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

Good afternoon. Day 2 of Jefferies Global Healthcare Conference here in New York. I appreciate your support of the conference. We have -- as our -- if I didn't say it, Dave Windley with Jefferies Healthcare Equity Research. We have as our next presenting company, ICON plc, based in Dublin. ICLR ticker. I -- just as a quick aside, I've covered the company since way back in the 1900s. So I've known this company for a long time. Steve Cutler, the company's CEO; and Kate Haven, Investor Relations are here with us today. Really appreciate you being here. And Steve wanted to make some opening remarks before we dive into the Q&A. So I'll hand it over to you.

Thanks, Dave, and welcome to all of you. ICON, as Dave mentioned, is an Irish-based CRO, contract research organization. So we do work for the pharmaceutical industry, run their clinical trials. We're probably best known for having assisted Pfizer and BioNTech with bringing the COVID vaccine to market a couple of years ago now, in about 12 months. And so that's certainly our most notorious project or a famous project depending on how you look at it. We're an organization that is, as I said, Irish-based, a global scale, about 40,000 people around the globe. We had our Capital Markets Day last week in New York. Some of you probably attended. And the key messages that came through from that were really pretty straightforward. One is we see the market in our space moving forward at a nice clip at around about 5% to 6% over the next few years based on large pharma R&D spend, based on an improving biotech environment, which we'll talk about a bit more in a moment, and based on continuing penetration of the R&D development spend within the pharma environment. So a good, strong market, always challenges, macroeconomic, elections, geopolitical as you all know about. But overall, with the various scientific, technological and therapeutic advances and innovations that are happening within our space, be that mRNA, cell and gene therapy, even the GLP-1s and obesity, there's a really strong, I think, case for a market that's moving forward very nicely. We, as an organization, are well positioned to take advantage of that market. We doubled our size 3 years ago when we acquired PRA Health Sciences, and that integration is now complete. We're through that. And we're now one of the large global leaders with scale and capability in the development space. So we believe we're really well positioned now to take advantage of those tailwinds on that market. We're not slowing down. We're not being passive. We're moving forward with innovation. We have a number of activities going through, through AI and machine learning. We've deployed something like 2 million hours in machine learning and robotics. Last year, we're moving to about 3.5 million. So we continue to drive our SG&A down and continue to drive our EBITDA margins up, and where we have a very good story to tell on that as we drive innovation and progress across our market and across the longer term. So we projected around 7% to 10% of growth target basis on the next -- over the next 3 years or so. So we really do believe that we are in a good place to move forward. So with that, I'll sit down and we'll have the chat going.

Great, Steve. Thank you for that. Enjoyed the Investor Day last week. I thought an impressive group of managers that you put in front of us, and was good opportunity to get a chance to talk to several of them. So I want to start on demand. We talked about this a little bit, but you've offered several numbers in terms of contextualizing the demand environment, one, your 7% to 10% growth target that you just mentioned, a high single-digit bookings growth in the first quarter and kind of a low double-digit RFP growth kind of building behind that. So maybe you could talk about the sources of that demand across customer cohorts, where you're seeing the real strength at the moment and between large pharma and biotech.

Yes. If we look at large pharma first day, we've certainly seen continuing solid demand in that space. We have traditionally been known as a large pharma CRO. We worked with all of the big organizations, big pharma organization. And we continue to do that. We have partnerships with something like 16 of the top 20. And in that market, we see solid but -- strong growth in terms of R&D spend and a continuing opportunity to penetrate that market. So it's in the vicinity of 3% to 4% from a large pharma point of view. And we feel pretty confident that based on the RFP, the growth that we're seeing and the opportunities we're seeing that, that will continue in the medium term. Biotech, on the other hand, we've seen certainly some evidence of recovery in the first quarter this year. That may have moderated a little bit in the last couple of months. But overall, year-to-date, the biotech funding environment has improved, no question about that. We haven't seen that come through so much in the RFPs at this point. We think that will probably take another quarter or two to come through. But overall, we see, again, in that market sort of higher single-digit growth rates in the more medium term. And we do believe that our RFP flow will start to reflect that improved funding environment as we get into the back end of this year and then perhaps it will start to hit revenue in about a year's time. So there is a little bit of a delay in terms of that recovery on the funding side of things and what that leads to in terms of our operations and our revenue generation. But as I say, overall, solid demand in both segments of the market. We feel pretty good about where it's heading.

On that biotech side, we talked a little bit about, and you highlighted the rebranding effort. Chris Smyth has come in to lead ICON Biotech. I think you said downstairs that you're about 6 months into that. And I think on some calls, you've talked about maybe your win rate in biotech has actually improved. So maybe the RFP flow has not improved, but your win rate within it is pretty respectable. So talk about maybe the -- if you like, what you're trying to get done with the rebranding and then also the rebranding impact, if any, so far?

Yes. As I said, previously, ICON has been known as a large pharma CRO for -- ever since we've been around, which is about 35 years now. Having said that, we've always done a lot of biotech work, and we've been pretty present in that space, but we haven't had that sort of I suppose, that brand name has been more around large pharma. As we acquired PRA Health Sciences, we recognize the opportunity to focus their Phase II/III group in the biotech space, their center of gravity was more in the biotech space as opposed as opposed to the legacy ICON Group, which was more in large pharma. And so we did that very purposefully, which helped with the whole integration process. And what we've found over the last couple of years is we've gone forward nicely in that space. But we do need to kind of rebrand ourselves and give that a little bit more marketing oomph. And so we brought in a new leader. We're spending some money around ICON Biotech and branding that with our sponsors and with the biotech community. We're out sponsoring biotech meetings. We're attending biotech meetings. Chris has brought in a number of people who are particularly familiar with the biotech segment and being able to manage those sorts of customers. They are a different cat. As I say, they are a different sort of breed. They require of us a different approach to our large pharma customers. And so it's important that we focus very much on those. So we now have about 8,000 people of the 40,000 in our organization focused exclusively on the biotech segment. And so we believe that's really going to help us to improve our growth rates in that space to engage those customers. And as I say, they are a different breed. They have different requirements, and they do need a different type of management and a different type of approach. So it's important, I think, that we materially impact, and we materially shift what we're doing. And we communicate that to the market, perhaps a little more effectively than we've done over the last couple of years.

Got it. And on the -- maybe thinking about the funding environment having improved, you're talking about kind of seeing that cycle through proposals to bid defenses to maybe bookings, feeling that a little bit more toward the end of the year, if I'm understanding you correctly. What -- to the extent that you have kind of a grassroots feel for this, what's the state of urgency, I guess? To some degree, we might think these companies have been without capital that they'd be chomping at the bit to get started as soon as they do get some, but we are also hearing about these companies not being ready, like the documentation not being ready and the preparedness on the biotech side not being as it should be to get the study started. So curious about the level of urgency.

Yes. That was an interesting one. The company is not being ready. We haven't noticed the companies we work with not being ready. As you say, they're usually chomping at the bid money can, the availability of capital to prosecute their programs is always an issue. And -- but as they have it and as we -- at the time that they have it, they're usually ready to go. And quite frankly, it's our job to make sure they're ready. And that's our job to make sure that they've got their protocols and their documentations in place. And we'd like to think that we should be helping them do that and facilitating that. So we haven't noticed any reticence or any slowdown in the biotechs who have the funding and who have the protocols and the plans ready to go. We're ready to support them in any way.

Let's move over to the large pharma side. So one of the things that has been a notable advancement is your partnership portfolio, I'll call it, ICON and PRA together, then combined to 13. And then as you've highlighted, you've added another 3, I think, since the merger. To what would you attribute the success there in terms of your -- is it the breadth of services by themselves? Or maybe also talk to us about how you're marshaling those resources -- those capabilities together to capture the attention of the client?

Yes. I think as you look at the journey we've been on over the last, well, 3 to 4 years as we acquired PRA Health Sciences, we were two -- I mean, PRA and ICON were two good, strong, competent global organizations at number 5, number 6 in the market to get -- when we came together as we have, we're now number 1 or 2 in pretty much every market segment, and we're one of the top global leaders with significant scale therapeutically, geographically and right across the business. So we're an organization now that -- and without wishing to be all arrogant about it, that our sponsors and particularly large pharmas want to talk to because we have all of the capabilities, we have all of the scale, we have all the requirements that perhaps has either individual organization we didn't have. So strategically, it's been a terrific move for us. One of the rationale that we put together when we decided to make the acquisition was our ability to engage large customers and to bring on more of these partners. That's really played out very nicely. And it's not just in the top 20. It's in the top 60s. We think about our large pharma segment, we extend down to really the top 50 or 60 companies by R&D spend. And we've made progress not just in those top 20, as you noted, but in the top 60 as well. And it's not just bringing on partners, it's expanding their share of wallet, if you like, within those partners. And so overall -- the reason for it is -- we can debate, but really, scale, capability, the technology that we have available, our ability to invest in technology and the right technology, the relationships that we have with these partners, the track record that we have with these partners. And so we feel we've really put ourselves in a really strong position to be able to benefit from those continuing partnerships and the expansion of those partnerships as more and more the sort of more midsized companies start to move in that direction as well.

Maybe I'll just add. I think it's the combination two of the leading offering in FSP and in full service that really differentiates us and puts us at a different position at the table with our customers. Everyone is going to have a different situation that they're solving for, and it necessitates I think, an ability to customize the solution, right? And oftentimes, that's sort of what Barry was talking about in terms of sort of that blended model, right, that has elements of functional, it has elements of full service and our ability in terms of the breadth of the offering that we have across the board there, really, I think, puts us in a differentiated position that we certainly weren't in 3 years ago.

That's exactly where I was going to go. The question I was going to ask is does -- or how many competitors have scaled enough FSP offerings that they can even compete? Or maybe a different way to ask it is, to the extent that big pharma is moving toward these blended solutions, how does that drive share into an even shorter list of big global players?

I mean I'd say there's one in particular that probably is close enough in terms of an evolved FSP offering, in terms of overall scale. I mean we certainly feel like we have the largest in the industry on the functional side and certainly pretty close in terms of the full service side. So combined, we feel like we're in the leading position. And there's a close number 2. Obviously, I think we can all probably deduce who that is. But then I think it does sort of drop off pretty materially once you go beyond that, Dave. So we've already seen a little bit of that bifurcation we've talked about in the market, right, where the top 2 or 3 players have been pulling away a bit just based on sort of the market trends toward the larger scale players. We've seen that taking place in the market as large pharma, in particular, have been certainly looking to consolidate the number of providers that they're using, right? And that benefits the larger-scale player certainly. So we think that trend probably continues in certainly the midterm period.

Yes. You invoked Barry's name, Berry Balfe from last week. And in his presentation, one of the things that he talked about and maybe even elaborated on to me off-line was kind of again, this marshaling of resources or realigning the way the service is being delivered as a way to drive savings. So I'd compare and contrast, it's not 1,500 monitors at a lower bill rate, it's, hey, can we get it done with 1,100 monitors instead. Perhaps you could talk about how having the breadth of services you have gives you some levers to pull to do that? And then where you maybe are taking some operational skin in the game in those areas?

Yes. We have some good experience around moving the debate away from the number of dollars per hour or number of dollars per day that traditionally FSP contracts have been priced, and moving them to more output and outcome-based type reward, if you like, a more value-based proposition. So the example that we have is with one of our larger customers where we went in, we won some work to do some functional work with them. And they were running at around about monitoring days, this is days on site. This is CRAs who go to sites to monitor data. . And typically, they were at about 2 to 3 days on site, working with one of our competitors in a functional basis. We went in and took one of the regions in this case, it was the North American region. We're able to move that from 2 to 3 to closer to 6 to 7 days on site. And in doing that, we didn't -- we weren't competing on a sort of dollars per hour base. We were being paid on a more value on an outcome unit basis, monitoring basis, which allowed us, as we were more efficient to improve our margins in that space, while significantly improving their level of productivity to the point where we've now taken over the global operation on that front now. We've displaced our competitor in Europe as well as in North America. So that's an example of how we're trying to move the goalpost a little bit from an FSP point of view, which, as I said, it's traditionally been pushes down on a $1 per hour based or $1 per month or $1 per week, and more to a more an outcome or a productivity-based measure, which allows us an ability to be more efficient if we're good at what we do. It also allows us an opportunity to take a little bit of risk and to put a little bit of money or a little bit of sort of a bonus penalty on delivery of that extra productivity and allow us to -- once we do that and we have confidence in our operations to be able to do that to be able to expand our margin. So FSP traditionally, people think maybe is a lower-margin business. We're, I believe, able through these sorts of measures to improve the margins in that space, to bring in technology where appropriate, to put in place outcome-based, incentive-based value operations or value measures which allow our customers to get significant value, as you say, doing the work that traditionally 1,500 monitors were doing with more like 750 or 1,000 of them. And that overall reduces their cost, although the unit cost may be a little on the higher side.

So I enjoy that example. So we've -- in those examples, we're talking about core clinical. Your site network and your lab and you've mentioned that those are areas that you might like to bulk up inorganically, and we'll get to that in a minute. But are there similar levers to pull by bringing those services to bear with the client or kind of differentiating yourself from competitors?

I think there are -- yes, certainly, our Accellacare site network has been very successful in what it's done so far. We recruited something like 60% faster in our Accellacare site network than we do in our ad hoc sites on a like-for-like trial basis. So that's substantial. We're also improved in terms of queries, in terms of quality and in terms of start-up time, all leads to improved performance on the project or on the portfolio. . The opportunity for us, of course, in site network is to expand that. It represents around just under 10% of our patients -- much fewer than 10% of our sites incidentally because they recruit disproportionately large number of patients. But I need -- I'd like that to be 30% of our patients. And so the opportunity for us there is to expand that site network and have it run as effectively as the current number is about 100, 125 sites at the moment, and have them run as effectively. And if I can do that, then we really start to change the game. And that's where we're looking to move forward on the M&A front as well. But ultimately, our site network, we've expanded -- we talked again at our Capital Markets Day about that ecosystem of sites. It's not just about a site and recruiting patients. It's around how we identify those sites using AI, using our One Search tool, how we support that site with our study site coordinators, our patient recruitment services, our home health, so ecosystem and even our ICON digital platform, how the site can get access to training documents and submit CVs and how we support the sites in a way, in a holistic way that allows us to bring sites up and activate them to so they can recruit patients in a much faster time. Typically, in many trials, it can be up to 12 months between the time for the start of study and the time you get a site up. We're trying to move that down closer to 3 months. And with this approach and through our Accellacare site, we believe we can make significant progress in there.

Does having a lab -- so I think it's a little bit of a COVID question, but I think during COVID, having a internal -- a captive lab was an advantage because of the need for speed. In the broader market, as you're outselling, does having your lab and cross-selling the lab help you to focus the client on a shorter list of competitors?

I think it does. But it's -- I'd say a modest effect, to be honest. There's still a fair amount of work that our lab does that is not done by our clinical group. But as the more data we can show our customers and we are all data geeks. We all like to see the objective improvement in what we do, when we do it a certain way, and we're able to provide that, data. And of course, the lab gives us a great source of data for finding the best sites and where the postings are. But as we go forward, the lab, I think, gives us an opportunity to minimize the white space. When you think about a clinical trial, there are a number of components, the clinical component, the site component of the data management that all of those sort of things. The lab component is also a very important one, and where you can minimize the white space between that and the rest of the project team, you can actually improve efficiency, improve margins and certainly improve speed, and that's what our customers are looking for. So the lab, I think, is a real opportunity, a real advantage for us, and I'd really like to see us be able to scale up on those.

That's great. I've spent a lot of time focused on kind of strategy and not much on numbers. I'm going to blend one here. Your automation is something that is kind of caught my ear in the last couple of calls, and you're now focused on getting to 3.5 million automated hours in '24. Last week, you set an 8 million target for, I think, the 3-year horizon. It seems like to me, this automation lever is a big driver of your ability to continue to drive margin over the multiyear horizon. So maybe talk about the key factors that get you to 8 million hours and how do the centers of excellence factor into that?

Yes. I mean just to take a step back, we do see robotics and AI as being a very important contributor of our margin progress over the next few years. And it's already contributed. As you noted, we did something like 2 million machine hours last year, which represents in the vicinity of 1,000 people, and we grew our revenues certainly much faster than we grow our headcount. So we'd already contributing. We're pretty practical and pragmatic in terms of how we're applying AI and robotics and machine learning. There's a lot of hype and a lot talked about in the industry around how that's going to help. We certainly see it happening in the discovery space, and there's certainly some tangible benefits there. But that's not our area. Our area is more in logistics and process. And so we believe as we move towards the 3.5 million this year and then up to 8 million over the next sort of 3 years that will be not necessarily to remove people from the business, but we'll remove the need to hire at the same rate as perhaps we've done in the past because the robotics and the AI will allow us to do things much more effectively in fairly mundane sort of areas. I mean document management is a key part of what we do. We collect the dollar documents. They all have to be filed digitally, and AI can help us there. Queries from a data management perspective. We're already using AI and robotics to help us to identify inconsistencies in data as it comes in from patients. Even things like invoicing and site payments, the pretty basic mundane stuff, but there's a substantial amount of resource that we spend in that area that we can push off to a more machine learning capability, and hence help with those margins. So I'm very optimistic about what we can do, but I'm also pragmatic and practical about how we're going to apply it. And I'm not one who's going to rush off and spend a whole ton of money on stuff that may or may not work. We like to see things work effectively. We like to pilot them here at ICON and then implement them and scale them up as we see them be successful.

Excellent. Well, we're out of time. Thank you for your attention, and thanks to the ICON folks for your attendance again this year, and I wish everybody a good rest of the afternoon. We're down in the final hours here. Thanks very much.

Thanks, Dave.