ICON Public Limited Company (ICLR) Q4 2024 Earnings Report, Transcript and Summary

Good day, and welcome to the ICON Q4 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] And please also note that today's conference is being recorded. I would now like to hand you over to speaker of today, Kate Haven. Please go ahead.

Good day, and thank you for joining us on this call covering the quarter and year ended December 31, 2024. Also on the call today, we have our CEO, Dr. Steve Cutler; our CFO, Nigel Clerkin; and our COO, Barry Balfe. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call. Certain statements in today's call will be forward-looking statements. These statements are based on management's current expectations and information currently available, including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward-looking statements, due to risks and uncertainties associated with the company's business and listeners are cautioned that forward-looking statements are not guarantees of future performance. Forward-looking statements are only as of the date they are made and we do not undertake any obligation to update publicly any forward-looking 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, including the Form 20-F filed on February 23, 2024. This presentation includes selected non-GAAP financial measures, which Steve and Nigel will be referencing in their prepared remarks. For a presentation of the most directly comparable GAAP financial measures, please refer to the Press Release section titled Condensed Consolidated Statements of Operations. While non-GAAP financial measures are not superior to, or a substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes. Included in the press release and the earnings slides, you will note a reconciliation of non-GAAP measures. Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share excludes stock compensation expense, restructuring costs, foreign currency gains and losses amortization and transaction-related and integration-related costs in their respective tax benefits. We will be limiting the call today to one hour and would therefore ask participants to keep their questions to one each in the interest of time. I would now like to hand the call over to our CEO, Dr. Steve Cutler.

Thank you, Kate. Before I begin my remarks on the quarter, I wanted to briefly, I wanted to briefly introduce our newly appointed COO, Barry Balfe, who is joining us on the call today. Barry has had a long and successful tenure at ICON over the last twenty years in both full service and FSP roles, most recently leading our large pharma business. He brings to the role extensive experience in establishing and growing, large strategic partnerships that have delivered clear and sustainable value for our customers. This is a key component of our growth strategy that Barry will focus on strengthening across our mid-size customer segment, going forward. Turning to the results for the fourth quarter and full year 2024, ICON's performance was in line with the expectations we set out, when reporting quarter three, with both revenue and adjusted earnings per share results at the midpoint of our full year guidance range. Moving to this year, we are reaffirming our full year guidance range that we issued last month, which reflects the current transition period, in which we are operating. Our current views on the overall environment are consistent with what we saw at the start of this year, with evidence of positive leading indicators, alongside a continuing backdrop of cautiousness and volatility. Overall opportunity flow improved in quarter four and was broadly based across the business. In the biotech market, the dynamic of careful capital allocation is continuing, where companies are being more cautious in how they are deploying their spend across their development programs. While we saw progress in terms of awards in this division in the quarter, decision making and speed of trial starts is not yet back to a normalized timeframe. From a large pharma perspective, the picture continues to be mixed. Some customers are well placed for R&D spending growth this year, and others face budgetary pressures or have already gone through reprioritization exercises. While this type of activity can result in disruption in terms of overall spend, in some cases, it also affords ICON an opportunity to engage further, precipitating opportunities to help alleviate problems within their portfolio or development functions. We are seeing particular strength in demand from our recent strategic alliances, and have a number of current partnership opportunities extending beyond the Top 20 pharma cohort, in our pipeline for this year. This in addition to the improving indicators in biotech, provides us with visibility to accelerated growth, as we move through this current transition period in our business. We were also encouraged by the improved performance from a business development perspective in quarter four, with gross bookings of $3.06 billion increasing 8% sequentially and 3% year-over-year. We made good progress in awards within our biotech business, executing on the improved pipeline and opportunity flow in that division. Unfortunately, this better performance in gross bookings was offset by an uptick in overall cancellations in the quarter, which totaled $651 million and this resulted in a net book-to-bill ratio of 1.18x in quarter four and 1.2x on a trailing 12 month basis. Cancellations impacted all divisions without a particular concentration in any therapeutic area. These canceled trials, some of which were expected to run-in quarter one will pressure near-term revenue and margin as a result, but were contemplated, when we issue our full year 2025 guidance in January. With the addition of our new awards in quarter four, our backlog grew to $24.7 billion at the end of 2024, representing an increase of 1.4% on quarter three of 2024 or increase of 8.3% year-over-year. Our backlog burn was 8.4% in the quarter, slightly down from quarter three levels. With regard to our COVID-related work this year, I'm pleased to advise that, there are no issues with funding related to the two large scale next generation vaccine studies we are supporting. One is now actively screening patients and moving forward as planned. The other trial has been delayed by the sponsor and we are working with them on plans to resume later in the year. This has been considered in our guidance reaffirmation and we continue to monitor the situation carefully. As we navigate the current volatility in our market and headwinds within our portfolio, we remain focused on investing in the key factors that are continuing to differentiate ICON and are delivering value for our customers. Our digital innovation strategy is a critical component of how we can transform clinical delivery by seamlessly integrating AI and key technology advancement into clinical research. By uniting technology, unique data assets and excellent service delivery, we are seeing better outcomes for customers across several key metrics. Year-over-year, this is delivering 10% faster site activation, 33 fewer non-recruiting sites and 24% increase in trials completed on time. We're building on that success with the planned launch of several new solutions this year that will improve efficiencies in areas such as resource forecasting and site contracting. As our customers evaluate and change their development models, it is incumbent upon ICON to understand their goals and support their evolving needs. Each customer situation is unique, but what most are seeking is a provider that can offer them innovative solutions with the flexibility and agility to adapt to the needs of their portfolios. Importantly, this evolves as customers acquire new companies, assets or adjust prioritization to a functional or full service model in their portfolios. ICON's deep partnership experience and ability to customize solutions is a critical element of our differential advantage in the CRO market, providing value and delivering key outcomes for customers. Embedded in our culture of innovation is our focus on the continued progression of automation across our organization. It not only fuels our ability to drive better solutions for our customers, but it has also enabled us to lead the industry in the adoption and implementation of robotic process automation, a tool that makes us more competitive and efficient organization. We exceeded our target of 3.5 million hours delivered in 2024 and are on the way to achieving over 5 million hours in 2025, which will save over $100 million in total costs annually, compared to what they would have been without these automations. We have a number of key areas we're focused on improving this year, including pharmacovigilance, document management, laboratory services and internal processes across finance and commercial functions. In addition to the elements of our automation strategy, that will enable us to better leverage our cost base across the organization, we've been executing our plans for further cost management. ICON has a long track record of successful cost management. As we continue to see the market volatility, we are taking measures to ensure our cost base is aligned to the demand environment. This began in quarter four and focuses primarily on the alignment of resources globally to support our customers' needs across all segments. Reflecting back on 2024, despite the more challenging backdrop, our team delivered full year revenue growth of 2% and adjusted earnings per share of 9.5% both on a full year and year-over-year basis. Importantly, we also achieved our target on free cash flow of $1.1 billion for the full year, an increase of 10% over full year 2023. Amidst the market volatility we are experiencing currently, there are a number of areas across our business that are positively impacting our performance and positioned us for a return to targeted growth in the mid-term. Our lab and early phase business are moving forward well and we have seen continued strength in therapeutic areas such as cardio-metabolic diseases as well as oncology with new award growth increasing in the double-digits in both areas on a full service basis in 2024. In quarter four, we won a significant level of work from a new mid-sized customer in our Biotech division with a well positioned oncology pipeline. These program wins were attributable to the strong team and clear strategy at ICON, leveraged from the positive experience and solid relationships that our team had built with a smaller biotech that this midsize customer had acquired. While we are pleased to see the momentum in new awards in these important therapeutic areas and new partnerships, they will take time to contribute to revenue. We continue to expect that, pass through revenue mix will increase in the first half of 2025, which will pressure our EBITDA margin. From a bookings perspective, we are maintaining our target of a book-to-bill ratio of at least 1.2x on a trailing twelve month basis, which we believe is supported by the overall opportunity flow, we are seeing across the totality of our business. We saw good evidence of this already this year, with a large Phase 3 full service award from one of our new strategic alliance partners in the cardio-metabolic space in quarter one. This underscores ICON's ability to elevate historically transactional relationships to the level of enterprise partnerships with our scaled and diversified offering. Our strong balance sheet positions, enables us to continue to execute our capital deployment strategy, prioritizing share repurchase activity in the short-term alongside highly strategic M&A transactions to further scale our service offerings. Finally, while we continue to work through somewhat uncertain environment, I believe, the fundamentals of our business and the market within which we operate remain strong, supporting an improved outlook in 2026. During this time, we are focusing on our core operations and customer delivery, positioning ICON to emerge from this view, as a more resilient organization, able to take full advantage of the many opportunities that lie ahead. Before I close out my prepared remarks, I want to thank all our employees at ICON for their efforts in 2024, the year in which we supported over 400 customers across 1,500 studies. I'll now hand it over to Nigel for the further review of our financial results. Nigel?

Thanks, Steve. Revenue in quarter four was $2.04 billion, representing a year-on-year decrease of 1.2%. For the full year 2024, revenue was $8.28 billion, an increase of 2% over 2023. In quarter four, overall customer concentration in our Top 25 customers increased from quarter three 2024. Our top five customers represented 26.2% of revenue in the quarter. Our Top 10 represented 42.3%, while our Top 25 represented 64.4%. Gross margin for the quarter was 29.6% and 29.7% for the year, compared to 30.4% and 29.9% in quarter four and full year 2023, respectively. Total SG&A expense was $181 million in quarter four or 8.9% of revenue. For the full year, total SG&A expense was $727 million or 8.8% of revenue, a decline from total SG&A expense of $733 million or 9% of revenue for the full year 2023. Adjusted EBITDA was $423 million for the quarter or 20.7% of revenue. In the comparable period last year, adjusted EBITDA was $448 million or 21.7% of revenue, representing a year-on-year decrease of 5.7%. For the full year 2024, adjusted EBITDA totaled $1.74 billion or 21% of revenue, an increase of 2.5% over full year 2023, and a 10 basis point increase in adjusted EBITDA margin. Adjusted operating income for quarter four was $385 million, a margin of 18.9%. Net interest expense was $47 million for quarter four and $205 million for the full year 2024. On a full year basis, net interest expense declined $110 million or 35%. The effective tax rate was 16.5% for the quarter as well as for the full year 2024. Adjusted net income for the quarter was $282 million, a margin of 13.8%, equating to adjusted earnings per share of $3.43, a decrease of 0.9% year-over-year. For the year, we recorded adjusted earnings per share of $14 an increase of 9.5% over 2023. In the fourth quarter, the company reported $8 million of transaction and integration related costs. U.S. GAAP income from operations amounted to $297 million or 14.6% of revenue during quarter four. U.S. GAAP net income in quarter four was $260 million or $3.16 per diluted share, compared to $2.6 per share for the equivalent prior year period, an increase of 21.5%. For the year, we recorded U.S. GAAP net income per diluted share of $9.53, up from $7.4 in 2023. Net accounts receivable was $1.07 billion at December 31, 2024. This compares with a net accounts receivable balance of $1.17 billion at the end of quarter three, 2024. DSO was 47 days at December 31, 2024, a decrease of five days from quarter three, 2024 and flat from quarter four, 2023. Cash from operating activities in the quarter was $338 million and free cash flow was $277 million in the quarter, bringing our full year 2024 free cash flow to a total of $1.1 billion in line with our target for the year and representing an increase of 10% over full year 2023. At December 31, 2024, cash totaled $539 million and debt totaled $3.4 billion, leaving a net debt position of $2.9 billion. This compared to net debt of $2.7 billion at September 30, 2024, and net debt of $3.8 billion at December 31, 2023. We ended the quarter with a leverage ratio of 1.7x net debt to adjusted EBITDA. Our balance sheet is very strong, but we remain disciplined, as we consider opportunities for further capital deployment. Our overall strategy is focused in the near-term on a balanced approach to deployment in favor of share repurchases as well as opportunistic M&A execution. We made significant share repurchases in quarter four, totaling $400 million, at an average price of $217, given our view on the dislocation in the valuation of the company, which brought our full year total share repurchase amount to $500 million in 2024, at an average price of $229. We plan to remain active in buying back shares in the near-term and have secured an additional $750 million authorization from our Board of Directors, bringing our total current authorization to $1 billion. We will also continue to evaluate M&A opportunities to further scale our current service offerings in strategic areas that can support future growth. With that, we'll now open it up for questions.

Thank you. [Operator Instructions] We're now going to our first question. And the first question is coming from Justin Bowers from DB. Your line is open. Please go ahead.

Hi, good afternoon, Steve and Barry. Can you discuss the demand environment and how that's evolving for both large pharma and biotech customers? And then, a quick follow-up on that is, you talked about the strength in Phase 1 and we've heard about that across the industry as well. And should we view that as a leading indicator for what's to come down the pipe in Phase 2 and beyond over the next year or two?

Sure, Justin. So in terms of what we're seeing in the environment for both large and biotech, I think as I said, our RFP numbers have been very solid. Certainly, the back end of the year, fourth quarter, they were up somewhat and across the last 12 months, stable in the large pharma and up to the low single-digits in the biotech. So, we see -- we're seeing some good opportunities come through the pipeline being reasonably full. Of course, that needs to translate into wins and then revenue of course. But overall, the demand environment we see has been pretty solid right across the segments there. Overall, I think we're in a good place there. In terms of early phase and bringing through, as I mentioned in my notes or in my scripted comments, we are seeing some improvements and some growth in our early phase business. It's a modest part of our overall organization of course, but it's a very important part. We are seeing some nice uptick there both from an RFP and a revenue point of view. Not dramatic, but it's certainly a trend that, we're liking to see. Whether that translates into more Phase 2, Phase 3 business, I think is something we could debate today, but we won't do that. We haven't traditionally seen a lot of pull through Phase 1 through to Phase 2, Phase 3. But having said that, particularly with the smaller companies, the biotechs, there is some potential for that to happen. But I'd caution you to make too much of a correlation between growth in Phase 1 and that subsequent same sort of growth in Phase 2. Across the business, across the industry, there's a correlation I believe and I think good success or compounds coming through in Phase 1 will tend to lead to more opportunities in Phase 2, 3, but it's a fairly loose correlation I would say.

Thank you. We're now going to go to the next question in the line. And this question is coming from Patrick Donnelly from Citi. Your line is open. Please go ahead.

Hi, guys. Thank you for taking the questions. Steve, maybe on the back of that, it sounds like the demand environment, you sound okay on it, in general. Again, maybe a little bit of optimism in there. You obviously gave a very wide range, particularly on the earnings side, to start the year a month ago. Are you feeling any different today than a month ago? Are things firming up a little bit? I guess when we think about that range, 13% to 15% particularly, what could lead us to the bottom end there? Or, are you feeling a little bit better about maybe edging towards the midpoint or above? And then on the back of that, if I could, for Nigel, just how you think about the margins, as we go through the year, the moving pieces? What are the cost actions you guys are looking at, if things do soften a little bit? Thank you guys so much.

Yes. Patrick, I really don't think the situation has changed much from where we were four to six weeks ago at JPM. We talked about -- we have provided a wide range, because there is some caution and we are seeing some volatility in the market. And so, I don't have a lot more to say really from what we said, it's mixed. There are some challenges out there. There are certainly a number of opportunities out there, which would lead us to the upper end of that range, but there are also of course some risks there, which would push us in the bottom. So at the moment, as I say reaffirming guidance. We think that's the right thing to do. The range of guidance on both revenue and EPS remains the same, because we're really only a month or so down the track, I think, be able to narrow that range as we get obviously further into the year. I'll leave Nigel with the margin question.

Yes, Patrick. Consistent on the margins as well from what you would have heard us say before essentially, when you look at our full year margin in 2024 at an EBITDA level, it was about 21%. And for this year, just given some of the pressures we talked about before, particularly the pass through Steve mentioned in H1 especially, we would expect our full year margins to be probably somewhere around 1% lower this year. Within that lower in H1 and obviously then higher in H2, just given the cadence of some of that pass through activity and also then the cost adjustment actions that are sort of ongoing at ICON typically. So hopefully that gives you a flavor for us.

Thank you very much. And we're now going to take the next question in line. This question is coming from Luke Sergott from Barclays. Your line is open. Please go ahead.

Great. Good morning. Thank you for the question. I just kind of wanted to get a sense of the 4Q booking strength. You guys had a really big step-up there sequentially. Anything that we've seen outside of like typical seasonality over the last few years. So can you just talk about, what the makeup of that bookings are, more FSP or more, like, low cost, you know, lower price business? Is there any type of trend there or waiting towards a small versus large pharma? And then kind of how this leads into your jump-off into Q1 and how we should think about that?

Sure, Luke. The strength in Q4 was probably more around the biotech segment actually in terms of the wins we were able to secure. We brought in a number, a couple of significant full service biotech opportunities, which I think, as they start up, albeit there's always a ramp up period. Large pharma was more muted, I would say, in Q4. But overall, we were very pleased with the gross number that we're able to pick up cancellations. As I mentioned in my call, my notes were a little elevated and that was sort of across the different segments. Nothing perhaps a little bit more in large pharma actually in the end rather than biotech. But again fairly well spread and no particular therapeutic area there. So we were pleased with the improvement in the wins on the biotech side of things and that's continued in terms of the opportunities that we're seeing. They're not quite ready to declare victory, but we do see some green shoots in that space and then some opportunity as we get into 2025 obviously and then in 2026. And so, we'll play that through. We need to continue that momentum, if you like from a business development point of view. And I think we have the pipeline to be able to do that and that should then start to translate into some solid revenue gains as we get later in this year and into 2026.

Thank you. We're now going to move on to the next question in the line. And this question is coming from Ann Hynes from Mizuho. Your line is open. Please go ahead.

Great. Thank you. Can you talk about pricing trends in both segments, biotech and large pharma, just competitive pricing trends? And also, in relation to your last question, on the biotech strength, do you think you're gaining share from competitors? Or do you think it's just the underlying market gaining strength again? Thanks.

Let me take the biotech one first and then I'm going to hand over to Barry to talk a bit more about pricing trends that he's seeing within those segments. I think it's a little early to get too bullish around gaining share on the biotech market. And we have some work to do there. I think we've made some solid progress, but I think we still have some work to do. We're pleased with the opportunities we're seeing. I was very pleased with the business development performance. We now need to turn that into solid operational performance and revenue. And I'd like to get that question again in a quarter or two, because I think at that point, we'll be able to sort of be a bit more definitive about the progress we're making in terms of market share. But happy with progress, but I think more to do in that space. Pricing trends, Barry?

I don't think there's a whole lot to report on in terms of changes on competitiveness or otherwise of pricing. It's always been competitive. It remains the case. I think in the biotech space, we tend to compete on the amount of certainty and clarity we can give to customers, not just straight up sticker price on a particular study. So the quality of strategy, the experience and indications, the degree to which we can bring not only speed, but also predictability tends honestly, if anything, to be a bigger factor than the last couple of points on price. And as we said before, in large pharma, the real competition on price tends to be at these periodic refresh points for the large preferred provider, rather than at the point of award of individual studies. So nothing really to report in terms of how that played out in the quarter, certainly nothing different to previously reported quarters.

Thank you. We're now going to move on to the next question in the queue. And the next question is coming from David Windley from Jefferies. Your line is open. Please go ahead.

Thanks. Good afternoon, gentlemen, and, Barry, congrats on the promotion. I'm going to ask a multi-parter, maybe predictably, but I'll headline it by saying my driving point here, Steve, is around kind of burn rate essentially and getting that some of the points you made about, still slow decision making. So, the trend in the industry and that's gotten a lot of lip service has been FSP. We got that back in a couple of different surveys. And my point there, I guess, is that, FSP and particularly the way you guys book FSP in backlog would drive a higher burn rate. But then, ICON has actually won a couple of full-service partnerships that you've highlighted recently, and I'm not clear on how much business from those partnerships might be flowing into backlog, and that might have an opposite effect on burn rate. So punch line here is, you talked about burn rate being slower. You talked about still slow decision making. I'm curious about how FSP mix is shifting in your business and backlog and just want to hear you talk out more how the demand environment that sounds like it's getting better is not necessarily immediately translating into a revenue outlook that you had to guide a little lower when you came out in January? Thanks. Sorry for the long question.

That's okay, Dave. We know you well. You've almost answered your own question, Dave. To be honest with you, because you've got it pretty much right. FSP certainly does burn more consistently, more reliably and faster and full service less so. And of course, we wait for ramp ups and there's probably more delays with the full service sort of project. And particularly in the biotech space, some of those delays relate to decision making and how quickly we can get started. I was really pleased with our performance in the quarter in relation to, as I think you mentioned a couple of the strategic partnerships, new strategic partnerships that we've won and we've been able to secure work from actually two of those new strategic partnerships that has gone into the backlog. And that will play through certainly starting in this year, but it will have a limited impact, because again it's a relatively slow burn. And they are full-service projects that will help us to deliver a really solid margin. There's a number of things, pros and cons, tailwinds and headwinds on that. The FSP work that we won wasn't any more than we normally expect to win in a quarter. So, to the extent that, that will maintain or help us maintain the burn rate, the full service might slow it down a little bit. So I'll ask Nigel to maybe comment a little bit on the burn rate going forward, because that is an area that we're obviously working on very hard to progress.

Yes, Dave, getting back to the point, I don't think really FSP is any materially different in terms of proportion of our business than it has been. That was part of your underlying question. So that's not really a driver. It's more to the point Steve said, and you've heard us talk about before. We are seeing obviously a broader trend of more complex trials, which do take longer to start up and so on. We do continue to see delays in bio-techs just driving forward with awards that have been already made. So, those trends still are there. And then, at these points, we've had some nice wins in the full service side as well. So, we obviously exited the year at about 8.4% burn rate, and I'd say, it will be in the low 8s again through the course of the year, broadly similar.

Thank you. We're now going to move on to the next question in line. And the next question is coming from Jailendra Singh from Truist Securities. Your line is open. Please go ahead.

Yes, thank you. This is Jailendra Singh from Truist. I want to go back to biotech market. It looks like you're calling trends there still relatively mixed, some positive sign, but still some delayed decision making. How do I reconcile that with a commentary from some of your peers? One of your peers pointed to pretty stable trends there. Another CEO talked about funding still being a challenge. Is that primarily a function of type of biotech clients you work with? And related to that, as you guys -- have you guys been able to figure out one or two things which might be driving these decision making delays? And what kind of catalyst or clarity they're looking for?

Yes. It's a multi-factorial question that one, Jailendra. I think you characterized it well. We are seeing continued volatility and continued sort of mixed the environment in the biotech space. I think last year 2024 was a good year overall from a biotech funding or capital raising perspective, but it was volatile and it was up and down. And I think I got whiplash looking at the numbers each month. I think what -- also if you look at if you dig into the sort of characteristics of that, there was it wasn't particularly well spread across a large number of bio-techs. It was concentrated in certain bio-techs who had some very good science or some very good opportunities. And so, when it's not distributed as evenly as you'd like, it probably continues to challenge us in terms of how those customers, particularly the ones, who weren't so well-funded, allocate their capital. So I do think that's a component of the volatility and the challenge that we see in the biotech environment going forward. Notwithstanding that, as I say, the RFPs were in a reasonably solid place up, as I said, low single-digits. We would like to think and we would expect that, that will continue. And if we see the continued development and the up-ticking of the capital markets, I think, we're starting to see some green shoots there. I don't think, I'm quite ready to declare victory, but we do see some optimistic signs in the biotech segment, and it's an area that I think we're very focused on and I think we can make some good market share gains in the more medium-term.

Thank you. We're now going to move on to the next question in the queue. And this question is coming from Jack Meehan from Nephron Research. Please go ahead.

Thank you. Just had a guidance question for you, which is great to hear from you what your visibility into the 2025 revenue forecast is in terms of revenue coverage. I know some of your peers provide that stat, just be helpful to hear that. And then, also what sort of book-to-bill do you think you need in order to hit the forecast to kind of make up whatever gap there is? Thanks.

So Nigel might take that one. Jack, if you don't mind.

Yes, Jack. I mean, obviously, we've talked about there is increased uncertainty. There is volatility out there. That is why we've given a wider range. So forgive me, if we're not going to give you more specifics in terms of coverage, et cetera. Frankly, at this point, it's early in the year. Steve talked about the various pieces that are moving around. But again, we've reaffirmed the range, and let's keep plugging through the year.

And I think from a book-to-bill, Jack, as I mentioned, we're targeting 1.2x I think there possibly will be some volatility in that number, but 1.2x on a trailing 12 month basis is the target that we have. And we would like to think we would expect to be very close to that on a trailing 12 month, but I think there quite well be some volatility in that number.

Thank you very much. We're now going to move on to the next question in the line. And this question is coming from Max Smock from William Blair. Your line is open. Please go ahead.

Good morning. Thanks for taking our question. Congrats, Barry, on the new role. I wanted to follow-up on some of the COVID commentary you all made during the prepared remarks. Just on the BARDA COVID contract specifically, how much of that is still in your backlog? And how much are you baking into revenue from the contract this year at the midpoint? And how much should we expect to remain as we head into 2026? Thanks.

We have the BARDA work is still in our backlog. The COVID work is still in our backlog at about a low single digit number. As I said in my prepared remarks, one of those studies is moving ahead very actively, where I think it's actually today we start screening or in a couple of days we start screening. The other one has been delayed for reasons, unrelated to funding to some more technical aspects of the trial. But we would -- that has not been canceled. It remains in our backlog. We would hope and it's more hope than expectation that, that would come back towards the back end of the year. That's what we're planning for, or expecting. But we're being careful as we forecast and the reaffirmation of guidance, as I said, makes -- takes all of that into consideration, Max. So the COVID work remains important to us. Vaccine work remains important to us. But it's not a huge part of our portfolio or backlog. Vaccine work is in the low single-digits sort of on the backlog sort of thing. So while it's important, because it burns fast, back to Dave's question, it gets moving quickly. It's not a huge part of our portfolio. And so, I'll leave it at that.

Yes. Max, obviously, we won't give the individual contract contributions as we never do in our business. But, in totality across the business in terms of the COVID contribution for the year, we would expect it would pick up a bit from, the full year '24, in that, and represent about low single-digits in totality for COVID related business, in 2025.

Thank you. We're now moving on to the next question in the line. And the next question is coming from Michael Cherny from Leerink. Your line is open. Please go ahead.

Good morning. Thank you for taking my question. This is Asim Hussain from Michael Cherny. I know that you mentioned, you are managing cost in the volatile operating environment, which is obviously prudent. How are you thinking about the trade-off on these cost-cutting versus your views on growth? Thank you.

I think I got your question related to cost in relation to the delivering the work. I think that, was the trade-offs there. I mean obviously we're in somewhat challenging and we call it a transition year 2025, as we move through. We do have to be very active in aligning our cost base with the work that we have in the backlog and the work that's burning in the backlog. I'll ask Barry to comment a little bit in a minute because he has overall the largest part of the business in terms of our cost allocations. But there is certainly some work being done to realign those costs and to maintain our margins and to get to where we want to be from an EPS point of view. And that's we're very active on that. And we've got a good track record of doing that. So we won't be too specific, about where those cost reductions are happening, but it is something that's obviously occupying us pretty assiduously at the moment. Do you want to comment, Barry?

Yes. I think as we said, cost control is an ongoing competence at ICON. It's nothing out of the ordinary. And for us, we obviously manage our cost base in order to ensure that, we execute on growth opportunities where they exist or make adjustments where appropriate. So we're certainly continuing to invest in the business where there's opportunities to accelerate growth, and we'll manage our costs appropriately in order to do that.

Thank you very much. And we're now going to the next question in the line. And this question is coming from Elizabeth Anderson from Evercore ISI. Your line is open. Please go ahead.

Hi, guys. Thanks so much for the question. I was wondering, one, if you could talk about sort of the growth of FSP and bookings versus, say, a year ago. Is that sort of still on trend? Do you see sort of a softening and maybe a more balance between FSO and FSP in the booking? And secondly, can you talk about anything that would change your typical free cash flow conversion, in 2025 versus what we saw in 2024? Thanks.

Okay, Elizabeth. I'll let Barry have a crack at the FSP question, and then Nigel might talk about cash flow.

I think I'll just repeat what Steve said a little earlier, Elizabeth, which is FSP hasn't changed fundamentally as a proportion of our business. I think that's reflected, generally speaking, in the awards, in the backlog and in the revenue. So nothing material there. Obviously, there's waxes and wings on individual customers across quarter-to-quarter. But as a percentage of the overall business, I don't honestly have anything to report as a departure there. Nigel, perhaps you take the free cash flow?

Yes. Elizabeth, so cash flow, we obviously continue to manage cash flow very strongly. The company has a good record on that and finished 2024 really well, hitting the $1.1 billion free cash flow target that we set out. Within the year, you will have seen, as I mentioned before, there was an uptick in our unbilled revenue amount during the year of about $400 million through the end of Q3. And we did manage to start to make some inroads into that in Q4. It came down by about $75 million, but there still remains north of $300 million of a disconnect there, i.e. revenue was ahead of billings. So, inherently, that should impact free cash flow for this year to the tune of around that amount. Obviously, we are working hard to try and mitigate the impact of that, as we go through the year. And again, pleased to see we've already made some progress on that in the fourth quarter. But directionally, you should expect it to be lower than 2024, because of that fact.

Thank you very much. And we're now going to move on to the next question in the line. And this question is coming from Casey Woodring from JPMorgan. Your line is open. Please go ahead.

Great. Thank you for taking my questions. My first is just you talked about customers evaluating and changing development models and you also mentioned some of the new solutions you're launching. Can you just elaborate on that? Are these new solutions something customers are now asking for? And also curious, if customers have shifted their percentage of outsourcing spend versus in sourcing here as a result of these changing development models? And if you still assume that 100 to 200 basis points of annual outsourcing penetration in the market moving forward? Thanks.

Okay. Casey, you got your three questions in there nicely done. I'll let Barry go with the development model.

I think when we talk about changing development models, what we're really talking about is matching their partnering or sourcing strategy to their evolving development strategy. And so far as we've called out a trend, largely among the more established companies. It has been that by and large, everybody is doing some work in house, some work on an in source and some work on an outsourced basis. And we've tried to make a virtue out of meeting customers where they are and customizing our solutions to account for their preferences. So yes, that certainly is a very major point of engagement with our customers. There's not a one size fits all approach. And that's been something that's played out very well for us as we've seen that heightened period of activity for preferred providerships, refreshes and re-ups over the last 18 months or so. Of course, we are blending new capabilities. You talk about new solutions. It's not just about how we blend the modalities, it's about new capabilities. And Steve already alluded to, I think I spoke about, when we win, it tends to be because we can apply our processes, our systems, our technologies to demonstrate greater confidence in trial execution planning. So time to start, better predictability of recruitment rates, increased site performance and ultimately reduce time and cost. So these are certainly things that we tend to see. To the tail end of your question about FSO, FSP dynamics, I think there are certainly more people doing some FSP than there were five years ago. But as I said, I think it was to Elizabeth, there isn't a material difference in the proportion of our business that is FSO or FSP. As we move towards these blended solutions, we tend to be doing both models with a greater proportion of our customers, and we tend to be incumbent with a greater proportion of that customer universe. So nothing major to report in terms of the proportionality of FSO and FSP, but certainly those conversations focusing on blending and making sure, we're better able to customize those models.

And then, just on the outsourcing spend and penetration, Casey, we remain pretty positive and pretty constructive in the long-term in terms of R&D budgets moving ahead and outsourcing spend continuing to penetrate, continuing to move up at around 100 bps a year. That's what we've seen really over the last, I don't know, 15 or 20 years ever since I've been doing this in this business. And while it might go down and up a little bit year-to-year, we remain pretty constructive on the market. The value I think that our industry and it's not just ICON, but our industry brings to the pharma, I think most enlightened pharma development managers really do recognize the flexibility, the innovation and the can do approach that we take. And I think that's something that our industry brings to pharma development. And I think that's going to continue allow our market to continue to grow.

Thank you very much. And we're now going to move on to the next question in line. This question is coming from Charles Rhyee from TD Cowen. Your line is open. Please go ahead.

Hi. This is Lucas on for Charles. Thanks for taking the questions. I wanted to ask about elevated cancellations in 4Q, just, if there's any common themes amongst these cancellations, obviously a big step-up in 4Q. And then, in terms of that trend kind of moving forward, others have indicated that cancellations could continue into the early part of 2025. So I guess what are your guys' expectations for this trend moving forward? And then is there any assumption built into your revenue guide that assumes this does continue forward?

Yes. As I said on the in my prepared remarks, we saw it was a fairly even spread across the business in terms of the cancellations, not just for Q4, but as we look back over 2024 in its entirety. So nothing much really to call out. There, possibly a little bit more in the large pharma space over the full year. But as we've said, biotech continue to be challenged a little bit in terms of their availability of capital. And I would expect the cancellations would continue to be on the higher side of normal, I'll put it that way, as we go through 2025. And until we're really in a situation where the capital markets are really back and fully available to biotech, some of the science has been flushed out or some of the more fragile science has been flushed out, if I could put it that way. I think we'll find -- there will be a little bit more on the elevated side. Having said that, we were very pleased as I said with our gross booking number and the opportunities in the pipeline, I think suggest that that can continue at our targeted rate. And I think, we've got some real opportunity there. Overall, we're very optimistic, notwithstanding the fact that, we do believe that cancels will be a sort of a passive more elevated factor part of our life going forward. And that is all contemplated and considered, as we've done the guide and as we reaffirm our guidance as well. We've thought that through. We've made some projections on that front and we believe we've taken that all into account.

Thank you. We're now going to move on to the next question in line. And this question is coming from Matt Sykes from Goldman Sachs. Your line is open. Please go ahead.

Thank you. Good morning. Thanks for taking my questions. A lot has been asked. But I just want to focus on one topic regarding policy uncertainty and specifically the reports of FDA headcount reductions. Have you had any kind of comments or feedback from your customers in terms of how that might impact their business and pipeline progression? And then, as you reflect on your own business, any kind of impact that that could have to you? I know there's a lot of uncertainties, but just would love to get your view on that.

I mean, we haven't had any specific comments, or at least I haven't from the team shaking their head here around what's happening within FDA and potential reductions in headcount et cetera, et cetera. There's -- as you quite rightly noted a fair bit of uncertainty in terms of what's happening in Health and Human Services with the recent appointment of the new secretary. We don't think, that's necessarily, it's all going to be bad. We think there's some potential opportunities for us in that space. As regulations get challenged, I think that could be a positive for us. We have heard some talk around from our customers around the potential for small molecules to be extended the same sort of patent protection, as the large molecules within the IRA Act. I think that would be a positive for our customers. We've heard some positive commentary from our customers, in terms of where even the President and the new administration and the new Health and Human Services sector will go in terms of regulation, but also in terms of wanting to get more information, wanting to get more data on things like vaccines. And so, you want more data on trial, you need to do more trials. And so, I think overall, there's -- it's probably more positive than negative in terms of the new administration. Not to say that, there aren't some risks and certainly to agree with you in that it's very early days at this point and very hard to we're really just speculating. But we're certainly not totally downbeat on that. We believe, there's going to be a lot of good things brought forward by the new administration and we think we can benefit from it.

Thank you very much. We're now moving on to the next question in line. And this question comes from Michael Ryskin from Bank of America. Your line is open. Please go ahead.

Great. Thanks for squeezing me in. Steve, I kind of want to go back and ask maybe a big picture question. And I'm thinking back to last quarter's earnings call, when you frame sort of your updated view and what happened on 3Q. And if I remember correctly, you kind of framed it from the perspective of every period you forecast, there are risks and opportunities that are unknown to you as you're going in. And sometimes you capitalize on opportunities, sometimes you avoid the risks or vice versa. And you kind of frame 3Q as a lot more of the risks materialize and a lot fewer of the opportunities, but still sort of being in that general range you look at. I just want to get now that, you have fourth quarter under your belt, you've got January and most of February, has your perspective on those ranges kind of been the same in terms of balancing the risk and the reward, the opportunities and the downsides going forward? And what I'm trying to get back to is, your comments on how biotech played out in the fourth quarter? How bookings played out? Your thoughts on the gross booking wins and the cancellations. Are you still operating in that sort of same environment where it's a little bit of a balance and comes down to execution to get to the upper end of that?

The short answer is, absolutely, yes. We've analyzed the risks within our portfolio, within the opportunities that we've had. And our finance team has been doing sterling work in looking at that and evaluating and quantifying what those risks are. And on, the other side, we're also looking at the opportunities and what can potentially come into the organization in terms of opportunities or RFPs or work that we know about now. And then, of course, we always expect that, some things that we don't know about will come in. As I said, it's still very early in the year. So our evaluation continues. We've taken a good look at ourselves, I think over the last couple of months and I think we've done a good job in Q4 in quantifying those opportunities and those risks. I believe, our guidance, as I think everybody is well aware remains wide and that's for a reason. We are in a very volatile environment. So characterizing those opportunities and the risks is probably a little bit more challenging. There are probably more of them both ways, and they may be a little larger in some ways as well. So that's why we've maintained our wide range on both EPS and revenue and that will continue at least for the next few months. We'll obviously consider that, as we get to our first quarter earnings call and probably our second quarter earnings call, and wherever we can look at what those risks and opportunities are and look to narrow that range. But at the moment, we still see as I've characterized a somewhat mixed environment, where there are plenty of opportunities, but there are also some risks as well. And we want to be very transparent about that. And we've considered those as we've gone forward and as we've set the guidance ranges, which we did back in January.

Thank you. We're now going to have our final question. And our final question comes from Josh Waldman from Cleveland Research. Your line is open. Please go ahead.

Thanks for taking my questions. Steve, I believe you mentioned stronger RFP activity end of year. I guess, was this above normal seasonality? And at this point, do you think there's anything unique about the current environment that suggests, there could be maybe more of a disconnect between RFP flow and revenue conversion versus historical patterns? Or, do you still feel pretty confident RFP flow remains a good indicator of near-term demand?

Josh, I think RFP flow is a somewhat reasonable, I'll just put it that way, indicator of future revenue. But it's not perfect and not by a long way. We have within those RFPs, I think I've said it to you all before, about a third we win, about a third we lose and about a third gets canceled as an RFP. And so, when you look at those -- and that varies a bit obviously within the various segments of the business. But ultimately the work we win in tradition, over the last several years has tended to be slower burn oncology rare disease, Nigel talked all about it, where we've had the opportunity to win vaccine work or increasingly, as we talked about on the call, we've made some progress in the cardio-metabolic space, we believe that work will burn a bit faster. So from that point of view, as the therapeutic mix sort of shifts within the RFP portfolio or work that we have in the backlog, we do have the potential to improve our burn rate and move our revenues forward. But I think it's a little early to say that, the sort of uptick that we saw at the back end of the year or the positive signs that we saw in the back end of the year, are going to convert into revenue in the very short-term. I tend to look at the RFPs across a trailing twelve month basis. And on that basis, on the large pharma space, we were stable, but relatively flat. On the biotech side, we were up, but the business was at a low single-digits. So this while the back-end of the year was positive over the longer sort of twelve month period, it was they were fairly stable and positively and I'm constructive on it. But I don't think it's going to necessarily drive a large amount of revenue into or more than we would expect normally into 2025. I'll just leave it at that.

There's no more questions in the queue at the moment.

Okay. So, thank you, operator, and thank you all for attending the call today. I want to close by reiterating my confidence in the underlying fundamentals of our industry, the strength of the ICON offering and our strong position in the market. We'll continue to navigate this environment as we did in quarter four, investing in our business to take advantage of the opportunities, we see across the market and advance our innovative solutions for customers. Thanks for joining us and your support of Icon.

This concludes today's conference call. Thanks for participating. You may now disconnect.