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

All right. Good morning. Thank you for being here. I'm Dave Windley with Jefferies Healthcare Equity Research. I'm based in the States, run our Nashville office in Tennessee. I have been with the firm for 24 years and have covered the CRO space for a few years longer than that. And I was -- I told Steve that, in fact, I've covered ICON since the 1900s. So it has been a while. So really appreciate ICON being here. They have been a very -- I mean, if you don't know the history, you should spend some time learning the history. It's just -- it's a fascinating success story from the founding of the company and I think about 1991 and is obviously one of the leading clinical research organizations in the world. So we're going to get into some Q&A fireside. Steve has a couple of minutes of opening remarks here. So I should also say Nigel, the company's newly named CFO, is also joining us. He was saying 3 weeks on the job. So I'm going to give him all the hard questions here shortly. But Steve and Nigel, both here. Thank you very much. And Steve, I'll let you take it away.

Thanks, Dave, and good morning, everybody. Nice to be here at the Jefferies Conference. I did want to just provide a little bit of context in terms of what's happened with ICON over the last quarter or so, particularly. We had a disappointing quarter 3 for some specific reasons relating to particularly our top 2 customers, and we'll talk about that a bit more in the fireside chat. And that's been an area that we've been aware of, but there are certainly confluence of circumstances that hit us rather hard and rather late in quarter 3, leading to us reducing our guidance. I would say, though, however, the guidance we gave or the revised guidance we gave in quarter 3 stands, and we reiterate that firmly for 2024. Nothing's changed in that respect. We are a company that's had something like 50 quarters of good solid progression in terms of earnings and progress on revenues. And the last quarter was something of an anomaly due, as I said, to -- particularly to a couple of our larger customers, but we do feel that we are on the path back and we'll be back within a couple of quarters going forward. So just to firm, we are reiterating our guidance for 2024. That's the revised guidance that we gave on the Q3 call. We do believe we remain a strong partner to our customers. Our customers, of course, have ups and downs. Some are going up, some are going down in terms of budgets, in terms of development models. And we help them to navigate their clinical development environment, whether it be patent extensions or expirations, whether it be opportunities with the GLP-1 agonists, and there are plenty of those. We've been successful in bringing on 3 new strategic partners over the last 12 months, and we believe they're already starting to give us some benefit going forward. And we've talked about a target of low to mid-single-digit revenue growth in 2025. Now that's not guidance. That's a target. And nothing that has happened over the last few weeks has changed that. We will be giving firm guidance for 2025 at the JPMorgan conference in January. And at that point, we'll give you a good indication of where we think we'll be. But at the moment, we feel low to mid-single-digit growth on a revenue basis is what we're targeting and what we believe is possible. We are seeing growth outside of our top 2 at around the mid-single digits and outside of our top 25 at a sort of similar number, even a slightly higher number. So there is good growth amongst the portfolio. Of course, we do -- we have, as we were fairly specific about, had some issues in terms of declining budgets and changing models in those top 2 customers. In terms of capital deployment, we've been active in the market from a share buyback perspective. We have spent $200 million in the fourth quarter in addition to the $100 million we spent in Q3. So a total of $300 million has been spent in the share buyback capacity. We have approval from our Board to spend $750 million. So we still have some opportunity in that market, and we continue to be active, and Nigel can address any questions that we have in that respect. So overall, we see a very solid and constructive view of the industry going forward from a mid- to long-term point of view. The next 2 to 3 quarters where we're going to be working through some challenges as we get to the bottom of the budget in terms of our top customer and work from there. So with that, Dave, I'll go to the fireside.

Great. Very much appreciate that. That sets up the questions quite well. Thank you. So I want to start on the large pharma side. As you just highlighted, you've gained 3 partnerships since the merger with PRA, which I believe closed in the second half of 2021. So we're talking about kind of a 3-year period, one of those quite recently. And I guess there's a couple of questions here, so I'll try to take them in order. First of all, as you think about the 16 now pharma companies with whom you have partnerships and these budget reprioritizations and, I'll call it, austerity that some of these companies are going through, how would you describe the kind of the dividing line between those that feel like they've completed this activity and you have some amount of visibility about what awards may be coming out and those that still haven't completed that would be something of an opaque situation.

So it's actually 17 of the top 20 Dave. So we feel we've actually -- the vast majority of the top 20, we have strategic partnerships with. And as you said, 3 in the last 12 months, we feel is a good vindication of what we did when we came together with PRA 3-ish years ago. And in terms of those top customers and even across the industry, there are always companies that are spending more and some that are spending less. We look at our top 25, we see more than half going forward are spending more or we're foreseeing an increase in spend with us in the next 12 months or so. But there are always others that are coming down a little bit. So you kind of look at it across the industry and across the sort of portfolio. And we see in the large pharma space, about a mid-single, 3% to 5% sort of growth rate going forward on an annual basis. There's nothing that we've seen that would indicate that that's different. So overall, as I say, some of the opportunities within the GLP-1 agonist, some of the opportunities within cell and gene therapy and some of those areas are certainly going forward very, very rapidly, and very exciting from our point of view. And there are other companies and particularly perhaps in some of the vaccine areas, we've seen some sort of pullback. So it goes in fits and starts a little bit. There's perhaps a little bit more volatility in the market, in the large pharma now than perhaps there has been in the past. But overall, we see a pretty constructive 3% to 5% sort of growth rate in the medium term.

Okay. One of your -- you talked about the challenges with the 2 larger customers, which I think perhaps what makes it slightly more painful is those 2 that are jocking things more aggressively happen to be your 2 largest customers. One of those, I guess, has some fairly obvious and high-profile pending cuts, I'll say, there's debate with activist investor pushing on just how deep those cuts ought to go. Does your outlook and thought around this low to mid-single-digit growth in '25 contemplate another fairly substantial step down in one of your top 2 customers?

We've made some projections on that. And that particular customer, we do expect it to continue to fall in 2025, and we've made some projections around that, that are, I think, appropriate. They're not conservative. They're not -- they're in the middle of the range. We understand we talk to them on a regular basis. We understand what their challenges are, and we're helping them to work through them. I don't think -- I don't feel even with potential budget cuts that they're going to actually push those into the more clinical development space. We've had some recent conversations with them, and we believe we've appropriately accrued for or covered that decline. On the other hand, the other large customer that had been falling over the last 12, 24 months is now starting to move in the other direction, starting to move up, in the low single digits. So we're starting to get some compensation or some tailwind from that customer. And then there are some others that are moving in the right direction as well and others come down. So overall, we do think we're appropriately covered, and we've forecast what we expect to happen from that particular customer, albeit we're still working out the timing of it and what the depth of that decline will be.

Okay. And on the second point, interesting, I think at the time of the conference call and our follow-up conversation that the second customer that we're referring to was -- maybe you had indicated to me that you thought it was at the Nadir. And so maybe it was more certain, but is this kind of starting to move up that you described fairly recent?

Yes. As I said, at the conference call, we thought we were at the bottom, and we're now seeing, having continued -- we're talking to them all the time. We're now seeing a modest uptick. So it is fairly recent. And we're optimistic about how that plays forward.

Okay. Great. You mentioned in your prepared remarks, the cancellations in vaccine. Vaccine business does, I think, burn fairly quickly, sometimes has some fairly substantial pass-throughs to it. And so the absence of vaccine could have both the effect on a somewhat diminution to the burn rate as well as just the absence of the dollar. So is -- I guess I would add -- well, one more thing. You've also talked at ICON about vaccines being a fairly strong therapeutic suit for you. Is there something broader going on in vaccines, people walking away from some of these combo vaccines with COVID or otherwise that we should be aware of? Or is it just a one-off?

I think it's more a one-off. We are strong, I think, therapeutically in vaccines, but they're not a huge part of our portfolio in the vicinity of sort of mid-single digits. And they -- while this year, they're probably low single digits given some of those delays and cancellations. As we get into next year, of course, we've talked about the BARDA-funded studies that are on track and are moving forward and certainly for the first half of this year, and they'll run right through next year. We'll probably move up into sort of mid-single digits from a vaccine point of view. So while vaccines are very important, and we do believe we have a therapeutic advantage, I think it does wax and wane a little bit. We'll see what happens with the new administration in the U.S. in terms of what impact that has. If any, I don't think it's going to have any impact on the BARDA work that we have already scheduled and we've already started. But who knows? Longer term, that's something that -- if that person, Robert F. Kennedy actually gets confirmed, and I think that's speculative. But if he does, I mean, there's some discussion to be had there. But overall, we see vaccines remain an important part of our portfolio. We do them well. They are -- they can be a little bit margin dilutive in that they have a large pass-through component. And so that's a little bit of a headwind for next year as we do those BARDA studies. But certainly, the burn rate is facilitated by that sort of work, and that's always welcome.

Interesting. So good kind of clarification and delineation that the BARDA work is actually not the source of the cancellations that you mentioned on the third quarter call. So its elsewhere, commercial customers.

Yes. And it's not just COVID work. There was some flu work that was canceled and then delayed and some RSV work that got pushed back. So no, it wasn't just COVID work. We do work across a variety of sort of subtherapeutic areas within the vaccine space.

Okay. Flipping to biotech. One of the 3 areas that you had called out on the call that were the source of softness in the quarter was, I think, slower activity in decision cycles and some delayed or slowed study starts in biotech. And I think also including maybe some award decisions that got pushed into the fourth quarter you thought. How would you update us on how that's progressed since we last heard from you?

I don't think it's changed dramatically. I think we're still seeing the biotechs who have been able to access capital. And I think that's a little bit of a challenge for them. We've seen the capital markets be a little volatile, up and down quarter-to-quarter. But generally, I think moving in the right direction. We're seeing RFPs or request for proposals start to move in the right direction from a biotech point of view, that's encouraging. Although as I think I called out in the quarter, some of that is around how much do I need to raise it's sort of more -- not so much for the project, although that's important, it's really sort of an indicator for how much they need to go to the markets to raise. Overall, I think we've seen the biotech market sort of moving forward constructively. I think there's still a little bit of volatility there. There's still some uncertainty. We're certainly still seeing some delays in terms of how they allocate their capital and how they spend that money, and we certainly saw that in Q3. I don't anticipate that's going to change dramatically even in the sort of short term. But as we get into next year and towards the end of next year, I'm optimistic that the biotech market will move back to sort of high single digits in terms of growth. And by 2026, we'll be in a good place. So I think the short-term volatility will probably remain and some of those concerns around allocation of capital and conservatism in sort of decision-making will remain for a while yet. But overall, it's generally heading in the right direction, I think.

Got it. So another thing that you talked about related to this topic, biotech, the thing that you talked about at the Investor Day was a fairly substantial and deliberate rebranding of ICON Biotech. What impact do you think that has had? And is it even possible to disentangle rebranding in your company-specific efforts from a broader kind of biotech malaise?

Yes. That's a good question. I mean we have, I think, traditionally, and you talked about the history with ICON. We've been around the industry now for over 30 years. And I think traditionally, we have been known as a large company, a large pharma CRO. As we made the union with PRA effective, we focused their group, their Phase II, Phase III group very much in the biotech segment. That's where they had their center of gravity, although it wasn't exclusively biotech. And I think we recognized at that time that we needed to up our ante in terms of our branding and our marketing. And I think that's probably taken, to be very honest, a little longer than we thought would be the case. And so we continue to work that through. We continue to improve and to up our marketing and our branding strategy. I think we're probably a year or 2. That's more of a medium-term sort of opportunity for us or solution for us. And I think we're making good progress. We're certainly having a number of discussions with a number of biotechs, even at this conference, we're meeting with a number of biotechs who have very substantial programs to prosecute. And the old story of the small CRO and the small biotech really doesn't ring through terribly well when you have a biotech who want to spend tens and even hundreds of millions on programs that span across the world. And we're talking to several who have very substantial programs that they want to put forward. And so we are, I think, a very viable option for them. And I think it's the right strategy for us to push through on biotech. We have something like 7,000 people focused in that area on biotech, people who understand the travels and the trivials of a biotech company. And I think that's a very powerful message to the biotech community and to our biotech customers. And it's starting to resonate very well, albeit perhaps a little slower than I would have liked.

Yes. On another topic kind of adjacent to this at the Investor Day was your kind of business model evolution to pull some key functions, study start-up type functions. I'll get all this wrong, but patient recruitment study start-up type and centralize those. How has that progressed? Is it still too early to tell? Or what impact has -- have those changes made?

I think they've helped us to maintain and improve our margins up until now. We're a company that manages costs pretty well. And we're trying in that place to get the balance between functions and activities that really are very biotech or large pharma specific versus those that are more generic. I mean data management, for example, tends to be the same, whether you're working for a biotech company or for a large pharma company. Now there are some differences there in terms of agility and being able to respond very quickly to requests or to changes. But generally, having one group is a more efficient way of being able to do that. You can scale those resources, you can move those resources when you have particular deadlines on particular projects, whether they be biotech or large pharma. So overall, it's gone well. We've started to really drive some efficiencies on that front, and I think we're a better operation. And -- but there's a point at which we have to have very specific clinical, project management, medical. Those sort of things remain very focused in the biotech segment. So we're getting the balance, I think, Dave, between efficiency and customization.

Okay. I'm going to stay on the cost efficiency topic. One of the things that I think you've done a really nice job of spelling out is the 2 million hours of automation followed by another 1.5 million per year for several years with, I think, a 2027 goal as part of your long-range plan. And that 1.5 million hours is a substantial number of heads in my mind that you don't have to hire as the top line grows and is a source of scaling for your business. Is that -- as we're going through this more turbulent period from a bookings and revenue conversion standpoint, does that interrupt at all the ability to drive the 1.5 million hours? Or can you still go full steam ahead on that?

I think we still go full steam ahead of that. We'll do something like 3.5 million hours this year.

In the year. That will be the cumulative number...

No. No that will be for the year. So we're moving very fast in that area, and that's translating to in the vicinity of $70 million, $75 million in terms of costs that we would have incurred otherwise in the business had we not gone down that track. So it's starting to have a material impact on our business and on our efficiency. And it's a very important part of how we're driving the business in the long term. That continual need to be price competitive means we need to keep moving from a cost and efficiency point of view. And the -- to call it AI in some areas is probably a little bit out on the edge. It's really around machine learning and OCR and those sorts of areas that basically can be -- we can -- filing documents and editing queries in data management. So it's not all AI, but it is very important, and it is saving us a lot of effort and a lot of time and a lot of money in terms of our -- particularly on the SG&A side of things, but not just in SG&A, also in our direct costs as well.

Sure. And then going back to the prior question, is centralizing some of the functions that you talked about at the May Investor Day critical to being able to achieve some of those automation hours -- are some of those -- is a substantial amount of that automation going into those areas?

It is, yes, certainly around data management, around trial and master filing, even around medical writing, even around things like RFIs and RFPs request for information, would be becoming more automated in that. You can imagine we have large numbers of people who put out proposals on a daily and weekly basis, and we're starting to automate that and to make that a more efficient process. So it's really going right across the organization to our site identification and site selection. There is a number of areas just starting to impact on and not just making us able to do it with lower or fewer resources, but able to do the task better in the longer term as well.

And then that last part of what you said may fit right into this next question, but thinking about sales force efficiency or sales efficiency. So we talk about RFP flows, delays in decision-making, et cetera. We obviously care a lot about top line and what that signals for top line, but it also -- you want to prevent your sales force from having to spin its wheels on opportunities that just never go to decision. Question being, we hear that, that is a problem, that there's more RFPs floating around out there, one, that biotechs are fishing for more price. And so they're issuing to more CROs to try to get a better price. And then in some cases, the award just never goes to decision, maybe they can't raise the money or whatever. How big of an issue is that right now?

I think that is an issue. And I think we have seen a trend. It's a little volatile quarter-to-quarter. So I'm hesitant to sort of call it a sort of overall trend. But anecdotally, certainly, we've seen a number of projects or bids that we've made that really never have come to a decision. It tends to be around 20% to 30% of the RFP dollars that we put out don't come to a decision. We call closed canceled. In other words, they're canceled before they even get to a contracting point. So it is an area, I think, that we're seeing some uptick in, but it's -- I say I'm not quite ready to call it a significant trend at this point, but it is something we certainly see on an anecdotal basis.

Great. Let's move to trying to get Nigel in here and so acquisition, you did make an acquisition of a European CRO, I think it was about an $80 million acquisition pretty much at the end of the third quarter. Maybe remind us how that fits into the business and what some of the kind of financial profile was or is?

Yes, Dave. So it's an Eastern European-based business. So obviously fits very nicely into the efficiency play that Steve has already talked about. So it's pretty modest in scale. It's not a huge contributor to us this year, but just a sort of a normal course transaction for us really.

And can I just jump in on that, Dave? Just to be absolutely crystal clear, we did not add the backlog of that to our from a sales point of view. That's not what we do. It certainly came into our backlog, as you'd expect, but we -- none of the sales, none of the awards in Q3 were related to that acquisition. It's an acquisition, as Nigel said, that's focused in Eastern Europe. It's a nice on a functional basis. It also brings us some biotech customers and some emerging biotech customers, which we're happy again to build our biotech business. But just to be very clear, we did not add that. It's not -- no part of our sales or awards number came from that acquisition.

Got it. And this is just a bulk presence in Eastern Europe where relative kind of labor costs and access to patients is...

Yes, exactly.

Benefited?

Exactly.

Okay. Beyond that, I'm actually pleased to hear that you've been active in the equity markets since the quarter, since you talked about the $100 million, so $200 million more since then. I guess maybe give us a little bit of a temperature check on as the stock sits where it is, your M&A pipeline that I know you're looking at and Simon is working on, but we don't know, how do you think about the balance between the 2 here forward?

I mean they're both important, Dave. So obviously, given where the share price is right now, it's appropriate for us to be looking at using our balance sheet to buy back some shares. We have been doing that, and we'll continue to do that. Steve hit the headlines already. We've done up $200 million since the Q3 results call. We have capacity from the Board for up to $750 million. So we've done $300 million of that so far, and we'll continue to be active. At the same time, M&A, where strategically sensible, continues to be a priority for us as well. So we don't necessarily think it should be either or. We will continue to look at both. But certainly, given where the share price is, we're continuing to look actively at the buybacks as well.

Well good. So we got Nigel in on a question before we have to wrap. Steve and Nigel, thank you for being here. The light is flashing at me. I'm getting the hook. Thanks to everybody for hanging in with us for our 2024 15th anniversary, Jefferies London Healthcare Conference, as a matter of fact. So thanks a lot. Enjoy the rest of the day. Appreciate it.

Thanks, Dave.