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

And that's it, I think we're live. So good morning, everybody. Luke Sergott from Barclays, cover Life Sciences, Tools and Diagnostics here. This is my great pleasure to welcome Brendan Brennan and Jonathan Curtain from ICON. If you guys -- I think you guys want to do kind of a little quick introduction, and then we'll dive right into some questions.

Sure. It's great to be at least on the conference with you guys, again, virtually this time. Unfortunately, my view out the window of a very, very dull, wet. So doesn't really compare it to the usual Miami Beach scape, but we're considering putting a picture over the window to make ourselves feel a little bit better. Obviously, it's been a busy couple of weeks, and I'm sure we'll get into some nice Q&A with Luke shortly. But we're obviously excited about the recent developments that have happened here at ICON in terms of our acquisition of PRA. We think it really is across the board, by every metric, for every stakeholder, a really, really strong merger of 2 really solid companies coming from places of strength in an industry with really good tailwinds. And I think that doing this, while we have that sense of strength really, will give us the ability to consolidate and continue to grow as we do that. So we're really excited about it. We're really thrilled. As you can see, Jonathan's brought his pink shirt, I'm remiss today. I have locked up my PRA colors on today, but I've got my blue shirt on today. But we're super excited about it. Look forward to the questions. It's been a really great quarter as well. I think it's worth saying as well as from a standalone perspective, both organizations had great leaps forward, great book to build, really strong fundamentals there and coming into 2021 with a renewed sense of vigor and an expectation of growth across both organizations. So those are a couple of remarks. Jon, I might hand back to you, Luke, and we'll probably get more into the more interesting part, which is the Q&A section.

Yes, that's great. You guys are certainly bringing together 2 unique color combinations with pink and green. So we'll see how that turns out. With the deal, so when you talk about the metrics and the combination of the company, so just kind of walk us through why now? I mean, you guys have always been staunch in saying that you didn't feel like you needed to do anything of that scale? Is there something where the coronavirus and the lockdowns really kind of accelerated adoption of some technology aspects that you couldn't build quickly enough? Or is it just that you saw an opportunity to get that type of scale and really continue to gain share and operate from a position of strengths?

I guess it's certainly more the latter, Luke. I think there are definitely elements of this transaction, where if you look at the industry in totality, we still have a very segmented industry, and quite a dispersed industry. So we always felt - I mean we have the last number of years and Steve has obviously been very clear, when he became CEO back of 2017, one of the first things he did was seriously take a look at [ it by himself this consolidation ]. So I think we always thought consolidation was on the horizon in this industry, and we wanted to be in a position where we were making proactive decisions about that as opposed to being reactive. We are #5 and #6 in the marketplace. So these were great, great competitor. We are really impressed with their management team. We really think the culture is put together well. And we're doing this, as I said, from a point of strength. We're doing this at a time when actually, there is quite a nice tailwind in the industry, and we're looking for additional growth. Both of these organizations are growing in 2021 significantly and will continue to grow, and that's really what we're about here. We're not about shrinking. We're not about really kind of thinking about do we have to do this. Neither of us have to do this. I'm very clear on that particular point. This is an opportunity to put together really 2 stalwarts in the industry and combine to create what we think will be industry-leading [ down the road ]. And with the strength, depth, therapeutically, geographically, that will be kind of as good as any, if not better, than most in the industry. So a really compelling story. One that also answers a lot of our pieces. I mean, we feel that we are in a position where we had to do this as a result of coronavirus? No. I think you've seen strong recoveries in both organizations independently off to Q4, and that trend continues into Q1 2021. But what you have seen actually is, is it is -- does give us -- present the opportunity to look at how clinical research is still different. Obviously, we're very proud of the fact that we've just finished out on the -- or continuing to work on, I should say, the Pfizer BioNTech trial, first approved drug to market for the -- obviously, first approved vaccine to market. And when we looked at that, that gives us a lot of opportunity from the perspective of using things like remote monitoring. So for example, we had sites in South America that were being monitored by some of our teams in Japan, being able to follow us on in terms of how you monitor trials has really taking a step forward. And I think our pharma partners are much more open to the concept. So when we look at the complementarity of assets between ourselves and PRA, obviously, we have the site infrastructure. We have the [ remote ] home visit infrastructure. They have a great, great remote and mobile platform and that we're able to now put all the pieces, both technology and physical infrastructure around the patient to allow us to reach more patients at a time when people are very much aware of that clinical research is an apparent care option. If you go back 2, 3 years ago, folks -- a lot of those folks talking to each other at the health care conferences. We all know what we talk about. A lot of people on The Street didn't. 3% to 5% is the average participation in clinical research. We just think that there is huge opportunity, both from making it easier for the patient to be involved in clinical research by having that virtual tribal infrastructure we can put around them, which I think these 2 businesses bring together. But also just the broad awareness of what clinical research is and clinical research as a care option. So we think this is a really great time to try to use the scale of the organization and use the independent investments we've done to really push the paradigm on how Clinical Research is delivered. But we also think it's a great time just in terms of the industry, as I said, bringing to very strong organizations together. We're very much focused on continued growth as we go forward.

Okay. That's great background. And so when I think about the industry in general, it's been that the large global players like yourself and your other public peers have been taking share from a lot of the midsize, right? And so at the bottom, you have very small CROs, very specialized, maybe have 1 or 2 biotech clients. They're all over the place. They really haven't seen a lot of share loss, but it's been you guys stealing share from that midsize player. Do you think that by scaling up and essentially becoming the third largest now with PRA, you really accelerate that share gain? Or is this that -- you saw that probably in 3 to 5 years, I know how long-term you guys think out -- you plan outside. So was it that 3 to 5 years, we're saying like, okay, now I think that, that share gain is probably going to normalize, so we need to scale up to maintain share against our public peers? Am I making that clear?

I think what you're asking -- yes, I think you're saying, do we kind of envisage that there will be a slowdown in either a share gain from other peers in the industry, be they smaller or larger and is that one of the reasons why consolidation was important?

Yes.

All right. Got you. I think really, what we're looking at is this -- I mean, certainly, we are looking for the long-term nature of the industry when we did this deal. We certainly weren't thinking about this, is something we needed to do for the next 18 months. This is definitely something we're thinking about as a combined organization. As I said, that could be in a leadership position globally for the next 5 to 10 years. Certainly, that's the way we're looking at things. That said, I mean, the biotech market specifically, and the funding, obviously, has been extraordinarily strong. You guys know, and I think we've made it very clear as standalone organization, but you guys know that PRA has such a great pedigree in terms of where they've evolved from in that industry, that -- those small to mid customers. They kind of grew up with them on the West Coast, in the lower part of the U.S., still have an amazing pedigree there. I think we bring a very nice complimentarity together there, where ICON was probably a little more large customer-centric, although we have been growing in that smaller or mid customers. And those small or mid customers, they're looking for the same things. They're looking for, have you guys got the breadth to really bring my patients in as quickly as you can, and you have the technology offerings? Because they're well funded organizations. And they want to feel that they're going into relationship with counterparts who are really super strong and can deliver the patients and the speed to patient and on technology and analytics around how to find those patients. So they're looking and asking the same question and getting a sense of comfort from that kind of broad analytical base. So we do feel that actually, as the market has continued to some extent, consolidate. And as we look at where the growing parts of the market are, the growing parts, those biotechs, the small biotech, the midsized guys, they want to know the same -- they want the same level of comfort in terms of speed to patient recruitment. And I think we best deliver that at scale where you can get those patients from anywhere in the world, but also we're significantly investing in the technology, in the analytics that we've talked about on numerous occasions for a stand-alone organization. And I think this coming together these organizations really significantly augment our ability to put the analytics together, to get the health care intelligence out to really, really present very compelling pictures to all of our customers, regardless of studies, of how and where to get your patients, how to design your trial, how to get to speed to patient, really make it happen and to offer innovative solutions around patient access, as we've talked about with decentralized trials. So I do think it's really a very compelling story for [ newly ], regardless of scale. And I think that will certainly continue to play to the larger companies in the industry from the perspective of the ability to continue to invest and push our paradigm.

Okay. And from that biotech perspective, I think -- I mean, so PRA, they had peer-leading growth. It was decelerating, and this has kind of been The Street's call as to -- at least from the sell-side perspective, why a lot of this has stayed on the sidelines and just waiting for that growth to kind of stabilize and then the margin structure to shake itself out because after the Symphony deal, things started -- it wasn't -- the integration took a little bit and then the margins really started to tail off. So when you think about stabilizing that growth and the integration into your well-oiled machine of a clinical trial operator, what are the headwinds that you see ahead of you? And how quickly do you think that the business combination can be that much stronger than, I guess, just the direct way of saying what kind of near-term disruption are you guys planning for from the combining the 2 businesses?

Yes. Sure. I mean, as we combine the organizations that we want to move from strength to strength, they've had a good year, I think 2021 -- 2020 for both of us would have been much more solid year and a much more return to normal growth year. Had it not been for the coronavirus. I think their backlog and our backlog are still immensely strong going into 2021. And obviously, we've got back to a position now where we're seeing circa 70% of sites back to normality at this point, and that's going to move -- continue to move in the right direction as we go through '21. So I do think both sets of companies independently had a pretty -- and do have, and I think we've referenced in our guidance today, pretty strong 2021 end book. So I think that's a positive. So we're riding on that positive coming into the transaction. I do think, obviously, one of the things we'll be focused -- super focused on as we go through the integration is obviously customer focus and staff focus. There's got to be our 2 big areas of focus, where we're going to make sure that we stay focused on delivering for our customers and we're going to stay super focused on making sure that we have a staff cohort, both in ICON and in PRA. And as we come together as one organization they are really invested in actually continuing on and developing their careers with us. So I think that's going to be a huge area of focus for us. And there's a lot of other pieces that we'll be looking to do over time, obviously integration, back office integration, systems integration. However, I think if we can stay focused on what's super important, which is what's always important in CROs in Phase I through IV, which is staying focused on your staff and staying focused on your customer delivery, I think that's a great big piece of the pie. So we're going to stay focused on those 2 items. Competitors will say what competitors say. And that's great for the mill, I understand that. But we're going to be focused on that, and we're going to look to grow as an organization as we go through '21, which, as I said, I think we've got a great backlog. I think we've got as individual companies, I think we combine that, we're in a good place. And we have a nicely diversified customer base. So the risk, I think, around customer loss or any of those pieces that folks are talking to is significantly lower in this transaction than it possibly would have been with any other higher scale CRO transaction.

Okay. That's helpful. And from that integration aspect, so just theoretically and the way I think about the trials, I think it'd probably be easier to combine the clinical trial aspect because ultimately, you're just porting over their existing relationships and therapeutic focus onto your site network and in your overall infrastructure that you've built up over the decades. The combination of the data aspect, right, because these are new pieces that you guys built by a string of pearls acquisition theory or strategy, kind of developed those in-house. A lot of organic stuff that you built out, Firecrest, all those that was an acquisition. But what I'm saying is that you have all these disparate pieces that are coming together. And then all of a sudden, you're jamming through a large data lake and then their tech-enabled services. Can you give us a sense of how that integration is going to go because that's less of a bodies overlap kind of synergy opportunity where it's -- you probably have to hire software developers to merge the 2 codes? I'm not a tech...

Yes. And I think that's one of the pieces. A lot of what we're offering to the customer is complementary. So really, it's about, yes, you're right in some aspects. There is an element of collation of analytics. So if we're going to break it into parts, maybe a little bit, so the Symphony data lakes that you referred to it, is an asset that will predominantly look at, obviously, combining with other clinical lab and other experience-based data sets that we already piped together in the 2 organizations. That there will be a bit of, to your point, code integration to pull those pieces together. I think that's really compelling from, obviously, we want to have that as fulsome, and as we always said in the past, we're pretty data agnostic in terms of the way the data sources come from as long as they're good, clean data quality. So I think once we even make sure that data quality is good across all of those assets, which it is very, very solid, the analytics is where we will focus on. So the pulling together is one piece. But the analytics and the focus on actually getting better information, better insights into patient recruitment, patient availability, all of those pieces is really what we will be focused on there. When you kind of step away from that for a moment ago, well, but you guys didn't have FIRECREST. They have other pieces of platform, be it their remote platform, [ hedge our ] zone together from an IT perspective. And that is -- and honestly, we'll need to have them in an overall infrastructure. However, they are a little bit discrete in terms of their play. So FIRECREST doesn't necessarily you need to link Day 1. We have the FIRECREST offering on the same trial, where we have the remote PRA offerings on that same trial. We can put those 2 pieces together as an offering to the customer and say, you know what you can do without your consent. You can do your training protocol through FIRECREST. We can also put an infrastructure around the patient for effectively a clinical trial management process for them, and we can deliver this all to the patient and to the doctor using our site infrastructure with our nurses visiting the home of the patient so that you couldn't really create a very, very good suite of technology and physical infrastructure around the patients. That allows a lot more patients to be involved with clinical research from their homes or certainly, as the other people are more rested by going to hospital sites. That will be answered during the course of this year, it gives us a lot more optionality for patient recruitment. So there are 2 distinct parts. So there is the element of -- there's are lots of ancillary services that are technology-based that we'll be able to put together in a package and say, this package works really well together. However, the IT infrastructures don't have to be absolutely linked. And then there's a data lake and the other assets that we will have to integrate and do some work around that in terms of doing the analytical intelligence. So that's a piece where we feel as a combined organization, again, we'll be investing heavily to actually get that analytic perspective and that data perspective really, really driving insight. So yes, we're very excited about that, but we don't see that as -- we're very accustomed to putting different data sources in as it is into our one data combination business. So I think that's something that we'll be looking forward to getting on with very, very quickly post integration.

Okay. So they can operate standalone without having a full integration and without having that disruption, that's helpful framework. Okay. I think that's about on the deal. I guess with the $150 million in synergies, I mean, the deal is not even closed. So I can't imagine you'd update us on synergy targets or anything like that. But just give us a sense of the things that you're looking to bring. I mean, you guys were bringing in robots, that was a cool Analyst Day, by the way. Not as fun as Dublin, but still a pretty cool Analyst Day. Give us a sense of where you see the low-hanging fruit on the PRA side?

I'll take that on there, Luke. So there are a number of initiatives that, obviously, we've got a framework for our plan. I think that the $150 million number is an achievable target for us over the course of the 3, 4 years. We're thinking about it as kind of an even allocation over that period. So I'll say, 30% end of '22. Another 30%, 35% by the end of '23. 30% by '24 and probably a balancing 10%, give or take, in '25, but naturally knowing us as we do, we'll be trying to do that or achieve those targets at a sooner date. And indeed, hopefully, some more. But in terms of the initiatives, I mean, I think we can't of get away from the fact that we've a very successful global support infrastructure. Our SG&A line has been flat dollar-for-dollar terms going back 5, 6 years. And I think in a kind of a very prudent manner we'll integrate some of those back-office departments into kind of an ICON-esque infrastructure as well. We'll do that in a very measured way. This is a story about growth. And certainly, the context here is about minimal disruption -- no disruption in these 2 from an operational perspective. So we'll do that over a period of time. But when we do look at the opportunities that we've materialized from an ICON perspective, there are significant -- there's a significant path there from mirroring that onto our own framework. So I think the core of that is trying to utilize our offshore base and the very well-established base we have in Chennai in the Philippines. We've over 2,200 staff in those locations now. So it's not like we're starting from scratch. We intend to grow that base significantly over the next number of years and thereby leverage that infrastructure we have there. Outside of that, we're looking at optimizing our IT infrastructure. So elimination of duplicate IT licensing and spend, consolidation of IT and telecom infrastructure and services. Brendan mentioned, I think, earlier the facilities piece. That's obviously going to be a significant area. We've done that ourselves over the years. I think COVID gets you thinking about that anyway, right? But there's no doubt that it rightsizes combined office footprint will be something that we'll look at. Unsurprisingly, there's a number of cities and towns that both PRA and ICON have offices in, and it makes sense from a financial perspective, but also an integration perspective to get the teams together under the one roof. So we'll be looking at that from -- pretty quickly as well. Outside of that, there will be various different other places to go to like the corporate costs as well that we're focusing on. So I think that kind of SG&A back-office platform, the IT side and indeed, the office footprint, they're probably the big 3 buckets. Again, very achievable target from our side will be -- we'll do it in the right way and the right manner. This is a story about growth rather than cuts. But I think it's a target that we're comfortable with at the moment.

Okay. That's helpful. And then I dive into your guide real quick, Brendan, just as you think about the assumptions behind it leading into the year? And just give us an idea of how things have been trending versus those from a recovery perspective? And when you think that we can probably be back to operating at normal, and if there's capacity in the system to handle that?

Yes. I think, Luke, obviously, we're very happy with the guidance number, that it was kind of ahead of market expectations. We've seen strong -- obviously, we've seen a strong recovery in the business in Q4 and margin profiles kind of going back to where we would have expected them to be. I think they were very similar to where we ended Q4 '19. So very, very happy with our progress. Obviously the guide is a solid guide. I'm very happy with that. I think that is the -- what we've seen so far this year and certainly off the back of a very strong business wins profile in Q4 is that, that's a very durable set of numbers from our perspective. So we're happy with how that's progressing at this stage. I do think we have, as I said, earlier on, probably about 70% now of health care infrastructure allowing for normal clinical research-type activities, which we think is going to be -- and we kind of said this from the get-go. This is not new news. We've said it's going to take H1 to -- all of H1, certainly to get back to normality. So similar time, into Q2 or 3, I should say, we do feel that's probably a time when we're probably back to full service, if you like, from patients and availability of sites doing effectively the same kind of trials that would have been possible beforehand. I think the adding of technology, to your point around capacity, is there a way or a wall of work that's going to hit you in Q -- H2, let's say, given that everywhere is back up and running, I think that some of the actual technology pieces that we've used have actually unlocked utilization ability within CROs. And what I mean by that is the fact that if you had a geography in the past where you may be subutilized, with remote monitoring and the increasing of remote monitoring and the acceptance of remote monitoring as a modality in clinical research, those allow us to actually plug in suboptimal parts of our organization geographically into maybe busier products that we're working on in different parts of the globe. So I think that really does give us some ability to actually continue to push forward and obviously, to utilize our efficiency as an organization. That said, we will continue to -- we're continuing to recruit as we go through Q1 and Q2. The market is obviously very strong at the moment in terms of the competitive market in -- particularly in North America. But I do think we are seeing good levels of additional heads coming into the organizational model. And we want to continue that story as we go through the course of the year. So we will be looking to continue to recruit utilization, but also using technology that really helps us from a -- insuring us that the full business is utilized. And as I said, that new paradigm around being able to have folks in one place remotely monitoring trials elsewhere will be a real fit, kind of a real aid in terms of getting those trials across the line. So no, I mean, we're happy at the moment, it's very much we're looking at that. I mean, H1, just in terms of modeling, H1 will be a bit hotter from a revenue burn perspective, given that we have vaccine work that's coming through in H1. So for the first 6 months of the year, we're going to see strong revenue growth. I think we'll see strong revenue growth in the second half, albeit the mix will shift a little bit away from the vaccines, more towards the antiviral, more towards the historical business that we've been working on. But again, not over against there with some kind of concept of a cliff or anything like that. I think the work that we've seen on vaccines, particularly has prolonged beyond where we thought it would at this stage. We're still seeing decent business wins, additional follow-on trials that are coming through in that space. So we do think 2021 is going to be a busy year for vaccine developments the whole way through. And as we said, we really see that at the back-end ramping up on the more traditional stuff. So a busy year ahead, and an exciting year ahead on all fronts, about operational delivery, business wins and obviously, with the very exciting news around the combination.

Great. All right. That's a great way to end it. Look forward to staying in touch and connecting with you guys soon. Like I said, next year, we'll be on the beach. I'm going to set up a nice like cabana for us. So it will be beautiful.

Of course, Luke. I'll hold you to it.

All right. I'll talk to you soon.

Take care.