Earnings Call Transcript - ICLR Q2 2021

Operator, Operator

Good day and thank you for being here. Welcome to the ICON PLC Quarter Two Results Call. All participants are currently in listen-only mode. I will now turn the conference over to your speaker today, Jonathan Curtain. Please continue.

Jonathan Curtain, Head of Corporate Finance Group

Thank you very much. Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended June 30, 2021. Also on the call today, we have our CEO, Dr. Steve Cutler; and our CFO, Mr. Brendan Brennan. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call. Certain statements in today's call will be forward-looking statements. These statements are based on management's current expectations and information currently available, including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business. And listeners are cautioned that forward-looking statements are not guarantees of future performance. Forward-looking statements are only as of the date they are made. 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. This presentation includes selected non-GAAP financial measures. For a presentation of the most directly comparable GAAP financial measures, please refer to the press release statement and the condensed consolidated statements of operations U.S. GAAP unaudited. While non-GAAP financial measures are not superior to or a substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes. We'll be limiting this call today to one hour. We therefore ask participants to keep their questions to one each with an opportunity to ask one related follow-up question. I would now like to hand over the call to our CFO, Mr. Brendan Brennan.

Brendan Brennan, CFO

Thank you, Jonathan. In quarter two, ICON achieved growth business wins of $1,316 million and recorded $210 million worth of cancellations. Consequently, net awards in the quarter were a record $1.1 billion, resulting in a net book-to-bill of 1.27 times and a trailing 12-month net book-to-bill of 1.34 times. With the addition of these new awards, our backlog grew to a record $10.2 billion. This represents a year-on-year increase of 12.7%. Revenue in quarter two was $871.2 million. This represents a year-on-year increase of 40.5% or 37.5% on a constant currency basis and CDO basis. Our top customer represented 12.7% of revenue for the quarter compared with 12.1% in quarter two 2020. Our top five customers represented 40.9%. Our quarter two revenue was in line with last year. Our top 10 represented 54.2% compared to 54.9% last year, while our top 25 represented 72.4% compared to 71.3% last year. Of note on a combined company basis, our largest customer in quarter two would have been 7.3% of revenue. Gross margin for the quarter was 27.6% compared to 27% last quarter, and 28.1% in the comparable quarter last year. Our adjusted SG&A was 10.3% of revenue in quarter two, which compared to 10% last quarter and 13.5% in the comparable period last year. Adjusted operating income in the quarter was $142.9 million, a margin of 15.3%. This compared to 15% last quarter and 12.1% in the comparable quarter last year. The adjusted net interest expense was $2.2 million for the quarter. And the adjusted effective tax rate was 13% for the quarter. Adjusted net income attributable to the Group for the quarter was $113.2 million, a margin of 13%, equating to the diluted per share of $2.12. This compares to earnings per share of $2.06 in quarter one 2021 and $1.20 in the comparable quarter last year. During the quarter, the company recorded $42.1 million of transaction and integration related costs. U.S. GAAP income from operations amounted to $112.9 million or 13% of revenue. U.S. GAAP net income attributable to the Group was $73.9 million or $1.38 per diluted share compared to $0.90 per share for the equivalent prior year period. Included in the press release and the earnings slides, you will note that we included adjusted earnings per share of $4.46 for the first half of the year. This excludes stock compensation expense, amortization, and transactional related costs and their respective tax benefits. As a consequence, we estimated the adjusted effective tax rate for H1 2021 was 15.2%. In addition, with respect to our guidance, we expect the fully diluted share count to be approximately 83.7 million shares for the second half of 2021. Net accounts receivable was $417.4 million at June 30, 2021. This compares with a net accounts receivable balance of $465.6 million at March 31, 2021. On a comparative basis, days sales outstanding were 35 days at June 30, 2021 as compared with 39 days at the end of March 2021 and 53 days at the end of June 2020. Cash generation from operating activities in the quarter was $128.4 million. At June 30, 2021, the company had a gross cash balance of $1,057 million and cash equivalents of $350 million leaving a net cash balance of $707 million. This is compared to net cash of $595 million at March 31, 2021 and net cash of $244 million at June 30, 2020. Capital expenditure during the quarter was $12.9 million. As you know, the PRA acquisition was funded through a combination of cash equity and debt. Over the course of May and June, we engaged with Capital Markets to secure long-term financing, resulting in a number of outcomes worth sharing. The first relates to our credit rating status, where we achieved a double B plus and Ba1 ratings from S&P and Moody's, respectively. This represents only a one notch decrease from both agencies relative to our previous investment grade position, and we remain one of the highest rated CROs in the industry. Secondly, we had a very positive process raising the $6 billion of debt required to finance the transaction. This was broken into two instruments, $5.5 billion of floating term loan B notes over a seven-year tenor and $0.5 billion fixed high yield bond over a five-year tenor. Our term loan B offering was oversubscribed in excess of two and a half times, allowing us to secure an all-in rate of 3%. Demand was also very high for our high yield bond, with subscriptions of over $3 billion, helping us to secure a rate of just 2.875%. This all means we will have a current blended interest rate of just below 3%. The finance structure will allow us to maximize repayment of our debt to do that more quickly. We completed the transaction with a debt to adjusted EBITDA and inclusive of synergies ratio of approximately 4.2 turns, with our goal to reach 2.5 times adjusted EBITDA by the end of 2023. In addition to this long-term debt, we increased our revolving credit facility from $150 million to $300 million. This facility is currently undrawn. Before I hand over to Steve, I'd like to make you aware of a change in our Investor Relations department. Jonathan Curtain, who has led this function for over four years, will transition out of the IR role to lead our commercial finance team alongside his existing responsibilities as Head of our Corporate Finance Group. I'm pleased to announce that Kate Haven, who was moving across from our corporate development team, will succeed Jonathan as Vice President of Investor Relations. Jonathan will be working closely with Kate to ensure a smooth transition. And I wish them both the very best of luck in their new roles. And so with all of that said, I'd like to hand the call over to Steve.

Steve Cutler, CEO

Thank you, Brendan and good day, everyone. On July 1st, we were delighted to close ICON's acquisition of PRA. This transaction brings together two high quality, innovative, growing organizations with similar culture and values to become the world's leading healthcare intelligence and clinical CRO. With the addition of PRA, the new ICON will create a novel paradigm for bringing clinical research to patients, offering expanded capabilities and solutions to customers, while delivering significant value to shareholders. The environment created by the COVID-19 pandemic has presented the industry with an opportunity to accelerate changes in the clinical monitoring process. The need for a more flexible and efficient approach to clinical monitoring and data review has emerged, and this demand will fundamentally change the way in which trials are conducted going forward. A key milestone for ICON was the manner in which we helped deliver the first COVID vaccine to the market in record time, applying this agile and flexible framework to our clinical monitoring model. Our ability to execute these large scale projects has resulted in a very healthy level of business wins in this area. And during the first half of this year, both ICON and PRA both saw the influence of these vaccine trials on our revenue, with a higher proportion of pass-throughs relative to non-COVID work. As we progress through the remainder of the year, we expect our pass-through mix to begin to return to a more normalized level. In parallel, we have seen an increased shift from traditional to hybrid models, and we are excited about future opportunities in a decentralized trial space. The industry is poised for transformational change. We are now in a position of significant strength, with the combined market-leading skillsets and resources of both PRA and ICON. Moving forward, the new ICON will provide our customers with the integrated solutions required to execute on these novel delivery models, while making it easier for patients to be part of clinical development. Successful decentralized trials require mobile site and patient-centric technology to support telemedicine, site resources to ease the investigator and patient burden, in-home services to patients, central labs to process and manage testing, and also direct-to-patient capabilities to enable drug distribution and management. I believe the new ICON is in the unique position to be able to integrate these key components to create compelling and differentiated solutions for customers. Both ICON and PRA have long histories of individual company success. And collectively, we will be much stronger than the sum of our parts. Our goal is to create the world's leading healthcare intelligence CRO, where customers will benefit from our broader service offerings and geographic footprint, deeper therapeutic expertise, expansive healthcare technology, innovation, and functional talent and capabilities. Integration activities are well underway and functional teams from both legacy organizations are collaborating well to ensure we have a seamless transition to a single company. As we integrate our day-to-day focus remains on business continuity and the execution and delivery of our customers' clinical projects. The complementary nature of our services will also present revenue synergies across our broader customer base. Already, we are seeing interest from customers in the new ICON, with positive, strategic partnership discussions being initiated and cross-selling opportunities being generated in areas such as central and specialty labs, the Accellacare site network, Home Health Services, and Imaging. We are also actively pursuing our cost synergy target of $150 million and have already announced internally the consolidation of a number of offices that are situated in similar locations. This will not only drive P&L benefits, but will also help our teams to do their best work, as we return to the office post-pandemic. As the marketplace continues to evolve, it will be important to remain focused on innovation that facilitates our core mission of getting drugs and devices to market faster. Our new partnership with Allscripts Veradigm aims to create the industry's leading EHR-based clinical research network that reaches more than 25,000 physicians and 14 million patients across the United States. Using Veradigm StudySource platform, which extends existing EHR systems to include clinical research, alongside our proprietary eSource technology and clinical research expertise, this network will enable physicians to offer clinical research as a care option to their patients, driving efficiencies across the trial process and increasing patient accessibility and diversity in clinical trials. In addition, we have seen growing interest from sponsors in clinical trial tokenization. Tokenizing enrolled clinical trial patients enables them to be followed within a real world data setting in a de-identified manner, increasing our ability to identify long-term outcomes and improving our reporting of key follow-up data to sponsors and regulatory authorities. The new ICON is the only organization that has implemented a customer-friendly environment of multiple tokens to allow for linkages to a vast data ecosystem in a compliant and secure end-to-end approach. Through our Symphony asset Sonoma, ICON has data and analytic resources and expertise to translate tokenized patient populations into actionable information for clients, which will support their ongoing product development, registration, and pricing goals. Current customers include three of the world's top 15 pharma companies since the initial launch in May 2021 are utilizing the benefits of our partnerships. Alongside our existing capabilities, we can deliver truly differentiated trial solutions to meet growing customer needs and positively impact clinical trial development. As we integrate these key components into our patient, site, and data strategy, we will be able to provide a compelling set of solutions to customers that will accelerate patient recruitment and retention, increase participant diversity, and shorten clinical trial timelines. Ultimately, our goal is to create a sustainable competitive advantage over the medium to long-term by actively investing and leading in the space where clinical development is heading. On a standalone basis during the quarter, ICON increased net business wins to a record $1.1 billion, delivering a quarterly book-to-bill ratio of 1.27 and growing our backlog to $10.2 billion, an increase of 12.7% year-on-year. Revenue grew 41% to $871.2 million, and adjusted earnings per share increased by 77% to $2.12. We were also delighted to see strong PRA business wins for the quarter of nearly $1.2 billion and a net book-to-bill of 1.21. This helps build momentum for the rest of the year and beyond, and demonstrates our customers' confidence in the new ICON's continued operational performance and our commitment to delivering hard and innovative patient-centric solutions. We expect to create significant long-term shareholder value by combining revenue growth from enhanced service offerings, innovative solutions, and increased scale with our best-in-class global support services model. As a result of this acquisition, we are updating our 2021 outlook with revenue guidance in the range of $5.3 billion to $5.5 billion, and adjusted earnings per share guidance in the range of $9.10 to $9.50. Before moving to Q&A, I would again like to welcome our PRA colleagues to the new ICON and thank all of our teams for all their hard work and commitment during the quarter. Operator, we are now ready for questions.

Sandy Draper, Analyst

Thank you for a strong quarter and for closing the deal. I have a question regarding the financial aspect. Brendan, you mentioned your targets for reducing debt, but do you have a specific target for the percentage of free cash flow that will go towards this reduction, or what pacing should we expect for the deleveraging?

Brendan Brennan, CFO

Certainly. We aim to reach approximately 2.5 times debt-to-EBITDA by the end of 2023, and we'll remain focused on that objective during the interim. In 2022 and 2023, we will consider small acquisitions and reinvestment opportunities. A significant portion of our cash will be directed towards achieving that goal during this period. While we haven't defined a specific percentage of free cash flow to allocate, a substantial amount will be dedicated until we reach that leverage target. Afterward, our focus will shift to managing debt levels and utilizing our cash resources to continue growing the organization as necessary.

Sandy Draper, Analyst

Thanks, Brendan. My follow-up is also about finances. Can you let me know if there are any future transaction costs expected on a cash basis in the next quarter or two, or have you mostly completed the one-time cash charges for the transaction?

Brendan Brennan, CFO

Yeah. Most of that, I'd like to say, would be done. Sandy, that's just unfortunately not true. We will take more cash expenses in the third quarter, but the vast majority will be taken care of by then. So there still will be a considerable number to go, not the similar amount certainly, and maybe even a little higher in the third quarter than we saw in the second quarter after that where our majority will be done.

Elizabeth Anderson, Analyst

Hi, guys. Thanks so much for the question and congratulations on the transaction coming to completion. I was just wondering on two things. Could you talk about one, any update on thoughts on some of your larger overlapping clients and sort of their feedback, and any early potential combined win? And then two, could you also speak to staff retention and the broader integration efforts from an internal perspective?

Steve Cutler, CEO

Sure, Elizabeth. Regarding overlapping clients, we've previously mentioned that we have one or two that overlap significantly. We’ve engaged in several discussions with those customers, and the feedback has been very positive. We are perceiving less risk with these clients than we initially expected when considering the transaction. In many cases, the discussions have shown that both companies are performing well for these customers, and there is interest in combining our offerings to ensure we remain a critical part of their operations. Overall, the response has been encouraging, especially from larger pharmaceutical companies and biotechs, with nearly universal positive reactions. On the topic of staff retention and attrition, we've noticed a slight increase in staff turnover over the past year. However, I don't believe that this is directly linked to the transaction. The labor market, particularly in the United States, is currently very competitive, and globally, it's undergoing changes as we emerge from the pandemic. There are many factors influencing this situation, and we are taking steps to address it. We have various plans to attract new graduates and ensure we are offering competitive salaries. It's likely that our competitors are facing a similar uptick in attrition, and this trend is not unique to ICON or our acquisition. It seems to be a broader industry phenomenon, especially as significant investments are being made in clinical development. Therefore, we need to acknowledge that strong business development wins and higher attrition can occur simultaneously.

Elizabeth Anderson, Analyst

Got it. That's very helpful. Thank you.

Erin Wright, Analyst

Great. Thanks. As it relates to your guidance, what are some of the key changes relative to your prior expectations for each standalone business on a more operational basis in terms of what's implied in the outlook for the second half of the year? Have there been any meaningful changes on that front since you just gave it on a combined basis? Thanks.

Brendan Brennan, CFO

Not meaningful, Erin. I think the operational companies are both heading in a strong direction for the second half of the year, as we've mentioned. There are other factors to consider, such as the stock count, which I referenced earlier; we expect to have about 83.6 million to 83.7 million shares in the second half of the year, which will impact the EPS number. However, the underlying operating income and EBITDA are progressing well in both organizations. We're pleased with this and expect significant growth quarter-over-quarter and year-over-year. Overall, we are moving in the right direction. We'll begin to see some synergies having an effect, but the work we’re doing on synergies is intended for the long term. We are taking steps now that will provide benefits over the coming years, with some impact seen in the first half, but we are really focusing on 2022 and 2023. So, we anticipate strong operational performance continuing into Q3 and Q4.

Steve Cutler, CEO

I would like to add that we have been involved with the larger vaccine trials, which had a significant pass-through component in the first half of this year. Those studies are nearing completion now. We still have considerable COVID-related work, which was a major factor in our business achievements this quarter. However, the significant pass-through studies associated with the vaccines are also coming to an end, which is slightly reducing the rapid revenue growth we have experienced over the past couple of quarters. This is the only aspect that I believe might affect our guidance a bit.

Erin Wright, Analyst

Okay. Great. And that goes right into my second question, which is, could you provide a little bit more detail on the COVID-related awards to date at each of the businesses, or on a combined basis and the percentage of revenue kind of in the quarter associated with COVID-related work? And I guess, you've commented already on sort of the dynamics throughout the year, but if you could give us a little bit of color on the COVID trends on that front, that'd be helpful.

Steve Cutler, CEO

In terms of new COVID opportunities, there has been a slight flattening, but we're still seeing a significant number of RFPs in the high teens. This represents a considerable share of our work, and there isn't a sudden drop in demand. New business figures are somewhat higher, and our backlog remains in the mid-single digits. COVID-related work remains a crucial part of our offerings and is not going away. While the major vaccine trials are winding down, we're shifting towards treatment trials, diagnostics, and long-term follow-up studies, as well as exploring various patient populations in the vaccine sector. I expect this work to continue for a couple more years, especially with the emergence of new variants and potential booster needs, which could also influence the situation. Overall, the environment for COVID work has been very positive. Additionally, we've observed a notable increase in non-COVID RFPs as well, which have been rising significantly, helping to offset the flattening of COVID-related RFPs. This contributes to a favorable business landscape.

John Kreger, Analyst

Thanks very much. Steve, I know you're calling the new company the world's leading healthcare intelligence company, clinical CRO. Can you just expand a little bit on the healthcare intelligence part? Are we thinking about that primarily as that the legacy PRA/Symphony business, or broader? Just tell us what you're really thinking about with that part of the tagline? Thanks.

Steve Cutler, CEO

Yeah. It's a good question, John. I mean, we are thinking about the data component of that but not just the data, it's the way we use the data and the way we are able to analyze and do things differently than the way we interpret that data. Symphony is an important part of it. I talked a bit about tokenization. We think that's a very important part of being a healthcare intelligence organization, being able to track patients in a de-identified and compliant manner in the long-term. If we had been able to do that on the vaccine portfolios, we'd be able to answer a lot of the questions that are only really coming up now: do we need another booster? What's the timeframe for the immune response to wear out? So, that sort of intelligence, and that sort of information that allows us to make insightful decisions and take actions, and support, not just the ongoing registration of our sponsors' products, but their development of those products in different indications and the pricing of those products, as we see the value of those products and how they're helping people in society on a real world evidence basis. So, Symphony is a big part of it. We've talked a lot about our one view tool and how we're using that to identify the right sites. Our patient approaches where we're going directly to patients and gathering that sort of data are wearables, etc. It's a variety of things around our patient, site, and data strategy. But the intelligence side of things is really using technology and data in a way that's perhaps a little bit more nuanced and a little bit more insightful than it has been used in the past, and allowing us to ultimately deliver trials in a different way, much more effectively and efficiently.

John Kreger, Analyst

That’s great. Thank you. And maybe a quick follow-up to Elizabeth's question about staff. Does this change your thinking at all on margins going forward, or are you able to pass higher labor costs along in your bids?

Steve Cutler, CEO

There is some pressure on wages, and we need to actively compete in the current marketplace, which is quite dynamic. In the short term, we may experience some wage pressure, but I believe we can manage it. We are including clauses in our contracts that enable us to adjust pricing based on inflation. This situation is also accelerating our shift towards a more efficient model, emphasizing offsite monitoring and remote patient care. This allows our staff to work more efficiently, improving their work-life balance as they can perform a significant portion of their tasks from their desks instead of traveling frequently. Our sponsors are supportive of this approach, which mirrors what we implemented during the pandemic and has proven beneficial. The current labor market is also facilitating this transition. We believe this will help mitigate any challenges related to wage inflation and costs in the medium to long term. In the short term, we are managing through these changes and remain confident in our ability to handle them. There are always opportunities in these situations, and I think this is certainly one of them.

Eric Coldwell, Analyst

Thank you very much. I have a couple of questions that I hope will be quick. First, in your prepared remarks, you mentioned that your largest customer on a pro forma basis represented 7.3% of revenue in the quarter. Were you indicating that ICON's largest customer would be reduced to that percentage, or are you referring to the largest customer across both companies as being 7.3%?

Brendan Brennan, CFO

That's across the spectrum of both companies, Eric. So, that's our new customer base. The top customer of that new customer base would be 7.3%.

Eric Coldwell, Analyst

That's great. Second one, I'm hoping you can give us your thoughts on tax rate in the second half.

Brendan Brennan, CFO

Yeah. We mentioned that we would start around 17% and adjust from there, Eric. Our perspective has not changed on that. So, at this point, we would be considering 17% for the second half of 2021.

Eric Coldwell, Analyst

Okay. And next one, don't know if you have this or you're able to share it. The PRA historically provided service level bookings, kind of a unique approach. They did transition and start adding in full bookings about a year ago. But I'm curious if you would have that number at hand, just for comparable purposes for those of us who were tracking PRA in the past?

Brendan Brennan, CFO

Not at hand, Eric. My feelings on this one, I'm a great believer in there's only one type of revenue and there's only one type of booking, which is the 606, my apologies. So that's where we'll be looking at as we go forward.

David Windley, Analyst

Hi, thanks for the opportunity to ask my questions. I have several inquiries regarding the demand environment. I would appreciate it if you could provide more insight not only on RFP trends but also on how your hit rate has changed; has it remained stable or seen any variations? Additionally, in the prepared remarks, there was mention of hybrid models. I'm curious about what you're observing in the RFPs you're dealing with, or in the bids you're submitting. Are you adopting a more proactive approach with hybrid and DCT strategies in your studies, and how is that influencing your RFP activities?

Steve Cutler, CEO

David, let me begin with the RFPs. As I mentioned, we are experiencing a very positive environment, not only in the biotech sector but across all segments we operate in, including large pharma, biotech, and midsize companies, all seeing significant annual growth in RFP dollars. I'm quite pleased with how this is progressing. This trend is evident in both organizations, as ICON has noticed this growth and PRA has also reported similar mid-teens increases in their RFPs. This positive momentum is reflected in the awards we've received. I was happy to see an improvement in our hit rate in terms of dollar value, particularly in our late-stage and early-stage businesses. This is specific to ICON, as I don’t yet have detailed information for PRA. In our Accellacare Home Health division, we have observed better win rates and strike rates. With more opportunities and increased hit rates, we find ourselves in a strong position, which reflects the trust our customers have in our execution ability and our integration process. Regarding hybrid trials, we are seeing a lot of interest. There is much discussion about how these trials function moving forward. Currently, most of the trials we propose include some hybrid elements, whether through remote monitoring, wearables, or direct-to-patient data collection. The majority of the trials we propose have hybrid or decentralized components, which we view positively as it provides us with a foundation to improve and enhance each subsequent trial. Our customers are very receptive to these discussions, especially since it leads to more effective trial management and budget allocation. They are confident in our ability to deliver such trials.

David Windley, Analyst

That sounds encouraging. Thank you. My follow-up question is related to what you mentioned in your prepared remarks, where you highlighted several areas for cross-selling opportunities. It seems that some of these may present challenges in going to market and offering those services. For instance, providing central labs to the PRA client base might be more immediate, while integrating certain technology capabilities and the decentralized clinical trial approach may require additional integration and development before your go-to-market strategy is fully prepared. I would like to know if you agree with that perspective, or if you could provide insight into how soon you anticipate realizing revenue synergy opportunities for some areas compared to others.

Steve Cutler, CEO

I agree with what you said, Dave. We've already seen some successes in the lab area, and revenue is starting to come in. I believe that in the second half of the year, we'll see revenue from these immediate opportunities, including language services and imaging labs. We're expecting around $100 million in annual revenue synergies, and I think we are on track to achieve that, possibly even exceeding it. Regarding the mobile health platform and decentralized approaches, you're correct that these will take a bit longer to develop. We're putting significant effort into building our unified platform. Although we have multiple platforms currently, those are advancing, and we're investing heavily and holding discussions to move forward. This process will require some time, but we believe that by the end of this year and into next year, our unified platform will be ready. This will replace our current platform and enable us to better integrate our capabilities and resources into a decentralized model. It will take some time, but it is not years away; I expect we will be very active in this area within the next 12 months as we implement this fully decentralized approach.

Tycho Peterson, Analyst

Hey, thanks. Steve, I'm going to follow up on that kind of last line of questioning. It's great to hear about the revenue synergies and then kind of a hit rate. I'm just curious, what's really resonating as you're out talking to customers? If we think about the third of the top 20 pharma customers, you don't currently do business with. As you go to kind of pitch to them, is it scale? Is it the new capabilities you bring to the table? Can you just talk a little bit about what's kind of resonating? And then another angle that you talked about at the time of the deal was, accelerated patient recruitment through the Accellacare network. How are you thinking about doing that as well?

Steve Cutler, CEO

Sure, Tycho. When we engage with customers, they express a variety of interests. They highlight the importance of our scalability, resources, and the depth and breadth of our therapeutic offerings. We possess these qualities, which are essential. However, there is a growing interest in our Accellacare Home Health network and site network, which provides a fresh perspective on how we facilitate patient access to clinical trials, particularly with our decentralized approach. The topic of tokenization is sparking significant interest in strategic discussions. Additionally, the decentralized trials and the mobile health platform we are developing are attracting attention as well. Customers are eager to learn about our advancements in these areas. So, it's a blend of the traditional aspects like scale and resources, along with the emerging technology and data opportunities we're introducing, enabling us to create highly integrated solutions in the clinical space. This combination is particularly exciting for our larger clients regarding our new offerings. The Accellacare network and its sites align well with our decentralized trial strategy. We recognize that even in decentralized trials, physical sites remain essential, and we see them as foundational to our approach. They are performing well both financially and operationally, and we continually evaluate their efficiency and recruitment performance. The quality of data from these sites has been excellent, and they have played a significant role in major vaccine trials. I am pleased with their performance and particularly enthusiastic about their contribution to a hybrid and decentralized strategy moving forward. We believe we have all the critical elements needed to create compelling solutions for our customers, which is driving interest among new clients.

Tycho Peterson, Analyst

And how are you thinking about the real world data solutions, part of the business that they bring? Obviously, there's a lot of focus with the pandemic and therapies being kind of rushed to market. How are you feeling about real world data at this point?

Steve Cutler, CEO

We feel that we're making significant progress with real world data. The tokenization process adds another dimension to real world data, enabling us to gather information from various sources, such as genomic data, lab results, and health records, all on an individual, de-identified basis. This allows us to track data effectively. This is certainly an important addition to our capabilities, and together with other areas we've been exploring, it provides a compelling narrative and an effective operational strategy for real world applications. We genuinely believe that real world data is essential for the future of clinical development. While randomized controlled trials have been crucial over the past century, the ability to gather, analyze, and derive insights from real world evidence is increasingly vital. We are particularly aware of this demand as we emerge from the pandemic, especially regarding data from vaccine cohorts, which will be highly valuable in the long term. This area is a major focus for us, and we believe we possess significant advantages in it.

Tycho Peterson, Analyst

Last one for me. There's obviously a lot of moving pieces in this space now with PPD being acquired by Parexel and back to private equity. We see what happens with Covance at Labcorp. How much of a focus is this for your customers, as you go out and have discussions that a number of these assets are changing hands?

Steve Cutler, CEO

That's a tough question, Tycho. We've discussed our projects with our customers, but I don't typically inquire about their opinions on our competitors. Honestly, I haven't heard significant concerns from our customers regarding the industry's developments. They understand that it is a dynamic field with numerous changes driven by various factors. So, I assume they are aware of these changes. However, I prefer to focus on discussing ICON and what we are doing rather than engaging in conversations about our competitors.

Jack Meehan, Analyst

Thank you. Good morning and good afternoon. I would like to start by asking if you could provide more insights on the PRA results for the quarter. There was a significant increase in revenues sequentially. Could you explain any dynamics related to the path through or COVID work that may have contributed to this?

Steve Cutler, CEO

I believe we mentioned in our prepared remarks that we experienced a notable amount of activity in the first half of the year, especially in the second quarter due to large vaccine trials. Both companies faced similar circumstances, which contributed to a significant increase in revenues primarily from these trials. So, it wasn't unexpected. We achieved this because it seems that the timeline for these trials is nearing its end. There isn't additional follow-on work, and while we aren't facing a drastic decline, I think we've reached the peak of this area. Moving forward, we will be focusing more on treatment trials, diagnostic trials, and smaller-scale follow-ups on the vaccine trials.

Brendan Brennan, CFO

Yes, Jack. As I mentioned earlier, we expect growth to continue sequentially. Steve pointed out that revenues were very strong in the first half of the year due to a significant amount of pass-through revenue, which will decrease in the latter half of the year. This is reflected in our guidance, particularly at the midpoint and higher end. You can likely deduce the sequential numbers for operating income yourself, but we absolutely expect it to continue moving in the right direction and even pick up pace. I believe we may even see a slight increase from Q3 to Q4. Overall, we anticipate good sequential progress as the year progresses.

Luke Sergott, Analyst

Hey guys, thanks for the question. I want to get your perspective on the comment about the COVID cliff. As we consider the variants and the additional capacity for vaccinating children under 18, along with the regular business starting to recover, I understand there are various therapeutic indications. But is the industry equipped to manage all this extra work? I would appreciate your insights on this, and how it relates to the potential for a soft landing versus a cliff.

Steve Cutler, CEO

I believe there is sufficient industry capacity to manage the current workload. The trials we are conducting now are more efficient and effective. Our remote monitoring and major sites globally, including our Accellacare locations, have significantly contributed to patient numbers. While we have a large number of patients in these trials, we don't necessarily require many sites because each site handles a high volume of patients. These trials are relatively low intensity, particularly if they're not oncology-focused. They work well with a decentralized remote approach. I am confident we can meet the demands placed upon us. I mentioned that I don't expect to see very large vaccine trials with 40,000 to 50,000 patients in the future, but we will continue to conduct follow-on studies for kids and various subpopulations. As I've pointed out, the RFP percentages remain high, indicating they are still a crucial part of our portfolio and backlog. However, I don't foresee a significant increase in revenues or pass-throughs in the coming quarters, similar to what we have observed recently.

Patrick Donnelly, Analyst

Great. Thanks for taking the questions, guys. Brendan, maybe one for you on the cost synergy side. It sounds like that's already starting to take shape through some near-term opportunities. Can you just talk about how things are going to progress there, some of the near-term opportunities and then confidence level now that you've gotten under the hood a bit and kind of kicked the tires?

Brendan Brennan, CFO

We are pleased with the progress we're making on the project. We're beginning to see those numbers and gain a clearer understanding of reaching the $150 million target, which we believe is very achievable and we aim to exceed it. Steve mentioned that some early actions we've taken relate to office infrastructure, and we've already announced some consolidations in this area. I would estimate that around 20 to 25 percent of the $150 million could come from savings in facilities and facilities management. This is important as we integrate the two organizations, both from a cultural perspective and a financial standpoint. These early steps are crucial, and we are also exploring other areas to manage costs stringently and leverage our effective models for support services. We are confident in our strategies for efficiency with our enterprise-wide systems and onshore/offshore models that have been in place for a while. While we will be implementing more of these facility initiatives in the future, there will be some impact in the latter half of this year as we establish the groundwork for significant progress in 2022.

Steve Cutler, CEO

Thank you for the question, Patrick. And the situation with COVID work, you've talked a lot about it. Can you just talk about the margin profile as we get into things like non-vaccine COVID work? I mean, any reason we should see a big shift, we talked about the pass-throughs obviously, but as we get into things like next year and the mix shifts away from some of the large vaccine trials into some of the non-big vaccine COVID work, how should we think about the margin profile, some of that COVID specific work child versus not?

Brendan Brennan, CFO

Yeah. Well, I think as we get into the non-vaccine trials, obviously that has a very beneficial mix in terms of the revenue; without those large pass-throughs, certainly not to the same extent without pastures, of course, but not nearly to the same extent as a 44,000 patient trial or those similar sized studies. And that will have a pretty significant positive mix element to our overall margin profile. And so, certainly as we come through this first half of the year, we've seen that impact on gross margin particularly, and we do expect that to start to significantly improve as we get into the back half of the year and certainly into 2022 as well.

Ann Hynes, Analyst

Hi. Can you hear me?

Brendan Brennan, CFO

Yes. Yep.

Ann Hynes, Analyst

Sorry. It's Ann Hynes. Sorry about that. Just a question. I might have missed this, but did you provide a combined backlog as of 6/30/21 for both the combined company?

Brendan Brennan, CFO

No, not yet Ann, mainly because we're evaluating the best approach. We report on a full contract value basis according to 606 standards. We need to consider that the PRA team would not have included that previously. So, we will discuss this, Ann, likely at the end of our process. We are still finalizing our balance sheets, which takes time. We are working on that, and we will provide an opening to closing reconciliation for you during the Q3 call.

Ann Hynes, Analyst

Okay. Shifting to the environment, I understand the demand is very strong, but can you discuss the supply situation, particularly with CRAs? Some of my recent observations suggest that the environment is becoming much tighter. Can you address wage pressure related to CRAs and any other pressure you are experiencing?

Steve Cutler, CEO

Yes, Ann. The situation is becoming more challenging, particularly in North America, which is the main area of concern. Other regions are performing well; Europe and Asia are not significant issues, and while Latin America requires some attention, the primary tightening is occurring in North America. Salaries are on the rise, and as you mentioned earlier in the call, we are implementing several strategies to promote individuals more promptly, hire new graduates, and focus on bringing in people for clinical trial assistant roles, along with providing them training. We are actively taking measures to alleviate the pressure we are experiencing, but currently, the market is quite competitive, and there is strong demand.

Ann Hynes, Analyst

All right. And one last question, I know you're doing non-GAAP earnings now with PRA, can you talk about just what we should assume for stock comp expense and amortization for the combined companies? Do you have those numbers yet?

Brendan Brennan, CFO

It'll be a bit. We'll probably give you more granularity on that in the next quarter. The amortization is obviously going to be pretty significant as a number of running for the P&L account. It's going to be in that ballpark of somewhere, probably in the like 350s, in the 400 on an annual basis. And the stock comp will probably just be an excess of the $100 million mark. So, kind of in the $110 million to $115 million mark albeit, and that's probably elevated this year a little bit as a result of some of the change of control provisions in the contracts. So, we'll give you a better clarity on that, but those numbers are just kind of broad ballparks for you to work with.

Dan Leonard, Analyst

Thank you. Just a couple of clarifications. First off, have you seen any changes or impacts from COVID variants worldwide on site availability, patient willingness to enroll in clinical trials, even over the past four to six weeks?

Steve Cutler, CEO

We are not experiencing significant site availability issues. In response to your question about developing sites for trials, the pandemic seems to be heading toward an end. Currently, approximately 15% to 20% of sites are still affected by COVID. However, patient recruitment is generally around the 90% threshold we aim for. It appears we are gradually progressing, but we may not reach full capacity for a few more months, possibly even into winter. While we are heading in the right direction, there are still challenges to overcome. So, in terms of closing remarks, I'd like to thank everyone for listening today. These are certainly exciting times for us at the new ICON, and we're pleased to have delivered another strong quarter, demonstrating continuing progress and representing a strong platform for future growth. We also look forward to continuing our integration and the creation of the world's leading healthcare intelligence and clinical CRO. And finally, I want to take the opportunity to recognize our entire workforce and to thank them for all their efforts over the past quarter. Thank you all and have a great day.

Operator, Operator

This concludes our call for today. Thank you for participating. You may now disconnect.