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 to have Dr. Steve Cutler, CEO of ICON, and Kate Haven, IR. Thanks for making it. And I guess we can get right into it, it's only 25 minutes.

Sure.

All right. So I guess the topic de jure among CROs, obviously, biotech funding market has kind of started to unlock a little bit, but you guys have seen continued strength in large pharma. Give us kind of the lay of the lands right now as you exited the year and then into 1Q, how that's kind of playing out versus your expectations?

Yes. I think we're seeing overall a very constructive environment, fueled for us mainly by large pharma. We've certainly seen some significant upticks in opportunity in large pharma over the last 3 to 6 months, and that's -- that's looking really positive for us in terms of engagement with strategic partners and the opportunity to build our business on current strategic partners and of course, 1 or 2 new ones as well. The biotech front has also been positive. We see RFPs in the mid-single digits, up a trailing 12-month basis. We see [indiscernible] the funding environment, at least the first couple of months in this year being pretty positive. The IPO market seems to be up little bit follow-ons are strong. The qualitative feedback we have from customers is positive and so we're pretty positive in that area as well. So overall the demand environment for us is strong.

And on the large RFP, you talked about biotech RFP trailing 12 months of 6% were mid-singles. The -- and then the large pharma, you said up double digits, kind of comp that to how -- what's like a normal growth. What's the normal RFP rate for large pharma for you?

I don't know if there is a normal RFPs. There is somewhat [indiscernible] for awards and for revenue. But they are assuring. And I think they have some correlation. But it's not -- I want to be careful. It's not a perfect correlation. We -- customers ask us for ballpark figures, increasingly, biotechs ask us for what the numbers are before they go to get their financing because they want to know what their program is going to cost. So I think -- when I think of RFPs, if they're in the mid- to high single digits on an uptick basis on a trailing -- particularly trailing 12 months, 1 quarter, I think is again, unreliable and can be volatile. But I think on a trailing 12 month in the mid- to high single digits, I think that's a very positive sort of environment for us.

We would generally expect it to track with market, right, and maybe a little bit above that, right, based on the strength of the relationships that we have from a customer perspective. So that correlates with what Steve was saying in terms of mid- to high single digits, yes.

And on the -- talk about like how the RFP has changed over like the last 3, 5 years from -- as the versus -- what I'm trying to get is, the drugs are getting more complex and the trials arguably have a lot more arms, smaller patient population. So give us the puts and takes in how those RFPs really kind of the dollar amount versus the volume.

Yes. I don't know the dollar amount, actually changed that much because even though we're looking for smaller numbers of patients, when you're looking for rare disease patients in these very complex trials, the dollars per patient tend to be significantly higher than perhaps they were in the past, certainly much higher than some of the old osteoporosis and cardiovascular studies we used to do where we did thousands of patients in the past. Those dollars per patient were relatively low. These dollars per patient can be very substantial because finding these patients is hard and the duration over which you do the trials is longer. That hurts us a little bit on the burn rate. But in terms of dollars per project or dollars from a revenue point of view, it's -- I don't see a huge amount of difference in that perspective.

And then so it kind of goes into the next question about kind of the scale that you guys have. You talked a lot about getting a seat at a table where you necessarily wouldn't have before the PRA deal. So talk about the global scale and how much that is needed in today's environment? And is that really what's helped to insulate you from some of the other headwinds from biotech funding or large pharma tightening your belt over the last year, 1.5 years?

Yes. I think about when we -- I mean, we're almost 3 years since the PRA Health Sciences merger or acquisition that we made. So it's been an interesting 3 years. It's been a fun 3 years and I think we've done a really good job in that whole integration. And so what it did bring us when we went to the market, as I said, back in '21, scale was a big part of it. Building from being a number sort of 4 or 5 organization and a #6 organization coming together to be a #1 or 2 in most segments was very significant, probably the most transformational aspect of that whole. And it's been hugely advantageous in terms of the strategic discussions we're having with particularly large pharma with our breadth and depth of coverage. Scale is an absolute. You have to have scale in our business to be -- and is really only 4 or 5 of us to have the sort of scale we're talking about now. And I think we have a top 3 are even starting to differentiate themselves a little bit, including us on the basis of scale. It's not just scale, of course, we did that -- in that deal, we've got customer relationships. We've got technology. We've got obviously the financial benefits that we've been able to prosecute in terms of cost synergies and [indiscernible]. So it's been a really, really good deal for us. But scale possibly more than anything else has really put us into the big leagues, has made a supplier in that space. And I'm thrilled with how it's really played out. I do think going forward, it will increasingly differentiate us from -- at least from the next level of CROs. The top 3 or so are pretty much there or thereabouts. We don't differentiate too much on in terms of scale and the growth comes down to more subtle things, technology platforms, et cetera. But on the top 3, we are definitely a player there and it's been usually a good basis for us.

And then along the top 3, so everybody has been talking about pricing in the overall market. CROs and the channel techs you deal with, they're very expensive, but pharma is going to continue to use them. That's been like the constant feedback. So there's a current Baro's thesis right now that the work that you're bidding on right now in the RFPs is coming -- you're getting a lot of pricing pressure from pharma. It's going to come through at a lower margin down the road. What are you seeing on the pricing side? Is there any validity to that thesis?

Our business is competitive. And no question about that. It will always be competitive. We see -- we're constantly seeing pressure from customers to be more cost effective. The most enlightened customers recognize that what we bring as value and outcomes. And if they measure us in terms of outputs and execution and value and delivery, price as such doesn't -- isn't at the top of their list. So where we were able and when we consistently and reliably execute on projects, which is definitely our focus. There's -- I mean, the pricing side of things that may have a procurement group, I'll have us. There's always going to be a back and forth there in terms of what volume discount or whatever we give them. But price is not -- is not the major factor. It's really unique when you find it hard to differentiate on whatever you're looking for. As I say delivery outcome, that's when price becomes more of a challenge for us. And there's always an element of pricing pressure and there's often our competitors will, to some extent push or -- will pull on that front, some more than others in some cases. We see ourselves as a premium price, premium quality, premium delivery organization, a reliable, consistent delivery of strong outcomes. And when we can do that and we can communicate that message well, the customer state they don't put the price at the number -- into number 1 criteria [indiscernible] obviously works well for us.

Yes. Makes sense. The quality first. With that in mind and you talk about the shift in FSP and you said that this has been [indiscernible] minus is something that's been going on for the last 5, 10 years, how does that play into your overall strategic plan? Like what are you guys seeing there from FSP? Where do you think that this goes? And then talk about how -- what you're doing to offset that slightly lower contribution.

Yes. I mean we've definitely talked about, obviously, that trend starting to increase last year, in particular, with a few large pharmas in particular looking more at utilizing more of an FSP modality. I think we've also been talking about that concept that most often, you're seeing this hybrid approach where there's elements of FSP, but also elements of full service, most of these customer relationships. So getting to that sort of second part of your question in terms of offsetting margin pressure, which FSP in comparison to full service runs about 200 to 300 basis points lower in contribution margin if you're looking at the segments in totality. This hybrid approach actually helps that margin offset over time, where we're looking to increasingly utilize more elements of full service and our offering or even things like technology, our systems to customers because we think that improves delivery for them. So overall, you're hoping -- you're leading to better outcomes for the customers on an FSP-like model, but you're utilizing other elements of service delivery. So it ends up being more of a hybrid approach between the 2. And I'd say we certainly see that increasing, and there's interest from customers and moving in that direction. With that said, I think we talked about it on the call at the start of this year, we actually saw a full service come out in terms of a higher proportion of opportunities as we started this year. So overall, not a huge change in terms of that mix of our business between FSP and full service. But certainly, there have been -- it's generally customer driven, right, in terms of where their preferred approach is. And sometimes, you can see those shifts in any given year, right? if there's a few that might come out and say, we want to move more towards functional or FSP and you might see the reverse in the next year or 2, right, in terms of moving more towards full service.

Is there any reason other than cost to move from strategic to FSP?

I guess that's a question for our customers rather than for us. I mean we're agnostic to be honest with you, I don't mind. We're the biggest FSP provider. We're one of the biggest, 1 in top 2 in a full-service provider. We're able to put those blended hybrid solutions together as well. So I think it's probably they would see it as a cost. But at the end of the day, what they need to think about, and I think most of them do is what's the value? Where do they get most value? Where do they get the best outcomes? And in some cases, that might be an FSP solution. In other cases, I think it's a full service solution. It's certainly in the rare disease, complex oncology type trials. I advocate a full service solution to be a better option. But when customers have broad portfolios and large operations, the FSP works for them. That's fine with us. We can comment on either.

Sometimes it's the flexibility, Luke and I think some customers like around FSP and it at least has that perception, right, where things are more within their control or that resources, they can sort of push and pull. Hey, if we need more in this area, you can more easily add that in, right, from an FSP perspective versus full service.

And on the -- again, we talked about this morning, how has the FSP changed? Is not just any more just having like a 1,000 people just get that 1,000 people and then [indiscernible] sponsor ends up running them. Like what other analytics and other ancillary things that you're layering on top of that contract where it's a very different looking than it was 5 or 10 years ago.

Yes. I think it's fair to say that the whole FSP is a much more sophisticated offering, a much more sophisticated market than it was even 5 years ago, where it did tend to be give me 100, give me 1,000 people, and I'll tell them what to do kind of thing. We now do that, and we based our pricing on units, on outcomes, we add technology to that. We add systems and approaches and best process. And every FSP, there's no sort of [ coward ] approach. Every FSP has some slight differences in terms of what we're providing, not just in terms of the people, but as I say, in terms of process, SOPs, technology systems and that allows us to add and probably improve our pricing in that space. So it's certainly not a race to the bottom on that one. We are able to improve our margins based on the value we add to that [indiscernible] ultimately we take in terms of delivering on that.

And on that contribution margin difference, do you think that, that evolution of the more sophisticated FSP model helps to the -- shrink that? Or do you think it pretty much will continue to stay at that?

I think it will help to -- I think it will probably shrink it to some extent, although I'd like to see the full service margins. We have an ability to also -- which those are through technology and the various things that we place on those full service trials. So I don't see this as just staying constant. I see both kind of moving up. Maybe the differential might shrink a touch, but probably not dramatically.

All right. That's good. And then so when you're thinking about the demand is steady and strong for you guys. Burn rates have been coming down. Let's talk a little bit about the dynamics there and why -- where you ultimately see them kind of bottoming, or is it just going to be a constant steady March down?

I hope this [indiscernible] constant steady month down. We have seen a slight diminution in the burn rates really around these rare disease trials in every oncology trial, so on rare disease trial these days because they're always looking for some type of patient. So the duration of that trials has elongated and has extended certainly over the last few years. On the other hand, the vaccine trials to the extent that we get them and nobody wants another pandemic, but the vaccine trials are -- the trials have burned a lot faster. The GLP-1, those drugs, those agonists and their successes, I think, offer us an opportunity to do some of these more large-scale trials back in the -- back in the day. I sound like a dinosaur, but back in the day when I started, we were doing these large osteoporosis trials, large cardiovascular trials, [indiscernible] different thousands of patients. They burn quickly. They generated a lot of revenue. I think the GLP-1 drugs, and that is obesity drugs offer us an opportunity to perhaps move back in that direction a little bit. So any sort of continued challenge from the rare disease oncology will be mitigated somewhat by some of these opportunities, be it vaccines, or be it the good ones or other sort of mass market type opportunity.

And on the GLP-1 demand that you're seeing, I mean there are tons of companies. And I guess the fear here is that we end up with another COVID type of spike and then so talk about where you see the GLP-1 dynamic kind of playing out for you from a duration perspective?

Yes. I don't see a COVID-type spike with the GLP-1s with the obesity, I -- certainly, I think, going to be an uptick in the medium term as the new generation of many obesity drugs come to market, new dosage forms, next generation. But I think that's going to be -- going to be large-scale trials that will be longer-term trials. The regulators, I think, have got to want outcomes type data in the COVID, it was like, do we have a response and you've got a response pretty quickly. And so it was [indiscernible] almost done, and that sort of went up pretty quickly, it's come down fairly good. I think it's going to be a much more smooth sort of up and probably down the other side at some point down the track, but I think if you're looking at a sort of 5-year type horizon on a 2-year type horizon. You're looking at a...

Very traditional.

Well, more traditional type of drug class and type of the approach. And there always going to be new generations of drugs coming through in that space. It's such a huge area of need and the benefits of the societal health is so significant that I think there's going to be, obviously, a ton of money invested in a ton of research and development being done in that space.

Yes. On the business that you're winning now, and this kind of goes in with the GLP-1, but other things as well. From a reimbursement or a pass-through perspective, has there been any dramatic change -- not dramatic, just changes in the level of the pass-through versus what has gone in the past?

Not significantly, certainly. I mean, we've definitely reverted more toward a normal profile in terms of the studies that we're running now. Obviously, it was really that COVID specific work that had much larger outsized sort of proportion of pass-through's versus direct fee. So now I'd say we certainly have seen a return to more sort of normal mix from that perspective.

It's a good segue into the margin. So as we were talking about FSP and pricing and everything else, you guys are at the 50 basis points in your LRP. At some point, the PRA integration costs there, talk about any other runway that you guys have in the remaining costs that you can continue to strip those out? And then the second piece is just on continuing to get better operating leverage where you see that?

Yes. I think with respect to PRA, I mean, or as I say, almost 3 years in now. I think we're pretty much done on trying to sort of pull those out as a separate cost synergy. We made those well ahead of time, $150 million. And I think we're not looking to sort of continually come back to that, these [indiscernible] happen, it's done. Let's move on to kind of things I'm looking at revenue synergies. We've seen some nice -- we're on track for that. I think we talked about in the '24 has been $100 million. I think we're on track. But to me, that's kind of -- we got to really move on now. And that doesn't mean there isn't significant opportunity in our business to continue that margin drive. We've talked about 50 bps this year. I think we'll deliver on that. It will probably be more in the SG&A line than it will be in the gross margin line. Gross margin, there will be some opportunities, of course, as we move on with AI and machine learning and process and even the location of where we do the work. But there's always sort of headwinds in that respect in terms of being competitive on products and wanting to grow our revenues and not be uncompetitive on price. So we don't grow our revenue. We want to do that. And so I'd say 30% of our ballpark as being the sort of number on the gross margin line. On the SG&A though, I think we can continue to make progress in that space. And I'm not going to set a target at this point or big area of audacious goal. But I do think there's opportunity there. We're under 9% in the last quarter. In terms of percentage of revenue, there's no reason we can't continue as we get bigger and as we grow our organization, the opportunity to leverage our global business services, which is well organized, well run, and still has opportunity, I think, is there, whether it be through the machine learning AI, whether it be through optimizing locations, the labor arbitrage area is still a lot of opportunity for us as we brought together PRA. They were an organization that was probably less optimally located. I'll just put it in those terms. And we've made some adjustments and we continue to make some adjustments in that. And that over next few years still some opportunity there -- so I think on that front, we have plenty of optimism for being able to continue to improve our margins, and then it will be, as I say, more in the fixed cost and the SG&A.

All right. And then your balance sheet is in a great spot. I mean just putting out a ton of cash. Can you walk us through the priorities there from M&A versus retail? And then as your thinking about M&A, we can dig into that a little bit.

Yes. I mean -- as you all know, we paid down our debt. We're at about 2x adjusted EBITDA. We'll be restructuring and refinancing to bonds this year. We'll take about $100 million of our interest expense from 2023 into 2024. So we feel pretty good about that. That really allows us to, as we throw off cash to deploy that cash in the M&A setting. And that's very much the priority. We feel that we have opportunities to improve the operations that we currently do and move up where we're a little subpar in certain parts of our business. So the areas around sites and patient recruitment. That's an area that we feel we have some opportunity in and we want them to build our capability and build our performance and execution in. Labs also, we're probably #3 or 4 in the market and that what we'd like to be in the top 2. That might be an opportunity as we see lab acquisitions come up even in the real world evidence, the late phase, we could be a little bit larger in that space as well. So those are some of the areas that we feel we can deploy. We don't want to get out. We want to use our balance sheet. And in the past, we've been fairly conservative organization. Balance sheet, you know that. And so we feel somewhere between 1.5x and 2.5x adjusted EBITDA is the right place to be. And so we'll use our -- what's a very strong balance sheet going forward to. We may drop inside around some of that for a period of time. But overall, that's sort of the number we wouldn't here.

And those areas you want to get bigger, like you talked about real-world evidence or labs like the -- is there a particular reason why you don't have that scale now? Or just as simple as adding the [indiscernible] capabilities?

Companies get into very -- very strong in the Phase II, Phase III, we're big in the FSP real world. Well, we're not as large as I'd like to be. So going forward that presents an opportunity. Is there a reason why we're not [indiscernible] the right opportunity probably didn't come along at the right time? Or was that a price that I felt or we felt is a little frothy and there's plenty of those opportunities that are frothy. We're pretty careful with how we deploy our capital on that, but I'm not going to overpay for things that are really super high value for us. So that's our culture and I -- we watch our payments pretty carefully, as you can see. And we do that not just on the cost side, but also on the M&A side as well.

I can't imagine you overpay for anything other than your sell-side coverage, that's all we have time for. Thank you.

Thank you.

Thank you.