Q1 2023 ICON plc Earnings Call
Speaker 1: only mode. After the speaker presentation there will be a question and answer session. So ask a question you will need to press star 1 1 on your telephone. I would now like to turn the conference over to the speaker today Kate Heavon. Please go ahead mom the one is open.
Speaker 2: Good day and thank you for joining us on this call covering the quarter ended March 31, 2023. Also on the call today we have our CEO , Dr. Steve Cutler, and our CFO , Mr. Brendan Brennan. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call.
Speaker 2: Certain statements in today's call will be forward-looking statements. These statements are based on management's current expectations and information currently available, including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward-looking statements.
Speaker 2: due to risks and uncertainties associated with the company's business, and listeners are cautioned that forward-looking statements are not guaranteed of future performance.
Speaker 2: undertake any obligation to update publicly any forward-looking statement either as a result of new information, future events, or otherwise. More information about the risks and uncertainties relating to these forward-looking statements may be found in SEC reports filed by the company, including the Form 20-S filed on February 25.
Speaker 2: 24th, 2023.
Speaker 2: This presentation includes selected non-GAAP financial measures, which Steve and Brendan will be referencing in their prepared remarks. For a presentation of the most directly comparable GAAP financial measures, please refer to the press release section titled, Condensed Consolidated Statements of Operations.
Speaker 2: While non-GAAP financial measures are not superior to or substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes.
Speaker 2: a reconciliation of non-GAAP measures.
Speaker 2: expense, restructuring costs, foreign currency gains and losses, amortization and transaction related and integration related costs and their respective tax benefits.
Speaker 2: We will be limiting the call today to one hour and would therefore ask participants to keep their questions to one each with an opportunity for a brief follow-up. I would now like to hand the call over to our CEO , Dr. Steve Cutler. Thanks Kate and good day everyone.
Speaker 3: ICON made a good start to 2023 in Quarter 1, delivering solid results while continuing to develop our strategic initiatives in healthcare intelligence.
Speaker 3: We continue to navigate macroeconomic headwinds that are impacting our industry. While we expect these challenges to cause uncertainty in the short to medium term.
Speaker 3: Now, more than ever, our customers are turning to Icon as a strong, stable and strategic partner that has the broad service, resources and capabilities to optimally manage their clinical development programs and functions.
Speaker 3: Notwithstanding this, we have seen a generally stable underlying market demand across customer segments.
Speaker 3: supported by the fundamental drivers of increasing R&D spend.
Speaker 3: further outsourcing penetration. This has resulted in improving sequential RFP trends in quarter one. Within customer segments demand from mid and large biopharma companies continues to show growth with a recent increase in the number of larger FSP opportunities.
Speaker 3: In the emerging biotech segment, cautiousness with regard to spending has continued.
Speaker 3: as the broader funding environment remains challenged.
Speaker 3: Companies are actively conserving cash and prioritising programs until they have improved visibility to additional funding.
Speaker 3: As a result, we have seen some delays in decision making within this segment.
Speaker 3: and more considered assessments on the scale and timing of their studies. While this dynamic creates a more challenging environment in the segment in the near term,
Speaker 3: phase of development and connecting our operational and medical experts with their leadership team.
Speaker 3: to collaboratively regenerate optimal development plans and conduct their studies.
Speaker 3: and long-term partnerships.
Speaker 3: We remain encouraged by the traction we are gaining broadly in the marketplace.
Speaker 3: and the opportunity ahead of our company.
Speaker 3: segments and we've made good progress in advancing a number of strategic discussions.
Speaker 3: with large and mid-sized farmer companies since our union with PRA Health Sciences.
Speaker 3: There is an increasing amount of engagement taking place at a strategic level in customer accounts as companies evaluate and review their optimal clinical development strategies. We are seeing a growing need for full service, functional and hybrid solutions with customers seeking a partner.
Speaker 3: that has the necessary scale, expertise, experience, and breadth of offering to seamlessly execute their programs and or augment their existing infrastructure. To that end, in quarter one we announced the strategic partnership with Leo Farmer, a global leader in dermatology.
Speaker 3: with ICON acting as their sole provider of clinical development services.
Speaker 3: The partnership will leverage both fully outsourced and functional outsourcing activities in a tailored and flexible hybrid approach to development.
Speaker 3: This unique model is designed to provide patients improved access to innovative trials while effectively and flexibly managing Leo's development portfolio.
Speaker 3: In addition, our late phase business was awarded a full service strategic partnership in real world solutions by a large biopharma sponsor in Quarter 1. This customer cited ICON's strong history of delivering real world evidence studies, collaborative approach to deliver solutions, and assessment of CRO leadership.
Speaker 3: as key decision criteria when awarding this partnership.
Speaker 3: We continue to see opportunities to improve our execution in key development activities such as study start-up, site selection, patient identification and recruitment as trial complexity increases and durations expand.
Speaker 3: With challenging dynamics in the market, such as site-spacing resource constraints, increasingly niche patient populations, and an overall up-tick in regulatory requirements, the need for novel solutions and new approaches.
Speaker 3: With challenging dynamics in the market, such as site spacing, resource constraints, increasingly niche patient populations, and an overall uptick in regulatory requirements, the need for novel solutions and new approaches is accelerating.
Speaker 3: As a consequence, our focus and investment in innovation has continued to increase across a number of areas within our organisation. We have demonstrated success with several tools we have developed at ICO and believe we are in the early stages of creating even more meaningful improvements in clinical development. Our approach to innovation recognises the importance of coupling our unique experience and expertise alongside technology to develop solutions that deliver value for customers.
Speaker 3: One search, our integrated AI tool for site identification and site selection, is driving remarkably better delivery of studies, with a 53% reduction in the median time for site identification and a 50% reduction in the percentage of non-enrolling sites on icon studies. Separately, we have launched a new customer facing tool with our late phase business called Cassandra designed to more accurately predict post-marketing commitments.
Speaker 3: This model utilises machine learning technology along with our leading expertise in phase four and post-marketing clinical trials to generate insights on late phase strategy.
Speaker 4: and playing.
Speaker 3: Outside of technology we are further investing in our differentiated capabilities with a purchase of the remaining shared in our joint venture with Oncocare, a global cancer research site network.
Speaker 3: OnkerCare is uniquely positioned to increase patient engagement and oncologist participation in clinical research through more efficient clinical trial delivering and a patient-led approach.
Speaker 3: We are excited to add OncoCare to our leading site and patient solutions business with the critical therapeutic expertise and experience it brings to further enhance our offer.
Speaker 3: Moving to our financial performance in quarter one, Icon delivered solid results with a 5.3% revenue growth on a constant currency organic basis over quarter one 2022. Excluding COVID related work on a constant currency basis, revenue increased 9% year over 20%.
Speaker 3: Gross booking has increased 6% sequentially.
Speaker 3: But a higher level of cancellations and contract modifications in the quarter resulted in net bookings growth of 3% over Q4 2022 and a net book to bill of 1.22%.
Speaker 3: Solid direct fee revenue growth drove gross margin expansion of 200 basis points on a year of a year basis.
Speaker 3: We also saw another quarter of impressive growth in adjusted EBITDA, resulting in an increase of 17.2% year over year, driven by cost management and a continued execution of our hub location strategy across global business services.
Speaker 3: Our capital deployment strategy continues as planned, with a further reduction in our floating rate debt exposure in the quarter. Additionally, we remain active in evaluating potential acquisition opportunities that strategically align with our portfolio and further enhance our offering.
Speaker 3: We are reaffirming a full year 2023 financial guidance of revenue in the range of $7.94 to $8.34 billion representing 2.6 to 7.7% growth on a year-over-year reported basis and adjusted earnings per share in the range of $12.40.
Speaker 3: to $13.05 representing growth of 5.5 to 11.1% on a year-over-year basis.
Speaker 3: The guidance assumes double digits adjusted EBITDA growth for the full year 2023 over 2022.
Speaker 3: Finally, I want to thank our employees across Icon for their significant contributions to our performance in quarter one.
Speaker 3: We remain steadfast in our commitment to advancing and accelerating clinical development, and we are encouraged by the value we are delivering for customer sites and patients.
Speaker 3: I'll now turn the call over to Brendan for additional comments on our financial results.
Speaker 3: additional comments on our financial results. Brendan.
Speaker 3: Thanks, Dave. In quarter one, ICON achieved gross business wins of $2.86 billion and recorded $443 million worth of cancellations.
Speaker 5: This resulted in net awards in the quarter of $2.42 billion a net book developed 1.22 times.
Speaker 5: With the addition of the new awards in quarter one, our backlog grew to a record of $21.2 billion, representing an increase of 2.4% on quarter four, 22, on an increase of 8.4% and Year over Year.
Speaker 5: Our backlog burn was 9.6% in the quarter, slightly down from Q4 levels as expected.
Speaker 5: Revenue in Quarter 1 was $1,978,600,000. This represents a year-on-year increase of 4% or 5.3% on constant currency organic basis.
Speaker 5: Overall, customer concentration in our top 25 customers decreased from Q4 2022. Our top customer represented 8.8% of total revenue in Q1 and our top 5 customers represented 28.8% of revenue. Our top 10 represents 42.6% while our top 25 represents 63.5%.
Speaker 5: Rose Margin for the quarter was 29.8% compared to 29.9% in quarter 422.
Speaker 5: Gross margin increased to 200 places points over gross margin of 27.8% in quarter one of 2022.
Speaker 5: Total SGNA expense was $189.6 million in quarter one or 9.6% of revenue. In the comparable period last year, Total SGNA expense was $177 million.
Speaker 5: $187.9 million or 9.9% of revenue. The uptick in SG&A expense was driven by an increase in our general bad debt provision of approximately $15 million in the quarter. As Steve mentioned, this is a reflection of the challenging economic environment that a small subset of our customers are facing.
Speaker 5: At just the EBITDA was $399 million for the quarter or 20.2% of revenue. In the car over a period last year at just the EBITDA was $340.6 million or 17.9% of revenue, representing a year-on-year increase of 17.2%.
Speaker 5: Adjusted operating income for a quarter four was $368.7 million, a margin of 18.6%.
Speaker 5: This was an increase of 17.4% over a adjusted operating income of $314.1 million, a margin of 16.5% in Q1 of 2022.
Speaker 5: Then an interest expense was $81 million for quarter one as rate increases drove sequential interest expense higher as anticipated. We continue to expect the full year interest expense to total approximately $300 million in 2023.
Speaker 5: The effective tax rate was 16.5% for the quarter and we continue to expect the full year 2023 adjusted effective tax rate to be approximately 16.5%.
Speaker 5: Adjusted net income attributable to the group for the quarter was $239.8 million, a margin of 12.1%, equating to adjusted earnings for shares of $2.90, an increase of 5.1% year over year.
Speaker 5: In the first quarter the company recorded $11.4 million of transaction and integration related costs. US GAAP income from operations amounted to $216.8 million or 11% of revenue during Q1. US GAAP net income attributed to the group in Q1 was $116.7 million or $1.41 per diluted share.
Speaker 5: compared to $1.36 per share of the equivalent period in the prior year. In terms of the butter dynamics to consider for this year, we expect to see backlog conversion average 9.5% for the full year in line with our previous expectations. As long as duration.
Speaker 5: complex therapeutic programs continue to grow as a proportion of our overall backlog. Separately, we expect to see a modest decrease in our interest expense in quarter two from quarter one levels.
Speaker 5: Net accounts receivable was 1 billion $197 million at the 31st of March 2023. This compares to a net accounts receivable balance of 1 billion $182 million at the 31st of December 2022. DSO was 54 days in the quarter, up from 35 days on a comparable basis from March 31st to March 22 and flat on a comparable basis.
Speaker 5: at December 31st 2022. Cash from operating activities in the quarter was 176 million dollars. We continue to focus on management of our DSO and are encouraged with our billing levels as well as record cash collection activities which were in excess of 1.9 billion dollars in quarter one.
Speaker 5: However, we have more work to do in this area and our focus will remain to ensure we sequentially approve both our collections and DSO performance for the remainder of the year.
Speaker 5: At 31 March 2021, the company had a cash balance of $282 million in debt of $4.489 billion, leaving a net debt position of $4.207 billion. This compared to a net debt of $4.364 billion at 31 December 2022.
Speaker 5: and debt of 4.581 billion dollars on March 31st 2022. Capital expenditure during the quarter was 26.7 million dollars.
Speaker 5: We made a 250 million payment on our term loan B facility in Q1 and ended the quarter with a leverage ratio of 2.8 times net debt to adjusted EBITDA.
Speaker 5: We expect to continue our payments on our terminal B facility over the course of 2023, totalling approximately $800 to $1bn for the full year. In addition, we have negotiated an increase in our revolving credit facilities from $300m to $500m as a result of the increased scale of the organisation.
Speaker 5: In closing, before we move to Q&A, we want to again extend our gratitude to ICON employees around the globe for their efforts and contributions throughout the quarter.
Speaker 1: Operator, we are now ready for questions. Ladies and gentlemen, we now begin this question and answer session.
Speaker 1: As a reminder, if you wish to ask a question, please press star 1 1 on your telephone.
Speaker 1: We are now taking the first question.
Speaker 6: And the first question from John Soroby from UBS. Please go ahead. Your line is open. Hi, thanks for taking the question. I guess I was wondering if you could provide a little color on what you're seeing from large pharma demand. Some of the large pharma companies have now some optimization on R&D projects and are you seeing any changes in demand there and has that played into any of those increases in cancellations?
Speaker 3: Yeah John , I think the demand as we've said on previous calls from large farmers has been pretty consistent and pretty solid. So we haven't seen any sort of significant downturn. Our large farmer part of our business has been probably one of the best performing parts of our business over the last 12 months or so and the demand continues from that.
Speaker 3: from that group of customers. As I alluded to in my comments, we're seeing some FSP opportunities in that area, but I'm not ready to declare that as a trend. But certainly the demand has continued quite strongly in that space in the last month.
Speaker 6: do you expect that burn rate to continue to be below that 10% rate for the remainder of the year?
Speaker 5: for the mid-nines there. So I don't think that's gonna change dramatically as we've gone through the year. Brendan, do you wanna? Yeah, that's exactly it. I think we were pretty clear on that. So yeah, we expect it to be, on average, about nine and a half percent for the full year. Yeah. Great, thanks for taking the questions. Okay.
Speaker 1: Thank you for your question.
Speaker 1: We are now taking the next question. The next question for Hans Heinz from MIDS Group. Please go ahead. Your run is open.
Speaker 7: Great, thank you. Maybe you could talk about the RFP activity by customer type, what's growing, what's not growing. And then secondly, the non-human primate issue, when do you think, if at all, that will impact late-stage clinical trials? And maybe what are your customers talking about, and is this something that you are worried about for 2024 and 2025? Thanks.
Speaker 8: Sure.
Speaker 3: And let me take the second one first if I could. In HP there's not a human primate issue. We really haven't seen our customers, I heard our customers talking about that at this point. And I don't anticipate that's going to be an issue for us, certainly in the short the median term. You know, if things continue or go worse on that front, there would presumably be some impact down the track, but there are different models that...
Speaker 3: I think our customers can implement in this space and believe that things will get sorted out well before it impacts us in the clinical space. So I don't have that as one of my top 10 risks so to speak. And that's not something that I'd say our customers are concerned about, at least from what they've told me at the moment.
terms of RFP activity across the customer segments, as I mentioned to John's question we've seen solid continuation on the RFPs from a large farmer point of view. I think biotech has been a bit more muted, we've said that, we've been consistent what we've said that over the last 12 months or so. Having said that, sequentially from the last quarter you know we've seen upticks in both areas.
from an RFP point of view. So it seems that we're seeing some positive steps in that direction as I say on a sequential basis and then across things like labs, real-world evidence, late phase, you know we're seeing some consistently strong trends you know on a year-to-year basis.
Overall, we see demand continuing being solid, a little bit of volatility in the biotech space, as I think we've alluded to, in terms of decision-making and RFP opportunities, but overall the market I think is constructive and solid.
We see demand continuing being solid, a little bit of volatility in the biotech space, as I think we've alluded to, in terms of decision making and RFP opportunities, but overall the market is constructive and solid. Great, thanks.
Thank you for your question.
We are now taking the next question. Please stand by. The next question is from Elizabeth Henderson from Everco IC. Please go ahead, your line is open.
Hi, guys. Thanks so much for the question. Obviously, you mentioned that on the SG&A line in the first quarter, the bad debt expense flew through that. How are you expecting the cadence of that to continue?
through the back half of the year, where your incremental opportunities given the current macro outlook. Thanks.
Hey, let's run my take that one. Yeah, we, you know, we, we, we increased that up to you as I mentioned that in the prepared remarks, $50 million in the quarter. It was a general provision. So we've, it was just across the board, across, across that customer group. We don't anticipate that it'll be of that quantum as we go forward. I'm sure.
we'll keep an eye to it and in the normal course it would be maybe a couple of million dollars on a quarterly basis but we certainly don't expect that quantum to have to be repeated as we go beyond quarter one at this point so it was I think appropriate and the level of bad dep revision we have across the group which is still only about in totality about 36 million dollars is appropriate.
But again, we don't expect that sequentially to be in that same ballpark. Got it. And can you talk about any sort of notable changes in sort of share shift or anything? I know we've heard different commentary from different players in the market. So just trying to get a sense of any notable changes either sequentially or year over year, depending how you think about that in terms of share shift.
larger ones but we do believe we're well positioned to take shares as we all know some of our larger competitors are going through some changes and we do think there might be some opportunity there for us and we'll be looking to take advantage of that but I can't say that we've had a significant share shift on that front from the larger customers or the larger competitors at the present time.
Thank you for your question. We are now taking the next question.
The next question for Max Moch from William Lay. Please go ahead. Yara Neato.
Hi, good morning. Thank you for taking our questions. Starting off with a quick one for me here, I just wanted to clarify on how your expectations for FX have changed this year. Brennan, I know you previously talked about it being a little less than a 1% headwind. Is there any update to that outlook given the more moderate headwind that we saw here in the first quarter? Thanks. Some things I hear about stat your core
Yeah, I mean it has gone a little positive max in terms of the overall outlook at this point. So should it really be a little bit of a tailwind for the full year at this point, we always gone to 110 or anything around that, that being the major currency pair. You know, you will have noticed that we are reaffirming our guidance so certainly.
our tinking on that FX during the course of this quarter is certainly included in those numbers. Okay, thank you. And then following up, I believe you said excluding COVID growth was 9% in a quarter, which implies COVID was something like a 90 million headwind. In your commentary last quarter about COVID revenue stepping down, I think 6% of revenue in 22 to 4% in 23 implied something like
a lot of Edwin's there Max. Yeah, what we see our COVID revenues coming down and about the rate that you outlined there, we've seen a ring around about four to five percent this year and probably coming down the backlog, I think is around three. So yeah, they are coming down. So I think you're...
assumptions or your expectations on that front are broadly in line with ours? Yeah, Max, I mean, the expectation coming into this year is that we were going to see sequential decreases as we progress through the year. So Q1 was the expectation in terms of the highest COVID contribution as we're continuing to work through some trials that are starting to wind down.
Great, thank you.
Thank you for your question.
We are now taking the next question. The next question from Patrick Donnelly from CT. Please go ahead, your line is open.
Hey guys, thank you for taking the questions. Steve and maybe Brendan can chime in as well. Just one on the guidance, I guess philosophy at a high level. I mean it seems like as you work your way through the quarter, you know cancellations may be picked up a little bit. You have the bad debt expense. The early stage biotech continues to be a little bit soft I guess.
I guess you guys have this great track record of execution, hitting numbers, beating numbers even. I guess we sit here today, you know, four months into the year. How do you think about, you know, the upside to guidance compared to whether it's January , this time last year, whatever it might be? I guess how comfortable are you with the guide given, you know, there are maybe some crack showing up on the macro side at a high level.
we can get to our midpoint. That is our expectation at the moment. Having said that, the macro environment is probably more challenging now than it was when we set guidance back a couple of months ago.
And so there are some things we have to work through and we're doing that very actively with the team. We're all very engaged in wanting to do that. But at the moment we feel with a reasonable level of confidence that we can reaffirm and we can get where we want to be on the guiding side of things.
Yeah, I mean, just to again echo maybe some of the comments I said to Max, Patrick, obviously, we have, we are in a slightly more favorable foreign exchange environment now than we would have been when we set the guidance. And you'll see that, to Steve's point, but there have been some macro other elements that have given caution. Overall, we've left it in the same place. So you can see that even though we're leaving it in the same place, there are certainly election polls.
that are going into that number and we're considering an quarterly business. Yep, understood, okay. And then Brendan, maybe on the DSO piece, obviously that's been a focus, you kinda flagged it last quarter, talked a little bit more about it this quarter. Can you just talk about, I guess, what's being done there? To your point, I don't think there was any sequential improvement. You're talking about, obviously, throughout the year, we'll see some improvement there. Can you just talk about, what's being done there?
What are we doing? Biggest piece I suppose that we've done over the last couple of quarters in making sure that we're billing the correct quantums on a quarterly basis. We've seen billing now in Q4 and Q1 well in excess of our revenue in both of those quarters and in fact in excess of two billion dollars in each of those quarters.
Effectively, that's just catching up on some of the billing that is kind of outlined. It was missed effectively during the first half of 2022. So we need to get back in line with that. Those bills are out the door. We're having the obviously now we're in the point of making sure that we can get them in with the credit terms.
And of course, the ongoing calls to conversations with our customers make sure that they're happy with the fact process and they were getting the cash in. So I think what we've done is made really, really good progress in terms of making sure that our bidding is at the right level over the last couple of quarters. We've seen that our cash collections picked up nicely from Q3, Q4, and then into Q4 and Q1, I should say. So what we're seeing really then is making sure that we're continuing on that good progress as we go from one to two. And certainly would like to see some significant impacts to the DSO, of course, the DSO.
with two here. First off, pass-throughs. I know you don't break out reimbursable and pass-through details, viewed all as one cohesive model, but I am curious. We've seen some volatility in that sector of revenue, that segment of revenue, more than, I think more than normal, and normal is pretty volatile.
Are you can you give us some qualitative trends in terms of pass through impact on revenue or bookings? I know you don't break it out specifically, but I'm just curious what you're seeing in the marketplace.
Yeah, I think we'll, you know, I think as I said to you, Eric, you're right, the past three times volatile and have been volatile as we've kind of exited the COVID phase as well. We've had some headwinds there that have had some given us some challenges. You know, I think maybe the best way to answer that question is to say that...
on a direct fee basis, revenue growth was in the highest single digits for the quarter. And so clearly as we've reported it about 5.3% was constant currency, you can say that the pass-throughs were a little bit of a headwind at the quarter and probably continue to be going forward. But we're very confident and very happy that the underlying margin-generating...
revenue and business is continuing to grow at a very solid clip. And so that's probably the best way to address that question.
Fair enough and then second one here labor inflation. Obviously it's been rather high the last couple of years there's been good pricing opportunities the last couple of years as we entered into 2023. I think the general expectation in the market was that getting pricing out of customers might be harder after
opportunities are stacking up to offset those pressures. And obviously, say this all in the context of a very nice margin expansion. So I think we know where you're headed with this, but I'd like to get your updated thoughts. Yeah, I mean, so let me start with the pricing. You hit it pretty much spot on Eric. You know, our products and negotiations, I think we've talked about.
with us on not just inflation increases but also there's a level of sort of market related increases that we have you know we have some good data on but of course that's always a discussion and it's probably a increasingly challenging discussion going forward so I'd say that that
That particular aspect of our business has probably become a bit more challenging from a pricing point of view but we continue to provide good data on not just the inflation environment but the market environment and customers are smart, they do understand that we need to pay market-related salaries and all that good stuff. So it's a constructive conversation but probably not as...
easy, these things are never easy but it wasn't it's not as it's probably a bit more challenging than it was a year or two ago. In terms of wage inflation you know we again that one's that one's been a bit more challenging as well as we all know inflation continues we've seen it in around about the four to five percent level across the organization some countries of course are more than others and of course
But I would say the pressure in the labor market has probably attenuated a little bit over the last sort of six months, 12 months or so. We've seen our retention levels continuously tick up over the last few, really last 15, 18 months now and I sort of...
We're up well above, well we're getting well back to pre-COVID levels now, in fact even ahead of pre-COVID levels, so we've made some good progress in that front. And so we are finding I think that the labour market, the sort of red hot labour market that it was perhaps during COVID or post-COVID is sort of...
easing a little bit now and we're finding that our salary merit increases and bonuses have gone down well with our employees and that you know we're able to retain them and give them opportunity. So overall I think both environments are challenging perhaps more so than the normal times but we're managing I think pretty well.
That'll be all for me. I just want to say congrats on a steady report and pretty choppy seas. So keep it up. Thanks, guys. Thanks. Thanks, Eric. Next question, please.
That will be all for me. I just want to say congrats on a steady report in pretty choppy-seas. So keep it up. Thanks, guys. Thanks. Thanks, Eric. Any questions, please? Thank you. Will you question?
We are now taking the next question. Please stand by. The next question is from Sandy Draper from Google Name Partner. Please go ahead. Your line is open. Thanks very much. I'll echo two things about Eric. One, congrats on last quarter, but also a lot of my questions have been.
So maybe for me, and just to sort of head potential questions for me off at the pass, in your slides you just called out the 2022 revenue by customer segment. And I think there could potentially be some misunderstanding. You call out small biopharma is 33%. And the-
file pharma out there looking for funding tomorrow.
Hey Sandy, it's Brendan here. As we talked about, the way we've defined how we look at that subsector of emerging biotechs or small non-funded or non-revenue generating is for companies that have R&D spends on an annual basis of less than $100 million. And companies of that ilk would represent about 15% of total revenue.
So obviously a 15 of that 33. So just to give you an idea of what that what that quantum of exposure is. Okay, great. I appreciate that clarification. And then maybe my unrelated follow up, this longer term thinking about your comments about backlog burn, certainly understand as you're getting through the COVID workforce burning fast and obviously.
depending on where pass throughs come in, you're seeing it step down but sort of stabilize around sort of nine, five-ish. Is the mix of business such that if it stayed like this, you would see a multi-year, just a little bit of step down, or are we now sort of at a level that, okay, we're stable here, and unless there are changes, it's gonna say plus or minus.
to stay in this nine and a half type level longer term, or are we back into a long term, slightly declining trend? Thanks. Yeah, I mean Sandy, that's a tough one to answer. It really depends upon the sorts of projects we can win and get into the portfolio and then start off. Obviously oncology is about 40% of our work where it tends to burn a bit slower.
But when we get some vaccine work coming that will burn faster. So, you know, we would anticipate it. We're certainly looking at keeping our backlog numbered around about the mid nines. 9.5% is our expectation. I think we can do that. It certainly has ticked down a little bit since on the post COVID.
period and that is because those vaccines studies are tended to go away and we're back into the more routine oncology slower studies. There are other therapeutic areas that would burn a little faster as well. We believe there's some opportunities in the metabolic area where some of the G or P inhibitors is coming through and that no sort to trial.
the next question.
Please stand by.
The next question from David Dwinley from Jefferies. Please go ahead. Your line is up. Hi, thank you very much. Thanks for taking my question. Kind of a different version of the...
The much asked burn question, Steve, your, your comments in your prepared remarks, he talked about changes in decision making cycle times, which is, is I don't think the 1st time you've talked about that. That's kind of been an ongoing kind of building issue.
we are seeing in, you know, in kind of industry clinical trial start data that this large building bucket of trials that are really not moving to start, which would seem to kind of square with what you're talking about.
Would you, I guess two part question here, would you attribute that to mostly small biotech and mostly kind of challenges in funding or are there other issues there? And then the second part of the question is, how are you guys thinking about risk adjusting?
revenue forecast and or your backlog for this you know deeper deliberation about what clients want to move forward. Thanks. Yeah I'll take the first part David and Brendan might have a crack on the revenue forecasting side of things. You know I think there's a good chunk of that those trials that are not starting as well.
the industry I think of that and that tends to be in the small it's not exclusively I must say it's not exclusively in the biotechs and emerging companies but that I would say would tend to be tend to be the most of it. Interestingly as we look across our cancellations they were slightly elevated for the quarter but as we look across that you know they really came about 50-50 from our larger pharma and our biotech so
If you look at it on a cancellation basis, there wasn't any particular predominance towards the biotech sector. So take from that what you will, maybe on the forecast. Yeah. And I'll not let Dave. We constantly look on a quarterly basis, of course, that are forecasts. And that's obviously deliberating about when the first patient ends. When are we going to get going on?
customers about the timing of their projects. And so really it's only projects that have good visibility that come into that forecast, and we really have a very, very strong sense that they have funding in place and all of those pieces to actually go ahead. So of course that then informs our guidance setting processes we go through on a quarterly basis. So I feel like we have a fairly robust idea and picture of what styles are going to start and what files are going to be attenuated.
Got it. And then my second question, if I can sneak this one in on cash conversion, I appreciate you address this a little bit before to one of the prior questions. But I think on the last quarter, you talked about having improved your billings in the third quarter or fourth quarter, I guess I thought that I'll be it.
To be fair, you said first half. I thought that maybe the third quarter billings from last year would start to see maybe a more impactful move on on your AR. And I guess I'm just kind of fishing for are you getting pushback in terms of customers ability or willingness to pay on time? Or is it simply just
customers waiting to the you know whatever the term is 60, 90, 120 day term on on the payment and that hasn't
customers waiting to the you know whatever the term is 60, 90, 120 day term on on the payment and that hasn't gotten to we haven't gotten to that point yet.
I guess it predominantly the latter. There's always going to be some conversations you have to have with customers to make sure that they pay their bills and that they're well-funded and all those kind of points. But as we said, we didn't take our billing in Q3. Our cash collections in Q1 weren't significantly off the event that we built in Q3. So we did see a nice uptake. Or wait. We did.
The next question is from Justin Bowers from Deutsche Bank. Please go ahead, your line is open.
Hi, good afternoon. Just on the prepared remarks, you mentioned seeing sort of an uptick in demand across the service and hoping you could expand upon that and we're seeing a demand from there. Yo so
Well I think we talked about an uptick in demand across large pharma and so that's a decent chunk of full service in that but most of our uptake in full service is really within the biotech and the more mid-sized areas in terms of uptick in demand. The large pharma market's been strong.
there's a good component of FSP in that market as well Justin. I don't think I would mean to lead anyone astray on that one but it's really the large farmer we've seen good, you know, a solid market demand RFP was on that one and that there is a component of both FSP and full service in that.
Whereas of course in the biotech and mid-sized it's much more predominantly full service. And that market has been a little bit more, as I say, volatile. So you put it all together and I think we see good demand for both and even for hybrid opportunities as well. And we see ourselves as well positioned to be able to accommodate either of those three models really, if you think of full service FSP and the more hybrid ones.
Got it. And then just one quick follow up with sort of taking a step back and as we think about some of these more hybrid with respect to like virtual and DCTs, you know, increasing over time, how should we think about that with respect to the level of pass-throughs? For those who plan to continue to connect with Cosmo, and other training materials that we have given over the past week leave a press ofT We thank you Guy for "#
And are you starting to see that impact the level of pass-throughs now in some of the contracts? I don't think we've seen any sort of material impact on pass-throughs through the shift to hybrid models or
DCTs will still have significant pass-throughs associated with them. I'm not sure I see too much difference between that and a full service type opportunity. Hybrids perhaps, I mean the FSP traditionally has a lower proportion of pass-throughs so hybrids are probably towards the, the pass-through proportions are probably towards the lower end.
not as high as say a full service but so to the extent that that impacts we you know we'll see that but it's a yeah the number of DCT trials we do is fairly limited most trials have a DCT component but there are very few pure DCT trials and as I said we don't really see any impact of on the proportion or the amount of pass-throughs on those on those trials at this point.
Got it. Thanks a bunch. Okay, thanks. Next question.
Thank you for your question. We're now taking the next question. Please stand by. And the next question is from Luke Segrod from BassLays. Please go ahead. Awesome, good morning everybody. I want to go back to that decision and the timing delays because
Brendan and Steve what I guess when we talked back in 4Q you guys were talking about customers kind of
right sizing their R&D budget and maybe they're not ordering up all the bells and whistles that would go into a trial and now we're hearing about actual delays in trial starts. And so through your history in the industry, what percentage of these trial delays or the starts will actually turn into just never even starting up like as you guys think about it.
Gee Luke, that's a, I mean how long is a piece of string? I mean who am I for a response to that one? That's such a hard one.
So I'd want to answer. I think it's fair to say that we are seeing some delays. In terms of the percentages and the impact, it will have an impact. No question about that.
to the extent that's going to continue to the percentage of trials that are in there. You know, it's not insignificant. And you know, we are seeing, as I say, the delayed and we're looking at it in terms of decision-making and customers being very careful about what services they want and what trial they want to do in this.
perhaps some opportunity in terms of consulting with them to make sure they're doing the right trial and that they do anything that's too big or too small or you know they do the right number of trials and all that so there's as I say some opportunity, but they are being very considered and it is leading to some delays particularly with those smaller trials.
here to the business. OneSource continues to be a differentiator for you guys. Can you update us on how much of the backlog includes, or how many of the wins are now including OneSource for you guys? Can I assume that this is a premium service?
Yeah, it's one search actually. Oh, I'm sorry. Yeah. This is our proprietary application that allows us to identify the right sites to be in a trial. You know, and making sure that and the benefits we're seeing as I said is fastest, faster selection, faster identification, faster setup, but probably most importantly.
fewer sites that have zero recruiting patients or even one patient. As you can imagine in our business, you know, getting a site up that has the recruits that doesn't recruit or even recruits one patient can be much more problematic than obviously they're not getting that site up at all or getting sites that recruit five or ten or you know a critical number of patients. So the benefits are there from an efficiency point of view. We apply that tool now to all the studies we do.
trials take you know at least a year to two years and sometimes three years. So many of the trials that we started using this technology on are still in process and still working through. What I was alluding to in my comments is we're starting to see those tangible benefits really impact our portfolio of work and so I'm really pleased with the
with the technology and we've been able to bring in some different data sources as well which help us to identify sites that have a greater propensity to recruit diverse patient populations. You know that's a big issue with the regulatory authorities now. We need to be recruiting more diverse patient populations and so the tool is also allowing us to identify sites that can help us to do that as well. So it has a number of benefits not just speed but also diversity and quality.
All right, great, thanks. Thank you for your question. We are now taking the next question. And the next question from Casey Woodring from JP Morgan. Please go ahead, Yannick. Great, thanks for taking my questions.
So we've been getting a lot of questions around the read through to CROs from the bearish commentary from some of the bioprocessing companies on their smid biotech customers of late. Can you explain your level of visibility into the smid spend versus some of those bioprocessing players? You know those companies largely took down their expectations for the year after seeing smid spend trends over the first three months of this year. But you've just said here today that smid biotech RFPs improved sequentially and are reiterating guidance. So just kind of curious on the difference in commentary there. Yeah, you know as I said Casey,
We've seen sequential updates and so we see an underlying pretty reasonably constructive market in the biotech area. It's not to say there's not some volatility out there, funding challenges are in existence, they are taking more time, you've heard all of that. But overall these are the companies that are producing or finding the drugs. This is where the innovation is happening in our industry and so we...
really want to engage with them because they often become part of our large farmer partners as well as the C-Gen Pfizer acquisition was I think during the quarter that happened and these are the companies that really have a really bringing these really new and improved and fantastic drugs to market so being part of it is important for us we're there for the long term there is some volatility to market no question about that they are high by that by their very nature higher risk companies only have sometimes one or one or two drugs sometimes
and so there's an element of volatility that we're all working through but overall and on the underlying market and the underlying business we believe in the biotech space is solid, is strong and I believe we've probably hit the nadir in terms of the biotech funding area. I think we can see
positive noises and some positive funding moves going forward. So I'd like to think that in 12 months, it won't be in the next six I don't think, but in the next 12 months or so we'll really be back on track with respect to a solid and stable biotech funding environment, particularly as we see things like interest rates and hopefully some of the macroeconomic challenges dissipate, we can be in a good place. So as I say, short-term volatility, short-term challenges.
next 12 months or so, but I think in the longer term we feel we're in a very good place with this market and we feel the market's very solid.
that specifically occurred in the last few weeks of the quarter. Curious as to how spending is trending from Smith customers over the last few weeks kind of after all of that stuff went down, has there been a notable drop off in RFPs or any significant change to how those Smith customers are thinking about things after FVB? Thank you.
Hi Casey, it's Brendan here. We didn't see any substantial movement after it and obviously it was a concern at the time but I think obviously the federal government came out and dealt pretty definitively with it and so it hasn't had a kind of significant knock-on at this point.
Thank you for your question. We are now taking the next question.
Thank you for your question. We are now taking the next question. Please stand by.
The next question from Derek DeBouin for Bank of America. Please go ahead. Your name is open. Hi. Great. Thanks for squeezing me in. So, a lot of what – a lot of things asked, but I just wanted some color. Is there any particular therapeutic area?
that is the early-stage biotechs that are delaying, you know, for example, cell and gene therapy or something like that. Anything that's sort of common about it, and then I actually have some financial statement questions.
Sorry, the question was around cell and gene therapy. Well, basically just asking if you're seeing any therapeutic area in some of these early stage biotics, there's one therapeutic area that's getting delayed, right? For example, cell and gene therapy, I'm just sort of curious as to if there's any common themes for the ones that are getting delayed or they just all just early stage and have cash issues. Yeah, more the latter. I think there's no particular focus on any particular issue.
What are you looking for for a run rate on, for the year for restructuring and other costs and for stock based compensation, just to sort of help true up the adjusted net income numbers?
Yeah, I think probably the first quarter numbers aren't a bad proxy in terms of what we were expecting. You might see some of the integration costs take off a little bit as we go through the course of the year. But the dollars that we have at the first quarter probably aren't a million miles off. Certainly on something like stock-based comp that will nearly just be take that number and multiply it by four. So
integration costs we'd expect to see run off a little bit. And on restructuring, well we'll keep an eye to that as we go through the course of the year. We're constantly looking at our office infrastructure, that was a large part of the restructuring cost in the current quarter. So that's something I think that will be in the same ballpark and we'll keep an eye to that. So that might move around a little bit but the other two, one decreasing slightly, the other one will be rather stable.
Great, thank you very much. Thank you for your question. We are now taking the next question. The next question is from Timothy Dale from Wells Fargo. Please go ahead. You have any questions? season.
Great, thank you. So, Steve, just wanted to follow on to an earlier response on share shift. You mentioned some changes going on at peers that offer near-term opportunities to pick up some share around this volatility, but thinking about after those transition periods are behind them, how should we be thinking about shared defensibility under a backdrop of a few new well-capitalized players or...
more motivated, well-capitalized players with an increased appetite for recovering the share loss over the last few years.
Tim, I'm not sure you should be overly concerned about it from our point of view. I think we see, as I say, some of our competitors going through some changes, expected changes, and that's all good for them. But customers are relatively conservative, and shareships don't happen quickly in our business. It's a relatively conservative industry, and we all have partners and relatively long-term partnerships that play out, and these agreements are usually in place for several years.
certainly nothing dramatic would be my expectation. I think what I thought so from that on the large-scale competitor point of view I think what we've seen more recently is some pick up in share from some of the more from the smaller mid-sized competitors and so we've been fortunate I think you know as I think about rescue opportunities or rescue trials that come into our business and we've seen several come in from some of the smaller players, smaller to mid-sized players I'll put it that way and so that's probably the more you know the more opportunity for short-term gained a long it's a more over a...
several years, I think, to make any adjustments on the larger custom competitors. All right, now I appreciate that. And thank you for introducing me to the term recalcitrance, by the way. My follow-up is just, Brendan, I think we'd all appreciate, if you're willing to provide it, a bit more visibility on how order trends vary on a month-by-month basis in one queue. Appreciate the commentary, a little peek through into April , but that'd be great if you could help us out or at least tell us if there's any.
volatility across the months within the quarter. In business development term is it?
Yep, yep, thanks. Yeah, I mean, every quarter has its own look to it in all honesty. There's some quarters where you come in strong at the start of the quarter and there's often four quarters where you're finding it out to the last minute. So I don't think there's any, this quarter we started off well, we had a solid quarter throughout. As Steve mentioned, the cancellations were a touch harder than we would have liked, but still very solid overall performance. So I don't think there's a particular trend.
everyone for joining the call today. We look forward to updating you on our results as we progress through the year and further deliver on our mission in accelerating clinical development. Thanks all and have a good day.
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