Earnings Call Transcript - ICLR Q3 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the ICON plc Q3 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Kate Haven, VP of Investor Relations. Please go ahead.

Kate Haven, VP of Investor Relations

Hello, and thank you for joining us on this call covering the quarter ended September 30, 2025. Also on the call today, we have our CEO, Barry Balfe; our CFO, Nigel Clerkin; and our former CEO and Non-Executive Board member, Steve Cutler. 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 21, 2025. This presentation includes selected non-GAAP financial measures, which Barry 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 earnings slides, you will note a reconciliation of non-GAAP measures. Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share exclude stock compensation expense, restructuring costs, foreign currency exchange, amortization, transaction-related and integration-related costs, goodwill impairment, and their related tax effects. We will be limiting the call today to 1 hour and would therefore ask participants to keep their questions to one each in the interest of time. I would now like to hand over the call to our former CEO and Non-Executive Director, Dr. Steve Cutler, for opening remarks.

Steve Cutler, Former CEO and Non-Executive Board Member

Thank you, Kate, and good day, everyone. As I reflect back on the last 14 years I've spent at ICON, I feel a strong sense of pride for what we've accomplished over that time, growing from a company of 8,500 employees that was #6 in the industry to 40,000 people worldwide, and a ranking in the top tier of global CROs. It's been an honor to lead this organization, and I have no doubt that the future opportunity for ICON is robust and the leadership team in place is the right one to move it forward. I want to sincerely thank all my colleagues and friends at ICON for their partnership and dedicated efforts that have fueled our success over the years. I also want to thank our customers for their partnership and loyalty in working with us to deliver their projects through some external challenges, including COVID and several geopolitical conflicts. Finally, I want to thank the analyst community and our many loyal shareholders who I've come to know well and who have supported our company and its evolution in my time here, particularly as the CEO. I look forward to continuing to support Barry and the rest of the ICON team in my role as a Non-Executive Director, and I remain confident in the continuing success of ICON over the longer term. Barry, I'll now hand it over to you.

Barry Balfe, CEO

Thank you, Steve. And I'd like to start by expressing my gratitude to you for your partnership in ensuring such a smooth transition period and for your leadership and support over many years. On behalf of the whole ICON team, I wish you the very best in retirement and look forward to your continued engagement and contributions as a valued member of our Board. Turning to our results for the third quarter. Our performance was broadly in line with expectations as we successfully navigated a mixed market characterized by known challenges and emerging opportunities. We executed well on the encouraging level of RFPs that went to decision in the quarter. Similar to quarter 2, overall gross business awards were strong, totaling $3 billion and were up mid-single digits on a year-over-year basis. Encouragingly, these awards were broad-based across large, midsized, and biotech customers with notable strength in the areas of oncology, cardiometabolic disease, and FSP. Revenue increased on both a sequential and year-over-year basis in the quarter with therapeutic mix driving strong pass-through revenues. Our overall burn rate was flat sequentially in quarter 3 at 8.2%, in line with our previously communicated expectations. While quarter 3 results reflect continued strong cost control across the business, our overall margin profile was negatively impacted by the higher pass-through revenue mix. Adjusted EBITDA margin was 19.4%, a 20 basis point sequential decline. During quarter 3, we bought back $250 million in shares, bringing our total share repurchases to $750 million year-to-date. This all translated into adjusted earnings per share of $3.31, a 1.5% increase over quarter 2. Additionally, we generated strong free cash flow totaling $334 million in the quarter and $687 million on a year-to-date basis. While I'm particularly pleased with gross business awards in the quarter, our net book-to-bill of 1.02x was negatively impacted by elevated cancellations of $900 million, broadly flat with quarter 2 levels with a bias towards previously awarded studies that were canceled prior to commencing enrollment. Looking to the remainder of the year, we expect largely similar conditions to persist in the market and have assumed this in our updated guidance. I am particularly encouraged by our strong pipeline of actionable opportunities, reflecting our continued focus on commercial excellence and broader and deeper market penetration across customer groups. A notable area of strength in quarter 3 was in the biotech sector with a significant increase of RFP flow on a year-over-year and sequential basis. However, despite recent improvements in biotech funding, the environment remains mixed regarding the timelines for conversion of opportunities to award and contract. We have amended our full year guidance range to reflect the nature and phasing of business wins and cancellations as well as stronger pass-through revenue activity. We now expect full year revenue to be in the range of $8.05 billion to $8.1 billion and full year adjusted earnings per share to be in the range of $13 to $13.20. While we're not providing 2026 guidance at this stage, our outlook for the year will in part be influenced by the extent to which we can sustain the positive trends of the last 2 quarters regarding RFP flow and gross bookings, transition to more normalized levels of cancellations in 2026, and optimize the burn rate of studies that are actively enrolling. Accordingly, we remain focused on executing our strategy with an emphasis on accelerating top line growth, rigorous cost management, the deployment of novel technologies to enhance our offering, and a balanced approach to capital allocation. Regarding revenue, our plans prioritize expansion of opportunity flow and win rates in biotech, diversification of our revenue streams in large pharma, increased share of market in the important midsized segment, and further acceleration of strong growth in our labs, early phase, and FSP business. ICON continues to manage costs effectively, and our investments in enhanced resource demand management and allocation technologies continue to play a key role in our ability to scale our workforce rapidly and effectively in line with business needs. While revenue mix and pricing pressure are expected to weigh on gross margins in the near term, we continue to differentiate primarily based on capability, expertise, solution design, and technological disruption of the clinical trials process. This enables us to take time and cost out of the development cycle while creating and capturing value. A key priority for me is the deployment of innovative technologies that allow for greater speed and predictability as well as enhanced efficiency. We're building on the significant progress that we've made in the area of process automation and will accelerate investments in AI-enabled technologies and external partnerships that enhance our capabilities and provide for seamless analysis and interpretation of clinical trial data. We continue to see value in returning capital to shareholders, while our strong financial position also gives us latitude to invest organically in our capabilities and to consider opportunities for inorganic growth in the right circumstances. In summary, while recent cancellation levels are a headwind to revenue growth in the immediate term, ICON's global scale, industry-leading capabilities, and financial strength provide us with an excellent platform for growth. The recent demand dynamics provide significant grounds for optimism regarding the midterm trajectory as we move beyond a period of volatility and return to normalized levels of growth. I'm excited by the path ahead given the strong market position we've established and how we can continue to evolve our offering to better serve our customers and patients around the world. I'll now hand it over to Nigel for a more detailed review of our financial results.

Nigel Clerkin, CFO

Thanks, Barry. Revenue in quarter 3 was $2.043 billion, representing a year-on-year increase of 0.6%. Revenue was up approximately 1.3% sequentially on quarter 2 2025. Overall, customer concentration in our top 25 customers was broadly aligned with quarter 2 2025. Our top 5 customers represented 24.6% of revenue in the quarter, our top 10 represented 39.8%, and our top 25 represented 66.6%. Adjusted gross margin for the quarter was 28.2% compared to 29.5% in quarter 3 2024 and down 10 basis points on quarter 2 2025. Adjusted SG&A expense was $179.2 million in quarter 3 or 8.8% of revenue. Relative to the comparative period last year, adjusted SG&A was down by $1.2 million in quarter 3. Adjusted EBITDA was $396.7 million for the quarter, an increase of $0.7 million sequentially. Adjusted EBITDA margin decreased 20 basis points over quarter 2 2025 to 19.4% of revenue. Adjusted operating income for quarter 3 was $356.9 million, while adjusted net interest expense was $47 million. The effective tax rate was 16.5% for the quarter. We continue to expect the full year 2025 adjusted effective tax rate to be approximately 16.5%. Adjusted net income for the quarter was $258.8 million, equating to adjusted earnings per share of $3.31, a decrease of 1.2% year-over-year or an increase of 1.5% on quarter 2 2025. U.S. GAAP income from operations amounted to $86.6 million or 4.2% of quarter 3 revenue. U.S. GAAP net income in quarter 3 was $2.4 million or $0.03 per diluted share compared to $2.36 per share for the equivalent prior year period. From a cash perspective, quarter 3 had cash from operating activities coming in at $387.6 million. This resulted in free cash flow in the quarter of $333.9 million, bringing our total year-to-date to $687.2 million. Overall, cash collections were solid in quarter 3 with our free cash flow higher than quarter 2, reflecting the timing of interest and tax payments as well as restructuring expenses. At September 30, 2025, cash totaled $468.9 million and debt totaled $3.4 billion, leaving a net debt position of $2.9 billion. This was broadly in line with net debt at June 30, 2025, of $3 billion. We ended the quarter with a leverage ratio of 1.8x net debt to adjusted trailing 12-month EBITDA. Our balance sheet position remains very strong, which affords us the flexibility to continue to strategically deploy capital. We are focused on an approach that balances further investment in our business as well as future growth while also returning capital to shareholders. We made significant share repurchases in quarter 3, totaling $250 million at an average price of $175 per share, bringing our total share repurchases year-to-date to $750 million. With that, we'll now open it up for questions.

Operator, Operator

And your first question today comes from Elizabeth Anderson from Evercore.

Elizabeth Anderson, Analyst

Congratulations, Steve, and congratulations, Barry. I'm looking forward to the next steps for both of you. Regarding the question, could you provide more insight into the cancellation dynamics? I appreciate that the cancellations this quarter aligned with what Steve mentioned during the second-quarter call. How do you view those trends moving forward? Are you suggesting that we might see elevated cancellation levels in the fourth quarter, which would then taper off? Are there other factors influencing this situation? A bit more detail would be appreciated.

Barry Balfe, CEO

Elizabeth, it's Barry here. I think cancellations came in generally as we expected, with a mix across the group. There was significant activity in pharmaceuticals during the quarter. As mentioned earlier, cancellations were primarily related to studies awarded before the third quarter that were canceled before enrollment began. This answers your question regarding the nature of the cancellations. Most of these were not ongoing studies that were actively consuming resources, which is somewhat preferable. As we indicated in our guidance, we anticipate that conditions will remain largely the same for the remainder of the year, but I also believe they will moderate as we progress into 2026, certainly throughout the year. While I can't pinpoint the highest or lowest levels of cancellations, I do think we are closer to the end of this period of increased cancellations than to the beginning.

Operator, Operator

And the question comes from the line of Michael Cherny from Leerink Partners.

Michael Cherny, Analyst

Maybe if I can dive in a little bit on some of the gross margin commentary you had. I think the dynamics on mix and pass-through clearly were in place. Is there anything that you're working on proactively from a gross margin side to try and offset some of those dynamics? And especially on the pricing side, how you think about firming up price in certain markets, areas where you'll compete, where you won't compete? Anything more you can give on that front would be great.

Nigel Clerkin, CFO

Michael, why don't I start and then, Barry, obviously, feel free to chime in. So you are right in terms of the gross margin picture. Obviously, earlier in the year, we had hoped to exit the year at a margin closer to where we exited last year in terms of EBITDA margin. Clearly, as we've gone through this year, we have seen an increase in the proportion of pass-throughs. We've talked about that as we've gone through the year. So that is certainly weighing on the margin outlook for the balance of this year and frankly, into next year as well. We've also, of course, talked about the increasing pricing competitiveness that we're seeing in the market generally. Barry can touch more on that, which again is not so much of an impact for this year but is a factor that might weigh on margin outlook for next year. Having said all of that, you're absolutely right. ICON, of course, always has had a very long track record of managing its cost base appropriately, and we've continued to do that through the course of this year. That is partly through adjusting our resourcing to the demand environment that we see out there. And you can see that, for example, in our staffing numbers are about 5% lower now than they were at the end of last year, just as an example of that. But also, and Barry touched on how we are leveraging technology as well, for sure, in terms of efficiency and how that can help in terms of margin profile, but also in terms of effectiveness in how we deliver to our customers as well for all the reasons you mentioned. And Barry, I don't know if you want to add in, in terms of how we can use that to help deliver for our customers and ultimately improve our own margins over time, too.

Barry Balfe, CEO

I appreciate the question, Mike. The first step is to seek out more opportunities with significant direct fees. I want to maintain our high pass-through mix opportunities while enhancing them with additional direct fee awards. Our emphasis is on driving commercial excellence, ensuring we can capture a larger share of the market and convert more opportunities into wins, which is essential for us. I'm satisfied with our progress in the third quarter in this area. Regarding technology, Nigel made a valid point. We aim to strengthen the technological environment at ICON, particularly by deploying agents that can handle workflows rather than merely answering questions. Simultaneously, we manage the underlying processes and our geographical presence. As I mentioned earlier, we leverage our existing technology for timely and appropriate resource allocation, pinpointing projects that would benefit from additional resources and reallocating where we have excess capacity to maximize impact. Concerning pricing, while it always influences our gross margin, our primary focus is on how we achieve success. We have never relied on price cuts to win, and we won't start now. We distinguish ourselves through superior capabilities, extensive expertise, and better solution design. Delivering studies faster and more cost-effectively relies more on these factors than on pricing. These are crucial considerations for us.

Operator, Operator

Your next question comes from the line of Justin Bowers from Deutsche Bank.

Justin Bowers, Analyst

And I also echo Liz's sentiment, Steve and Barry. So Barry, can you maybe discuss the industry environment a little bit and bifurcate between pharma and biotech? And maybe more specifically around the tenor of those conversations in light of what seems to be a regulatory and trade environment of increasing clarity?

Barry Balfe, CEO

Yes. It's a good question, Justin. There's a lot in there. So I'll certainly do my best. I think the first thing to say is I understand why people have been looking very carefully at biotech funding and taking some heart from the Q3 numbers, albeit it is a single quarter. Likewise, in pharma, I think we're pretty clear on why the markets reacted positively to some of the news over the course of the quarter around TrumpRx and the interactions with pharma in that regard. So there is certainly a sense that we may be getting closer to a point of some consistency. And I think we've said this before on the call, good policy or bad, consistent policy, certainty, dealing with some of the uncertainty that our customers have been facing is certainly net good for the sector. Whether or not that's what has driven the significant double-digit increases in RFP flow, whether that's what's trickling down into the successes we've had over the last couple of quarters in terms of gross bookings, it's a little early to see, but we're certainly glad to see it. What I would say just in terms of balancing that, though, is we said for a while, we would expect to see improvement on those leading indicators like RFP flow and gross bookings being trailed somewhat by follow-through onto the revenue and earnings line. So some positive indicators in terms of the environment, some interesting signs that perhaps deal flow is starting to tick up around large pharma as well. They're encouraging signs. But of course, we're still untangling the consequences of the last couple of years of volatility. So I think we should characterize the environment as encouraging, but still somewhat mixed.

Operator, Operator

Your next question comes from the line of Jailendra Singh from Truist Securities.

Jailendra Singh, Analyst

I want to get more color on the competitive pricing environment. You gave some flavor of that. Has this got worse than what you guys have talked about in the past? Is it across the board? Are there any particular market segments you're seeing it? And based on your observation, are you seeing pricing pressure more driven by clients looking to squeeze extra dollar? Or is it more driven by your competitors trying to win more business?

Barry Balfe, CEO

It's a good question, Jailendra. I don't think it's gotten worse for sure. I think what we've talked about over the last couple of quarters is that the prevailing environment in '25 is more competitive than in certain prior years. But I don't think that's something that we've seen continue to deteriorate by any means over the course of the year. I think it's also fair to say that just given the structure of the relationships we have in large pharma that that's where a lot of the pressure comes from, which is not to say that our biotech customers don't require significant support, not just getting to the right price, but getting to really good predictability about that price. And this is a significant priority for us at ICON. We invest not just in being cost-effective, high-quality, and speedy, but we also invest carefully to make sure we can be predictable. Our biotech customers really need to know when their studies are going to start, when their patients are going to be enrolled, and when they're likely to be completed. So that's certainly something we've focused on. So I don't think it's something that's gotten worse over the course of the year, but I would characterize it as a particularly competitive environment. And to the last part of your question, I think when the bowl is smaller, the dogs are hungrier to a certain degree. So I think one feeds the other. We certainly see heightened levels of competitive activity among our competitors, but I think that's driven by the upstream dynamics that are impacting our customers.

Operator, Operator

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

Patrick Donnelly, Analyst

Maybe one that kind of following up on some earlier ones in terms of the pricing and pass-through environment. I know you guys don't want to talk '26 too much. But just in terms of what those impacts could look like on the moving pieces on margins into next year. It seems like higher pass-throughs will continue a little bit on the pricing that you've talked about. So can you just talk about just the levers on margins as we get into next year, just high level in terms of moving pieces? Again, obviously, pricing pass-throughs are an impact, but just trying to think about potential offsets and the opportunity to keep those flat to potentially up. Is that on the table?

Nigel Clerkin, CFO

Patrick, it's Nigel. You've mentioned the key factors at play. As Mike earlier indicated, you're correct that the increase in pass-throughs as part of our overall revenue mix will be a significant consideration for next year. The pricing environment has indeed been more challenging this year compared to the past. While this won't have a major impact on us this year, it will certainly be a more significant consideration as we move into next year. On the positive side, ICON has a strong history of efficiently managing the business and investing in technologies that enhance our effectiveness and efficiency for our customers. Regarding our margin outlook for next year, we aren't going to discuss specifics today. We'll provide that information when we issue our guidance in January or February. Thank you for your understanding as we work through this ourselves.

Operator, Operator

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

Jack Meehan, Analyst

I wanted to follow up on kind of the margin question. I was wondering if you could provide more color on the level of pass-throughs. I'm not sure if there's any metrics you can share like as a percentage of gross revenue, where it was in 2024, where it's tracking in 2025? And based on what you look at the backlog now, like how much that could shift in 2026? I think just trying to get a sense for where gross margins can start to bottom out. Do you think 27% is close to a floor.

Nigel Clerkin, CFO

Yes, Nigel, I'll address that. We report revenue as a whole and do not separate it into pass-throughs and direct fees. We can provide qualitative insights on the increasing share of pass-throughs. Regarding margins, we have discussed the various factors that may impact them next year and how we might address some of those challenges. It's too early for us to offer guidance on the margin outlook for next year; we will provide that when the time is right. Barry, do you want to add anything?

Barry Balfe, CEO

No, I think you covered it really well. I mean there's multiple different puts and calls. One of the big ones is business mix. The degree at which awards in different therapeutic areas manifest into revenue is not always linear and it's not always obvious. But as an indicator, over the last year, our level of RFP activity and indeed our level of awards in an area like cardiometabolic, which carries a very significant pass-through load have increased by more than an order of magnitude. So when we see significant shifts in pass-through in heavy therapeutic areas, this is good news. These are gross bookings that will drive direct fees, that will drive margins in time. But they do also make us consider what the pass-through load will be. So it takes time to work how that works through the flow, and we'll certainly be taking that into account when we set guidance early in the new year.

Operator, Operator

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

Eric Coldwell, Analyst

I am curious about the changes in your approach to backlog and bookings, where you've prioritized written confirmations over formally contracted awards, which is somewhat unusual compared to others in the industry. How have those ratios progressed over time? Additionally, with the increase in cancellations you're experiencing, what percentage of those cancellations is related to the noncontracted bookings that lack legally binding terms? I'm interested in understanding the ratio of noncontracted bookings in your backlog and how that ratio has evolved, as well as the origin of the cancellations.

Nigel Clerkin, CFO

Eric, maybe I'll take that, and Barry, obviously, feel free to add. I can't really comment on what others do, frankly, in terms of how they book awards. I'll leave you to assess that on what they do. You are right, our practice has been to take bookings on award and the logic rather than on contract, and the logic for that is that, that is closer to now, if you will, in terms of what's happening on the ground commercially because obviously, there is a lag from awards to signing a contract that can be several months. So it is a more real-time measure, if you will, of what's happening in terms of commercial demand. On your question on the timing of that over time or the pattern of awards and cancels, I think Barry touched on the point that the predominance of the cancels that we've seen have been in awards that haven't yet moved to enrollment. So that is a mixture of both. Frankly, I don't have at my fingertips the mix of that between the 2. But it is reflective of, again, the factors that we've seen and touched on over the last few quarters around cancels being elevated because of reprioritization decisions because of, for example, in the biotech arena, the funding environment and companies hoping to raise money or haven't raised money or have been delayed and so on and reprioritizing where they spend and likewise in large pharma. So it is a mixture, frankly, and that's what we've seen so far.

Operator, Operator

Your next question comes from the line of Charles Rhyee from TD Cowen.

Charles Rhyee, Analyst

I would like to follow up on Eric's question. When you examine the backlog, and I'm sure you've analyzed it, do you feel confident that we've addressed most of the potential projects that could be canceled? Do you have a clearer understanding of the quality of the remaining backlog you're currently reviewing? Additionally, Barry, at the beginning, you mentioned a strong flow of RFPs in biotech. Can you provide any further details regarding win rates in biotech and any changes in your market share in this sector? Has that changed during the third quarter or in 2025 compared to 2024, and what trends are you observing?

Barry Balfe, CEO

Expertly managed 2-parter, Charles. I'll do my best to address both. I think on the backlog, look, as we said, there are a mix of reasons why studies cancel, whether it's emerging clinical data from an ongoing study, whether it's reprioritization of the portfolio, or other reasons. And there are a mix of contracted and ongoing, ongoing and precontract, et cetera. So there are really a mix. What I would say is that to the degree that the turmoil of the last couple of years did result in some delays and some disruption in terms of awards proceeding to contract and contract proceeding to study start, I am confident we are closer to the end of that process than the beginning. Now who knows what normal looks like in this business. But as I said earlier, I do anticipate that we will return to more normalized levels of cancels, which I think is germane to the question that you're asking about backlog. I'm also encouraged by the profile of the awards that are going into backlog of late. I do think there's a much healthier association between the awards that are coming in now and in the last number of quarters than perhaps those that are coming out of backlog or at least those that are driving us above historical norms for cancellation. So I'm encouraged by that for sure. In terms of biotech RFP flow, I mean, retrospective rationalization is a dangerous thing. We know biotech funding has improved somewhat. We've spoken repeatedly that that's sort of a 2-sided coin. There's the level of funding, but there's also the amount of the allocated funding that gets deployed. And I think that's probably the under-discussed side of the argument. We do see a number of our biotech customers not just moving forward to deploy capital, but to deploy it in indications where they're running larger studies relatively deep into the development cycle. Now, is that good for us? Yes, I think it is. Does it mean occasionally you see some larger cancels come out of that biotech organization or that biotech field? Yes, it does. But I think in the main, I am optimistic and encouraged. We made a strategic priority out of seeing more of the biotech market. We are being successful in that regard. We're looking at very significant increases in RFP flow quarter-over-quarter, year-over-year trailing 12 months. That's a good thing. We also, in balance, said that we wanted to see a significantly higher win rate in biotech, and that's materially flat on a quarter-over-quarter basis. So there's work to do for ICON there. In all honesty, there's areas of the biotech market where ICON wasn't historically as present or as focused as I want us to be, and as I believe we are now. And if that means we show up on other people's radar more than we did in the past, then I think that's a really good thing, and the focus of the teams will be converting that elevated RFP flow into sustained higher bookings.

Operator, Operator

Your next question comes from the line of Michael Ryskin from Bank of America.

Michael Ryskin, Analyst

Great. I appreciate the metaphor. It's an excellent way to express it. I want to revisit that and perhaps discuss the pricing and pass-through aspect from a different perspective. I'm curious about the fluctuations in therapy mix, customer mix, pricing dynamics, and pass-through that occur consistently from quarter to quarter. Can you share any insights about what you are currently observing? Is it more short-term, or does it seem cyclical or structural? Looking ahead, do you have any visibility or comments on how long this dynamic might last and when you expect things to stabilize?

Barry Balfe, CEO

I think I said on our last call, Mike, that history makes fools of us all. So I'm going to be careful of prognosticating around what the pricing environment might be like a year or 2 or 5 from now. I think the important thing to note is that it's stable, right? It is an elevated competitive market. And I've always said, good companies have great competitors, and that's a good thing. So there's an onus on all of us to realize that drug development is too expensive, and it takes too long. And the over-under on more cost-effective drug development skews substantially towards better processes, more effective interaction with regulators to reduce the onerous burden on patients and on drug developers and on the deployment of technologies to move this whole industry in the right direction. I think that will drive up net spend in the sector actually. I don't think it will drive it down. I just think we'll get more research done per dollar spent. So I don't want to overstate the impact of pricing per se on the cost pressures that are actually creating those pricing dynamics in the first place. So it's stable. Is it competitive? Yes. Do I think that's a function of the upstream dynamics, be they regulatory, geopolitical, or LOE-related for our customers? I absolutely do in pharma and likewise, funding for our biotech customers. I said a few times now, we didn't get to where we are in a heartbeat, and I don't think we'll get back in a heartbeat. But as things begin to normalize in terms of funding, in terms of deployment of capital, in terms of a clearer regulatory and political picture, I imagine we will see things graduate back towards more normalized levels right across the sector. But I'm afraid I'm not going to throw out a number and a date for you. I think that would be a little premature.

Operator, Operator

Your next question today comes from the line of David Windley from Jefferies.

David Windley, Analyst

Best wishes to Steve and Barry for your next phases. I wanted to try to combine 2 of the major themes here, margins and bookings together and ask the question, how do you balance labor force stability and the benefits of that in both productivity and also perceptions of clients of stability of their project teams and things like that with the defensive margin. I figure over multiple years, ICON has had several risks, both synergy driven by PRA and the market environment demand-driven. So again, how do you balance that stability of workforce and the external perceptions that, that can create?

Barry Balfe, CEO

It's a pretty broad question, Dave. And I think I appreciate where you're coming from, albeit I'm not entirely sure how to answer it to be candid. Maybe the easiest way is to say that our headcount moved by about 100 FTE over the course of the quarter, which in a 40,000-person organization isn't substantial. I think our trailing attrition remains near historic lows, and that's been a good number for us, pretty much in a straight line since the COVID peaks where the whole industry saw a bit of a peak. So we focus on really driving efficiency, making sure we have the right resources in the right roles, in the right locations at the right times. And that's not so much a function of bookings actually as it is a function of what is required to move these studies forward. I talked earlier on about a more algorithmic approach to resource management. Part of that is being able to spread your risk over your portfolio. You remember earlier in the year when we talked about some very large studies coming in, then going on hold, some canceling, some renewing, and then stopping. And we didn't see massive swings in the labor force. We didn't see massive swings in the margin dynamics, and we didn't see massive disruption of the customers on the other studies that were in the books. So I think the answer is we pull all the levers that any professional service company does. We continue to invest in the best talent. I believe we have the best expertise in the industry. It's absolutely vital to me that we sustain and improve that position. But I don't really see it as a trade-off of margin and bookings. It's more about making sure that we give our customers the best people, and we give our people the best environment in which to be successful.

Operator, Operator

Our next question comes from the line of Dan Leonard from UBS.

Kyle Crews, Analyst

This is Kyle on for Dan. It sounds like you expect cancellations to moderate in 2026, given your current view on the backlog. But is there a risk that elevated cancellations related to order not yet started studies will persist throughout 2026? Separately, could you provide an update on BARDA-funded COVID-related trials that you continue to service?

Barry Balfe, CEO

I'll take the second one, Kyle. I mean, I think we've talked about 1% to 2% COVID revenue. So there's not much of a cliff to fall off there, more of a curve? On a full year basis expectation. I think any change there is to the upside, very honestly. In terms of cancels, I mean, no one can ever say there's not a risk of anything happening probabilistically. I think it's unlikely. What we think we're seeing, at least my sense of it is we are seeing the consequences of the last couple of years. You've got the confluence of a couple of issues, funding pressures, LOE driving reprioritization, perhaps some of the science that got funded when money was cheap and abundant not perhaps being followed through. And that has put a different light on some of the studies that were planned, awarded, and in some cases, started. Am I confident that we will see a return to more normalized level of cancels in 2026? Yes, I am. Am I willing to sign on the dotted line and say that will be linear from January 1? No, I'm not. But I do think we're closer to the ninth inning than the first. On the basis of how we interpret the backlog, on the basis of how we speak with our customers and on the basis of the broad demand dynamics across the industry, I think that's a reasonable assumption. How far, how fast, and how soon, I think it's a little early to say. But as we've said, we do consider them likely to remain elevated in quarter 4.

Operator, Operator

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

Luke Sergott, Analyst

I just want to talk a little bit about the burn rate, and it's been relatively stable here. Your 4Q based on the midpoint kind of implies like a little bit of a step down there. Talk about the recent bookings that you're getting, what's coming out of the backlog and just the visibility that these burn rates will stick around this like 8 to 8.2 level as we think about kind of modeling in the toggles for '26.

Barry Balfe, CEO

Luke, it's Barry here. I'll start, and Nigel might want to elaborate a little bit. I would point you first in my remarks that the cancels that we took during the quarter, not entirely, but they did skew disproportionately towards studies that had not yet started that were sitting in the backlog effectively at a 0% burn rate. I'd also point you to the increase in gross bookings, which in the immediate term actually are a drag on the burn rate as studies take time to ramp up. So I think there are some of the primary dynamics. But Nigel, you might want to expand.

Nigel Clerkin, CFO

Yes, I think you're correct. We had anticipated that our burn rate would remain stable at around 8% throughout the year, and that has been the case. In fact, it has been slightly better than expected so far this year. We'll see where we end up in Q4, but around 8% was our expectation and aligns with what we're observing. Looking ahead to next year, the burn rate will depend on several factors, including cancellations and significant new wins, as well as the initiatives we are implementing to improve the burn rate over time. This will also be a key component of how we shape our guidance for next year, which we will discuss in more detail later on.

Operator, Operator

Your next question comes from the line of Max Smock from William Blair.

Christine Rains, Analyst

It's Christine Rains for Max. I wanted to echo the congratulations to both Steve and Barry. In terms of our question, hoping you can discuss if you're still seeing strength in early phase work that you called out previously? Or if there's been more of a shift towards late phase work?

Barry Balfe, CEO

Thanks, Christine. Appreciate your good wishes. The answer is yes. We continue to see good activity in our early phase business with strong growth, both on a year-over-year and a sequential basis. That's a business that's grown at double digits on a year-over-year basis, and that's growth that we intend to sustain and improve.

Operator, Operator

Your next question comes from the line of Casey Woodring from JPMorgan.

Casey Woodring, Analyst

Yes, Steve, Barry, congratulations. So just quickly, 2 quick ones. First one, any more granularity on the trial mix that drove the higher pass-throughs this quarter? Was it all cardiometabolic? And then just one on the cost management side. Automation has been a theme you've called out in the past as a margin driver. Going back to your last Analyst Day, you talked a lot about the advancements you've made there on taking man-hours out. So just curious on kind of the progress you've made on that front and how much you can offset pricing pressure there via automation and AI?

Nigel Clerkin, CFO

Casey, I will begin with the trial mix. It is indeed a factor, and Barry mentioned the strong opportunities and successes we are experiencing in that area. He also referred to the ongoing COVID vaccine study, which had a notable impact in the third quarter. Generally, our previous comments about pass-throughs becoming a larger share of our revenue over time are not the primary focus; rather, it revolves around the therapeutic mix we have discussed. Regarding automation, you are correct that it is one of the strategies we continually pursue to enhance efficiency, and we will maintain that focus. Barry, would you like to add anything on our priorities in that regard?

Barry Balfe, CEO

Yes. I think you've dealt with it well. I mean at the end of the day, Casey, our customers depend on us to take time and cost out of the development cycle and create value in that regard, we get to share in some of that value. That's the basic premise of our partnerships. So when we think about cost management, there's puts and calls there in terms of what we save and what we share. But certainly, technology is a huge part of it. And I've talked before about the importance to me of leaning more assertively into some of these AI-enabled technologies. We just actually progressed the project to roll out an end-to-end project management, workflow management system, which is a really important evolution for us to be able to bring all the data together, put it in the hands of the PMs and inform more rapid and accurate decision-making. We're obviously engaged in a range of external partnerships where these technologies allow us to recruit patients more effectively, more quickly to manage patients, both in terms of their care, the stipend that they're paid more effectively, our clinical trial management systems with our external partners and indeed risk-based quality management. One of the big areas that will drive efficiency is actually in the area of agentic AI. So we started deploying over the course of the last year or so agents across our business to help us delegate workflow and process to these agents rather than simply information gathering via large language models, et cetera. And one that I would call out is a proprietary technology we developed by the name Orbis, which is effectively a multi-agent digital assistant. If you think about multiple agents across the ICON landscape, this is the front door through which employees can go in and relate to multiple agents at the same time without needing a PhD in the organization's digital infrastructure to access that information. So effectively an agent of agent that allows you to run multiple analyses, source multiple different data points from multiple different agents across the system. Now that's early days, but that's exactly the kind of thing that would create and I hope capture value for the company and its customers.

Operator, Operator

We will now take our final question for today. And the final question comes from the line of Rob Cottrell from Cleveland Research.

Rob Cottrell, Analyst

I guess I want to dig back into the margin and potential benefit from technology investments that both Barry and Nigel, you focused on to help offset some of the price and pass-through margin pressure. Can you just share how some of these customer conversations are developing as it relates to how you balance sharing the savings with customers versus capturing the savings to help your margins in the near term? And when you expect these potential efficiency savings to begin to flow through for you all into 2026 or 2027?

Barry Balfe, CEO

It's a good question, Rob, but a multifaceted one. I guess I wouldn't encourage you to think about it as a single day on which we start managing margin through technologies or otherwise. That's an organic process. It's been going on for the 20 years I've been here, and it's continuing. The other thing I would point out before I get to the heart of your question is we are calling out sustained margin pressure in the immediate term. It's not like we're calling out massive upside in the immediate term because of a particular technology that's going to solve all of our problems. But to your question about the customer conversation, one of the interesting things that's cropped up as we're developing and in many instances, co-developing these transformational technologies and capabilities with our customers, it forces us to think in the context of long-term relationships about whether our pricing and commercial arrangements now will be reflective of the situation by the time those relationships come to maturity. So if you're signing a 5-year partnership 10 years ago, you probably agreed your terms, plus or minus inflation. Now we're very much building into those discussions. Hey, guys, here's how efficient we believe we can be together based on the nature of that relationship. But let's build into the governance model a forum and a format where we can recognize efficiencies as these new capabilities come on stream. That's a big part of the attraction of working with a company like ICON. We're going to get incrementally more efficient with you, through you, and for you, and we want to be in a creative conversation about how we share the benefits. And that co-development piece is actually quite a high bar because there's a huge level of IT and technological investments between ourselves and probably 1 or 2 others and the larger customers in the space, but we are very much having conversations with them about how we will revisit commercial terms as the clinical trial paradigm gets disrupted and as we become more efficient as a company. Nigel, I don't know if there's anything you want to add there.

Nigel Clerkin, CFO

Yes. No, I think you've outlined it well, Barry. Rob, I guess the only things I would add is that as Barry just went through, that's a clear example of the benefits of scale that, frankly, we can bring to those conversations, we are able to. We have the capability of making those investments, providing that sort of longer-term perspective. And secondly, the only other thing I would add is that point of how do we share these benefits together, it's a great question, but also it's fundamental, frankly, to the philosophy and culture that you should have as a service organization to your customers. In the end, it is about delivering better service to them more effectively and more efficiently and jointly sharing in that. And that is how we always have and will continue to approach these topics.

Operator, Operator

I would now like to hand the call back to Barry Balfe for closing remarks.

Barry Balfe, CEO

Well, thank you. Very briefly before we close out, I would like to extend my thanks to our 40,000 dedicated employees across ICON for their continued commitment and outstanding delivery for our customers and the patients we all serve. And for all of you joining us on the call today, we thank you for your support. We look forward to connecting again over the course of the coming quarters. Thank you.

Operator, Operator

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