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

Okay. Good afternoon, everyone. My name is Eric Coldwell. I cover pharma services with Baird, and it's a great pleasure to have ICON with us today, Dr. Cutler, Kate Haven, thank you so much.

This is obviously a very interested crowd today. There's been some interesting moves in the stock and the sector. And I think we're going to shift gears away from some of the canned Q&A and just jump right into what the heck is going on and maybe give us a little lay of the land on what's on your mind.

Sure. Thanks, Eric. Nice to be here. Yes, we've seen something of a negative reaction with the stock today, I think based on some comments, which I want to make sure we clarify. I think we've seen some commentary from some of our competitors and not so much our competitors, but companies peripheral to our space, which have perhaps caused a little bit of concern. I'm not sure they -- I certainly don't think they particularly relate to our business. I remain very constructive and very optimistic about our long-term prospects. As you all know, we did a major acquisition 3 years ago. That's playing out nicely for us in terms of our strategic partners and the ability to bring those on. We talked about at our Investor Day a 7% to 10% long-term target growth rate, including M&A. That remains in place. We're also reiterating guidance. We feel good about the guidance for this year, and there's no change in that. So we've not made any material changes or material ounces. What we did want to clarify is we are seeing a little bit of some challenges within the -- particularly the biotech space. The funding environment, first part of the year, quarter or so was very positive. That seems to have attenuated a little bit. And it also -- that seems to us, at least what we're seeing in the business is it's translated into a little bit of delay or some delays in sort of decision-making around that biotech space, which has some potential for impact. But overall, the number -- the percentage of RFPs that are coming through, the dollar amounts that are coming through remain strong, remain good, and we feel positive about that. In our large pharma segment, as it's publicly disclosed, and we've talked about this for a year now, some 1 or 2 of our larger customers are restructuring their business and going through some budget cuts. So that's -- there's nothing new there. We certainly haven't -- that's not news to anybody. And that's, of course, having some impact on our business. That's a headwind for us in the very short term. We feel we have a bit more visibility about that now, about the amount and about the timing of it. And we feel that, that will play out really over the next couple of quarters. And as we get into next year, we'll feel that, that will become much more neutral. And so we wanted to be honest and transparent about that. Our nature as an organization is to be honest and open with shareholders and with analysts and try to give you a perspective of what our business. We don't try to sugarcoat things too much. We like to be upfront, and that's what we're trying to do. No material changes really to the environment or to our business apart from, as I said, some of the biotech -- the slowdown in some of the biotech decision-making, which is having potentially some impact in the very short term.

With this -- and by the way, it should not -- in my opinion, should not be much of a surprise to anyone given what we've seen across the broader industry, coupled with the slower biotech funding as we left the first quarter of this year and saw a bit of an abatement subsequently. Was this all -- were all of the topics that you just highlighted topics that you had considered when you gave the recent update and the recent guidance?

Yes. Yes, absolutely. Really, over the last sort of 6, 8 weeks, and summer is also a bit of a challenging time. August, not much happens in our business, and September is a big month for us. So we have a lot of wood to chop, obviously, in September to get our quarter 3 number done. So there's a little bit of that playing in. But there's nothing that's fundamentally changed that we hadn't already thought about or included in our guidance. We are seeing a little bit of what we thought we were thinking and those predictions, if you like, or that planning is coming to fruition, if that makes sense. So we're seeing what we thought we'd see. And we just wanted to be specific and honest and open about that.

And for the full year, your original outlook was a 1.2 to 1.3 -- ZIP code book-to-bill was somewhere in the midpoint of that full year total. Q1 1.27 last quarter, if I remember, was a 1.22, I believe. So you averaged out at the 1.25 simple average. How is it feeling here in the back half? Did these comments take you more to the lower end of that range back where you were a year ago? And you don't know, right? You won't know because September hasn't happened in December -- November, December haven't happened. So you don't know. But would that be the bias today that you would say Street head would probably be in the right place in the lower half of that range? Or is there actually a concern that maybe it could do it below?

No, I don't think it's going to go below, particularly on a trailing 12-month basis. We remain targeting in the 1.2 to 1.3 trailing 12 months. We feel at 1.24, 1.25 at the moment, we're there or thereabouts. And I don't think that's going to change. But the possibility on a quarter-by-quarter basis to be a little bit volatile remains. And I think that's what we're signaling today. But trailing 12 months, we feel pretty good about what that's going to be. And certainly, as we get into next year, we feel we're going to be in that 1.2 to 1.3 range. That remains our target. We believe we can deliver on that.

Last -- maybe I'll come back to this a couple of times given the dramatic changes in the shares today in the sector. It just -- we're going to get a -- we already have received a number of questions. We're going to get more. But if you were sitting in my shoes or in the audience's shoes and you were thinking about an LRP, which maybe, Kate, if you want to jump in and just remind everybody what it is because there may be some people in here who aren't as familiar with your LRP from a top line perspective, in particular. If you were sitting here today, would you be biasing to the lower end of that still in the range, but biasing to the lower end given the environment? Or would you say no, we really feel like that is a fair range and target the midpoint and hopefully a little better when all is said and done?

Why don't you outline, and then I'll...

Sure. So at the end of May, at our Investor Day, we set out our 3-year targets, which on the top line from a revenue growth perspective was 7% to 10%, which was inclusive of 1% to 2% of M&A on an annual basis, a margin target of 22.5% in 2027, which assumes about a 30 to 40 basis point expansion on a year-over-year basis from where we are today, which we're going to do a little bit better than that already for the full year '24 and low to mid-teens in terms of the EPS growth as well.

So we believe that's a reasonable range. And I'm not going to tell you we're going to be at the lower end of that at this stage. We believe we've made really good progress in the strategic partnership side of things. We announced that on the Q2 call, we brought on another. We're close to another one. I can't be specific about that at this stage. We'll talk about that on the Q3 call. But -- so I feel good about where the business is going. And I'm not going to tell you it's going to be at the lower end of the range at this stage. I think we feel very positive about that. And even if we were -- I mean, our ability to leverage our global business services to move the AI machine learning opportunities forward to be more efficient. And that margin challenge that we have that we've set ourselves, we believe, is very achievable even if it was at the lower end of that range, in fact, even beatable. So we feel good about where that -- where our business is going. We feel good about the environment, albeit within the very short term, there are 1 or 2 things we're working through.

I'm going to come back with more. Don't worry, but -- let's get to regular scheduled programming. You just announced a new CFO. Actually, maybe a little quicker than I had anticipated. I felt like it probably didn't feel like that to you, but felt like it moved pretty fast. What can you tell us -- I mean I've met Nigel, but it's been years. What can you tell us about Nigel?

Well, I mean, Nigel Clerkin is a guy, is Dublin-based. He's Irishman, and that's important for us for various tax-related reasons. We have our key execs located in ILT and our Board meeting in Dublin. That's an important aspect of it. But notwithstanding that, he has experience in a number of different segments of our industry, I suppose, in pharma itself, in services, in med tech and more laterally in the sort of start-up side of things, in a sort of high-tech sort of company, albeit not related to pharma. He also has good experience as a CFO in a private setting and in a public setting. That was important to us as well. We obviously believe his knowledge of and his ability to interact with investors and analysts is a key part of it. Brendan did that extremely well. And Brendan, as you say, Eric, big shoes to fill. But we believe Nigel brings in a breadth of experience that even Brendan didn't have, quite frankly. And so we feel he can bring something to us. He can move us to the next level, and he can keep us on track with the growth we've shown over the last 20 years or so.

All right. Let's go back to the business. Big pharma, you've already preambled a couple of the -- and you did this last quarter. So again, this is not a change. If something is a change, you can tell us today, but these are not changes that I'm going to highlight. You had -- your top 5 clients were slower in the second quarter, but the rest -- the next, I don't know, 1,000, however many other clients you have, were up 8%. And one thing I've been saying a lot, and I think it's rippling around the sector is that there really do seem to be 3 different cohorts of large pharma clients these days. There's a handful at the top spending like I'll borrow a say from one of your competitors, which I think he's right. There's a couple of a few that are spending like drunken sailors and things are going pretty well from them. And there's a few at the bottom that are -- maybe I won't use the words I've used with you, but they're not so good. And then there's a group in the middle, maybe a little bigger group than normal perhaps that are optimizing and just kind of slow, doing what they've done, but they're looking to save money and maybe find ways to be more efficient, so not necessarily growth engines. Have you seen a shift in that -- one, do you agree with that definition? Two, have you seen a shift in that mix, i.e., you hear Charles River say that basically all big pharmas are cutting. That doesn't sound so good. It's not a great way to start off our day. It's not a new statement from them, but it's not a great way to start off the day. Are you seeing any bigger shift in big pharma activity or behavior here in the last couple of months?

No. And we certainly don't see all big pharma cutting. Absolutely not. We see overall that market growing mid-single digits is kind of the way we think about it. And -- but as you quite rightly characterized, Eric, there are some in the budgets are going down category. There are some in the middle and there are some, we have -- we're working with all of them. In our case, 1 or 2 in our top 5 are in the initial category, and that's a headwind that we're working through. It's been the case for 12 months now, and it will be the case for probably another couple of quarters in the -- again, in the very short term. But as we see the ones that are spending more and the partnerships we're developing continue to grow and continue to grow outside of that top 5, we see plenty of reason for optimism. And up until the first half of the year, we've grown the business at around 5% despite the fact that we were having some budget cuts within 1 or 2 of our top customers. And we believe that, that sort of number can sort of broadly continue. But we do see an end to it. We do see it happen -- as I said, that equilibrium being reached in the next sort of 6 to 9 months is that what we see it. And we do see those other customers really starting to come through to provide us with a tailwind as we get into the later stages of 2025 and 2026.

And some of those -- so 2 points on this. First, where you've seen a slowdown at 2 of your top -- a reduction, let's say, at a couple of your top 5 clients. Have you actually outperformed the other vendors in those relationships?

Yes, we have. Yes, quite honestly.

It's not -- we had a market share issue?

It's not a market share. If anything, I think we've taken more market share, but they're just spending less. It's hard to -- when the pie is getting smaller, it's hard to increase your revenues. But we're certainly taking more of whatever pie there is there for sure.

And then with some of these other customers and the other customer growth, is it possible to parse out what are new wins and expansions since the PRA deal? I know the new top 30, that's not feeding you right now, perhaps, but you had a few other similar situations in the past. It sounds like there could be another one coming. How long -- big picture, how long is it taking for those deals to ramp? Has that changed? It used to be 3 years, 4 years to really get to peak revenue on a new deal. Is it still the same?

I don't know if I would say 3 or 4 years. I mean we typically think about it as more like 24 months probably to try to get to peak. It's going to be -- I know I'm sort of parsing. But I think we've seen some outperformance from some and some that skew a little bit longer. It really depends on the customer-specific situation. The most recent deal that we won is probably going to take a little bit longer because they weren't traditionally a high outsourced company, right? So that will take them a little bit longer. On the flip side, some of the -- another one that we more recently won is actually, I think, going to come through a little bit faster. So there's definitely some puts and takes, I think. It's very customer specific.

I was going to jump in and say, I think some of your peers have taken more like 3 to 4 years. But to be fair, you've ramped some of yours pretty quickly. I'm thinking more about industry trends. And sometimes you've had peers that have won deals and haven't ramped them at all. So I mean, I think you've had pretty good success here. Any comments you could make more about potential opportunities beyond the next one? I mean, at some point, do we run out of runway because it's a mature marketplace? How does that evolve? Or do you...

I think if you look at the top 20, we've made good progress over the last 2, 3 years as we've come together with PRA Health Sciences and become that larger scaled organization. We've added at least 4 of those. So we're 80%, 85% of the top 20 now we have. And of course, we'll continue to push for those last couple. But I think what we're increasingly now doing is shifting our focus to the top 60. And that's really how we define large pharma in the top 60. So there are a number of companies in the top 60 who don't -- I mean most of them work, obviously, with us and with other providers, but don't have a particularly strategic view of partnership. And I think we, as an organization, have evolved in a way that we can help them to build that strategic view and to outsource in a way that is more efficient, perhaps and more effective than what they're doing at the moment. That's certainly our view, and that's what we're putting and even proactively going to some of those companies and making proactive proposals rather than waiting for the RFP to come and working with them on what we can do to lower their development costs and do it more efficiently. So there's a lot of opportunity still in that, particularly in that 20 to 60. And these are companies that spend hundreds of millions of dollars a year in outsourced development. They're not -- don't think of them as we're all trying to -- chasing $50 million. We're chasing several hundred billion and the opportunity for us is to be 1 of 1 or 1 of 2. So it's a real opportunity for us.

I had an investor want to know about the pricing environment broadly, maybe terms and pricing. I had some questions on terms that I wanted to throw at you myself. But how would you characterize the top 60, your definition of the larger client base? How would you characterize pricing maybe in aggregate, maybe full service versus functional, maybe it's geographic. There could be some nuances here. And then on the term side, clients that have been asking for -- which by the way, has been going on for decades, but clients that have been asking for more extensions to milestones or paying in 120 days instead of 90 if you're a top pharma, those kind of things, a lot to throw at you, but it's a complex ecosystem, and I think there's questions on a number of fronts.

Yes. I think -- and we talked a little bit about this on the Q2 call. The pricing environment is competitive as it always is, right? So someone, I think, was asking us earlier today, is it any different than 12 months ago? I'm not sure it's wildly different actually in terms of that. What we said on the Q2 call, I think, which holds true is that probably where you're seeing a bit more competitive behavior is for those strategic deals, right? We're not surprising in this type of environment where you have players in this mid-tier that have maybe lost some share or maybe are struggling. They're going to try to use price as a tool, right, to get their foot in the door or try to regain share. So it wouldn't be surprising, right, that they're going to be more aggressive on price, in those type of scenarios. So that's a situation where you would see more aggressive pricing, certainly. I don't think it has translated into better wins necessarily for them based on what we've seen in the market. I think it's still definitely a bifurcated marketplace where the top 3 are successful, obviously, inclusive of ICON there. But that's probably where we've seen more of that behavior, but pricing generally is certainly competitive. And on the term side, that's certainly fair what you said in terms of -- especially in this environment where interest rates are higher, people are holding on to cash longer, it's difficult.

Is ICON has historically -- and I mean this in a good way, you've had investment-grade debt. You worked yourself right back there after PRA. Historically, the company was one with short arms and deep pockets and a conservative mindset, you were able to ironically.

We've got the first dollar we ever earned, Eric. That's what we've got.

Yes. Right. But you were able to use that financial strength as an arrow in the quiver, if you will, for winning some business in the past that you didn't need the cash to come in as quickly as some of your competitors did. Are you still using that tool? Is this something that you would say, look, there might be a situation or 2 where you would bend a bit on terms? I'm just trying to get a sense on how confident you are in the cash flow profile longer term?

I think we're confident in the cash flow profile. And there are times when we will lean on that a little bit. And as Kate quite rightly says, our DSO has pushed out a touch in the last quarter or so. And it's probably not coming back in anytime soon given the environment we're in. But we are pretty disciplined in terms of the credit terms we ask for and that we ultimately settle on and demand from customers, particularly in the biotech segment where you've clearly got a little bit more risk around the funding of programs and the payment of invoices. And so we take that discipline right across the board, whether it be pricing, whether it be credit terms, whether it be the terms of our contracts, et cetera, et cetera. And we're pretty -- and I think that's the case for the top 3 as well. We're all, I think, fairly clear on that. And I think customers respect that and understand that and generally go with it. There's not -- you can talk about credit terms of 30, 60, 90, whatever days. There's not much competitive advantage in offering that. I mean this is not that customers wanted to ask, but ultimately, that's their procurement groups asking rather than their operational groups who are really deciding on who wins the project.

Right. One last nuance here, and I want to spend, obviously, some time on biotech and smaller clients. But with the pricing, Kate, you mentioned more -- and you said this on the last quarterly call, too, again, so not new, but more in the strategic deals, but we have heard perhaps a bit more in FSP than in full service. Is that fair? Or would you say no, it really is balanced?

You can answer that, Steve.

Well, I mean, I think we're seeing in the more later -- the latter strategic deals are pushed back towards full service, Eric. So that.

I meant on pricing, Steve, where you've seen the pricing cut. We've heard specifically that 1 or 2 competitors have been aggressive on FSP deals. So...

I think that's probably true. I think that's probably true. But again, customers are savvy. They know what they want. And they know ultimately, particularly on a functional deal where the pricing is very much related to the cost of the resources. And if you're pushing price right down, the cost of your resources has to go down. You're getting people who'll have less experience and less ability to prosecute the work and customers realize that. So we have various ways of obviously, locating people in the right ways, providing with the right technology in order to do the job. But the most important thing is we do the job for the customer. We clearly need to make a solid margin on that, and we do. But they do understand that they can't push us right down to the bottom. Otherwise, they're not going to get the people that they want for their functional work.

With the biotech environment broadly, are there more nuances you would point to in terms of where you've seen some of this -- I don't want to say -- I don't want to downplay it. I don't want to say lack of acceleration, although I think there has been a bit of that in the market where companies expected more acceleration from smaller clients this year that hasn't played out. Has it been more in a specific therapeutic class, say, cell and gene therapy or some area which wouldn't be a big sector for you, but probably -- but is there -- is it a therapeutic class? Is it a geography? Is it a phase of development? Is it a size of client? Is there anything that would stand out to you as abnormal difference from just an overall mosaic of funding went down, rates are still high, world is still a bit screwed up and just general sluggishness compared to what was expected.

Not that I can identify or pull out that we've quantitatively been able to identify at this stage. It appears to be across the board. Possibly in terms of some of the larger projects, some of these biotechs do projects that are in the tens and hundreds of millions of dollars. I mean these are very serious development programs. They are very -- and of course, when they're -- when they're raising having to raise and spend, they think very carefully about what they're developing and what indications. The IRA is probably having some impact on that in terms of whether they do it in parallel or in series. We're seeing -- start to see opportunities to develop these drugs in parallel now. So that, again, gives us some opportunity in relation to where they're being pushed. But from a therapeutic point of view, we're seeing some uptick around the GLP-1s, albeit fairly early stage, Phase I, Phase II, the new generation of GLP-1s, we see those starting to come through, not necessarily a biotech thing, but across the board. But it's probably around the size of the projects. The ones that are $20 million to $30 million and above get a lot of scrutiny in terms of how -- and quite likely so, you'd expect that and perhaps a little bit more so than perhaps they did in the past when money was much easier to raise.

Senior management and Boards getting involved into discussions more than in the past, venture capitalists actually playing a role in this process more than the past?

Yes, particularly boards and particularly senior folks. The CEO is always involved, often sitting at the bid defense and bid defense meeting. So you need to make sure that from a financial point of view, we're competitive and active. Credit terms do come into play occasionally. But really, it's around operational delivery and a confidence that we can operationally deliver and that we're going to be around in 3 to 5 years' time when the drug finally comes to market.

And I believe you said last quarter that your RFPs in that biotech group were up -- still up in the mid-single digits and maybe improved a bit over the prior quarter. And do you still feel like there's incremental positive momentum in RFPs even if the decisions aren't getting made or the competition is a little higher?

We certainly see a good strong flow of RFPs. It's not going down. It's not going dramatically up. It's pretty constant, pretty consistent. The only thing I'd call out, and I did this morning was when you have an RFP, you either get a yes, go ahead with a project, no, you didn't win it or it's not going to proceed for anyone. And that category has probably ticked up just a touch a little bit. So we're watching that carefully. But overall, the number of RFPs, the dollar value of RFPs continues to be positive, continues to be strong, and we've got a lot of opportunity in the pipeline, particularly in the next couple of months to be able to generate those wins.

How about hit rates on the biotech side? You made some changes at the end of last year with your organization and felt like you had a decent -- I mean, everybody felt like they had momentum in the first quarter when funding was what it was, but at least we wanted to feel that way. But how about hit rate in biotech specifically and maybe more particularly in small biotech, how are you doing?

Yes, we don't measure small versus large. It's in the biotech space. And the hit rate has been strong and has probably ticked up a little bit. We're seeing some -- certainly some consistency at a strong hit rate in that area. Again, it's project-specific, customer-specific and you win and you lose. But overall, we find that our offering is being well received. When we lose, you lose by a millimeter. And I guess when you win, you probably win by a millimeter as well. It's a very competitive space. But the competition is more around the operations, the strategy, the patient journey and being able to predict that and account for that and deliver that. That's what -- rather than it is around price. The biotechs are probably less sensitive on price than the large pharma.

Last one specific to biotech. Cancellation rates. Have you seen any change in cancellation behavior specific to the biotech cohort?

We haven't. No.

Certainly in terms of contracts, no. Nothing there. 2% of opening backlog tends to be our cancellation, that's been very consistent. As I mentioned, in the RFP space, there might be a little bit, but it's not a contracted award.

I think I have to throw out there on September 10th. So, we found out from a few times this year across the industry that what happens from the second week of the quarter to the end of the quarter can change, but it sounds like there's really no notable change in, frankly, much of anything since you talked last quarter?

No, that's exactly right. No material -- no really material changes, but we are trying to be, as I say, honest and open around some of the perhaps slowdown or apparent slowing down in decision-making, particularly in the biotech and the challenges that we're addressing in our large pharma, in our top large pharma. As I said, Eric, we feel very constructive and very positive about the longer-term growth of the organization. We've put out the 7% to 10%. No one is walking away from that. We have our guidance for the year. No one is walking away from that. So I feel good about where the organization is going and how we've positioned ourselves post the union with PRA to really be a very, very strong competitor in this industry.

I have 40 seconds, and I want to hit on Phase I, the clinical pharmacology unit. You kind of alluded to it, seeing some perhaps some strength there. I've had some incredibly positive channel checks in Phase I over the last month or 2. It seems like there's an uplift across the board on things in Phase 1, particularly. I don't know if it's because the average size has gotten bigger. I don't know if it's -- clients are, for lack of a better word, canning the bottom x number of smaller CROs out there in that space, and they're driving all of their work to the leaders. But the channel checks are really good. You just made some positive comments. When these facilities are full, they print money because they operate like an airline or a hotel and when the seats are full, you make money. Is this a notable impact potentially in the back half?

I mean we've certainly seen some upticks in the awards in early phase and the opportunities in early phase. I'm not quite ready to declare it as a significant tailwind going into next year, but maybe that's my conservatism. But in the GLP-1 space, I sort of alluded to, and we've had some interesting and some significant awards on a sort of partnership basis within the Phase I. So I can only concur with your -- the feedback you've had. As I said, I'm not ready to declare it as a huge tailwind, but there's certainly some very positive trends there.

Okay. Well, with that, I'm going to introduce the next 4 companies, and then thank you very much for your time here. So we have Novanta, EyePoint Pharmaceuticals, Cellectis and National Resilience coming up in the next 4 sessions. Thank you very much. Steve, Kate.

Thank you.

Thank you. Appreciate it.