All right, kicking off. Thank you, everybody, for joining us in person and online. It's very nice to have you with us today. My name is Elizabeth Anderson. I'm the Health Care Services and CRO analyst here at Evercore. Very, very happy to be joined by Anshul Thakral, CEO of Fortrea, as well as Jill McConnell and Tracy as well in the audience, so you know, as you sit here, how many days has it been? Are you still counting it in days or have we moved to months?
We've moved to months.
You've moved to months. Nice. OK, nice.
Around four months.
Around four months. Yeah, well, I like how we surprised you on that earnings call like that. The first day, a couple days in, we threw you right in. I sort of, you know, as you sort of take a situation, where are we in sort of the process and sort of your taking a look at the organization, getting to know it? I know you've been on the road a ton, meeting clients, meeting people internally. Sort of where are we in your digestion process of Fortrea?
Yeah, no, I think, first of all, Elizabeth, thanks for having us. And as we were talking about earlier, great location. It's good to be out of the Northeast for a couple days.
Yes, for sure.
So thanks for having us in Florida. I think the journey is moving along at a rapid pace, and I'm excited about that. I think that CEO transitions can be hard. I've been fortunate that the executive team at Fortrea and beyond the executive team, the top 100 leadership team, and then all of the employees have responded very well.
Yeah.
So which has made my job a lot easier to digest and integrate, and I think I've definitely gotten my feet under me and gotten a pretty good handle for the business. I've been out to most of our major geographies. I think I've met in person about a third of our workforce at this point in the last couple of months, and I think I've spent time in person with most of our top 15, top 20 customers.
Nice.
Starting to get a fairly good grounding of where we are, what we need to work on. We are deep into the next phase, the next 90 days, as you might want to call it, deep into the next phase of starting to implement small but very meaningful changes in the right direction of where I want to be able to take the company. Feeling very comfortable with where we are right now.
Got it. No, that makes sense. And you know, as we think about the go-forward activity, you're going to guide on your 4 Q call? Is that for 2026? And that's kind of.
Our heart.
We'll start to hear the Anshul plan and Anshul and Jill plan?
I think it would be prudent for us to wait. We're not guiding to anything right now. I'd like to, look, we had a great Q3. I'm very proud of the team for responding and reacting. And we pivoted pretty hard in Q3, which was great. I'd like to be able to consistently deliver that here in Q4, have a better understanding of where the market's headed. Lots of changes, even with the announcement of the FDA yesterday. Lots of changes still happening in the marketplace. So I think it's prudent for us to wait till.
Yeah, that totally makes sense.
Year-end earnings when we'll start sharing.
Got it. As you've been going around talking to your large customers and others, how would you sort of characterize the broader pharma budget environment right now?
Sure. I think in general, I think my peers have said the same thing, which is feeling neutral to positive.
OK.
I think folks are starting to. There's two big sort of levers here. Let's talk about the big companies and then the mid-sized to small companies, the ones that rely on financing versus the ones that are very affected by a geopolitical environment. I think at the big pharma companies, we're starting to hear a sigh of relief that, hey, even though we've got a chaotic environment in front of us, we know how to operate in this chaotic environment. I think Pfizer's signing of the deal with the Trump administration was a big step forward in the right direction of people saying, OK, this is the new environment. This is how we're going to operate, and we're going to operate through this. As a result, most of the companies are starting to reactivate their R&D pipelines, get their focus right for 2026 and beyond.
And then the small to mid-sized companies, as we saw even in some of yesterday's reports, funding levels are a lot better than they were last year. They're not where they were in 2018, but they're a lot better. So I think in general, the sentiment is improving. And I think people are cautious. I think most folks would say neutral to positive. And I think we should expect to see R&D pipeline growth starting to return to very low single digits for now.
Yeah, that's great. And would you say that those comments extend to your biotech customers too? Or you would think they would differently?
I think even on the biotech side, so look, I think we're starting to see M&A activity pick up.
Yep.
You know, I think the Metsera acquisition, as well as some others, we're starting to see some large-scale M&A activity pick up. We're seeing licensing deals pick up. I think these conferences like yours and conferences like that will happen in the first part of January are going to be telling in terms of where we see the biopharma releasing funding to motivate further biotech spending. That's one aspect. So we're seeing more of that. And I think the venture community is starting to feel better about starting to see some returns, which in, you know, it's a domino effect, which leads to being able to see new funds being raised. So if we look at just even capital deployment in November and December, it was a lot better than it was last year.
Yep.
I think that's going to take time for translating into pharma services, because the funding environment improving is still one or two quarters delay in when our business starts seeing output.
OK, that makes sense. Regarding pharma company strategic partnerships, it seems like there were a number that were sort of RFP'd or bid out over the last 12-18 months. Is that sort of, do these things just kind of ebb and flow over the course of these things? Or sort of how are you thinking about the characterization of these potential transactions in 2026?
So I think these things ebb and flow. And I think that what I think about big pharma, I think, you know, top 30 plus some odd companies, very large, multi-billion dollars of R&D spend, big procurement departments, multi-billion dollars of spend on CRO, CDMO, and other services. So we tend to see every three years or so. And it's kind of like seats in Congress, right?
Yeah.
Not everybody goes in the same cycle, right? So every year you see some. I think in the last year, year- and- a- half, we saw more than normal. That doesn't mean there won't be any at all in 2026.
OK.
And I'm sure there'll be more in 2027. So every three years or so, they go through sort of partnership refreshes, which is the right thing to do. It's the right fiduciary thing to do to stay completely current on the kind of rates you have, the kind of partners you have. For us at Fortrea, we are geared up one way or the other. We've done a great job of protecting our existing big partnerships. And we've actually added to mid-sized partnerships this past year.
Yep.
We've got a team and a set of capabilities across commercial, finance, legal, and operations that's geared up that even if there's partnerships we don't know about that come our way in back half of 2026, we're geared up for it.
Got it. No, that makes sense. And how do you effectively compete in that sort of larger pharma space? Because you have certain advantages, but on the size, maybe you're a little smaller than some of those. But that can be a benefit too. So how do you kind of think about that when you're thinking about those types of partnership opportunities?
Look, I think you've got to look at that in two lenses, FSP and FSO.
OK.
We strategically look at FSP and FSO as two very different product offerings. And then when we think about partnerships, we think about those differently. There are FSP partnerships that sometimes are very significant, you know, 1,000 person plus in scale that are largely a price play. You know, as I've stated in the past, we're trying to be very disciplined in what we do from a strategy and from a pricing standpoint. There may be some of those partnerships, it's not that we can't compete. We may choose not to compete because it may not be the right type of business for us. We certainly can compete. There's nothing that stops us from a capability or resource standpoint.
OK.
Then on the FSO side, you know, we get invited to partnerships from the number one pharma company down to the number 30 pharma company. And there are areas where we are able to compete. Maybe we're not able to compete on the same scale that an IQVIA or ICON can. But every pharma company is always looking for a mix of partners. They're always looking for across therapeutic areas. Nobody wants to have two or three of the partners that have the same size and shape. So actually us being a slightly different shape and size than the rest of the global partners sometimes is a strategic advantage for us.
Nice. No, that makes sense, and you know, if we think about the customer concentration in terms of that top 10 or however exactly you want to cut it, where in the sort of pecking order of priorities do you place revenue diversification? Is it comfortable with that?
No, I think it's a great question.
Comfortable with it. But you know, how do you think about that going forward?
Look, I think that is an excellent question because we definitely have some customer concentration with some large customers of ours. I think for me, it's less about focusing on diversification because we have strong, very healthy, multi-decade-long relationships with some of these customers. It's more about the real priority for the business is growth. And growth is going to come from a combination of increasing our win rates with some of our mid-sized pharma companies, but more importantly, opening up our aperture and getting a wider look at the market. I've talked about in the last earnings call too is what's most important right now is new customer introduction into Fortrea. So now that in and of itself, the byproduct will be a diversification and a change in customer concentration.
But my strategy is to focus on opening up at the aperture. Diversification becomes the byproduct of that.
That makes sense. And if you think about that opening of the aperture, that totally makes sense. How do we think about, like, you know, are customers or potential customers willing to take a look? Or they say like, oh, I remember Covance from, you know, 1997, and that's like how open are people to that? And they're not even sort of current on what's going on in the organization.
Far more than you would think. I mean, I think that we have to talk about our story.
Yeah.
The brand, for most customers, I would say in the biotech, biopharma, small, mid, large, they recognize Fortrea as the former Covance.
Yeah.
They understand that.
Yeah.
There's a small customer segment, especially outside the U.S., where we'll have to do a little bit of edification on our capabilities. But we rarely are asked, hey, come and just tell us your capabilities presentation. It's a well-known household name and commodity at this point in terms of understanding, hey, there's six big CROs that can all do almost any clinical trial in any space, and we're one of those six.
OK.
What we have to do is this is still a relationship-driven business. You know, this is still professional services. What I'm really focused on is our commercial, our operations organization, and expanding that relationship network and ensuring that more and more customers are getting, even if we lose in the RFP, getting a feel for what we really can do and how we bring scientific expertise, how we bring technical expertise, and how we're trying to change the model and how we staff our people so that we can start creating that awareness. It's less about the brand awareness. It's more about what I want to do next with our operating model.
OK, that makes a ton of sense, and then maybe switching down to the biotech, because you've obviously nicely diversified from sort of pharma and biotech exposure. You know, where are you seeing the most success there, and sort of as you've gone out and talking to them, you know, how do they sort of view the sort of next step in their evolution with Fortrea?
I think the companies that I talk to, and I'll tell you, you know, just here at your conference, between breakfast and various meetings, I think I've met with two or three folks that one that knows us well and two that don't. Just out of your conference, just having a chance to network, I think people are very open-minded. I think our size to them is our sort of secret weapon. We have the ability to execute on any phase I through phase IV clinical trial. But we can do it in a way where a small customer isn't going to get lost in our own framework and isn't going to get lost in our bureaucracy.
And I'm focused a lot on revamping our biotech operating model and creating a model where how we staff, how we resource, how we're perceived, how we're felt, and how the relationship is with a small company looks differently than it does with one of our larger clients. So that both segments of the market and sometimes the mid-segments are slightly different is getting a fit-for-purpose staffing model, resourcing model, a fit-for-purpose working model. And when I talk about that and when some of them see that in play, that really resonates. And I think that's going to be a big part of our story this year.
That makes sense. How do we think about it? Maybe just to double-click on that slightly, how do we think about, like, what does that staffing model? Like, how do you make sure that these tiny companies don't get lost in the big pond?
Let's give you an example. One could argue, hey, well, you're sharing some trade secrets. I think every CRO should be doing it if they're not already doing it. You know, if you're a small company that is based out of, let's say, Boston, and you've got 50 employees and you've got a clinical staff of five or six, and you've got to manage a phase II or phase III clinical trial, and you've hired a CRO. If the CRO staffs 70 people on this at a fractionated all around the world, that's a very complex task for you to manage. But if that CRO says and comes to you and says, hey, let's explore a different model, it might be slightly more expensive in the short term, or maybe it's not. Let's staff holistic people. Let's staff full resources.
Let's see if we can geo-collocate some of those resources to where some of your people are and really spend the time and get behind the art and science of resourcing to fit the ecosystem, the dynamics, and the phenotype of what you're trying to do in your biotech company. That's a pretty big differentiated advantage. It's not easy to do. It's harder to do as you get bigger and bigger. Being the size we are, I think that's part of our secret weapon. We actually can do that. We actually can be that kind of flexible and nimble. And it breaks some of the norms. And sometimes you have these conversations and say, OK, this is the typical staffing model. These are the typical resources. Let's talk about changing that a little bit.
Let's talk about how that fits the company that you're trying to build, the ecosystem that you're trying to build. Makes it a little bit harder for us. But if we have the right systems, the right tools, and the right management discipline in place, then we can do that, and if we can do that, that's a big differentiator for them.
Yeah. No, that makes sense. And do you feel like you're sort of there in that evolution of being able to offer that? Or, you know, if we want to come up with an innings analogy or is it innings 7 or, you know?
I definitely don't think we're at Innings 7. I mean, just given how impatient I am, nothing's ever at Innings 7.
Nice.
It's nothing's ever moving as fast as I want. I think we are certainly made a lot of progress in that direction. And this 2026, we're going to be making more and more progress in that direction. I don't know if we'll ever get to the end zone because my goal is for us to be a continuous learning organization that is continuing to evolve and change. What some of our companies and clients need in 2026 isn't going to look the same as what they need in 2028 because I don't know all the trends of what's going to take place. I've got to find a way for us to be a flexible and nimble enough organization that we can continue to model that behavior and evolve as things go.
Yeah. No, that makes a ton of sense. And then maybe from a therapeutic mix area, how are you seeing that evolve as we've come through 2025 and are exiting the year?
I think therapeutic mix for us continues to be largely in line with what the market is. You know, we are not a big player in vaccines. We run several vaccine clinical trials. We are very capable in vaccines. We've got a great vaccine partner, two or three good vaccine partners. But we're not banking our backlog on large COVID vaccine trials like some others have done that.
Yeah.
So, we're not a huge player and banking on government-funded studies like BARDA. That's been a tailwind for us because that's led to less cancellations. It's led to a normalization of cancellations for us. That's been positive. But beyond that, our therapeutic area mix looks largely like the therapeutic area mix in the market. We're strong in about 20 or so therapeutic areas. And they're exactly what you would expect in the market. And, you know, oncology is the biggest therapeutic area in clinical development. Oncology is our biggest therapeutic area.
That makes sense. And you think that should be that it just sounds like that will see investment maybe as the business grows, but you don't feel like you have to step up investment in anything?
There isn't a therapeutic area that we are competing in where we don't have in-house capabilities. You know, and if I saw a trend that said, hey, therapeutic area X is going to be big in the next two to three years, I would immediately start looking to invest into that therapeutic area and make sure we're ready for it. The best way we can expand, the best way we can do this is to not be closed-minded in who we work with. We try to work with customers of all shapes and sizes because you don't know where the next set of innovation is coming from. Sometimes we could be working with a European biotech company that's on the cutting edge of doing something in cell and gene therapy to a very small company in a very small clinical trial.
That's fantastic because if that technology takes off three years later, we've got experience others don't. So the best thing we can do in terms of quote unquote investing in therapeutic areas is have an open mind and an open aperture to who we work with. So we're continuously working on clinical trials that are on the leading edge.
OK. That makes sense. So, you know, maybe switching over to Jill for a moment, you know, how are you thinking about the progress on sort of the human capital and finance systems that you plan to set up by the year to sort of finally maybe, maybe?
Yeah.
Settle down on these TSAs?
Yes. We are completely exited from the TSAs. We launched our year at the beginning of the year, and, you know, I think that team, in very tight timelines and a tight budget, did a great job, so the human capital system's up and running, and that's up and running, and we have them very well connected, which in a people business is going to add a lot of value, and we're already starting to see that, and, you know, now that things are getting stabilized, we're really excited about, you know, what the data and analytics we're going to be able to get from that going forward.
Nice. And I think on the Q3 call, you also talked about some new systems helping to drive sort of new processes and improve efficiency. Can you expand on that and maybe give us an example there?
Yeah. I think probably this might be one actually you want to pick up on, Jill, because I think there's some great things with our Xcellerate platform and the mobile apps for the CRAs.
Yeah. So we've always had a very innovative technology backbone. And that has been all about our workflow. We're starting to be able to do things that we may actually be able to get a lot more in front of the customer on. There's two big pieces to it. One is our CRA Mobile App. We've developed in-house. It's AI-powered. Our ability to be able to hand a tool to our field force, which is our CRAs. It's in pilot stages right now for CRAs to be able to automate their workflow against every site or every study that they're going to. I've worked with some of them, seen it in the field and demo. We're going to get through pilot phases here in Q1 and start rolling this out across study.
The customers that we've shown this to have said, you know, frankly, it's a game changer because you have a lot of manual work that is done by CRAs that we can start using AI to help automate some of that. And what this yields for us isn't just things like efficiency gains, but it's really quality gains, which is where the focus is, which is where we're driving. This is completely developed. Everything's been developed in-house. We're in pilot stages now. Our Xcellerate platform that we've talked about in the past, we're starting to spin new modules off of that from a risk-based quality management to being able to do data visualization and data integration into the customer's workflow.
We've gotten to a point where several customers have actually come to us, "hey, as this gets more and more integrated, we'd like to talk about how you can roll out your systems on work we're doing with others," and so that's the next level of conversations. We don't want to get ahead of our skis on this. Focus for us has been using this technology and tool to automate and change our workflow, not just from a cost perspective, but we actually think it increases the quality, and we think that's a real differentiator.
And it sounds like it's sort of part of a continuing process going forward, right? It's not like, OK, check, we did that, check, we did this. OK, good.
This isn't meant to be a shiny object.
Yeah.
You know, as I talk about internally within our teams, I talk about, look, our pillars and priorities are commercial excellence, operational excellence, financial excellence. That's what we've talked about with you. And when I talk about internal teams, that is all wrapped around a culture of technology and innovation. What we want to see happening isn't chasing one big shiny object. What we want to be seeing is workflow changes by using technology across the organization. Some of our best ideas are coming from some of our most junior people. We're running multiple hackathons in Asia, as well as now we're starting to look at it in the U.S. and letting people who have to be actually solving the problems work with us to develop the solutions. And then we'll figure out how to scale them. Because the last thing you want to do is the engineer's dilemma.
Let's develop a big shiny AI-powered system that's never actually going to impact our workflow.
Yeah.
We're starting the other way around and thinking about continuous improvement on our workflow, and how does technology and AI enable us to have continuous improvement on our workflow?
Yeah. And that probably.
That's where these ideas are coming from.
Right. That creates like a nice virtual feedback loop.
It creates a feedback loop.
With them too.
And if we invest in anything and create anything, we know it's going to get adopted. The biggest issue in all of these technologies and tools is adoption. If we're going to do grassroots campaign, then we know these are going to get adopted.
Yeah. No, that makes a ton of sense. How do you think about, like, you know, I think you've talked about some of these tools and things, but if you talk about sort of commercial excellence, which I think was the first pillar that you just highlighted, like, what does that mean? Like, what sort of practices or what kinds of things need to happen differently?
Yeah, sure. Look, I think commercial excellence has several pieces to it. You know, there's a cultural piece of creating an organization that doesn't give up. There's just an absolute cultural piece of creating a resilient commercial organization. A sales job, whether you're in banking or you're in CRO or you're anywhere else, your job is to hear no 50 times before you hear yes one time. It's making sure we've got the right people and the right culture, which we do, and continue to give them the tools to enhance their ability to be better at their job. Beyond that, it's also thinking about what are the other resources that our commercial teams need to have to meet the client's demands and needs.
Some of that, sometimes for some of our small customers, is certain tools that can do really fast estimations on budget changes, et cetera, things that we can put in our client's hands. So we're developing those. Those are going to be launched here in the next couple of quarters and continuing to bring nontraditional resources to the table that will enhance our selling ability in the market. That's what I mean by commercial excellence. But most of it is around a culture of, you know, excellence, not giving up, hanging around the hoop, pursuing that last lead, opening up the aperture and getting out to, you know, every aspect of RFP management that we can.
Yeah. No, that makes sense. And you clearly are exuding that as you're sort of saying it. But how do you sort of permeate that down? Because cultural things are sort of famously tough to change.
You know, I learned this lesson from my old boss when I first would go around in the CRO world. He's been a mentor of mine for a long time. And you can't tell people what to do. You have to show them what to do. I go on sales visits with as many salespeople in our organization as humanly possible. I don't go through a single week without having gone on multiple sale visits. I mean, I've done two pitches this morning. And the best way to have a cultural change in the organization is to model the behavior and show them what good looks like and not accept anything short of good.
That sounds like a good place to start. So, you know, how do you think, like, the mix of businesses that you have, you know, obviously you guys have had, you have a nice phase one business versus later stage. Is that kind of a question of, like, how do you think about the relative investment opportunities? And that is another dimension of your growth story going forward versus sort of like just sort of seeing where the market goes.
So, you know, it's definitely not see where the market goes, because I think each business has to have its own priority and has to really be run differently. Think about it from a business priority. We have our largest business, which is our full-service outsourcing business. Our next business is our FSP business. And last but not least is our clinical pharmacology business. All three businesses have specific goals in terms of what we need to do commercially, what we need to do on the cost side, what we need to do on the people side, what we need to do on the technology and innovation side. And I'm running these as three business lines that have to accomplish those goals. And you talked about our clinical pharmacology business. We think clinical pharmacology has seen some great tailwinds here in the last few months.
I am really focused on that. I've went out and spent some time in our Leeds clinic. I'm going out to our Dallas clinic here in a couple of months or in a month. I'm trying to get out to all of our clinics in the next couple of months. We are doing amazing work for big pharma clients, as well as now for our mid to small-sized clients across all of these clinics. I am entirely focused on how do we open up the aperture and have these clinics take on more and different kinds of studies. How do we have our clinics be able to support, even if it's supporting other CROs in patient enrollment and patient recruitment for phase III GLP-1 studies or phase III vaccine studies? Our clinics are completely capable of that.
We think we can actually transform some of our clinics into being more multi-research sites rather than being just phase I sites. So there's an entire growth plan and strategy that is focused on that business and certainly not seeing where the market takes us. I think there's a lot of opportunity for us, regardless of the market conditions, to continue to grow there.
Got it. No, that makes sense. What do you think about, I mean, the pharmacology, sorry, clinical pharmacology business is a unique offering, you know, not totally unique, but it's definitely a unique offering that you have. How do you think about, like, does that give you a competitive advantage in other parts of the business and sort of.
I think it does. I think it does. I think the clinical pharmacology business allows us to really lead with science, allows us to recruit and attract some very talented people because it's a very technical business. It's highly driven by our medical professionals that run these clinics and staff. Just having those colleagues in the organization creates an institutional knowledge and creates knowledge. If we do our job right, knowledge transfer into our late-stage business adds a fair amount of value. That said, the goodwill that we generate by running these trials with some of our big pharma partners, where we may not have a late-stage partnership, when it comes time for a late-stage partnership, that gives us a leg up. It doesn't necessarily one-for-one translate into, hey, you ran a phase I study, so we're guaranteed to get you a phase II study.
I'd love to say it does. It does not. Nobody's business really gets that. You got to earn every piece. But the better work we do there, the more institutional knowledge we build within a therapeutic area, the more we can follow the molecule from early phases to late phases, the better our organization gets. And certainly, every time we do good work, it brings goodwill into that client situation, which we hope increases our probability of winning the next phase of work.
Yeah.
But there's no guarantees to go from one phase to another.
Sure. No, that makes sense. You know, I think one of the questions that many people have had in the market over the last year is sort of pricing. It's looking for growth, looking for opportunities, and we've seen it come down in certain categories over the past year. This seems more stable of late. How would you characterize sort of the current, and maybe it's talking FSO and FSP separately, like, how would you sort of characterize the state of the current pricing market, and, you know, where have people been accepting of price, and maybe where have they been less accepting of price?
Yeah, I think the price. I get asked this question in virtually every meeting, right? Especially because some of our competitors have talked about this topic. I think pricing plays a role in the FSP world and plays less of a role in the FSO world. In the FSP world, it's more of a commoditized offering. And certainly, price matters. And some of our larger competitors that have perhaps taken on larger cancellations have been a bit more aggressive here in the last 18 months. We've tried to remain fairly disciplined and be able to make sure business that we take on has the right margin profile and has the right strategic value for us before we take on business.
And so there have been cases where we've walked away from RFP or walked away from a situation if a competitor has gotten too aggressive because that's not the right business model for us. At our scale, it doesn't make sense. But that's been the place where price has had the most influence. I think price has less of an influence in the FSO world. And the reason it's less of an influence is I think customers, our colleagues in the customer base, are incredibly smart and incredibly sophisticated, and they can see through it. They know what they're buying. Usually, price manifests itself not in percent discounts. It manifests itself in aggressive strategies. It manifests itself in maybe promising the ability to enroll a program faster than what may be feasible or, you know, being a bit aggressive in how many resources or what you need to do.
The thing is, eventually, that sorts itself out, right? That ends up showing up a year later, six months later in a contract modification or ends up showing up in a change order, et cetera. And I think customers are, in general, very sophisticated buyers, and they see through that. And we try to, we don't, sometimes we lose, Elizabeth, because we haven't taken enough of an aggressive stance, and one of our competitors has. But we find that to play the long game, we try to stick true to what the data is showing us in terms of what's feasible and what isn't feasible. Sure, we'll apply a stretch goal to it, but not something that's unreasonable. That's how you get price competition in FSO. I think even the competitors that were doing that for a short period of time have sort of backed off on that.
So I'm starting to see more rational behavior in the FSO world.
Got it. And our change orders, I mean, this is probably a hard question to answer and aggregate, but at least for what you have visibility into, are change orders a sort of a percentage of project total coming down as sponsors kind of get wind of this? Or it's just, it's hard to see it in that light?
No, it's hard to see it in that light. I look at change orders from the perspective of anyone who's remodeling a house. Let's say you're redoing your kitchen.
It's never what the quote is on the first.
But why? The question is why, right? In defense of general contractors out there, and none have ever satisfied our house's old needs, it's because you changed your mind on what tiles you're going to have. It's because when you opened up the floor, you found out that there's a plumbing issue. It's because the sink that you wanted is nine months back ordered, and so you put a different sink in place. Change orders are a manifestation of scope changes. They're a manifestation of change in strategy. They're a natural part of any service line. You have change orders if you're working with a consulting firm. You have change orders if you're working with a plumber. You have change orders whether you're working with a CRO. It's not because somebody's trying to do something. It's because as a customer, you've gone out and had a change.
You know, whether it's a change in scope, a change in regulation that requires you to do something different, or collective realization that this strategy isn't working and it's a change in strategy. What we can't get compensated for, and we don't even try to, is if we make a mistake or we have inefficiencies on our side. What we can get compensated for and what we should get compensated for, like anybody, is when we're doing great work and we collectively with the customer are changing the approach, the strategy, the need of that particular project. It's an important part of the business. Now, your question really is, does that percentage of the total change? Well, unless clinical development's going to get more predictable and easier, no, it doesn't.
I think as long as it's a complex project that we're running with ever-changing regulatory environment and ever-changing issues within standard of care, projects that are five, 10 years long are going to have changes in the middle of the project.
Yeah. No, that makes sense. Have you seen a general shift towards sort of more milestone-based project and sort of pricing versus sort of what was before? Like, how does that play out in your business?
I think there is. There's a, there's almost always some level of milestones that are associated with how you get paid, some level of milestones, et cetera. Many customers will have innovative contracts around bonuses and penalties associated with hitting certain timelines. We have constantly, there's a constant push and pull between the CRO and customers of taking on more operational risk, taking on more executional risk, taking on more strategic risk, et cetera. I wouldn't say there's been a change. I think this is a constant evolving landscape, and we've got a sophisticated group of people in our pricing and finance departments that meet our customers and work with them to figure out what contract makes sense. That's why most of our contracts are bespoke for that specific customer's situation and need.
Since no two clinical trials and no two customers are created equal, no two contracts are created equal.
Yeah, that makes sense, and then maybe from the cost perspective, as you've been through, you know, last year and this year, and you've been through a lot of transitions in the business, where do you really, as we're sitting here now, see sort of, okay, this is sort of done or at least done as of the current environment, and sort of like, where's the next set of opportunities from? Because I don't think anyone would look at it and be like, oh, this is an optimized margin structure.
No, it clearly is not, right, and we're very focused on that. And I think that the difference that you see this year compared to maybe the first 18 months, right? We are independent now. It's more of our systems and processes. The cost discipline is there. We changed the service fee forecasting process. It's become a lot more reliable and accurate, so you know, and we've made some targeted changes in the organization to try to think about where we needed to bring in different capabilities. I think with costs now, there clearly is still, you know, optimization to be done, and we've been talking about continuing to right size, but to really get to pure margins, you know, and we've been trying to talk a little bit more about pure margins being more probably that two competitors that are private, right?
You know, because you've got the big three, they have very different scale and they have big central labs and they have other things. You know, but if you think about the three in the middle, you know, Syneos, Parexel, you're probably talking mid-teens. So there's still significant opportunity there. There is still more we can do around cost cutting, but we really have to get to that consistent commercial delivery that Anshul was talking about. Because you need the revenue growth. You know, we're building a structure that can optimize and we'll be able to absorb the growth when it comes back. So when the growth starts to come, you'll start to see the inflection, right? In the meantime, we're continuing to work on the margin optimization. You know, we announced this year the $150 million of gross savings. We're on track for that.
That's about $90 million of net actual savings in the year. We're really pleased. You know, I think that we're able to be consistently delivering against that and the organization is getting that muscle built well. There's going to be more of that coming next year when we talk about 2026, but we will have to get that combination of revenue. Because actually, when you look at the opportunity now, there's going to be more that will come from revenue growth. Still some, you know, that can come from cost savings, but the revenue growth will be a big part of that too.
Got it. And traditionally, I think of CROs as sort of, you need like 2%-3% revenue for that sort of to start to see the inflection and the incrementals. Would you say that's fair or?
Yeah, I think if we can consistently get the, you know, the new business wins that get us to consistent, even low single-digit growth, to your point, you would start to see inflection, right? So, you know, we're not guiding to 2026, as Anshul said. We know the market is still a little bit depressed. It's probably a little bit better next year, but everyone's kind of talking about low single digits. You know, we acknowledge the first half of this year. We haven't talked about that here, but I know we've talked about it with you in the past. The first half of this year, bookings were soft. That impacts us going into the first half of next year.
But part of the rationale of waiting on the guidance is what we did in Q3, what we can do in Q4, even in Q1 of next year in this environment can have a significant impact on the second half and where that could be. So it's trying to see all those pieces come into the puzzle. But yes, I do think low single-digit growth, if we can consistently get there on the service fee side, would allow for margin expansion to start to come.
Yeah. Obviously, that was a very nice 3Q result. I think it's probably one of the best CEO transition results and years that we've ever seen. So that was very impressive. As we think about sort of the maybe knock-on effects of that and sort of the leverage level, I know sometimes when I'm talking to investors about Fortrea and I say, look, there's this opportunity and they have this, you know, we have Anshul, they have Jill sitting there and they do all these things and the market's inflecting. They're like, okay, well, and then they stop with the leverage. They're like, I cannot. So how do you sort of think about that in terms of the opportunity?
What would you sort of say to that group of people to sort of put them in the right position for when it hits their minimum, the maximum that they're allowed to invest in?
Sure. I mean, there are a couple of points I think that are important in terms of just understanding the overall picture. This has been a very 2025, again, with that first 18 months behind us has been very different. We were, you know, really pleased with the cash flow. We reported, you know, positive, really strong in Q3, the $77 million almost of senior notes we paid down a couple of weeks ago, cash on hand. It's all signs, the DSO improving. You know, we've got the foundations in place. The best way for us to improve that leverage is going to be to grow margins. But in the near term, you know, with like what we did a couple of weeks ago with the cash on hand, we have that as a priority.
It's going to be the combination of the two, but the bigger opportunity is on expanding the margin, and you know, we have plenty of liquidity. We have plenty of headroom under all of our covenants. It's not really an issue of that. You know, I do think we're focused on it, but we're focused on that margin piece because we know that's really what's going to drive the meaningful change in leverage as well.
Okay, got it.
But the foundations are there, right? I think from a cash flow liquidity perspective, people should be feeling comfortable with what they've seen over the last few quarters. I think that's really what Fortrea can do.
You know, it's interesting because there's an investor lens to that question and there's a customer lens to that question.
Oh, interesting. Yeah.
Right? You know, on a customer lens to that question, it's not a topic that comes up. It doesn't prevent us from running the business. It doesn't prevent us from what our customers need to see from us. And frankly, when our customers look at us and they compare us to a Parexel and a Syneos that are private, we all know what leverage ratios look like in private companies, right? So this is a great question and it's important for us and we continue to work on it. And we know what we have to do because we know we have to get a balance sheet to a certain level that allows us to have a balance sheet that's more powerful from an investment strategy standpoint. And the only way we're going to get there is through growth and is through profitable growth. And I think we're making strides.
We made strides in Q3 and we're going to continue making strides, but a really important point is I get why it holds investors up. It does not hold us from running the business. It does not hold our customers from working with us. It doesn't impact us from a day-to-day business, and I think that's an important point that sometimes we don't talk about.
Yeah, that is a good point. And to your point about a lot of assets in the CRO space have been in the private world and the leverage levels run clearly much higher, much higher.
I mean, let's just for a second, we have IQVIA, a very, very giant machine, right? We have Thermo Fisher. That's not PPD. It's Thermo Fisher's balance sheet. We don't know what PPD's balance sheet is. Thermo’s balance sheet. And then you have ICON. And then the rest of our competitors outside of MedPace are private. So from a day-to-day business operating standpoint, it doesn't impact us, but we need to get this leverage down and stay constant focus and cash flow management and debt management is a weekly topic for Jill and I.
That makes sense. Maybe in the last couple of minutes, you know, if we sit here in December of 2026, on the same stage, I always say, you know, what does success look like for you at that point?
Yeah, look, let's, without giving guidance, let's talk about numbers and metrics. Consistent book to bills, at least three out of four quarters, four out of four quarters is hard to do. Sometimes it's market dynamic dependent, timing dependent, et cetera, et cetera. But consistent book to bills, that makes me feel good. The journey that we've been on, on the margin recovery and cost cutting, which while the pass-throughs are hiding the numbers a bit in 2025, as Jill has stated in the past, it's been spot on to what we committed to and we've delivered against it. We're going to make some commitments in 2026 and delivering against those 2026 commitments. Having these two metrics in line will then have a domino effect on other things. It'll have a domino effect on what our balance sheet looks like.
It'll have a domino effect on what our cash position looks like. And it'll have a domino effect, frankly, on what our employee retention looks like. Getting these five things right, I'm feeling really good sitting here a year from now and hoping for similar weather in Miami.
Yeah, me too. This is much better than even last year's weather.
Yeah, better than the snow in the Northeast that we're all about to fly back to.
Exactly. Exactly. That sounds like a great place to end it. Thank you very much for joining and having the view and thanks for everyone online.
Thank you.
Thank you, everybody. Thanks for the questions, Elizabeth.
Awesome. Thank you.