Good afternoon, everybody. I'm Luke Sergott, I cover life science tools and diagnostics here at Barclays. It's my pleasure to have Dr. Steve Cutler, CEO of ICON, and Kate Haven, IR. Thanks for making it. I guess we can get right into it since there are only 25 minutes.
Sure.
All right, so I guess the topic du jour among CRO is obviously, biotech funding market has kind of started to unlock a little bit, but you guys have seen continued strength in large pharma. Give us kind of the lay of the land right now as you exited the year and then into 1Q, how that's kind of playing out versus your expectations.
Yeah, I think we're seeing overall a very constructive environment fueled for us mainly by large pharma. We've certainly seen some significant upticks in opportunity in large pharma over the last, you know, 3-6 months, and that's looking really positive for us in terms of engagement with strategic partners and the opportunity to build our business on current strategic partners, and of course one or two new ones as well. The biotech front has also been positive. You know, we see RFPs in the mid-single digits upward trailing 12-month basis. We see the workload, the funding environment, at least the first couple of months of this year being pretty positive. The IPO market seems to be up a little bit. Filings are strong.
The qualitative feedback we have from customers is positive. And so we're pretty positive in that area as well. So overall, the demand environment for us is looking strong.
On the large pharma, you talked about the biotech RFP, you know, trailing 12 months up 6% or, you know, we're in the singles. Then the large pharma, you said up double digits. Kind of compare that to how—what's like a normal RFP rate for large pharma for you?
Ah! You know, I don't know if there is a normal. RFPs are, yeah, they're a somewhat unreliable surrogate for awards and for revenue, but they are a surrogate, and I think they have some correlation. But it's not... You know, I want to be careful. It's not a perfect-
Mm.
- correlation. We, you know, customers ask us for ballpark figures. Increasingly, biotechs ask us for the, what the numbers are before they go to get their financing, because they want to know what their program's gonna cost. So, you know, I think of—when I think of RFPs, if they're in the mid to high single digits on an uptick basis, on a particularly trailing twelve months, one quarter, I think is hard, is again, a little unreliable and can be volatile. But I think on a trailing 12 months in the mid to high single digits, I think that's a very positive sort of environment for us.
Yeah.
We would generally expect it to track with market, right? And maybe a little bit above that, right, based on the strength of the relationships that we have from a customer perspective. So that correlates with what, you know, Steve was saying in terms of mid to high single digits.
Mid to high.
Yeah.
Talk about, like, the, how the RFP has changed over, like, the last 3-5 years from, you know, as the, versus the... What I'm trying to get at is, you know, the drugs are getting more complex, and the trials arguably have a lot more arms, smaller patient population. So give us the puts and takes and how those RFPs really kind of the dollar amount versus the volume.
Yeah, I don't know the dollar amounts actually change all that much, because even though we're looking for smaller numbers of patients, when you're looking for rare disease patients in these very complex trials, the dollars per patient tend to be significantly higher than perhaps they were in the past. Certainly, much higher than some of the old, you know, osteoporosis and cardiovascular studies we used to do, where we did thousands of patients in the past. Those dollars per patient were relatively low. These dollars per patient can be very substantial, because finding these patients is hard, and the duration over which you do the trials is longer. That hurts us a little bit on the burn rate, but in terms of dollars per project or dollars, you know, from a revenue point of view, it's...
I don't see a huge amount of difference in that respect.
And then, so it kind of goes into the next question about kind of the scale that you guys have. You talk a lot about getting a seat at the table where you necessarily wouldn't have before the PRA deal. So talk about the global scale and how much that is needed in, in today's environment, and is that really what's helped to insulate you from some of the other headwinds from biotech funding or, or large pharma tightening their belt over the last year, year and a half?
Yeah, I think about when we—I mean, we're almost three years since the PRA Health Sciences merger or acquisition that we made. So it's been an interesting three years. It's been a fun three years, and I think we've done a really good job in that whole integration. And so what it did bring us when we went to the market, as I said, back in 2021, you know, scale was a big part of it. You know, building from being a number four or five organization and a number six organization coming together to be a number one or two in most segments, you know, was very significant, but probably the most transformational aspect of that whole...
It's been hugely advantageous in terms of the strategic discussions we're having with particularly large pharma, with our breadth and depth of coverage. Scale is an absolute. You have to have scale in our business to be... And there's really only four or five of us that have the sort of scale we're talking about now. And I think we have, and the top three are even starting to differentiate themselves a little bit, including us, on the basis of scale. It's not just scale, of course, when we did that deal. We got customer relationships, we got technology, we've got obviously the financial benefits that we've been able to prosecute in terms of cost synergies and revenue. So it's been a really, really good deal for us.
But, but scale, possibly more than anything else, has really put us into the, into the big leagues, has made us a player in that space, and I, I'm, I'm thrilled with how it's, it's really played out. So I do think going forward, it'll increasingly differentiate us from, at least from the next level of, of CROs. The top three or so are, are, you know, are pretty much there or thereabout. We don't differentiate too much on in terms of scale. It really comes down to more
Yeah.
subtle things, technology, you know, platforms, et cetera. But in, you know, in the top three, we are definitely a player there, and it's been hugely good business for us.
And among the top three, so everybody has been talking about pricing in the overall market. CROs and the talents like you do, they're very expensive, but pharma's gonna continue to use them. That's been like the constant feedback. So there's a current bear thesis right now that the work that you're bidding on right now and the RFPs, you're getting a lot of pricing pressure from pharma. It's gonna come through at a lower margin down the road. What are you seeing on the pricing side? Is there any validity to that thesis?
You know, our business is competitive, you know, and no question about that. It'll always be competitive. We see... We're constantly seeing pressure from customers to be more cost effective. The most enlightened customers recognize that what we bring is value and outcomes, and if they measure us in terms of, you know, outputs and execution and value and delivery, price as such, doesn't, isn't, isn't at the top of their list. So where we were able and when we can consistently and reliably execute on projects, which is definitely our focus, there's... I mean, the pricing side of things, they have a procurement group. You know, there's always gonna be a back and forward there in terms of what volume discounts or whatever we give them. But price is not the major factor.
It's really when you find it hard to differentiate on whatever you're looking for, you know, as I say, delivery outcome, that's when price becomes more of a challenge for us. And there's always an element of pricing pressure, and there's often, you know, our competitors will, you know, to some extent, push or pull on that front, some more than others in some cases. But, you know, we see ourselves as a premium price, premium quality, premium delivery organization. A reliable, consistent deliverer of strong outcomes. And when we can do that, and we can communicate that message well to customers, they don't put price at the number one criteria for selection. It obviously works well for us.
Yeah, makes sense. The quality first. With that in mind, and you talk about the shift in FSP, and you said that this has been, at breakfast this morning, this is something that's been going on for the last 5, 10 years. How does that play into your overall strategic plan? Like, what are you guys seeing there from FSP? Where do you think that this goes? And then talk about, you know, how... what you're doing to offset that slightly lower contribution?
Yeah, I mean, we've definitely talked about, obviously, that trend starting to increase, you know, last year in particular, with a few large pharmas in particular, looking more at utilizing more of an FSP modality. I think we've also been talking about that concept that most often you're seeing this hybrid approach, where there's elements of FSP, but also elements of full service, most of these customer relationships. So getting to that, you know, sort of second part of your question in terms of offsetting margin pressure, which FSP in comparison to full service runs about 200-300 basis points lower in contribution margin.
If you're looking at the segments in totality, this hybrid approach actually helps that margin offset over time, where we're looking to increasingly utilize more elements of full service in our offerings, or even things like technology, our systems to customers, because we think that improves delivery for them. So overall, you're hoping, you know, you're leading to better outcomes for the customers on an FSP-like model, but you're utilizing other elements of service delivery. So it ends up being more of a hybrid approach between the two. And I'd say we certainly see that increasing, and there's interest from customers in moving in that direction.
With that said, I think, you know, we talked about it on the call, you know, at the start of this year, we actually saw full service come out in terms of, you know, higher proportion of opportunities as we started this year. So overall, not a huge change-
Mm-hmm.
In terms of that mix of our business between FSP and full service. But certainly, there have been, you know, it's generally customer driven, right? In terms of where their preferred approach is. And sometimes you can see those shifts in any given year, right? If there's a few that might come out and say, "Hey, we wanna move more towards functional or FSP," and you might see the reverse in the next year or two, right? In terms of moving more towards full service.
Is there any reason other than cost to move from strategic to FSP?
I guess that's a question for our customers rather than for us. I mean, we're agnostic, to be honest with you. I don't mind. We're the biggest FSP provider. We're one of the biggest or we're top two in a full service provider. We're able to put those blended, you know, hybrid solutions together as well. So, you know, I think it's probably they would see it as a cost, but at the end of the day, what they need to think about, and I think most of them do, is what's the value? Where do they get the most value? Where do they get best outcomes? And in some cases, that might be an FSP solution. In other cases, I think it's a full service solution.
Certainly in the rare disease, complex oncology type trials, I'd advocate a full service solution to be a better option. But, you know, when customers have broad portfolio and large, you know, operations, then the FSP works for them. That's fine with us. We can accommodate either.
Sometimes it's, it's the flexibility, Luke, and I think some around FSP, it at least has that perception, right? Where things are more within their control, or that resources they can sort of push and pull. "Hey, if we need more in this area, you can more easily add that in," right? From a FSP perspective versus full service.
And we, again, we talked about this morning, but, you know, how has the FSP changed? It's not just anymore, just having like, you need 1,000 people, just get that 1,000 people and then just that particular, like, sponsor ends up running them. You know, like, what other analytics and other ancillary things that you're layering on top of that contract, where it's very different looking than it was 5 or 10 years ago?
Yeah. I think it's fair to say that the whole FSP is a much more sophisticated offering, a much more sophisticated market than it was even five years ago, where it did tend to be, you know, "Give me a hundred, give me a thousand people, and I'll tell them what to do," kind of thing. We now do that, and we base our pricing on units, on outcomes. We add technology to that. We add systems and approaches and best process, and, you know, every FSP, there's no sort of cookie cutter approach. Every FSP has some slight differences in terms of what we're providing, not just in terms of the people, but as I say, in terms of process, SOPs, technology, systems. And that allows us to add, you know, and probably improve our pricing in that space.
So it's not, it's certainly not a race to the bottom on that front. We're able to improve our margins based on the value we add to that responsibility, and ultimately, the risk we take in terms of delivering on that.
On that contribution margin difference, do you think that that evolution of the more sophisticated FSP model helps to shrink that? Or do you think it pretty much will continue to, to stay at that gap?
I think it'll help to ... I think it'll probably shrink it to some extent, although I'd, you know, I'd like to see the full service margins. We have an ability to also push those up through technology and the various things that we place on those full service trials. So, you know, I don't see it as just staying constant, but I see both kind of moving up. Maybe the differential might shrink a touch, but probably not dramatically.
All right. That's good. And then, so when you're thinking about the demand is steady and strong for you guys. You know, burn rates have been coming down. Let's talk a little bit about the dynamics there, and why, you know, where you ultimately see them kind of bottoming or is it just gonna be a constant, steady march down?
I hope it's not gonna be a constant, steady march down.
Yeah.
I mean, you know, we have seen a slight diminution in the burn rates, really around these rare disease trials. I mean, every oncology trial is sort of a more rare disease trial these days, because they're always looking for some subtype of patient. And so, you know, the duration of our trials has elongated, has extended, certainly over the last few years. On the other hand, you know, the vaccine trials, to the extent that we get them, and, you know, nobody wants another pandemic, but the vaccine trials are trials that burn a lot faster. The GLP-1, those drugs, those agonists, and their successes, I think offer us an opportunity to do some of these more large-scale trials.
Back in the day, I hate to sound like a dinosaur, but back in the day when I started, you know, we were doing these large osteoporosis trials, large cardiovascular trials, big, you know, high-
Yeah.
These were thousands of patients. They burned quickly, they generated a lot of revenue. You know, I think the GLP-1 drugs and those obesity drugs offer us an opportunity to perhaps move back in that direction a little bit. So I hope any sort of continued challenge, you know, from the rare disease oncology will be mitigated somewhat by some of these opportunities, be it vaccines or be it the GLP-1s or other sort of mass market type of opportunities.
And on the GLP-1 demand that you're seeing, I mean, there's tons of companies and... I guess the fear here is that we end up with another COVID type of spike. And then, so talk about where you see the GLP-1 dynamic kind of playing out for you from a duration perspective.
Yeah, I don't see a COVID-type spike, you know, with the GLP-1s, with the obesity. I, you know, I... There's certainly, I think, gonna be an uptick in the medium term as the new generation of anti-obesity drugs come to market, new dosage forms, you know, next generation. But I think that's gonna be, these are gonna be large scale trials. They'll be longer term trials. The regulators, I think, are gonna want outcomes type data. You know, in the COVID, it was like, you know, do we have a response? And you got a response pretty quickly, and so it was bang and almost done. That sort of went up very quickly, and it's come down fairly quickly.
I think it's gonna be a much more smooth sort of up, you know, probably down the other side at some point down the track. But I think if you're looking at a sort of five-year type horizon rather than two-year type horizon, you're looking at with the-
Like a traditional-
... A more traditional type of drug class and type of approach. And there's always going to be new, you know, generations of GLP-1 drugs coming through in that space. It's such a huge area of need, and the benefits of, you know, to societal health are so significant that I think there's gonna be obviously a ton of money invested, a ton of research and development being done in that space.
Yeah. On the business that you're winning now, this kind of goes in with the GLP-1, but other things as well. You know, from a reimbursement or pass-through perspective, have there been any dramatic change, or not dramatic, but just changes in the level of the pass-through versus what has gone in the past?
... Not significantly, certainly. I mean, we've definitely reverted more toward a normal profile in terms of the studies that we're running now. Obviously, it was really that COVID specific work that had, you know, much larger outsized, you know, sort of proportion of pass-throughs versus direct fee. So now I'd say we certainly have seen a return to more sort of normal mix from that perspective.
It's a good segue into the margin. So, you know, as we're talking about FSP and pricing and everything else, you got the 50 basis points in your LRP. You know, at some point, the PRA integration costs there, you know, talk about any other runway that you guys have in the remaining costs, so you can continue to strip those out. And then the second piece is just on continuing to get better operating leverage, where you see that?
Yeah, I, I think with respect to PRA, I mean, we're, as I say, almost three years in now, I think we're pretty much done on trying to sort of pull those out as a separate, you know, cost synergy. You know, we've made those well ahead of time, $150 million. And I think we're, you know, we're not looking to sort of continually come back to that. And the integration's happened, it's done. Let's move on, kind of thing, is the way I'm looking at. Revenue synergies, you know, we've seen some nice... We're on track for that. I think we talked about, you know, end of 2024 as being a $100 million. I think we're on track for that. So that, to me, that's kind of, we've got to move on now.
But that doesn't mean there isn't significant opportunity in our business to continue that margin drive. We talked about 50 [basis points] this year. I think we'll deliver on that. It'll probably be more in the SG&A line than it will be in the gross margin line. Gross margin, there'll be some opportunities, of course, as we move on with AI and machine learning and process and even the location of where we do the work. But you know, there's always sort of headwinds in that respect in terms of you know, being competitive on price and wanting to grow our revenues and not being so uncompetitive on price, so we don't grow our revenues. We want to do that.
And so I'd say 30% for ballpark as being the sort of number on the gross margin line. On the SG&A, though, I think we can continue to make progress in that space. And I'm not going to set a target at this point or any sort of big, hairy, audacious goal, but I do think there's, you know, there's opportunity there. We're under 9% in the last quarter, in terms of percentage of revenue. I. You know, there's no reason we can't continue, as we get bigger and as we grow our organization, the opportunity to leverage our Global Business Services, which is well organized, well run, and still has opportunity, I think is there. Whether it be through the machine learning AI, whether it be through optimizing locations, the labor arbitrage area is still one of opportunity for us.
As we've brought together, you know, PRA, they, they were an organization that was probably less optimally located, I'll just put it in those terms. And we've made some adjustments, and we continue to make some adjustments in that, and that's over the next few years, still some, some opportunity, in that. So, you know, I think on that front, we, we have plenty of optimism for being able to, you know, to continue to improve our, our margins. And then it'll be, as I say, more in the, in the fixed cost than the SG&A.
All right. And then, your balance sheet is in great spot. Just putting out a ton of cash. Walk us through the priorities there from the M&A versus the repo, and then as you're thinking about M&A, we can dig into that a little bit.
Yeah. I mean, we've as you well know, we've paid down our debt. We're at about 2x Adjusted EBITDA. We'll be restructuring, refinancing to bonds this year. We'll take about $100 million off our interest expense from 2023 into 2024. So we feel pretty good about that. That really allows us to, as we throw off cash, to deploy that cash in the M&A setting, and that's very much the priority. We feel that we have opportunities to improve the operations that we currently do and move up where we're a little subpar in certain parts of our business.
So, you know, the areas around sites, sites and patient recruitment, that's an area that we feel we have some opportunity in, and we want to build our capability and build our performance and execution in. Labs, also, we're probably number sort of four in the market on that one. We'd like to be in the top two. That might be an opportunity as we see lab acquisitions come up. Even in the real world evidence, the late phase, you know, we could be a little bit larger in that space as well. So those are some of the areas that we feel we can deploy. We don't wanna get out-- We wanna use our balance sheet. In the past, we've been a fairly conservative organization from a balance sheet, you know that.
And so we feel somewhere between 1.5x and 2.5x Adjusted EBITDA is the right place to be. And so we'll use our, you know, what's a very strong balance sheet going forward to... We may drop inside or out like that for a period of time, but overall, that's sort of the number we want to be at.
As areas you want to get bigger, like, we've talked about real world evidence or labs, like, is there, is there a particular reason why you don't have that scale now? Or is it just, it's just as simple as adding the bodies and capabilities?
Ah! You know, we're very strong in the phase 2, phase 3. We're big in the FSP. Real-world, well, we're not as large as I'd like to be. So going forward, that presents an opportunity. Is there a reason why we're not? You know, the right opportunity probably didn't come along at the right time, or it was at a price that I felt or we felt was, you know, a little frothy. And there's plenty of those opportunities that are frothy. And I'm, you know, we're pretty careful with how we deploy our capital on that, but I'm not going to overpay for things that aren't really, you know, super high value for us. So that's our culture at ICON.
We watch our pennies pretty carefully, as you can see. And we do that not just on the cost side, but also on the M&A side as well.
I can't imagine you overpaying for anything other than, other than your sell side coverage. That's all we have time for. Thank you.
Thanks. Thanks, folks.
Thank you.