Earnings Call Transcript - ICLR Q4 2023

Operator, Operator

Good day and thank you for standing by. Welcome to the ICON Q4 and Full Year 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Kate Haven. Please go ahead.

Kate Haven, Investor Relations

Good day. And thank you for joining us on this call covering the quarter and full year ended December 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 statement 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-S 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 tax benefits. We will be limiting the call today to one hour, and would therefore ask participants to keep their questions to one each, with an opportunity for a brief follow-up. I would now like to hand the call over to our CEO, Dr. Steve Cutler.

Dr. Steve Cutler, CEO

Thank you, Kate, and good day, everyone. ICON delivered strong results in quarter four and for the full year 2023, as our team successfully navigated a dynamic environment impacted by several macroeconomic and geopolitical challenges. Through consistent operational delivery, increased scale, and our comprehensive suite of solutions, we were successful in securing new partnerships and expanding existing relationships across our customer segments and with the world's top 20 pharma companies in particular. Overall, we continue to experience positive demand trends in our industry. In the fourth quarter, we did see some volatility in RFP activity across customer segments, as small biotech was somewhat muted toward the end of the year, with some companies continuing to be deliberate with their overall development spend decisions. With that said, we are encouraged by the improving sentiment among customers in quarter one, as well as underlying trends from a funding perspective that suggests a stabilizing market as we have entered 2024. Within the large pharma segment, we continue to see a strong level of opportunities, anchored by the strength of our new and existing strategic partnerships. In totality, across all segments, our overall trailing 12-month RFP activity increased in the high-single digits in quarter four, consistent with quarter three, and this appears to be continuing or even accelerating early in 2024. Given this backdrop, and in line with our previous comments, we expect book-to-bill to be in the range of 1.2 times to 1.3 times on a quarterly basis in 2024, with an overall target of 1.25 times for the full year 2024. In quarter four, net bookings increased 8% on a year-over-year basis, driving 10% growth in total backlog over quarter four 2022. We saw continued strength in demand across our large pharma segment for both full-service and FSP solutions, as well as excellent performance from our laboratory services business. Our innovative and scaled offerings are resonating well with customers and strongly position ICON for further traction in new and existing customer accounts. To this end, in quarter four, we were awarded a new full-service strategic partnership with a top 20 pharma customer, creating significant new business potential in Phase I-IV studies across a number of therapeutic areas in their portfolio. Our depth of experience in longstanding and transformational large pharma partnerships was one of the key criteria for selecting ICON, as well as our collaborative approach in achieving meaningful efficiencies in their development programs. In reflecting back on the numerous accomplishments across our organization in 2023, there are several in particular that highlight our commitment to operational excellence. Our efforts in driving forward our ambitious automation agenda resulted in the achievement of greater than 2 million hours of automated activity in 2023 across a number of functions and processes. We have set another goal for automation in 2024, driving to deliver significant further improvement in areas such as critical study startup activities, further automation of our back-office activities, as well as processes such as data ingestion and review, with a target of 3.5 million hours for the full year. At the time of the acquisition of PRA Health Sciences in July 2021, we set ambitious targets for both synergy realization and total debt pay down. The following two-year period was characterized by unexpected macroeconomic pressures and challenges in our market. Despite this dynamic, we remained consistent in our planned actions and were able to accelerate both the full cost synergy realization, as well as our target leverage ratio, ahead of our initial timelines as we closed out 2023. This was all possible, of course, through the efforts of our over 41,000 employees across the world who have worked tirelessly to progress our customers' projects, many of whom have been recognized with prestigious industry awards for their efforts. Turning to review our financial performance in the quarter, ICON delivered a strong set of financial results, with revenue growth of 5.3% over Q4 2022. Direct fee revenue growth continues to be robust and within the high-single digits on a year-over-year basis, while pass-through revenue was slightly below our expectations due to the wind-down of COVID-related trials in the quarter. With strong direct fee revenue growth and lower than expected pass-through revenue, we saw a notable uptick in gross margin on a sequential and year-over-year basis, resulting in a 30.4% margin for Q4. On this note, we do anticipate returning to a more normalized gross margin profile of approximately 30% for the full year 2024. On another positive note, ICON again delivered substantial growth on adjusted EBITDA in Q4, as SG&A expense was essentially flat on a sequential basis, resulting in a margin of 21.7%, well ahead of the mid-term target we set back in early 2022. Given the revenue mix shift in Q4, our full year 2023 adjusted EBITDA margin of 20.9% was stronger than anticipated, an impressive 180-basis-point growth in adjusted EBITDA margin in 2023 on a year-over-year basis. We expect adjusted EBITDA margin expansion of circa 50 basis points on a full year basis in 2024. We continued to successfully execute our capital deployment strategy in the fourth quarter, closing the previously announced acquisition of Phillips Pharma Solutions in October. While this transaction is a small contributor to ICON's overall revenue, it supplements our current medical imaging capability and adds cardiac safety solutions to our service offering, providing our customers with a more integrated service. In addition, earlier this year, we closed the acquisition of HumanFirst, a cloud-based technology company focused on accelerating and improving digital health technology selection in clinical trials. The addition of HumanFirst will position us to become the industry leader in integrated clinical outcome assessment solutions, allowing customers to make evidence-based decisions to reduce patient burden and enhance data quality. Separately, we have a number of capital projects that are in development to bring additional efficiency to critical trial paying points and ultimately deliver more value to our customers. We are well underway in developing a comprehensive planning and oversight capability for site selection and activation that is coupled with improved resource forecasting, designed to deliver enhanced patient recruitment timelines. In addition, we continue to progress our investments in AI and automation. One example is the development of our Firecrest site and investigator database, designed to provide in-depth insights to address industry challenges such as investigator and site activity and their overall performance. We were very pleased with the upgraded credit rating we received from Moody's in December, ICON's second upgrade to investment-grade rating in the fourth quarter following the S&P Global Ratings upgrade in October. This important milestone allows us the ability to refinance our variable-rate debt and move forward toward a more favorable capital structure that will give us more flexibility from a capital deployment perspective, particularly in the second half of 2024. We have a definitive plan that has been approved by our Board and will be executed in the first half of this year, allowing us to achieve the targeted total interest expense reduction of approximately $100 million on a year-over-year basis from 2023. In line with our strategy, M&A remains the priority as the optimal way to deliver shareholder value, and we fully intend to utilize the strength of our balance sheet to acquire companies that complement our current services and add to our ability to deliver faster and more efficiently for customers. However, we have also secured approval to opportunistically spend up to $500 million on share repurchases over the next 12 months. Given the positive trajectory from our performance in quarter four and current market conditions in the start of this year, we are reaffirming the full year 2024 financial guidance we issued in January. We expect revenue to be in the range of $8.4 billion to $8.8 billion, an increase of 3.4% to 8.4% over full year 2023. Additionally, we expect adjusted earnings per share to be in the range of $14.50 to $15.30, representing an increase of 13.4% to 19.6% over full year 2023. I'll now turn it over to Brendan for further details on the financial results.

Brendan Brennan, CFO

Thanks, Steve. In quarter four, ICON achieved gross business wins of $2.99 billion and recorded $461 million worth of cancellations. This resulted in a solid level of net awards in the quarter of $2.53 billion and a net book-to-bill of 1.22 times. Full year 2023 gross business wins were $11.77 billion and cancellations were $1.82 billion, resulting in the net business wins of $9.95 billion and also a net book-to-bill of 1.22 times. With the addition of the new awards in quarter four, our backlog grew to a record $22.8 billion, representing an increase of 2.4% on quarter three of 2023 or an increase of 10% year-over-year. Our backlog burn was 9.3% in the quarter, slightly down from quarter three levels. Revenue in quarter four was $2.66 billion. This represented a year-on-year increase of 5.3% or 4.1% on a constant currency basis. Full year revenue was $8.12 billion. This represented a year-on-year increase of 4.9% or 4.6% on a constant currency basis. Overall customer concentration in our top 25 customers increased from quarter three 2023. Our top customer represented 9.5% of total revenue in quarter four, our top five customers represented 27.5%, our top 10 represented 43.8%, while our top 25 represented 66.8%. In the full year 2023, our top customer represented 8.9% of revenue, our top five customers represented 26.8% of revenue, our top 10 represented 41.4%, while our top 25 represented 62.9%. Gross margin for the quarter was 30.4%, compared to 29.8% in quarter three 2023. Gross margin increased 50 basis points over gross margin of 29.9% in quarter four 2022. Full year 2023 gross margin was 29.9% and we anticipate this to be a similar level for the full year 2024. Total SG&A expense was $180.2 million in quarter four or 8.7% of revenue. This is essentially flat on the prior quarter. In the comparable period last year, total SG&A expense was $182.2 million or 9.3% of revenue. Full year SG&A expense was $732.7 million or 9% of revenue, representing an improvement of 80 basis points over full year 2022 and a reduction in spend of $24.7 million. Adjusted EBITDA was $448.2 million for the quarter or 21.7% of revenue. In the comparable period last year, adjusted EBITDA was $405 million or 20.6% of revenue, representing a year-on-year increase of 10.7%. Sequentially, adjusted EBITDA margin improved 70 basis points over quarter three margin of 21%. Full year 2023, adjusted EBITDA was $1,694.1 million or 20.9%, representing very strong growth of 14.5% on a year-over-year basis. Adjusted operating income for quarter four was $414.4 million, a margin of 20.1%. This is an increase of 9.7% over adjusted operating income of $377.7 million, a margin of 19.3% in quarter four of 2022. Full year 2023, adjusted operating income was $1,568 million, a margin of 19.3%. This was an improvement of 14.2% on full year 2022. Net interest expense was $75.4 million for quarter four. Full year net interest expense totaled $315.3 million in 2023, compared to $209.6 million in the full year 2022. The effective tax rate was 15.2% for the quarter. The full year 2023 effective tax rate was 15.5%, down from our full year 2022 effective tax rate of 16.5%. Adjusted net income attributable to the group for the quarter was $287.5 million, a margin of 13.9%, equating to adjusted earnings per share of $3.46, an increase of 10.5% year-over-year. Full year adjusted net income attributable to the group was $1,058 million, equating to an adjusted earnings per share of $12.79, an increase of 9% year-over-year. In the fourth quarter, the company recorded $9.7 million of transaction and integration-related costs. Full year transaction and integration-related costs were $44.2 million, and full year restructuring costs were $45.4 million. U.S. GAAP income from operations amounted to $265.6 million or 12.9% of revenue during quarter four. Full year U.S. GAAP income from operations amounted to $956.2 million or 11.8%. U.S. GAAP net income in quarter four was $216.4 million or $2.60 per diluted share, compared to $1.42 per share for the equivalent prior year period. Full year U.S. GAAP net income was $612.3 million or $7.40 per diluted share, compared to $505.3 million or $6.13 per diluted share for the full year 2022. Net accounts receivable was $1.088 billion at the 31st of December, 2023. This compares with a net accounts receivable balance of $1.129 billion at the end of quarter three, 2023. DSO was 47 days at December 31, 2023, a decrease of two days from September 30, 2023. Cash from operating activities in the quarter was $440.1 million. Free cash flow was excellent in quarter four, increasing 24% sequentially and achieving our target of circa $1 billion for the full year. We were very pleased with the diligent efforts from our team in driving a seven-day improvement in DSO over the course of the year. This now brings us back in line with our anticipated range based on our current mix of customers and their payment terms. We will continue to stay focused on billing levels and cash collections as we progress through this year. At December 31, 2023, cash and cash equivalents totaled $380.1 million and debt totaled $3.78 billion, leaving a net debt position of $3.4 billion. This compared to a net debt of $3.73 billion at September 30, 2023, and net debt of $4.36 billion at December 31, 2022. Capital expenditure during the quarter was $52.7 million. From a capital deployment perspective, we made a payment of $250 million in our Term Loan B facility in quarter four, and at the end of the quarter, we had a leverage ratio of 2 times net debt-to-adjusted EBITDA. We made payment on our Term Loan B facility of $950 million in full year 2023. As Steve mentioned, we are pleased to receive the upgrades in our credit ratings from both S&P Global Ratings and Moody's in the fourth quarter. With a return to an investment-grade rating, we now have the ability to more favorably refinance our debt, and in turn, free up more capital to deploy opportunistically for M&A, as well as potential share repurchase. Our preferred use of capital remains M&A, and we have a healthy pipeline of opportunities we are currently engaged on that are focused on adding scale and capability to strategic areas of our portfolio. Finally, our key assumptions behind the full year guidance remain in place, an effective tax rate of 16.5%, free cash flow target of circa $1.1 billion, CapEx spend in the range of $150 million to $200 million, and interest expense of circa $200 million to $230 million, all for the full year 2024. Before we move to Q&A, we want to commend the dedicated employees of ICON for their efforts in delivering another year of solid performance and continuing to support our mission in bringing new therapies to patients around the world.

Operator, Operator

Thank you. We'll now take our first question. Please stand by. The first question is from Justin Bowers from Deutsche Bank. Please go ahead.

Justin Bowers, Analyst

Hi. Good morning, everyone. Can you just remind us what the net service fee revenue growth was in the quarter, and then more broadly, is there a rule of thumb or heuristic that we can use to help better understand sort of like what the topline headwind is from a shift to FSP? That's the first question.

Dr. Steve Cutler, CEO

I think that's two, actually, Justin, but on a direct fee basis, we're about 8%. We achieved high-single digits on a direct fee basis, so we feel good about that. We had slightly lower pass-throughs during the quarter, which brought us back overall to the five. When it comes to the topline impact of FSP, it’s challenging to quantify that at this stage. This is a very gradual approach. FSP is a relatively modest, yet important, part of our business, contributing similarly to our full-service work. While it may modestly impact overall margins as it grows, we'll discuss that further as we go through the call, along with the trends related to FSP. However, the impact on a headwind basis over the long term is estimated at around 200 to 300 basis points, but it truly relies on the customer and the specific contract.

Brendan Brennan, CFO

Yeah. And of course, as we think about it, we talked about the fact that we saw that mix there last year, I think, we've started off this year with very strong indications that our full service organization is going to grow well in terms of business wins this year. So, and certainly, Justin, of course, it's included in our guidance as given, and certainly the midpoint there would include the mixed shift, if you like, to the extent we see that during the course of it.

Operator, Operator

Thank you. We'll now take our next question and this is from the line of Jailendra Singh from Truist Securities. Please go ahead.

Jailendra Singh, Analyst

Thank you, and good morning, everyone. So I wanted to follow-up on your macro commentary. It seems you are encouraged by data points and trends you've seen in Q1 thus far, but you're maintaining your outlook, which assumes slower CRO industry growth. So is it fair to say that you're not reflecting recent trends in your outlook, and if these trends continue, would you say that will be kind of upside your expectations for the year?

Dr. Steve Cutler, CEO

I would describe the situation this way, Jailendra. We mentioned earlier in January that the RFP landscape for biotech was somewhat subdued, while large pharma showed strong performance. As we entered the first half of the first quarter this year, we've observed a slight increase in RFPs and an overall improved environment. Although we are not declaring victory yet or reporting on the first quarter today, we are seeing mid-teens growth in RFP opportunities, largely driven by strength in large pharma. Some of the strategic partnerships we've discussed are yielding results in terms of opportunities, and we are also experiencing a modest increase of mid-single digits in the biotech sector. As we mentioned, biotech seems to be stabilizing and improving, which appears to be reflected in the very early part of this year. We are optimistic about this trend but not ready to alter our guidance or become overly optimistic at this stage. However, we are certainly encouraged by the positive developments we see so far in the first part of the quarter.

Jailendra Singh, Analyst

Okay. And then my quick follow-up on the gross margin. Looks like, of course, you expect that to be flat at 30% year-over-year. I just want to understand the puts and takes there. Are you seeing any pricing pressure from your clients, which might be impacting trends? Clearly, the shift to more FSP work is a headwind, but it's very gradual. Any offsetting factors you can highlight? Just give us more granular details about the gross margin trends this year.

Brendan Brennan, CFO

Yeah. I'll take that one in terms of the margin progress and profile. Obviously, we were very happy with how we ended up the year. And yeah, we think that circa 30% is probably the right way to think about 2024. There are, of course, mixed shifts in the absolute levels of business. And to your point, they're quite gradual in terms of really having a significant margin profile impact. But we do a lot of work, as we've talked about in the past, in terms of making sure we're an efficient organization, and that runs from making sure that all of our projects are highly utilized by our staff right down to the concepts of how we use our technology to continue automation and the use of robotics in our organization. And of course, that impacts not only on our gross margin, but on our SG&A as well. And so we look to continue that investment and Steve made reference to that in his prepared comments as we go through the course of 2023, I suppose, or 2024, I should say. All of that gives us confidence that, even with shifting dynamics in our mix of business between full service and FSP, we should be in a good place to be able to maintain that 30% gross margin, and as we talked about, that is our kind of more of our medium-term target as well. So we feel good about that, and I think it's that diligence from a project management perspective and that use of technology that really gives us the comfort on that particular point.

Jailendra Singh, Analyst

Great. Thanks, guys.

Operator, Operator

Thank you. We'll now take our next question and this is from the line of Luke Sergott from Barclays. Please go ahead.

Luke Sergott, Analyst

Great. Thanks, guys. Just to follow-up on that pricing. We hear about the competitive dynamics in the market. You always talk about the pharma industry always sharpening their pencils. But as you guys have shifted more towards large pharma, given the lack of biotech funding and RFPs out there, the large CROs are competing on fewer projects. So are you guys seeing fewer projects across large pharma and then how is that pricing environment among these projects, and is anybody kind of getting a little aggressive on the pricing dynamic?

Dr. Steve Cutler, CEO

We're definitely noticing more opportunities in large pharma. The request for proposal funds we’re receiving are strong, driving an increase in RFP activity for early 2024. We attribute this partly to our numerous strategic partnerships across the industry and to our significant scale as an organization. We're now a key player in the development space, making us part of the conversation, even if we're not a direct partner with a large pharma company. This has resulted in increased opportunities and funding for us. Although the pricing environment remains competitive, we are adept at structuring project teams and managing projects efficiently. Our strategic relationships with several clients enhance our win rate in this sector, allowing us to secure a larger share of those funds compared to other market segments. While challenges concerning pricing persist, we believe we're well-equipped to handle them.

Luke Sergott, Analyst

Great. And then I guess the follow-up there is kind of on the same vein there. You guys put out the 1.25 book-to-bill guide. I don't remember you guys putting usually a hard target like that. So what's giving you the visibility? Is it something from the customer class, like, you said, like you can have a visibility in the biotech funding coming back or large pharma or some therapeutic index, just give us some type of idea of where you're getting that visibility?

Dr. Steve Cutler, CEO

Well, I'd say, first of all, it's a target rather than a guide. That is a fact…

Luke Sergott, Analyst

Sorry, I didn't mean to put the words in your mouth.

Dr. Steve Cutler, CEO

Let's be clear, that's what we're shooting for. That's what we believe the market will support. So we're basing that on the opportunities we're seeing coming in the door on the build that we have on a more strategic level with some of these midsize and large pharma customers. We're basing it on the stabilization and the improvement as we see in the biotech funding space and our opportunity to win business there. There's a number of things there. We feel we're in a good place to be able to benefit from those opportunities. We feel the companies moved along nicely. We've made a lot of progress with the integration, the union with PRA. That's much of that is behind us now. We feel very constructive about the long, medium, and longer term future of the organization and the industry for that matter.

Luke Sergott, Analyst

Great. Thanks.

Kate Haven, Investor Relations

I'll quickly add that the 1.25 times is the average target we're considering for the full year. This doesn't mean that every quarter will hit exactly 1.25 times, but we're looking at a range of 1.2 times to 1.3 times for the year, which averages out to 1.25 times.

Luke Sergott, Analyst

Okay. Great. Thanks.

Operator, Operator

Thank you. We'll now take our next question and this is from the line of Eric Coldwell from Baird. Please go ahead.

Eric Coldwell, Analyst

Thank you. Good morning. I wanted to discuss staffing and resourcing. With the mid-single-digit revenue growth this year, what kind of hiring needs do you anticipate? How does that appear on a gross and net basis, including whether turnover is improving? Can you achieve more with fewer resources? Also, I know you have completed a few smaller deals recently. What do you expect for the full year, considering the M&A, in terms of headcount? Thank you.

Dr. Steve Cutler, CEO

Overall, we didn't really increase our headcount this year. Instead, we achieved growth through improved efficiency among our 41,000 dedicated employees. A significant contribution came from the 2 million hours dedicated to automation, and we're planning to expand on that. Our resourcing has been solid, and we've experienced month-to-month and quarter-to-quarter improvements in retention over the last couple of years. Currently, our retention levels are higher than they were before COVID, which has eased the pressure on resourcing and positively impacted our SG&A. We believe our workforce is engaged and effective, making the organization more efficient than it was two years ago. Our target is to increase automation to around 3.5 million hours, translating to a considerable impact on our workforce. We expect to grow mainly through automation and process improvements rather than adding headcount. However, given our growth projections for this year, we will likely need to add some people, but at a lower rate compared to revenue growth. We are confident that we can maintain efficiencies through utilization and automation. As we re-enter the M&A market, we will bring on new employees as we acquire companies, but we anticipate that revenue will increase at a faster rate than headcount or related costs moving forward.

Eric Coldwell, Analyst

That's great. If I could just throw in one follow-up here or a different question, the 1.2 times to 1.3 times book-to-bill range is consistent with what you've said in the past. I'm curious with this new publicly known contract with BARDA or opportunity with BARDA, do you have expectations in your annual book-to-bill related to that? I assume they're fairly modest, if so, but I'm just curious how much of that is, I hate to use the term legacy or core, because I think these are all core contracts, but non-BARDA work, how much of the net book-to-bill goal is more, I guess, traditional work versus this unique government opportunity and I'll wrap it up there. Thanks.

Dr. Steve Cutler, CEO

We occasionally see BARDA contracts come through, but there’s nothing in the fourth quarter. While there may be some opportunities in the pipeline, we don’t anticipate they will significantly affect our book-to-bill ratio for the year. They might have some quarterly impact, but overall, in terms of the targets we set for new business awards, the effect will be quite modest. These contracts are important for our business as they usually involve vaccine-related studies, allowing us to generate revenue more quickly than some other projects. However, we don’t expect them to have a substantial impact on an annual basis or significantly influence our book-to-bill ratio. Thanks, Eric.

Operator, Operator

Thank you. We'll now take our next question and this is from the line of Patrick Donnelly from Citi. Please go ahead.

Patrick Donnelly, Analyst

Hey, guys. Thanks for taking the questions. Steve, I wanted to pick up on the burn rate that you just mentioned there in terms of just what's in the pipeline, obviously, I know it varies between things like oncology. Obviously, you mentioned Sparta there. Can you just talk about how you're thinking about that burn conversion rate this year and where that trend line is going? And maybe Brendan, I'm sure you can chime in as well, but just curious on how you're thinking about that piece.

Dr. Steve Cutler, CEO

Sure. Pat, I'll share my thoughts on that, and then Brendan can provide additional details. We're currently at about 9.3% this quarter, which is a decrease of 20 basis points from the last quarter. I don't anticipate it increasing in the near future due to the changes in our portfolio since moving away from the COVID vaccine trials. We might see a further decrease of about 10 basis points, and while we're actively seeking ways to mitigate that, including accelerating our current trials, our overall trend is likely to remain flat or slightly downward in the short to medium term. Brendan?

Brendan Brennan, CFO

I think that's right. As we look ahead to 2024, we expect to be in the 9.2% to 9.3% range. There are opportunities if we can increase vaccine distribution, which could provide some positive momentum in the latter half of the year, but for now, we're focused on the ranges we've discussed.

Operator, Operator

Thank you. We'll now take our next question. This is from the line of Jack Meehan from Nephron Research. Please go ahead.

Jack Meehan, Analyst

Thank you. Good morning and good afternoon. I wanted to ask about some of the customer disclosures you provide. So just recently, you've had pretty good growth from your largest customer. I was wondering if there were any themes you would call out or therapeutic areas. Just how should we think about the durability of growth here?

Dr. Steve Cutler, CEO

I think, as you can see from the numbers we reported, the largest customer did experience growth. This was mainly driven by a couple of large projects that progressed quickly during the quarter, so I don't believe we're seeing this as a long-term trend. On the other hand, the two to five segment saw a slight decline, particularly due to changes in one customer's mix. These dynamics can fluctuate from quarter to quarter, so I wouldn't place too much emphasis on that as a long-term trend. We're confident about our top 10 and top 20 customers, most of whom are growing. For the ones that aren't, it seems to be more about a shift in mix rather than any other issues, and we're observing increased interest in other business areas from them, even if it's generating different revenue flows. Overall, we feel positive. I've mentioned before that we've made progress strategically with a couple of customers, as well as with others in the large pharma sector, where we haven't yet established a strategic partnership but are engaging them on significant opportunities. Some of these customers are facing challenges, which has led to more strategic discussions about how we can assist them in navigating their short- or medium-term difficulties. While it's common to think that when customers are financially struggling they will cut costs or spending, they can approach spending differently, which can sometimes be beneficial for us. Difficult times can create opportunities, and we're seeing this happen in a couple of significant areas within the large pharma sector.

Jack Meehan, Analyst

Great. And as one follow-up, what's the latest tone you're hearing around the IRA? I think there was a lot of, maybe concern or uncertainty around that last year. Do you feel like customers have a greater handle around how that's going to impact their R&D spend plan?

Dr. Steve Cutler, CEO

I haven't seen much change since last year. There is genuine concern among customers regarding how their organizations will adapt. We have a meeting scheduled in a couple of weeks with some of our largest customers, and that will be one of the topics we discuss. We'll have some external experts joining us, which should give us more insight. Overall, I believe things have not changed dramatically. While they are negotiating pricing, I don’t think that has substantially contributed to any current budget challenges they are facing. These changes will take several years to implement. In short, not much has really changed. Customers remain concerned and somewhat challenged, but they are exploring different approaches to drug development. We have discussed conducting these developments concurrently rather than sequentially, which could allow us to bring products to market faster across multiple indications instead of waiting to complete one before starting another. Often, these situations create new opportunities because we can approach things differently.

Jack Meehan, Analyst

That was good. Thanks, Steve.

Operator, Operator

Thank you. We'll now move to the next question. Please stand by. This is from the line of Elizabeth Anderson from Evercore ISI. Please go ahead.

Elizabeth Anderson, Analyst

Hi guys. Good morning, and thanks for the question. I just wanted to follow-up on some of the demand questions that have been asked before. I think, obviously, one thing people continue to be worried about is, like, the overall, sort of pharma spending environment, whether it's IRA specifically related or something else. It's obviously nice that you have that new strategic partnership. That's nice to see. Can you talk about sort of the level of visibility on your strategic partnerships with large pharma and how kind of maybe they help you get a sense of sort of where their pipelines are going and help give people a little bit more confidence in the trajectory there? Thank you.

Dr. Steve Cutler, CEO

With our strategic partners, we have some visibility into their pipelines, which is a key advantage of our collaboration. We are informed about upcoming developments and the therapeutic areas where we need to focus our efforts. Through our discussions and meetings with senior committees, we can align our partnership effectively. Currently, I have not heard any significant concerns regarding funding or research and development spending from them. In fact, based on the recent requests for proposals we've received and the strength shown last year and in the second and third quarters, we're identifying more opportunities. As their budgets may become slightly tighter and they become more mindful of their expenses, they seem to be open to outsourcing more than they currently engage in. While I can't definitively comment on whether budgets are increasing or decreasing, we observe modest increases in R&D spending over the medium to long term; however, the allocation of that funding is crucial for us. Overall, we see a growing opportunity regarding outsourced funds and greater potential to expand our market reach.

Elizabeth Anderson, Analyst

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

Dr. Steve Cutler, CEO

Good.

Operator, Operator

Thank you. We'll now move to the next question. Please stand by. This is from the line of David Windley from Jefferies. Please go ahead.

David Windley, Analyst

Hi. Hi. Good morning. Good afternoon. Thanks for taking my questions. I wanted to explore margin a little bit. First, just in talking about the FSP shift, you've highlighted that it is very gradual. I get that. My sense is that, at least what I'm aware of is that, at the gross margin level, the margin difference between full service and FSP would be quite a bit wider. And then maybe at the EBITDA margin level, you get to that 200 basis points to 300 basis points of margin difference because the SG&A load on FSP is lower. You could correct me if I'm wrong there. So, I guess, I wanted to understand maybe if you could quantify from a percentage of revenue basis, how gradual is this shift to FSP such that you still think you can keep the gross margin at around 30%? I'll leave it there and come back with a follow-up.

Brendan Brennan, CFO

I will address that to begin with. As you mentioned, it's a gradual process. Honestly, at the beginning of this year, we indicated that the opportunity seemed to lean more towards full service. Therefore, I want to emphasize that we have observed trends in the past of transitioning from full service to FSP. I don't believe this time is significantly different; some companies shift one way while others go the opposite. That's an important point to highlight. Your observation about EBITDA is valid, and we have pointed out that over 20% of our business falls under the FSP share of revenue. We do not expect a significant enough movement to alter the gross margin. We will continue to drive efficiencies through effective workforce utilization and automation to balance any mix shifts. Our organization is experienced in FSP and adept at managing our contracts, allowing for growth. However, it's important to note that I don't anticipate a substantial change in the FSP versus non-FSP percentage from 2023 to 2024. The shift will be gradual and take time, and others are moving in the opposite direction as well. While I might not provide all the specifics you seek, I am confident that we can maintain our gross margin profiles this year and operate efficiently across both models, achieving the margin improvement we discussed, contributing 50 basis points to EBITDA.

David Windley, Analyst

Got it. Okay. You mentioned that the incremental partnership was full service, which likely plays a role. My follow-up question is about automation. Despite your earlier response, the ongoing trend towards FSP alongside automation appears crucial, and the advancements in your automation hours seem strategic and vital for your long-term margin expansion. I have two questions: First, can you compare the cost of an automation hour with the cost of a labor hour? Second, since you ended the fourth quarter of 2023 better than expected, it seems you have effectively advanced 20 basis points of margin expansion to 2023. Achieving 50 basis points now appears more ambitious than when you initially shared that guidance. Can you assure us that reaching the full 50 basis points remains attainable? Thank you.

Brendan Brennan, CFO

I'll start with how we measure the hours we're discussing; these are equivalent hours that people would normally work. Essentially, we're referring to removing those hours from the organization. When we mention 2 million, it represents 2 million hours of labor time taken out. Unfortunately, I don't have a specific ratio handy, but we are talking about a significant number of hours and average labor costs removed. This is not just a target we consider but also a crucial measurement for our organization. Even when factoring in different global regions and lower-cost areas, the savings from this automation would still be substantial. We recognize that this is a strategic element in improving our gross margin, and we'll continue to focus on it. Regarding your second point, we usually refrain from discussing targets we believe are unachievable. We still feel confident about the 50 basis points target; we performed better than anticipated, setting a more ambitious goal. As I mentioned earlier, we aim to maintain our gross margin around the 30% mark while achieving continued leverage on our SG&A. You can see that there was a $25 million decrease in our SG&A from 2022 to 2023. Our team has been very effective in delivering this leverage, which we want to maintain. While we don't need the same level of absolute dollar reduction as we move into 2024, we need most of the 50 basis points leverage to come from SG&A throughout the year, and we believe we have a solid plan to accomplish that. Steve, would you like to add anything?

Dr. Steve Cutler, CEO

Oh! I think that's it, you said it all.

David Windley, Analyst

You're right. Thank you. I do know you to be very good at that. You're right.

Operator, Operator

Thank you. We'll now take our next question and this is from the line of Max Smock from William Blair. Please go ahead.

Max Smock, Analyst

Hey. Good morning. Good afternoon. Thanks for taking our questions. Just a couple of quick ones for me here. So on direct fee versus pass-through revenue, I think it's been a couple of quarters now where pass-through revenue has been a pretty meaningful headwind on the topline. Just wondering if you can give us direct fee revenue growth in total for 2023 versus pass-throughs and then what you have embedded for each of these buckets in the topline guide for 2024. Now let's go ahead and ask my follow-up since it's related. How much of the margin improvement this year came from that mixed shift to direct fee revenue and then how are you thinking about the impact margins from this potential mixed shift in 2024? Thank you.

Brendan Brennan, CFO

Max, I'll attempt to address the comparison between 2022 and 2023. We've noted that direct fee revenue growth is more in the high-single digits. You can see the overall performance from the pass-throughs for the entire year. There has been a persistent challenge with pass-throughs throughout 2023. This trend is largely due to the transition from vaccines to a more traditional therapeutic mix that includes more oncology and orphan-type therapies, which typically have longer durations. We’ve experienced this headwind for the past couple of years, and it is not unique to 2023. However, we believe we are nearing the end of this challenge. We expect that the mix will still present some headwind as we approach 2024, but not as significantly as it did in 2023. We anticipate our COVID and non-COVID revenue mix will remain similar, around 3% to 4% for both 2023 and 2024. We hope to see a reduction in this headwind as we move into 2024, but we will monitor how this unfolds over the year and provide more detailed updates as we progress. I apologize for not noting the second part of your question.

Dr. Steve Cutler, CEO

Mix shift.

Brendan Brennan, CFO

We will provide more detailed information as the year progresses, and we believe that the mix shift will allow for greater clarity.

Max Smock, Analyst

Sounds good. Thank you.

Operator, Operator

Thank you. We'll now take our next question and this is from the line of Ann Hynes from Mizuho Securities. Please go ahead.

Ann Hynes, Analyst

Hi. Good morning. I want to focus on capital deployment. In your prepared remarks, you mentioned M&A. Is there any unannounced M&A included in your guidance? My second question is about the types of assets you are considering to enhance. Additionally, regarding the share repurchase, I know that's not included in the guidance, how do you balance M&A with share repurchase for this year?

Dr. Steve Cutler, CEO

Okay. The answer to your question is no. And your first question, anyway, we don't have any M&A in our guidance. So just to be clear on that. In terms of...

Ann Hynes, Analyst

New M&A, sorry, the new M&A, the previously announced M&A, obviously, is in there from Phillips and...

Dr. Steve Cutler, CEO

That's right. Yes. Yes. Yes.

Ann Hynes, Analyst

Yeah.

Dr. Steve Cutler, CEO

That's included. Previously announced, yes, but there's nothing new. Regarding our share buyback approach, we are at a crucial stage for the organization. We have successfully reduced our debt, now at 2 times adjusted EBITDA, which is a favorable position. We aim to stay within a range of 1.5 to 2.5 times. We have another debt payment scheduled for this quarter and are focused on restructuring it to gain certainty regarding our interest payments. We've mentioned a $100 million reduction in interest fees for 2024 compared to 2023. As we progress, the M&A area will become increasingly important, and we are currently exploring several opportunities since these processes take time. We are enhancing our Accellacare site network and aim to strengthen our position there. The labs present an opportunity for us, whether in specialty labs or our central lab, as we currently do not rank in the top three, but we would like to. We also see potential in other areas related to services and devices. We are rigorously evaluating M&A prospects, and as we restructure our debt, it will take priority for capital deployment. The share buyback remains authorized by the Board, and we will implement it strategically when appropriate. Particularly if there are no viable M&A opportunities at reasonable prices, we believe there are several organizations and capabilities that align well with us and will help us conduct clinical trials more efficiently, which continues to be our top priority.

Ann Hynes, Analyst

Great. And just on your revenue guidance, there is a wide range and can you just go through what gets you to the low end and what gets you to the high end or the big variant factors?

Brendan Brennan, CFO

Yeah. I'll take that, Ann. There is a wide range, and we'll be narrowing that as we go through the course of the year, without doubt, and we may even think about that in quarter one or quarter two. I think we're still looking at a market, certainly, when we set the guidance, that will have some element of uncertainty in it, and we were trying to really reflect that. There are obviously some opportunities. Steve made reference to the fact that there could be some additional vaccine work that could burn quickly through that and that might help us to get up into the higher end of the range, and likewise, there's always the risk of cancellations in this nature of the business. That's just the nature of the world, right? So as we get more certainty, certainly, we'll be narrowing that range as we get into the year. But certainly, I would always say to people when asked, the midpoint is as good a place as any, right? So if you're trying to do your modeling, that's where I'd send you to.

Operator, Operator

Thank you. And we'll now take our next question. This is from the line of Jack Wallace from Guggenheim Partners. Please go ahead.

Jack Wallace, Analyst

Hey. Thanks for taking my question. I'll keep this brief. I was just wondering, given the market dynamics and the pressures facing your customers, particularly the largest ones, if there's any incremental appetite utilizing risk-based monitoring and if we'll follow up to that if some of your investments in AI could be an accelerator for that? Thank you.

Dr. Steve Cutler, CEO

Okay. So, Jack, as I understand your question, is there any incremental appetite for risk-based monitoring based on some of their financial challenges? I mean, I wouldn't necessarily associate risk-based monitoring with financial challenges. I mean, risk-based monitoring is part of what we do on a normal basis now, where we focus our attention and our resources on sites or patients or areas of the data collection process that has the greatest risk, and we use particularly offsite and our IT technology, some of our newest IT technology, to identify data that perhaps needs further scrutiny. And it is a more efficient way of doing it. So to that extent, we're spending our customers' dollars more effectively and efficiently. But I think of it in those terms rather than as a cost reduction way of doing things. It's just a more effective way of deploying dollars around the clinical monitoring process is what I'd put it. Is that antiquated?

Jack Wallace, Analyst

On the risk. Yeah. No. That does. I appreciate it. Thank you.

Dr. Steve Cutler, CEO

Thanks, Jack.

Operator, Operator

Thank you. We'll now take the next question. This is from the line of Dan Leonard from UBS. Please go ahead.

Dan Leonard, Analyst

Thank you. Just a couple of cleanups. First off on the COVID work, can you remind me what percentage of your backlog at this point is COVID and how you expect sales to trend in 2024?

Kate Haven, Investor Relations

Hey, Dan. They're well aligned in terms of the backlog and the percentage of revenue in that range of 3% to 4% for the full year.

Dan Leonard, Analyst

Thank you. And the other cleanup, can you give an acquisition sales contribution figure in the quarter? If you did, I missed it, from the deals you've already announced and then how much is in that 2024 guide?

Brendan Brennan, CFO

Oh! It's not huge. I mean, it's circa 10 in the quarter. It'll be in that ballpark for the quarter. It's not far off.

Dan Leonard, Analyst

Thank you.

Operator, Operator

Thank you. We'll now take the next question. This is from the line of Derik De Bruin from Bank of America. Please go ahead.

Mike Ryskin, Analyst

Hey. Thanks for taking the question. This is Mike Ryskin on for Derik. Same thing, a couple minor cleanups. One is just, could you clarify exactly what the pricing assumption is for 2024? I know you talk about price qualitatively, but if you could quantify it. And then also on the interest expense, the $100 million year-over-year, all that makes sense and you talked about some of the payments coming over the course of the year, but just anything on pacing as we go through the year, just from modeling, when should we – when and how should we pace that through the year? Thanks.

Brendan Brennan, CFO

On the pricing piece, Mike, it very much depends. There's no straight answer to that one. Of course, we have inflationary increases in most of our contracts and we have those negotiations with our customers at the start of the year. They obviously follow CPI Index in terms of inflationary pieces. So that's a conversation that happens every year. It's progressing around this time of the year again, but each new business will depend on the individual customer. And on the $100 million of, I mean, I would say, probably more back-ended. We want to try to get all this sorted out in H1. So I would say, stepping down quarter-by-quarter, but probably more dramatically in the second half.

Mike Ryskin, Analyst

Thanks, guys.

Operator, Operator

Thank you. And we have one more question. This is from the line of Casey Woodring from JPMorgan. Please go ahead.

Casey Woodring, Analyst

Great. Hi. Thank you for squeezing me in. A lot's been asked, but I wanted to follow up on the strategic partnership questions. Just wondering how many of those types of partnerships you have now and is there a way to size this new opportunity that you called out this quarter and then the total opportunity of those partnerships in aggregate? And then also just what gives your full-service offering a competitive advantage in winning those types of partnerships? Thanks.

Dr. Steve Cutler, CEO

I have a quick question at the end, Casey. What is our competitive advantage over the industry? Let me start with our strategic partnerships. We’re not ready to quantify them yet, but we believe they could generate at least $200 million in annual revenue as we collaborate with a top 20 or top 30 pharmaceutical company. I don’t have an immediate number for the total from these partnerships off the top of my head. Currently, we have strategic relationships with a significant majority of the top 20 pharmaceutical companies. About 18 to 20 months ago, we had partnerships with 13 of them, and we’ve made progress with about 16 now. We have several companies we’re in discussions with, even though we haven’t signed a master service agreement or formalized a partnership. The process can often take a year or two, not just to establish the partnership but also for the business to ramp up afterward. These current discussions may not immediately impact revenues, but we do see potential opportunities. To be honest, I’m starting to drive improvements in our request for proposal processes as well. Regarding competitive advantage, we are now a significant player in the industry, and our merger with PRA 20 months ago has greatly contributed to that. The talent we’ve added has also strengthened our organization. As a major player in clinical development, we have the technology, resources, and capabilities that allow us to be considered for partnerships. We have access to multiple discussions, which is a change from five years ago when we often missed out on many opportunities. In terms of advantages over bigger competitors, our site network presents opportunities, and our technology, including OneSearch and other publicly known tools, gives us an edge. Additionally, the mix of services we provide, such as our functional services group and focus on biotech, is important in contemplating strategic partnerships and when comparing ourselves to larger competitors. Each company has its strengths, but in our industry, no single factor sets you apart; there’s no unique intellectual property for us to rely on. We depend on our expertise and the strategic decisions we make, right down to the project management level. All these aspects matter as we pursue partnerships or regular projects, and we believe we are competing effectively in this realm now.

Casey Woodring, Analyst

Thank you.

Dr. Steve Cutler, CEO

Thank you, Operator. I believe we have addressed all the questions. I appreciate everyone’s contributions and inquiries. Thank you for participating in the call today and for your ongoing interest in ICON. We are genuinely excited about the opportunities that lie ahead and feel that we are at a crucial stage in our company’s development. This is reflected in the comments we've shared today regarding our strategic partnerships and future prospects. Thank you once again for the questions, and have a great day.

Operator, Operator

Thank you. This concludes the conference for today. Thank you for participating and you may now disconnect. Speakers please stand by.