ICON Public Limited Company (ICLR) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon ladies and gentlemen. Thank you for standing by and welcome to the ICON plc Quarter Two Results for 2019. During the call, all participants will be in a listen-only mode. [Operator Instructions] I must advise you that today's call is being recorded, Thursday, the 25th of July, 2019. And I shall now hand over to Jonathan Curtain. Please go ahead, sir.

Thank you, Jody. Good day ladies and gentlemen. Thank you for joining us on this call covering the quarter ended June 30th, 2019. 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. 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. The company's filings with the Securities and Exchange Commission discuss the risks and uncertainties associated with the company's business. This presentation includes selected non-GAAP financial measures. For a presentation of the most 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. From January 1st, 2018, the revenue recognition standard ASC 606 became effective for ICON. Consequently, current and prior year period comments made by both Brendan and Steve incorporate the impact of this revenue standard. Starting last quarter, all business win and backlog-related financial measurements comprise both direct fee and pass-through components. In addition, the comments of both Brendan and Steve will exclude the impact of quarter two, 2018 restructuring charge, when quoting year-over-year comparisons. We'll be limiting the call today to one hour and would therefore ask participants to keep their questions to one each with an opportunity to ask one related follow-up question. I would now like to hand over the call to our CFO, Mr. Brendan Brennan.

Thanks Jonathan. In quarter two, we achieved gross business wins of $1.035 billion and recorded $135 million worth of cancellations. Consequently, the net awards in the quarter were $901 million, resulting in a strong net book-to-bill of 1.3 times. On a trailing 12-month basis, our net book-to-bill was 1.29 times. With the addition of these new awards, our backlog grew to $8.2 billion. This represents a year-on-year increase of 11.1%. Revenue in quarter two was $695.1 million. This represents a year-on-year growth of 8.3% or 10.5% on a constant currency basis. On a constant dollar organic basis, year-on-year revenue growth was 9.4%. Our top customer represented 12.9% of revenue for the quarter compared with 14.1% in quarter two, 2018. We expect revenue concentration from our top customer to remain in line with our previous stated guidance of 11% to 13% of revenue for the full year. Growth outside our top customer on a trailing 12-month basis remained robust. Our top five customers represented 36.9% compared to 40.3% last year. Our top 10 represented 49.5% compared to 55.8% last year, while our top 25 represented 69.5% compared to 73.7% last year. Gross margin for the quarter was 29.4% compared to 29.5% quarter one and 30% in the comparable quarter last year. Our global business support model continues to perform well and as a result, SG&A was 12% of revenue in the quarter. This compares to 12.1% last quarter and 12.6% in the comparable period last year. Operating income for the quarter was $106.1 million, a margin of 15.3%. This compared to 15.1% last quarter and 14.7% in the comparable quarter last year. The interest expense for the quarter was $1.4 million and the effective tax rate was 11.9%. Net income attributable to the group for the quarter was $91.9 million, a margin of 13.2%, equating to diluted earnings per share of $1.69. This compares to earnings per share of a $1.63 in quarter one and $1.51 in the comparable quarter last year, an increase of 11.6%. On a comparative non-GAAP basis, day’s sales outstanding were 61 days at June 30, 2019. This compares with 59 days at the end of March 2019. The increase of two days reflects the continuing industry trend of fewer billing milestones and lengthening gaps between those milestones within our customer contracts, as well as a general increase in credit terms for our customers. Cash generated from operating activities for the quarter was $22.7 million. Consistent with previous years, a significant outlay during the quarter was staff bonuses, which were paid in April. During the quarter, the group completed the purchase of a 60% interest in MeDiNova for $39.3 million. Capital expenditure was $11.2 million and $40.1 million worth of stock was repurchased at an average price of $135.48. At June 30, 2019, the company had net cash of $81.8 million compared to a net cash of $128.6 million at March 31, 2019, and net cash of $23.9 million at June 30, 2018. With all of that said, I'd now like to hand the call over to Steve.

Thank you, Brendan and good morning or good afternoon to all of you. Quarter two was another strong quarter for ICON, and once again demonstrates the increasing momentum of our patient site and data delivery strategy. Our sharp focus in this strategic area as well as sustained operational delivery excellence resulted in robust year-over-year revenue growth of 8.3% or 10.5% on a constant currency basis. Significantly much of this growth came from customers outside of our top 10, reflecting our broad-based foundation for continued progress in this area. The strong revenue momentum in unison with continued efficiencies and discipline on our cost lines, resulted in year-over-year earnings per share growth of 11.6% to $1.69. Overall, market demand remains healthy within the R&D and outsourcing environment. Large pharma customers continue to look to ICON's innovation, breadth of capabilities and best-in-class delivery models to help them reduce development time and cost. Furthermore, we are benefiting from the trend of mid-tier pharma and biotech firms reducing the number of CRO partners. Demand from smaller and specialty pharma also remains healthy as they leverage the global footprint and scope of services that ICON can provide. All of this continues to point to market share shifting towards the largest CROs, and we are confident that ICON is benefiting accordingly. Through our focused execution and by continuing to target growth from these sectors, ICON posted gross business wins of $1.035 billion and net business awards of $901 million. This delivered a very positive book-to-bill of 1.3 times. As a result of these bookings, backlog increased 11.1% over last year to nearly $8.2 billion. RFP flow for the quarter was also robust with year-over-year growth in the mid to single-digits. And we continue to see opportunities to expand our revenue base across the customer spectrum, including biotechs, mid-sized pharma and opportunities with large strategic partners. This will continue to diversify our customer base providing us a strong platform, enabling us to drive sustainable revenue growth. During the quarter, our headcount grew to nearly 14,400 employees, a 5.6% increase year-over-year. Our continued strong business development performance means that we expect this headcount to be increasingly utilized during the remainder of the year to deliver top line growth. We remain focused on balancing the need for these additional project resources with continued leverage of our industry-leading global business support model. During the quarter, we saw further evidence of this with SG&A improving to 12% of revenue, down from 12.6% last year. The ability to utilize this SG&A platform and create further leverage is a key component of our integration plans for acquired companies. However, the primary purpose of our acquisition strategy remains providing an enhanced and differentiated service offering to our customers. So far this year, we have deployed capital on two transactions. In January, we enhanced our laboratory offering in the area of molecular diagnostic testing, a key component of oncology research with the announcement of the acquisition of MolecularMD. This acquisition brings to ICON expanded testing platforms, including companion diagnostic development, next-generation sequencing and immunohistochemistry. MolecularMD's services are already driving benefits across service lines and further enhancing the competitiveness of our overall lab and clinical service offerings. Even at this early stage, we are very pleased with the level of customer interaction we are generating. We are already actively engaging several partnership discussions with some top 10 pharmas. Our second and most recent transaction was the acquisition of a majority shareholding in MeDiNova Research. MeDiNova further enhances our patient site and data strategy, which is focused on the rapid recruitment and retention of patients in clinical trials. By enhancing our ability to access patients, we are supporting ICON's mission of reducing the development cost for sponsors and accelerating the delivery of safe and effective devices and medicines to patients. Patient recruitment is a constant challenge for our customers and can represent more than 30% of total study costs. MeDiNova greatly enhances ICON's recruitment capabilities in Europe and in South Africa, complementing our U.S.-focused PMG site network by bringing to ICON a network of 33 active clinical research sites. This means that within our site network alone, ICON now has access to over 8 million patients across 87 sites. We are pleased to see continued evidence that our site network and healthcare alliance sites are benefiting our customers. The number of patients randomized through PMG during the quarter increased substantially with 30% of ICON's patients now coming through the PMG and our healthcare alliances, up from 28% last quarter and 25% at year-end 2018. Metrics like this, in combination with our data analytics expertise through our OneSearch platform and access to research-grade data from our innovative data partnerships, provide us with confidence that ICON has a clear and differentiated position on how to enhance our engagement with patients and investigators, and ultimately, reduce development timelines and costs. Our cash flow and balance sheet remain strong. And we continue to look at opportunities to deploy capital. During the quarter, we repurchased $40 million worth of shares at an average price of $135.48. This means, in total, we have spent just over $65 million year-to-date repurchasing over 496,000 shares at an average price of $131.19. As we look forward to the end of the year, I want to take this opportunity to reiterate our full year guidance. We expect 2019 revenue to be in the range of $2.76 billion to $2.84 billion and earnings to be in the range of $6.75 to $6.95. Before moving to Q&A, I'd like to welcome all the MeDiNova staff to ICON, and of course, thank the entire ICON team for all their hard work and commitment during the quarter. In particular, I would like to recognize all of the ICON teams who won awards at the recent Clinical and Research Excellence Awards and Pharma Times' U.S. Clinical Researcher of the Year awards, respectively. Thank you, everyone, and we're now ready for questions.

Thank you very much, sir. [Operator Instructions] Our first question today is from Robert Jones from Goldman Sachs. Please go ahead.

Great. Thanks for the questions. I guess, just starting on MeDiNova and maybe a little bit even more broadly on the site network strategy, in general. I guess, first on MeDiNova specifically. It sounds like it was revenue neutral to the quarter. Curious, how we should think about what that adds on a go-forward basis? And then, I guess, taking a step back, it seems like your largest private competitor, I think, has embarked on a pretty focused strategy on site networks. Your largest public competitor shared recently that they are also pursuing a site network strategy. I'm wondering if you could just comment on how competitive this market has become, and how are you able to stay differentiated as others have clearly tried to go down this path as well?

Robert, I'll let Brendan take the first part of the question in terms of the revenue opportunity from MeDiNova.

Yeah. So MeDiNova, as I think we've spoken about before, is an organization that we are working with, and obviously we have developed a relationship with those folks on some of the -- during some of the clinical work on the trials that they were working on from our patient recruitment perspective. So as a result of that, Bob, a lot of their revenue, about 80% of their revenue already goes through our investigator payments, if you like, our pass-through lines. So it's actually in part of our 606 revenue already. So, there'll be a fairly minimal uptick in revenue. But of course, now we'll be taking in the margin profile of that business, and that as I said, that would be most significant element. And really of course, to follow into maybe Steve's point, this was really a very strategic direction acquisition for us, complementing our U.S. sites very much so. So, it was much more around strategic than financial rationale.

And Robert, in terms of the competitive spice that the site networks represent, I think we recognize that it is becoming increasingly competitive and one or two of our competitors are certainly moving in that direction. We think that's an endorsement of our strategy, actually so I'm not unhappy see that. Although, I do think we have a couple of things. First of all, a first mover advantage with the acquisition of MeDiNova or 60% of MeDiNova. We also bring ourselves a global network. I think that's important, particularly in the area of North America and Western Europe, where patients are required and are more difficult to recruit. So I think the fact that we have a network established now in that space and in that geographical segment is important for us. We also see it's not just about sites. It’s about data, and it’s about patients as well. So we call it our patient's site and data strategy for a reason, and that’s because it is very much an integrated and holistic approach to getting patients into clinical trials. So that’s very important to it, critical to it. But so is the data component of that, and we have various actions and strategies working along that. I think we've talked about that in the past, and of course, increasingly, patients -- patient centricity is also a very important part of our strategy, and we'll have further announcements to make on that, I believe in the next little while. So it's an important area. I think one that is going to be competitive, but we feel we have an advantage in it, as I said, in terms of the global network and the fact that we've been pursuing this now for several years.

Great. Thanks so much. Appreciate it.

Okay.

Thank you very much. The next question is from Erin Wright from Credit Suisse. Please go ahead.

Great. Thanks. Can you discuss a little bit about the customer mix of new business wins, demand trends across kind of large and small biopharma? Will smaller biopharma continue to be a meaningful driver for you? I guess what are you seeing right now in terms of demand trends on that front? And should we think about -- how should we think about this in terms of your overall kind of diversification of your customer base over time?

Sure. Let me try the second part of your question first, Erin. Certainly, we're seeing continued strong demand, really right across the spectrum of customers, biotechs, mid-size and larger pharma, but particularly, I would say in the midsize and the biotech area. Certainly, from an RFP perspective, I talked about robust mid-single -- mid to high-single digits, and that's certainly been the case in those segments. We continue to see the biotech segment well funded, and those companies with money to spend and probably more importantly, ambition to take their compounds not just through to proof-of-concept or into Phase II, but right through to market, having done their Phase III. So we see some large programs coming through in that biotech space. In terms of development of our revenue, I think -- and as we reported, revenue growth in our -- outside of our top 10, certainly outside of our top 25 customers was robust this quarter. Again, I don't want to get too focused in on one quarter's revenue growth for any particular group of customers. I think we need to approach it much more on an annual basis or a longer term basis. We believe we have -- and we won business across the spectrum, and so we have a platform for sustainable revenue growth in the long-term and that's the important part for us. It is not just focused around one particular customer, or one particular group of customers. It's around a large section. We believe we are well represented in the key segments that we operate in.

Okay. Thanks. And then did pass-throughs have any sort of meaningful impact in the quarter?

The pass-throughs, no. The pass-throughs, I mean, Erin, they are the part of our cost base now. We look at our projects on the basis of our percentage of completion on the overall project basis and that's what the revenue reflects. So I wouldn't say, there was any meaningful impact there.

Okay. Thank you.

Thank you. Our next question comes from the line of Sandy Draper from SunTrust. Please go ahead.

Thanks very much. I guess, the first one is for Brendan. Did I hear you right, the constant dollar organic growth rate was 9.4%? Just wanted to verify that.

That's correct, Sandy, 9.4%. Yeah.

Okay. Great. It's not really a follow-up because it's an unrelated question. One of your competitors talked about seeing some wage inflation, just tighter labor market across everything, but certainly a lot of hiring going on across the industry. It's not really showing up in your expense line right now, but just any thoughts about wage inflation and pressure there? Obviously, your global footprint, the way you run the business, you are to-date have been very effective at distributing the cost around the globe in low cost areas, but just any thoughts about eventually that creeping up and becoming a little bit more of a factor? Thanks.

Sure, Sandy. I think we've got to be realistic. Certainly, unemployment in the United States now is well under 4%, has been for a little while. And so we're conscious of the fact that we have to be competitive with salaries in order to retain good quality staff and we make a point of wanting to do that. And we haven't seen dramatic, certainly any dramatic wage inflation in that area, but there are certainly hotspots around the business where we are taking a look at our markets, salaries and making sure we're doing that. I wouldn't raise it as a particular issue at the moment, but we are very conscious of it. We are conscious of needing to retain the best staff and making sure they are competitively compensated and that certainly a big focus, not just of our HR organization, but of our entire organization to make sure we do a good job in that space.

Great. Thanks, Steve.

Thank you very much. Our next question today is from David Windley from Jefferies. Please go ahead.

Hi. Good morning. Thanks for taking my question. A good segue from Sandy there. On margin and particularly gross margin, gross margin trends has been under some pressure the last five or six quarters. You've more than offset that with your global support framework. I'm wondering, if wage inflation is not a part of the picture there, is there a shift in business mix that is influencing gross margin or is it simply are you still in a position of hiring ahead of the curve to some degree? And then, Steve, to dovetail the site network discussion here, as you increase, you've called out three percentages on the percent of patients that are recruited through the site network. As that increases, does that have quantifiable positive margin benefits to the company as well? So kind of two distinct parts of a margin question. Thanks.

Sure. So let me start with the gross margin. As you say, the gross margin came down, I think, 10 bps quarter-to-quarter so not a huge amount. But I can tell you unequivocally, it really wasn't due to any shift in the mix of business. Our FSP business remains at around about 15 or so percent of our business and it hasn't increased dramatically. So it hasn't increased even slowly over the last few quarters, or even couple of years so it's not a mix shift. I would acknowledge though as book-to-bill has been very solid, as you appreciated, over the last couple of years really and there is – there has been a little bit of a need to hire to make sure we get those projects moving. So we've done some analysis. A larger proportion of our work is in startup at the moment and that means you have to have resources on board, and particularly, it's the more expensive resources, project managers, project directors on board to guide and to drive those projects through start up. And so as we've done that, that's put a little bit of pressure on the gross margin. I think we can manage that, we can manage that effectively going forward, and I don't think that's going to go down much further. But I do think – that's the area that's meant we've had to, as I say, we take a little bit of a small decline on the gross margin. In terms of site network, yes, I do believe there is an opportunity to improve margins as we increase the proportion of patients through our network and that's really not -- it's really in relation to something that's very much in line with what our customers are looking for and that's including the speed of recruitment. So, if we can do these -- if we do our projects significantly faster because we are starting up our site network and we're getting patients in faster through our site network, we're increasing proportion of patients in through our site network. We're more likely to be on time or even ahead of time as we go towards the contracts where we have a sort of fixed budget with a fixed outcome, the opportunity to finish ahead of time and hence, make a greater margin on those projects presents itself. So it's all about helping us to deliver more effectively and more cost efficiently. Our customers then get budget certainty and we can improve -- we can continue to improve our pricing, but we also get a larger share of that and we make better margins. That is a long-term benefit. That's not something that's going to happen tomorrow or even in the next 12 months, but we do see it as being one of the effective strategies in helping us to maintain or even improve our margins in the long-term.

Understood. I suspect that there is much and thanks for the answers.

Thank you, very much. Our next question today is from that line of Ross Muken from Evercore. Please go ahead.

Hey guy, it's Luke on for Ross today. I guess, just more on trying to get an idea of the margin cadence for the rest of the year. Pfizer revenues became 12% again. I think that was a little ahead of our expectations. Are you guys starting to hit that ramp-up phase where it's no more on the implementation but hitting that sweet spot where you're getting more profitable revenues coming through?

Luke, if that question is specific to Pfizer, I think when you're looking at margin profiles for our overall organization, Pfizer is a proportion, but we need to look at the mix of business and of course, there's different phases of what we're going through at the moment. Steven made the point around when we were talking about the gross margin pressure there that we are -- it looks like we've got more in start-up at the moment and that's cost us a little bit on gross margin. But I think that margin trend that we see there, that we see in the first half of the year, is probably going to be replicated as we go through the back half of the year as well. So, on gross margin, probably stability, but again, probably any margin upside coming from SG&A leverage as we ramp up the revenue. So, I wouldn't say any one customer is going to moving from if you like start-up to maintenance, is going to move the dial too much on margin. We will be managing it as an overall group of cross-sell portfolio.

All right. That's very helpful. Thanks. And I guess, you talked about the DSOs ticking up and that's more of a function of just how the sponsors are looking to increase the gaps between milestones and essentially make you guys start sharing all of that risk. And I imagine that there's an opportunity for you to extract more pricing on those projects. And can you give us a sense of how those projects shake out versus when you're doing FSP or other functional service work and kind of how the demand trends change between those?

I think we've seen healthy demand in both of our businesses, Luke, over the last while. Certainly, that's been probably been seen in the marketplace. So, in terms of the credit profile, obviously, it's a different animal in our clinical Phase II, III business versus the typical FSP model, which is very much billed past the month that the comps are actually completed. So, yes, really that when I'm talking about those milestones and the elongation, that really is peculiar to large-scale projects where obviously, we're working on a piece of business where there are milestones that will be hit during the course of that. So, if you're looking for I suppose the elongation point on our DSO, it definitely is more on our Phase II, III business than it would in our FSP business.

Okay. Great. Thanks.

[Operator Instructions] The next is from John Kreger from William Blair. Please go ahead.

Hi, thanks very much. Steve, just following up on Erin’s question, if you think about your backlog and your business awards over the last year or so, are you seeing any interesting trends in terms of maybe therapeutic mix changes, geographic mix changes? Even are the studies getting bigger and more complex or smaller, anything you could point to?

John, not really, no. We continue to have a large franchise in the oncology space and a lot of work goes on there, but I think that's pretty typical of the larger CROs. Around about 40% of our backlogs in oncology -- revenue that comes through in that respect. CNS anti-infectives have probably made a little bit of a comeback, anti-infective side of things, I would say, couple of years ago. Respiratory, immunology is large, gastro. So but in terms of significant trends, no, we don't see much. The major trend really that's really been over the last few years has been the continued increase in complex and large scale. Although, they don't have to be, but they are not always the same. On oncology trials, you see the oncology revolution, they are not necessarily large trials, but they are very complex trials usually and then expensive trials on a per patient basis. But that's probably the trend I'd point to that’s continued over the last -- few years, nothing certainly the few quarters that I can point out.

That's helpful. Thanks. Follow-on to that, how are you feeling about – you sort of the late phase, pharmacoeconomic, RWE-type work? Are you getting your fair share there? Or is that a business that you feel like you are underserving at this point?

You know, I think, it continues to be very important segment of the market -- and it's a fairly eclectic segment of the market really when you look at it and there, certainly our late phase business reflects that. You know, we have a group that looks in the real world evidence space. We have a very efficient sort of III-b, IV non-interventional type trial contingent and then we have a consulting group around our health economics, pricing and market access, medical communications. So it's hard to categorize it as one market because there are a number of different segments and it is, as I say, fairly eclectic. You know, we've seen some progress in that area over the last 12 months. We've got more to do. We brought the Mapi team in -- it must be almost 2 years ago now, and they have certainly contributed significantly to us in terms of expertise, in terms of customer relationships and in terms of opportunity. The device opportunities also in that space for us, they continue to grow. We seem to nice -- uptick and we have some new management in our device area who are making impact already. So you know, we are very optimistic about the contribution we can make in that space. We remain opportunistic about further opportunities M&A wise, but it certainly is a space we like. We believe we can do well and we are putting a lot of focus one.

Great. Thanks. Then may be one more quick one. I think you guys have talked in the past about process automation being an opportunity to drive some additional efficiencies in the business. Can you give us some update on where there that stands and are we early days there? Or fairly follow-on? Thanks.

To characterize it, you know, from a sort of the high level John, yeah, it is early days, but we have deployed a number of bots in the space and we are actively -- we have an active program and we measure what we are doing and how we are deploying on a very regular basis. So that’s -- it is ongoing. We are looking at the clinical space to helping our -- in the more routine task. We are also looking in the finance area, in the IT area, even HR as well. So there are number of areas we are deploying. But I would say -- we are in the first or second inning, I would say in that respect. And we still got some way to go. I would anticipate this is going to be, you know, 3 to 5 year journey. We will make progress, I think along that way and we will give you update along the way. Do you want to add to that?

No, no. That’s fine.

Okay.

Excellent. Thank you.

Thank you very much. Our next question today is from Stephen Baxter from Wolfe Research. Please go ahead.

Hi. Thanks. A lot of mine have been asked, so I'm going to come back to the comments on the DSO. My understanding is that -- smaller customers are typically paying largely upfront for their work, which seems to be an offset for whatever is happening across the rest of your book of business. And obviously the growth you've seen at the small end right now is quite robust. So wondering how to think about that? And whether you're seeing any type of payment changes in terms of payment terms there as biotech seems to intensify in terms of level of competition for that subset of business? Thank you.

Thanks, Stephen. No, I mean, we're seeing robust growth across all segments of our business. And I think an important point to note is that we have seen robust growth in sort of our top 10 customers this quarter. But certainly, that's right across all types of organizations, not peculiar to one segment of the market. So it's been good broad-based growth across all sectors. So you're quite right, we do work with small biotech to some extent. And yes, there is an element of prepayment that offsets in absolute terms on DSOs. Obviously, we look at this quite commercially as well as our organization. We're very well-financed company. We have a strong balance sheet. And so sometimes we look at this as an element of our commercial negotiation piece as well. We have, as you guys know, a very, very low bad debt exposure. So I think we managed this well and we managed to bring that strong balance sheet into play from a commercial perspective. So that's something certainly that we have used in the past and continue to.

Okay. Thanks. And just a quick follow-up, kind of a simple modeling question hopefully. Yeah, you're buying back stock, but your share count was up sequentially a little bit. Like what's the right way to think about how share count goes through the year as you're buying back stock? Are you trying to keep things stable, or should we be expecting some type of benefit to share count from that? Thanks.

Stephen, I'll take that one as well. Yeah, mostly, we do a lot of our share issuance to staff in the second quarter, so it has a big dilution impact on the share numbers. So, as you go to the back end of the year and we continue to buy back, it will be in a net decrease. So, really the Q2 is the one to watch there for big dilution, but over the course of the year, what we are trying to do is really keep that number flat. So you can see the big dilution in Q2, but we're trying to get back to where we started effectively by the time we get to the end of the year. And we reckon that's about 1 million shares in terms of the dilution that we need to buy back.

Thank you.

Thank you very much. Our next question today is from Juan Avendano from Bank of America. Please go ahead.

Hi. Thank you. The M&A contribution from recent deals to revenue growth was a little bit higher than I expected, is this M&A revenue solely due to MolecularMD or also MeDiNova? What's the split between the two?

Predominantly, MMD, one, as we mentioned already, MeDiNova only came in during the course of this quarter. So it had a much smaller impact in absolute terms. I know it's already a lot of it's in the pass-through line. So I would say probably about 80% was from MMD.

Okay. Got it. And if that's the case, I believe MMD is performing ahead of your expectations, what was driving that?

Well, you're right. They are performing very well, so we're very pleased, Juan, with what's happening, but what's driving it? Well, I mean, we've been -- I think the integration has been managed well. I think we've been able to take on the -- it’s a very solid, very strong organization. We're delighted with what they bring to us not just in terms of financial returns and in turn, as I mentioned in my comments, in terms of opportunities, they are giving us on a business development -- from a business development point of view. We're in a couple of discussions with some large pharma companies around the provision of laboratory services, which we quite frankly, probably wouldn't be without them. So they really brought more than just dollars and cents to use from a P&L point of view. They brought some real strategic go forward, which is what I'm very excited about.

Good. On capital deployment, you've done two deals this year with MMD and MeDiNova. Do you hope to do more deals later this year?

We -- of course, yes. We remain very open to doing that and particularly around our patient site and data strategy. So we have -- we're always in conversation with a number of potential targets and that certainly remains the case at the moment. We expect to be able to do at least another one this year, that's the expectation from our point of view anyway.

Good. And another question unrelated. I don't have the historical figures on the gross wins under ASC 606, including the pass-throughs. Can you tell us whether gross wins, including the pass-throughs grew year-over-year in the first and second quarter this year?

Excellent question, Juan. I think a quick answer is, yeah, the gross wins did grow year-over-year on a 606 basis, which obviously includes pass-throughs. I know on a net basis, they grew certainly in the high single digits and I think not dissimilar on a -- yeah, it's not dissimilar on a -- probably mid single-digits on a gross wins basis.

Okay. And last one, if I may. Your cancellation rate was 1.7% of the beginning backlog. This is the lowest level in the over two years. What drove the low levels of cancellations? And what does this say about the quality of your backlog?

Honestly, Juan, I don't think I'd get too positive or negative about it. If it was down a little bit, I think it indicates the quality of the backlog is solid. As you said, 1.7%, that's right. I think it was 13% of gross wins, which was a little lower, but I think we typically go between 13% and 17%, so it was at the lower end. But I don't think you can read anything really into one quarter's cancellations. So not to be too dismissive of it, but we were happy with the number, but it's just one number in one quarter. I think you've got to look at this over a long period of time.

Okay, got it. Thank you very much. I’ll leave it there and I’ll follow-up offline.

Okay.

Our next question today is from Jack Meehan from Barclays. Please go ahead.

Thanks. Good afternoon. Brendan, I wanted to follow-up back on cash flow. I was wondering if you could confirm for us what the target is for the year, if anything has changed from the initial guidance and what the expectation is around DSOs? Do you think they stabilize from here into year-end? Just this is the new normal, or you think they could actually come back and help with some of the cash collection before year-end?

Yeah, Jack. Well, we still have kind of in our heads about $300 million for cash from operations during the course of the year as our target. I think we're well on target to get to there. As you guys know from looking at our historical cash flows, about one-third of our cash flow is coming in quarters one, three, and four and very little comes in quarter two with the payment of bonuses I mentioned earlier on. So we're on track to certainly being in that ballpark of $300 million for the year. So we're still certainly hoping for that. In terms of your DSO question, certainly, we're going to work very, very hard and diligently to try to make sure that we're not leaving anything on the table in terms of our cash cycle. So we are very focused on trying to improve that as we go through the back end of the year. As I said, these are long-term contracts with commercial terms that have been laid down quite some time ago. So it's never easy to move these numbers quickly, but certainly, we're going to stay focused on that. And if we do manage to eat into that somewhat, that would be an upside to that $300 million number. So I think that $300 million is a doable number at this stage and that said, if we can help out on the DSOs side that will be positive as well.

And just to confirm, the $300 million, that's free cash flow net of CapEx, correct?

That's correct.

Yeah. And then, just one on the revenue side. You've seen some revenue burn stabilization from the last 1.5 years or so, do you feel like maybe just as you think about where the backlog at and the life cycle of various projects you're working on, do you think there is actually a point where that could start to improve and you see revenue begin to accelerate?

I think that's certainly potentially possible, Jack, down the track. But I think in the near-term, we'll probably stay much the same. There may be a very modest further tick down of 10 bps, but it's an area we're looking at very hard in terms of starting up projects and getting them moving. As I said, we have a larger proportion of our backlog in start-up at the moment. So it's hard to see it dramatically increasing over the next few quarters. But I certainly think over the next couple of years, as we continually improve our processes as our site and patient data strategy implements and really comes to the fore, that we will be able to get that burn rate up or increase it further. But as I said, what goes against that is the oncology work that we're doing, the complexity of that work and to some extent, some of the strategic relationships we're in as well. Work does change and does tend to flow through a little bit slower than perhaps in a more biotech-type environment, although that probably the biotech environment counters that again a little bit. And that work tends to burn a bit faster. So there's lots of puts and calls in this area. We certainly see it. We certainly, our activities are there trying to stabilize it. Near-term, it may be a little bit under pressure, but I think in the longer term, we can move it upwards. That’s certainly our goal.

Great. Thank you, Steve.

Thank you very much. Ladies and gentlemen, just a reminder to ask one question for the time being due to the amount of questions remaining. The next one is from Tycho Peterson from JPMorgan. Please go ahead.

Thanks. Can you provide an update on the patient engagement program that you launched in May, how that's tracking?

The patient engagement program that we launched in May, Tycho, I'll be honest with you and say I'm not totally familiar with that or at least at my level. So I haven't got an update on it. I know we launched something and I know we are going out to patients. We are developing a patient portal, but -- and that's in place now or developing and being put in place. But I don't have a specific update on the progress we've made since May, I'm afraid.

I'll ask a different one then. On MMD, I know you have a couple of questions before, but can you talk a little bit about some of the new businesses that, that's opening up, in particular on the diagnostic front? I know you've flagged some codevelopment deals. And then, I know they had a collaboration with Sysmex. Is that still in place going forward?

Certainly, in terms of the collaboration, I mean, we are in conversation with a couple of very substantial pharma companies who are looking to do lab refreshes. They do these, of course, on a regular basis every three or four years and we tend to be in there. But we have -- I think we've advanced further in these discussions than we have in the past, because of the specific expertise that the MMD guys bring to the table in terms of the genotyping. The companion diagnostic testing is a big part of oncology drug development, so that's given us now the string to our bow in that front. So there's nothing signed, sealed and delivered in any of it this year, but we've advanced further and we are in fairly substantial discussion with as I say a couple of these companies and we feel pretty good about where we are on that front. So as I said, MMD has brought to us more than just P&L benefit although that's also an important part of it.

Okay. I'll live with that. Thanks.

Thank you very much. Our next question for today is from Dan Leonard from Deutsche Bank. Please go ahead.

Thank you. So could you comment on your exposure to the various pharma mega mergers? It does seem like the pace of activity on the M&A front in pharma has accelerated here in 2019?

Yeah. I'd say, overall, Daniel, we have limited exposure to it. There's one or two of those customers who are merging who we have obviously more work with than others. But I think as I've said before, even the ones that we do have some exposure to we find ultimately that they usually lead to more outsourcing, because there's a need to cut costs, reprioritize pipelines. And that tends to slow things down within the company and that can be the short-term consequence of these things, but ultimately, more dollars are outsourced. So while I know we all get a little jazzed about consolidation within the pharma industry, my experience and I think the evidence is from an outsourcing perspective that ultimately they lead to more opportunity. So I remain optimistic as I said to the ones that we are exposed to -- or the one that we are exposed to and it really is not something I lie awake at night worrying about too much. We're positioned pretty well with both companies and we believe will be a part of their ongoing outsourcing strategy as they get together.

Okay. Thank you.

Our next question for today is from the line of Dan Brennan from UBS. Please go ahead.

Great. Thanks for taking the questions, guys. I just have a question on all the news out of D.C. with all this drug price rhetoric, it seems to be getting louder and I'm just wondering you didn't flag it. But I'm just wondering, are you seeing any impact on decision-making today or would you expect if some of these changes actually get implemented that this could cause some impact on decision-making going forward? Thank you.

I think just taking the first part of the question, Dan. The answer is no. At the moment, we're not seeing any impact of the discussions. The drug price discussion well, they've been going on for years, haven't they, just perhaps at a greater intensity over the last six months to 12 months. But certainly, we haven't seen any direct impact on customers, on our discussions with customers in the last six months to 12 months. Could they impact? Anything that impacts our customers' level of profitability or revenues can potentially impact us. I think that's an obvious statement. But it isn't something that -- in some ways, I believe there's pockets of opportunity there, because if drug -- if the pricing their revenue line gets impacted, they'll need to be even more efficient with their spend and I think there is certainly a case to be made for outsourcing and efficient outsourcing has been an even larger part of their R&D spend. So while there's always potential challenges, I think there is potential opportunity there with some of the discussions they are having and if anything actually gets implemented. As we all know, there is a lot of talk and not a lot of action ultimately around drug pricing in the United States. And that's a situation that we are familiar with and I think will probably continue for a while. So again, it's out there. It's something that we're aware of, but there is no immediate impact and I think there is potentially further opportunity for us down the line.

Great. Thank you.

Okay. And I'll now hand the call back to Steve for closing remarks.

Okay. So, thank you, everyone, for listening in today. We're pleased that quarter two was another strong quarter for ICON, and we look forward to building on this progress throughout 2019, as we consolidate our position as the COO partner of choice in drug development. Thank you very much everyone.

Ladies and gentlemen, that does conclude our conference for today. Thank you all for your participation. You may now disconnect.