilize their internal platforms.
 
ICON’s strategy of using technology to enhance our global processes can be seen in our deployment of a global SOP Document Management system and a WEB based training delivery solution.
 
In our central laboratory, we utilize a comprehensive suite of software, including a laboratory information management system (LIMS), a kit/sample management system and a web interface system to allow clients to review results online.
 
Our IT systems are operated from two centralized hubs in Philadelphia and Dublin. Other offices are linked to these hubs through a resilient network that is managed by a tier one global telecommunications provider. Traveling staff can also access all systems via secure remote dial up facilities. A global corporate intranet portal provides access to all authorized data and applications for our internal staff as well as providing an internal platform for company wide communication.

 
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Sales and Marketing
 
Our global sales and marketing strategy is to focus our business development efforts on pharmaceutical, biotechnology and medical device companies whose development projects are advancing. By developing and maintaining close relationships with our clients, we gain repeat business, can leverage a full service portfolio and achieve lateral penetration into other therapeutic divisions where applicable. Simultaneously, we are actively establishing new client relationships.
 
While our sales and marketing activities are carried out locally by executives in each of the major locations, the sales and marketing process is coordinated centrally to ensure a consistent and differentiated market positioning for ICON and ongoing development of the ICON brand. In addition, all our business development professionals, senior executives and project team leaders share responsibility for the maintenance of key client relationships and business development activities.
 
Clients
 
In the year ended December 31, 2008, revenue was earned from over 400 clients, including all of the top 20 pharmaceutical companies as ranked by 2007 revenues.
 
We have in the past and may in the future derive a significant portion of our net revenue from a relatively limited number of major projects or clients. During the year ended December 31, 2008, 29% of our net revenue was derived from our top five clients and no one client contributed more than 10% of net revenues. During the year ended December 31, 2007, 30% of our net revenue was derived from our top five clients and no one client contributed more than 10% of net revenues. During the year ended December 31, 2006, 35% of our net revenue was derived from our top five clients and no one client contributed more than 10% of net revenues. We believe that the importance of certain clients reflects our success in penetrating our client base. The loss of, or a significant decrease in business from one or more of these key clients could result in a material adverse effect.
 
Contractual Arrangements
 
We are generally awarded contracts based upon our response to requests for proposals received from pharmaceutical, biotechnology and medical device industries.
 
Most of our revenues are earned from contracts which are fixed price, based on certain activities and performance specifications. Payment terms usually provide either for payments based on the achievement of certain identified milestones or activity levels or monthly payments according to a fixed payment schedule over the life of the contract. Where clients request changes in the scope of a trial or in the services to be provided by us, a change order or amendment is issued often resulting in additional revenues for us. We also contract on a “fee-for-service,” or “time and materials” basis, but this accounts for a small portion of overall project activities.
 
Contract terms may range from several weeks to several years depending on the nature of the work to be performed. In most cases, a portion of the contract fee, typically 10% to 20%, is paid at the time the study or trial is started. The balance of the contract fee payable is generally payable in installments over the study or trial duration and may be based on the achievement of certain performance targets or “milestones” or, to a lesser extent, on a fixed monthly payment schedule. For instance, installment payments may be based on patient enrollment or delivery of the database. Reimbursable expenses are typically estimated and budgeted within the contract and invoiced on a monthly basis. Reimbursable expenses include payments to investigators, travel and accommodation costs and various other direct costs incurred in the course of the clinical trial which are fully reimbursable by the client.
 
Most of our contracts are terminable immediately by the client with justifiable cause or with 30 to 90 days notice without cause. In the event of termination, we are entitled to all sums owed for work performed through the notice of termination and certain costs associated with termination of the study. Termination or delay in the performance of a contract occurs for various reasons, including, but not limited to, unexpected or undesired results, production problems resulting in shortages of the drug, adverse patient reactions to the drug, the client’s decision to de-emphasize a particular trial or inadequate patient enrollment or investigator recruitment.

 
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Backlog
 
Our backlog consists of potential net revenue yet to be earned from projects awarded by clients.
 
At December 31, 2008, we had a backlog of approximately $1.7 billion, compared with approximately $1.3 billion at December 31, 2007. 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.
 
Competition
 
The CRO industry is highly fragmented, consisting of several hundred small, limited-service providers and a limited number of medium-sized and large CROs with global operations. We primarily compete against in-house departments of pharmaceutical companies and other CROs with global operations. Some of these competitors have substantially greater capital, technical and other resources than us. CROs generally compete on the basis of previous experience, the quality of contract research, the ability to organize and manage large-scale trials on a global basis, the ability to manage large and complex medical databases, the ability to provide statistical and regulatory services, the ability to recruit suitable investigators, the ability to integrate information technology with systems to improve the efficiency of contract research, an international presence with strategically located facilities, financial viability, medical and scientific expertise in specific therapeutic areas and price. We believe that we compete favorably in these areas. Our principal CRO competitors are Covance Inc., i3 Research (United Health Group Incorporated), Kendle International Inc., MDS Inc., Omnicare Inc., PAREXEL International Corporation, Pharmaceutical Product Development Inc., PharmaNet Development Group Inc., PRA International Inc. and Quintiles Transnational Corporation. The trend toward CRO industry consolidation has resulted in heightened competition among the larger CROs for clients and acquisition candidates.
 
Government Regulation
 
Regulation of Clinical Trials
 
The clinical investigation of new drugs is highly regulated by government agencies. The standard for the conduct of clinical research and development studies is Good Clinical Practice, which stipulates procedures designed to ensure the quality and integrity of data obtained from clinical testing and to protect the rights and safety of clinical subjects.
 
Regulatory authorities, including the FDA, have promulgated regulations and guidelines that pertain to applications to initiate trials of products, the approval and conduct of studies, report and record retention, informed consent, applications for the approval of drugs and post-marketing requirements. Pursuant to these regulations and guidelines, service providers that assume the obligations of a drug sponsor are required to comply with applicable regulations and are subject to regulatory action for failure to comply with such regulations and guidelines. In the United States and Europe, the trend has been in the direction of increased regulation by the applicable regulatory authority.
 
In providing our services in the United States, we are obligated to comply with FDA requirements governing such activities. These include ensuring that the study is approved by an appropriate independent review board (IRB)/Ethics Committee, obtaining patient informed consents, verifying qualifications of investigators, reporting patients’ adverse reactions to drugs and maintaining thorough and accurate records. We must maintain critical documents for each study for specified periods, and such documents may be reviewed by the study sponsor and the FDA during audits.
 
The services we provide outside the United States are ultimately subject to similar regulation by the relevant regulatory authority, including the Medicines Control Agency in the United Kingdom and the Bundesinstitut für Arzneimittel und Medizinprodukte in Germany. In addition, our activities in Europe are affected by the European Medicines Evaluation Agency, which is based in London, England.

 
20

 
 
We must retain records for each study for specified periods for inspection by the client and by the applicable regulatory authority during audits. If such audits document that we have failed to comply adequately with applicable regulations and guidelines, it could result in a material adverse effect. In addition, our failure to comply with applicable regulation and guidelines, depending on the extent of the failure, could result in fines, debarment, termination or suspension of ongoing research or the disqualification of data, any of which could also result in a material adverse effect.
 
Potential Liability and Insurance
 
We contract with physicians who serve as investigators in conducting clinical trials to test new drugs on their patients. Such testing creates a risk of liability for personal injury to or death of the patients resulting from adverse reactions to the drugs administered. In addition, although we do not believe that we are legally accountable for the medical care rendered by third party investigators, it is possible that we could be subject to claims and expenses arising from any professional malpractice of the investigators with whom we contract. We also could be held liable for errors or omissions in connection with the services we perform.
 
From time to time, we are asked to act as the legal representative of a client in certain jurisdictions where the client does not itself have a legal entity but where legislation requires it to do so. As we believe that acting as legal representative of clients might expose us to a higher risk of liability, there is an entity within the ICON Group designated to provide this service in relevant jurisdictions subject to certain preconditions being met. The preconditions relate to obtaining protections such as specific insurance and indemnities from the client to cover the nature of the exposure.
 
We believe that the risk of liability to patients in clinical trials is mitigated by various regulatory requirements, including the role of institutional review boards and the need to obtain each patient’s informed consent. The FDA requires each human clinical trial to be reviewed and approved by the institutional review board at each study site. An institutional review board is an independent committee that includes both medical and non-medical personnel and is obligated to protect the interests of patients enrolled in the trial. After the trial begins, the institutional review board monitors the protocol and measures designed to protect patients, such as the requirement to obtain informed consent.
 
We further attempt to reduce our risks through contractual indemnification provisions with clients and through insurance maintained by clients, investigators and us. However, the contractual indemnifications generally do not protect us against certain of our own actions such as negligence, the terms and scope of such indemnification vary from client to client and from trial to trial, and the financial performance of these indemnities is not secured. Therefore, we bear the risk that the indemnity may not be sufficient or that the indemnifying party may not have the financial ability to fulfill its indemnification obligations. We maintain worldwide professional liability insurance. We believe that our insurance coverage is adequate. There can be no assurance, however, that we will be able to maintain such insurance coverage on terms acceptable to us, if at all. We could be materially adversely affected if we were required to pay damages or bear the costs of defending any claim outside the scope of or in excess of a contractual indemnification provision or beyond the level of insurance coverage or in the event that an indemnifying party does not fulfill its indemnification obligations.
 
Description of Property
 
We lease all but one of our facilities under operating leases.
 
Our principal executive offices are located in South County Business Park, Leopardstown, Dublin, Republic of Ireland, where we own an office facility on approximately four and a half acres. In July 2008 we completed an expansion of this facility, extending the facility by approximately 12,900 square meters to approximately 15,800 square meters.
 
We maintain three offices in New York, two offices in each of the following US cities: Philadelphia, Chicago, San Antonio and San Francisco, and one office in each of the following US cities: Irvine, Nashville, Wilmington, Raleigh, Baltimore, Tampa, San Diego, Salt Lake City and Houston.
 
Our European operations maintain two offices in Manchester, Paris, Amsterdam, Stockholm and Warsaw, and one office in each of the following cities: Southampton, Cambridge, Marlow, Frankfurt, Munich, Berlin, Helsinki, Copenhagen, Milan, Barcelona, Riga, Budapest, Vilinius, Prague, Kiev, Bucharest, Moscow, Novosibirsk and Tel Aviv.

 
21

 
 
Our Rest of World offices are located in Auckland, Sydney, Tokyo, Osaka, Seoul, Beijing, Taipei, Hong Kong, Bangkok, Singapore, Chennai, Bangalore, New Dehli, Johannesburg, Montreal, Mexico City, Sao Paolo, Lima, Buenos Aires, Bogota and Santiago.
 
Unresolved Staff Comments
 
Not applicable.
 
 
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements, accompanying notes and other financial information, appearing in Item 18. The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States.
 
Overview
 
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 6,975 employees, in 71 locations in 38 countries, providing Phase I - IV Clinical Trial Management, Drug Development Support Services, Data Management and Biostatistics and Central Laboratory and Imaging Services. For the year ended December 31, 2008, we derived approximately 43.8%, 47.8% and 8.4% of our net revenue in the United States, Europe and Rest of World, respectively.
 
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.
 
Direct costs consist primarily of compensation, associated fringe benefits and share based compensation expense for project-related employees and other direct project driven costs. Selling, general and administrative expenses consist of compensation, related fringe benefits and share based compensation expense for selling and administrative employees, professional services, advertising costs and all costs related to facilities and information systems.
 
Our backlog consists of potential net revenue yet to be earned from projects awarded by clients. At December 31, 2008, we had a backlog of approximately $1.7 billion, compared with approximately $1.3 billion at December 31, 2007. 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.

 
22

 
 
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 20 operations operating in U.S. dollars, 11 trading in Euros, 5 in pounds Sterling, 3 in Indian Rupee, 2 each in Russian Rouble, Japanese Yen, Swedish Krona and Polish Zloty, and 1 each in Australian dollars, Singapore dollars, Israeli New Shekels, Latvian Lats, Argentine Peso, South African Rand, Canadian dollar, Hungarian Forint, Danish Krone, Czech Koruna, Ukraine Hryvnia, Romanian New Leu, Hong Kong dollar, Taiwan dollar, Mexican Peso, Brazilian Real, Chilean Peso, South Korean Won, Thai Baht, Chinese Yuan Renminbi, Lithuanian Litas, Colombian Peso, Peruvian Neuvo Sol & New Zealand dollars. 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 ICON’s 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. ICON’s 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.
 
Operating Results
 
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.
                         
   
Jan 1, 2007
to Dec 31, 2007
   
Jan 1, 2008 to
Dec 31, 2008
   
Jan 1, 2007 to
Dec 31, 2007
   
Jan 1, 2008 to
Dec 31, 2008
 
                         
   
Percentage of Net Revenue
   
Percentage Increase
 
                         
Net revenue
    100 %     100 %     38.4 %     37.2 %
                                 
Costs and expenses: Direct costs
    56.2 %     56.5 %     38.3 %     38.0 %
                                 
Selling, general and administrative
    29.8 %     28.8 %     37.6 %     32.3 %
                                 
Depreciation and amortization
    3.0 %     3.2 %     27.2 %     45.9 %
                                 
Income from operations
    11.0 %     11.5 %     44.8 %     43.7 %

 
23

 
 
Year ended December 31, 2008 compared to year ended December 31, 2007
 
Net revenue for the year increased by $234.5 million, or 37.2%, from $630.7 million for the year ended December 31, 2007 to $865.2 million for the year ended December 31, 2008. Revenues in the United States, Europe and the Rest of World increased by 20.0%, 48.3%, and 102.2% respectively. In the year ended December 31, 2008, net revenue from our central laboratory business increased by 32.9%, from $53.5 million, to $71.1 million, while our clinical research segment improved by 37.6%, from $577.2 million to $794.1 million. This increase has resulted from a combination of increased business from existing clients, business won from new clients and increased use of outsourcing by the pharmaceutical, biotechnology and medical device industries.
 
Direct costs for the year increased by $134.8 million, or 38.0%, from $354.5 million for the year ended December 31, 2007 to $489.2 million for the year ended December 31, 2008. Direct costs as a percentage of net revenue increased to 56.5% in the year ended December 31, 2008, compared to 56.2% in the year ended December 31, 2007. The primary reason for this increase was an increase in personnel related costs of $120.7 million resulting from an increase in the number of project related employees of over 990. The remainder of the increase resulted primarily from increased laboratory and consulting expenses.
 
Selling, general and administrative expenses for the year increased by $60.8 million, or 32.3%, from $188.0 million for the year ended December 31, 2007, to $248.8 million for the year ended December 31, 2008. As a percentage of net revenue, selling, general and administrative expenses, decreased from 29.8% for the year ended December 31, 2007, to 28.8% for the year ended December 31, 2008. The increase in absolute terms is primarily driven by increased personnel costs of $34.5 million, principally driven by increased levels of both administrative and operations infrastructure staff to support expanding operations and revenue growth. In addition to these personnel costs there were additional rental charges of $7.5 million, from further office openings in 2008, increased professional, legal and accounting costs of $5.4 million, increased utility costs of $5.5 million and an increase of $4.3 million in relation to support and maintenance costs. These increases were partially offset by a gain in relation to realized and unrealized foreign exchange of $2.3 million which compared with a loss of $6.3 million for the year ended December 31, 2007. These gains arise on the revaluation of monetary assets and liabilities throughout the year.
 
Total share based compensation expense recognized during the year ended December 31, 2008, amounted to $6.1 milllion compared to $5.7 million during the year ended December 31, 2007.
 
Depreciation and amortization expense for the year increased by $8.7 million, or 45.9%, from $19.0 million for the year ended December 31, 2007, to $27.7 million for the year ended December 31, 2008. As a percentage of net revenue, depreciation and amortization increased from 3.0% of net revenues for the year ended December 31, 2007, to 3.2% for the year ended December 31, 2008. This increase relates primarily to our investment in facilities and equipment to enable our continued growth. Capital expenditures were $71.4 million in 2008. $24.6 million of this spend is attributable to expenditure on the expansion of our facility in Dublin, Republic of Ireland, while the balance relates to the Company’s continued investment in facilities and information technology to support our continued growth globally. We expect depreciation in 2009 to increase as a result of this investment.
 
Income from operations for the year increased by $30.3 million, or 43.7%, from $69.2 million for the year ended December 31, 2007 to $99.5 million for the year ended December 31, 2008. As a percentage of net revenue, income from operations increased from 11.0% of net revenues for the year ended December 31, 2007, to 11.5% for the year ended December 31, 2008. Operating margins for our central laboratory business were 7.8% for the year ended December 31, 2008, compared to 6.9% for the year ended December 31, 2007. The central laboratory constitutes approximately 8.2% of our business revenues for the year ended December 31, 2008. Operating margins for our clinical research segment increased to 11.8% for the year ended December 31, 2008, from 11.4% for the year ended December 31, 2007.
 
Net interest expense for the year ended December 31, 2008, was $1.2 million, compared with net interest income of $2.7 million for the year ended December 31, 2007. The Company has entered into a number of significant banking facilities since July 2007. These facilities have been used to fund the acquisitions of DOCS International in July 2007, Healthcare Discoveries in February 2008 and Prevalere in November 2008, and also to fund the expansion of the Company’s Dublin facility.

 
24

 
 
Our provision for income taxes increased from $15.8 million for the year ended December 31, 2007, to $20.0 million for the year ended December 31, 2008. ICON plc’s effective tax rate for the year ended December 31, 2008, was 20.3% compared with 22.0% for the year ended December 31, 2007. The effective tax rate is principally a function of the distribution of pre-tax profits in the territories in which the Group operates.
 
Year ended December 31, 2007 compared to year ended December 31, 2006
 
Net revenue increased by $175.1 million, or 38.4%, from $455.6 million to $630.7 million. Revenues in the United States, Europe and the Rest of World increased by 18.7%, 71.2% and 35.0% respectively. In the year ended December 31, 2007, net revenue from our central laboratory business increased by 13.3%, from $47.2 million, to $53.5 million, while our clinical research segment improved by 41.3%, from $408.4 million to $577.2 million, over the prior period. This increase in net revenue has resulted from a combination of increased business from existing clients, business won from new clients, increased use of outsourcing by the pharmaceutical, biotechnology and medical device industries and an underlying increase in research and development spending.
 
Direct costs increased by $98.2 million, or 38.3%, from $256.3 million to $354.5 million. Direct costs as a percentage of net revenue remained static at 56.2% in the year ended December 31, 2007, compared to the year ended December 31, 2006. The primary reason for the increase in direct costs was the increase in personnel related costs of $86.3 million resulting from the increase in direct headcount of over 1,100 employees. The remainder of the increase resulted primarily from increased laboratory and consulting expenses.
 
Selling, general and administrative expenses increased by $51.4 million, or 37.6%, from $136.6 million to $188.0 million. As a percentage of net revenue, selling, general and administrative expenses, decreased from 30.0% for the year ended December 31, 2006, to 29.8% for the year ended December 31, 2007. The increase in SG&A costs is primarily driven by increased personnel costs of $22.0 million principally driven by the increased levels of both administrative and operations infrastructure staff to support expanding operations and revenue growth. In addition to these personnel costs there were additional rental charges of $4.9 million from further office openings in 2007, increased professional, legal and accounting costs of $4.5 million, increased information technology costs of $3.8 million, an increase of $4.7 million in relation to realized and unrealized foreign exchange loss and increased temporary staff and recruitment costs of $6.6 million.
 
The total share based compensation expense recognized during the year ended December 31, 2007 amounted to $5.7m compared to $4.1 million during the year ended December 31, 2006.
 
Depreciation and amortization expense increased by $4.1 million, or 27.2%, from $14.9 million to $19.0 million. As a percentage of net revenue, depreciation and amortization decreased from 3.3% of net revenues for the year ended December 31, 2006, to 3.0% for the year ended December 31, 2007. This increase in absolute terms relates primarily to our investment in facilities and equipment to enable our continued growth. Capital expenditures were $75.7 million in 2007. $37.9 million of this spend is attributable to the construction of the Company’s new headquarter building in Dublin, Republic of Ireland, while the balance relates to the Company’s continued investment in facilities and information technology to support its continued growth globally. We expect depreciation in 2008 to increase as a result of this investment.
 
Income from operations increased by $21.4 million, or 44.8%, from $47.8 million to $69.2 million. As a percentage of net revenue, income from operations increased from 10.5% of net revenues for the year ended December 31, 2006, to 11% for the year ended December 31, 2007. The year ended December 31, 2007, saw a continued improvement in the performance of the central laboratory business, with results improving from an operating profit of 4.9% for the year ended December 31, 2006, to an operating profit of 6.9% for the year ended December 31, 2007. The central laboratory constitutes approximately 8.5% of our business revenues for the year ended December 31, 2007. Operating margins for our clinical research segment increased to 11.4% in the year ended December 31, 2007, from 11.1% for the year ended December 31, 2006.
 
Net interest income for the year ended December 31, 2007, was $2.7 million, a decrease of $0.9 million from the year ended December 31, 2006. The Company entered into two significant banking facilities during 2007 to fund the acquisition of DOCS International in July 2007 $40.6 million (€29.5 million) and expenditure on the expansion of the Company’s facility.

 
25

 
 
Our provision for income taxes increased from $12.9 million for the year ended December 31, 2006, to $15.8 million for the year ended December 31, 2007. ICON plc’s effective tax rate for the year ended December 31, 2007, was 22% compared with 25% for the year ended December 31, 2006. 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. Since our inception, we have financed our operations and growth primarily with cash flows from operations, net proceeds of $49.1 million raised in our initial public offering in May 1998, net proceeds of $44.3 million raised in our public offering in August 2003 and net borrowings of $105.4 million. Our principal operating cash needs are payment of salaries, office rents, travel expenditures and payments to investigators. The aggregate amount of employee compensation, excluding stock compensation expense, paid by us and our subsidiaries for the years ended December 31, 2006, December 31, 2007 and December 31, 2008, amounted to $274.6 million, $382.7 million and $528.5 million respectively. 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.
 
As of December 31, 2008, our working capital was $186.0 million, compared to $193.3 million at December 31, 2007. The most significant influence on our 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 and the timing of cash receipts. The number of days revenue outstanding was 70 days at December 31, 2008 and 66 days at December 31, 2007.
 
Net cash provided by operating activities was $81.3 million for the year ended December 31, 2008, compared with $43.0 million for the year ended December 31, 2007 and $50.5 million for the year ended December 31, 2006. The increase in cash provided from operating activities arises primarily from an increase in the profits of the Company during the current year.
 
Net cash used in investing activities was $117.4 million for the year ended December 31, 2008, compared with $118.5 million for the year ended December 31, 2007 and $55.3 million in the year ended December 31, 2006. Net cash used in the year ended December 31, 2008 arises principally from capital expenditure and the purchase of subsidiary undertakings. Capital expenditure for the year ended December 31, 2008, amounted to $67.9 million, and included expenditure on the expansion of the Company’s facility in Dublin, Republic of Ireland, together with continued investment in global infrastructure and information technology systems to support ongoing expansion. Cash paid for the purchase of subsidiary undertakings during the year ended December 31, 2008, amounted to $49.5 million, and included the acquisitions of Healthcare Discoveries in February 2008 and Prevalere Life Sciences in November 2008.
 
Net cash provided by financing activities was $22.3 million for the year ended December 31, 2008, compared with $94.0 million for the year ended December 31, 2007 and $7.7 million in the year ended December 31, 2006. We received an additional $10.0 million in net borrowings during the year ended December 31, 2008, $8.5 million on the exercise of share options and $4.1 million in income tax benefits from the exercise of share options. During the year ended December 31, 2007, we received $89.8 million in net borrowings, $5.3 million from the exercise of share options and $1.5 million in income tax benefits from the exercise of share options.
 
As a result of these cash flows, cash and cash equivalents at December 31, 2008, was $58.4 million, a decrease of $18.5 million for the year ended December 31, 2008, compared to an increase of $13.8 million for the year ended December 31, 2007, and an increase of $3.5 million for the year ended December 31, 2006. Net debt at December 31, 2008, amounted to $4.3 million, comprising cash and cash equivalents of $58.4 million, short term investments of $42.7 million, less bank credit lines and loan facilities of $105.4 million. Net cash at December 31, 2007, amounted to $23.8 million, comprising cash and cash equivalents of $76.9 million, short term investments of $41.6 million, less bank credit lines and facilities of $94.8 million.

 
26

 
 
On July 9, 2007, ICON plc entered into a five year committed multi-currency facility agreement for €35 million ($48.9 million) with The Governor and Company of the Bank of Ireland. Our obligations under the facility are secured by certain composite guarantees, indemnities and pledges in favor of the bank. The facility bears interest at an annual rate equal to the EURIBOR plus a margin. On July 10, 2007, the Company drew down €29.5 million ($41.2 million) of the facility to fund the acquisition of DOCS International. On October 15, 2007, the remaining €5.5 million ($7.7 million) of the facility was drawn down to fund expenditure on the expansion of the Company’s facility in Dublin, Republic of Ireland.
 
On January 2, 2009, an additional four year committed credit facility was negotiated with The Governor and Company of the 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 favour of the bank.
 
On October 17, 2007, an uncommitted credit facility was negotiated with Allied Irish Bank plc, for €30 million ($41.9 million). Interest is calculated at the EUR interbank rate plus a margin. The facility is secured by the same composite guarantees and indemnities in place for the Bank of Ireland committed facility. The funds were used to refinance overdraft facilities in place to fund expenditure on the expansion of the Dublin facility. On January 8, 2008, the facility with Allied Irish Banks plc was increased to €50 million ($69.9 million).
 
On December 22, 2008, committed credit facilities were negotiated with Allied Irish Bank plc for $75 million. The facilities comprise a one year Euro facility of approximately €20 million ($28.0 million), with the balance comprising a three year US dollar facility. The Euro facility bears interest at EURIBOR plus a margin and the US dollar facility bears interest at LIBOR plus a margin. Both facilities are secured by certain composite guarantees and pledges in favour of the bank. These facilities replace the uncommitted facilities negotiated on January 8, 2008. $28.4 million of these facilities were used to fund the acquisition of Prevalere with the remaining balance used to refinance the previous drawn uncommitted facilities.
 
On February 4, 2008, an uncommitted credit facility was negotiated with Citibank N.A, for $30 million. Interest is calculated at the London Interbank Market rate plus a margin. $12.0 million of this facility was drawn down in February 2008 to fund the acquisition of Healthcare Discoveries. On September 30, 2008, the $12.0 million previously drawn was repaid in full. At December 31, 2008, this facility remained un-drawn and available to the Company.
 
The average margin payable on the above mentioned facilities is 1.70 per cent..
 
On February 11, 2008, the Company acquired 100% of the common stock of Healthcare Discoveries Inc., for an initial cash consideration of $10.9 million, excluding costs of acquisition. Healthcare Discoveries, located in San Antonio, Texas, is engaged in the provision of Phase I clinical trial management services. Certain performance milestones were built into the acquisition agreement requiring payment of additional consideration of up to $10.0 million if these milestones were achieved during the year ended December 31, 2008. No amounts have been accrued at December 31, 2008, as the milestones have not been achieved.
 
On November 14, 2008, the Company acquired 100% of the common stock of Prevalere Life Sciences Inc. (“Prevalere”), for an initial cash consideration of $36.8 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 are achieved during the years ended December 31, 2008 and 2009. Additional consideration of $5.0 million has been accrued at December 31, 2008, in respect of the milestones for the year ended December 31, 2008. No amounts have been accrued for additional consideration potentially payable in respect of the milestones for the year ended December 31, 2009.

 
27

 
 
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 $3.0 million if these milestones are achieved during the year ended December 31, 2009. At December 31, 2008, no amounts have been accrued in respect of the potential additional consideration.
 
On July 12, 2007, the Company acquired 100% of the common stock of DOCS International, a European based clinical research staffing organization, for a cash consideration of $40.6 million (€29.5 million). DOCS International operates in eight European countries and focuses on the training and supply of contract and permanent clinical research personnel to the pharmaceutical and biotech industry.
 
As at December 31, 2008, the Company had $285.8 million in contractual obligations and commercial commitments. As at December 31, 2008, the Company had known obligations of $168.6 million in respect of operating leases, primarily relating to leased office facilities. Additionally, the Company had bank debt of $105.4 million used to finance the acquisition of DOCS International in July 2007, Healthcare Discoveries in February 2008, Prevalere in November 2008, and expenditure on the expansion of our Dublin facility.
 
Contractual obligations table
 
The following table represents our contractual obligations and commercial commitments as of December 31, 2008:
                               
 
Payments due by period
 
    Total     Less than 1
year
    1 to 3
years
    3 to 5
years
    More than
5
years
 
   
(U.S.$ in millions)
 
Operating lease obligations
    168.6       38.2       60.5       40.2       29.7  
Capital lease obligations
    0.7       0.3       0.4              
Bank credit lines and loans facilities
    105.4       40.2       53.0       12.2        
Non-current tax liabilities
    11.1             8.0       3.1        
                                         
Total (U.S.$ in millions)
 
$
285.8    
$
78.7    
$
121.9    
$
55.5    
$
29.7  
 
We expect to spend approximately $50 million in the next twelve months on further investments in information technology, the expansion of existing facilities and the addition of new offices. We expect to increase this level of spending in subsequent years. We believe that we will be able to fund our additional foreseeable cash needs for the next twelve months from cash flow from operations and existing cash balances. In the future, we may consider acquiring businesses to enhance our service offerings and global presence. Any such acquisitions could require additional external financing and we may from time to time seek to obtain funds from public or private issues of equity or debt securities. There can be no assurance that such financing will be available on terms acceptable to us.
 
Critical Accounting Policies
 
The preparation of consolidated financial statements in accordance with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.
 
We base our estimates and judgments on historical experience and on the other factors that we believe are reasonable under current circumstances. Actual results may differ from these estimates if these assumptions prove to be incorrect or if conditions develop other than as assumed for the purposes of such estimates. The following is a discussion of the accounting policies used by us, which we believe are critical in that they require estimates and judgments by management.

 
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Revenue Recognition
 
Significant management judgments and estimates must be made and used in connection with the recognition of revenue in any accounting period. Material differences in the amount of revenue in any given period may result if these judgments or estimates prove to be incorrect or if management’s estimates change on the basis of development of the business or market conditions. To date there have been no material differences arising from these judgments and estimates.
 
We earn revenues by providing a number of different services to our clients. These services include clinical trials management, biometric activities, consulting, and imaging and laboratory services. Revenue for services, as rendered, are recognized only after persuasive evidence of an arrangement exists, the sales price is fixed or determinable and collectibility is reasonably assured.
 
We recognize biometric revenues on a fee-for-service basis as each unit of data is prepared. Imaging revenue is recognized on a fee-for-service basis recognizing revenue for each image completed. Consulting revenue is recognized on a fee-for-service- basis recognizing revenue as each hour of the related service is performed.
 
We recognize laboratory service revenue on a fee-for-service basis. We account for laboratory service contracts as multiple element arrangements, with contractual elements comprising laboratory kits and laboratory testing, each of which can be sold separately. Fair values for contractual elements are determined by reference to objective and reliable evidence of the fair values. Revenues for contractual elements are recognized on the basis of the number of deliverable units completed in the period.
 
We recognize Clinical trials management revenue on a proportional performance method based on the relationship between hours incurred and the total estimated hours of the trial. We use the input (effort expended) method to measure progress towards completion as there is a direct relationship between input and productivity. Contract costs equate to the product of labor hours incurred and compensation rates. Contract revenue is the product of the aggregated labor hours required to complete the specified contract tasks at the agreed contract rates.
 
We invoice our customers upon achievement of specified contractual milestones. This mechanism, which allows us to receive payment from our customers throughout the duration of the contract, is not reflective of revenue earned. We recognize revenues over the period from the awarding of the customer’s contract to study completion and acceptance. This requires us to estimate total expected revenue, time inputs, contract costs, profitability and expected duration of the clinical trial. The Company regularly reviews the estimate of total contract time to ensure such estimates remain appropriate taking into account actual contract stage of completion, remaining time to complete and any identified changes to the contract scope. Remaining time to complete depends on the specific contract tasks and the complexity of the contract and can include geographical site selection and initiation, patient enrolment, patient testing and level of results analysis required. While we may routinely adjust time estimates, estimates and assumptions historically have been accurate in all material respects in the aggregate.
 
If we do not accurately estimate the resources required or the scope of the work to be performed, or do not manage our projects properly within the planned cost or satisfy our obligations under the contracts, then future results may be significantly and negatively affected.
 
Goodwill
 
We review our goodwill for impairment annually, or more frequently if facts or circumstances warrant such a review. We evaluate goodwill for impairment by comparing the fair value of each reporting segment to its carrying value. Fair value is determined using the market approach, by assessing the market value of each reporting unit, and the income approach, based on estimated discounted future cash flows. Estimates and judgments used include those relating to commercial risk, revenue and cost projections, our intention with respect to the acquired goodwill, the impact of competition, the impact of any reorganization or change of our business focus, the level of third party interest in our operations and market conditions.
 
If the implied fair value of reporting unit goodwill is lower than its carrying amount, goodwill is impaired and written down to its implied fair value. If we were to use different estimates or judgments, particularly with respect to expected revenue and cost projections or the impact of any reorganization or change of business focus, a material impairment charge to the statement of operations could arise. We believe that we have used reasonable estimates and judgments in assessing the carrying value of our goodwill.

 
29

 
 
Taxation
 
Given the global nature of our business and the multiple taxing jurisdictions in which we operate, the determination of the Company’s provision for income taxes requires significant judgments and estimates, the ultimate tax outcome of which may not be certain. Although we believe our estimates are reasonable, the final outcome of these matters may be different than those reflected in our historical income tax provisions and accruals. Such differences could have a material effect on our income tax provision and results in the period during which such determination is made.
 
Deferred tax assets and liabilities are determined using enacted or substantially enacted tax rates for the effects of net operating losses and temporary differences between the book and tax bases of assets and liabilities. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. While management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment, there can be no assurance that these deferred tax assets may be realizable.
 
We operate within multiple taxing jurisdictions and are subject to audits in these jurisdictions. These audits can involve complex issues which may require an extended period of time for resolution. Management believe that adequate provisions for income taxes have been made in the financial statements.
 
Inflation
 
We believe that the effects of inflation generally do not have a material adverse impact on our operations or financial conditions.
 
New Accounting Pronouncements
 
In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (FSP 157-3). FSP 157-3 clarifies the application of SFAS No. 157 in a market that is not active and addresses application issues such as the use of internal assumptions when relevant observable data does not exist, the use of observable information when the market is not active and the use of market quotes when assessing the relevance of observable and unobservable data. FSP 157-3 is effective for all periods presented in accordance with SFAS No. 157. The Company does not expect the adoption of FSP 157-3 to have a material impact on the financial statements.
 
In April 2008, the FASB issued FSP 142-3 Determination of the Useful Life of Intangible Assets (FSP 142-3). FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142 Goodwill and Other Intangible Assets (SFAS No. 142). FSP 142-3 applies prospectively to intangible assets that are acquired individually or with a group of other assets in a business combination or asset acquisition. The Company does not expect the adoption of FSP 142-3 to have a material impact on the financial statements.
 
In December 2007, the FASB issued FASB Statement No. 141R, Business Combinations (SFAS No. 141R) and FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements– an amendment to ARB No. 51 (SFAS No. 160). SFAS No. 141R and SFAS No. 160 require most identifiable assets, liabilities, noncontrolling interests, and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Both Statements are effective for periods beginning on or after December 15, 2008, and earlier adoption is prohibited. SFAS No. 141R will be applied to business combinations occurring after the effective date. SFAS No. 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. The Company does not expect the adoption of SFAS No. 141R and SFAS No. 160 to have a material impact on the financial statements.
 
30

 
In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurement (SFAS No. 157). Statement 157 defines fair value, establishes a framework for the measurement of fair value, and enhances disclosures about fair value measurements. The Statement does not require any new fair value measures. The Statement is effective for fair value measures already required or permitted by other standards for fiscal years beginning after November 15, 2007. The Company was required to adopt SFAS No. 157 beginning on January 1, 2008. SFAS No. 157 is required to be applied prospectively, except for certain financial instruments. Any transition adjustment will be recognized as an adjustment to opening retained earnings in the year of adoption. In November 2007, the FASB proposed a one-year deferral of SFAS No. 157’s fair-value measurement requirements for nonfinancial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. The adoption of SFAS No. 157 has not had a material impact on the financial statements.
 
 
Directors and Senior Management
 
The following table and accompanying biographies set forth certain information concerning each of ICON plc’s directors, officers and other key employees as of December 31, 2008.
         
Name
 
Age
 
Position
Dr. John Climax (1)(5)
 
56
 
Chairman of the Board, Director
Peter Gray (1)(5)
 
54
 
Chief Executive Officer, Director
Ciaran Murray (1)(5)
 
46
 
Chief Financial Officer
Dr. Ronan Lambe
 
69
 
Director
Thomas Lynch (2)(3)(4)
 
52
 
Director
Edward Roberts (2)(3)(4)
 
74
 
Director
Shuji Higuchi
 
68
 
Director
Dr. Bruce Given (2)(3)(4)
 
54
 
Director
Professor Dermot Kelleher
 
53
 
Director
William Taaffe
 
60
 
President Corporate Development
Dr. John Hubbard
 
52