Earnings Call Transcript - ICLR Q1 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the ICON Plc Q1, 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. I must advise you that the conference is being recorded today on Thursday, the 23rd of April, 2020. I would now like to turn the conference over to your speaker today, Jonathan Curtain. Please go ahead, sir.

Jonathan Curtain, Speaker

Thanks, Tim. Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended March 31, 2020. Also on the call today, we have our CEO, Dr. Steven Cutler; and our CFO, Mr. Brendan Brennan. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call. Certain statements in today's call will be forward-looking statements. These statements are based on management's current expectations and information currently available including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the Company's business, and listeners are cautioned that forward-looking statements are not guarantees of future performance. Forward looking statements are only as of the date that they are made and do not undertake any obligations to update publicly any forward-looking statements, either the results 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. For a presentation of the most directly comparable GAAP financial measures, please refer to the press release statement headed, Condensed Consolidated Statements of Operations U.S. GAAP Unaudited. While non-GAAP financial measures are not superior to, or a substitute for, the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes. We'll be limiting the call today to one hour and would therefore ask participants to keep their questions to one each, with an opportunity to ask one related follow-up question. I would now like to hand over the call to our CFO, Mr. Brendan Brennan.

Brendan Brennan, CFO

Thank you, Jonathan. In February on ICON's fourth quarter 2019 earnings call, we outlined our expectations for the COVID-19 impact to our quarter one 2020 revenue would be in the range of $4 million to $7 million, the majority of which was associated with our Chinese operations. Following that call, we have seen a very rapid escalation into a global pandemic. Accordingly, whilst we are pleased with the operational and financial momentum we brought into 2020, the significant disruption and uncertainty caused by COVID-19 means that we have taken the decision to withdraw our full year 2020 financial guidance. My following comments will focus on our quarter one performance and these will then outline further details in relation to our current and future operational challenges as well as the various measures we are putting in place to mitigate these risks. In quarter one, we achieved gross business wins of $1.27 billion and reported a $160 million worth of cancellations. Consequently, net awards in quarter one were $867 million, resulting in a net book to bill of 1.21. With the addition of these new awards, our backlog grew to $8.7 billion. This represented a year-on-year increase of 10.4%. Revenue in quarter one was $715.1 million, representing year-on-year growth of 6% or 6.5% on a constant currency basis. On a conference on organic places, revenue growth was 5%. Our top customer represented 11.4% of revenue for the quarter compared with 14.8% in quarter one 2019. Our top five customers represented 39.9% of quarter one revenue compared to 39.9% last year. Our top 10 represented 52.2% compared to 53.1% last year while our top 25 represented 69.6% compared to 71.6% last year. Gross margin for the quarter was 29.3% compared to 29.9% in our quarter four and 29.5 in the comparable quarter last year. Our SG&A was 12.2% of revenue in quarter one, which compared to 11.9% last quarter and 12.1% in the comparable periods last year. Operating income for the quarter was $106.3 million, a margin of 14.9%. This compares to 15.9% last quarter, 15.1% in the comparable quarter last year. The net interest expense was $1.4 million for the quarter and the effective tax rate was 12% for the quarter. Net income attributable to the group for the quarter was $91.7 million, a margin of 12.8% equating to diluted earnings per share of $1.70. This compares to earnings per share of $1.83 in quarter four and $1.63 in the comparable quarter last year, an increase of 4.3%. On a comparative basis, days sales outstanding were 55 days at March 31, 2020. This compares with 54 days at the end of December '19 and 59 days at the end of March '19. Cash generation from operating activities in the quarter was strong at $142.8 million. Capital expenditure was $11.3 million in quarter one, in addition to a $175 million worth of stock that was repurchased in quarter one at an average price of $141.68. This equated to over 1,235,000 shares, which is in excess of our stated goal of repurchasing 1 million shares over the course of the full year. We do not have any immediate plans to repurchase any further shares. At March 31, 2020, the Company had gross cash balances of $484 million and debt of $350 million, leaving a net cash position of $134 million. This compares to net cash of $220 million at December 31, 2019 and net cash of $128.6 million at March 31, 2017. In addition to the significant cash flow, we currently have an undrawn revolving credit facility of $150 million available to use. Our robust cash generation and strong access to liquidity put us in a very resilient position as we worked through the challenges that 2020 brings. And with all of that said, I'd now like to hand the call over to you, Steve.

Dr. Steven Cutler, CEO

Thank you, Brendan, and good morning to all of you. As we entered 2020, the key industry drivers of a positive outsourcing landscape, growth in R&D budgets and a continued strong biotech environment remained in place. In quarter one, we booked strong levels of growth and net awards of $1.027 billion and $867 million, representing book-to-bill of 1.44 and 1.21 respectively. Consequently, we grew our backlog year-over-year by 10.4% to $8.7 billion with revenues expanding to $715.1 million or 6.5% on a constant currency basis. We achieved the gross margin of 29.3% and we continued our strong SG&A performance with SG&A at 12.2% of revenue. This delivered earnings per share growth year-over-year of 4.3% to $1.70. In addition, in April, we were very pleased to announce the continuation of our long-term relationship with our top customer with the signing of a new multi-year services agreement. However, while the impact of COVID-19 was relatively modest in quarter one this year, it is our expectation that we would experience a more severe downturn in our business in quarters two and three and possibly beyond. It is clear that 2020 is going to be a difficult year for the CRO industry as we face the extraordinary challenges brought about by the sudden onset of the coronavirus pandemic. Our core Phase II, III business is the service line most impacted. New trials are being put on hold, patient enrollment has slowed and approximately two thirds of our sites are either restricted or stopped access altogether for our CRA, resulting in significantly fewer monitoring visits. Furthermore, although a smaller part of our business in our central laboratories, sample volumes received into our facilities have been reduced by approximately 40% due to the drop-off in site activity levels. The consequences of these challenges will curtail our ability to execute in the quarters ahead. However, despite the obvious issues, we are proactively reviewing and implementing alternative trial monitoring approaches with customers on a study-by-study basis, including remote and risk-based management, and we are seeing significant demand for our at-home services delivered through our recently acquired Symphony Clinical Research Group. The active push to develop a treatment for COVID-19 is also resulting in a large number of RFPs and some significant successes with projects that we anticipate will start quickly. In addition, since mid-March, we are seeing conditions gradually improving in China with over 70% of our sites now reopened and monitoring activities recommencing. Our hope is that other regions will follow soon in quick order as they stabilize and recover. Furthermore, I want to point out that the impact to our business is not uniform and indeed in certain areas such as our functional solutions business, we remain positive in our outlook for 2020 and are expecting year-over-year revenue growth. Whilst access to third-party sites is currently significantly reduced, we are realizing the benefits of previous investments and acquisitions which are in part helping to offset this impact. Through our site network model, we are able to provide a proven method to engage physicians and patients into clinical research programs. Our embedded staff also have direct access to the site’s patient database, which helps evaluate the patient population during the study feasibility phase, increasing enrollment and making clinical trial participation a much more efficient process for the physician. As country restrictions ease and enrollment restarts, this network will play a crucial part in accelerating the recruitment process for new and ongoing trials. Our acquisition of Symphony Clinical Research has also positioned ICON as the leading global provider of at-home and alternative site visits with over 300 clinical trials completed across five continents. Since the outbreak of the COVID-19 pandemic, we have experienced tremendous interest in the service with serious inquiries with over 60 sponsors. We've been ramping up the scale of this delivery method with staff being transferred from other areas of our clinical research services in order to enable delivery of trials using this approach across more studies. Furthermore, while all CROs and sponsors including ICON will be placing emphasis on remote and risk-based monitoring, ICON is also differentiated by its iconic platform and FIRECREST technology. Iconic helps analyze operational, clinical, and real-world data, enhancing the design and delivery of our projects as well as strengthening our engagement with investigators and customers. And FIRECREST enables remote management of aspects of clinical trials such as investigator and staff training on protocol and patient education through portal and video delivery. FIRECREST is used by all of the top 20 global pharma companies with almost 0.5 million registered users. Nevertheless, as we are not immune to the impact of COVID-19, we are taking immediate and proactive cost reduction measures to protect jobs, maintain our business performance, and ensure that we are ready to move quickly when business conditions improve later in the year. To address the challenges brought on by the pandemic, we have developed a comprehensive cost optimization strategy. It includes an immediate freeze on hiring in certain business units, the removal of contract staff with permanent employees who can assume responsibilities, and a reduction of our non-labor variable spend in discretionary areas such as travel and facilities. As a people business, the majority of our costs are employee-related, which also means that a major part of our cost optimization strategy is the implementation of a temporary salary reduction for all employees. Since the middle of April, the board and senior leadership have taken a 30% reduction in fees and salary respectively; and our Chairman, Ciaran Murray and I have taken a 40% reduction. The remainder of the Company, we are adopting a progressive approach, with the vast majority of employees taking a single-digit salary reduction. While these measures are designed to protect jobs, I realize that these actions are difficult and I would like to thank all of our staff for their flexibility and understanding. Taking these cost containment plans into account and in conjunction with our current revenue forecast, our quarter two outlook is for revenue to be in the range of $575 million to $625 million and earnings per share to be in the range of $0.90 to $1.30. Our balance sheet remains resilient and industry leading. At the end of quarter one, we had a gross cash balance of $484 million, $350 million of debt, and thus, a net positive cash balance of $134 million. In closing, I want to make it clear that we see the significant disruption caused by this pandemic as relatively short-term, and as we move beyond 2020, we expect global conditions to improve and the core fundamentals that have driven growth in the CRO space to reemerge. In the medium-to-long term, we see increased opportunities to deploy capital more cost-effectively and build our global franchise. However, for the time being, we are well-positioned to weather the challenges of the pandemic and position ourselves for the growth opportunities that lie ahead. Before moving to Q&A, I'd like to thank the entire ICON team for all their hard work and commitment during this challenging time. Your safety and well-being are the Company's priority. At ICON, our mission is to help our customers accelerate the development of innovative medicines and devices that save lives and improve the quality of life. Over the years, we have helped to bring many such treatments, vaccines, and medical devices to market, positively impacting the lives of millions of patients. This ethos will remain during the current crisis as we work on a number of important COVID-19 trials on behalf of customers as well as much-needed treatments for other illnesses and diseases. Thank you, everyone, and we're now ready for questions.

Operator, Operator

Your first question today comes from the line of Erin Wright. Please go ahead.

Erin Wright, Analyst

And this guidance that you just gave for the second quarter, did it assume any sort of improvement throughout the quarter? Or are you just extrapolating what you’re currently seeing? I'm just curious how you're thinking about things progressing throughout the second quarter?

Dr. Steven Cutler, CEO

First of all, Erin, I wouldn't refer to it as guidance. We specifically describe it as our outlook. This reflects what we can anticipate at this moment since we haven't yet experienced a full calendar month of significant impact. March was a month where the latter half was much more notable than the first half. So, I would characterize it as more of an outlook based on what we've observed moving forward. Concerning improvements during the quarter, we haven't modeled any at this time. We're facing a challenging quarter, and we believe we're nearing the peak of these challenges. Throughout the quarter, we don't see a specific phased approach. Right now, we're just beginning April and starting to gather some initial signs. It's still quite early, but we think the quarter will remain relatively flat and stable, marking the lowest point in the curve.

Erin Wright, Analyst

And then, are you seeing any sort of abnormal cancellations? Or are you viewing this more of a timing delay? Or do you think of this as also being a bulge or acceleration in the back half of the year, if the environment normalizes?

Dr. Steven Cutler, CEO

A couple of points there, one is, no, we're not seeing any significant cancellations. You saw our cancellation rate in Q1 was on par; and certainly, as we've gone into April, we've not seen any further cancellations above the normal sort of run of the mill approach there. We do see this being a relatively short-term issue, and we do see us moving forward as we get into quarter three and particularly quarter four and into next year that will come through. That of course assumes some sort of therapeutic will be developed very quickly and possibly a vaccine will be available within the next 12 months or so. So, there are some assumptions with that, but we do see that this is going to be a relatively short-term issue that we need to deal with that we need to work through. But I think the longer-term we're going to be in a very good position.

Operator, Operator

Thank you. Your next question comes from the line of Jack Meehan. Please go ahead.

Jack Meehan, Analyst

I wanted to drill in a little bit more on the commentary related to what you're seeing in terms of sites open versus closed? So it's been roughly two-thirds of your sites have been impacted at some point. How is that, if you went from March, beginning of March to beginning of April to where you are today, how is that trended at any given point? And just to confirm what Erin was doing after, you're assuming it stays where it is through the end of the second quarter; that's what your outlook assumes?

Dr. Steven Cutler, CEO

Yes, Jack. This situation arose very quickly. Approximately two-thirds of the sites have been affected. By "affected," I mean that clinical research associates are unable to access sites, recruitment has been paused, and site visits are not possible. This encompasses various issues related to the two-thirds of the sites. This all unfolded within about three to four weeks. Recently, we haven't encountered any new challenges or reductions in our ability to access sites. Around two-thirds will remain accessible, and we are conducting remote monitoring visits for many of the sites we can't physically reach. The number of accessible sites decreased rapidly but has stabilized for now, and we are optimistic it will remain around this figure and gradually improve. The recovery will likely happen in a staggered way as countries and states begin to reopen. Some areas will recover quickly, while others may take longer, and we will focus on either COVID-related trials or other priorities. It’s not just about reopening; it’s also about how priorities are set for the clinical trials at these sites. We have a strong involvement in oncology trials, which we believe will be prioritized as sites resume operations. Overall, we think we've hit the lowest point and expect a gradual improvement over the next six to nine months.

Jack Meehan, Analyst

And then, it does seem like the biggest impact is on the monitoring and recruitment, but there are obviously other aspects of clinical trials as well. I was just curious if you could talk a little bit about any success you're having at maybe reallocating where you're focusing the resourcing of your CRAs, as some of these states are closed. Just what are some of the things you're working on?

Dr. Steven Cutler, CEO

Sure, and you're right. The monitoring of our studies is the major impact on this at the moment, and that's significant. But, I think one of the benefits we have as a business without different service areas is the ability to transfer resources. For instance, the Symphony Clinical Research Group, people who visit patients in an at-home environment. The staff within our clinical business who have nursing qualifications and are qualified to do that work are able to potentially transfer, and we have been looking and doing that as we've seen a lot of inquiries coming in on that business. The other part of our business is our FSP, which hasn't at this stage been impacted in any significant way. In fact, we have a requirement for people in that business, hence we are able to transfer a number of people from our Phase II, Phase III business in the clinical space across to our docs FSPs business. So, the ability and the collaboration and the flexibility of resource management and deployment is certainly an advantage that we have, and we're actively looking at how we do that so that we can minimize the lack of resources or maximize the utilization of our resources right across the business.

Operator, Operator

Your next question comes from Elizabeth Anderson. Please go ahead.

Elizabeth Anderson, Analyst

Hi guys. Good morning. Thanks for the update. I had a question about how sponsors are reacting to sort of more digital solutions. I mean, you mentioned some, and I'm sure some of it is early conversations. But how are people, are people looking at it more like in terms of forward-going trials? Is it sort of things that they can convert? Are there particular areas that you're seeing more interest in? Any details you could provide that would be helpful?

Dr. Steven Cutler, CEO

It's early days for that, we’re all sort of just running around trying to make sure that we get the basic stuff done. I think there's a lot of talk around how the pandemic will impact the clinical trial process in the longer term, and I think we could all see certainly more remote monitoring. The remote monitoring has been going for a while now. There's nothing terribly new about that, but I think it will certainly help to accelerate that within some customers. We certainly see some more interest in the virtual trial, but this is not the time to be setting up virtual trials or hybrid trials. It's more discussion and all the talk about it, but we need a more stable environment, I think, in order to actually move that forward. I do think there's no doubt that that's going to happen going forward, and we'll see more digital opportunities and virtual hybrid trials. It'll accelerate the conversation. I think, and I certainly see that happening. However, I've been around this industry long enough to know that things don't happen always as fast as perhaps we'd like. So at the moment, everyone's telling you how things are going to be, but it’s never going to be a simple transition. It's all going to be different. That will inevitably, to some extent, be true. But as we get through this, I think those conversations will increase. People will be more ready to pilot and to move forward, but I don’t see a dramatic change in the digitalization of clinical trials at this point, at least not in the immediate future.

Elizabeth Anderson, Analyst

Okay. That's helpful. And then if we think about the RFPs that you guys have seen in the last few weeks, obviously the funding market for biotech is largely closed. But you know, they've raised a lot of money. Are you seeing any sort of significant mix shifts? I mean, obviously I'm sure COVID RFPs are way up, but in terms of the rest of your book of business.

Dr. Steven Cutler, CEO

I mean I'm talking about quarter one and remember quarter one was moderately normal until the last two to three weeks, I suppose. So, in terms of quarter one, our RFP dollars were up in the high single digits. It was a good quarter, and I was very pleased with that dollar availability. It was across the spectrum, from large pharma to smaller pharma. So, we're seeing plenty of opportunities and that’s continued at least in the last few weeks. We haven't seen a significant drop-off in opportunities. There was a little bit of a slowdown in decision-making towards the end of the quarter with everybody sort of taking stock of what they were doing, and I think that might well be the case in quarter two as well. But overall, opportunities on a year-on-year basis were actually following the trends that they have over the last few years.

Operator, Operator

Thank you. Your next question comes from the line of Dave Windley. Please go ahead.

Dave Windley, Analyst

Hi. Good afternoon, gentlemen. Thank you for taking my questions. Hope you're healthy and safe, sounds like you are. I wanted to try to get a little more precision. So, Steve, in your comments about site impacts, you said two-thirds. When you call a site impacted, does that mean that it's basically totally inaccessible? Or is there a way to think about kind of partial accessibility and an ability to move forward? Just wondering kind of definitionally around that? And then, in terms of your ability to pivot to digital, remote, risk-based type solutions, are you able to put a percentage on that? Like the number of visits that you've been able to switch to some type of digital remote access that mitigates the overall downside to visit activity?

Dr. Steven Cutler, CEO

Yes, thanks, Dave. I hope you're well as well. I know it's a challenging time for everyone, but we're trying to stay safe. In terms of sites impacted, there is; every site is a little different to be honest with you. The way I'm looking at that number is that we talked about 65%. The two-thirds of sites are impacted in some way. So, that is certainly not totally inaccessible. There are very few sites that are totally inaccessible in any way. But the way the business is impacted, they'll have some significant impacts on our business. In terms of the risk-based monitoring, you know, as we look at those sites that can't do the physical onsite visits, it's about a third of those, about a third of sites have an ability to be monitored from a remote basis. Sorry, I misspoke, about two-thirds of those sites can be monitored on a risk-based monitoring basis, but it's about a half of those that are actually happening. So, there’s an element of yes, we can do it, but we can’t implement it all, at least not in the short term. We are working with a number of those sites to actually be able to implement that. So, about a third of them can actually do it and two-thirds of those potentially can do it. The third we are actually implementing. So it’s again a moving picture and not entirely easy. I mean, this is not the focus for many sites at the moment so actually implement that remote monitoring does have challenges. But it is something we're actively working on and trying to get as many visits as possible. I would say about half of the time we're able to move that forward and certainly been able to implement the risk of remote monitoring.

Dave Windley, Analyst

Got it. Thank you. So many questions to ask, only one more left to do. I'm going to focus on bookings for my second. So appreciate your comments about the environment. Sounds like the impact was pretty late in the quarter albeit usually I think the third month of the quarter is a little bit say seasonally if you want to call it more important to closing bookings. So, I guess what I'm trying to gauge is your gross and net bookings are comparable gross dollars year-over-year a little bit down from last year. So it would seem that if the environment is holding up as you said similar to what it has been the last couple of years from a fee opportunity standpoint that maybe your close rate was impacted by COVID. Wanted to make sure I understood that and if you're able to put a number on that that would be appreciated. But just kind of trying to understand what maybe what bookings would have looked like had you closed what you thought you were going to close by the end of the quarter if not for COVID?

Dr. Steven Cutler, CEO

Yes. That is hard to say what we wouldn't have closed if not for COVID. Certainly COVID had a significant impact, I think right across the business. And I do include bookings in the last couple of weeks of the quarter. So I think it is fair to say that the number would have been higher absent COVID. There were decisions that were delayed and not made because of that. I'm not going to try to put a number on that, but I do think it was a significant factor. I do think that quarter two, that will probably continue in terms of decisions being made by customers. The whole pandemic is causing them all to look hard at what they're doing, obviously. And so I wouldn't be surprised to see some impact there in terms of decision-making. I think what I was trying to highlight in my commentary is that overall, the environment is still pretty positive. The biotech funding might have come down a little bit, and we'll see where that goes. But R&D spending remains strong, and I think all of this remains a fairly short-term issue. That's our premise at the moment; the overall environment will remain positive albeit with some volatility and perhaps some short-term issues.

Operator, Operator

Thank you. Your next question comes from the line of Dan Leonard. Please go ahead.

Dan Leonard, Analyst

Thank you. So thinking about what the rebound looks like post-COVID. Do you anticipate any bottlenecks in the clinical trial system with a lot of molecules that have been delayed, all trying to get trials started and continued at the same time? And how does your site network play into your opportunity there?

Dr. Steven Cutler, CEO

I think it's possible there'll be some challenges as everyone rushes back. Although I think as we look at it, it's likely that we're not going to flick a switch and every site's going to be open from day one with everyone rushing back in. I think this is going to be a staged and phased process that's probably going to happen over at least a six to nine-month period. You know, possibly starting in the next few weeks even. So as you look at it and know why, I think it’s a manageable process as we look at it clearly, we want to make sure that the studies we have ongoing at the moment are brought back and we’ve collected as much of the data as we possibly can. We want to stop, we want to get studies started and there's no question about that. There will be an element of catch-up as well as there will be some work that we can do that will catch up. There will be some work posted that we won't be able to catch up on as well. It's not exclusively delaying revenue. Some of it probably won't happen at least in the short term. But there will certainly be a large component of work that I think we will be able to catch up. We certainly see a huge amount of activity around the COVID space. I'm actually really encouraged about the speed at which these trials are getting up. I was talking to a customer the other day, who submitted an IND and three weeks later, we think we’ll get a first patient. This is three weeks off of the submission of an IND, which is unheard of, in my experience. So we’re probably testing a little bit some of the norms of the regulatory process. I'm not suggesting that we're going to get studies up in three weeks on a regular basis in the future. But I do think we're looking hard at what we do as an industry to get studies started and that’s challenging some of the accepted sort of timelines and may well be an opportunity. We talk about digital technology and virtual trials. It may well be an opportunity. I think we can handle the move back into the sites. I don't think that's going to cause too much pain as we get back.

Dan Leonard, Analyst

Okay. That's helpful. And then, just to follow up on the M&A pipeline from a COVID disruption? What are your thoughts on that?

Brendan Brennan, CFO

Yes, thanks Dan. Brandon's here. I think obviously, the focus of the organization is weathering the storm at the moment. We've done a lot of M&A and we are very thankful for that. Obviously, businesses like Symphony have been a great bonus to us over the last couple of weeks. But certainly, we'll be looking at being a little more careful with our balance sheet over the next couple of months. We've done some significant buyback in the fourth quarter. I did mention in my prepared comments that we're also going to be holding on that for a moment. So, I think it will be one where we will be focusing internally and really making sure that our balance sheet remains a very good position over the next couple of months, say, the next couple of quarters, and that's where the focus will be.

Operator, Operator

Thank you. Your next question comes from the line of Stephen Baxter. Please go ahead.

Stephen Baxter, Analyst

Hey, thanks for all the information this morning. So you touched on this a little bit and obviously you've got the business is quite hard to model over the near term. But when you look at Q2 revenue with the outlook that you guys gave for down somewhere between near 10% to 17% year-over-year and off your previous trajectory, obviously by more than that. I think what a lot of people are trying to figure out is whether demand and the associated revenue over the next couple quarters is being lost or replaced with lower-cost services or kind of simply shifted out to the right. So, I'd love to get your perspective on that. Anything you can say about the balance between what feels like is likely to be lost versus a couple of the recoverable at this point would be really helpful. Thank you.

Brendan Brennan, CFO

Thanks, Stephen. I might take that one as well as Brendan here. I mean, any of the effects that we're seeing at the moment is more on the delay side of things. The book of business in the backlog we have, as we said, we haven't seen significant conservations off the back of this. So it really is about the accessibility of our sites, getting our CRAs back to those sites, and then really ramping up on the trials. None of the trials are going away; the activity levels are good for what we see coming through the door, from an RFP perspective, it looks solid as well. So we'd be hopeful that this is a delay because of that issue and as time goes by we'll barn show our backlog and get back on course revenue as we get back into the back end of the year. So, we don't see any kind of devaluation of our business, and we don't see significant shifts away from the proper profile of our business either. As Steve said, our FSP business is doing well during the course of this year, and there are certain parts of our businesses like the in-home monitoring and the home nurse business that will be doing well during the course of this year. So that may shift things a little bit, but overall we don't see any long-term shifts scenario profitability level.

Operator, Operator

Thank you. And our next question comes from the line of Tycho Peterson. Please go ahead.

Tycho Peterson, Analyst

Hey thanks. Steve, as we think about getting back up and running, can you talk to how much of a differentiated factor your site ownership is on your part just competitively versus some of your peers? And then, if we think about the checklist that's going to be required to get some of the sites up and running. How are you thinking about things like FDA signoff in terms of changing protocols kind of mid-trial and agreeing on costs splitting costs with sponsors? Can you talk with some of the other things beyond just having patients having the premium to travel that are required to sites up and running?

Dr. Steven Cutler, CEO

Sure, Tycho. I do believe our site network is going to be a significant advantage for us as we get our projects back up and running as we come through this. These are sites that we have our staff embedded, and who we have very strong alliances with and who tend to recruit better, have better startup times, and who recruit faster and have ultimately better quality in terms of protocol adherence. I think it's going to be an important advantage for us, particularly early as we get back to it. They're going to be ready to go and very much accessible, as they are at the moment where, of course, local guidelines allow them to be. Having said that, I don't want to overstate that because there is still a relatively small part of our overall patient recruitment services, so it will have an impact, I think an important impact on our business, but I don't want to overstate it in terms of materiality. In terms of the regulators and the signoff of protocol changes, I've been very encouraged by the interactions we've seen with the FDA, certainly through our ACRO, the CRO association. We've got a lot of engagement from the EMA and the FDA in terms of how we document protocol changes, how we communicate that, and what those changes are. I think the regulators have put out some guidance. And as I think we talked about sponsors moving on and their attitudes towards digitalization of trials, I think we'll see the regulators also embracing that, now that this has become an important component of trials going forward and adjusting guidance to make sure that they're embracing that. At the end of the day, you've got to do the trial, and then they need the data to be rigorous and accurately reflect what's been done. So we must be diligent about documenting those changes and making sure that we're very clear about what's being done and why it's being done. So, I think the regulators have been extremely accommodating under the circumstances and also very fast-moving.

Tycho Peterson, Analyst

And a follow-up, I appreciate you talking about the number of COVID-related work. Can you just maybe help us put some context on how much you think COVID-related vaccine and therapy work could be a tailwind potentially this year? And then how should we think about central lab coming back in the context of the recovery too? Thanks.

Dr. Steven Cutler, CEO

I think the COVID work such as we're seeing it will be a tailwind, but I think it'll be relatively modest. The benefit of course is that this is vaccine work and the urgency that I see around getting these studies up and running is quite frankly incredible and not surprising given the challenges we're facing, but it really is moving fast. So I think it will be a tailwind for us. I hesitate again to be too bullish on it because it's still a relatively small component of our work and the trials need to get going. What we've seen is really rapid start-up and ability to recruit. Having said that, there are some trials that have recruited very quickly and we've started to see the lab samples come through. So there is no doubt that they are going to help us. The work there is going to be a positive. How much I find to be hard for us at the moment to forecast the materiality of that or even put a number on that. It'll be certainly a wind going in the right direction and we can certainly do it all with many of those sort of winds as we can. In terms of the central lab, I think I quoted to you that a 40% reduction from run rates in February and samples. I think again that will come back slowly. I don't think we're going to get much lower than that. It may be plus or minus 5%, but I don't think we're going to go too much lower than that. Some of that, as I indicated, some of the COVID work as it ramps will help with the samples that we receive. So, I think that 40% to 50% is probably the right number and we'll slowly move back up. I think it will probably take most of the year to get back to a normal run rate. But I do think it will get better, and there will be, I believe some catch-up there as well. Samples will have been taken that haven't been sent. There will be some new samples, of course, as well. So, there will all be catch-up, but there will be, I think the opportunity to some catch-up revenue in the lab space in addition.

Operator, Operator

Thank you. And your next question today comes from the line of Robert Jones. Please go ahead.

Robert Jones, Analyst

Thanks for the questions. I guess, Steve, clearly you shared your view that you think this or the Company thinks is to be somewhat short-lived recovery over the next six to nine months. I guess maybe just to dig in a little bit more on what informs that view as you sit here today, appreciating, obviously it's an extremely fluid situation. And then just related to that as far as the sites being able to come back online, just given the drop in patient visits that we've seen globally, how are you thinking about clinical trials being prioritized relative to just routine patient visits, which clearly will have a backlog as well?

Dr. Steven Cutler, CEO

Yes. There are a couple of reasons for our belief that this situation is relatively short-term. Firstly, it seems that some governments were caught off guard and had underestimated the significance of the issue a few months ago. We are now better prepared, and there's a possibility that the virus could resurge in the fall in the Northern Hemisphere, which would present challenges. However, I don't expect the impact to be as severe as what we experienced over the past month and a half. Our preparedness and understanding will be improved. Additionally, while vaccine development may take time, I anticipate that we will see advancements in therapeutics over the next three to six months, particularly for high-risk patients and those with serious conditions. This progress will be beneficial. The willingness of the community to address these challenges will likely lead to quicker actions than we've seen previously as they recognize the potential impact of flu season combined with the ongoing situation. Developing a strong vaccine will be challenging, but there will be experiments and Phase III trials conducted in the coming months. This information supports my view that we will make progress and improve. While I don't expect a return to normalcy in the fourth quarter, I believe we will be on an upward trajectory. By the first quarter, I anticipate we will return to a more normal trading environment.

Operator, Operator

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

John Kreger, Analyst

Hi, thanks very much. Steve, congrats on the Pfizer renewal. Are you able to elaborate at all on any interesting sort of changes of scope or structure of that relationship or should we view it as pretty much steady as she goes versus contract? And do you have any other kind of significant renewals that we should be thinking about for the remainder of the year?

Dr. Steven Cutler, CEO

Hi, John. And no, nothing in particular that we changed in terms of the Pfizer contract. There were scenarios of discussion, but really it was a very collegial and positive negotiation with Pfizer. So, no major changes to that. In terms of any other significant alliance agreements that are up for discussion or negotiations specifically, I don’t think so for the remainder of the year.

John Kreger, Analyst

Excellent. That's good news. And then one quick follow up. You mentioned, China showing at least some signs of opening up. Are there any lessons you can take away from that as you watch that play out as to what you might see later in the year in Western Europe or the U.S.?

Dr. Steven Cutler, CEO

Yes, we're looking at how China is starting to open up, albeit relatively slowly, and some of the other Asian countries as well, and we do take some solace from how that's moving forward. I believe that it can be broadly applied. Obviously, China is a relatively small part of our business, so I hesitate to draw too much from one particular country, but given that it was the epicenter of the initiation of the whole pandemic and in fact it does seem to be moving on now, it gives us again hope that this is a relatively short-term issue that we believe we can get through. As I said, my concern is around the alliance. Yes, I think the other areas in labs are where we’ve been seeing some opportunities, and certainly, we’ve been able to agree to quite a couple of significant opportunities and partnerships for our lab operations and our central lab and our biological lab in the last six months. So, I tend to think about clinical processes; it's the largest part of our business, but our lab operations have been able to secure a couple of partnerships recently. And that puts us in a good position to really build that business.

Operator, Operator

Thank you. And your next question comes from the line of Patrick Donnelly. Please go ahead.

Patrick Donnelly, Analyst

Steve, maybe just along the biotech funding environment, I know you’ve mentioned a couple of times. Obviously, there has been a bit of a pause here given the disruption. New raises have been pretty minimal. When you look out to the other side of this and even maybe the midterm view for the years to come, has your opinion changed in terms of what the growth could be in the overall market given a little bit of pullback in that funding? Or do you think things come back pretty quickly and we're in a pretty normalized market for next year.

Dr. Steven Cutler, CEO

Go on. Yes, sorry, go ahead. I'll let Brendan have a crack at that one, Pat.

Brendan Brennan, CFO

Yes, I think we've seen a pretty stable environment from a funding perspective and the growth that we’ve seen there has been welcomed. There were a lot of good science that’s there as well, which is always the underlying piece in terms of what our biotech’s deserve to get fund or not. And as we go out, I think your question is a good one in terms of the longer term. We still think that there are opportunities there. It's been a really strong part of our marketplace. I suppose the fundamentals of this pandemic that we're seeing don't really change the fundamentals from development. We do see that there is continued opportunity particularly in the biotech space where there has been a lot of innovation and creativity. I'm going to expect that the good science and decent funding levels should persist. I think even though folks are taking a bit of a pause as we think about this year as the entire global economy probably will. Then as we think about 2021, we would be very hopeful that we'll see that both areas are quite strong.

Operator, Operator

Great. And then Brendan, maybe another quick one. Obviously, DSO has been a big focus for you guys. I assume this external shock changes things a little bit, but what's your perspective on the focus there as we go through this pandemic?

Dr. Steven Cutler, CEO

Yes, we'll still be very focused as an element of our business, and we saw decent progress. I mean we didn't see any great diminution in it as we came into the first quarter. As I see even as we started off Q2 cash collections remained relatively solid. So we're not seeing any particular issues there yet. That said, we're going to be keeping a close focus on it as we go through the months and quarters ahead. But at the moment, it still looks like we're in a very solid position.

Operator, Operator

Thank you. And our next question comes from the line of Sandy Draper. Please go ahead.

Sandy Draper, Analyst

Thank you very much for squeezing me in at the end of the call. I'm glad you guys are doing well over there, all things considered. My question is on the expense side. I mean that's an area you guys have had incredibly outperformed over years and years and done a great job. Brendan, when you think about your near-term cost controls and what you're doing as you start to win, when we start to come back to a more normalized environment. Are there specific areas you think you may be able to take a more look at and say, hey what we thought we really need to spend here but we realize we can live without this or we can do it differently? Do you think this changes maybe longer term, how you think about the cost structure of the business or basically once things come back on, do all those costs that you're pulling out all have to ramp back up in line if not faster than the revenue? Thanks.

Brendan Brennan, CFO

That's a good question, Sandy. We're pretty tight cost monitors on a good day. This has obviously been a very challenging period, and we are thinking about our cost base from that perspective and I've looked at how we can take that down a step. A large chunk of that is around remuneration and salaries. That is something that I think will build back up. That said, however, I think this whole environment in this kind of virtual work environment provides pause for thought around what is absolutely necessary. So, we'll be looking at our cost base. I think those are, some of which certainly will come back in. There's no question about that. And we'd like to see that come in sooner rather than later. With hopefully it looked over in the general business environment. I have a feeling that we'll be looking at all cost lines and actually asking the question, can we do things more virtually? Do we need as much travel? I think there are questions that we constantly ask ourselves, and I suppose this environment has tested all businesses in the world. I see what they can be more flexible and how they operate. So, we'll bear that in mind as we go through.

Operator, Operator

Thank you. And I believe we have time for one last question from Juan Avendano. Please go ahead.

Juan Avendano, Analyst

Thank you for fitting me in. I joined the call late, so I apologize if this has been asked. Can you talk to us about how remote monitoring activities impact a CRO's revenue and profitability? In particular, I guess, I'm interested in how alternative site visits could impact pass-through. Based on some of my research and consultations, it seems like remote monitoring could be a positive mix for CROs, but I was curious if you could confirm that?

Dr. Steven Cutler, CEO

Well, I think the potential for us to do remote monitoring effectively and well is actually beneficial from a profitability point of view. There's a lot of time spent and I think that's also a boon for customers potentially too, in that they'll spend less money getting their data reviewed. We'll be able to do—this gives us more opportunity to do more work. I think there is a win-win as we’re sorry to use the term. From a profitability point of view, but also from a customer point of view going forward. In terms of pass-through, I don't think that's going to make a huge difference. The pass-through is primarily in terms of monitoring and the major part of the pass-through costs of investigative studies. So, I tell us why you might have a small impact. While Brendan can comment on that, I don't think that's going to have a huge impact, but I'm optimistic in terms of remote monitoring and how that's going forward.

Juan Avendano, Analyst

Okay, got it. Then a follow-up I guess is I understand the studies in the startup or activation phase could possibly be the most prone to delays and potential cancellations. Can you tell us what percentage of your studies are in the startup phase versus accrual and path database lockout?

Dr. Steven Cutler, CEO

I can give you sort of a high-level ballpark. I'm not sure— we certainly haven't seen any evidence that the studies in start-up are more likely to cancel. We haven't had—we had two cancellations, which is on par with where we'd normally be. I don't—we haven't seen it uptick in cancellations certainly related to the start-up of studies. I would say probably 20%, 25% of studies are in the start-up phase, about 50% to 60% are in ongoing recruitment and enrollment and data plays. I mean there is probably 20% that are in sort of the final stages of database lock and report writing, etc. Very broad high-level figures, but I think that works would be. As I said, we haven't seen any evidence that studies early on in their lifecycle are more prone to cancel.

Brendan Brennan, CFO

I mean, SG&A as a percentage of revenue actually takes up by 10 basis points on a year-over-year basis. This is the first time that I see this happening in many years. Can you talk about how perhaps the COVID-19 dynamic could be impacting your or would impact, if any at all your ability to continue to offshore SG&A leverage?

Operator, Operator

Thank you for your questions. And that appears to be all the questions that we've taken today. I will now hand back to Steven Cutler for closing remarks.

Dr. Steven Cutler, CEO

Thanks, Tim. So thank you everyone for listening in today as the impact of the COVID pandemic continues to evolve. ICON is focused on protecting the safety and well-being of our employees and patients, and continuing to serve the important work we undertake on behalf of our customers, and in turn, preserving the strength of our business. I want to take this opportunity again to recognize our entire workforce and to thank them sincerely for the tireless efforts and the ongoing resilience they’re showing during this very challenging period. Thank you, everyone.

Operator, Operator

And we thanks to each of our speakers. That does conclude today's conference. Thank you all for participating. You may all now disconnect.