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

Good afternoon, everyone. Thanks for joining us for the management presentation. My name is Max Smock. I cover ICON for William Blair. I'm pleased to be joined this morning by CEO, Dr. Steve Cutler. Before we get into the presentation, I want to mention 2 things. First, the breakout session will be held in Adler on the second floor immediately following the presentation. And second, I'm required to inform you that for a complete list of research disclosures or potential conflicts of interest, please visit our website at williamblair.com. So again, very pleased to have ICON here with us today; and with that, I'll turn it over to Steve.

Thank you, Max, and welcome, everybody, to the ICON presentation. Very nice to be here in Chicago. Let me start off with the forward-looking statement. I think you've all seen that multiple times today, so I won't go on too long, but important to note. And let me start then with ICON. ICON is a CRO. We're an organization that spends effort, resources and capital in helping our biopharma customers bring products to market faster and more efficiently, basically, drugs and devices. We're an outsourcing organization, one that helps to get -- helps the Pfizers, the GSKs and the smaller companies as well to come to market without them having to put in place their own clinical development resources. In terms of our market considerations, we operate in a strong growing market. Increasing biopharma R&D spend is driving further penetration of our market. In other words, we're doing more of the development work that our customers might otherwise do. And we're also seeing R&D budgets grow at around about 4% to 5% on a compound annual growth rate. So overall, the market growing at around about mid-single digits, we feel that's a good place for us to operate. We are impacted by some near-term challenges. No question about that. You all know some of the macroeconomic challenges and some of the geopolitical challenges that have been facing us over the last couple of years, and they do impact our business. We are seeing -- we had some challenges on the biotech funding environment. We're seeing that starting to stabilize. We'll talk about that perhaps a bit more in the Q&A session after this presentation. But we do see biotech essentially contributing much of the innovation around the pharma space. So most of the large pharma companies are getting most of their innovation, their new drugs from the biotech companies. And so they are a very important part of the landscape; and ultimately, we believe that environment is stabilizing from a funding point of view and will be, over the next 12, 24 months, in a much better place. There are some industry pain points in terms of efficiency and development opportunities. Recruiting patients into clinical trials remains the major sort of critical path step that we're all trying to solve. We have some ways of doing that, which I'll talk about in a moment, in comparison to our competitors. And we do believe we're well positioned to be able to do that. We made a major acquisition, doubled our size almost 2 years ago now, and I'll give you a bit of an update on how that's going as well. But we are now a scale organization that really is able to bring those resources and capabilities to our customers in a way that really accelerates their programs. And we've been able to identify those customers and to build partnerships with those customers, which was one of the major reasons for doing that acquisition. So the overall market conditions remain very positive, remain very strong for us in the -- particularly in the longer term, notwithstanding some near-term challenges. In terms of our differentiators, these are the 5 areas of differentiation, which I'll touch upon in a moment: global scale, our clinical focus, site and patient access, the ability to access sites and access patients for those clinical trials, our data and technology and as part of our data and technology, our decentralized clinical trial solutions and outcomes. Coming out of the pandemic, one of the opportunities that we see as a real driver of our growth in the longer term is the ability to deploy technology and the ability to be more decentralized, more patient centric in a clinical trial setting. And we're looking to better take advantage of that trend over the next number of years. So let me spend a little bit of time on each of those key differentiating capabilities and then compare ourselves with our 4 or 5 major competitors with respect to those differentiated capabilities. First of all, global scale. In the clinical development process, you need to be at scale. You need to have resources in all parts of the world to be able to recruit the types of patients we need for clinical trials. As clinical trials have developed, the big cardiovascular trials that perhaps in vogue 10, 20 years ago have diminished somewhat. And we're more in oncology. We're more in rare disease; and particularly in things like rare disease, you need to be able to go to various parts of the world to find those patients. We're able to do that. As you can see with the head count of over 41,000 people globally, we are the world leader in a number of those key areas, particularly in the Phase II/III area, in early phase and in laboratory facilities, where we rank very highly. We are the leader in FSP, functional service provision. This is a different model of clinical development that we have within our capabilities along with full service and the ability to deploy both full service and functional allows us to put together a model for partners that meets their requirements and meets their development needs. We also have comprehensive late phase and real-world evidence services. This is the later phase as you get towards the market. Customers and companies want to do projects in certain specific indications, in new indications to do the life cycle management; and the ability to be able to deploy resources in that space is particularly important. And as I'll talk about, our global site and patient access facilities allow us to get preferred access to patients and to sites who run these clinical trials. So we're a large organization. We have the resources. We have the global scale. We're also structured in a way that focuses in the clinical segment. A number of our competitors work in different segments of the market, be it commercial, be it preclinical, be it data. We focus in Phase I to Phase IV, Phase I being first introduction in demand of a drug and Phase IV being those later-phase market-related profiling studies that get done. We are in that clinical space, very focused in that clinical space where most of the decision-making and a lot of the dollars in our biopharma customers are spent in that clinical space. We underlie it with a global business services support group that's very centralized and has allowed us to drive our SG&A down from where it was probably 10, 15 years ago for about 20% to 25% of our revenues to now where we're under 10% of our revenues are spent on SG&A. And we think we have continued opportunity in that area to continue to drive the margins. And I'll show you the margin improvement we've been able to deliver to the market in a moment. And then underpinning all of that, of course, is a culture of innovation and ability to bring technology and new ideas to market to be more efficient, continue to be effective and efficient as we drive to market. It still costs in the vicinity of $3 billion to $4 billion to bring a drug to market. We're about trying to find more efficient ways of doing that for our customers. The third area I want to talk about in terms of differentiating abilities is our connection with sites and patients. Ultimately, we trial drugs in patients. It's going to be a long while before we look at AI or computers to trial drugs. We still need people and patients to bring new drugs to market, and altruistic endeavors and the altruism of people and patients who are willing to go into clinical trials drives a lot of the innovation that goes on around clinical development. And around our sites and patients, we have a site network where we have a number of owned sites, and we have a number of sites also where we have embedded resource, so people who facilitate the recruitment of those patients into that site, into our clinical trials. We have our in-home services group that allows people, nurses to go out to patients' homes. In other words, to bring patients and to make it more convenient for those patients to go into their clinical trials to support the sites. Site resourcing, as I said, in around 60 countries, where we can actually take those resources to the sites and facilitate. Many of the sites are overworked. Many of the sites don't have a lot of time to run clinical research. There are a number of figures around being involved in the clinical trial once and then not going into another one because of the administrative burden, we tend to -- we are able to relieve that by providing resources to the sites to allow them to continue to participate in research. We have our FIRECREST site portal, which is a site support portal that allows them -- allows the sites to be able to get trained, to see videos, to do informed consent and ultimately, to get access to our decentralized platform in order to enter the data, so a number of areas we're able to support the sites, indeed, as well as in the patient recruitment side of things as well, where we drive engagement and bring -- help to bring patients to the sites through advertising through social media, those sorts of things where we can bring patients to the sites to enter into the clinical trial. So those -- that connection with sites and patients remains a very important part of what we do. We also have the decentralized clinical trial solution. This is a solution that came in through our acquisition or union with PRA Health Sciences. And we've been able to wrap around the services around that platform, be it our concierge services, the ability to support patients as they go into clinical trials, how do they use their wearable device, how do they go into their clinical trial, how do they enter the data that they need to enter through there -- in this case, their -- the handheld device, and we're able to support that through the community-based assessments as well, wearables, and the ability to collect that data is very important. Our recruitment services, I've already mentioned. The global site network is integrated into our decentralized trial platform. So the ability to implement not just a clinical trial but our decentralized platform in the context of all of the other services we have, I think, differentiates us nicely as an organization. And so just summarizing those areas of strength across our key differentiators, it does position us, I believe, for future share gains. As you look at the 4 or so competitors -- major competitors in our business at the moment and across that global scale, we believe we have some advantage in one or more areas of key differentiation, be it global scale, clinical focus, that full service and functional models, the ability to deploy those different models, our own site network or our integrated decentralized clinical trial approach. So as a large-scale organization, those are the areas we think we have some significant advantage in over those competitors, and we believe that positions us extremely well for growth in the longer term. To move on in terms of our customer profile, we are a well-balanced and diversified group. Again, a number of years ago, as a legacy ICON organization, we were very concentrated with one customer. That concentration has diminished substantially, whereby our top customer now is less than well under 9%, 10% of our revenues. And so we're in a much better and a much stronger position across our organization and feel that we're well managed, and our portfolio reflects that. You can see a large biopharma where the majority of dollars are spent in the development space is around half of our business, and the other half is split between the small biotechs. About 15% are what we'd call capital market dependent or organizations that spend less than $100 million a year in development and about 12% in midsize, the remainder being in other areas, things like the government, et cetera, et cetera, so again, a well-diversified, strong portfolio that allows us potentials for growth right across the customer base. We're still successfully delivering on our integration commitments. One of -- we had a number of rationale for doing the deal or the union we did with PRA back in 2021. And we now feel we're able to really bring those forward. I talked a lot about scale and the ability to bring those 41,000 people now to our customers' programs. We are now -- have a seat at the table with a lot of our larger customers and large partners. We have the ability to talk to them. We are part of the conversation, whereas a few -- couple of years ago, we weren't always part of the conversation. That's been a significant benefit for us as an organization. We've retained our customers. We've improved our positions with our customers, with those larger customers. Typically, the top 20 is how we measure ourselves. We are partners with the vast majority of those, and we've made good progress on and are in continuing negotiations with a number of those customers about partnerships and partnerships that perhaps weren't on the table, as I say, a couple of years ago, we're now very much in the mix. We were able to deploy and bring in, through the union with PRA Health Sciences, decentralized trial platform. Again, post COVID, the ability to deploy and to implement decentralized trials is something that we've seen, and we continue to see that opportunity. It's not that every trial is a decentralized trial, and there are very few that are purely decentralized. Most trials these days have a component of decentralization, have a component of patient centricity. And we're able to deploy that platform in a way that allows us to bring a more diverse patient population that's important for regulators. They're constantly asking companies now to bring in more diverse populations. Again, through the COVID pandemic, there was a lot of focus on that. We were able to do that as we played a major role in the development of the Pfizer-BioNTechCOVID vaccine. We had 1,000 people actually deployed on that trial, a matter of public knowledge that, that was very successful and one of the shortest ever clinical development programs that's been run. And we're very proud of our contribution to that trial. But one of the things that brought in was the ability to recruit a diverse population, which was very important as we interpreted the results of that. The cost synergies, of course, the revenue synergies that come through any union and any acquisition have come through nicely. Certainly, on the cost side, we're about a year ahead of what we anticipated. We're anticipating this year getting the $450 million that we committed to the market, and we'll probably do a little bit better than that as we're going forward. We're a disciplined, focused, cost-conscious organization. And as I mentioned, with our global business services group, we've been able to deliver nicely on that commitment of the $150 million, and we believe there's more opportunity out there as we go forward. The revenue synergies, we've committed to $100 million by the end of 2024 as we exit it. We're on track for that. We're winning at around about that rate on an annual basis of additional work that we wouldn't have won. Things like a lab now is available to our whole organization. That's been driving some very significant wins. Our imaging group has been driving some significant wins. Accellacare site network has also been driving some significant revenue synergies. And as those wins get embedded into the backlog and move through, they will contribute to our top and, of course, our bottom line as well. So over the year to Q1 2023 where we last reported, we saw a 5%, 5.3% constant currency revenue growth. That was in the high single digit on a direct fee basis. We have some headwinds a little bit on a pass-through basis from our COVID time where vaccine trials tended to have larger or a greater proportion of pass-through revenue. And so that's, to some extent, attenuating a little bit the growth rate as we fight through those headwinds. But ex COVID, we were in -- certainly in the high single digits from a growth point of view, and we anticipate and we look -- think we be getting back to that in the more medium term as well. We've seen something like 17% on the adjusted EBITDA growth, so a very solid growth from an EBITDA point of view, driven particularly by those cost synergies that I mentioned and those rapid implementation of those cost synergies and not quite so high on the EPS growth. The interest rates, of course, as with many companies, have impacted. We've certainly increased our interest rate payments quite significantly given the debt we have. That's stabilizing now. We're hoping with the Fed's cooperation that we'll see some positive news on the interest payments as we get into next year. And as we move more towards -- we've come down from about 3.7 million -- I'll go to it at the moment -- 3.7 from -- for leverage from an EBITDA point of view to more like 2.8. Now we anticipate being at around about investment grade, that's around about 2.5, sometime in the second half of this year, and that will give us the ability to restructure the debt and to improve, again, our interest rate payments. We continue to pay back about $800 million to $1 billion of that debt on an annual basis. Our free cash flow is such that we should be able to continue to do that. And that's been very much a focus for us over the first 18 months or 2 years of the union. In terms of our industry-leading adjusted EBITDA expansion, you can see over the last several quarters now, 8 quarters or so, we've grown our EBITDA at an unprecedented rate. That's -- it's really been a very significant improvement as we've gone forward. We still think there's more to do. We committed to 21% by 2025. Looks like we're going to be well ahead of that. And so we see some opportunity there going forward. We've got -- we'll get to '21 and then we'll work out what we're going to do. As my former boss used to say, every ceiling becomes a floor and -- sorry, yes, every ceiling becomes a floor. So we're looking to continue to drive that forward, albeit on the basis more of continued SG&A leverage rather than a significant expansion of our gross margins. In terms of our -- over the last 12 months, reported adjusted EBITDA growth at the end of Q1, you can see that we're over the 30% mark. So we're really -- we really have driven that EBITDA growth very significantly on the back of our acquisition of PRA and our ability to take cost out of that union. And I'm really pleased with how we've been able to do that, and the team at ICON has really shown some discipline in that space. So as we go forward in terms of our capital deployment strategy, I talked about the leverage, the improvement there. The priority has been on debt paydown. It continues to be on debt paydown, where we're looking to be at around 2.5 in the relatively near term. That will be the second half of this year. That will get us to an investment-grade and ability to restructure at improved interest rates. And as you can see from there, we've made good progress over the last few quarters and continue to do that. And we expect to make -- to be able to maintain that sort of rate of progress over the next year or so. In terms of capital expenditures, we have $200 million in CapEx expected for 2023. The focus, as you can see on IT, labs and early phase, facilities, we're doing some consolidation there, technology, the ability to utilize data to access patients for clinical trials. There's a number of areas there that we're bringing in, our OneSearch tool where we're using AI and machine learning and robotics to improve the way we identify and recruit sites to get into clinical trials. We want the best sites to be in the trial. We don't want sites that aren't going to recruit patients. That's a waste of money. That's inefficient. And we have a tool, we believe, that really gives us some significant advantage on that front. M&A is a key area for focus, particularly as we get back, as I said, to investment grade and we pay down that debt in those areas. Site and patient solutions, there's opportunity there. It'll be more string of pearls. It'll be more supplementing the areas of our business that we feel we're not market leaders in. There are 1 or 2 of those. And as you can see, those are the sorts of areas there on the slide that we think we have some opportunity. Share repurchase will be a lower priority, but it will be -- we will be opportunistic in that area should we see the opportunity to repurchase. And if we don't find the assets that we want to bring on, but a priority at this stage, obviously, debt pay down, as I've said, in the short term, but then in the more medium term, M&A becomes a real focus again for us. Our history of performance in terms of revenue, you can see that progress over the last, what is it, 21 or so years. We've certainly grown as an organization from 5 people in Dublin in 1990 when we were established by our 2 founders, 1 of whom is still on our Board. So still -- we still retain that tradition and that culture of ownership and of an ability to get things done and to execute as a clinical trial organization, something that I'm very keen to continue. Our adjusted EPS, you can see a little bit of a dip there back in 2011. But since then, a pretty significant improvement over the last, as I say, 10, 11 years, and we see that continuing for the certain -- for the future. Just a presentation like this wouldn't be complete without a mention of ESG. We are an organization that does care about our social responsibilities, particularly. We're not an organization, obviously, manufacturers that has lots of factories. But on the social area, we feel passionate about diversity, inclusion and belonging. That's very much a core value of ours. We measure ourselves in terms of women and progression of our females coming through the organization. We're also making sure that we give people the opportunities they need to develop their careers. And so it's an important aspect of what we do in the organization. We recently were rerated by EcoVadis in a 64 score. We went up from 46. So it's an area we're seeing some real progress on from a corporate point of view and one we feel that is very important for us and also engages our workforce. We have a relatively young workforce, a relatively educated workforce, and they certainly feel strongly about our commitment to ESG and particularly the social aspects of that. And then just to finish off, we're recognized widely as an industry leader within our space and some of the awards we're very proud of, particularly around the Scrip award as the 2022 winner as the best CRO and the number of vaccine awards. We have that expertise in the vaccine space, particularly as a legacy of our COVID projects. We were able to, as I said, be very much involved in the Pfizer BioNTech and a number of other of the COVID vaccines, so again, very pleased with that. So I'll finish off with a slide that I hope is going to work, which is a video. Thank you. [Presentation]

All right. Thanks, everyone, for attending. Just as a reminder, the breakout will be in Adler.