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Edited Transcript of PPD.OQ earnings conference call or presentation 5-Aug-20 12:30pm GMT

Q2 2020 PPD Inc Earnings Call

Sep 22, 2020 (Thomson StreetEvents) -- Edited Transcript of PPD Inc earnings conference call or presentation Wednesday, August 5, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher G. Scully

PPD, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary

* David S. Simmons

PPD, Inc. - Chairman & CEO

* Nathan Speicher

PPD, Inc. - SVP of Finance

* William J. Sharbaugh

PPD, Inc. - COO

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Conference Call Participants

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* David Howard Windley

Jefferies LLC, Research Division - MD & Equity Analyst

* Jack Meehan

Nephron Research LLC - Research Analyst

* Jack Rogoff

Goldman Sachs Group, Inc., Research Division - Research Analyst

* John Charles Kreger

William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst

* Juan Esteban Avendano

BofA Merrill Lynch, Research Division - Associate

* Tycho W. Peterson

JPMorgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to PPD's Second Quarter 2020 Earnings Conference Call. Please note today's call is being recorded. At this time, I'd like to turn the conference over to Nate Speicher, Senior Vice President of Finance for PPD. Mr. Speicher, you may begin.

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Nathan Speicher, PPD, Inc. - SVP of Finance [2]

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Good morning, everyone, and thank you for joining the earnings call. Today, we will review our financial and operating results for the second quarter of 2020. Joining me on the call today are David Simmons, PPD's Chairman and CEO; Bill Sharbaugh, our COO; and Chris Scully, our CFO.

Please note that today's discussion contains forward-looking statements based on the current business environment and as such, include certain risks and uncertainties, which could cause our actual results to differ materially from such forward-looking statements. More information about potential risk factors can be found in our 2019 Form 10-K filing and in our upcoming Form 10-Q filing.

Also, in addition to U.S. GAAP reporting, we will be discussing financial measures that do not conform to GAAP. We believe these non-GAAP measures enhance the understanding of our performance because they are more representative of how we internally measure our business. Please note these non-GAAP financial measures should not be considered in isolation from or as a substitute for GAAP measures. A reconciliation of GAAP to non-GAAP results is available in the press release we issued last night and in the supplemental investor presentation posted to our Investor Relations website.

Lastly, regarding the basis of presentation for today's discussion, please note that all P&L metrics discussed, including revenue, segment revenue and adjusted EBITDA, are on an ASC 606 basis. For commercial metrics discussed, including net authorizations, net book-to-bill, backlog and backlog conversion, those remain on a historical as-awarded ASC 605 direct-only basis unless otherwise noted.

With that, I'll turn the call over to David.

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David S. Simmons, PPD, Inc. - Chairman & CEO [3]

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Thank you, Nate. Good morning, everyone, and thank you for joining our second quarter 2020 earnings call. I hope everyone's well.

Despite the headwinds that COVID-19 posed to our business this quarter, we were able to exceed our Q2 guidance, delivering a positive year-on-year growth. I am very pleased with the resilience of our business and the adaptability of our management team and colleagues to face this challenge and to minimize its negative impacts.

As we did in our first quarter earnings call, we will provide an update on the impacts to our business stemming from the virus. I'll start with our Q2 performance and then turn to the future, giving some color on the positive signs of recovery we are seeing and the impact on our ability to convert our growing backlog into profitable revenues.

Regarding guidance, the fluid nature of the operating environment amidst COVID-19 makes it more difficult to guide with precision, in particular, the further you go out. For this reason, we are only providing quantitative guidance for the third quarter on today's call. However, as Chris will expand upon in his remarks, should key operating metrics continue to improve at the same pace that they have over the last several months, we expect year-on-year growth rates for Q4 revenue and adjusted EBITDA to be similar or higher than Q3, which we are guiding to be higher than Q2.

Let's take a look at the second quarter in a little more depth. Second quarter results were at or above prior year second quarter results, reflecting positive year-on-year growth. I would like to call out 3 highlights.

First, net authorizations reached $1.05 billion, representing 12.4% year-on-year growth. Our net book-to-bill was 1.34x. In addition, we experienced no unusual cancellation activity related to COVID-19.

Second, our ending backlog of $7.6 billion is a new record, representing 13.3% growth year-on-year. It is also worth noting that we achieved a relatively strong 605 backlog conversion rate of 10.7% despite COVID-19 operational challenges.

And third, we achieved positive year-on-year revenue and EBITDA growth with notably strong performance in our lab segment, which achieved revenue growth of nearly 20%.

The second quarter brought with it challenges and opportunities for PPD, and we are successfully navigating the complexities posed by the pandemic and seizing all opportunities to support our customers.

Our priorities have remained consistent since the beginning of the pandemic: first, employee and patient safety; second, business continuity and maintaining financial strength; and third, being part of the solution to COVID-19. I will provide a few summary comments on these priorities, which Bill and Chris will expand upon in their remarks.

First, our top priority has and continues to be colleague and patient safety. We continue to take a thoughtful approach to office reopening and resumption of travel. We are using our own judgment where local regulations or guidance may be more permissive than the internal views of our medical experts. Simply put, we are erring on the side of caution.

Successful implementation of policies and procedures is not just important to safety but also to our second priority, business continuity. For example, the revised practices that our labs teams have adopted has allowed us to continue to operate at near full capacity across all of the labs. This has been a key driver of the lab's performance we experienced in Q2.

Let's go a little deeper into our second priority, business continuity. While we continue to see impacts from COVID-19, the majority of studies are continuing, and we are seeing a gradual lessening of the impacts. Notably, despite ever-changing local conditions, our teams are effectively progressing ongoing studies and kicking off new work. For instance, we successfully activated nearly as many sites in June of this year as we did in June of 2019.

I credit our success to 3 fundamental strengths of PPD: first, our global footprint, which allows us to flex up and down as regions are impacted and also offers customers mitigating strategies to keep their studies running; second, the tenure of our management team across the globe, whose experience and adaptability have been causal in enabling our relatively strong backlog conversion rate to continue despite the impediments posed by COVID-19; and third, our recent investments in site networks, data and technology are enabling fast implementation of alternate strategies.

For instance, we are now supporting more than 3x as many digital and virtual studies as we were before the pandemic. While still less than 5% of our backlog, our client conversations suggest this acceleration will continue. In sum, I couldn't be more proud of our employees, whose commitment to our purpose and mission are unwavering.

Shifting from business continuity to maintaining financial strength, I shared on our last earnings call that we sought to minimize the impact of cost-mitigation measures on our colleagues, taking a targeted set of actions such as voluntary sabbaticals or part-time work through our choice program.

These actions, coupled with our continued strong prosecution of our large backlog, including COVID-19 work, allowed us to deliver positive EBITDA growth for the quarter as well as preventing deterioration in our margin profile. While we continue to monitor and deploy mitigating actions as needed, we have begun to wind down some of these programs with staff returning from reduced work schedules.

PPD has actually grown our employment base during this pandemic to more than 24,500 colleagues. And we are actively recruiting more than 1,000 new positions.

We are well positioned to service our record book of business. This is a clear signal of our optimism for a continued recovery in clinical trial conduct.

Finally, I am proud to share that we have established a leadership position in COVID-19 work. On the Q1 call, I shared that we had won 39 awards, and I can now report this has grown to over 85 awards as of today. I am most excited about the breadth of this work as it encompasses both vaccines and treatment programs, spans phases from early development to large Phase III programs to noninterventional studies. And it represents more than 50 unique clients, including biopharma, biotech and government agencies. The spectrum of these awards applies to our enterprise, too, with many full-service clinical awards.

Our labs and accelerated enrollment solutions are also playing a significant role with many studies planned regardless of whether PPD is the CRO running the study or not. Lastly, we are applying all of our innovative solutions to these studies, whether it be our data capabilities to select sites, our site network to enroll patients quickly or direct-to-patient capabilities to support patients remotely.

While this has been a challenging year for us all, I continue to be inspired by PPD's colleagues every day and energized by the mission of our organization to deliver life-changing therapies. The need for innovative medicines has never been more clear. I'm genuinely impressed by how our industry has come together to respond to the pandemic and how our industry can continue to collaborate in the future. I see a few positive signals across stakeholders.

On the customer front, biotech funding is robust, and R&D budgets continue to be strong. Our proven PPD biotech model puts us in a good position to further strengthen our leadership position. Site access continues to improve, both for patients and CROs. We now have access to more than 55% of sites globally, and patient access is even better. More than 80% of sites reported in a recent survey that they have resumed normal patient operations.

And on a related note, we are seeing patients increasingly willing to participate in clinical trials. We have a unique view of patient resilience through our site network and patient recruitment business. As of this past week, we are nearly back to Q1 volumes for patient consents. This is the step whereby patients declare their willingness to participate in a clinical trial. We believe this is a solid leading indicator of patient enrollment and a positive step forward to a return to normalcy in clinical trials.

I feel confident that the broader pharmaceutical development industry will emerge even stronger from the pandemic. For PPD, in particular, I believe that our industry-leading talent and our culture of quality execution will continue to enable our success. Looking toward the future, our business is not deteriorating, but rather accelerating.

I'll close with my high-level view of the business. On the commercial front, we continue to win with our customers, achieving double-digit backlog growth. On the operational front, we adapted more strongly than I could have imagined. Even with the impacts from the pandemic that we've discussed, we have done a strong job converting our backlog to revenue as we emerge from the pandemic's grip. We expect to further accelerate as we catch up on paused work and initiate work on new awards. And lastly, from a financial perspective, we outpaced our second quarter guidance projections and maintained a margin profile in line with prior year performance. Whatever challenges COVID presents us, I feel confident that we will be able to adapt.

I'll now turn it over to Bill Sharbaugh, our Chief Operating Officer, to review our operating results.

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William J. Sharbaugh, PPD, Inc. - COO [4]

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Thanks, David, and good morning, everyone. Similar to last quarter, my comments will again focus on the underlying drivers of our performance. Our culture of quality execution and the leadership positions that each of our businesses has established continue to position us well.

Before diving into the segments and to reiterate what I stated in Q1, operating metrics are inherently difficult to compare across peers due to lack of common definitions and data sources. So keep this in mind as you consider these data points.

I'll start with our Clinical Development Services segment and the impacts we are seeing to ongoing studies, study pauses and new awards. The majority of studies are continuing. While we saw many sponsors implement enrollment pauses, they are gradually being lifted as sponsors gain more comfort operating in the pandemic and as regional and local circumstances improve.

On the Q1 call, we shared that 10% of our clinical backlog was impacted by these pauses, which we have now seen improve to 7%. We are actively working with customers to start up new studies and restart enrollment on studies that were put on hold. Our accelerated enrollment solutions business is helping clients to more quickly enroll paused studies as well as new COVID-19 studies using our unique patient recruitment capabilities and owned global site network.

Similarly, we have seen a steady improvement in resumption of site-based activities with full access to more than 55% of sites globally. During the quarter, while access was limited at some sites, we continue to deploy remote monitoring and are now seeing total activity near pre-pandemic levels.

At the peak of site access disruption, we were conducting nearly 90% of our monitoring activity remotely. And now, as on-site visits resume, that has shifted to approximately 60%. We expect this trend of increased site access and increased site activity to continue and accelerate into Q3 and Q4, although with greater levels of remote activity persisting due to efficiency gains.

On the patient front, while some sites are not accepting CRA visits, the vast majority are resuming patient visits and related activity. I'll also note that we are seeing patient enrollment on non-COVID-19 studies begin to trend up.

In addition, we continue to support studies by direct-to-patient shipments, digital and virtual solutions and our site network, which has remained open throughout the pandemic. We are also leveraging our site network to deploy virtualization technology faster than we could at traditional sites.

As David shared, we are working on a large and diverse backlog of COVID-19 work. These programs span multiple phases, mechanisms of action and cut across both our clinical and labs businesses. The organization is working tirelessly to execute these studies, and our teams have demonstrated a relentless focus on execution.

I'd like to share a few examples to provide some color on the scope of work within clinical and our unique capabilities. Our data capabilities are important in meeting enrollment targets. Using epidemiology models and our scientific expertise within Evidera, we are building predictions and scenario plans to optimize and adapt site selection to account for new and emerging hotspots.

Our accelerated enrollment solutions business includes the world's largest vaccine site network. With high throughput sites across all major geographies, we are supporting clients to meet aggressive enrollment time lines and milestones. And lastly, we're running several treatment and vaccine studies with a high degree of virtualization, which leverage internal investments and partnerships, which we believe will become increasingly important.

Next, shifting to the Laboratory Services segment. I'd like to highlight that in Q2, the labs delivered strong revenue growth of 19.9%. It's worth noting this performance was driven by double-digit growth across all of our labs.

So first and foremost, we've been able to ensure business continuity. The implementation of shift work, remote work, work pods has ensured that our scientists were able to safely access facilities and continue to progress their work for customers. As I shared in our Q1 call, our bioanalytical, vaccines and GMP labs are driven primarily by staff availability and facility capacity, not sample volumes.

Second, while our central lab saw an initial disruption to sample volumes, this abated during the second quarter, and volumes have returned to pre-pandemic levels. This was driven by our diverse backlog and the ability of the team to quickly seize opportunities presented by COVID-19.

Lastly, our labs are supporting a significant number of COVID-19 programs, and the pipeline is robust going into the second half of the year. I attribute this success to our scientific expertise, global infrastructure and capacity, combined with can-do leadership and culture. As an example, the lab team quickly developed new assays, molecular, serology and functional, designed specifically for COVID-19 vaccine and therapy development programs.

To summarize, we're very pleased with lab performance in Q2. Given the continued strong growth and large backlog of work, we are continuing to invest in infrastructure to support our customers' needs and expect approximately 75,000 square feet of new lab space within China and North America to come online by year-end. I expect our scientific expertise and our proven ability to execute will translate into solid growth within this segment.

I will now turn it over to Chris Scully, our Chief Financial Officer, to review our financial results.

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Christopher G. Scully, PPD, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary [5]

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Thanks, Bill. Good morning, everyone. In my prepared comments today, I'll be covering our quarter 2 results; updating you on balance sheet metrics and capital structure; and lastly, providing you with an update on our forward guidance before opening for Q&A.

Before diving into the numbers, as on previous calls, when referring to our P&L, I'll be doing so on an ASC 606 basis. When referring to commercial metrics such as net authorizations, backlog and net book-to-bill ratios, my commentary will remain, unless otherwise noted, on a historical ASC 605 basis to maintain comparability with prior periods. However, similar to last quarter, we have included these metrics in our investor supplement on an ASC 606 basis, both with and without indirects.

In addition, we have provided at analysts' request these metrics on a onetime basis for all 4 quarters of 2019 in the appendix of the document. We hope the added information will aid everyone in their modeling efforts.

Finally, also similar to our last call, given the exceptional circumstances surrounding COVID-19, we have expanded the operational and financial metrics that we're providing today, along with sharing guidance for the upcoming quarter. That said, we are unlikely to provide all of these disclosures on an ongoing basis post the pandemic.

Turning to our quarter 2 results. As David noted, it was a strong quarter of bookings. Despite the disruptions from the pandemic, we recorded $1.05 billion in net authorizations, which was up 12.4% year-on-year, resulting in a net book-to-bill ratio of 1.34x.

Providing some additional detail, RFP and award volumes were solid across biotech and biopharma customers, with double-digit growth in new bookings in both our clinical and our lab segments with no unusual cancellation activity related to COVID-19. As we saw our customers shift RFP volume towards COVID-19 therapy and vaccines programs in the quarter, we did see a changing mix of studies by therapeutic area with roughly 25% of our award volume-related to COVID-19 programs. Given that the dynamics and the behavior of these studies could differ from more traditional studies and since we have limited historical precedents, out of conservatism, we've increased the haircut or discount applied to COVID awards in determining the dollar amount to add to authorizations and backlog beyond the historical averages that we've applied to non-COVID work under our policy.

One additional item to note, which is different this quarter, is that authorizations' growth and net book-to-bill ratios were notably higher on an ASC 606 basis than on either an ASC 605 or an ASC 606 directs-only basis as outlined in the investor supplement. The reason for this is that the mix of indirects to directs was significantly higher on COVID awards that we won in the quarter, in particular, on vaccine studies with a high magnitude of investor grants.

With respect to the P&L, quarter 2 revenue of $1.01 billion increased 1.4% over the second quarter of 2019. This was driven by 19.9% revenue growth in our Laboratory Services segment, partially offset by a 2.2% decline in our Clinical Development Services segment revenue, which was impacted to a greater degree from disruptions associated with the pandemic.

On an adjusted EBITDA -- or our adjusted EBITDA of $194.4 million increased 0.8% over the second quarter of 2019, generally keeping pace with revenue growth. The adjusted EBITDA performance was aided by the cost-mitigation actions we put in place and discussed on the quarter 1 call.

As David noted earlier, both our revenue and adjusted EBITDA were significantly above the high end of the range provided for quarter 2 guidance on our last call. Let me provide some additional context on the drivers for the beat.

First, when we initially gave the Q2 guidance, we noted that given the uncertain nature of COVID-19, we conservatively assumed that May and June would further deteriorate versus our April experience across a number of metrics such as site access, patient enrollment and lab sample volumes. As it turned out, not only did we not see these metrics deteriorate, but in most cases, they improved in May and June versus April.

Second, the COVID-19 programs that we are supporting have generally expanded in scope and fast-burning revenue from these studies helped offset parts of the business which were more negatively impacted by COVID-19.

Third, as Bill noted, within our labs business, we were able to maintain a higher-than-anticipated level of productivity in our GMP, BioA and vaccines labs. And we actually saw sample volumes increase in our central labs in most weeks compared to quarter 1 levels as a result of COVID work and successful conversion of other studies in backlog.

And finally, and equally as important, our long-standing focus on operational excellence has allowed us to adapt to the pandemic, redeploy those colleagues working on studies that were paused to other studies or productive activities and mitigate the operational and financial impacts of COVID-19. We have been able to find alternative ways to progress work for customers even more successfully than we had anticipated when we issued quarter 2 guidance. Overall, we're very pleased with these results.

Turning to cash and liquidity. During the quarter, we continued to see strong operating cash flows underpinned by stable or improving trends across key metrics such as DSO, AR aging and cash collection. As a result, if not for the full repayment of our quarter 1 revolver borrowings, our ending cash balance would have been $843 million, which is over $100 million higher than our quarter 1 ending balance.

With respect to the revolver, you'll recall that we drew down $150 million from our $300 million credit facility in March, out of an abundance of caution given the volatile global markets at that time. In light of improving market conditions, strong cash flows and continued strong operating performance, we repaid this amount in full at the end of June. Collectively, our revolver capacity and our Q2 ending balance, our cash balance of $693 million leave us with nearly $1 billion in total liquidity, which represents the strongest liquidity position the company has had in over 10 years.

During quarter 2, we also refinanced our most costly tranche of debt through the issuance of new 2025 and 2028 senior notes at lower rates, which reduces our annual cash interest expense by approximately $19 million and extends our maturities. As of June 30, our net leverage ratio was 4.48x trailing 12-month adjusted EBITDA, which declined from 4.54x at the end of quarter 1. Excluding the $77 million in cash used to pay fees and expenses for the refinancing, net leverage would have declined to 4.38x. As noted in the investor supplement, we are reiterating our original objective to reduce net leverage to the low 4s by the end of 2020 and into the 3s in 2021.

Now turning to our Q3 revenue and adjusted EBITDA guidance. The company expects revenues of $1.065 billion to $1.085 billion, which equates to plus 4% to plus 6% growth versus Q3 of 2019, and adjusted EBITDA of $211 million to $215 million, which equates to plus 4% to plus 6% growth versus Q3 of 2019.

Finally, regarding our outlook for the fourth quarter and as David noted, should site access, patient enrollment and other key metrics continue to improve at the same pace that they have over the last several months, PPD expects year-on-year growth rates for quarter 4 revenue and adjusted EBITDA to be similar or higher than Q3 per the guidance that I just shared.

So to wrap things up, despite the pandemic, Q2 was another strong quarter from a commercial perspective with double-digit year-on-year growth in net authorizations, and we continue to see no unusual cancellation activity related to COVID-19. Second quarter revenue and adjusted EBITDA were materially above the top end of the previously provided guidance with positive growth versus last year and minimal erosion in margins. Cash collections and other balance sheet metrics have continued to remain extremely strong.

We've refinanced the most expensive tranche of our debt in our capital structure. We've reiterated our expectations to reduce leverage to the levels guided to before the pandemic. And our liquidity position is the highest that it's been in over a decade. We expect increasing year-on-year growth in both quarter 3 and quarter 4, assuming that the pace of recovery continues as it has the last several months. And we're very proud to be working on so many promising COVID-19 vaccines and therapies.

With that, I'll now hand over the call back to the operator to open the line for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Jack Meehan with Nephron Research.

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Jack Meehan, Nephron Research LLC - Research Analyst [2]

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I wanted to focus on some of the new business commentary related to COVID-19. How should we be thinking about the burn rates for this business? Do you expect most of it to convert in the next year? And how do the economics for some of the vaccine work change as they move from Phase II and into Phase III for you?

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Christopher G. Scully, PPD, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary [3]

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All right. So Jack, the burn rate on COVID-19 awards is a bit faster than it would be on non-COVID awards. To give you an idea of the estimate, the duration of our COVID studies are anywhere from 6 to 18 months versus basically 3 years on a traditional kind of backlog.

On overall economics, let me kind of speak not to the question of Phase II versus Phase III but overall, in terms of COVID-19 kind of awards, what we kind of -- the vast majority of this work is at either existing MSA kind of partnership kind of levels in terms of pricing or prenegotiated kind of government rates. And we're not expecting any material change in our margins overall as a company as a result of an increasing shift to kind of COVID-19 kind of awards versus others, at least on a directs-only basis.

As I did note on my comments earlier on the call, on those studies where, of course, we kind of have a higher ratio of indirects to directs, that could be basically something that plays out on the margins in the future. But as CFO, I'm perfectly okay with that as it will result in higher EBITDA growth.

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Jack Meehan, Nephron Research LLC - Research Analyst [4]

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Sounds good. And then just as a follow-up, I was curious to get your thoughts on how you manage through the work right now? There's been delayed work from the last few months amidst the pandemic, which I imagine you want to catch up on moving into the second half of the year. And now you're layering on top some additional work related to COVID-19. How are you prioritizing that? And what are you looking to do in terms of managing labor to execute upon it?

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David S. Simmons, PPD, Inc. - Chairman & CEO [5]

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Yes. Jack, it's David. I'll start this, and Bill may want to lay in some more color. First of all, the -- we're staffing to run the full backlog of work, COVID and non-COVID. So as you heard in the script, we finished in the pandemic, we've actually grown employment to 24,500 people, and we've got open reqs for 1,000 new positions. So we're not having -- we're not going to be and don't foresee ourselves in a position where we have to prioritize certain parts of work over the other. We plan on executing all of it as we're predicting more improving site access and higher rates of patient enrollment getting back to normal. So that's the first point.

The second point in this is we've done a good job being able to reallocate resources away from sites where we don't have access on the activities, billable activities, where we can get access on billable activities that don't require site access. So there's been this under the -- if you look at an iceberg, where you see the tip on all these financial results, what's going on underneath it in clinical is a ton of adaptations, customer by customer, study by study, meeting and figuring out how we can put in mitigation strategies to keep the studies running.

So our labor utilization has actually been pretty high, higher than we would have thought it would have been given the pandemic impediments. So we feel like we're in a good zone of knowing how to have the workforce deployed and then sizing the workforce to handle the work coming in.

Final comment I'll make is we do have this -- we are in a somewhat complicated projection scenario of projecting the recovery in site access and patient enrollment and calibrating the staffing to that. So because we have this big backlog of work that's been troublesome to get full access to, to run it because of the site impediments. And when we do get back to normal, we're going to catch up on that work, and we have all of the work that's been building up, COVID and non-COVID, for new studies. So there's going to be a spike of activity. We're going to have to do some extraordinary efforts to prosecute. But we feel like we're really well positioned for that. Bill, is there any color you want to add to that?

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William J. Sharbaugh, PPD, Inc. - COO [6]

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Yes. To your point, turnover is down year-over-year pretty significantly for us. And obviously, retention is key in this environment, but we're hiring aggressively.

When it comes to the actual sort of catch-up you're talking about, as I said in my comments, 55% of sites, that's how we define it, have completely unfettered access sort of returning to normalcy. The rest of the sites just had some degree, the way we define it could be anything. Maybe they were -- require only visiting a certain part of the institution or maybe they require some kind of testing before entering or you've got to look at a certain part of the material at a time. I mean it's something small. But basically, sites are opening back up, patient activity, 80% of sites are resuming patient participation and seeing patients. So that's opening up quite quickly. We're sending 2 monitors out sometime to catch back up.

So as David said, it's a site-by-site, sponsor-by-sponsor, study-by-study discussion, but we're in the catch-up mode as more and more on-site visits are allowed, which allows us to get after a lot of the source data and allows us to get after drug accountability and some of those activities that cannot be done through a virtual or remote visit.

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Operator [7]

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Our next question comes from Tycho Peterson with JPMorgan.

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Tycho W. Peterson, JPMorgan Chase & Co, Research Division - Senior Analyst [8]

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Wanted to ask just on the clinical services recovery, if you could provide any color just on how things are trending across early development versus Stage II, III versus peri and post? And then are you able to quantify any contributions from the faster-burning COVID tailwinds at this point on clinical?

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William J. Sharbaugh, PPD, Inc. - COO [9]

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Yes. Thanks, Tycho. This is Bill. As I said in last quarter, early development was a part of our business that was hit the hardest. Really, those clinics were closed down because you're bringing healthy normals into an environment that's unsafe. Since then, we've put in a lot of procedures and measures. Testing is widely available of our own staff as well as the volunteers that come into that business. It's open back up, and we are running studies for sponsors. So while hit hard, it is recovering and back up.

Our site network was a little bit of the same scenario, where you got to put in procedures and have tests available to get that back up and running. But in terms of the II, III activity, as we've said, it's been at a blistering pace. There's been a lot of COVID work on both the treatment side and the vaccine side. There's a lot of different modalities that are being tested. And we were able to continue studies with remote visits and telemedicine techniques, et cetera.

So COVID has certainly been a tailwind for us in both clinical and in the labs, no doubt about it. We think we're in a leadership position. But basically, now what we're seeing is activity continuing. There's just a shift from remote back to on-site visits. That is occurring slowly, methodically. And metrics have improved, leading indicator metrics have improved May, June and July. So we've kind of stated in our commentary, assuming that trend continues, we feel good about the back half of the year.

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Tycho W. Peterson, JPMorgan Chase & Co, Research Division - Senior Analyst [10]

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Great. And then a couple of quick follow-ups on the COVID commentary. Lab was much stronger at 20%. Was that more tied to COVID work or facility expansions like GMP? And then any comments you can make on enrollment on COVID-related vaccine or therapy work? I think last time you talked about needing to enroll over 13,000 patients on the original 39 trials. I'm just curious if there's going to be any issues around patient recruitment and enrollment. And then lastly, just curious on share gains here because last quarter, you talked about transferring clinical trial patients from sites that remain closed from competitors. I'm curious if you've actually picked up some share under that as well.

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Christopher G. Scully, PPD, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary [11]

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Maybe I'll take the first piece of that. I think there was 3 pieces to that question, Tycho. The first piece is on the labs' performance in the quarter. What I would say is that all 3 of our labs actually grew at a double-digit pace within the quarter. Both basically BioA and vaccines and GMP were less impacted by COVID disruption than central labs.

That said, in central labs, we did see an initial reduction in central lab samples volumes early in the quarter, but things kind of recovered, I think, fairly quickly. And for most months, we're above pre-COVID levels due to both the combination of having COVID awards and executing on the backlog of awards we won last year. So all 3 labs had some really healthy performance in the quarter.

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David S. Simmons, PPD, Inc. - Chairman & CEO [12]

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I'll take the second question, which is around our thoughts on recruitability, if that's a word, on COVID work. One thing we learned with some early work we did was the need to be able to activate sites in a nontraditional way. For example, the activation of elderly care facility in the initial outbreak of the study and speed of getting that activated and getting investigational product into the site. So we actually playbook that through the first realm where we've been applying it.

So on therapeutics or vaccines, it's slightly different. But if there's a hotspot, being able to identify the hotspot, in some ways, predict the hotspot, which we're doing through Evidera and be ready to go is really cutting time out of this. And when we do that well, the recruiting pace on these COVID studies, both the vaccines and therapeutics, has been and we expect will continue to be fast.

So we don't see any impediments to recruiting these studies, and we expect them to recruit much more quickly than we have traditional studies. And I think the third question was share gain, yes, share gain, but specifically around patients that may not be able to get access and us leveraging our site network to do it and what we might be seeing there. Maybe Bill, you can take that one.

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William J. Sharbaugh, PPD, Inc. - COO [13]

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Yes. That is -- a real advantage we have is that we've got the largest vaccine site network out there. And if you look across the U.S., Europe, Asia, our network is about 180 sites, which we've said before but is perfectly positioned and designed to conduct vaccine trials. So we've got broad geographic scope across the U.S. as we -- and I said in my comments, we can sort of move to where we see hotspots or outbreaks. And same is true in Europe, less sites, but very capable sites.

So these are relatively easy studies to run. So when you combine our patient-finding capability with our site network, we're able to recruit and process patients very efficiently in our site network. So that's one of the things that make us capable.

Obviously, we've got -- one of our largest therapeutic areas is infectious disease and vaccines, and that's both in our clinical business and our laboratory business. So well positioned there. And in our Evidera business, as we mentioned, we have epidemiology analytics that help us predict the best sites to place studies in. And again, that's taking data all the way down to the county level, and in some cases, even smaller bits of data around the U.S. And then in Europe, we're operating mostly at the country level, but there's really good data. And so we can empower analytics about where to go to find these patients. So we feel really confident about the recruitment.

You had mentioned a number of, I think, 13,000 patients. We're going to be recruiting, orders of magnitude, more patients than that across our COVID backlog.

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Operator [14]

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Our next question comes from David Windley with Jefferies.

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David Howard Windley, Jefferies LLC, Research Division - MD & Equity Analyst [15]

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Congratulations on the results. I wanted to see if I could slice a couple of these things a different way. So appreciate the data on the percentage of bookings in the quarter that came from COVID. Given the more rapid burn rate expected here, can you help us to understand either how you think about that flowing into revenue, like what your COVID concentration in revenue in the coming quarters might be? Or a slightly different way to come at that would be, as I look at what the implied burn rate on backlog is for the third quarter based on your guidance, it's improving as you suggest. It's still lower than the first quarter. And I guess thinking about COVID layering in, could accelerate -- could move higher pretty markedly. And I guess I'm trying to understand how to titrate that.

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Christopher G. Scully, PPD, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary [16]

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Yes. So thanks, Dave. I think that's an astute kind of observation. I think one of the things that I would kind of note on that is, yes, burn rates do basically incrementally kind of improve in Q3 versus Q2. But basically, the environment is still not as clean or as orderly as we had in quarter 1. So I think it's natural for it to be lower is one element of the answer to your question.

The second basically kind of piece that I would add is while basically, these studies are going to progress on a COVID basis, on a very rapid kind of basis in the next several months, at least on a direct basis. On some of those large kind of, again, vaccines awards where you had a lot of large indirects associated with them from investigator grants, our experience has kind of been on an investigator grant that it takes time for those to be processed by kind of sites and submitted to the company. So we are expecting that's going to be a little bit of a tailwind in terms of our burn rate, at least on a full 606 basis within the quarter. So that does kind of slow it a little bit.

But in terms of the contribution, what we will share is that in quarter 2, about just under $50 million or about 4% of our revenues came from COVID awards. We would expect that to improve somewhat in basically Q3, but don't want to get into kind of giving you a more precise figure from that. But hopefully, from those data points, it helps frame out the way you should think about it.

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David Howard Windley, Jefferies LLC, Research Division - MD & Equity Analyst [17]

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Yes. That's very helpful. So my follow-up question, you mentioned a couple of things that struck me as perhaps slightly different than some of the concerns I've heard expressed from others. And those were remote monitoring efficiencies and patients showing greater interest in participating in trials.

And so on those 2 things, I guess, I just wanted to hear more color. So on the remote monitoring, I hear folks saying, yes, we can do remote monitoring, but we still have to get on site to complete the site visit. So it's a little redundant and it's less efficient. So if you could kind of clarify on that.

And then we also hear concerns about patients concerned about exposing themselves to COVID, therefore, concerned about kind of participating in trials unless it's cancer or something like that. Sounds like you're a little bit more optimistic on both of those. So if you could elaborate, I'd appreciate it.

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David S. Simmons, PPD, Inc. - Chairman & CEO [18]

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All right. Dave, I'll take the second one on the patient resiliency, and then Bill will take the first one, which I'm not sure we're different than what the others are saying on remote monitoring, but he'll get into the efficiency part of it in that question.

On the patient resiliency, I mean, I've seen what the survey said, but what we're reporting is our data on volume of patients that are consenting to participate in a particular clinical trial. So it's not what they think or what they're concerned about, it's what they're doing, and it's a very positive leading indicator. So that does seem counter. If you were going in thinking that patients aren't resilient, there's a lot of fear and patients aren't showing up, what we're seeing is opposite of that. So that is a bit counter, so I can validate that you are seeing something different in what we're saying about patient resilience.

Now that's from the consents coming out of our site network and patient recruitment capability, which, I mean, to put a proportionality element on it is maybe 180 sites against 10,000 global sites. But it is -- we're seeing the data that it is very important to our business, and it looks solid. Bill, you want to talk about the remote monitoring efficiencies?

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William J. Sharbaugh, PPD, Inc. - COO [19]

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Yes. So Dave, let me answer your question. I don't think any of -- in my view, here's the situation. We are in favor of anything that makes the conduct of clinical trials more efficient, more effective and lowers cost for our customers and increases access to medicines for patients. And I think all of this virtual and digital and remoteness is helping to do that.

Now as I said in my commentary, kind of at the peak, we were doing 90% of our visits remotely, and now it's down to 60%, and that trend is moving downward. And it's true. As I said, you got to go back at some point and clean up some things that you need to do on site, requires an on-site visit. And that's why we've said certain studies, certain indications don't lend themselves to being totally remote with some kind of combination, a hybrid trial.

But net-net, anything that helps you screen a patient faster, enroll a patient faster, consent the patient faster and makes it easier for the site to do, easier for the patient to understand, easier to show sponsors transparently how the study is progressing, that's a good thing. And so we're in favor of and using that kind of technology. I think the COVID pandemic crisis is accelerating the use of that.

PPD has been thinking about it for a while. We're well positioned. By and large, remote-based monitoring and reduced source data verification techniques and technology has been put in place by companies like PPD for quite some time. So it's not completely new and unheard of.

I think, ultimately, a dominant design will emerge. That is the most effective way to conduct trials. And I think what that will do in the long run is push up clinical trial volume because sponsors will be able to stretch their dollars further and test more new medicines. And that volume will be positive, both for us as a company, be positive for pharma, and it will be a win for patients because there's more trials to participate in and more drugs coming to the market.

So I mean, yes, we're reacting to the pandemic. It's a little bit of work to do between the remote visits and on-site visits. But it's not a problem. Like I said, we'll be sending multiple monitors out, using a lot of different techniques to do that. The regulators have been very helpful and positive in terms of guidance for sponsors and CROs. So we're in a good spot. I think it's a good thing.

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Operator [20]

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Our next question comes from Robert Jones with Goldman Sachs.

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Jack Rogoff, Goldman Sachs Group, Inc., Research Division - Research Analyst [21]

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This is Jack Rogoff on for Bob. I wanted to ask about the higher productivity in the labs. Was this productivity of space or individuals? And is there an opportunity for this to be more permanent? Or is this more unique to the COVID environment?

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William J. Sharbaugh, PPD, Inc. - COO [22]

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I'll go ahead and take that. I mean our labs are -- we're constantly searching for productivity. So when you say productivity, I think of things like electronic lab notebooks, I think about systems that give sites as well as customers and our team's transparency into where samples are, et cetera. I think about ordering and good kind of inventory management techniques, et cetera. But the bottom line is this crisis has allowed us to, as I said, use different shifts, putting employees in pods, letting them do some of the wet lab bench work on site, but then moving home to do some of the analysis and QC-type work and report writing, et cetera.

I think it's made us more productive, and it's given our employees more flexibility, while at the same time, helping us go after our #1 priority, which is business continuity for customers, which we've been able to maintain. And I think that's where our labs have really shined. None of our labs shut down.

We've had a couple of cases of COVID for those employees. They've been quickly identified through testing, isolated. And again, the labs are working diligently around the clock. So that's every single one of our labs, as Chris said, all growing double digit during this time period. So really effective and efficient could change the way we do some work, but -- in the future, but doing a great job and growing robustly, looks strong for the back half of the year.

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Jack Rogoff, Goldman Sachs Group, Inc., Research Division - Research Analyst [23]

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Got it. That's helpful. And then on the Pfizer extension, are there any meaningful expansions or changes to that relationship we should be aware of?

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David S. Simmons, PPD, Inc. - Chairman & CEO [24]

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No. It's -- we've been partnered with Pfizer since 2015, and this is just a continuation of the business rhythm we have with them. So I wouldn't read more than that in it.

It's a very good sign. I think probably the biggest strategic thing to read is it reflects the quality of the work we're executing because Pfizer is very good at drug development and very strict in their expectations.

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Operator [25]

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Our next question comes from Ricky Goldwasser with Morgan Stanley.

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Unidentified Analyst, [26]

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This is [Roni] for Ricky. I wanted to ask about the segment operating margin. So you have a lab business that obviously has a higher margin profile, but we see some sequential and year-over-year margin contraction in lab's fourth quarter. I wonder if you can provide any color on what drives down the margin in labs? And what do you see the margin opportunities going forward or return to more historical levels?

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Christopher G. Scully, PPD, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary [27]

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Well, I would say, one thing you do have to take into consideration is what we're doing great in kind of labs. Effectively, there could be a mix between kind of labs in terms of growth rates. And the second thing is, is what we've been able to keep things open. We did have to kind of introduce different protocols and other kinds of things that maybe made it a little bit less efficient than what we had in the past, I think.

But overall, we feel pretty good about basically the way we've been able to mitigate any decline in margins, not only within labs, but within the company overall and delivering the results we had for the quarter.

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Nathan Speicher, PPD, Inc. - SVP of Finance [28]

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And I would just add one thing is that the labs had to acquire a bunch of personal protection equipment. That's in the GAAP P&L, but it's not burdening the adjusted P&L. So if you strip that out, it's a little bit more in line with historical numbers.

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Operator [29]

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Our next question comes from John Kreger with William Blair.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [30]

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Can you talk a bit about how the flow of awards and RFP has been different across kind of your different client cohorts, larger pharma versus mid versus small biotech?

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David S. Simmons, PPD, Inc. - Chairman & CEO [31]

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Yes. It's been strong across all segments as a summary comment. We have seen both in biotech and biopharma, the whole industry mobilize around COVID. So you have seen focus, attention and capital allocation shift to COVID.

So we've seen a slight, actually, more slight than we had predicted, kind of slowdown or lower volume of RFP volume on the traditional work when you take COVID into consideration. But just to say, we were expecting more of a pullback because we saw so much COVID work coming out of both segments. So both very strong.

If you took out the COVID work, we're -- actually, we would be pretty satisfied with the way we would have posted the quarter from an authorization standpoint. That's what I said. It's -- on its own, the traditional work actually beat what we were expecting. But it was a slight pullback from what we would have thought would have been a normal amount of volume with the way the market was developing.

So that's -- I think there's a COVID, non-COVID piece that's going on. And then I think there's a large biopharma and biotech set of dynamics that are going on. Biotech, maybe having a bit of a longer time to get their head around how to restart studies, kick off new studies in the midst of the pandemic. It seems like large biopharma adapted and got their head around that and have gone back off hold on more studies a little more quickly. So we'd expect biotech to follow suit going forward. But again, going back to authorizations, both segments have been very strong.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [32]

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Great. And then my follow-up is you guys have clearly been very successful winning COVID work. Curious if you're having any issues with being maxed out, either from a kind of a lab capacity standpoint or the ability to enroll this many studies that are presumably competing for a lot of the same types of patients?

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David S. Simmons, PPD, Inc. - Chairman & CEO [33]

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We don't think so is the short answer to this. Like the labs' capacity, our biggest concern was keeping COVID-19 infections out of our workforce, which we've done very effectively.

When I talk about colleague and patient safety, this is one of the things I'm most proud of, is that if we had to make an error, we're going to make an error on protecting our people and patients. And by putting in the processes, they proved so effective. We've had very little infection spread, and anything that's, even a warning sign has been isolated and dealt with.

So capacity in the labs has been really sufficient. We've always had excess capacity in central labs. So all the extra volume coming through central labs is welcomed with open arms.

Now on the clinical side, as I tried to point out in my comments to get ahead of this question, we've been expanding our colleague population. And if you go back into Q1, we didn't take any aggressive cost actions towards our workforce. We had some very small number of furloughs in our early development, our Phase I clinics. But that was where we limited, and we offered this choice program to our colleagues to take sabbaticals and part-time work if they were trying to balance their new family complications with kids being home from school and not having school. A lot of our colleagues took that up. So we were able to save some costs. They were able to balance their lives. They're coming back. So we're getting our full workforce back.

As Bill mentioned, turnover rates are the lowest they've been -- ever been. And now we've added another 1,000 reqs for new positions. So we think our capacity to prosecute the work is right on where it needs to be, including doing some catch-up work once the site access continues to improve and patient enrollment picks up.

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William J. Sharbaugh, PPD, Inc. - COO [34]

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Yes. I would add to David's comment that the head count figures that he shared earlier on in the call represent a double-digit increase in our head count base versus the end of quarter 2 of last year with an awful lot of hiring requisitions that are kind of out there. So we've continued to keep pace in hiring through this pandemic to make sure that we're in a good position to convert basically backlog into kind of revenues in the quarters ahead.

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Operator [35]

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Our next question comes from Juan Avendano with Bank of America.

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Juan Esteban Avendano, BofA Merrill Lynch, Research Division - Associate [36]

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My question is on the recent COVID awards, but I don't want to focus on the burn phase. I want to focus on the patient recruitment and potential future cancellations. I understand that there will be a lot of competition for COVID patients. So can we expect every COVID late-stage trial to be fully recruited? And also, as the leading COVID vaccine and therapeutic candidates advance and for Phase III data later this year, should we expect an uptick in cancellations on the COVID projects that are a little bit more behind?

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David S. Simmons, PPD, Inc. - Chairman & CEO [37]

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Yes. I'll start this. First, COVID awards, COVID work are a new phenomenon of award to us. And we don't necessarily think that they will behave in terms of risk of cancellation or modification of the study, upscaling or downscaling the study. We don't believe that we should rely on our traditional historical trend analysis on awards and how they behave in backlog. As such, we have haircut COVID awards more dramatically in what we put into our backlog to take a more conservative view and be ready in case there were some cancellations.

That said, we're not seeing anything yet that would suggest that there are going to be extraordinary cancellations or out-of-the-norm cancellations. If I look at maybe split therapeutics from vaccines, if you look at vaccines, there's a series of Phase IIIs that are going up across the industry, all looking at approximately 30,000 patient sizing of what's going to go in. And I've seen this volunteer patient registrar -- or registry that's already up over 150,000 people who have said they'll volunteer for the vaccine study.

So in terms of patient access, now there's that registry, but there's also a need to go into the right geographic location to run the study, and we have to be very adaptive on that. I don't think you're going to see, at least right -- from what I can see right now, I don't see an impediment to all of the vaccine studies that are going into Phase III being able to recruit.

On the therapeutic side, it's the same thing. We haven't had trouble recruiting yet. I think we've seen probably the biggest bolus of award activity occur in Q2. I think we'll see another sizable bolus in Q3 but maybe a little bit less. So we're getting the maximum number of these, and we're not struggling yet from what I can see in terms of recruiting and running them.

So I'll have to say, this is a new world. I don't think looking at our historic traditional backlog and how awards have behaved in backlog will necessarily apply to COVID. Therefore, there may be some more cancellation risk in the COVID work. We've tried to be conservative in that. All that being said, so far, we haven't seen it manifest itself in terms of more cancellations.

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William J. Sharbaugh, PPD, Inc. - COO [38]

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David, I just might add, one, that's a good question is what's the cancellation risk of COVID backlog, generally speaking, and we've been looking at that. If you think about the treatment side of the equation, there's a lot of sponsors who are repositioning some of their drugs. Obviously, this coronavirus is new. Yes, it's a SARS virus. There's some knowledge about it, but I mean it's being scientifically studied. And whether it's anti-inflammatories, antivirals, anticoagulants, many companies are trying their drugs. So you just think there's a wide variety of mechanisms of action that are being tested here, which is a good thing.

So there's antivirals, monoclonal antibodies. There's plasma, human plasma components. There's immunomodulators. There's novel agents. That's just on the treatment side. And so our backlog is across a bunch of sponsors.

On the vaccine side, we're perfectly positioned with a great rep and a site network and a lot of know-how here and great labs. Think about the vaccines. You've got DNA vaccines, RNA vaccines, live attenuated, inactivated protein subunits, replicating viral vectors, nonreplicating. So I mean, let's think about it. The health care industry is throwing the kitchen sink at this thing. And we actually think there's a lot of energy and a lot of activity and a lot of ideas. We don't think the cancellation risk is any different than the rest of our backlog.

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Christopher G. Scully, PPD, Inc. - Executive VP, CFO, Treasurer & Assistant Secretary [39]

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However, as noted kind of earlier, we prefer to be conservative, and that's how we've kind of always managed our backlog policies in the past. In light of that, we discounted these more than we normally would.

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Operator [40]

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At this time, I would like to turn the call back over to Mr. Simmons for closing comments.

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David S. Simmons, PPD, Inc. - Chairman & CEO [41]

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All right. Thank you, operator. I'll close by saying how proud I am of all our employees and their dedication to delivering for our customers and patients during these very uncertain times while maintaining the high-quality operating standards for which PPD is known. We continue to prioritize the safety of our employees and patients and remain confident that the strategies we put in place position us well for continued momentum, exiting in a strong second quarter. Thank you all for joining the call today. Stay safe, and we look forward to updating you on our progress on the next call.

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Operator [42]

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Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.