ICON Public Limited Company (ICLR) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for passing by. And welcome to the ICON plc Q3 2020 Earnings Conference Call. [Operator Instructions] I would like to note that this call is recorded today, Thursday the 22nd of October 2020. I would now like to hand over to your first speaker today, Mr. Jonathan Curtain. Please go ahead, sir.

Thank you, Tracey. Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter-end of September 30th, 2020. Also on the call today, we have our CEO Dr. Steve Cutler and our CFO Mr. Brendan Brennan. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today’s call. Certain statements in today’s call will be forward-looking statements. These statements are based on management’s current expectations and information currently available, including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company’s business, and listeners are cautioned that forward-looking statements are not guarantees of future performance. Forward-looking statements are only as of the date that they are made and we do not undertake any obligation to update publicly any forward-looking statements, either as a result of new information, future events or otherwise. More information about the risks and uncertainties relating to these forward-looking statements may be found in the SEC reports filed by the company. This presentation includes selected non-GAAP financial measures. For a presentation of 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. 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 the call over to our CFO, Mr. Brendan Brennan.

Thank you, Jonathan. In quarter three, we achieved gross business wins of $1.2 billion and recorded a $190 million worth of cancellations. Consequently, net awards in the quarter were a record $990 million, resulting in a net book-to-bill of 1.41x. With the addition of these new awards, our backlog grew to $9.4 billion. This represented a year-on-year increase of an 11.8%. Revenue in quarter three was $701.7 million. This represented a year-on-year increase of 1.2% or 1.9% on a constant currency basis. Sequentially, revenue increased by 13.1% from quarter two. Our top customer represented 12.4% of revenue for the quarter compared with an 11.4% in quarter three 2019. Our top five customers represented 38.4% of quarter three revenue compared to 36.2% of last year’s. Our top 10 represented 51.1% compared to 49.1% last year, while our top 25 represented 67.9% compared to the same number 67.9% last year. Gross margin for the quarter was 29.7% in quarter three compared to 28.1% last year and 29.7% in the comparable quarter last year. Our SG&A was a 11.8% of revenue in quarter three, which compared to 13.5% last quarter and 12% in the comparable period last year. Operating income for the quarter three was a $108.4 million, a margin of 15.4%. This compared to 12.1% last quarter and 15.5% in the comparable quarter last year. The net interest expense was $3 million for the quarter and the effective tax rate was 13% for the quarter. Net income attributable to the group for third quarter was $91.6 million, a margin of 13.1%, equating to diluted earnings per share of $1.72. This compares to earnings per share of $1.20 in quarter two and a $1.74 in the comparable quarter last year. Net accounts receivable were $500.1 million at 30th of September, 2020. This compares with a net accounts receivable balance of $490.2 million as recorded at June, 2020. On a comparative basis, day’s sales outstanding were 45 days at September 30th, 2020. This compares with 53 days at the end of June 2020 and 56 days at the end of September of 2019. Cash generation from operating activities in the quarter was $112 million. In September 30th, 2020, the company had a growth cash balance of $710 million and debt of $350 million, leaving a net cash balance of $360 million. This compared to a net cash of $204.4 million at June 30th, 2020 and net cash of $122 million at September 30th, 2019. Capital expenditure during the quarter was $7 million. During the quarter, ICON also competed the successful delayed draw down refinancing of the existing private placement of $350 million senior notes maturing on December 15th, 2020. This transaction have been successfully placed over three and five year tenures at a blended rate of 2.41% compared to the current private placement amended rates of 3.37%. The drawdown of funds will coincide with the maturity of the senior notes in December 2020. With all of that said, I’d now like to hand over the call to Steve.

Thank you, Brendan, and good morning to you all. Despite the continuing industry challenges brought on by COVID-19, overall this was an excellent quarter for ICON. Driven by positive market demand in conjunction with our ability to win COVID-19 related opportunities, we booked record levels of gross and net awards of $1.2 billion and $990 million representing book-to-bills of 1.68 and 1.41 respectively. In doing so, we were able to grow our backlog year-over-year by 12% to $9.4 billion. This gives us a firm foundation to build upon next quarter and into 2021. During the quarter, we delivered a revenue of $702 million a substantial improvement of 13% on last quarter. And earnings per share went over 72 up over 40% from $1.20 in quarter two. COVID continues to test our industry but we have responded well to these challenges and are pleased with our strong recovery. We remain confident with the sequential improvement same this quarter will continue as we return to more normal business conditions over the medium term. The progress made in our financial performance mirrors the recovery we are seeing in the clinical trial environment. The relevant sites continue to reopen, remains consistent at around about 1% to 2% per week with approximately 40% of trial sites remaining impacted to some degree. A clear improvement on the 60% impacted at the end of quarter two. In addition, during the quarter, size initiations remain strong with overall patient involvement above pre-COVID levels albeit with recruitment from our COVID trial materially impacting that performance. While understanding the risk of a second wave impact, we are expecting these metrics to continue to improve steadily so that it will be well into 2021 before we get back to pre-pandemic levels on our non-COVID trial work. The positive influence that our COVID trials continue to have on these recovery indicators is important especially in the short term. Sponsors continue to prioritize this urgent work and we continue to be successful winning substantial amounts of COVID business and in getting these projects up and running quickly. However, as development portfolios rebalance over the medium term and spending returns to more traditional therapeutic priorities, we are well placed to apply the lessons and opportunities from the pandemic and continue our progress in this area. Early this month, ICON was awarded “Best Clinical Research Organization” at the Vaccine Industry Excellence Awards. This reward is recognition of the continued hard work and dedication of the ICON Vaccines team that emphasizes our differentiated strength in this critically important therapeutic area. Since February, ICON has mobilized its vaccine resources to address the COVID-19 global threat and ICON’s company providing clinical monitoring and safety oversight on more than a 100 COVID-19 trials for both the private and government sectors. In addition, our ability to leverage our global site network Acella Care has been a key benefit for customers during the crucial stages of COVID trials. Acella Care’s dedicated trial support teams can achieve faster study start up for our customers through efficiencies gained in central process management including budgeting and contracting which can otherwise be a source of delay. Combined with Symphony Clinical Research, our patient centric global provider of at-home care and nursing, we are able to improve trial accessibility for patients thereby broadening ICONs access to patients and accelerating the trial process. This integrated approach is leading to increased engagement with investigators, improve quality, and better timeline compliance. The outbreak of COVID-19 had a substantial impact on the conduct of clinical trials. With many ongoing trials been disrupted and planned trials being delayed. As it went on COVID, it became important to look at alternative solutions in many areas in order to minimise the impact of the pandemic. The environment created by the COVID-19 pandemic has presented the industry with an opportunity to accelerate changes in the clinical monitoring process. The need for more agile and flexible approach to clinical monitoring and data review has emerged. And these demand will fundamentally change the way in which trials are monitored going forward. In particular, the pandemic has highlighted the over reliance on traditional onsite monitoring and provide the opportunity for sponsors and CROs to accelerate the adoption of remote monitoring and other technology based approaches using RIP, machine learning and artificial intelligence. I believe this will help us move towards a more efficient model overtime, it will allow more trials to be conducted and more innovated compounds to be brought to the market faster and more cost effectively. As Brendan discussed earlier, our cash collection remain robust in quarter three, confirming the strength of our customer base and hoping to maintain our balance sheet as the best in the industry. This leaves us well-placed to face any further pandemic challenges and particular positions as well to take advantage of future M&A opportunities that may present over the near and medium terms. Going forward, as we look to the end of this year, we are increasing our 2020 revenue guidance from range of $2.65 billion to $2.75 billion to a range of $2.75 billion to $2.81 billion. And not only our earnings guidance, from a range of $6 to $6.50 to a range of $6.35 to $6.50. At this stage, we are planning to give guidance on full-year 2021 at our quarter four earnings call in February. Finally, I would like to thank all our employees for their resilience, flexibility and understanding over the past eight months. At the high of all we achieve at ICON are our hardworking and dedicated employees. Our focus during this pandemic remains on protecting their safety and wellbeing as well as continuing to deliver the important work we undertake on behalf of our customers. Thank you, everyone. And we’re now ready for questions.

Thank you. [Operator Instructions] Your first question today comes from the line of David Windley from Jefferies.

Hi, good morning. Thanks for taking my question. Good afternoon, for you guys. Steve, you mentioned in your prepared remarks you kind of got to recovery of the system in the medium term and kind of the cycling of COVID work into non-COVID work. I guess, on the outside we see these dates that companies are expecting to report or update. But I don’t know that we fully understand the CROs involvement and kind of the duration of your trial as it relates to those public, there’s public dates. Can you give us a better sense of how your current book of work dates out over the next year or so and when do you think that weaning of COVID work is going to happen that then the non-COVID needs to ramp-up?

Yes. That’s a question we talk about internally, Dave, on a regular basis. And it’s I think it’s a little hard to be too definitive on that at the moment. I think there are a number of scenarios that give a pan out what could possibly pan out. One is the COVID trial there ongoing find a vaccine that is or treatment and both presumably, that is exceptionally effective and the work winds or decreases in the more near-term I suppose. And the other is and I think this is much more likely that the trials that are ongoing at the moment, we’ll find a vaccine, it will be partially effective but the authorities will be looking for more than one. And there’ll be a continued need and a continued desire to get a more effective vaccine. So, the work I believe from a COVID perspective is going to continue probably for the next couple of years. I think that’s the most likely scenario. And that’s the way we’re thinking of it at the moment. And so, as we think about the COVID work continuing as I say for the next couple of years, I think there’s going to be a lot of a number of vaccine trials lots go vaccine trials that we’ll need to be a part of and then we’re certainly playing our part in that at the moment. On the non-COVID work as you indicated, yes we are as I had indicated in my comments, where we’re certainly lower in terms of patient recruitment than we were pre-pandemic. And we do see that increasing and improving but I think it’ll largely some of that the way that comes back will depend upon how the scenario with the COVID stuff pans out. Because the COVID work used having an impact on a number of sites and on the availability we’ve investigated et cetera. And of course as we see potential reemergence of the virus in the Northern hemisphere in the fall, that has an impact as well. So, I hate it but to point out similarly different scenarios. But I think from our business point-of-view, the medium term is looking strong and looking good whether it’d be COVID work and I think that will continue or and non-COVID work to the coming back to more pre-pandemic levels. I think in either scenario it looks reasonably strong, reasonably good for us.

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

Yes. We certainly have seen some slowing in the reopening, as sort of the symbolic curve, we see as it approaches the top, it is certainly slowing. And so, we don’t see us getting back to all thoughts full opened even with the current progress we’re making until as to say well into 2021. That’s still our expectation. And the reason for that I think is there’s a number of reasons for that. I think as you note these players would have happened, the reemergence of the virus people are concerned about that. I think we’re seeing some patients still concerned about travelling to sites. I think there’s also an element of a number of these sites are involved in these largescale COVID trials that’s taken some of their capacity away. So, there’s an element there. So, I’ll like to see it’s multifactorial but we’re certainly seeing a slowing compared to where we were even a couple of months ago but it’s not zero. And we are moving us forward and we do expect that certainly within the next 12 months or so, that’s outside by first half of next year we’ll be assuming continued progress and consuming no major outbreak again, we do expect to that thoughts we’ll be back to pre-pandemic levels.

I appreciate the answers. Thank you.

Good.

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

Great, thanks. Maybe just on the COVID bookings, I know you guys called it out above 20% last quarter. Can you just talk about how that trend is in 3Q again? So, we feel like you have pretty good presence on that side given the vaccine but just wondering in terms of percentage where the COVID bookings are.

Yes, Patrick. It was slow. Only –- I’m not going to be, we’re not going to get into sort of specific percentages but it would certainly was a –- it was where we were in Q2 and probably a little bit further ahead of that. So, we had a good quarter from COVID from a new bookings point-of-view. And that’s you know that will trend like into an increasing proportion of that revenues as we go into Q4. It wasn’t a huge proportion of our revenue in Q3 but it will be more in Q4. And so, it was a good substantial part of our new business wins. And at least a par and ahead of where we were at Q2.

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

Hey Patrick, it's Brendan here. I must get and take a crack of those. In terms of the cost normalization here, I think we're broadening for as we finished out Q3. Certainly we were most of the cost structure fees' were had moderated back to normal. Thanks to the fact of course more of our work is being done remotely now. So, probably just the effect required in the way they would have been over the past. And that will persist into Q4 most of the cost control allowance have been dealt with now. And any fees' that we have done where we want to and that’s also many people hold or anything on those kind of issues from the COVID perspective. I'll say with -- so, it shouldn’t have a margin impact as we progress into quarter four, those specific pieces. We've kind of taken care of that. I think that the piece, the second piece on your question around margin profiles. I think what we do see on vaccine trials is obviously I have your elements on past through calls as the cost I see of the total and cost of other trial. And therefore, we would expect yes on the fixed or fixed revenue basis, that there will be more proportional revenue on which we and this is the margin and that would have a detrimental impact to gross margin. And so, it's going to be one of the I suppose the challenges with these to these over the next couple of quarters because obviously the proportion of that part of revenue will be larger. And we'll have that an impact. With that said, I think our earnings as we've outlined very much, so most part our thinking is and in fourth quarter four in terms of that EPS growth. We still see a decent trajectory on EPS growth.

That's really helpful, thanks Brendan.

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

Hi guys, thanks for the question. I have a question on today's that make up of on facts you were. And in, is there a difference in terms of cancellations or how that kind of flows through. And just one question on kind of think of through the cancellation rates for next quarter and then sort of broadly speaking for '21?

Yes. I don’t think we've seen any sort of particular unique issue to trend around cancellations we in fact seeing were. I think what we do see is that its, yes it's a large number of patients in a relatively short period of time and so projecting the revenues the resourcing et cetera, yes has it's challenges. Now, that’s what we do, that's our cool competence. And so, it's something that we obviously take very seriously and we believe we're good at it. But it does certainly have more challenges in terms of how quickly that will burns and the rate at which we do the work and the time period of which we do the work has some pretty material impact on our business. So, that would be I think the sort of the more unique picture of these sort of large vaccine trials and any sort of issue around cancellations or anything like that. We don’t see any differences on that front.

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

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

That's very helpful, thank you.

Okay.

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

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

Yes Bob, we certainly have obviously seen our share of vaccine work and pass through it's certainly a large relevance of the moment we've seen in the past. I don’t think that maybe those numbers spoken about where our but we've certainly been in our experience something in the range of two to five times is probably more in-line with our in our experience. And all these this quantum of pass through. That said, although it hasn’t really had an impact the aspect of quarter. It didn’t really have an impact like year-to-date in terms of the mix shift in our revenue. And I think that's probably visible in our margin profile as well when compared to last year. So, we do see that this is more of an issue for Q4 as certainly as Steve outlined into 2021 where we might see more of that pass through coming through with a lower margin profile. And that will have a knock on gross margin consequence. But as I said and as kind of early days and these the nature of these trials are very fast. And so, it will be and a little difficult to forecast. So, we'll be doing our best job at really putting our thinking how far between now and as Steve outlined the Q4 call in terms of making sure that we need to view a guidance to you that makes sense at the hold.

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

Yes, it's Steve, Robert. Let me comment to give you some sort of flavor for 2021. We see some positive momentum going into 2021; no question about that. Our book-to-bills have been solid over the last couple of quarters. Even despite the pandemic. We've been able to win business and that's an area that really hasn’t seem to have add and more the pandemic hasn’t seem to add in a major impact on. The biotech funding environment, we continue to see very strong funding there. Our RFP environment has been strong, higher single digit improvement year-over-year certainly in the biotech space but even in large frame as well we're seeing some more continued development and continued growth in the opportunities we're seeing there. So, the business environment as overall been pretty positive and we see that will play into a strong performance for us in 2021. The COVID opportunities as I've said earlier in the call, I think are going to continue. I think we're going to see more work. I don’t think it's just going to drop off the cliff as we sort of get through these first tranche of trials. I think there'll be more work to be done there, so that I think all gives well for us in terms of the opportunity and the differentiation we can provide in terms of our vaccine experience. So, it's looking strong and looking positive. But we're not ready and that that rolls ahead with and potential head wins as you all know. I mean, the virus is reemerging as we get into the fall. There are challenges and potentially slowdown of the site reopening has been referred to. And we're not ready to issue guidance, so any real sort of sense of guidance at this point in time. I think it's we need all the time that we all have in the next three to four months to assess what opportunities are coming through, what success is moved through in terms of vaccines that are coming to market as we see potential vaccine. That's going to be positive I think for everyone including our sites in a clinical trial environment. But we're not quite ready to go out and give definitive guidance in the market. And not only we have pushed back earlier months but we have pushed back what we usually do for the year, from January to February. Because we think we'll need all that time to make the assessment and to see how these trials are going to play through. So, we may owe an apology for that, that's the way it's going to be. I think it's interesting there, some of our competitors have done differently. But that's the choice.

That's fair, thank you.

Okay.

Thank you. Your next question comes from the line of George Hill from Deutsche Bank.

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

Yes. I'm not talking to definitively give you that split. George, we're doing both. The vaccine obviously the vaccine trials are much larger in terms of patients, in terms of contract size revenue burn rate even is higher. And so, there are a number of different characteristics around these larger trials. And they probably have more of an impact on our full path then on our quarterly numbers than the treatment trials. We tend to be smaller, we're 100s of patients rather than 10s of 1000s of patients. Even now the vaccine trials it -- patients, will call in patients is probably a little bit of a stretch because essentially they're healthy volunteers. But they there are a large number of them. And the data work that goes with that is very substantial. So, from that point-of-view, the vaccine trials are more material to us in terms of finances, well certainly in terms of operationally because they're both important. We're doing -- I don’t -- we have -- I don’t have the data right at hand. In terms of numbers of trials, I think it's fairly evenly split at the moment. But in terms of contract values and revenues, the vaccine trials are substantially large and substantially more materially to us at this point.

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

A sure answer that is "No" George. We're not, it's we see our cancellation rate this quarter was pretty much in line with what has normally been sort of the third -- no, we're not seeing any differences on the cancellations of out of these trials.

Okay, thank you.

Thank you. Your next question comes from the line of John Kreger.

Hi good morning, this is Jon Kaufman on for Kreger. Thank you for the time. Just thinking about the outlook for virtual trials, what are the factors that have historically prevent its sponsors from moving a larger percentage of their trials to a more virtual model. Are the regulators on board with the shift to a more virtual trials or is that still to become. And understanding that large pharma has been piloting virtual trial source for a couple of years now. Is you experience I guess how is your experience during the pandemic led you to believe that they are more willing now to actually conduct more of early phase trials in a virtual manner. Thank you.

Yes, that's a big question, Jon. I could probably take a day or two to answer that one but I'll try to do in a couple of minutes. I think the short answer is what you know the fact is sort of moving against virtual trials. And they do relate to this an element of conservatism within our industry. I think that's certainly is the case. I think the regulators certainly up till now have not necessarily been 100% on board with how we do. And the all question we get is when we propose a more decentralized or virtual trial as well which trial or which drug did you get the market on the basis of a virtual trial and the answer is well that hasn’t happened yet. And so, we'll revert and that's completely understandable from our sponsor point-of-view. As far as I'm concerned, we have we are highly regulated industry and then lead to validate data and verify data and make sure patients receive in a very safe and efficient manner. Is that it's always going to be there. Having said that, I think we've certainly seen during the pandemic, the regulators move very quickly in understanding the challenges that the industries faced and be accommodating with those challenges. And that needs to play through obviously into submissions over the next realistically couple of years to make sure that happens. Because that there's always an element of the some of the people at the top who are writing the white papers say one thing and then the auditors who are actually at the call phase do something different. So, there is an element of validating that that approach. But certainly the overt guidance and output from the regulators has been very accommodating and much more positive with respect to how the industry is pivoted to be more remote orientated. And I think that will continue and we certainly see some positives on that front. In terms of going forward, we've seen its all essentially seismic shift in the way trials are being monitored over the last six to eight months as I look at our own business here. Pre-pandemic about 5% of visits or monitoring visits were off sign and that alludes sort of virtual. During the height of the pandemic, that flipped very quickly to about 60% of visits being outside of virtual. And that was probably a little bit of an overstatement because I think a lot of these will probably telephone visits and those sorts of things. But as we come through and that started to recover, that’s gone down but it's still about 30%. Well, that includes the business we're doing at the moment are remote and the technology associated with those visits has really come to the floor very effectively. So, we're able to in many in almost all cases will now evaluate either 20 medical records remotely and the systems are now in place at many sites to be able to do that. And it makes it a much more efficient process. The move is happening, I don’t think we're ever going back to where we were pre-pandemic. And really the remote monitoring is just a buyer mark if you like for a move much more towards a virtual trial decentralized trials. And now, we've seen unprecedented demand for our Symphony home care services that it's really been a fantastic from our point-of-view. But we're extremely busy in having and those is go to patients homes to ensure that they stay in trials and they get the right treatment and they get the right attention. And that is also playing into our decentralized clinical trial offering as well. So, I think the short answer to your question is it's been a challenge up to now but the pandemic as there's always silver linings with these things. And I think one of them is that is a significant move towards a much more -- clinical trial environment which is going to help all of us be more effective and faster.

Thank you, much appreciate it.

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

Well, thanks. You mentioned several improving fundamental metrics here. I just I want to clarify, you highlighted high single digit RFP for I believe in a previous question. And is that excluding COVID related work, I assume this is much of that is gaining momentum here. And then, I do have a second question. Is if you could see to the trends across your Central Lab business and in this sort of environment, that'd be great. Thanks.

In terms our full year does include COVID work, the high single digit sort of number. And then these numbers bounce around a bit but yes in that that certainly we're including everything in that number. I think I mentioned the biotech small midsized pharma as we've seen increased, some of that being funded by government. As you all know, the government extremely interested in these trials and some of that funding that we've sort of allocated to small or mid-sized in terms of our patents really come from the government. Everyone understands what the clinical trial is, now even my mother understands what I do now for the first time in about 40 years. So that's they are weighing as I suppose of clinical trials in societies. I have never seen anything like it really. Everyone understands, everyone knows what's happening. Everyone reading on the front pages of New York Times. So, that's certainly playing into that. I hope that helps. And I think you understand.

Right, yes. And my second questions just on Central Lab. And if you could see between trends --.

And Brendan, do you want to make sure like attend to the site now on the Central Lab servings, yes.

Yes. Now that's been trending well, they've been doing really well. We're very happy with their performance. Obviously that has been they have been writing on the contents of COVID work. And we've seen that and that's been a big kind of a story there but certainly our Central Labs are doing very well. And as I've heard, indeed the others labs as well have run a clinical and then advances well. So, it has been a strong performance for them during the course of the year. And I think it's fair to say very much helped by the if you like the tailwind of the COVID works that they've certainly helping front. So yes, good news for them and hopefully looking into a very well world in 2021.

Is that going double digits, you would say?

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

Okay great, thank you.

Thank you. Your next question comes from the line of Dan Leonard from Wells Fargo.

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

You mean capacity at the site level?

Yes, exactly. Patient to patient sites, et cetera.

Yes. I'd be -- I don’t think we have any immediate concerns around the capacity to execute from an investigator insight point-of-view. That may mean of course that we need to bring on new investigators and train up sites and that again brings to the fore our Acella Care network and our at-home care network that we have sort of more or less dedicated or more dedicated to the clinical trials. And so, if we do see some constraints there, we have networked in our line of sight that we are ready to go to. But I think it would be a straight to make it say that we won't be able to actual industry work we have to execute on COVID and on COVID work because of capacity constraint. Certainly the investigator the sites have been incredibly accommodating in taking on this COVID work at very short notice and that I think as I've commented on previous calls that this speed of which we'd been able to get these sites up and then these trials moving is unprecedented. I'd certainly say nothing like it in my 31 years of doing this. So, there is an interest out there from sites and from investigators particularly on the COVID work obviously. But also I think we'll see the non-COVID work come back as well over the more near-to-medium term. And I guess I think I recognized again I think the way in as of clinical trial is now from the public's point-of-view and from investigator sides but we'd also get to move it into right direction. So, I don’t have a suitable significant concern in the in terms of capacity to undertake this trial.

Okay, that's fair. And then from my follow-up, can you comment on the performance of your real world offerings and you've talked a bit about the impact of the pandemic accelerating interest in virtual trials remote monitoring. But does it impact the interest in real world offerings at all, do you see a different appetite for maybe synthetic control arms would. Fewer people are enrolling in traditional trials or is that a stretch, is it not really that relevant?

I think there is some theoretical opportunity there. We certainly talk a lot about that when we had conversations with customers around the real world impact and how we can implement the synthetic control arms. And that I would be, I would not be telling you the truth if I said we had a whole bunch of trials going on with synthetic control arms. That's just not the case. They remain more on the edge I suppose innovative edge of new trial design adaptive new trial design. The regulators are getting on board with those and then certainly a planning on the appropriate use of things like synthetic controls and real world data to get drugs to market. We certainly see it's a trend going forward, would like that the decentralized virtual trials on the real world data. There's no question I think as we go forward we'll do more of those trials. They will be used as a basis for approval of new compounds going forward. I think the pandemic of anything has shown us there are different ways to get drugs to market early, emergency use with authorization and follow-up data, with et cetera. So, we do believe there is a significant opportunity here going forward. But it's not going to happen tomorrow, we'll be lot to decentralized trials. There will be a period of time that this will ramp-up and there'll need to be some British companies who move forward with these and both their registrations on real world data and in other areas. And that's what I think will we'll see so to start to tick-tick the scale, we'll move forward. So, I think it's a process and it's a journey rather than anything it's going to happen immediately.

Okay, I appreciate the start. Thank you.

Thank you. Your next question comes from the line of Eric Coldwell from Baird.

Thanks, very much. I've got a few here. First off, just a quick one. Can you tell us who the JV partner is on onsite care?

Yes, actually and one of the with the JV partner there is it actualized the founder of an the European site based business that we just acquired in MeDiNova which has been a great success in addition to our overall organization. So, the former CEO has stepped into the role of leading that joint venture and we're very happy to have him as part of our structure and he's obviously done a great job at building these kind of networks in the past. So, he's bringing that and optionally want us to building up that area like global and oncology network. So, very happy with that.

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

I think it's been a it's a year and half of success of our nice overall story and I think we've been working on this one from the last year to improve it. And from where we were this time last year really, the guys on the team has done an excellent job. And really improving communication between the project management teams and the finance organizations make sure that we're building appropriately and in a timely manner. And obviously you know hopefully then to get cash in as I would something about there. And so, I think it's been just a lot of good go in fact hard work and team work. I think there has been a little bit of it, yes, a little bit of a tailwind and that is about on strictly on the past two elements on some of these vaccine trials but not nearly or significantly as I would say just the old section had a couple or had a triple I should say on that fee. So, that there was credit there be -- to be given there. I think it's really from a large amount of teams and the finance goes to, has done the hard work.

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

Yes, I think it does make sense, Eric. I can opine a little bit on that but I don’t I wouldn’t say I have any definitive data on which of the 40% and what contribution they make to with in terms of patients into trials. I can say that we are from pre-pandemic with treatment levels in a non-COVID work, we're still at around about 50% or the full year 50% of pre-pandemic levels though it's still materially impacted. So, from that this 40% of the thoughts and you would say that they are pretty important, fairly significant component of that recruitment supply I suppose on a weekly basis. As I think I referenced in my comments to close to COVID work has really supplemented when to at the point where we in fact we're well above normal recruitment levels. Certainly in the last couple of months we've been way above recruitment levels. But it's really been because of the COVID work. And the sites are contributing to that, that's being obviously handpicked and selected to do that. So, it's hard to be too definitive about the 40% who are still impacted. They are impacted to a greater more or less of extent. Some of them is probably it's less than 5% now, it's too closed. But the vast majority of those impacted are impacted to some ways they perform. So, they're not taking on new trials, they have limited to just doing the trials they're doing. Patient visits are happening now much more than they were say back in the half or the heat of them the pandemic. But there's still some impact. That as I said it's going to take I think at least another six or eight months for those sites to come back to a point where they're truly contributing. That is why we've gone forward with our Onco care, JV and the Acella Care network. Because we're seeing less impact in those sites and a disproportionate contribution from those networks because we're able to help them to get back to normal or help them to address the challenges of the pandemic and of the trials that they are recruiting.

Thanks, very much.

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

Thank you. Good morning, good afternoon. And on COVID, so I was looking at the revenue contribution from your largest client. I thought that it might be bigger this quarter just given the pacing of vaccine trial enrolment you can see in the headlines. Is there any color you can provide on the shape of how that teamwork is burning and how that will trend into the fourth quarter and 2021?

Hey Jack, I'm going to take some of those, its Brendan here. And obviously that's been an area of activity where we have been ramping up part as your race in terms of the speed of patient recruitment they are significant. And I think there is and I think we've referenced that earlier in the call about while you know there will be a proportion of that side that will be done certainly before the end of this year. The follow-up largely will go on for quite some time there afterwards. So, this would be and there's nowhere to think with any possible filing that would go into the FDA that that was just at the end of our involvement in the trial process. So, certainly that will lead us over a longer period than that point-in-time and there will obviously be an additional tunnel for us. So, we're happy with the pace of the new recognition that's been on that trials specifically in the third quarter. Certainly, I think it will certainly be a chunk of the work that we do what else dealt in the fourth quarter as we work towards the backend of the year and as you referenced those important milestones for that customer. And I think that's true of all of these trials and I think that's worth bearing in mind that even though there is the patient recruitment phase, that the early parts of the trial and today is that the trial is quite short in terms of dose it's raising. There is consistent follow-up or that will happen over time and I think Steve's points around these trials being with us and part of the landscape throughout 2021 and very fine as in the context.

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

Yes, Jack. I think I'll try to take a quick one again. And we have seen a lot of activities tick in maybe I'm going to say in the Americas on that side of it. We're doing a decent job I would say on making sure our folks are being abroad and we're continuing to recruit. And as we go through into the fourth quarter, so it's certainly building out the headcount. We'll be passing the profile of the organization as we go through the fourth quarter. I think we've made the point that we're managing the cost base pretty well and we saw that particularly in margin in the third quarter. I think the larger piece in terms of moving margin profiles in the fourth quarter is probably the proportion of revenue that we see that will be cost related in Q4. So, I think that's a bigger piece but I think there will be certainly an element of continued headcount growth. And particularly in North America where a lot of these trial activities actually will be happening. So, that will be certainly something we do up there.

Thank you, Brendan.

Thank you. Next question comes from the line of Sandy Draper, SunTrust.

Thanks so much and good morning, good afternoon. Maybe just a lot of questions you're obviously been asked. Maybe a quick one, Brendan. I dint hear you give the constant currency for organic growth number?

Well sort of Sandy, because I haven’t yet, I was wondering if someone's been asked. It's so when we said at year-over-year it was 1.2% and the constant currency is 1.9% is a down obviously given the context of the current quarter versus the time last year. And cost to dollar organic spend is about 3% down year-over-year.

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

Yes, it's Steve here and that's been, yes. I would say there's certainly opportunity as we talk about you know I talked about the switch towards more remote monitoring and using technology to improve and to make our monitoring more efficient and data review more efficient. We've been able to progress our robotic process automation. In fact, we do taking at the quarter year like on each quarter, friendly enough. And that we know this quarter was with the team on their RPA, robotic who've been able to make significant progress around the data management and the locking of pages there. So, that's an example in a specific data management area but that I think approach and similar approaches can be applied to our clinical operations group. And I do think in the longer term, there will be opportunities to improve at our gross margin. Having said that, there inevitably be headwinds as well. So, I think you are thinking around 29% to 30% is probably the right way to go. There'll be some opportunities to push that ahead. There'll be some headwinds that'll make that more challenging. And so, I think that's probably I would not want to commit to a significantly higher gross margin and even in the longer term. At this point I think this is a very competitive industry and we'll find that costs and as I say headwinds will mitigate the inevitable. And or the obvious opportunities that we have through doing more remote monitoring, doing more technology based trial management and data management. So, is it's in effect pros and cons headwinds tailwinds but I think of it is 29% 30% being a reasonable continued target to maintain.

Great, I appreciate the comments, Steve.

Thanks, Sandy.

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

Great, thanks. Thanks for taking the question, guys. So, Steve I got this question on kind of when we get back to normal. Is it consistent with what you were saying last quarter, I noted a few questions that are really on but I believe last quarter you were thinking maybe early next year I'm not trying to put urging now but now it sounds like back half that kind as on Dave's question I think about the pace in moment. Just wondering did has it changed since Q2 or is consistent?

Dan, I would have to say that it's really it's consistent but if anything is probably pushed back a little bit. I think we see back to Dave's question, there is a pace of reopening that the thoughts had slowed. And so, we're thinking I'm thinking probably more into Q2 than I have into Q1. So, that hasn’t, it hasn’t changed dramatically. I never thought we'd be back everything this year. I think that was consistent with that from the start, but we do see continued progress but I think it probably is pushing back a little bit. Now as I said the reasons for that I think are multi-factorial. Part of it is because the COVID work it's been that's ongoing. So there are it's not all negative there is some silver linings here out of this pandemic. And these COVID trials are certainly silver linings for us both on a treatment trial basis and on the vaccine basis. But in terms of the non-COVID what I will say traditional portfolio that's still got some way to go to recover and so I am thinking middle of next year is probably more the timeframe now that I thought perhaps six months.

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

I will try to give you a slight, it's a little qualitative. We don't have any specific data on that end. I would say it's -- but I will say it's all the above. There is still an element of patients not wanting to go to institutions, not wanting to go hospitals with potentially the risk of any sort of infection but alone COVID is higher. I think that is component of it in terms of recruitment rates we have certainly seen that. I think there is an element of sites not wanting to take on new trials because they are busy with COVID clinical work or they are doing clinical trials, normal clinical trials. So there is I think, it's multifactorial. And I think you are going to find that site impacted is -- then we have seen as site initiation visits come to normal at pre-sites so our studies so to start up is coming up in terms of the number of sites we are engaging in new trials going forward. But there is no question, there is still an impact of the current sites or the current portfolio within the current portfolio still impacted and I think it's for a multitude of reasons. There are opportunities as I said we talked about our (indiscernible) network where we have seen less impact on our care and we will be, that's the process that's going to take a year or two to really sort of develop. So, we are not ready to declare victory on that one yet but I think there are things we can do. There are some opportunities I think to bring on new investigators and try on new investigations. That has its own challenges of course. That's not [indiscernible] so there is investment that I think to be made there to address some of these issues but these impact on site is, every site is to some extend unique and they all have different focus, and different reasons and but I will try to give a flavor for some of those.

Great, that's perfect. Thank you, Steve.

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

Hi, thank you. I was juggling calls so I apologize if this was asked before but COVID related bookings for you have made up a decent proportion. Some of the feedbacks that we have gotten is that COVID bookings might be prone to a higher cancellations risk specially after some of the (indiscernible) COVID vaccine trials that's no announced in phase 3 data in the fourth quarter or later. Do you agree with this notion and have you discounted your COVID bookings enough to account for this possible dynamic?

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

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

Hey Juan, Brendan here. Yes, I think we came into this year saying this could be in the range of 12% to 13%. As is always the case in every quarter our tax rate is dependent upon where we make our revenue and our operating income and I think that's just that the geographical shift of that is a little heavier towards North America in the last quarter. I think that will be the case in Q3 or Q4 as well. So, I think 13 is around right for this quarter and certainly for next quarter. I think obviously we'll give you more guidance in Colorado the long-term tax impact when we get out into our guidance for next year which we're going to do on the Q4 call but 12% to 13% is kind of exactly where we said it would be this year and it looks like we'll be probably banging in the middle of that range 12.5% for the full year. So, I think it's too early to say if there is but if there is another kind of a longer term tax implication outlook and certainly we've been solid on that 12% for a number of years now.

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

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

Got it, thank you. I'll leave it there.

Thanks, Juan.

Thank you. And your final question today comes in the line of Tycho Peterson with JPMorgan.

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

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

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

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

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

I think we qualified our comments earlier on to say that we obviously were growing well in terms of business wins in the central lab and we're starting to see that pick up I don't think we were quite a double-digit growth in the central labs in the current quarter. But we do expect good growth from them in quarters four and one and two and I think a good proportion of that growth certainly so probably in line with maybe about a quarter of that growth is coming from those kind of that covered kind of all the support that we're seeing.

Okay, thank you.

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

Okay. Thank you, operator. So thank you everyone for listening in today. As the impact of the COVID-19 pandemic continue to evolve Icon is focused on executing our strategy as we look to grow our business further and enhance our position as the CRO partner of choice. I want to take this opportunity again to recognize our entire workforce and to thank them for their tireless efforts and ongoing resilience during what's been a very challenging period. Thank you everyone.

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