ICON plc

Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter and full year ended December 31st, 2021. Also on the call today, we have our CEO, Dr. Steve Cutler, and our CFO, Mr. Brendan Brennan. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call. 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 are made, and we do not undertake any obligation to update publicly any forward-looking statement, either as a result of new information, future events, or otherwise. More information about the risks and uncertainties related to these forward-looking statements may be found in SEC reports filed by the company. This presentation includes selected non-GAAP financial measures, which Steve and Brendan will be referencing in their prepared remarks. For a presentation of the most directly comparable GAAP financial measures, please refer to the press release statement headed Condensed Consolidated Statements of Operations. While non-GAAP financial measures are not superior to or substitute for the comparable gap measures, we believe certain non-gap information is more useful to investors for historical comparison purposes. 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 to ask one related follow-up question. I would now like to hand over the call to our CFO, Mr. Brendan Brennan.

Thank you, Kate. In quarter four, ICON achieved gross business wins of $2.79 billion. and recorded 413 million worth of cancellations. Consequently, net awards in the quarter were $2.38 billion, resulting in a net book-to-bill of 1.26 times. Full-year 2021 grocers' business wins were $8.12 billion, and cancellations were $1.16 billion, resulting in net business wins of $6.96 billion and a net book-to-bill of 1.27 times. With the addition of the new awards in quarter four, our backlog grew to a record $19.1 billion, representing an increase of 2.6% on Q3 2021 or an increase of 9.5% year-over-year on a combined company basis. Included in the press release are earnings slides. You will note a reconciliation of non-GAAP measures. Adjusted EBITDA excludes stock compensation expense, restructuring costs, foreign currency gains and losses, amortization and transaction-related costs and their respective tax benefits. Adjusted revenue in quarter four was $1,881,000,000. This represents a year-on-year increase of 147.4% or 148.7% on a constant currency basis. On a combined company basis, adjusted revenue increased 15.1% from the comparable period last year. For full-year revenue, The number was 5,481,000,000. This represents a year-on-year increase of 95.9% or 94.5% on a constant currency basis. On a combined company basis, adjusted revenue increased 24.8% from 2020. We continue to see an improvement in our top 25 customer concentration in the fourth quarter. Our top customer represented 8.5% of revenue and our top five customers represented 28.3% of revenue Our top 10 represented 41.4%, while our top 25 represented 61.4%. In the full year 2021, our top customer represented 8% of revenue, and our top five customers represented 31.6% of revenue. Our top 10 represented 45.3%, while our top 25 represented 65%. Adjusted gross margin for the quarter was 28.1%, compared to 27.9%, quarter three, full-year adjusted gross margin was 27.9%. Adjusted EBITDA was $333 million to the quarter, or 17.7% of revenue. In the comparable period last year, on a combined company basis, adjusted EBITDA was $295 million, or 18.1% of revenue. This represents a year-on-year increase of 12.7%. On a combined company basis, full-year 2021 adjusted EBITDA was $1,248,000,000, or 16.7%. This compares to adjusted EBITDA of $996 million for the full year 2020, or 16.7% of revenue, representing an increase of 25.3% year-on-year. Adjusted operating income for the quarter 4 was $308 million, a margin of 16.4%. The adjusted net interest expense was $44.3 million for the quarter, and the adjusted effective tax rate was 17% for the quarter. As noted earlier this year, we expect the full year 2022 adjusted tax rate to be approximately 16.5%. Adjusted net income attributable to the group for the quarter was $218 million, a margin of 11.6%, equating to diluted earnings per share of $2.63%, an increase of 25% year-over-year. Full-year adjusted net income attributable to the group was $666 million. During the quarter, the company recognized gap revenue of $1,885,000,000 and $5,481,000,000 of gap revenue in the full year 2021. In the fourth quarter, the company recorded $16 million of transaction and integration-related costs Four-year transaction and integration-related costs were $198.3 million. U.S. GAAP income from operations amounted to $144.5 million, or 7.7% of revenue during the quarter four. Four-year U.S. GAAP income from operations amounted to $378.5 million. U.S. GAAP net income attributable to the group for the quarter four was $76.5 million, or $0.92 per diluted share, compared to $1.90 per share of the equivalent share. prior year period. Full year U.S. GAAP net income attributed to the group was $153.2 million, or $2.25 per diluted share. Net accounts receivable was $642 million at the 31st of December 2021. This compares with a net accounts receivable balance of $540 million at the 30th of September 2021. On a GAAP comparative basis, days sales outstanding were 31 days at December 31, 2021. This compares to 26 days sales outstanding at September 30, 2021, and this also compares to 57 days at the end of December 2020. Cash generation from operating activities in the quarter was $290 million. At December 31, 2021, the company had a gross cash balance of $754 million, and debt of $5,436,000,000, leaving a net debt position of $4,682,000,000. This compared to a net debt of $4,918,000,000 at September 30, 2021, and net cash of $494,000,000 at December 31, 2020. Capital expenditure during the quarter was $47.7 million, driven by spend associated with IT infrastructure and systems, as well as additional investments in our facilities and laboratories. We ended the year with a performer net debt to trailing 12 months adjusted EBITDA ratio of 3.4 times. The priority for capital deployment remains on debt pay down in the near term. Given our strong cash flow generation, we reiterate our target of exiting 2022 below three times adjusted EBITDA well ahead of the initial target we set in 2021. In addition, our Board of Directors authorised a shared repurchase programme of up to $100 million, which we intend to deploy opportunistically beginning this quarter. With all of that said, I'd now like to hand over the call to Steve.

Thank you, Brendan, and good day, everyone. 2021 was an outstanding year for ICON. Over the course of the year, we completed a transformational acquisition, doubling the scale of the organisation and creating a world-leading healthcare intelligence and clinical research organisation. Our employees expertly navigated the challenges of the ongoing pandemic, deploying innovative solutions to ensure clinical trials were able to continue and patients received life-saving treatments despite continued impact to site and patient access. We delivered on our mission to accelerate the development of customers' drugs and devices by providing support on 30 new drug approvals in 2021 in areas such as liver disease, schizophrenia, a range of cancers, and of course, infectious disease. I'm incredibly proud of the role the ICON team has played in the fight against COVID and the development of these critical vaccines and therapies. The overall environment in clinical development throughout 2021 was robust as biopharma development spending continued to grow and biotech funding activity was near the record level seen in 2020. Scientific advancements in areas such as mRNA techniques in vaccines and cell and gene therapies present new opportunities to develop novel drugs that could have a major impact on potential treatments for a variety of diseases. Customers are increasingly turning to CROs as partners, not just providers, to aid in the development of these complex and groundbreaking therapies. RFP volume continued to be strong through the year, increasing low double digits on a year-over-year basis for the quarter and full year 2021. While biotech funding levels were down from a record year in 2020, we have not seen this negatively affect overall demand in the small biopharma customer segment. In fact, in quarter four, we saw particular strength in RFP activity in the small and mid-sized biopharma segments, as strong cash positions continued to drive demand for best-in-class development. We were very pleased to see our top 25 customer concentration decrease sequentially in the fourth quarter, as well as from a full-year perspective attributable to the new icon combination. At a high level, our overall customer mix is well balanced with approximately half of revenue attributable to large biopharma and 45% attributable to small and mid-sized biopharma companies. Within this segment, companies that have less than $100 million in annual R&D spend represented a mid-teen percentage of our overall revenue in 2021. This percentage will vary on a quarterly basis, and I would add that we haven't seen any issues or concerns related to cash collections or rising bad debts in this customer subset. Our engagement with customers on a strategic level has continued to show positive progress. ICON's offering of integrated and innovative solutions appeals to biopharma customers large and small and across different modalities of development from functional to full service. Our success in creating enduring strategic customer partnerships with strong delivery for our customers has led to further opportunities to expand existing relationships as well as open the door to new partnerships. As new icon, we can be even more of a strategic partner to our customers with the unique resources, world-class talent, and differentiated solutions we offer. I'm delighted to report that we secured an agreement with a large pharma partner during the quarter, expanding our existing relationship across a number of services and further validating the strategic merits of the new ICOM organization. During the quarter, ICOM increased net business wins to a record $2.38 billion, delivering a quarterly book to bill of 1.26 and growing our backlog to $19.1 billion, an increase of approximately 3% over quarter three, 2021, and approximately 10% year over year on a combined company basis. We believe our backlog is a robust figure based on contracted and awarded work with a conservative but realistic assessment of associated pass-through costs. New award activity was strong across several operating segments. On a combined company basis, full year 2021 revenue and adjusted EBITDA increased an impressive 25% year over year, hitting the midpoint of our guidance ranges for revenue and adjusted EPS for the year. Our backlog burn for the quarter remained over 10%. Cash collection efforts continued to be strong with a DSO of 31 days down from 57 days on a comparable basis from December 31st 2020. As a result, I'm happy to report that these efforts allowed us to make a $500 million payment on our term loan B facility at the end of the year, reducing our leverage to 3.4 times adjusted EBITDA, including synergies, exiting 2021. This puts us on track to exit 2022 with a leverage ratio of approximately 2.5 times adjusted EBITDA, we are pleased with the progress already made on our cost and revenue synergy goals. As announced earlier this year, we expect to reach a run rate of approximately 50% of our $150 million cost synergy target, or $75 million exiting this year. From a revenue synergy perspective, our target of $100 million by 2024 remains unchanged. Our cross-sell award activity has been strong, particularly in awards for central and specialty labs, the AcelaCare site network, imaging, and early phase services. Our integration process continues well with notable achievements in the first six months as a combined organization. We have completed over 30 facility integrations across our sites, unifying our workforce and ensuring an efficient footprint across our organization as the pandemic restrictions start to ease. Our technology and systems integration activity and planning is well underway, with a priority focus on enterprise-level systems in order to enable a unified and engaged employee experience as soon as possible. Our global business support services model has started organization-wide implementation in areas such as finance, IT, and other administrative functions. In addition, we have rolled out our new brand campaigns highlighting the shared values of New Icon and reflecting the best of both from the organisations we have brought together. The priorities we set out at the start of the integration remain unchanged, delivering on time and budget for our customers and ensuring a positive employee experience. To that end, we have increased our investment in internal initiatives to improve retention and attract the industry's best talent. as we strive to become the employer of choice in the CRO industry. Indeed, we were pleased to be the only CRO included in the Forbes America's Best Large Employers list for 2022. As the labour market continues to be highly competitive, we recognise the importance of continuing to invest in our employees and provide support in areas such as career development and training With the increased scale of new ICON, we are excited by the expanded and diverse career opportunities that are available for our entire employee population. As the COVID-19 pandemic continues on, we see areas of opportunity amidst the challenges that inevitably will remain. Alongside our biopharma partners, ICON has played a key role in the ongoing development of COVID vaccines and therapies. We rose to the challenge of executing clinical trials in record timelines, starting up sites and recruiting patients with increased efficiency. Our site network was at the heart of many of these critical vaccine trials, displaying the strategic benefits we can bring to our owned and partnered sites in the AsellaCare network. We saw the peak of revenues related to COVID programs occurring in the first half of 2021. As expected, the level of COVID work decreased further in quarter four to mid-single digits as a percentage of total revenue as large vaccine trials gradually wound down and therapies made up a larger proportion of our contracted work. End of quarter four, our backlog from COVID-related projects decreased further, representing approximately 5% of total backlog, which is down slightly from the end of the third quarter. Our expectation is that revenue attributable to COVID-related vaccines and therapies will represent less than 5% of total revenue in 2022. This assumes we do not see a need for further large-scale trials on new variants. We saw increased and continued resilience from sites and staff through the fourth quarter despite the emergence of the Omicron variant, although approximately 15% of sites remain restricted in some capacity due to COVID across the globe, a similar level to quarter three. Innovation is valued in our industry and by our customers more than ever, as impacts from the global pandemic continue to be felt and have necessitated a change in how we can best execute clinical trials. We are seeing solutions such as remote and risk-based monitoring deployed on the majority of clinical trial programs, and the number of hybrid trials initiated have increased significantly over the course of the last two years. Our innovation priorities at ICON have focused on providing enhanced solutions that address core customer needs, faster access to diverse patient groups, and more efficient clinical development. As customers seek novel solutions, we have continued to invest in unique partnerships and expanded offerings to further our position as a leader in helping to transform clinical development. During the quarter, we announced an expansion of our AcelaCare site network, entering the new partnerships with six research sites across four countries. These new site partnerships further our strategy of increasing the reach and capabilities of our site network, as well as expanding our therapeutic depth and expertise in the areas of CNS and immune diseases. With the addition of these new partnerships, Our site network now stands at over 100 active locations across eight countries, with access to over 9 million patients globally. This broad reach and increased resource has enabled us to realise increased efficiencies for our customers' trials, including faster patient recruitment and steady start-up at ICON sites versus industry averages. In addition to the site network, we have made significant investments in our digital health platform, one of the key components of our decentralized clinical trial offering. Now branded the ICON Digital Platform, or IDP, this platform builds upon our already strong patient-facing mobile application and has integrated other key applications, such as e-consent, wearables data capture, and telehealth capabilities. One of our critical differentiators is our ability to integrate operational and functional expertise into our digital platform, allowing for customization and enhancements based on customer needs and our first-hand trial experience, while also providing a compelling one-stop service that avoids the need to contract third parties, thereby improving accountability while reducing risk and timelines for customers. Her role as a leader in successful decentralized trial execution was evidenced with the presentation of the chief heart failure trial results in quarter four in conjunction with the 2021 American Heart Association Conference. This is the only published, positive, fully decentralized trial that we have seen in the industry. This large, randomized trial required a significant amount of innovative planning, design, implementation, and unique services to execute. This trial integrated several components of our DCT offering, the mobile health platform, including a smartphone app to enroll participants and collect data, direct-to-patient drug and device logistics, a virtual coordinating center, and wearables components. In addition to showing improvement in patient retention rates, Trial results confirmed a dramatic increase in patient diversity, more than four times better than industry averages. I applaud the new ICON team that ran this program alongside a key pharma partner, successfully implementing a new model of development in the middle of a global pandemic and enrolling patients with heart failure, which is one of the most challenging disease entities to treat. This is a great example of our innovative strategy in action, providing solutions to support patients and creating the opportunity for a more diverse patient population to participate in clinical research. In addition to increasing patient diversity and inclusion in clinical trials, we have seen trials including decentralized components recognize other benefits, such as reduced data variability and more timely data capture with the utilization of digital health technologies and wearables. By leveraging our extensive resources, technology, and product development expertise, ICON is well positioned to partner with our customers to provide insights on where hybrid and decentralized designs are likely to work well for sites and patients, and just as importantly, in what protocols they are unlikely to be successful. Deploying decentralized solutions is not a one size fits all approach. Every study needs to be evaluated by an experienced team to properly conduct this analysis. As this market continues to evolve, we see a consistent need from our customers to find new ways of solving complex issues in their development programs. At ICON, we pride ourselves on our ability to take on our customers' challenges as our own. We are committed to our investments in innovation through talent, technologies, data, and analytics, as well as with novel partnerships such as those with DeepLens and Veridigm announced earlier this year to disrupt traditional product development. We're excited by the opportunity in front of us to create a new paradigm for bringing clinical research to patients and believe in the value it will bring to shareholders, sites, customers, and patients. With the strong performance in the fourth quarter and positive momentum coming into this year, We are reiterating our 2022 financial guidance of revenue in the range of $7.77 to $8.05 billion, representing growth of 42% to 47% over full year 2021 revenue. And adjusted earnings per share guidance in the range of $11.55 to $11.95, up 20% to 24%, over full year 2021 adjusted earnings per share. As we look beyond 2022, we continue to expect to deliver on the mid to long term financial projections we announced a year ago. Revenue growth in the mid to high single digits on a combined company basis and adjusted EBITDA growth in the low teens and EPS growth in the mid to high teens. We're looking forward to sharing more of our longer term projections at our in-person analyst day, which will be held on St. Patrick's Day, March 17th, at our site in Bluebell, Pennsylvania. The event will be webcast and will feature several members of ICON's leadership team highlighting our strategic focus areas, including innovation and technology. Finally, I'm thrilled that our team's excellent performance in 2021 has resulted in several industry awards, including SRIP's Best CRO Award, and additionally, As mentioned previously, ICON was the only CRO to be recognised in Forbes America's best large employers list for 2022. Before moving to Q&A, I'd like to recognise and thank sincerely all of the 38,000 ICON employees across the globe for their commitment and tireless efforts in the quarter and throughout 2021. We look forward to continued success in 2022 as we build the world's leading healthcare intelligence organization and help shape the future of drug development. Operator, we're now ready for questions. Thank you.

Thank you, dear participants. We will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star and one on your telephone and wait for a name to be announced. The first question comes from Eric Caldwell from Baird. Please ask your question.

Thanks. Good morning. I just have one quick clarification and then a question. Steve, at the very end, I think you said your midterm targets were from mid to high single-digit revenue CAGR. The slide deck says high single-digit. I may have misheard you. I just want to get a clarification on that.

Let me just check. to long-term revenue growth, mid to high single digits on a long-term basis, Eric, on revenue, mid to high single digits.

Okay. Thank you. And then on the client mix, I appreciate all the additional comments today. We have a group of companies in the space that all characterize and categorize their biotech mix and client mix quite differently. You gave some additional detail today talking about under $100 million of annual R&D spend. I was curious if you could maybe parse that just a bit further and talk about pre-commercial clients, clients that don't have a marketed approved product. They're not generating their own revenue. I suspect it's a slightly smaller subset of that sub-$100 million R&D spend, but if you had any additional color, it would be great. Thank you.

Sure. So as I think we... We outline, we think of our small biotechs as sort of outside the top 75. And within that, that's about a third of our revenue, a third of our backlog. And within that subset, as I was alluding to or talking in my comments, about half of that group we think of as being pre-revenue or capital market dependent, depending on how you look at it. So we would look at ourselves as having about mid-teens, 15, 16-ish percent of our revenue and our backlog with that sort of customer, as pre-revenue sort of customer. So we have a very modest exposure to that group. Quite frankly, we manage that very carefully in terms of getting credit checks on those customers. We work very hard to make sure our cash collections on those customers are ahead of our normal numbers. We haven't seen any real concerns in terms of bad debts or challenges with payment, any more than we would normally see. We feel we manage that group, that segment well. We feel we're in a good place with that group. They are almost exclusively extremely well funded. The average sort of cash on hand is in the two to three year mark. So it's a segment of the market we feel comfortable with, Eric, in terms of dealing with them and in terms of working with them to build their portfolios or to help them with their portfolios and to prosecute their programs.

And, Steve, I would assume that that mix, that 15% to 16% is spread across at least several hundred clients, if not even more than that. Do you have any sense?

It would be in that range, yeah. It would be in that range. Several hundred, yeah. It's a large number of customers. Long tail, yeah. Long tail.

Yeah. Very good. Thanks, guys. I appreciate it. No problem.

Thank you. The next question comes from John Crager from William Blair. Please ask your question.

much Steve with now a couple of quarters under your belt of the sort of new icon it would be great if you'd be willing to sort of break down the the business a little bit more I'm curious how you'd characterize sort of the traditional full-service business versus FSP maybe the central lab just kind of cut it however you're willing and and if you think about sort of the outlook for 22 Are there any real kind of standouts across those various buckets? Thanks.

Yeah, I mean, we're seeing, I mean, we certainly saw in 2021 very strong growth really right across the segments of the business, John. Full service went well both in a large pharma context and in a biotech and small mid-size where we focus. Both those areas grew nicely. Our functional services group grew nicely as well, as did our specialty pharma. Our specialty pharma includes our labs, early phase, decentralized trials, late phase, et cetera. So they all performed well from an annual growth point of view. We're seeing good interest and good RFP activity across those segments as well, whether it be biotech, Large pharma, probably biotech is a little bit ahead of large pharma at the moment in terms of RFP opportunities and growth potential in the long term. FSP continues to be a backbone and is a strong performer for us. Our lab business has done well. They won a good solid business over the last 12 months or so. Early phase, we've certainly beefed up in that space and we're a real player in that space. That continues to be a real opportunity for us. Site network had a great year, as did our home health area. So, you know, really, there weren't too many bad spots. There weren't too many areas of weakness in our business across 2021. And really, we see, we're very optimistic that, you know, that continuing across the business going forward.

Great. Thank you. Quick follow-up. Maybe... staff hiring goals for 22 and how the turnover rate has been trending versus more historical norms in this tight labor market?

Yeah, there's no question the labor market is tight. I think that applies across all of our competitors and with our customers as well. Certainly the biotechs and the large farmers, we all share, we fish from the same pond, so to speak, and we're all finding some challenges in terms of making sure we attract and retain the right people. As always with our business, there are certain hot spots and certain spots that are probably okay. If you're looking for CRAs in North America, that's a hot spot at the moment. And we're working various ways of making sure we retain people. Certainly attrition has gone up a little bit. I think it's more related to the environment that we've been in, in terms of the capital and the market available to develop drugs and the competition for that resource more than any other sort of area. But it's certainly an area we continue to work on very hard and focus on very hard. But we have a number of plans in place. We're seeing, I think, some improvement. Over the last couple of months, we've seen retention improve. And as we move into 2022, I think we expect to see that continue I think as we bring the two organisations together, people are seeing opportunities within our organisation for developing their careers. It's not all about salaries and costs. It's about giving people opportunity to develop their careers, and we're certainly making a very significant push on that and getting some traction there, I think. So overall, we're optimistic in terms of how that's playing out, but it is an area of intense focus for us at the moment.

That's great. Thank you.

Thank you. The next question comes to the line of Tycho Peterson from JP Morgan. Please ask your question.

Hi guys. This is Casey on for Tycho. I was curious what percentage of your trials are decentralized right now? How should we think about that percentage in 2022 given 15% of sites are currently impacted from COVID now? And then how should we think about the net impact of increasing decentralization and the COVID roll off to pass through revenue for 2022? You know that your guide assumes a conservative assumption on pass-throughs, so just curious as to what you're thinking there. Thank you.

Yeah, Casey, I mean, in terms of decentralized trials, pretty much, you know, the vast majority of trials that we win and start off have a component of decentralization going forward. Now, that may be one or two components of remote monitoring, a wearable component, a home health component, But there's very few trials we start off that are totally traditional trials anymore. But there are also very few that start off that are completely decentralized. I cited the one that we completed, the CHIEF study. That was a totally decentralized trial, very successful study, and the team did a great job on it. But they're very rare. And so the vast majority of our trials are what we term hybrid trials. that we're moving more and more decentralized going forward. But I think we're some years away from even a significant minority of our studies being fully decentralized. We've got some work to do on that one. In terms of pass-through costs on that, we're not seeing any real fundamental change or shift in terms of the amount of dollars associated, the pass-through dollars associated with decentralized trials at the moment. It's early days, and as I said, most of the studies we run are hybrid studies, and so there's still a strong component of site investigator fees. Patients are still, maybe they're not visiting sites every, as they would normally do at every visit, but there's still a large component of site and investigator fees. There's still a requirement for CRAs to travel the site. We're not seeing much change in terms of the pass-throughs at the moment. They represent approximately a high 20s, around a 30% of total contracted fees, and that's just a little bit during the pandemic, but really it's back at sort of where we traditionally expect to see it going forward.

Casey, maybe just to add to that, and I think maybe what you're referencing, and correct me if I'm wrong, is the fact that obviously in the first half of 21, we did have a large part of our portfolio working on the vaccine trials that do have elevated pass-throughs, and obviously we're lapping those in the first six months of 22, and that is very much built into the guidance. There are run rates on, I think Steve called out the run rates on COVID work, where, you know, expected to be in 22 to be less than 5% of revenue. So, We're talking about a much more normalized level of pass-through for the full year 22, much more in line with what you would have seen in 18 and 19. So helping margin profile significantly and still very, very good solid underlying direct fee revenue.

Got it. Thank you. Then maybe just one to follow up. So at our conference, you noted that SG&A would be under 10% of revenues in the longer term. think they were 10.5% in 4Q. So how should we be modeling this for 2022, inclusive of the $75 million of synergies? What sort of leverage do you have on this line? Thanks.

Yeah, I think as probably we've shown in the past, we're pretty assiduous cost managers, and we certainly want to make progress during the course of 2022 to bring us certainly in line with that 10%, if not below that 10% by the time we exit the year. So that's certainly a firmly in our view at this point as we continue through 22, and that's how I'd indicate folks should think about that from a modeling perspective.

Excuse me, have you finished with your question, sir?

Yeah, thank you.

Thank you very much. The next question comes from Elizabeth Anderson from Evercore ISI. Please ask your question.

Hi, guys. Thanks so much for the question. In terms of some of your peers have been talking about the pacing of the year and sort of seeing revenues accelerate over the course of the year. I know you don't typically guide quarterly, but I wonder if just directionally you could give us some indication about how you sort of see the balance of demand. And then secondly, not to make Steve repeat himself again, but I'm getting a lot of questions just to 100%. understand the midterm growth targets in the way you said in your script versus the slides again. And if you could just one more time say them for everybody.

Sure. Okay. So Elizabeth, I think as Brendan just alluded to, for 2022, as we lap the large, the heavy pass-throughs that we had in the COVID trials in 2021, the growth will be a little on the lower side. and we'll accelerate more as we get past those and go into the second half of the year. So on a 6.06 basis, it'll be a little lower in the first half of the year, and we'll expand going forward in the second half of the year. On a direct fee basis, of course, we're going to be growing at a good clip, but it's the pass-throughs that give us a little bit of a challenge in the first half of the year. In terms of longer-term revenue growth, I think I said mid to high single digits. That's what we're expecting to do on a revenue basis. So that's the ambition we have for the next two, three years. That's the sort of time I'm thinking about. Mid to high single digits is where we pitch ourselves and we believe we can get.

Okay, perfect. And then just adjusted EBITDA CAGR sort of low teens and EPS CAGR mid-teens plus those two?

Yeah. Yeah, absolutely.

Okay, perfect. Thanks for that clarification. I appreciate it.

Okay. Thank you. The next question comes from David Windley from Jefferies. Please ask your question.

Hi, good morning. Thanks for taking my questions. Steve, we're hearing from Big Pharma and even some medium and maybe the upper end of small biopharma that they are leaning or potentially leaning more on FSP vendors as they have difficulty filling internal positions. And then also hearing that PRA, we knew PRA was a fairly large percentage of PRA's revenue prior to your acquisition, but that, you know, maybe you and PRA, ICON pre-PRA and PRA were among the more aggressive or assertive in the FSP space. And so wondering both what you're seeing from a demand standpoint more specifically and how the combination has perched you competitively. Thanks.

Sure. Well, let me take your second question first. You know, we believe we're the number one market leader in the FSP space as the two organisations come together. The Legacy PRA organisation brought a very significant functional group to the DOCS organisation and together we believe we're well in front of anybody else in the market and it does give us significant flexibility in terms of ability to find labour for our full service groups as required. It also gives us an opportunity to get ourselves, to embed ourselves with large pharma and particularly move partnerships along in large pharma. So there's one or two opportunities that we've been able to start out as an FSP type contract, but it's morphed into more than that. So we see several benefits. of being that market leader on the FSP front, not just the normal revenues and margins, but that ability to drive partnership and build partnership with large pharma. In terms of your first question around large pharma and their move towards FSP, I think it's fair to say that large pharma are our major customers in that front, and they are leaning on us to get resource because resources are hard to find. in the industry and it is probably leading to some growth in that space or some advancement in that space that perhaps otherwise wouldn't be the case if the labour markets weren't quite so tight. We welcome that as an opportunity because again we find it can lead to other opportunities. Very few companies are just functional or just full service. Most of the large farmers have a component of both and as a company that leads in both full service and in functional, we believe we can be that ideal partner for those sort of companies.

Thanks for that. And then as follow-up on duration, I guess the follow-up question is duration of backlog and thinking about burn rate and knowing that management teams really build this on a bottoms-up, trial-by-trial basis, but I believe that management has commented about a target of around 10% burn rate. We've heard from some others that as the COVID environment kind of drifts away or drifts out of backlog, that a lot of the winds have maybe come in some fairly long duration areas like oncology and things like that. So I'm just wondering what your duration of backlog looks like and what you think that can produce from a revenue burn rate standpoint.

Yeah, I'll ask Brendan to comment, but I think there's no question that we saw through the COVID era, if I could put it that way, the last couple, you know, those vaccine trials burned quickly and did certainly help to improve our burn rate. We've got it now to over 10% and our ambition, our target is to keep it at around the 10% mark. That's what we'd like to do. You know, there were a lot of things that came out of COVID apart from vaccine trials that helped us to improve our burn rate, Dave. The speed at which things got approved, the ability to move trials forward faster really came to the fore and really did help to allow us to burn. My expectation and hope is that we can continue that, some of those processes, and obviously that involves sites and regulators and customers and those sorts of things as well. So it's not just our industry or our company. But my expectation is that we can continue a lot of those good things and move things along faster. I think that's the opportunity that COVID has brought us, the knowledge that we can do things faster if we need to and if it really matters, and it does, quite frankly. So I'm optimistic that we can continue to keep our burn rate at the higher end, even if the COVID work, as it will, declines in the longer term. But that remains to be seen, and it also remains requires, you know, partnership and collaboration with all of the various parties involved in clinical trials. Do you want to add?

Yeah, I mean, I suppose the only thing I'd add to that, Dave, is obviously, you know, our kind of, you know, average duration of backlog or contracts. I mean, we still think probably about three years in aggregate, given all of the mix of different therapeutic areas we have. And, of course, you think, you know, you think to do the math back on that, it kind of brings you somewhere in that kind of 8% to 10% range of quarterly conversions. I think if you mix, I suppose, that eight starting points, if you like, with our mix of FSP business, our mix of consulting businesses, and the fact that we have such a broad portfolio of an organization, we do think, to Steve's point, that that 10% is where we want to think about as we go forward. And we think that's doable out of the backlog we have and also some of the additional pieces that, as Steve said, we picked up in our armory in terms of how to burn backlog in terms of better use of technology and elements like that. So, yeah, we feel like that's certainly the right number to be targeting.

That's great. Thank you. I appreciate the detail.

Thank you. The next question comes from Patrick Donnelly from Citi. Please ask your question.

Hey, thanks, guys. Brendan, maybe one for you just on the margin profile. Can you just talk about the moving pieces into 22? Obviously, the cost synergies, you know, now that we're, you know, eight months past the deal close or so, can you just talk about the visibility there? into capturing, you know, those in 22 to offset maybe a little bit of the labor pressures. And obviously you touched on SG&A a little bit. But just curious, again, if you could pull forward a little bit if the wage inflation does intensify or how you're feeling about that, the margin side.

Yeah, sure, Patrick. You know, as we look into 22 in totality and what I kind of said at And previous comments was our Q4 was a good jumping off point to look at our margin profile as we go through 22. I think it's safe to say that we're not singing a particularly different hymn from how we would have talked about this in the past, is that gross margin will be a slower story. We say expect to see some conversion, but we do feel like our revenue mix is much more normalized now in terms of vaccine, non-vaccine work. So using Q4 is a good benchmark to start with. in terms of the gross margin profile as you jump off into Q1 and thereon. So that's probably the area that's going to be a little flatter as we go through certainly the first half of the year. Still looking for good margin leverage, to your point, and SG&A converting well. We said we were 50% identified and included in 22 in terms of the $150 million of synergies we outlined initially. So they will be rolling in, and that will be helping us get down below our 10% SG&A as a percentage of revenue target as we work through the course of the year. So it's kind of a flatter story from a gross margin, certainly in the first half of the year with some of the lapping of the elements that we've seen, with continued good leverage in the SG&A line, and then probably seeing a little more pickup in the back half of the year from an overall perspective.

Patrick, the only thing I'd add to that is that we have a receptive audience with our customers in terms of pricing. As we all face the same sort of challenges, they understand that we want to retain our people and we need to pay them a market salary, and it doesn't help if there's too much turnover. So I'll just say that probably more so than at any time, at least over the last 10 or 20 years, we've The pricing discussions with customers are perhaps not quite as challenging as perhaps they've been in the past. I'll just leave it at that.

That's helpful, Steve. And then maybe just another one on the kind of smaller biotech companies, kind of helpful to hear you talk about that mid-teens percentage coming from that group. And again, good news that you haven't seen any cancellations or payment issues. I guess more forward-looking in terms of conversations and bookings, it sounds like you're pretty confident with the amount of funds that have been raised over the past two years, you know, that's sustainable in terms of the cashflow for those companies to continue the trial work, but just curious, those conversations, again, a little more forward looking with them. It doesn't sound like any softening, but how do you view it? And do you see the background, the backdrop currently as efficient to continue to capitalize on growth there?

We're pretty optimistic about our operations in that segment and our ability to win business in that segment and to continue to make that a real growth area for our organization, Patrick. They are generally well-funded. As I said, we see two to three years of cash on the books for most of these companies. We don't have any issues in terms of bad debts or payment issues. And so it's an area we feel confident we can continue to drive in. You know, it's fair to say, I think that the funding environment has attenuated a little bit over the last sort of six or 12 months or so. But there's a lot of really good science out there. The RNA technology, the checkpoint inhibitors, some of the drug conjugates, there's a lot of great science and there's money out there available to that science. And so we see, we're having a conversation with a customer yesterday. you know, more around the sort of private, these private companies, and they were very bullish about the amount of money available to these companies and the ability for good science and good development programs to attract this money and to continue to be well funded by it. There's no doubt there's probably some things out there that shouldn't be funded or have been funded and they won't move through. But really, companies who are well-organized and have good development capabilities and good ideas and are applying the wealth of technology and scientific opportunity that's out there to the capital that's available are going to continue to do well. And I think we'll be the beneficiaries of that going forward. So I remain optimistic and very positive about that segment of the market. Thank you.

Thank you. The next question comes from Chuck Meehan from Nefrom Research. Please ask your question.

Thank you, and good morning. I was hoping you could talk about the gross authorizations in the quarter. By my math, they were down 2.5% year-over-year on a pro forma basis, but I'm not sure if that's totally apples to apples. So I was wondering if you could comment on pro forma for PRA, what the trend was, and what might have impacted the rate of growth in the quarter.

Yeah, I don't have that exact number in front of me, Jack. I think they might have been down slightly year on year. And part of it was the significant awards we got last year. Again, it's lapping. We talk about lapping the revenue number in the first half of this year. Well, this quarter, last quarter, we were lapping the awards number. So we had some very significant awards go into quarter four of 2020-2021. And that comparison was probably a little bit down, more because of the somewhat extraordinarily high number, as I say, back a year ago. And we didn't have that sort of level of award, particularly around the vaccines and the pass-throughs on the new business. So I think it was slightly down on a quarter-by-quarter basis. But for the year, it was up nicely. And we'd like to look at this across the full year.

Great. Thanks for clarifying. And then, Brendan, as a follow-up, I was just looking at the balance sheet. The unbilled revenue in the quarter increased about $75 million sequentially. I think historically this has been flattish or down slightly into year-end. I know there's probably some moving parts with PRA, but was just wondering if you could comment on why that might have increased into year-end.

Nothing really terribly strange, Jack. Some harmonization of how we, you know, obviously recognize revenue and make sure that we're looking at the pass-through, particularly the investigator payments element of that is accounted across the organization. So a bit of harmonization on that front. I don't think it's a long-term trend we're going to see there. And obviously we'll be making sure that we continue to, you know, bring that through and get it billed. And we still have that kind of 25 to 30 days total DSO range in our heads. So that's very much where we're targeting. And you can see in the cash flows, in this very strong cash flows in the back half of the year and into Q4. So still happy enough with where that's going to, where that's trending.

Thank you, Brendan.

Thank you. The next question comes from Dan Leonard from Wells Fargo. Please ask your question.

Thank you. I wanted to circle back on small biotech. Can you speak to bookings and RFP trends specifically in that mid-teens portion of your business from companies with less than $100 million in R&D spend?

No, Dan, I can't, to be honest with you. We don't track to that level. What I can speak to is to the biotech segment as a whole for us. We have that. That's the 75 and below in terms of prescriptions. sales, and that was extremely strong in Q4, quarter to quarter, year on year, and across the year. So, I mean, as I said, within that, about approximately half of those very small pre-revenues, and my assumption is that that was also strong, but I don't have that specific number from a WINS basis available. Overall, the biotech market was was very strong and continues to be strong.

And Steve, I heard your comments around no issues or concerns on cash collections or rising bad debt with that small biotech group. But folks I speak with are more concerned that they'll meter out the cash they have differently in the current environment. They're not concerned they don't have cash. It could get metered out differently. So I don't know if there's anything you can speak to on that front.

I'm not quite sure I understand the question.

I think it's maybe a slowdown in just what they're going to do with their cash. I mean, I think that one of the big pieces here is obviously development is still crucial to them as organizations. So I don't know that they're going to start pulling back on that particular element of spend in their overall working on their balance sheet. And indeed, when you look at people who are looking to get capital funding, it's because they want to make sure that they continue their development process. So We certainly don't see them looking at their cash balances in a different way other than to continue to fund their development opportunities. Appreciate those thoughts. Thank you.

Thank you. The next question comes to the line of Luke Salgot from Barclays. Please ask your question.

Terrifying for me. So, again, on the mid-term targets, you have high singles in the deck, and that's what you said at the JPM and time of PRA deal. but then Steve, you just kind of said mid singles to high singles. I just wanted to make sure that you're, you know, are you walking that back or is the mid to high really what you're talking about for 22? But then beyond that, you're looking for high singles.

No, we're talking about mid to high for 22 and, and ongoing from there. Uh, Luke.

Okay. So mid to high ongoing through, you know, going forward. Okay. Yep.

Yep. All right.

All right. Um, And then the other clarification here is on the RFP volume. You said it was up mid-singles. The SMID biotech segment was up mid-singles at the JPMorgan conference. And then you're talking about it being upload doubles. So just trying to get the difference there, what you guys are seeing.

Well, you know, it was in, you know, overall it was sort of, you know, high single, I suppose, from an overall RFP, low doubles. It was in that sort of range, 8 to 10 or so. It was a bit higher in the biotech space and a little lower in the large pharma space. So, you know, overall it was in that high singles and a low doubles sort of range. I mean, these things are, you know, can... We don't get too... focused in on one particular quarter. Overall, the year was up nicely in that low double-digit range. On a quarter-to-quarter, year-on-year basis, low double digits. That's what we saw on the RFPs. We feel that the market's moving in the right direction. Probably biotech area continues to be strong. and that was a little bit higher in the biotech and a little bit low in the large pharma. That's how it played out.

All right, great. And then just real quick, if I can squeeze one in here more long-term. So you've talked about the new indications and demand for that in RFPs, like kind of fill in the funnel here. Are you seeing the return to the pre-COVID levels where you're seeing monoclonal antibodies and like ADCs, really take the lion's share of those RFPs? Are we seeing the new market for cell and gene therapy and mRNA really starting to take off and starting to fill that RFP and backlog funnel?

Oh, yeah. I mean, I think it's a little early to sort of make that call, Luke, to be honest. You know, we're certainly seeing activity in the cell and gene therapy area. We're starting to see more activity in the mRNA and RNA area, for that matter, and drug conjugates. you know, those sorts of, I mean, the rare diseases, all those sort of things, that's coming through. Is it a tidal wave? No. But we're certainly seeing some moves in that direction around, as I said, the science and the, you know, the technology that's really becoming available, whether it be out of the pandemic or in other areas. So, you know, I would say we're certainly seeing a move towards it. I would hesitate to call it a you know, a tsunami of opportunity, but there's certainly a nice tailwind, if you like, with this new sort of, new sort of science that's being applied to, to New Jersey, particularly in the, you know, in the biotech and small pharma space.

Great. Really appreciate the color. Thank you, as always.

Thank you. The next question comes from Derek Debrin from Bank of America. Please ask your question.

Great. Thank you for taking my question. Just two quick ones. What's embedded in terms of your thoughts on M&A? You know, a lot of your competitors include some capital deployment into their top-line growth. I mean, yours looks more like you're talking about an organic basis. And then I've got to follow up. Yeah.

Sure. Let me check on the M&A. I mean, I think as we've been pretty specific, Derek, our priority for capital deployment is on paying down the debt in the short term. But we're making such good progress on that that we are – And we will, particularly as we get to the back end of this year, start to think about what other opportunities there are in the M&A space. So there's a number of areas we feel we could potentially, in the more, I suppose, more medium term, next sort of 12 to 18 months, look at around some of the technology, around our home health, the whole decentralized trial area, patient recruitment, our labs, There are some areas that we feel we could potentially invest in further and build from an inquisitive point of view. But I would emphasize that we want to get to that two and a half times as a focus. That's the plan as we get into next year. And so that's very much the priority at the moment.

Great. And just one follow up. Obviously, China has been in the news lately. Some questions from the FDA on some of the clinical trials being run there. You know, I thought your comments on diversity are interesting and sort of that increasing. How do you sort of see this opportunity with potentially some of the concerns or questions on the China based trials? And how does that sort of factor into your outlook? You talk about your over, you know, your China exposure in particular and sort of like, is this an opportunity for you to sort of help gain a little bit more business there? Thank you.

Sure, it's funny you ask about China. I thought you would be asking about the Ukraine and Russia, given the current situation there. But let me address Ukraine and Russia. We have resources there. We have offices there. It's less than 2% of our population. So just to allay any fears there, the operations are continuing. Site visits are continuing. The very recent developments haven't impacted that at all. And we're obviously hopeful that that continues. It's a fluid situation. But our operations are in good place there, and we feel like we can continue to monitor our trials. But we have less than 2% of our operations. In terms of China, China remains an important market for us, an important focus for us, both from a local and more functional point of view, and from a deliverer of full-service trials. There have been some challenges, and there continue to be some challenges with the SFDA, In China, it is a situation that we constantly need to be vigilant in terms of what they're expecting and what we need to be delivering for them. And we have a strong organization out there now. We have over 1,000 people in China now as the two combined organizations. We have many hundreds of sites, and they make a major contribution to our full-service work, be it in the biotech, small companies, farmer market or in our in more of our large farmer or as i said on a functional basis so you have a big operation there so it's it's one we take a lot of interest in uh we monitor very carefully uh the regulatory uh requests out there and the relations with the the regulators out there to make sure that we're doing the right thing by then um but it it you know it's a it's one of the more challenging environments that we that we work within i will just leave it at that and uh and say that, as I say, it remains a key area for us, particularly in terms of long-term growth. We see a number of companies out there that have ambitions to move east, to develop drugs in the east, and we're starting to engage with those sort of companies, more so perhaps than some of the companies who just want to do work in China. So there's an increasing opportunity out there, and I think over the next five to ten years it will be an increasingly important part of our business.

Thank you.

Thank you. And to the participants for all your questions, I would like to hand the conference over to our speakers for closing remarks.

Thanks, operator. Thank you for listening in today. We are pleased to have delivered a record quarter and year as the new icon and are proud of the support provided to our customers in the development of life-saving drugs and devices. I want to take another opportunity to recognise our entire workforce for their unwavering commitment and efforts over the past quarter and in 2021. Thank you all, and have a great day.