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Hello, and welcome to the ICON plc Q1 2024 Results Call. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand over to Kate Haven, VP of Investor Relations. Please go ahead.
Thank you. Good day, and thank you for joining us on this call covering the quarter ended March 31, 2024. Also on the call today, we have our CEO, Dr. Steve Cutler; our CFO, Brendan Brennan; and Senior Vice President of Corporate and Commercial Finance, Emer Lyons. I would like to note that this call is webcast and that there are slides available to download on our website to accompany today's call.
Certain statements in today's call will be forward-looking statements. These statements are based on management's current expectations and information currently available, including current economic and industry conditions. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, and listeners are cautioned that forward-looking statements are not guarantees of future performance.
Forward-looking statements are only as of the date they are made, and we do not undertake any obligation to update publicly any forward-looking statements, either as a result of new information, future events or otherwise. More information about the risks and uncertainties relating to these forward-looking statements may be found in the SEC reports filed by the company, including its Form 20-F filed on February 23, 2024.
This presentation includes selected non-GAAP financial measures, which Steve and Brendan will be referencing in their prepared remarks. For a presentation of the most directly comparable GAAP financial measures, please refer to the press release section titled Condensed Consolidated Statements of Operations.
While non-GAAP financial measures are not superior to or a substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes. Included in the press release and the earnings slides, you will note a reconciliation of non-GAAP measures.
Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share excludes stock compensation expense, restructuring costs, foreign currency gains and losses, amortization and transaction-related and integration-related costs and their respective tax benefits.
We will be limiting the call today to 1 hour. [Operator Instructions]
I would now like to hand the call over to our CEO, Dr. Steve Cutler.
Thank you, Kate, and good day, everyone. ICON's performance in quarter 1 marked a strong start to the year, combining solid financial results, an impressive uptick in business awards and excellent adjusted earnings growth.
Net business wins were a record in the quarter, exceeding $2.65 billion as our comprehensive scaled offering continues to fuel our leadership position in clinical development. The market trends we saw early in quarter 1 continued throughout the balance of the quarter, characterized by stabilizing demand within the biotech customer base as well as a continuation of the robust demand we have consistently seen from large pharma customers.
Underlying demand drivers are incrementally more positive through quarter 1, with biotech funding increasing over 50% on a year-over-year basis in quarter 1, according to BioCentury, and large pharma R&D spend figures indicating low single-digit growth for the full year, in line with previous expectations. Proposal volumes are at healthy levels, with overall RFP volume increasing low double digits on a trailing 12-month basis.
In quarter 1, net bookings grew 10% on a year-over-year basis, resulting in a book-to-bill of 1.27x in the quarter and increasing our trailing 12-month book-to-bill ratio to 1.24.
We had a robust business development performance across all operational segments, with notable strength in our large pharma full-service solutions segment as well as in our laboratory business.
While it's early in quarter 2, to date, we have seen a continuation of these trends across customer segments, and we remain positive on the outlook for the full year. We expect book-to-bill to be in the range of 1.2 to 1.3x on a quarterly basis, maintaining our previous target range and expectation for an average book-to-bill of 1.25x for the full year 2024.
One of our important strategic initiatives as we came into 2024 was the focused rebranding of our dedicated biotech solutions business, ICON biotech. We saw an opportunity to enhance our market position within the biotech segment with customers that historically associated ICON with a large pharma focus. ICON biotech is the world's largest dedicated biotech CRO, with approximately 8,000 staff that are exclusively committed to that segment and understand the unique needs of the biotech customers we support. We are committed to optimally serving this key customer group and believe we can best do so through our current dedicated structure.
Following the rebrand activity in quarter 4 last year, I am pleased to report that we are already seeing positive momentum in terms of customer receptivity and an increased win rate in this segment.
In addition to our focused efforts within the biotech segment, we continue to drive forward our leadership in large pharma. Growing strategic partnerships is a critical element to this strategy, which not only includes the execution of new strategic partnerships, but renewing and expanding existing customer relationships.
In quarter 1, we were successful in renewing a long-standing top 20 pharma partnership, primarily utilizing full-service solutions. The renewal reinforces our strong delivery, history of execution for this important customer and our collective team's collaboration to drive efficiency across their development portfolio.
Another important factor in ICON's ability to secure and grow our customer partnerships is through the development of innovative solutions across our portfolio. We are excited about the future potential of our comprehensive and cost-effective offering in clinical trial tokenization. This end-to-end approach follows patients longitudinally through their health care journey beyond their participation in a clinical trial.
The surge in drug development in areas like diabetes and obesity has increased the need to collect and analyze long-term follow-up safety, efficacy and health expenditure data. We are anticipating greater market, regulatory and reimbursement requirements in the future, hence the need to deliver broader, more comprehensive insights that ultimately drive increased value for our customers.
Turning to our financial performance in quarter 1. Our team delivered another period of strong results across a number of measures. Total revenue increased 6% on a year-over-year basis. Gross margin of 29.9% increased 10 basis points over quarter 1 2023. And total SG&A expense decreased 90 basis points on a year-over-year basis to 8.7% of total revenue, driving a very strong adjusted EBITDA growth of 11.3% over quarter 1 2023.
This resulted in an adjusted EBITDA margin of 21.2% in the quarter, up 100 basis points year-on-year. Given the performance on adjusted EBITDA growth and the continued paydown of our Term Loan B debt, we saw excellent year-over-year growth in adjusted earnings per share of 20%.
The execution of our capital deployment strategy continued as planned in the first quarter. We closed the previously announced acquisition of HumanFirst in January, a leader in the field of digital health technology selection. This important capability is strategically aligned with our approach to providing an enhanced integrated offer. Combination of our leading clinical outcome assessment capabilities and digital health technology selection offers the ability for customers to optimize clinical trial design and enhance data collection quality.
As we've previously noted, our capital deployment priority remains M&A. And we continue to actively evaluate assets that will strategically and operationally enhance the current areas of our service portfolio.
After positive rating changes from S&P and Moody's in the back half of 2023, moving ICON back to investment-grade status, we began the execution of the planned refinancing of our variable rate debt in quarter 1. This included a successful repricing of our existing Term Loan B in the quarter, reducing our interest rate by 25 basis points as well as the removal of our credit adjustment spread.
In parallel, we improved the terms of our revolver facility. And we are working closely with our banking partners to progress refinancing of our debt. This will allow us to better utilize our balance sheet and provide more certainty on our annual interest expense. We continue to expect our full year interest expense will be in the range of $200 million to $230 million this year.
We are updating our full year 2024 guidance range to account for our financial performance in quarter 1 and the positive market environment we've seen so far this year. We expect revenue to be in the range of $8.48 billion to $8.72 billion, an increase of 4.4% to 7.4% over full year 2023. Additionally, we expect adjusted earnings per share to be in the range of $14.65 to $15.15, an increase of 14.5% to 18.5% on a year-over-year basis.
The new ranges maintain the midpoint of our previous guidance range, reflecting an outlook that is consistent in terms of overall market activity and our performance year-to-date.
Before I hand it over to Brendan for further detail on our financial performance, I want to provide a brief update on our previously announced CFO transition. As we indicated earlier this month, Brendan has decided to depart ICON after a long and very successful tenure in our finance organization of the company, and importantly, as our CFO for the past 12 years.
While we're sorry to see Brendan go, we understand his desire to take on the new challenge in his career, moving to a different industry. And we are very grateful for his significant contributions to our organization over the past 18 years.
As previously noted, we have commenced a process with a large global recruitment firm to identify our next Chief Financial Officer, which includes both external and internal candidates for the role. We plan to provide additional updates on this process and transition period as we progress. In the meantime, Brendan is firmly in his role as the CFO, and we have not made any changes to our broader finance organization as a result of this announcement.
Finally, we are looking forward to our upcoming Investor Day, which will take place on May 30 in New York City. The leadership team of ICON will be present at this important event, and further details will be made available on our website in the coming week.
In closing, I want to thank all of our colleagues at ICON for their dedicated efforts in quarter 1 in continuing to support our mission in bringing new therapies to patients around the world.
Brendan, I'll now turn it over to you.
Thanks, Steve. I appreciate the kind words and want to reiterate my commitment to ensuring a smooth transition. We plan to work closely with Steve and our broader management team to accomplish this.
Turning to our financial results in quarter 1. In quarter 1, ICON achieved gross business wins of $3.11 billion, and recorded $460 million worth of cancellations. This resulted in a solid level of net awards in the quarter of $2.65 billion and a net book-to-bill of 1.27.
With the addition of new awards in quarter 1, our backlog grew to a record $23.4 billion, representing an increase of 2.5% on quarter 4 of 2023 or an increase of 10.1% year-over-year. Our backlog burn was 9.2% in the quarter, slightly down from the quarter 4 levels, and we anticipate similar levels through the remainder of the year.
Revenue in quarter 1 was $2,090 million. This represents a year-on-year increase of 5.7% or 5.4% on a constant currency basis.
Overall, customer concentration in our top 25 customers decreased from quarter 4 2023. Our top 5 customers represented 26% of revenue in quarter 1; our top 10 represented 41.4%; while our top 25 represented 62%.
Gross margin for the quarter was 29.9% compared to 30.4% in quarter 4 2023. Gross margin increased 10 basis points over gross margin of 29.8% in quarter 1 2023.
Total SG&A expense was $181.7 million in quarter 1 or 8.7% of revenue. This was in line with the prior quarter on total percent of revenue. In the comparable period last year, total SG&A expense was $189.6 million or 9.6% of revenue.
Adjusted EBITDA was $444 million for the quarter or 21.2% of revenue. In the comparable period last year, adjusted EBITDA was $399.1 million or 20.2% of revenue, representing a very strong year-on-year increase of 11.3%, an expansion of 100 basis points in margin.
Adjusted operating income for quarter 1 was $411.4 million, a margin of 19.7%. This was an increase of 11.6%; adjusted operating income of $368.7 million; and margin of 18.6% in quarter 1 of 2023.
Net interest expense was $65.8 million for quarter 1. We continue to expect the full year interest expense to total approximately $200 million to $230 million in 2024.
The effective tax rate was 16.5% for the quarter. We continue to expect the full year 2024 adjusted effective tax rate to be approximately 16.5%.
Adjusted net income attributable to the group for the quarter was $288.5 million, a margin of 13.8% equating to an adjusted earnings per share of $3.47, an increase of 19.7% year-over-year.
In the first quarter, the company recorded $7 million of transaction- and integration-related costs. U.S. GAAP income from operations amounted to $285.5 million or 13.7% of revenue during quarter 1. U.S. GAAP net income in quarter 1 was $187.4 million or $2.25 per diluted share compared to $1.41 per share for the equivalent prior year period, an increase of 16%.
Net accounts receivable was $1,146 million at 31st of March 2024. This compares with a net accounts receivable balance of $1,088 million at the end of quarter 4 of 2023. DSO was 49 days at March 31, 2023, a decrease of 5 days from quarter 1 2023.
Cash from operating activities in the quarter was $327.1 million. And free cash flow was $300 million in the quarter, an increase of 102% on a year-over-year basis.
While DSO increased sequentially, we continued to target mid-40s in terms of DSO on a full year basis, albeit we can have fluctuations on the timing of payments that can influence total DSO in any particular quarter.
At March 31, 2024, cash totaled $398 million, and net debt totaled $3.5 billion, leaving a net debt position of $3.1 billion. This compared to net debt of $3.4 billion at December 31, 2023, and net debt of $4.2 billion at March 31, 2023. Capital expenditure during the quarter was $27.2 million.
From a capital deployment perspective, we made a payment of $275 million on Term Loan B facility in quarter 1 and ended the quarter with a leverage ratio of 1.8x net debt to adjusted EBITDA. Given the successful repricing of our Term Loan B and our intention to refinance our existing debt, we do not anticipate making discretionary payments in quarter 2 at this time.
After successfully deleveraging over the past few years as well as our return to investment-grade rated company, we feel we are well positioned from a balance sheet perspective to deploy more capital opportunistically for M&A as well as potential share repurchase. Our preferred use of capital remains M&A, and we have a number of opportunities in the pipeline that we are currently engaged on, which would add scale and capability to fast-growing strategic areas of our portfolio.
Our key assumptions behind the full year guidance remain in place: effective tax rate of 16.5%; free cash flow target of circa $1.1 billion; CapEx spend in the range of $150 million to $200 million; and interest expense in the range of $200 million to $230 million, all for the full year 2024.
Finally, I would also like to sincerely thank our ICON employees around the world for their hard work and dedication in delivering our strong performance in quarter 1.
Operator, we are now ready for questions.
Thank you. [Operator Instructions] The first question comes from Charles Rhyee at TD Cowen.
This is Adam on for Charles. We've seen an uptick in emerging biopharma funding. I'm wondering if you can give us a sense of what's usually the general time frame for that to flow into RFPs, bookings and then ultimately revenue. You guys noted seeing stabilizing biotech demand. I'm wondering if you guys are already starting to see in the robust growth in net wins this quarter biotech contribute?
Sure. So overall, we've seen a solid increase in RFPs in the quarter in the sort of low double-digit sort of area. But the biotech funding, as you've noted, it certainly has picked up very nicely. We haven't seen that necessarily come through so much on the RFPs just yet. And I would expect that's probably going to be delayed a quarter or 2. So we would expect somewhere in the second half of the year for the results of that biotech funding, assuming it continues, of course, to come through in terms of awards and then as we get towards the end of the year and even into next year, to hit the revenue line.
So I think what we've seen -- we continue to see solid demand in the biotech. But the real uptick and the opportunity, I think, going forward is probably more weighted towards the end of the year, couple of quarters delay and then as we get into early next year on the revenue side of things.
[Operator Instructions] Your next question comes from Max Smock at William Blair.
Steve, you called out a continuation of positive trends here in the second quarter. Results were solid, and you had a great quarter for bookings. Given things seem to be moving in the right direction here, can you just walk through the rationale for taking down the high end of your guidance range for 2024?
Yes, Max. It's still early in the year. And of course, we have -- I mean we've narrowed the guidance, as you've noted, quite significantly now, so on both the EPS and the revenue side. And because it's still early in the year, we feel it's not appropriate necessarily to increase the midpoint of guidance. It was really just a matter of we're pretty confident about that midpoint as we announced it initially. And so we feel, at this point, the right thing to do is just to narrow that guidance.
We'll certainly be looking at what we'll be doing in the next couple of months. And as we get to the July call, we'll see where we are. But inevitably in our business, there are puts and calls things, some headwinds and some tailwinds. And overall, as we're only 3 months into the year from an announced results point of view, we felt it was the right thing to do was to narrow because we're confident about the midpoint, but not to move that midpoint at this point.
Understood. Maybe just to clarify quickly on RFPs. You mentioned up low double digits in total. Do you have that breakdown or how that breaks down between biotech and large pharma? And then how does each of those buckets compare to where they were at, at the end of last year?
And then it sounds like, based on your prior answer a few minutes ago, you would actually expect RFPs to get better from here given the lag between funding and that ultimately, showing up in RFP flow. I just wanted to make sure I understood that commentary correctly.
Yes. I mean to answer the second part of your question first, yes, we do think there is a bit of a lag period there. So the better funding environment that we've all seen in the first quarter or so, we talked about that, we think that's going to flow through probably in the second half of the year. So to be absolutely crystal clear on that, there's a lag of at least a couple of quarters there.
In terms of the -- we don't really split out too much the RFP data. But qualitatively, certainly, large pharma continues to be strong, and we've seen that. The biotech's also been solid, perhaps not quite as strong, but it does seem to be on the uplift.
So if I look at, say, low double digits, large pharma is well above that. Biotech is probably more in the mid-singles if I had to put a number on it. And it's -- as I say, it's solid, strong. We're seeing some -- plenty of good opportunities in the biotech space.
We've been successful. Our win rate in that biotech space has gone up over the last quarter or so. So we feel good about the solutions and the propositions we're putting in front of customers and their receptivity to those.
But as I say, overall, the very solid, very constructive environment on the RFP front and we feel good about where the market is heading overall.
[Operator Instructions] Next question is from Casey Woodring at JPMorgan.
So your book-to-bill target for the year is 1.25 on average, the midpoint of that 1.2, 1.3 range. I know bookings fluctuate on a quarterly basis. But given the strong start to the year and the improving funding backdrop, do you think you can sustain quarterly bookings above that 1.25 number?
And then on that point, from a quarterly phasing perspective, if we see similar bookings in 2Q here that we saw in 1Q, above 1.25, is it fair to assume that there would be upside to the back half of the year?
Casey, we've had a good quarter on the bookings. It was very solid. And then we're really pleased with the way that the market is sort of moving. I'm not going to get ahead of ourselves in terms of going above the 1.25. I think that's a solid target that we have.
We'll see how the biotech funding and the environment sort of contributes to RFP opportunities in the back end as we've talked about. It's not out of the question that we could be above that. But I think at this stage, we'll stick with our 1.2 to 1.3 and then -- and being somewhere in the middle of that on an average basis across the quarters. That's the way we think about it.
If we got above that, I'm not sure. Revenue takes a bit of a while to flow through. A lot of the work we're still winning is oncology. Our burn rate is around 9.2. I don't see that going up anytime soon. So there may be some modest impact if we have a particularly strong second quarter on the business wins. But I'm not certainly going to promise that at this stage.
I think we feel like the opportunities are flowing through nicely. As I say, it's very early in the second quarter, but the opportunities are flowing through nicely. We have a good opportunity list, and I feel confident about our performance in Q2, but it's very early days on that front. And we feel as that plays out, we'll come to July, and we'll adjust our forecast and where we're going.
So overall, positive, strong, constructive, but we're not ready to declare victory and to push too fast ahead despite what you'd like us to do.
Got it. That's helpful. And then maybe just a quick follow-up. Can you talk about your win rate in the quarter? And maybe elaborate on how much of the bookings growth you saw was the result of share gains versus trial growth coming back?
Our win rate was consistent with where it's been. Certainly, the large pharma win rate has been very positive, being [indiscernible], and that's been consistent. Biotech certainly came back in the quarter very well. So we feel we're making a lot of progress in the biotech space with the opportunities that we've pitched. And we've got some good opportunities in the hopper for the second quarter.
So we feel that we're on our game nicely with the biotech. That story, the rebranding that we put in place towards the end of last year is really starting to gain some traction with customers.
We have a number of very significant opportunities. Some of these biotech opportunities are really large trials, really large programs, and we've been successful on a number of them. So we feel we're in a good place.
And the hit rate, strike rate, call it what you like, it's not as high, of course, in biotech as it is in large pharma where we tend to have the strategic partnerships, but we compete very strongly and increasingly strongly in that space. And we feel the rebranding approach is really starting to pay dividends along with the good people and the good team we have on the biotech space.
[Operator Instructions] Your next question comes from Ann Hynes at Mizuho Securities.
You both mentioned M&A as a priority in your prepared remarks. Can you just remind us what type of services or needs that you think ICON is missing?
And then secondly, your DSOs, down year-over-year, but they did tick up sequentially. If you could provide some more data on that, that would be great.
Sure, I'll take the M&A, and then I'll let Brendan handle the DSO question. We've been fairly clear in the past that M&A is a priority, and it is around adding capabilities to services and functions that we currently have in the organization.
So we're looking to uptick. It could be in the laboratory space. It could be in the site space. It could be in the other parts of the business. Devices, there's a number of areas that we feel we could move that sort of functional service area within our organization up to being either 1 or 2 in the market.
Overall, of course, we feel we're very -- we're equal #1 or even a little ahead in some areas. Certainly on the FSP space, we're, by far, the #1 player. On the full service space, we're very close to being the #1 player, if not the #1 player.
But there are areas within that business, as I said, laboratories, sites, devices up that we feel that are within our bailiwick and within our wheelhouse, but it could be upticked from a revenue and operational point of view to help us to really provide a little more scale in some of those areas. So those are the sorts of areas we're focused on.
We have a number of those opportunities in the hopper. And as you've seen, our finances and our balance sheet now lend themselves much more effectively to making those transactions.
We've done a couple relatively recently with HumanFirst and BioTel. They were relatively small. We're looking to continue that, but to uptick in terms of the revenue and EBITDA contribution that these new ones would make to the overall P&L.
Brendan, do you want to take DSO?
Yes. Thanks, Ann. I was still heartened, I suppose, by the level of cash from operations and free cash flow, which is very strong in the quarter. So I'm very happy that we're making a lot of progress from where we were in the past, albeit yes, we did see a 2-day attenuation in the DSO from Q4 to Q1.
I don't think there's anything particular there. We said we would continue to focus on being in the mid-40s for the full year. So that's obviously our goal. We had -- unfortunately, Easter just happened to have hit, that Easter holiday period happened to hit at the exact end of the quarter, 31st of March. Easter was early this year. So that didn't help.
But it's a couple of days. So that's something I think we can recoup as we go through the course of the year and still overall, happy with the cash flows, which were very strong in the quarter.
[Operator Instructions] The next question is from Dan Leonard at UBS.
Steven, I was hoping maybe you could elaborate a bit further on your improved win rate in biotech.
Dan, I could give you a million reasons why we've improved that. It's a multifactorial thing. We've had some great opportunities and the team, I think we have a new leadership in, in the biotech space. And they're doing a good job in bringing our organization really through in that in terms of our customers and biotech traction and understanding of what our offering is.
We have, as I said, 8,000 people in that. That story is resonating well with the biotech customers. They recognize -- I mean as you all know, it's typical for biotech customers to at least have some sort of consideration for smaller CROs because they believe they can be more fast and agile.
At the end of the day, we have 8,000 people dedicated to running the biotech and they can -- they have a -- with their new leadership have an autonomy and an ability to move that business and to make decisions in that business in a quick and an agile manner.
And I think so we've addressed that, albeit within the framework of a large and very financially stable and viable company. And so that's the benefit that we're trying to get both to our biotech customers, and that's resonating very well.
I've had a couple of discussions with them myself, and they understand what we bring now to the biotech space, that dedicated resource and that financial stability and ability to bring innovation and creativity and agility to their projects.
So as we have our senior managers sort of double down and focus in on these key opportunities in terms of engaging with customers, talking to them, understanding their needs, putting to them the various innovations and solutions that we can as an organization present, it's starting to really resonate nicely.
And it's, as I say, turned into a -- gave us a nice uptick on the win rate. There's no one reason that this sort of thing happens. But it is, I think, a trend, and I do believe it will continue.
And a related follow-up, I just want to make sure I understand better the biotech rebrand. A couple of years ago at your Analyst Day, you talked about your dedicated business units for biotech, 8,000 employees and such. So what exactly changed at the end of the year?
I don't know that much changed operationally from our point of view. What I think we've done now is communicate that better to customers and to engage our -- like I said, we have new leadership in there, and they've done a really nice job in making that connection with customers personally and on a face-to-face basis.
So there's an element of ICON being known, I think, as a larger pharma CRO in the past, and that's quite valid and continues as you well know. But we also do a significant amount of work, about 30%, 35% of our work is in the biotech space. And that's -- so it's a very important segment for us.
As you all know, there's a lot of innovation in drug development comes out of the biotech, there's certain drug research comes out of the biotech. A lot of the new drugs, I think it was something like 40% of new drugs we've got to market last year through FDA were originated in the biotech space.
So they make a huge contribution to the drug development landscape. And being a key provider and a key partner of that segment is really important. So I think they better understand that.
Now we've been able to communicate that better. Our marketing message is getting out there. But probably more important than marketing messages is our key senior leaders in that team have been out talking with customers and having them understand what it means to have 8,000 people available to them and for them to be able to put the innovation with that level of financial viability. It's a communication thing, and I think we're really starting to get on top of that now.
Yes. And I think it's an important point, Dan, that you made that structurally, actually, it isn't different than what we presented at the Analyst Day in terms of having a dedicated segment to biotech with those dedicated resources. It's really around that customer perception and making sure people understand that, which is what we're redoubling efforts on and not making the structural changes there.
[Operator Instructions] The next question is from Mike Ryskin at Bank of America.
Great. And Brendan, I want to say congrats and wishing you the best going forward. I know you'll still be here for the next couple of calls, but still, it's good working with you.
Thanks, Michael.
Yes. I want to focus a little bit on the big pharma segment a little bit or customer group a little bit. I think in your prepared remarks, you called out a continuation of robust demand. You talked about R&D for the group for 2024 seems to be pretty stable, in line with prior.
I just want to get a sense of how much of that is already locked in when we think where we are in the year in April. Is there a risk of that changing as you go forward? I know budgets can be set, but there's also news this morning of Bristol announcing job cuts, 2,200 layoffs. So there's still some things that are fluid in that end market. So just curious how those conversations have evolved year-to-date and sort of upside/downside risk for the rest of the year?
Yes, right. Mike, I'll take it, and Brendan might want to jump in. As you said, we've seen pretty strong demand in the large pharma space. And it's not just this quarter. It's been really over the last 12, 18 months. Nothing has changed in that for now. Have some of the larger companies changed their models or adjusted their budgets? And the absolute answer is yes to that. We've seen a little -- we've certainly seen some of that in the first quarter where revenues have gone down and up in different areas.
We're very encouraged by -- we're encouraged by the overall growth of the organization because certainly, outside our top 10, on a year-on-year basis, we've seen significant revenue uptick in growth. And that's not necessarily all sort of smaller customers. Our own, the biotech customers, some of them are quite large for us. So it doesn't exactly equate when you go outside top 10 or outside the top 25 to be smaller and biotech customers.
But that segment has certainly increased. And there's 1 or 2 in the upper echelons of our revenue group that have come down a bit because of the things that you just mentioned, budget cuts and some challenges they have with patent extensions, et cetera, et cetera.
So it's quarter-to-quarter, it can go one way or the other. Sometimes we finish a significant project at the end of last year, and then the revenue falls off a little bit for the first quarter. That sort of thing happens.
Overall, we see a very stable and very strong demand in the large pharma. And as I think I talked about sort of 3% to 4%, but we believe we're taking market share in that space. And a good part of our growth is due to our strong operational delivery in that space.
And so it's a strong and a continuing market for us. And we believe, while it will be puts and calls and ups and downs and some customers will have greater budget challenges, and many of them have some significant patent life challenges or loss of exclusivity issues coming up over the next -- that's a relatively common theme. It's a constant thing that they deal with on a regular basis. It means they have to do more R&D to bring new compounds through. So overall, we feel good about that space.
Yes. No, I think just reflecting on it, one of the things that we talked about at the start of our call is we have actually seen pretty decent traction from the large pharma group and probably more on the full service side of the house as well as we've come into '24, and that's been heartening. But you also see in our statistics that we continue to diversify as a customer base. The customer base continues to diversify. And so that large concentration is always going to be there as part of our piece. It's always part of how CROs are built, but it continues to diversify. And to Steve's point, some go up, some go down.
What we're focused on as an organization is that in holistic terms, we're moving in the right direction. I feel we have a market, both in pharma and biotech, that really does support that. So yes, that's what we want to see continuing is that diversification increasing over time.
Okay. That's helpful, and appreciate it. If I could squeeze in a quick follow-up, going back to the CFO transition. It sounds like you never know, but you might not be able to sort of announce a successor until later in the year, but you've got the Analyst Day coming up in May. So anything you can say in terms of what we should look forward to from the event?
Well, you can look forward to our plans for the next few years, Mike, and where we are and what our innovation is and how we're going to move the organization forward, in terms of at the Investor Day anyway. But we certainly will provide an update on our CFO transition at the Investor Day. We'll have some further information on it, I think, at that time, although it's still relatively early days.
Having said that, we're moving fairly quickly. We've engaged a global recruitment firm. We already have interest from some very good candidates. No one, of course, who's going to approach Brendan's abilities.
Thank you, Steve. Thank you. I appreciate that.
But unless we can clone him in the next 6 months, we're -- it's -- we do have to replace him. And of course, as I mentioned, we wish him all the best.
But we have already some interest with some very good candidates, candidates who run public companies. And so we feel good about the position we're in. And as I say, we'll -- the Investor Day is not far away. It's only, what is it, a month away or so? So we won't have any sort of definitive announcement for you at that point, but I'll certainly give you an update on where we are.
And we have, as I say, some fairly tight timelines in terms of long lists and shortlists and making appointments. And we do anticipate that we'll have somebody on board within the course of this year. That's the expectation.
And I do hope they'd be able to overlap with Brendan and learn a little from him as he heads out the door. But -- so that's where we are. We feel that we're in a reasonable place, given fairly early on in the search.
[Operator Instructions] Next question comes from Eric Coldwell at Baird.
I wanted to go back to the biotech rebranding and the improved win rate and your double-down focus there. I'm curious if you could share with us the number of small biotechs that you work with, whether you want to call that emerging biopharma, pre-revenue clients, however you wish to define them and then how that number has changed?
And then also, what that is as a percent of revenue and/or backlog? I think a couple of years ago, it was laid out as somewhere around, if I remember, about 16% of revenue the way you used to define it. So if you could give us an update on that.
And then with this focus, is it on the really small, really early-stage biotech clients? Or is it more mid and large biotech where you're just looking to further penetrate a more mature biotech segment? I'm curious on how broad the focus is, how deep you're going in terms of the nascency of some of these clients, their size, et cetera?
Okay. I mean there's a lot in that question, Eric. So I'll try to unpick it a little bit. The biotech rebrand, we think of biotech overall, as I indicated, sort of low 30% of our revenues, in that sort of number. But the number I think we talked about a few years ago was on our capital market dependent type biotechs, the ones that are really required to go out and raise money, and that's around 15%. So we work with a variety of biotechs in the vicinity of -- I'm not even sure exactly how many, but it's around the 500 sort of number. It's a lot.
And we do anything from small consulting projects with them to very, very large-scale Phase III in the hundreds of millions of dollars with some of them. They're an entity in themselves. They work in a different way to large pharma and hence, having a different focus on them or having a group of people who focus on them differently in terms of their ability to engage, in terms of our opportunity to input on their trial design, on their development programs. It's a very different market, quite frankly. And one that our people, I think, are increasingly working in extremely well.
And I think, as I said, with the rebrand, the customers are understanding that and appreciating that. And also while they recognize our expertise and resources, they also recognize our financial viability and stability, which I think is something that's very important when these customers want to take a drug right through to market rather than just to partner up with a large pharma.
So we offer them a different strategic option, these companies going forward. And that's, I think, extremely valuable to them and we've been able to sort of communicate that to them, the market that's in. I hope that gives you a little bit of a flavor for what that group of customers is.
If I could just throw one more in, then I'll jump off. Head count's been flat over the last year, and you are growing in the mid-single digits. I'm just curious what your thoughts are on labor productivity, retention and then also hiring demands as 2024 progresses and maybe moving into 2025 if current trends continue.
Sure. Well, you're right, yes. We haven't increased head count dramatically. It's been very flat over the last 12 months or so, and yet, we have been able to increase revenue.
A good part of the reason is our strategy around our efficiency. We've been able to bring in and use the bots, machine learning. AI has been a significant contributing factor. Our IT group has done an excellent job in bringing that in.
I think we talked about 2 million hours of time last year, and we've got a target of something like 3.5 million for this year. So that's a really important part of it.
The optimization of the location of our workforce is also an important part of it. We have a terrific team here at ICON who work really hard. And they were very efficient and who understands the need to continue to be more efficient. And that's a really important part of what we do.
And I think the other part of it is the systems and technology that we're continually able to deploy around the organization has given our smart people the opportunity to be more efficient and to operate and to get more done within the same amount of time.
So all of those things, I think, have helped us to keep our head count pretty flat. I think it's gone up 100 or so over the year. And it's really allowed us to be continually more productive.
We have to do that. We set ourselves a goal of being -- of increasing at least several percent in productivity each year to allow us to be -- to continue to be the efficient organization we can be.
The other part that I think that's helped is on the retention. Again, the team, the managers in the organization have done a terrific job in continuing to engage people in a way that's brought our retention up to -- it's in the high 80s now.
We're -- I don't know there's a time we've had better retention in the organization. It's quite extraordinary really, the way it's improved on a quarter-by-quarter basis really over the last couple of years post COVID.
So we're well -- we're in much better retention than we had pre-COVID and probably better retention than we've had at any time in our history, I would have thought. And again, I guess it's a tribute to the managers and the leaders of the organization, who've created an environment around here that people want to work in, and people feel engaged in. So I'd give them the credit on that front. But it's all helped us to become more efficient and hence, to avoid having to increase our head count in line with our revenue.
[Operator Instructions] The next question is from Patrick Donnelly at Citi.
Maybe on the back of that last one on head count piece, it's probably one for Brendan. Just on the margin side, obviously, SG&A has been a nice lever. Can you talk about, is that still heading towards 8 here in the relative near term?
And obviously, you guys are talking about 50 bps overall. But can you just talk about the margin dynamics, FSP, that shift has seemed to quiet down a little bit. I guess it's just because service has been strong for you guys, better margins on that front. But again, can you just talk about, I guess, the SG&A levers? Is it still right to think about that 8% near term? And then again, that FSP shift, where it feels like you guys have that well under control, but if you want to talk to that as well.
Yes, Patrick. Well, I think from the -- just maybe starting off with the gross margin piece. And I think we kind of clearly indicated coming into this year that we still are targeting to be in around where we were in the current quarter, in around that 30% mark for the full year.
And obviously, there's lots of moving parts underneath that. Steve made reference to our efficiency as an organization. You made reference to the fact that we're talking a little bit more last year about FSP, albeit full service has been much more impactful so far this year. And that obviously has a little bit of shift in the margin profile.
But it's taken account of in terms of our forecast gross margin there in around the 30% mark. So yes, those pieces are kind of baked in, if you like, in terms of margin shift. And we feel that we can sustain that 30% gross margin in that profile.
As I kind of mentioned on numerous calls in the past, our leverage that we expect, and we talked about 50 bps of expansion in 2024, is predominantly on SG&A. I think you can see we're making good progress on that. I had referenced that was where we expected to see the margin leverage this year.
And yes, we always -- we're assiduous cost managers as you well know. And we look to bring efficiency using the same pieces that Steve referenced in terms of our gross margin efficiencies or our technology, the use of systems and the use of machine learning, AI and robotics to ensure that we're as efficient as an organization and people spend their time working on value-added work as opposed to [indiscernible] or things that can't be automated.
So that's where we continue to look at. And I think that will probably predominantly be the large way we will be leveraging our margin and cost base, not just this year but into the future. So yes, we're making good progress, and would like to see that progress continue.
[Operator Instructions] Your next question comes from Justin Bowers at Deutsche Bank.
So we'll stick with large pharma here. Can you talk a little bit about the velocity of decision-making amongst the large pharma clients with respect to either new programs or to outsourcing approaches relative to last year and some of the concerns there?
And then, just with respect to outsourcing penetration, I think historically, we thought we've seen the industry grow, let's say, 1 or 2 points per year there. Is that still intact for 2024 and the next couple of years?
Sure. Justin, I mean, I'll answer your second part first. Penetration, yes, 1% to 2% a year, 100, 200 bps, I think, is the way to think about it. And that's what we think about it. We think there's still plenty of upside over the next decade or 2. Maybe there's no doubt a ceiling, maybe at 70%, 75%, but we're probably only at sort of 50%, 55% now. So I think there's still plenty of room for upside on the penetration side.
And of course, it varies depending on which company you're at. A large pharma, it's going to be lower than it is in the biotech where we'll typically do pretty much everything for them.
In terms of velocity decision, I don't think we see any particular change in the velocity decision. Things can take some time, and sometimes they happen very quickly. A rescue project can be made, a decision to be made in a week. If it's a large development program with a new asset in a significant indication, that could take 3 to 6 months really depending on the individual customer, on their circumstances, on whether they're raising money or not.
I don't see any much difference between large pharma and between biotech. Sometimes the biotechs take a fair bit of time on these things. Possibly they're a little faster in terms of making decisions. But I'm not sure I notice too much of a difference on that one, and I certainly haven't noted any elongation of the decision velocity over the last quarter or 2. I think that that's continued at about the same rate as normal.
Understood. Yes, I was just thinking in terms of the higher impact of the IRA and the rate environment last year and how that changed so quickly. But I'll take the rest off-line. Appreciate the question.
Okay. Thanks, Justin.
Thanks, Justin.
[Operator Instructions] The next question is from David Windley at Jefferies.
My first question, Steve, you've both mentioned a couple of times about large pharma and FSO being strong to start off the year. You also mentioned the client renewal on that front. I wondered if those are one and the same or if the large pharma and FSO uplift is broader than just that one client renewal. Maybe you can give some color around that.
Well, the particular renewal that we've had is particularly in full service. So that's certainly the case. But I think it goes -- the full service sort of comeback, if that's the way to put it, goes a bit beyond that one customer.
Typically, in our industry, we see a little bit swings and roundabouts, and the pendulum goes one way and comes back the other. I think a year or so ago, we were seeing a push more towards functional. I think that's now starting to come back, and we're seeing maybe a little bit more of a -- I wouldn't say it's a tidal wave or a tsunami, but there is probably an attenuation of that push towards FSP. And perhaps it's coming back a little bit on the full service. What we probably are seeing more than anything is an increase in these -- what we call these blended models where particularly large pharma, of course, want to do or want to have the facility to do both, both the more functional approach, and the more full service approach if that makes sense.
So on a project, they might do their data management, medical writing or stats, or whatever, through a functional service agreement. But the clinical and the project management for the particular trial or the particular program would be more on a full service basis.
So those -- and we feel like we're very well positioned to be able to accommodate those sorts of solutions. We are the biggest on the FSP provider, and we obviously have a very significant footprint in full service as well.
So that our ability to put those models together is, I think, unprecedented in the industry. And so when we add that and we add our technology and our site networks to it, we can put together a really compelling offering for these large pharma customers.
Great. And then switching subjects, following up on some comments around data strategy, and you talked about tokenization. I guess I'm thinking about your internal Symphony asset, but probably also reliance on external data assets. And maybe you could just comment on your current thoughts on data strategy and then also kind of how critical is data versus maybe the analytics, what you do with the data, how you bring the data to the sites, things like that? And maybe put -- talk about what is your data strategy currently. And then how important is the data strategy in the context of actually delivering at the site level?
Sure. Let me start with the tokenization. The Symphony business that we have within the organization is a critical part of our business from the tokenization level. And I'm really excited about this tokenization because I think it gives us the ability to follow up patients in a very cost-effective manner for an extended period of time, well beyond the clinical trial.
So when you think about as we get into more of these obesity type trials where we have to treat thousands of patients over an extended period of time and the ability to collect data very cost effectively with the [indiscernible] offers us a huge opportunity. And it offers our customers a huge opportunity.
If you think back in the day when those of you who are old enough to remember the Vioxx challenges around cardiovascular events in the painkiller, if they'd been able to tokenize a lot of that -- a lot of those patients, they'd have been able to put in context those cardiovascular events and potentially have a different outcome.
But -- and that's the way I'm thinking about the ability for us to tokenize patients in this obesity space, in the diabetes space, where we're doing that again to some of these really large-scale clinical trials. We've been away a bit from these large-scale clinical trials in the industry.
We got into rare diseases and very specific, small, 100-patient studies were big studies. Now I think the opportunity going forward is to get into some of these really large ones. And I think our ability to tokenize these patients and to follow them up and to provide that data to customers on a long-term basis is really exciting.
In terms of our data strategy, we continue to not necessarily want to own all the data. We obtain data from a number of different sources. Symphony is a really important part of that. But we have our lab data. We have a number of external sources of data around -- from Citeline and organizations, [ so that includes scores ]. We have our clinical -- our trial management system. And what we're bringing together from a number of different sources is an ability through our technology then to identify patients for trials and to find those patients and get those patients into clinical trials.
One of our initiatives in the innovation space is through an organization called Veradigm, where we can actually utilize their electronic medical records and go out and find patients and bring patients in and have patients referred to our clinical trials.
So that's early days on that one. We're trying that out on a number of trials, particularly in some of these more rare disease trials. But the ability for us to access data that we don't necessarily own but we have access to and we can bring together and collate through our system, through our OneSearch system, which you've seen no doubt at the Investor Day. And you'll see some more of this technology at our Investor Day in New York in -- next month. We'll show you what we've been doing and what we're able to do in terms of bringing these disparate sorts of data together, presenting them in a way that allows us to take actions and take -- and make insights into where we find patients for clinical trials.
For us, it's all about delivering patients into clinical trials and doing that in a really cost-effective and a timely basis. And our whole data strategy is aligned towards that.
I know it's a bit of a high-level answer. We'll be able to give you a bit more information on this, David, at the Investor Day in New York in a month's time.
Brendan, congrats on your career at ICON. Appreciate working with you.
Thanks, Dave. Appreciate that.
[Operator Instructions] The next question is from Elizabeth Anderson at Evercore ISI.
Maybe pivoting off of what Dave just asked, how do we think about the current market for real-world evidence? I mean I think that there's like some -- maybe 2 phenomenon going on, maybe some sort of cyclical element on it and also maybe some sort of structural changes as we've seen, obviously, the rise in AI and that kind of thing impacting the market.
Could you sort of give us what you sort of view as what's going on there with your business and sort of where you see the competitive landscape shaking out over the next year or 2?
Elizabeth, yes, we continue to see real world as a really important part of the landscape and what we need to do. Symphony's a part of that, and we have other sources of real-world evidence as well. I mentioned the Veradigm opportunity.
So it's -- we see continued interest in there. We see opportunity for growth in there, particularly as we get, as I say, these larger-scale trials. I think real world is going to be continuing and again going to grow significantly. So there's a lot there.
I don't think we see any sort of major shift right now. But I think as the obesity drugs really start to be developed or the new round of them start to be developed, we'll see an increasing role for real-world evidence and the ability to access it and to take in such from them.
So I could rave on for hours about real world. I won't do that. But again, you'll hear more about that at our Investor Day in a couple of weeks.
Great. And congrats, Brendan. It's been a pleasure.
Thanks, Elizabeth. Cheers.
[Operator Instructions] Next question is from Jack Meehan of Nephron Research.
Just one question. In the past, in the deck, you've also given us the contribution from the #1 customer as well. Was just curious how they're doing. What was their contribution in the quarter?
Yes, Jack. It's Brendan here. It was similar to last quarter, in that kind of 8% to 9% range. I think we wanted to move away from being overly focused on 1 customer. I think I made the point earlier in the call that we are seeing a more diversified company as we go forward. And it aligns again with our quarterly filings with the SEC that we would carve out 1 to 5. So that's the way we'll be showing that as we go forward.
[Operator Instructions] Next question is from Luke Sergott at Barclays.
Great. Can you talk about like the pass-throughs, the trends that you're seeing here in the current quarter and the elevated booking -- your bookings that you had for this quarter? Anything to step up there? We're just trying to find anything, I guess, to pick at or find issue with.
No luck there, Luke. Brendan here. Obviously, we had a very solid quarter in terms of bookings, but that wasn't based on elevated pass-throughs or anything like that. We had a very solid direct fee book-to-bill as well, up to similar. So no, nothing there to particularly get you guys worried about. It was a very solid quarter across the organization and very much in terms of direct fee also.
[Operator Instructions] Next comes from Jack Wallace at Guggenheim Partners.
This is Mitch on for Jack. Most of mine have been asked and answered, but maybe just one on therapeutic mix. Is there anything to note in regards to changes in mix in the first quarter or in the pipeline?
Mitch, no, not really. We continue with a good 40% of our work in the oncology space. And then the rest of them are sort of between 10 and 15, the [ ME victors ], vaccines, CNS, cardiovascular. It might mix it -- it go up and down a little bit on a trial if a big trial comes in, but really, still the most -- it's not most, it's not more than 50%, but about 40% of work's oncology and rare disease. And so that tends to dominate our portfolio.
[Operator Instructions] This comes from Jailendra Singh at Truist Securities.
Congrats, Brendan, as well. Just wanted to ask about BIOSECURE Act and what you guys are hearing from your global pharma customers. And even this act process, if you see this act having any implications for the CRO industry and global CRO players like ICON?
Yes. Jailendra, I won't profess to be an expert in the implications of the BIOSECURE Act, but there are potential issues. I think it's probably more for our -- it's more a question for our pharma customers in terms of their access to CDMOs and those sorts of organizations and the potential, particularly, I think, in China for some challenges in terms of supply.
And I guess if it's supply of a drug product, there may potentially be some implications for supply or clinical trial supplies. But really, our pharma brethren are pretty smart people, and they plan very well for these sorts of things. So I'd be very surprised if we saw any really material impact.
I know there are some concerns about it. They've expressed those to the government. But I think the supply chain challenge, I think, has been ongoing now for several years. And I think they're thinking and I think they've already thought very hard about where they get particularly the manufacturing of their drug, their APIs done. And so I don't see much implication for us certainly in the short term.
Okay. So I think we're at end of the questions. So thank you, operator. We will -- I want to thank you all for joining our call today and for your continued interest in ICON.
We look forward to seeing many of you at our upcoming Investor Day in New York City and providing you with an opportunity to spotlight the important work we do here at ICON. Thank you, all, and have a good day.
This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.