Fortrea Holdings Inc. (FTRE) Earnings Call Transcript & Summary

Good morning, everyone. My name is Taiye Opabunmi and I'm delighted to welcome you to the 44 JPMorgan Healthcare Conference. Our next presenting company is Fortrea Holdings. It's -- they're leading global contract research organization dedicated to advancing clinical development and delivering innovative solutions that accelerate the path from molecule to medicine. And I want you to welcome the CEO, Anshul Thakral, who will be leading the presentation today, and joined by the CFO, Jill McConnell, who will be helping with Q&A.

Thank you very much for the introduction, and thank you for hosting us. We appreciate it and we always enjoy spending time here at the conference. It's a great way to kick start the year for everybody. Okay. Before I get started, I want to welcome everyone, and thank everybody for joining us. And let me start briefly by showing the mandatory forward-looking statements. And since all of you are familiar with it, I won't read every word and move on with the presentation, okay? Now I appreciate that some of you have been with us on this journey, and some are new to Fortrea and its story. So here's a quick reminder. We became Fortrea in 2023, spinning out from Labcorp. Our heritage goes back for several decades, our roots being with Covance. Now Labcorp acquired Covance in 2015, and the clinical development part of the business was spun out as Fortrea, with the central labs being carved and remaining with our former parent. Our distinctive name tells our unique -- our distinctive name tells our unique founding story. We were created with a promise, a promise to solve the complexities that exist within drug development to make life-changing innovation possible. With a new promise came a new name. Our name was created to reflect a unique combination of attributes. We move clinical trials forward with ease, Fortrea. Forward represents the direction that we are dedicated to move treatments and therapeutics for so many people, Trials is at the center of what we do. And so it makes sense that the concept of clinical trials is at the center of our name. It reminds us to stay focused on the core -- on our core business. Ease is our goal, the ease of clinical development process for everyone involved and to create a different experience working with and for a CRO that is unlike any other. And a little bit of a refresher on who we are, where we are because some folks are new to the story. Over the past 2.5 years as Fortrea, we have built a unique value proposition as a pure-play global CRO with several decades of experience behind us, as I've said. We have the broad scale and capabilities to deliver for our diversified client base from the largest pharmaceutical companies in the world to virtual biotechs with a single asset and a handful of principles, looking for funding in the halls of JPMorgan. We can design and deliver solutions to meet any one of their needs. Most importantly, we have the experience to back that up and do it reliably. But clients don't just come to Fortrea for it's past. They appreciate how we are focused on modernizing study delivery, leveraging AI and machine learning and focusing on automation and predictive analytics to drive productivity and safeguard the quality of clinical trials. Ultimately, our value is derived from being -- playing a vital role in the spectrum of clinical development. Our leadership team has deep CRO as well as industry experience that enables us to lean into that vital role. I'll spend the next few minutes talking about each one of these points here. Let's talk a little bit about the market. Now in the presentation right before us, we had the same similar sort of conversation. As we all know, the market environment has been a bit challenging for the past few years. Now at this point, however, we are cautiously optimistic about the return to growth in overall investments in pharmaceutical R&D. We see R&D growth getting back to roughly 3% to 4% here in the near term. This is being driven by big pharma companies going back to prioritizing R&D to build out their pipelines and the near improvement we've seen in biotech funding. Now even with the shift towards growth, I think it's pertinent to remind everybody that it takes a bit of time before you start seeing that in CRO world. Now turning to Fortrea, talk a little bit about our business and our various services here. We help clients generate evidence to support the development of new and innovative products. Our goal is to bend the cost and time curve of clinical development to advance our clients' programs even as clinical development becomes more complex and even more time consuming. We do this across the clinical trial continuum. Our clinical pharmacology services performs Phase I first-in-human NDA-enabling clinical studies. Our clinical development solutions are comprehensive, including clinical operations, clinical data management, biostatistics, programming, e-clinical pharmacovigilance and beyond. Our consulting group has a tremendous reputation spanning the spectrum of drug development from regulatory to market access advisory services that are relied on by both our small and midsized clients. While we are known for our oncology experience, we have deep expertise in more than 20 broad therapeutic areas, including cardiovascular, cell and gene therapies, neurology, ophthalmology as well as rare diseases and pediatric studies. We're a truly global organization with roughly 14,500 colleagues across the globe. Let's talk a little bit about each of the various businesses. Let's talk a little bit about clinical pharmacology. Our world-class clinical pharmacology network works on some of the most exciting and advanced therapies currently in development. We have 4 clinical research units spanning the U.S. and Europe with more than 1,000 colleagues dedicated 100% to these early phase studies that have very distinct characteristics and very distinct challenges amongst themselves. We're recognized by clients as a leader in clinical pharmacology. Our ability to provide GMP pharmacy Phase I manufacturing across our network of clinics help save time and money for these clients. We also have bedside data capture that's now been implemented across all 4 of our clinics allowing us to operate in one integrated global solution. Our capabilities and world-leading expertise have enabled us to develop strategic partnerships and truly sticky relationships with our clients which span from large pharma, some of the largest pharma in the world, all the way to small startups who are all utilizing our clinical pharmacology units across the world. Now let's flip over a bit to the biggest part of our business. Over the past few years, we strengthened our focus as a pure-play CRO with a comprehensive suite of services. Our model is agile, enabling us to create bespoke solutions that are tailored to the specific needs of our clients. These solutions are meant to be highly flexible across full-service outsourcing, FSP as well as hybrid staffing and resourcing models. Our ability to be flexible and customize our resourcing and project management solutions is especially relevant to some of our small to midsized biotech clients who rely on our ability to deliver what they need, the way they need it, when they need it and with the highest levels of global quality standards. Over the years, we have become deeply connected within the global R&D ecosystem, including our large investigator site network that enables us not only to place studies globally but allows us to create a different experience for our sponsors that are engaging with these sites. Our pharmacovigilance services have now earned industry-wide recognition as a worldwide leader, underpinning all of our delivery is a relentless focus on project management. You've heard me talk about that a few times, enabling us to become a trusted and accountable partner. We see ourselves as a world-class professional services company, working with clients on extremely important and complex projects aimed at bringing innovative medicines to market. Patients are waiting, and that is what drives us, and we recognize that. Fortrea is one of just a handful of global -- truly global CROs that can handle virtually any form of clinical management project across therapeutic areas, across regions, across geographies and across any shape and size. We have the scale, we have the expertise, and we have the operational strength to deliver large-scale development projects or any of the top 10 pharma companies in the world, but we're not so big that some of our midsized and small companies get lost in our size. We focus very heavily on building a deep level of customer intimacy in every corner of Fortrea. The ability to serve a diverse slate of customers is reflected well in the diversity of our client base which is roughly speaking 50-50 large pharma and biotech. We like this mix, and we continually strive to nurture this balance to enable us to see the best of both worlds between large pharma and small biotech companies. Excuse me, I've been talking all day. A little water break goes a long way. We are fully embracing and leveraging AI and machine learning across the spectrum of what we do. From clinical trial to commercial, we're constantly striving to bend the time and cost curve, but we are taking a conscious and focused journey to pilot, to fail early and roll out successes. To share a few examples, we're developing our own agentic solutions. We're modernizing our Accelerate platform, which is the core of how we do clinical delivery and embedding it with AI and ML in virtually every module, and we're working with a variety of innovative partners across the industry. Through these efforts, we are changing how we deliver clinical trials and changing how our employees work. AI and ML is not a catch phrase. It needs to be part of the fabric in how we deliver for our clients, and we're embracing that fully. And we think in some places, we're going to make some leap frog -- leap journeys in front of our competitors as well. After 2 years as Fortrea, we've got the foundation in place and we've made it through the headwinds that are typical when you emerge out of a spin. Now we are able to completely focus on sustaining revenue growth and margin expansion. Going forward, we will measure our progress against 3 standards, 3 standards of excellence: commercial excellence, growing our business by building trusted partnerships with our clients by growing our reach, relevance and repeat business; operational excellence, executing on projects that our clients have placed in our reliable hands with deeper project management capabilities an enhanced biotech operating model and a digitization of our workflow; financial excellence, continued organizational rightsizing, further SG&A effectiveness improving our operating margins and continuing to optimize our capital structure. Now we'll be talking more about our Q4 results in February, and we'll release our guidance for 2026 at that time. I am very proud of what the team achieved in Q3 and that in 2025, the team was able to deliver in line with guidance provided. So said another way, we delivered what we said we would and we remain committed to our priorities of margin expansion and top line growth. I'm very pleased to be on this journey with a very seasoned management team that has deep CRO and client experience. To recap, after 2.5 years as Fortrea, we have built a unique value proposition as a pure-play global CRO with decades of experience behind us. We have the broad scale and the capabilities to address our diversified client base, with a mix of roughly 50-50 large pharma and small biotech clients. We're a leader in clinical pharmacology service. We're a leader in full-service Phase I through Phase IV clinical trials, FSP solutions and we have global scale and expertise spanning across 20 broad therapeutic areas. We're modernizing study delivery. We're leveraging technology to bend the time and cost curve in clinical development. And now with the spin firmly behind us, we're focused on 3 pillars of excellence that I'm driving the company towards: commercial excellence, operational excellence and financial excellence to drive a culture of sustained revenue growth and margin expansion unlocking value for our shareholders. Now I want to thank you for the time. This concludes sort of formal remarks, and I want to open this up to questions from Kai and from the rest of the audience as well.

Thank you very much, Anshul. That was a wonderful presentation. So just to flag, we'll take questions from the audience. But to kick us off, I have like 2 questions for Anshul at the moment, is that okay?

Of course.

Okay. All right. So I know you've now spent roughly 6 months in a role. So congratulations on that. And I know you joined Fortrea with a solid understanding of the business. But after spending time with your employees, your client and your investors, how would you see your perspective has evolved since you joined? And then were there like any surprises, positive or negative, relative to your initial expectations?

I think that's a great question, and thank you for that. It has been -- It's been a journey over the past 5-some-odd months. And you're right, I came into this new venture with a pretty firm understanding of what I thought Fortrea strengths were as well as what I thought the challenge is not just in Fortrea but in the industry were more broadly. And my perspective hasn't changed, if anything it sharpened. And having spent a considerable amount of time in the first couple of months traveling across the globe, meeting with our client base, meeting with our colleague base across several continents, the conclusions arrived at were a validation of my hypothesis. The foundation and the fundamentals are incredibly strong. The team -- the largest majority of the team is focused on delivery and is delivering in a consistent manner is recognized by our customers in delivering in a consistent manner, and we have relatively sticky relationships with our customer base. And some of the challenges are what I thought they were. We did have, for a period of time in 2025, softening of the market. We've had that since 2024. That creates some challenges. And at the same time, I think the company really needed a sharp focus on execution and commercial execution, operational execution and financial execution, and that's been a large part of where my time has gone and where my priorities have been.

Good. Good. And just to double click on commercial execution. I know you've referenced the Reach, Relevance, and Repeat as a framework that you want to use for Fortrea's commercial engine. Can you sort of walk us through why you think this framework is necessary? And what specifically has changed in terms of like your go-to-market approach? And how are you beginning to see that show up in that customer engagement?

So this is a framework and a conversation that isn't necessarily just met for how I engage our investors and the investment community, but it's really about how I engage our employees and engage our commercial teams. It's about simplifying and getting focused on a handful of priorities that we need to execute on. Reach is really important. I think we do very well with customers that we know very well, but a big focus for me and our commercial teams has been to expand our reach and bring new customers into the fold. It's going to be part of our growth strategy, it's how we return to growth. Relevance is very important. We need to make sure we're not bidding on things we're not qualified to win. We need to make sure we're really focused on areas where we have expertise, lean into those expertise, be able to design the kind of solutions and bespoke solutions for customers that are more akin to a high-performing professional services organization. And that's why I talk about relevance with our team quite a bit and repeat. There's no reason why we shouldn't be getting the next phase of work and the next study or the next indication within a customer if we're delivering really well. Biggest part of commercial isn't just a sales team. It's actually our execution and our operations team. How we execute and how we show up on the first study is what leads to the next one and the one after that and one after that. And so Reach, Relevance and Repeat are not just a framework I've been using in conversations like this, but it's been trying to get a very consistent, clear message with our customer-facing teams on what we need to do to continue to sustain growth in the business.

Thank you very much for that. All right. With that, I'll open it up to the audience for any Q&A.

It's always great to go right before lunch. Everyone is focused on what's in the boxed lunches.

All right. Well, I have some other questions for Anshul and Jill. So how would you -- you mentioned like pharma R&D investment in this space, so how would you characterize like the broader pharma budget environment now? And sort of are you seeing increased signs of spending?

Yes. I think a lot of my peers have talked about this, many of the analysts covered in the industry talked about this. I think there's a reasonable amount of consensus amongst us all. I think we all use different words, I mean something similar, but I think we're all cautiously optimistic is a way to think about it. I think in the Charles River presentation just earlier, the CEO was talking about headwinds in 2025, and there were considerable headwinds in terms of in terms of big pharma, still continuing to figure out what the MFN pathway looks like and what does it mean for pricing and what does it mean for investments with AstraZeneca coming to agreement and other companies coming to agreement these are kind of headwinds that are starting to subside. Biotech companies continuously looking to new sources of funding, looking for sources of funding. We know in the first half of the year, funding environment is more challenged and more constrained. We saw in the back half of the year that getting better. So some of the headwinds that were holding back the capital flow that leads to R&D investment, which is the precursor to what leads to opportunities for us, I think we're seeing some of that subside, not all of it, some of it. So I think my sentiment would be very similar to what you probably heard from others is a cautious level of optimism. I think I've heard folks talk about different estimates, 3% to 4% return on R&D investment over the course of the near term. That seems in line with what we're seeing and what we're hearing as well.

Good. Thank you very much for that.

[indiscernible]

There is a mic coming.

Can you just talk about outsourcing trends in general and then within that, the mix towards FSP because it seems like that's been another narrative.

Yes, I'm happy to do that. Look, based on where I sit and what I see and what I hear and even my time before Fortrea, I think these trends are in -- going from FSP to FSO, FSO to FSP, they're very dependent on a specific company, where it is in its life cycle, the specific executives that have taken over specific roles. And I think there were several processes over 2024 and 2025 in some pharmaceutical companies where you saw a bit of a shift towards more FSP. Some of that came back. But these things ebb and flow. And if I go back over the last 10, 15 years, every couple of years, we see some ebbs and flow in that, especially in large pharma, but nothing that has dramatically moved the market, in my opinion. When I look at small to midsized companies and biotech companies, it's been pretty consistent, and the trend has been consistent towards more full-service outsourcing. I think what we do see more of right now is this concept of more hybrid models. We see this concept of especially midsized companies focusing on full-service outsourcing for everything but data management and treating data management is something different. So one of the things that helps us at Fortrea is our ability to pivot with our clients, depending on who our client is, our ability to provide either a full-service solution, an FSP solution or more and more what we're seeing some version of a hybrid solution depending on the case.

Any more questions?

Thanks for that.

Okay. All right. I have one question. So investors, they often focus on consistency rather than like single quarter-to-quarter outcomes. What operational and commercial changes sort of give you confidence that Fortrea can deliver more consistent book-to-bill performance going forward?

Yes, I think that's a great question. I think consistency matters the most. But consistency to me is all about discipline and execution. You'll see fluctuations, especially in commercial performance quarter-to-quarter, if you're seeing the same book-to-bill quarter-over-quarter, I doubt those numbers because these things move up and down. But my razor focus right now with all of our customer-facing teams has been on discipline and execution. My focus with the commercial team has been on increasing our aperture and increasing our win rates, increasing the quality of our proposals going from more bespoke solutions and getting a little more forward thinking in what the client needs. And my focus on the execution side has been with our project management organization, how we show up ultimately makes all the difference. Look, I really think that this is a people business. I think -- I've seen some of our clients actually in the audience. I think at the end of the day, it's not about necessarily the logo. It's about the people. It's a people business. How are people show up and how they engage with clients, how they present proactive solutions, how they think through the strategy and how they build confidence and reliability with our clients and how they are going to be able to deliver over the next few years and how we back that up by ensuring our people are enabled, are empowered, have the tools and resources. Ultimately, that's what wins. And to get to a level of consistent financial performance, I have to focus on that. I have to focus on discipline and execution.

Thank you. I think this is to both of you. So I know in your presentation, you've emphasized on the next phase in -- about margin improvement and you say it's a multiyear journey. How should investors think about these key building blocks of like cost reduction versus revenue growth? And like what do you think ultimately enables Fortrea to move towards the more industry standard margins over time?

Yes. Maybe I'll take that one, Anshul. So we have been on a journey. And certainly, we know that compared to a peer set, which in our mind, is probably something around mid-teens in terms of margin and where we need to be. There's a lot of opportunity. We have been on a journey and we have more work to do. And it's a combination of cost discipline. So rightsizing the business, we've talked this year about the journey we've been on. we have been communicating our progress towards our goal of about $150 million of gross cost savings this year and getting to about $90 million of net savings. And we're going to continue to be on a rightsizing journey as an organization. But the other piece that's really critical to that in terms of being able to get to those peer margins is getting revenue growth, driving that top line growth, and that's a lot of that commercial discipline and execution as well as the operational delivery that Anshul mentioned there. We can and will continue to focus on how we rightsize the business, but we cannot get to peer margins just through cost cutting. And so what he's been very focused on and the entire team has been how do we have that consistent execution commercially so that we can get to a period where we're bringing new business in, and we're executing against it effectively. So it's a multiyear journey. We're not -- as Anshul said, we're not providing our '26 outlook today. We will do that later in February when we provide our full year results with that guidance. But we also are thinking about how do we share with you all in '26, what that journey looks like and over the term, what it will take to get to margins that are more consistent with peers.

Thank you very much, Jill. Another question that has been on my mind is, the CRO market is very, very competitive. So [indiscernible] in FSP, how are you balancing the pricing discipline? Would you need to win share? And where you draw the line on what there might be dilutive to long-term margins?

Yes. I'm happy to start and you can add in, I think I haven't had a single meeting where that question hasn't come up. So we got a little bit of practice in answering that. I do think the CRO industry is very competitive. I think it's fairly competitive, frankly, because you need to have enough players to be able to drive innovation in any given market. I think you have to look at pricing at both FSP and FSO. What I've said in the past on the full-service outsourcing is I don't think customers buy on price. Even the largest pharma companies, while they have, obviously, volume and negotiating levers, nobody wants to sacrifice the quality of the team or the hours that it takes to deliver a task over price. I think that really clients buy on team, strategy, output, having conviction that you could actually deliver the results that you're promising. On FSP, on the other hand, I do think price plays a bigger lever. And I think in 2024 and the first part of 2025, we saw some level of discipline drop there and aggressive price competition. There's areas where we drew the line and chose to walk away from business because it didn't fit requirements for what we think is a healthy mix from a customer standpoint and a margin priority standpoint. That said, as I look at the back half of 2025 and even conversations I'm having now, I do see pricing discipline has returned. I think we see a little bit more of a normal behavior that one would expect.

Thank you very much for that. Jill, I think this one is for you. Okay. So beyond like near-term deleveraging, how should investors think about like your capital allocation priorities over the medium term? And how do these priorities support both growth and your margin expansion?

Sure. And we get that question a lot as well. And I do think coming out of the spin, we inherited a fair amount of debt. And we have, as an organization, been focused throughout the last couple of years, and we remain focused on how do we improve that leverage position. And I'll remind people, we've done some divestitures. We've used that -- those proceeds to pay down debt. And we were really pleased. We announced in November, we paid down roughly $77 million of some of our notes using cash on hand. And so we have demonstrated over time, consistency and discipline in using our cash proceeds to help improve the position. The other thing that is important is we've made some really significant improvements in our order-to-cash processes, which is showing up in our DSO and our ability to bring cash in. And so we've been on a journey with that. The first quarter of last year, we had some impacts as we launched a new ERP. And I talked about that ahead of time. And I think we've been able to demonstrate over the course of the year that this is an organization that can and is delivering cash flow, and we're committed to that going forward. So when you think about capital allocation going forward, we will be continue to be focused on how we improve our debt position. We'll think about where the targeted organic investments we make to continue to improve our ability to be relevant and to get the right level of reach and we're kind of thinking about the other things, some of the things that Anshul mentioned in terms of technologies, targeted technology investments that help improve our productivity and quality. But that's where we're focused. And I think we've demonstrated good discipline on that, and we'll continue to do so.

Thank you very much for that, Jill. Just before I ask my last question, I want to see if anyone else have a question from the audience? Okay. So Anshul and Jill, as investors think about Fortrea coming out of this conference, what is the single most important message you want them to take away regarding your company's trajectory and execution?

Yes. Thank you for that, and thanks for the time and hosting us today and asking questions. Look, I think the single most important thing is that Fortrea has completely come out of the spin. The market is getting better. Some of the headwinds that we talked about in the market are starting to subside. Our focus as a management team is purely on our customers right now. Our focus is on execution and getting the whole organization to focus on execution for our customers. We think that is the best path to not only margin expansion but also growth and returning back to a sustainable level of growth. And so if there's anything I would want folks to walk away from is our mantra right now is focused on execution. And our priorities are our customers and the work that we have signed up to deliver for our customers.

Thank you very much. All right.

Thank you. [indiscernible].

Thank you everyone for coming. All right.