Earnings Call
Icon PLC (ICLR)
Earnings Call Transcript - ICLR Q1 2023
Operator, Operator
Ladies and gentlemen, thank you for standing by, and welcome to ICON Q1 Results 2023 Conference Call. I would now like to turn the conference over to the speaker today, Kate Haven. Please go ahead, ma'am. Your line is open.
Kate Haven, Head of Investor Relations
Good day, and thank you for joining us on this call covering the quarter ended March 31, 2023. Also on the call today, we have our CEO, Dr. Steve Cutler; and our CFO, Mr. Brendan Brennan. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call. Certain statements in today's call will be forward-looking statements. These statements are based on management's current expectations and information currently available, including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business. And listeners are cautioned that forward-looking statements are not 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 24, 2023. 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 exclude stock compensation expense, restructuring costs, foreign currency gains and losses, amortization and transaction-related and integration-related costs and their respective cash benefits. We will be limiting the call today to one hour. I would now like to hand the call over to our CEO, Dr. Steve Cutler.
Steve Cutler, CEO
Thanks, Kate. And good day, everyone. ICON made a good start to 2023, in quarter one, delivering solid results while continuing to develop our strategic initiatives in healthcare intelligence. We continue to navigate macroeconomic headwinds that are impacting our industry. While we expect these challenges to cause uncertainty in the short to medium term, now more than ever, our customers are turning to ICON as a strong, stable and strategic partner that has the broad resources and capabilities to optimally manage their clinical development programs and functions. Notwithstanding this, we have seen a generally stable underlying market demand across customer segments, supported by the fundamental drivers of increasing R&D spending and further outsourcing penetration. This has resulted in improving sequential RFP trends in quarter one. Within customer segments, demand from mid- and large biopharma companies continues to show growth with a recent increase in the number of larger FSP opportunities. In the emerging biotech segment, cautiousness with regard to spending has continued as the broader funding environment remained challenged. Companies are actively conserving cash and prioritizing programs until they have improved visibility to additional funding. As a result, we have seen some delays in decision-making within this segment and more considered assessments on the scale and timing of their studies. While this dynamic creates a more challenging environment in this segment in the near term, our commitment remains unchanged in this area of the market that continues to fuel innovation in R&D. We are partnering with many of our biotech customers at an early phase of development and connecting our operational and medical experts with their leadership teams to collaboratively regenerate optimal development plans and conduct their studies. In doing so, we get to truly understand our customers' objectives, and this builds meaningful and long-term partnerships. We remain encouraged by the traction we are gaining broadly in the marketplace and the opportunity ahead of ICON. Our unique position as a world-leading provider of clinical development services appeals to customers across all segments. And we've made good progress in advancing a number of strategic discussions with large and mid-sized pharma companies since our union with PRA Health Sciences. There is an increasing amount of engagement taking place at a strategic level in customer accounts as companies evaluate and review their optimal clinical development strategies. We are seeing a growing need for full-service, functional and hybrid solutions, with customers seeking a partner that has the necessary scale, expertise, experience and breadth of offering to seamlessly execute their programs and/or augment their existing infrastructure. To that end, in quarter one, we announced a strategic partnership with LEO Pharma, a global leader in dermatology, with ICON acting as their sole provider of clinical development services. The partnership will leverage both fully outsourced and functional outsourcing activities in a tailored and flexible hybrid approach to development. This unique model is designed to provide patients improved access to innovative trials while effectively and flexibly managing LEO's development portfolio. In addition, our late-phase business was awarded a full-service strategic partnership in real-world solutions by a large biopharma sponsor in quarter one. This customer cited ICON's strong history of delivering real-world evidence studies, collaborative approach to deliver solutions and assessment of CRO leadership as key decision criteria when awarding this partnership. We continue to see opportunity to improve our execution in key development activities such as Study Start-Up, site selection, patient identification and recruitment, as trial complexity increases and durations expand. With challenging dynamics in the market such as sites facing resource constraints, increasingly niche patient populations and an overall uptick in regulatory requirements, the need for novel solutions and new approaches is accelerating. As a consequence, our focus and investment in innovation has continued to increase across a number of areas within our organization. We have demonstrated success with several tools we have developed at ICON and believe we are in the early stages of creating even more meaningful improvements in clinical development. Our approach to innovation recognizes the importance of coupling our unique experience and expertise alongside technology to develop solutions that deliver value for customers. OneSearch, our integrated AI tool for site identification and selection, is driving remarkably better delivery of studies, with a 53% reduction in the median time for site identification and a 50% reduction in the percentage of non-enrolling sites on ICON studies. Separately, we have launched a new customer-facing tool with our late-phase business called Cassandra, designed to more accurately predict post-marketing commitments. This model utilizes machine learning technologies, along with our leading expertise in Phase IV and post-marketing clinical trials, to generate insights on late-phase strategy and planning. Outside of technology, we are further investing in our differentiated capabilities with the purchase of the remaining shares in our joint venture with Oncacare, a global cancer research site network. Oncacare is uniquely positioned to increase patient engagement and oncologists' participation in clinical research through more efficient clinical trial delivery and a patient-led approach. We are excited to add Oncacare to our leading site and patient solutions business with critical therapeutic expertise and experience it brings to further enhance our offer. Moving to our financial performance in quarter one. ICON delivered solid results with a 5.3% revenue growth on a constant currency organic basis over quarter one 2022. Excluding COVID-related work on a constant currency basis, revenue increased 9% year-over-year. Gross bookings increased 6% sequentially, but a higher level of cancellations and contract modifications in the quarter resulted in net bookings growth of 3% over quarter four 2022 and a net book-to-bill of 1.22. Solid direct fee revenue growth drove gross margin expansion of 200 basis points on a year-over-year basis. We also saw another quarter of impressive growth in adjusted EBITDA resulting in an increase of 17.2% year-over-year, driven by cost management and the continued execution of our hub location strategy across global business services. Our capital deployment strategy continued as planned, with a further reduction in our floating-rate debt exposure in the quarter. Additionally, we remain active in evaluating potential acquisition opportunities that strategically align with our portfolio and further enhance our offering. We are reaffirming our full year 2023 financial guidance of revenue in the range of $7.94 billion to $8.34 billion, representing 2.6% to 7.7% growth on a year-over-year reported basis; and adjusted earnings per share in the range of $12.40 to $13.05, representing growth of 5.5% to 11.1% on a year-over-year basis. The guidance assumes double-digit adjusted EBITDA growth for the full year 2023, over 2022. Finally, I want to thank our employees across ICON for their significant contributions to our performance in quarter one. We remain steadfast in our commitment to advancing and accelerating clinical development; and we are encouraged by the value we are delivering for customers, sites, and patients. I'll now turn the call over to Brendan for additional comments on our financial results.
Brendan Brennan, CFO
Thanks, Steve. In quarter one, ICON achieved gross business wins of $2.86 billion and recorded $443 million worth of cancellations. This resulted in net awards in the quarter of $2.42 billion, a net book-to-bill of 1.22x. With the addition of the new awards in quarter one, our backlog grew to a record $21.2 billion, representing an increase of 2.4% on quarter four of '22 or an increase of 8.4% year-over-year. Our backlog burn was 9.6% in the quarter, slightly down from quarter four levels as expected. Revenue in quarter one was $1,978.6 million. This represents a year-on-year increase of 4%, or 5.3% on a constant currency organic basis. Overall, customer concentration in our top 25 customers decreased from quarter four 2022. Our top customer represented 8.8% of total revenue in quarter one, and our top 5 customers represented 28.8% of revenue. Our top 10 represented 42.6%, while our top 25 represented 63.5%. Gross margin for the quarter was 29.8% compared to 29.9% in quarter four '22. Gross margin increased to 200 basis points over gross margin of 27.8% in quarter one of 2022. Total SG&A expense was $189.6 million in quarter one or 9.6% of revenue. In the comparable period last year, total SG&A expense was $187.9 million or 9.9% of revenue. The uptick in SG&A expense was driven by an increase in our general bad debt provision of approximately $15 million in the quarter. As Steve mentioned, this is a reflection of the challenging economic environment that a small subset of our customers are facing. Adjusted EBITDA was $399 million for the quarter or 20.2% of revenue. In the comparable period last year, adjusted EBITDA was $340.6 million or 17.9% of revenue, representing a year-on-year increase of 17.2%. Adjusted operating income for quarter four was $368.7 million, a margin of 18.6%. This was an increase of 17.4% over adjusted operating income of $314.1 million, a margin of 16.5%, in quarter one of 2022. Net interest expense was $81 million for quarter one as rate increases drove sequential interest expenses higher as anticipated. We continue to expect the full year interest expense to total approximately $300 million in 2023. The effective tax rate was 16.5% for the quarter, and we continue to expect the full year 2023 adjusted effective tax rate to be approximately 16.5%. Adjusted net income attributable to the group for the quarter was $239.8 million, a margin of 12.1%, equating to adjusted earnings per share of $2.90, an increase of 5.1% year-over-year. In the first quarter, the company recorded $11.4 million of transaction and integration-related costs. U.S. GAAP income from operations amounted to $216.8 million or 11% of revenue during quarter one. U.S. GAAP net income attributed to the group in quarter one was $116.7 million or $1.41 per diluted share compared to $1.36 per share for the equivalent period in the prior year. In terms of other dynamics to consider for this year, we expect to see backlog conversion average 9.5% for the full year, in line with our previous expectations. As longer duration, complex therapeutic programs continue to grow as a proportion of our overall backlog. Separately, we expect to see a modest decrease in our interest expense in quarter two from quarter one levels. Net accounts receivable was $1.197 billion at the 31st of March 2023. This compares with a net accounts receivable balance of $1.182 billion at the 31st of December 2022. DSO was 54 days in the quarter, up from 35 days on a comparable basis from March 31, 2022, and flat on a comparable basis at December 31, 2022. Cash from operating activities in the quarter was $176 million. We continue to focus on management of our DSO and are encouraged with our billing levels as well as record cash collection activities, which were in excess of $1.9 billion in quarter one. However, we have more work to do in this area, and our focus will remain to ensure we sequentially improve both our collections and the add-on performance for the remainder of the year. At March 31, 2023, the company had a cash balance of $282 million and debt of $4.489 billion, leaving a net debt position of $4.207 billion. This compared to a net debt of $4.364 billion at December 31, 2022, and net debt of $4.581 billion at March 31, 2022. Capital expenditure during the quarter was $26.7 million. We made a €250 million payment on our term loan B facility in quarter one and ended the quarter with a leverage ratio of 2.8x net debt to adjusted EBITDA. We expect to continue our payments on our Term Loan B facility over the course of 2023, totaling approximately $800 million to $1 billion for the full year. In addition, we have negotiated an increase in our revolving credit facilities from €300 million to €500 million as a result of the increased scale of the organization. In closing, before we move to Q&A, we want to again extend our gratitude to ICON employees around the globe for their efforts and contributions throughout the quarter. Operator, we are now ready for questions.
Operator, Operator
And the first question from John Sourbeer from UBS. Please go ahead. Your line is open.
John Sourbeer, Analyst
Hi, thanks for taking the question. I guess I was wondering if you could provide a little color on what you're seeing from large pharma demand. Some of the large pharma companies have announced some optimization on R&D projects. And are you seeing any changes in demand there? And has that played into any of those increases in cancellations?
Steve Cutler, CEO
Yes, John, I think the demand, as we've said on previous calls, is from large pharma has been pretty consistent and pretty solid, so we haven't seen any significant downturn. Our large pharma part of our business has been probably one of the best-performing parts of our business over the last 12 months or so. And the demand continues from that group of customers. As I alluded to in my comments, we're seeing some FSP opportunities in that area, but I'm not ready to declare that as a trend. But certainly the demand has continued quite strongly in that space in the last 12 months.
John Sourbeer, Analyst
Great. And if I can ask just one follow-up here. Just when you look at the backlog conversion and some of the dynamics there, how do you expect that to play out throughout the year? And do you expect that run rate to continue to be below that 10% rate for the remainder of the year?
Steve Cutler, CEO
Yes, we'd expect it to continue at around the rate it is. I think we've said 9.5% for the year, mid-9s there, so I don't think that's going to change dramatically as we've gone through the year. Brendan, do you want to...
Brendan Brennan, CFO
Yes, that's exactly it. I think we were pretty clear on that. So yes, we expect it to be on average about 9.5% for the full year.
John Sourbeer, Analyst
Great. Thanks for taking the questions.
Operator, Operator
Thank you for your question. We are taking the next question. The next question from Ann Hynes from Mizuho Group. Please go ahead. Your line is open.
Ann Hynes, Analyst
Great. Thank you. Can you maybe talk about the RFP activity by customer type? What's growing? What's not growing? And then secondly, the nonhuman primate issue, when do you think at all that will impact late-stage clinical trials? And maybe, were your customers talking about it? And is this something that you are worried about for 2024 and 2025? Thanks.
Steve Cutler, CEO
Sure. And let me take the second one first, if I could, NHP, the nonhuman primate issue, we really haven't seen our customers or heard our customers talking about that at this point. And I don't anticipate that's going to be an issue for us, certainly in the short to medium term. If things continue or go worse on that front, there would presumably be some impact down the track, but there are different models that I think our customers can implement in this space and believe that things will get sorted out well before it impacts us in the clinical space, so I don't have that as one of my top risks, so to speak. That's not something that, as I say, our customers are concerned about, at least from what they've told me at the moment. In terms of RFP activity across the customer segments, as I mentioned to John's question, we've seen solid continuation on the RFPs from a large pharma point of view. I think biotech has been a bit more muted. I think we've said that. We've been consistent in what we've said over the last 12 months or so. Having said that, sequentially from the last quarter, we've seen upticks in both areas from an RFP point of view, so it seems that we're seeing some positive steps in that direction, as I say, on a sequential basis. And then across things like labs, real-world evidence, late phase, we're seeing some consistently strong trends on a year-to-year basis. So overall we see demand continuing being solid; a little bit of volatility in the biotech space, as I think I've we've alluded to, in terms of decision-making and RFP opportunities, but overall the market, I think, is constructive and solid.
Ann Hynes, Analyst
Great. Thanks.
Operator, Operator
Thank you for your question. We are now taking the next question. Please standby. The next question from Elizabeth Anderson from Evercore ISI. Please go ahead. Your line is open.
Elizabeth Anderson, Analyst
Hi, everyone. Thank you for the question. You mentioned that the bad debt expense was reflected in the SG&A line in the first quarter. How do you expect that to develop in the second half of the year? What are your additional opportunities considering the current economic outlook? Thank you.
Brendan Brennan, CFO
Yes, we increased the provision by $15 million in the quarter, as I mentioned in my comments. This was a general provision that applied across the board within that customer group. We do not expect to see such a significant amount moving forward. Normally, it could be a couple of million dollars each quarter, but we do not expect that level to be repeated beyond the first quarter. I believe this provision was appropriate. The total bad debt provision across the group remains around $36 million, which I also consider to be appropriate, but we don't foresee it being at that same level sequentially.
Elizabeth Anderson, Analyst
Got it. And can you talk about any sort of notable changes and kind of share shift or anything? I know we've heard different commentary from different players in the market, so I'm just trying to get a sense of any notable changes either sequentially or sort of year-over-year, depending on how you think about that in terms of share shifts among different CROs?
Steve Cutler, CEO
We don't have any specific comments on that, Elizabeth. We believe we are competing effectively. Occasionally, we hear about a study coming our way, which seems to be more from smaller and mid-sized CROs rather than the larger ones. However, we feel we are well positioned to capture market shares. As you know, some larger competitors are undergoing changes, and we see potential opportunities there. We intend to take advantage of that, but currently, we haven't experienced a significant shift in market share from larger customers or competitors.
Elizabeth Anderson, Analyst
Okay. Thanks so much guys.
Operator, Operator
Thank you for your question. We are now taking the next question. The next question from 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 have a quick question regarding your expectations for foreign exchange this year. Brendan, previously you mentioned it could be a little less than a 1% headwind. Is there any update to that outlook considering the more moderate headwind we experienced in the first quarter? Thanks.
Brendan Brennan, CFO
Yes. I mean it has gone a little positive, Max, in terms of the overall outlook at this point, so it should really be a little bit of a tailwind for the full year. At this point, we've obviously gone to 110. Or I think we're hanging in around that, that being the major currency pair. And you will have noticed that we are reaffirming our guidance, so certainly our thinking on that FX during the course of this quarter is certainly included in those numbers.
Max Smock, Analyst
Okay. Thank you. And then following up, I believe you said, excluding COVID, growth was 9% in the quarter, which implies COVID was something like a $90 million headwind. In your commentary last quarter about COVID revenue stepping down. And I think 6% of revenue in '22 to 4% in '23 implied something like a $140 million headwind in total in 2023, so I'd be curious to hear if the headwind that we saw in this quarter was in line with your expectation. And is there any change to the thinking in terms of the total headwind this year? In other words, do we only have roughly $50 million of a headwind to work through here in the remainder of 2023? Thanks.
Steve Cutler, CEO
We're experiencing significant challenges, Max. Our COVID revenues are decreasing at a rate similar to what you mentioned. We're looking at a reduction of approximately 4% to 5% this year, which is expected to continue. The backlog appears to be around 3%. So yes, this decline is happening, and I believe your assumptions and expectations align well with ours.
Kate Haven, Head of Investor Relations
Yes, Max. Our expectation for this year was to see a sequential decrease as the year progresses. Therefore, we anticipated Q1 would have the highest COVID contribution as we move through some trials that are wrapping up.
Max Smock, Analyst
Okay. Great. Thank you.
Operator, Operator
Thank you for your question. We are now taking the next question. The next question from Patrick Donnelly from Citi. Please go ahead. Your line is open.
Patrick Donnelly, Analyst
Hi, guys. Thank you for taking the questions. Steve, and maybe Brendan can chime in as well, just one on the guidance, I guess, philosophy at a high level. I mean it seems like, as you worked your way through the quarter, cancellations maybe picked up a little bit. You have the bad debt expense. Early-stage biotech continues to be a little bit soft, I guess. I guess you guys have this great track record of execution, hitting numbers, beating numbers even. I guess, when you sit here today four months into the year, how do you think about the upside to guidance compared to whether it's January, this time last year, whatever it might be? I guess, how comfortable are you with the guide given there are maybe some cracks showing up on the macro side at a high level? Obviously the bookings held in well, so just curious as you kind of sit here and think about the guide, particularly on the top line, the confidence level there.
Steve Cutler, CEO
Yes, I'll have a crack at that, Patrick. And then Brendan can jump in. We've reaffirmed guidance, so we believe we can get to our midpoint. That is our expectation at the moment. Having said that, the macro environment is probably more challenging now than it was when we set guidance back a couple of months ago, and so there are some things we have to work through. And we're doing that very actively with the team. We're all very engaged in wanting to do that, but at the moment, we feel with a reasonable level of confidence that we can reaffirm and we can get where we want to be on the guidance side of things.
Brendan Brennan, CFO
Yes, I want to reiterate some of the comments I made to Max and Patrick. We are currently in a somewhat more favorable foreign exchange environment compared to when we established the guidance. However, there are other macro factors that have instilled some caution. Despite this, we've kept the guidance unchanged. You can see that while we are maintaining the same guidance, there are various influences affecting that number that we are evaluating on a quarterly basis.
Patrick Donnelly, Analyst
Yes. Understood, okay. And then Brendan, maybe on the DSO piece, obviously that's been a focus. You kind of flagged it last quarter and talked a little bit more about it this quarter. Can you just talk about, I guess, what's being done there? To your point, I don't think there was any sequential improvement. You're talking about obviously, throughout the year, we'll see some improvement there, so can you just talk about the level of focus there, any changes to customer payment terms, things like that? The unbilled side picked up a little bit, so I just want to talk through that and what the expectations are.
Brendan Brennan, CFO
Sure, Patrick. This is an item that I keep a close eye on, and I've been coordinating with our teams to ensure we make good progress throughout the year. The most significant action we've taken in the last few quarters is focusing on building the right amounts on a quarterly basis. Our billing in both Q4 and Q1 has significantly exceeded our revenue, surpassing $2 billion in each of those quarters. This is essentially catching up on some of the billing that was missed during the first half of 2022, and we needed to realign with that. Those bills have been sent out, and we are now working to ensure they are collected within credit terms while maintaining ongoing communication with our customers to ensure their satisfaction with the process and to secure cash collections. We have made substantial progress in achieving the right billing levels over the past couple of quarters. Our cash collections have improved nicely from Q3 to Q4 and then from Q4 to Q1. Moving forward, our goal is to continue this positive trend, and we expect to see significant improvements in Days Sales Outstanding throughout the year, which is our primary focus.
Patrick Donnelly, Analyst
Okay. Appreciate it, guys.
Operator, Operator
Thank you for your question. We are now taking the next question. The next question from Eric Coldwell from R. W. Baird. Please go ahead. Your line is open.
Eric Coldwell, Analyst
Thank you. Good morning. A lot of my questions have been addressed, but I want to take a slightly different approach with two topics. First, about pass-throughs. I understand you don't separate reimbursable and pass-through details and consider them as one cohesive model, but I'm curious. We’ve noticed some volatility in that revenue segment, more than usual, and since usual is already quite volatile, can you provide any qualitative trends regarding the impact of pass-throughs on revenue or bookings? I know it’s not specified, but I’m interested in what you’re observing in the marketplace.
Steve Cutler, CEO
Yes. I believe you're correct, Eric. Pass-throughs have been and continue to be volatile. As we moved beyond the COVID phase, we've faced some challenges in that area as well. To address your question, revenue growth on a direct fee basis was high single digits for the quarter. We reported around 5.3% in constant currency, indicating that pass-throughs were somewhat of a headwind this quarter and may remain so in the future. However, we are very confident and pleased that the underlying margin-generating revenue and business are consistently growing at a strong rate. That's likely the best way to respond to your inquiry.
Eric Coldwell, Analyst
Fair enough. And then second one here, labor inflation. Obviously it's been rather high in the last couple of years. There's been good pricing opportunities the last couple of years. As we entered into 2023, I think the general expectation in the market was that getting pricing out of customers might be harder after two years of pretty good activity, but I am curious if you could give us an update on those two fronts, both the labor inflation and what you're expecting on a net realized basis this year within your staff and then how pricing opportunities are stacking up to offset those pressures. And obviously, say, this is all in the context of a very nice margin expansion, so I think we know where you're headed with this, but I'd like to get your updated thoughts.
Steve Cutler, CEO
Certainly. Regarding pricing, you are correct in your observation. Our negotiations with customers have been generally collaborative over the past couple of years, but this is beginning to shift as we enter the post-COVID era. Customers seem to be more resistant when it comes to discussing not only inflation-related adjustments but also market-driven increases. While we possess solid data on these market dynamics, it has become a more complex conversation. This aspect of our business is more challenging than it was a year or two ago. On the topic of wage inflation, this too has been difficult given the ongoing inflation rates, which have hovered around 4% to 5% across the organization, with some countries experiencing higher levels. However, the pressure in the labor market has softened somewhat over the past six to twelve months. Our retention rates have been improving steadily over the last 15 to 18 months and are now surpassing pre-COVID levels. Overall, the labor market is no longer as intensely competitive as it was during or immediately after COVID. We have found that our salary increases and bonuses have been positively received by our employees, allowing us to retain talent and provide growth opportunities. Both the pricing and labor environments present challenges, perhaps more than usual, but we are managing these situations effectively.
Eric Coldwell, Analyst
That will be all for me. I just want to say congrats on a steady report in pretty choppy sea. So keep it up. Thanks guys.
Steve Cutler, CEO
Thanks Eric.
Operator, Operator
Thank you for your question. We are now taking the next question. Please standby. The next question from Sandy Draper from Guggenheim and Partner. Please go ahead. Your line is open.
Sandy Draper, Analyst
Thank you very much. I want to echo two points that Eric just made. First, congratulations on a strong quarter. Also, many of my questions have already been addressed, but I’d like to clarify something regarding the 2022 revenue by customer segment in your slides. You mentioned that small biopharma accounts for 33%, but the footnote notes that this refers to companies greater than or equal to 76 that are still generating revenue. Can you remind us what percentage of your customer base is pre-revenue? This will help prevent any misconception that 33% of biopharma companies are actively seeking funding right away.
Brendan Brennan, CFO
Sandy, it's Brendan here. Yes, as we talked about, it's kind of the way we've defined how we look at that subsector or whatever want to call them, emerging biotechs or small non-funded or non-revenue-generating, is for companies that have R&D spend on an annual basis of less than 100 million. And companies of that ilk, would represent about 15% of total revenue. So obviously, 15% of that 33. So just to give you an idea of what that quantum of exposure is.
Sandy Draper, Analyst
I appreciate that clarification. Moving on to a different topic, I wanted to think longer-term about your comments regarding backlog burn. I understand that the COVID situation is being resolved quickly. Depending on where the pass-throughs land, you seem to see a decrease but then a stabilization around 9.5. Is the business mix such that if it stays this way, you would expect a gradual multi-year decline? Or are we at a stable level now, where unless there are significant changes, it will likely remain around the 9.5 level in the long term? Or are we entering a long-term trend of slight decline? Thank you.
Steve Cutler, CEO
Yes, Sandy, that's a tough question to answer. It really depends on the types of projects we can secure and add to our portfolio before starting them. Oncology represents about 40% of our work, which tends to progress more slowly. However, when we secure vaccine projects, they tend to move faster. Therefore, we expect to maintain our backlog burn around the mid-9s, specifically at 9.5%. I believe we can achieve that. It has decreased slightly since the post-COVID period because vaccine studies have diminished, and we are returning to more standard oncology studies, which are slower. There are other therapeutic areas that may also progress more quickly. We see potential opportunities in the metabolic field with some of the GLP inhibitors emerging. There are positives and negatives to consider. Overall, I think the best outlook is a long-term expectation in the mid-9s.
Sandy Draper, Analyst
Okay. Great. Thanks so much.
Operator, Operator
Thank you for your question. We are now taking the next question. Please standby. The next question from David Windley from Jefferies. Please go ahead. Your line is open.
David Windley, Analyst
Hi, thank you very much for taking my question. I have a different take on the frequently asked burn question. Steve, in your remarks, you mentioned changes in decision-making cycles, and this isn't the first time you've addressed this. It seems to be an ongoing issue. We're observing a significant number of clinical trials in the industry that are not progressing to start, which aligns with your observations. I have a two-part question: Do you believe this is mainly due to challenges in funding for small biotech companies, or are there other contributing factors? Additionally, how are you approaching adjustments to your revenue forecast and backlog in light of this deeper consideration of what clients are choosing to move forward with? Thank you.
Steve Cutler, CEO
Yes, I'll address the first part. Brendan can provide insights on revenue forecasting. A significant portion of the trials isn't starting as quickly as we'd prefer, particularly in the biotech funding area. However, we have many customers seeking proposals and budget plans for their trials who have not secured funding yet. We are cautious about adding these to our backlog, but this does involve a notable segment of the industry, primarily among smaller companies, though it's not limited to them. Notably, while we observed a slight increase in cancellations this quarter, they were roughly evenly split between larger pharmaceutical companies and biotech firms. Therefore, on a cancellation basis, there wasn't a significant lean towards the biotech sector. Brendan, perhaps you can discuss the forecasting aspect?
Brendan Brennan, CFO
Yes. We regularly review our forecast on a quarterly basis, considering factors such as when the first patient will be enrolled and when the project will actually commence. We continuously assess the headcount needed to deliver that revenue throughout the year. We engage in active discussions with our project managers, relationship managers, sponsors, and customers regarding the timing of their projects. Only projects with clear visibility and confirmed funding are included in our forecast. This insight significantly aids our guidance-setting process on a quarterly basis. Overall, we have a solid understanding of which projects are likely to begin and which may face challenges.
David Windley, Analyst
Got it. And then my second question, if I can sneak this one in, is about cash conversion. I appreciate you addressed this a little bit before in response to one of the prior questions, but I think, in the last quarter, you mentioned that you improved your billings in the third and fourth quarters. However, I'd thought that, to be fair, you said in the first half. I expected that maybe the third quarter billings from last year would start to have a more significant impact on your accounts receivable. I'm just trying to understand if you're experiencing pushback regarding customers' ability or willingness to pay on time, or if it's simply that customers are waiting for the standard payment terms of 60, 90, or 120 days, and we just haven't reached that point yet.
Brendan Brennan, CFO
It's predominantly the latter, Dave. There's always going to be some conversations you have to have with customers to make sure that they pay their bills and that they're well-funded and all those kind of points, but as we said, we didn't uptick our billing in Q3. Our cash collections in Q1 weren't significantly of the event that we built in Q3. So we did see a nice uptick, albeit we need to continue that uptick from Q3 to Q4; and likewise, the cash collections from Q1 to Q2, so still an area of focus. I think still we have done decent billing. And we should be able to get the cash in, but still very much focused.
David Windley, Analyst
Great. Thank you. Appreciate the additional detail. Good luck.
Operator, Operator
Thank you for your question. We are now taking the next question. The next question from Justin Bowers from Deutsche Bank. Please go ahead. Your line is open.
Justin Bowers, Analyst
Hi, good afternoon. Just on the prepared remarks you mentioned seeing sort of an uptick in demand across this service. And I was hoping you could expand upon that and where you're seeing demand from there.
Steve Cutler, CEO
We discussed an increase in demand from large pharmaceutical companies. While a significant portion of our full-service growth is within this area, most of the increase in demand is actually coming from biotech and mid-sized companies. The large pharma sector remains strong, and there is a substantial element of Full Service Provider (FSP) work within it. I want to clarify that we have observed solid market demand through requests for proposals in this sector. Both FSP and full service are present, but in contrast, the biotech and mid-sized companies mainly require full service, which tends to be more variable. Overall, we see good demand for all formats, including hybrid opportunities, and we believe we are well-equipped to handle any of these three models: full service, FSP, and hybrids.
Justin Bowers, Analyst
Got it. And then just one quick follow-up. With sort of taking a step back and as we think about some of these more hybrid with respect to like virtual and ECPs increasing over time, how should we think about that with respect to the level of pass-throughs? And are you starting to see that impact the level of pass-throughs now in some of the contracts?
Steve Cutler, CEO
I don't think we've observed any significant impact on pass-throughs due to the shift to hybrid models or DCTs. DCTs will continue to have notable pass-throughs associated with them. I don't see much difference between that and a full-service opportunity. However, FSPs typically have a lower proportion of pass-throughs, so hybrids are likely on the lower end of the pass-through spectrum, not as high as a full service. As that may have an effect, we'll evaluate it, but the number of DCT trials we conduct is quite limited. Most trials include a DCT component, but there are very few that are purely DCT. Currently, we don't perceive any impact on the proportion or amount of pass-throughs for those trials.
Justin Bowers, Analyst
Got it. Thanks so much.
Operator, Operator
Thank you for your question. We are now taking the next question. Please standby. And the next question from Luke Sergott for Barclays. Please go ahead. Your line is open.
Luke Sergott, Analyst
Awesome. Good morning, everybody. I want to go back to that decision and the timing delays because, Brendan and Steve, I guess, when we talked back in 4Q, you guys were talking about customers kind of rightsizing their R&D budget. And maybe they're not ordering up all the bells and whistles that would go into a trial. And now we're hearing about actual delays in trial starts. And so through your history in the industry, what percentage of these trial delays or the starts will actually turn into just never even starting up like as you guys think about it?
Steve Cutler, CEO
That's a difficult question to answer. I can say that we are experiencing some delays. It will have an impact, that’s for sure. The ongoing percentage of trials affected is notable. We're observing that decision-making is cautious, with customers carefully considering the services they need and the trials they wish to pursue. This presents an opportunity for us to consult with them, ensuring they're choosing the right trials and scale. There’s potential here, but the process is deliberate. We see delays particularly among smaller companies with one or two drugs aiming for market entry. While it's challenging to quantify the overall impact on our figures right now, it is certainly not trivial.
Luke Sergott, Analyst
That's helpful. Let's discuss the business. The One Search feature continues to set you apart. Can you provide an update on the backlog and how many of the recent wins have included One Search? I assume this is a premium service.
Steve Cutler, CEO
Yes, it's OneSearch. This is our proprietary application that helps us identify the best sites for trials, ensuring faster selection, identification, and setup. Most importantly, it reduces the number of sites that recruit no patients or just one patient. In our field, having a site that does not recruit effectively is often more problematic than not activating that site at all, compared to those that can recruit a meaningful number of patients. The efficiency benefits are clear, and we now apply this tool to all our studies, though it has only been regularly used for the past 12 to 18 months. The advantages we are seeing are just beginning to emerge, as these trials typically take a year to three years to complete. Many trials utilizing this technology are still ongoing. I mentioned earlier that we are beginning to witness tangible benefits impacting our portfolio. I'm very satisfied with the technology, and we have incorporated various data sources that assist in identifying sites that are likely to recruit diverse patient populations, an important factor for regulatory authorities. We need to ensure we are reaching more diverse populations, and this tool also helps us do that. It offers several benefits, not only in terms of speed but also in enhancing diversity and quality.
Luke Sergott, Analyst
All right, great. Thanks.
Operator, Operator
Thank you for your question. We are now taking the next question. And the next question from Casey Woodring from JPMorgan. Please go ahead. Your line is open.
Casey Woodring, Analyst
Great. Thanks for taking my questions. So we've been getting a lot of questions around the read-through to CROs from the bearish commentary from some of the bioprocessing companies on their SMID biotech customers of late. Can you explain your level of visibility into the SMID spend versus some of those bioprocessing players? Those companies largely took down their expectations for the year after seeing SMID spend trends over the first three months of this year, but you've just said here today that SMID biotech RFPs improved sequentially and are reiterating guidance, so I'm just kind of curious on the difference in commentary there.
Steve Cutler, CEO
Yes, we've observed a sequential increase in the biotech market, which appears to be quite constructive overall. While there is some volatility and ongoing funding challenges that are causing delays, the companies in this sector are actively discovering and developing new drugs, driving innovation in our industry. It is essential for us to engage with these firms, as many of them eventually collaborate with our larger pharmaceutical partners. The recent acquisition of Seagen by Pfizer during the quarter highlights the importance of these companies, which are successfully bringing new and improved drugs to market. We are committed to supporting them for the long term. Despite the inherent risks associated with these companies, often having only one or two drugs in development, we believe the underlying biotech market remains strong. I think we may have reached the lowest point in biotech funding, and there are signs of positive funding trends ahead. In about 12 months, I believe we will see a return to a more stable biotech funding environment, particularly as interest rates and other macroeconomic issues improve. While we anticipate short-term volatility and challenges, we feel optimistic about the long-term outlook for this market, which appears solid.
Casey Woodring, Analyst
Got it. And then just as a follow-up to that commentary. So the banking crisis and the SVB situation, that specifically occurred in the last few weeks of the quarter. Curious as to how spending is trending from SMID customers over the last few weeks kind of after all of that stuff went down. Has there been a notable drop-off in RFPs? Is there any significant change to how the SMID customers are thinking about things after SVB?
Brendan Brennan, CFO
Casey, it's Brendan here. We didn't see any substantial movement after it. Obviously, it was a bit of a concern at the time, but I think the federal government addressed it quite definitively. Therefore, it hasn't had a significant impact at this point.
Operator, Operator
Thank you for your question. We are now taking the next question. Please standby. The next question from Derik De Bruin for Bank of America. Please go ahead. Your line is open.
Derik De Bruin, Analyst
Hi, thanks for including me. A lot has already been covered, but I wanted to ask if there are any specific therapeutic areas among early-stage biotechs that are experiencing delays, such as cell and gene therapy. Is there anything common about these delays? I also have some questions regarding the financial statements.
Steve Cutler, CEO
Yes, I believe it leans more towards the latter. Currently, there isn't a specific focus on any particular therapeutic area. Oncology is certainly a significant field in that regard. Delays are often associated with oncology studies, which tend to progress more slowly. However, I don’t think there is any specific therapeutic area that is notably affected.
Derik De Bruin, Analyst
Got it. I have a few questions regarding the adjustments. What run rate are you anticipating for restructuring and other costs, as well as for stock-based compensation, to support the increase in adjusted net income?
Brendan Brennan, CFO
Yes. I believe the first quarter results give us a reasonable indication of what we can expect moving forward. We may see a reduction in integration costs as the year progresses. The figures from the first quarter are likely to be quite accurate, particularly for stock-based compensation, where we can simply take that amount and multiply it by four. We anticipate a slight decrease in integration costs and are monitoring restructuring expenses throughout the year. Our office infrastructure is a significant portion of the restructuring costs for this quarter, so we expect those figures to remain in a similar range. While they may fluctuate a bit, one cost is expected to decrease slightly while the other remains relatively stable.
Derik De Bruin, Analyst
Great. Thank you very much.
Operator, Operator
Thank you for your question. We are now taking the next question. The next question from Timothy Dale from Wells Fargo. Please go ahead. Your line is open.
Timothy Daley, Analyst
Great. Thank you. So Steve, I just wanted to follow on to an earlier response on share shift. You mentioned some changes going on at peers that offer near-term opportunities to pick up some share around this volatility, but thinking about after those transition periods are behind them, how should we be thinking about share defensibility under a backdrop of a few new well-capitalized players; or more motivated, well-capitalized players with an increased appetite for recovering the share lost over the last few years?
Steve Cutler, CEO
Tim, I don't think you need to worry too much from our perspective. We are seeing some of our competitors experiencing changes, which is positive for them. However, customers tend to be cautious, and shifts in market share don't occur rapidly in our industry. It’s generally a conservative sector, and we have long-term partnerships that are typically in place for several years. Therefore, I wouldn't expect anything dramatic to happen. From a competitive standpoint, we've noticed a recent increase in market share from some smaller and mid-sized competitors. This presents us with opportunities as we see several possibilities arising from these smaller players. In the short term, that's likely where we can gain some advantage. Long-term changes involving the larger competitors will take several years to materialize.
Timothy Daley, Analyst
All right. No, I appreciate that. And thank you for introducing me the term recalcitrance by the way. My follow-up is just, Brendan, I think we'd all appreciate if you're willing to provide a bit more visibility on how order trends varied by month-by-month basis in 1Q. Appreciate the commentary, a little peek through into April, but that would be great if you could help us out or at least tell us if there's any volatility across the months within the quarter.
Brendan Brennan, CFO
In business development, there are quarters that start off strong and others where momentum builds up until the end. This particular quarter began well, and we maintained solid performance throughout, despite cancellations being higher than we would have liked. Overall, it was a strong quarter, but I wouldn’t say there’s a specific trend. Each quarter can vary, and while we had a good start this time, the situation can shift from one quarter to the next.
Timothy Daley, Analyst
All right. Appreciate it. Thank you.
Operator, Operator
Thank you for your question. There are no further questions. I will hand back the conference to Steven Cutler for closing remarks.
Steve Cutler, CEO
Well, good. Thank you, operator. And thank you, everyone, for joining the call today. We look forward to updating you on our results as we progress through the year and further deliver on our mission in accelerating clinical development. Thanks all, and have a good day.
Operator, Operator
That concludes the conference for today. Thank you for participating.