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

Good morning, everybody. Last day of the Barclays Conference, right and early. My name is Luke Sergott. I cover Life Sciences Tools and Diagnostics. With me, I have Dr. Steven Cutler, CEO of ICON; and Kate Haven, Head of IR. Thank you again for making it this morning.

Pleasure.

Great. So I guess, I mean, there's a lot of volatility, a lot of questions, concerns around the CRO market. I'd like to -- let's start off first with kind of the recent news and idiosyncratic stuff that you guys have been dealing with, particularly around the BARDA. Just had -- you talked about contract being pushed out for 90 days. Just walk through dynamics, how this is going to roll on. You're dealing with staffing up, staffing down, back to staffing up like timing around that, the margin impacts and just kind of...

Yes. It's somewhat uncertain time, not just with those contracts, but across particularly the biotech space. We'll talk about that, I think, through the discussion, Luke. But specifically on those 2 BARDA contracts, one we know has been pushed back. And the second one that we talked about on the call a couple of weeks ago, which was moving forward, we've disclosed through our 8-K that, that had been delayed 90 days and should start again at the end of the second quarter. And that will have somewhat of an impact on our margins in the first half of the year, given that we were literally ready to start recruiting patients. We can mitigate that to some extent, but not entirely. We're pretty good at resource planning and resource allocation. And so there are other things we could put those people on, we recruit on a just-in-time basis. And so not everyone was already recruited. And certainly, things like our lab work, which has tends to be a bit down the track on those projects, would be recruited a little later. So there's things we can do to mitigate, but there will be some impact. We don't really have any further information on that particular trial as to what the reasons are for the delay. And so I don't want to speculate on that too much at this point. We'll hopefully know within the next few weeks and on our April call, Q1 call, we'll be able to give, I hope some more indication as to what's happening in that trial. The fact that it's 90 days, specifically a 90-day delay does give me some confidence that it will come back. There's some technical issue with the [indiscernible] product, the drug product or there's some issue with the protocol that BARDA wants to and FDA wants to talk about. But that remains to be seen. And so it is -- it remains in our forecast. We're expecting that it will start within the 90 days, but there's more information to come there, I think, in the next month or 2. I hope that's helpful.

And this is just kind of the guidance and you talked about this earlier, but a lot of the feedback and investors just trying to size the framework within the guide that you guys gave. You gave a pretty wide range. You got very uncertain time. I thought it was prudent, especially given the timing. But like if you took that BARDA piece out, is that baked in within the cushion within that guide range that you gave? Just kind of frame it out from revenue and EPS, if you think about it?

Yes. I think if we -- and we'll certainly give consideration to taking those trials out given the uncertainty around them. But if we do take them out then on the revenue side, we'd certainly be at the lower end of the guide. On the EPS, I think we're still well within the guide. That's -- we have some levers we can pull on the EPS line that allows us to manage, again, the costs relating to those trials, particularly now we know they are going to be sort of pushed back a bit. So on EPS, I'm relatively confident on, but the revenue would certainly be at the lower end.

Yes. Just assuming that everything kind of stayed normal...

That's right. I mean it's early in the year. It's early March. So we have a good chunk of the year to go. There's work we can win. There's work we can bring in to replace that work to some extent. So I'm relatively confident. I know the ranges are wide, and we'll look to narrow those as we go through the year. But as I said, it is fail early in the year, and there are things we can do.

Yes. I totally understand. It's a good leeway into talking about what kind of work you guys can pick up and talk about the demand and the overall health of the industry. You have -- you talked about large pharma kind of being more stable, biotech is a lot more choppy. We saw a nice pickup there in gross bookings in 4Q. Just talk about the durability and visibility of some of that work that can come on.

Yes. It's an interesting and I'd say, challenging time in our industry. I've been doing this for a lot of years now, and it's probably as volatile or as challenging as it's ever been, I would say. And from our Q3 numbers last year where we had almost a convergence of circumstances around vaccine cancellations around the biotech funding issues and, of course, around our 2 larger customers, particularly impacting us at all happening at the one time, which was the particular challenge. To some extent, the large pharma is mitigating a little bit. We have certainly visibility on our largest customer and the downtick in revenues there. We believe we're at the -- not there on that front. The second customer, we still have some uncertainty. It's declining this year. We don't -- we're not quite sure where we're finally on that one yet. I think we're more towards the end than we are to the start, but there's still some uncertainty around that one. On the large pharma as a whole, we see some optimism -- I see some optimism certainly long term. RFPs have been relative [indiscernible]. The challenge that large pharma has around their LOEs at $200 million, they need to replace plus $100 million they need to grow to get to kind of a 5% CAGR to me presents a huge opportunity for our business and our industry, in fact, to help them to get new products to market over the next 5 or 6 years, which is the time frame that they're looking at. And I was at a meeting earlier this week with our leaders on -- with large pharma leaders and biotech leaders and the talk is around -- less around cost cutting and budget discussions than it is around how do we get those products to market now. So I see something of a pivot now in terms of what they're doing to accelerate their innovation and accelerate products to market, which I found encouraging from a large pharma point of view. Biotech, I think remains uncertain and volatile in the funding environment. I get whiplash looking at the month-to-month. January seems to be quite a good month, February, not so good. I know we're up 10%, 12% on a trailing 12-month basis, but it's choppy. And what I see is companies that have good science are getting funded, but it's a sort of a narrower group than what I'd like. I'd like to see a broader range. And so that impacts the way we're seeing the biotechs and what they're considering. We do see some delays and some caution in how they allocate even when they award us work the speed at which that work gets contracted and goes forward and what actually happens is causing us some pause, I suppose. And so it's certainly a challenging time. I think what is 800 public biotech, 200 of which are trading below cash value. I think there's -- we're kind of -- there's more to come through on the biotech front. I think there'll be some challenges for the biotech industry for another 12 months or so, at least as that plays through. So it just remains a challenging volatile period in our business. But as I said, long term is what pharma needs to do to replace that LOE revenues that's going away and then to grow, I think in the long term, we're in a good place. And I think over the next 5 years, our industry is going to be in -- our company is going to be -- going to do nicely. The short term is what we're working through.

Got you. And when you're talking to pharma and the -- on the large pharma side, you're going through and they're going through the restructuring. Do they call you in and ask for -- not ask for your input, but like when you actually win that strategic relationship, they kind of bring in and open up the kimono, show what their 5-year pipeline would look like so that you can help bid on that work and within that strategic relationship. When they do the restructuring, how early are you brought into the conversation? Like -- or is it something that they just say, "All right, we're going to get rid of this, just say vaccine program" and you it's up to you guys to go through your book of business with them and say, "well, this vaccine program, this how much needs to come out."

It varies. It really depends upon the customer. Some customers on a strategically, we have a very close relationship. We have a steering committee. We get access to their pipeline. They talk to us about what assets we would develop, what therapeutic areas we would almost exclusively work in, assuming continued good performance. And that's certainly been the case with the last couple that we've brought on. We have access to their pipeline, particularly in a certain therapeutic area, and it's a therapeutic area that looks like it will burn faster and grow quicker. So that's encouraging. Others a little bit more hands off. They'll make their own strategic decision, and then they'll let us know what's happening. And others, we have an opportunity to be proactive. We've been to one of our strategic customers. We've gone to them and said, how do we get -- how do we help and get pharma's drugs to market in a more efficient way. And they said, "Well, we've got -- there's a bunch of things we'd like to develop, but the cost of developing them are too high." So we've gone back to them and said, "well, we can do it for less." If you let us make some decisions around the countries we select, the sites we select, the endpoints you're focusing on, if you can give us some real input in your protocols and your development programs, we can do that. So we've put together a partnership that allows us to go, okay? And that brings down their threshold in terms of what they can -- what they have to pay and it helps them to get more opportunities to market in that particular case. So that's an exciting opportunity for us, and it's shown us that we can be more proactive with these sort of customers and bring to them solutions that allow them to develop their business faster. So it really does vary depending upon.

Yes. And I guess just leading a good seg into as you're thinking about the restructuring and visibility and et cetera, one of your larger peers thrown a number of about like 70%, and that kind of feels like -- I don't know, you just -- it feels about right, like seventh inning maybe here and whatever it means. So help us understand like your visibility on where we are in the cycle of restructuring from the other pharma side. How do you think about...

Yes, I have -- as Steve likes to say, I discourage him from using the baseball inning references. So I'll jump in on this one. No, I think we largely agree that we're closer to the end than the beginning, although it's tough to say where exactly we are in that. I mean it's very customer specific, right? I mean there's customers, obviously, that are very well positioned and haven't had to face restructurings and budgetary pressures over the last couple of years, and there are some that are obviously on the other end of that. So as we look through the next 12 months, I think the expectation is that we certainly don't have the elevated level of activity that we've had certainly in the last 18 months, but there's still going to be some level of uncertainty and restructuring that, that some companies are going through, right? So it's not uniformly the case. As we look across our portfolio, there are sort of puts and takes, right? There are some that are well positioned and growing really nicely and there's some that are still facing some headwinds. So net-net, that's -- there's still progression, certainly in our large pharma group this year, but it's certainly a sort of mixed when you sort of peel that back.

Got it. And I guess from capacity and volume and a pricing perspective, I mean the mantra is like trials are getting -- you're taking a lot more pricing right now, and that's going into your backlog and so that's going to flow through, obviously, and hurt your margin in the future. Talk about the pricing dynamic. And it's more if not like they're asking for 10%, 15% discounts across the board? Or is it -- they're going -- when you're doing an RFP or you're going into an award, are they just being much more discerning on each function going line by line versus just saying, all right, here's this large Phase III, we'll give you $350 million to run it, right? I mean is it -- which way is it going?

Yes. I would challenge the thesis that the pricing dynamic has changed fundamentally and what's going into our backlog is lower margin than what went in a couple of years ago. I don't see that. We are pretty disciplined in terms of the -- we track our margins, not just the margins that we operate on as we run the project, but what the theoretical margins are when we sell the business. And we have some levers we can pull on that in terms of where the work is done, even within a proposal and a contract. And customers are usually fairly agnostic about us. If we can do the work in a low-cost country, they tend not to mind that, particularly if it's more back office work. And so we have some levers we can pull to maintain and to even improve our margins going forward. So the thesis we're suddenly in a low-margin environment, I don't think has played through. The other thing is as we've won these strategic partnerships, when you're winning a significant amount of work on a area basis particularly sort of hundreds of millions on [indiscernible], you can really generate some efficiencies. And the scale that we are at allows us to generate those efficiencies and to maintain those much. So even if we have a theoretical margin on our proposal or on our -- on a strategic partnership, we can generally be sort of 300 to 500 bps above that because we will operate more efficiently than we even thought we could. That's our sort of traditional track record. So I think the pricing environment remains challenging in particularly, around those strategic partnerships. But the benefit of our scale allows us to get the leverage on those sort of partnerships. And even on significant projects. When you're at a $50 million above, that's a large lot project to be able to generate those efficiencies. And I guess one of the -- you can say, our projects have elongated mall, which has pushed the burn right down, which is not such a good thing. But it does allow us to generate the sort of efficiencies. It's a little bit harder to do that in those rare disease studies when you don't necessarily have all the leverage. But in those large-scale oncology trials that do tend to take longer and burn slower, you can still generate some of those efficiencies. And I think that's an opportunity that we have that's perhaps unique to some of our sort of smaller competitors.

And just thinking about that from being able to drive leverage on larger indications or if you're talking about GLP-1, you can obviously scale that up a lot more and get your efficiency there, but like the rare disease you're talking about, there's not as many KOLs, it's harder to find those people and you can't kind of leverage the CRAs or the people that are working on it. So are you able to -- because there's also ultimately just it's a capacity issue, right? And so you're able to ultimately price those rare disease trials to make up for that margin? Is that how you guys -- is that from a mix of business perspective, right? You're able to kind of get the deficiency in the GLP-1 where there's unlimited capacity versus the rare disease and you're able to offset that pricing and that one ways you're able to help holding that gross margin?

Yes, I think that's a reasonable sort of thesis. The more common indications, the faster burns, we can get more leverage. We can get more operating margin. And the rare diseases are a bit more challenging because they're rare. You can only go to sort of a couple of sites in each country rather than we have a sort of a mantra where we go to 5 sites, at least 5 sites in each economy because that gives us, again, that opportunity for leverage. Where diseases, that's a bit more difficult. And so you're kind of a little bit more spotty in terms of how you're doing you have to manage that. So it does tend to balance off a little bit, but we push hard on those areas where we have a sort of therapeutic franchise, particularly in the strategic partnerships. So that allows us to make up for some of those more rare disease trials.

And continuing on this mixed theme of therapeutic, when you think about strategic versus FSP, or the hybrid work and the trends that you've been seeing in switching more to FSP given you guys are the largest FSP player, and that's kind of been where the demand is going recently. If you're thinking about the rare disease or your backlog burn or things that are weighing on that, like is there a big difference there between demand levels on strategic versus FSP on an indication basis? Or is this just kind of like a pick or choose, depending on the company?

I don't think from an indication perspective, again, it tends to be very customer specific, right, in terms of how their -- what their primary development model is and where they're going as an organization, right, either more towards full service or FSP or increasingly hybrid, right, where they're adopting elements of both. So certainly less so from an indication perspective. I guess maybe the one caveat there would be within some customers where they're making acquisitions in new therapeutic areas, right, where they don't have resident expertise sometimes that does lend itself more toward a full-service model, right? Because they don't have the experience, right? They don't have the capability and they're going to lean more on their providers to obviously increasingly do more of that work. So that's more opportunity for us in those cases.

Yes, that makes sense. And I guess on -- speaking about the health and when you're thinking about this like where pharma is going to get there, $300 billion of revenue in the next 5 years. You think about the health of the biotech market, still kind of flushing through here, you guys have seen elevated cancellations. You're saying that they're going to be elevated versus historic levels. Talk about your visibility on that. And from a cancellation perspective, the mix, is that more strategic FSP, large pharma, biotech, just...

Yes. We do think cancels will sort of be at a more elevated level for the next 12 months or so. We see that sort of uncertainty within particularly the biotech space. I do think the biotech industry is sort of halfway through some reshaping. I think to be very honest, there was some science funded in past years that is a little fragile. And that will flush out, I think, over the next probably -- I think we're still a year or 2 through that. So that volatility, I think, is probably going to continue. And that will, I think, lead to us having a sort of somewhat elevated cancellation level, not dramatically so. But I think those reprioritizations and the cancellations are going to continue. Large pharma on the other hand, I think, have been through a well through their kind of let's-cut-in-the-budget phase and realize that they need now to get products to market. So I'm optimistic on the large pharma front and confident that we can continue to work in that segment very effectively to help them move those products to market, which will help them fill that $300 billion gap that they have and that they realize they have, as I said, I was at a conference earlier this week, and that realization is clearly on their minds as they think through what they need to do on that front. And even on the FSO, FSP basis, we see some customers move towards FSP. That's clear some of our larger customers. Others have moved the other way. Certainly, some of the more strategic partners have moved because they realize that there's a cost to doing FSP. You have to have that infrastructure to be able to manage those resources. And that's a cost that they don't necessarily want to take on at this stage. They'd rather have us do it. They feel confident that we can do it effectively or and even more effectively than they can do it internally. And that the cost ultimately is beneficial in terms of making it a more variable cost. And so we take on that risk from a up and down cancellation, is it going to happen or not point of view, but also we get that margin benefit as well. I even had a breakfast with a customer, a more midsized customer the other morning who was saying, we've done a lot of FSP. We want to shift back to the full service. We've got too much cost internally now managing that FSP. So every customer is different, and they have a different perspective and a different leaders and different managers have a different perspective on how they want to proceed.

Yes. And that's -- I mean, that's another big question that we get is are you hearing more about insourcing, right? And I mean, the trend has been to continue to outsource from what it sounds like you're saying it's -- they can't do the work without you guys. So is there an element where they're looking at the budget and saying, going the other way and saying like, "Oh, well, we can't, we got to start doing some of this more stuff in-house, but we still have on some of the other functions, we'll just have you guys do more FSP." Are you seeing any of that anywhere?

There's -- I was in pharma in the early part of my career. And there's always -- human nature is a little bit that we can do it better than you. That's just natural. The facts and the data suggest that they can't. And I think they're increasingly realizing that with the challenge they have around LOEs that they don't really have a choice. They have to use organizations like ours in our industry, and we can do it effectively for them. So I'm very optimistic in the longer term about our ability to contribute to that problem that pharma has and provide a solution to that problem that pharma clearly has. And the evidence that I hear that when I talk to customers is that they do realize that the smart -- the leaders of those realize that they do need to use us that we have a level of expertise. We do more trials than any of the large pharma companies. We have more expertise and more in the sort of logistics are running a clinical trial than any of the large pharmaceutical companies. And they realize that, I think, in a...

All right. And just last one here, I guess, with all the -- to add to all the volatility and uncertainty to start the year, and a lot of the policy changes on NIH funding is very small risk you guys on that. But just trying to as you think about HHS Secretary and the vaccine, rhetoric, et cetera, like are you seeing contracts or awards? You talked about the health of the market being really strong, but are you seeing elongation in decision-making because of this or any of this noise or...

It's very early, I think, to -- and we're not at the moment. It's not that we -- that couldn't happen. But generally on the -- there's certainly some uncertainty and that's not helping. But I think that will settle down in the next sort of 6 months or so. In terms of the new leaders in charge of HHS and others, what I see is potential upside. That RFK wants to see vaccines available to anybody who wants to get them. He wants to see data on efficacy. He wants to see data on safety. That means more trials. So I'm optimistic about what that opportunity. I think there's also going to be a focus from him, particularly more on foods and preservatives and that and all of that make America healthy. Again, I think doesn't always come back to vaccine. It's really around there's much we can do in that space. And I think everyone would welcome that. So while there's uncertainty, and there will continue to be some volatility in that space for a period of time, I think it will settle down. And I think we'll get on with developing drugs and solving the problems that pharma has in the sort of short to medium term.

Great. It's always a pleasure.

Thanks, Luke. Thanks a lot.