Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended September 30, 2020.
Also on
the call today, we have our CEO, Doctor. 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, and 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 statements, 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 both directly comparable GAAP financial measures, please refer to the press release statement headed, 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 1 hour and would therefore ask participants to keep their questions to 1 each with an opportunity to ask one related follow-up question.
Would now like to hand over the call to our CFO, Mr. Brendan Brennan.
Thank you, Jonathan. In quarter 3, we achieved gross business wins of $1,200,000,000 and recorded $190,000,000 worth of cancellation. Consequently, net awards in the quarter were a record $990,000,000 resulting in a net book to bill of 1.41 times. With the addition of these new awards, our backlog grew to $9,400,000,000 This represents a year on year increase of 11.8%. Revenue in quarter 3 was $701,700,000 This represents year on year increase of 1.2% or 1.9% on a constant currency basis.
Sequentially, revenue increased by 13.1% from quarter 2. Our top customer represented 12.4% of revenue for the quarter compared with 11.4% in quarter 3 2019. Our top 5 customers represented 38.4 percent of quarter 3 revenue compared to 36.2% last year. Our top 10 represented 61.1% compared to 49.1% last year, while our top 25 represented 67.9% compared to the same number 67.9 percent last year. Gross margin for the quarter was 29.7% in quarter 3 compared to 28.1% last year and 29.7% in the comparable quarter last year.
Our SG and A was 11.8 percent of revenue in quarter 3, which compared to 13.5% last quarter and 12% in the comparable period last year. Operating income for the quarter 3 was $180,400,000 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 $3,000,000 for the quarter and the effective tax rate was 13% for the quarter. Net income attributable to the group for the quarter was $91,600,000 a margin of 13.1 percent equating to diluted earnings per share of $1.72 This compares to earnings per share of 1.20 quarter 2 and $1.74 in the comparable quarter last year.
The net accounts receivable were $500,100,000 at 30th September 2020. This compares with net accounts receivable balance of $490,200,000 at 30th June 2020. On a comparative basis, days sales outstanding were 45 days at September 30, 2020. This compares with 53 days at the end of June 2020 and 56 days at the end of September of 20 19. Cash generation from operating activities in the quarter was $112,000,000 At September 30, 2020, the company had a gross cash balance of $710,000,000 and debt of $350,000,000 leaving a net cash balance of $360,000,000 This compares to net cash of $244,000,000 at June 30, 2020 and net cash of $122,000,000 at September 30, 2019.
Capital expenditure during the quarter was $7,000,000 During the quarter, ICON also completed the successful delayed drawdown refinancing of the existing private placement of $250,000,000 senior notes maturing on December 15, 2020. The transaction has been successfully priced over 3 5 year tenures at a blended rate of 2.41 percent 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. And 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-nineteen, overall, this was an excellent quarter for Icon, driven by positive market demand in conjunction with our ability to win COVID-nineteen related opportunities, we booked record levels of gross and net awards of $1,200,000,000 $990,000,000 representing book to bills of $1,680,000,000 and $1,41,000,000 respectively. In doing so, we were able to grow our backlog year over year by 12% to $9,400,000,000 This gives us a firm foundation to build upon next quarter and into 2021. During the quarter, we delivered revenue of $702,000,000 a substantial improvement of 13% on last quarter and earnings per share of $1.72 up over 40% from $1.20 in quarter 2. 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 improvement 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% to 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 2. In addition, during the quarter, site initiations remained strong with overall patient enrollment above pre COVID level, albeit with recruitment for our COVID trial materially impacting that performance. Notwithstanding the risk of a second wave impact, we are expecting these metrics to continue to improve steadily, but that will be well into 2021 before we get back to pre pandemic levels on our non COVID type 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 coated 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 that emphasizes our differentiated strength in this critically important therapeutic area.
Since February, ICON has mobilized its vaccine resources to address the COVID-nineteen global threat and ICON is currently providing clinical monitoring and safety oversight on more than 100 COVID-nineteen 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 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-nineteen 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-nineteen 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 over reliance 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 3, 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 and 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 $2,650,000,000 to $2,750,000,000 to a range of 2.75 dollars to $2,810,000,000 and narrowing our earnings guidance from a range of $6 to 6.50 dollars to a range of $6.35 to $6.50 At this stage, we are planning to give guidance on full year 2020 1 at our quarter 4 earnings call in February. Finally, I would like to thank all our employees for their resilience, flexibility and understanding over the past 8 months.
At the heart of all we achieve at ICON are our hard working and dedicated employees. Our focus during this pandemic remains on protecting their safety and well-being 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.
Your first question today comes from the line of Dave Windley from Jefferies.
Hi, good morning. Thanks for taking my question or good afternoon for you guys. Steve, you mentioned in your prepared remarks, you kind of 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 gates out over the next year or so? And when do you think that waning of COVID work is going to happen that then the non COVID needs to ramp up?
Yes. That's a question we talk about internally, Dave, on a regular basis. And it's 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 going to pan out or could possibly pan out. One is the current trials 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.
And 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. So 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. And so 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 lot of a number of vaccine trials, large scale vaccine trials that we'll 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, we are as I indicated in my comments, we're certainly lower in terms of patient recruitment than we were pre pandemic. And we do see that increasing and improving. But I think largely some of that the way that comes back will depend upon how the scenario with the COVID stuff pans out because the COVID work is having an impact on a number of sites and on the availability of investigators, etcetera, etcetera.
And of course, as we see potential reemergence of the virus in the Northern Hemisphere in the fall, that has an impact as well. So 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. So 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% to 4%, call it midpoint, 3% a week and today it sounds like more like 1% to 2% a week. And 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? And just how do you see that proceeding? Can we avoid shutdowns essentially as we proceed through the fall?
Yes. We certainly have seen some slowing in the reopening. It's sort of the asymptotic curve as it approaches the top. It is certainly slowing. And so we don't see us getting back to all sites fully opened even with the current progress we're making until, as I say, well into 2021.
That's still our expectation. And the reason for that, I think, is there's a number of reasons for it. I think as you note these players 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 that have taken some of their capacity away.
So there's an element there. So it's multifactorial, but we're certainly seeing slowing compared to where we were even a couple of months ago. But 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, we'll be assuming continued progress and consuming 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 about 20% last quarter. Can you just talk about how that trended in 3Q? Again, it certainly feels like you have a pretty good presence on that side given the vaccine, but just wondering in terms of percentage where the COVID bookings are?
Yes, Patrick. It was strong. I'm not going to be we're not going to get into sort of specific percentages, but it was certainly it was where we were in Q2 and probably a little bit further ahead of that. So 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. And so it was a good substantial part of our new business wins and at least a par and ahead of where we were in Q2.
Okay. And then 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. And then 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?
Patrick, it's Brandon here. I might take a crack at those ones. In terms of the cost normalization, yes, I think we're as we finish out Q3, certainly we were most of the cost structure pieces were had moderated back to normal. Same for the fact, of course, more of our work is being done remotely now. So travel budgets just aren't required in the way they would have been in the past.
And that will persist into Q4 for most of the cost control elements have been dealt with now. And any pieces that we had done where we want to make people whole or anything on those kind of issues from a selling perspective are dealt with. So it shouldn't have a margin impact as we progress into quarter 4. Those specific pieces, we've kind of taken care of that. I think the piece 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.
And therefore, we would expect, yes, on the 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. And so 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. On that said, I think our earnings, as we've outlined, very much some of what our thinking is in Q4 4 in terms of EPS growth. We still see a decent trajectory on EPS growth.
That's really helpful. Thanks, Brandon.
Thank you. Your next question comes from the line of Elizabeth Anderson from Evercore.
Hi, guys. Thanks for the question. I had 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? Just I'm just trying to think of through the cancellation rate for next quarter and then sort of broadly speaking for 2021?
Yes. 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 is a large number of patients in a relatively short period of time. And so projecting the revenues, the resourcing, etcetera, has its challenges. Now that's what we do.
That's our core competence. And so it's something that we obviously take very seriously and we believe we're good at it. But it does certainly have more challenges in terms of how quickly that work burns and the rate at which we do the work and the time period over which we do the work has some pretty material impacts on our business. So 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. And I know on the capital deployment, you guys have a very enviable cash position at this point. And you said you're sort of looking at it as potential for M and A as things change in that market. How are you thinking about balancing that versus the share repurchases as we move into 2021?
Our priority, we've been pretty clear on this for a number of years. Our priority is M and A, appropriate M and A, and that's where we 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. I'll put in terms of share buyback. We commit to doing about 1,000,000 shares this year to eventually buyback what we release.
And that will continue. We'll continue to do that. And we'll be opportunistic as that allows where we see opportunities to jump into the market. But the focus for us is very much on M and A and on capital deployment around building our systems and our organization, things like OncoCare that we've set up or we've established that JV this quarter and we believe that's an area that we can deploy our capital in effectively to get best benefit for our business.
That's very helpful. Thank you.
Okay. Your next question comes from the line of Robert O'Neill.
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 after a relatively normal trial. Are you seeing anything similar to anything you can share on how pass throughs have impacted the quarter and maybe how you're thinking about pass throughs for 4Q and next year?
Yes, Paul. We certainly have obviously seen our share of vaccine work and pass through is certainly a larger element of the moment we've 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 were what we've certainly been in our experience, something in the range of 2 to 5 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, it hasn't really had an impact, it hasn't really had an impact year to date in terms of the mix shift in our revenue. And I think that's probably visible in our margin profiles as well when compared to last year.
So we do feel that this is more of an issue for Q4. And certainly as these 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. But it's kind of early days and these the nature of these trials are very, very fast. So it will be a little difficult to forecast. So 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 here 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. 1 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, so obviously in their CRO segments, obviously more than average growth work pushed out. Anything you really thought just around how it's going to 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?
Yes. It's Steve here, Robert. Let me comment to give you some sort of flavor for 2021. I mean, we see some positive momentum going into 2021. No question 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 really hasn't seemed to have had a or 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, but even in large pharma as well, we've seen some continued development and continued growth in the opportunities we're seeing there. So 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 off the as we sort of get through these first tranche of trials. I think there'll be more work to be done there. So that I think all goes well for us in terms of the opportunity and the differentiation we can provide in terms of our vaccine experience.
So it's looking strong and looking positive, but we're not ready. There are also headwinds and potential headwinds as you all know. I mean the virus is reemerging as we get into the fall. There are challenges and potential to slowdown of the site reopening has been referred to. And we're not ready to issue guidance or any real sort of sense of guidance at this point in time.
I think it's we need all the time that we'll have in the next 3 to 4 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 in a clinical trial environment. But we're not quite ready to go out and give definitive guidance in the market. I mean, we have pushed back only a 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. So 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, but 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, I guess the demand for vaccine related trials and the demand for therapeutics related trials. And I guess can you talk about the split there and kind of are there any margin or pricing implications we should think about between the 2?
Yes. I'm not sure I can sort of definitively give you that split. George, we're doing both. The vaccine obviously, the vaccine trials are much larger in terms of patients, in terms of contract size, revenue, burn rate even is higher. So 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 I mean, calling in patients is probably a little bit of a stretch because essentially they're healthy volunteers, but they there are a large number of them.
And the data work that goes with that is very substantial. So 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. We're doing 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. And 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?
Short answer to that is no, George, we're not. It's you can see our cancellation rate this quarter was pretty much in line with what it's normally be. So 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 John Kaufman on for Krueger. 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 the shift to more virtual trials or is that still to come?
And understanding that large pharma has been piloting virtual trial tools for a couple of years now, is your experience 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.
Yes, that's a big question, John. I could probably take a day or 2 to answer that one, but I'll try to do it in a couple of minutes. I mean, I think the short answer is what the fact is sort of moving against virtual trials, they do relate to this. 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. And the goal question we get is when we propose a more decentralized or virtual trial as well, which trial or which drug did you get to market on the basis of a virtual trial? And the answer is, well, that hasn't happened yet. And so we revert. And that's completely understandable from our sponsors' point of view as far as I'm concerned.
We are 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 has faced and being accommodating with those challenges. Now that needs to play through obviously into submissions over the next realistically couple of years to make sure that that happens because that there's always an element of 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. So there's an element of validating that approach. But certainly, the overt guidance and output from the regulators has been very accommodating and much more positive with respect to how the industry has pivoted to be more remote orientated.
And 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 are being monitored over the last 6 to 8 months. As I look at our own business here, pre pandemic, about 5 percent of visits of monitoring visits were off-site, in other words, sort of virtual. During the height of the pandemic, that flipped very quickly to about 60% of visits being off-site or virtual. And that was probably a little bit of an over statement because I think a lot of these were probably telephone visits and those sort of things.
But as we
come
through and have started to recover, that's gone down, but it's still about 30%. So about a third of the visits we're doing at the moment are remote. And the technology associated with those visits has really come to the fore very effectively. So we're able to in many in almost all cases though now evaluate electronic medical records remotely. And 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.
So the move is happening. I don't think we're ever going back to where we were pre pandemic. And 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. It'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.
And that is also playing into our decentralized clinical trial offering as well. So 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 is a significant move towards a much more 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 Ellen Wright from Credit Suisse. Suisse.
Great, thanks. You mentioned several improving fundamental metrics here. I just I want to clarify, you highlighted high single digit RFP flow, I believe, in a previous question. And is that excluding COVID related work? I assume this is a metric that is gaining momentum here.
And then I do have a second question, if you could speak to the trends across your central lab business in this sort of environment, that would be great. Thanks.
In terms of R and D, it does include code word, the high single digit sort of number. And these numbers bounce around a bit. But that's certainly we're including everything in that number. I think I mentioned the biotech small, midsized pharma as we've seen an increase. Some of that's being funded by government.
As you all know, the government is extremely interested in these trials and some of that funding that we've allocated to small and midsize 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. So that's it's the awareness, I suppose, of clinical trials in societies. I've never seen anything like it.
Everyone understands, everyone knows what's happening. Everyone reads on a front page of the times. So that's certainly playing into that. I hope that helps.
My second question is just on Central Labs. If you could speak to Brendan,
do you want to maybe Dougie will take that one on the Central Labs side of things, yes.
Yes. No, they've been trending well. They've been doing really well. We're very happy with their performance. Obviously, that has been they have been running on the coattails of COVID work, and we've seen that.
And that's been a big part of the story there. But certainly, our central labs are doing very well. As our other indeed our other labs as well, our bioanalytical and other labs as well. So it has been a strong performance for them during the course of the year. And I think it's fair to say very, very much helped by the, if you like, the tailwind all the COVID work that they certainly have been from.
So yes, good year for them and hopefully looking into another one in 2021.
Is that growing double digits you would say?
Well, we're not quite in that ballpark because of course we had the same situation it's very strong and it's going up. But really, the strength is really coming now in Q3. Is it's very strong and it's going up, but really the strength is really coming now in Q3 and Q4. So year to date, we're still down year over year because of sample delays and samples coming in across the other spectrum of our trials excluding the COVID work. But I think the COVID work is certainly helping it getting back on track as it is across the rest of the organization.
So not in line with the overall business performance at the top level, but certainly their business wins profile has been very strong. 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 Don Leonard from Wells Fargo.
Thank you. So, 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?
Yes, exactly. Patient sites etcetera.
Yes. I'd be 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 and our I don't get brings to the floor our CellaCare network and our OncomCare network that we have sort of more or less dedicated or more dedicated to the clinical trial. So if we do see some constraints there, we have our networks and our alliance sites that we're ready to go to. But I think it would be a stretch for me to say that we won't be able to 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. And 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. So there's an interest out there from sites and from investigators, particularly on the COVID work, obviously. But also, I think we'll see the non COVID work come back as well over the more near to medium term.
And 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 side's point of view is also going to move it in the right direction. So I don't have a significant concern in terms of capacity to undertake this trial.
Okay. That's fair. And then for my follow-up, can you comment on the performance of your real world offerings? And you 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. But I would be 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 are 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 pining 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 and follow-up data, etcetera, etcetera. So 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 trial. There will be a period of time that this will ramp up and there'll need to be some brave companies who move forward with these and base their registrations on real world data and other areas. And that's what I think we'll sort of start to tip the scale and we'll move forward. So I think it's a process and it's a journey rather than anything that's going to happen immediately.
Okay. Appreciate this thought. 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. The can you tell us who the JV partner is on OnkaCare?
Yes. Actually, one of the the JV partners there, the fact that Guy is the founder of the European site based business that we just acquired, Minniva, which has been a great success in addition to our overall organization. So the former CEO has stepped into the role of leading that joint venture, and we're very happy to have him as part of he's got he's bringing that entrepreneurial mindset to building out he's bringing that entrepreneurial mindset to building out that global oncology network. So 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 mix and 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 just curious how you got where you got that fantastic improvement in DSO and how sustainable you think that is?
It's been a year and a half of success over night, 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. And 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. And obviously, the hustle then to get cash in is always something that's there.
So 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 up to about on particularly on the pass through elements on some of these vaccine trials, but not nearly as significantly as I would say just the old version hard hassle or hard hustle, I should say, on that piece. So there was credit there to be given out. I think it's really and it's the project management teams and the finance guys who have done the hard work.
That's great. Last one for 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. So 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?
Yes. I think it does make sense, Eric. I can opine a little bit on that, but I don't 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% to 50% of pre pandemic levels. So it's still materially impacted.
So from that, if it's 40% of the sites, you would say that they are pretty important, a 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 were well above our normal recruitment levels. Certainly, over the last couple of months, we've been way, way above recruitment levels. But 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.
So 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 probably it's less than 5% now, it's still closed. But the vast majority of those impacted are impacted to some way shape or form. So 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. But there's still some impact. And as I said, it's going to take, I think, at least another 6 or 8 months for those sites to come back to a point where they're fully contributing. And this is why we've gone forward with our OncoCare JV and the AcelaCare network, because we're seeing less impact from those sites and a disproportionate contribution from those networks, because 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 are 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, so 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 will trend into the Q4 in 2021?
Hey, Jack. I might take a stab at us. Brendan here. Obviously, that's been an area of activity where we have been ramping apart. You're right in terms of the speed of patient recruitment there is significant.
I think there is and 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. So it would be a misnomer to think with any possible filing that would go into the FDA that, that would just be the end of our involvement in the trial process. So certainly, that will bleed out over a longer period than that point in time and there will obviously be additional follow-up work. So we're happy with the pace of revenue recognition that's been on that trial specifically in the Q3 certainly. I think it will certainly be a chunk of the work that we do without doubt in the Q4 as we work towards the back end of the year and as you referenced those important milestones for that customer.
And 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, the early parts of the trial and the day issue of the trial is quite short in terms of the dosage regime, there is consistent follow-up work that will happen over time. And I think with us and part of the landscape throughout 2021 is very valid in that context.
Great. And 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 end of the Q4?
Yes, Jack, I think I'll try to take it to Craig 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 on board, and we're continuing to recruit as we go through into the Q4. So certainly building out the headcount will be part of the profile of the organization as we go through the Q4. I think we've made the point that we're managing the cost base pretty well, and we saw that particularly in margins in the 3rd quarter.
I think the larger piece in terms of moving margin profile in the 4th quarter is probably the proportion of revenue that we see that will be pass through related in Q4. So I think that's a bigger piece, but I think there will be certainly an element of continued headcount growth in particularly in North America where a lot of this trial activity is actually physically happening. So that will be certainly something we'll be looking at.
Thank you, Brandon.
Thank you. Next question comes from the line of Sanjay Draper from Chirrup.
Thanks so much and good morning, good afternoon. Maybe just a lot of questions that have been asked. Maybe a quick one, Brendan. I didn't hear you give the constant currency organic growth number?
Well, Scott, it's funny because I haven't yet. I was wondering if somebody was going to ask. So we would say that year over year it was 1.2%, constant currency is 1 point 9%. These are down, obviously, given the context of the current quarter versus this time last year. And constant dollar organic, Sandy, is about 3% down year over year.
Okay, great. And then my follow-up, there's been a lot asked about gross margins. And as you pointed out, it was a nice one, nice return. I would assume a lot of that's just because revenue came up. And there could be some near term impacts to COVID.
But 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% to 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? Or 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 Steve here. It's Denis here. I would say there's certainly opportunity as we talk about the I talked 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. And the winner of this quarter was a team on our RPA, everybody who've been able to make significant progress around the data management and the locking of pages there. So that's an example in a specific data management area, but that I think approach and similar approaches can be applied to our clinical operations group. And I do think in the longer term, there will be opportunities to improve our gross margin. Having said that, there will inevitably be headwinds as well.
So I think your thinking around 29% to 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. And so 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 or the obvious opportunities that we have through doing more remote monitoring, doing more technology based trial management and data management.
So there's a pros and cons, headwinds, tailwinds, but I think of it as 2,930 being a reasonable continued target to maintain.
Great. I appreciate the comment, Steve.
Thank
you. Your next question comes from the line of Dan Brennan from UBS.
Great. Thanks for taking
the question, guys. So Steve, I just wanted 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, but now it sounds like back half to kind of on Dave's question, I think, about the pace 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, the pace of reopening of the sites has slowed. And so we're thinking I'm thinking probably more into Q2 than I am into Q1. So 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. But we do see and we do see continued progress. But I think it probably is pushing back a little bit. And as I said, the reasons for that, I think, are multifactorial. Part of it is because of the COVID work that's being that's ongoing.
So there are it's not all negative. There were 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. But in terms of the non COVID, what I say, traditional portfolio, that's still got some way to go to recover. And so I'm thinking middle of next year is probably more of the time frame now than I thought perhaps 6 months ago.
Great. Thanks. And then just kind of on that same
point, I mean, if you could help, is it more of the patients, the inability to get patients to the sites because
of the outbreaks or is
it really the sites not opening up? Or I know early in the conversation with the question on capacity and you indicated if the demand was there, so that 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 or maybe it's the sponsor, maybe they're still focused on running COVID that they're just telling you to hold back on some of the other on some of the non COVID work. So if you can help just maybe parse through some of the key factors on that. Thank you.
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 easy to say this, but I'd say it's all of 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. So there's I think it's multifactorial. And I think you're going to find that sites impacted this is another.
We have seen our site initiation visits come back to normal, our pre site. So our study sort of start up is coming back in terms of the number of sites we're engaging in new trials going forward. But there's no question there's still an impact on of the current cohort of sites or the current 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 Cellacare network, We've seen less impact in our OncoCare that will be that's a process that's going to take a year or 2 to sort of really develop. So we're not ready to declare victory on that one yet. But I think there are things we can do. There are some opportunities, I think, to bring on new investigators and try new investigators. That has its own challenges, of course, because that's not a panacea.
So there's an investment, I think, to be made there to address some of these issues. But these impact on sites is every site is to some extent unique and they all have different focus foci and different reasons and I'm trying 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 Amundano 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 3 data in the Q4 or later. Do you agree with this notion?
And have you discounted your COVID bookings enough to account for this possible dynamic?
Yes, you're right. Jan, that question was asked a little earlier, but I'll answer it again. They are 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. They are they do tend to be certain.
The vaccine trials tend to be large material trials and the speed at which they burn has a significant impact on us, but we haven't seen any increase in our cancellation. So 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's not an asset. 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? And 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 saw in the quarter, whether or not it would have any long term implications for ICON.
Juan, it's Brendan here. Yes, I think we came into this year saying that we'd be in the range of 12% to 13%. As is always the case in every quarter, our tax rate is dependent upon where we make our revenue and our operating income. And I think it's just 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.
So I think 13% is around right for this quarter and certainly for next quarter. I think obviously we'll give you more guidance in color as the long term tax impact when we get into our guidance for next year, which we're going to do on the Q4 call. But 12% to 13% is kind of exactly where we said it would be this year. And then it looks like we'll be probably buying in the middle of that range 12.5% for full year. So I think it's too early to say if there's if there's a kind of a longer term tax implication outlook, certainly we've been solid on that 12% for a number of years there.
Got it. Thank you. And ever since you reinstated guidance 2020 guidance, did you give an updated outlook on what percentage of revenue your top customers supposed to account for in 2020?
Funny enough, I don't think it will change really from the actual range we gave at the beginning of the year, which was 12% to 14%
to 14%. 14%, yes.
Got it. Thank you. I'll leave it there.
Thanks, Walt.
Thank you. And your final question today comes from the line of Tycho Peterson with JP Morgan.
Hey, thanks. I'll start with 1 on operating margins. I know you had a bunch on gross margins earlier. And I know you don't provide operating margin guidance. Just a question is, you bounced back up to 15% this quarter.
And you had said earlier in the year, you would see compression.
I think you'd set up
to 2%. You saw a little bit more in the second quarter. But as we think about the COVID vaccine trials having more pass throughs, which lower operating margins, how do we think about that dynamic into the Q4? Is it 15% sustainable in your view?
It's like I asked what 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 kind of obviously, we've guided towards that at the midpoint, You're probably looking at an impact. It certainly will be an impact on op income. I would say it's 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.
But again, as I said, it just really does depend on the quantum of that ramp up that we see in Q4.
Okay. And then for Steve, I appreciate the other comments on the recovery and site accessibility, etcetera. I'm curious if there are things you can do as we think about kind of a second wave here to kind of minimize patient dropouts, work around site closings? Are there proactive steps you guys are taking as caseloads are going back up?
Yes, Tycho. There are things we could do. I'll keep mentioning our network, our TeleCare and OncoCare, 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 TeleCare sites are making significant contributions to the big trials we're running in the month. But 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 then their and then in 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 to several qualified nurses. So there are various things we can do around our both COVID and non COVID portfolio to help sites to deliver for us. And we're certainly doing that through the various functions we have in the organization.
And then 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. So how sustainable is double digit growth in Central Lab? Give?
I think we qualified our commentary on to say that we obviously 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 a double digit growth in central in quarters 4, 1, 2. And I think a good proportion of that was certainly so our properties are probably in line with maybe about a quarter of that growth is coming from those that gold kind of gold support that we're
seeing. Okay. Thank you.
Thank you.
Back to you, sir, for any closing comments. Thank you.
Okay. Thank you, operator. So thank you, everyone, for listening in today. As the impact of the COVID-nineteen pandemic continued 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.