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

Great. Good morning, everyone, and welcome to day 3 of the BofA Healthcare Conference. This is Chris McCarthy, the healthcare specialist in the U.S. Thanks so much for joining. Today I have the privilege of hosting a company covered by Juan Avendano, ICON. With us from management, we have Brendan Brennan; and from IR, Jonathan Curtain. Brendan, Jonathan, thank you so much for joining us. Why don't we start with some opening remarks? Thanks again for being here.

No. Our pleasure, Chris, regret to be at the conference again. It's a shame can't do it face-to-face, but hopefully, those things will be becoming a bit more of a reality as we go forward in the next couple of months into the fall. As I said, it's a pleasure to be here at the -- especially at the Bank of America conference. We have had, obviously, a very busy year to date. And if you all know that obviously, we are -- obviously, we are [indiscernible] and to [indiscernible] and healthcare so far this year with our colleagues at PRA and the combination of our organizations, one that we're extraordinarily excited about, and we're [ hoping to announce that by] the third quarter, so we're looking at July at this point. So that's something we're all looking with great excitement towards completion and are on track to that currently at the moment. I think the wider CRO industry remains extremely strong. The fundamentals remain extremely good, and we continue to see a well-funded environment, both from a small biotech side of the market as well as our mid- and large customers continuing to look at their product portfolios and continue to develop an [indiscernible] backup, as we start to other non-COVID portfolio is ramping back strongly as well as still a significant amount of interest in COVID. It's probably going to be more probably in the vaccine space, the treatment at this stage certainly, but still a very, very strong interest in that space, and that we do think -- continued interest in that space as we go through '21 and into '22. ICON and PRA both had exceptional first quarters of the year. It's been a strong fourth quarter for CROs generally speaking. But certainly, we felt that our performance was very indicative of the good recovery that we're seeing. And as we said, right from the get-go, when we announced the transaction back in February, this is 2 organizations coming together from a point of growth, from a point of strength in the industry. And we're looking very forward to be able to combine in that growth context continue to grow and to really be the leading CRO of health sciences organizational of the world. So with those, those brief comments, Chris, I'll turn back to you [indiscernible].

That's great, Brendan. So you hit on PRA within your table set comment. So the deal is dominating a lot of investor discussions. So it'd probably be good to dive into it a little bit deeper. Rationale for the transaction, feedback from customers and investors since the announcement, how is the integration process outlook, cross-sell opportunities and DCT capabilities as you combine the strength of both organizations?

Yes, Chris, it's been a -- as I said, it's been an interesting few months. We're certainly a busy organizations for the moment. We are well on the track for our initial integration as much we had to obviously prior to close as we're having great conversations. I think we've got 2 exciting organizations, are keen to get on with the transaction, and as they really feel the benefits of being, as I said, one of the largest CROs in the world. Our exposure is from an internal feedback loop for the first instance, our management teams are very excited about it. We're moving in the right direction. I think the feedback has been only very, very solid, whether it be from a customer or from investors. We've got very good feedback loop. Our customers that have come back with [obviously reactions] very early on, had a lot of good conversations there from both organizations. One of the strengths of this deal, as we always said, was the fact that there isn't massive overlap, but particularly in our top tenders, a massive overlap. We said the combined company will have much a diversified book. There will be no single customer over 10%. That remains true. The feedback from our customer base where we've had those conversations, it's been positive. A bit excited about the range of services, the combination of our complementary services. And you mentioned DCT, Chris, that's an area where people are already excited. Obviously, ICON brings to that story, our site network, our nurse home business network in terms of the ability to get nurses to the patients' homes without patients to be involved in a decentralized trial using telemedicine, using one of our dedicated sites. And of course, what PRA brings to that story really is that very much the operating system and all of the software needed. So that effectively, ICON [theoretically would be a ] one-stop shop where you can get everything that you need to actually run a decentralized trial. And one of main points in the industry to this point on things that we've got in this feedback from customers very much in the disease side around that, they're saying that this is great from that opportunity. I don't have to manage the logistics in between a software provider or a CRO over here, then you have that nurse patient organization if I need people to go out to sites or direct to patients' homes. I don't have to manage the logistics, you guys do that all, so very much of an encapsulated solution, and we're getting a lot of positive feedback about that. And of course, in the context of just coming through COVID, when we're all home-based to a greater or lesser extent, it's been very positive as well as we see a real shift towards that type of decentralized trial in the industry. I think on the shareholder piece, to just address that. We've seen as well very solid positive feedback. I think, obviously, the interest a price was somewhat lackluster, given that people were maybe associated with this deal with prior experience in the CRO industry. I think one of the things we said is that, ICON and PRA are very similar organizations in that we look at deal with information and people in the same way. We work in Phase I through IV. We know our colleagues across the way in PRA. We know how to run these types of businesses with no unknowns for us, if you like, as a combined management team in terms of running these organizations. And I think that is a real strength that we're bringing through this and really sets it a part from maybe deals in the past where you had businesses that were going together that weren't exactly like [indiscernible] there were large parts of those businesses that didn't mesh maybe as well. But I think this is an organization that matches really well. I think shareholders already are really starting to get their heads around that. I think the positive is also the share price performance really going back over the last couple of weeks to reflect on that. And certainly, no unusual share movements along with the [indiscernible] what we expect. So all going well, so hopefully, means we could get back [indiscernible] in early July. So positive so for a very, very positive story so far, Chris, right across.

All right. Great. Thanks, Brendan. Maybe that's a good segue into COVID-19. Maybe on the CRO industry, touch upon the operational metrics. Site accessibility, study setup, patient recruitment, how are levels tracking in comparison to before the pandemic?

Yes. I think we move more much the same position as we were and we talked a little bit this on our Q1 call as those were not that far away from that at this point, Chris. So we're seeing a bit of -- 80% of our sites back for normality effectively. And you've got 20% of sites that are impacted to some extent. I'd like to make a caveat there that when we say impacted, to some extent, we're not talking about sites that are literally doors are closed, you can't get in. You're talking about there is maybe some number of restriction, and there's quite the accessibility that there was in the past. However, very, very few, de minimis numbers of sites, in fact, are -- absolutely are still closed. So what we're seeing, particularly in the western world, North America, Western Europe, is really good accessibility to site with [ strong everything ] for 20%, as I said so 20% of our sites still impacted to some degree. However, outdoors shift. So we're still working with those folks. We're so working on all of our sites. And of course, we still have a fully developed toolkit in terms of remote work and remote clinical monitoring that we've deployed very, very well over the course of the COVID crisis. If you look back a year, [SFOs] we were point this time April, May last year is an evolving crisis at that point in time, especially in the western world, the metrics are embarrassing. So at that point, only 20% sites were accessible, fully normal, if you like, and an 80% where it impacts it someway. So we know, of course, that metric flipped entirely on its head. We still continue to see progress, obviously, good progress in the late-stage where the vacation program is rolling out well. It's coming along side the U.K. is doing well. At the various locations around the world, obviously, Australia, New Zealand, much less impacted, they have had much less impacts at this point. Generally speaking, India [indiscernible], obviously, we're all aware of the very, very serious nature of COVID in that country at this point. However, what we're seeing in Western Europe, although slower than the U.S., you're now getting to a point where 20% to 30% of most of the Western Europe is vaccinated, and we are seeing good traction there. So CROs and pharma [indiscernible], are very naturally turning towards the real [indiscernible] of all of their programs a lot of our partners in ramping their programs back up now. Those who have been a little less [indiscernible] just to kick off some of our programs, now are thinking about time lines. I mean those are folks not because if they want to be cautious, just maybe the indication or nature of the disease, or perhaps thinking about recruiting a respiratory trial. And obviously, respiratory patients, very cautious at the moment about their own activities at their own -- taking that risk and going to hospitals. And now we're starting to see signs of like the chances of actually the time when we start those types of trials and really match the backup. So we're seeing good progress across our portfolio. Obviously, our COVID work is still extremely strong, and that's obviously had a significant impact in terms of patient enrollments. So obviously, the numbers of patients enrolled in our trials, especially for our [indiscernible] a vaccine, special organization, we've seen very significant increases year-over-year in terms of [indiscernible] numbers of patients going on trial. Of course, there is the vaccine effect included in those numbers. Strip that out, and we're still not where we'd like to be. In normal course, however, it's trending in the right direction. So if you take out the vaccine, the COVID vaccine worked, it has been trending in the right direction that will continue, and we still expect that to be back to normalized levels, certainly by the end of H1, maybe into H2. So that's what we're seeing in terms of site accessibility and, of course, patient and patient recruitment brand as we go further into this year.

Okay. And most CROs have planned on having COVID-19 drug development last through 2022. And then last week, there was a surprise headline of U.S. support for vaccine waivers. So can you weigh in on this topic and how it could possibly deincentivize vaccine development going forward?

Yes. I think it is, and I think in fairness to the U.S. administration, they were very clear that this was COVID only, and that's what they were talking about. So I don't think -- I'm not sure if that has a broader vaccine impact, if you like -- specifically in COVID vaccine, obviously it has an impact. What we are seeing is from a vaccine perspective, and it's as much to do with the fact that we are seeing now, particularly as we always predicted that this would be the case in the spring of this year, and in spring as we are now, review the vaccines is having a real impact upon the numbers of people, obviously, getting disease or active tenses on a daily basis both the states in Western Europe. So we are excited to see that impact and the production runs obviously by now approved are very, very significant and ramping up. But of course, the drug that we are hopeful and run the trial for, Pfizer, the BioNTech, of course, we were very proud of that involvement. And of course, that vaccines we've used very, very broadly, both in the U.S. and in Western Europe. And obviously, as they're doing huge [indiscernible] that's how we're significant impact. So I think that's in line with where our expectation was. Only corona vaccine makers that are in their Phase III trials close to actually submission, who are still going, who I think there is still need for. And if you look at this, I don't know sometimes in the [ Western world ] we can be a little [ Western-centric]. I think, well, North America and Western Europe is okay, but of course, we're aware of the fact that it's a developing problem. It continues to be a problem in South America and obviously, in the Indian subcontinent. And the areas around those areas as well are actually getting kind of be lateral impact as well. So it's still a very significant issue. We're going to need more vaccines. We're going to need vaccines that are easily stored. These vaccines that will have different price points. Those kind of vaccines are still in development. I think there is room for those to run. And I don't think that the conversation kind of target us that, which is a conversation at this stage because I think it's been mixed feedback and particularly on the [indiscernible]. [Technical Difficulty]. Sure. [indiscernible] there, Chris, I'm not sure if our broadcast friends can help us there is something coming in on top. Okay. Hopefully, we're back to all normal now. Sorry for that folks. Interruptions are our normal broadcasting. So I think it's still -- there's going to be a lot of international conversations to be had on that. I think existing vaccines that are in Phase II/III will be developed, albeit I do think you're correct in the assumption that by end of H1, into end of this year, certainly, vaccines will probably be there or thereabouts the interesting pivot [indiscernible], I would be looking at antivirals and treatments. And that's really where we see as opposed to the pivot to the COVID work. Not that COVID work is going to go up or down, but rather we're going to continue to see increased trials in antivirus.

Okay. And sorry about the technical issue there for a second. And hopefully, you didn't address this in the last response while we lost you for a second. But given the amount of COVID-19 work that appears in the pipeline, do you foresee any challenges in recruiting patients for future COVID-19 studies as more vaccines get administered? And will it be more difficult to find eligible patients that are naive to treatment? And how do you plan on working through this?

Well, Chris, as most folks now, where drug development happens is where disease is, right? And we've seen, obviously, a large and quick process to treat and obviously develop initial vaccines and those trials, particularly the Pfizer and BioNTech trial, of course, which we were involved, was done predominantly in the states in some Latin American countries. When the disease was very much on the uptick and right in those countries, and you were able to get patients in, I think your point is a valid one in that as vaccines are rolled out ubiquitously in some of those territories, in the time of my patients. But unfortunately, there are always parts of the world where there will be more patients where vaccines are not being rolled out. As clinical trial specialists we know that, that's where we need to do our work and grow our patients. So I do think there will be some elements of a shift in terms of geographical mix, in terms of how the trials are done, to allow for the continuing speed of trials. This, I suppose, in a way, is nothing particularly new to CROs. We do encounter this, and that's not just particularly with these. But we've seen it with biosimilar developments or any other types of challenges that we've had over the years. So that's certainly something that we do expect in more of the Western the world, let's call it. But I think we -- it still does give us a pivot into more of the developing world in terms of further vaccine [indiscernible].

Okay. Pivoting to financial performance. On the first quarter, your top customer business doubled. But on the other hand, based on the revenue concentration figures that you disclosed, it seems like revenue outside of your top 25 customers has been declining and is lagging on the recovery. Why is this the case? And what can you do to drive more growth in the smaller customer accounts?

Yes. Chris, I think one of the points, obviously, that does arise here is that as I said in my opening, but the fact that we see ourselves as vaccine specialists. And of course, we've been -- I've been very proud to talk about our experience with Pfizer organization in terms of helping them with their vaccine programs, of course. As a result of that, we see some concentrations with our top customer. Likewise, we have other vaccines, large scale vaccine we're working on, and that certainly has added to concentration in top 5, let's call it. And that certainly is at play there. And as we know, in this industry as well with large vaccine trials, there is a -- there is certainly a skew in terms of the pass-through revenue that is heavier with these trials as well, and that skews the number somewhat as well. All of that said, I think it's fair to say, as of our top 5, we're seeing good development in terms of business development. I do think we will continue to see broad diversification. And if you look at the nature of our backlog, what we're seeing there, I think there's a bit of a -- given the nature of vaccine trials we're working on. But large pieces of business coming but burning quickly, driving maybe more concentration. What you're seeing in terms of the backlog, very good business environment, very broad business [ lens ] profile from our midtier and small customers as well as our large customers. And we very much do feel, actually, and I think we've made the point of that as we get in is the back end of the year, probably even after Q3, Q4, we will see those concentration levels start to balance back up again. That's very much our expectation in H2 as in that customer going down quite a bit, and we'll see a better mix of growth going from in a next side of our top 5 customers. So that's something that we have good visibility of given the nature of our backlog and the pace of our backlog and . And of course, as I referenced in my opening comments, a really, really strong tailwind in this industry around funding, around people's awareness of clinical research as a care option. I think that's something else where one of the silver linings to be like a lot of other stats, a couple of very difficult years or so has been that everybody now considers themselves an expert on clinical research, which 2 years ago, people didn't know what clinical research was or certainly if they did, they were in the healthcare industry. So this broadening of the potential patient accessibility that we have as a result of people being aware of the power of clinical development, the power of the vaccine developments, is something that we feel that's going to have significantly of patient equipment and significant in the industry and continue bonding as well in terms of the return from a financial perspective, I think coming up through drug development. So we do see, as I said, significant shift in that concentration of mix as we go in H2. I think that will lay some of the figures that we don't have around at the moment. Of course, really good broad-based business wins in the last couple of months.

Okay. On SG&A, it stayed flat for 6 years on an absolute basis. It hit a low as a percentage of sales at 10%. So can you discuss how much runway there is left driving SG&A leverage?

Yes, Chris. I mean it's an interesting one. We -- as [indiscernible] we started to use our infrastructure in ICON to ensure that we're getting best efficiency, is probably the way to call it, in terms of our SG&A costs. So I think the 10% in the current quarter was a result of the very strong revenue growth kind of was the SG&A leverage in the sector quarter. Although we're still very proud of the fact that we are very, very vicious in how we use our dollars. I think we still have, obviously, as we go into a different world, I mean, ICON will be a different organization for Q3. It is somewhat resented, and we'll be looking at all of our metrics again in terms of the new cost base as a new organization. And again, one of the things where we try to make sure that we're doing is that we're being as efficient as possible. And those of you know us, know that we do believe in annual zero-based budgeting and looking at every cost and making sure that it's something that needs to be spent because there's a lot of in this organization, we fundamentally believe that we're going to spend money, let's spend on the proline staff and are going to make a revenue build the organization of builders for our future organization. Let's invest in the infrastructure around those people, which, of course, is supported by the SG&A. It is smart, and it is an efficient way in a system-led way as possible. So we'll continue that dynamic. We still do believe that there is opportunity. And certainly as we go into this deal with PRA, we've kind of headlined that we're targeting $150 million of synergies there. And frankly, we will bring the discipline and experience we have around very efficient management of our SG&A policy into the combined organization. I certainly believe that, that will be certainly a half that we based on our saving as we think about it forward. So yes, I think there's additional runway, Chris, from where we are. And certainly, that will be changed quite substantially and that will cost will change quite substantially post combination, and it gives us additional way to consider how we be as efficient.

Okay. On a related topic, offshoring is important to SG&A goals and wondering if you've seen any impact to your offshore operations from the COVID-19 resurgence in India?

It's a great question, Chris. And obviously, we're a -- predominantly our thoughts and our concerns are with our colleagues in India. They are very, very important part of our organization. I don't like the phrase offshoring, it's just -- they're just at the heart of the organization, and obviously, our thoughts and prayers at with them at the moment. We are monitoring that in very, very close calls. And we are tracking company from server have been obviously -- have had positive COVID results. And the state of all of those people in terms of their health levels, those who have been or where they're at, we're seeing relatively minimal numbers thankfully, touch wood, for the moment. We are working with all our partners to make sure that they've got good working environments, that they're not taking undue risks for making sure that they've got good insurance coverage that they've got good access to PPE, that we're really supporting people as much as we can at the moment. We've also done some of the [indiscernible] things in at the moment. So we are keeping a very, very close eye to that at the moment. I get e-mails on the daily basis from my colleagues and finance organizations and they are updating me on the folks in the finance organization, and how they're doing that. I know it's true all parts of our organization as well. So at the moment, we're relatively unimpacted there at this point. We're certainly keeping a close eye. We're working with those folks to make sure that they're creating a safe environment around them and their colleagues as they possibly can at this point. But certainly our prayers are with them, and we're hoping that once we move vaccines, specifically pushed to India.

Okay. And then potential tax implications from the Biden infrastructure plan, could you share your thoughts there?

Yes. No, it's an interesting model, obviously, we're as had we have demand for being an Irish company, we're speaking to you from Dublin today [indiscernible] is in our global office. So certainly, we are impacted to it to the extent that we have, obviously, a significant operation in the United States albeit you probably have -- or probably one of the CROs [indiscernible], probably it does more outside the U.S. than a lot of our large peers. We have an effective tax rate at moment with 13%. We said the future, we expect that to be about 14% post the merger with PRA. At the moment, we're keeping an eye closely on that, how it is developing. Obviously, there is increased operational tax rate. That's under consideration incentives at the moment around other elements around strictly where [operations] are controlled and what obviously looks at the nature of companies, at whether they're U.S. companies or non-U.S. companies. So we're keeping a close eye to those developments and others. We feel still confident at this stage in getting to our 14% blended tax rate, and of course, it's not just the U.S., but all of the tax rates around the world, in which countries that we're impacted by, that make up that blended rate. So at this point, we still feel evilly confident about that. Albeit, we are watching further detail and I suppose there will be a detail here to our tax planning to ensure that we go -- we can get that right, and we'll keep the market updated on that as we go through. But at this point, even with the latest update that we're seeing from the Biden administration that we are still on track to get that 14%.

Okay. Great. Moving on to ESG. Could you share thoughts from an industry and ICON-specific perspective?

Yes. Of course, Chris. ESG is, it's a continual focus of ours. And we do our ESG reports, which is on our website last year. There's a lot of great detail in that in terms of all the measures that are contained within a broad infrastructure of we've seen significant, obviously, increase in our activities, our roundness that have to be communicated to our shareholders around that. But of course, I'm talking about the [indiscernible] of the ESG information for ICON. And of course, we'll be doing that out on an annual basis. So it really does provide a really good document in terms of all the different elements. And we try to get in there and give as much granularity as we can, specifically in measuring our carbon footprint and I mentioned our diversity. A lot of the things as an organization, and one thing we're very proud of, and my colleague, John, has reminded me just before we came the call, but of course, ourselves and PRA are the only 2 CROs to be acknowledged by Forbes magazine this year as -- in the top 100 companies in the world in terms of diversities. So that was a great, great acknowledgment on that ESG and of course, in these times. So that's great to see that we have that coming out in culture there and the support to [indiscernible], and diversity is very, very important to both of us as culture as a company. So we'll look to embrace that and bring it forward even further as we combine it as an organization. So yes, we're certainly having those communications. We're obviously looking to combine any report to put our colleagues at PRA. We will have initial information on websites as we look forward. And of course, we'll be doing that annual report on a commodity basis as we go forward to fully make sure that folks are aware of that. We're very proud of our record to date. As I said, we're trying to get there a little more specific on some of the targets that we're setting [indiscernible] onto those things on the reports and making sure that we're as good as our word in terms of those targets as we go forward. So it's a very, very relevant topic to us [indiscernible] folks.

Okay. Brendan and Jonathan, unfortunately, we're out of time. Thank you so much for participating. I hope you have a great day of meetings, and thanks to everyone who listened in.

Great. Thanks, Chris.