ICON Public Limited Company (ICLR) Q2 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to ICON PLC Quarter Two Results Call. At this time, all participants are in a listen-only mode. [Operator Instructions] I'd now like to hand the conference over to your speaker today, Jonathan Curtain. Please go ahead.

Thank you very much. Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended June 30, 2021. Also on the call today, we have our CEO, Dr. Steve Cutler; and our CFO, Mr. Brendan Brennan. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call. Certain statements in today's call will be forward-looking statements. These statements are based on management's current expectations and information currently available, including current economic and industry conditions, actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, and listeners are cautioned that forward-looking statements are not guarantees of future performance. Forward-looking statements are only as of the date they are made. 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 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 and the 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 this call today to one hour we therefore ask participants to keep their questions to one each with an opportunity to ask one related follow-up question. I would now like to hand over the call to our CFO, Mr. Brendan Brennan.

Thank you, Jonathan. In quarter two ICON achieved growth business wins of $1,316 million and recorded the $210 million worth of cancellations. Consequently, net awards in the quarter were a record $1.1 billion, resulting in a net book-to-bill of 1.27 times and a trailing 12-month net book-to-bill of 1.34 times. With the addition of these new awards, our backlog grew to a record $10.2 billion. This represents a year-on-year increase of 12.7%. Revenue in quarter two was $871.2 million. This represents a year-on-year increase of 40.5% or 37.5% on a constant currency basis and CDO basis. Our top customer represented 12.7% of revenue for the quarter compared with 12.1% in quarter two 2020. Our top five customers represented 40.9%. Our quarter two revenue in line with last year. Our top 10 represented 54.2% compared to 54.9% last year, while our top 25 represented 72.4% compared to 71.3% last year. Of note on a combined company basis, our largest customer in quarter two would have been 7.3% of revenue. Gross margin for the quarter was 27.6% compared to 27% last quarter, and 28.1% in the comparable quarter last year. And our adjusted SG&A was 10.3% of revenue in quarter two, which compared to 10% last quarter and 13.5% in the comparable period last year. Adjusted operating income in the quarter -- in quarter two was $142.9 million, a margin of 15.3%. This compared to 15% last quarter and 12.1% in comparable quarter last year. The adjusted net interest expense was $2.2 million for the quarter. And the adjusted effective tax rate was 13% for the quarter. Adjusted net income attributable to the Group for the quarter was $113.2 million, a margin of 13% equating to the diluted per share of $2.12. This compares to the earnings per share of $2.06 in quarter one 2021 and $1.20 in the comparable quarter last year. During the company -- during the quarter, the company recorded $42.1 million of transaction and integration related costs. U.S. GAAP income from operations amounted to $112.9 million or 13% of revenue. U.S. GAAP net income attributable to the Group was $73.9 million or $1.38 per diluted share compared to $0.90 per share for the equivalent prior year period. Included in the press release and the earnings slides, you will note that we included adjusted earnings per share of $4.46 for the first of the year. This excludes stock compensation expense, amortization, and transactional related costs and their respective tax benefits. As a consequence, we estimated the adjusted effective tax rate for H1 2021 was 15.2%. In addition, with respect to our guidance, we expect the fully diluted share count to be approximately 83.7 million shares for the second half of 2021. Net accounts receivable was $417.4 million at 30th of June, 2021. This compares with a net accounts receivable balance of $465.6 million at 31 March, 2021. On a comparative basis, days sales outstanding were 35 days at June 30th, 2021 as compared with 39 days at the end of March, 2021 and 53 days at the end of June, 2020. Cash generation from operating activities in the quarter was $128.4 million. At June 30th, 2021, the company had a gross cash balance of $1,057 million and cash [ph] of $350 million leaving a net cash balance of $707 million. This is compared to net cash of $595 million at March 31st, 2021 and net cash of $244 million at June 30th, 2020. Capital expenditure during the quarter was $12.9 million. As you know, the PRA acquisition was funded through a combination of cash equity and debt. Over the course of May and June, we engaged with Capital Markets to secure long-term financing, resulting in a number of outcomes worth sharing. The first relates to our credit rating status, where we achieved a double B plus and Ba1 ratings from S&P and Moody's, respectively. This represents only at one notch decrease from both agencies relative to our previous investment grade position, and we remain one of the highest rated CROs in the industry. Secondly, we had a very positive process raising the $6 billion of debt required to finance the transaction. This was broke into two instruments, $5.5 billion of floating term loan B notes over a seven-year tenor and $0.5 billion fixed high yield bond over a five-year tenor. Our term loan B offering was oversubscribed in excess of two and a half times, having us to secure an all-in rate of 3%. Demand was also very high for our high yield bond, with subscriptions of over $3 billion, helping us to secure a rate of just 2.875%. This all means we will have a current blended interest rate of just below 3%. The finance structure will allow us to maximize repayment of [ph] debt to do that more quickly. We completed the transaction with a debt to adjusted EBITDA and inclusive of synergies ratio of approximately 4.2 turns, what our global -- sorry -- with our goal to reach 2.5 times adjusted EBITDA by the end of 2023. In addition to this long-term debt, we increased our revolving credit facility from $150 million to $300 million. This facility is currently undrawn. Before I hand over to Steve, I'd like to make you aware of a change in our Investor Relations department. Jonathan Curtain, who has led this function for over four years, will transition out of the IR role to lead our commercial finance team alongside his existing responsibilities as Head of our Corporate Finance Group. I'm pleased to announce that Kate Haven, who was moving across from our corporate development team, will succeed Jonathan as Vice President of Investor Relations. Jonathan will be working closely with Kate to ensure smooth transition. And I wish them both the very best of luck in their new roles. And so with all of that said, I'd like to hand the call over to Steve.

Thank you, Brendan and good day, everyone. On July, the 1st, we were delighted to close ICON's acquisition of PRA. This transaction brings together two high quality, innovative, growing organizations with similar culture and values to become the world's leading healthcare intelligence and clinical CRO. With the addition of PRA, the new ICON will create a novel paradigm for bringing clinical research to patients, offering expanded capabilities and solutions to customers, while delivering significant value to shareholders. The environment created by the COVID-19 pandemic has presented the industry with an opportunity to accelerate changes in the clinical monitoring process. The need for a more flexible and efficient approach to clinical monitoring and data review has emerged, and this demand will fundamentally change the way in which trials are conducted going forward. A key milestone for ICON was the manner in which we help deliver the first COVID vaccine to the market in record time, applying this agile and flexible framework to our clinical monitoring model. Our ability to execute these large scale projects has resulted in a very healthy level of business wins in this area. And during the first half of this year, both ICON and PRA both saw the influence of these vaccine trials on our revenue, with a higher proportion of pass-throughs relative to non-COVID work. As we progress through the remainder of the year, we expect our pass-through mix to begin to return to a more normalized level. In parallel, we have seen an increased shift from traditional to hybrid models, and we are excited about future opportunities in a decentralized trial space. The industry is poised for transformational change. We are now in a position of significant strength, with the combined market-leading skillsets and resources of both PRA and ICON. Moving forward, the new ICON will provide our customers with the integrated solutions required to execute on these novel delivery models, while making it easier for patients to be part of clinical development. Successful decentralized trials require mobile site and patient-centric technology to support telemedicine, site resources to ease the investigator and patient burden, in-home services to patients, central labs to process and manage testing, and also direct-to-patient capabilities to enable drug distribution and management. I believe the new ICON is in the unique position to be able to integrate these key components to create compelling and differentiated solutions for customers. Both ICON and PRA have long histories of individual company success. And collectively, we will be much stronger than the sum of our parts. Our goal is to create the world's leading healthcare intelligence CRO, where customers will benefit from our broader service offerings and geographic footprint, deeper therapeutic expertise, expansive healthcare technology, innovation, and functional talent and capabilities. Integration activities are well underway and functional team from both legacy organizations are collaborating well to ensure we have a seamless transition to a single company. As we integrate our day-to-day focus remained on business continuity and the execution and delivery of our customers' clinical projects. The complimentary nature of our services will also prevent -- present revenue synergies across our broader customer base. Already, we are seeing interest from customers in the new ICON, with positive, strategic partnership discussions being initiated and cross-selling opportunities being generated in areas such as central and specialty labs, the Accellacare site network, Home Health Services and Imaging. We are also actively pursuing our cost synergy target of $150 million and have already announced internally the consolidation of a number of offices that are situated in similar locations. This will not only drive P&L benefits, but will also help our teams to do their best work, as we returned to the office post-pandemic. As the marketplace continues to evolve, it will be important to remain focused on innovation that facilitates our core mission of getting drugs and devices to market faster. Our new partnership with Allscripts Veradigm aims to create the industry's leading HER-based clinical research network that reaches more than 25,000 physicians and 14 million patients across the United States. Using Veradigm StudySource platform, which extends existing EHR systems to include clinical research, alongside our proprietary eSource technology and clinical research expertise, this network will enable physicians to offer clinical research as a care option to their patients, driving efficiencies across the trial process and increasing patient accessibility and diversity in clinical trials. In addition, we have seen growing interest from sponsors in clinical trial tokenization. Tokenizing enrolled clinical trial patients enables them to be followed within a real world data setting in a deidentified manner, increasing our ability to identify long-term outcomes and improving our reporting of key follow-up data to sponsors and regulatory authorities. New ICON is the only organization that has implemented a customer-friendly environment of multiple tokens to allow for linkages to a vast data ecosystem in a compliant and secure end-to end-approach. Through our Symphony asset Sonoma, ICON has data and analytic resources and expertise to translate tokenized patient populations into actionable information for clients, which will support their ongoing product development, registration and pricing goals. Current customers include three of the world's top 15 pharma companies since initial launch in May, 2021 are utilizing the benefits about partnerships. Alongside our existing capabilities, we can deliver truly differentiated trial solutions to meet growing customer needs and positively impact clinical trial development. As we integrate these key components into our patient, site and data strategy, we will be able to provide a compelling set of solutions to customers that will accelerate patient recruitment and retention, increase participant diversity and shorten clinical trial timelines. Ultimately, our goal is to create a sustainable competitive advantage over the medium to long-term by actively investing and leading in the space where clinical development is heading. On a standalone basis during the quarter, ICON increased net business wins to a record 1.1 billion, delivering a quarterly book-to-bill 1.27 and growing our backlog to $10.2 billion, an increase of 12.7% year-on-year. Revenue grew 41% to $871.2 million, and adjusted earnings per share increased by 77% to $2.12. We were also delighted to see strong PRA business wins for the quarter of nearly $1.2 billion and a net book-to-bill of 1.21. This helps build momentum for the rest of the year and beyond, and demonstrates our customers' confidence in the new ICON's continued operational performance and our commitment to delivering hard and innovative patient-centric solutions. We expect to create significant long-term shareholder value by combining revenue growth from enhanced service offerings, innovative solutions, and increase scale with our best-in-class global support services model. As a result of this acquisition, we are updating our 2021 outlook with revenue guidance in the range of $5.3 billion to $5.5 billion, and adjusted earnings per share guidance in the range of $9.10 to $9.50. Before moving to Q&A, I would again like to welcome our PRA colleagues to the new ICON and thank all of our teams for all their hard work and commitment during the quarter. Operator, we're now ready for questions.

Thanks so much and congratulations on a strong quarter, and also getting the deal done. My question an issue and really on the financial side. Brendan, you talked about your targets for delevering, but when I think about it, do you have a target for like a percentage of free cash flow to delever, or is it going to be -- what's sort of the pacing we should be thinking about in terms of that deleveraging?

Yeah. Sandy, I called it on the prepared remarks there. Obviously, we want to try to get up to about 2.5 times debt-to-EBITDA by the end of 2023. So, we'll stay focused on that, in that interim period. So, you've got 2022 and 2023 where save really opportun -- small acquisitions or small elements supply back. We'll definitely be looking at most of our cash going towards getting to that target, Sandy, in that timeframe. So, it'll be like -- we haven't set an exact percentage of free cash flow, but certainly a very high percentage until we get off to that leverage point. And from that point on it, then, of course, it will be much more about managing desks at that level and really using our cash resources to continue to build out the organization, as we know, we will still have to do.

Okay. Thanks Brendan. And my follow-up is also financially related. Now, let -- I'll let others ask the smart strategic questions. Are there any future transaction costs that on a cash basis over the next quarter or two, or you pretty much done with the one-time charges in cash charges for the transaction?

Yeah. Most of that, I'd like to say, have done. Sandy, that’s just unfortunately not true. We will take more cash expenses in the third quarter, but the vast majority will be taking the care off by then. So, there still will be a chuck enough number to go, not the similar certainly, and maybe even a little higher in the third order that we saw in the second quarter after that where our majority done.

Okay. Great. Thanks so much.

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

Hi, guys. Thanks so much for the question and congratulations on the transaction coming to completion. I was just wondering on two things. Could you talk about one, any update on thoughts on some of your larger overlapping clients and sort of their feedback, and any early potential combined win? And then two, could you also speak to staff retention and the broader integration efforts from internal perspective?

Yeah. Sure, Elizabeth. In terms of overlapping clients, I think we've been public before, and that we do have one or two that overlap to a reasonable degree. We've had a number of discussions with those customers and those discussions have been very positively received to the point. We're not -- we're seeing less risk in those customers than perhaps we had anticipated before, as we contemplated the transaction. So, in a number of circumstances, number of areas that I'm involved in, we've had those discussions. They're in a good place. We -- both companies are delivering well for those customers and they're looking to combine the offering and to make sure that we continue as a key part of those customers. So, it's been, in general, very positive. And as I alluded to in my comments as well, we've been -- we've had a number of strategic discussions with customers who neither company has had a particularly strategic relationship with over the past few years. And they are also interested in what the combined entity can bring as well. So, net-net, very positive in terms of a particularly large pharma companies and biotechs as well. It's been a strong, positive customer response right across the board, almost uniformly. In terms of staff retention, attrition, we certainly seen a little bit of a tickup in retention -- in attrition of staff over the last -- it's probably the last 12 months really. It's certainly not necessarily, I don't believe, directly related to the transaction. It -- we believe the labor market, particularly in the United States is pretty hot at the moment and quite frankly, the labor market across the world is kind of restructuring as we come out of this pandemic. So, I think there are a lot of moving parts going on in this -- in the labor market as such. And we've seen a little bit of an uptick when we're addressing it. There are various plans we have in place to bring new graduates in to people career paths to obviously to make sure we're paying market salaries, et cetera, et cetera. I think you'll find a same uptick in attrition with our competitors as well. I don't think it's just related to ICON or what we've done. And I certainly don't think it's directly related to the acquisition or to the transaction. It's something that we're seeing across the industry as there's a lot of money is being spent in clinical development. So, we're not just competing with other CROs for staff. We're competing for -- with pharma companies and biotech companies as well. So, it's consequences of the market, the growing market and the availability of capital to develop drugs. And then that's -- so we can't complain about the business development wins being strong and attrition being higher at the same time, you have to probably be take one with the other as well.

Got it. That's very helpful. Thank you.

Okay.

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

Great. Thanks. As it relates to your guidance, what are some of the key changes relative to your prior expectations for each standalone business on more operational basis in terms of what's implied in the outlook for the second half of the year? Have there been any meaningful changes on that front since you just gave it on a combined basis? Thanks.

Not meaningful, Erin. I think the operational companies are both moving in a strong direction to the second half of the year. We kind of outlined that. There are other elements, of course, in terms of numbers of -- the stock count, I made reference to the fact that we'd be about 83.6 million or about 83.7 million shares, my apologies, in the second half of the year that obviously has a bearing on the EPS number. But the underlying operating income and EBITDA are moving solidly in both organizations in the right direction. And we're pleased with that and that we'll see good uptake quarter-over-quarter and indeed year-over-year. So, I think, predominantly, we're moving the right direction. We'll start to see some of the synergies impacting, but the work we're doing around synergies it's for the long-term, of course. And we're putting the steps in place now that will really benefit over the next number of years. And, of course, a little bit this in the first six months, but certainly more thinking about 2022 and 2023 in that regard. So, a strong operational performance rolling forward into Q3 and Q4.

I think the only thing I'd add to that Erin is, we've been involved as have PRA, as I said, with the larger these vaccine trials, which have had a significant pass-through element in the first half of this year. Those studies are coming towards their end. Now, we've still got -- still a lot of COVID work. It was a significant part of our business wins this quarter. But the big -- those big pass-through studies it'd be vaccines, those are probably coming towards the end of it now, which is sort of attenuating a little bit the very rapid growth in revenue we've seen over the last couple of quarters. So, that's the only thing that I think would probably played into our guidance a little bit as well.

Okay. Great. And that goes right into my second question, which is, could you provide a little bit more detail on the COVID-related awards to date at each of the businesses, or on a combined basis and the percentage of revenue kind of in the quarter associated with COVID-related work? And I guess, you've commented already on sort of the dynamics throughout the year, but if you could give us a little bit of color on the COVID trends on that front, that'd be helpful.

Yeah. In terms of new COVID opportunities coming in, that's sort of flattened off a little bit, but it's still in the vicinity -- now high teens in terms of our RFPs. So, it's still a significant proportion of our work. There's no COVID cliff, I suppose, is the overall message here. It's a high teens on RFPs. New business, it's a little bit higher than that. And on our backlog, it's in the high -- mid single digits. So, it’s a -- COVID work continues to be an important part of our portfolio. It's not going away. As I say, the big vaccine trials, those days are probably coming towards an end, but we're moving more towards treatment trials, diagnostics. There's long-term follow-up trials. There's different patient population trials in the vaccine space. And so that work, I -- as I said before, it's going to continue for another couple of years, I think, and who knows with variants and all the rest of it coming through, booster -- the requirement or potential requirements for boosters, that may also impact it as well. But it's certainly been a very positive environment from COVID work. And even in the non- COVID work, we've seen a significant uptick in our RFPs as well. So, if the COVID sort of RFPs have been flattening off a little bit, the non-COVID RFPs have been growing quite substantially to replace that. So, it's a positive business environment.

Okay. Perfect. Thank you.

Your next question comes from the line of John C. Kreger from William Blair. Please ask your question.

Thanks very much. Steve, I know you're calling the new company the world's leading healthcare intelligence company, clinical CRO. Can you just expand a little bit on the healthcare intelligence part? Are we thinking about that primarily is that the legacy PRA/Symphony business, or broader? Just tell us what you're really thinking about with that part of the tagline? Thanks.

Yeah. It's a good question, John. I mean, we are thinking about the data component of that and -- but not just the data, it's the way we use the data and the way we are able to analyze and do things differently than the way we interpret that data. Symphony is an important part of it. I talked a bit about tokenization. We think that's a very important part of being a healthcare intelligence organization, being able to track patients in a deidentified and compliant manner in the long-term. If we've been able to do that on the vaccine portfolios, we'd be able to answer a lot of the questions that are only really coming up now, do we need another booster? What's the timeframe for the immune response to wear out? So, that sort of intelligence, and that sort of information that allows us to make insightful decisions and take actions, and support, not just the ongoing registration of our sponsors' products, but their development of those products in different indications and the pricing of those products, as we see the value of those products and how they're helping people in the -- in society on a real world evidence basis. So, Symphony is a big part of it. We've talked a lot about our one view tool and how we're using that to identify the right sites. And so, like sites, our patient approaches where we're going directly to patient and gathering that sort of data are wearables at DC. It's a variety of things around our patient site and data strategy, but the intelligence side of things is really using technology and data in a way that's perhaps a little bit more nuanced and a little bit more insightful than it has been used in the past, and allowing us to ultimately deliver trials in a different way, much more effectively and efficiently.

That’s great. Thank you. And maybe a quick follow-up to Elizabeth's question about staff. Do you -- does this change you’re thinking at all on margins going forward, or are you able to pass higher labor costs along in your bids?

There's certainly a little pressure on the wage line. And we need to compete actively in the marketplace. And as I've said, it's a very active marketplace at the moment. So, in the very short-term, we might get a little pressure there. I think we can handle that. We certainly got causes within our contracts that allow us to adjust our pricing on the basis of inflation. And importantly, I think it's also supercharging our efforts to move to that more efficient model where we're doing more offsite monitoring, more remote patient monitoring and allowing our staff to be more efficient to allow them to gain a better work-life balance, essentially, rather than being on a plane and going to sites physically all the time that they're able to do a fair bit of their work at their desk on their computers, because we can do -- we can monitor the studies remotely. It's really moving those efforts fast. And I think our sponsors are also buying into that. So, as we sort -- it's what we did during the pandemic, and we got some talents from that. This is labor market is also helping that as well. So, we believe that will help us to offset any challenges we have from a wage inflation and cost perspective, certainly in the medium to long-term. And the short-term, we're working that through and we think we can handle it. But there are opportunities -- there are always opportunities in these sorts of things as well. And I think that's certainly one of them.

Sounds good. Thank you.

Next question comes from the line of Eric Coldwell from Baird. Please ask your question.

Thanks very much. A couple -- I have a few, but I think they're hopefully pretty quick. First one, in the prepared remarks, you said your largest customer on a pro forma basis was 7.3%, I think you said of revenue in the quarter. Were you specifically citing ICON's largest customer would be brought down to that level, or looking across the spectrum of both companies, the largest customer would be 7.3%?

That's across the spectrum of boat companies, Eric. So, that's our new customer base. The top customer of that new customer base would be 7.3%.

That's great. Second one, I'm hoping you can give us your thoughts on tax rate in the second half.

Yeah. We said we'd start off it in around the ballpark of 17% and work our way down from that, Eric. We haven't changed our mind -- mindset on that one. So, we're -- at this stage, we'd be thinking 17% for the second half of 2021.

Okay. And next one, don't know if you have this or you're able to share it. The PRA historically provided service level bookings, kind of a unique approach. They did transition and start adding in full bookings about a year ago. But I'm curious if you would have that number at hand, just for comparable purposes for those of us who were tracking PRA in the past?

Not at hand, Eric. My feelings on this one, I'm a great believer in there's only one type of revenue and there's only one type of booking, which is the 606, my apologies. So that's where we'll be looking at as we go forward.

Okay. Thanks very much. I appreciate it.

Next question comes from the line of David Windley from Jefferies. Please ask your question.

Hi, thanks. Good morning. Good afternoon. Thanks for taking my questions. Several questions I've kind of gotten at the point of the demand environment, but I was hoping you could perhaps add a little bit more color to, not just RFP trends, but maybe also how your hit rate has evolved if that stayed relatively stable or changed at all? And then within that, there was mentioned in the prepared remarks, Steve, about hybrid models. I'm wondering what you're seeing within the RFPs, or maybe -- RFPs you're seeing, or maybe the bid you're submitting. If you're being more proactive about it with hybrid and DCT type approaches to your study, how is that creeping into the RFP front?

Sure. David, let me start with the RFPs. I think as I indicated, it's been and continues to be a very positive environment, not just in the biotech space, but right across the spectrum and right across the segments that we operate in large pharma, biotech, midsize, we're all in the high-teens in terms of annual increase in RFP dollars. So, it's -- couldn't be happier with the way that's moving forward. I think -- then -- and I think that's really across both organizations. ICON, certainly seeing that. And as we've seen PRA also have seen a similar sort of mid-teens sort of increases across in their RFP. So, again, we've both seen that. I think that's evidenced in the awards. In terms of hit rate, I was pleased. Actually, as I looked at this morning to see an uptick in the hit rate on a dollar basis, again, across the spectrum, particularly in our late stage business and our early stage business, and this is ICON standalone. I don't have the detail for PRA at this stage. But in our Accellacare Home Health, we've seen an uptick in our win rates and our strike rates. So, again, that's all with the increased numbers of opportunities, increased hit rates has really put us in a pretty good position. I think it really does speak to the confidence that our customers have in our ability to execute, but also our ability to make this integration go well. In terms of hybrids and hybrid trials, we're certainly seeing a lot of interest in that. There's a lot -- as you would well know, there's a lot of talk and there's a lot of discussion around how these trials work and how they're operating going forward. I would say that almost the majority of the trials we propose at the moment have some sort of hybrid sort of component, whether it be a remote monitoring sort of component or a wearable technique, or a data collection area that relates to direct-to-patient sort of mode. So, they are very much hybrid and hybrid goes from one end of the spectrum, right up to the other, really down the decentralized trial, and that there's a lot in between. But the vast majority, I'd say, of trials that we propose really do have some sort of hybrid component or some sort of decentralized component now, which we find positive. It gives us something to build on, and it gives us an opportunity to deliver that component of the trial and then build on it for the next one to become a more a hybrid or even a more fully decentralized sort of approach. So, it's -- again, our customers are very much aware of it and very much open to those discussions and particularly where it makes their trials and their budgets more efficiently spent. They feel confident that we can deliver those sorts of trials.

That sounds encouraging. Thank you. My follow-up question kind of related to that, you mentioned in your prepared remarks, also you touched on a number of the areas, where cross-selling is an opportunity. It seems to me that some of those might be a little -- the ability to go-to-market and offer those services. For example, central labs to PRA client base might be more immediate, whereas perhaps the integration of some of the technology capabilities and the DCT trial approach might require a little bit more integration and development before your go-to-market strategy might be ready. I wondered if you agree with that. Or if you could give us a sense for how immediately you might see some revenue synergy opportunities for some things versus others.

I would say, I do broadly agree with what you just said, Dave. We certainly seen already some wins on the lab front, and revenue starting to flow into, and I would -- certainly in the second half of the year, we'll see revenue starting to flow from those immediate opportunities, language services, imaging labs that's happening. We have an expectation of around $100 million in revenue synergies on a run rate, annual run rate basis. And I think we're well on our way to that. And I'd like to think we can potentially exceed it. In terms of the mobile health platform and some of the decentralized, you're right. I mean, those things are going to take a little bit more time to come into play. We're working very hard to build our unified platform. We have a number of platforms, but those are moving forward and changing and we're investing significantly in those platforms and having discussions with couple of -- these things always take a little bit of time. But we believe as we get towards the end of this year and the next year, we're going to have our unified platform ready to go, which will then replace the current platform that we have and will allow us to, again, further integrate various aspects of our capabilities and resources into that decentralized approach. That will take a little longer, no question about that. But it's not years away. It's certainly, I think, within the next 12 months, we'll be very active in that space in terms of implementing that sort of totally decentralized approach.

Excellent. Thank you. Very helpful.

Your next question comes from the line of Tycho Peterson from JP Morgan. Please ask your question.

Hey, thanks. Steve, I'm going to follow-up on that kind of last line of questioning. It's great to hear about the revenue synergies and then kind of a hit rate. I'm just curious, what's really resonating as you're out talking to customers. If we think about the third of the top 20 pharma customers, you don't currently do business with. As you go to kind of pitch to them, is it scale? Is it the new capabilities you bring to the table? Can you just talk a little bit about what's kind of resonating? And then another angle that you talked about at the time of the deal was, accelerated patient recruitment through the Accellacare network. How are you thinking about doing that as well?

Sure, Tycho. I'd say, as we talk to customers -- I mean, it's all of those things that they want to talk to us about. Obviously, it's -- there's usual scale capabilities, resources, therapeutic depth and breadth, et cetera, et cetera, is important to them. You have to be there and we have that, but I think increasingly they're also interested in Accellacare Home Health network, the Accellacare site network, which gives us a different slant on how we bring patients to their clinical trials and then on our decentralized approach is as well. The tokenization is creating a lot of interest around -- for some of these strategic discussions. The decentralized trials and the mobile health platform that we're developing is also creating a lot of interest. They're interested to hear what we're doing in that respect. So, it's a combination of the usual sort of scale and resources and capabilities, but increasingly also the technology, the data opportunities we're bringing and the ability to really put together a solution that's highly integrated in that clinical space. I think that's what's got our customers, particularly the larger ones, very excited about the new offering. In terms of Accellacare, the network -- the sites, it's fitting in nicely with our decentralized trial approach. We don't believe there's any -- on the decentralized trials you have -- there's still going to be sites involved. You still have to have that. And we believe they can be the foundation for our decentralized offering. They're performing strongly both financially and operational, and it's an area that we continue to revisit. We continue to look at what we're doing with those sites, how fast they are able to come up to speed and what their recruitment rates are like. The quality of the data that we're providing at those sites has been really first-class and they played a major role for us in involvement with the big vaccine trials. And so, they're really -- I'd say, I'm pretty pleased with the way they're performing and particularly excited about the role they're going to play in that more hybrid and decentralized approach as we go forward. We really feel we've got all the key components of that decentralized approach to bring together solutions that can be very exciting for customers. I think that's really what's getting these new customers particularly interested.

And how are you thinking about the real world data solutions, part of the business that they bring? Obviously, there's a lot of focus with the pandemic and therapies being kind of rushed to market. How are you feeling about real world data at this point?

Yeah. We feel -- we're feeling like we're making good progress in the real world data. The tokenization side of things, it introduces another aspect of a real world data that really has the ability to bring in data from disparate and different sources from genomics data, from lab data, from the health record data, to bring it together on an individual deidentified patient basis and allow us to track that. So that's certainly another arrow in our quiver from a real world perspective. And we feel that, that along with some of the other areas that we've been already working down, it gives us a nice story to tell and a nice operational delivery process to put forward on the real world front. We really do believe real world is a fundamental part of the future of clinical development. The randomized controlled trial certainly played a major role over the last, probably hundred years now. But going forward real world evidence and the ability to collect and to assimilate and analyze and really take direct insights, real world data is absolutely going to be critical. And I think we're seeing that as we come out of the pandemic with the vaccine, the patients who are in the vaccine portfolios, the ability to have a look at that data on a long going basis would be extremely valued and is extremely valuable. And so, that's an area we're very highly focused on and believe we have some real advantages.

Last one for me. There's obviously a lot of moving pieces in this space now with, PPD being acquired Parexel and back to private equity. We see what happens with Covance at Labcorp. How much of a focus is this for your customers, as you go out and have discussions that a number of these assets are changing hands?

That's a tough one, Tycho. I think we talked to our customers about what we're doing and their projects. I don't sort of get too much into what they think about our competitors. I'll be honest I haven't heard any huge concerns from our customers about what's happening in industry. They recognize we're in a dynamic industry. There are a lot of changes precipitated by lots of different things. And so, it's -- I'm presuming they're sort of aware of it, where does those changes? But I don't get into too many discussions about our competitors with our customers. I'd prefer to talk about ICON and what we're doing.

Okay. Thank you.

Thank you. And your next question comes from the line of Jack Meehan from Nephron Research. Your line is now open.

Thank you. Good morning and good afternoon. Wanted to start -- I was hoping you could give a little bit more color on the PRA results in the quarter. They had a big sequential step-up on revenues. Just was curious if you could talk about any path through dynamics or COVID work that might've contributed there.

Yeah. Jack, I think we alluded in our prepared comments that I think we both saw a fairly significant amount of work in the first half of the year and specifically in the second quarter from these large vaccine trials. I think both companies were in a similar position there, which led to that significant jump up in revenues predominantly because of the large pass-throughs in those trials. So, no huge surprise. I think we pulled it out, because I think going forward, those trials of -- the days of those trials are probably coming towards the end. There is not follow on work. There's no cliff, but there's this sort of -- I think we've hit the peak there and going forward, we're going to be doing more, say treatment trials, diagnostic trials, et cetera, and follow-up on a smaller scale on those vaccine trials. But I think that was certainly a factor for the revenues on the PRA side of things as it was for ICON.

Great. And one for Brendan. Just within the guidance, I was wondering if you could give any color around phasing in the third quarter, in the fourth quarter. Or just -- there's obviously a lot of moving parts, just any color around your expectations for building up to the full year number, it would be helpful.

Yeah. Jack, I mean, we will -- as I said probably previously to give better [ph] answers. We do expect the growth to continue to be sequential. Steve made the point around that the revenues, obviously on the first half of the year, were very strong as a consequence of a lot of that pass-through revenue coming through that is going to dissipate somewhat in the back half of the year. That's kind of indicated in the guidance and certainly at the midpoint and the higher end even. So, you can see that sequentially -- you can probably work at the math on that yourselves, but sequentially, on op income yes, absolutely continue to moving in the right direction and it'll be even an off pace. I think we might even see a little bit of a pickup from Q3 into Q4, a little more so. So, I think that's broadly where that we do expect it to say good sequential progress with -- continuing to pick up as we get through the year.

Thank you.

Your next question comes from the line of Luke Sergott from Barclays. Please ask your question.

Hey guys, thanks for the question. I just want to get -- Steve, I just want to get your take on that COVID cliff comment. So, as we think about the variance and adding capacity for vaccines for kids and under 18 and as the regular business starts coming back online, I know that there are different therapeutic indications. But is there enough industry capacity to handle all this extra work that's going on? Just would love to hear your thoughts on that, and then how that kind of bakes into the soft landing versus the cliff.

Yeah. I certainly think there's enough. I mean, to answer your question directly, Luke, I think we've got enough industry capacity to do this. The way we're doing these trials now, I think is more efficient, more effective. The remote -- I've talked about the remote monitoring. We have some mega sites around the world and certainly some of our Accellacare sites have made major contributions in terms of patient numbers. So, while you have a lot of patients in these trials, you don't necessarily have a huge number of sites, because you have a lot of patients at those sites. They're relatively low intensity type trials, is that makes sense. If they're not oncology trials, put it that way. They just have a large volume of patients with a lower intensity of work and you can -- they do suit themselves very well, very much to a remote decentralized type of approach. So, I'm very confident we have the capacity to do the work that we're going to be asked to do. I did make the comment that I don't think we're going to be doing these very large 40,000, 50,000 patient vaccine trials in the future. That doesn't mean to say we won't be -- say doing a follow on studies, the kids, the various subpopulations. And we're doing those. As I indicated at the RFP percentages are still in the high-teens in the last quarter. So, it remains of -- the COVID work remains an important part of our portfolio, important part of our backlog. But I just don't anticipate that you'll see the significant uptick in revenues. And, of course, those pass-throughs in future quarters, as we've seen in the last couple of quarters, that's really what I was trying to get across.

Yeah. That's helpful. And then lastly, on the mix of the FSP work, can you just talk about the -- how -- if there's been any changes in demand trends on those RFPs with a mix of FSP? And then how you guys think about that going forward now with PRA and the book?

Well, we feel very good about our FSP, a strategic solutions group. We are the industry leader by some distance in that area. We have a very -- I believe, a compelling offering in that space. We've had two extremely successful organizations coming together to make a really top-notch, we believe, functional services groups. So, we feel very good about our position in the market and our ability to continue to really dominate that market we believe going forward. In terms of demand, we still see strong demand in the functional space. It's an important part of our offering. It supports our full service business as well. So, it really is -- it's a double benefit for us. It's a market and a strong market and a growing market in itself, but it also allows us the ability to bring in short-term resources from our own group in a relatively fast and speedy basis. So, it has a number of benefits from our -- for our business, both for our full service. And, of course, as an entity alone and these functional opportunities are growing and not just in terms of pure functional, but more hybrid sort of where we provide some data analytics. So, we provide some project management or we will do it on a unit basis and take responsibility for the delivery of the outcome, rather than just on a -- this is an emerging and a developing -- evolving, should I say business and one that we feel very connected to and passionate about growing.

All right. Thanks.

Your next question comes from the line of Don Hooker from KeyBanc Capital Mark. Please ask your question.

Great. A lot of questions have been asked here. So, I just have one. I was interested in this new Veradigm tool, this new partnership with Allscripts and kind of what led you -- what's interesting to you about entering a partnership with Allscripts and what are they going to give you in terms of data and access that you didn't already have? You have a lot of partnerships, so I'd love your perspective there.

Yeah. I'd love to put it -- this is really the PRA side of our business. That's -- it's moved into this. But really it's an opportunity to very much expand the capabilities of our clinical research network, if you like. These are sites, where we're installing or helping to install software, which allows them to identify patients and then for those -- for the patients in their practices to become candidates for clinical trials that are going on. So, we're spreading the net wide and these are trials that would probably be initially in the more late stage area, more simple sort of later stage trials, because most of the site -- many of the sites will be relatively research naive, but patients will -- people will go into their physicians who were part of this network will be offered whatever treatment they need for whatever they have. But the physicians will know that there's a clinical trial available to them, which they can either refer those patients to a particular site, or if the circumstances dictate, they can become a site themselves. So, we were really introducing clinical researchers as a care option for patients, which I certainly believe is the future of clinical research. We have to get more people involved. Only typically 3% to 5% of people have been involved in a clinical trial. This is one way to expand that. We talked about democratizing clinical trials, diversifying the patients or being conscious of the need to diversify our patient population. This is a way we're practically intangibly doing that, allowing us to look at the electronic health records in the sites and find these patients, and then offer that clinical research as that -- as an option to them. So, it's an exciting area. One that I can take no credit for whatsoever. Kent Thoelke is our Chief Innovation Officer, has driven this and he has driven a number of these sorts of initiatives, but we're excited about being able to partner with Veradigm Allscripts sites and really as I make this a option for patients.

Great. Well, thanks for the question.

Your next question comes from the line of Patrick Donnelly from Citi. Please ask your question.

Great. Thanks for taking the questions, guys. Brendan, maybe one for you on the cost synergy side. It sounds like that's already starting to take shape through some near term opportunities. Can you just talk about how things are going to progress there, some of the near term opportunities and then confidence level now that you've gotten under the hood a bit and kind of kick the tires?

Yeah. I think, we're happy with the progress we're making there in the project. It's a -- we're starting to obviously get into those numbers and really get a better sense of getting out for that 150, which as we've said in the past, we think is a very doable number and we'll look to exceed it, of course. Steve made reference to the fact that some of the early actions we've taken already is around the office infrastructure. And we've announced some of the consolidation of the office infrastructure already. And that will have -- certainly as we think of that 150, I would imagine probably about -- in the range of 20 or so percent, maybe even 25% of that 150 could be identified through to those types of savings around facilities and facilities management. And that's an area that we're keen to do is we bring the two organizations together. It makes sense from a cultural point of view to have folks in one office, is about the teamwork, and also makes good financial sense. So, there's some of the early pieces we are doing. Of course, we're looking at other areas as well, and ICON to be very stringent cost managers and that we will bring that discipline, but also the good models that we have for running our support services in terms of the efficiency of our enterprise wide systems and the onshore/offshore models that we've had in the organization for quite some time now. So, we think we can make a good progress there, early days. It's probably more of the -- as I said, the facilities pieces, but good line of sight. And we'll start to see that coming in. As I said, not so much in the back half of this year, a little bit, certainly, in the back half this year, but obviously we're putting down the building blocks ready for good progress for that in 2022.

No, that's helpful. One -- just one on kind of the COVID work and you've talked a lot about it. Can you just talk about the margin profile, some of that non-vaccine COVID work? I mean, any reason we should see a big shift, we talked about the pass-throughs obviously, but as we get into things like next year and the mix shifts away from some of the large vaccine trials into some of the non-big vaccine COVID work, how should we think about the margin profile, some of that COVID specific work child versus not?

Yeah. Well, I think as we get into the non-vaccine trials, obviously that has a very beneficial mix in terms of the revenue, would have those large pastures are certainly not to the same extent without postures, of course, but not nearly to the same extent is a 44,000 patient trial or those [indiscernible]. And that will have a pretty significant positive mix element to our overall margin profile. And so, certainly as we come through this first half of the year, we've seen that impact on gross margin particularly, and we do expect that to start to significantly improve as we get into the back half of the year and certainly into 2022 as well.

That's helpful. Thank you.

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

Hi. Thank you for squeezing me in. Just one for me. On the tax energies, given the ICON is an Irish company, this is definitely a favorable component to the deal. But can you give us your updated thoughts to see if there's been any evolution on your thought process on the proposed global minimum tax and anti-tax inversion reforms that are being proposed and whether or not they would apply to ICON?

Second part, first one, Juan, on the anti inversion rules, no, we don't think they would apply the relative scales of the organization ourselves and the legacy PRA organization. We're good. Obviously, we were the largest startup company by market cap, so we don't feel there's any risk really around the anti inversion rules in this particular transaction. On the first part, it's probably too early to say, to be absolutely honest. Of course, what we can say is that as we get, and if we do see an agreed minimum global tax rate, the chances are that proportionally ICON will still benefit more than our public company peers in -- that are non-Irish based effectively, because they're different. The proportion of saving, if you like, will still be, or savings as a result of efficient tax rates will probably be -- still be larger maybe possibly than even they are now, albeit might move up from where we're currently thinking. As you know, we're thinking about 14% for the long run, that's still what we're working towards. That's still what the legislation says. And, of course, there's going to be a lot of work and a lot of geographies before that starts to change. So, we'll continue to work with that with a certainly in denial to that minimum global tax rate as time goes by.

Thank you.

Your next question comes from the line of Vela Nissen [ph] from Mizuho. Please ask your question.

Hi. Can you hear me?

Yes. Yep.

Sorry. It's Ann Hynes. Sorry about that. Just a question. I might've missed this, but did you provide a combined backlog as of 6/30/21 for both the combined company?

No. Not, not yet Ann, mainly because we're obviously looking at what's the right way to do that. We report on our full contract value basis on a 606 basis. And we'll have to have a think about -- just -- obviously the PRA guys would have -- would not have included that in the past. So, we will be, Ann, talking about that, probably at the end of our -- we're still closing our balance sheets as you know, and that takes a bit of time. So, we're still working on that process and we'll have that -- we'll have an opening to closing reconciliation for you on the Q3 call.

Okay. And then, maybe shifting to -- just the environment, like I know the demand environment is very strong, but can you talk about the supply environment, especially with CRAs, some of my recent checks suggest like the environment's getting much tighter. Can you -- so can you just talk about wage pressure with CRAs and any other bridge pressure you're seeing?

Yeah. Sure, Ann. It is getting tighter. Yeah. Particularly in certain parts of the world, North America, probably the focal points. The other parts of the world, I think we're in good shape. Europe's not as so much of an issue. Asia is not so much of an issue. Latin America has a little bit of focus as well, but really North America is where that tightening is. And yeah, the salaries are increasing. And we are putting in place. And you guys sort of alluded to earlier in the call, a number of things that we're doing to promote people in a more timely manner to bring in new graduates to truly put a focus on bringing in new -- people who are more in the sort of clinical trial assistant role, and to train them and all that other good stuff. So, there's a lot of things we're doing to attenuate or to limit that sort of pressure. But at the moment, it's a fairly hot market and fairly a strong demand from -- as I say from that point of view.

All right. And one last question, I know you're doing non-GAAP earnings now with PRA, can you talk about just what we should assume for stock comp expense and amortization for the combined companies? Do you have those numbers yet?

It'll be a bit. We'll probably give you more granularity on that in the next quarter. The amortization is obviously going to be pretty significant as a number of running for the P&L account. It's going to be in that ballpark of somewhere, probably in the like 350s, in the 400 on an annual basis.

Okay.

And the stock hump will probably just be an excess of the $100 million mark. So, kind of in the -- yeah, $110 million to $115 million and mark albeit, and that's probably elevated this year a little bit as a result of some of the change of control provisions in the 308 [ph] contracts. So, we'll give you a better clarity on that, but those numbers are just kind of broad ballparks for you to work with.

All right. Great. Thanks so much.

Your last question comes from the line of Dan Leonard from Wells Fargo. Please ask your question.

Thank you. Just a couple of clarifications. First off, have you seen any changes or impacts from COVID variants worldwide on site availability, patient willingness to enroll in clinical trials, even over the past four to six weeks?

Site availability, no. We seem silly in terms of -- I'm interpreting your question, Dan, in terms of developing sites to do any sort of trials, because of the pandemic now sort of moving towards, we hope, it end. We certainly see about 15% to 20% of sites having -- still having some impact from COVID. But recruitment of patients generally is back to -- I would have thought about that the 90% mark on a point where we want to go. And as this seems to be a bit of a sigmoidal curve, if that makes sense. We kind of keep approaching the top, but we're not quite there. And I think it might be a few more months or even into the winter before we actually get there. It's that's the question that you're asking. I think we're moving in the right direction, but it's still some impact.

Yeah. That's the exact question. Thank you. And then my follow-up, as I'm trying to think about framing 2022, I know you said there was no COVID cliff, but there's a tough comp from COVID vaccine trials. So, does your high single digit revenue CAGR, does that apply to 2022 when you consider a 2021 base inclusive of PRA for the full year, or is that more of a normalized comment beyond the bump of COVID trial work?

I think that's probably more the latter. Dan, high single digits, we think is sort of post-COVID through the -- through into the more normal, whatever normal is these days. Maybe we'll get back to this someday. But we see that as a sort of cadence the business can sustain on a long-term basis. And that being, I think, significantly above what the market will be at around -- we think around 6%, 7%, maybe 8%, but we're going to be a little higher than that and we believe we can easily fulfill -- well, maybe not easily, but we can certainly fulfill those sorts of obligations or proposals.

Got it. Thanks for the clarification.

Okay. All right. So, in terms of closing remarks, I'd like to thank everyone for listening today. There is -- these are certainly exciting times for us at the new ICON, and we're pleased to have delivered another strong quarter, demonstrating continuing progress and representing a strong platform for future growth. We also look forward to continuing our integration and the creation of the world's leading healthcare intelligence and clinical CRM. And finally, I want to take the opportunity to recognize our entire workforce and to thank them for all their efforts over the past quarter. Thank you all and have a great day.

This concludes our call for today. Thank you for participating. You may now disconnect.