Earnings Call Transcript
Icon PLC (ICLR)
Earnings Call Transcript - ICLR Q4 2021
Operator, Operator
Good day and thank you for standing by, welcome to the ICON Plc, Fourth Quarter results 2021 conference call. At this time, all participants are in listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our first speaker today, Kate Haven, please go ahead.
Kate Haven, Speaker
Good day ladies and gentlemen. Thank you for joining us on this call covering the quarter and full year ended December 31, 2021. Also on the call today, we have our CEO Dr. Steve Cutler, and our CFO, Mr. Brendan Brennan. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call. Certain statements in today's call will be forward-looking statements. These statements are based on management's current expectations and information currently available, including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, and listeners are cautioned that forward-looking statements are not guaranteed the 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 related to these forward-looking statements may be found in SEC reports filed by the company. This presentation includes selected non-GAAP financial measures, which Steve and Brendan will be referencing in their prepared remarks. For a presentation of the most directly comparable GAAP financial measures, please refer to the press release statement headed Condensed Consolidated Statements of Operations. While non-GAAP financial measures are not superior to or a substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes. We will be limiting the call today to one hour, and 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.
Brendan Brennan, CFO
Thank you, Kate. In quarter four, ICON achieved gross business wins of $2.79 billion and recorded $413 million worth of cancellations. Consequently, net awards in the quarter were $2.38 billion, resulting in a net book-to-bill of 1.26x. Full-year 2021 gross business wins were $8.12 billion and cancellations were $1.16 billion, resulting in net business wins of $6.96 billion on a net book-to-bill of 1.27x. With the addition of the new awards in quarter four, our backlog grew to a record $19.1 billion, representing an increase of 2.6% on Q3 2021, or an increase of 9.5% year-over-year on a combined company basis. Included in the press release are earnings slides, you will note a reconciliation of non-GAAP measures. Adjusted EBITDA excludes stock compensation expense, restructuring costs, foreign currency gains and losses, amortization, and transaction-related costs, and their respective tax benefits. Adjusted revenue in quarter four was $1 billion, $881 million, this represents a year-on-year increase of 147.4% or 148.7% on a constant currency basis. On our combined company basis, adjusted revenue increased 15.1% from the comparable period last year. For full-year revenue, the number was $5 billion, $481 million. This represents a year-on-year increase of 95.9% or 94.5% on a constant currency basis. On a combined company basis, adjusted revenue increased 24.8% from 2020. We continue to see an improvement in our top 25 customer concentration in the fourth quarter. Our top customer represented 8.5% of revenue, and our top five customers represented 28.3% of revenue. Our top 10 represented 41.4%, while our top 25 represented 61.4%. In the full-year 2021, our top customer represented 8% of revenue, and our top five customers represented 31.6% of revenue. Our top ten represented 45.3%, while our top 25 represented 65%. Adjusted gross margin for the quarter was 28.1%, compared to 27.9% in Quarter 3, full-year adjusted gross margin was 27.9%. Adjusted EBITDA was $333 million for the quarter, or 17.7% of revenue. In the comparable period last year on a combined company basis, adjusted EBITDA was $295 million or 18.1% of revenue. This represents a year-on-year increase of 12.7%. On a combined company basis, full-year 2021 adjusted EBITDA was $1,248 million or 16.7%. This compares to adjusted EBITDA of $996 million for the full-year 2020 or 16.7% of revenue, representing an increase of 205.3% year-on-year. Adjusted operating income for the quarter four was $308 million, a margin of 16.4%. The adjusted net interest expense was $44.3 million for the quarter and the adjusted effective tax rate was 17% for the quarter. As noted earlier this year, we expect the full-year 2022 adjusted tax rate to be approximately 16.5%. Adjusted net income attributable to the group for the quarter was $218 million, a margin of 11.6% equating to diluted earnings per share of $2.63, an increase of 25% year-over-year. Full-year adjusted net income attributable to the group was $666 million. During the quarter, the Company recognized GAAP revenue of $1.885 billion, and $5.481 billion of GAAP revenue in the full-year 2021. In the fourth quarter, the Company recorded $16 million of transaction and integration-related costs. Full-year transaction and integration-related costs were $198.3 million. U.S. GAAP income from operations amounted to $144.5 million, or 7.7% of revenue during the quarter four. Full-year U.S. GAAP income from operations amounted to $378.5 million. U.S. GAAP net income attributable to the group for the quarter four was $76.5 million, or $0.92 per diluted share, compared to $1.90 per share for the equivalent prior-year period. Full-year U.S. GAAP net income attributable to the growth was $153.2 million or $2.25 per diluted share. Net accounts receivable was $642 million at December 2021, this compares with a net accounts receivable balance of $540 million at the 30th of September 2021. On a GAAP comparative basis, days sales outstanding were 31 days at December 21st, 2021 as compared to 26 days’ sales outstanding at September 30th, 2021. This also compares to 57 days at the end of December 2020. Cash generation from operating activities in the quarter was $219 million. At December 31st, 2021, the company had a gross cash balance of $754 million and debt of $5.436 billion, leaving a net debt position of $4.682 billion. This compared to a net debt of $4.918 billion at September 30, 2021, and net cash of $494 million at December 31, 2020. Capital expenditure during the quarter was $47.7 million driven by spend associated with IT infrastructure and systems, as well as additional investments in our facilities and laboratories. We ended the year with a net debt to trailing 12-month adjusted EBITDA ratio of 3.4 times. The priority for capital deployment remains on debt pay down in the near term. Given our strong cash flow generation, we reiterate our target of exiting 2022 below three times adjusted EBITDA well ahead of the initial target we set in 2021. In addition, our Board of Directors authorized a share repurchase program up to $100 million, which we intend to deploy opportunistically beginning this quarter. And with all of that said, I'd now like to hand over the call to Steve.
Steve Cutler, CEO
Thank you, Brendan, and good day, everyone. 2021 was a remarkable year for ICON. Throughout the year, we completed a significant acquisition that doubled our organization's scale and established us as a leading health care intelligence and clinical research entity. Our employees managed the challenges posed by the ongoing pandemic with skill, implementing innovative solutions to maintain clinical trials and ensure that patients had access to life-saving treatments despite ongoing restrictions. We achieved our mission to expedite the development of our clients' drugs and devices by supporting 30 new drug approvals in 2021 across various areas, including liver disease, schizophrenia, multiple cancers, and infectious diseases. I am extremely proud of the contribution the ICON team made in combating COVID and in the development of critical vaccines and therapies. The clinical development landscape was strong throughout 2021 as biopharma spending continued to rise, and funding in biotech remained near the high levels of 2020. Scientific advancements like mRNA vaccine techniques and cell and gene therapies have opened up new avenues for developing innovative drugs that could significantly impact treatment options for various diseases. Customers are increasingly viewing CROs as strategic partners rather than mere service providers in the development of these complex therapies. We saw a strong RFP volume throughout the year, rising modestly on a year-over-year basis both for the quarter and the full year. Despite a decline in biotech funding from the record levels of 2020, overall demand in the small Biopharma customer segment remained robust. In fact, in the fourth quarter, we noted notable strength in RFP activity in the small and mid-sized Biopharma sectors, driven by strong financial positions that continued to enhance the demand for top-tier development services. We were pleased to see a reduction in our concentration among our top 25 customers both sequentially in the fourth quarter and for the entire year, a change driven by the new combined ICON. Overall, our customer mix remains balanced, with nearly half our revenue coming from large Biopharma and 45% from small and mid-sized Biopharma companies. Among these smaller companies, those spending less than $100 million on annual R&D made up a mid-teen percentage of our total revenue in 2021. This percentage can fluctuate quarterly, but we have not encountered issues regarding cash collections or increased bad debts in this customer subset. Our strategic engagement with customers continues to show positive developments. ICON's suite of integrated and innovative solutions attracts Biopharma clients of all sizes and across various development modalities. Our success in fostering lasting partnerships with our customers, providing strong delivery, has led to further opportunities to expand existing relationships and forge new ones. As the new ICON, we can enhance our role as a strategic partner to our clients. With our unique resources, top talent, and distinctive solutions, I am pleased to announce that we secured a partnership agreement with a major pharma client during the quarter, which expands our ongoing relationship across multiple services and reinforces the strategic advantages of the new ICON organization. In the quarter, ICON achieved net business wins of $2.38 billion, resulting in a quarterly book-to-bill ratio of $1.26 billion and increasing our backlog to $19.1 billion, reflecting an approximate 3% rise over the third quarter and nearly 10% year-over-year on a combined company basis. We view our backlog as a solid figure based on contracted and awarded work, calculated with a conservative yet realistic approach toward associated pass-through costs. New award activity performed well across various operational segments. For the full year of 2021, on a combined basis, our revenue and adjusted EBITDA both rose an impressive 25% year-over-year, landing at the midpoint of our guidance ranges for revenue and adjusted EPS for the year. Our backlog burn for the quarter remained above 10%. Cash collection efforts have been strong, with a DSO of 31 days, down from 57 days compared to December 31, 2020. Consequently, I am pleased to report that these efforts enabled us to make a $500 million payment on our term loan B facility at year-end, decreasing our leverage to 3.4 times adjusted EBITDA, which includes synergies at the end of 2021. This positions us to exit 2022 with a projected leverage ratio of about 2.5 times adjusted EBITDA. We are satisfied with the advancements made towards our cost and revenue synergy targets. As announced earlier this year, we anticipate achieving a run rate of about 50% of our $150 million cost synergy target, or $75 million, by the end of this year. Our goal for revenue synergy remains unchanged at $100 million by 2024. We have seen strong cross-sell award activity, particularly in areas such as central and specialty labs, the Accellacare site network imaging, and early phase services. Our integration process is progressing well, with significant accomplishments in the initial six months as a combined organization. Over 30 facility integrations across our sites have been completed, unifying our workforce and streamlining our operations as pandemic restrictions reduce. Our planning and execution of technology and systems integration are in advanced stages, focusing on enterprise-level systems to facilitate a consistent, unified, and engaged employee experience as soon as possible. Our new global business support services model is beginning its organization-wide implementation in areas like finance, IT, and other administrative functions. We have also launched a new branding campaign that showcases the common values of the new ICON, reflecting the best of both organizations we have integrated. Our primary goals for the integration process remain unchanged: delivering on time and on budget for our customers while ensuring a positive employee experience. To support this, we have increased our investments in initiatives aimed at improving retention and attracting top talent in the industry as we strive to become the employer of choice within the CRO sector. We are proud to be the only CRO included in Forbes' list of America's best large employers for 2022. As the job market remains fiercely competitive, we understand the importance of ongoing investments in our workforce and supporting them in areas like career development and training programs. With the expanded scale of new ICON, we are excited about the diverse and expanded career opportunities available to our entire employee base. While the COVID-19 pandemic challenges continue, we also see areas of opportunity. Together with our Biopharma partners, ICON has been instrumental in the ongoing development of COVID vaccines and therapies. We have efficiently conducted clinical trials within record timelines, establishing sites and recruiting patients with enhanced effectiveness. Our site network played a vital role in many of these crucial vaccine trials, showcasing the strategic advantages we provide through our owned and partnered sites in the Accellacare network. The peak revenue from COVID programs occurred in the first half of 2021. As expected, the volume of COVID work further diminished in the fourth quarter to mid-single-digit percentages of total revenue as large vaccine trials gradually conclude and therapies gain a larger share of our contracted projects. By the end of the fourth quarter, our backlog from COVID-related projects further declined, making up around 5% of our total backlog, a slight decrease from the end of the third quarter. We expect that revenue from COVID-related vaccines and therapies will account for less than 5% of total revenue in 2022, assuming no need arises for large-scale trials of new variants. Despite the onset of the omicron variant, we maintained resilience from our sites and staff throughout Q4. Approximately 15% of our sites worldwide remain restricted in some capacity due to COVID, a level consistent with Q3. Innovation is increasingly valued in our industry and by our customers, especially in light of the global pandemic, which has necessitated changes in how we efficiently execute clinical trials. We are witnessing the deployment of solutions like remote and risk-based monitoring across the majority of clinical trial programs, with a significant increase in hybrid trials initiated over the past few years. Our innovation priorities focus on providing enhanced solutions to address essential customer needs, including quicker access to diverse patient populations and more efficient clinical development. In response to customer demand for innovative solutions, we have continued investing in unique partnerships and broadening our offerings to solidify our leadership in transforming clinical development. In the quarter, we announced an expansion of our Accellacare site network, establishing partnerships with six new research sites across four countries. These new site collaborations further our strategy of enhancing the reach and capabilities of our network while also expanding our therapeutic depth and expertise in CNS and immune diseases. With these new partnerships, our site network now incorporates over 100 active locations in eight countries, giving us access to over 9 million patients worldwide. This extensive reach and increased resources have enabled us to deliver greater efficiencies in our clients' trials, including swifter patient recruitment and study startup at ICON sites compared to industry averages. Additionally, we have made considerable investments in our digital health platform, which is a central element of our Decentralized Clinical Trial offering. Now branded as the ICON Digital Platform, or IDP, this platform enhances our already strong mobile application and integrates with other key functionalities like e-consent, wearables data capture, and telehealth services. One of our critical advantages lies in our capability to blend operational and functional expertise within our digital platform, enabling customization and enhancements based on customer requirements and our direct trial experience, while also offering a cohesive service that minimizes the need for third-party contracts, thereby improving accountability and reducing risks and timelines for our customers. Our leadership in successful decentralized trial execution was showcased through the presentation of chief heart failure trial results in Q4 at the 2021 American Heart Association Conference. This marked the only published positive fully decentralized trial we have witnessed in the industry. The large randomized trial required innovative planning, design, implementation, and specialized services to carry out. It integrated multiple components of our DCT offerings, including a mobile health platform with a smartphone app for participant enrollment and data collection, direct-to-patient logistics for drugs and devices, a virtual coordinating center, and wearable devices. In addition to enhancing patient retention rates, the trial results demonstrated a substantial increase in patient diversity, exceeding industry averages by more than four times. I commend the new ICON team for successfully executing this program in collaboration with a key pharma partner, establishing a new development model during a global pandemic and enrolling patients with heart failure, which is a particularly challenging condition to treat. This exemplifies our innovative strategy in action, providing solutions that support patient inclusion and fostering opportunities for diverse populations to participate in clinical research. Besides enhancing patient diversity and inclusion in clinical trials, we have seen trials incorporating decentralized components recognize other advantages, such as reduced data variability and more timely data capture through digital health technologies and wearables. By capitalizing on our extensive resources, technology, and product development proficiency, ICON is well-positioned to collaborate with our customers, offering insights on their hybrid and decentralized designs in relation to sites and patients, as well as identifying protocols that may be less likely to succeed. Implementing decentralized solutions is not a one-size-fits-all approach; every study must be assessed by an experienced team to ensure proper analysis. As this market continues to grow, we notice a consistent demand from our customers to discover new ways to tackle complex challenges in their development programs. We are dedicated to addressing our customers’ challenges as if they were our own. We commit to our investments in innovation through talent, technology, data, and analytics, as well as essential partnerships, including those with Deep Lens and Veradigm, announced earlier this year, to revolutionize conventional product development. We are enthusiastic about the opportunities before us to establish a new paradigm for bringing clinical research to patients and recognize the value of integrating stakeholders, sites, customers, and end-users. Following our strong performance in the fourth quarter and positive momentum heading into this year, we are reaffirming our 2022 financial guidance of revenue between $7.77 billion and $8.05 billion, which represents a growth of 42% to 47% compared to full-year 2021 revenue. Our adjusted earnings per share guidance ranges from $11.55 to $11.95, reflecting an increase of 20% to 24% over full-year 2021 adjusted earnings per share. As we look ahead beyond 2022, we maintain our expectation of delivering on the mid-to-long-term financial projections shared a year prior, with anticipated revenue growth in the mid-to-high single digits on a combined company basis, as well as adjusted EBITDA growth in the low teens and EPS growth in the mid-to-high teens. We are eager to share more about our long-term strategies at our in-person Analyst Day event on St. Patrick’s Day, March 17, 2022, at our site in Blue Bell, Pennsylvania. The event will be webcast and feature several members of ICON’s leadership team discussing our key strategic focus areas, including innovation and technology. Finally, I am excited that our team’s exceptional performance in 2021 has earned us several industry accolades, including Scrip's Best CRO award. As previously mentioned, ICON was the only CRO recognized in Forbes' America’s Best Large Employers list for 2022. Before we transition to Q&A, I want to sincerely acknowledge and thank all 38,000 ICON employees worldwide for their dedication and hard work during the quarter and throughout 2021. We anticipate continued success in 2022 as we work towards building the world’s leading health care intelligence organization and shaping the future of drug development. Operator, we are now ready for questions.
Brendan Brennan, CFO
Thank you.
Operator, Operator
Thank you, dear participants. We will now begin the Question-and-Answer session. The first question comes from the line of Eric Coldwell from Baird. Please ask your question.
Eric Coldwell, Analyst
Thanks. Good morning. I just have one quick clarification and then a question. Steve, at the very end, I think you said your midterm targets were for mid-to-high single-digit revenue CAGR. The slide deck says high single-digit. I may have misheard you. I just want to get a clarification on that.
Steve Cutler, CEO
Checking. Mid to long-term revenue growth mid to high single-digits on a long-term basis. Eric, on revenue, mid up to high single-digits.
Eric Coldwell, Analyst
Okay. Thank you. And then on the client mix, I appreciate all the additional comments today. We have a group of companies in the space that all characterize and categorize their biotech mix and client mix quite differently. You gave some additional detail today talking about under $100 million of annual R&D spend. I was curious if you could maybe parse that just a bit further and talk about pre-commercial clients that don't have a marketed approved product and are not generating their own revenue. I suspect that it's a slightly smaller subset of that sub-100 million R&D spend, but if you had any additional color would be great. Thank you.
Steve Cutler, CEO
Sure. As we mentioned, we consider our small biotech clients to be those outside the top 75. This group represents about a third of our revenue and backlog, and within this subset, I indicated earlier that about half are quite dependent on revenue or capital markets. We estimate that this segment contributes approximately 15 to 16% of our revenue and backlog, represented by pre-revenue customers. Our exposure to this group is modest, and we manage it carefully by conducting credit checks on these clients. We make an effort to ensure that our cash collections from them exceed our usual figures, and so far, we haven't encountered any significant issues with bad debts or payment challenges beyond what we typically experience. Overall, we believe we handle this segment effectively and are in a solid position. Most of these clients are very well-funded, with average cash reserves that can support them for two to three years. Therefore, we feel comfortable working with them to develop their portfolios and advance their programs.
Eric Coldwell, Analyst
And, Steve, I would assume that that mix, that 15% to 16%, is spread across at least several hundred clients if not even more than that. Give any sense?
Steve Cutler, CEO
Yeah, it would be in that range. Yes, it would be in that range. So several hundred, yes. It's a large number of customers.
Brendan Brennan, CFO
Long-term. Yeah.
Steve Cutler, CEO
Long-term.
Eric Coldwell, Analyst
Yeah. Very good. Thanks, guys. I appreciate it.
Steve Cutler, CEO
You're welcome.
Operator, Operator
Thank you. The next question comes from the line of John Kreger from William Blair. Please ask your question.
John Kreger, Analyst
Steve, now that we have a couple of quarters under your belt with the new ICON, could you provide a breakdown of the business? I'm interested in how you would differentiate the traditional full-service business from FSP and possibly the central lab. Feel free to discuss it in whichever way you're comfortable. Additionally, looking ahead to 2022, are there any noteworthy areas in those various segments? Thank you.
Steve Cutler, CEO
We saw very strong growth in 2021 across all segments of the business. The full-service area performed well in both large pharma and biotech, particularly with small to mid-sized companies. Both sectors experienced nice growth. Our functional services group also grew significantly, alongside our specialty pharma, which includes our labs and early phase decentralized trials. All these areas showed solid annual growth. We are noticing good interest and activity in request for proposals across these segments, with biotech slightly leading large pharma in terms of opportunities and long-term growth potential. FSP remains a key area and is performing strongly for us. Our lab business has excelled, securing good contracts in the past year. In early phase, we have established ourselves as a significant player and continue to see real opportunities there. Our Accellacare site network and home health care had a great year as well. Overall, we did not encounter many weaknesses in our business throughout 2021, and we are optimistic about this trend continuing moving forward.
John Kreger, Analyst
Great. Thank you. Quick follow-up, maybe on staff hiring goals for '22 and how the turnover rate has been trending versus more historical norms in this tight labor market?
Steve Cutler, CEO
The labor market is indeed tight, and this is true for all our competitors and customers. We all operate within the same space, like fishing in the same pond, and we're encountering challenges in attracting and retaining the right talent. There are specific areas where demand is high and other areas that are relatively stable. For instance, there is currently a high demand for Clinical Research Associates in North America. We are exploring various strategies to retain our staff, although we have noticed a slight increase in attrition, which seems more linked to the current market conditions and competition for funding to develop drugs rather than any internal issues. Nevertheless, we are dedicated to addressing this challenge and are seeing some positive trends, with retention improving over the past few months. As we head into 2022, we expect this trend to continue. Combining our two organizations is creating new opportunities for employees to explore niche areas within our field. It's not solely about compensation; we are focused on providing career development opportunities, and we are making significant efforts in this area. Overall, we are optimistic about the progress, but we are maintaining intense focus on these challenges.
John Kreger, Analyst
That's great. Thank you.
Steve Cutler, CEO
Thanks.
Operator, Operator
Thank you. The next question comes from the line of Tycho Peterson from JPMorgan. Please ask your question.
Kevin Casey, Analyst
Hi, guys. This is Casey on for Tycho. Was curious what percentage of your trials are decentralized right now? How should we think about that percentage in 2022 given 15% of sites are currently impacted from COVID now? And then, how should we think about the net impact of increasing decentralization and the COVID roll-off capacity revenue for 2022? Your guide assumes a conservative assumption on pass-throughs. So just curious as to what you're thinking there? Thank you.
Steve Cutler, CEO
The majority of the trials we initiate incorporate some level of decentralization. These trials usually include elements such as remote monitoring, wearables, or home health services, but few are entirely traditional. We also see very few trials that are completely decentralized from the start. The Chief trial we completed was a fully decentralized study and performed very well, thanks to the team's efforts, but such cases are uncommon. Most of our trials are classified as hybrid, and we are gradually moving towards more decentralization. However, it may still be several years before a significant portion of our studies becomes fully decentralized. Regarding pass-through costs, we haven't observed any notable changes in the funds related to decentralized trials at this time. Since many of our studies are hybrid, there remains a strong presence of competitive site investigators, even though patient visits may be less frequent. Currently, the pass-through fees constitute around 25% to 30% of the total contracted phase, which had a slight reduction during the pandemic but is now returning to typical levels.
Brendan Brennan, CFO
And, Casey, to add to that, what you're referencing might be the fact that in the first half of '21, a significant portion of our portfolio was focused on vaccine trials, which had higher pass-throughs. We are now comparing against that in the first six months of '22, and this is accounted for in our guidance. Our expected run rates for COVID work in '22 are projected to be less than 5% of revenue. This indicates we are moving towards a more normalized level of pass-throughs for the full year 22, more in line with what was seen in '18 and '19, which will significantly enhance our margin profile, alongside maintaining strong underlying direct fee revenues.
Kevin Casey, Analyst
Got it, thank you. And then maybe just one to follow-up. So at our conference, that SG&A would be under 10% of revenues in the longer term. I think they were 10.5% in 4Q. So how should we be modeling what's for 2022, inclusive of the $75 million of synergies? What sort of leverage do you have on this line? Thanks.
Brendan Brennan, CFO
Yes, as we have demonstrated in the past, we are committed to managing costs effectively, and we aim to align our spending with our target of 10% or even lower by the end of the year. We believe this approach will be sustainable as we progress through 2022, and that’s how you should consider it in your modeling.
Operator, Operator
Excuse me. Have you finished with your question, sir?
Kevin Casey, Analyst
Yes. Thank you.
Operator, Operator
Thank you very much. The next question comes from the line of Elizabeth Anderson from Evercore ISI. Please ask your question.
Elizabeth Anderson, Analyst
Hi everyone. Thank you for the question. Some of your peers have mentioned the year's pacing and the acceleration of revenues. While I know you typically don’t provide quarterly guidance, could you give us a general sense of how you perceive the demand balance? Additionally, I don't want to make Steve restate anything, but I'm receiving numerous inquiries to clarify the mid-term growth targets you shared in your script compared to the slides. Could you please reiterate those for everyone?
Steve Cutler, CEO
Okay, so Elizabeth, I think as Brendan mentioned, for 2022, as we compare against the significant pass-throughs we experienced during the COVID trials in 2021, the growth will be slightly lower initially and is expected to accelerate as we move into the second half of the year. On a 606 basis, we anticipate a dip in the first half with improvement in the latter half. Regarding direct fee-based growth, we expect a solid increase, but the pass-throughs will pose some challenges in the early part of the year. For longer-term revenue growth, I previously stated we expect mid to high single-digit growth. This is our goal for the next couple of years, and we believe we can achieve that growth target.
Elizabeth Anderson, Analyst
Adjusted EBITDA is expected to grow at a low teens compound annual growth rate, while EPS is anticipated to grow at a mid-teens rate, in addition to those two.
Steve Cutler, CEO
Yeah.
Brendan Brennan, CFO
Yeah, absolutely.
Elizabeth Anderson, Analyst
Yeah. Okay. Perfect. Thanks for that clarification. I appreciate it.
Operator, Operator
Thank you. The next question comes from the line of David Windley from Jefferies, please ask your question.
David Windley, Analyst
Hi. Good morning. Thanks for taking my questions. Steve, we're hearing from big pharma and even some medium and maybe the upper end of small pharma that are small Biopharma that they are leaning or potentially leaning more on FSP vendors as they have difficulty filling internal positions. And then also hearing that PRA, we knew PRA was a fairly large percentage of PRA's revenue prior to your acquisition, but that maybe you and PRA, ICON pre-PRA and PRA were among the more aggressive or assertive in the FSP space, and so wondering both what you're seeing from a demand standpoint more specifically, and how the combination has purchased you competitively. Thanks.
Steve Cutler, CEO
Sure, let me address the initial question. We believe we hold the top position in the FSP market as the two organizations merge. The legacy PRA organization contributed a substantial functional group to the docs’ organization, and together, we feel we are significantly ahead of our competitors. This collaboration provides us with considerable flexibility in sourcing labor for our full-service groups as needed. It also presents us with the chance to integrate ourselves within large pharmaceutical companies and advance partnerships. In fact, we have begun several contracts as FSP arrangements that have evolved into more comprehensive collaborations. Therefore, we see numerous advantages in being the market leader in FSP, not only in terms of revenues and margins but also in our ability to foster partnerships with large pharma. Regarding your initial question about large pharma's shift toward FSP, it's clear that they are our primary clients in this area. They rely on us for resources due to the current difficulty in finding talent within the industry. This situation has likely contributed to growth in that sector, which might not have occurred if the labor market wasn't so tight. We view this as a valuable opportunity, as it can lead to additional prospects. Few companies operate exclusively in one area; most large pharmaceutical firms have elements of both functional and full-service needs. As a leader in both domains, we consider ourselves the ideal partner for these companies.
David Windley, Analyst
Thank you for that. As a follow-up regarding the duration, I would like to ask about the duration of the backlog and how it relates to the burn rate. I understand that the management team has developed this on a trial-by-trial basis. Management has mentioned aiming for a burn rate of around 10%. We have also heard that as the COVID situation begins to fade, many wins have occurred in longer-term areas such as oncology. I am curious about the duration of your backlog and what revenue growth you expect from the burn rate.
Steve Cutler, CEO
I'll let Brendan comment, but it's clear that we are still navigating the challenges posed by the COVID era. The vaccine trials progressed quickly and certainly contributed to enhancing our burn rate. Currently, we have increased it to over 10%, and our goal is to maintain it around that level. Various factors stemming from COVID, beyond just the vaccine trials, have aided us in improving our burn rate and guidance. The expedited approval process and the faster execution of trials have been beneficial, helping us to maintain our burn rate. I hope we can continue to adopt some of these efficient processes, which involve collaboration with sites, regulators, and customers. It's a broader challenge that encompasses our industry, but I remain optimistic that we can sustain many of the positive changes we've made and operate at a quicker pace. COVID has taught us that we can achieve things more rapidly when necessary, and this is crucial. I am hopeful that we can keep our burn rate elevated, even as COVID-related work diminishes over time, although this depends on our ability to partner and collaborate with all parties involved in clinical trials. Would you like to add anything?
Brendan Brennan, CFO
Yes. I'd like to mention that our average duration of backlog or contracts is approximately three years across various therapeutic areas. This leads us to anticipate a quarterly conversion rate in the range of 8% to 10%. If we consider this starting point along with our diverse mix of FSP and consulting businesses, we agree with Steve that aiming for that 10% target is appropriate as we move forward. We believe this is indeed the right objective to pursue.
David Windley, Analyst
That's great. Thank you. I appreciate the detail.
Operator, Operator
Thank you. The next question comes from the line of Patrick Donnelly from Citi. Please ask your question.
Patrick Donnelly, Analyst
Thanks guys. Brendan, maybe one for you just on the margin profile. Can you just talk about the moving pieces into 22 obviously the cost synergies, you're now there were eight months past the deal closure? So can you talk about the visibility into capturing those in '22 to offset maybe a little bit of the labor pressures and obviously touched on SG&A a little bit. But just curious again, if you could pull forward a little bit? If the wage inflation doesn't intensify, or how you're feeling about the margin side?
Brendan Brennan, CFO
Yes. Sure, Patrick. As we look into '22 in totality, and what I'm going to say that my previous comments were: our Q4 was a good jumping-off point to look at our margin profile as we go through '22; I think it's safe to say that we're not seeing a particularly different him from how we're going to talk about this in the past, is that gross margin will be a slower story. We say expect to see some conversion, but we do feel like our revenue mix is much more normalized now in terms of vaccine, non-vaccine work, so using Q4 is a good benchmark to start with in terms of gross margin profile as you jump off into Q1 and there on. And so that's the area, there's going to be a little flatter as we go through the first half of the year. And still looking for good margin leverage to your point in SG&A converting well we said we were 50% identified and included in '22 in terms of a $150 million of synergies, that we outlined initially. So they will be rolling in, and that will be helping us get down below our 10% SG&A as a percentage of revenue target as we work through the course of the year. So it's a flatter story for gross margin, certainly in the first half of the year with some of the lapping of the elements that we've seen with continued good leverage in the SG&A line, and then probably seeing a little more pick-up in the back half of the year from an overall perspective.
Steve Cutler, CEO
Patrick, I want to add that we have a receptive audience with our customers regarding pricing. As we all face similar challenges, they understand our need to retain talent and offer competitive salaries, especially given the high turnover rates. I believe that now, more than ever in the last 10 to 20 years, pricing discussions with our customers are less difficult than they have been in the past. I'll leave it at that.
Patrick Donnelly, Analyst
That's helpful, Steve. And then just another one on the smaller biotech companies. It's kind of helpful to hear you talk about that mid-teens percentage coming from that group. And again, good news that you haven't seen any cancellations or payment issues. I guess more forward-looking in terms of the conversations and bookings, it sounds like you're pretty confident with the amount of funds that have been raised over the past two years, and that's sustainable in terms of the cash flow for those companies to continue the trials. But just curious, those conversations again, a little more forward-looking with them, it doesn't sound like any softening, but how do you view it and do you see the backdrop currently has sufficient to continue to capitalize on growth there?
Steve Cutler, CEO
We are quite optimistic about our operations in that segment and our ability to attract business and maintain growth in that area. These companies are generally well-funded, with two to three years of cash available. We are not experiencing issues with bad debts or payment delays, which gives us confidence that we can continue to succeed. While the funding environment has eased slightly in the past six to twelve months, there is still a wealth of promising science available, such as RNA technology, checkpoint inhibitors, and drug conjugates. There is funding available for this science. In a recent conversation with a customer, they expressed strong confidence in the funding available for private companies and their capacity to attract investments with quality science and development programs. Although there may be some projects that are not deserving of funding, well-organized companies with solid development capabilities and innovative ideas will effectively leverage the technology and opportunities in the market. I remain very optimistic about this segment moving forward.
Patrick Donnelly, Analyst
Thank you.
Operator, Operator
The next question comes from the line of Jack Meehan from Nephron Research. Please ask your question.
Jack Meehan, Analyst
Thank you. And good morning. Was hoping you could talk about the gross authorizations in the quarter, by my math, they were down 2.5% year-over-year on a pro forma basis, but I'm not sure if that's totally apples-to-apples. So was wondering if you could comment on pro forma for PRA, what the trend was, and what might have impacted the rate of growth in the quarter.
Steve Cutler, CEO
I don't have that exact number on hand, Jack. They have decreased slightly year-on-year this time, partly due to the significant awards we received last year. We are comparing this with the revenue figures from the first half of this year. In the last quarter, we were comparing the awards figures. We had some substantial awards in the fourth quarter of 2020, and that comparison may have shown a decline, primarily due to the unusually high numbers we saw a year ago. We didn’t have that same level of awards, especially concerning the vaccines and the pastures business. So, while it was slightly down on a quarter-by-quarter basis, for the year, it was up nicely, and we need to consider the full-year figures.
Jack Meehan, Analyst
Great. Thanks for clarifying. And then, Brendan, as a follow-up, I was just looking at the balance sheet, the unbilled revenue in the quarter increased about $75 million sequentially. I think historically, this has been flattish or down slightly into year-end. I know there's probably some moving parts with PRA, but was just wondering if you could comment on why that might have increased in the year-end.
Brendan Brennan, CFO
Nothing really unusual, Jack; we're just aligning how we recognize revenue and ensuring we're accurately reflecting the pass-through, especially regarding investigator payment settlements within the organization. There’s been some alignment in that area, but I don't see it as a long-term trend. We'll continue to manage our process and maintain our goal of a 25 to 30 days total DSO range. That's our target, and you can observe in the cash flows— there are very strong cash flows in the second half of the year and into Q4. So, we're still optimistic about the trends we expect.
Jack Meehan, Analyst
Thank you, Brendan.
Operator, Operator
Thank you. The next question comes from the line of Dan Leonard from Wells Fargo. Please ask your question.
Dan Leonard, Analyst
Thank you. I wanted to circle back on small biotech. Can you speak to bookings in RFP trends specifically in that mid-teens portion of your business from companies with less than a $100 million in R&D?
Steve Cutler, CEO
No, Dan. I can't. To be honest with you, we don't track to that level. What I can speak to is the Biotech segment as a whole for us we have that, that's the 75 and below in terms of prescription sales, that was extremely strong in Q4, quarter-to-quarter, year-on-year and across the year. So I mean, as I said, within that about approximately half of those very small revenues and our applied assumption is that is also strong, but I don't have that specific number from a win’s basis available. Overall, the Biotech market was very strong and continues to be strong.
Dan Leonard, Analyst
And, Steve, I heard your comments around no issues or concerns on cash collections or rising bad debt with that small biotech group. But folks I speak with are more concerned that they'll meter out the cash they have differently in the current environment. They're not concerned they don't have cash if it could get metered out differently. So I don't know if there's anything you can speak to on that front.
Steve Cutler, CEO
I'm not quite sure I understood the question.
Brendan Brennan, CFO
I think it's a slowdown in what they're going to do with our cash. I think that one of the big pieces here is obviously development is still crucial to the organization. So I don't know that they're going to start pulling back on that particular element of spend in their overall working on their balance sheet. Indeed, when you look at people who are looking to get capital funding, it's because they want to make sure that they continue their development process. So we certainly don't see them looking at their cash balances in a different way other than to continue to fund their development opportunities.
Dan Leonard, Analyst
Appreciate this, thank you.
Operator, Operator
Thank you. The next question comes from the line of Luke Sergott from Barclays. Please ask your question.
Luke Sergott, Analyst
I want to clarify something regarding the midterm targets. You mentioned high singles in the DAC during the JPM conference and at the time of the PRA deal, but now Steve, you stated mid-singles to high singles. Are you revising your earlier position, or is the mid-to-high range what you're actually referring to for 2022, with a focus on high singles beyond that?
Steve Cutler, CEO
What's over that mid-to-high for 22, and ongoing from there.
Luke Sergott, Analyst
Okay, so mid-to-high ongoing through, you know, going forward, okay.
Steve Cutler, CEO
Yes, that's correct.
Luke Sergott, Analyst
Alright. Great. And then just really quick, if I can squeeze one in here more long term, so you've talked about the new indications and demand for then, RFPs, like kind of filling the funnel here, have you seen the return to the pre-COVID levels where you're seeing monoclonal antibodies and like ADCs really take a lion's share of those RFP? Are we seeing the new market for selling gene therapy and mRNA really starting to take off and starting to fill that RFP and backlog funnel?
Steve Cutler, CEO
I think it's a bit early to make a definitive call on that. We're noticing increased activity in the cell and gene therapy sector, as well as in the mRNA and RNA fields, along with drug conjugates. While we're seeing some movement towards addressing rare diseases, it's not overwhelmingly significant. However, there is progress in that direction, especially with the advancements in science and technology that have emerged from the pandemic and other areas. It's a positive shift, but I would be cautious about labeling it as an overwhelming surge of opportunity. Nevertheless, it certainly provides a beneficial momentum, particularly within the Biotech and small pharma sectors.
Luke Sergott, Analyst
Great. I really appreciate the color. Thank you, as always.
Operator, Operator
Thank you. The next question comes from the line of Derik De Bruin from Bank of America. Please ask your question.
Derik De Bruin, Analyst
Thank you for taking my question. I have two quick ones. What are your thoughts on M&A? Many of your competitors are allocating capital towards their top line growth, while it seems you're focused more on organic growth. I have a follow-up as well.
Brendan Brennan, CFO
Yeah.
Steve Cutler, CEO
Our current priority for capital deployment is focused on reducing debt in the short term. We are making significant progress in this area, and as we approach the end of this year, we will start considering other opportunities in the mergers and acquisitions space. There are several sectors, particularly in technology, home health, decentralized trials, patient recruitment, and our labs, where we see potential for investment and growth. However, I want to stress that our main objective is to reach a debt level of two and a half times. That remains our priority as we move into next year.
Derik De Bruin, Analyst
Great. Just one follow-up. China has been in the news lately, particularly regarding some inquiries from the FDA about the clinical trials there. I found your comments about diversity in relation to this situation interesting. How do you perceive the opportunities given the concerns surrounding the China-based trials? How does this impact your outlook? You've mentioned your exposure in China, especially regarding earnings, and how this might allow you to capture more business there. Thank you.
Steve Cutler, CEO
It's interesting you asked about China. I expected you to inquire about Ukraine and Russia given the current situation. To address that, we have resources and offices in that region, but they represent less than 2% of our total operations. All activities, including site visits, are ongoing, and the recent developments have not affected our plans. We are hopeful that this continues; while it's a fluid situation, our operations are stable, and we are confident in monitoring our trials. Regarding China, it continues to be a significant market and focus for us, both functionally and in providing full-service trials. There are ongoing challenges with the SFDA, and being aware of their expectations is crucial. We now have over 1,000 people in China, from combined organizations, and a substantial number of sites contributing greatly to our full-service work, especially in relation to the Biotech Small Pharma market compared to larger pharmaceutical companies. We monitor regulatory demands carefully and maintain our relationships with regulators to ensure we are compliant. It remains one of the more challenging environments we operate in, but it's also a vital area for long-term growth. Many companies are aiming to expand into the eastern market for drug development, and we are beginning to engage with those firms more than others focused solely on China. There are growing opportunities, and I believe that over the next five to ten years, China will become an increasingly important aspect of our business.
Derik De Bruin, Analyst
Thank you.
Operator, Operator
Thank you to the participants for all your questions. I would like to hand the conference over to our speakers for closing remarks.
Steve Cutler, CEO
Thank you, Operator. Thank you for listening in today. We are pleased to have delivered a record quarter and year as the new ICON. And I'm proud of the support provided to our customers in the development of life-saving drugs and devices. I want to take another opportunity to recognize our entire workforce, their unwavering commitment and efforts over the past quarter and in 2021. Thank you all, and have a great day.
Operator, Operator
That does conclude our conference for today. Thank you for participating. You may all disconnect. Have a nice day.