ICON Public Limited Company (ICLR) Earnings Call Transcript & Summary

Good morning. This is Jack Meehan from the Life Science Tools and Diagnostics team. Appreciate you joining us for the Barclays Virtual Health Care Conference. I personally wish we were in Miami, but very pleased to be joined by the ICON team next with CFO, Brendan Brennan; as well as Head of Investor Relations, Jonathan Curtain. Gents, maybe I'll turn it over to you just to see if you have any introductory comments?

Thanks, Jack. It's great to be going on a virtual conference with you guys. I think maybe that's the way of the future in a lot of ways. So maybe this is no bad thing in terms of thinking differently about how we communicate. It's been an interesting start to the year. I think that's certainly true. What we have seen so far has been managed relatively well, I would say, within the ICON organization. Obviously, the hot-button topic is COVID-19 and how as an industry and a company we are dealing with that. As we outlined on our call, we think there is an impact to our first quarter that's no more or less than we -- what we called out on our call. So an impact of about $4 million to $7 million is what we called out. We haven't changed our assessment on that. We are carefully reviewing the situation as it evolves, particularly in our larger territories such as Western Europe and North America. But the impact, as we said, in the Asia region is probably still in that ballpark. And we are, as I said, carefully monitoring it as we go. I think the good news is that so far, we are seeing a stable business environment. It is still very, very solid from what we see, and we certainly are thinking that our first quarter business wins are looking okay from our expectation levels at this stage. And so that good business environment remains robust, and we remain obviously out there fighting hard for every opportunity. I do -- we do see this, as an organization, as a transient impact upon the industry. And indeed, we do see it picking back up but one that we will, as I said, be closely monitoring as time goes on. In terms of our own story, we do see 2019 -- or 2020 being another solid year, given of course, what we've just spoken about and looking to see decent levels of revenue growth and margin accretion as we go through the course of the year. So I don't have any other impacts from COVID that we haven't counted in yet. And we continue to look at a solid marketplace. We continue to see, as I said, good BD for developments, both from the small biotechs and the larger customer groups. So across the market, still a very, very solid environment. And with that, Jack, I'll stop talking and let you maybe ask some more questions that will help with some of the issues.

Yes. Thank you, Brendan. The only thing I would disagree with is I don't want the virtual conference to be the way of the future. I hope we're back in Miami next year.

Fair enough, Jack.

Maybe let's just continue on with the coronavirus impact. So you had called out the $4 million to $7 million in the first quarter. Can you just maybe walk us through as you look at the business where you've seen the impact? And in terms of the awards, you talked about the environment remaining robust. Just have you seen any change in terms of the pace of the way pharma companies are doing business in the face of the impact?

Sure. Yes. I mean we've seen -- obviously, we've seen in the most impacted areas the biggest restriction, particularly in terms of ability of staff to monitor at site. That's exactly as you would expect. So in our territories, predominantly at the moment, it's been -- those ones that have been mostly impacted are China and South Korea. Obviously, Italy is becoming emergent at the moment. But certainly over the last number of months, it has been the former 2 territories that I spoke about. And of course, that was unlimited too, and what you really need to do is limit the ability of sites and patients to continue with their usual models of interaction. And it would limit then our ability to have clinical monitoring conducted at the same pace. We do feel at the moment, as I said, that it is a transitory impact so that we should be able to catch up on any site visit midst later in the year on the assumption that as we've seen good progress, I suppose, with the evolution of the disease in China, and we have seen a lot of our staff coming back to offices there as well. So we're hopeful that that will be the course that it will take in other parts of the world. That's certainly how we've seen things playing out, and that's very much what we're very focused on. As an organization, obviously, we're limiting travel. We're encouraging homework where practicable but also really just following local government decisions in each territory. So for example, there is no stay-at-home issue notice here in Ireland. So myself and Jonathan are sitting in our office in Leopardstown as we speak and continuing to work as normal. In terms of the business development environment, I think the good news there is so far, so good. We haven't seen any meaningful slowdown in decision-making from either our large pharma partners or small biotech partners at this stage. So they seem to see it as we do, that those are transient impacts to the organization and to the industry, and they're very much looking at continuing to ensure that their development pipelines are being worked upon and developed over time. So that's very much what we're seeing in the marketplace at the moment. So I would say we're doing a lot of communication back to our pharma partners. We are having pretty much -- with a lot of it at this stage, we're certainly tracking all of the patients and their progress on their trials and having very, very regular communications back to our pharma partners to ensure good progress on ongoing trials as well. So it's very much a mix of ensuring that the work we have is progressing at a pace that we can accept and get our heads around as well as ensuring that the new business wins are continuing to flow in.

Great. So maybe kind of moving past the transitory impact and back to the strategy. There's been a lot of change across the CRO landscape the last few years. Just as you size up ICON's approach to clinical development, I thought it would just be helpful to kick it off and talk about where you view the company is most differentiated versus the way some of your peers are trying to approach clinical development.

Yes. Jack, it's been -- we've been -- had a pretty clear strategy for a number of years now in relation to, I suppose, our differential in our approach to clinical development. And that has been very much around the concept of data, site and patients, all 3 being extremely important elements of how you really crack the nut, which is speed of patient recruitment. So we've been, as you guys know, on the data side of the house, been very much working with data partners using our skills from the perspective of analytics, not being the folks who own the data but actually work with folks who are managing data, which is good, clean data sources, and then composing that into our own, if you like, data warehouse and doing the analysis off the back of that data. And we think that's worked well for us. It allows us to have a very eclectic view of numerous different metadata points. And certainly, we've been and we've talked about -- a lot about, yes, the use of our internal data, our internal lab data, our internal clinical trial experience data but also the use of external parties across numerous areas but particularly electronic medical records, which we find, when maintained properly and in a consistent manner and kept really up to date, which is very, very crucial, as being a very, very good source of data, to be able to really be able to heat map where those patients are at any point in time and being able to help our pharma partners design their trials around how we can gather those patients quickly. The other piece is then -- is that, obviously, as we and a lot of our competitors will talk about that element of their data strategy and how that sits on top, if you like. We've also converted from the bottom up, which is very much around that concept of being embedded at the site, being really good support structures for doctors at sites, making sure that their process is as easy as it can be and ensuring that the patient and doctor experience on the clinical trial is as easy as it can be. And we've used, obviously, our site and patient networks to achieve that. We have numerous sites now, as we know, where we have embedded staff in both Western Europe and North America. And that's really there to make that doctor experience as easy as possible and to make the -- whether it be contracting, whether it be the software they use on the trial to conduct the trial to our FIRECREST modality, whether it be help them with patient site -- patient selection in the process. We have the embedded staff on the ground to help with all of those services. So the doctor can literally come in, do their examination, do their trial work, walk out, get their check at the end of the month and so it's a win-win for everybody involved. And I suppose the latest piece to that puzzle has been our -- very much our patient focus through our acquisition of Symphony and really looking at how can we support the patients through the trial in addition to the doctor, how can we enable the type of virtual trials, the type of really getting out to the patients in the home and how can we really make sure that they are focused upon making sure, that they're being very much staying in line with the protocol of the trial and their expectations around their own drug regimen. And so that's very much a new piece to our puzzle, the one that we're very excited about. I think it does open the door to the concept of the virtual trial. We've been very good on our technology sources around different devices that can be deployed in the home to help support real-time information for a single trial. This -- having this nurse organization that can actually visit patients in home is a furtherment of that. So the key strategy for us is very much around, yes, data, absolutely, no different or less than any of our peers, but also the support for the doctor and the patient on the ground to make sure that their process through the trial is as painless as it possibly can be.

Great. I was actually hoping you could elaborate a little bit more on the site networks because as we size ICON up versus some of the peers, you've definitely -- you're one of the leaders on the site network side pushing down that path. I was just wondering about -- talk a little bit more about the additional value that the site networks provide for the clinical trials. And is there a way that you think you could actually capture some economics over time in terms of the use of these site networks? And then maybe finally, what's the right balance between owning and partnering in terms of the reach that you want to have?

Sure. Yes, absolutely. As I said, we've spoken about in the past, the -- why we're doing this, I suppose, in the first instance is really around speed to patient recruitment. And we have seen that when we do recruit through our sites where we have embedded staff, it does work at least a 50% better pace than what we see in the traditional model, if you like. So that really is one of the big focus. From a commercial perspective, it is much more about having that additional service to the pharma companies. So it has its own independent revenue line, if you like, its own revenue stream to help the speed to patient recruitment, but also then making sure this is the predominant model that we're using in our own clinical model, if you like. So about 20% of our patients, as we know, are coming in through this modality at the moment through our own site, our embedded site networks. I think it's important to differentiate between the classic SMO structures, what we have as an organization. The site management organizations were very much clinical only, very much owned infrastructure. What we think is really the piece that really cracks this model is being -- yes, we have certain owned clinical models, but they are really more at hubs in terms of how we get out to other sites and proselytize, if you like, at other sites about the benefit of this model and to other doctors in this model. The benefit, I think, really comes when you have patient populations who are normally coming into a doctor's practice or to a general petitioner or hospital group network and where we can embed into that network our staff to support the doctors. So not actually directly implying the doctors but actually having the support staff around the doctors to ensure in their normal work, clinical trials is a really good option for them in terms of the commercials of the site, but also in terms of their own ability to be able to get involved in broader research and development and to really kind of expand on their own resume, if you like. So it is -- we do think it is a very, very good model commercially for the sites, for us as a CRO company and for our pharma partners when they're looking to really speed up the model. I think in where we want to get to with this model, certainly, we would like to, over time, see 1/3 at least of our patients come to our own site network. And as I said, we're making good progress towards this. We have our affiliated model as well, where there's a relationship with the site that's not as quite as embedded, and we'd like to see at least 1/3 of our patients come through that modality. So I think there will always be opportunity in giving therapeutic mix some of the traditional model. And again, we would say that probably 1/3 over time would be still in that traditional model. But certainly, we want to continue to press this advantage that we feel that we have in the marketplace and that better speed of patient recruitment coming through a larger proportion of our onshore.

Great. Maybe just moving back to the business environment and your relationships with large pharma, one of the themes over a number of years in the industry has been the use of strategic partnerships. I was wondering if you could comment on have you seen any changes in the way that pharma is approaching these partnerships. And one of your large customers you extended by 1 year, a year ago. Maybe just when do you expect an update there? And what gives you confidence it will be a long-term extension potential versus something shorter term again?

Sure. Yes. I think if we look -- before speaking to that particular customer, if we look at, holistically, strategic alliances, they have changed over time. But I think there's certainly -- what you can say about them is that they're not one-size-fits-all. I think that's fair to say. So some pharma partners have gone down specific routes. Some have gone down others. We see some partners who have more FSP-type relationships. We see some who are obviously more full-service type relationships. We see some of the hybrids of both in organizations operating across the model. We see some who have still in-house trials being done as well. So there has been evolution, I would say, honest, but nothing I would say that is uniform. So I think sometimes people think everybody is moving towards full service or everybody is moving towards FSP. And I think what you see really in reality is some folks are moving in some directions and other folks are moving in opposite direction. And there is always that element of chop and change as part of these strategic relationships. But it's fair to say that they've been evolving over time. I think the technology join-ups between the CROs and the pharma partners are much more evolved now than they would have been at the beginning of these relationships. If you look more -- probably a decade or more ago, of course, it's when they started coming about. And there is a lot more embedded-type work and embedded-type relationships into the pharma companies. So then that become, in fairness, quite sticky in most instances. And I think that's true of our largest customer, who you referenced in terms of that process, and that's an ongoing process, as we know. They did extend for 1 year last year. That was their request. They didn't quite feel that they were ready to go into full MSA agreements and terms the last year. So we were happy to roll forward and work with them as a good partner. And their model is this sign. It's that they do want to reflect something very similar to the original MSA that we put in a number of years ago, which will be a 3-plus-2-type model, so 3 years-plus to get an option of an additional 2. That is something that we are working on and towards at the moment. And we do hope that, certainly, by -- I think the time lines for this one are June. That is the events of time that we have. And as we all know, work does tend to take a few months' time that you give it. So we would like to see it happen before that. And certainly, we're working towards that. But at this stage, our -- kind of our expectation is probably June is around the right time. But I'm very, very happy with that relationship. I think it's a good relationship. As I say, they're our biggest customer. We don't see that changing at any point in the near future, certainly. And it's one where we do feel that there's a really, really solid, long-term working relationship. And we look forward to continuing with that relationship as we go forward the next number of years. So in good process, I would say, still will be about that June time frame. But I suppose, from the perspective of a good relationship with #1 partner, we still see that continuing as we go forward.

Great. Next, was just hoping you could weigh in on the competitive environment. How would you characterize that now for the awards? Have there been any changes, given all the comings and goings in the different CROs here and there? And how has pricing generally been as you compete for awards?

Jack, I'd always say that pricing is competitive in our industry, and I don't think that's really changed over the years. It's always been -- we're tough competitors with each other, let's be frank, and then pricing is certainly an element of that. We live -- but we are fortunate to live in a fairly benign environment in terms of demand profiles for CROs at the moment. So the pricing environment is relatively stable, I would say. But with that, you need to bear in mind that when there's a bid for a big pharma company, folks will bring their best game to it, and that will -- and pricing will be an element of that. And there's nothing new in that particularly. I think we've seen people really bring their best game to any pricing negotiation that they've had, any competitive nature for large-scale relationships where you know it's multiyear deals with significant amount of dollars that could well come off the back of that. So no change there, I would say. I don't think -- I think we often in the public space and -- pardon me, ICON has been one of the longest serving public companies out in the marketplace. And it's interesting to see because we've been public for as far 20-plus years. And I think there's often a perception that other companies or other competitors that are still private and come back to the market that they fundamentally change their approach and nature of their competitiveness. And you do see some elements of that at some stages. But generally, I would say the companies are big and mature enough at this stage to really realize that when you sign a contract or when you sign a multiple-year relationship with a partner, you're going to be left with that merger for a long time. So I would say that big players have been relatively disciplined about pricing and not irrational, let's say, and I think that persists. Not to say that we are not -- it is still a very, very, as I say, competitive marketplace, but there's nothing new particularly in that. So I would say there's nothing that -- to go public. The privatizations that we've seen over the last while have really sparked off in terms of additional pricing competition.

Great. Maybe turning to the income statement. How should we be thinking about the gross margin progression from here? And maybe just comment on how do you find the right balance between investment and labor, and making sure you're maximizing the efficiency of clinical trials?

Yes. No, it's a good question. We've talked about the fact that our margin profiles are something that we work on in terms of trying to -- ensuring that we maintain at or in around that high 29%, 30% mark of revenue. And that's something that we do as see being consistent as we go forward. And that really predominantly is because we -- when we use technology and we gain efficiencies, as we often do in terms of our clinical approach, or when we see mix shifts in our business, be that towards or away from FSP, which, as we know, is a slightly different pricing paradigm. We certainly have been able to make sure that we're sharing those efficiency benefits from a technology perspective with our customers. And so people will say, see the benefit of the efficiency and that they are really -- we use it really much more from the perspective of keeping our existing partners embedded in relationships, but also as a real good hook for new customers to see when there is technology benefits, when there is efficiencies, when we bring in new service lines like patient recruitment, and obviously, the patient and site business. But these are all additional pieces that really allow us to lever our position in the marketplace from a competitive standpoint in terms of new business wins. And so that's very much how we look at our construction of our gross margin. It is around maintaining our margin profile, continuing to leverage through the use of our SG&A cost base, drive earnings growth for our shareholders certainly through that. But predominantly, as a gross margin function being it really being a part of the overall top line growth and really, really focusing on that as part of -- as I said, it's been a very benign business development environment, letting that be the lead point and using that as the biggest key to growth.

Great. And then maybe just in the last couple of minutes, I was hoping to get your latest thoughts on capital deployment. Obviously, given some of the volatility in the markets, does that change for you at all the willingness of sellers or your willingness to do a deal at the moment? And then obviously, given some of the volatility in the equity markets, how are you feeling about buyback and the value of your own shares?

Yes. And I think we have said, Jack, and continue to certainly pursue that we would be opportunistic in the marketplace in relation to buyback. And certainly, we are active in buyback at the moment. We had said clearly that we were going to buy back 1 million shares over the course of the year without specifically giving timing to when that would happen, as I said, because we look at opportunistic share prices and the equity markets. Certainly, we're seeing weakness, as we all have, over the last number of weeks, and we have been active in that buyback, so that we are certainly out there at the moment, continuing that as part of our capital deployment model. From an M&A perspective, it is interesting. We have seen -- I mean it is very, very early days or so as this virus evolves, to see long-term multiples in the space change very specifically. But certainly, we have a very strong balance sheet, as folks know, and very, very good cash conversion cycle in this organization. And we certainly do want to continue at pace with the level of M&A that you've seen from us over the last year or plus. We've done 4 small tuck-ins over the last year. We're very happy with those. They've been really great strategic additions to the organization. And we want to continue that trend. And we have a very healthy pipeline. And I think the fact that we have a very strong balance sheet at the moment in this sort of somewhat more uncertain time allows us to be a little more flexible than maybe some others out there. So certainly, it is something that we're continuing to look at and hoping very much to be able to continue that good pace of M&A that we've seen. So the focus is very much still on M&A, still on in that strategic element of bolt-ons. Maybe some of those bolt-ons will be slightly more sizable than what we've seen in the past, which would be fine, I think. As an organization, I think we can certainly manage that, and efficiently. And I think this is a good year to take opportunity there as well.

Agreed. Okay. Well, thank you for joining us in the virtual event. Wish we were together in person, but I appreciate you making the most of it in the new setting.

Thank you, Jack. Our pleasure.

Yes. Talk soon. Bye.