Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ending September 30th, 2020. Also on the call today, we have our CEO, Dr. Steve Cutler, and our CFO, Mr. Brendan Brennan. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call. Certain statements in today's call will be forward-looking statements. These statements are based on management's current expectations and information currently available, including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business. Listeners are cautioned that forward-looking statements are not guarantees of future performance.
Forward-looking statements are only as of the date that they are made, and we do not undertake any obligation to update publicly any forward-looking statement, either as a result of new information, future events, or otherwise. More information about the risks and uncertainties relating to these forward-looking statements may be found in the SEC reports filed by the company. This presentation includes selected non-GAAP financial measures. For a presentation of those directly comparable GAAP financial measures, please refer to the press release statement headed Condensed Consolidated Statements of Operations, U.S. GAAP Unaudited. While non-GAAP financial measures are not superior to or a substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes.
We will be limiting the call today to one hour and would therefore ask participants to keep their questions to one each with an opportunity to ask one related follow-up question. I would now like to hand over the call to our CFO, Mr. Brendan Brennan.
Thank you, Jonathan. In quarter three, we achieved gross business wins of $1.2 billion and recorded $190 million worth of cancellation. Consequently, net awards in the quarter were a record $990 million, resulting in a net book-to-bill of 1.41 times. With the addition of these new awards, our backlog grew to $9.4 billion. This represents a year-on-year increase of 11.8%. Revenue in quarter three was $701.7 million. This represents a year-on-year increase of 1.2% or 1.9% on a constant currency basis. Sequentially, revenue increased by 13.1% from quarter two. Our top customer represented 12.4% of revenue for the quarter, compared with 11.4% in quarter three 2019. Our top five customers represented 38.4% of quarter three revenue, compared to 36.2% last year. Our top 10 represented 51.1% compared to 49.1% last year. While our top 25 represented 67.9% compared to the same number, 67.9%, last year.
Gross margin for the quarter was 29.7% in quarter three compared to 28.1% last year and 29.7% in the comparable quarter last year. Our SG&A was 11.8% of revenue in quarter three, which compared to 13.5% last quarter and 12% in the comparable period last year. Operating income for the quarter three was $108.4 million, a margin of 15.4%. This compared to 12.1% last quarter and 15.5% in the comparable quarter last year. Net interest expense was $3 million for the quarter, and the effective tax rate was 13% for the quarter. Net income attributable to the group for the quarter was $91.6 million, a margin of 13.1%, equating to diluted earnings per share of $1.72. This compares to earnings per share of $1.20 in quarter two and $1.74 in the comparable quarter last year. The net accounts receivable were $500.1 million at 30th September 2020.
This compares with net accounts receivable balance of $490.2 million at 30th June 2020. On a comparative basis, days sales outstanding were 45 days at September 30th, 2020. This compares with 52 days at the end of June 2020 and 56 days at the end of September 2019. Cash generation from operating activities in the quarter was $112 million. At September 30th, 2020, the company had a gross cash balance of $710 million and debt of $350 million, leaving a net cash balance of $360 million. This compares to net cash of $244 million at June 30th, 2020, and net cash of $122 million at September 30th, 2019. Capital expenditure during the quarter was $7 million. During the quarter, ICON also completed the successful delayed drawdown refinancing of the existing private placement of $250 million senior notes maturing on December 15th, 2020.
The transaction has been successfully priced over three and five-year tenures at a blended rate of 2.41%, compared to the current private placement blended rate of 3.37%. The drawdown of funds will coincide with the maturity of the senior notes in December 2020. With all that said, I'd now like to hand over this call to Steve.
Thank you, Brendan, and good morning to you all. Despite the continuing industry challenges brought on by COVID-19, overall, this was an excellent quarter for ICON. Driven by positive market demand in conjunction with our ability to win COVID-19 related opportunities, we booked record levels of gross and net awards of $1.2 billion and $990 million, representing book-to-bills of 1.68 and 1.41 respectively.
In doing so, we were able to grow our backlog year-over-year by 12% to $9.4 billion. This gives us a firm foundation to build upon next quarter and into 2021. During the quarter, we delivered revenue of $702 million, a substantial improvement of 13% on last quarter, and EPS of $1.72, up over 40% from $1.20 in quarter two. COVID continues to test our industry, but we have responded well to these challenges and are pleased with our strong recovery. We remain confident that the sequential improvements seen this quarter will continue as we return to more normal business conditions over the medium term. The progress made in our financial performance mirrors the recovery we are seeing in the clinical trial environment.
The rate at which sites continue to reopen remains consistent at around about 1%-2% per week, with approximately 40% of trial sites remaining impacted to some degree, a clear improvement on the 60% impacted at the end of quarter two. In addition, during the quarter, site initiations remained strong with overall patient enrollment above pre-COVID levels, albeit with recruitment for our COVID trials materially impacting that performance. Notwithstanding the risk of a second wave impact, we are expecting these metrics to continue to improve steadily, but that it will be well into 2021 before we get back to pre-pandemic levels on our non-COVID trial work. The positive influence that our COVID trials continue to have on these recovery indicators is important, especially in the short term.
Sponsors continue to prioritize this urgent work, and we continue to be successful, winning substantial amounts of COVID business and in getting these projects up and running quickly. However, as development portfolios rebalance over the medium term and spending returns to more traditional therapeutic priorities, we are well-placed to apply the lessons and opportunities from the pandemic and continue our progress in this area. Earlier this month, ICON was awarded Best Clinical Research Organization at the Vaccine Industry Excellence Awards. This award is recognition of the continued hard work and dedication of the ICON Vaccines team and emphasizes our differentiated strength in this critically important therapy area. Since February, ICON has mobilized its vaccine resources to address the COVID-19 global threat, and ICON is currently providing clinical monitoring and safety oversight on more than 100 COVID-19 trials for both the private and government sectors.
In addition, our ability to leverage our global site network, Accellacare, has been a key benefit for customers during the crucial stages of COVID-19 trials. Accellacare's dedicated trial support teams can achieve faster study startup for our customers through efficiencies gained in central process management, including budgeting and contracting, which can otherwise be a source of delay. Combined with Symphony Clinical Research, our patient-centric global provider of at-home care and nursing, we are able to improve trial accessibility for patients, thereby broadening ICON's access to patients and accelerating the trial process. This integrated approach is leading to increased engagement with investigators, improved quality, and better timeline compliance. The outbreak of COVID-19 had a substantial impact on the conduct of clinical trials, with many ongoing trials being disrupted and planned trials being delayed.
As events unfolded, it became important to look at alternative solutions in many areas in order to minimize the impact of the pandemic. The environment created by the COVID-19 pandemic has presented the industry with an opportunity to accelerate changes in the clinical monitoring process. The need for a more agile and flexible approach to clinical monitoring and data review has emerged, and this demand will fundamentally change the way in which trials are monitored going forward. In particular, the pandemic has highlighted the overreliance on traditional on-site monitoring and provided the opportunity for sponsors and CROs to accelerate the adoption of remote monitoring and other technology-based approaches using RPA, machine learning, and artificial intelligence.
I believe this will help us move towards a more efficient model over time that will allow more trials to be conducted and more innovative compounds to be brought to the market faster and more cost-effectively. As Brendan discussed earlier, our cash collection remained robust in quarter three, confirming the strength of our customer base and helping to maintain our balance sheet as the best in the industry. This leaves us well-placed to face any further pandemic challenges and, in particular, positions us well to take advantage of future M&A opportunities that may present over the near and medium terms.
Going forward, as we look to the end of this year, we are increasing our 2020 revenue guidance from a range of $2.65 billion-$2.75 billion to a range of $2.75 billion-$2.81 billion, and narrowing our earnings guidance from a range of $6-$6.50 to a range of $6.35-$6.50. At this stage, we are planning to give guidance on full year 2021 at our Quarter Four earnings call in February. Finally, I would like to thank all our employees for their resilience, flexibility, and understanding over the past eight months. At the heart of all we achieve at ICON are our hardworking and dedicated employees. Our focus during this pandemic remains on protecting their safety and wellbeing, as well as continuing to deliver the important work we undertake on behalf of our customers. Thank you, everyone, and we're now ready for questions.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. Your first question today comes from the line of Dave Windley from Jefferies.
Hi. Good morning. Thanks for taking my question. Good afternoon for you guys. Steve, you mentioned in your prepared remarks, you kind of got to recovery of the system in the medium term and, kind of the cycling of COVID work into non-COVID work. I guess, on the outside, we see these dates that companies are expecting to report out data, but I don't know that we fully understand the CRO's involvement and kind of the duration of your trial as it relates to those public dates. Can you give us a better sense of how your current book of work dates out over the next year or so? When do you think that waning of COVID work is going to happen, that then the non-COVID needs to ramp up?
Yeah. That's a question we talk about internally, Dave, on a regular basis. I think it's a little hard to be too definitive on that at the moment. I think there are a number of scenarios that are gonna pan out or could possibly pan out. One is, the current trial that are ongoing, find a vaccine that is, or a treatment and both presumably, that is exceptionally effective and the work wanes or decreases in the more near term, I suppose. The other is, and I think this is much more likely, that the trials that are ongoing at the moment will find a vaccine. It will be partially effective, but the authorities will be looking for more than one, and there'll be a continued need and a continued desire to get a more effective vaccine.
The work, I believe, from a COVID perspective, is going to continue probably for the next couple of years. I think that's the most likely scenario, and that's the way we're thinking of it at the moment. As we think about the COVID work continuing, as I say, for the next couple of years, I think there's going to be a number of vaccine trials, large-scale vaccine trials that we will need to be a part of, and we're certainly playing our part in that at the moment. On the non-COVID work, as you indicated, as I indicated in my comments, we're certainly lower in terms of patient recruitment, than we were pre-pandemic. We do see that increasing and improving. I think it will largely, the way that comes back will depend upon how the scenario with the COVID stuff pans out.
The COVID work is having an impact on a number of sites and on the availability of investigators, et cetera. Of course, as we see potential reemergence of the virus in the northern hemisphere in the fall, that has an impact as well. I hate to paint out too many different scenarios, but I think from our business point of view, the medium term is looking strong and looking good, whether it be COVID work, and I think that will continue, or our non-COVID work sort of coming back to a more pre-pandemic levels. I think in either scenario, it looks reasonably strong, reasonably good for us.
Got it. I appreciate that. For my follow-up, kind of relatedly, you talked about the relatively consistent pace of site reopenings. I think earlier in, maybe in the summer, that view was maybe something like 2%-4%, call it midpoint 3% a week. Today sounds like more like 1%-2% a week. We're certainly seeing and hearing about regional flares or spikes in some infection case data. I'm wondering, one, have you seen some slowing, and is it related to some of that regional flaring? Just how do you see that proceeding? Can we avoid shutdowns essentially as we proceed through the fall?
We certainly have seen some slowing in the reopening. As a sort of the asymptotic curve, as it approaches the top it is certainly slowing. We don't see us getting back to all sites fully open, even with the current progress we're making until, as I say, well into 2021. That's still our expectation. The reason for that, I think is, there's a number of reasons for it. I think as you note these flares that have happened, the reemergence of the virus, people are concerned about that. I think we're seeing some patients still concerned about traveling to sites. I think there's also an element of a number of these sites are involved in these large-scale COVID trials, and that's taken some of their capacity away. There's an element there.
I think it's multifactorial, but we're certainly seeing a slowing compared to where we were even a couple of months ago. It's not zero, and we are moving it forward, and we do expect that certainly within the next 12 months or so. I'd say by the first half of next year. Assuming continued progress and assuming no major outbreak again, we do expect that our sites will be back to pre-pandemic levels.
I appreciate the answers. Thank you.
Good.
Thank you. Your next question comes from the line of Patrick Donnelly from Citigroup.
Great, thanks. Maybe just on the COVID bookings. I know you guys called it out above 20% last quarter. Can you just talk about how that trended in Q3? Again, it certainly feels like you have a pretty good presence on that side, given the vaccine. Just wondering, in terms of percentage, where the COVID bookings are.
Yeah, Patrick, it was strong. We're not going to get into specific percentages, but it was certainly where we were in Q2 and probably a little bit further ahead of that. We had a good quarter from COVID, from a new bookings point of view. That will translate into an increasing proportion of our revenues as we go into Q4. It wasn't a huge proportion of our revenue in Q3, but it will be more in Q4. It was a good substantial part of our new business wins and at least on par and ahead of where we were at Q2.
Okay. Maybe on the margin side, can you just talk through any of the cost control measures you guys put in place earlier this year coming back? I know last quarter you talked about normalizing some spend in the back half. On top of that, any margin profile difference of the COVID work, relative to other trials we should be thinking about over the next year or so?
Hey, Patrick, Brendan here. I might take a crack at those ones. In terms of the cost normalization, yeah, I think as we finished out Q3, certainly most of the cost structure pieces had moderated back to normal. Save for the fact, of course, more of our work is being done remotely now, travel budgets just aren't required in the way they would have been in the past. That will persist into Q4. Most of the cost control elements have been dealt with now and any pieces that we had done where we wanted to, I suppose, make people whole or anything on those kind of issues from a salary perspective are dealt with. It shouldn't have a margin impact as we progress into quarter four. Those specific pieces, we've taken care of that.
I think the second piece on your question around margin profile, I think what we do see on vaccine trials is obviously a heavier element of pass-through costs as proportionality of the total cost of the trial. Therefore, we would expect, yes, on the ASC 606 revenue basis, that there will be more proportional revenue on which we earn little margin, and that would have a detrimental impact to gross margin. It's going to be one of the, I suppose, challenges with these studies over the next couple of quarters because obviously the proportion of that pass-through revenue will be larger, and we'll have that impact. That said, I think our earnings, as we've outlined, very much sum up what our thinking is for quarter four in terms of EPS growth, and we still see a decent trajectory on EPS growth.
That's really helpful. Thanks, Brendan.
Thank you. Your next question comes from the line of Elizabeth Anderson from Evercore.
Hi, guys. Thanks for the question. I have a question on sort of the makeup of vaccine work. Is there a difference in terms of cancellations or how that kind of flows through? I'm just trying to think of through the cancellation rate for next quarter and then sort of broadly speaking for 2021.
Yeah, Elizabeth. I don't think we've seen any sort of particular unique issue or trend around cancellations with vaccine work. I think what we do see is that there's a large number of patients in a relatively short period of time. Projecting the revenues, the resourcing, et cetera, has its challenges. Now, that's what we do. That's our core competence, it's something that we obviously take very seriously, and we believe we're good at it. It does certainly have more challenges in terms of how quickly that work burns and the rate at which we do the work. The time period over which we do the work has some pretty material impacts on our business.
That would be, I think, the sort of more unique feature of these sort of large vaccine trials than any sort of issue around cancellations or anything like that. We don't see any differences on that front.
Okay. That's helpful. I know on the capital deployment, you guys obviously have a very enviable cash position at this point, and you said you were sort of looking at it as potential for M&A as things change in that market. How are you thinking about balancing that versus, say, share repurchases as we move into 2021?
Our priority, we've been pretty clear on this for a number of years now. Our priority is M&A, appropriate M&A, and that's what we're focused on, and there are a number of opportunities out there in the market at the moment that we continue to test on an ongoing basis. In terms of share buyback, we commit to doing about 1 million shares each year to essentially buy back what we release. That will continue. We'll continue to do that. We'll be opportunistic as that allows, where we see opportunities to jump into the market. The focus for us is very much on M&A and on capital deployment around building our systems and our organization.
Things like Oncacare that we've established that JV this quarter, and we believe that's an area that we can deploy our capital in effectively to get the best benefit for our business.
That's very helpful. Thank you.
Good.
Your next question comes from the line, Robert Jones from Goldman Sachs.
Great. Thanks for the questions. Maybe Brendan, one for you on this pass-through dynamic that seems to be more pronounced given some of the dynamics around the COVID-related work. One of your peers discussed that you could actually see 10 times as much of pass-through relative to a normal trial. Are you seeing anything similar? Anything you can share on how pass-throughs have impacted the quarter and maybe how you're thinking about pass-throughs for 4Q next year?
Yes. We certainly have obviously seen our share of vaccine work, and pass-through is certainly a larger element of the moment we've seen in the past. I don't think that maybe those numbers spoken about are what we've certainly been in our experience. Something in the range of two to five times is probably more in line with our experience of this quantum of pass-through. That said, although it hasn't really had an impact, the [aspect of the quarter] didn't really have an impact year to date in terms of the mix shift in our revenue. I think that's probably visible in our margin profiles as well when compared to last year.
We do feel that this is more of an issue for Q4 and certainly as Steve's outlined into 2021, when we might see more of that pass-through coming through with a lower margin profile, and that will have a knock on gross margin consequence. It's early days, and the nature of these trials are very, very fast. It will be a little difficult to forecast. We'll be doing our best job at really putting our thinking hats on between now and, as Steve outlined, the Q4 call in terms of making sure that we can give you a guidance steer that makes sense at that point.
I guess maybe just to follow up on that point. I think typically, or at least recently, you've been giving guidance in January. One of your peers, again, felt like they were in a position to give guidance for next year at this point in the year, thinking about mid-teens type of growth. Obviously, in their CRO segment, so obviously more than average growth given all that's going on with COVID-19 work pushed out. Any early thoughts just around how quickly it would look and then maybe just timing-wise, why February? I know it's splitting hairs a bit, but why the 4Q call and not earlier?
Yeah, it's Steve here, Robert. Let me comment, give you some sort of flavor for 2021. No question about that. Our book-to-bills have been solid over the last couple of quarters. Even despite the pandemic, we've been able to win business. That's an area that the pandemic hasn't seemed to have had a major impact on. The biotech funding environment, we continue to see very strong funding there. Our RFP environment has been strong. High single-digit improvement year-over-year, certainly in the biotech space, even in large pharma as well. We've seen some continued development and continued growth in the opportunities that we've seen there. The business environment has overall been pretty positive, and we see that will play into a strong performance for us in 2021.
The COVID opportunities, as I said earlier in the call, I think are going to continue. I think we're going to see more work. I don't think it's just going to drop off the cliff as we sort of get through these first tranche of trials. I think there'll be more work to be done there. That, I think, augurs well for us in terms of the opportunity and the differentiation we can provide in terms of our vaccine experience. It's looking strong and looking positive. We're not ready. There are also headwinds and potential headwinds, as you all know. The virus is reemerging as we get into the fall. There are challenges and potential, the slowdown of the site reopening has been referred to. We're not ready to issue guidance or any real sort of sense of guidance at this point in time.
I think we need all the time that we'll have in the next three to four months to assess what opportunities are coming through, what success is moved through in terms of vaccines that are coming to market. As we see potential vaccines, that's going to be a positive, I think, for everyone, including our sites and our clinical trial environment. We're not quite ready to go out and give definitive guidance on the market. We have pushed back only one month, but we have pushed back what we usually do for the year from January to February, because we think we'll need all that time to make the assessment and to see how these trials are going to play through. We make no apology for that. That's the way it's going to be. I think it's interesting that some of our competitors have done differently.
That's their choice.
That's fair. Thank you.
Okay.
Thank you. Your next question comes from the line of George Hill from Deutsche Bank.
Hey, good morning, guys, and thanks for taking the question. Steve, I was just wondering if you could talk a little bit about digging into COVID-19, I guess the demand for vaccine-related trials and the demand for therapeutics-related trials. I guess, can you talk about the split there, and are there any margin or pricing implications we should think about between the two?
Yeah. I'm not sure I can sort of definitively give you that split, George. We're doing both. Obviously, the vaccine trials are much larger in terms of patients, in terms of contract size, revenue, burn rate even is higher. There are a number of different characteristics around these larger trials, and they probably have more of an impact on our forecast and on our quarterly numbers, than the treatment trials, which tend to be smaller, more hundreds of patients rather than tens of thousands of patients, even though the vaccine trials, calling them patients is probably a little bit of a stretch because essentially they're healthy volunteers. There are a large number of them, and the data work that goes with that is very substantial.
From that point of view, the vaccine trials are more material to us in terms of finances, not necessarily in terms of operationally, because they're both important. I don't have the data right at hand. In terms of numbers of trials, I think it's fairly evenly split at the moment. But in terms of contract values and revenues, the vaccine trials are substantially large and substantially more material to us at this point.
Okay. Maybe if I could just have a quick follow-up. Given everybody's focus on the COVID work, are you guys seeing anything meaningfully different in the cancellation rate or what clients are looking to kind of press forward with or cancel as it relates to trials?
The short answer to that is no, George, we're not. You can see our cancellation rate this quarter was pretty much in line with what it's normally been. No, we're not seeing any differences on the cancellations of either of those trials.
Okay. Thank you.
Thank you. Your next question comes from the line of John Kreger.
Hi. Good morning. This is Jon Kaufman on for Kreger. Thank you for the time. Just thinking about the outlook for virtual trials, what are the factors that have historically prevented sponsors from moving a larger percentage of their trials to a more virtual model? Are the regulators on board with a shift to more virtual trials, or is that still to come? Understanding that large pharma has been piloting virtual trial tools for a couple of years now, I guess, has your experience during the pandemic led you to believe that they are more willing now to actually conduct more of their late-phase trials in a virtual manner? Thank you.
Yeah, that's a big question, John. I could probably take a day or two to answer that one, but I'll try to do it in a couple of minutes. I think the short answer is, the factors sort of moving against virtual trials, they do relate to. There's an element of conservatism within our industry. I think that's certainly the case. I think the regulators, certainly up till now, have not necessarily been 100% on board with how we do this. The old question we get is, when we propose a more decentralized or virtual trial is, "Well, which trial or which drug did you get to market on the basis of a virtual trial?" The answer is, well, that hasn't happened yet. We revert. That's completely understandable from our sponsor's point of view, as far as I'm concerned.
We're a highly regulated industry, and the need to validate data and verify data and make sure patients receive in a very safe and efficient manner is always going to be there. Having said that, I think we've certainly seen during the pandemic, the regulators move very quickly in understanding the challenges that the industry's faced and being accommodating with those challenges. Now, that needs to play through, obviously, into the submissions over the next, realistically, couple of years to make sure that that happens. There's always an element of some of the people at the top who are writing the white papers say one thing, and then the auditors who are actually at the coalface do something different. There's an element of validating that approach.
Certainly, the overt guidance and output from the regulators has been very accommodating and much more positive with respect to how the industry's pivoted to be more remote-oriented. I think that will continue, and we certainly see some positives on that front. In terms of going forward, we've seen essentially a seismic shift in the way trials have been monitored over the last six to eight months. As I look at our own business here, pre-pandemic, about 5% of visits, of monitoring visits were offsite. In other words, sort of virtual. During the height of the pandemic, that flipped very quickly to about 60% of visits being offsite or virtual. That was probably a little bit of an overstatement because I think a lot of these were probably telephone visits and those sort of things.
As we've come through and have started to recover, that's gone down, but it's still about 30%. About a third of the visits we're doing at the moment are remote. The technology associated with those visits has really come to the fore very effectively. We're able to, in almost all cases, now evaluate electronic medical records remotely. The systems are now in place at many sites to be able to do that, and it makes it a much, much more efficient approach. The move is happening. I don't think we're ever going back to where we were pre-pandemic. Really, the remote monitoring is just a biomarker, if you like, for a move much more towards virtual trials, decentralized trials. Now, we've seen unprecedented demand for our Symphony home care services.
That's really been fantastic from our point of view, but we're extremely busy in having our nurses go to patients' homes to ensure that they stay in trials and they get the right treatment and they get the right attention. That is also playing into our decentralized clinical trial offering as well. I think the short answer to your question is, it's been a challenge up till now, but the pandemic, there's always silver linings with these things, and I think one of them is that it's a significant move towards a much more virtual clinical trial environment, which is going to help all of us be more effective and faster.
Thank you. Much appreciated.
Thank you. Your next question comes from the line of Erin Wright from Credit Suisse.
Great, thanks. You mentioned several improving fundamental metrics here. I want to clarify, you highlighted high single-digit RFP flow, I believe, in a previous question. Is that excluding COVID-related work? I assume this is a metric that is gaining momentum here. I do have a second question, if you could speak to the trends across your central lab business, in this sort of environment, that'd be great. Thanks.
In terms of RFP, it does include COVID work, the high single digit sort of number. These numbers bounce around a bit, but that's certainly including everything in that number. I think I mentioned the biotech, small, mid-size pharma, as we've seen an increase. Some of that's been funded by government, as you all know. The government are extremely interested in these trials and some of that funding that would allocate it to small and mid-size in terms of RFPs has really come from the government. Everyone understands what a clinical trial is. Now, even my mother understands what I do now for the first time in about 40 years. The awareness, I suppose, of clinical trials in society is that I've never seen anything like it really. Everyone understands, everyone knows what's happening. Everyone reads it on the front page of The New York Times.
That's certainly playing into that. I hope that helps.
Yeah, my second question just on central lab, if you could speak to that.
Brendan, do you want to?
Sure.
Maybe Brendan will take that one on the central lab side of things.
Yeah, no, they've been trending well. They've been doing really well. We're very happy with their performance. Obviously, they have been riding on the coattails of COVID work, and we've seen that, and that's been a big part of the story there. Certainly, our central labs are doing very well. As are indeed our other labs as well, our bioanalytical and other labs as well. It has been a strong performance for them during the course of the year, and I think it's fair to say very much helped by the, if you like, the tailwind of the COVID work that they certainly have been from. Yeah, good year for them, and hopefully looking into another good one in 2021.
Is that growing double digits, you would say?
We're not quite in that ballpark because, of course, we had the same situation where a lot of the units were closed, and a lot of samples were delayed in coming back in. What I'd say is it's very strong, and it's coming up, but really the strength is really coming now in Q3 and Q4. Year-to-date, we're still down year-over-year because of the sample delays and samples just not coming in across the other spectrum of our trials, excluding the COVID work. I think the COVID work is certainly helping it getting back on track as it is across the rest of the organization. Not in line with the overall business performance at the top level.
Certainly, their business wins profile has been very strong, and we're really starting to see them ramp back up well in Q3 and into Q4.
Okay, great. Thank you.
Thank you. Your next question comes from the line of Dan Leonard from Wells Fargo.
Thank you. First question, can you comment on industry clinical trial capacity in a scenario where COVID work maintains into 2021, and traditional trial work resumes? Are there any bottlenecks that could limit the growth above and beyond what your backlog growth and others might suggest?
You mean capacity at the site level?
Yep. Exactly. Patients, sites, et cetera.
Yeah. I don't think we have any immediate concerns around the capacity to execute from an investigator and site point of view. That may mean, of course, that we need to bring on new investigators, and train up sites. I think it brings to the fore our Accellacare network and our Oncacare network that we have more or less dedicated, or more dedicated to the clinical trial. If we do see some constraints there, we have our networks and our alliance sites that we're ready to go to. I think it would be a stretch for me to say that we won't be able to execute, or the industry won't be able to execute on COVID and non-COVID work because of capacity constraints. Certainly, the investigators, the sites, have been incredibly accommodating in taking on this COVID work at very short notice.
I think as I've commented on previous calls, the speed at which we've been able to get these sites up and these trials moving is unprecedented. I've certainly seen nothing like it in my 30-odd years of doing this. There's an interest out there from sites and from investigators, particularly on the COVID work, obviously. Also, I think we'll see the non-COVID work come back as well over the more near to medium term. I guess, I think they recognize, again, I think the awareness of clinical trials now from the public's point of view and from investigator and sites point of view is also going to move us in the right direction. I don't have a significant concern in terms of capacity to undertake these trials.
Okay. That's fair. Then for my follow-up, can you comment on the performance of your real-world offerings? You've talked a bit about the impact of the pandemic accelerating interest in virtual trials, remote monitoring. Does it impact the interest in real-world offerings at all? Do you see a different appetite for maybe synthetic control arms when fewer people are enrolling in traditional trials, or is that a stretch? Is it not really that relevant?
I think there's some theoretical opportunity there. We certainly talk a lot about that, and we've had conversations with customers around the real-world impact and how we can implement the synthetic control arms. I would not be telling you the truth if I said we had a whole bunch of trials going on with synthetic control arms. That's just not the case. They remain more on the edge, I suppose, innovative edge of new trial design, adaptive new trial design. The regulators are getting on board with those and are certainly opining on the appropriate use of things like synthetic controls and real-world data to get drugs to market. We certainly see it's a trend going forward, a bit like the decentralized virtual trials on the real-world data. There's no question, I think, as we go forward, we'll do more of those trials.
They will be used as the basis for approval of new compounds going forward. I think the pandemic, if anything, has shown us there are different ways to get drugs to market early, emergency use authorization, then follow-up data, et cetera. We do believe there's a significant opportunity here going forward, but it's not going to happen tomorrow. A little bit like the decentralized trials. There will be a period of time that this will ramp up, and there'll need to be some brave companies who'll move forward with these and base their registrations on real-world data and other areas. That's what I think we'll sort of start to tip the scale, and we'll move forward. I think it's a process and it's a journey rather than anything that's going to happen immediately.
Okay. Appreciate the spot. Thank you.
Thank you. Your next question comes from the line of Eric Coldwell from Baird.
Thanks very much. I've got a few here. First off, just a quick one. Can you tell us who the JV partner is on Oncacare?
Yeah, actually, one of the JV partners there is actually the founder of the European site-based business that we just acquired, MeDiNova, which has been a great success and an addition to our overall organization. The former CEO has stepped into the role of leading that joint venture, and we're very happy to have him as part of that structure. He's obviously done a great job at building these kind of networks in the past. He's bringing that entrepreneurial mindset to building out that global oncology network. Very, very happy about that.
Hey, Brendan, since you're talking, I'll stay with you on my second one. Cash flow, good job there. I'm curious, was it internal initiatives that drove this or perhaps a mix in timing of some of the work that's been coming in with COVID and maybe somehow related to the pass-through revenue streams, given the speed and the burn here? I'm curious how you got where you got, that fantastic improvement in DSO and how sustainable you think that is.
It's a year and a half, success overnight, that old story. Eric, we've been working on this one for the last year to improve it from where we were at this time last year, really. The guys on the team have done an excellent job on really improving communication between the project management teams and the finance organizations to make sure that we're billing appropriately and in a timely manner. Obviously, the hustle then to get cash in is always something that's there. I think it's been just a lot of good old-fashioned hard work and teamwork. I think there's been a little bit of a tailwind that's helped us about, particularly on the pass-through elements on some of these vaccine trials, but not nearly as significantly as I would say, just the old-fashioned hard hustle, I should say, on that piece.
If there was credit there to be given out, I think it's really down to the project management teams and the finance guys who have done the hard work.
That's great. Last one from me. On the comments that about 40% of sites remain impacted in some way, shape, or form, I think that's pretty well understood. The question is, are all sites created equally? On one hand, you might think, well, it was the weaker sites that haven't been able to reopen, and on the other hand, I could see this being very busy sites in urban areas where the challenges are the greatest. I mean, we're certainly seeing that in the U.S., where the big cities are more impacted than the rural areas in terms of activity. Just hoping for your comments. Are the 40% of sites impacted also correlated or equivalent to 40% of historic global activity from that tranche of sites? Does that make sense?
Yeah, I think it does make sense, Eric. I can opine a little bit on that, but I wouldn't say I have any definitive data on which of the 40% and what contribution they make to us in terms of patients into the trials. I can say that we are from pre-pandemic recruitment levels, in our non-COVID work, we're still at around about 50%, 40%-50% of pre-pandemic levels. It's still materially impacted. From that, if it's 40% of the sites, you would say that they are a pretty important, fairly significant component of that recruitment supply, I suppose, on a weekly basis. As I think I referenced in my comments, of course, the COVID work has really supplemented to the point where the sites, we're well above our normal recruitment levels. Certainly over the last couple of months, we've been way above recruitment levels.
It's really been because of the COVID work, and the sites are contributing to that. They've been obviously handpicked and selected to do that. It's hard to be too definitive about the 40% who are still impacted. They are impacted to a greater or a lesser extent. Some of them, it's less than 5% now. It's still closed. The vast majority of those impacted are impacted to some way, shape, or form. They're not taking on new trials. They're limited to just doing the trials they're doing. Patient visits are happening now much more than they were, say, back in the heart of the heat of the pandemic. There's still some impact. As I said, it's going to take, I think, at least another six or eight months for those sites to come back to a point where they're fully contributing.
This is why we've gone forward with our Oncacare JV and the Accellacare network because we're seeing less impact from those sites and a disproportionate contribution from those networks. We're able to help them to get back to normal and help them to address the challenges of the pandemic and of the trials that they're recruiting.
Thanks very much.
Thank you. Your next question comes from the line of Jack Meehan from Nephron.
Thank you. Good morning, good afternoon. On COVID, I was looking at the revenue contribution from your largest client. I thought that it might be bigger this quarter, just given the pacing of vaccine trial enrollment you can see in the headlines. Is there any color you can provide on the shape of how vaccine work is burning and how that'll trend into the fourth quarter in 2021?
Hey, Jack. I might take a stab at it. It's Brendan here. Obviously, that's been an area of activity where we have been ramping up hard as you're right in terms of the speed of patient recruitment there is significant. I think we referenced it earlier in the call that while there will be a proportion of that trial that will be done certainly before the end of this year, the follow-up monitoring will go on for quite some time there afterwards. It would be a misnomer to think with any possible filing that would go into FDA, that that would just be the end of our involvement in the trial process. Certainly that will bleed out over a longer period than that point in time, and there will obviously be additional follow-up work.
We're happy with the pace of revenue recognition that's been on that trial, specifically in the third quarter, certainly. I think it'll certainly be a chunk of the work that we do, without doubt, in the fourth quarter as we work towards the back end of the year and as you referenced those important milestones for that customer. I think that's true of all of these trials. I think it's worth bearing in mind that even though there is the patient recruitment phase at the early parts of the trial and the stage of the trial is quite short in terms of the dosage regime, there is consistent follow-up work that will happen over time. I think Steve's point around these trials being with us and part of the landscape throughout 2021 is very valid in that context.
Great. You're obviously doing a lot of hiring at the moment to support the new business wins. Can you talk about how relative wages are trending and maybe contextualize it for us in terms of the gross margin? Just how should we be thinking about that into the fourth quarter?
Yeah. Jack, I think I'll probably take a crack at it again. We have seen a lot of activity, particularly, I'm going to say, in the Americas on that side of it. We're doing a decent job, I would say, on making sure our folks are staying aboard, and we're continuing to recruit as we go through into the fourth quarter. Certainly building out the headcount will be part of the profile of the organization as we go through the fourth quarter. I think we've made the point that we're managing the cost base pretty well. We saw that particularly in margins in the third quarter. I think the larger piece in terms of moving margin profile in the fourth quarter is probably the proportion of revenue that we see that will be passed through related in Q4. I think that's a bigger piece.
I think there will be certainly an element of continued headcount growth, particularly in North America, where a lot of this trial activity is actually physically happening. That would be certainly something we'll be looking at.
Thank you, Brendan.
Thank you. Next question comes from the line of Sandy Draper from Truist.
Thanks so much. Good morning, good afternoon. Maybe just a lot of questions that I've been asked. Maybe a quick one, Brendan. I didn't hear you give the constant currency organic growth number.
Well spotted, Sandy, because I haven't yet. I was wondering if somebody was going to ask. We said that year-over-year it was 1.2%, constant currency is 1.9%. These are down, obviously, given the context of the current quarter versus this time last year. Constant dollar organic, Sandy, is about 3% down year-over-year.
Okay, great. Then, my fault, there's been a lot asked about gross margins. As you pointed out, it was a nice one, nice return. I would assume a lot of that's just as revenue came up, and there's going to be some near-term impacts to COVID. When you think longer term, you guys have sort of said the long-term target is to hold gross margin steady, which, when I read that, it's 29%-30% type gross margins. Is there anything coming out of COVID as you start to do maybe more remote trials, lower costs, maybe not to travel as much, that over the medium to longer term could suggest you could actually sustain above a 30% gross margin?
Are there not enough big enough things to really change the margin structure, and we really should be thinking about holding the margin as the longer-term goal? Thanks.
Yeah. It's easy enough, Sandy. I would say there's certainly opportunity as we talk about the switch towards more remote monitoring and using technology to improve and to make our monitoring more efficient, our data review more efficient. We've been able to progress our robotic process automation. In fact, we do a team of the quarter here at ICON, each quarter, funnily enough. The winner of this quarter was a team on our RPA, robotic, who've been able to make significant progress around the data management and the locking of pages there. That's an example in a specific data management area. That, I think, approach and similar approaches can be applied to our clinical operations group. I do think in the longer term, there will be opportunities to improve our gross margin. Having said that, there'll inevitably be headwinds as well.
I think you're thinking around 29%-30% is probably the right way to go. There'll be some opportunities to push that ahead. There'll be some headwinds that'll make that more challenging. I think that's probably I would not want to commit to a significantly higher gross margin, even in the longer term at this point. I think this is a very competitive industry, and we'll find that costs, and as I say, headwinds, will mitigate the inevitable and the obvious opportunities that we have through doing more remote monitoring, doing more technology-based trial management, and data management. There's, as I say, pros and cons, headwinds, tailwinds, but I think of it as 29%, 30% being a reasonable continued target to maintain.
Great. I appreciate the comment, Steve.
Thanks, Sandy.
Thank you. Your next question comes from the line of Dan Brennan from UBS.
Great. Thanks for taking the question, guys. Steve, I just wanted to ask this question on kind of when we get back to normal. Is it consistent with what you were saying last quarter? I know there's a few questions early on, but I believe last quarter you were thinking maybe early next year. I'm not trying to put words in your mouth, and now it sounds like back half to kind of on Dave's question, I think, about the patient enrollment. Just wondering, has it changed since Q2, or is it consistent?
Dan, I'd have to say that it's consistent, but if anything, it's probably pushed back a little bit. I think we see, back to Dave's question, that the pace of reopening of the sites has slowed. I'm thinking probably more into Q2 than I am into Q1. It hasn't changed dramatically. I never thought we'd be back, everything this year. I think I was consistent with that from the start. We do see continued progress, but I think it probably is pushing back a little bit. As I said, the reasons for that, I think, are multifactorial. Part of it is because of the COVID work that's ongoing. It's not all negative. There are some silver linings here out of this pandemic, and these COVID trials are certainly silver linings for us, both on a treatment trial basis and on a vaccine basis.
In terms of the non-COVID and more, what I say, traditional portfolio, that's still got some way to go to recover. I'm thinking middle of next year is probably more the timeframe now than I thought perhaps six months ago.
Great, thanks. Then just on that same point, maybe if you could help. Is it more the patients, the inability to get patients to the sites because of the outbreaks, or is it really the sites not opening up? I know earlier in the conversation, there was a question on capacity, and you indicated if the demand was there, certainly you could train up more sites. I'm just hoping maybe just to kind of triage a little bit in terms of what the main holdups are. Maybe it's the sponsors. Maybe they're so focused on running COVID that they're just telling you to hold back on some of the non-COVID work. If you can help just maybe parse through some of the key factors on that. Thank you.
Yeah. I'll try to give you a flavor. It's a little qualitative. We don't have any specific data on that, Dan. I would say it's, and it's easy to say this, but I'd say it's all the above. There is still an element of patients not wanting to go to institutions, not wanting to go to hospitals where potentially the risk of any sort of infection, let alone COVID, is higher. I think that's a component of it, in terms of recruitment rates. We've certainly seen that. I think there's an element of sites not wanting to take on new trials, because they're busy with COVID clinical work, or they're doing clinical trials, normal clinical trials. I think it's multifactorial, and I think you're going to find that site's impact is another. We have seen our site initiation visits come back to normal, our pre-site.
Our study sort of startup is coming back in terms of the number of sites we're engaging in new trials going forward. There's no question there's still an impact of the current cohort of sites or the portfolio within the current cohort is still impacted, and I think it's for a multitude of reasons. There are opportunities. As I said, we talked about our Accellacare network, where we've seen less impact in our Oncacare. That's a process that's going to take a year or two to sort of really develop. We're not ready to declare victory on that one yet. I think there are things we can do. There are some opportunities, I think, to bring on new investigators and train up new investigators. That has its own challenges, of course. That's not a panacea.
There's an investment, I think, to be made there to address some of these issues. This impact on sites is, every site is, to some extent, unique and they all have different focus, foci, and different reasons and, but I've tried to give you a flavor for some of those.
Great. No, that's perfect. Thank you, Steve.
Thank you. Your next question comes from the line of Juan Avendano from Bank of America.
Hi. Thank you. I was juggling calls and so I apologize if this was asked before, but COVID-related bookings for you have made up a decent proportion. Some of the feedback that we've gotten is that COVID bookings might be prone to a higher cancellation risk, especially after some of the preeminent COVID vaccine trials start announcing phase III data in the fourth quarter or later. Do you agree with this notion, and have you discounted your COVID bookings enough to account for this possible dynamic?
Yeah, you're right, Juan. That question was asked a little earlier, but I'll answer it again. Certainly our bookings Q2 and Q3, COVID bookings have been a substantial proportion of our wins. At this stage, we haven't seen any increase in cancellations on that. Certainly the vaccine trials tend to be large material trials, and the speed at which they burn has a significant impact on us. We haven't seen any increase in our cancellations. We haven't taken any specific provision or any sort of actions related to that at this point.
Okay. Got it. Thank you, and I apologize for the redundancy. Hopefully that one wasn't asked.
No problem.
On the tax rate, it was 13% this quarter, about 100 basis points higher than what it's been typical for ICON. What caused the increase this quarter, is your tax rate outlook in the out years is still about 12%? I just want to confirm whether or not the blip-up that we saw in the quarter, whether or not it would have any long-term implications for ICON.
Hey, Juan. It's Brendan here. I think we came into this year saying this would be in the range of 12%-13%. As is always the case, in every quarter, our tax rate is dependent upon where we make our revenue and our operating income. I think the geographical shift of that is a little heavier towards North America in the last quarter. I think that will be the case in Q3 or Q4 as well. I think 13% is in or around right for this quarter and certainly for next quarter. I think obviously we'll give you more guidance in quarter as the long-term tax impact when we get out into our guidance for next year, which we're going to do on the Q4 call. 12%-13% is exactly where we said it would be this year.
Looks like we'll be probably banging in the middle of that range, 12.5% for the full year. I think it's too early to say if there's a longer-term tax implication outlook. Certainly, we've been solid on that 12% for a number of years now.
Got it. Thank you. Ever since you reinstated guidance, 2020 guidance, did you give an updated outlook on what % of revenue your top customer is supposed to account for in 2020?
Funny enough, I don't think it'll change really from the actual range we gave at the beginning of the year, which was 12%-14%. 12%-14%.
14%, yep.
Got it. Thank you. I'll leave it there.
Thanks, Juan.
Thank you. Your final question today comes from the line of Tycho Peterson from JP Morgan.
Hey, thanks. I'll start with one on operating margins. I know you had a bunch on gross margins earlier. I know you don't provide operating margin guidance. Just the question is, you bounced back up to 15% this quarter. You had said earlier in the year you would see compression. I think you'd said up to 2%, you saw a little bit more in the second quarter. As we think about the COVID vaccine trials having more passthroughs, which lower operating margins, how do we think about that dynamic into the fourth quarter? Is the 15% sustainable, in your view?
Tycho, I suppose it depends on the pace of those trials and how they ramp up during the course of the quarter, which will be something that's difficult to measure sometimes, and these are very fast-moving trials, so that will be one piece that will determine that. I think if they ramp up in line with our expectation right now, which obviously we've guided towards that as a midpoint, you're probably looking about an impact. It certainly will be an impact on OP income. I would say in the tune of maybe 0.5% to 1% on overall margin profile as it relates to that proportion of pass-through coming through during the quarter. Again, as I said, it just really does depend on the quantum of that ramp-up that we see in Q4.
Okay. For Steve, I appreciate the comments on the recovery and site accessibility, et cetera. I am curious if there are things you can do as we think about a second wave here to minimize patient dropouts, work around site closings. Are there proactive steps you guys are taking as caseloads are going back up?
Yeah, Tycho, there are things we could do. I'll keep mentioning our network, our Accellacare and Oncacare. We have a much better ability to influence there, I think, and so that's where we're trying to place a number of trials, and they're making significant contributions. Our Accellacare sites are making significant contributions to the big trials we're running at the moment. There are other things we can do to more ad hoc sites around enrollment managers and clinical managers who can go to these sites and help to deploy resource and help them with the work.
We have the Symphony group that it tends to be focused with patients and home care, but they also have the capacity to be able to go to sites as well and to support sites in what they're doing from a clinical trial point of view, whether it be helping to recruit patients, helping to see patients if they're all qualified nurses. There are various things we can do around our both COVID and non-COVID portfolio to help sites to deliver for us. We're certainly doing that through the various functions we have in the organization.
Last one on Central Lab. Just curious, how much of the double-digit growth this quarter was catch-up from last quarter? You had noted some delays. How sustainable is double-digit growth in Central Lab, if any?
I think we qualified our comments earlier on to say that obviously we were growing well in terms of business wins in Central Lab, and we're starting to see that pick up. I don't think we're quite at double-digit growth in Central Lab in the current quarter, but we do expect good growth from them in quarters [four and one and two. I think a good proportion of that was certainly probably in line with maybe about a quarter of that growth is coming from that kind of support that we're seeing.
Okay. Thank you.
Thank you. Back to you, sir, for any closing comments. Thank you.
Okay. Thank you, operator. Thank you, everyone, for listening in today. As the impact of the COVID-19 pandemic continue to evolve, ICON is focused on executing our strategy as we look to grow our business further and enhance our position as the CRO partner of choice. I want to take this opportunity again to recognize our entire workforce and to thank them for their tireless efforts and ongoing resilience during what's been a very challenging period. Thank you, everyone.