Okay, good afternoon, everyone. My name is Eric Coldwell. I cover pharma services with Baird, and it's a great pleasure to have ICON with us today. Dr. Cutler, Kate Haven, thank you so much. This is obviously a very interesting crowd today. There's been some interesting moves in the stock and the sector, and I think we're gonna shift gears away from some of the canned Q&A and just jump right into what the heck is going on, and maybe give us a little lay of the land on what's on your mind.
Sure. Thanks, Eric, nice to be here. Yeah, we've seen something of a negative reaction with the stock today, I think, based on the, you know, some comments, which I'll wanna make sure we clarify. You know, I think we've seen some commentary from some of our competitors and not so much our competitors, but companies peripheral to our space, which have perhaps caused a little bit of concern. I'm not sure they... I certainly don't think they particularly relate to our business. I remain very constructive and very optimistic about our long-term prospects. As you all know, we did a major acquisition three years ago. That's playing out nicely for us in terms of our strategic partners and ability to bring those on.
We talked about at our Investor Day a 7%-10% long-term target growth rate, including M&A. That remains in place. We're also reiterating guidance. We feel good about it, the guidance for this year, and there's no change in that. So we've not made any material changes or any material announcements. What we did wanna clarify is we are seeing a little bit of some challenges within the, particularly the biotech space. The funding environment, first part of the year, quarter or so, was very positive. That seems to have attenuated a little bit.
And it also seems to us, or at least what we're seeing in the business, is it's translated into a little bit of delay or some delays in sort of decision making around that biotech space, which, you know, has some potential for impact. But overall, the number, the percentage of RFPs that are coming through, the dollar amounts that are coming through remain strong, remain good, and we feel positive about that. In our large pharma segment, as it's publicly disclosed, and we've talked about this for a year now, in that some one or two of our larger customers are restructuring their business and, and going through some budget cuts. So that's. There's nothing new there. We certainly haven't. That's not news to anybody, and that's, of course, having some impact on our business.
That's a headwind for us in the very short term. We feel we have a bit more visibility about that now, about the amount and about the timing of it, and we feel that over the, that'll play out really over the next couple of quarters, and as we get into next year, we'll feel that that will become much more neutral. And so we wanted to be honest and transparent about that. Our, our nature as an organization is to be honest and open with shareholders and, and with analysts and, and try to give you a perspective of what our business... We don't try to sugarcoat things too much. We like to be upfront, and that's what we're trying to do.
No material changes, really, to the environment or to our business, apart from, as I said, the slowdown in some of the biotech decision-making, which is having potentially some impact in the very short term.
With this, and by the way, it should not, in my opinion, should not be much of a surprise to anyone, given what we've seen across the broader industry, coupled with the slower biotech funding as we left the first quarter of this year and saw a bit of an abatement subsequently. Were all of the topics that you just highlighted topics that you had considered when you gave the recent update and the recent guidance?
Yeah. Yeah, absolutely. You know, I really over the last sort of six, eight weeks, we and summer is also a bit of a challenging time. August, not much happens in our business, and September is a big month for us. So we have a lot of, you know, wood to chop, obviously, in September to get our, you know, our quarter three numbers done. So there's a little bit of that playing in, but there's nothing that's fundamentally changed that we hadn't already thought about or included in our guidance. You know, we are seeing a little bit of what we thought we were thinking, you know, and those predictions, if you like, or that that planning is coming to fruition, if that makes sense.
So we're seeing what we thought we'd see, and we just wanted to be, you know, specific and honest and open about that.
For the full year, your original outlook was a 1.2 to 1.3-
Yeah
... book-to-bill with-
Yeah
- somewhere in the midpoint of that-
That's right
... for your full year total. Q1 1.27 last quarter, if I remember, was a 1.22, I believe.
That's right.
Yeah.
So you averaged out at the 1.25, simple average. How is it feeling here in the back half? Did these comments take you more to the lower end of that range, back where you were a year ago? And you don't know, right?
Yeah.
You won't know, because September hasn't happened.
Yeah.
And November, December haven't happened.
That's right
... so you don't know. But, would that be the bias today, that you would say street head would probably be in the right place in the lower half of that range? Or is there actually a concern that, you know, maybe it could divot below?
No, I don't think it's gonna go below, particularly on a trailing twelve-month basis. We remain targeted in the 1.2-1.3 trailing twelve months. We feel at 1.24 or 1.25 at the moment, we're there or thereabouts, and I don't think that's gonna change. But, I mean, you know, the possibility on a quarter-by-quarter basis to be a little bit volatile remains, and I think that's what we're seeing today. But trailing twelve months, we feel pretty good about what that's gonna be, and certainly as we get into next year, we feel we're gonna be in that 1.2-1.3 range. That remains our target. We believe we can deliver on that.
Now, last, maybe I'll come back to this a couple of times, given the dramatic changes in the shares today and the sector. It just... You know, we already have received a number of questions. We're gonna get more. But if you were sitting in my shoes or in the audience's shoes, and you were thinking about an LRP, which maybe, Kate, if you wanna jump in and just remind everybody what it is, 'cause there may be some people in here who aren't as familiar with your LRP from a top-line perspective in particular? If you were sitting here today, would you be biasing to the lower end of that, still in the range, but biasing to the lower end, given the environment?
Or would you say, "No, we really feel like that is a fair range, and, you know, target the midpoint, and hopefully a little better when all is said and done?
Why don't you outline, and then I'll talk?
Sure. So at the end of May, at our Investor Day, we set out our three-year targets, which on the top line from a revenue growth perspective, was 7%-10%, which was inclusive of 1%-2% of M&A on an annual basis. A margin target of 22.5% in 2027, which assumes about a 30-40 basis points expansion on a year-over-year basis from where we are today, which we're gonna do a little bit better than that already for the full year 2024, and low to mid-teens in terms of the EPS growth as well.
So we believe that's a reasonable range, and I'm not gonna tell you we're gonna be at the lower end of that at this stage. We believe we've made really good progress in the strategic partnership side of things. We announced that on the Q2 call, we brought on another. We're close to another one. Can't be specific about that at this stage. We'll talk about that on the Q3 call. But so I feel good about where the business is going, and I'm not gonna tell you it's gonna be at the lower end of the range at this stage. I think we feel very positive about that.
And even if we were, I mean, our ability to leverage our global business services, to move the AI machine learning opportunities forward to be more efficient, and that margin challenge, you know, that we have, that we've set ourselves, we believe is very achievable, even if it was at the lower end of that range. In fact, even beatable. So we feel good about where our business is going. We feel good about the environment, albeit within the very short term, there are one or two things we're working through.
I'm gonna come back with more, don't worry. But
No, Jim, alright.
Let's get to regularly scheduled programming.
Sure.
You just announced a new CFO.
Yeah.
Yeah.
Actually, maybe a little quicker than I had anticipated. Felt like it probably didn't feel like that to you but felt like it moved pretty fast. What can you tell us? I've met Nigel, but it's been years. What can you tell us about Nigel?
Well, I mean, Nigel Clerkin is a guy, he's Dublin-based, he's an Irishman, and that's important for us, you know, for various, you know, tax-related reasons. We have our key execs located now in Ireland, and our board meets in Dublin. That's an important aspect of it. But notwithstanding that, he has experience in a number of different segments of our industry, I suppose, in pharma itself, in services, in medtech, and more latterly, in a sort of start-up side of things, in a sort of high-tech sort of company, albeit not related to pharma. He also has good experience as a CFO in a private setting and in a public setting. That was important to us as well.
We obviously believe, you know, his knowledge of and his ability to interact with investors and analysts is a key part of it. Brendan did that extremely well, and Brendan's, you know, he has, as you say, Eric, big shoes to fill. But we believe Nigel brings in a breadth of experience that even Brendan didn't have, quite frankly. And so we feel he can bring something to us. He can move us, you know, to the next level, and he can keep us on track with the growth we've shown over the last twenty years or so.
All right, let's go back to the business. Big pharma, you've already preambled a couple of the... and you did this last quarter, so again, this is not a change. If something is a change, you can tell us today, but these are not changes that I'm gonna highlight. You had your top five clients were slower-
Mm-hmm
... in the second quarter, but the rest, the next, I don't know, thousand, however many other clients you have, were up 8%.
Right.
And one thing I've been saying a lot, and I think it's rippling around the sector, is that there really do seem to be three different cohorts of large pharma clients these days. There's a handful at the top spending, like, I'll borrow a saying from one of your competitors, which I think he's right: There's a couple, a few that are spending like drunken sailors, and things are going pretty well from them, and there's a few at the bottom that are maybe I won't use the words I've used with you, but they're not so good.
And then there's a group in the middle, maybe a little bigger group than normal, perhaps, that are optimizing and just kind of slow, doing what they've done, but they're looking to save money and maybe find ways to be more efficient. So not necessarily growth engines. Have you seen a shift in that? One, do you agree with that definition? Two, have you seen a shift in that mix? I.e., you hear Charles River say that basically all big pharmas are cutting. That doesn't sound so good.
No.
It's not a great way to start off our day. It's not a new statement from them, but it's not a great way to start off the day. Are you seeing any bigger shift in big pharma activity or behavior here in the last couple of months?
No, and we certainly don't see all big pharma cutting. Absolutely not. We see overall that market growing mid-single digits is kind of the way we think about it. And, but as you quite rightly characterize, Eric, you know, there are some in the, you know, budgets are going down category, there are some in the middle, and there are some. We have, you know, we're working with all of them. In our case, you know, one or two in our top five are in the initial category, and that's a headwind that we're working through. It's been the case for the twelve months now, and it'll be the case for probably another couple of quarters in the, in the, again, in the very short term.
But as we see the ones that are spending more and the partnerships we're developing continue to grow outside of that top five, we see plenty of reason for optimism and for, you know, even up until the first half of the year, we've grown the business at around 5%, despite the fact that we were having some, you know, budget cuts within one or two of our top customers. And, you know, we believe that that sort of number can sort of broadly continue. But, you know, we do see an end to it.
We do see it happen, you know, as I say, that equilibrium being reached in the next sort of six to nine months is the way we see it, and we do see those other customers really starting to come through to provide us with a tailwind as we get into the later stages of 2025 and 2026.
And some of those. So two points on this. First-
Mm.
-where you've seen a slowdown at two of your top, a reduction, let's say, at a couple of your top five clients, have you actually outperformed the other vendors in those relationships?
Yeah, we have. Yeah, quite, quite honestly-
So it's not a-
We have-
It's not a market share issue.
It's not a market share.
It's not competitive.
If anything, I think we've taken more market share.
Yeah. I know.
But they're just spending less. When the pie is getting smaller, it's hard to increase your revenues. But we're certainly taking more of whatever pie there is there, for sure.
And then with some of these other customers and the other customer growth, is it possible to parse out what are new wins and expansions since the PRA deal? I know the new top 30, that's not-
Sure
... feeding you right now, perhaps, but you had a few other similar situations in the past. It sounds like there could be another one coming. Big picture, how long is it taking for those deals to ramp? Has that changed? It used to be three years, four years to really get to peak revenue on a new deal. Is it still the same?
I don't know if I would say three or four years. I mean, we typically think about it as more like twenty-four months, probably, to try to get to peak.
All right.
It's gonna be. I know, I'm sort of parsing, but I think we've seen some outperformance from some and some that skew a little bit longer. It really depends on the customer-specific situation. The most recent deal that we won is probably gonna take a little bit longer because they weren't traditionally a high outsourced company, right?
Yeah.
So that will take them a little bit longer.
Right.
On the flip side, another one that we more recently won is actually, I think, gonna come through a little bit faster. So, there's definitely some puts and takes, I think. It's very customer specific.
I was gonna jump in and say, I think some of your peers have taken more like 3-4 years. But to be fair-
Okay
... you've ramped some of yours pretty quickly. I'm thinking more about industry trends. And sometimes you've had peers that have won deals and haven't ramped them at all. I mean, you know, I think you've had pretty good success here. Any comments you could make more about potential opportunities beyond the next one? I mean, at some point, do we run out of runway because it's a mature marketplace? How does that evolve, or do you-
You know, I think if you look at the top twenty-
Yeah
... we've made good progress over the last two, three years as we've come together with PRA Health Sciences and become that larger scaled organization. We've added at least four of those, so we're 80%-85% of the top 20 now we have. And of course, we'll continue to push for those last couple. But I think what we're increasingly now doing is shifting our focus to the top 60, and that's really how we define large pharma in the top 60. So there are a number of companies in the top 60 who don't. I mean, they, most of them work obviously with us and with other providers, but don't have a particularly strategic view of partnership.
And I think we, as an organization, have you know evolved in a way that we can help them to you know to build that strategic view and to outsource in a way that is more efficient perhaps, and more effective than what they're doing at the moment. That's certainly our view, and that's what we're putting... And even proactively going to some of those companies and you know making proactive proposals, rather than waiting for the RFP to come, and working with them on what we can do to lower their development costs and do it more efficiently. So there's a lot of opportunity still in that, particularly in that 20-60 play. And these are companies that spend hundreds of millions of dollars a year in outsourced development.
They're not, you know, you don't think of them as, you know, we're all trying to, you know, we're all chasing, you know, $50 million. We're chasing several hundred million, and the opportunity for us is to be one of one, or even one of two.
Yeah.
It's a real opportunity for us.
I had an investor want to know about the, the pricing environment broadly, maybe terms and pricing. You know, I, I had some questions on terms that I wanted to throw at you myself, but, how would you characterize the top 60? Your, your definition of the larger client base, how would you characterize pricing? Maybe in aggregate, maybe full service versus functional, maybe it's geographic, there could be some nuances here. And then on the term side, clients that have been asking for, which, by the way, it's been going on for decades-
Right
... but clients that have been asking for more extensions to milestones or paying in a hundred and twenty days instead of ninety, if you're a top pharma, those kind of things. A lot to throw at you, but it's a complex ecosystem, and I think there's questions on a number of fronts.
Yeah, I mean, I think, and we talked a little bit about this on the Q2 call. I mean, the pricing environment is competitive, as it always is, right? So someone I think was asking us earlier today: Is it any different than twelve months ago? I'm not sure it's wildly different actually, in terms of of that. What we said on the Q2 call, I think which holds true, is that probably where you're seeing a bit more competitive behaviors for those strategic deals, right? Where, not surprising in this type of environment, where you have players in this mid-tier that have maybe lost some share or maybe are struggling. They're going to try to use price as a tool, right? To get their foot in the door or try to regain share.
So it wouldn't be surprising, right, that they're going to be more aggressive on price, in those type of scenarios. So that's a situation where you would see more aggressive pricing, certainly. I don't think it has translated into better wins, necessarily for them based on what we've seen in the market. I think it's still definitely a bifurcated marketplace where the top three are successful, obviously inclusive of ICON there. But that's probably where we've seen more of that behavior. But pricing generally, you know, is certainly competitive.
Yeah-
On the term side, that's certainly fair what you said-
Mm
... you know, in terms of, especially in this environment where interest rates are higher, people are holding onto cash longer, it's difficult.
ICON has historically, and I mean this in a good way, you've had investment-grade debt. You worked yourself right back there after PRA.
Mm.
Historically, the company was one with short arms and deep pockets and a conservative mindset. You were able to ironically-
Still got the first dollar ever, and Eric, that's what we've got.
Yeah, right. But you were able to use that financial strength as a, you know, an arrow in the quiver, if you will, for winning some business in the past, that you didn't need the cash to come in as quickly as some of your competitors did. Are you still using that tool? Is this something that you would say, look, you know, there might be a search situation or two where you would bend a bit on terms? I'm just trying to get a sense on how confident you are in the cash flow profile longer term.
I think we're confident in the cash flow profile. And, you know, there are times when we will lean on that a little bit. And as Kate quite rightly says, you know, our DSO has pushed out a touch in the last quarter or so, and, you know, it's probably not coming back in anytime soon, given the environment we're in. But we are pretty disciplined in terms of the credit terms we ask for, and that we ultimately, you know, settle on and demand from customers, particularly in the biotech segment, where you've clearly got a little bit more risk around the funding and programs and the payment of invoices.
And so, you know, we take that discipline, you know, right across the board, whether it be pricing, whether it be credit terms, whether it be the, you know, terms of our contracts, et cetera, et cetera. And we're pretty accurate, and I think that's the case for the top three as well. You know, we're all, I think, fairly clear on that, and I think customers respect that and understand that and, you know, and generally go with it. You know, you can talk about credit terms of thirty, sixty, ninety, whatever days. There's not much competitive advantage in offering that. I mean, there's... It's not the customers wanted to ask, but ultimately, that's their procurement groups asking, rather than their operational groups who are really deciding on who wins the project.
Right. One last nuance here, and I want to spend obviously some time on biotech, and smaller clients.
Mm.
But, with the pricing, Kate, you mentioned more competitive and you said this on the last quarterly call, too. Again, so not new, but, more in the strategic deals, but we have heard perhaps a bit more in FSP than in full service. Is that fair, or would you say, no, it really is balanced?
That's you can answer that, Steve.
I mean, I think we're seeing the latter strategic deals are pushed back towards full service, Eric, so that-
I meant on pricing, Steve. I'm sorry.
Oh, okay.
Where you've seen the pricing comp, we've heard specifically that one or two competitors have been aggressive on FSP deals, so I...
I think that's probably true.
Okay.
I think that's probably true, but again, customers are savvy. They know what they want, and they know, you know, ultimately, particularly on a functional deal where the pricing is very much related to the cost of the resources, and if you're pushing price right down, the cost of your resources has to go down. You're getting people who have less experience and less ability to prosecute the work, and customers realize that. So, you know, we have various ways of obviously locating people in the right ways, providing them with the right technology in order to do the job. But the most important thing is we do the job for the customer.
Yeah.
We clearly need to make a solid margin on that, and we do. But they do understand that they can't, you know, push us right down to the bottom. Otherwise, they're not gonna get the people that they want for their functional work.
With the biotech environment broadly, are there more nuances you would point to in terms of where you've seen some of this... I don't wanna say-- I don't want to downplay it, I don't wanna say lack of acceleration, although I think there has been a bit of that in the market, where companies expected more acceleration from smaller clients this year that hasn't played out. Has it been more in a specific therapeutic class, say, cell and gene therapy or some area which wouldn't be a big sector for you, but probably is there- is it a therapeutic class? Is it a geography? Is it a phase of development? Is it a size of client?
Is there anything that would stand out to you as an abnormal difference from just an overall mosaic of funding went down, rates are still high, world's still a bit screwed up?
Mm-hmm
... and just general-
Right
... sluggishness compared to what was expected?
Not that I can, you know, identify or pull out, or that we've quantitatively been able to, you know, identify at this stage. It appears to be across the board. Possibly in terms of some of the larger projects. You know, some of these biotechs do projects that are in the tens and hundreds of millions of dollars. I mean, these are very serious development programs. They are very serious. And, of course, when they're spending, when they're raising, having to raise and spend, they think very carefully about what they're developing and what indications. The IRA is probably having some impact on that in terms of whether they do it in parallel or in series. We're starting to see opportunities to develop these drugs in parallel now.
So that, again, gives us some opportunity in relation to, you know, to where they're being pushed. But, you know, from a therapeutic point of view, we're seeing some uptick around the GLP-1s, albeit fairly early stage, you know, phase I, phase II, the new generation of GLP-1s, we see those starting to come through. Not necessarily a biotech thing, but across the board, but it's, it's probably around the size of the projects. You know, the ones that are, that are, you know, $20 million-$30 million and above get a lot of scrutiny in terms of how, and quite rightly so, you'd expect that. And perhaps a little bit more so than perhaps they did in the past when money was much easier to raise.
Senior management and boards getting involved in-
Indeed
... discussions more than in the past.
Yes.
Venture capitalists actually playing a role in the-
Yes
... process more than the past?
Yes. Yeah,
Yeah
... particularly boards, you know, and particularly senior folks. You know, the CEO is always involved, often sitting at the bid defense, a bid defense meeting. So you need to make sure that, you know, from a financial point of view, we're competitive and active. Credit terms do come into play occasionally, but really it's around operational delivery and a confidence that we can operationally deliver, and that we're gonna be around in, you know, three to five years' time when the drug finally comes to market.
And I believe you said last quarter that your RFPs in that biotech group were up in the-- still up in the mid-single digits and maybe improved a bit over-
Yeah
... the prior quarter.
Right.
Yeah.
Yes. Yeah.
And do you still feel like there's incremental positive momentum in RFPs, even if the decisions aren't getting made, or the?
Well-
... competition's a little higher?
We certainly see a good strong flow of RFPs.
So not a-
It's not going down. No, not dramatically up. It's pretty constant, pretty consistent. The only thing I'd call out, and I did this morning, was, you know, when you have an RFP, you either get a, "Yes, go ahead with the project, no, you didn't win it," or, "It's not gonna proceed for anyone." And that category is probably ticked up just a touch, a little bit. So we're watching that carefully. But overall, the number of RFPs, the dollar value of RFPs continues to be positive, continues to be strong, and we've got a lot of, you know, opportunity in the pipeline, particularly in the, you know, in the next couple of months, to be able to, you know, to generate those wins.
How about hit rates on the biotech side? You made some changes at the end of last year-
Mm-hmm
... with your organization and felt like you had a decent... I mean, everybody felt like they had momentum in the first quarter when funding was what it was, but-
Right
... at least we wanted to feel that way, but how about hit rate in biotech specifically, and maybe more particularly in small biotech? How are you, how are you doing?
Yeah, we don't measure small versus large. It's in the biotech space, and the hit rate's been strong, and it's probably ticked up a little bit. You know, we're seeing some certainly some consistency at a strong hit rate in that area. Again, it's, you know, it's project specific, customer specific, and you know, you win and you lose, you know? But overall, we find that our offering is being well received. When we lose, you lose by a millimeter, and I guess when you win, you probably win by a millimeter as well. It's a very competitive space. But the competition is more around the operations, the strategy, the patient journey, and being able to-
Yeah
... you know, predict that and account for that and deliver that. That's what, rather than is around price. The biotechs are probably less sensitive on price than the large pharma.
Last one specific to biotech. Cancellation rates, have you seen any change in cancellation behavior specific to the biotech cohort?
We haven't, no.
Certainly in terms of contracts, no, nothing, nothing there. 2% of opening backlog tends to be our cancellation, and that's been very consistent. As I mentioned, in the RFP space, there might be a little bit, but it's not a contracted award.
I think I have to throw out there, it's September 10th, so we found out from a few times this year across the industry that what happens-
That is fair.
... from the second week of the quarter to the end of the quarter can change, but it sounds like there's really no notable change in frankly much of anything since you talked last quarter.
No, no, that's, that's exactly right. No material, no really material changes, but we are trying to be, as I say, honest and open around some of the perhaps slowdown or apparent slowing down in decision-making, particularly in the biotech, and the challenges that we're addressing in our large pharma, in our top large pharma. As I said, Eric, we feel very constructive and very positive about the longer-term growth of the organization. We've put out the 7%-10%. No one's walking away from that. We have our guidance for the year. No one's walking away from that. So I feel good about where the organization's going and how we've positioned ourselves post the union with PRA to really be a very, very strong competitor in this industry.
I have forty seconds, and I wanna, I wanna hit on phase I, the clinical pharmacology unit. You kind of alluded to it, seen some-
Mm
... perhaps some strength there.
Mm-hmm.
I've had some incredibly positive channel checks in phase I over the last month or two. It seems like there's an uplift across the board on things in phase I particularly. I don't know if it's because the average size has gotten bigger. I don't know if it's clients are, for lack of a better word, canning the bottom X number of smaller-
Mm
... CROs out there in that space, and they're driving all of their work to the leaders. But the channel checks are really good. You just made some positive comments. When these facilities are full, they print money-
Yeah
... because they operate like an airline or a hotel, and when the seats are full, you make money. Is this a notable impact potentially in the back half?
I mean, we've certainly seen some upticks in the awards in early phase and the opportunities in early phase. I'm not quite ready to declare it as a significant tailwind going into next year, but maybe that's my conservatism. But in the GLP-1 space, I'd sort of alluded to and we've had some interesting and some significant awards on a sort of partnership basis within the phase I. So, you know, I can only concur with your, you know, the feedback you've had. You know, as I say, I'm not ready to declare it as a huge tailwind, but there's certainly some very positive trends there.
Okay. Well, with that, I'm gonna introduce the next four companies, and then, thank you very much for your time here.
Thank you.
So we have Novanta, EyePoint Pharmaceuticals, Cellectis, and National Resilience coming up in the next four sessions. Thank you very much. Steve, Kate?
Thank you.
Thank you.
Thanks.
Appreciate it. Thank you.