Q3 2020 PPD Inc Earnings Call
Good morning, and welcome to <unk> third quarter 2020 earnings Conference call.
Please note today's call is being recorded.
At this time I'd like to turn the conference over to Nate Spike or senior Vice President of Finance for PPD. Mr. Speaker, you may begin.
Good morning, everyone and thank you for joining the earnings call today, We'll review our financial and operating results for the third quarter of 2020.
Joining me on the call today are David Simmons, Ppgs, Chairman and CEO, Bill Sharpe <unk>, our COO and Christie Kelly our CFO.
Please note that today's discussion contains forward looking statements based on the current business environment.
And as such include certain risks and uncertainties, which could cause our actual results to differ materially from such forward looking statements.
More information about potential risk factors can be found in our 2019 form 10-K filing and our upcoming form 10-Q filings.
Also in addition to U.S. GAAP reporting we will be discussing financial measures that do not conform to GAAP.
We believe these non-GAAP measures enhance your understanding of our performance because they are more representative of how we internally measure our business.
Please note. These non-GAAP financial measures should not be considered in isolation from or as a substitute for GAAP measures.
A reconciliation of GAAP to non-GAAP results is available in the press release, we issued last night.
And in the supplemental investor presentation posted to our IR website.
Lastly regarding the basis of presentation for today's discussion. Please note that all piano metrics discussed, including revenue segment revenue and adjusted EBITDA on an assay six so six basis.
For commercial metrics discussed, including that authorizations that book to Bill backlog and backlog conversion those remain on a historical as award assay six so five direct only basis, unless otherwise noted with that I'll turn the call over to David.
Oh, Thank you may and good morning, everyone and thanks for joining our third quarter earnings call.
While we continue to operate in an environment impacted by Covance team [noise] PPD continues to achieve strong results for our customers our colleagues and our shareholders.
I'll start with an overview of our Q3 performance before turning it over to Bill and Chris for additional operational and financial details and Q4 guidance.
We revised our Q3 guidance upward in mid September and light of July and August performance and positive internal data and external signals.
Our actual performance in the third quarter exceeded these targets.
Well, Chris will provide more details the major driver of outperformance was faster conversion of new COVID-19 awards into revenue than we had anticipated.
I'm pleased to share a few highlights from Q3.
Net authorizations reached $1.2 billion, representing a 33.3% year on year growth and a net book to Bill ratio of 1.35 times while.
While we continue to achieve commercial success with Cove in 19 related programs. I'd also note that these awards represented around 20% of authorizations for the quarter.
Our backlog continues to reach new record with an ending backlog log of $7.9 billion, representing 15.9% growth year on year.
I'd also like to highlight that our backlog conversion rate improved since Q2 to be more in line with historical averages at 11.8%.
This execution translates to revenue growth of 20.5% with strong results across both clinical and lab segment and adjusted EBITDA growth of 14.8%.
Even when removing COVID-19 related studies, we would have still achieved growth in revenue.
This marks the third quarter operating in an environment impacted by the pandemic.
Over the past two quarters, I've emphasized certain priorities, including safety and business continuity well.
While these priorities remain as we have adapted to this environment of uncertainty I want to focus my commentary on how we continue to differentiate ourselves and how these differentiators are causal to our outperformance.
Well I can pick any therapeutic area to highlight our points of differentiation.
Given the Cove at 19 pandemic, let's look in infectious disease, and vaccines and unpack how PPD is different.
First we have built industry, leading expertise and experience through our long history of supporting these types of studies globally.
Including more than 300 studies across more than 50 countries in the past five years.
More recently, we've won more than 140 COVID-19 related awards across multiple modalities phases and services and have already enrolled more than 50000 patients across covert treatment in vaccine studies.
Our customers value, our track record of delivery and quality.
Second.
This depth of experience to.
Strategically direct our investments to create a set of solutions that we believe to be unique.
For instance, our vaccine site network helps to accelerate enrollment and increase patient diversity enrolled into our studies.
Our epidemiology models predict hot spots before they occur and.
And our digital tools enable data capture and remote patient follow up among many other benefits.
On top of these clinical capabilities, we have significant labs experience supporting many FDA approved vaccines across a wide variety of indications and differentiated offerings across our full spectrum of labs capabilities.
While we don't normally discuss specific clients the mode. Darren a press release and mention a PBD specifically is a testament to our experience and expertise.
We offer all of these capabilities through an integrated model. So clients can dedicate less of their time to oversight planning and communication.
As an example on one large COVID-19 program, we have more than 20 functions across segments working together to achieve milestones more quickly.
This brings me to my third point.
Our collaborative customer engagement model.
We were one of the first CRM to develop a targeted biotech offering specifically aimed at proactive engagement with emerging biotech companies.
Within infectious diseases in vaccines, and specifically with the Cove in 19 pandemic proactive fast customer engagement is critical.
Power engagement model has enabled us to collaborate with customers on protocol Development Act.
Activate sites quickly and begin patient recruitment activities, even before the final protocol has been approved.
Lastly, and perhaps most importantly, our success hinges on the talent and tenure of our team.
The global footprint of experienced clinical and laboratory leaders.
Low turnover rates and therapeutically aligned resources.
We have knowledgeable feet on the ground around the world ready to navigate local challenges and expedite trial progress through round the clock coverage.
These are just a few examples of our strengths, but I hope it helps to paint the picture of how PPD is unique.
As I mentioned I could pick any therapeutic area and paint a similar picture of differentiation.
We are building on these capabilities and strengths every day.
I'd like to close with some thoughts on future expectations.
As I look across our stakeholders I continue to see a very positive future for the industry and for PPD in particular.
While the pandemic is presented site and patient access challenges. These groups are resilient and we continue to see increasing enrollment through the insight that we have through our site network.
Governments and regulatory bodies are collaborating like never before.
R&D demand remains strong and outsourcing remains a critical lever for our clients, which I expect to see even more of as we and other large crs offer more technologies and more efficiencies.
Innovation is continuing at an accelerated pace and the future holds promise across stakeholders.
In closing, it's been a strong quarter for PPD and I'm optimistic as I look towards the future AR.
Our team of experienced leaders is demonstrating the adaptability to navigate unforeseen challenges while continually growing profits year on year.
Our backlog continues to grow and while COVID-19 related awards have been a focus.
They remain less than 10% of our total backlog.
I call your attention to our backlog conversion rates here.
Even before most COVID-19 related awards began to convert to revenue, we sustained our conversion rates better than industry averages.
Looking ahead.
2500 additional colleagues Onboarded since September Thirtyth, 2019, and more than 1000 positions posted our team is ready to expertly prosecute our growing backlog.
As we look toward 2021, I am confident and our ability to continue our trajectory by deepening client relationships and further advancing our expertise and capabilities in areas that matter most to our clients.
I'll now hand, it off to Bill sharp, our Chief operating officer.
Thanks, David and good morning, everyone operating performance was strong in Q3 with solid contributions from both segments PPD leaders across the company are working tirelessly to drive positive results for our customers and patients, while keeping safety and quality top of mind starts.
Starting with our clinical development services segment, we achieved 19.2% year on year revenue growth. In Q3. This was achieved by efficiently prosecuting our backlog and quickly executing new Kobe 19 related awards.
As I've done in the past two quarters I will provide a view into several metrics related to the pandemic and again suggest caution when trying to make direct comparisons between companies as each company's definitions are different.
First to provide insight into ongoing studies unrelated to COVID-19 development programs over the quarter, we saw improvements in site and patient access while our proprietary site network has remained accessible throughout the pandemic across our broader footprint.
We had full access to less than 50% of sites in the past and this has improved to 60% to 70% of sites globally, meaning no limitations or delays on visits shipments for filing at these sites. Our total site visit activity has rebounded through.
Combination of onsite and remote visits in.
In prior months we.
We shifted to conduct 90% of monitoring activity remotely more recently, we've been able to get back on site and completed 50% of our monitoring visits on site during Q3.
Second we have seen positive trends in patient participation enrollment as David mentioned, we have a unique view into patient behavior through our site network and over recent months, we're seeing more patients express interest in participating in clinical research as an example, our site.
At work recently enrolled 159 patients in the Osteopetrosis study in less than 38 days more broadly across our global clinical footprint, we've seen monthly patient enrollment on Noncovered 19 development programs more than double from its lowest point.
While not yet back to pre pandemic levels. We believe this is a demonstration that clients sites and patients are ready to reengage in clinical research when they are able.
Third the innovative approaches of digital engagement and direct to patient drug shipments are effective in maintaining patient participation and trial continuity.
Expect continued adaptation to trial design aimed at patient Centricity. Even went in person activity is fully possible for instance, remote screen via telemedicine that our site network has helped to increase patient reach and offers promise for the future.
Looking ahead, we remain watchful of virus resurgence around the globe because we've seen some leveling off of site access in recent weeks.
Given these dynamics, we expect that we will continue to operate in an environment, where limitations exist as we look to Q4 and beyond.
That said, we remain optimistic about our ability to prosecute our backlog and we have been able to progress trial throughout the pan dynamic.
Shifting to COVID-19 related vaccines and therapies PPD was selected to advance many new candidates and dozens of existing products through the clinical trial process.
We have significant infectious disease experience and are proud to assist industry and government sponsors seeking to prevent and treat cove at 19.
We have approximately 3000 employees across segments and functions working on Cove in 19 related programs in some capacity our.
Our teams that PPD in collaboration with sponsors and regulators have recruited randomized and dose patients in a fully virtual manner.
Also reduce cycle times of key processes to days that otherwise would have taken weeks or months for instance on one COVID-19 treatment study, we activated 100 sites in less than one month.
Even while sites were strained with patient care and site selection was shifting due to pandemic spread this level of innovation and flexibility, while maintaining quality and safety is meaningful.
Next moving to laboratory services, we had another strong quarter with 26.6% year on year revenue growth.
As we shared during our Q2 call Central lab volumes rebounded and returned to pre pandemic levels.
This volume continued to increase in samples are above pre pandemic levels, owing both to new COVID-19, and Noncovered 19 related awards.
Notably within our Central Labs, we were recognized that the vaccine industry Excellence awards as the best Central Lab. This is a tremendous honor for our lab team and it's especially significant at this time when there's urgency surrounding vaccines development.
As I mentioned in the past, our GMP bioanalytical and vaccine labs are not reliant on sample volume and we have continued to keep staff productive and partner with customers on exciting programs. For instance, these labs have played a role in the development of new COVID-19 related assays.
And COVID-19 monoclonal antibody testing.
In addition, as customers have experienced pandemic related disruptions our labs have quickly jumped into action to support customers in meeting deadlines on ongoing noncovered related programs.
The lab segment is well positioned for future growth owing to continued commercial success technology advancements and available capacity one future expansion I'm excited about is a new lab offering bioanalytical biomarker and vaccine services in Suzhou, China, which we expect to be fully.
The operational in 2021.
Finally, I want to highlight that as an enterprise. We recently obtained the ISO 27001 certification a recognition of our commitment to information security. This is a testament to the culture of quality and compliance that permeates across all businesses and functions that.
PPD.
I'll now pass it over to Chris to comment on our financial results.
Thanks, Bill Good morning, everyone. My prepared comments today I'll be covering our quarter three results.
Updating you on the company's cash and liquidity.
And lastly, discussing revenue and adjusted EBITDA guidance for quarter, four and full year 2020, and providing commentary on 2021 prior to opening up the line for Q and a.
Before diving into the numbers I'd like to remind you of a few important details related to today's marks.
Which are consistent with our recent earnings calls.
First when referring to our financial performance I'll be doing so on an AMC six so six basis second.
Second when referring to our commercial performance, including metrics related to net authorizations and backlog I'll be doing so on a historical assay six so five basis unless indicated otherwise to maintain comparability with prior periods that said we have also included these metrics in our investor supplement on an eight.
C. Six so six basis, both with and without Indirects to aid investors find.
Finally also similar to our last call given the exceptional circumstances surrounding COVID-19, we've expanded the operational and financial metrics that we are providing today.
That said, we are unlikely to provide all of these disclosures on an ongoing basis post the pandemic.
Turning to our Q3 results.
As David noted we had another strong quarter of bookings, we recorded $1.2 billion in net authorizations, which was up 33% year on year, resulting in a net book to bill ratio of 1.3 Fivex.
Year to date, our net authorizations of $3.3 billion are up 17.8% over the same period of last year and our net book to Bill ratio is 1.33 X.
Providing some additional details on our Q3 bookings.
RFP and award volumes were once again robust across biotech and biopharma customers with double digit growth in new bookings in both our clinical and lab segments.
With no unusual cancellation activity related to cope at 19.
In terms of the mix of Covance versus non coated awards, while we continue to record a sizable valley volume of covert bookings in Q3.
As customers began to shift their attention back to the progression of other assets and their portfolios in the quarter. We saw the percentage of new bookings from Covance studies decline from approximately 25% of our total in Q2 to slightly under 20% in Q3.
Excluding Covance awards, we had double digit year on year growth in new bookings in Q3, and the net book to Bill ratio just shy of 1.2 Opex.
Finally on authorizations as with last quarter, given that the dynamics and behavior of Covance studies could differ from more traditional studies and since we have limited historical precedence.
Out of conservatism, we've again applied a larger haircut or discount to covert awards in determining the dollar amount to add to authorizations in backlog than the historical averages we've applied to non co bid work under our policy.
With respect to the TNL Q3 revenue of 1.234 billion increased 20.5% over the third quarter of 2019. This.
This was driven by 26.6% revenue growth in our lab segment and 19.2% growth in our clinical segment.
Revenue growth ex Cove, it was plus 1% growth.
Growth, excluding both covered and pass throughs was plus 2% with labs growing double digits and clinical down 1%.
Adjusted EBITDA for the quarter was $232.6 million, an increase of 14.8% over the same period of last year.
It should be noted that revenue growth outpaced EBITDA growth in the quarter due to a higher mix of indirect to direct revenues and cobot vaccine studies, resulting an optically lower adjusted EBITDA margin.
Revenues, excluding reimbursed cost grew in line with adjusted EBIT in the quarter at roughly 15%.
As David noted earlier, both our revenue and adjusted EBITDA were above the high end of the updated guidance ranges provided in September.
The beat was primarily driven by faster than expected burn of Covance studies in our clinical segment, where on some key programs. Our revenue since September were three to four times higher than what we recorded in July and August 10.
Turning to cash and liquidity.
Our operating cash flows remain strong in Q3.
Well, we did see a slight increase in DSL as a result of a significant uptick in customer activity in invoicing. We also had a record quarter on cash receipts and we further improved our AR aging profile.
As we seek to successfully collect on the large bolus of invoicing during quarter four we would anticipate even strong stronger cash collections and a reduction in dsos as we go forward.
Ultimately, we were able to improve our cash position from $693 million in Q2 to over $800 million in Q3 as a result, our ending cash balance combined with our revolver capacity further expanded our liquidity position, which was previously at its highest position in over 10 years too.
An even higher level of greater than 1.1 billion at quarter end.
As of September Thirtyth, our net leverage was 4.17 times trailing 12 month, adjusted EBITDA, which declined from 4.48 times at the end of Q2.
This continued progress means that we remain on track if not ahead of our stated goals at the time of the IPO in terms of reducing net leverage levels to the low fours by year end and into the threes next year.
Moving on to forward looking guidance.
For Q4 at the company expects revenues of $1.256 billion to $1.298 billion, which equates to plus 20% to 24% growth versus Q4, 2019, and adjusted EBITDA of 244 million to 250 million, which equates to plus four.
10% to 17% growth versus quarter four 2019.
For the full year the company expects revenues of 4.573 billion to $4.615 billion, which equates to plus 13.5% to 14.5% growth versus full year 2019, and adjusted EBITDA of 867 million to $874 million.
Which equates to 11.6% to 12.5% growth versus full year 2019.
These ranges assume that the impact of the pandemic on site access and patient enrollment either stays the same or gradually improves in November and December versus the first half October and that there are not any material delays or cancellations in fast burning cobot studies forecasted in the quarter from emerging safety concerns or other issues.
Turning to 2021.
As a standard practice and given a number of moving parts in the current operating environment related to the pandemic. We don't plan on giving formal 2021 guidance until our quarter four earnings call. However, we did want to provide investors with commentary that we hope is helpful and their understanding of key dynamics of our business and.
Now, we expect things to unfold in the quarters ahead, let.
Let me begin by saying that historically prior to COVID-19, our backlog has it reliably converted into revenues at a stable to increasing rate for the last five years.
However, backlog conversion and ultimately revenue and adjusted EBITDA delivery next year will largely be a function of two elements that remain difficult to precisely predict at this point in time.
First is covert awards and whether existing and any future studies will run as planned to be delayed or potentially be cancelled and second how the pandemic will impact the progression of noncovered work through the duration of next year.
Taking some time to discuss each of these items in more detail in Q3 of this year. Our overall backlog conversion rates returned to either close to at or above pre pandemic levels, depending on which of the metrics provided in our investor supplement you'd look at be it AC six so five six so six or.
Six so six directs only we've again provided all in an effort to be as transparent as possible in our disclosures.
While we are pleased that this recovery we would note that it is aided by a sizable magnitude of revenues from fast burning coal at awards in Q3 in particular from the vaccine studies, which are converting to revenue at a considerably faster rate than our overall portfolio.
Backlog conversion rates, excluding Covance studies, although improving sequentially from Q2 to Q3 and driving positive year on year growth ex Covidien Q3 remains below pre pandemic levels in the quarter and are likely to remain impacted for at least a portion of next year.
I would remind everyone that while PPD has adapted and found solutions to progress work on behalf of customers as well as if not better than anyone as evidenced by our growth rates, we're not through the pandemic yet as we entered the flu season, we are seeing cobot case flare ups in Europe, the us and other parts of the world that are low.
Lastly to continue to impact site and patient enrollment activities in the quarters ahead.
In quarter, four we again expect revenue growth and overall backlog conversion to benefit from a sizable volume of fast burning coal at work and to remain at an elevated level.
However, as the large vaccine studies ultimately progress beyond the patient enrollment and dosing stages and the work on trials shifts to longer term patient monitoring backlog conversion and the quarterly revenue contributions from vaccines trials will decrease.
As to exactly how those vaccines trials run in which quarters various stages are complete and other factors remain difficult to precisely predict.
The same is true for knowing exactly when conversion rates on noncovered work will be sufficient to sustain our growth in quarters on a standalone basis without such a strong benefit of Covance vaccines revenue.
We are optimistic that with the approval of multiple vaccines and therapeutics to treat co bid in coming quarters and into next year that site access and ultimately backlog conversion will eventually return to historical levels at some point in 2021.
However for full year 2021, overall quarterly backlog conversion is more likely than not to be at least 20 to 30 bips below 2019 levels as vaccines revenues decline and it takes some time for non co bid conversion rates to return to normal this.
This mathematically would translate into adjusted EBITDA that would be at or close to the company's original 2021 expectations of $960 million at the time of the IPO prior to the pandemic if the above assumptions on improvement on site access and patient enrollment activities and ultimately backlog.
Conversion were to hold true and we have continued commercial success in winning net new business.
With the benefit of having another quarter of data on our Q4 call. We will provide an updated view and a definitive range of revenue and adjusted EBITDA guidance, but hope that this commentary helps until then.
Prior to wrapping things up I'm pleased to announce that Tracy chromite has joined PPD as vice President and our new head of Investor Relations Tracy is a seasoned IR professional with over 25 years of experience and mostly recently served as head of IR for nuance communications.
She will be taking over from Nate Spiker, who has helped lead our IPO process and establish our public IR function now.
Nate will work with Tracy in the coming months to transition IR prior to him taking on a new role that PPD, which will be announced internally later this year.
We sincerely thank Nate for his work leading the IR function. The last several quarters and are happy to welcome Tracey the PPD.
In conclusion before opening up for today.
Q3 was another strong quarter from a commercial perspective with double digit year on year growth and net authorizations. We continue to see no unusual can't relations activity related to cope in 19, and our backlog is up nearly 16% year on year.
Third quarter revenue and adjusted EBITDA exceeded the high ends of our guidance ranges with double digit growth versus last year and positive revenue growth with and without Covance studies.
Our balance sheet has remained extremely strong we remain on track if not ahead of our goals at the time of the IPO in terms of reducing net leverage levels to the low fours by year end and into the threes next year, despite the pandemic and our robust liquidity position continues to grow quarter after quarter.
We're.
We're expecting another strong quarter with double digit revenue and adjusted EBITDA growth in Q4 and for the full year in total and we are well positioned to deliver at or close to our original IPO goals for adjusted EBITDA in 2021 with definitive guidance ranges to be provided on.
Our Q4 call.
With that I'll now hand over the call back to the operator to open the line for Q and a.
Thank you we will now be conducting a question and answer session.
Yes, all callers limit themselves to one question and one follow up.
I have additional questions you may we queue and those questions will be addressed time permitting.
If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate your line is in the question queue.
Hey Press Star two if he would like to remove your questions in the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we pull for questions.
Thank you. Our first question comes from the line of Eric Coldwell with Baird. Please proceed with your question.
Thanks, very much and thank you for all the fantastic details Bill I wanted to come to you.
You gave a lot of great metrics on the progression you are seeing at sites and with patients.
And I think this was referred to briefly in the in the prepared remarks, but.
I'm curious what you're seeing with the delayed studies projects that were scheduled to ramp this year before cobot started we just did a survey that said clients expected to get the vast majority of delayed studies online between September in February I'm curious if you agree with that thought process number one and number two if the recent case.
Spikes of.
Perhaps led to any recent discussions with clients that we're hoping to get previously delayed studies back on board.
Yes, Eric how are you doing thanks for the question.
Generally in agreement with that statement you laid out there as I mentioned, we have seen an improvement in site access I think I mentioned, 55% in the Q2 call and it's between 60 and 70% now and I look at that on a monthly basis since April I've seen a steady progression upwards. So thats a good thing.
Thing and we have a pretty large site network here PPD and we've conducted a survey of over 13000 sites and 86% at this point have resumed normal activities and and around 63%. According to our survey allow on site monitoring so it has been improving.
Now, having said that what ultimately matters is our ability to get on site and interact with.
The staff and patients and clearly there is some kind of.
Hot spots or spikes occurring with the pandemic I can't predict what's going to happen in the future, but what I can say is that PPD is right.
Ready and able to deal with that I also mentioned in my remarks that.
At the height of the pandemic, we are conducting around 90% of our visits remotely that's now.
Down around 50% of slightly more than 50% of visits are on site. So we have the flexibility I think to adapt to the conditions on the ground and as I've said before Thats region by region country by country State by state.
So.
We're going to watch this closely we have weekly metrics coming out were.
Putting the data points together and watching it but we have the flexibility to deal with whatever occurs.
Thank you very much for that and I just my follow up will be a shift to Chris for a really boring technical financial question, Chris the.
The tax rate over the last few quarters, 28%, 15%, 29% 22 28. This quarter you guys always foreshadowed volatility in quarter to quarter movement, but.
How do we get a handle on these shifts and could you give us some guidance on whats driving that volatility in the near term and what maybe what you're expecting over the next quarter or or few quarters.
Certainly that's what that's what I'm here for our.
Thanks, Rob appreciate the question we thought.
That this was raised in several it notes that were published last night on the quarter three effective tax rate was impacted primarily by two items. The first is that Q3 tax expense was unfavorably impacted by the impacts of changes in estimated geographic distribution of pretax POC profits between jurisdictions.
As well as the cumulative impacts of a Q3 income tax rate change in the UK from 17% to 19% together. These changes amounted to an impact of approximately $5.5 million in quarter three.
The second item is additionally, due to optical impacts to the Q3 TR from fair value losses on investments during Q3.
On pre tax book income the rate looks artificially high at 53% in the quarter, excluding the optical impacts from these fair value losses, our EMR would have been closer to 33% as a consequence of the two items that we mentioned earlier.
In terms of what I would expect for 2020.
Our year to date HCR is roughly 24.5%.
Due to the anticipated or discrete tax items that we kind of foresee in the near future. We're expecting the full year each year for 2020 to be in the neighborhood of 24%.
If we kind of go out further than that what we would say is that the previous guidance range. What was provided had assumed that the UK rate was 17% versus 19%. So given the increase in the UK income tax rate our future SCR performance will still depend on the ultimate.
Distribution of pre tax book income between jurisdictions. However, the increase in UK rate suggests that the tier in the future will be closer to the higher end of the previous guidance range of 21% to 23% that we gave or possibly slightly higher most likely in the range of 22% to 24%. So.
Hopefully that gives you the the.
The clarity I think on on that will help you projected going forward in the future.
And fantastic answers in both cases, thank you very much good job with the Threeq you execution. Thanks.
Thanks.
Our next question comes from the line of Robert Jones with Goldman Sachs. Please proceed with your question.
Great. Thanks for the questions.
I guess, maybe just to start with the Fourq you implied revenue guide I know you guys have been nice enough to give us the impact on bookings and revenue as its progressed from Cove. It I was wondering if you would be able to maybe give us some sense of the cobot contrail contribution assumed in the Fourq revenue number.
Good morning, Bob.
As indicated in my prepared remarks, we again expect a sizable contribution from Cove in revenues in quarter four.
However, we won't be breaking it down into a specific number but again, it's going to be a really strong quarter for those cobot studies, how strong it is really depends on how they progress and that's why we have a slightly wider range of revenues in the guidance, we gave in quarter four relative to previous quarters.
Okay that makes sense I guess, just a follow up then related the as we think about the impact from covert trials. There has been a focus on pass through is probably more than normal just given some of the dynamics around covert trials related to the encore trials.
Any sense you can give us on this dynamic what it meant in Threeq and how you're thinking about pass through revenues in Fourq you.
Absolutely. So passers again will be considerably higher in quarter four as they were in quarter three.
In general what we kind of saw in Q3 was that on our flex vaccine studies, there with a three to one ratio between indirect and direct.
We assume it's going to be somewhere in that ballpark as well in quarter four.
Perfect. Thanks, so much.
Our next question comes from the line of Jack Meehan with Nefyn Research. Please proceed with your question.
Good morning, and thanks for all the color on how things are trending in 2020 and into 2021.
I wanted to just ask about how growth trended in the quarter I ask because you obviously raise the bar in mid September to 13% to 16% growth and then ended up clearing that pretty well so maybe.
Maybe just a little bit more color around the shape of these cover trials, especially for the vaccine how much is booked in quarter one two.
Versus what's going to drift into 2021.
Any additional granularity would be helpful.
Certainly Jack.
So in terms of the quarter as as I noted in my prepared remarks, while the kind of Noncovered studies progressed I think there was a significant increase in our ability to progress those studies I think early in quarter three.
And it was more stable as we went through the quarter with some slight improvements on the covert awards, we clearly kind of had a lot more revenues in September than we had in July and August and that was part of the reason for the beat as.
These studies are not following sort of historical precedence and have been burning extremely quickly.
As to the relation of what will happen for next year.
As the duration of our current backlog of of covert awards is such that we expect to have revenues throughout next year from Cove and into 2022 that said.
The average quarterly revenue from covert awards next year is likely to be lower than it is in Q3 and Q4 this year, where we're getting such a significant contribution from this bolus of fast moving vaccine studies.
As those studies start to decline revenues or excuse me a start to progress well see a decrease as a shift there.
The work shifts over to longer term patient monitoring activity, so that will reduce the average quarterly kind of revenues.
We're likely to have some lumpiness as programs start and stop next year and depending on the scope of services that we have.
That's going to result in a regular growth rates next year that said, we're trying to stay away from providing guidance on the phasing at this point for 2021, but rather thats something we plan on addressing on the Q4 call.
Sounds good and then theres been a little bit of a to be around.
For the cobot trials, the potential risks around cancellation or discontinuation and I was hoping you could weigh in on that I know you are using a higher haircut.
In terms of what's getting booked.
Is there some point in the trial, though where you feel like you are in the clear what what does it take to get there.
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Yes, so if I unpack your question into two pieces.
The first answer is yes, and the way we handle backlog on not just Covance studies, but any studies they'll.
They'll become a point in time in the studies progression, where it's clear that the revenues are sort of.
Highly probable to manifest and if that becomes the case, we will adjust our haircut percentage to take it down so that we would increase our authorizations kind of for that and that would kind of come out and revenues. So as a close loop system on that.
As to how we should think about vaccines awards overall, our position on them largely hasnt changed from our past comments, namely that we havent seen any uptick in cancellations on them, so far but it but it still is early days, we don't expect there to be one vaccine that kind of comes out and gets and.
Early authorization at that will result in a cancellation of other programs.
Frankly from what we've kind of seen so far and what the government has said publicly is.
They view that multiple vaccines in multiple therapeutics are going to be needed to treat coveted in the future.
And there are also other constraints like manufacturing and kind of what not such that we expect multiple programs to go on now that said individual programs have we seen on some of the the.
The programs are currently being developed could run into safety issues as the response of the vaccine.
Several programs that are out there thats created delays in Q3.
There could be a situation, where an adverse event is stronger than that and it does result in a cancellation in the future.
We also could kind of see something on the maybe the third wave of vaccines programs that are out there that perhaps basically the efficacy of the early kind of vaccines are much stronger than expected and that kind of poses a risk that on some of them maybe for economic reasons, the kind of company or the sponsors.
Is less willing to go ahead, but so far we haven't seen any evidence on that but.
As we don't know fully how these programs will behave as you noted we have been cautious in our approach in booking authorizations.
Thanks Bill.
Our next question comes from the line of Elizabeth Anderson with Evercore. Please proceed with your question.
Hi, Jeff.
Quick clarification question I just there was some initial confusion you guys said nine sixtys for your 21, EBITDA 916 right.
Yes, 960, 960, yes, nine six after that.
That's what I thought, but any couple of questions about that.
Abundantly clear.
Okay as you talked about obviously.
Our strong cash position and improved cash flow going into the end.
How does that change your thinking in terms of capital deployment, maybe not only for Q, but as we move into 2021.
In terms of like new M&A opportunities that cobalt has created or you sort of think continue along this path that you laid out initially.
Yes, it's a good question I think fundamentally our thinking hasn't changed in that we're looking to invest in the business and continuing to build on these differentiators and capabilities that have been serving us. So well I think whats changed is probably the magnitude of strength, we feel about the balance sheet.
And our abilities, but it doesn't it's not binary where based on where the cash position is we're suddenly more.
Interest in M&A than we were before we've been committed and I think it is the same about wanting to continue to expand and add service capabilities that improve our differentiation, Chris you want to add anything to that no I think David David answered. It I would just simply say that as we continue to decrease our leverage level over time and get into that.
Threes, which will happen in the near future based on the progress we've made.
We'll determine what the optimal use of capital is on a go forward basis between organic investments to enhance our capabilities as Bill mentioned earlier, we've continued to invest in our labs business in China and other geographies on paying down debt pursuing M&A or returning cash to shareholders through share repurchases or dividends.
That said I think we're in a great position as you noted Elizabeth given that were at record levels of liquidity.
And through our growth and our cash flow conversion that continues to put us in a great spot as we shared with folks during the IPO.
That makes the times have you guys seen any change in kind as like availability.
Or like multiples.
Yes.
It's still too early.
I think we've seen a couple of cases, where some assets that may it may have had valuation expectations.
Going into the pandemic being higher than they are now, especially businesses that may be hurting from a pandemic and ability to generate the cash flows they thought they could generate.
Okay. Thank you.
Our next question comes from the line of Erin Wright with Credit Suisse. Please proceed with your question.
Hi, Thanks on the side, how would you characterize some of the trends that you're seeing across the core central lab.
Thank you Derek.
The lab segment can you break out what cobank related and not across that business.
Yes, thanks for the question.
Look the labs business has been performing very strongly over the past couple of quarters and where.
Very happy with that business and feel like we were uniquely positioned to take advantage of UBS.
Of just underlying market growth, but but the coated pandemic as well.
Clearly going forward.
We expect the labs momentum and growth to continue probably not at the level you're seeing now.
Which is.
Pretty phenomenal.
The GMP and by away and vaccines business as I said is less dependent on on samples themselves. The central lab is dependent on samples we've seen that as we said in Q2 recover to pre pandemic levels and now here in Q3, we've exceeded pre pandemic levels and our central lab.
As winning I mentioned the award that we won we've got excellent technology, there that allows transparency and we're perfectly positioned for for this covidien.
Pandemic, we're in right now so the central lab has been growing very strongly we don't break out the sort.
Sort of the sub segments of the lab business. So I don't want to talk specifically about it but we are seeing strength on strength across all of the labs. So they're all contributing to this very strong growth going forward I think the main point I want to make to you is we.
We expect our labs to grow.
In the future and beat underlying lab market performance, but we don't expect them to necessarily grow at this blistering pace. We're seeing right now so I expect strong growth into into the Q4 and into next year.
Maybe to add to what Bill had said, what we did disclose or share in Q2 was that in the quarter all three of our labs.
Grew at a double digit pace and had for the first half I believe that's also the case in Q3, so all of them are performing extremely well.
Okay, Great. That's helpful. And then just a bigger picture question.
With the significant shift.
Tele health in virtual solutions, I guess, how sticky is that shifting and post coping Walton.
The economics and finance.
Locations for you with that potentially greater shape this type of trial.
Yes. This is bill thanks for the question.
You know we shared during Q2 and would reiterate that now in Q3 that were seeing.
And higher number of awards and interest in Sorta digital slashed virtual trials or decentralized trials use another term but.
But on a percentage basis. This is still a low.
Volume relative to our overall revenue in EBITDA as a company. So I'm expecting that we're going to see a post pandemic momentum continue in this area and others broad interest in eco eight consent tele visits fully virtual trials.
We mentioned the screening app that we use in our site network business and we're screening 90% of our patients right now through that.
That tell a visit App for our site network business. So I expect the tools and the operating model to shift over time and this momentum to continue and I think PPD is in a position where we are able to bring together not only our own technology and our own knowledge, but we're also.
Able to bring other.
Sort of third parties in the ecosystem to patch together a solution for a customer whether it's a trial that they are about to run in their designing or it's a trial that is running and they want to ensure business continuity and sort of patient continuity in that trial. So you might find answer to the question I think.
Its important is growing in importance, we've got a lot of capability, we're going to continue to invest in this area, but it's still a small percentage of our overall backlog at this point.
Okay got it thanks.
Our next question comes from the line of Ricky Goldwasser with Morgan Stanley. Please proceed with your question.
Yes, hi, good morning, So just going back to the EBITDA guidance for next year off 960, if I look back at your.
Guidance from pre closing.
Can it be.
For any higher I think we're talking here about kind of 12% to 10% growth.
So when we think about theme side to EBITDA tied with his team pre.
Should we think about that difference is about $20 million and on the EBIT line is the benefit you expect to see some good.
Next year and the remaining of the balance would be just.
The catch up work in new trial starts.
Well again, Ricky I think we don't plan on kind of breaking out the revenues at this stage I think between revenue.
Excluding covance from basically Cove. It is something that we may discuss on our quarter four call that said.
Qualitatively, we expect to have covert awards kind of through the duration of next year, but at a lower average quarterly rate than what we had in Q3 and Q4 of this year. Our Noncovered studies, we do expect that.
At some point next year with the introduction of vaccines and therapeutics to treat covert that we're going to see an improvement in conversion rates, but they are likely to kind of remain impacted us for some time until we're finally through this.
Okay. So.
Is it the right way to think about it at 960 million EBITDA for next year still has a fairly large component also.
Thanks.
And maybe in the second half of the year. Okay. Great. Thank you and then just a clarification on site access as we think about utilization of these sites you said doing damage, 90% of inventory right now 50% of visits our onsite. So should we assume that date, if 60% to 70%.
Site accessible at these sites all right. Thanks.
Person capacity.
Ricky This is bill answering your question here no I don't think you should.
Make the connection to to capacity.
Based on site accessibility.
You know.
The bottom line here is that we're seeing sites get better and better at dealing with the pandemic and their ability to treat patients and look.
Patient activity is also improving we're talking about site availability here, but patient activity is also improving and I think you are seeing.
Patients and physicians.
Understanding the need to continue.
Healthcare thats required and so the sites or are pretty good at doing that plus as I mentioned, we have a lot of alternative strategies available to us at our disposal to keep the clinical trials moving whether the there's a resurgence in the virus or not so I feel pretty pretty comfortable but I don't think you make the correlation that there.
Generally 50% capacity at the sites, we've seen noncovered site activity increases well our site activations have have increased and there.
Availability and willingness to see patients is increasing too now we're watching that very closely as we move into the winter months and with some of the signals and signs of hotspot impossible resurgence.
Thank you.
Our next question comes from the line of Tycho Peterson with JP Morgan. Please proceed with your question.
Hey, good morning, Chris.
I'm wondering if you could tell us how much of the clinical backlog is still delayed given that metric into Q I think it was 7% and it was 10% in the first quarter are you able to break that out and then can you also just talk to what drove that significant growth in September you talked about Threex to Fourx July August and any comments on October bookings.
Alright so.
Unfortunately, I might not be able to foresee here. So much information about the riches Tyco are the reason is I don't have an updated metric on the 7% I would assume that.
It has kind of come down, but it hasn't gone to zero as there is just a piece of it that is still stuck out there but.
But we certainly haven't seen it get kind of worse, okay by name measures, but likely better but still some degree of impact, but I don't have the specific figure.
On the second question, we don't have our financial results yet for the month of basically October.
Yet I would kind of say that on our interim metrics, we're seeing that basically so I can't give you a specific figure, but covidien metrics and progression of those trials has continued to kind of kinect.
On a go at it at a very high pace. So we havent seen any drop off per se is what I would say yeah. Let me, let me add a couple of oil and so im spending a lot of time with with customers gross biotech and large biopharma and planning meetings and status meetings and I think the the holds that are driven by the customers are.
In significant now.
That initial pull back once the there was an understanding that these studies across therapeutic areas can be executed with.
Safety of patients in mine and a lot of the technology that bill talked about to screen remotely through telemedicine and all that all about Easter.
He stop on the hold impact from the customer side.
There's there's still this site access.
Issue. This remaining while it's getting better its still does remain and maybe a way to look at this is if you take out all the Cove and work and you look at just the traditional backlog ex Cove it.
How is our ability to convert that backlog what would our backlog conversion rates look like well I won't give you. The specifics I can tell you. They improved from Q2 to Q3, which is another element of this traditional backlog is being processed.
The industry certainly PPD is adapting with our customers very very well to be able to continue to execute those non cobot studies. So thats on the whole piece on that.
I'd like to add in a couple of comments on the authorizations piece as well because I think in Q2. There was a question of what are we seeing in bio pharma and biotech.
Relative to the non Cove at work in the volume of Noncovered work, we were saying I mentioned in Q2 Biopharm was back to normal in terms of the competitive decision volumes, we would expect to see in the quarter that continued in crude Q3 I mentioned in Q2, it's still look like biotech was a little bit light on traditional work, maybe they were hesitant with the band.
Mick in Q3 that that phenomenon is gone.
Competitive decision volume sourcing from biotech in Q3, excluding Cove. It was exactly where we thought it would be under normal circumstances. So thats, a very positive element and just maybe another cut at this if you look at our our awards and in Q3 and you take out all the co.
Good awards.
We still grew authorizations year on year at a double digit pace. So I think you're seeing there we're focusing a lot on cobot and that work is a tailwind to us, especially the vaccines piece in Q3 and going into Q4, but this traditional book of business there doesn't appear to be.
Hold back from other Biopharma biotech of of getting back to prosecuting their pipeline of new drugs.
Where the issue exists is the ability to prosecute the site level.
Offset a bit by all these adaptations of remote monitoring Tele medicine, prescreening visits and and whatnot. So you put all those dynamics together, that's what makes it a little hard for us to precisely forecast 2021, but as we get each quarter under our belt, we know a little bit more so hopefully that gives you a little more color on what I think was yet.
Question.
Yes, Thats helpful. And then on the site access dynamic you'd previously talked about it improving kind of wanted to 2% of weak I know on the call. Today, you talked about leveling off recently, which is not surprising caseload is going back up I mean should we assume you kind of hover at this 60% to 70% rate for most of the fourth quarter and then on enrollment doesn't seem like there is any.
Patient enrollment issues I'm, just curious how you think about drop out or patient hesitancy as cold cases are picking back up as well.
On the on the site access I mean, it's it's I'll try to answer the question, but fundamentally we don't know because we don't know how this resurgence of the pandemic is going to really hit.
I would say maybe to put boundary conditions around this.
We saw the world in the us get hit pretty hard in the second quarter and maybe in PPD terms without Cove and work all that impacted site access got to a level I think where we were at 50% 50% of sites or even less than that but we're accessible and that had our backlog.
Version rate drop about 100, Bips versus 2019 standard so that's probably how bad it could get.
Now we would until proven otherwise we would assume that we're going to stay at the level. We're at while we have seen some plateau and maybe a belief that with the resurgent the way resurgence, where we're seeing it now a belief that 1% to 2% improvement a week that might be too optimistic, especially since we're seeing the plateau, so probably holding that is a fair.
Assumption and maybe the the sites have gotten better at dealing with caseload and processing and access continues to improve that would be an optimistic case, so that probably bound the site access piece that way.
Okay, and then last one district for Chris on Capex thinking about I know you are adding 75000 feet lab space in China.
Does that kind of get you what you need here in the near term or how should we think about additional capacity expansion, maybe the first half next year.
Yes, I'll, maybe start and bill may want to kind of that as well right. Now we don't have any constraints on basically our capacity basically in any of our labs. So again, just like thinking about the way the math kind of works on this is that.
The places that we historically would have basically capital constrained would be more bio and GMP, we have ample basically kind of space within our central lab. So that we can scale up volumes to a significant degree with any covance studies or any extra work without without any need for basically additional capacity expansion, we may need to.
Add sempra instrumentation or kind of other things like that but yes.
Right now, we feel perfectly comfortable and executing all the cove and work that we need on the other two they're relatively kind of less basically impacted by the demands kind of created by basically cobot studies, and it's more or less running the normal way that it would so we typically kind of have a lead time, where we can see what's required.
Fired and have ample opportunity over like a six to nine month kind of period to basically make those investments in growth, but right now we don't feel capacity constrained in any of the labs, but we're making the investments today to kind of make sure that we have ample capacity as demand continues to kind of grow ahead anything add bill.
Chris That's the main point were not capacity constrained in any of our labs I happened to highlight the China expansion, because that's where we want to take advantage of a new market.
But we're we're expanding in our Richmond, Virginia, Bioanalytical vaccine lab, we're expanding in our Middle 10, Madison GMP lab were expanding in our IYR Athlone, Ireland laboratory footprint as well which serves.
Predominantly GMP and as Chris said, our Central lab is.
Is an area, where we're not capacity constrained by facilities, that's high throughput high automation tool.
Type a lab and we have an ability to take on more work and have been doing so.
Okay. Thank you.
We have reached the end of the question and answer session.
Just a month I would now like to turn the floor back over to you for closing comments.
Thank you operator, while 2000 Twentys presented several challenges as I hope you can see from our Q3 results PBD remains focused on continuing our track record of growth.
I want to thank all of our employees for going above and beyond to deliver for our customers. It's truly inspirational what we're saying and.
And thanks for joining our call today and have a nice day.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.