ICON PLC (ICLR) 2020 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended September 30, 2020. 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 that they are 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 the SEC reports filed by the company. This presentation includes selected non-GAAP financial measures.

For a presentation of directly comparable GAAP financial measures, please refer to the press release statement headed condensed consolidated statements of operations U.S. GAAP unaudited.

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. We will be limiting the call today to 1 hour and would therefore ask participants to keep their questions to 1 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, Jonathan. In quarter 3, we achieved gross business wins of $1.2 billion and recorded $190 million worth of cancellations. Consequently, net awards in the quarter were a record $990 million, resulting in a net book-to-bill of 1.41x.

With the addition of these new awards, our backlog grew to $9.4 billion. This represents a year-on-year increase of 11.8%. Revenue in quarter 3 was $701.7 million. This represents a year-on-year increase of 1.2% or 1.9% on a constant currency basis.

Sequentially, revenue increased by 13.1% in quarter 2. Our top customer represented 12.4% of revenue for the quarter compared with 11.4% in quarter 3 2019.

Our top 5 customers represented 38.4% of quarter 3 revenue compared to $36.2 million last year. Our top 10 represented 51.1% compared to 49.1% last year, while our top 25 represented 67.9% compared to the same number, 67.9% last year.

Gross margin for the quarter was 29.7% in quarter 3 compared to 28.1% last year and 29.7% in the comparable quarter last year. Our SG&A was 11.8% of revenue in quarter 3, which compared to 13.5% last quarter and 12% in the comparable period last year.

Operating income for the quarter 3 was $108.4 million, a margin of 15.4%. This compared to 12.1% last quarter and 15.5% in the comparable quarter last year. Net interest expense was $3 million for the quarter, and the effective tax rate was 13% for the quarter. Net income attributable to the group for the quarter was $91.6 million, a margin of 13.1%, equating to diluted earnings per share of $1.72. This compares to earnings per share of $1.20 in quarter 2 and $1.74 in the comparable quarter last year.

The net accounts receivable were $500.1 million at 30th of September 2020. This compares with net accounts receivable balance of $490.2 million at 30th of June 2020. On the comparative basis, days sales outstanding were 45 days at September 30, 2020. This compares to 53 days at the end of June, 2020 and 56 days at the end of September of 2019.

Cash generation from operating activities in the quarter was $112 million. At September 30, 2020, the company had a gross cash balance of $710 million and debt of $350 million, leaving a net cash balance of $360 million. This compares to net cash of $244 million at June 30, 2020, and net cash of $122 million at September 30, 2019.

Capital expenditure during the quarter was $7 million. During the quarter, ICON also completed the successful delayed drawdown refinancing of the existing private placement of $350 million of senior notes maturing on December 15, 2020. The transaction has been successfully priced over 3 and 5 year tenures at a blended rate of 2.41% compared to the current private placement blended rate of 3.37%.

The drawdown of funds will coincide with the maturities of the senior notes in December 2020. With all that said, I'd now like to hand over the call to Steve.

Thank you, Brendan, and good morning to you all. Despite the continuing industry challenges brought on by COVID-19, overall, this was an excellent quarter for ICON, driven by positive market demand in conjunction with our ability to win COVID-19 related opportunities, we booked record levels of gross and net awards of $1.2 billion and $990 million, representing book-to-bills of 1.68 and 1.41, respectively. In doing so, we were able to grow our backlog year-over-year by 12% to $9.4 billion. This gives us a firm foundation to build upon next quarter and into 2021. During the quarter, we delivered revenue of $702 million, a substantial improvement of 13% on last quarter. And earnings per share of $1.72, up over 40% from $1.20 in quarter 2.

COVID-19 continues to test our industry, but we have responded well to these challenges and are pleased with our strong recovery. We remain confident that the sequential improvement seen this quarter will continue as we return to more normal business conditions over the medium term.

The progress made in our financial performance mirrors the recovery we are seeing in the clinical trial environment. The rate at which sites continue to reopen remains consistent at around about 1% to 2% per week, with approximately 40% of trial sites remaining impacted to some degree. A clear improvement on the 60% impacted at the end of quarter 2.

In addition, during the quarter, site initiations remained strong with overall patient enrollment above pre COVID level, albeit with recruitment for our COVID trials materially impacted that performance. Notwithstanding the risk of a second wave impact, we are expecting these metrics to continue to improve steadily, but that we will be well into 2021 before it back to pre-pandemic levels on our non COVID outlook.

The positive influence that our COVID trials continue to have on these recovery indicators is important, especially in the short term. Sponsors continue to prioritize as urgent work, and we continue to be successful winning substantial amounts of COVID business and in getting these projects up and running quickly.

However, as the development portfolios rebalance over the medium-term and spending returns to more traditional therapeutic priorities, we are well placed to apply the lessons and opportunities from the pandemic and continue our progress in this area.

Earlier this month, ICON was awarded Best Clinical Research Organization at the Vaccine industry Excellence awards.

This award is recognition of the continued hard work and dedication of the ICON Vaccines team and emphasizes our differentiated strength in this critically important therapy area. Since February, ICON has mobilized its vaccine resources to address the COVID-19 global threat, and ICON is currently providing clinical monitoring and safety oversight on more than 100 COVID-19 trials for both the private and government sectors.

In addition, our ability to leverage our global site network, Accellacare has been a key benefit for customers during the crucial stages of COVID trials. Accellacare's dedicated trial support teams can achieve faster study startup for our customers through efficiencies gained in central process management, including budgeting and contracting, which can otherwise be a source of delay.

Combined with Symphony clinical research, our patient-centric global provider of at home care and nursing, we are able to improve trial accessibility for patients thereby broadening ICON's access to patients and accelerating the trial process.

This integrated approach is leading to increased engagement with investigators, improved quality and better time line compliance. The outbreak of COVID-19 had a substantial impact on the conduct of clinical trials with many ongoing trials being disrupted and planned trials being delayed.

As events unfolded, it became important to look at alternative solutions in many areas in order to minimize the impact of the pandemic. The environment created by the COVID-19 pandemic has presented the industry with an opportunity to accelerate changes in the clinical monitoring process.

The need for a more agile and flexible approach to clinical monitoring and data review has emerged, and this demand will fundamentally change the way in which trials are monitored going forward.

In particular, the pandemic has highlighted the over reliance on traditional on-site monitoring and provided the opportunity for sponsors and CROs to accelerate the adoption of remote monitoring and other technology-based approaches using RPA, machine learning and artificial intelligence.

I believe this will help us move towards a more efficient model over time that will allow more trials to be conducted and more innovative compounds to be brought to the market faster and more cost effectively.

As Brendan discussed earlier, our cash collection remained robust in quarter 3, confirming the strength of our customer base and helping to maintain our balance sheet as the best in the industry. This leaves us well placed to face any further pandemic challenges, and in particular, positions us well to take advantage of future M&A opportunities that may present over the near and medium terms.

Going forward, as we look to the end of this year, we are increasing our 2020 revenue guidance from a range of $2.65 to $2.75 billion to a range of $2.75 to $2.81 billion and narrowing our earnings guidance from a range of $6.00 to $6.50 to a range of $6.35 to $6.50.

At this stage, we are planning to give guidance on full year 2021 at our quarter 4 earnings call in February. Finally, I would like to thank all our employees for their resilience, flexibility and understanding over the past 8 months. At the heart of all we achieve at ICON are our hard-working and dedicated employees. Our focus during this pandemic remains on protecting their safety and well-being as well as continuing to deliver the important work we undertake on behalf of our customers.

Thank you, everyone, and we're now ready for questions.

(Operator Instructions)

Your first question today comes from the line of Dave Windley from Jefferies.

Steve, you mentioned in your prepared remarks, you kind of got to recovery of the system in the medium-term and kind of the cycling of COVID work into non COVID work. I guess, on the outside, we see these dates that companies are expecting to report out data, but I don't know that we fully understand the CRO's involvement and kind of the duration of your trial as it relates to those public dates. Can you give us a better sense of how your current book of work gates out over the next year or so? And when do you think that waning of COVID work is going to happen that then the non COVID needs to ramp up?

Yes. That's a question we talk about internally, Dave, on a regular basis. And it's -- I think it's a little hard to be too definitive on that at the moment. I think there are a number of scenarios that are going to pan out or could possibly pan out. One is the current trials are ongoing, find a vaccine that is -- or a treatment and both presumably, that is exceptionally effective and the work wanes or decreases in the more near term, I suppose.

And the other is -- and I think this is much more likely that the trials that are ongoing at the moment will find a vaccine, it will be partially effective, but the authorities will be looking for more than one. And there'll be a continued need and a continued desire to get a more effective vaccine. So the work, I believe, from a COVID perspective, is going to continue probably for the next couple of years.

I think that's the most likely scenario. And that's the way we're thinking of it at the moment. And so as we think about the COVID work continuing, as I say, for the next couple of years, I think there's going to be a lot of -- a number of vaccine trials, large-scale vaccine trials that we'll need to be a part of, and we're certainly playing our part in that at the moment.

On the non COVID work, as you indicated, we are -- as I indicated in my comments, we're certainly lower in terms of patient recruitment than we were pre pandemic. And we do see that increasing and improving, but I think it is largely some of that -- the way that comes back will depend upon how the scenario with the COVID stuff pans out because the COVID work is having an impact on a number of sites and on the availability of investigators, et cetera, et cetera.

And of course, as we see potential reemergence of the virus in the northern Hemisphere in the fall, that has an impact as well. So I had to paint out too many different scenarios. But I think from our business point of view, the medium-term is looking strong and looking good, whether it be COVID work, and I think that will continue or our non COVID work sort of coming back to a more pre pandemic levelS.

I think in either scenario, it looks reasonably strong -- reasonably good for us.

Got it. Appreciate that. So for my follow-up, kind of relatedly, you talked about the relatively consistent pace of site reopenings. I think earlier in maybe in the summer, that view was maybe something like 2% to 4%, call it, midpoint 3% a week. And today, it sounds like more like 1% to 2% a week. And we're certainly seeing and hearing about regional flares or spikes in some infection case data. I'm wondering, one, have you seen some slowing? And is it related to some of that regional flaring? And just how do you see that proceeding? Can we avoid shutdowns essentially as we proceed through the fall?

Yes. We certainly have seen some slowing in the reopening. It's sort of [asentonic] curve, as it approaches the top. It is certainly slowing. And so we don't see us getting back to all sites fully opened. Even with the current progress we're making until, as I say, well into 2021.

That's still our expectation. And the reason for that, I think, is there's a number of reasons for it. I think as you note, these players that have happened, the reemergence of the virus, people are concerned about that. I think we're seeing some patients still concerned about traveling to sites. I think there's also an element of a number of these sites are involved in these large-scale COVID trials, and that's taken some of their capacity away.

So there's an element there. So it's multifactorial, but we're certainly seeing a slowing compared to where we were even a couple of months ago. But it's not 0. And we are moving it forward. And we do expect that certainly within the next 12 months or so, I would say, by the first half of next year, we'll be -- assuming continued progress and consuming no major outbreak again, we do expect that our sites will be back to pre-pandemic levels.

Your next question comes from the line of Patrick Donnelly from Citigroup.

Maybe just on the COVID bookings. I know you guys called it out above 20% last quarter. Can you just talk about how that trended in 3Q? Again, it certainly feels like you have a pretty good presence on that side given the vaccine. But just wondering in terms of percentage where the COVID bookings are?

Yes, Patrick, it was strong. I'm not going to be -- we're not going to get into any sort of specific percentages, but it was certainly -- it was where we were in Q2 and probably a little bit further ahead of that. So we had a good quarter from COVID from a new bookings point of view.

And that will translate into an increasing proportion of our revenues as we go into Q4. It wasn't a huge proportion of our revenue in Q3, but it will be more in Q4. And so it was a good, substantial part of our new business wins and at least at par and ahead of where we were.

Okay. And then maybe on the margin side, can you just talk through any of the cost control measures you guys put in place earlier this year coming back? I know last quarter, you talked about normalizing some spend in the back half. And then on top of that, any margin profile difference of the COVID work relative to other trials we should be thinking about over the next year or so?

Patrick, it's Brendan here. I might take a crack at those ones. In terms of the cost normalization, yes, I think we're -- as we finish out Q3, certainly, we were -- most of the cost reduction pieces were -- had moderated back to normal. Same for the fact, of course, more of our work is being done remotely now.

So travel budgets just aren't required in the way they would have been in the past. And that will persist into Q4 for most of the cost control elements have been dealt with now. And any pieces that we have done where we wanted to, I suppose, make people whole or anything on those kind of issues from a salary perspective, I dealt with. So it shouldn't have a margin impact as we progress into quarter 4.

Those specific pieces, we've kind of taken care of that. I think the second piece on your question around margin profile. I think what we do see on vaccine trials is, obviously a heavier element of pass-through costs as proportionality of the total cost of the trial. And therefore, we would expect, yes, on the 606 revenue basis, that there will be more proportional revenue on which we earn a little margin, and that would have a decremental impact to gross margin.

So it's going to be one of the, I suppose, challenges with these studies over the next couple of quarters because, obviously, the proportion of that pass-through revenue will be larger, and we'll have that impact.

On that said, I think our earnings, we -- as we've outlined, very much somewhat what our thinking is for quarter 4 in terms of EPS growth, and we still see a decent trajectory on EPS growth.

Your next question comes from the line of Elizabeth Anderson from Evercore.

I had a question on sort of the makeup of vaccine work. Is there a difference in terms of cancellations, or how that kind of flows through? Just want trying to think of through the cancellation rate for next quarter and then sort of broadly speaking for '21.

Yes. Elizabeth, I don't think we've seen any sort of particular unique issue or trend around cancellations with vaccine work. I think what we do see is that there's a large number of patients in a relatively short period of time. And so projecting the revenues, the resourcing, et cetera, has its challenges. Now that's what we do. That's our core competence. And so it's something that we obviously take very seriously, and we believe we're good at it.

But it does certainly have more challenges in terms of how quickly that work burns and the rate at which we do the work and the time period over which we do the work has some pretty material impact on our business. So that would be, I think, the sort of more unique feature of these sort of large vaccine trials and any sort of issue around cancellations or anything like that. We don't see any differences on that front.

Okay. That's helpful. And I know on the capital deployment, you guys obviously have a very enviable cash position at this point since you're sort of looking -- added essential for M&A as things change in that market. How are you thinking about balancing that versus, say, share repurchases as we move into 2021?

Our priority, we've been pretty clear on this for a number of years. Our priority is M&A, appropriate M&A, and that's where -- that's what we're focused on. And there are a number of opportunities out there in the market at the moment that we continue to assess on an ongoing basis. In terms of share buyback, we commit to doing about 1 million shares each year to essentially buy back what we release, and that will continue. We'll continue to do that, and we'll be opportunistic as that allows where we see opportunities to jump into the market. But the focus for us is very much on M&A and capital deployment around building our systems and our organization like Oncacare that we've set up or we've established that JV this quarter, and we believe that's an area that we can deploy our capital effectively to get best benefit for our business.

Your next question comes from the line of Robert Jones from Goldman Sachs.

Great. Maybe Brendan, one for you on this pass-through dynamic. It seems to be more pronounced, given some of the dynamics around the COVID-related work. One of your peers discussed that you could actually see 10x as much relative to a normal trial. Are you seeing anything similar? Anything you can share on how pass-throughs have impacted the quarter, and maybe how you're thinking about pass-throughs for 4Q and next year?

Yes. So we certainly have obviously seen our share of vaccine work and pass-through as certainly a larger element than what we've seen in the past. I don't think that -- maybe those numbers spoken about where our -- what we've certainly been in our experience, something in the range of 2 to 5x is probably more in line with our experience of these -- this quantum of pass-through. And that said, although, it hasn't really had an impact on us for the quarter, it didn't really have an impact year-to-date in terms of the mix shift in our revenue, and I think that's probably visible in our margin profiles as well when compared to last year.

So we do feel that this is more of an issue for Q4, and certainly, as Steve outlined, into 2021, when we might see more of that pass-through coming through with a lower margin profile, and that will have a knock-on gross margin consequence. But as I said, it's kind of early days, and these -- the nature of these trials are very, very fast. So it will be a little difficult to forecast. So we'll be doing our best job at really putting our thinking hats on between now and as Steve outlined, the Q4 call in terms of making sure that we can give you a guidance here that makes sense at that point.

I guess, maybe just a follow-up on that point. I think, typically or at least recently, you've been giving guidance in January, one of your peers again felt like they were in a position to give guidance for next year at this point in the year, thinking about mid-teens type of growth. So obviously, in their CRO segment, so obviously, more-than-average growth just given all that's going on with COVID and the work pushed out. Any early thoughts just around how next year could look? And then maybe just timing wise, why February, I know it's splitting hairs a bit, but why the 4Q call and not earlier?

Yes. It's Steve here, Robert. Let me comment and give you some sort of flavor for 2021. I mean, we see some positive momentum going into 2021, no question about that. Our book-to-bills have been solid over the last couple of quarters, even despite the pandemic. We've been able to win business, that's an area that really hasn't seem to have had -- the pandemic hasn't seemed to have had a major impact on the biotech funding environment, we continue to see very strong funding there.

Our RFP environment has been strong, high single-digit improvement year-over-year, certainly in the biotech space, but even in large pharma as well. We've seen some continued development and continued growth in the opportunities that we've seen there. So the business environment has overall been pretty positive, and we see that would play into a strong performance for us in 2021. The COVID opportunities, as I've said earlier in the call, I think are going to continue. I think we're going to see more work. I don't think it's just going to drop off as we sort of get through the first tranche of trials, I think there'll be more work to be done there. So that, I think, all goes well for us in terms of the opportunity and the differentiation we can provide in terms of our vaccine experience. So it's looking strong and looking positive. But we're not ready. There are also headwinds and potential headwinds, as you all know. I mean, the virus is reemerging as we get into the fall. There are challenges and potentially the slowdown of the site reopening has been referred to. And we're not ready to issue guidance or any real sort of sense of guidance at this point in time.

I think it's -- we need all the time that we'll have in the next 3 to 4 months to assess what opportunities are coming through, what success is moved through in terms of vaccines that are coming to market as we see potential vaccine that's going to be a positive, I think, for everyone, including our sites in a clinical trial environment. But we're not quite ready to go out and give definitive guidance in the market, we have pushed back only a month, but we have pushed back what we usually do for the year from January to February because we think we'll need all that time to make the assessment and to see how these trials are going to play through. So we make no apology for that. That's the way it's going to be. I think it's interesting that some of our competitors have done differently, but that's their choice.

Our next question comes from the line of George Hill from Deutsche Bank.

Steve, I was just wondering if you could talk a little bit about digging into COVID. I guess, the demand for vaccine related trials and the demand for therapeutics related trials. And I guess, can you talk about the split there? And kind of are there any margin or pricing implications we should think about between the 2?

Yes. I'm not sure I can sort of definitively give you that split. George, we're doing both. The vaccine, obviously, the vaccine trials are much larger in terms of patients, in terms of contract size, revenue burn rate even is higher. So there are a number of different characteristics around these larger trials. And they probably have more of an impact on our forecasted on our quarterly numbers than the treatment trials, which tend to be smaller, more hundreds of patients rather than tens of thousands of patients, even though the vaccine trials pace -- I mean, quality in patients is probably a little bit of a stretch because essentially they're healthy volunteers, but there are a large number of them.

And the data work that goes with that is very substantial. So from that point of view, the vaccine trials are more material to us in terms of -- in terms of finances, not necessarily in terms of operationally, because they're both important. We're doing -- I don't -- we have -- I don't have the data right at hand. In terms of numbers of trials, I think it's fairly evenly split at the moment. But in terms of contract values and revenues, the vaccine trials are substantially large and substantially more material to us at this stage of point.

okay. And maybe if I could just have a quick follow-up, given everybody's focus on the COVID work. Are you guys seeing anything meaningfully different in the cancellation rate or what clients are looking to kind of press forward with or cancel as it relates to trials?

Short answer to that is no, George. We're not. It's -- you can see our cancellation rate this quarter was pretty much in line with what it's normally been sort of -- so no, we're not seeing any differences on the cancellations of either of those trials.

Your next question comes from the line of John Kreger.

This is John Kaufman on for Kreger. Just thinking about the outlook for virtual trials, what are the factors that have historically prevented sponsors from moving a larger percentage of their trials to a more virtual model? Are the regulators on board with a shift to more virtual trials? Or is that still to come? And understanding that large pharma has been piloting virtual trial tools for a couple of years now. Is your experience, I guess -- has your experience during the pandemic led you to believe that they are more willing now to actually conduct more of their late phase trials in a virtual manner.

Yes, that's a big question, John. I can probably take a day or 2 to answer that one, but I'll try to do it in a couple of minutes. I mean, I think the short answer is, the fact is sort of moving against virtual trials, they do relate to. There's an element of conservatism within our industry. I think that's certainly the case.

I think the regulators certainly up till now have not necessarily been 100% on board with how we do this. And the gold question we get is when we propose a more decentralized or virtual trial as well, which trial or which drug did you get to market on the basis of a virtual trial? And the answer is, well, that hasn't happened yet. And so we revert.

And that's completely understandable from our sponsor's point of view. As far as I'm concerned. We are a highly regulated industry and the need to validate data and verify data and make sure patients receive in a very safe an efficient manner is always going to be there. Having said that, I think we've certainly seen during the pandemic, the regulators move very quickly in understanding the challenges that the industry has faced and being accommodating with those challenges. Now that needs to play through obviously into the submissions over the next realistically a couple of years to make sure that, that happens because that -- there's always an element of some of the people at the top who are writing the white paper, say one thing and then the auditors who are actually at the coal face, do something different.

So there's an element of validating that approach. But certainly, the overt guidance and output from the regulators has been very accommodating and much more positive with respect to how the industry has pivoted to be more remote orientated. And I think that will continue, and we certainly see some positives on that front.

In terms of going forward, we've seen essentially a seismic shift in the way trials have been monitored over the last 6 to 8 months. As I look at our own business here, pre pandemic, about 5% of visits of monitoring visits were off -- were off-site. In other words, sort of virtual. During the height of the pandemic, that flipped very quickly to about 60% of visits being off-site on virtual.

And that was probably a little bit of an overstatement because I think a lot of these were probably telephone visits and those sort of things. But as we've come through and have started to recover, that's gone down, but it's still about 30%. So about 1/3 of the visits we're doing at the moment are remote. And the technology associated with those visits has really come to the fall very effectively. So we're able to -- in many -- in almost all cases, though now evaluate the electronic medical records remotely. And the systems are now in place at many sites to be able to do that, and it makes it a much, much more efficient approach. So the move is happening. I don't think we're ever going back to where we were pre pandemic. And really, the remote monitoring is just a biomarker, if you like, for a move much more towards virtual trials, decentralized trials.

Now we've seen an unprecedented demand for our Symphony Home care services that's really been fantastic from our point of view, but we're extremely busy in having our nurses go to patients' homes to ensure that they stay in trials and they get the right treatment and they get the right attention. And that is also playing into our decentralized clinical trial offering as well.

So I think the short answer to your question is, it's been a challenge up till now, but the pandemic, there's always silver linings with these things. And I think one of them is that it is a significant move towards a much more virtual clinical trial environment, which is going to help all of us be more effective and faster.

Your next question comes from the line of Erin Wright from Credit Suisse.

You mentioned several improving fundamental metrics here. I just -- I want to clarify, you highlighted high single-digit RFP flow, I believe, in a previous question, is that excluding COVID related work? I assume this is a metric that is gaining momentum here. And then I do have a second question, if you could speak to the trends across your central lab business in this sort of environment, that would be great.

In terms of RFP, yes, it does include COVID work, the high single-digit sort of number. And these numbers bounce around a bit. But that's certainly -- we're including everything in that number. I think I mentioned the biotech, small, midsized pharma as we've seen increase.

Some of that is being funded by government, as you all know, government is extremely interested in these trials. And some of that funding that was sort of allocated to small and midsize in terms of RFPs, has really come from the government.

Everyone understands what a clinical trial is now. Even my mother understands what I do now for the first time in about 40 years. So that's -- it's the awareness, I suppose, of clinical trials in societies that I've never seen anything like it really. Everyone understands, everyone knows what's happening. They've gone reasons (inaudible).

So that's certainly playing into that, that helps.

My second question, just on central lab. If you could...

Brendan, do you want to take that one on the central lab side of things.

Yes. No, that's been trending well. They've been doing really well. We're very happy with our performance. Obviously, that has been -- they have been riding on the coat tails of COVID work, and we've seen that, and that's been a big part of the story there, but certainly, our central labs are doing very well. As our Roeland as well, are bioanalytical as well. So it has been a strong performance for them during the course of the year. And I think it's fair to say, very, very much helped by the, if you like, a tailwind of the COVID work that they certainly happen from.

So yes, a good year for them and hopefully looking into another good one in 2021.

Is that growing double digits, you would say?

Well, we're not quite in that ballpark because, of course, we have the same situation where a lot of the units were closed and a lot of samples were delayed in coming back in. So what I say is very strong. It's going up, that really, the strength is really coming now in Q3 and Q4. So year-to-date, we're still down year-over-year because of the sample delays and samples that are coming in across the other spectrum of our trials, excluding the COVID work. But I think the COVID work is certainly helping it getting back on track as it is across the rest of the organization. So not out of line with the overall business performance at the top level. But certainly, their business wins profile has been very strong, and we're really starting to see them ramp back up well in Q3 and into Q4.

Our next question comes from the line of Dan Leonard from Wells Fargo.

So first question, can you comment on industry clinical trial capacity in a scenario where COVID work maintains into 2021 and traditional trial work resumes, are there any bottlenecks that could limit the growth above and beyond what your backlog growth and others might suggest?

You mean capacity at the site level?

Yes. Exactly. Patient sites, et cetera?

Yes. I'd be -- I don't think we have any immediate concerns around the capacity to execute from an investigator and site point of view. That may mean, of course, that we need to bring on new investigators and train up sites and our -- and then brings to the before our Accellacare network and our Oncacare network that we have sort of more or less dedicated or more dedicated to the clinical trial.

So if we do see some constraints there, we have our networks and our alliance sites that we're ready to go to. But I think it would be a stretch for me to say that we won't be able to (inaudible) the industry, won't be able to execute on COVID and non COVID work because of capacity constraints. Certainly, the investigators at the sites have been incredibly accommodating in taking on this COVID work at very short notice.

And I think as I've commented on previous calls, the speed at which we've been able to get these sites up and these trials moving is unprecedented. I've certainly seen nothing like it in my 30-odd years of doing this. So there's an interest out there from sites and from investigators, particularly on the COVID work, obviously. But also, I think we'll see the non COVID work come back as well over the more near to medium term. And I guess I think they recognize, again, I think the awareness of clinical trials now from the public's point of view and from investigator and site point of view, is also we're going to move it in the right direction. So I don't have a significant concern in terms of capacity to run take these trials.

Okay. That's fair. And then for my follow-up, can you comment on the performance of your real-world offerings? And you've talked a bit about the impact of the pandemic accelerating interest in virtual trials, remote monitoring. Does it impact the interest in real-world offerings at all? Do you see a different appetite for maybe synthetic control arms where fewer people are enrolling than traditional trials? Or is that a stretch? Is it not really that relevant?

I think there's some theoretical opportunity there. We certainly talk a lot about that, and we've had conversations with customers around the real-world impact and how we can implement the synthetic control arms. But I would be -- I would not be telling you the truth, if I said we had a whole bunch of trials going on with synthetic control arms. That's just not the case. They remain more on the edge, I suppose, innovative edge of new trial design, adaptive new trial design.

The regulators are getting on board with those and are certainly pining on the appropriate use of things like synthetic controls and real-world data to get drugs to market.

we certainly see it a trend going forward, a little bit like the decentralized virtual trials on the real-world data. There is no question. I think as we go forward, we'll do more of those trials. They will be used as the basis for approval of new compounds going forward.

I think the pandemic, if anything, has shown us there are different ways to get drugs to market early, emergency use authorization and then follow-up data, et cetera, et cetera. So we do believe there is a significant opportunity here going forward, but it's not going to happen tomorrow.

A little bit like the decentralized trial. There will be a period of time that this will ramp up, and there'll need to be some brave companies who'll move forward with these and base their registrations on real-world data and other areas. And that's what I think will sort of start to tip the scale, and we'll move forward. So I think it's a process, and it's a journey rather than anything that's going to happen immediately.

Our next question comes from the line of Eric Coldwell from Baird.

I've got a few here. First off, just a quick one. The -- can you tell us who the JV partner is on Oncacare?

Yes. Actually, one of the JV partners there, they've actually (inaudible) the founder of the European site-based business that we just acquired MeDiNova, which has been a great success and an addition to our overall organization. So the former CEO has stepped into the role of leading that joint venture, and we're very happy to have him as part of that structure, and he's obviously done a great job at building these kind of networks in the past. So he's got -- he's bringing that entrepreneurial mindset to building out that global oncology network. So very, very happy with that.

Brendan, since you're talking, I'll stay with you on my second one. Cash flow, good job there. I'm curious, was it internal initiatives that drove this? Or perhaps, mix and timing of some of the work that's been coming in with COVID, and maybe somehow related to the pass-through revenue streams, given the speed and the burn here. I'm just -- I'm curious how you got where you got, that fantastic improvement in DSO, and how sustainable you think that is?

I think it's been -- it's 1.5 years, but success overnight is not the whole story, Eric. We've been working on this one for the last year to improve it from where we were at this time last year, really. The guys and the team have done an excellent job and really improving communication between the project management teams and the finance organizations, make sure that we're billing appropriately in a timely manner. And obviously, the (inaudible) then to get cash in is always something that's there. So I think it's been just a lot of good old fashion hard work and teamwork. I think there has been a little bit of a tailwind about on particularly on the pass-through elements on some of these vaccine trials, but not nearly as significantly, as I would say, just the old fashion hard hustle or hard tussle, I should say, on that piece. So there was credit there to be given out. I think it's really down to the project management teams and the finance guys who've done the hard work.

That's great. Last one for me. On the comments that about 40% of sites remain impacted in some way, shape or form. I think that's pretty well understood. The question is, are all sites created equally? On one hand, you might think, well, it was the weaker sites that haven't been able to reopen. And on the other hand, I could see this being very busy sites in urban areas where the challenges are the greatest. I mean, we're certainly seeing that in the U.S., where the big cities are more impacted than the rural areas in terms of activity. So just hoping for your comments, are the 40% of sites, in fact, impacted also correlated or equivalent to 40% of historic global activity from that tranche of sites. Does that make sense?

Yes. I think it does make sense, Eric. I can opine a little bit on that, but I don't -- I wouldn't say, I have any definitive data on which of the 40% and what contribution they make to us in terms of patients into the trial. I can say that we are, from pre-pandemic recruitment levels in our non-COVID work, we're still at around about 50% -- 40% to 50% of pre-pandemic level. So it's still materially impacted. So from that -- if it's 40% of the sites, you would say that they are pretty important, a fairly significant component of that recruitment supply, I suppose, on a weekly basis. As I think I referenced in my comments, of course, the COVID work has really supplemented to the point where the sites -- we're well above our normal recruitment levels. Certainly, over the last couple of months, we've been way, way above recruitment levels, but it's really been because of the COVID work, and the sites are contributing to that.

They've been obviously handpicked and selected to do that. So it's hard to be too definitive about the 40% who are still impacted. They are impacted to a greater or a lesser extent. Some of them, it's probably -- it's less than 5% now. It's still closed, but there is -- the vast majority of those impacted are impacted to some way, shape or form. So they're not taking on new trials.

They're limited to just doing the trials they're doing. Patient visits are happening now much more than they were, say, back in the heart or the heat of the pandemic. But there is still some impact, and as I said, it's going to take, I think, at least, another 6 or 8 months for those sites to come back to a point where they're fully contributing.

This is why we've gone forward with our Oncacare JV and the (inaudible) network because we're seeing less impact from those sites and a disproportionate contribution from those networks because we're able to help them to get back to normal and help them to address the challenges of the pandemic and of the trials that they're recruiting.

Your next question comes from the line of Jack Meehan from Nephron.

On COVID. So I was looking at the revenue contribution from your largest client. I thought that it might be bigger this quarter, just given the pacing of vaccine trial enrollment you can see in the headlines.

Is there any color you can provide on the shape of how vaccine work is burning? And how that will trend into the fourth quarter and 2021?

Jack, I'm going to take a stab at this. It's Brendan here. Obviously, that's been an area of activity where we have been ramping (inaudible) , as you're right, in terms of the speed of patient recruitment they're significant. I think there is -- and I think we referenced it earlier in the call that while there will be a proportion of that trial that will be done certainly before the end of this year, the follow-up monitoring will go on for quite some time there afterwards.

So it would be a misnomer to think with any possible filing that would go into FDA that, that would just be the end of our involvement in the trial process. So certainly, that will bleed out over a longer period and then than that point in time, and there will obviously be additional follow-up work. So we're happy with the pace of revenue recognition, has been on that trial, specifically, in the third quarter, certainly. I think it will certainly be a chunk of the work that we do, without doubt, in the fourth quarter as we work towards the back end of the year, and as you referenced, those important milestones for that customer. And I think that's true of all of these trials.

I think it's worth bearing in mind that even though there is the patient recruitment phase, and there's some of the early parts of the trial and (inaudible) trial is quite short in terms of dosage regime, there is consistent follow-up work that will happen over time. And I think Steve's point around these trials being with us and part of the landscape throughout 2021 is very valid in that context.

Great. And you're obviously doing a lot of hiring at the moment to support the new business wins. Can you talk about how relative wages are trending? And maybe contextualize it for us in terms of the gross margin. Just how should we be thinking about that into the fourth quarter?

Yes. Jack, I think, I'll try to take a crack at that again. We have seen a lot of activity, particularly, I'm going to say, in the Americas. On that side of it, we're doing a decent job, I would say, on making sure our folks are staying aboard, and we're continuing to recruit as we go through into the fourth quarter.

So certainly building out the headcount will be part of the profile of the organization as we go through the fourth quarter. I think we've made the point that we're managing the cost base pretty well, and we saw that particularly in margins in the third quarter. I think the larger piece in terms of moving margin profile in the fourth quarter, it's probably the proportion of revenue that we see that will be pass-through related in Q4. So I think that's a bigger piece, but I think there will be certainly an element of continued headcount growth in -- particularly, in North America, where a lot of this trial activity is actually physically happening. So -- and that will be certainly something we'll be looking at.

Next question comes from the line of [Sandy Draper] (inaudible)

Maybe just a lot of questions have obviously been asked. Maybe a quick one, Brendan. I didn't hear you give the constant currency organic growth.

Well, [though it plan it] because I haven't yet. I was wondering if someone was going to ask. So we would say that year-over-year, it was 1.2%. Constant currency is 1.9%. These are down, obviously, given the context of the current quarter versus this time last year. And constant dollar organic[, Sandy], is about 3% down year-over-year.

Okay. Great. And then my follow-up, there's been a lot asked about gross margins. And as you pointed out, it was a nice one, mix return. I would assume a lot of that just as revenue came up, and there could be some near-term impacts to COVID. But when we think longer term, you guys have sort of said the long-term target is to hold gross margin steady, which when I read that, it's 29% to 30% type gross margins. Is there anything coming out of COVID as you start to do maybe more remote trials, lower cost, maybe not to travel as much that over the medium to longer term could suggest you could actually sustain above a 30% gross margin? Or there are not enough -- big enough things to really change the margin structure, and we really should be thinking about holding the margin as the longer-term goal?

Yes. It's Steve here, [Sandy]. I would say, there is certainly opportunity as we talk about -- I talked about the switch towards more remote monitoring and using technology to improve and to make our monitoring more efficient, our data review more efficient. We've been able to progress our robotic process automation. In fact, we do a team every quarter here at ICON each quarter, funnily enough. And the winner of this quarter was a team on our RPA, who've been able to make significant progress around the data management and the locking of pages there. So that's an example in a specific data management area, but that, I think, approach -- and similar approaches can be applied to our clinical operations group.

And I do think, in the longer term, there will be opportunities to improve our gross margin. Having said that, there will inevitably be headwinds as well. So I think you're thinking around 29% to 30% is probably the right way to go. There will be some opportunities to push that ahead. There will be some headwinds that will make that more challenging. And so I think that's probably -- I would not want to commit to a significantly higher gross margin even in the longer term at this point.

I think this is a very competitive industry, and we'll find that costs, and as I say, headwinds will mitigate the inevitable, and all the obvious opportunities that we have through doing more remote monitoring, doing more technology-based trial management and data management. So as I say, pros and cons, headwinds, tailwinds, but I think of it as 29%, 30% being a reasonable continued target to maintain.

Your next question comes from the line of Dan Brennan from UBS.

Great. So Steve, I just wanted to ask a question on kind of when we get back to normal, is it consistent with what you were saying last quarter? I know there were few questions earlier on, but I believe, last quarter, you were thinking maybe early next year. I'm not trying to put words in your mouth, but now it sounds like it's back half to kind of Dave's question, I think, about the pace of enrollment. Just wondering, has it changed since Q2? Or is it consistent?

Dan, I'd have to say that it's consistent, but if anything, it's probably pushed back a little bit. I think we see, back to Dave's question, the pace of reopening of the sites has slowed, and so we're thinking -- I'm thinking probably more into Q2 than I am into Q1. So it hasn't changed dramatically. I never thought we'd be back everything this year. I think, I was consistent with that from the start, but we do see -- and we do see continued progress.

But I think it probably is pushing back a little bit, and as I said, the reasons for that, I think, are multifactorial. Part of it is because of the COVID world that's been that's ongoing. So there are -- it's not all negative. There are some silver linings here out of this pandemic, and these COVID trials are certainly silver linings for us, both on a treatment trial basis and on a vaccine basis. But in terms of the non-COVID, what I'd say, traditional portfolio, that's still got some way to go to recover. And so I'm thinking middle of next year is probably more the time frame now than I thought, perhaps, 6 months ago.

Great. And then just kind of on that same point, I mean, if you could help. Is it more of the patients, the inability to get patients to the sites because of the outbreaks? Or is it really the sites not opening up? Or I know you -- earlier in the conversation, there was a question on capacity, and you indicated that the demand was there, certainly you could train up more sites. I'm just hoping maybe just to kind of triage a little bit in terms of what the main hubbubs are. Or maybe it's the sponsors. Maybe they're so focused on running COVID that they're just telling you to hold back on some of the non-COVID work. So if you can help just maybe parse through some of the key factors on that.

Yes. I'll try to give you a flavor. It's a little qualitative. We don't have any specific data on that, Dan. I would say, it's -- and I know it's easy to say this, but I'd say, it's all of the above.

There is still an element of patients not wanting to go to institutions, not wanting to go to hospitals where potentially the risk of any sort of infection, let alone COVID is higher. I think that's a component of it in terms of recruitment rates, we've certainly seen that. I think there is an element of sites not wanting to take on new trials because they're busy with COVID clinical work or they're doing clinical trials -- normal clinical trials.

So there is -- I think, it's multifactorial, and I think you're going to find that sites impacted is a number. We have seen our site initiation visits come back to normal. Our pre-site -- so our study sort of start-up is coming back in terms of the number of sites we're engaging in new trials forward. But there is no question, there is still an impact on -- of the current cohort of sites or the current -- the portfolio within the current cohort is still impacted. And I think it's for a multitude of reasons. There are opportunities. As I said, we talked about our [Accellacare] network, where we've seen less impact than our Oncacare that will be -- that's a process that's going to take a year or 2 to sort of really develop. So we're not ready to declare victory on that one yet, but I think there are things we can do. There are some opportunities, I think, to bring on new investigators and train up new investigators. That has its own challenges, of course. That's not a panacea. So -- but there is an investment, I think, to be made there to address some of these issues. But this impact on sites is -- every site is, to some extent, unique. And they all have different focus are in different reasons, and I've tried to give you a flavor for some of those.

Your next question comes from the line of Juan Avendano from Bank of America.

I was juggling calls, and so I apologize if this was asked before, but COVID-related bookings for you have made up a decent proportion. Some of the feedback that we've gotten is that COVID bookings might be prone to a higher cancellation risk, especially after some of the preeminent COVID vaccine trials start announcing Phase III data in the fourth quarter or later. Do you agree with this notion? And have you discounted your COVID bookings enough to account for this possible dynamic?

Yes, you're right. Yes, and that question was asked a little earlier, but I'll answer it again. They are -- certainly, our bookings, Q2 and Q3 COVID bookings have been a substantial proportion of our wins. At this stage, we haven't seen any increase in cancellations on that. They are -- they do tend to be certainly the vaccine trials tend to be large material trials and the speed at which they burn has a significant impact on us, but we haven't seen any increase in our cancellations. So we haven't taken any specific provision or any sort of actions related to that at this point.

Okay. Got it. And I apologize for the redundancy. Hopefully, that wasn't asked. On the tax rate, it was 13% this quarter, about 100 basis points higher than what it's been typical for ICON. What caused the increase this quarter? And is your tax rate outlook in the out years is still about 12%? I just want to confirm whether or not the blip up that we saw in the quarter, whether or not, it would have any long-term implications for ICON?

Juan, it's Brendan here. Yes, I think we came into this year, thinking this would be in the range of 12% to 13% as it's always the case in every quarter, our tax rate is dependent upon where we make our revenue and our operating income. And I think it's just that the geographical shift of that, a little heavier toward North America in the last quarter. I think that would be the case in Q3 or Q4 as well. So I think [turnkey] is around ripe for this quarter and certainly, for next quarter.

I think, obviously, we'll give you more guidance and color as the long-term tax impact when we get out into our guidance for next year, which we're going to do on the Q4 call. But 12% to 13% is kind of exactly where we said it would be this year, and it looks like we'll be probably buying in the middle of that range, 12.5%, for the full year. So I think it's too early to say if there is a kind of a longer-term tax implication outlook. Certainly, we've been solid on that 12% for a number of years now.

Got it. And ever since you reinstated guidance, 2020 guidance, did you give an updated outlook on what percentage of revenue your top customers are supposed to account for in 2020?

Funny enough, I don't think it will change really from the range we gave at the beginning of the year, which was 12% to 14%.

14%, yes.

And your final question today comes from the line of Tycho Peterson from JPMorgan.

I'll start with one on operating margins. I know you had a bunch of gross margins earlier, and I know you don't provide operating margin guidance. Just the question is, you bounced back up to 15% this quarter. And you had said, earlier in the year, you would see compression. I think you said up to 2%, you saw a little bit more in the second quarter. But as we think about the COVID vaccine trials having more pass-throughs, which lower operating margins, how do we think about that dynamic into the fourth quarter? Is the 15% sustainable in your view?

Tycho, actually that depends on the pace of those trials and how they ramp up during the course of the quarter, which will be something that's difficult to measure sometimes, and these are very fast-moving trials. So that will be one piece that will determine that. I think if they ramp-up in line with our expectation right now, which kind of -- we've guided or at the midpoint, you're probably looking about an impact. It certainly will be an impact on off income, I would say, in the tune of maybe 0.5% to 1% on overall margin profile as it relates to that proportion of pass-through coming through during the quarter. But again, as I said, it does -- just really does depend on the quantum of that ramp up that we see in Q4.

Okay. And then, for Steve, I appreciate the comments on the recovery and site accessibility, et cetera. I'm curious if there are things you can do as we think about kind of a second wave here to kind of minimize patient dropouts, work around site closings? Are there proactive steps you guys are taking as cases [are actually] are going back up?

Yes. Tycho, there are things we could do. I'll keep mentioning our network, our telecare and AltaCare. We have a much better ability to influence there, I think, and so that's where we're trying to place a number of trials. And they're making significant contributions to [at telecare] sites, making significant contributions to the B trials we're running at the moment. But there are other things we can do to more ad hoc sites around enrollment managers and clinical managers who can go to these sites and help to deploy resource and help them with the work. We have the Symphony Group that tends to be focused with patients and home care, but they also have the capacity to be able to go to sites as well and to support sites in the -- in what they're doing from a clinical trial point of view, whether it be helping to recruit patients, helping to see patients as there all qualified nurses. So there are various things we can do around our -- for both COVID and non-COVID portfolio to help sites to deliver for us, and we're certainly doing that through the various functions we have in the organization.

And then last one on Central Lab. I'm just curious how much of the double-digit growth this quarter was catch-up from last quarter? And you had noticed some delays, so how sustainable is double-digit growth in Central Lab here?

I think we qualified our comments earlier on to say that we obviously were growing well in terms of business wins in the Central Lab, and we're starting to see that pick up. I don't think we require a double-digit growth in the Central Lab in the current quarter, but we do expect good growth from them in quarters 4 and 1 or 2. And I think a good proportion of that growth, certainly, probably in line with maybe about a quarter of that growth is coming from those cutback to kind of all of support that we're receiving.

Back to you, sir, for any closing comments. Thank you.

Okay. Thank you, operator. So thank you, everyone, for listening in today. As the impact of the COVID-19 pandemic continue to evolve, ICON is focused on executing our strategy as we look to grow our business further and enhance our position as the CRO partner of choice.

I want to take this opportunity again to recognize our entire workforce and to thank them for their tireless efforts and ongoing resilience during what's been a very challenging period. Thank you, everyone.

Thank you. Ladies and gentlemen, that does conclude your call for today. Thank you all for participating, and you may now disconnect.