Dr. Steve Cutler: Yeah. Pat, I mean, I think, we have to be a little careful here. RFPs are a marker for new business wins, but they’re not a perfect marker. We all know that. And so, but having said that, what we’ve seen, as I said, over the first seven weeks or eight weeks of the year is a nice uptick on a trailing — particularly on a trailing 12-month and year-on-year comparison basis. As I said, mid-teens across the portfolio, but the majority of it is in the large pharma space. And that, to us, is good because, as I mentioned, we have a better win rate in that. So more dollars and more opportunities and a better win rate means we feel good about where the large pharma space is going. Having said that, we’re also seeing a more modest, but certainly an uptick in our biotech opportunities and that’s exciting for us as well, as we’re really making a push on our biotech profile in the industry.
We have 7,000 people focused on biotech and they actually do focus on biotech. It’s not a smoke and mirrors thing with us. We have these people totally dedicated to this space. And so we’re doing a bit more talking about that with our customers, and I think, that’s starting to get some traction. And so, overall, we feel we’ve almost got past the nadir. Perhaps the nadir was the fourth quarter and we’re starting to move. We’ve upped it a notch, I think, and it certainly feels to us like we’re moving. The train’s moved away from the station and we’re starting to gain a bit of pace in that area. So, overall, as I say, I’m pretty constructive about it.
Patrick Donnelly: Understood. Thank you so much.
Operator: Thank you. We’ll now take our next question. This is from the line of Jack Meehan from Nephron Research. Please go ahead.
Jack Meehan: Thank you. Good morning and good afternoon. I wanted to ask about some of the customer disclosures you provide. So just recently, you’ve had pretty good growth from your largest customer. I was wondering if there were any themes you would call out or therapeutic areas. Just how should we think about the durability of growth here?
Dr. Steve Cutler: Yeah. I think, as you can see from the numbers we reported, the largest customer did grow. That was specifically related to a couple of large projects that moved forward pretty quickly in the quarter and so I don’t think we’re necessarily seeing that as a sustained trend. Alternatively, the two to five dropped a little bit. Again, as it relates to one particular customer in there where the mix shift was changing a bit. So, these things change a little bit on a quarter-to-quarter basis, Jack. I wouldn’t get too focused in on that as those are sort of long-term trends. We feel we’re in a good place with our top 10, top 20 customers. They’re all — apart from one or two, they’re growing and the ones that aren’t growing it’s more a mix shift change rather than anything else and even so we’re seeing more of the business that they’re wanting to go into, albeit it’s at a different revenue flow.
So, overall, we feel good. I’ve said it a number of times, we’ve made progress on the strategic front with a couple of customers and even others in the large pharma space where we haven’t necessarily become a strategic partner with them and we’re talking to them about some significant opportunities. Some of them are having some challenges, as we all know, and that has led to probably more strategic discussions around what we can do and how we can help them to get through some of the short- or medium-term pain that they have to endure. So, I know we often think about when customers are having a hard time sort of financially that they necessarily cut costs or cut spending. They can spend in different ways in my experience and sometimes that can be a significant benefit for us in terms of what they do versus when they’re running and growing and their revenues are going up as well.
So hard times produce opportunity for us and that’s certainly proving the case in one or two areas on the significant large pharma space.
Jack Meehan: Great. And as one follow-up, what’s the latest tone you’re hearing around the IRA? I think there was a lot of, maybe concern or uncertainty around that last year. Do you feel like customers have a greater handle around how that’s going to impact their R&D spend plan?
Dr. Steve Cutler: I haven’t heard a lot that’s changed since last year. I do think there’s some genuine concern from customers around how their organizations are going to handle that. We have a meeting in a couple of weeks with some of our largest customers and that’s a topic on the agenda to talk through with. We have some external people coming in, so I’ll get a better handle for it then. But I don’t think things have changed dramatically. I know that it’s moved forward, they’re negotiating the pricing. We haven’t seen a — we haven’t seen — I don’t think that’s been necessarily a reason for any budget challenges that they’ve had at this point. These are changes that are going to take some years to work in. And so, the short answer to your question, Jack, is not much changed, really.
They remain, I think, concerned and somewhat challenged by it, but they’re looking at different ways of developing drugs. We’ve talked about doing it in concurrent — doing these developments concurrently rather than in series and that gives us an opportunity to expand the opportunity, to get them to market faster in multiple indications versus just waiting and doing it, as I say, sequentially. So again, sometimes these things and often these things, give us opportunity because we represent a possibility of doing things in a different way.
Jack Meehan: That was good. Thanks, Steve.
Operator: Thank you. We’ll now take our next question and this is from the line of Elizabeth Anderson from Evercore ISI. Please go ahead.
Elizabeth Anderson: Hi guys. Good morning and thanks for the question. I just wanted to follow-up on some of the demand questions that have been asked before. I think, obviously, one thing people continue to be worried about is, like, the overall, sort of pharma spending environment, whether it’s IRA specifically related or something else. It’s obviously nice that you have that new strategic partnership. That’s nice to see. Can you talk about sort of the level of visibility on your strategic partnerships with large pharma and how kind of maybe they help you get a sense of sort of where their pipelines are going and help give people a little bit more confidence in the trajectory there? Thank you.
Dr. Steve Cutler: Yeah. I mean, I think, with our strategic partners, Elizabeth, we do get some visibility on their pipelines and that’s one of the advantages of that partnership. We know what’s coming down the pike. We know what therapeutic area we need to ramp up in and through our understandings and steering — senior steering committee meetings, we’re able to work out where we need to be as a partnership. I’m not hearing, again, at this stage, any further concerns on funding or on their R&D spend, if anything, based on the RFP opportunities we’ve got over the last couple of months and even last quarter, last year and second quarter and third quarter was strong as well, we’re seeing more opportunity. So, I guess, I keep saying it, but as their budgets become perhaps a little bit more constrained or they watch where they’re spending their dollars, they do appear to be coming more open to outsourcing and outsourcing even more than they’re doing at the moment.
So, as I say, I can’t add much in terms of where the budgets are and whether it’s an increase or decrease. We see — we read the same data you do in terms of modest increases in R&D spending over the medium- to long-term, but it’s how that money’s allocated is really what’s important to us. And if anything, I think we’re seeing more opportunity in terms of the dollars that are outsourced and the opportunity to penetrate further that market.
Elizabeth Anderson: Got it. That’s super helpful. Thank you very much.
Dr. Steve Cutler: Good.
Operator: Thank you. We’ll now move to the next question. Please stand by. This is from the line of David Windley from Jefferies. Please go ahead.
David Windley: Hi. Hi. Good morning. Good afternoon. Thanks for taking my questions. I wanted to explore margin a little bit. First, just in talking about the FSP shift, you’ve highlighted that it is very gradual. I get that. I — my sense is that, at least what I’m aware of is that, at the gross margin level, the margin difference between full service and FSP would be quite a bit wider. And then maybe at the EBITDA margin level, you get to that 200 basis points to 300 basis points of margin difference because the SG&A load on FSP is lower. You could correct me if I’m wrong there. So, I guess, I wanted to understand maybe if you could quantify from a percentage of revenue basis, how gradual is this shift to FSP such that you still think you can keep the gross margin at around 30%? I’ll leave it there and come back with a follow-up.
Brendan Brennan: I might take a crack at that one just to start off with. As you said, it is a gradual process. And as we think through the impact of this, and let’s be honest as well, and before Christ, we said at the start of this year, actually, if anything, the scales probably tipped more towards the full service piece in terms of the opportunity that’s out there. So I don’t think — I’d start off by saying, we’ve seen trends in moving from full service to FSP in the past. I don’t know if this is structurally any different from the trends we’ve seen in the past where some folks move in one direction, some folks move in the other direction. So that’s probably the first important point to make. I think your commentary is not incorrect in terms of by the time you get to EBITDA, it’s minimized and we’ve talked about the fact that in excess of 20% of our business is in that kind of FSP share of our revenue portfolio.
I mean, we don’t see it moving materially enough, I suppose, to really shift the gross margin piece. Certainly in terms of what we can do, as we’ve talked about, the efficiencies we drive through good utilization of our workforce through the use of automation in terms of balancing out any kind of makeshift that we have there. So I think we’re a good organization. We’ve been doing FSP for a long time. I think we’re efficient at how we deliver on our FSP contracts to the point that we can manage this and manage that growth. But I do think it’s important to note that I don’t think, I mean, I’m not even sure we’ll see a material shift in terms of the percentage year-over-year from 2023 to 2024 in terms of the FSP, non-FSP business. So it is gradual and it will take time.
And as I said, we’ve got other people going the opposite direction as well. We’ve got people moving away from FSP towards full service. So I’m obviously not giving you maybe the granularity it’s like, but I do think we’re very comfortable with, as we get through the course of this year, being able to maintain those gross margin profiles overall and being efficient as an organization and very accustomed to both models to be able to drop that margin improvement that we talked about, 50 bps to the EBITDA line.
David Windley: Got it. Okay. And I did note that you said that the incremental partnership was full service. So that probably factors in. My follow-up question is around the automation. I mean, in so much as, notwithstanding your answer, this trend of multiyear trend toward FSP, offsetting that with automation seems particularly important and the improvement in your hours of automation seems pretty strategic and critical to your margin expansion strategy over the long-term. So I’ve kind of a two-parter here. One, could you give us a sense of the cost of an automation hour versus the cost of a labor hour? And two, in so much as you finished the fourth quarter of 2023 higher than you expected, and so the full year, you — in air quotes, kind of pulled forward 20 basis points of margin expansion to 2023, to the full year of 2023, getting to 50 basis points is really more aggressive than or more aspirational than when you gave that guidance the first time and maybe give us the comfort that you still think that full 50 basis points is achievable?
Thank you.
Brendan Brennan: I’ll start maybe, Dave, on — I suppose the way we measure those hours that we’re talking about, they’re the equivalent hours that people would do. So if this was a job of work, we’re talking about removing those hours from the organization. So when we talk about like the 2 million, we’re talking about 2 million hours of kind of labor time removed from the organization. I don’t know if I have above hour ratio for you that I can quickly give, unfortunately, but what we’re talking about is a very substantial amount of hours of our average labor costs removed from the organization and not the target we think about in terms of how we measure that as an organization and also how we set a target. I mean, obviously, 2 million hours of people’s labor time, even if you say, take a blended rate and look at our different geographies around the world and even if you said that this was occurring in lower cost geographies where you take the automation out, even if you made all those caveats, you’re talking about very substantial savings as a result of this type of automation.
And so we do think you’re absolutely right, it is an important and strategic element of our gross margin development and something that we will be continuing to focus on over time. On the second bit, and then I’m sure Steve will want to chime in as well, but on the second piece, I think, as well enough, Dave, at this point to know that we generally don’t talk about targets that we feel we can’t hit. So we still do think the 50 bps is right, you’re quite right, we ended up better than we thought we would and so that’s a more ambitious target. As I’ve said earlier in the call, I think, it’s more around kind of keeping that gross margin in that 30% ballpark and seeing continued leverage on our SG&A. And of course, you saw an absolute dollar decrease in 2022 to 2023 of $25 million on our SG&A.
So we’ve got a great experience there and an amazing team that helps us deliver that leverage and it’s that kind of leverage we’re looking for, not quite that level of leverage, we don’t need to absolute dollar drop as we go into 2024, but we certainly need to see the vast majority of the leverage on the 50 bps come from SG&A over the course of the year and I think we’ve got a good plan to achieve that. I don’t know, Steve, if you want to add anything.
Dr. Steve Cutler: Oh! I think that’s it, you said it all.
David Windley: You’re right. Thank you. I do know you to be very good at that. You’re right.
Dr. Steve Cutler: Thank you, Dave.
Operator: Thank you. We’ll now take our next question and this is from the line of Max Smock from William Blair. Please go ahead.
