ICON Public Limited Company (NASDAQ:ICLR) Q3 2022 Earnings Conference Call November 3, 2022 8:00 AM ET
Kate Haven - Vice President of Investor Relations
Brendan Brennan - Chief Financial Officer
Steve Cutler - Chief Executive Officer
Conference Call Participants
Eric Coldwell - Robert W. Baird & Co.
Christine Rains - William Blair & Company LLC
David Windley - Jefferies LLC
Sandy Draper - Guggenheim Partners
Elizabeth Anderson - Evercore ISI
Justin Bowers - Deutsche Bank
Luke Sergott - Barclays
Patrick Donnelly - Citigroup Inc.
Jack Meehan - Nephron Research LLC
Casey Woodring - JPMorgan Chase & Co.
Dan Leonard - Credit Suisse
Derik De Bruin - Bank of America Merrill Lynch
John Sourbeer - UBS
Good day and thank you for joining us on this call covering the quarter ended September 30, 2022. Also on the call today, we have our CEO, Dr. Steve Cutler; and our CFO, Mr. Brendan Brennan. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call.
Certain statements in today's call will be forward-looking statements. These statements are based on management's current expectations and information currently available, including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, and listeners are cautioned that forward-looking statements are not guarantees of future performance. Forward-looking statements are only as of the date they are made, and we do not undertake any obligation to update publicly any forward-looking statements, either as a result of new information, future events or otherwise. More information about the risks and uncertainties relating to these forward-looking statements may be found in SEC reports filed by the company, including the Form 20-F filed on March 1, 2022. 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 excludes stock compensation expense, restructuring costs, foreign currency gains and losses, amortization and transaction-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 to ask one related follow-up question.
I would now like to hand the call over to our CFO, Mr. Brendan Brennan.
Thanks, Kate. In quarter three, ICON achieved gross business wins of $2.740 billion and recorded $389 million worth of cancellations. This resulted in net awards in the quarter of $2.35 billion, a net book-to-bill of 1.21x. On a trailing 12-month basis, our net book-to-bill was 1.24x.
With the addition of the new awards in quarter three, our backlog grew to a record $20.2 billion, representing an increase of 1.3% on quarter two of 2022 or an increase of 9% year-over-year, our backlog burn was 9.7% in the quarter, slightly below quarter two.
Revenue in quarter three was $1.942 billion. This represented a year-on-year increase of 3.9% on adjusted revenue or 7.4% on a constant currency organic basis. The revenue impact from year-on-year changes in foreign exchange results resulted in a headwind approximately of $67 million in quarter three. Our top 25 customers concentration increased slightly from quarter two as our top customer represented 8.6% of revenue. Our top five customers represented 27.8% of revenue. Our top 10 represented 41.7%, while our top 25 represented 62.6%.
Adjusted gross margin for the quarter was 29.5% compared to 28.4% in quarter two. Gross margin strength was driven by continued direct fee revenue growth and improved resource utilization in quarter three. Total SG&A expense was a $192.9 million in quarter three or 9.9% of revenue. In the comparable period last year, total SG&A expense was $196.3 million or 10.5% of revenue. We expect total SG&A expense to be at a similar absolute level in quarter four as we saw in quarter three.
Adjusted EBITDA was $379.6 million for the quarter or 19.5% of revenue. In the comparable period last year, adjusted EBITDA was $324.9 million or 17.4% of revenue, representing a year-on-year increase of 16.9%. Adjusted operating income for quarter three was $352.7 million, a margin of 18.2%. The adjusted net interest expense was $57.2 million for quarter three. As previously communicated, due to the increasing interest rate environment expected through the duration of this year, we are anticipating full-year interest expense to total approximately $210 million in 2022. This represents an increase of approximately $50 million from our initial assumptions for full-year interest expense when this guidance was issued in January.
The adjusted effective tax rate was 16% for the quarter. We continue to expect the full-year 2022 adjusted effective tax rate to be approximately 16.5%. Adjusted net income attributable to the group for the quarter was $247.2 million, a margin of 12.7%, equating to diluted earnings per share of $3, an increase of 17.5% year-over-year.
In the third quarter, the company recorded $8 million of transaction and integration-related costs. U.S. GAAP income from operations amounted to $243.7 million or 12.5% of revenue during quarter three. U.S. GAAP net income attributable to the group in the quarter three was $160.2 million or $1.94 per diluted share compared to a loss of $1.17 per share for the equivalent period last year.
Net accounts receivable was $934 million at 30th of September 2022 and this compares with a net accounts receivable balance of $875 million at [30th] June 2022. Cash collection efforts continue to be strong with DSO of 43 days in the quarter, up from 26 days on a comparable basis from September 30, 2021, and up from 41 days on a comparable basis at June 30, 2022.
Cash generation from operating activities in the quarter was $214 million. At September 30, 2022, the company had a cash balance of $609.2 million and debt of $4.850 billion, leaving a net debt position of $4.239 billion. This compared to a net debt of $4.429 billion at June 30, 2022, and net debt of $4.918 billion at September 30, 2021.
Capital expenditure during the quarter was $37.3 million. We ended the quarter with a net debt to trailing 12-month adjusted EBITDA ratio of 2.9x. Our capital deployment priorities continue to be debt pay down. And as such, we made a payment of $200 million on our Term Loan B facility in the quarter, bringing our total repayments to $600 million year-to-date. We expect to make a similar size repayment in quarter four, which will allow us to exit the year with a net debt to trailing 12-month adjusted EBITDA of approximately 2.7x. This is in line with our previously communicated target exiting the year with a leverage ratio below 3x and well ahead of our initial expectations set in July of last year.
With the rising interest rate environment, we have decided to hedge a portion of our floating interest rate exposure in Term Loan B facility. While we will work to finalize our hedging strategy and resulting agreement by the end of this year, we anticipate this will effectively hedge a significant proportion of our floating interest rate exposure, providing more certainty around anticipated interest rate expense for the full-year of 2023 as market conditions continue to fluctuate.
With all of that said, I'd now like to hand over the call to Steve.
Thanks, Brendan, and good day to everyone. ICON delivered a very solid performance in the third quarter as our team continued to execute well across our operational segments amidst the challenging macroeconomic environment. The macroeconomic pressures that have been impacting our business for the majority of this year remain in focus is the war in Ukraine, and to a lesser degree, the lingering effects of the pandemic, including rolling lockdowns and the zero COVID policy in China have impacted our operations in these regions.
Across the globe, we continue to prioritize the safety of our employees while also maintaining trial continuity for our patients and customers. Our expectation for the full impact in 2022 revenue from these factors remains in the range of $60 million to $80 million as we have not seen any notable improvement in our ability to operate in the Ukraine and Russia, in particular.
In addition to the conflict in Europe and the COVID-related issues in China, the further strengthening of the U.S. dollar and rising interest rate environment continued to impact our results in the third quarter and outlook for the full-year 2022. Notwithstanding these issues, we remain encouraged by the positive underlying demand environment for clinical development services. Strength in demand has been led by mid and large biopharma companies, both in terms of RFP activity and in our business development performance in quarter three.
As the broader funding environment in the biotech sector remains challenged, we are seeing a continuation of the trend we highlighted on previous earnings call, which is more deliberate spending from customers in the emerging biotech segment. This is translating to a lower average opportunity value in this segment as biotech companies look to optimize study designs and are generally more cautious in their approach to clinical development as they conserve cash in an uncertain environment. While this dynamic has caused a slight headwind to new business wins in this segment, we have not seen disruption in terms of ongoing projects, delays or an increase in cancellations at this time. Bad debts also remain at historical low levels.
Overall clinical development demand has continued to grow as evidenced by trailing 12-month RFP growth in the high single digits as increasingly complex clinical trials required a capabilities footprint and integrated solutions that only global CROs can deliver. ICON's unique partnership model that brings the necessary expertise, technology and insights to deliver patient-centric trials is resonating well and we continue to find success in expanding existing customer partnerships.
We've also made good progress initiating new large pharma discussions and partnerships, which was a key strategic rationale for our union with PRA Health Sciences. We believe the diversified portfolio of services across ICON positions us well with customers that have evolving needs and require flexibility in their approach to clinical development. Our strategic focus on all aspects of clinical development has enabled us to lead the market in providing unique solutions such as blended trial models where elements of full service and functional service provision are utilized and customized to deliver dedicated services and functions to biopharma customers.
In addition to supporting our customers' new models of development, we remain steadfast in our commitment to innovation and continue to invest in opportunities where we see potential for significant near-term improvements in patient identification, recruitment, site performance and investigator engagement.
In quarter three, we successfully completed the pilot of our partnership with Veradigm, a company that is creating the largest EHR integrated site network in the industry with 23,000 sites, 30,000 physicians and access to over 40 million potential patients for trials. Through the partnership, we aim to lower the burden of participation for physicians while increasing the overall number of patients that have access to clinical research. We are encouraged by the results of the pilot and the opportunity to more rapidly and predictably connect patients and physicians with appropriate clinical trial opportunities.
Additionally, our One Search platform, which uses proprietary algorithms and a variety of data sources to identify the best sites for a clinical trial was recently recognized by a major trade publication as the leading industry tool in data analytics and business intelligence. One Search is helping to tangibly improve our site start-up times and recruiting site metric, which drives improved speed and efficiency for our customers.
Turning to our financial performance. I'm pleased with our results in the third quarter, with strong backlog growth of 9% year-over-year and revenue growth of approximately 4% or 7.4% on a constant currency organic basis over the third quarter of 2021. Excluding COVID-related work, revenue growth was over 14% year-over-year on the same basis. Operational performance was particularly strong in the quarter with approximately 17% adjusted EBITDA growth year-over-year, resulting in a margin of 19.5%.
Direct fee revenue growth and improved resource utilization alongside strong SG&A cost management helped drive our performance in the quarter. And we remain well on track to meet our target of 19% adjusted EBITDA margin for the full-year 2022. This leaves us well on track to meet our medium-term goal of mid-teens growth in adjusted EBITDA through 2025.
In addition, earnings per share grew strongly at 17.5% year-over-year in quarter three. We continued our progress in reducing our floating rate debt exposure by making a $200 million payment on our Term Loan B facility in quarter three and resulting in a 2.9x net debt to adjusted EBITDA ratio at the end of the quarter.
Furthermore, as Brendan mentioned, we are finalizing our hedging strategy for the majority of our variable rate debt in order to provide greater certainty on our interest costs going forward. We expect to be able to announce the terms of this agreement by the end of this year.
Only 15 months after completing the union with PRA Health Sciences, we have made excellent progress on the execution of cost synergies and integration of the organization, which has allowed us to pay down our variable rate debt even faster than our initial expectations. As we approach our target of 2.5x adjusted EBITDA, we anticipate our capital deployment focus will increasingly include potential share repurchase activity alongside M&A as we look to add capabilities and assets that further enhance our service offering.
Given our financial performance in quarter three and the healthy underlying business environment, we are reaffirming our full-year 2022 guidance of revenue in the range of $7.69 billion to $7.81 billion and earnings per share of $11.65 to $11.85. Additionally, as previously communicated, our full-year EBITDA margin expectation of 19% remains unchanged.
I've spoken in the past about our ambitious goal to be the recognized employer of choice in the industry and a highlight I was particularly proud of in the quarter, with ICON's recognition as a 2022 Forbes World's Best Employers list as one of only two CROs. We believe this award along with other industry recognition we have received is a direct result of the investment and focus ICON has made on talent management, training programs and overall career development for our employees. We continue to operate in a highly competitive industry for talent. And despite continued tightness in areas of the labor market, I'm pleased to report that we have seen steady improvements in employee retention each month as we have progressed through 2022.
An additional highlight in quarter three was the release of our 2021 ESG report featuring our environmental, social and governance commitments. ICON performed our first ESG materiality assessment in 2022 and identified a number of priorities where we believe we can deliver the greatest positive impact for our stakeholders. We are deeply committed to our stated goals and objectives across a number of initiatives, including advancing public health, improving our employee experience and minimizing our global environmental footprint.
In light of broader macroeconomic challenge is expected to continue to impact our business results, we wanted to provide initial thoughts on our outlook for 2023. Given the significant strengthening of the U.S. dollar over the course of 2022, we anticipate a continuing revenue headwind in the first half of 2023, assuming foreign exchange rates continue at current levels. Backlog conversion is expected to be flat to slightly below Q3 levels due to a few notable factors. We are seeing a lengthening of overall study duration due to increasing trial complexity in full-service programs driven by growth in therapeutic areas like oncology and rare disease and a decline in vaccine-related work as a proportion of our overall backlog.
Based on current dynamics in the demand environment, our quarterly book-to-bill remains unchanged in the range of 1.2x to 1.3x target. We remain ambitious in our goal to drive 100 basis points of EBITDA margin expansion in 2023 as we continue to expect strong direct fee revenue growth along with solid cost management initiatives, including the realization of the full $150 million cost synergy target in 2023. Our longer-term growth aspiration of achieving $10 billion in revenue in 2025 remains unchanged.
We plan to issue detailed financial guidance in accordance with our usual timing in January at the JPMorgan Healthcare Conference. This timing allows for the necessary inputs of our quarter four results, debt hedging strategy and the latest macroeconomic outlook in order to provide a specific guidance range for the year.
Before we move to Q&A, I want to recognize and thank our employees across the globe for their continued efforts and significant contributions to our performance this quarter and in the year-to-date.
So operator, we are now ready for questions.
Thank you. [Operator Instructions] Your first question comes from the line of Eric Coldwell from Baird. Please ask your question.
Thank you very much. I'm going to start with some comments made today September conference about the labor inflation environment. I did hear today at the turnover and staffing overall maybe improving month-to-month, but there were some comments about going into 2023, expecting higher labor expense and frankly, I thought that might pull back your EBITDA expansion goals, but it doesn't sound like it has. So anything you could share on that would be a good start? Thank you very much.
Sure. Thanks, Eric. Yes, we do expect to see some inflation in LIBOR rates given the inflationary environment. But the bottom line is we believe we can counter that with the various initiatives we have ongoing in the organization to help us. We continue to reduce our SG&A costs. We have various operational initiatives that we believe we can put in place. So while we're not naive and expecting that there's going to be some pressure on LIBOR rates, those sort of increases we believe, can be more than offset by some of the initiatives we have going on in the organization.
One, if I could just have one more real quick. Thank you for some of these initial thoughts on 2023. That's helpful. I think maybe the biggest – when we're looking at variance across the street, probably the biggest variance we've been seeing across a number of our names is models for interest expense. I know there's some uncertainty with the hedging program you're setting up. But is it possible to prompt you to maybe give a bit of a – maybe a wide range on what you're thinking just to level set and get everybody in the same ballpark on interest expense outlook for next year?
Hi, Eric, it's Brendan here. I'll take that one. One of the reasons I suppose, we talked about giving guidance at JPM is because like everything else, the underlying LIBOR and SOFR rates are fluctuating quite dramatically at the moment as well. So it's a bit of a moving ball or moving goalposts, I should say, at this point. That said, we do expect to be in the high-200s for the full-year interest rate, I would say, probably I'd guide you more towards the top end of that range. So that's our current expectation. But please do take that as a draft and we'll see how the market is playing out over the next couple of months. And obviously, we'll come back to you with something a little more specific than that when we get to January and our guidance at JPM.
Great. That's very helpful. Thanks, guys. Congrats on good results.
Thank you. We will take our next question. And the question comes from the line of Max Smock from William Blair. Please ask your question.
Hi. Thanks for the question. It’s Christine Rains on for Max Smock. Just a question on last quarter's call, you pointed out that ICON is interested in increasing its exposure to small biotech. I didn't hear you talk about on this call, but I think that makes sense given what we see as excellent long-term growth prospects from this cohort, but it kind of took us by surprise given near-term funding risk. So I was hoping you could give some detail on this strategy kind of like your time line that you expect to pursue this and your optimal small biotech target mix?
Okay. That's not our recollection, Christine. We're not looking to increase our exposure to small but I think it remains a very important part of our business at around half of it. But it's an area that, as we all know, has some funding challenges at the moment. And then that's something we recognize. But we're not looking necessarily to increase it. In fact, what we've seen is our large pharma and midsized pharma discussions and business development has probably moved very significantly up in the last – probably the last 12 months really as we've come together. And then certainly, that trend has continued in quarter three.
So if anything, we will be increasing our exposure in the large pharma market given the success we've had both in winning business in that segment and in some of these more strategic discussions that we continue to have in the large pharma space. So I mean biotechs and small emerging remain an important part of our business, as I've mentioned, but we're not looking necessarily to dramatically increase our exposure in that space.
Thanks. That makes sense. And just one follow-up for me. Just on the revenue front, last quarter, you noted you're on track to meet your $100 million cross-sell target for the year. I didn't hear you mention that this time around. Is that still the goal?
That is very much still a goal. We remain on track for that. We've said that would be as we end 2024. So there's a longer-term lag, I suppose, on revenue synergies. The cost synergies, as I think I outlined, have come in faster than we expected. We're on track for $100 million this year and from a run rate of $150 million for next year. So we feel we're very pleased with how they've gone for. Revenue synergies are working forward. We're selling and getting those awards, but that will be a little bit slower to come through and we're talking end of 2024 on those.
Great. Thank you so much.
Thank you. We will take our next question. And your question comes from the line of David Windley from Jefferies. Please ask your question.
Hi. Thank you for taking my question. I wanted to start with some backlog conversion as a general topic. Steve, in your prepared remarks, you talked about longer duration of trials and some factors on that front. We've also heard some commentary about labor challenges and attrition at sites and things like that. So, I guess, the duration of studies in your backlog is probably a little more secular. Are there also some shorter-term issues that are affecting that duration? And do you think those can be alleviated in the near term?
Yes. Thanks, Dave. As I think we've outlined, the backlog conversion has dropped down a little bit, and we're anticipating flat maybe slightly lower as we go to the end of the year. And it's really because of the return to a sort of normal cadence of longer-term trials, oncology is becoming a more – a larger proportion of our backlog. The COVID stuff is sort of moving away as fast-burning vaccine study. So it's more in relation to the shift in our backlog, if you like, and the makeup of the studies that we're doing.
In terms of how we mitigate it, there's a number of factors ongoing, obviously, operationally. But the site one is an interesting one, we haven't seen the sort of disruption from a resource point of view at our Accellacare Sites. And we do believe there's an opportunity there to push more trials through our Accellacare Sites and to expand that. We have a good – probably most of the people in fact all of the people in our Accellacare Sites are dedicated to us and are dedicated on research. They don't have a pull to other sort of more standard clinical work.
And so we see that's an advantage, and that's leading to a continued improved performance in those sites and those are Accellacare Sites. We're well above on our recruitment rate, 20%, 30%, 40% above our sort of more ad hoc sites. And so that's playing through nicely for us. We believe there's further opportunity there to push more trials and mitigate any pressure on the backlog burn.
Thank you for that. Very helpful. So then my second question is around your comments on RFP versus kind of the reported numbers on bookings. It sounds like the RFP flows are still progressing at a pretty decent clip. You said high single digits, bookings were down year-over-year by about 1%. And so I wondered if the bridge there is hit rate or decisions, awards just not being issued, more RFPs not going to award? Or what would be the delta between kind of high single-digit RFP growth and slightly down bookings?
The bookings on a quarter-to-quarter Dave were pretty flat there, but it was slightly up rather than slightly down about 1%. But these RFPs, I think I've always said this, is somewhat in exact marker, if you like, for bookings. We do get RFPs that come through that are more costing exercises, some of them are more ballpark figures and then some come completely out of the blue. So as I say, it's not an exact match for bookings. We're certainly seeing a lot of activity in the large pharma space on the RFP space. That's an area that's gone up.
And on the biotech space, it's been a little more muted. So we're seeing – but overall, the numbers are solid, as I say, mid – sorry, high single-digit on a trailing 12-month basis. So I hesitate to get too focused on RFPs. It's the business development. We've been flattish, and that reflects, as I say, some movement within the market on large pharma, midsize and biotech putting it all together. So it is what it is.
Thank you very much. Good luck with the rest of the year. Thank you.
Thank you. We will take our next question. And the question comes from the line of Sandy Draper from Guggenheim Partners. Please ask your question.
Thanks. First question on cash flow, good quarter. And I think in the slides, you still have the target of 100 – I mean, you have $1 billion of free cash flow. Just wanted to see, Brendan, if that's still the target? And if so, that would imply a pretty nice step up and I would assume that would really come from working capital. So I just wanted to get any comments on that?
Yes. We just – we put those kind of those targets. They were kind of implied in the original guidance, Sandy. There shouldn't probably be read through as forecast elements. So they were kind of the objectives we set out at the beginning of the year. I think we'll improve certainly in cash flow in Q4. We had an excellent quarter of billing in Q3. So I do expect to see good cash flow generation on the back of that in Q4. We're probably not quite to the level that would get us to the $1 billion mark in total. We'll certainly still aim for that. We're probably around we've been doing just over $200 million in free cash flow on a quarterly basis so far this year. I'd like to see a little bit more but probably won't close that gap into [indiscernible]. So we're certainly – 200-plus is certainly our expectation. I'd like to see that maybe push up maybe even to the $300 million mark, but I don't think we'll quite close that gap, Sandy.
Okay. That's really helpful. And then my unrelated follow-up. On the gross margin side, obviously, really good number. And I think you mentioned, or maybe it was Steve, about just the high mix of service revenue versus pass-throughs. I didn't know if there's – if that's really the bulk of it or if there's other stuff going on there. And in general, I mean, is it fair to think about – because I know there's a lot of focus on bookings, but I try to focus on quality of bookings and a big quarter that's heavily pass-through doesn't meet a whole lot. But is it fair to say your bookings over the past three or four quarters have been more weighted towards service revenue versus pass-through because it's certainly showing up in the gross margin hedges? Any thoughts around that sort of trend.
Yes, I'll start off on that one, Sandy, and maybe Steve might want to chime in. I think from – listen, we called out and Steve called out the numbers, very good solid double-digit growth ex-COVID this year. And obviously, COVID with what is just quantum of pass-through as we saw in prior years, was a drag factor on gross margin. We certainly, with the normalization of a mix of our backlog coming through the course of this year, see those kind of vaccine, high pass-through business still continuing to wind down. And to your point, really good solid direct fee revenue replacing that, which has a normal cadence of pass-through included in it.
So you're probably in kind of – we, I suppose, historically told about somewhere in the 25% to 30% of gross revenue being pass-through on full-service work. And I think you're coming back down to that. Obviously, that was much, much higher with COVID work, where it was – it could have been actually – the pass-through was often bigger than the actual significantly bigger than direct fees. So yes, I think we are seeing an element of that continuing. And as I said, that also adds to some of the points that we may talk about in terms of backlog conversion as well. So certainly, it's a good story from a business wins perspective in terms of good mix of direct fee revenue helping gross margin. Steve, did you want to answer that?
Sorry, Sandy. I think what Brendan said it's right. We're certainly seeing a greater proportion of trials with a lower proportion of pass-throughs, if that make sense. So if you look at our direct fee revenue growth, we are in the sort of high single digits, that sort of number. So it's playing through nicely in helping fuel as a tailwind for our gross margin going forward.
Got it. Thanks so much.
Thank you. We will take our next question. And the question is from Elizabeth Anderson from Evercore ISI. Please ask your question.
Hi. Good morning or good afternoon guys. One of the concern I was just wondering as sort of as you're talking about the demand environment in third quarter, that was very helpful. As you think about sort of how the fourth quarter has been trending so far, are you seeing any major changes in either sort of RFP flow in any of your customer segments or win rates or anything in that nature that would be worth calling out either on the positive side or the negative side?
Elizabeth, it's still pretty early in the fourth quarter. We're a month in. We track this on a week-to-week basis. We're not seeing any trends, either positive or negative that I'd call out at this point.
Okay. That's very helpful. And then just in terms of the cost synergy updates that you mentioned. I appreciate you said on realization of the total $150 million for 2023. Where do you sort of expect to be at this point by the end of the year?
Well, by the end of the year, we'll be at a run rate that will give us the $150 million in 2023. We've got a little bit of work to do there in the last few months of the quarter to get those initiatives in place, and – but we feel very confident that, that will be there, and we will already – we'll have the $100 million in 2022. So we're well ahead of where we thought we were going to be with respect to our efficiencies, cost synergies, et cetera, et cetera. And that's helping us be pretty confident about our EBITDA and EPS growth going forward, a little bit back to Eric's question around LIBOR in place. There are some headwinds on LIBOR inflation, but because we've driven so well and we've accelerated those cost synergies, we think we can move forward well overall from an EBITDA point of view. And there is – some of that also impacts our gross margin.
Got it. That’s super helpful. Thank you.
Thank you. We will take our next question. And the question is from Justin Bowers from Deutsche Bank. Please ask your question.
Hi. Good afternoon everyone. Just continuing on the margin question. So the additional synergies are clearly a big piece of the buzzle, but can you help us think through the other levers that are going to help you drive that 100 basis point expansion for 2023?
Sure, Justin. I mean there's a number of operational initiatives that we have in planning as we come together as we continue to come together. This is a long-term process. We're being very considered and careful about how we integrate not wanting to disrupt customers' projects. But having said that, there are some operational efficiencies around functions that we believe we can gain. We've got some opportunities around where we locate resource as we go forward really over the next couple of years.
We have initiatives around our artificial intelligence and machine learning aspects that we're bringing in to do some of the more routine Well, so there are a number of areas there that we believe over the quarter, probably more medium term that we can drive, and we believe that's going to give us, again, over and above any headwinds, some opportunities to expand our margin by the 100 bps that we think we can do next year.
And maybe just one more on the large pharma commentary. You talked about the trailing 12-month growth. Is there anything out there that you're seeing that might been that? And then in terms of the increased momentum that you're seeing, that ICON seeing in large pharma bizdev, what are –what do you think some of the key factors are there?
Is there anything out there that could bend, I guess, there's always things that can bend this sort of thing. But we see – it's not just one or two customers. We see a trend across a number of different organizations, a number of different large pharma and midsized pharma for that matter, who want to engage with us. And so of course, there are things that could knock us off track. But at the moment, we're not seeing anything.
And even with the challenges around the macro, it's probably driving more of it. I think they're seeing more of an opportunity for more importance around their outsourcing strategy and getting those strategies in place with good competence partners. So I'm very confident that we'll continue that sort of progress. The business development side of things continues to be positive, particularly in that segment, particularly in that segment. And so we're very optimistic about the way we're doing that. And I think the main reason for it is because we're an organization of significant scale now.
As I said, it was one of the key rationale for the union with PRA. PRA have brought huge expertise and competence to us. We're a very significant clinical development player now. And customers want to talk to us about what we can bring to them, whether it be in the FSP space, the full-service space, our technology, our labs, our ICON decentralized platform. We're spending and a lot of resource and effort in bringing that forward. We're seeing a lot of opportunities around those decentralized trials, and they want to be part of that. They want to have that discussion with us. So it's – we feel very constructive and positive about that – those sorts of discussions.
Thank you. Appreciate the questions.
Thank you. We will take our next question. And the question comes from Luke Sergott from Barclays. Please ask your question.
Hey. Thanks, guys. Do you think – just some housecleaning stuff? Can you give us an idea of what your growth ex-COVID was to see what that burn looks like?
Yes, we can. Sorry, I'm just trying to find that number here in the script...
Mid-teens. I think we called out 14%, Luke, in the comments.
And that would have been constant currency.
On a constant currency basis, yes, 14% was the number.
Awesome. Thanks. So just getting back here to thinking forward and past the COVID and everything, so you guys gave out a normalized annualized run rate for largest customer, and this was a while ago. I think it was at your Dublin Analyst Day, and that was around like 350, if I remember correctly. How should we think about this going forward, let's say, as you're approaching that path to your long-term guide?
Not quite clear with the question, Luke. I'm sorry. What's the question?
It's basically trying to figure out as that – because your largest customer right now is about $650 million. I'm just trying to figure out how quickly that burns off. And then where the offset is. It looks like the rest of your book continues to grow outside your top 25 taking massive step ups here in the last couple of years. So just really trying to figure out those two moving parts going forward?
Yes. I mean, again, back to the – one of the rationales for the union with PRA was to reduce our customer concentration. We've done that. No one is more than I think – certainly, no one is more than 10%. I think our large it's around about 8-ish percent backlog and revenue-wise. So we're pleased with the results of that union and what that's done to us. We would see that probably continuing at about that rate. We have a good relationship with our largest customer, obviously, I feel confident in what we're doing. And so I don't know that that's going to dramatically fall.
However, as you no doubt have seen, we are growing our business outside of the top 25. I think this quarter, we had something like high single digits outside of the top 25 which sort of signals where we're going as an organization around expanding our customer base and working in the more midsized and smaller customers sort of group. So I'm not sure that I see dramatic changes going forward. Our top five, 10 customers will continue to be a very significant part of our business and that will be really where a lot of our strategic partnerships are focused, of course. So I would anticipate that, that concentration there would be – would continue at about that rate, maybe drop a little bit in the longer term as we expand. But overall, not dramatic differences.
All right. Thanks.
Thank you. We will take our next question. And the question is from the line of Patrick Donnelly from Citi. Please ask your question.
Thanks for taking the questions. Steve, helpful color on 2023 to start there. I guess kind of diving into that a little bit more. I mean you talked previously about the book-to-bill kind of being above 1.2. That would enable high single-digit growth in 2023 potential to kind of shift down towards mid-single if it goes below. I think we've been right at that number for two quarters now. You talked a little bit about the conversion being flat or slightly below 3Q with that lengthening and trial duration. I guess where does that leave us thinking for next year? Are we sliding a little bit below the high single? Just want to get color there. And then maybe, Brendan, just how big is the FX headwind? I know you talked about – it's evident in the first half, no surprise there, but maybe if you can just quantify that would be helpful.
Yes. Maybe I'll take the first part of your question, Patrick. We're talking about high singles on a constant currency basis, and that remains our target, our plan. I think we're going to look at all sorts of inputs, as I indicated in the next two, three months to see where we're going to be from a guidance point of view. And we're not ready to provide really any sort of strong indication and guidance on this call. We aspire to those high single digits. We're going to look at the various inputs, the burn rates, essentially, the win rates and the composition of the wins, which is very important.
As we look at – we get into the sort of final few months of the year, another couple of wins in the vaccine studies can have a material impact on these sorts of things. We'll look at all of those things and come back to you in January with respect to where we're going to be on the guidance. But on a constant currency basis, we remain focused on moving towards what we said in the past.
Yes, and FX...
Yes, sure. On the FX piece, and I think this is color now from our year-to-date perspective, In Q2, of course, we kind of – we adjusted our topline revenue guidance to take account of that. And at the time we were saying it was in the range of $120 million to $140 million of an impact having on the topline at that point. We have seen that increase in Q3, but the most dramatic part of that certainly was in the first half of the year. So certainly just about north of $150 million to the end of September. We'll keep a close eye to where FX rates are going. They're still wobbling a little bit. I think we've got a little more hanging on to parity, but certainly, the euro has dropped below parity on a number of occasions over the last couple of weeks. So that might still be a factor as we think about Q4. But to this point, at the end of Q3, it's just north of $150 million.
And then for 2023, Brendan, any initial kind of number as of FX rates today?
Yes, it's an excellent question. I think there is – as we look out and we think of average rates in constant currency from this year to next year, we apply something like spot rights to next year versus this year, that could deliver about a 1% headwind in foreign exchange terms. To Steve's point, there's a lot of work to do between now and our guidance call again. But that certainly is indicative of what we would expect if there was no change from where we're at the moment.
Okay. And then just quickly on the balance sheet, capital deployment, encouraging to hear you guys paying down some debt, getting rid of some of that variable interest. You mentioned share repurchases as well, Steve, I think bolt-on M&A. How do we think about the balance there kind of in the near term? I assume debt is still the priority, but maybe just talk through that piece? Thank you.
Yes. Patrick, that is pay down is still a priority. As I said, we anticipate paying another $200 million of our loan in the fourth quarter. But as you all know, M&A takes a little bit of time. And so we're certainly looking actively or starting to look actively in the market because we believe around 2.5x adjusted EBITDA is about the right number for our balance sheet – we're not planning to go back to zero debt. So we want to use our balance sheet. We've got a strong business that's generating significant cash flow.
And so as we get into next year, we'll be looking at – certainly, M&A will be the next priority, if you like. Once, we've got – we've moved out our leverage rate to where we want to be. But share buybacks remain an option as well as we – again, as we contemplate what we're going to do with our capital as we – and we keep it at around the 2.5x.
So that will be – that will be a little bit more opportunistic and it will depend upon what's available in the market and what sort of pricing we're seeing around some of the assets that we're looking to acquire. So there's a number of factors going in there, but we did want to signal that we are going to be actively in that space probably over – certainly over the next 12 to 18 months. That's our plan.
Thank you. We will move to our next question. The question comes from the line of Jack Meehan from Nephron Research. Please ask your question.
Thank you. Hello, everyone. I wanted to follow-up on Patrick's initial question, just dig a little bit more into the backlog conversion dynamic. Is it possible to say today what portion of your mix is oncology and rare disease and just how much that's going to shift next year? And maybe just conversely, what the vaccine mix is changing?
I'll take this to start on that one, Jack, and then Brendan might follow-up. I mean oncology and rare disease is a significant part of our [indiscernible]. It's about 40-ish percent of what we do. And it's probably going up rather than going down. If you look at oncology, CNS, vaccines, that probably gets us pretty close to 60%. Our vaccines, of course, burn quicker. And as those trials come in, they do give us a tailwind on burn.
But oncology, I mean, almost every oncology trial is a rare disease trials these days because of the sort of patients we're looking for. And they do tend to be kind of large, long-term type study. So they are a drag, if you like, on our burn or be it their long-term work. But they do – as we're increasing and there are, as I say, a very significant part of our backlog they do put a little bit of a headwind on it. Brendan, do you want to add?
Yes. No, I think anything – I mean, you're spot on, Steve, in terms of the proportionality there of both oncology and anti-infectives. So the one thing I would call out maybe is that the COVID as a part of our backlog is still in around the kind of that mid single-digit level. And we expect, as we've talked about that in terms of revenue contribution moving down from probably mid-singles this year into probably into the lower singles next year. So that certainly is still a contributing factor in some of that conversion drop off as well.
Got it. And then just curious, is any of the moderation you're expecting in backlog conversion related to labor access? Also, can you just talk about regional dynamics, notably Europe and China, just how you feel about site access and the rate at which trial starts have been?
Yes, in terms of – we don't see labor access, at least our internal labor access being a rate limiter for backlog conversion. We are seeing at some of our nonAccellacare sites some impact there, particularly in United States and, of course, with the lockdowns at [indiscernible], we've been fairly clear on that. So there is some impact in that space. But we're hoping and expecting that weakened, as I said, I think previously, we can drive some of our – more of our trials into our Accellacare network and expand out of Accellacare network because we have dedicated resources in that network that aren't impacted by some of the other challenges that more or more ad hoc sites have.
So we think we can mitigate some of that site burn, if that makes sense through our Accellacare site network and through supporting sites in addition to that as supporting some of the ad hoc sites, that are particularly key recruiting sites. So there's various things we're doing to help us to say, mitigate the risk on the site side of things. We don't see – in terms of labor access, it's a challenging market and all of that sort of thing. I don't think that's got any significantly easier, but it hasn't got any worse either. And so we see access to labor and access to people who can do the work internally as being not a factor that's going to hurt us in the short to medium term.
Thank you. We will move to our next question. The question comes from Casey Woodring from JPMorgan. Please ask your question.
Hi, guys. Thanks for squeezing me in. Just piggybacking off of the cash flow question asked earlier, it looks like unbilled revenue grew 62% year-over-year. So just curious as to what drove such a big jump in the quarter and if there are any read-throughs from that number? Thank you.
Thanks, Casey. I'll take that. We've been going through a process of harmonizing our process around revenue recognition over the course of the year. Certainly, we did see some elements of that where we would have had naturally a higher unbilled revenue balance in the ICON organization. And I think what you're seeing is that kind of returning to that point. We're seeing, obviously, when we brought NPRA at first, they had a lower position on that one. But I think what we're doing is correct. I do think, well, we've had – I mean, focusing on the future a little bit more so is that we've had a very, very solid quarter of good billing in Q3.
I made reference to the fact that we had a couple of systems issues as we went through Q2, and we obviously are now all on one [indiscernible] platform in Q3, which has been a huge, huge piece of work and will help us significantly in driving this balance as we go forward. So we're certainly looking and pushing that down as we go forward. But there will always be a normal level of unbilled balance there as we look at the makeup of our ideas. So probably somewhere in the region of 35 to 40 days is not a bad area where we'd like to be in the longer term. So we certainly will be looking at pushing that balance down as I said, a really good quarter of billing, and we'll see how hopefully play into the numbers in Q4.
Thank you. We will move to our next question. The question comes from the line of Dan Leonard from Credit Suisse. Please ask your question.
Thank you for taking the question. So I was wondering if you can give us the dollar amount of COVID-related trial revenue in the quarter. And then the progression, Brendan, can I clarify, you said low single-digit proportion of revenue in 2023? Or was that a backlog comment in response to Jack?
Second question first, maybe there was it was low single digits in terms of revenue in 2023 is our expectation at this point is coming off a backlog of about 5% or mid-single at the moment. On the – I don't know if we have even a percentage on the – in the quarter. Kate, do you have that number?
Yes, it was mid-single digit in terms of revenue.
Yes, mid-single, yes.
That works. Thank you.
Thank you. We will take our next question. The question comes from the line of Derik De Bruin from Bank of America. Please ask your question.
Derik De Bruin
Hi. Good morning. Can you talk a little bit about sort of like your cancellation rate expectations and sort of thinking about is 2% a good go-forward number to do that? And just anything unusual you're seeing in with respect to cancellations now, any pullback in people changing plans, just like that? Just some general color on what you're seeing there and how you think about going forward? Thank you.
Yes. I think the – I mean, the overall comment on that, Dan, is it's sort of more of the same. We haven't seen any significant changes in our cancellation, either the rate, the dollar number you saw that 2% of opening backlog. Gross wise, we're fairly careful with what we've put into the backlog in terms of who we contract with. And so there might be stuff that we don't put in, it doesn't ever happen sort of thing. But overall, in terms of our smaller customers, as I said in my comments, we are seeing some more deliberate in terms of what studies they're funding and in terms of what studies they're doing, that's logical. But we are seeing good signs and good companies getting funding and getting an ability to move their projects forward and whether it be in the private markets or in the public markets for that matter from the follow-ons. They seem to be able to get the money they need. So we're not certainly not seeing in the clinical space, an increase in the cancellation rate around these smaller – that's where your question is directed. And so overall, as I said, more of the same.
Derik De Bruin
Great. Thank you.
Thank you. We will take our final question. The question comes from the line of John Sourbeer from UBS. Please ask your question.
Hi. Thanks for taking the question at the end. On the revenue synergies, you mentioned earlier on exiting on 2024 of those synergies. But if you're looking out at the demand environment here and if things were to change, is there an ability to partially maybe offset that and accelerate some of these revenue synergies as we look to next year?
Well, I mean, John, we're always trying to accelerate our revenue synergies, but it really depends upon the – and we track this pretty carefully. These are not just studies we thought we might have won if we haven't come together. They're very carefully tracked in terms of this is a service we're providing in one organization, one legacy organization or the other that wouldn't have been provided if we remain two separate organizations. So we're tracking that. And the awards really are on track for that $100 million, and we – on an annual basis. And we expect those awards as these things burn and take a little bit of time to come through, we expect the revenue synergies to actually hit us as we exit 2024. So we're always trying to, of course, provide or accelerate them. But at the moment, the indication is that we're on track with what we said we're going doing as opposed to cost synergies where we're well ahead of what we said we'd do.
Okay. So thanks to everyone. We remain very confident about the business environment and what we're doing here at ICON to execute and to prosecute our customers projects. So thank you, everyone, for joining the call today. We're pleased with our third quarter results, and we again extend our thanks to our dedicated workforce across ICON as we continue to navigate the evolving landscape in clinical development and the broader environment, we remain focused on partnering to market faster for patients. Thank you very much, everyone.