Good morning, and welcome to PPD's First Quarter two020 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..

Good morning, everyone, and thank you for joining the earnings call. Today, we'll review our financial and operating results for the first 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, includes 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 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 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 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..

net authorizations of $1.06 billion resulting in a Q1 net book-to-bill of 1.3x and notably, we did not see any unusual cancellation activity related to COVID-19; a record ending backlog of $7.3 billion, an increase of 11.9% year-on-year; double-digit P&L growth with revenue of $1.07 billion and adjusted EBITDA of $196.9 million, representing 11.3% and 17.3% growth versus the prior year, respectively, with strong underlying contributions from both our clinical and laboratory segments, which had top line growth of 8% and 31%, respectively; ending cash of $738 million, our highest quarter ending cash balance in over 10 years; continued progress on our balance sheet objectives, with net leverage declining from 6.9x as of Q4 to 4.7x, immediately following the IPO and down to 4.5x as of the end of Q1.

While we're pleased with our first quarter results, we continue to be focused on the here and now and managing through this pandemic. Fundamentally, clinical trials exist to address unmet patient needs, and these needs have not gone away as a result of the pandemic.

In fact, PPD's purpose and mission have never been more clear and inspiring to our organization than they are at this time.

The pandemic has presented headwinds to our business, yet we feel confident that the mitigating actions we've taken and the tailwinds we are experiencing from COVID-19-related work will allow us to emerge from the pandemic in a strong position.

During our Q4 earnings call, I shared PPD's three priorities related to COVID-19 and I'd like to provide an update across these priorities. First, our main priority is employee and patient safety. We quickly organized a Pandemic Committee, co-chaired by our Chief Medical Officer and Chief HR Officer to protect colleague and patient safety.

Through this team's leadership, we quickly moved to remote work for all remote-capable employees, closed domiciling at our Phase I clinics and instituted measures across our offices, sites and labs to maximize employee safety.

Our second priority has been business continuity with the dual goals of delivering for our customers and maintaining financial strength. Across both of these goals, we entered the pandemic from a position of strength.

Our long-standing reputation of delivery excellence coupled with our investments in owned-site networks, digital and virtual trial solutions and remote site monitoring tools have enabled us to provide trial continuity solutions for our customers. Our teams are working hand-in-hand with our customers to ensure continuity of their studies.

And our customers are looking for our guidance and partnership related to digital and virtual solutions across their pipelines. Bill will provide further details on this front, but the power of our enterprise to fulfill customers' needs has never been more clear.

Although more than half of active investigator sites have been impacted, we have adapted and shifted our resources to continue to make progress on our customer studies, such as focusing our team on the trial work not related to site visits and shifting available resources to support new COVID-19 clinical trials.

The adaptability of our organization across all levels, our low turnover and the cross-training of our team members continues to embed confidence in our customers that PPD is their partner of choice through this pandemic.

Regarding financial strength, it has been important to PPD to maintain our balance sheet while minimizing the impact to our talented colleagues. We have taken a balanced approach to cost mitigation and implemented a program we call Choice, where employees are permitted to take a short-term sabbatical or temporary hours reduction.

With more than 600 employees taking us up on this entirely voluntary program, it is clear that this was a needed offering for employees to balance work and family needs while delivering cost savings to the company. Most importantly, this program positions us well to quickly mobilize resources as sites resume clinical trial activity.

This last point is critical because we believe when we do get back to something close to normalcy, we will have to execute on our full plan of work plus catch-up work that has been building up.

In addition to the Choice program, we have implemented a suite of more typical cost control actions, including fast and severe restrictions on travel, a salary freeze for executive management and paused hiring in areas where demand is delayed while still adding targeted resources for areas of work expansion such as COVID-19-related work.

Speaking of COVID-19 work, we are proud to be an active part of the solution to this pandemic.

The strength of our infectious diseases and vaccines franchises with experience on 300 trials over the last five years, coupled with our regulatory expertise in this space, has allowed us to build a leadership position in COVID-19-related vaccines and treatments, with 39 awards to date, spanning our clinical and lab segments.

We continue to be actively involved in bidding on several dozen additional clinical trials targeting COVID-19. In anticipation of the growing demand for our services, we are proactively building capacity across functions to partner with our customers as they tackle treatment and vaccine development for COVID-19.

As you'll recall from the Q4 earnings call, I mentioned that we quickly mobilized a team who has proactively engaged all companies that have announced COVID-19 work in the public domain. I did not expect at that time the depth and breadth of studies that would launch.

It has been incredible to see the power of the industry and how fast our customers have turned on a dime to address this global health crisis. And our team has reacted just as quickly. Current treatment studies that we're partnered on are projected to enroll upwards of 13,000 patients.

Looking forward, we remain fundamentally bullish about the outlook for PPD in our industry. This pandemic represents a dramatic real-world example of the value the innovative life sciences industry provides to society.

I expect this crisis to have a positive impact to R&D investment levels in the coming years as well as aiding accelerated adoption of innovative approaches to trial conduct. We are also experiencing even greater collaboration between pharma sponsors, CROs and regulators, which bodes well for the future of innovative new medicines.

Lastly, as demonstrated by the COVID-19 examples I discussed, we believe our differentiated services, unique customer engagement model and continued commitment to operational excellence, will be increasingly important to customers and positions us well for continued strong growth post this pandemic.

I'd like to close by saying how proud I am of our 24,000-plus colleagues around the world. Their willingness to go above and beyond for our customers and patients, while exercising caution to blunt the spread of the virus has been truly remarkable, and I'm thankful for their dedication and hard work.

We'll continue to provide updates on this topic in the coming quarters as the situation evolves. I'll now turn it over to Bill Sharbaugh, our Chief Operating Officer, to review our operating results..

Thank you, David, and good morning, everyone. During the first quarter, we saw continued operating momentum across the business with strong financial performance from both our segments. I would call out the exceptionally strong results within our Laboratory Services segment.

Our labs produced organic revenue growth in excess of 30% versus prior year, resulting from strong authorizations, rapid customer uptake of new facility expansions in our GMP lab and increased FTE contracts in the vaccine lab.

Given the focus on COVID-19, my comments will largely center on our business continuity efforts and how we are responding to the crisis. Our long-standing history of operational excellence, along with our unique mix of clinical and lab services, put us in a strong position heading into the pandemic.

Before I go through the segments, I would note that while we are sharing certain operating metrics, as our peers have done, these are inherently difficult to compare across the space. I'll start with commentary on our Clinical Development Services business. Our clinical business is impacted in three ways.

First, as David noted earlier, the majority of studies are continuing, and we haven't seen an increase in cancellations. But we have seen several sponsors implement enrollment pauses for studies that have not started or studies with at-risk patient populations, such as immunocompromised individuals and the elderly.

For those studies that have yet to start-up, some sponsors are requesting us to complete preenrollment tasks, such as country in-site selection, remote site initiation visits, study, design and planning and database building so that the new trial can start quickly once given the green light.

Overall, we estimate that approximately 10% of our clinical services backlog is impacted by these pauses while 90% continues. Second, physical access to sites has been disrupted despite regulatory agencies around the world issuing guidance supporting the continuance of clinical trials while protecting patient safety.

In our case, we've seen approximately 54% of site institutions impacted whether it be a suspension of CRA site visits or other site-related activities. About 70% of our clinical trial revenue is not related to site monitoring. Of the 30% tied to monitoring, we've been able to migrate more than half our work to a remote-based approach.

We've also deployed several strategies to ensure patient participation can continue. Our logistics network allows us to ship supplies and medications directly to the patient where appropriate. In addition, we are using digital techniques to screen, monitor and enroll patients for some clinical trials.

PPD is also looking beyond digital and virtual solutions and traditional sites to find other ways to help customers continue their clinical trials.

As an example, within a matter of weeks, PPD designed and operationalized a program that allows the transfer of clinical trial patients from sites that have closed due to the pandemic to our network of 180 research sites, which have remained open and can rescue delayed clinical trials.

In addition, several customers moved volume to our medical communications call center as smaller competitors were unable to maintain business continuity. Third, we have won a significant amount of fast burning COVID-19 work, which is helping to partially offset the impacts I've mentioned.

Our teams are working tirelessly to launch and execute these studies. In several cases, working through the night to activate sites to allow dosing of critically ill patients the following day. New COVID-19 studies, coupled with the backlog of tasks from ongoing clinical trials, position us for a busy period as we enter recovery.

While we have seen work resume with a quickening pace in countries like China, including site monitoring visits and new activations, we expect the recovery to be more gradual throughout the rest of the world. We are poised to accelerate trial delivery as soon as sites reopen.

I believe the strength of our people managers and our industry-low turnover will enable us to continue high-quality execution throughout the pandemic and into recovery. Chris will discuss the financial impacts in his comments. Now turning to the Laboratory Services segment. Let me provide some context on how this business has been impacted.

To minimize the pandemic impacts, the lab's leadership team mobilized quickly to establish clear safety protocols, implement split shifts, segregate departmental teams and move remote-capable employees home.

These strategies, in addition to close coordination with state and local authorities, ensured our scientific staff have access to facilities to progress work in a safe and efficient manner. As a reminder, PPD Labs is comprised of a broad range of capabilities focused on drug development and organized into bioanalytical, GMP, vaccine and central labs.

In order of magnitude, our GMP, BioA and vaccine lab together represents about 2/3 of our Laboratory business. Our GMP, BioA and vaccine labs are not reliant on sample volumes. Rather, the key drivers for these labs are staff availability and facility capacity.

With respect to the central lab, we have seen disruption to sample volumes, but as sites reopen, we are seeing volumes recover.

Lastly, PPD is one of the leading experts in infectious disease and vaccines, and this is underpinned by our 30-plus years of experience, which includes 15 FDA-approved vaccines and experience in over 300 infectious disease and vaccine trials.

As a result, our labs are actively involved in a significant amount of COVID-19 work, which we expect to increase going forward. While the pandemic has no doubt presented challenges, our operations remain strong, our leaders and employees are adapting and we have and will find ways to ensure colleague and patient safety.

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

revenues of $907 million to $946 million, which equates to a minus 9% to minus 5% decline versus quarter two of 2019; adjusted EBITDA of $170 million to $177 million, which equates to a minus 12% to a minus 8% decline versus quarter two of 2019 on an as-reported basis.

So to wrap things up, quarter one was an exceptional quarter from both a commercial and financial perspective despite expanded COVID-19-related impacts in the second half of March.

While we expect the impacts from the pandemic to increase in quarter two, our robust liquidity and extensive state of mitigation efforts have helped us to navigate the crisis to date and positions us well for strong growth post COVID-19. With that, I'll now hand over to the call back to the operator to open the line for Q&A..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Tycho Peterson of JPMorgan. Please go ahead..

Hi, good morning. I appreciate you're not giving full year guidance.

But as we think about sites getting back up and reopened, I'm wondering if you could just give us some general parameters as to how you're thinking about number of sites that may be accessible in the back half of the year and by year-end? And how will Acurian help get – sites get back up and running faster?.

Yes. Thanks, Tycho, for the question. I'll start this, and then you may want Chris and Bill to comment on the two follow-up points of what we're looking at relative to financial impacts and then how we see Acurian and our site network through the year.

So first, I'd say, it's a very difficult question because we don't know how the recovery is going to come, and we don't feel it would be prudent to try to project whether this is V shaped, U shaped or some other shape.

We do think, and in our Q2 guidance, we have the impact that's at its most extreme form that we've faced thus far continuing through the second quarter. So that might be one point that helps. As we see sites coming back on, we probably have the most positive example based on what's happening in China. We don't forecast that Western Europe and U.S.

will follow the speed of recovery that happened in China. Maybe that's conservative. In retrospect, we might look back and say it was conservative, but that's what we've currently planned. Let me see if Chris and then Bill want to add anything to that..

The only thing I would add is, I think, David, your comments apply to what we've forecasted for our quarter two kind of business. That doesn't mean operationally that we're not prepared to kind of accelerate kind of things if the pandemic's impacts are slower than that..

Yes. Tycho, this is Bill. As David mentioned, China is a comparator, but we're not sure it's the best comparator because activity has accelerated faster than we thought it would and forecasted it would.

We've seen project initiations increase, IRB approvals increase, contract negotiations increase, site initiation visits increase, enrollments increasing, site audits are increasing. And based on our data and survey data we've seen suggests that they're back and sort of have recovered about 60%.

Don't – as David said, don't expect the same necessary trajectory in Europe and in the U.S., but we are prepared. So from a resourcing perspective, we're in really good shape.

So our site network, look, we think this is a good asset to have in our mix of services, and it can be used as a rescue mechanism for delayed studies, and we're in those kinds of conversations with customers.

It's true it does have a fixed cost base associated with it that needs to be covered, but that's clearly offset by its strategic value and its use by customers and its uniqueness. So it's early days, but we think this is a good asset and part of the solution to help delayed clinical trials..

That's helpful.

And then for the follow-up on the 2Q guidance, are you able to give us any color on clinical versus lab? How you're thinking about one versus the other?.

Thanks for the question, Tycho. I think the answer to that is that we don't plan on giving specific guidance beyond what we have for the total company at the segment level.

That said, per Bill's comments earlier on as well as some of the ones I made in the prepared comments for the call, we did kind of indicate that our clinical business is more greatly impacted than our labs business. So in our labs business, specifically, we have lower sample volumes in the central labs.

However, that's less than 1/3 of the total business. BioA and GMP are impacted by less of a degree. It's likely that they're not going to continue to grow at the same rate that they had in quarter one, given it was a phenomenal growth rate. That said, we continue to expect for them to grow faster than the market..

Okay, thanks. I appreciate it..

The next question is from Ricky Goldwasser of Morgan Stanley. Please go ahead..

Yes, hi. Good morning. In the prepared remarks, you talked about the collaboration that you're seeing between you and clients and the FDA. So maybe if you can just kind of like give some more examples and color there. And also, as you think longer-term post COVID, what do you think of the – the FDA has been a lot more flexible.

What do you think is going to stick post COVID? And if you think about the approach that clients have, clients that are bringing new RFPs on, are they starting to think kind of like longer-term beyond COVID of making changes and adding things as a result of what we're seeing now?.

The last part of the question, when you say adding things, could you be a little more specific?.

Meaning, when we kind of talked in the past about RFPs, I think there was this sense that some of the remote monitoring capabilities, right, we're not as entrenched in those RFPs.

So are you starting to see clients having conversations that think about how are we thinking about trial design post COVID or are all the conversation focused on the here and now?.

Okay. And that's also linked to the second part of the question around FDA flexibility.

You're hitting on the same thing?.

That's right..

Okay. Let me take those two at the back, and then we'll see if we have some examples of collaboration that are going to hit the mark on this.

So as we had in the prepared remarks, we do think that there'll be an accelerated adoption of virtual digital technologies into trials to be more patient-centric, to remove the burden on the patient, to be able to take more of the trial to the patient as opposed to the patient having to come to a physical infrastructure.

The ability to do that is different across different therapeutic areas and different studies. So I wouldn't look at this as one big general statement. It's going to be very nuanced, but some studies do lend themselves towards more virtualization, if you can accept that term.

So the way we look at it in terms of trying to sense the acceleration of adoption, you've hit on two of them. One is the regulators' posture towards adoption of these technologies and deviations to more status quo approaches to trial conduct. Second is readiness of the digital and virtual technologies to be applied to studies.

Let me just tick that one off now. That looks really solid. The technologies work. They're able to go. So you give that one a box tick. And then the third that you hit on is clients' willingness to challenge the status quo and adopt these new technologies into the studies.

So if I pick that off, let's go with customers first because the number of customer engagements that's been going on with us has not changed pre COVID and post COVID, meaning the volume of interactions we have are just as significant and robust as pre the crisis.

They're just happening all over virtual technologies like Zoom, Microsoft Teams, WebEx, things like that. In those conversations, there is a dramatic increase in the volume of conversations around adapting these technologies into studies. Twofold.

First is adopting the technologies and approaches into studies that are already actively in process in our backlog. We've got active conversations of changes to be considered being put in on 10% of the active studies that were running in our backlog.

So that's a dramatic increase in volume of real discussions to modify the protocols to adopt these technologies. And the conversations have extended into future pipeline for the customers.

So on that collaboration, I would give you that volume has increased dramatically from pre COVID to in the midst of COVID, and it's not just related to the COVID studies. It's also related to future pipeline. So that's one of the major reasons we said that we see an accelerated adoption.

Now on the regulatory side, the regulators – and we're not just focused on the FDA. Regulators around the world have given guidance during the pandemic to help studies continue and to help patients continue to receive medicines, continue to participate in the studies because it may be part of the practice of care and be very important to them.

So they're accepting deviations to the protocols to use these types of technologies.

We've had cases of the Italian regulators, when the hospitals were overwhelmed, were allowing patients in a study that couldn't get into an investigator site that was burdened by COVID-19 treatment of patients to go to another site on the study that was not shut down due to COVID-19 treatments and continue the protocol there. So that's an example.

It's not technology based. They also accepted the use of televisits for patient follow up. So that's an example of regulators leaning in.

The big question we have, and we don't know the answer to is post pandemic, do the regulators continue to be embracing the use of these type of technologies or do they shift back to a more conservative approach of back to the status quo of trials. And that point, we don't know.

But given all those three dimensions, customers have clearly leaned into this more and their appetite to apply these technologies is greater. Regulators have shown more flexibility during the pandemic, but the big question is, will they continue that post pandemic..

And just a quick follow-up there.

Are there any – given the change in client appetite, are there any strategic assets that you think that are interesting for you to add to meet this change in appetite and demand?.

Not specifically. We're generally on the lookout beyond the partnerships and investments we have as we engage on specific trials and look at the right deployment of digital and virtual technologies onto each of these trials, how much are covered by partners we already work with on the technology and virtualization side.

And as we see things that might be missing, and it's not always technology related. Some of it is also nontechnology related to be able to enable the trial going to the patient's home, for example. So we're keeping an eye on this and screening, but we don't have anything specifically that we think we need at this point..

Thank you..

The next question is from Robert Jones of Goldman Sachs. Please go ahead..

Great, thanks for taking my question. This is Jack Rogoff on for Bob. Can you help us understand the 31% growth in the Lab segment? It sounded like a good amount of vaccine work and GMP capacity uptake.

I'm curious how much of this was more of a lumpy pull forward of higher capacity build-outs versus more sustainable growth for you guys?.

So this is Chris. I'll start with that and Bill may want to fill in some additional details beyond what I share. But quarter one growth in Labs was a result of a combination of favorable factors, including what we ended with last year is a really robust starting backlog. Second is the authorizations wins that we had in the current quarter.

That led to faster expected customer utilization of some of the capacity expansions that we did last year. And we also benefited from major accelerations in a vaccines development program at one of our key customers. So it was a combination of multiple factors that went into it.

I don't know if, Bill, you'd like to add something?.

Yes. Maybe just to add some color to Chris' commentary. We've got a diverse set of laboratories. We think they are one, two or three in their respective niches. And we're a recognized leader in our labs.

So your question was, is this lumpy? Well, we – in Q1, you can see our authorization results and Labs were certainly a big contributor to that, and we've had strong authorization growth. So look, we've added capacity, but we usually add capacity in a kind of a smart way.

It's aligned with customer demand, but you have to build out enough capacity when you go the trouble and apply the CapEx to sustain you for a year or 2. So we certainly have enough capacity to grow, and we have a customer and market demand that suggests we're in a good space.

We had an outstanding quarter in Q1, no doubt about it, but we feel good about our laboratory segment going forward..

Got it. That's helpful.

And then are you expecting any change in your CapEx outlook this year? Or are things progressing as normal in this area?.

Yes. We're not guiding specifically to where we'll end up in terms of CapEx for the year. We tend to be a business that's a little bit less capital-intensive than many others. So we've averaged around 4% of ASC 605 kind of sales per year, I think, a little bit below that on an ASC 606 basis.

You may see us hold back slightly on some of these expenditures where we deem that they're nonessential given the pandemic and our desire to strengthen up liquidity. But we're going to continue to kind of invest at the same time where there's opportunities that we have a high degree of confidence or need and that are going to aid our customers..

Make sense. Thank you..

The next question is from Dave Windley of Jefferies. Please go ahead..

Hi, thanks for taking my questions. Good morning gentlemen. On – I wanted to get some follow-up on a comment that Bill has made a couple of times around China. You talked about – you gave us a litany of contracts, site activations, things like that.

I'm wondering, since we kind of don't fully trust the data we see in the major kind of infection trackers.

Are you seeing any spike in infection rate that would worry you that you would have to kind of retrench back into a more restricted environment in China? Or is that continuing to progress without inhibition?.

Yes, Dave, I couldn't comment on the infection rate in China overall. I'll leave that to international health authorities in China. All I can do is tell you what we've seen in our business. This is an interesting factoid and makes me really happy, but none of our employees in China contracted the virus so far, which is amazing.

And reviewing with our team the progress that's being made, I'm just suggesting that we're seeing activity resume in China. The metrics in the month of, recently have suggested that there's an uptick in activity in China. So that's positive, and we're going to see what happens.

But I couldn't really comment on the infection rate in that country or anything of that nature..

Got it. I was just digging for, have you and your business had to rein back at any point in the last, say, couple of months, but it sounds like no. The second question that I wanted to explore was around your cost controls, which seemed pretty significant.

I guess, quantitatively, I'm basically looking at a kind of 1Q to 2Q sequential decremental margin that is lower than your reported EBITDA margin in the first quarter. So kind of looks like you're reducing costs by more than 100% of your costs. And I hear you talking about putting capacity in place for COVID-related trials.

You have a lab business that obviously has a fair amount of fixed capacity in it.

And I just want to better understand where you're able to pull levers on cost to mitigate the impact to EBITDA as you go into 2Q?.

Yes. Thanks, Dave. I'm not sure if we kind of look at the math the same way that you're looking at. As I kind of look at it, our margin improved slightly from I believe it's about 18.4% in quarter one to 18.7% next quarter. That does have embedded within it a fair degree of cost control.

One thing you have to keep in mind is in terms of the staffing or the resourcing is to the extent that there are kind of colleagues that would not have demand if it weren't for COVID-19 awards, we're able, in large part, to kind of shift some of those bodies where they have the capabilities to support the COVID-19 kind of work.

That's what David referred to in his section about basically people being cross-trained and really having a great degree of flexibility, which has been part and parcel of how we've been able to manage our cost base as tightly as we have the last several years.

So that adaptability and flexibility definitely plays out favorably amidst a crisis like this..

Okay. But it does suggest that you're actually assuming greater productivity sequentially despite the disruption and having to shift people around..

Dave, this is Bill. I might answer it in this way. Look, personnel is the biggest cost in our business, right? And – given its nature, so utilization is key to us and we have a lot of capability here analytically and to control that.

And to your point, given the current situation, there's a lot of tension between cost containment and the expected increase in demand. Look, we certainly slowed hiring. Our utilization is holding up pretty good. It's certainly not a target, as you would expect.

And we have taken an approach of reallocating team members between projects and shifting team members between functions in some cases. And so overall, our priority is quality and ensuring that we can keep business continuity for customers and studies and patients.

And so we're doing that through a variety of mechanisms, and we're poised as recovery occurs to take advantage of that. Now look, clearly, a lot of other drivers of cost, travel costs have gone way down, et cetera. David mentioned some activities in his commentary.

And we've had employees who have voluntarily chosen to reduce their hours in the Choice program that David mentioned. So I mean, we have a lot of levers we're pulling on the cost side appropriately with the situation, but we are poised to recover..

Okay, thank you..

Yes. Just one other thing to add, Dave, on the question is, as you know, these are some complicated kind of businesses.

So in addition to all those things, which we're doing to kind of manage some other factors could skew the percentages a little bit here and there, including the FX rates for the quarter, the ratio of indirects to directs, what we're kind of doing in our variable compensation. So a series of those things could also twist it.

But basically, overall, I think the story is, is that, that this is a team that has a lot of experience in terms of managing utilization and staffing, and we do a great job at that, and this is not the first time we've been at it, and we're going to execute this really well in quarter two..

Excellent, thank you very much..

The next question is from John Kreger of William Blair. Please go ahead..

Hi, thanks very much. Can you tell us how well are the Phase I clinics holding up? I would think they're probably getting hit harder than some of your other areas..

Yes, John, this is Bill. Our Phase I clinics are part of our early development services business, which is in clinical. And so it's a subset of that broad category defined as early development. Look, we – what we did as the situation was developing in March. We finished out ongoing studies that were near completion for clients.

We took a look at the situation. We decided to shut down that clinic. We furloughed some of the employees, and we thought that was the right thing to do because we didn't want to domicile healthy normal patients based on all the guidance from international, national and our local health authorities. So I would – we looked at the marketplace.

We saw about half of those providing those services, kept them open and some reduced capacity and about half closed. We are in the camp of closing because we thought that was the right thing to do. So that's a subset of our business. We have clinics in Las Vegas, Nevada, in Austin, Texas and in Orlando, Florida.

And we're in the process of planning for reopening, depending on how the virus progresses, but I would see us taking a phased approach where these open up at the end of Q2 for a small subset of studies, a whole bunch of new procedures put in place. And then through the course of Q3, ramp up and then be at full capacity in Q4.

That's how we're sort of thinking of our Phase I clinics. There's a lot of detail around it, but our team has done an excellent job, and we think we've done the right thing as a company to protect both our staff and patients..

John, it's David. One thing to add – one thing to emphasize what Bill said and then something to add. First thing to emphasize is that colleague and patient safety has come first. Of the three objectives that we're working on, if they ever come in conflict, colleague and patient safety wins. Hence, the very fast decision to shut down the clinics.

That's the point I would emphasize, Bill brought up. The point I would add is that customer demand for these services is very strong. So customers are – keep asking us when are we going to be able to reopen the Phase I clinics..

That's very helpful. And then a follow-up around the site network. I'm guessing the patient flow there is better than what you're seeing in sites that you don't own or manage.

Any metrics that you could provide on that? I'm just curious how your site network patient volumes might have trended in the quarter compared to the other sites where you work?.

Yes, John, this is Bill. So first of all, our site network has remained open, okay? Number one. Number two, ongoing clinical trials, many ongoing clinical trials have continued, albeit at a slower pace.

And then some clinical trials have been put on hold by customers because they represented these at-risk patient populations that I mentioned earlier, immunocompromised patients or elderly patients. So it's a bit of a mixed bag there. The key thing is it has remained open, they are screening, recruiting and enrolling patients.

And as I said, it's a rescue mechanism for ongoing clinical trials, and we're having discussions with customers around that right now. We put into place a couple of virtual solutions to help keep patients engaged and enrolled in those trials. Customers are very concerned about patients lost to follow-up.

We've been able to maintain a lot of continuity there. So we have experienced some studies that are delayed to enrollment or paused on enrollment just because of the nature of those patients, but it's remained open, and many studies are continuing. So we think as recovery strengthens that our site network is going to be a great solution.

And then those studies that are on pause are going to resume..

Sounds good. Thank you..

The next question is from Erin Wright of Crédit Suisse. Please go ahead..

Great, thanks. Biotech funding, I would expect to be a little bit more volatile, obviously, in this environment.

I mean, what are you seeing and hearing across that cohort of customers compared to large pharma?.

Thanks for that question, Erin. First, I'm going to say that biotech funding looks as robust as it's ever been in Q1. What we're seeing is funding from IPO and debt financing, probably off a little bit or flattish, but funding from venture capital increased in Q1. So the total was a very robust funding environment.

So we're not seeing any signs of funding weakness on the biotech front. Second part is we continue to see cash on balance sheets of the funded biotech companies sitting at about two to three and trending to the three-year number in terms of cash on the balance sheet at current levels of R&D spending.

So those are those two elements of the amount of capital flowing in and the amount of cash on balance sheets that the well-funded biotech companies are sitting on are both as strong as they've ever been. So that's the first point.

The second is, I think, specific to PPD, I would bring out, which is in our backlog, if you look at the authorizations in our backlog from our biotech customers, approximately 80% of that award volume is for Phase II and later stage studies, which tend to be lower risk studies than the earlier stage biotech study.

So you got an overall funding environment is strong and then the particular types of work we do in the later stages of development, which makes up on a dollar value, approximately 80% of our biotech backlog is relatively less risky..

Okay. Got it. And then you mentioned the success you're seeing in COVID-related business wins.

How should we be thinking about how meaningful those are from a financial perspective?.

Yes. A couple of things to consider, as you think about them is, one, they're fast burning. So this is – tends to be revenue that's going to run this year and into 2021. So that's the first point.

Second is, we think that the COVID book of work is dynamic meaning, you've got a lot – the industry has really responded rapidly and are doing a lot of testing of scientific hypothesis around COVID. And some are going to be good hypothesis that will get early data that's positive, and others will be not so good hypothesis.

So I would expect with the awards that are coming in, some will cancel, some will expand. And we've already seen some expansions in the work we've won. So we mentioned 39 awards. Another way to think about this is that 39 awards, about 2/3 of those awards are for treatments, 1/3 of those awards are for vaccines.

So the first and fastest kind of runs out of the blocks were the treatment programs, and those that had really good early data have already expanded scope. So another thing to think about is as you see awards, they're starting in the earlier stage. But if the data comes out very positively, you can see rapid expansions of these programs.

An example of that is we had one treatment program that we were working on, where our original scoping was to enroll approximately 700 patients. Within four weeks and the early data readouts on that, the scope expansion went to well over 6,000 patients. I mean it's just a rapid and massive increase in scope.

And Bill talked about our people going 24 hours a day, trying to make sure that we're able to enroll patients and get medicines to patients. That's actually tied to this specific example. Vaccines are lagging a little bit because it's being tested in healthy volunteers.

But I would expect that the good vaccines programs are going to see scope expansion start to pop in Q2. Now the question is, you've got this double force, which early data readouts aren't going to be so positive, so there could be some cancellations or just the studies stop after that early stage.

And then others where the data is positive is going to be relatively large scope expansions. And then because that's why we do these studies, it's hard to project what the volume is going to be in the future..

Great, thank you..

The next question is from Juan Avendano of Bank of America. Please go ahead..

Hi, thank you.

Can you give us an update on the percentage of your overall patients that you are able to recruit from your site network? And also, what is the percentage of your sites that are exclusively dedicated to clinical research and thus potentially seeing a smaller impact from health care resources being diverted to COVID-19?.

I'm sorry, can I get the second part of your question again, Juan?.

Yes.

And so what is the percentage of your overall sites that are exclusively dedicated to clinical research and thus potentially seeing a smaller impact from health care resources being diverted to COVID-19?.

Okay. I mean, we don't have the specific data to disclose on either of those fronts, but let me try to help with the questions.

On the percent of patients related to our site network versus other site networks, say proportionality hasn't changed through this COVID-19 crisis, meaning the majority of patients are still flowing through the traditional site network versus the 180 sites we have.

I would say that we, on our sites, while they're open and patients have been resilient, meaning patients are willing to participate in clinical trial conduct, the biggest factor affecting our own site network has been customer holds.

Where if you flip and go to the traditional investigator sites, the biggest impact has been investigator sites as part of hospitals that are dealing with COVID-19 outbreaks. And there's severe impediments to our ability to do on-site activity, which Bill framed the proportionality in his opening comments.

So you have this kind of different impact from COVID in our sites, which is more driven by customer holds in proportionality standpoint and zero impact on the sites being opened from the pandemic versus traditional sites, which are more impacted by the pandemic than from customer holds.

So that would be, to try to help inform your question without disclosing the specific numbers you're asking for.

Bill, is there anything you want to add to that?.

No. I think you hit it..

Thank you..

The next question is from Dan Brennan of UBS. Please go ahead..

Thanks for taking the questions. David, you mentioned during the prepared remarks, that you think COVID could actually have a net positive impact on the overall R&D spend, I think, for biopharma.

I was wondering in that context, a topic we've tried to think about is when we look out beyond 2020, the ability for CROs to [Audio Dip] So could you just speak a little bit about, maybe give a little more color on the overall level of R&D and COVID impact? And is there an ability, is there a slack capacity, whether it be at the sites, investigators or in CRAs to actually have an ability to catch up for what's been delayed?.

Yes. I think there's – you were getting cut off in the question, but I think the question had two parts is what was behind the statement of believing that this COVID experience will have a positive effect on R&D investment.

And then I think your second question was around what – how do we see the complexity or challenge of catch-up once we get back to normalcy. So assuming that was the gist of the questions. So on the first piece, the statement on R&D investment levels is not a technically based feeling or belief. It's twofold.

It's one, that I think with the pandemic going out, I think society is realizing that in the face of extreme health challenges or risks to health, where does one turn for solutions? And the innovative biopharma and biotech industries is the place that's mobilized on their own at speed and at pace and are having real impacts already.

I mean, just if we look at remdesivir's approval and the amount of work going on. So one, I think since all the, maybe pre COVID, you may have seen just the general narrative out in the public being one that's more negative to the industry because of drug pricing and a political focus on drug pricing.

I think society is probably seeing very clearly the role that this industry plays. So I think the belief and the importance of this industry to society is pronounced in this. That's the main driver behind the R&D investment levels.

I think probably a sub chapter of that is maybe a renewed focus in public-private and what I believe would lead to a public-private discussion on infectious disease preparedness, which maybe was lacking a bit, heading into this. So that's the first piece on the R&D investment side.

On the recovery side, this is a really tough topic, and it's one that we spend a lot of time on, and business by business within the total of PPD, it looks different. But fundamentally, we have to be prepared for different types of recovery curves, whether they be V shaped, U shaped or W shaped with reoccurrence of the pandemic.

But we do believe that we're going to get back to a point where we're going to have to run whatever time period, let's say, it's fourth quarter. Again, we don't know what it's going to be. Let's say, fourth quarter, where we get back to the requirement where we've got to run the full expected book of work for that quarter that was planned.

And then we have all of this catch-up work for delayed activities that have gone on. So resourcing becomes very, very important. And this is why we've been very loathe to take draconian actions on our cost base.

Our leaders have done a great job adapting resourcing and reshifting resourcing to keep utilization as high as we can, but it has taken a bit of a knock. And this Choice program has been key. So people are managing their lives better, but we haven't given up that capacity, that flex capacity to come back in.

But we do believe when that period of time hits where we have to do our normally planned volume of work and do the catch up work, that we're going to have to ramp up hiring. And the timing of the ramp-up of hiring at or in advance of this spike is something PPD does really well and calibrates really well.

And we're going to have – this is going to test our ability probably unlike any other spike buildup that we've seen in the past. I just want to see if Bill wants to add anything to this..

Yes. David, I think you framed it quite well. I think the challenges aren't technical in nature. It's going to be access to sites, right? So access is a challenge. Clearly, there's new procedures that will be in place that various countries, institutions, et cetera, will put into place.

And we and you will have to react to that so that our CRAs are prepared and able to enter those sites. And then it's the nature of our business. It's core.

But clearly, there's a lot of protocol amendments that have been put in place around clinical trials as we've added digital services, as we're in a rescue mode, opening up new sites, catching up on activities that are required to be done at the site.

We've done a lot of this work in advance, as I've said, to the extent we can to start-up a new clinical trial. But that's our bread and butter, those protocol amendments. And like David said, from a resourcing perspective, we're planning for recovery and ready for recovery..

Great, thank you very much..

This concludes today's question-and-answer session. I would like to turn the conference back over to David Simmons for closing remarks..

Yes. I want to thank everyone that participated in the call. We appreciate your time and allocation of time to PPD. As you can tell, we're very pleased with the quarter one results, but that's behind us now. Our full focus is on managing PPD and being part of the solution to this pandemic as we go through Q2 and into the rest of 2020.

So again, thank you for your time, and we'll close the call..

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day..