Q3 2023 ICON PLC Earnings Call
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Good day, I'm, sorry keeps us done Goodbye Watkins. So the Q3 2023 earnings conference call at this time, all participants southern Edison only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one.
And one on your telephone you would then have an automated message advise then you'll have just raised.
To withdraw your question. Please press star one and one again.
Please be advised that today's conference is being recorded.
Like to hand, the conference over to your speaker today.
Please go ahead.
Thanks.
Good day and thank you for joining us on this call covering the quarter ended September 32023 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.
And that there are slides available to download on our website to accompany today's call.
Certain statements in today's call will be forward looking statements. These statements are based on management's current expectations and information currently available, including current economic and industry conditions.
Actual results may differ materially from those stated or implied by forward looking statements due to risks and uncertainties associated with the company's business and listeners are cautioned that forward looking statements are not guarantees of future performance.
Forward looking statements are only as of the date, they're made and we do not undertake any obligation to update publicly any forward looking statements either as a result of new information future events or otherwise.
More information about the risks and uncertainties relating to these forward looking statements may be found in our SEC reports filed by the company, including the form 20-F filed on February 24 to 2023.
This presentation includes selected non-GAAP financial measures, which Steve and Brendan will be referencing in their prepared remarks for our presentation of the most directly comparable GAAP financial measures. Please refer to the press release section titled condensed consolidated statements of operations.
While non-GAAP financial measures are not superior to or a substitute for the comparable GAAP measures. We believe certain non-GAAP information is more useful to investors for historical comparison purposes.
Included in the press release and the earnings side, you will note a reconciliation of non-GAAP measures adjusted EBITDA adjusted net income and adjusted diluted earnings per share excludes stock compensation expense restructuring costs foreign currency gains and losses amortization and transaction related and integration related costs and their respective tax.
Yes.
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'd now like to hand, the call over to our CEO, Dr. Steve Cutler.
Thank you Kate and good day everyone.
I Couldnt delivered impressive results in quarter three as we continue to work as a trusted partner for our customers and bringing innovative solutions to achieve their clinical development goals.
The industry demand environment in clinical development remains healthy with a solid level of opportunities present across all customer segments.
Overall RFP activity continued to improve in quarter three with growth in the high single digits on a trailing 12 month basis.
Net bookings increased 10% year over year, resulting in a good book to Bill of 126 times revenue in the quarter.
Historically.
We've seen a very close correlation between 606 and 605 net business wins and that was the case this quarter as well.
This has helped us to drive strong direct fee revenue growth and margin progression.
We are encouraged by the positive trends, we are seeing across our business that have continued into the beginning of quarter four and we remain cautiously optimistic that this trend will continue as we close out this year.
But that said were.
Mindful of macroeconomic factors driving uncertainty and a number of areas, including biotech funding levels, the interest rate environment and evolving geopolitical concerns all of which impacted our industry.
Operator: Good day, and thank you for standing by.
Operator: Welcome to the Q3 2023 earnings conference call. At this time all participants are in the listen only mode. After the speakers presentation, there will be a question and answer session. To ask a question draw in the session, you will need to press star one and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. Please be advised that today's conference is being recorded.
As customers face uncertainty or potential challenges in their business, whether it be from macroeconomic concerns changes.
Changes such as the inflation reduction act or in total cost pressures.
Our role as a strategic partner becomes even more critical.
We are constantly engaging with our customers.
<unk> solutions that accelerate clinical development, while driving greater efficiencies across their portfolios.
Unknown Executive: I would not like to have the conference over to speak it today.
Kate Haven: Kate Haven, please go ahead. Thanks. Good day, and thank you for joining us on this call covering the quarter ended September 30th, 2023. Also on the call today we have our CEO, Dr. Steve Cutler and our CFO, Mr. Brennan Brennan. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call. Certain statements in today's call will be forward-looking statements.
We do this in a number of areas, including implementing technology solutions advanced data analytics, and streamlining right limiting development activities.
We believe this backdrop presents icon with even more potential opportunity in terms of outsourced work over time.
Kate Haven: These statements are based on management's current expectations and information currently available, including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, and listeners are cautioned that forward-looking statements are not guarantees a future performance. Forward-looking statements are only as of the date they are made, and we do not undertake any application to update publicly any forward-looking statement, either as a result of new information, future events or otherwise.
Given the scale of the company in the range of our customer base, we are well diversified and embedded from a customer and service segment perspective, ensuring that the impact of any market changes can be managed effectively.
Does that and we are seeing a significant level of demand with customers seeking novel solutions to customize the development model that is built on flexibility and efficient delivery of services.
As we've noted before this often takes the shape of a blended model of development incorporating elements of full service and functional solutions.
Our competitive position has never been better and being able to address our customer needs in this regard.
Kate Haven: 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 20S filed on February 24th, 2023. This presentation includes selected non-gap financial measures, which Steve and Brennan will be referencing in their prepared remarks. For a presentation of the most directly comparable gap financial measures, please refer to the press release section titled Condensed Consolidated Statements of Operations. While non-gap financial measures are not superior to or a substitute for the comparable gap measures, we believe certain non-gap information is more useful to investors for historical comparison purposes.
The experience depth and breadth of our capabilities across full service and functional solutions is unmatched in the industry.
In addition, our market leadership extends beyond the services and solutions offered to the stability.
And consistency of our team at an executive and operational level.
This has allowed us to build and further develop strong customer relationships, leading icon well placed to partner with customers more strategic manner.
We also retained our singular focus in clinical development, which we believe provides improved project delivery for our customers and is a key differentiator in our industry.
Kate Haven: Included in the press release and the earning sides, you will note a reconciliation of non-gap measures. Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share, excludes stock compensation expense, restructuring costs, foreign currency gains and loss of amortization and transaction related and integration related costs and their respective tax benefits.
Our therapeutic depth and experience has led to continued success from a new business perspective.
As we announced in September we are partnering with BARDA as part of project next Gen to execute a phase two multi year clinical trial to evaluate the effectiveness of next generation COVID-19 vaccines.
Kate Haven: 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.
Steven Cutler: I now like to hand the call over to our CEO, Dr. Steve Cullen. Thank you, Kate, and a good day everyone. I can't deliver impressive results in quarter three as we continue to work as a trusted partner for our customers in bringing innovative solutions to achieve their clinical development goals. The industry demand environment in clinical development remains healthy with a solid level of opportunities present across all customer segments. Overall, RFP activity continued to improve in quarter three with growth in the higher single digits on a trailing 12 months base.
We were selected for this important trial due to our leading experience in vaccine development and specifically and effectively executing recent first generation COVID-19 trials.
In the current year, we expect our COVID-19 related business to be in the range of 3% to 4% of total revenue.
We would anticipate that on a go forward basis would continue to represent a similar percentage of total revenue.
We have continued our focused investments to drive forward, our strategy of becoming the world's leading healthcare intelligence organization.
Steven Cutler: Neat Bookings increased 10% year over year, resulting in a good book to bill of 1.26 times revenue in the quarter. Historically, we've seen a very close correlation between 606 and 605 net business wins, and that was the case this quarter as well. This has helped us to drive strong direct fee revenue growth and our margin progression. We are encouraged by the positive trends we have seen across our business that have continued into the beginning of quarter four, and we remain cautiously optimistic that this trend will continue as we close out this year.
One critical element, we focused on is an improving overall patient access and engagement to make it easier for the site and patient to participate in clinical research.
We have recently partnered with watch it.
Clinical trial provider that utilizes decentralized solutions to bring the trial to a patient.
Through a mobile research unit or nursing team met a patient preferred location.
We believe lot chips capabilities will nicely complement our decentralized trial offering and act as an extension of our broad <unk> network.
This approach to development not only improves overall patient access.
Steven Cutler: With that said, we're mindful of macroeconomic factors driving uncertainty in a number of areas, including biotech funding levels, the interest rate environment, and evolving geopolitical concerns, all of which impact our industry. As customers face uncertainty or potential challenges in their business, whether it be from macroeconomic concerns, changes such as the Inflation Reduction Act, or internal cost pressures, our role as a strategic partner becomes even more critical. We are constantly engaging with our customers in identifying solutions that accelerate clinical development while driving greater efficiencies across their portfolios.
But importantly, it has the potential to reach more diverse patient populations as well an issue that is an increasingly important factor in <unk>.
Clinical development.
We recently completed our annual celebration of our own it culture at icon engaging every single employee across our organization across time zones and global locations.
We highlight the important work that we do in advancing life saving products to the market.
<unk> mission that unites our dedicated workforce and underpins the unique culture and pride that differentiates our organization.
A great Testament to this point was the recognition that icon received in September and being named as one of the worlds best companies in 2023 by time.
Steven Cutler: We do this in a number of areas, including implementing technology solutions, advanced data analytics, and streamlining rate limiting development activities. We believe this backdrop presents icon with even more potential opportunity in terms of outsourced work over time. Given the scale of the company and the range of our customer base, we are well diversified and embedded from a customer and service segment perspective, ensuring that the impact of any market changes can be managed effectively.
This inaugural list.
Compilation of the most outstanding global companies across a number of industries.
The analysis ranked companies in three key areas.
<unk> satisfaction revenue growth and sustainability.
We were proud to be recognized amongst this prestigious group of companies as the top ranked CRO on the list.
This award is reflective of the increased scale of our organization and our commitment to making icon the customer partner and employer of choice within our industry.
Steven Cutler: To that end, we are seeing a significant level of demand with customers seeking novel solutions to customize a development model that is built on flexibility and efficient delivery of services. As we've noted before, this often takes the shape of a blended model of development, incorporating elements of full service and functional solutions. Our competitive position has never been better in being able to address our customer needs in this regard. The experience, depth, and breadth of our capabilities across full service and functional solutions is unmatched in the industry.
Moving to our financial performance in the quarter icon delivered strong results with 6% revenue growth of our quarter three 2022.
Directly revenue growth was again in the high single digits on a year over year basis.
Net bookings were also strong across our business segments, reaching a record level in quarter, three and driving 10% year over year growth total backlog.
So all of our direct fee growth and our industry, leading cost management supported our double digit adjusted EBITDA growth.
Steven Cutler: In addition, our market leadership extends beyond the services and solutions offered to the stability, tenure, and consistency of our team at an executive and operations level. This has allowed us to build and further develop strong customer relationships, leaving icon well placed to partner with customers in a more strategic manner. We also retain our singular focus in clinical development, which we believe provides improved project delivery for our customers and is a key differentiator in our industry. Our therapeutic depth and experience has led to continued success from a new business perspective.
<unk> margin of 21% quarter.
This was driven by a continued increase in gross margin as well as further leverage in our SG&A expense, which totaled $8 eight <unk> revenue in quarter three.
The adjusted EBITDA margin level of 21% was set as a mid term target for 2025 back in early 2022, and I commend our team for the impressive performance to deliver on this target well ahead of our initial plan.
Further despite the ongoing pressure on a year over year basis from increased interest expense, we continue to grow our earnings per share in quarter three with a notable 10% increase over quarter three 2022.
Steven Cutler: As we announced in September, we are partnering with Barra as part of Project Next Gen to execute a phase to multi-year clinical trial to evaluate the effectiveness of next-generation COVID-19 vaccines. We were selected for this important trial due to our leading experience in vaccine development and specifically in effectively executing recent first-generation COVID-19 trials. In the current year, we expect our COVID-related business to be in the range of 3-4% of total revenue and would anticipate that on a go-forward basis would continue to represent a similar percentage of total revenue.
From a capital deployment perspective, we executed on our strategic priorities as previously outlined with a focus on continued debt paydown as well as a return to our M&A strategy focused on tuck in acquisitions in strategically important areas of our portfolio.
In October we closed a small but strategic acquisition of Phillips pharma solutions, a leading provider of medical imaging and cardiac safety monitoring solutions.
This will enhance our medical imaging experience and capabilities, particularly in the therapeutic areas of cardiovascular and metabolic diseases.
Steven Cutler: We have continued our focused investments to drive forward our strategy and becoming the world's leading healthcare intelligence organisation. One critical element we focused on is in improving overall patient access and engagement to make it easier for a site and patient to participate in clinical research. We have recently partnered with Lightship, a clinical trial provider that utilizes decentralized solutions to bring the trial to a patient either through a mobile research unit or nursing team at a patient's preferred location.
It also brings new core laboratory services to icon positioning us well to grow further in both existing and new customer relationships.
While this is a small acquisition broadcom expected to contribute less than $10 million in the fourth quarter. It is synergistic with our business and providing cardiac services that are needed on clinical trials.
We expect to continue evaluating further strategic acquisitions as well as opportunistic share repurchases as we move into 2024.
Steven Cutler: We believe Lightship's capabilities will nicely complement our decentralized trial offering and act as an extension of our broad, a select care site network. This approach to development not only improves overall patient access, but importantly, it has the potential to reach more diverse patient populations as well, an issue that is an increasingly important factor in clinical development.
I was also pleased with our recently announced returned to an investment grade debt rating by S&P global ratings.
While we are still in discussions with other rating agencies I am confident that we will be able to restructure a significant portion of our variable rate debt in the next six months or so.
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Along with continued debt paydown.
Steven Cutler: We recently completed our annual celebration of our own it culture at ICON, engaging every single employee across our organisation across time zones and global locations. We highlight the important work that we do in advancing life-saving products to the market, a noble mission that unites our dedicated workforce and underpins the unique culture and pride that differentiates our organisation. A great testament to this point was the recognition that ICON received in September in being named as one of the world's best companies in 2023 by time.
Significantly reduced interest expense in 2024.
We will provide more details on this as we make further progress.
With our performance through quarter, three we are reiterating our financial guidance for the full year 2023, we expect revenue to be in the range of eight point or $7 billion to $8 to $1 billion, an increase of $4 three to six 1% over the prior year.
Additionally, we expect adjusted earnings per share to be in the range of $12 63.
To $12 91.
Steven Cutler: The inaugural list is a compilation of the most outstanding global companies across a number of industries. The analysis ranked companies in three key areas, employee satisfaction, revenue growth and sustainability. We were proud to be recognised amongst this prestigious group of companies as the top ranked CRO on the list. This award is reflective of the increased scale of our organisation and our commitment to making ICON the customer partner and employer of choice within our industry.
Representing an increase of seven 5% to nine 9% over the full year 2022.
Before I close out my comments I want to recognize our colleagues in Israel and the conflict in the middle East during this very difficult time.
The safety and well being of our employees is and will always be our number one priority.
And we are actively supporting affected employees as well as customers in that region.
We remain focused on ensuring continuity of our business operations and the customer studies to the best of our ability and we will continue to support our dedicated team who have shown great resiliency during these challenging times.
Steven Cutler: Moving to our financial performance in the quarter, ICON delivered strong results with 6% revenue growth over quarter three 2022. Directly revenue growth was again in the higher single digits on a year-over-year basis. Net bookings were also strong across our business segments reaching a record level in quarter three and driving 10% year-over-year growth in our total back. Scholar, direct fee growth, and our industry leading cost management supported our double digit adjusted EBITDA growth, resulting in a margin of 21% in the water.
I'll now turn it over to Brendan for additional comments on our financial results Brendan.
Thanks, Dave and quarter training icon achieved gross business wins of 3.06 billion.
And recorded $474 million worth of cancellation. This resulted in an impressive level of net awards in the quarter of $2 five $8 billion of net book to Bill of 126 times with the addition of the New awards in quarter three our backlog grew to a record $22 2 billion.
Steven Cutler: This was driven by a continued increase in gross margin, as well as further leverage in our SGNA expense, which totaled 8.8% revenue in quarter three. The adjusted EBITDA margin level of 21% was set as a mid-term target for 2025 back in early 2022, and I commend our team for the impressive performance to deliver on this target well ahead of our initial plan. Further, despite the ongoing pressure on a year-over-year basis from increased interest expense, we continued to grow our earnings per share in quarter three, with a notable 10% increase over quarter three 2022.
Representing an increase of two 6% on quarter two of 2023, an increase of 10% year over year.
Backlog burn was nine 5% in the quarter in line with quarter two levels as we anticipated.
Revenue in quarter, three was $2.055 billion. This represented a year on year increase of five 8% or four 8% on a constant currency organic basis.
Overall customer concentration in our top 25 customers increased slightly from quarter two 2023.
Top customer represented eight 5% of total revenue in quarter, three and our top five customers represented 25, 7% our.
Our top 10 represented 44%, while our top 25 represented 62, 2%.
Steven Cutler: From a capital deployment perspective, we executed on our strategic priorities as previously outlined, with a focus on continued debt paydown, as well as a return to our M&A strategy, focused on targeting acquisitions in strategically important areas of our portfolio.
Our customer base remains well diversified with a number of scaled partnerships.
Resulting in a lack of particular concentration across our top customers.
Gross margin for the quarter was 29, 8% compared to 29, 6% in quarter. Two 2023 gross margin increased Turkey basis points of gross margin of 29, 5% in quarter three 2022.
Steven Cutler: In October, we closed a small but strategic acquisition of Philip's farmer solutions, a leading provider of medical imaging and cardiac safety monitoring solutions. This will enhance our medical imaging experience and capabilities, particularly in the therapeutic areas of cardiovascular and metabolic diseases. It also brings new, core laboratory services to ITOM, positioning us well to grow further in both existing and new customer relationships. While this is a small acquisition provider, expected to contribute less than $10 million in fourth quarter, it's synergistic with our business in providing cardiac services that are needed on clinical trials. We expect to continue evaluating further strategic acquisitions as well as opportunistic shape or in purchases as we move into 2024.
Total SG&A expense was $191 million in quarter, three or eight 8% of revenue in the comparable period last year total SG&A expense was $192 9 million online 9% of revenue the.
The year over year reduction was driven by successful delivery of cost synergies related to the PRA transaction as well as further implementation of our global business services model.
Adjusted EBITDA was $432 $5 million for the quarter or 21% of revenue.
In the comparable period last year, adjusted EBITDA was $379 6 million.
Or 19, 5% of revenue representing a year over year increase of 13, 9% sequentially adjusted EBITDA margin improved 50 basis points over quarter two margin of 25%.
Steven Cutler: I was also pleased with our recently announced return to an investment grade debt rating by S&P Global Ratings. While we are still in discussions with other rating agencies, I'm confident that we will be able to restructure a significant portion of our variable rate debt in the next six months or so, which will, along with continued debt paydown, lead to significantly reduced interest expense in 2024. We will provide more details on this as we make further progress.
Adjusted operating income for the quarter three was $401 $1 million a margin of 19, 5%. This is an increase of 13, 7% over adjusted operating income of $352 7 million a margin of 18, 2% in quarter three 2022.
Net interest expense was $78 million for poultry portrait, we continue to expect that full year interest expense to total approximately $310 million in 2023.
The tax rate was 15, 2% for the quarter. We continue to expect the full year of 2023 adjusted effective tax rate to be approximately 15, 5% down from our full year 2022 effective tax rate of 16, 5%.
Steven Cutler: With our performance through quarter three, we are reiterating our financial guidance for the full year 2023. We expect revenue to be in the range of $8.07 billion to $8.21 billion, an increase of 4.3 to 6.1% over the prior year. Additionally, we expect adjusted earnings to share to be in the range of $12.63 to $12.91 representing an increase of 7.5 to 9.9% over the full year 2022.
Adjusted net income attributable to the group for the quarter was $273 9 million a margin of 13, 3% equating to adjusted earnings per share of $3 30, an increase of 10% year over year.
In the third quarter the company recorded a $10 4 million of transaction and integration related costs.
GAAP income from operations amounted to $264 3 million or 12, 9% of revenue during quarter three U S. GAAP net income attributable to the group in the quarter three was $163 7 million or $1 97.
Steven Cutler: Before I close out my comments, I want to recognise our colleagues in Israel and the conflict area in the Middle East during this very difficult of Time. The safety and well-being of our employees is and will always be our number one priority and we are actively supporting affected employees as well as customers in that region. We remain focused on ensuring continuity of our business operations and customer studies to the best of our ability and we will continue to support our dedicated team who have shown great resiliency during these challenging times.
Per diluted share compared to $1 94 per share for the equivalent period in the prior year.
Net accounts receivable was $1 <unk> 9 billion as at 30 September 2023. This compares with a net accounts receivable balance of $1 171 billion at the end of quarter two 2023.
<unk> was 49 days at September 30 of 2009, three a decrease of three days from June 30 of 2023 cash from operating activities in the quarter was $341 5 million.
Brendan Brennan: I'll now turn it over to Brendan for additional comments on our financial results. Brendan? Thanks, Dave. In quarter-tree, I kind of achieved gross business wins of $3.06 billion and recorded $470 million dollars word of cancellation. This resulted in an impressive level of net awards in the quarter of $2.58 billion dollars and net book to bill of 1.26 times. With the addition of the new awards in quarter-tree, our backlog grew to a record $22.2 billion dollars, representing an increase of 2.6% on quarter-tree of 2023 or an increase 10% year over year.
Free cash flow was very strong in the quarter tree increasingly impressive 82% sequentially.
We were pleased with the improvements in DSO in quarter, three and expect to make further progress in quarter four as our focus on billing and cash collection activities continue.
At September 30 of 2023, cash and cash equivalents totaled $315 million and debt totaled $4 zero 4 billion, leaving.
Leaving a net debt position of $3 73 billion.
This compared to a net debt of $4 zero 4 billion at June charts, you had tried to statutory net debt of $4 4 billion at September <unk> 2022.
Brendan Brennan: Our backlog of burn was 9.5% in the quarter in line with quarter-two levels as we anticipated. Revenue in quarter-tree was $2.55 million. This represented a year-and-year increase of 5.8% or 4.8% on a currency-organic basis. Overall, customer concentration in our top 25 customers increases slightly from quarter-two to 2023. Our top customer represented 8.5% of total revenue in quarter-tree and our top five customers represented 25.7%. Our top 10 represented 40.4% while our top 25 represented 62.2%.
Capital expenditure during the quarter was $29 1 million.
From a capital deployment perspective, we made a payment of $300 million on our term loan b facility in quarter, three and ended the quarter with a leverage ratio leverage ratio to three times net debt to adjusted EBITDA.
We expect to make another payment on our terminal in bps those in quarter, four which result, which would result in total payments for the full year in the range of $800 million to $1 billion.
We were pleased to receive an upgrade in our credit rating from S&P Global ratings earlier this month to an investment grade rating with stable outlook. This upgrade was based on our strong operating performance and compare it to Delevering deleveraging since the acquisition that the PRA Health Sciences.
Brendan Brennan: Our customer base remains well diversified with a number of scaled partnerships, resulting in a lack of particular concentration across our top customers. Gross margin for the quarter was 29.8% compared to 29.6% in quarter-two 2023. Gross margin increased to 30 basis points over gross margin of 29.5% in quarter-tree 2022. Total SGNA expense was $180.1 million in quarter-tree or 8.8% of revenue. In the comparable period last year, total SGNA expense was $192.9 million or 9.9% of revenue.
Acquisition in July 2021.
As we have done in the past we will plan to issue full year guidance for 2024 in early January in conjunction with our presentation at the Jpmorgan Healthcare conference.
Finally, a key assumptions behind our full year guidance remain in place and effective tax rate of 15, 5% free cash flow target of circa 1 billion Capex.
Capex spend of circa $150 million in interest expense of <unk> $310 million for the full year of 2023.
Brendan Brennan: The year-over-year reduction was driven by successful delivery of cost strategies related to the PRA transaction as well as further implementation of our global business services model. At just at EBITDA, was $432.5 million for the quarter or 21% of revenue. In the comparable period last year, just at EBITDA was $379.6 million or 19.5% of revenue representing a year-over-year increase of 13.9%. Sequentially, just at EBITDA, margin improved 50 basis points over quarter-to-two margin of 20.5%.
Before we move to Q&A, we want to thank all of the employees for.
For their efforts in delivering our continued performance in quarter three.
Operator, we are now ready for questions.
As a reminder to ask a question you will need to press star one.
On your kind of thing.
That could be announced to withdraw your question. Please press star one on one.
We will take our first question.
Brendan Brennan: Adjusted operating income for the quarter-tree was $401.1 million, the margin of 19.5%. This was an increase of 13.7% over adjusted operating income of $352.7 million, margin of 18.2% in quarter-tree 2022. Net interest expense was $78 million for quarter-tree. We continue to expect that full-year interest expense to total approximately 310 million in 2023. The effective tax rate was 15.2% for the quarter, we continue to expect the full year 2023 adjusted effective tax rate to be approximately 50 and a half percent down from our full year 2022 effective tax rate of 60 and a half percent.
Another question comes from the line of Max <unk> from William Blair. Please go ahead. Your line is open.
Hi, Thank you for taking our question, it's Christy Randall for Max Slack.
I was hoping you could share.
What growth was on both a direct fee.
On Covid basis.
And what you see as your normalized range for pass through as a percent of sales and when you expect to get back to that level. Thanks.
Yes.
You saw our reported.
<unk> is around 6% and on a 606 basis directly was a bit higher than that and the highest in the higher single digits.
From a directly basis and on a non COVID-19 basis, similar sort of numbers. So those that's where we were from a.
A directory of non Covid basis.
Great. Thank you and then just a quick follow up.
Brendan Brennan: In the third quarter, the company recorded $10.4 million of transaction and integration related costs. U.S, gap income from operations amounted to $264.3 million or $12.9% of revenue during quarter-tree. U.S, gap net income attributable to the group in the quarter-tree was $163.7 million or $1.97 per deluded share, compared to $1.94 per share for the equivalent period in the prior year. Net accounts receivable was $1.129 billion at 30 September 2023, this compared with a net accounts receivable balance of $1.171 billion at the end of quarter-tree 2023.
The impact of Pfizer's recently announced cost cuts and.
And was this baked into your outlook or were they unexpected thanks.
Although these are these are relatively expected we're in close contact with our partner customers on a regular basis and we recognize the challenges that.
That particular customer as we are working closely with them in terms of what they are looking to do no. Nothing has been decided at this point there's.
Sometimes with these sort of things some opportunity for us.
Happy to further consolidate their spending even though they are looking to take that overall spend down over the relatively short term. So these things aren't always negatives for us.
Brendan Brennan: DSO was 49 days at September-tourty at 20 May-tree, a decrease of three days from June-tourty at 2023. Cash from operating activities in the quarter was $341.5 million. Free cash flow was very strong in the quarter-tree, increasing impressive 82% sequentially. We were pleased with the improvements in DSO in quarter-tree and expect to make further progress in quarter-four as our focus on billing levels and cash collection activities continue. At September-tourty at 2023, cash equivalent totaled $315 million and DSO totaled $4.04 billion, leaving net debt position of $3.73 billion.
We work closely with our partners to look at it and we have that in the forecast here.
Great. Thanks for the color and congrats on the quarter.
Thanks, Thank you.
Thank you.
We'll take our next question.
The question comes from the line of Eric Coldwell from Baird. Please go ahead. Your line is open.
Thank you good morning, good afternoon.
Wanted to ask on the BARDA contract given that that is public.
Public information visible contract could you.
Speak to all about the impact on awards in the third quarter, how you might see that evolving through the fourth quarter and then really just the mechanics of how those contracts play out and how you take bookings on various relationships that could develop with different partners.
Brendan Brennan: This compared to a net debt of $4.04 billion at June-tourty at 2020-tourty and net debt of $4.24 billion at September-tourty at 2022. Capital expenditure during the quarter was $29.1 million. From a capital deployment perspective, we made a payment of $300 million on our Terminal B facility in quarter-tree and the end of the quarter would leverage ratio 2.3 times net debt to adjust the debit debt. We expect to make another payment on our Terminal B facility in quarter-four, which would result in total payments for the full year in the range of $800 million to a billion dollars.
There's a lot of interest in the mechanics of how the bookings play out through the BARDA contract. Thank you very much.
Sure Hi, Eric.
Yes, we don't give specific details on individual contracts, but that was as you well know subject of our release and is certainly an important contract for us and we've taken the full amount, but it's certainly not at the size as we've seen reported its significantly less than some of the reports we've seen in terms of.
Brendan Brennan: We were pleased to receive an upgrade in our credit rating from S&P Global Ratings earlier this month to an investment-grade rating with a stable outlook. This upgrade was based on our strong operating performance and commitment to delivering due leveraging since the acquisition of the PRA Health Sciences acquisition in July 2021.
The dollar amount there. So it is a phase II study I want to emphasize that phase two study.
It is an important award.
And.
It's a multiyear study is really going to start it won't have any impact obviously on this year.
Brendan Brennan: As we have done in the past, we will plan to issue full-year guidance for 2024 in early January in conjunction with our presentation at the J.P. Morgan Health Care Conference. Finally, our key assumptions behind the full-year guidance remain in place, an effective tax rate of 15.5 percent, free cash flow target of $0.00 billion, CapExpand of circa $150 million, an interest expense of circa $310 million for the full year 2023.
To start to play and probably into the back end of next year and it will run for several years.
It is a vaccine study so it will probably burn a bit faster than some of our other trials, but these things do tend to.
<unk> over several years.
It's certainly the case with this one I think the important thing though around this COVID-19 work is it is it is not one off we're seeing COVID-19 well covered revenues at about 3% to 4% of revenues this year and quite frankly, we expect that to continue over the next couple of years 'twenty five 'twenty four 'twenty five even into the 2006, we believe <unk>.
Brendan Brennan: Before we move to Q&A, we want to thank all of the employees like on further efforts in delivering our continued performance in quarter-tree. Thank you.
It is something thats going to work within the development work with to bring on new <unk>, new generation of new vaccines, new treatments for Covid is going to continue it's going to become part of the normal clinical developments of the landscape and so.
Operator: Operator, we are now ready for questions. Thank you. As a reminder to ask a question, you will need to press star one and run on your telephone and wait your name to be announced. To withdraw your question, please press star one and one again.
I don't think this should be thought of as a one off.
I don't think we're going to have any sort of.
Hills to climb so to speak as we go as we go round with Covid, it's going to be work that that continues at around the low single digits in revenues.
A long term basis. So that's what I'd say about this we have other similar sort of projects. So similar sort of pending awards.
Christine Rains: Hi, thank you for taking our question. It's Christine Rains on for Max Smock.
Steven Cutler: So I'm hoping to share what growth was on both a direct fee and non-COVID basis and what you see as your normalised range for passers as a percent of sales and when you expect to get back to the level. Thanks. Yeah, well, well, he saw our reported numbers around 6% on a 606 basis. Direct fee was a bit higher than that in the higher single digits from a direct fee basis and on a non-COVID basis similar sort of number. So that's where we were from a direct fee and non-COVID basis.
This space as well.
We will hope to hopefully be successful in those over the next couple of quarters six to 12 months and ongoing so as I say not a one off significant contract, but not one that's.
Christine Rains: Great. Thank you.
At the at the level of it.
I have seen in some of the some of the quotes that's for sure.
Yes, I think.
Bit surprised that you took the full amount in the third quarter.
The concern is the streets looking at.
Public document that says 1 billion dollar award spread across you and a few others, but you are the biggest.
I think the concern is obviously going to be without further definition, how much of your bookings came in <unk> from that because.
Steven Cutler: And then just a quick follow-up. How did it impact? Have Pfizer's recently announced cost cuts then and was this baked into your outlook or were they unexpected? Thanks. Oh no, these are relatively expected. We're in close contact with our partner customers on a regular basis and we recognise the challenges that that particular customer has. We're working closely with them in terms of what they're looking to do. No, nothing's been decided at this point that sometimes with these sort of things some opportunity for us in that they were happy to further consolidate their spending even though they were looking to take that overall spend down over the relatively short term. So these things aren't always negatives for us but that we work closely with our partners to look at it and we have that in the forecast.
Some people have.
Some.
Do some quick math and think that your net bookings ex BARDA would be in theory could even be down year over year.
Book to Bill below one so I.
I am hoping maybe stretch here.
Alright.
I can tell you unequivocally that that is not because it wasn't even our largest award in the quarter.
So yes.
<unk> would be tight that we would do we would take the full amount. That's what we would normally do as we would with any other customer in fact, it's a government contract, it's probably less likely to be canceled I think than some of the other ones, we work with with private companies.
We just followed a normal a normal policy the numbers is significant but not overwhelming.
Christine Rains: Great. Thanks for the colour and congrats on the quarter. Thanks. Thank you.
And it's something that we would we feel is there.
Entirely appropriately taken this quarter.
Operator: We will take our next question.
I think I'd add Eric just just just to emphasize the fact that we've always been relatively conservative in how we book our business into our backlog and I think thats been consistent throughout time and as Steve said in his opening comments theres not I agree there's a lot of similarity in the book to Bill is between our direct fee at our 606 so between.
Eric Coldwell: The question comes from the line of Eric Coldwar from Bad. Please go ahead. Your line is open. Thank you. Good morning. Good afternoon. I wanted to ask on the Barta contract given that that is public information visible contract. Could you speak to all about the impact on awards in the third quarter? How you might see that evolving through the fourth quarter and then really just the mechanics of how those contracts play out and how you take bookings on various relationships that could develop with different partners.
560, <unk> not a lot of difference in terms of the book to Bill is that we do in the quarters certainly the case in the current quarter as well so I think yes.
Yes. It was a significant award, but we are conservative in doing this and I think we've taken the appropriate approach and as Steve said, it's it's all I have.
Eric Coldwell: I think there's a lot of interest in the mechanics of how the bookings play out through the Barta contract. Thank you very much. Sure. Hi, Eric. Yeah. We don't give sort of specific details on individual context but that was as you will know, a subject of a release and certainly an important contract for us. We've taken the full amount of it. It's certainly not at the size as we've seen reported. It's significantly less than some of the reports we've seen in terms of the dollar amount there.
The biggest one of the quarter. So I think we're in good place from our perspective.
Okay. Thank you.
Thank you.
We will take our next question.
Your question comes from the line of Justin <unk> from Deutsche Bank. Please go ahead. Your line is open.
Hi, good afternoon, good morning, everyone.
Taking a step back can you sort of paint the landscape core.
Eric Coldwell: So it is a phase two study. I want to emphasize that phase two study. So it's an important award and it's a multi year study. It's really going to start. It won't have any impact obviously on this year. It's going to start to play probably into the back end of next year and it'll run for several years. It is a vaccine study so it'll probably burn a bit faster than some of our other trials but these things do tend to burn over several years.
Large pharma customers.
Aerotech customers and maybe sort of like contrast that to.
At this time last year or maybe even earlier this year, just trying to get a sense of how the environments evolved.
Yes.
We've seen pretty constructive positive RFP numbers for certainly for the last two quarters of all of all of the segments across biotech large pharma in a more sort of ancillary services labs early phase et cetera, et cetera, and obviously FSP as well so.
Eric Coldwell: And that's certainly the case with this one. I think the important thing though around this COVID work is it is it is not one off. We're seeing COVID were COVID revenues at about three to four percent of revenues this year. And quite frankly, we expect that to continue over the next couple of years, 25, 24 or 25, even to 26. We believe COVID is something that's going to the work within the development work with to bring on new generation and new vaccines, new treatments for COVID is going to continue.
Eric Coldwell: It's going to become part of the normal clinical developments of our landscape. And so I don't think this should be thought of as a one off. I don't think we're going to have any sort of, you know, hills to climb so to speak as we go as we go around with COVID. It's going to be worth it that continues out around the low single digit in revenues on a long term basis.
<unk> talked about.
High single digits as being a sort of across the landscape and thats fairly consistently across those segments.
Overall, we see a very constructive very positive sort of business environment. Obviously, there were some challenges out there in the macroeconomic environment, we're very aware of that but.
No I think we talked about cautiously optimistic as being sort of watch words for the for this present time and there's nothing that we've seen and certainly from an RFP point of view or from an awards point of view that would that would change that it's a constructive solid positive environment, we feel we're well placed to benefit from.
Got it and then just a quick follow up.
Eric Coldwell: So that's what I'd say about this. We have other similar sort of projects or similar sort of pending awards in this space as well. And we'll hopefully be successful in those over the next couple of quarters, six, 12 months and ongoing. So it is a say not a one off significant contract, but not one that's at the level that I've seen in some of the, some of the quotes. That's for sure.
In terms of.
The burn rate when you when you look at the backlog down as far as the awards over the last two.
<unk> months is.
Sort of the go forward burn rate, we can get similar in that nine five plus or minus.
Corridor and over the next 12 months or anything in the.
Eric Coldwell: Yeah, I think I'm a bit surprised that you took the full amount in the third quarter and I guess the the concern is the streets looking at a public document that says a billion dollar awards spread across you and a few others, but you're the biggest. You know, I think the concern is obviously going to be without further definition how much of your bookings came in 3Q from that because, you know, some people could have some, you know, do some quick math and think that your net bookings exporter would be, you know, in theory, could even be down year over year, you know, book to bill below one.
And the backlog.
Change the sort of thing.
Yes, very well.
Hey, Jonathan its Brendan here I might take that one yeah, obviously, we've talked about 95% for the full year. This year, that's our forecast position for 2023.
As we look into our business wins.
As they come in in the back end of the year.
We've made the comments there that we are cautiously optimistic that future here, so that applies to Q4 as well.
And we want to see good development so.
We'll obviously give a much more fulsome update on whatever our guidance, but at this stage, yes. It's in that in that corridor is probably not a bad way of thinking about things, albeit we will give further color as I said, when we get to our guidance, which we are planning to do in January and J P. F.
Eric Coldwell: So I'm hoping maybe stretch here. Well, I can tell you unequivocally that that is not the case. It wasn't even our largest award in the in the quarter. So, you know, our policy would be taped that we would we would take the full amount. That's what we would normally do as we would with any other customer. In fact, it's a government contract. It's probably less likely to be canceled, I think, than some of the other ones we work with with with private companies.
Got it thank you.
Thank you.
We will take our next question.
Your next question comes from the line of Derik de Bruin from Bank of America. Please go ahead. Your line is open.
Hi, Good morning, and thank you for taking my question. So.
Eric Coldwell: So, you know, it's a we've just followed our normal our normal policy. The number is significant, but not overwhelming. And it's something that we would we feel has been entirely appropriately taken this quarter. I think I'd add that Eric, you know, just just just just the impression of the fact we've always been relatively conservative and how we book our business into our backlog. And I think that's been consistent throughout time. And as he said in his opening comments, you know, there's not a great there's a lot of similarity in the book to bills between our direct fee and our 606.
As you noted.
Done great work on the EBITA margin in Europe had a day basically that youre targeting ahead of schedule.
I have to be the juror can ask where do we go from here how much expansion do we do we continue to see going forward just any color on that.
Yes sure.
We're ahead of schedule on our EBITDA margin at 21% for the quarter. So we're very pleased with with what.
How we've been able to do that that's been a combination of both improvements in the operational side of things gross margin and also on the on the SG&A front with our World Class Global business services group.
Eric Coldwell: So between 605 and 606 is not a lot of difference in terms of the book to bills that we do in the quarters. Certainly the case in the current quarter as well. So I think, you know, yes, yes, it was a significant award, but we are conservative in doing this. And I think we did we we've taken an appropriate approach. And as Steve said, it's not even the biggest one of the four. So I think we're we're in good place from the perspective. Okay. Thank you.
Going forward given given some of the market dynamics, probably any further uptick and we're certainly aiming for that going forward into 'twenty four 'twenty five we'll probably come in the in the SG&A region.
Continue to push hard in the in the robotics.
Machine learning space, we've got a significant amount of resource deployed in that area now that is increasingly put some fairly aggressive targets in that space. We were also looking at it.
Steven Cutler: We will take our next question. The question comes from the line of disembowels from Deutsche Bank. Please go ahead. Your line is open. Hi, good afternoon. This year just trying to get a sense of how the environments evolved. Yeah, just I mean, we've seen pretty constructive positive RFP numbers for certainly for the last two quarters over all of all the segments across biotech large farmer in our more sort of ancillary services labs early phase, et cetera, et cetera.
Our workforce is located on the longer term and making sure. We are maximizing benefits in that position in that case, what other there were a few more leave as we can continue to pull it probably more in the SG&A space than that in the operational space, where we can possibly make some modest improvements, but it'll be more.
So I think in that area in the medium term.
Great.
I've had a number of.
Investors asking questions about the.
Crow competitive dynamics in the market given that.
You just had a one company got spun out you had another one taken private by product.
In private equity.
Maybe a little bit more focus on those businesses now than they were in the past I guess.
Steven Cutler: And obviously FSP as well. So, you know, I talked about high single digits as being a sort of across the landscape. And it's fairly consistently across those segments. So, you know, overall, we see a very constructive, a very positive sort of business environment. Obviously there are some challenges out there in the macroeconomic environment. We're very aware of that.
What's your take on the competitive landscape and how that evolves given you've got some of these smaller players that have sort of kind of seeing some changes.
Yes, its been interesting timing out.
Industry over the last several years I suppose with some companies going private and spinning out in the rest of it.
We do see the top three sort of starting to differentiate will move away from that sort of that middle tier.
Brendan Brennan: But, you know, I think we talked about cautiously optimistic as being our sort of watchwords for this present time. And there's nothing that we've seen certainly from an RFP point of view or from an awards point of view that would change that. You know, it's a constructive, solid, positive environment. We feel we're well placed to benefit, from. Got it.
I think as is evidenced.
Evidenced in the data.
Coming out in terms of our revenues and profitability to such a scale I think represents an important differentiating advantage.
For those top three so I think that will continue.
Brendan Brennan: And then just a quick follow up, in terms of the burn rate, when you look at the backlog down and sort of the awards over the last 12 months is sort of the go forward burn rate, you know, we think it's similar in that nine and a half plus or minus corridor, you know, over the next 12 months or anything in the backlog that would change the sort of trajectory of that.
Some of our competitors at more of a modest the lower levels of <unk> got some challenges and some work to do and then they're going to do it more in a private setting in one or two cases and thats for them to do and I'm not going to sort of get too specific on that but it has I think offered us some opportunity to improve our market share or to put ourselves in a better position competitively.
And Thats usually.
Usually a relatively short term thing they will get their act together at some point.
But so for us it is a stable.
Committed.
Brendan Brennan: Hey, Justin, it's Brandon here. I might take that one. Yeah, obviously we've talked about it at 9.5% for the full year this year. It's our forecast position for 2023. As we look into our business winds, as they came in in the back end of the year, Steve made the comments there that we're, you know, cautiously optimistic about the future here. So that applies to Q4 as well. And, you know, we want to see good development.
Realization focused in the clinical space.
Very stable from a management point of view.
It's probably offer some opportunity and.
We're certainly going to take that and we've been we've been I think benefiting from it.
Thank you very much.
Thank you.
We'll take our next question.
Your next question comes from the line of Elizabeth Anderson from Evercore ISI. Please go ahead. Your line is open.
Brendan Brennan: So we'll obviously give a most more full-small update when we're our guidance. But this day, yes, it's in that corridor is probably not a bad way of thinking about things, albeit we will give forwarder color, as I said, when we get to our guidance, which we are planning to do in January and JPM.
Operator: Thank you.
Hey, guys. Thanks, so much for that question.
Maybe just circling back to some of the pharma commentary I think obviously investors have been a bit nervous because of sort of what's happening on tools and maybe on the early development.
<unk> side, which I understand obviously, you don't plan, but how do we think about like from your conversations with pharma like where are they prioritizing their spending.
Derek DeBroom: We will take our next question. Your next question comes from the line of Derek DeBroom from Bank of America. Please go ahead. Your line is open. Hi, good morning. And thank you for taking my question. So as you noted, you've done great work on the EBITDA margin and you're basically a fit your target at a schedule.
And deserve I got back way of as I'm trying to figure out like how are you guys continuing to sort of outperform what we have seen that sort of course first of all on some of the earlier stage stuff.
Yes.
Yes, I mean, I'm not sure I can add much more to what I said before we've seen a very solid environment RFP was wood was right across the segments be it large pharma biotech.
Brendan Brennan: You know, I have to be the jerk and ask, where do we go from here? How much expansion do we do we continue to be going forward to spend any color on that? Yeah, sure, Derek. As you know, we're ahead of schedule on our EBITDA margin at 21 percent for the quarter. So we're very pleased with what, you know, how we've been able to do that. That's played on the combination of both improvements in the operational side of things, gross margin and also on the SG&A front with our World Class Global Business Services Group.
And more in the sort of ancillary services that we do labs have been been strong for us reasonably late phase real world evidence.
Our life <unk> group has also done well so it's been fairly broad based.
I'd say I think we've pulled it out before there's been a little bit of a move towards FSP and hybrid solutions in the in the large pharma market thats been a.
Brendan Brennan: You know, I think going forward, given some of the market dynamics, it's probably any further uptick. And we're certainly aiming for that going forward into 2425. We'll probably come in the SG&A region. We continue to push hard in the robotics AI machine learning sort of space. We've got a significant amount of resource deployed in that area now and that's increasing. We've got some fairly aggressive targets. In that space, we're also looking at where our workforce is located in the longer term and making sure we're maximizing benefits in that position.
Certainly a feature and we feel well placed to be able to accommodate that and to put in place solutions in a more hybrid I suppose in terms of adding technology and adding opportunity too.
Push on with margins in that space.
But overall again, it's I would say a broad priced positive environment biotech funding of course remains something of an overhang, but even that seems to be to us stabilizing.
And I think the last month or two.
There's some green shoots there. So again, we're finding good signs getting getting funded so I won't say anymore I think.
Brendan Brennan: In that case, well, there are a few more levers we can continue to pull in probably more in the SG&A space than in the operational space, where we can possibly make some modest improvements, but it'll be more challenging, I think, in that area in the median term. Great.
Broad based positive constructed.
Maybe just to add to that.
A little bit spread inherent obviously folks are going to spend the money on the phase III. The three drugs that are closer to the market.
Steven Cutler: And I've had a number of investors asking questions about the share of competitive dynamics in the market, given that, you know, you just had one company got spun out. You had another one taken private by going into private equity, maybe a little bit more focus on those businesses now than they were in the past. I guess, what's your sort of take on the zero competitive landscape and how that evolves, given you've got some of these smaller players that have sort of had seen some changes.
More potentially even if there if the air ticket better transaction. So that's always a prioritizing area and we've seen that in past cycles as well.
Got it and maybe one follow up for you Brendan.
Have a nice improvement in the Dsos in the quarter, how do we think about the go forward rate for that and sort of where it might normalize I know you've been talking about sort of differences between sort of farmers recent behavior in biotech so any more color on that would be helpful.
Yes, everybody is keen to hang on to their dollars at the moment, but I think that's fair.
Steven Cutler: Yeah, it's been interesting timing out in our industry over the last several years, I suppose, with some companies going private and spinning out and the rest of it. You know, we do see the top three sort of starting to differentiate or move away from that sort of middle tier. That I think is being evidence in the data that's coming out in terms of our revenues and profitability, etc. And that just scale, I think, represents an important differentiating advantage for those top three.
Fair to say ourselves included I mean, I think we've talked about.
In this organization with a blend of customers we have in Atlanta commercial terms, we have that the mid Forty's is good that's a good position. So if everything works well and Thats, where we should be.
If we're doing exceptionally well well below that and if we're doing a little off the off that mark where we need to catch up I still think that that's where we're working forward. So as we think about the fourth quarter. We obviously, we're glad to be back in the forties now at 49% at the end of Q3, but certainly we're still looking to improve on our 2% to three days as we go into the fourth quarter.
Steven Cutler: So I think that will continue out some of our competitors at more than more the lower levels of got some challenges and some work to do. And then they're going to do it more in a private setting in one or two cases. And that's for them to do and I'm not going to sort of get too specific on that, but it has, I think, offered us some opportunity to improve our market share or to put ourselves in a better position competitively.
I think that's important from our cash conversion cycle as well as we get into the back half of the year to get to our free cash flow targets. So that that certainly is our target and that we're confident we can continue to go about doing that work as we get into Q4.
Got it thank you.
Thank you.
Steven Cutler: And that's usually a relatively short term thing. They'll get their act together at some point. But so for us, you know, as a stable committed organization focused in the clinical space and being very stable from a management point of view, you know, it's probably offered us some opportunity. And we're certainly keen to take that and we've been I think benefiting from it.
We will take our next question.
The next question comes from the line of Jack Meehan from Nephron Research. Please go ahead. Your line is open.
Thank you good morning, and good afternoon.
Brendan I know you said you would provide guidance of J P. M. I was wondering though if you had any framing comments for 2024, you could share and puts and takes in just one thing I'd be keen to hear about is just thoughts on interest expense like how does the recent debt upgrade maybe play into that.
Derek DeBroom: Thank you very much. Thank you.
Operator: We will take our next question.
Ann Hynes: Your next question comes from the line of a little bit of Anderson from ethical ISIP. Go ahead. Your line is open. Hey guys. Thanks so much for the question. Maybe just circling back to some of the farmer commentary. I think obviously investors have been a bit nervous because of sort of what's happening on tools and maybe on the early development side, which I understand obviously you don't, you don't play in. But how do we think about like from your conversations with farmer, like where are they prioritizing the spending?
Yes.
Please go to the guidance before the guidance.
Yes.
Okay.
Yes, it's all of us.
Listen I'll start on interest I do think we have a good opportunity here, obviously, we've talked about the fact, we've got a $310 million forecast for 2023.
Just been upgraded we hope that we will see more traction on the other agencies before the end of the year that will give us an opportunity to hopefully even.
Consider changing the structure of our debt as we go into the fourth quarter of 2004, I think there is a real opportunity to bring that interest down fairly substantially in the ballpark of circa $100 million year over year.
Ann Hynes: And I guess I'm just sort of like a back way of trying to figure out like how are you guys continuing to sort of outperform what we've seen as sort of worse results on on some of the earlier stage stuff. Yeah, I mean, I'm not sure I can add much more to what I said before. We know we've seen a very solid environment RIP wise ward wise right across the segments, be a large farmer.
So thats, obviously, a very very significant parish of our overall thinking for next year and it's one of the reasons why as we get into we have to see how things will play out from the agency's perspective, and the timing of when we could do that so it's also another reason why January makes more sense to give more color and more detail on that perspective, I don't know, Steve if you have any comments on.
Ann Hynes: The biotech and more in the sort of ancillary services that we do labs have been been strong for us recently, late base real world evidence and our late base group has also done well. So, you know, it's been fairly broad based. I would say I think we've called it out before. There's been a little bit of a move towards FSP and hybrid solutions in the large farmer market. That's been a, that's been certainly a feature and we feel well placed to be able to accommodate that and to put in place solutions that are more hybrid, I suppose in terms of adding technology and adding opportunity to, you know, to push on with margins in that space.
The other broader 24 piece.
<unk> asking for there at the moment, but from my perspective.
Listen we've got another quarter to do here, that's what we're focused on in Q4, and we think our book to Bill. It's all to play forward is a good market environment, there and if we can keep all those pieces moving we should be we should be in good good charge for 2024.
Ann Hynes: So, you know, but overall, again, it's, I say, a broad-based positive environment biotech funding, of course, you know, remains something about overhang, but even that seems to be to us stabilizing. And I think the last month or two, there's some green shoots there. So, you know, again, we're finding good science, getting, getting funded. So, I won't say any more. I think the, you know, good-based positive constructives. I mean, maybe just a little bit of a spread in here.
I would concur with that Jack.
Got a couple of months ago.
And this year, there's a lot of things at stake and we're obviously pushing through as much as we can get into this year.
<unk> point of view and at that point, we will sit down and look at will.
We will be in 'twenty, four, but we're not ready to get too specific about that.
Great. Okay, and just one follow up I just wanted to nitpick, the cancellation number a little bit here it stepped up a bit quarter over quarter, just curious what youre hearing about from customers like if theres any re prioritization in the portfolio there.
And maybe expectations for the fourth quarter.
No we haven't seen any sort of specific patents in the cancellations.
Ann Hynes: You know, obviously, folks are going to spend the money on the phase two to three drones that are closer to, you know, the market and have more potential even if they're, if they're a thing, a bit of transactions. So, that's always a prioritizing area and we've seen that in past cycles as well. No, and maybe one follow-up for you, Brendan. Obviously, I had a nice improvement in the DSS in the quarter.
Yes.
To add up but really not anything out of it.
We didn't think we certainly say no no areas of concern or specific as I say consistent patterns in.
In that number but I think you could expect.
Similar number 2% those are the number in the fourth quarter, that's the sort of thats the sort of expectation.
Ann Hynes: How do we think about the, like, go forward rate for that and sort of where it might normalize? I know you've been talking about sort of differences between sort of farmers, recent behavior and biotech. So any more color on that would be helpful. Yeah, everybody's keen to hang on to their dollars at the moment, but I think that that's fair to say ourselves included. I mean, I think we've talked about, you know, in this organization with a blend of customers we have in the blend of commercial terms, we have that the mid 40s is good.
Would add but we're certainly not seeing any incident in sort of any patent or increased level of cancellation due to any sort of.
Environmental factor so to speak.
2% on opening backlog Jack is what we typically would expect and have seen.
Shortly.
Great. Thank you guys.
Thank you.
We will take our next question.
Ann Hynes: It's that's a good position. So if everything works well, that's where we should be. If we're doing exceptionally well, we're below that. And if we're doing a little off that mark, we need to catch up. I still think that's where we're looking for it. So as we think about the fourth quarter, obviously we're glad to be back in the 40s now at 49 in the end of Q3, but certainly we're still looking to improve on our two to three days as we go into the fourth quarter.
The question comes from the line of Patrick Donnelly from Citi. Please go ahead. Your line is open.
Hey, guys. Thanks for taking the questions Steve.
Steve maybe just a follow up on Eric's BARDA question. There we are still getting a few investor inbounds on that piece I guess to ask a different way or frame. It a different way when you think about <unk> book to Bill is this the right ballpark. This one to five type area, the right ballpark or should we be looking to back out BARDA and think about the <unk>.
Ann Hynes: And I think that's important from our cash conversions. Like as well as we get into the back half of the year to get to our free cash flow targets. So that that's certainly is our target. And that we're confident we can continue to go about doing that work as we get in the Q4. Right.
Brendan Brennan: Thank you.
Operator: We will take our next question.
Number more than that whatever it ends up being 1115 whenever that might be range, just given what youre seeing on RFP. It would be helpful. Maybe to frame up about <unk> book to bill expectations, given what you've seen over the last couple of months.
Jack Meehan: The next question comes from the line of Jack me and from nephon research. Please go ahead. Your line is open. Thank you. Good morning. Good afternoon. Brendan, I know you said you would provide guidance at JPM. I was wondering though if you had any framing comments for 2024 you could share and put some takes and just one thing I'd be keen to hear about is just thoughts on interest expense. Like how does the recent debt upgrade maybe play into that? Yeah, is this is this please give us a guidance before the garden. Yeah, yeah, yeah, it's all of us.
Yes.
Patrick We've said pretty clearly that rfps have been up in the last couple of quarters. So we're seeing plenty of opportunities we've got the 125.
126 this quarter.
My expectation is we'll be at a similar number for Q4.
They may or may not be other baader.
<unk> Covid type work in there.
And if there is great. If there isn't I think will still be around that number.
Yes.
You should start thinking about this as a one off we are.
A number of large pending.
Pending proposals.
Brendan Brennan: Listen, I'll start on the interest. I do think we have a good opportunity here. Obviously we've talked about the fact we've got a $310 million forecast for 2023. We've just been upgraded and we hope that we'll see more traction on the other agencies before the end of the year. That will give us an opportunity to hopefully even consider changing the structure of our debt as we go into the forest quarter of 24.
Brendan Brennan: You know, I think there's, you know, it's a real opportunity to bring that interest down fairly substantially like in the ballpark of circle $100 million a year over a year. So that's obviously a very, very significant part of our overall thinking for next year. And it's one of the reasons why as we get into, you know, we have to see how things will play out from the agency's perspective and the timing of when we could do that.
Projects in the Hopper I suppose.
Some of them come through some of them done some of them get delayed some of that pushed up as I said, we've got more of this body of work.
In the Hopper as well and so I think in the next but maybe not fourth quarter, but in Q1 Q2 next year, we will get decisions on that and we feel like we're in a good position to.
To win that sort of work with.
I think the premier vaccine developer in the industry I think that's well known.
Yes.
I think you can expect.
Similar so the number that certainly our aspiration our expectation for Q3 based on those increased opportunities that we're seeing as I said broad based across the industry.
Brendan Brennan: So it's also another reason why why January makes more sense to give more color and more detail on that perspective. I don't see the view of any comments on the on the broader 24 piece Jack Jackson asking for their moment, but from my perspective, listen, we've got another quarter to do here. That's what we're focused on in Q4. And we think our book to build is all to play for. There's a good market environment there.
No that's really helpful and I guess another 24 before 'twenty forward question, just given again the book to Bill This quarter. The fact that you are talking about COVID-19 as a percentage being flat next year. If you can do another 125 in <unk>.
Brendan Brennan: And if we can keep all those pieces moving, we should be we should be in good in good charge for 2024. Yeah, I would concur with that Jack, you know, we've got a couple of months to go in this in this year. There's a lot of things at stake. And, you know, we're obviously pushing for as much as we can get into this year from a awards point of view.
Over the historical period that type of book to Bill would typically imply something a little more in the high single digit growth, particularly given COVID-19 not stepping down any change to that framework. Just when you think high level about what the book to Bill implies for next year I appreciate it.
Sure.
It really will come down to the composition of the.
Brendan Brennan: And at that point, we'll sit down and work out where we'll be in 24, but we're not ready to get too specific about that. Great. Okay. And as one follow up, just wanted to nitpick the cancellation number a little bit here. It's stepped up, you know, a bit quarter of a quarter or just curious what you're hearing about from customers. Like if there's any reprioritizations, you know, in the portfolio there just and maybe expectations for the fourth quarter.
The work and what sort of work we get to if there are some vaccine studies in it and then.
Right.
We would be pushing up more towards the high single digits. If it's more oncology work will slow burn work then.
But we might be a little different it really depends upon what happens in the next couple of months as we get towards the end of the year and as I said to I think it was.
Patrick's question was we will sit down with Jessica will sit down and work out okay. What's the composition of that backlog what are the expectations is there any rescue work in areas of vaccine work in there and how do we how do we think about prosecuting and then executing in <unk>.
Brendan Brennan: No, we haven't seen any sort of specific patents in the cancellations. You know, there's a tab up, but really not anything out of the ordinary. I don't we didn't think and we certainly didn't know. No areas of concern or specific, as I say, consistent patents in that number. I think you could expect to, you know, a similar number 2% or sort of number. In the fourth quarter, that's the sort of that sort of expectation I would I would have, but we're certainly not seeing any in certainly in sort of any patent or increased level of cancellation due to any sort of environmental. And that's that's 2% on opening backlogs. Jack is what we typically would expect and have seen historically.
Jack Meehan: Great. Thank you guys.
That will essentially determined what we come back to you in January with from a from a guidance point of view.
Operator: Thank you.
Very helpful. Thank you.
Okay.
We will take our next question.
Your next question comes from the line of Casey Woodring from JP Morgan. Please go ahead. Your line is open.
Great. Thanks for taking my questions.
You mentioned high single digit RFP growth on a trailing 12 month basis Im curious what was that growth rate in the quarter and then if you could break that up by customer in the quarter curious if snit rfps continues to grow month over month as they had over the first six months of the year.
Patrick Donnelly: We will take our next question. The question comes from the line of Patrick Donnelly from city. Please go ahead. Your line is open. Hey guys, thanks for taking the questions. Steve, maybe just a follow up on Eric's part of questions earlier, still getting a few investor in balance on that piece. I guess to ask a different way or frame in a different way, you know, when you think about 4Q book to bill.
And then just curious if some of that is deliberate decision, making at <unk> and <unk>.
Mid has even improved quarter over quarter, I think underlying funding trends at least stabilized.
Market. So just wanted to get your updated thoughts on that customer segment.
Okay, just to clarify I think we've talked about.
RFP growth being greater in.
In the last two quarters, so Q3 and Q2.
Patrick Donnelly: Is this the right ballpark this 125 type area, the right ballpark, or should we be looking to back out bar to and think about the 4Q number more in that. Whatever it ends up being 1115, whatever that might be range, just given what you're seeing on our piece will be helpful, maybe to frame up that 4Q book to bill expectations. You know, given what you've seen over the last couple months. Well, you know, I think Patrick, you know, we've said pretty clearly that RFPs have been up in the last couple of quarters, so we're seeing plenty of opportunities.
We've talked about some some nice uptick on the on the RFP. So it is not on a trailing 12 month basis, it's more on a more recent basis in that.
Casey.
In terms of.
The opportunities across the so large Smith I mean, it's been a keep side, it's been pretty broad based.
Smid biotech large pharma again in that in the last last two quarters in that sort of high single digit range and those opportunities are being solid.
And we've seen decisions being made within a reasonable timeframe et cetera. So.
Patrick Donnelly: We've got to 1 to 5, 1 to 6 this quarter. My expectations would be at a similar number for Q4. There may or may not be other barter or covert type work in there. And if there is great, if there isn't, I think we'll, you know, will still be around that number. So, you know, you should stop thinking about this as a one off. We have a number of large, you know, pending proposals or projects in the hopper, I suppose.
It is what it is.
The market seems pretty constructive to us across the different segments.
A large smid and antibiotic and.
So I'm not sure I can say anymore than that.
Got it and then just a follow up on the final budget piece, given where we are in the year, how those conversations trended in terms of large customer cost cuts that was mentioned earlier, but it doesn't sound like those cost cuts will necessarily hit R&D spending at the moment.
Patrick Donnelly: And, you know, some of them come through, some of them don't, some of them get delayed, some of them are pushed up. As I said, we've got more of this barter work in the hopper as well. And so, I think in the next, maybe not fourth quarter, but in Q1, Q2 next year, we'll get decisions on that. And we feel like we're in a good position to, you know, to win that sort of work, where I think the premier vaccine developer in the industry, I think that's well known.
But just is there any indication that if macro doesn't improve here soon that R&D spend could be.
Next kind of cost cutting measure from those customers or.
Are those kind of more insulated thank you.
Yes.
We see the same information that you do in terms of R&D budgets.
Without going forward and what the likely growth is is there we're seeing 45, 6%.
Patrick Donnelly: So, you know, I think you can expect similar sort of number. That's certainly our aspiration, our expectation for Q3 based on those increased opportunities that we're seeing as I said, broad-based across the industry. No, that's really helpful. And I guess another 24 before 24 question, you know, just given, again, the book to bill this quarter, you know, the fact that you're talking about COVID as a percentage being flat next year, if you can do another one, two, five, in 4Q, you know, that seemed over the historical period that type of book to bill would typically imply, you know, something a little more in the high single-digit growth, particularly given, you know, COVID not stepping down.
The market growth number.
Our experience with specific customers as is similar in one or two of course as you well know we've got some specific.
<unk> challenges in the in the very short term, but we're their partners as I said, we believe we can provide some solutions for them and we can help them to reduce some of their costs, but also not necessarily reduce our revenues because they can help us by consolidating.
Some of their spend.
So as I say when these sort of things come out it's not always bad news is.
In fact, it's often we come out of it fairly positively so.
We're optimistic that as we go into the budgeting season.
Patrick Donnelly: Any change to that framework, you know, just when you think high level about what the book to bill applies for next year, I appreciate it. Sure, I mean, yeah, it really will come down to the composition of the work and what sort of work we get to win it. If there are some vaccines studies in it, and then you're right, we would be pushing up more towards the high single digit. If it's more oncology work or slower burn work, then we may be a little different.
That will be able to maintain or even improve our share of wallet within some of our larger customers in an even better partner to them in terms of helping them to.
To be more efficient irrespective of the model that.
Prosecuting or the spend that they have to to provide.
Thank you.
Okay.
Thank you we will take our next question.
Your next question comes from the line of Dave Windley from Jefferies. Please go ahead. Your line is open.
Patrick Donnelly: It really depends upon what happens in the next couple of months as we get toward the end of the year. And as I said to, honey, was Patrick's question was, we'll sit down or Jessica, we'll sit down and work out. Okay, what's the composition of that backlog? What are the expectations? Is there any rescue work in there, any vaccine work in there? And how do we think about prosecuting it and executing it? And that will essentially determine what we come back to you in January with from a garden's point of view. Very helpful. Thank you.
Brendan Brennan: We will take our next question.
Hi, Thank you thanks for taking my questions a few probably cleanups.
Brendan on the on the answer on the debt cost that you gave the 100 million potential reduction in interest expense.
Is that purely cost of that change or is that assuming some reduction in cost of debt and then applying cash flow to reduce.
Debt balances as well.
Yes, we will have a look I do think obviously it assumes continued debt paydown in the backend of this year.
Dave as we get into the first quarter gap, probably in that quarter as well then we will have a look at where the overall market is sitting both from an interest perspective and also what we can get away from that.
Steven Cutler: Your next question comes from the line of Casey Woodring from JP Morgan. Please go ahead. Your line is open. Great. Thanks for taking my questions. So you mentioned high single digit RFP growth on a trailing 12 month basis. Curious, what was that growth rate in the quarter? And then if you break that up by customer in the quarter curious to submit RFPs continue to grow month over month as they had over the first six months of the year.
We got the investment grade pieces, obviously, we'll be looking to move to investment grade bonds type structure. So.
It will be a combination of those things, but in the short term over the next six months, yes, absolutely we will be continuing the debt pay down okay.
Then on and thinking about.
Steven Cutler: And then just curious, you know, it's some of that deliberate decision making you've seen and submitted has even improved quarter over quarter. I think underlying funding trends had at least stabilized in the market. So just want to get your updated thoughts on that customer segment. Okay, just to clarify, we've talked about see, you know, RFP growth being graded to in the last two quarters, so Q3 and Q2. I think that's where we've talked about some nice uptick on the RFP.
Cadence of studies and the comment that Steve you made about approaching the end of the year and preparing guidance and things of that sort of looking at the mix of business.
This year's target for burn rate has been 95, you seem to be trending holding right in around that level.
Kind of starting higher ending a little bit lower as you had said you probably would've earlier early in the year.
Do you think that are similar.
Steven Cutler: It's not on a trailing 12 month basis, it's more on a more recent basis than that Casey. In terms of, you know, the opportunity across the sort of large or smid, I mean, it's been, I keep saying it's been pretty broad based. Smid biotech large farmer again in that in the last last two quarters in that sort of high single digit range and those opportunities have been solid. And you know, we've seen decisions being made within a reasonable time frame, etc.
Progression of of burn rate is is likely is it too early to be able to really make a call on that I'm just wondering if.
If we start at 96% at 94 is next year, starting at nine four and ending at nine two and how should we think about that moving through the year. Thanks.
Yes, I think it's a little early to be.
Prophesy that one David to be honest, we obviously.
Steven Cutler: So, you know, it's, it is what it is. You know, the market seems pretty constructive to us across the different segments, large smid and end the biotech. And so I'm not sure I can say any more than that. Got it. And then just a follow up on the farm of budget piece, given where we are in the year, how those conversations trended in terms of large customer cost cuts, you know, that was mentioned earlier, but doesn't sound like those cost cuts will necessarily hit R&D spending at the moment.
As to improve our burn rate and we do have several initiatives ongoing within the organization to do things faster and to improve that.
So we push it up.
From nine five knockdown.
We believe we will end the year at around $9 five in quarter four.
Steven Cutler: But just, you know, is there any indication that if macro doesn't improve here soon that R&D spend could be, you know, the next kind of cost cutting measure from those customers or are those kind of more insulated. Thank you.
That's what we expect and I would be too.
Do things operationally and.
And in <unk>.
Efficient manner I suppose that we can move move that at least at least hold it and possibly even increase it that's certainly what we're trying to do so.
Like your scenario of nine.
400, <unk> then at one point to that.
Not where we're trying to go at all and I do expect that we're going to be able to hold it.
Steven Cutler: Yeah, I mean, we see the same information that you do in terms of, you know, hourly budgets and, you know, whether they are going forward and what the likely growth is, is there, you know, we're seeing four, five, six percent sort of as a, as a, as a market growth number, you know, our, our experience with specific customers is, is similar, one or two, of course, as, as you well know, we've got some specific challenges in the, in the very short term, but, but where they partner, as I said, we believe we can provide some solutions for them, and we can help them to reduce some of their costs, but also not necessarily reduce our revenues, because they can help us by consolidating some of their spend, and so, so, as I say, when these sort of things come out, it's not always bad, in fact, in fact, it's often, you know, we come out of it fairly positively, so I'm, you know, optimistic that as we go into the budgeting season, that we'll be able to, to maintain or even improve our share of what within some of our larger customers, and, and, and we are even better partner to them, in terms of helping them to, to be more efficient, irrespective of the model that they are, they're prosecuting, or, or the, the spend that they have to, to provide. Thank you.
At a minimum hold next year and possibly increasing.
Excellent I'm glad you don't like that.
The.
The last.
Question for me is around Steve you mentioned in your prepared remarks, and talking about some of the environmental things you did mentioned geopolitical.
And I wondered if you could elaborate on that a little bit in terms of.
How the ways in which you see that affecting I'm, assuming a big one is site access.
But how you see geopolitical affecting the business are affecting your clients and their clinical operations and if you could comment about how much of the kind of global site landscape.
Is or is not available to you at the moment and how does that then read through to a sell of care for icon.
Right.
Yeah, Dave I mean.
Obviously, referring to.
Russia, Ukraine, China, Israel now.
Does it take Israel specifically.
We have a pretty well very important operation in Israel, and we are certainly reaching out to to our employees and particularly the ones that have been directly impacted by the horrible events that have been going on there and supporting them and obviously.
Operator: We will take our next question.
Our concern is with them and with our business operations to continue.
Tim Daley: Your next question comes from the line of Dave Winley from Jeffrey. Please go ahead. Your line is open. Hi. Thank you. Thanks for taking my questions. A few probably clean-ups. Brennan on the, on the answer on the debt cost that you gave the 100 million potential reduction in interest expense. Yep. That purely cost of debt change, or is that assuming some reduction in cost of debt and then applying cash flow to reduce debt balances as well?
However, we have around about 250 people in Israel. So it's not a it's not a huge part of out of our operation is well under 5% of our revenue is an important 0.5% of course, because we have customers out there as well, but it's not going to be a material impact in terms of site access at least in.
In the in the short term in fact.
Our employees are doing a fantastic.
Tastic Chubb and in continuing to do more.
So that's out there to keep our customers' projects going so well.
Tim Daley: Yeah, we'll have a look. I do think it obviously assumes continued debt paydown in the back end of this year. Dave, as we get into the first quarter, yeah, probably in that quarter as well, then we'll, we'll have a look at where the overall market is sitting, both from an interest perspective, and also what's what we can get away from, you know, if we get the investment grade pieces, obviously we'll be looking to move to investment grade bonds, type structures.
We're incredibly grateful to them for what they're doing and how they mentally and so resilient.
And continuing to do that work.
The bottom line from a financial point of view, it's a minimal impact China, we had some impact on earlier in the year, but that's really sort of coming back to sort of normal now we're seeing some significant growth rates in China.
Tim Daley: So it will be a combination of those things. But in the short term of the next six months, yes, absolutely. We'll be continuing the debt paydown. Okay. Then on and thinking about, you know, cadence of studies in the comment that Steve, you made about approaching the end of the year and preparing guidance and things of that sort, and looking at the mix of business, this year's target for burn rate has been nine and a half.
Last year, you would expect that because last year was quite low, but we're really bouncing back in China, now, which I'm really pleased about in Russia, Ukraine is kind of it's kind of.
More of the same where we're certainly diminished in terms of capability of inside access there.
We're not putting any new studies in Russia of course, Ukraine again, thanks to the resiliency of our employees, where we're able to monitor the studies that we have in those in.
Tim Daley: You seem to be trending, you know, holding right in around that level, kind of starting higher, ending a little bit lower. As you had said, you probably would have early and early in the year. Do you think that a similar progression of burn rate is likely, is it too early to be able to really make a call on that? I'm just wondering if, you know, if we start at nine, six, end at nine, four is next year starting at nine, four, ending at nine, two, and, you know, how should we think about that moving through the year?
In that country, and we've been able to close some databases again.
Thanks to the incredible dedication of our employees, but we're not really adding more work. There. So there is some impact across Russia, Ukraine, and Israel in terms of access to sites, but but overall I don't think it's a it's a really significant.
It won't be any it won't be any more significant going forward than what we have now certainly Russia declined as the sort of greatest area, where we'd be doing doing studies and that has already been impacted it won't be going back up anytime soon but I don't think it's going to go down any further either so unless we called out studies, but the overall I think a fairly modest.
Tim Daley: Thanks. Yeah, I think it's a little early to be, to be, you know, prophesizing on that one, David, to be honest with you, obviously our aim is to improve our burn rate. And we do have several initiatives ongoing within the organisation to, you know, to do things faster and to improve our burn rate. So we push it up from nine point five, not down. So we believe we'll end the year at around nine point five, in quarter four, that's what we expect.
Impact in terms of site access across our global network, which means from a standard of care, we've seen some uptick in.
In the recruitment they recruit now at something like twice as fast as.
Is that sort of normal sites, if I can use that term AD hoc type sites non SLR care sites.
Tim Daley: And our aim would be to, you know, to do things operationally. And, you know, in a efficient manner, I suppose, though, that we can move, move that, at least hold it and possibly even increase it. That's, that's certainly what we're trying to do further through. So I don't like your scenario of nine point four or five down at nine point two. That's, that's, that's not where we're trying to go at all.
And they've been very successful in doing that they get.
<unk> quickly.
The quality there is very good so I am pleased with the increasing contribution they're making we recruit about 10 or 12% of our patients now the silica side networks. So there might be an increasing contribution to our overall patient recruitment numbers I'd like that of course going forward to be bigger and thats, probably an area.
Tim Daley: And I do expect that we're going to be able to hold it as a minimum, hold it next year and possibly. I'm glad you don't like that. The last question for me is around Steve you mentioned in your prepared remarks and talking about some of the environmental things. You did mention geopolitical and I wondered if you could elaborate on that a little bit in terms of how the ways in which you see that affecting, I'm assuming, you know, a big one is side-access.
On the M&A front that we're going to be looking at in terms of site networks to to expand that that network and get a greater contribution from accelerated particularly as we as we move more into the decentralized clinical trials.
Sorry for the extra question. Thank you.
Okay. Thank.
Thank you we will take our next question.
Your next question comes from the line of Tim <unk> from Wells Fargo. Please go ahead. Your line is open.
Alright, thank you.
Steve by the secondary comment you made on Casey's RFP question.
Tim Daley: But how you see geopolitical affecting the business or affecting your clients and their clinical operations. And if you could, you know, comment about how much of the kind of global site landscape is or is not available to you at the moment. And how does that then read through to a seller care for for icon. Thanks. Right, right. Yeah, Dave, I mean, you know, I think you're obviously referring to Russia, Ukraine, China, Israel now.
You talked about how the broad customer sat rfps are looking good but you also mentioned I think budget season when that comes around so could you just kind of walk us through a typical timeline of budget season like when do you get firm communication from customers they've got their 24 budgets in hand.
This is what we are willing to spend or this is hal.
How we're looking to adjust our initial outlook just kind of January February December.
Tim Daley: So to take Israel specifically, you know, we have a pretty well very important operation in Israel. And we're certainly reaching out to our employees and particularly the ones have been directly impacted by the horrible events that have been going on there and supporting them. And obviously our concern is with them and with our business operations to continue. However, you know, we have around about 250 people in Israel. So it's not a huge part of our operation.
If you could help us kind of.
Mapped that out now.
Yes.
I don't know that were specifically directly involved.
I hear a little bit from customers around budget season, whether the budget is going up or whether it was staying flat. It doesn't it usually doesn't go down maybe one or two exceptions as I have.
Certain circumstances, but usually we're talking about a reasonable increase if we find actually in the in the fourth quarter. They have budget to spend an hour sometimes allocate that budget.
Tim Daley: It's well under 0.5% of our revenue. It's an important 0.5%. Of course, because we have customers out there as well. But it's not going to be a material impact in terms of side-access, at least in the short term. In fact, you know, our employees are doing a fantastic job in continuing to, you know, to monitor sites out there and to keep our customers projects going. So, you know, I'm just incredibly grateful to them for what they're doing and how they're meantfully and, you know, so resilient in continuing to, you know, to do that work out there.
A little more aggressively or sort of leo faster than they would because they need to spend it or lose it. So as I say, we get sort of indirect feedback Tim on the budgets and what they would likely to be we see the surveys as well and where we are optimistic that the the budget right.
The R&D growth rate will be probably more mid single digits is that the sort of the number we sort of expect to be basing our budget all.
Our targets on going into next year at least at least from an R&D, we obviously want to take market share and the potential to do better than that but.
Tim Daley: So the bottom line from the financial point of view, it's a minimal impact. China, we had some impact on earlier in the year, but that's really sort of coming back to sort of normal. Now we're seeing some significant growth rates in China over over last year. You'd expect that because last year was quite low. But we're really bouncing back in China now, which I'm really pleased about. And Russia, Ukraine is kind of, you know, more of the same.
I think that's what I would say around the customer budgets, they don't come to us.
Give us a huge amount of insight into it.
The budget to kind of be we get a fairly general sort of qualitative feel for particularly with our partners as to as to what theyre going to spend on how they're going to spend it all if theyre going to adjust their models, we'll do that sort of thing, but it's it's all fairly qualitative.
Tim Daley: We're certainly diminished in terms of capability of and side-access there. And we're not putting any new site studies in Russia, of course. Ukraine, again, thanks to the resiliency of our employees. We're able to monitor the studies that we have in that country. And we've been able to close some databases, again, thanks to the incredible dedication of our employees. But we're not really adding more work there. So there is some impact across Russia, Ukraine and Israel in terms of access to sites.
Got it great and then just a quick follow up here.
Higher level question.
Not trying to have you make a call on rates, where they are going but just hypothetically.
Funding cost or discount rates are higher.
Hypothetically, if we keep the NPV IRR model are unchanged.
Some other assumption on that.
Increasing probability of success.
Tim Daley: But overall, I don't think it's a really significant or it won't be any further. It won't be any more significant going forward than what we have now. Certainly, Russia, Ukraine is the sort of greatest area of where we've been doing studies. And that has already been impacted. It won't be going back up anytime soon. But I don't think it's going to go down any further either. And let's be close out studies.
Yes, Bob.
Let's see where we get some like cannibalization or demand destruction in the industry.
Higher hurdle rate in terms of SaaS that might result in lower number of trials that are going through at a higher rate scenario could you kind of just Chuck.
Like that concept for.
Something that <unk> been speaking to investors on recently.
Okay and your take on it.
Tim Daley: But overall, I think a fairly modest impact in terms of side-access across our global network, which means from, you know, from a satellite care, you know, we've seen some uptick in their recruitment. They recruit now at something like twice as fast as our, as our sort of normal sites. If I can use that to them ad hoc type sites, non-accelerate care sites. And they've been very successful in doing that. They get things started quickly.
Hey, Tim on like if there's a crack it's Brendan here I don't know if our I mean on a.
Macro level as a finance guy even in a pharma company, obviously theyre looking at yes, you are right hurdle rates and interest rates and all of those pieces, but thats from a holistic perspective, when I get to drug development, it's really about the candidate drug.
That moves forward and the potential that they have in their pipeline no one's going to under spend in terms of return on investment. If they think they are quality drugs and they have the opportunity to do that and you can see that.
Tim Daley: The quality there is very good. So I'm pleased with the increasing contribution they're making. We recruit about 10 or 12% of our patients now at the accelerate care site network. So they're making an increasing contribution to our overall patient recruitment numbers. I'd like that, of course, going forward to be bigger. And that's probably an area on the M&A front that we're going to be looking at in terms of site networks to expand that network and get a greater contribution from accelerate care particularly as we move more into the decentralized clinical trials. Sorry for the answer question. Thank you. Okay. Thank you.
And the overall environment. So it does come down to the specific company I would say more so in the actual drug pipeline that they have we've seen I think probably more promise in the drug pipelines.
In the last six months and people moving forward and getting on with their getting their funding is in place and moving in the right direction.
Then we have in the first half of this year. So I think that the trend is positive and albeit I'm sure someone's doing that math at a very senior level, but I don't know if it pragmatically impacts on trial by trial decisions.
Great I appreciate the feedback thank you.
Steven Cutler: We will take our next question. Your next question comes from the line of Tim Daley from Welfargo. Please go ahead, your line is open. Okay. Thank you. So Steve, what is the dig into a comment made on Casey's RFP question? You know, you talked about how the broad customer said, you know, our fees are looking good, but you also mentioned, I think budget season, when that comes around. So could you just kind of walk us through a typical timeline of the budget season, like, when do you get firm communication from customers?
Thank you.
We will take our next question.
Your next question comes from the line of Jack Wallace from Guggenheim Partners. Please go ahead. Your line is open.
Yes, thanks for taking my questions just a follow up to the last one and maybe there.
A little more color here, but is it.
Sierra said yourself it sounds like you're in a position to help your customers.
You reduce costs improve efficiency.
Maybe let's say with higher hurdle rates.
Steven Cutler: They've got their 24 budgets in hand. You know, this is what we're willing to spend, or this is how we're looking to adjust our initial outlook. Just kind of January, February, December, if you could help us kind of map that out in our heads. I mean, I don't know that we're specifically directly involved. I mean, I hear a little bit from customers around budget season, whether their budget's going up or whether it's staying flat, it doesn't usually doesn't go down.
Funding an opportunity for more outsourcing to.
Prove efficiency, which can help the proper portfolio MTV question.
So that the right candidates are getting funded but they're being funded and brought to market more efficiently because of incremental outsourcing.
That would certainly be our contention Jack.
Steven Cutler: I know there may be one or two exceptions is, you know, if they have certain circumstances, but usually we're talking about a reasonably increased if we find actually in the fourth quarter, they have budget to spend and they'll sometimes allocate that budget a little bit more aggressively or assertively or faster than they would because they need to spend it or lose it. So, you know, as I say, we get sort of indirect feedback on the budgets and what they're likely to be.
We believe we offer a very effective in a very efficient method of getting.
Drugs to market compared to the market and devices to market.
Steven Cutler: We see the surveys as well, and we're optimistic that the budget rate of the R&D growth rate will be probably more mid single digits. So, that's the sort of the number that we sort of expect to be basing our budget on and our targets on going into next year, at least from an R&D, we obviously want to take market share and potentially develop that. But, you know, I think that's what I'd say around the customer budget season.
That implies an fits in nicely with our cost of capital.
Obviously in the different segments of the markets have different views on that large pharma have have opportunity and obviously have their own capabilities mid size to some extent in biotech is very limited.
And so we see the various models that we offer.
As a efficient way and we have to continually drive ourselves to be more efficient more cost effective because we recognize its a very competitive business and companies do have choices not just within.
The CRO industry, but of course to do the work themselves internally. So we to some extent compete against not just the Tvs in the PPD, but against the internal groups as well and so we constantly remind ourselves that we need to be 20% better than our customers. Its a goal that we have as an organization in terms of.
Steven Cutler: They don't come to us and give us a huge amount of insight into what their budgets are going to be. Maybe we get a fairly general sort of qualitative feel for particularly with our partners is to what they're going to spend or how they're going to spend it all, if they're going to adjust their models or do that sort of thing, but it's all fairly qualitative.
The operational metrics.
We monitor.
The way, we do our work so we recognize that there's there's always competition in this industry.
Potent.
Yes.
To keep moving forward.
I appreciate that.
Last one is a housekeeping, it's pfizer still your largest customer.
Brendan Brennan: Kind of great. And then just a quick fall on here. So Steve, you know, higher level question was, you know, not trying to have you make a call on rates where they're going, but just, you know, hypothetically, if funding costs or discount rates are higher, you know, hypothetically to keep the NPV IRR models unchanged due to the tweaks and other assumptions, whether that's increasing probability success. You know, is that a recipe where we get some like cannibalization or demand disruption in the industry and, you know, with higher hurdle rates in terms of success that might be resolved in the lower number of trials that are going through in a higher rate scenario.
We don't.
We don't comment on.
On specific customers Jack but the fact that you are asking the question <unk>.
Rather than the mix of the month.
Thank you so much.
Thank you.
We will take our next question.
Your next question comes from the line of Ann Hynes from Mizuho Securities. Please go ahead. Your line is open.
Hi, good morning so.
Margins, obviously I'm currently a 21% with gross margin continuing to be a driver of that can you just describe what's happening in the labor market and is it running if it's running ahead of your expectations. What do you think is driving that.
Brendan Brennan: Could you kind of just just pose like that concept for us is something that's been speaking through investors on recently. Would love to be could you take on it? Tim, I might give this a crack. It's Brandon here. I mean, I don't know for, I mean, at a macro level as a finance guy even in a in a farmer company, obviously they're looking at, yes, your right, hurdle rates and interest rates and all those pieces, but that's from a holistic perspective.
And secondly, just to get back to the book to Bill in bar, there because I am getting more questions I'm sorry, if you already said this but just to confirm ex parte.
Book to Bill would have improved sequentially or at least spent about that kind of one to one to mark for that quarter that'd be great. Thanks.
Brendan Brennan: When I get drug development, it's really about the kind that it drugs and how that moves forward and, you know, the potential that they have in their pipeline, no one's going to understand in terms of return and investment. If they think they have quality drugs and they have the opportunity to do that, you can see that in the in the overall environment. So it does come down to the specific company, I would say more so and the actual drug pipeline that they have we've seen.
Okay, Let me tell you.
Let me tell you first one around the labor market.
Certainly, we're certainly seeing some I think.
Attenuation I suppose.
Wage or labor pressures in the.
In that market our retention has been.
Increasingly positive we've gone up on a month by month quarter by quarter basis over the last well, probably six or eight quarters now so well above pre COVID-19 levels.
Brendan Brennan: I think probably more promise in the drug pipelines in the last six months and people moving forward and getting on with their getting their findings in place and moving in the right direction. Then we have in the first half of this year. So I think that the 10 trend is positive and albeit I'm sure someone's doing that math at the very senior level, but I don't know if it pragmatically impacts on trial by trial decisions.
Jack Wallace: Thank you.
While.
Expectations with inflation and all of that.
Brendan Brennan: We will take our next question.
That.
We will remain that.
The merit increases.
We will need to be considering those carefully as we go into early next year.
We feel we're in a good place and we feel we've been we've been adequately coping and compensating our employees and that's reflected in the very strong retention that we have.
Jack Wallace: Your next question comes from the line of Jack Wallace from Guggenheim Partners. Please go ahead, your line is open. Yes, thanks for taking my questions. Just to follow up to the last one and maybe to get a little bit more color here, but as a serious as yourself, it sounds like you're in a position to help your customers. You reduce cost and prove efficiency. It isn't, you may be this a higher hurdle rates with funding and opportunity for more outsourcing to improve efficiency, which can help the portfolio NPV your question, so that the right candidates are getting funded, but they're being funded and brought to market more efficiently because of incremental outsourcing.
As an organization.
In terms of the.
The book to Bill we reported $1 26.
Again, I'll say it again some of the reports we've seen it in terms of the dollars associated with that BARDA contract significantly.
Significantly inflated and I'll just put it that way, we're not going to talk about the individual award or the.
Book to bill with or without it but I will significantly in fact, it was an important awards. It wasn't the largest award that we had in the quarter. It's an important award there are several others of them in the quarter.
Direct fee book to Bill was similar in fact, I think it was a little bit ahead.
Yeah.
Of the 606 so.
It was a it was an award that.
Jack Wallace: Well, that would certainly be our contention. Jack, you know, we believe we offer a very effective and a very efficient method of getting, you know, drugs to market, compounds to market and devices to market, you know, that complies and fits in nicely with cost capital. You know, obviously in the different segments of the markets have different views on that large farm, I have have opportunity and obviously have their own capabilities mid size to some extent and biotechs very limited.
It's still certainly compensated as well on the direct fee line as well. So we feel good about where we are with that we feel there are other opportunities and as I said.
Jack Wallace: And so, you know, we see the various models that we offer as a efficient way and we have to continually drive ourselves to be more efficient, to be more cost effective because we recognize it's a very competitive business. And, you know, companies do have choices, not just within the CRO industry, but of course to do the work themselves internally. So, you know, we see some extent compete against not just the occupiers and the PPDs, but against, you know, the internal groups as well.
This COVID-19 stuff is not a one off but we don't feel that.
This is a one and done we feel we've got opportunities and ongoing quarters to win these sorts of projects.
And we expect to be successful as we have been in quarter three.
Okay, great. Thanks very helpful.
Thank you have a nice day.
Other questions, so I would like to hand back to Tim.
For closing remarks.
Thanks, operator, thank you all for joining us today and for your interest in Icahn, we remain encouraged by the positive underlying fundamentals in the CRM market and we are confident not only our strong positioning as a strategic embedded partner to new and existing customers, but our ability to navigate the current dynamic environment as well.
We look forward to updating you on further progress as we close out 2023. Thank you all and have a good day.
Jack Wallace: And so, we constantly remind ourselves that we need to be 20% better than our customers. It's a goal that we have as an organization in terms of the operational metrics that we monitor in the way we do our work. So, you know, we recognize that there's always competition in this industry and it's important to, you know, to keep moving forward. I appreciate that. And just last one of the housekeeping, is Pfizer still your largest customer? We don't, we don't comment on on on specific customers Jack, but the fact that you're asking the question might indicate that there are others in the mix as a month. Thank you so much. Thank you.
Ann Hynes: We will take our next question.
This concludes today's conference call. Thank you for your participation you may now disconnect.
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Brendan Brennan: The next question comes from the line of unhines from Misaho Securities. Please go ahead. Your line is open. Hi, good morning. So, you know, margins are obviously improved to a 21% with gross margin continuing to be a driver of that. If you just described what's happening in the labor market and is it running, if it's running ahead of your expectations, what do you think is driving that? And then secondly, just to get back to the book to bill and barter, because I am getting more questions.
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Brendan Brennan: I'm sorry if you already said this, but just to confirm ex barter. Did would book to bill would have improved sequentially or at least been above that kind of one to 1.2 mark for the quarter. That'd be great.
Okay.
Okay.
Okay.
Brendan Brennan: Okay, let me tell you, let me tell you your first one and around the labour market. You know, we're certainly, we're certainly seeing some I think attenuation, I suppose, of wage or labour pressures in that market. Our retention has been increasingly positive. We've gone up on a month by month quarter by quarter basis over the last, well, probably six or eight quarters now. So we're well above pre-COVID levels. And while expectations with inflation and all that, we'll mean that the merit increases, we'll need to be considering those carefully as we go into early next year. We feel we're in a good place and we feel we've been adequately coping and compensating our employees and that's reflected in the very strong retention that we have as an organisation.
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Steven Cutler: In terms of the, you know, the book to bill, we reported the 1.26. I think, again, I'll say it again, some of the reports we've seen in terms of the dollars associated with that party contract were significantly inflated. I'll just put it that way. We're not going to talk about the individual award or the book to bill with or without it, but they were significantly inflated. Well, it was an important award.
Yes.
Steven Cutler: It wasn't the largest award that we had in the quarter. It's an important award. There are several others of them in the quarter. The direct fee book to bill was similar. In fact, I think it was a little bit ahead of the, of the, of the 606. So, so, you know, it was a, it was an award that, you know, that that still certainly compensated as well on the direct fee line as well.
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Steven Cutler: And so we feel good about where we are with that. We feel there are other opportunities. And as I said, you know, this COVID stuff is not a one off. We don't feel that this is a one and done. We feel we've got opportunities in ongoing quarters to win these sorts of projects. And we expect to be successful as we have been in quarter three.
Brendan Brennan: Okay. Great. Thanks. Very helpful. Thank you.
Operator: There are no further questions.
Okay.
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Steven Cutler: So, would like to hand back to for closing remarks. Thanks, operator. Thank you all for joining us today and for your interest in Icon. We remain encouraged by the positive underlying fundamentals in the CRR market. And we are confident not only are strong positioning as a strategic embedded partner to new and existing customers. But our ability to navigate the current dynamic environment as well.
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Steven Cutler: We look forward to updating you on further progress as we close out 2023. Thanks all and have a good day.
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Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you.
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