Good morning, everybody. Last day of the Barclays Conference, bright and early. My name is Luke Sergott. I cover life sciences and diagnostics. With me I have Dr. Steven Cutler, CEO of ICON, and Kate Haven, Head of IR. Thank you again for making it this morning.
Pleasure.
Great. I guess, I mean, there's a lot of volatility, a lot of questions, concerns around the CRO market. You know, I'd like to, let's start off first with kind of the recent news and idiosyncratic stuff that you guys have been dealing with, particularly around the BARDA. Just had the, you talked about contract being pushed out for 90 days. Just walk through dynamics, you know, how this is going to roll on. You know, you're dealing with the staffing up, staffing down, back to staffing up, like timing around that, the margin impacts, and just kind of how.
Yeah, it's a somewhat uncertain time, not just with those contracts, but across particularly the biotech space. And we'll, you know, we'll talk about that, I think, through the discussion, Luke. But specifically on those two BARDA contracts, one we know has been pushed back. The second one that we talked about on the call a couple of weeks ago, which was moving forward, we've disclosed through 8-K that that has been delayed 90 days and should start again at the end of the second quarter. That will have something like an impact on our margins in the first half of the year, given that we were literally, you know, ready to start recruiting patients. We can mitigate that to some extent, but not entirely. You know, we're pretty good at resource planning and resource allocation. There are other things we can put those people on.
You know, we recruit on a just-in-time basis. And so not everyone was already recruited. Certainly things like our lab work, which tends to be a bit down the track on those projects, you know, would be recruited a little later. So there's things we can do to mitigate, but there will be some impact. We don't really have any further information on that particular trial as to what the reasons are for the delay. I don't want to speculate on that too much at this point. We'll hopefully know within the next few weeks and on our April call, Q1 call, we'll be able to give, I hope, some more indication as to what's happening in that trial. The fact that it's a 90-day, specifically a 90-day delay, does give me some confidence that it will, you know, it will come back.
There's some technical issue with the medicinal product, the drug product, or there's some issue with the protocol that BARDA wants or the FDA wants to talk about. That remains to be seen. It remains in our forecast. We're expecting that it will start within the 90 days, but, you know, there's more information to come there, I think, in the next month or two, I hope.
That's helpful. This is just kind of the guidance, and we talked about this earlier, but, you know, a lot of the feedback and the investors are just trying to size in the framework within the guide that you guys gave. You gave a pretty wide range, very uncertain time. You know, that was very, I thought it was prudent, especially given the timing. Like if you took that BARDA piece out, is that baked in within the cushion within that guide range that you gave? Just kind of frame it out from revenue and EPS, if you think about it.
Yeah, I think if we, and we'll certainly give consideration to taking those trials out, given the uncertainty around them. But, you know, if we do take them out, then on the revenue side, we'd certainly be at the lower end of the guide. On the EPS, I think we're still well within the guide. That's, you know, we have some levers we can pull on the EPS line that allows us to manage the, again, the costs relating to those trials, particularly now we know they are going to be sort of pushed back a bit. On EPS, I'm relatively confident on, but the revenue would certainly be at the lower end.
Yeah. Just assuming that everything kind of stayed normal in the first two.
Yeah, that's right. I mean, it's early in the year for us. You know, it's early, you know, it's early March. So we have, you know, we have a good chunk of the year to go. There's work we can win. There's work we can bring in to, you know, to replace that work to some extent. You know, I'm relatively confident. I know the ranges are wide and we'll look to narrow those as we go through the year. As I say, you know, it is fairly early in the year and there are things we can do to improve those.
I totally understand. Back, you know, it's a good leeway into talking about, you know, what kind of work you guys can pick up and, you know, talk about the demand and the overall health of the industry. You have, you talked about, you know, large pharma kind of being more stable, biotech's a lot more choppy. We saw a nice pickup there in those bookings in 4Q. Just talk about the durability and visibility on some of that work that can come on.
Yeah, it's an interesting and I'd say challenging time within our industry. I've been doing this for a lot of years now and it's probably as volatile or as challenging as it's ever been, I would say. You know, and then, you know, from our Q3 numbers last year where we had almost a convergence of circumstances around, you know, vaccine cancellations, around the biotech funding issues, and of course around our two larger customers, particularly impacting us. It all happened at the one time, which was the particular challenge. To some extent, the large pharma is mitigating a little bit. We have certainly visibility on our largest customer and the downtick in revenues there. We believe we're at the near on that front. The second customer, we still have some uncertainty. It's declining this year.
You know, we don't, we're not quite sure where we are finally on that one yet. I think we're more towards the end than we are to the start. There is still some uncertainty around that one. On the large pharma as a whole, you know, we see some optimism. I see some optimism certainly long term. RFPs have been relatively positive. The challenge that large pharma has around their LOEs at $200 million, they need to replace plus $100 million they need to grow to get to kind of a 5% CAGR, to me presents a huge opportunity for our business and our industry, in fact, to, you know, help them to get new products to market over the next five or six years, which is the timeframe that they're looking at.
I was at a meeting earlier this week with our leaders, with large pharma leaders and biotech leaders. The talk is less around cost cutting and budget discussions than it is around how do we get those products to market now. I see something of a pivot now in terms of what they're doing to accelerate their innovation and accelerate products to market, which I found encouraging from a large pharma point of view. Biotech, I think, remains uncertain and volatile. The funding environment, you know, I get whiplash looking at the month to month. January said it'll be quite a good month. February, not so good. I know we're up, what, 10-12% on a trailing 12-month basis, but it's choppy.
What I see is companies that have good science are getting funded, but it's a sort of a narrower grouping than what I'd like. I'd like to see a broader range. That impacts the way we're seeing the biotechs and what they're considering. We do see some delays and some caution in how they allocate. Even when they award us work, you know, the speed at which that work gets contracted and goes forward and what actually happens, you know, is causing us some, you know, pause, I suppose. It is certainly a challenging time. I think there are, what is it, 800 public biotechs, 200 of which are trading below cash value. I think there's, you know, we're kind of, there's more to come through on the biotech front.
I think there'll be some challenges for the biotech industry for, you know, another 12 months or so at least as that plays through. It just remains a challenging, you know, volatile period in our business. As I say, long term with what pharma needs to do to replace that LOE revenues that's going away and then to grow, you know, I think in the long term we're in a good place. I think over the next, you know, five years, our industry's going to be, our company's going to be, you know, going to do nicely. The short term is what we're working through at the moment.
Gotcha. When you're talking to pharma and they're talking on the large pharma side, you know, and they're going through and they're going through the restructuring, do they call you in and say, and, you know, ask for, not ask for your input, but like when you actually win that strategic relationship, they kind of bring in, open up the kimono, show what their five-year pipeline would look like so that you can help bid on that work and within that strategic relationship.
When they do the restructuring, how early are you brought in to the conversation, you know, like, or is it something that they just say, all right, we're going to get rid of this, just say, vaccine program, and you, it's up to you guys to go through your book of business with them and say, all right, well, this vaccine program, you know, this is how much needs to come out.
It varies. It really depends upon the customer. You know, some customers on a strategic, we have a very close relationship. We have a steering committee. We get access to their pipeline. They talk to us about, you know, what assets we would develop, what therapeutic areas we would almost exclusively work in, you know, assuming continued good performance. That's certainly been the case with the last couple that we brought on. We have access to their pipeline, particularly in a certain therapeutic area. It's a therapeutic area that looks like it'll burn faster and grow quicker. That's encouraging. Others, a little bit more hands-off. They'll make their own strategic decisions and then they'll let us know what's happening. Others, we have an opportunity to be proactive. You know, we've been to one of our strategic customers.
We've gone to them and said, you know, how do we get, how do we help you get pharma drugs to market in a more efficient way? They said, well, we've got, there's a bunch of things we'd like to develop, but the cost of developing them are too high. You know, so we've gone back to them and said, well, we can do it for less if you let us make some decisions around the countries we select, the sites we select, the endpoints you're focusing on. You know, if you give us some real input in your protocols and your development programs, we can do that.
We, you know, we've put together, you know, a partnership that allows us to go, okay, and that brings down their threshold in terms of what they can, what they have to pay and helps them to get, you know, more opportunities to market in that particular case. That's an exciting opportunity for us. It's shown us that we can be more proactive with these sort of customers and bring to them solutions that allow them to develop their business faster. You know, it really does vary depending upon the customer.
I guess just leading, you know, good segue into, as you're thinking about the restructurings and visibility and et cetera, you know, when your larger peers threw out a number of about like 70% and that kind of feels like, I don't know, you just, it feels about right, like seventh inning maybe here and, you know, like talk whatever it means. Help us understand like your visibility on where we are in this cycle of restructuring from the large pharma side and how you think about coming out of it.
Yeah, I have, as Steve likes to say, I discourage him from using the baseball inning references. I'll jump in on this one. No, I think we largely agree that we're closer to the end than the beginning, although it's tough to say where exactly we are in that. I mean, it's very customer specific, right? I mean, there's customers obviously that are very well positioned and haven't, you know, had to face restructurings and budgetary, you know, pressures over the last couple of years. There's some that are obviously on the other end of that.
As we look through, you know, the sort of next 12 months, I think the expectation is that we certainly do not have the elevated level of activity that we have had certainly in the last 18 months, but there is still going to be some level of uncertainty and restructuring that some companies are going through, right? It is not uniformly the case. As we look across our portfolio, there are sort of puts and takes, right? There are some that are well positioned and growing really nicely, and there are some that are still facing some headwinds. Net net, that is, you know, there is still progression certainly in our large pharma group this year, but it is certainly a sort of mixed, you know, when you sort of peel that back.
Yeah. I guess from, you know, capacity and a volume and a pricing perspective, I mean, the mantra is like trials are getting, you're taking a lot more pricing right now, and that's going into your backlog. That's going to flow through obviously and hurt your margins in the future. Talk about the pricing dynamic. It's more of not like, you know, they're asking for 10-15% discounts across the board. Or is it they're going, when you're doing an RFP or you're going into an award, are they just being much more discerning on each function going line by line versus just saying, all right, here's this large phase three, we'll give you $350 million to run it, right? I mean, is it, which way is it going?
Yeah, I would challenge the thesis that, you know, the pricing dynamic has changed fundamentally and what's going into our backlog is lower margin than what went in, you know, a couple of years ago. I don't see that. You know, we are pretty disciplined in terms of the price. We track our margins, not just the margins that we operate on as we run the project, but what the theoretical margins are when we sell the business. You know, we have some levers we can pull on that in terms of where the work is done, even within a, you know, a proposal and in a contract. Customers are usually fairly agnostic about us. If we, you know, if we can do the work in a low-cost country, they tend not to mind that, you know, particularly if it's more back office work.
We have some levers we can pull to maintain and to even improve our margins going forward. The thesis that we're suddenly in a low margin environment, I don't think plays through. The other thing is, as we've won these strategic partnerships, when you're winning significant amount of work on a big area basis, particularly sort of, you know, hundreds of millions on a business, you can really generate some efficiencies. The scale that we are at allows us to generate those efficiencies and to maintain those margins. Even if we have a, you know, a theoretical margin on our proposal or on a strategic partnership, we can generally be, you know, sort of 300-500 basis points above that because we operate, you know, more efficiently than we even thought we could. That's our sort of traditional track record.
You know, I think the pricing environment, it remains challenging, particularly around those strategic partnerships. The benefit of our scale allows us to get the leverage on those sort of partnerships. Even on significant projects, you know, when you're at a $50 million above project, that's a large enough project to be able to generate those efficiencies. I guess one of the, you know, you can say our projects have elongated more, which has pushed the burn rate down, which is not such a good thing, but it does allow us to generate the sort of efficiencies. It's a little bit harder to do that in those rare disease studies when you don't necessarily have all the leverage. In those large scale oncology trials that do tend to, you know, take longer and burn slower, you can still generate some of those efficiencies.
I think that's an opportunity that we have that's perhaps unique to some of our sort of smaller competitors.
Just thinking about that from a being able to drive leverage on larger indications or, you know, if you're talking about GLP-1s, you can obviously scale that up a lot more and get your efficiency there. Like the rare disease you're talking about, you know, there's not as many KOLs, it's harder to find those people and you can't kind of leverage those CRAs or the people that are working on it. Are you able to, because there's also ultimately just it's a capacity issue, right? You're able to ultimately price those rare disease trials to make up for that margin. Is that how you guys, is that from a mix of business perspective, right? You're able to kind of get the efficiency on the GLP-1 where there's unlimited capacity versus the rare disease and you're able to offset that pricing.
Is that one of the ways you're able to help hold in that gross margin?
Yeah, I think that's a reasonable, you know, sort of thesis. You know, the more common indications, the faster burns, we can get more leverage, we can get more operating margin. The rare diseases are a bit more challenging because they're rare. You know, you can only go to sort of a couple of sites in each country rather than we have a sort of a mantra where we go to five sites, at least five sites in each country because that gives us again that opportunity for leverage. Rare diseases, that's a bit more difficult. You are kind of a little bit more spotty in terms of how you're doing it. You have to manage that. It does tend to balance off a little bit, but we push hard on those areas where we have a sort of therapeutic franchise, particularly in the strategic partnerships.
That allows us to make up for some of those, you know, more rare disease trials.
Continuing on this mixed theme of on therapeutic, you know, when you think about strategic versus FSP, you know, and the, or the hybrid work and the trends that you've been seeing and switching more to FSP, given you guys are the largest FSP player, and that's kind of been where the demand's going recently. You know, if you're thinking about the rare disease or your backlog burn or, you know, things that are weighing on that, like is there a big difference there between demand levels on strategic versus FSP on an indication basis or is this just kind of like a pick your choose, you know, depending on the company or the sponsor?
I don't think from an indication perspective, again, it tends to be very customer specific, right, in terms of how they're, you know, what their primary development model is and where they're going as an organization, right, either more toward full service or FSP or increasingly hybrid, right, where they're adopting elements of both. Certainly less so from an indication perspective. I guess maybe the one caveat there would be, you know, within some customers where they're making acquisitions in new therapeutic areas, right, where they don't have resident expertise, sometimes that does lend itself more toward a full service model, right, because they don't have the experience, right, they don't have the capability and they're going to lean more on their providers to obviously increasingly do more of that work. That's more opportunity for us in those cases.
Yeah, that makes sense. I guess on, you know, speaking about the health, when you're thinking about this, like where pharma's going to get their $300 billion of revenue in the next five years, you think about the health of the biotech market still kind of flushing through here. You guys have seen elevated cancellations. You're saying that they're going to be elevated versus historic levels. Talk about your visibility on that. From a cancellation perspective, the mix is at more strategic, FSP, large pharma, biotech, just.
Yeah, you know, we do think cancels will sort of be at a more elevated level for the next, you know, 12 months or so. You know, we see that sort of uncertainty within particularly the biotech space. You know, I do think the biotech industry is sort of halfway through some reshaping. I think, to be very honest, there was some science funded in past years that is a little fragile and that will flush out, I think, over the next probably, I think we're still a year or two through that. That volatility, I think, is probably going to continue. That will, I think, lead, you know, to us having a sort of somewhat elevated cancellation level, not dramatically so, but I think those reprioritizations and the cancellations are going to continue.
Large pharma, on the other hand, I think have been through or well through their kind of, oh, let's cut the budget phase and have realized that they need now to get products to market. I am optimistic on the large pharma front and confident that we can continue to work in that segment very effectively to help them, you know, move those products to market, which will help them, you know, fill that $300 billion gap that they have and that they realize they have. As I said, I was at a conference earlier this week and that realization is clearly on their minds as they think through, you know, what they need to do on that front. Even on the FSO, FSP basis, you know, we see some customers move towards FSP. That is clear. Some of our larger customers, others have moved the other way.
Certainly, some of the more strategic partners have moved because they realize that there's a cost to doing FSP. You have to have that infrastructure to be able to manage those resources. That's a cost that they don't necessarily want to take on at this stage. They'd rather have us do it. They feel confident that we can do it effectively or even more effectively than they can do it internally. The cost ultimately is beneficial in terms of making it a more variable cost. We take on that risk from an up and down, you know, cancellation isn't going to happen or not point of view, but also we get that margin benefit as well. I even had a breakfast with a customer, a more midsize customer the other morning who was saying, you know, we've done a lot of FSP.
We want to shift back to full service. We've got too much cost internally now managing that FSP. Every customer is different. They have a different perspective and, you know, different leaders and different managers have a different perspective on how they want to proceed.
Yeah. And that's, I mean, that's another big question that we get is, you know, are you hearing more about insourcing, right? I mean, the trend has been to continue to outsource from what it sounds like you're saying, it's they can't do the work without you guys. Is there an element where they're looking at the budget and saying, going the other way and saying like, oh, well, we can't, like we got to start doing some of this more stuff in-house, but we still have on some of the other functions, we'll just have you guys do more FSP. Are you seeing any of that anywhere?
You know, I was in pharma the early part of my career and there's always a human nature is a little bit that we can do it better than you. That's just natural. The facts and the data suggest that they can't. I think they're increasingly realizing that with the challenge they have around LOEs, that they don't really have a choice. They have to use organizations like ours and our industry, and we can do it effectively for them. I am very optimistic in the longer term about our ability to contribute to that problem that pharma has and provide a solution to that problem that pharma clearly has.
The evidence that I hear and that I, when I talk to customers, is that they do realize that the smart, the leaders of those realize that they do need to use us, that we have a level of expertise. We do more trials than any of the large pharma companies. We have more expertise and more in the sort of logistics of running a clinical trial than any of the large pharmaceutical companies. They realize that, I think, in a quiet moment.
All right. Just last one here, I guess with all the, to add to all the volatility, uncertainty to start the year, you know, a lot of the policy changes on, you know, NIH funding is very small risk to you guys on that, but just kind of, you know, as you think about HHS secretary and the vaccine rhetoric, et cetera, like are you seeing contracts or awards? You talk about the health of the market being really strong, but are you seeing elongation in decision making because of this or any of this noise or?
It's very early, I think, to, and we're not at the moment. It's not that we, that that couldn't happen, but, you know, generally on the, there's certainly some uncertainty and that's not helping. I think that'll settle down in the next sort of six months or so. You know, in terms of the new leaders in charge of HHS and others, you know, what I see is potential upside, you know, that RFK wants to see vaccines available to anybody who wants to get them. He wants to see data on efficacy. He wants to see data on safety. That means more trials. I'm optimistic about what the opportunity. I think there's also going to be a focus from him, particularly more on foods and preservatives and that and all of that, you know, Make America Healthy Again. I think doesn't always come back to vaccines.
It's really around as much he can do in that space. I think everyone would welcome that. While there's uncertainty and there will continue to be some volatility in that space for a period of time, I think it'll settle down and I think they'll, you know, we'll get on with, you know, developing drugs and solving the problems that pharma has in the sort of short to medium term.
Great. It's always a pleasure.
Great. Thanks, Luke.
Thanks a lot.