ICON PLC (ICLR) 2021 Q4 法說會逐字稿

Good day and thank you for standing by. Welcome to the ICON plc Fourth Quarter Results 2021 Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded.

I would now like to hand the conference over to our first speaker today, Kate Haven. Please go ahead.

Thanks. Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter and full year ended December 31, 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 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. (Operator Instructions) I would now like to hand over the call to our CFO, Mr. Brendan Brennan.

Thank you, Kate. In quarter 4, 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 1.26x.

Full year 2021 gross 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 1.27x. With the addition of the new awards in quarter 4, 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 or 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 4 was $1.881 billion. 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 billion. 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 5 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 5 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% in quarter 3. Full year adjusted gross margin was 27.9%.

Adjusted EBITDA was $333 million for 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 billion 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 GAAP revenue of $1.885 billion and $5.481 billion of GAAP revenue in the full year 2021.

In the fourth quarter, the company recorded $16 million of transaction and integration-related costs. Full 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 quarter 4.

Full year U.S. GAAP income from operations amounted to $378.5 million. U.S. GAAP net income attributable to the group for the quarter 4 was $76.5 million or $0.92 per diluted share compared to $1.90 per share for the equivalent prior year period. Full year U.S. GAAP net income attributable to the group was $153.2 million or $2.25 per diluted share.

Net accounts receivable was $642 million at 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 million, leaving a net debt position of $4.682 billion. This compared to a net debt of $4.918 billion at September 30, 2021, and net cash of $494 million 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 pro forma net debt to trailing 12-month adjusted EBITDA ratio of 3.4x. The priority for capital deployment remains on debt paydown in the near term. Given our strong cash flow generation, we reiterate our target of exiting 2022 below 3x adjusted EBITDA, well ahead of the initial target we set in 2021.

In addition, our Board of Directors authorized a share repurchase program of up to $100 million, which we intend to deploy opportunistically beginning this quarter.

And 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 organization and creating a world-leading health care intelligence and clinical research organization. Our employees expertly navigated the challenges of the ongoing pandemic, deploying innovative solutions to ensure clinical trials were able to continue and patients received lifesaving treatment 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 4, we saw a particular strength in RFP activity in the small and midsized biopharma segments as strong cash positions continue 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 midsized 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 debt 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 customer -- strategic customer partnerships with strong delivery for our customers has led to further opportunity 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 ICON organization.

During the quarter, ICON 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 3 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 continue to be strong with a DSO of 31 days, down from 57 days on a comparable basis from December 31, 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 3.4x adjusted EBITDA, including synergies, exiting 2021. This puts us on track to exit 2022 with a leverage ratio of approximately 2.5x 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 Accellacare Site Network, imaging and early phase services.

Our integration process continues well with notable achievements in the first 6 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 campaign, highlighting the shared values of new ICON and reflecting the best of both from the organizations we have brought together. The priorities we set out at the start of 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 labor market continues to be highly competitive, we recognize the importance of continuing to invest in our employees and provide support in areas such as career development and training programs. 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 time lines, 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 through our owned and partner sites in the Accellacare 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 4 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. At end of quarter 4, 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 3.

Innovation is valued in our industry and by our customers more than ever as impacts from the global pandemic continued to be filled 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 2 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 the expansion of our Accellacare Site Network, entering new partnerships with 6 research sites across 4 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 8 countries with access to over 9 million patients globally. This broad reach and increased resource has enabled us to realize increased efficiencies for our customers' trials, including faster patient recruitment and study 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 have 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 firsthand 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 time lines for customers.

Our role as a leader in successful decentralized trial execution was evidenced with the presentation of the CHIEF heart failure trial results in quarter 4 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 4x 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. And every study needs to be evaluated by an experienced team to properly conduct this analysis.

As this market continues to evolve, we are seeing 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 Deep Lens and Veradigm 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 billion 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 17, at our site in Blue Bell, 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 Scrip's Best CRO Award. And additionally, as mentioned previously, ICON was the only CRO to be recognized in Forbes America's Best Large Employers list for 2022.

Before moving to Q&A, I'd like to recognize 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 health care intelligence organization and help shape the future of drug development.

Operator, we're now ready for questions. Thank you.

(Operator Instructions) The first question comes from the line of Eric Coldwell from Baird.

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. Mid- to long term -- we announced that revenue growth, mid- to high single digits on a long-term basis, Eric, on revenue. Mid- to high single digits.

Okay. 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, would be great.

Sure. So as I think we outlined, we think of our small biotech as sort of outside the top 75. So those are -- and within that, that's about 1/3 of our revenue, 1/3 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 that -- we would be -- 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. And so we have a very modest exposure to that group.

And 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. And we haven't seen any real concerns in terms of bad debts or challenges with payment any more than we would normally see.

So 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 2- to 3-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?

Yes. It would be in that range, yes. It would be in that range. It's several hundred, yes. It's a large number of customers.

[On time.]

[On time.]

The next question comes from the line of John Kreger from William Blair.

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 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 if you think about sort of the outlook for '22, are there any real kind of standouts across those various buckets?

Yes. 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 -- with biotech and small-midsize where we focused. 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 good solid business in the -- 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. Our Accellacare Site Network had a great year as did our home health area.

So 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's continuing across the business going forward.

Great. A 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?

Yes. There's no question that the labor market is tight. And I think that applies across all of our competitors and with our customers as well. Certainly, the biotechs and the large pharmas, 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.

There are -- 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 dollars available to develop drugs and the competition for that resource more than any other sort of area. But there's certainly -- 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'll -- my -- we expect to see that continue to improve. And I think as we bring the 2 organizations together, people are seeing opportunities within our organization 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 see -- we're optimistic in terms of how that's playing out. But there are -- it is an area of intense focus for us at the moment.

The next question comes from the line of Tycho Peterson from JPMorgan.

This is Casey on for Tycho. 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.

Yes. Casey, I mean, in terms of decentralized trials, pretty much -- the vast majority of trials that we win and start off have a component of decentralization going forward. Now that may be 1 or 2 components of remote monitoring, a wearable component, home health. But there's very few trials we start off that totally are 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. 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 going to be -- 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 the terms of the number -- 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 to sites.

So we're not seeing much change in terms of the pass-throughs at the moment. They represent approximately high 20s, around 30% of total contracted fees. And that's adjusted a little bit during the pandemic. But really, it's back at sort of where we traditionally expect to see it going forward.

And 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, we -- in the first half of '21, we did have a larger part of our portfolio working on the vaccine trials that do have elevated pass-throughs. And obviously, we're lapping those in the first 6 months of '22, and that is very much built into the guidance there.

Our run rates on -- I think Steve called out the run rates on COVID work were 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 kind of what you would have seen in '18 and '19. So margin profile -- helping margin profile significantly and still very, very good, solid underlying direct fee revenue.

Got it. And then maybe just one to follow up. So at our conference, you know that, that SG&A would be under 10% of revenues in the longer term. I 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?

Yes. 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 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.

The next question comes from the line of Elizabeth Anderson from Evercore ISI.

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 -- what you said in the -- 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 lines, 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 606 basis, it will be a little lower in the first half of the year and will 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 could give us a little bit of a challenge in the first half part 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 on the next -- for the next sort of 2, 3 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 to.

Okay. Perfect. And then just adjusted EBITDA CAGR sort of low teens and EPS CAGR mid-teens plus those 2.

Yes.

Yes, absolutely.

The next question comes from the line of David Windley from Jefferies.

Steve, we're hearing from big pharma and even some medium and maybe the upper end of small pharma that -- or 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 -- it was a fairly large percentage of PRA's revenue prior to your acquisition but that 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?

Sure, Dave. Well, let me take your second question first. We believe we're the #1 market leader in the FSP space as the 2 organizations come together. The legacy PRA organization bought a very significant functional group to the docs organization. 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 labor for our full-service groups as required. And 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 1 or 2 opportunities that we've been able to start out as an FSP-type contract, but it's morphed into more than that. And 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 then 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 labor markets weren't quite so tight.

We welcome that as an opportunity because, again, we found -- we find it can lead to other opportunities. Not -- I mean, very few companies are just functional or just full service. Most of the large pharmas 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.

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 wins 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.

Yes. 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 -- those vaccine trials burn 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.

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 was really -- came to the fore and really did help to allow us to burn.

My expectation and hope is that we can continue that on 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 requires partnership and collaboration with all of the various parties involved in clinical trials. Do you want to add?

Yes. I mean I suppose the only thing I'd to that, Dave, is obviously, our kind of average duration of backlog or contracts, I mean, we still think probably about 3 years in aggregate given all of the mix of different therapeutic areas we have.

And of course, when you think -- you can do the math back on that, it kind of brings you somewhere in that kind of 8% to 10% range of quarterly conversion. I think if you mix that with that 8% starting point, 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 [other ones] like that. So yes, we feel like that's certainly the right number to be targeting.

The next question comes from the line of Patrick Donnelly from Citi.

Brendan, maybe one for you just on the margin profile. Can you just talk about the moving pieces into '22? Obviously, the cost synergies now that we're 8 months past the deal closed or so, can you just talk about the visibility into capturing those in '22 to offset maybe a little bit of the labor pressures? I know 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.

Yes. Sure, Patrick. As we look into '22 in totality, and what I kind of said that -- in 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 seeing 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 expect to see some conversion, but we do feel like our revenue mix is much more normalized now in terms of vaccine/nonvaccine 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, an SG&A converging 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 a 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.

And Patrick, the only thing I'd add to that is that we are getting -- 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, I -- at least over the last, I don't -- 10 or 20 years, we -- 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.

No, 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 2 years. That's sustainable in terms of the cash flow 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 sufficient to continue to capitalize on growth there?

We see -- 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 2 to 3 years of cash on the books for these -- 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 it.

It's fair to say, I think that the funding environment has attenuated a little bit over the last sort of 6 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 around -- 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 this -- for good science and good development programs to attract this money and to be -- continue -- to continue to be well funded by.

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.

The next question comes from the line of Jack Meehan from Nephron Research.

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.

Yes. 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 talked about lapping the revenue number in the first half of this year. Well, this quarter, last quarter, we were lapping the awards number.

And so we had some very significant awards go into quarter 4 of 2020. And that comparison was probably a little bit down, more because of the somewhat extraordinarily high number, as I said, back a year ago. And we didn't have that sort of level of award, particularly around the vaccines and the pass-throughs on 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. 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 I was just wondering if you could comment on why that might have increased in the year-end.

Nothing really terribly strange, Jack. Some harmonization of how we obviously recognize revenue and make sure that we're looking at the pass-through. And particularly, the investigator payment 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 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 what 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 of where that's going to -- where that's trending.

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

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 prescription 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, it's about -- approximately half are 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 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 this organization. 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.

The next question comes from the line of Luke Sergott from Barclays.

So again, on the midterm 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 -- 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 ongoing from there, Luke.

Okay. So mid- to high ongoing through -- going forward. Okay.

Yes. Yes, that's it.

All right. And then the other clarification here is on the RFP volume, you said up -- 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 up low double. So just trying to get the difference there, what you guys are seeing.

Well, it was in -- overall, it was sort of high single, I suppose, from an overall RFP, in 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 overall, it was in that high single to low double sort of range.

I mean these things can -- we don't get too focused in on one particular quarter. Overall, the year was up -- it was up nicely in that double digit, low double-digit range. And on a quarter-to-quarter, year-on-year basis, low double digits. And that's what we saw on the RFP.

So we feel that the market is moving in the right direction. Probably biotech area, it continues to be strong, and that was a little bit higher in the biotech and a little bit lower 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 RFPs like kind of filling the funnel here. Has -- 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?

Yes. I mean I think it's a little early to sort of make that call, Luke, to be honest. 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. So 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 technology that's really becoming available, whether it be out of the pandemic or in other areas.

So I would say we're certainly seeing a move towards it. It's -- I would have to take to call it a tsunami of opportunity. But there's certainly a nice tailwind, if you like, with this new sort of science that's being applied to new -- just particularly in the biotech and small pharma space.

The next question comes from the line of Derik De Bruin from Bank of America.

Just 2 quick ones. What's embedded in terms of your thoughts on M&A.? A lot of your competitors include some capital deployment into their top line growth. I mean yours looks like more like you're talking about an organic basis. And then I've got a follow-up.

Yes. Sure. Let me check on our -- I mean, our -- I think as we've been pretty specific, Derik, 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 the 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 acquisitive point of view. But I would emphasize that we want to get to that 2.5x as a focus. So 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. 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? Can you just talk about your over -- 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?

Sure. It's funny you asked about China. I thought you would be asking about the Ukraine and Russia given the current situation there. But -- so let me address Ukraine and Russia. We do -- 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 recent -- 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 are -- we have less than 2% of our operations there.

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 FDA in China. And 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 over -- in China now as the 2 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 pharma market or in our -- in the more of our large pharma or, as I said, on a functional basis. They have a big operation there.

So it's one we take a lot of interest in. We monitor very carefully the regulatory requests out there and our relations with the regulators out there to make sure that we're doing the right thing by them. But it's one of the more challenging environments that we work within, I will just leave it at that.

And so 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 5 to 10 years, it will be an increasingly important part of our business.

Thank you. And thank you, dear 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 lifesaving drugs and devices.

I want to take another opportunity to recognize our entire workforce for their unwavering commitment and efforts over the past quarter and in 2021. Thank you all, and have a great day.

That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.