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

Next session, and we're really pleased to have ICON here with us today and presenting for the company is Brendan Brennan, Chief Financial Officer; and Kate Haven, Vice President, Investor Relations. Guys, thanks for being with us.

Pleasure.

Sure.

Absolute pleasure. Yes.

So maybe jumping in right away, right? Obviously, one of the big topics has been the funding environment in the biotech. You guys have generally been pretty resilient through all of this, right? And I think this is despite the concerns and perhaps that's sort of a testament to your relationship with particularly a lot of large pharma companies. Maybe talk about sort of how that relationships -- those have changed or evolved particularly with the acquisition of PRA.

Yes, it's been -- well, it's actually nearly 3 years as we sit here today, since we announced the deal. And obviously, by the 1st of July of this year, it will be 3 years when we consummated the merge, if you like. So it's been an interesting period. We've certainly come through it, I think, pretty well. I'm very happy with the integration process and how it's run. We've had relatively good retention of staff, which has been very important and a good customer retention, obviously, during that period as well, which has been extremely important. It's not been without challenges. Of course, it hasn't. It's 220,000 people organizations coming together, different processes, different systems. Putting all of those things together has certainly been challenging at times. No question about that. But I feel like we definitely have, and I really felt actually over the last 6 months or so, very much a culture of one company now. And I think we've crossed that particular Rubicon. We're now actually going to the market with -- we think we'll have a new voice, there's the new ICON right across different market groups. And I think some of things, the [ teasers ] that we started off with are still fundamentally there in terms of really that focus and dedication towards biotech. We have a biotech group that has in excess of 7,000 people working in it. And they are dedicated and focused on that customer group. Likewise, we have a large pharma group. Likewise, we have an FSP groups. So I think that focus towards customer segments has really worked well. Obviously, I think probably in terms of how they've evolved, I think in the large and midsized pharmas, it's worked well over the last couple of years. We've seen good traction. We've seen the evolution of existing relationships and development of new relationships in that space. I would say the biotech, our biotech business has been a bit more challenged over that period of time. That's just the market for, obviously, the biotech funding. But we see good positive signs as we come into this year. Obviously, sequentially, RFP flow was up well from Q4 -- sorry, Q3 to Q4. We see a positive start from a funding environment as we come into 2024. And we see decent traction from all of our business units and all of our customer segments even in the first couple of months of the year from a business development perspective. So it's been a really good story in terms of getting -- really getting stabilized, getting the message out there. But I think really what we want to do now as we focus into '24 is making sure that we can also progress right across with all of our different customer segments really, really productively in 2024 and really show that face of that new ICON and being very much one company.

Yes. And you -- and I know on the call, you mentioned sort of this uptick in sort of activity, good RFP flow starts for the start of '24 here and continued strength in the large pharma segment. At the same time, right, we've all seen the news of pharma kind of retrenching cost-cutting and concerns with the large customers. Maybe kind of reconcile those 2 a little bit. I guess some people are worried, maybe does that flow into then the R&D budgets? Or maybe those 2 are a little distinct from each other?

I think what we saw last year in 2023 was I think there was a lot of folks looking at their development model, looking at their R&D spends in the large pharma groups particularly. I think they went and they had a hard look at the blend of how they deliver their research and development, whether it be full service outsourcing or FSP or the quantum, in fact, that they did in house. And so what I think you saw was a lot of people. And also, I think people were looking at have I got the right CROs fit for the job over the next 5 years as opposed to maybe when we put them in place 3 or 4 years ago. And I think the market has been quite dynamic and moved quite a lot in that, obviously, intervening period. Ourselves and PRA have come together and represent a very large player in the space. And obviously, there's been other challenges in the CRO marketplace in that period of time as well. So I did think that pharma really took 2023 to get their ducks in a row. And I think what we feel now in 2024 is a bit more traction. Like the thinking around what the model should look like has been done. Even some of the new selections of partners has been done. And I think what I'd like to see now is more of a traction. They are all saying that they're going to increase spending, even some of the -- I think, some of the companies that have been more troubled over the last period have even said in their own press releases over the last while that Q4 was probably at a later point and they want to continue to increase R&D spend as they go forward. So I do think we see good traction there. And I think it was really about them getting their structure right, with an idea to be able to really jump off and have a better '24.

In that sense, right, because I know one of the big words that last year was like reprioritization of pipe and -- it sounds like you can think of that, that that's been done at this point. Is that...

I think a lot -- yes, I think the hard work has been done. Yes. I think the hard work has been done. And I think people have got a better view both in terms of their own environments, of their own careers and where they're going as well as actually the relationship with our CRO partners. So I think yes, a lot of the hard lifting has been done there. I think there's -- inevitably, [ there's ifs ] and there's always outliers. There'll always be companies that are going through different things at different points in time, but generally speaking, as a marketplace, I feel like we're in a better position coming into 2024.

No, that's helpful. And if we think about the biotech side a bit, right? I mean this is also one where I think early in the year, you kind of highlighted some more muted activity closing out the year. But again, here also, it seems like we've seen a pickup. And obviously, in the capital markets, we've all noticed more activity as well.

Yes, of course.

This is -- I think, particularly emerging biopharma, you've talked about it only being about 15% of your overall mix. How should we think about this as a potential tailwind for you though during periods of improving funding, I guess?

Yes. I mean that's exactly the way we see it. As I mentioned, we've a very good, dedicated biotech team, and they really want to take any and every benefit that they can from an improving marketplace as we go through 2024. And I think they've got a -- it's actually a really robust organization. So they've got a good ability to actually be able to go out to be able to pitch that work to show their medical depth, to show their really advanced talent pools in terms of being able to design projects and really go out and be very compelling to customers as well as being pretty cost conscious as well. We're a big organization, we can get the leverage, which means we can deliver that value back to our customer. So I think we have that combination of good medical design, good infrastructure, keen pricing. That really should put them into a very good place and a very, very comprehensive organization there. That should put them in a really good place to be able to really go out hard and compete in that [ org ], in that part of the world. As we come into a better funding environment in '24, I'd really like to see that business particularly kind of shine in 2024. It's been a tough couple of years for them, both from an integration perspective and obviously, from a biotech funding perspective. But I think they're a great part of the organization. They've got a really good mindset, and I think they've got it all to do it in '24.

Do you see that becoming a bigger part of your mix? Because I think by some estimates, merchant biopharma, that pipeline is going to be a bigger part of the overall global pipeline of R&D. And at 15%, I mean, how do you look at this space and becoming a bigger presence in it? Or is that -- I mean, that's a kind of a risk management, like you want to keep it at a certain level?

Oh no. I mean I think we'll work in that marketplace as we see appropriate in terms of good organizations that want to have long-term partner relationships. We're certainly there to win business. There's no question about that. And we want to see that develop and continue to grow. I mean I think it will take time to shift and that's the emerging biotech is the 15%. So we have biotech customers obviously beyond that 15%. So it's a robust business unit. And I think they have it all to do. And I think hopefully, we've seen, as I said, come through the [ later ] point, and they've got an opportunity to grow. So yes, I really would like to see that grow as a proportion of our overall business.

I mean, we broadly, I would say, reflect obviously sort of market trends, right, as we see more dollars flowing in from a biotech perspective. I think we would expect our mix to certainly reflect that over time, given the scale of the company. There are some offsets, obviously, given the scale of FSP. That's generally obviously more of a large pharma model. So that helps sort of skew the mix more toward large pharma overall from a company perspective.

Yes. And I guess I'll skip ahead a little to M&A because I wanted to come back to FSP, but since we're kind of talking about it. Because obviously, M&A has been a key part of your strategy over the years. PRA obviously has changed complexion, made you a much bigger company, and we're taking a pause just to kind of reset, right? But your leverage is now at a point. Your debt is at a good point, right? Everything is in a perfect place to kind of resume M&A again. Would we think about then the targets maybe more towards biotech in that sense because if that's to get more exposure, a, because maybe it's more full-service outsourcing kind of model and maybe higher margins overall or higher margin dollars overall. Maybe just help us think about sort of how you think of M&A? Like what is more attractive to you? Like does mix matter? Things like that.

I mean I think certainly, when we think about M&A, we're thinking about what strategically can move the dial for all parts of the organization and where do we need to put it in. So when we think about moving the dial in terms of our full-service offering, whether it's large or small or mid, it doesn't actually matter to us in terms of they -- most organizations have the same nut to crack. They want to get their patients on to trials faster. That's what they want to do. They want to have their studies recruited, patients on trial. And how do you do that? And so we've -- we've spoken about this a lot over the last number of years, have a very sophisticated certain patient network in our organization. It's been an area where, particularly in general medicine and vaccines, it's been really productive in terms of helping us speed up the time to patient recruitment. And that's an embedded network of our style of working at hospital sites and doctor sites to basically take the pain out of clinical research, to take the [ contracted pain ] out of the payment paying out and all those other pieces where it can be just a pain for the doctors involved and actually be able to move that faster. That's certainly an area where I think it's -- regardless of customer size, that's an area we'd love to continue to invest in. We see the pressure on hospital sites and on doctor sites in terms of having enough staff to actually being able to deal with the amount of clinical research that's out there, particularly in North America and Western Europe. So that's an area where we want to continue to grow, and we think it's very strategic to the business. But again, it's that nut to crack, that speed to patient recruitment.

What about retail pharmacies as a network to help recruit patients as well?

I think one of the things you have to be careful about, and we've seen it in our own networks is therapeutic areas and therapeutic area splits. I think we've seen that even in our network, we have more of a concentration around general medicine and vaccine, where you've got ambulatory patients coming in who have -- when you have to, you can never forget 40% of our marketplace is oncology. And you just don't get those patients in those kind of environments. And likewise, it's probably the retail pharmacy would be a good environment where, again, they were very popular at the time they were doing the vaccine trials, where the patient population was everybody and anyone. But when you're talking about much more niche patient populations, you really need to have the key opinion leaders, you need to be at those sites. So it is -- I mean I think it's an interesting part to have as -- and maybe a mix and I think we've explored relationships with some of those folks in the past. But I think it's always going to be a mix, and it's always going to be therapeutically slanted.

So staying on site now, is -- so then is that a good area for investors to think of as where you want to keep expanding and putting capital into?

I think that's yes, from an M&A perspective, yes. But it's not just there. We'd like to -- we have a really good central lab and IABA lab. We'd love to continue to build out that. It's been growing really well over the last couple of years. We're probably down the pecking order a bit in terms of where we sit from a market perspective. We've got a great late-phase business outcomes business that, again, has been growing really well over the last number of years. And again, we'd look to see that grow through further M&A. And then there's kind of other areas where, whether it be use of technology in our organization, the concepts of biosimulation and how that is evolving in the marketplace. And of course, the concept of how you use IA to improve design of clinical research, all of those areas, I think, are areas where we'll continue to keep a very open eye in terms of M&A.

What about on the other side by commercialization like real-world evidence, real-world data, sort of like Phase IV kind of events? It hasn't been a big focus for you I don't think.

It's been a growing part of our business. But yes, traditionally probably a wee bit smaller than some of our peers, but it has been a very good, strong growing area of our business. And it is absolutely an area where we'd look to grow through M&A. And I think there are opportunities in the marketplace that we can avail on. Yes.

Okay. Let's jump back then, talk about FSP here. And it seems like what we've been learning over our time here is that this model has evolved, right? And I think definitionally, it's become kind of a gobbledygook a little bit, right? It's like everyone seems to have a different definition of it. But maybe talk about sort of your strategic position in FSP, both maybe sort of pure functional service versus what we're seeing as more of a hybrid model, sort of a mix of managed services. And maybe just remind folks sort of what your mix looks like today and what you guys think of this business.

Yes. It's like 20% of our business, just there or thereabouts is that kind of FSP model. For those -- I mean, unfortunately, to your point, people have been playing with terminology here a little bit. So sometimes large pharmas call it in-sourcing, and that confuses the issue again because people think insourcing means they're going to recruit hundreds of people and they're going to do it -- usually, that actually is a reference to this type of functional service provision by CROs. We're #1 in the marketplace. So we've got some very well-established long-term relationships with some of the biggest pharma companies in the world. Yes, I think that it is an evolving model. It's been an interesting space to be in over the last number of years. As I said, I think we do it really well. It is about being able to recruit and get really good staff into those business models quickly and efficiently. But it's also about value creation. So I think that some of the story, the paradigm has been shifting from just having the X number of heads that's been requested to actually being able to say, "ell, let's deliver value for you as a customer, what are your end points? What are you looking to get out of this head" -- this is the head workforce that effectively you're hiring into your organization. If we can manage that process, we can get you probably a better bang for your buck in terms of number of people you're using versus the outcomes that you're getting from that. And that's part of that evolution to that kind of blended model of having not only the -- in some instances, the FSP, so they might have all the clinical monitors for it, but then you might also be doing project management more directly in a more full-service modality or you might be using the technology that you would have in your organization and the SOPs that you have in your organization as opposed to the company that the people are embedded in. So it is about blending those pieces and how do you use FSP really efficiently and how do you move that paradigm from just heads on billing to something that's a much more sophisticated model to around value or value creation.

Got it. One of the questions that we often get is sort of the financial impact as you mix between these 2 type of businesses. And I understand that when people ask sort of what is the margin contribution, that between the 2, they're roughly -- they're pretty close to each other as a margin percentage. But my understanding is that FSP projects tend to be lower total dollars. And so...

Well, I mean...

Is that maybe not the case?

Well, I mean usually, there's a bit of a margin differential. There's probably about 200 to 300 bps of contribution margin differential between the 2. So I think people think of full service from the perspective of obviously on a 6 [indiscernible] basis, including -- inclusive of pass-through. And generally, that doesn't come along with an FSP type model. So that's probably the biggest difference. So you've got -- yes, sometimes you've got a slightly different mix. But generally speaking, FSP models are huge, huge relationships. They're usually with very large pharmas. They're usually very big contracts. So they are very weighty as part of the overall mix of business in an organization and certainly, a company ICON's size, we couldn't contemplate not having it as part of a significant part of our business. And as I said, we're very proud to be #1 in the marketplace and be very efficient at delivering it. So it's going to be -- continue to be a very important part of the business.

And there's a third thing also from a contract structure standpoint, right, it's not like we're contracting for a single trial that has a sort of start and a finite data end point, right, where this is like, hey, look, we are filling a certain function here. And this is more [indiscernible]...

And often, it's a -- I mean it's one of the reasons why we only report into our business wins 12 months visibility forward in terms of our revenue forecast in that business. We never put in a 3-year relationship because they're -- predominantly, they don't talk about a certain dollar contract. They're talking about a relationship whereby you'll supply us with clinical monitors over a period of time. And that can ramp up or down depending on where that company is in that cycle. So it would be very difficult to put in. It'd be a big estimate you'd be putting in to your business wins if you're putting something in on a onetime basis for 3-year contract?

Yes. I think a lot of people have been talking about it. And certainly, we've been hearing as well this seemingly shift from -- particularly most large pharma from full service, more towards this FSP kind of model. You kind of highlighted it last call, right, that you're starting to see more increased demand from large pharma back to [ FSO ]. Maybe talk about sort of these broader trends and how you've seen them generally move over the years? And maybe what does this last quarter kind of signal to you that we might seeing a shift back?

Yes. I think it's interesting. There definitely was a trend. There's no question about it. In 2023, where the FSP became a more prevalent modality that we were seeing more of during the course of that year, particularly with the large pharmas. And it is predominantly the large pharmas who employ that particular model. It's been interesting, though, because what we've seen in the past is that you do have things come in and out of vogue a little bit here in this FSP, non-FSP mix in terms of trial delivery, particularly. And so you do see whether it be various management teams are moving around the industry, bringing the modality that they're more familiar with. Sometimes that's what is the catalyst here. Sometimes it's a consultant who has a really bright idea and is talking to all the pharma companies about the shape of what their organization's going to look like. But we have seen it kind of move forth and back. And certainly, I'm 18 years in clinical research now and over my period of time here, I've definitely seen there have been periods where you'd get this kind of more of a move to full service and then more of a retrenchment and more of a move back into FSP. And it has been -- it has waxed and waned. It is interesting that I think people were talking about last year it being a paradigm shift that things were never going back. And it was really interesting from that perspective to see in '24, actually, the early indications are that there is more interest in full service outsourcing in the first couple of months of the year. And obviously, we were very happy to announce a new relationship, a new full-service relationship in Q4 as when we did our results as well, with a large pharma company. So it isn't one-way traffic. I think that's the first thing to understand. And I think there is that element that we've seen this in the past. I don't know if this was particularly different in 2023, albeit there was more noise around it because of things like the Inflation Reduction Act and other pieces that were going on in some specific pharma companies.

Yes. Maybe just to clarify the new full-service outsourced relationship. Was this a client that had been doing more FSP previously has come back to say, "Hey, we want to do more [indiscernible]"?

Yes. When I talked at the outset, I was talking about the fact that a lot of pharma companies took 2023 as a year to decide not only on their model on how they outsource, what they in-source, how much they're going to spend on R&D, but also to assess their CRO partners. This was one where we hadn't been doing full service outsourced work with this particular customer. They do both. They do have an element of FSP and an element of full-source outsourcing. And actually, I think they had 2 CRO partners that they put in place numerous years ago. And it was a reassessment in that point of time. And as I said, because there's been a lot of evolution of CROs over the last number of years. And obviously, we're a much bigger player now. And we felt that we just went in, represented ourselves really well from a medical perspective, from a design perspective, from a team perspective, and we're able to win that business off another industry participant. So it was a good competitive win from our perspective.

That's interesting. I guess maybe from -- in a large pharma company, when they're making these decisions between full service and maybe FSP, how much does therapeutic area also factor into it? Like maybe in some area -- in one therapeutic category, they might feel, hey, we have enough expertise in-house at least from a project management standpoint to do more FSP because then we can kind of oversee it. But maybe another therapeutic area, we want to lean on ICON's expertise here to manage that process. Does that factor in? Or is it more of a corporate kind of stance like, "Hey, this is sort of our overall strategy that we want to do more"?

Yes. I think that's not -- that point, it's not a bad one. I mean I do think people will have a mix. I mean, I don't know if there's a consistent answer to be absolutely honest. I don't know if it's like, yes, that's always the case. I'm not sure that's the case. But there certainly is, obviously, where -- as you'd expect, where people have -- where they feel that they need the additional therapeutic expertise of the CRO, yes, I think full service is the more obvious of the 2 modalities that you would use in that instance. But it's not -- I wouldn't say it was ubiquitous across the space.

Okay. Yes, I was just curious. Want to jump in the last few minutes here, talk about sort of long-term targets. You've kind of reached your 21% adjusted EBITDA margin target, certainly well in advance of 2025. And your guide -- '24 guide implying another 50 basis points of margin expansion. How should we think about long-term margins from here?

Take that one for the moment?

Yes. I mean we -- obviously, we said that in March of '22 in terms of that, the 21% EBITDA target. We haven't gotten there on a full year basis yet, although, obviously, we're very close in terms of the full year '23. I mean the way we thought about the likely makeup of that 21% was gross margin at 29% to 30% and SG&A somewhere between 8% to 9% of revenue. Obviously, we've closed in on the 30% of GM a bit faster, I would say, than maybe we anticipated. And obviously, we've been slowly working on working down the SG&A cost as well. So certainly, obviously, we're not ready to set a new target yet. Obviously, we'll consider that for -- we have an Investor Day coming up in May of this year where that's sort of the natural time we would revisit the midterm targets. But obviously, there's still some room to run, I think, on SG&A is sort of the short answer there. Obviously, we expect to make continued progress on that from a leverage perspective this year. But there's still, I think, some incremental leverage even we see beyond '24 in terms of SG&A, in particular. I would say from a mix perspective, we certainly feel like gross margin is more of a maintenance sort of story for at least sort of the full year '24, [ so being ] consistent on a year-over-year basis.

If we think beyond that though, particularly if we think about use of AI, generative AI, is that -- would that be more of a potential benefit to SG&A? Or would that be more in cost of goods sold?

Well, the way we think about this for the moment is it's -- for us, how we want to use AI in the first instance is very much around value creation for our customers. So we want to be able to help them using AI to develop better design trials. We want to help them to be able to process large quantums of clinical data to get better insights into how to run, structure those trials as we go forward. We talked about we have a specific tool called Cassandra that will tell you before you ever get to that point, if you're going to need to do -- run an outcomes trial on the basis of all of the outcomes trials that have ever been run in terms of what have been the indicating factors. So it's -- for us, really, it's about being smart around using AI. It's about being into the front end of what we do and about really turning the customer's sort of head I suppose, with our use of AI and its ability to actually give them insights in terms of trial design and other elements that are going to make a difference for them. We think that in the back office and in other elements of cost control, there is still plenty of room to run from a robotics and automation perspective. When I think about specific products that we need to do over the next number of years, I could get -- we could still have a significant impact upon our cost base just by better utilization of existing systems, better automation between systems and better use of robotics to do kind of the connections, if you will between pieces.

And the processes, right? Yes.

Exactly. And so that still gives us plenty of road to run. So that's the way we're seeing it at the moment from an automation versus AI perspective. We think AI is super important, but we want to really deploy it in the areas where we think are going to get the biggest bang for the buck where we think that is actually value creation for customers.

So if I just combine it together, right, if we think of the application of automation and potentially AI down the road, obviously, you feel very good about where your target's here, but it does seem like there is still room for further improvement down the road.

Yes. I think we'll always continue to challenge ourselves. Yes, that's not going away. I mean, as an organization from a margin standpoint, we've always been a company that every ceiling becomes a floor. So we're always going to get to that point, set a new target and then really be very visible about how we identify that. I will also say, we also don't have our set targets where we don't have good visibility of how to get there. And so I suppose part of my conversation here and part of what Kate was saying was that we feel that we have that good trajectory around that SG&A getting to about 8%, gross margin's about 30% over the next couple of years. That obviously gives us runway from where we are at the moment. Beyond that point, well, we'll do the work. We'll come up a plan and we'll come back to you guys.

Great. And maybe just to finish off here. As we think about sort of the longer term, where this market is going, and I think a lot of simplistic kind of thoughts, was like, oh, you take R&D budget growth, you take mix shift from more additional outsourcing, but obviously, that mix is kind of a hotchpotch of different types of models now. Like I guess it depends on what estimate you're looking at, like how much of the market has kind of outsourced. I think it's, what, over 50%, 53%?

Yes. Low 50%, 53% yes.

Where do you think that can get to? Is that something that can get to, let's say, 70%? I mean, obviously, you've come from 30% 10, 15 years ago.

Yes. Yes. As I said, I'm about to -- coming up with, well, 18 years now, 18 years plus in the industry, and it was about 30% when I came in. So yes, in that period of time, it's kind of about -- I mean, on average about 1% a year, right? I mean I think where the question is well, where is the ceiling on that, right? So if you're at 53%, you're in the low 50s. Is there 20%, another 20% to run kind of get to somewhere like 70%? I mean we've always thought that theoretically 65% to 70% should be very doable. And there's good reason for that. Like if you look at biotech companies, that's what they do just routinely. And also, in terms of where you look, really see where pharma companies are going to get their return on their investments in the future, it's probably not in the -- in the services that we offer as standard. So I do think there is more road to be run. I think it's anybody guess between -- certainly -- I think certainly, it's very safe up to 60%. 65% should be doable. I think beyond that, maybe it becomes a bit like more a question mark. There's always going to be companies that will want to do more in-house. But I think that's probably where we would like to see it go over the next while.

Okay. Great. Well, I think we'll stop it here, and thank you very much. Great to have you.

Thank you, Charles.

Thanks, Charles.

Thanks, everyone, for being here.

Good. Thank you.

Okay.