Earnings Call
Icon PLC (ICLR)
Earnings Call Transcript - ICLR Q2 2024
Operator, Operator
Good day, and thank you for standing by. Welcome to the ICON Q2 2024 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Kate Haven. Please go ahead.
Kate Haven, Senior Vice President
Good day, and thank you for joining us on this call covering the quarter ended June 30, 2024. Also on the call today, we have our CEO, Dr. Steve Cutler; our CFO, Brendan Brennan; and Senior Vice President of Corporate and Commercial Finance, Emer Lyons. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call. Certain statements in today's call will be forward-looking statements. These statements are based on management's current expectations and information currently available, including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, and listeners are cautioned that forward-looking statements are not guarantees of future performance. Forward-looking statements are only as of the date they are made, and we do not undertake any obligation to update publicly any forward-looking statements, either as a result of new information, future events or otherwise. More information about the risks and uncertainties relating to these forward-looking statements may be found in SEC reports filed by the company, including the Form 20-F filed on February 23, 2024. This presentation includes selected non-GAAP financial measures, which Steve and Brendan will be referencing in their prepared remarks. For a presentation of the most directly comparable GAAP financial measures, please refer to the Press Release section titled Condensed Consolidated Statements of Operations. While non-GAAP financial measures are not superior to or a substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes. Included in the press release and the earnings slides, you will note a reconciliation of non-GAAP measures. Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share excludes stock compensation expense, restructuring costs, foreign currency gains and losses, amortization, and transaction-related and integration-related costs and their respective tax benefits. We will be limiting the call today to one hour and would therefore ask participants to keep their questions to one each in the interest of time. I would now like to hand over the call to our CEO, Dr. Steve Cutler.
Steve Cutler, CEO
Thank you, Kate, and good day, everyone. ICON's results in quarter two continued our positive year-to-date trajectory of growth, marked by solid financial performance and further success in securing new business across our segments. Net business wins and backlog grew by 7% and 10%, respectively, year-over-year as our leading scaled offering continues to resonate with our customers, uniquely positioning ICON to meet increasing demand for innovative and flexible solutions in clinical development. We remain encouraged by the leading indicators in our market that support a solid demand environment, including continued growth in RFP flow and the overall consistent level of opportunities we are seeing across our customer segments. While biotech funding levels attenuated slightly in quarter two from a robust start in quarter one, we see this market continuing to stabilize and have seen a modest uptick in RFPs on a trailing 12-month and sequential basis within this segment. Importantly, customer sentiment appears to be improving, and we remain optimistic around the contribution to midterm growth. This important customer segment represents. In the large pharma segment, we see continued opportunity to win and expand our support of the many customers seeking novel solutions. While macro challenges and budget uncertainties remain a factor at the forefront in their overall spending decisions, we have seen continued prioritization around the development of late-stage clinical pipeline assets to advance drugs to market. We believe this provides a certain degree of stabilization to the demand patterns in this area of the market that have largely been steady through more volatile macroeconomic periods in recent years. Our offering in large pharma is particularly well placed to serve customers seeking flexible blended solutions encompassing both full service and functional elements of delivery with our proven agility and scalability in both service areas. One of the key strategic initiatives we laid out at our Investor Day in May was extending our leadership in the large pharma market through our blended solutions offering and our differentiated ability to customize a model for customers. This increasingly important approach was critical to our success in securing another new strategic partnership with a rapidly growing top 30 pharma company for full-service solutions in quarter two. We were selected for this partnership due to our ability to partner with this customer in creating a tailored operational solution that was optimized to fit their evolving needs. Our deep understanding of various outsourcing models and the ability to pivot between them was a key differentiating point for ICON as well as our portfolio of integrated clinical services that will create value in areas such as site and patient solutions and laboratory services. This reinforces our recent success in building partnerships outside of our top tier customers, creating a well-diversified and balanced portfolio that is not overly concentrated to a particular customer or therapeutic area. Specifically, in the first half of this year, we were able to grow revenue outside our top five customers by over 8%, illustrating the success we are having in executing our portfolio and developing our top tier customers of the future. As we continue to grow and scale our company, we remain focused on leveraging the unique blend of experience and capability we have in not only winning, but executing and expanding large-scale strategic partnerships that create strong value for both our customers and ICON. While our perspective on this year's demand environment has remained consistent, we did receive an update late in the quarter pertaining specifically to next-generation COVID vaccine trials that will cause an impact to our full year revenue in 2024 due to the delayed start of these studies. There were two primary but separate issues that affected the start of these trials. One was a delay in sponsors receiving regulatory guidance that was required before commencing trial enrollment pertaining to new variant specifications. And the second was investigational product-related issues that caused a delay in enrollment. We are working closely with our development partners to ensure efficient and timely execution of these high-priority studies that continue to be of critical importance to our customers and the safety and health of our communities. To be clear, these studies have not been canceled, and our expectation is that these trials will enroll the majority of patients in 2025 with start-up related activities having already commenced in some instances. With these anticipated changes, we now expect our COVID-related revenue to be approximately 1.5% to 2% of total revenue for the full year in 2024, representing a year-over-year headwind of approximately 200 basis points to total revenue. While we're disappointed by these unanticipated one-off project delays, these do happen in our industry, and they are limited to one specific area within our business. We remain confident in the strength and delivery of our underlying service offering as well as the benefits of a diversified mix of customers and therapeutic areas that constitute our entire portfolio. Our business performance, excluding COVID, has been very solid, with revenue growing 8% year-to-date over the first half of 2023 and is helping to offset some of the negative headwinds we are now expecting from both foreign exchange and the COVID-specific state delays. To that end, given the excellent margin delivery year-to-date through strong project execution and cost control across the business as well as further leverage of our global business services model, we are increasing our full year adjusted EBITDA margin expectation to 21.7% at the midpoint of our range, an increase of 80 basis points on a year-over-year basis. This outperformance, coupled with expected savings on full year interest expense is supporting the increase of our full year adjusted earnings per share guidance, which we now expect to be in the range of $15 to $15.20, an increase of 17.3% to 18.8% over the full year 2023. With the consistent trends in our broader demand environment, our expectation on book-to-bill remains in the range of 1.2 times to 1.3 times on a quarterly basis, maintaining our previous target range. Turning to financial performance in quarter two. Net bookings grew 7% on a year-over-year basis, resulting in a book-to-bill of 1.2 times in the quarter and sustaining our trailing 12-month book-to-bill ratio of 1.24 times. We again saw a strong performance in our large pharma business, particularly in full service solutions as well as for operational delivery services in data sciences, which notably secured a new sole provider award in the quarter. Total revenue increased 5.3% on a constant currency year-over-year basis in the quarter. Gross margin of 29.9% increased 30 basis points over quarter two 2023, and total SG&A expense decreased 40 basis points on a year-over-year basis to 8.7% of total revenue, driving another quarter of strong adjusted EBITDA growth of 9% over quarter two 2023. This resulted in an adjusted EBITDA margin of 21.2% in the quarter, up 70 basis points year-on-year. With strong margin delivery through our P&L, in addition to the benefits of our debt refinancing, we saw excellent year-over-year growth in adjusted earnings per share of approximately 21%. Following the successful repricing of our existing term loan B facility earlier this year, we continued our strategy of further refinancing our variable debt in quarter 2. We completed our inaugural SEC bond offering totaling $2 billion in early May, which was met with very strong investor interest and an initial order book of approximately $15 billion. The proceeds of this offering were allocated to the repayment of our fixed term loan B debt, resulting in a current capital structure, which has approximately 72% of our debt subject to fixed rates. As we noted at our Investor Day in May, this now provides us visibility to a reduction of approximately $110 million in interest expense over 2023, resulting in expected total full year interest expense in the range of $200 million to $210 million for 2024. Importantly, this was a great milestone for our company in completing our first investment-grade bond offering and providing increased balance sheet flexibility as we look to continue to optimally deploy capital on a go-forward basis. As we have previously stated, we remain focused on M&A as the priority use of capital in the near term with a focus on strategic assets that continue to differentiate our clinical offering and drive value for our customers. However, as communicated previously, we have authorization from our Board of Directors for a share repurchase program of up to $500 million to be deployed opportunistically on an ongoing basis if the appropriate assets cannot be secured at the right price. We are updating our full year 2024 guidance range to account for the delayed COVID-related projects, as well as foreign exchange headwinds due to the strengthening US dollar since our quarter 1 report. We now expect revenue to be in the range of $8.45 billion to $8.55 billion, an increase of 4.1% to 5.3% over full year 2023. As I noted earlier, we are increasing our full year adjusted earnings per share guidance to a range of $15 to $15.20, an increase of 17.3% to 18.8% on a year-over-year basis, reflecting our strong margin delivery and continued cost management. Before I close out my prepared remarks, I want to provide a brief update on our CFO transition. We continue to make good progress on our search for a new CFO, and we now have a small number of very strong candidates remaining in the process. We expect to make a more detailed announcement regarding this transition later in the current quarter. Finally, I want to extend my sincere thanks to all of our colleagues at ICON for their many efforts in the quarter and the first half of this year in supporting our customers and helping to accelerate their development programs to bring new therapies to patients around the world. Brendan, I'll now hand it over to you to review our financial performance in more detail.
Brendan Brennan, CFO
Thanks, Steve. In quarter 2, ICON achieved gross business wins of $3.07 billion, an increase of 7.4% on a year-over-year basis. In addition, we recorded $493 million worth of cancellations resulting in net awards in the quarter of $2.58 billion and net book-to-bill of 1.22 times. With the addition of the new awards in quarter 2, our backlog grew to a record $23.8 billion, representing an increase of 2% on quarter 1 of 2024 or an increase of 9.9% year-over-year. Our backlog burn was 9.1% in the quarter, slightly down from quarter one levels. Revenue in quarter two was $2.120 billion. This represented a year-on-year increase of 4.9% or 5.3% on a constant currency basis. Overall, customer concentration in our top 25 customers decreased from quarter one, 2024. Our top five customers represented 24.7% of revenue in quarter two. Our top 10 represented 39.3%, and our top 25 represented 60.9%. Gross margin for the quarter was 29.9%, consistent with quarter one, 2024, as expected. Gross margin increased 30 basis points over gross margin of 29.6% in quarter two 2023. Total SG&A expense was $183.5 million in quarter two or 8.7% of revenue. This was in line with the prior quarter on a total percent of revenue basis. In the comparable period last year, total SG&A expense was $182.9 million or 9.1% of revenue. Adjusted EBITDA was $450.4 million for the quarter or 21.2% of revenue. In the comparable period last year, adjusted EBITDA was $414.2 million or 20.5% of revenue, representing a very solid year-on-year increase of 8.7%, an expansion of 70 basis points in margin. Adjusted operating income for the quarter two was $417.3 million, a margin of 19.7%. This was an increase of 8.7%, adjusted operating income of $383.8 million, a margin of 19% in quarter two of 2023. Net interest expense was $42.9 million for quarter two. We continue to expect the full year interest expense to total approximately $200 million to $210 million in 2024, with a roughly even split in total remaining interest expense for the remaining two quarters of the year. The effective tax rate was 16.5% for the quarter. We continue to expect the full year 2024 adjusted effective tax rate to be approximately 16.5%. Adjusted net income attributable to the group for the quarter was $312.6 million, a margin of 14.7%, equating to adjusted earnings per share of $3.75, an increase of 20.6% year-over-year. In the second quarter, the company recorded $6.8 million of transaction and integration-related costs and $45.8 million of restructuring costs. US GAAP income from operations amounted to $229.9 million or 10.8% of revenue during quarter two. US GAAP net income in quarter two was $146.9 million or $1.76 per diluted share compared to $1.40 per share for the equivalent prior year period, an increase of 25.7%. Net accounts receivable was $1.198 billion at 30th of June 2024. This compares with net accounts receivable balance of $1.146 billion at the end of quarter one, 2024. DSO was 51 days at June 30, 2024, a decrease of one day from quarter two 2023 and an increase of two days from March 31, 2024. Cash from operating activities in the quarter was $218.6 million, and free cash flow was $182.4 million in the quarter, an increase of 6% on a year-over-year basis. We continue to see customers seeking more competitive contracted credit terms as well as a desire to hold on to cash longer given the higher interest rate environment we're currently in. This dynamic is primarily focused on our large pharma customer growth, which has been growing faster at ICON and is thus driving greater impact on our overall DSO profile. At June 30, 2024, cash totaled $506.6 million and debt totaled $3.4 billion, leaving a net debt position of $2.9 billion. This compared to net debt of $3.1 billion at March 31, 2024, and net debt of $4 billion at June 30, 2023. Capital expenditure during the quarter was $36.3 million. From a capital deployment perspective, $2 billion of cash from the successful investment-grade bond was used to repay $2.014 billion of our Term Loan B facility. Additionally, our revolving credit facility was undrawn at the end of quarter two. From a capital deployment perspective, as Steve indicated, our priorities for capital to be centered on M&A where we can acquire assets that further strengthen our portfolio of services and value proposition for customers. Our pipeline of opportunities is healthy. Yet, we remain disciplined in our approach to evaluating acquisitions that will meet our criteria from a strategic and financial perspective. We also continue to consider opportunistic share repurchase given our strong balance sheet position. Our key assumptions behind the full year guidance remain in place, an effective tax rate of 16.5%, free cash flow target of circa $1.1 billion, CapEx spend in the range of $150 million to $200 million and interest expense in the range of $200 million to $210 million, all for the full year 2024. Finally, I would like to also thank our ICON employees for their dedicated efforts in quarter two.
Operator, Operator
Thank you. We will take our first question. And your first question comes from the line of Justin Bowers from Deutsche Bank. Please go ahead. Your line is open.
Justin Bowers, Analyst
Hi. Good morning, everyone. In terms of what you're seeing with large pharma, what inning are we in, in terms of some of the announcements that we've seen, let's say, over the last six months, and how they're approaching IRA and what opportunities does that present for you outside of the core clinical business?
Steve Cutler, CEO
Yes. You mean inning in terms of budget discussions or budget cuts, Justin? Is that where you're coming from?
Justin Bowers, Analyst
Yes. That's right, Steve.
Steve Cutler, CEO
It's always difficult to gauge, but I believe we are somewhere around the fourth or fifth inning. We've observed several companies publicly announcing their plans, including some of our major customers. We see this trend beginning to take shape, and we feel optimistic about the growth of large pharmaceutical companies in terms of R&D spending and outsourcing in the future, as reflected in our RFP numbers. In the last year, large pharma has been in the low double digits and may even slightly exceed that. We're hopeful about the trajectory of large pharma. While budget cuts and cost reductions have an immediate effect, they also lead to a long-term reassessment of their spending, which we can benefit from. This relates to your second question regarding the IRA, as they're evaluating how to best allocate their resources. I've attended a couple of strategic partnership meetings recently where the companies expressed a desire to improve their current standing. They recognize that outsourcing and strategic partnerships are key to enhancing their efficiency, speed, and cost effectiveness. This open-minded attitude among our larger pharmaceutical clients is encouraging and presents us with opportunities, even amid considerations about the IRA and budget cuts, which allows for potential near-term gains.
Operator, Operator
Thank you. We will take our next question. Your next question comes from the line of David Windley from Jefferies. Please go ahead. Your line is open.
David Windley, Analyst
Thank you. Good morning. Thanks for taking the question. Steve, I guess I'm interested. I appreciate your comments on large pharma. If I could sneak in kind of a two-parter. On biotech, you had both at AR converts in June and then again on the call, talked about attenuation in funding. I wanted to understand, is that just a funding comment? Or did you also see that flow through to your activity? And then thinking about your kind of the pace of business flowing not only into backlog, but through backlog burn rate kind of just very moderately declining as has been the case for the industry for a long time. Just wanted to understand if that's kind of what we should set as our expectation going forward or do some of the global business services and your new functional Center of Excellence approach have the ability to stem that tide?
Steve Cutler, CEO
Sure. Let me address the biotech sector first. We are noticing a positive trend in the biotech market. The first quarter showed strong overall funding, while the second quarter was not as robust. My earlier comment referred to a slowdown in funding for biotech during the second quarter. However, year-to-date, we observe encouraging progress in biotech funding. In our pending pipeline, about 50% to 60% of opportunities—particularly among the top 25—are in the biotech space, representing significant potential. We see a lot of opportunities ahead, with substantial projects in the pipeline. Interestingly, with cancellations in the biotech and RFP areas, we typically discuss funding but not decisions made. In the second quarter, we experienced a decrease in the number of cancellations in proposals we bid on, which gives me confidence regarding the strength of our pending pipeline. About half of the top 25 opportunities are in biotech, indicating that there are serious and substantial offerings in this area, with potential in the multimillion and tens of millions of dollars range. I feel optimistic about the biotech market and the upcoming opportunities. As for backlog burn, it did decrease slightly, mainly due to the composition of our backlog, which is largely oncology-focused. This trend is expected to continue, though our centers of excellence might help reduce the downturn, even if it doesn't alter the overall trend significantly. We're currently around a 9% burn rate and may drop below that in the medium term. Opportunities may arise as we explore other therapeutic areas such as cardiovascular and metabolic and as COVID trials proceed, which can enhance our portfolio mix and impact burn rates positively. Additionally, our study start-up program, highlighted during our Investor Day, is beginning to yield results and contribute positively. This initiative will likely help us initiate studies and enroll patients more quickly, benefiting our customers by completing projects on time or earlier. We are taking various steps to improve our backlog burn, keeping in mind that the composition of our oncology and rare disease portfolio will continue to present challenges.
Operator, Operator
Thank you. We will take our next question. Your next question comes from the line of Max Smock from William Blair. Please go ahead. Your line is open.
Max Smock, Analyst
Hi. Good morning. Thank you for taking our questions. I wanted to follow up on the small biotech and get an update on the progress you're making with your revamped small biotech offering that you've been discussing over the past couple of quarters. How has that revamped offering impacted your win rate in the second quarter of this year? Thank you.
Steve Cutler, CEO
I believe it's still early in the process. As we mentioned at the Investor Day, we've rebranded our biotech offerings and identified ourselves as a large pharma CRO. This transition will take some time, and while we are observing progress and have numerous opportunities in our pending pipeline, the next few quarters, especially within the next year, will help us gauge the effectiveness of our rebranding effort. It's premature to claim success at this point. We are certainly witnessing some progress in the bidding opportunities and have secured our share of wins, but I would prefer to revisit this question in another quarter or two for a more definitive response.
Operator, Operator
Thank you. We will take our next question. Your next question comes from the line of Elizabeth Anderson from Evercore ISI. Please go ahead. Your line is open.
Elizabeth Anderson, Analyst
Hi. Sticking with the biotech team, we noticed a significant increase in funding earlier this year, which has somewhat stabilized in the second quarter. Can you provide an update on the influx we saw in the first quarter? I assume the situation varies, but are these opportunities still at the RFP stage, or are they beginning to convert? How should we view this in terms of potential opportunities?
Steve Cutler, CEO
Yes, that's a good question, Elizabeth. I believe it's accurate to say that we are beginning to see the early year funding coming through. The cancellations in the funding area and proposals appeared to be down in the second quarter, which is encouraging. There seems to be a much more robust pipeline of pending opportunities, which is positive for us. We are noticing an increase in the mid-single digits, and even from Q1 to Q2, we've made progress. Again, I'm hopeful about awards converting to revenue, but we are likely still a couple of quarters away, possibly starting in Q4 or early next year. Overall, we are starting to see progress, but we are still in the early stages of that development.
Operator, Operator
Thank you. We will take our next question. Your next question comes from the line of Patrick Donnelly from Citi. Please go ahead. Your line is open.
Patrick Donnelly, Analyst
Hey, guys. Thanks for taking the questions. Steve, maybe one for you just on the bookings trends, pretty solid first half year. Is it still right to think about kind of that mid-1, 2 range? Any changes to your level of confidence, obviously, the RFP flow and things like that support it. But just curious, obviously, last quarter sounded really good coming off that 127. Just wanted to take your temperature on the book-to-bill trends. And then just a quick housekeeping one for Brendan. On the revenue guide. It seems like if you back out the COVID piece, the core actually moved up over $50 million. I just want to make sure I'm doing the math on that correctly. I appreciate it guys.
Steve Cutler, CEO
Sure, I'll address the first part, and I'll let Brendan handle the second question. We are quite pleased with our book-to-bill ratio, which stands at 122 this quarter compared to 127 last quarter. We anticipate being in the range of 12 to 13, which we believe is necessary for maintaining the company's growth trajectory. Nothing has transpired in the past few months that alters our perspective on this. We remain optimistic. Notably, RFP cancellations appear to be decreasing, which is encouraging. The RFP opportunities seem to be progressing well across all segments, not only in large pharmaceuticals but also with mid-sized companies and biotechs. Overall, we are feeling constructive and optimistic about the market outlook and our potential performance in terms of book-to-bill by year-end. Brendan, would you like to address the core question?
Brendan Brennan, CFO
Sure. I think it’s clear that we’ve observed good growth in our core business outside of COVID, with an increase of 8% for the first half of the year. Additionally, we are seeing growth and diversification in our customer base beyond our top five clients, which also contributed an extra 8%. When you evaluate the components of our guidance, we are taking into account approximately $150 million in headwinds from COVID, as well as a $20 million headwind from foreign exchange. Therefore, the adjusted decrease of $100 million indicates strong performance outside those factors and reflects solid growth as I mentioned earlier.
Operator, Operator
Thank you. We will take our next question. Your next question comes from the line of Michael Ryskin from Bank of America. Please go ahead. Your line is open.
Michael Ryskin, Analyst
Great. Thanks for taking the question guys. I want to focus on the margin rate, as you said, solid progress in 2Q and you're raising the guide for the year. It looks like you're guiding to roughly 22% EBITDA margin in the second half just to get to that full year number. So I just want to dig into that a little bit further. You called out project execution, cost controls, efficiencies, things like that. But just curious if you could go into that a little bit deeper. Do you expect those to continue going forward? And I'm just asking that in the context of at your Analyst Day just a couple of months ago, you talked about 22.5% for 2027. So you're already mining 22% in the second half of the year. Just curious about the sustainability of that and how we should think about that as a jumping off point? Thanks.
Steve Cutler, CEO
Sure, Michael. Let me share some overarching insights on that, and then Brendan can provide more details. Overall, I'm very happy with how our margins are progressing and growing. We've made strides not only in the SG&A area but also regarding gross margins. We've seen a 30 basis point increase in gross margin year-over-year thanks to our team's strong execution. I'm proud of how effectively the team has performed, which allows us to be aggressive when bidding on strategic partnerships. The pricing environment is becoming tougher in some areas, but we are confident in our ability to maintain margins and deliver work that exceeds our estimated margins. Our execution team is strong and is supporting our gross margin efforts. On the SG&A side, as I've mentioned previously, we have an excellent global business services team that keeps pushing itself regarding location, automation, and efficiency. Our IT team has done a commendable job facilitating this, resulting in a nearly flat headcount while still growing the business. This demonstrates our focus on costs and enhancing efficiency, which is vital given the challenges we face in competing for strategic partnerships. Overall, we've seen an 80 basis point increase in EBITDA, which stems from both areas. While there are limitations to how much we can achieve, we are pushing those boundaries. As my former boss used to say, every ceiling becomes a floor, and that's our mindset. Brendan, perhaps you can share some specific thoughts.
Brendan Brennan, CFO
I think that's mostly accurate. To address your question, Michael, the estimate of around 22% for the second half is generally incorrect as well. We are anticipating significant margin improvement. As Steve mentioned, this will come from cost management across the entire organization. We expect to see an increase in gross margins in the second half, along with excellent cost control in our SG&A. This will contribute positively to our overall financial position for the complete year in 2021, and particularly in the range for 2022 in the second half.
Operator, Operator
Thank you. We will take our next question. And your next question comes from the line of Eric Coldwell from Baird. Please go ahead. Your line is open.
Eric Coldwell, Analyst
Thank you. Good afternoon. So first one, it's probably a bit of a nuanced question, but these COVID delays, is that part of the equation on the EBITDA margin increase because those programs at least historically typically came with higher pass-throughs, so you'll have perhaps a less negative mix from that revenue headwind?
Brendan Brennan, CFO
Eric, it's Brendan here. Yeah, I think that's absolutely correct. Obviously, as we went into the second half of the year and as we were thinking about our forecasting and our guidance for the start of the year, we were expecting those programs to hit in the second half, predominantly there obviously, as we talked about, the majority of the going to be delayed out into the very end of this year into 2025. Still good work. They'll get done, but just delayed. That certainly will have a positive gross margin impact as we continue to ramp up other parts of our business that we were expecting and as we talked about, are coming through well as we go into the second half of the year. So yes, I do think that will have a positive gross margin mix impact.
Eric Coldwell, Analyst
Thank you. Regarding the DSO, there has been notable progress throughout 2023 with successive improvements. However, it has recently returned to the average levels of last year over the past few quarters. You mentioned whether we are in a more competitive environment or if it is a continuation of that. Could you please clarify? Is the competitive landscape still ongoing, but we are seeing a greater involvement from larger pharmaceutical companies that tend to be more competitive or are asking for more? Or has the pressure to delay payments actually increased?
Steve Cutler, CEO
Let me start with a high-level overview, and then Brendan can provide additional details. Regarding the pricing environment, I believe it has intensified somewhat over the past few months. You often participate in strategic meetings, and I'm aware of the requests from our larger pharmaceutical partners, especially those seeking long-term relationships of three to five years. They are looking for the best rates available, which can lead to some challenging situations. There are a couple of competitors who are willing to consider quite unconventional rates, but we are not going in that direction. I don’t think that reflects the entire market, but there are a few companies moving that way. I believe our customers can see through much of that, but it does create some challenges. However, as I mentioned earlier, I am confident in our ability to handle any challenges affecting revenue because we usually deliver 200 to 400 basis points above our typical proposals. I'll let Brendan explain more about the DSO aspect.
Brendan Brennan, CFO
Thanks, Eric. Yes, I think there are two important points to highlight here. First, we have been very successful in our large pharmaceutical group, which has resulted in significant expansion in our business. This means that a larger proportion of our customer base is made up of these large pharmaceutical companies, leading to increased revenues from them. Consequently, the billing of our Days Sales Outstanding (DSO) is skewed more towards customers who are more demanding regarding credit terms. This is a key factor. In terms of competitiveness regarding DSO and credit terms, the pressure is not really coming from competition among Contract Research Organizations (CROs); rather, it's coming from the pharmaceutical companies themselves. They are focused on maintaining their cash balances, especially as some have specific challenges they need to address in 2024 and 2025. Therefore, the pressure we see regarding credit terms is largely driven by the pharmaceutical companies and their efforts to manage costs, R&D spending, and cash balances over the next few years.
Eric Coldwell, Analyst
Referring to Steve's comments on pricing competitiveness, we recently heard from a competitor focused more on biotechnology that they believe pricing has become somewhat easier in recent months compared to a couple of quarters ago. Your portfolio is more weighted towards big pharma compared to that competitor. Are you noticing an increase in pricing competition from big pharma, especially in strategic deals? Are you seeing similar trends among smaller biotech companies? Or do you agree with your competitor's observations that this group, due to improved funding and sentiment, is currently less price-sensitive than they were a few quarters back?
Steve Cutler, CEO
I agree with your assessment, Eric. We are not experiencing the same pricing discussions and pressures in the biotech sector as we do with large pharmaceutical companies. This has been the standard practice for large strategic partnerships, which typically last three to five years and involve significant financial commitments. Companies negotiate these deals upfront, seeking the best possible terms. This leads to a competitive environment, where you may be up against one or two other entities. In the biotech space, while pricing remains competitive, it is generally less intense due to the nature of one-off projects and programs, which may have some follow-on developments. This creates a different pricing dynamic, although, ultimately, the volume isn’t as significant.
Operator, Operator
Thank you. We will take our next question. Your next question comes from the line of Luke Sergott from Barclays. Please go ahead. Your line is open.
Luke Sergott, Analyst
Great. Thanks guys. I just want to dig in on the enrollment delays. And you're talking about how they're not canceled. And they're coming back. So can you give us a sense of the timing of how we should think about those, kind of rolling back on? And then, more high-level is like, the delays were they caused more from you lacking those functions and having to subcontract out or partner with somebody else? And then, would those issues been rectified if you guys had those functions internally.
Steve Cutler, CEO
Let me address the second part of your question first, Luke. The regulatory advice we needed was specifically from the agencies regarding the variance required in the comparator. It was a very targeted inquiry, and we couldn’t provide that ourselves. We believed the customer was seeking guidance from the agency, which was essential. There were also specific issues related to the investigational product that we couldn’t resolve on our own. While we attempted to assist where possible, we didn’t have the necessary resources. Regarding the delays, we received the news around June, indicating that there would be a delay. However, the work hasn’t stopped; we plan to enroll approximately 400 patients in one of the trials this year, starting in late August or September. Although the work is progressing on this trial, most of the enrollment will take place early next year due to the delays we've encountered. The initial phase of the study will commence, but it won’t have a significant enough impact to matter right away. The majority of revenue will be recognized once the investigative fees and our direct costs related to monitoring and management are completed, which will not happen until next year.
Operator, Operator
Thank you. We will take our next question. Your next question comes from the line of Jailendra Singh from Truist Securities. Please go ahead. Your line is open.
Jailendra Singh, Analyst
Thank you for taking my questions. I want to follow up on your comment regarding guidance, specifically excluding COVID and foreign exchange, which you mentioned is stable to improving. Considering the business over the past six months compared to your expectations at the beginning of the year, what are some key areas? Could you highlight any trends, whether macroeconomic or company-specific, that have exceeded your expectations? Additionally, what areas did not perform as well as you anticipated? I'm particularly interested in core trends, excluding COVID and foreign exchange.
Brendan Brennan, CFO
Jailendra, I may take that one, it's Brendan here. Obviously, when we looked at the modeling for the organization as we came into this year, obviously, we were talking about different quantum’s of COVID work. And, obviously, we've spoken to that extensively on this call. I think the positive signs, as we've talked about a little bit already is kind of some of our growth customers actually have done very well during the course of this year. And that's really customers that are outside of that top five. We've seen really very strong pleasing growth coming from them. There's some developing relationships there that we, as Steve referenced in his prepared remarks, we see as a big customer of the future. That and adding to that the fact that we continue to do well on signing new major relationships. All of these things are very significant positives in that core business. So that continues at good price. As we said, our top five, we grew year-over-year at 8%. And that's been driven by some of the good growth, probably maybe even a little bit ahead of our expectations as we came into the year. But as I said, probably more importantly, those new customer relationships that we continue to win are going to obviously be what really keeps us going as we go forward in the more medium-term.
Operator, Operator
Thank you. We will take our next question. Your next question comes from the line of Jack Meehan from Nephron Research. Please go ahead. Your line is open.
Jack Meehan, Analyst
Thank you. Hello, everyone. I wanted to talk a little bit about expectations around the burn rate. So it stepped down a little bit sequentially here. Just based on the business that's coming in the door and some of the adjustments you made, can you just talk about like how you think it trends through the remainder of the year? And do you think we're kind of at a bottoming point here as we enter 2025?
Brendan Brennan, CFO
Hi Jack, it's Brendan again. We've seen a slight decline in the current quarter, going from 9.1% in Q2. Looking ahead to Q3 and Q4, our guidance suggests we may drop into the high 8s for the latter half of the year. This is still quite solid considering our backlog mix. Over the long term, we've observed a declining trend primarily influenced by the nature of our business, especially in oncology, which typically has a longer timeline. However, we have some fast-track vaccine projects expected to begin in 2025, providing an opportunity to mitigate this decline. Our goal remains to minimize the impact of the backlog burn rate as it decreases over time. We will strive to manage this effectively and hope to see some improvements with different vaccine mixes as we approach 2025, depending on business performance between now and year-end. Rest assured, we will focus on maximizing our conversion rates each quarter, which is a top priority for the company.
Operator, Operator
Thank you. We will take our next question. Your next question comes from the line of Dan Leonard from UBS. Please go ahead. Your line is open.
Dan Leonard, Analyst
Thank you. Can you discuss whether or not your view on the long-term durability of COVID vaccine work has changed?
Steve Cutler, CEO
I don't think it has changed significantly. We see a moderate decline in the percentage of revenue from our COVID vaccine efforts. However, we believe there will be opportunities for new next-generation vaccines and other vaccines related to COVID. This will continue to be a part of our work in the long term, although it will be relatively modest and quite volatile. These trials are typically large and significant, so when they occur, they will have a substantial impact, similar to what we experienced during the pandemic. It’s challenging to predict the future regarding pandemics, but regulators and governments worldwide are very aware of the potential for future outbreaks and are intent on being better prepared than they were for the last one. I do believe this will create opportunities for us. However, predicting specifics will be difficult, as it will be inconsistent and volatile. I don’t have a clear forecast, so it's tough to provide any specifics.
Kate Haven, Senior Vice President
Yes. The way we discussed it, Dan, was that it would be somewhat similar to other infectious disease areas like flu, which typically accounts for about 1% to 2% of our revenue annually. It could fall within that range over the long term. Our expectations this year were higher based on the work we had secured. However, we don't believe that a figure like that for the long term is out of reach. Ultimately, it will depend on the scale of those trials and the outcomes we observe.
Operator, Operator
Thank you. We will take our next question. Your next question comes from the line of Jack Wallace from Guggenheim Securities. Please go ahead. Your line is open.
Jack Wallace, Analyst
Yes. Thanks, team. I wanted to quickly push back on the accounts receivables. Again, it sounds like you're rarely not willing to bet too much on price, but in terms of you winning some additional share inside of your larger customers, is the strength of your balance sheet an asset for yours to be able to be a little bit more competitive than maybe some of your competitors on payment terms?
Brendan Brennan, CFO
Thank you, Jack. It's Brendan here. I believe this is an important aspect of the discussions we're having. As I mentioned earlier in response to another question, this requirement is significant for pharmaceutical companies, as it helps them with their cash flow challenges they are currently facing. We've all received similar feedback from large pharmaceutical companies and their competitors. Our strong balance sheet definitely provides us with an advantage, and we've always recognized it as a competitive edge in the market. We intend to leverage this whenever possible, whether through capital deployment in mergers and acquisitions or by negotiating deals with our customers. We will utilize all our resources to continue winning business and remain competitive.
Operator, Operator
Thank you. We will take our next question. Your next question comes from the line of Casey Woodring from JPMorgan. Please go ahead. Your line is open.
Casey Woodring, Analyst
Great. Thank you for taking my question. So just cancellations in the quarter were slightly above 2% of beginning backlog, which has been your quarterly guide over time, but they're up 7% sequentially. So just wondering if there's anything to read into there, Steve, you mentioned earlier in the call that cancellations related to funding were down in the second quarter. And then just on the GLP-1 front, a few larger pharma companies have made some progress in the last couple of months. So curious if the recent updates we've seen in that space has changed your view on the GLP-1 contribution in the near to medium term? Thanks for squeezing me in.
Steve Cutler, CEO
Sure, Casey, you're correct. There was a slight increase in cancellations this quarter. However, we aren't interpreting that in any significant way at this point. We believe our portfolio has been managed effectively. Cancellations can fluctuate in this industry, which is precisely why we are here in case things don't succeed. Therefore, we have no major complaints about that, and we do not notice any specific trend in that area. Regarding GLP-1s, we are optimistic about the research and the opportunities emerging, especially among large pharmaceutical companies. We are also excited about some of the strategic partnerships we've established that are actively engaged in this field. There are numerous opportunities and a positive outlook as we move forward with GLP-1s. We believe we are well-prepared for the extensive trials ahead. We are recognized as one of the leading vaccine contract research organizations in the industry, and the GLP-1 trials, whether for new applications or new indications, will be substantial. Our scale and infrastructure give us a strong foundation to execute these trials effectively. Additionally, our technology in tokenization will enable us to conduct these trials efficiently. Overall, I am very optimistic about the future, particularly regarding obesity and cardiometabolic areas like diabetes. These trials will likely progress more rapidly compared to some of the rare disease or oncology studies we have, making this a promising area, and we are beginning to see more opportunities there.
Operator, Operator
Thank you. We will take our next question. Your next question comes from the line of Matt Sykes from Goldman Sachs. Please go ahead. Your line is open.
Matt Sykes, Analyst
Good morning. Thanks for squeezing me in. Just on capital deployment, I know you have the buyback authorization you've talked about wanting to be active in M&A. Is this like an either/or decision for you? Can you do both depending on the potential size of the M&A transactions? How are you thinking about prioritizing those two capital deployment efforts?
Steve Cutler, CEO
We have made it clear that mergers and acquisitions will be our primary focus. Currently, we have several opportunities in the pipeline that we believe have a strong chance of progressing within the next six months. We are targeting specific areas such as sites and late-stage labs, which we've previously discussed, and those efforts are beginning to align. Usually, these processes take longer than anticipated, and while we will not overpay in this area, we do have promising opportunities to enhance our clinical work and offerings. That is where our attention is directed. I have also mentioned that we aim to maintain a ratio of adjusted EBITDA between 1.5 to 2.5. As we approach the end of the year, without any M&A activity, we may fall below that range. Therefore, we will consider buyback opportunities where applicable, and we are open to pursuing them when we identify good prospects. To clarify, M&A is our focus, and there are opportunities out there. We intend to leverage our strong balance sheet, as Brendan has indicated, as we are well-positioned in that market. We do not foresee returning to the low-debt levels we had five to ten years ago, as we believe our current strategy is a sound approach and we feel confident about our standing in this area.
Operator, Operator
There are no further questions. I would like to turn the conference back to Steve Cutler for closing remarks.
Steve Cutler, CEO
Thank you, operator. We see a very positive market ahead and significant opportunities for ICON. While there may be some volatility, the stabilization of biotech funding and our growing prospects with large pharmaceutical companies put us in a strong position to take advantage of this favorable market. We appreciate your participation in today's call and your ongoing support for ICON. We look forward to providing more updates as we advance our partnerships with customers and help expedite critical medicines to patients in need. Thank you all, and have a great day.
Operator, Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.