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

Good afternoon, everybody. I'm Luke Sergott. I cover Life Science Tools and Diagnostics here at Barclays. It's my pleasure. I have Dr. Steve Cutler from -- CEO of ICON. So with that, I guess we can jump right into it. We'll really talk about some NHP stuff, some SVB.

So let's talk about your exposure to the SVB and more importantly, not your particular exposure, but have you done the analysis from your clients? And...

Yes, we've done the analysis to the extent that we can. We don't always have 100% transparency on this, Luke. But from our perspective and from what we've done our exposure is extremely low to companies that are exposed to SVB. And so we think it's in the very low single digits from an exposure point of view. So we don't think there's a longer-term or even short-term risk on that front. And we work with the smaller companies, and that's -- we've traditionally said -- or at least in the past said it's around 15% of our portfolio. That's probably come down a little bit over the last sort of 6 to 12 months as we've increased, we've diluted it, worked from our larger pharma customers. So we think the risk in that space and really in the whole biotech funding area is relatively contained and relatively limited from our portfolio point of view.

And are you -- on your conversations with the customers, I mean, you talked before about R&D budgets tightening and just the pharma CFOs starting to keep an eye on the budgets and putting more emphasis on their Tier 1 drug. So talk about how the current funding environment has progressed, especially in light of the recent worries? Has there been a tone change among your customers?

We haven't seen a tone change in the last 6 months or so. It's -- our customers are being very careful about how they allocate their capital. I was just at a meeting up the road in Fort Lauderdale earlier this week with a number of R&D leaders that we coordinated. And I had the opportunity to talk to a number of biotech leaders and a number of large pharma leaders. And there's always some challenges around the industry around biotech funding. The IPO market, of course, isn't very strong at the moment. But the consistent theme was good signs, getting funded companies with a good rationale for how the drug is working to getting funded, companies with good clinical data are getting funded. And so we see there's probably a little bit of a cleanup going on. But we're certainly seeing the customers we're working with in a reasonable place, they feel very optimistic about the future. They feel good about the ongoing and potential funding environment. So it's not something that we are overly concerned about. I think in the large pharma space, we're seeing decent growth in their R&D budgets. And certainly, the opportunity for us to talk to them and to be part of their solution going forward has very much been what we've been able to do. And we've seen that part of the market move forward nicely.

And on that, so after the PRA combination, you guys have -- you've talked about this now and you're getting seats at the table where before you weren't. Talk about -- I mean, how did you -- why weren't you invited before? And then how has it changed now that you have PRAs integrated? And as the funding environment shakes out, like is this part of the reason why you're so insulated maintaining that [ 1.2 ]. I realize there are like 4 or 5 questions there.

Yes. Before the union with PRA, we were both in the sort of 5 or 6 or #5 or #6 in the industry on a revenue basis. And so we are both solid players, both strong players, both had good portfolios, et cetera, decent. But when we put us together, we become the #1 or #2 player in most of the segments that we're operating in. And for us, that's very much the clinical segment. The Phase I to Phase IV, be it FSP, be it full service, be it hybrid, be it biotech, be it lives, we cover those segments extremely well. And so as we become that player and as that integration happens and we bring those resources and therapeutic depth, geographic depth to bear, we've become a player that our larger pharma sponsors need to include in the conversation. I don't mean that arrogantly anyway. We're not at all complacent about that. But they want to talk to us because we have those capabilities. And so we brought a whole new level, I suppose, a new scale, I suppose, to the clinical development market and landscape. And that's, I think, brought us much opportunity in terms of these more strategic conversations with customers. They want to talk about what we can do, how we can look at mitigating or helping them with some of the challenges and risks that they have. Obviously, we have the IRA impose that's starting to get some conversation with our customers, not so much with us yet. I think they see it as a little bit down the track. But it's something that we believe -- I certainly believe we offer opportunities, offer -- for us in terms of them being able to need to make their drug development process more efficient, do it in a more cost-effective way. And I think we can offer some solutions there. So I'm positive about those sorts of things. And I think in terms of the opportunity that offers us in the more longer term.

And so that's -- I mean, I guess that's the healthiest part of the market is within that largest pharma. And so as you guys -- as those budgets start getting released expected in the back half as some -- positive, you should really see the true benefit of the combined business in out years.

Yes. Yes, absolutely. Absolutely. It's -- we bring a scale and a depth of resource to the development landscape now that we could never have done in the past, whether it be geographically, Asia is a strong point for us now therapeutically, oncology, rare disease, cell and gene therapy. We are well positioned in those growing areas. Neurology is a big area for us now, even psychiatry. So the whole CNS is a therapeutic area that we have substantial resources in. And so we're a substantial player, and with the financial stability and availability to be able to really -- in a macroeconomic environment, then let's be honest, it's a little challenging at the moment. We are a very viable player and a very stable player.

Yes. And as you're talking about the near-term challenges, walk us through what you're seeing how to -- frame it within the regards to your full year guidance and how that should -- how you guys envision that playing out?

Well, I mean, we've issued guidance on revenues that are about -- below 5% of the midpoint, sort of high single digits on the EPS level. We see the interest rate challenges, of course, headwinds on that front. On the other hand, we continue to expand our margins. We're looking at another 100 bps this year. We've already made good progress on the margins in 2022. We're well ahead of our cost synergy target. We're about a year ahead, and we've gone into 2023 with the expectation that we'd get the full cost synergy there at $150 million. We believe we can possibly even beat that this year. So -- and as our business, as our portfolio kind of normalizes out of the COVID pandemic, we have more direct fee revenue coming through, which is helping, of course, on the gross margin level, and we continue to leverage on the business services area. So there's a number of areas, I think, within our business, a number of levers we have to pull that mitigate any challenges we have, whether it be in interest rates or inflation, wage inflation, all those sorts of things that we're able to look at and mitigate those sorts of challenges and continue to move our business forward. And as I said, with the expectation that we'll continue on that margin development this year, and that's something that we're pleased with. We're a pretty disciplined cost management organization. We're looking to continue that. But we're also looking to grow on the top line as well. And that's certainly the expectation in the medium to longer term.

And on the synergy pull forward, how much more runway do you have? Like is it just that you realized at all earlier and you just ultimately pull forward as you've seen other opportunities evolve as you [indiscernible]?

Yes. I think what we've certainly done, we certainly pulled it forward ahead of what we'd expect to do $150 million in for this year. I think there is more opportunity. It starts to become a little vague in terms of what's really merger related versus what the normal part of doing business. And we're always very conscious about what we can do to improve our margin. And so on the cost synergy side of things, we look at an ability to sort of continue to evolve the organization to the appropriate mix on the low cost, high cost, mid-cost country geographically. That's pretty basic stuff, but we have opportunity there with the combined organization. I'd say that's very much in progress at the moment and will help to continue to drive our margins. On the AI and machine learning, bot side of things, we have something like 1,000 FTEs of machine bots in place at the moment. Now that's not a huge proportion of 40,000 people, but it's a good start, and we think there's huge opportunity over the medium to longer term to move that forward who knows. They're doing much more mundane routine tasks that allows our people to do more value-added work. So I think there's an ongoing opportunity to continue to drive those cost synergies to the benefit of the organization.

All right. And so on the demand side of the puzzle, you're talking about seeing elevated or consistent strong demand out there, but are you seeing a change in the structure, so FSP versus the strategic? And give us an update there?

I don't know that we're seeing a trend in that space. Clearly larger pharma than -- even sometimes in the midsize tend to be more positioned themselves as buyers of FSP-type services. They also do full service. And in many cases, it's a hybrid. So that tends to be the case in the larger part of the market. In the small and midsize, well, full service is very much the approach on things like cell and gene therapy, you don't do it an FSP side, you do it in a full service-type setting. And so that is a significant opportunity for us to continue to drive that part of the business. There's always a little bit of a tendency that a new, different manager comes into a company and wants to do things in a slightly different way. I don't think there's a necessary trend towards full service or towards FSP. Most of the larger companies we work with have a kind of hybrid model. And we're really well positioned to be able to prosecute those hybrid models. We have a number of functional service area. We have a very strong full service area in both large pharma and then separately in the biotech. And we can put those things together in a way that is -- fits with what our customers ultimate strategic goals are, how they want to do it. We're able to give them advice and input. But of course, ultimately, they get to decide, and we can put that model in pharma.

And the pricing environment, it seems stable?

I'd say stable, possibly a little more challenging than it was, say, a year or so ago as we came out of COVID. And I think they -- our customers recognize that there was -- the great resignation was on. I think that's certainly stabilized. We've seen improvements in retention of our employees over the last 15, 18 months on a month-by-month basis. We're back now to where we were pre-pandemic. That's a very solid level. I feel we've got a good stable workforce. There's certainly some price, some cost challenges in terms of wage inflation probably a little higher than it's been in the past few years. But we're managing that through contractual options we have in terms of being in place simple than ever easy, but they're not duly difficult. They recognize the need to maintain their project teams and to give people an opportunity to increase their salaries on a market basis. And so we feel we have constructive conversations with customers on that front. And it's not dramatically difficult -- more difficult than it usually is I suppose.

All right. And so when you're able to pass that on, so we shouldn't expect a lot of pressure there?

We can pretty much mitigate -- no, we can mitigate any sort of pricing or wage pressure with the pricing upticks we get on a contractual basis and negotiations we have. So I think those things pretty much offset.

Okay. Just jumping around here, the Seagen-Pfizer deal, you've always talked about the pharma -- large-scale pharma M&A being near-term disruptive, but a longer-term opportunity. Do you have any overlap with Seagen? And then how do you guys view that? Do they use you at all?

Yes. There is some overlap space, we work with pretty much every company in the industry. So it would be a surprise for me to sit here and say we don't work with them. We do. We work with both of those organizations. And what we typically see for actually, I think because there's a lot of work going on to do the integration and those people tend to be focused, i am not able to do the -- or do the work and do the trial. So we see often a short-term bump. And in the long term, it usually works out to doing more rather than less. That's our experience with these sorts of unions. Typically, the larger company, the acquirer, the model that they have tends to be implemented, but not always. Often they let the company that they've acquired, continue to do what they do. They bought them for a reason. They bought because they're a successful organization, they don't want to change it. So that's -- it's very early on in that in terms of Seagen-pfizer deal, and it's unclear as to exactly what -- how it's going to turn out. But I don't lie awake at night worrying about that one going away. I think both continue the -- ultimately, the Pfizer organization will continue to be a very significant customer for us in the long term.

All right. And then on M&A on -- within the industry, your long-term guide, you had the $10 billion, and you just recently updated that to include -- it may or may not include the M&A. So talk about the tone change there. From a consolidation perspective, you talk about your portfolio, it's not like you need to scale up any more. So talk about what you're looking to do there.

Yes. We set -- our aspirations to the $10 billion in 2025 remains. And we have -- we've given the various sort of headwinds we've had over the past year or so, particularly with foreign exchange and interest rates. We do think that, that probably does -- is going to require some M&A. And on that front, we're -- while debt paydown remains a priority for us at the moment, M&A is sort of coming up the ranks there. And we do want to look at and we are looking at options, particularly around things like in the real world data, it will be more tuck-in, string of pools, our strategy that is legacy ICON. We prosecuted for a number of years. We'll continue to do that. So I don't see any large-scale transformational-type deals happening, but I certainly see opportunity to tuck in, to move a number of our service units up the league table in terms of their positions within the marketplace. We'd like to be 1 or 2 in pretty much every space, in every clinical space we work in. And so there's opportunities perhaps in the lab side of these, around real-world data, around analytics data to some extent, although we've been pretty public that we don't need to own data. We want to be able to access it. But the tools by which we use it and actually make decisions on that data are important for us. And so those are some of the areas that we think could potentially be candidates.

On the labs business, it's obviously less discussed with you, but update us on how big that business is for you? How that's been growing, especially with COVID and the vaccines, the increased lab usage there? Talk about the changes to the business.

Yes, Labs business is a relatively modest part of that business. It's less than 5% of our revenue. So it's not huge. It certainly had a big uptick during COVID. They did a lot of work. And they've hit the COVID hangover a little bit over the last sort of 6 to 12 months. And so -- but that's now starting to grow again as we get into 2023. The margins in that are very good. We feel like we're a very viable player in that space, even though we're probably more in a #4 ranking than in the top 2 where we'd like to be. And so that's, as I say talk about M&A, that's one of the areas that could -- we would like to sort of move ourselves up the ranking. But it's a good business. It's an area we -- it's -- we generate a lot of data from that business, and that data can help us with things like our site selection. Our OneSearch tool allows us to find the right sites for clinical trials. And that sources a number of not just external data sets, but internal data sets, and the labs business is one of those. I mean the labs gets a lot of information outside of the clinical trials that we do around sites that are performing. And so you can see that, that coming in gives us a sense of where we should be going in our clinical business to get patients. So there's a lot of sort of side benefits in addition to the solid revenue growth that we're getting in that space and the good margins.

Yes. Is there any need to add more capabilities there from technologies like sequencing and things like that?

Yes. We look at that, and there's certainly opportunity and there's certainly potential for growing our business in that sort of sequencing, gene sequencing side of things. So it's an area that you can get into very -- go very down deep in that area and given some very specialized testing. And that's -- we think about that, but we also want to broaden, and we want to make sure that we're really generating solid revenues at good margins. And so going deep versus staying high and broader is the sort of discussion we have on the labs business. It's a fundamental part of it. It's a good combination with our clinical. We get, as I say, good information from the labs that fuels our clinical trials business. And so it's those -- as we think about how we develop that business, we want to make sure we continue to get increasing advantage from those points of view.

All right. Let's shift gears here. We could talk about the nonhuman primates or the monkeys businesses as the head of the supply chain there because you have the early Phase 1 business. And so are you seeing any slowdown from RFPs for that early stage stuff because of the supply chain issues?

We haven't had any indication that the nonhuman primate issue an importation has had any impact on our early phase business studies. And that's really with obviously the preclinical CROs to tell [indiscernible] address that issue. I don't expect that's going to happen. If we're still talking about that this in a year's time, maybe we are going to see some impact on our -- particularly on our early phase business. But at the moment, there's been no discussion with customers around [indiscernible] the impact on their flow-through of new drugs into the clinical space. And I'm hoping that's going to be -- continue to be the case. As I say, I think if -- if we're talking about it in 12 months, we'll probably have some impact. But I think my sort of view of it is that will get sorted out in -- before the end of this year. I think there'll be limited sort of long-term impact.

That's good. On China, can you update us what you're seeing there, a smaller part of your business, but definitely growing a lot faster?

Yes. It isn't a huge part of our business, sort of 2-ish percent of our revenues. And so not particularly material, but important strategically for us. We have well over 1,000 people in China. We certainly saw some impact of the continued lockdowns out there and it impacted not just in terms of our employees, but in terms of sites and the ability of patients to get to site. So that had an impact on last year. That was certainly one of the headwinds, along with the Russia-Ukraine situation that -- it had a material -- not material is probably the wrong word. It wasn't material, but it was a significant impact for us. As we've gone into the lockdowns sort of opening up or at least becoming more open now, we've seen some progress and some acceleration there. And again, it's not a hugely material impact on our revenues. But it's moving in the right direction, I would say, from a site availability point of view, from a patient recruitment point of view, we've certainly seen some improvements out there. So I'm optimistic that China will be -- it's probably not quite back to normal yet, but I'm optimistic that within the next sort of 6 months and certainly by the end of the year, we'll be pretty much back to normal in China.

Okay. And so from -- how is that trending versus your expectation headed on the year and what you've seen so far throughout the quarter?

I think that's trending pretty much in line with what we expected and how we put our guidance together that China would come out of it. Now obviously, we assume no further -- another pandemic or anything or particular issues of the sort of the vaccination rates in China, which I think we can all sort of look at and think maybe they are quite where they wanted to be. But we've assumed a sort of slow, steady movement back to normal by sort of fourth quarter in that region.

That's helpful. Jumping back on to the -- when we were talking about the M&A and your string of pearl structure I had a note here, I didn't follow up on. Why wouldn't you just subcontract out to the CRO? Because I know a lot of that goes on within the industry as well instead of just acquiring. Like walk us through the strategy here of when you decide to buy versus contract.

Yes, it's a good question. In our business, our customers like us to have control over the things that they're at. So it's -- for us to be a one-stop shop is more attractive to a customer than for us to be -- we do the clinical and the data and then someone else does the stat on the lab or the site network or whatever, because it just introduces a whole additional [indiscernible]. So [indiscernible] it, we sometimes do in certain functions if we don't have them. It's a better story in terms of an integrated approach, taking out the right space, making it more efficient and more elegant in terms of delivery. We get to deliver the product. It's under our control. If things aren't going well, we get to crack it whip and you can crack it to a subcontract, but you're not as effective, quite frankly. I think customers understand that, and they like you -- they like it that you have or the CRO that the contract has the control over the vast majority of the services that they're providing, even if, as I say, even if it's a smaller-scale trial, they like that debt. And so it's more for that reason that we tend not to sort of -- some time wherever we can avoid it, we'd like to have within the clinical space, of course, those services within our.

All right. That's fine. Lastly, here on the bookings and the booking environment. You talked about the current RFP and current demand environment being able to support 1.2 for the next 6 months. Any update to that? And then what needs to happen to the industry for that to start dropping?

1.2 to 1.3 is kind of what we've said now in the last. And I don't see any change to that. The demand -- obviously, the comment we're public on where we were in quarter 4 so far this quarter, there's nothing to say that, that would be any different. So we see that as being a very viable as I said, large pharma and midsize continues to build up nicely. I think biotech has probably stabilized. That has been a little more muted. We've been public about that. But I think it's stabilized. The funding situation seems to be sort of stable now. We're seeing our RFPs in a more stable situation now. So I think that -- I think the 1.2 to 1.3 remains very much our target and very viable. In terms of what changed? Well, you look at sort of significant cancellations that might change that. But other than that, I don't see too much that's going to change that. We feel like we're through the large part integrate. So any issues there that some of our competitors may want to highlight. I think we've done -- we have a good business plan in place. We have a good strategy in place. Our customers have continued to support us. We've seen, as I say, [indiscernible] on the RFPs, particularly in the large pharma space, and those strategic discussions as we continue to build on those, we get more opportunities. And so I don't think there's too much it's going to take us off track with that respect -- in respect to that.

Awesome.

Great.

Thank you.

Good. Thanks, Luke.

Thank you.