South
County Business Park
Leopardstown,
Dublin 18, Ireland
December 5,
2008
Jim
Rosenberg
Senior
Assistant Chief Accountant
Division
of Corporation Finance
Securities
and Exchange Commission
100 F
Street, N.E.
Mail Stop
6010
Washington,
D.C. 20549
VIA OVERNIGHT MAIL AND
EDGAR
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Re:
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December 31, 2007 (File No.
333-08704)
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Dear Mr. Rosenberg:
The
Company acknowledges that it is responsible for the adequacy and accuracy of the
disclosure in the Form 20-F and in its other filings under the Securities
Exchange Act of 1934, as amended. The Company acknowledges that
comments of the Staff regarding the Form 20-F or changes to disclosure in
response to the Staff’s comments do not foreclose the Commission from taking any
action with respect to such filings. The Company also acknowledges
that the Staff’s comments may not be asserted by the Company as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
For your
convenience, we have reproduced each comment from the Comment Letter (in bold)
immediately before the Company’s response. Unless otherwise
indicated, all references to page numbers in the Company’s responses below refer
to page numbers in the Annual Statement, a copy of which was previously filed
with the Commission.
Filing Cover
Page
1. We
note that you did not provide some of the required information on your filing
cover page, including (1) the name, telephone, email and/or facsimile number and
address of the company contact person and (2) the indication of the basis of
account-
ing
you used to prepare the financial statements used in this
filing. Please see SEC Release 33-8879, effective March 4, 2008, and
revise accordingly.
RESPONSE: In
response to your comment, please note that (1) the Company’s contact person
is Ciaran Murray, Chief Financial Officer, ICON plc, South County Business Park,
Leopardstown, Dublin 18, Ireland, telephone 011-353-1-291-2000, facsimile
011-353-1-291-2700 and (2) as noted on page 1 of the current Form 20-F, the
basis of presentation used to prepare the financial statements is US
GAAP. Each of these will be included on the filing cover page in any
future filings on Form 20-F by the Company per the relevant SEC
releases.
Item 7. Major Shareholders
and Related
Party Transactions, page
41
2. We
note that you did not disclose the portion of each class of securities held in
the U.S. and the number of record holders in the U.S. as required by Item 7A.2.
of Form 20-F. Please revise to provide us with this information and
explain why you did not include this information in your filing. In
addition, please provide us with an analysis that supports your apparent
conclusion that you are a “foreign private issuer” within the meaning of Rule
3b-4 of the Exchange Act.
RESPONSE: Given
that certain of the ordinary shares and ADRs are held by brokers or other
nominees, the number of holders of record or registered holders in the United
States is not representative of the number of beneficial holders or of the
residence of beneficial holders. Based on management’s review of
relevant filings with the Commission and other publicly available information,
the Company believes that the number of ordinary shares (including ADSs) held by
holders of record that are residents of the United States is below 50% and may
include Fidelity Group Companies, Alliance Bernstein LP, Wasatch Group
Companies, Lord, Abbett & Co. LLC, FleetBoston Financial Corporation and
Capital Group International, Inc. In response to your comment, the
Company notes that a total of 28,835,244 ordinary shares (including ADSs) of the
Company were issued and outstanding at February 20, 2008, of which
7,354,457 ordinary shares (including ADSs) were held by holders of record in the
United States.
In
addition, the Company confirms that, in accordance with Rule 3b-4 of the
Exchange Act, it meets the requirements of being classified as a “Foreign
Private Issuer” as (1) it believes that no more than 50% of the Company’s
outstanding voting securities are directly or indirectly held of record by
residents of the United States and (2)(i) the majority of the executive
officers and directors are not citizens or residents of the United States,
(ii) less than 50% of the assets of the Company are located in the United
States and (iii) the business of the Company is not principally
administered in the United States. As noted in the Form 20-F and the
Company’s most recent report on Form 6-K for the quarter
ended September 30, 2008, (i) only 5 of our 17 executive
officers and directors are U.S. citizens or residents, (ii) the Company has
total assets of approximately $808 million, of which less than $346 million
are located in the United States and (iii) the Company is headquartered in
Ireland and approximately $23.8 million and $286.2 million of the income
and net revenue, respectively of the Company were generated in the
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United
States, representing approximately 33% and 44%, respectively of total income and
net revenue.
Per your
comment, the Company will more precisely disclose the information required by
Item 7.A.2 relating to its ordinary shares and ADSs held in the host country in
its Form 20-F for the fiscal year ending December 31, 2008 and
subsequent filings.
Note 2 - Significant
Accounting Policies
Revenue Recognition, page
65
3. You
disclose that you recognize revenue over the period from the awarding of a
contract to study completion and acceptance. You also disclose that
this requires you to estimate total expected revenue, time inputs, contracts
costs, profitability and expected duration of the clinical
trial. Please enhance your revenue recognition accounting policy as
follows:
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·
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Disclose
the factors considered and the methodology employed in estimating total
expected revenue, time inputs, contracts costs, profitability and expected
duration;
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·
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Disclose
the effect that changes in estimates have had on your financial position,
operating results or cash flow for the periods
presented;
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·
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Disclose
examples of the milestone payment received for clinical trials and what
you need to do to achieve the milestone
payment;
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·
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Disclose
why you believe that the milestone payments are fixed and determinable in
accordance with the guidelines of SAB 104 and qualify for inclusion in
total expected revenue;
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·
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Clarify
if the revenue recognized for clinical trials is limited to the cash
received to date. If not, please explain why recognizing
revenue in excess of cash received is appropriate;
and
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·
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Please
revise your revenue recognition accounting policy to address the above
comments as applicable.
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RESPONSE:
● Disclose
the factors considered and the methodology employed in estimating total expected
revenue, time inputs, contracts costs, profitability and expected
duration;
Revenue
earned from clinical trials represents a series of interdependent and related
tasks to be performed over the life of the contract agreement. These tasks
include, but are not limited to, preparation of the clinical study protocol and
patient information, development
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of case
record forms, investigator recruitment, study monitoring and analysis of study
data.
Clinical
trials contract revenues are agreed on contract initiation between the Company
and the customer and are directly based on the estimated time inputs to the
contract. Time inputs are agreed with the customer according to the estimated
amount of time required by clinical research staff to complete the various
contract tasks. 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 time involved is wholly dependent on the number of clinical
staff required to complete the specified tasks. Both the numbers of clinical
staff by task and the duration that these staff are required for are detailed in
the contract.
Contract
costs comprise staff time, therefore time inputs equate to contract costs.
Contract revenue and contract costs are directly based on the total time inputs
to the contract. Staff time inputs or contract costs do not occur evenly
throughout the contract but depend on the complexity, phase and size of the
study and the particular tasks being performed at any particular
time.
The
Company derives contract prices by aggregating the contract rates for the
various clinical staff hours required to complete the specified contract tasks.
The Company ensures contract profitability by pricing its contracts based on
standard staff rates, and ensuring any subsequent changes in scope are
appropriately monitored and change orders are promptly negotiated at standard
rates for the additional work. 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.
Factors considered include matters such as patient enrollment rate by
geographical site, patient testing rate, completion of case report forms,
changes in the composition of clinical staff and customer
requirements.
Studies
may range in duration from less than one to several years. Generally
tasks are performed in a sequential nature and progress may vary by site
according to the date of commencement of testing at a particular site and the
number of patients to be tested. Total contract duration is
calculated by aggregating the various staff time requirements detailed in the
contract.
● Disclose
the effect that changes in estimates have had on your financial position,
operating results or cash flow for the periods presented;
Change in
estimates have not materially impacted the Company’s financial position,
operating results or cash flow as contracts provide for price negotiation upon
changes in the scope, nature, duration or volume of services of the contracts.
The Company regularly reviews progress on each contract to ensure project tasks
are being completed in accordance with the project scope and plan agreed with
the customer. Once a change to the original contract is identified, the Company
negotiates a change order with the customer. The Company recognizes
revenues from these changes when persuasive evidence of the negotiated amount
exists through an approved customer change order. When a change
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order is
authorized, this triggers an increase or decrease to the total contract price.
Revenue is recognized as services are performed under the revised contract
price, consistent with the revenue recognition methodology previously
applied.
● Disclose
examples of the milestone payments received for clinical trials and what you
need to do to achieve the milestone payment;
Milestone
achievements do not trigger revenue recognition but are a mechanism to
facilitate cash collection throughout the contract duration. Under the payment
terms of the contract, the Company must achieve the target detailed in the
milestone before the hours incurred may be invoiced and cash collected from the
customer. If a milestone cannot be achieved due to factors outside of the
Company’s control, for example, patient recruitment quotas not filled, the
contract permits the Company to invoice hours incurred to date.
An
example of milestone payments on a typical contract is detailed
below.
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Milestone
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Percentage billing
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Contract
signing
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15%
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First
patient in
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5%
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5%
monitoring visits completed
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7%
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25%
of patients enrolled
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7%
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15%
monitoring visits completed
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6%
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50%
of patients enrolled
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10%
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50%
monitoring visits completed
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10%
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100%
of patients enrolled
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15%
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100%
monitoring visits completed
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15%
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Last
query resolved
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10%
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Total
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100%
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● Disclose
why you believe that the milestone payments are fixed and determinable in
accordance with the guidance of SAB 104 and qualify for inclusion in total
expected revenue;
Sales
prices are clearly specified in contracts. In the case of clinical
trial contracts, the contract price is directly based on the number of staff
required to complete the specified contract tasks and the duration that these
staff will be retained on contract tasks. The total sales price of
the contract is then broken down into progress (milestone) payments which the
company is entitled to invoice the customer when the particular milestone
specified is achieved. Milestones are typically related to an event in the
contract and would include, but are not limited to, items such as signing the
contract, x number of sites initiated, x number of patients enrolled and x
number of case record forms entered. Milestone payments are not recognized as
revenue but are used to facilitate cash collection over the life of the
contract. Any difference between the amount of revenue recognized
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and the
milestone payments is included in current assets as unbilled revenue or in
current liabilities as payments on account.
● Clarify if
the revenue recognized for clinical trials is limited to the cash received to
date. If not, please explain why recognizing revenue in excess of cash received
is appropriate; and
A
clinical trial contractual arrangement requires the Company to complete a series
of related and interdependent tasks over the duration of the contract. The
agreed total contract price is based directly on the number of people required
to complete the specified tasks and the duration each staff member is required
for. The level of resources required varies according to the complexity of the
contract and the particular task being performed. The Company
recognizes clinical trials revenue on the basis of the relationship between time
incurred and total estimated duration of the clinical trial. The Company
believes this method is appropriate as time inputs are not applied at a constant
rate over the duration of the contract but depend on the task being executed.
Given that the contract costs comprise staff time, time inputs equate to
contract costs in determining the state of contract fulfillment. The Company
believes that the inputs expended (costs incurred) in any period as a proportion
of total expected time (cost) inputs is the most appropriate measure to
recognize revenue and that this method represents the most accurate pattern over
which the contract obligations are fulfilled.
The
agreed total contract price is usually invoiced in a number of stages as the
Company achieves specified milestones. These may be invoiced at irregular
intervals over the contract duration and will not necessarily represent
fulfillment of contract obligations (contract time inputs) at the time of
invoicing. A clinical trial may involve a large number of geographical sites and
while, for example, the company may have enrolled sufficient patients to enable
it invoice that particular progress (milestone) payment, it may have also
commenced patient testing at a number of sites, but not in sufficient quantity
to enable it meet the patient testing quote for progress (milestone) invoice. As
a result, revenue earned on clinical trials is not limited to cash received to
date. Any difference between revenue recognized and cash collected is
included in current assets as unbilled revenue or in current liabilities as
payments on account.
If the
Company does not achieve the particular target set out in the progress
(milestone) payment schedule due to factors outside of its control, the contract
permits the Company to invoice for all work performed to that date. In the event
that a contract is terminated, it is possible that the value of the work
performed is greater than aggregate progress (milestone) billings at the date of
termination. Contract cancellation clauses ensure that the Company is paid for
all work performed to the termination date in this instance.
● Please
revise your revenue recognition accounting policy to address the above comments
as applicable.
The
Company proposes to revise its revenue recognition policy in its next annual
filing as follows (a marked copy will be provided supplementally to the
Commission):
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“The
Company primarily earns revenues by providing a number of different services to
its customers. These services include clinical trials management, biometric
activities, consulting, imaging and laboratory services. Contracts range in
duration from a number of months to several years.
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.
Clinical
trials management revenue is recognized on a proportional performance
method based on the relationship between
hours incurred and the total estimated hours of the trial.
The input (effort expended) method has been used to measure progress towards
completion as there is a direct relationship between input and productivity.
Contract rates 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. 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 the Company may routinely adjust time estimates, the Company’s
estimates and assumptions historically has been accurate in all material
respects in the aggregate.
Biometrics
revenue is recognised on a fee-for-service method as each unit of data is
prepared. Imaging revenue is recognised on a fee-for-service basis
recognizing revenue for each image completed. Consulting revenue is recognised
on a fee-for-service basis as each hour of the related service is performed.
Laboratory service revenue is recognised on a fee-for-service basis. The Company
accounts 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 their fair values.
Non-refundable set-up fees are allocated as additional consideration to the
contractual elements based on the proportionate fair values of each of these
elements. Revenues for contractual elements are recognised on the basis of the
number of deliverable units completed in the period.
Contracts
generally contain provisions for renegotiation in the event of changes in the
scope, nature, duration, or volume of services of the contract.
Renegotiated amounts are recognised as revenue by revision to the total contract
value arising as a result of an authorised customer change order.
The
difference between the amount of revenue recognised and the amount billed on a
particular contract is included in the balance sheet as unbilled
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revenue.
Normally, amounts become billable upon the achievement of certain milestones,
for example, target patient enrolment rates, clinical testing sites initiated or
case report forms completed. Once the milestone target is reached, amounts
become billable in accordance with pre-agreed payment schedules included in the
contract or on submission of appropriate billing detail. Such cash payments are
not representative of revenue earned on the contract as revenues are recognised
over the period in which the specified contractual obligations are fulfilled.
Amounts included in unbilled revenue are expected to be collected within one
year and are included within current assets. Advance billings to customers, for
which revenue has not been recognised, are recognised as payments on account
within current liabilities.
In the
event of contract termination, if the value of work performed and recognised as
revenue is greater than aggregate milestone billings at the date of termination,
cancellation clauses ensure that the Company is paid for all work performed to
the termination date.”
Note 4 - Goodwill, page
70
4. You
disclose under corporate strategy on page 13 that you have expanded
geographically in 36 countries and intend to continue globally to build your
client base. Your also enclose that you seek to enhance your
competitive position by increasing your scale and range of
services. However, you allocated almost the entire purchase price in
excess of fair value to goodwill for the three significant acquisitions
completed since 2004. Based on your disclosures it appears that you
may have acquired customer-related intangible assets, such as customer contracts
and related customer relationships and customer lists, and technology-related
intangible assets, such as databases and trade secrets. Please
enhance your disclosure as follows:
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·
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Please
disclose the factors that you have considered allocating a value of
approximately $2 million to customer- related intangible assets for the
three acquisitions completed since 2004 given your disclosure that one of
your corporate strategic goals is to build a client base by expanding
geographically;
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·
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Please
tell us why your disclosure that the goodwill acquired in the DOCS
International acquisitions represents the costs associated with
establishing a presence in the European staffing market is consistent with
the definition of goodwill as defined in Appendix F of SFAS 141 as opposed
to a customer-related intangible
asset;
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·
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Please
tell us why you did not allocate any value to technology-related
intangible assets given your disclosure that one of your strategic goals
is to expand your range of services and your disclosure that the Ovation
and DOCS International acquisitions broaden your range of service;
and
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·
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Please
disclose the primary reasons that contributed to a purchase price which
results in the recognition of goodwill in accordance with paragraph 51(b)
of SFAS 141.
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Please
refer to paragraphs 39 and A18 through A21 of Appendix A of SFAS 141 and EITF
02-17.
RESPONSE:
● Please
disclose the factors that you have considered allocating a value of
approximately $2 million to customer-related intangible assets for the three
acquisitions completed since 2004 given your disclosure that one of your
corporate strategic goals is to build a client base by expanding
geographically;
The
Company operated in 67 locations in 36 countries during 2007. While a number of
locations exist though acquisitions, the majority of locations have been built
by the Company through organic expansion. During each of the years ended
December 31, 2005, 2006 and 2007, the Company opened new offices in four, eight
and eight locations respectively. The acquisition of DOCS International in 2007
was the first acquisition to significantly increase the Company’s geographical
presence by adding 10 locations in eight European countries.
In each
acquisition the Company completed since 2004, the Company reviewed the relevant
guidance in SFAS 141 and EITF 02-17. The specific factors the Company considered
in allocating value to customer related intangible assets included:
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·
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The
practice of the acquired entity in establishing customer relationships
through contracts which provide control over future economic
benefits
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·
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Historic
customer attrition rates in each acquired
entity
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·
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Expected
future cash flows taking into account specific historic customer
margins
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·
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Historic
duration of and expected future lives of the customer relationships in
each entity
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·
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Whether
any value should be allocated to order backlog. The Company analyzed the
potential after-tax value of cash flows of each acquired entity from the
order backlog and concluded that no material amount
existed
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The
Company also obtained a third party valuation to support the purchase price
allocation it recorded in respect of the acquisition of DOCS International. This
valuation supported the Company’s allocation of the purchase price to intangible
assets.
● Please tell
us why your disclosure that the goodwill acquired in the DOCS International
acquisition represents the costs associated with establishing a presence in the
European staffing market is consistent with the definition of goodwill
as
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defined
in Appendix F of SFAS 141 as opposed to a customer-related intangible
asset;
The
Company considered the examples of intangible assets in paragraphs A14 through
A28 of SFAS 141 in allocating the purchase price to acquired net assets. The
Company separately identified customer relationships and recorded the fair value
of these relationships as intangible assets. The acquisition of DOCS
International essentially provided geographical presence and an established
workforce in eight countries across Europe. The Company did not operate in
certain of these countries prior to the acquisition, notably Finland and
Denmark. The Company concluded that these assets did not meet the criteria for
separate identification under SFAS 141 and concluded that the excess of the
purchase costs over the net of the amounts assigned to tangible and intangible
net assets acquired represented goodwill in accordance with the definition in
Appendix F of SFAS 141.
● Please tell
us why you did not allocate any value to technology-related intangible assets
given your disclosure that one of your strategic goals is to expand your range
of services and your disclosure that the Ovation and DOCS International
acquisitions broaden your range of service; and
The
Company assessed whether any value should be allocated to technology-related
intangible assets as part of their consideration of the appropriate purchase
accounting. The Company concluded that the acquisitions did not
contain any asset that would meet the definition of an intangible asset and
considered the examples noted in paragraph A14e of SFAS 141,
namely:
(1) Patented
technology
(2) Computer
software and mask works
(3) Unpatented
technology
(4) Databases,
including title plants
(5) Trade
secrets, such as secret formulas, processes, recipes
The
acquisition of Ovation broadened the Company’s services by giving the Company
access to a workforce with significant experience in late phase clinical
research. The acquisition of DOCS International broadened the Company’s services
by allowing the Company access to both an established workforce and geographical
presence in eight countries across Europe, which would not be easily replicated
by organic means. The Company did not deem these factors to qualify for separate
recognition as intangible assets separate from goodwill and concluded that no
value should be allocated to technology related intangible assets.
● Please
disclose the primary reasons that contributed to a purchase price which results
in the recognition of goodwill in accordance with paragraph 51(b) of SFAS
141.
The
primary reasons for the acquisition and the factors that result in recognition
of goodwill have been the acquisition of geographic presence and acquired
workforce.
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The
acquisition of DOCS International in 2007 provided the Company access to a
workforce in 10 locations across eight European countries, and established a
presence in the European contract staffing market.
The
Company proposes to revise its disclosure in its filing with the Commission on
Form 20-F for the fiscal year ended December 31, 2008 as
follows:
“Goodwill accounting
policy:
Goodwill
represents the excess of the cost of the acquired entities over the net amounts
assigned to assets acquired and liabilities assumed. Goodwill primarily
comprises acquired work force in place which does not qualify for recognition as
an asset apart from goodwill. Goodwill is stated net of any provision for
impairment. The Company tests goodwill annually for any impairments or whenever
events occur which may indicate impairment. The first step is to compare the
carrying amount of the reporting unit’s assets to the fair value of the
reporting unit. If the carrying amount exceeds the fair value then a second step
is completed which involves the fair value of the reporting unit being allocated
to each asset and liability with the excess being implied goodwill. The
impairment loss is the amount by which the recorded goodwill exceeds the implied
goodwill. No impairment was recognized as a result of the impairment testing
carried out at December 31, 2006 and December 31, 2007.”
In
footnote 4(a) ‘Goodwill, Acquisition of DOCS International’, the Company
proposes to add the following disclosure in its filing with the Commission of
Form 20-F for the fiscal year ended December 31, 2008:
“Goodwill
represents the geographical presence afforded to the Company in the European
staffing market and the acquisition of an established workforce in the eight
countries in which DOCS International operates.”
Index to Exhibits, page
97
5. It
does not appear that you have filed a copy of your Memorandum and Articles of
Association, as amended. Please revise to file a copy of your
Memorandum and Articles of Association and each amendment thereto.
RESPONSE: The
Company has supplementally provided to the Commission the Memorandum and
Articles of Association, as amended, and will file the same on a Form 6-K
promptly.
6. In
addition, it appears that one or more of your lease obligations may be a
material least pursuant to 4(b)(iv) of the Instructions as to Exhibits of Form
20-F. We note that on page 27 you disclose that you have $185.1
million in operating lease obligations, primary relating to leased office
facilities, which is more that half your total contractual
commitments. Please revise to file copies of all your material leases
as exhibits.
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RESPONSE: The
Company has identified four operating leases which individually account for more
than 5% of its operating lease obligations for the current fiscal
year. The Company is in the process of obtaining electronic copies of
these material leases and will file copies as exhibits to its filing on Form
20-F for the fiscal year ending December 31, 2008.
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_________________________________
We
believe that we have fully responded to your comments. However, if
you have any questions about any of our responses to your comments or require
further explanation, please do not hesitate to call me at (011)-351-1-291-2000
or Bill Miller of Cahill Gordon at (212) 701-3836.
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By: /s/ Ciaran Murray
Ciaran Murray
Chief Financial Officer
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William J. Miller
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