PPD, Inc.

Good morning, everyone, and thank you for joining the earnings call. Today, we'll review our financial and operating results for the third 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 filing and 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 IR 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 that 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.

Thank you, Nate. And good morning, everyone, and thanks for joining our third quarter earnings call.

While we continue to operate in an environment impacted by COVID-19, PPD continues to achieve strong results for our customers, our colleagues, and our shareholders. I'll start with an overview of our Q3 performance before turning it over to Bill and Chris for additional operational and financial details and Q4 guidance.

We revised our Q3 guidance upward in mid-September in light of July and August performance and positive internal data and external signals. Our actual performance in the third quarter exceeded these targets.

While Chris will provide more details, the major driver of our performance was faster conversion of new COVID-19 awards into revenue than we had anticipated. I'm pleased to share a few highlights from Q3.

Net authorizations reached $1.2 billion representing a 33.3% year-on-year growth and a net book-to-bill ratio of 1.35 times. While we continue to achieve commercial success with COVID-19 related programs, I'd also note that these awards represented around 20% of authorizations for the quarter.

Our backlog continues to reach new records with an ending backlog of $7.9 billion representing 15.9% growth year-on-year. I'd also like to highlight that our backlog conversion rate improved since Q2 to be more in line with historical averages at 11.8%.

This execution translates to revenue growth of 20.5% with strong results across both clinical and lab segments and adjusted EBITDA growth of 14.8%. Even when removing COVID-19 related studies, we would have still achieved growth in revenue.

This marks the third quarter operating in an environment impacted by the pandemic. Over the past two quarters, I've emphasized certain priorities including safety and business continuity.

While these priorities remain as we have adapted to this environment of uncertainty, I want to focus my commentary on how we continue to differentiate ourselves and how these differentiators are causal to our outperformance. While I can pick any therapeutic area to highlight our points of differentiation, given the COVID-19 pandemic, let's look at infectious disease and vaccines and unpack how PPD is different.

First, we have built industry-leading expertise and experience through our long history of supporting these types of studies globally, including more than 300 studies across more than 50 countries in the past five years. More recently, we've won more than 140 COVID-19 related awards across multiple modalities, phases, and services, and have already enrolled more than 50,000 patients across COVID treatment and vaccine studies.

Our customers value our track record of delivery and quality. Second, this depth of experience strategically directs our investments to create a set of solutions that we believe to be unique.

For instance, our vaccine site network helps to accelerate enrollment and increased patient diversity enrolled into our studies. Our epidemiology models predict hotspots before they occur and our digital tools enable data capture and remote patient follow-up among many other benefits.

On top of these clinical capabilities, we have significant labs experience supporting many FDA approved vaccines across a wide variety of indications and differentiated offerings across our full spectrum of labs capabilities. While we don't normally discuss specific client, the Moderna press release had mention of PPD specifically as a testament to our experience and expertise.

We offer all of these capabilities through an integrated model so clients can dedicate less of their time to oversight planning and communication. As an example, on one large COVID-19 program, we have more than 20 functions across segments working together to achieve milestones more quickly.

This brings me to my third point, our Collaborative Customer Engagement model. We were one of the first CROs to develop a targeted biotech offering specifically aimed at proactive engagement with emerging biotech companies.

Within infectious diseases and vaccines and specifically with the COVID-19 pandemic, proactive and fast customer engagement is critical. Our engagement model has enabled us to collaborate with customers on protocol development, activate sites quickly, and begin patient recruitment activities even before the final protocol has been approved.

Lastly and perhaps most importantly, our success hinges on the talent and tenure of our team with a global footprint of experienced clinical and laboratory leaders, low turnover rates, and therapeutically align resources, we have knowledgeable feet on the ground around the world ready to navigate local challenges and expedite trial progress through round the clock coverage. These are just a few examples of our strengths, but I hope it helps to paint the picture of how PPD is unique.

As I mentioned, I could pick any therapeutic area and paint a similar picture of differentiation. We are building on these capabilities and strengths every day.

I'd like to close with some thoughts on future expectations. As I look across our stakeholders, I continue to see a very positive future for the industry and for PPD in particular.

While the pandemic has presented site and patient access challenges, these groups are resilient, and we continue to see increasing enrollment through the insight that we have through our site network. Governments and regulatory bodies are collaborating like never before.

R&D demand remains strong and outsourcing remains a critical lever for our clients, which I expect to see even more of as we and other large CROs offer more technologies and more efficiencies. Innovation is continuing at an accelerated pace.

And the future holds promise across stakeholders. In closing, it's been a strong quarter for PPD, and I am optimistic as I look toward the future.

Our team of experienced leaders is demonstrating the adaptability to navigate unforeseen challenges while continually growing profits year-on-year. Our backlog continues to grow.

And while COVID-19 related awards have been a focus, they remain less than 10% of our total backlog. I call your attention to our backlog conversion rates.

Even before most COVID-19 related awards began to convert to revenue, we sustained our conversion rates better than industry averages. Looking ahead with 2,500 additional colleagues on board since September 30, 2019 and more than 1,000 positions posted, our team is ready to expertly prosecute our growing backlog.

As we look toward 2021, I am confident in our ability to continue our trajectory by deepening client relationships and further advancing our expertise and capabilities in areas that matter most to our clients. I'll now hand it off to Bill Sharbaugh, our Chief Operating Officer.

Thanks, David, and good morning, everyone. Operating performance was strong in Q3 with solid contributions from both segments.

PPD leaders across the company are working tirelessly to drive positive results for our customers and patients while keeping safety and quality top of mind. Starting with our Clinical Development Services segment, we achieved 19.2% year-on-year revenue growth in Q3.

This was achieved by efficiently prosecuting our backlog and quickly executing new COVID-19 related awards. As I've done in the past two quarters, I will provide a view into several metrics related to the pandemic, and again suggest caution when trying to make direct comparisons between companies as each company's definitions are different.

First, to provide insight into ongoing studies unrelated to COVID-19 development programs over the quarter, we saw improvements in site and patient access. While our proprietary site network has remained accessible throughout the pandemic, across our broader footprint, we had full access to less than 50% of sites in the past and this has improved to 60% to 70% of sites globally.

Meaning, no limitations or delays on visits, shipments, or filing at these sites. Our total site visit activity has rebounded through a combination of onsite and remote visits.

In prior months, we shifted to conduct 90% of monitoring activity remotely. More recently, we've been able to get back on site and completed 50% of our monitoring visits on site during Q3.

Second, we've seen positive trends in patient participation and enrollment. As David mentioned, we have a unique view into patient behavior through our site network and over recent months, we are seeing more patients express interest in participating in clinical research.

As an example, our site network recently enrolled 159 patients in an osteoporosis study in less than 38 days. More broadly, across our global clinical footprint, we've seen monthly patient enrollment on non-COVID-19 development programs, more than double from its lowest point.

While not yet back to pre-pandemic levels, we believe this is a demonstration that clients, sites, and patients are ready to reengage in clinical research when they are able. Third, the innovative approaches of digital engagement and direct-to-patient drug shipments are effective in maintaining patient participation and trial continuity.

I expect continued adaptation to trial design aimed at patient centricity even when in person activity is fully possible. For instance, remote screen via telemedicine at our site network has helped to increase patient reach and offers promise for the future.

Looking ahead, we remain watchful of virus resurgence around the globe because we've seen some leveling off of site access in recent weeks. Given these dynamics, we expect that we will continue to operate in an environment where limitations exist as we look to Q4 and beyond.

That said, we remain optimistic about our ability to prosecute our backlog, and we have been able to progress trials throughout the pandemic. Shifting the COVID-19 related vaccines and therapies, PPD was selected to advance many new candidates and dozens of existing products through the clinical trial process.

We have significant infectious disease experience and are proud to assist industry and government sponsors seeking to prevent and treat COVID-19. We have approximately 3,000 employees across segments and functions working on COVID-19 related programs in some capacity.

Our teams at PPD in collaboration with sponsors and regulators have recruited randomized and dosed patients in a fully virtual manner. We've also reduced cycle times of key processes two days that otherwise would have taken weeks or months.

For instance, on one COVID-19 treatment study, we activated 100 sites in less than one month. Even while sites were strained with patient care and site selection was shifting due to pandemic spread, this level of innovation and flexibility while maintaining quality and safety is meaningful.

Next, moving to Laboratory Services, we had another strong quarter with 26.6% year-on-year revenue growth. As we shared during our Q2 call, central lab volumes rebounded and returned to pre-pandemic levels.

This volume continues to increase and samples are above pre-pandemic levels owing both the new COVID-19 and non-COVID-19 related awards. Notably, within our central labs, we were recognized at the Vaccine Industry Excellence Awards, as the Best Central Lab.

This is a tremendous honor for our lab team and it's especially significant at this time when there is urgency surrounding vaccines development. As I mentioned in the past, our GMP Bioanalytical and vaccine labs are not reliant on sample volume and we have continued to keep staff productive and partner with customers on exciting programs.

For instance, these labs have played a role in the development of new COVID-19 related assays and COVID-19 monoclonal antibody testing. In addition, as customers have experienced pandemic related disruptions, our labs have quickly jumped into action to support customers in meeting deadlines on ongoing non-COVID-related programs.

The lab segment is well positioned for future growth, owing to continued commercial success technology advancements and available capacity. One future expansion I'm excited about is a new lab offering Bioanalytical, biomarker, and vaccine services in Suzhou, China which we expect to be fully operational in 2021.

Finally, I want to highlight that as an enterprise, we recently obtained the ISO 27,001 certification, a recognition of our commitment to information security. This is a testament to the culture of quality and compliance that permeates across all businesses and functions at PPD.

I'll now pass it over to Chris to comment on our financial results.

Thanks, Bill. Good morning, everyone.

My prepared comments today, I'll be covering our quarter three results, updating you on the company's cash and liquidity, and lastly, discussing revenue and adjusted EBITDA guidance for quarter four and full year 2020, and providing commentary on 2021 prior to opening up the line for Q&A. Before diving into the numbers, I'd like to remind you of a few important details related to today's remarks which are consistent with our recent earnings calls.

First, when referring to our financial performance, I'll be doing so on an ASC 606 basis. Second, when referring to our commercial performance including metrics related to net authorizations and backlog, I'll be doing so on a historical ASC 605 basis unless indicated otherwise to maintain comparability with prior periods.

That said, we have also included these metrics in our investor supplement on ASC 606 basis both with and without indirect to aid investors. Finally, also similar to our last call, given the exceptional circumstances surrounding COVID-19, we have expanded the operational and financial metrics that we are providing today.

That said, we are unlikely to provide all of these disclosures on an ongoing basis post the pandemic. Turning to our Q3 results, as David noted, we had another strong quarter of bookings.

We recorded $1.2 billion in net authorizations, which was up 33% year-on-year, resulting in a net book to bill ratio of 1.35x. Year-to-date, our net authorizations of $3.3 billion are up 17.8% over the same period of last year and our net book to bill ratio is 1.33x.

Providing some additional details on our Q3 bookings, RFP and award volumes were once again robust across biotech and biopharma customers with double-digit growth in new bookings in both our clinical and lab segments with no unusual cancellation activity related to COVID-19. In terms of the mix of COVID versus non-COVID-awards, while we continue to record a sizable volume of COVID bookings in Q3, as customers began to shift their attention back to the progression of other assets in their portfolios in the quarter, we saw the percentage of new bookings from COVID studies decline from approximately 25% of our total in Q2 to slightly under 20% in Q3.

Excluding COVID awards, we had double-digit year-on-year growth in new bookings in Q3 and a net book-to-bill ratio just shy of 1.20x. Finally, on authorizations, as we've last quarter, given that the dynamics and behavior of COVID studies could differ from more traditional studies and since we have limited historical precedents, out of conservatism, we've again applied a larger haircut or discount to COVID awards in determining the dollar amount to add to authorizations and backlog than the historical averages we've applied to non-COVID work under our policy.

With respect to the P&L, Q3 revenue of $1.234 billion increased 20.5% over the third quarter of 2019. This was driven by 26.6% revenue growth in our lab segment and 19.2% growth in our clinical segment.

Revenue growth ex-COVID was plus 1%. Growth excluding both COVID and pass-through was plus 2% with labs growing double-digits and clinical down 1%.

Adjusted EBITDA for the quarter was $232.6 million, an increase of 14.8% over the same period of last year. It should be noted that revenue growth outpaced EBITDA growth in the quarter due to a higher mix of indirect to direct revenues and COVID vaccine studies, resulting in an optically lower adjusted EBITDA margin.

Revenues excluding reimburse cost grew in line with adjusted EBITDA in the quarter at roughly 15%. As David noted earlier, both our revenue and adjusted EBITDA were above the high end of the updated guidance ranges provided in September.

The beat was primarily driven by faster than expected burn of COVID studies in our clinical segment, where on some key programs, our revenues in September were 3 to 4 times higher than what we recorded in July and August. Turning to cash and liquidity, our operating cash flows remained strong in Q3.

While we did see a slight increase in DSO as a result of a significant uptake in customer activity and invoicing, we also had a record quarter on cash receipts and we further improved our AR aging profile. As we successfully collect on the large bolus of invoicing during quarter four, we would anticipate even stronger cash collections and a reduction in DSO as we go forward.

Ultimately, we were able to improve our cash position from $693 million in Q2 to over $800 million in Q3. As a result, our ending cash balance combined with our revolver capacity, further expanded our liquidity position which was previously at its highest position in over 10 years to an even higher level of greater than $1.1 billion at quarter end.

As of September 30, our net leverage was 4.17 times trailing 12 month adjusted EBITDA which declined from 4.48 times at the end of Q2. This continued progress, means that we remain on track if not ahead of our stated goals at the time of the IPO in terms of reducing net leverage levels to the low fours by year-end and into the threes next year.

Moving on to forward-looking guidance. For Q4, the company expects revenues of $1.256 billion to $1.298 billion which equates to plus 20% to 24% growth versus Q4 2019 and adjusted EBITDA of $244 million to $250 million which equates to plus 14% to 17% growth versus quarter four 2019.

For the full year, the company expects revenues of $4.573 billion to $4.615 billion which equates to plus 13.5% to 14.5% growth versus full year 2019, and adjusted EBITDA of $867 million to $874 million which equates to 11.6% to 12.5% growth versus full year 2019. These ranges assume that the impact of the pandemic on site access and patient enrollment either stays the same or gradually improves in November and December versus the first half October and that there are not any material delays or cancellations in fast burning COVID studies forecasted in the quarter from emerging safety concerns or other issues.

Turning to 2021. As a standard practice and given the number of moving parts in the current operating environment related to the pandemic, we don't plan on giving formal 2021 guidance into our quarter four earnings call.

However, we did want to provide investors with commentary that we hope is helpful in their understanding of key dynamics of the business and how we expect things to unfold in the quarters ahead. Let me begin by saying that historically, prior to COVID-19, our backlog has reliably converted into revenues at a stable to increasing rate for the last five years.

However, backlog conversion and ultimately revenue and adjusted EBITDA delivery next year will largely be a function of two elements that remain difficult to precisely predict at this point in time. First is COVID awards and whether existing and any future studies will run as planned be delayed or potentially be canceled.

And second, how the pandemic will impact the progression of non-COVID work through the duration of next year. Taking some time to discuss each of these items in more detail.

In Q3 of this year, our overall backlog conversion rates returned to either close to, at, or above pre-pandemic levels depending on which of the metrics provided in our investor supplement you look at, be it ASC 605, 606, or 606 directs only. We've again provided all in an effort to be as transparent as possible in our disclosures.

While we are pleased at this recovery, we would note that it is aided by a sizable magnitude of revenues from fast burning COVID awards in Q3 in particular from the vaccine studies which are converting to revenue at a considerably faster rate than our overall portfolio. Backlog conversion rates excluding COVID studies, although improving sequentially from Q2 to Q3 and driving positive year-on-year growth ex-COVID in Q3, remain below pre-pandemic levels in the quarter and are likely to remain impacted for at least a portion of next year.

I would remind everyone that while PPD has adapted and found solutions to progress work on behalf of customers as well as, if not better than, anyone is evidenced by our growth rates. We are not through the pandemic yet.

As we enter the flu season, we are seeing COVID case flare-ups in Europe, the U.S., and other parts of the world there are likely to continue to impact site and patient enrollment activities in the quarters ahead. In quarter four, we again expect revenue growth in overall backlog conversion to benefit from a sizable volume of fast burning COVID work and to remain at an elevated level.

However, as a large vaccine studies ultimately progressed beyond the patient enrollment and dosing stages and the work on trials shift the longer-term patient monitoring backlog conversion and the quarterly revenue contributions from vaccines trials will decrease. As to exactly how those vaccines trials run, in which quarters various stages are complete, and other factors remain difficult to precisely predict.

The same is true for knowing exactly when conversion rates are non-COVID work will be sufficient to sustain our growth in quarters on a standalone basis without such a strong benefit of COVID vaccines revenues. We are optimistic that with the approval of multiple vaccines and therapeutics to treat COVID in coming quarters and into next year that site access and ultimately backlog conversion will eventually return to historical levels at some point in 2021.

However, for full year 2021, overall quarterly backlog conversion is more likely than not to be at least 20 bits to 30 bits below 2019 levels as vaccines revenues decline and it takes some time for non-COVID conversion rates to return to normal. This mathematically would translate into adjusted EBITDA that would be at or close to the company's original 2021 expectations of $960 million at the time of the IPO prior to the pandemic if the above assumptions on improvement on site access and patient enrollment activities and ultimately backlog conversion were to hold true and we have continued commercial success in winning net new business.

With the benefit of having an another quarter of data on our Q4 call, we will provide an updated view and a definitive range of revenue and adjusted EBITDA guidance, but hope that this commentary helps until then. Prior to wrapping things up, I am pleased to announce that has joined PPD as Vice President and our new Head of Investor Relations.

Tracy is a seasoned IR professional with over 25 years of experience and most recently served as Head of IR for Nuance Communications. She will be taking over from Nate Speicher who has helped lead our IPO process and established our public IR function.

Nate will work with Tracy in the coming months to transition IR prior to him taking on a new role at PPD, which will be announced internally later this year. We sincerely thank Nate for his work leading the IR function in the last several quarters and are happy to welcome Tracy to PPD.

In conclusion, before opening up for Q&A, Q3 was another strong quarter from a commercial perspective with double-digit year-on-year growth in net authorizations, we continue to see no unusual cancellations activity related to COVID-19 and our backlog is up nearly 16% year-on-year. Third quarter revenue and adjusted EBITDA exceeded the high ends of our guidance ranges with double-digit growth versus last year and positive revenue growth with and without COVID studies.

Our balance sheet has remained extremely strong. We remain on track if not ahead of our goals at the time of the IPO in terms of reducing net leverage levels to the low fours by year-end and into the threes next year despite the pandemic, and our robust liquidity position continues to grow quarter-after-quarter.

We are expecting another strong quarter with double-digit revenue and adjusted EBITDA growth in Q4 and for the full year in total and we are well positioned to deliver at or close to our original IPO goals for adjusted EBITDA in 2021 with definitive guidance ranges to be provided on our Q4 call. With that, I'll now hand over the call back to the operator to open the line for Q&A.

Thanks very much and thank you for all the fantastic details. Bill, I wanted to come to you, you gave a lot of great metrics on the progression you're seeing at sites and with patient.

I think this was referred to briefly in the prepared remarks, but I'm curious what you're seeing with the delayed studies, projects that were scheduled to ramp this year before COVID started. We just did a survey that said client expected to get the vast majority of delayed studies online between September and February.

I'm curious if you agree with that thought process, number one. And number two, if the recent case spikes have perhaps led any recent discussions with clients that we're hoping to get previously delayed studies back on board.

Thanks for the question. I mean generally, in agreement with that statement you laid out there.

As I mentioned, we've seen an improvement in site access. I think I mentioned 55% in the Q2 call and its between 60% and 70% now.

And if I look at that on a monthly basis since April, I've seen a steady progression upward. So that's a good thing.

And we have a pretty large site network here at PPD and we've conducted a survey of over 13,000 sites and 86% at this point have resumed normal activities and around 63% according to our survey allow on site monitoring, so it has been improving. Now having said that, what ultimately matters is our ability to get on site and interact with the staff and patients, and clearly there is some kind of hotspots or spikes occurring with the pandemic.

I can't predict what's going to happen in the future, but what I can say is that PPD is ready and able to deal with that. I also mentioned in my remarks that at the height of the pandemic, we are conducting around 90% of our visits remotely.

That's now down around 50% - slightly more than 50% of visits are on-site. So we have the flexibility I think to adapt to the conditions on the ground.

And as I've said before, that's region by region, country by country, state by state. So we're going to watch this closely, we have weekly metrics coming out, we're putting the data points together and watching it, but we have the flexibility to deal with whatever occurs.

And my follow-up will be a shift to Chris for a really boring technical financial question. Chris, the tax rate over the last few quarters, 28%, 15%, 29%, 22%, 28% this quarter, you guys always foreshadowed volatility in quarter to quarter movement, but how do we get a handle on these shifts?

And could you give us some guidance on what's driving that volatility in the near term and maybe what you're expecting over the next quarter or few quarters?

Certainly, that's what I'm here for, Eric.

Thanks Chris.

I appreciate the question. We thought that this was raised in several other notes that were published last night.

The quarter three effective tax rate was impacted primarily by two items, the first is that Q3 tax expense was unfavorably impacted by the impact of changes in estimated geographic distribution of pre-tax profits between jurisdictions, as well as the cumulative impacts of a Q3 income tax rate change in the U.K. from 17% to 19%.

Together, these changes amounted to an impact of approximately $5.5 million in quarter three. The second item is additionally due to optical impacts to the Q3 ETR from fair value losses on investments during Q3 on pre-tax book income, the rate looks artificially high at 53% in the quarter.

Excluding the optical impacts from these fair value losses, our ETR would have been closer to 33% as a consequence of the two items that we mentioned earlier. In terms of what I would expect for 2020, our year-to-date ETR is roughly 24.5% due to the anticipated or discrete tax items that we kind of foresee in the near future.

We're expecting the full-year ETR for 2020 to be in the neighborhood of 24%. If we kind of go out like further than that, what we would say is that the previous ETR guidance range that was provided had assumed that the U.K.

rate was 17% versus 19%. So given the increase in the U.K.

income tax rate, our future ETR performance will still depend on the ultimate distribution of pre-tax book income between jurisdictions. However, the increase in the U.K.

rates suggested that the ETR in the future will be closer to the higher end of the previous guidance range of 21% to 23% that we gave or possibly slightly higher, most likely in the range of 22% to 24%. So hopefully that gives you the clarity I think on - that will help you project it going forward in the future.

Fantastic answers in both cases. Thank you very much.

Good job with the 3Q execution. Thanks.

Thanks.

I guess maybe just to start with the 4Q implied revenue guide. I know you guys have been a nice enough to give us the impact on bookings and revenue.

As it progress from COVID, I was wondering if you would be able to maybe give us some sense of the COVID contribution assumed in the 4Q revenue number.

As indicated in my prepared remarks, we again expect a sizable contribution from COVID revenues in quarter four. However, we won't be breaking it down into a specific number, but again it's going to be a really strong quarter for those COVID studies, how strong it is really depends on how they progress and that's why we have a slightly wider range of revenues in the guidance we gave in quarter four relative to previous quarters.

I guess just a follow-up then relatedly. As we think about the impact from COVID trials, there has been a focus on pass-throughs, probably more than normal, just given some of the dynamics around COVID trials related to non-COVID trials, any sense you can give us on this dynamic?

What it meant in 3Q and how you're thinking about pass-through revenues in 4Q.

Absolutely. So, pass again will be considerably higher in quarter four as they were in the quarter three.

In general what we kind of saw in Q3, was that on our large vaccine studies, there was a 3:1 ratio between indirects and directs. We assume it's going to be somewhere in that ballpark as well in quarter four.

Good morning and thanks for all the color on how things are trending in 2020 and into 2021. I wanted to just ask about how growth trended in the quarter.

I asked because you obviously raised the bar in mid-September to 13% to 16% growth and then ended up clearing that pretty well, so maybe just a little bit more color around the shape of these COVID trials. Especially for the vaccines, how much is booked in quarter one, quarter two versus what's going to drift into 2021?

Any additional granularity will would be helpful.

Certainly, Jack. So in terms of the quarter, as I noted in my prepared remarks, while the kind of non-COVID studies progressed, I think there was a significant increase in our ability to progress those studies I think early in quarter three and it was more stable as we went through it with the quarter with some slight improvements.

On the COVID awards, we clearly kind of had a lot more revenues in September than we had in July and August, and that was part of the reason for the beat as these studies are not following sort of historical precedents and have been burning extremely quickly. After the relation of what will happen for next year, as the duration of our current backlog of COVID awards is such that we expect to have revenues throughout next year from COVID and into 2022.

That said, the average quarterly revenue from COVID-awards next year is likely to be lower than it is in Q3 and Q4 of this year where we're getting such a significant contribution from this bolus of fast moving vaccine studies. As those studies start to decline - revenues, excuse me, start to progress, we'll see a decrease as the shift or the work shifts over to longer-term patient monitoring activities, so that will reduce the average quarterly kind of revenues.

We're likely to have some lumpiness as program start and stop next year and depending on the scope of services that we have, that's going to result in irregular growth rates next year. That said, we're trying to stay away from providing guidance on the phasing at this point for 2021 but rather, that's something we plan on addressing on the Q4 call.

Sounds good. And then there's been a little bit of a debate around for the COVID trials, the potential risks around cancellation or discontinuation.

I was hoping you could weigh in on that. I know you're using a higher haircut in terms of what's getting booked.

Is there some point in the trial though where you feel like you're in the clear? What does it take to get there?

Yes. So if I unpack your question into pieces, the first answer is yes, and the way we handle backlog on not just COVID studies but any studies, they will become a point in time in the studies progression where it's clear that the revenues are sort of highly probable to manifest.

And if that becomes the case, we will adjust our haircut percentage to take it down so that we would increase our authorizations kind of for that and that would kind of come out and revenues so is it closed loop system on that. As to how we should think about vaccines awards overall, our position on them largely hasn't changed from our past comments.

Namely, that we haven't seen any uptick in cancellations on them so far, but still is early days. We don't expect there to be one vaccine that kind of comes out and gets an early authorization and that will result in a cancellation of other programs.

Frankly, from what we've kind of seen so far and what the government has said publicly is they view that multiple vaccines in multiple therapeutics are going to be needed to treat COVID in the future. And there are also other constraints like manufacturing and kind of what not such that we expect multiple programs to go on.

Now that said, individual programs that we've seen on some of the programs that are currently being developed could run into safety issues as a response to the vaccine and several programs that are out there that's created delays in Q3. There could be a situation where an adverse event is stronger than that it does a result in the cancellation in the future.

We also could kind of see something on maybe the third wave of vaccines programs that are out there that perhaps basically the efficacy of the early kind of vaccines are much stronger than expected and that kind of poses a risk that on some of them, maybe for economic reasons, the kind of company or the sponsor is less willing to go ahead. But so far we haven't seen any evidence on that, but as we don't know fully how these programs will behave as you noted, we have been cautious in our approach in booking authorizations.

Just a quick clarification question. There was some initial confusion.

You guys said 960 for your '21 EBITDA, not 916, right?

Yes. 960.

960. Perfect.

Okay. That's what I thought.

And a couple of questions about that, I wanted to make sure that that was abundantly clear. Okay.

As you talked about obviously with the strong cash position and a prudent cash flow going into the end of the year, how does that change your thinking in terms of capital deployment, maybe not only in 4Q, but as we move into 2021 in terms of are there like new M&A opportunities that COVID has created or you sort of think that your continue along the sort of path that you laid out initially?

It's a good question. I think fundamentally, our thinking hasn't changed in that we're looking to invest in the business and continuing to build on these differentiators and capabilities that have been serving us so well.

I think what's changed is probably the magnitude of strength we feel about the balance sheet and our abilities. But it does - it's not binary based on where the cash position is.

We're certainly more interested in M&A than we were before. We've been committed and I think it's the same about wanting to continue to expand and add service capabilities that improve our differentiation.

Chris, you want to add anything to that.

No, I think, David answered to that. I would just simply say that as we continue to decrease our leverage level over time and get into the threes, which will happen in the near future based on the progress we've made, we'll determine what the optimal use of capital is on a go forward basis between organic investments to enhance our capabilities.

As Bill mentioned earlier, we've continued to invest in our labs business in China and other geographies and paying down debt, pursuing M&A or returning cash to shareholders through share repurchases or dividends. That said, I think we're in a great position, as you noted, Elizabeth.

Given that we're at record levels of liquidity. And through our growth in our cash flow conversion, that continues to put us in a great spot as we shared with folks during the IPO.

That makes sense. Have you guys seen any change in kind of like availability of assets or like multiples or is it probably still too early on that front?

It's still too early.

Okay.

I think we've seen a couple of cases where some assets that may have had valuation expectations going into the pandemic being higher than they are now, especially businesses that may be hurting from the pandemic and ability to generate the cash flows they thought they could generate.

On the lab side of the business, how would you care some of the trends that you're seeing across the core central lab business compared to the remainder of the lab segment? And can you break out with COVID related and not across that business?

Yes, thanks for the question. Look the labs business has been performing very strongly over the past couple of quarters and we're very happy with that business and feel like we we're uniquely positioned to take advantage of just underlying market growth but the COVID pandemic as well.

Clearly going forward, we expect the lab's momentum and growth to continue, probably not at the level you're seeing now, which is pretty phenomenal. The GMP, BIOA, and vaccines business, as I said, is less dependent on samples themselves.

The central lab is dependent on samples we've seen that, as we said in Q2 to recover to pre-pandemic levels and now here in Q3, we've exceeded pre-pandemic levels, and our central lab is winning. I mentioned the award that we won.

We've got excellent technology there that allows transparency and we're perfectly positioned for this COVID pandemic we're in right now. So the central lab has been growing very strongly.

We don't break out this sort of the sub-segments of the lab business, so I don't want to talk specifically about it, but we're seeing strength on strength across all of the labs. So they're all contributing to this very strong growth going forward.

I think the main point I want to make to you is we expect our labs to grow in the future and beat underlying lab market performance, but we don't expect them to necessarily grow at this blistering pace we're seeing right now. So I expect strong growth into the Q4 and into next year.

Maybe to add to what Bill said, but we did disclose our share in Q2 with that in the quarter. All three of our labs grew at a double-digit pace and had for the first half, I believe that's also the case in Q3.

So all of them are performing extremely well.

And then just a bigger picture question. With the significant shift to remote monitoring and telehealth and virtual solutions, I guess how sticky is that shift in a post-COVID world and do you think the economic and financial implications for you with that potentially greater shift for this type of trial work?

Yes, this is Bill. Thanks for the question.

We shared during Q2 and would reiterate that now in Q3 that we're seeing higher number of awards and interest in sort of digital/virtual trials or decentralized trial using another term, but on a percentage basis, this is still a low volume relative to our overall revenue and EBITDA as a company. So I'm expecting that we're going to see post pandemic momentum continue in this area.

There is broad interest in e-co, e-Consent, televisits, fully virtual trials. We mentioned the screening app that we use in our site network business and we are screening 90% of our patients right now through that televisit app for our site network business.

So I expect the tools and the operating model to shift over time and this momentum to continue and I think PPD is in a position where we are able to bring together not only our own technology and our own knowledge, but we're also able to bring other sort of third parties in the ecosystem to patch together a solution for a customer, whether it's a trial that they're about to run in their designing or it's a trial that is running and they want to ensure business continuity and sort of patient continuity in that trial. So my answer to the question, I think it's important, it's growing in importance.

We've got a lot of capability, we're going to continue to invest in this area, but it's still a small percentage of our overall backlog at this point.

So just going back to the EBITDA guidance for next year of 960. If I look back at your guidance from pre-COVID, you still going to be fairly high.

I think we're talking here about during 12% to 10% growth. So when we think about what the implied EBITDA guide would have been pre-COVID, can we think about the difference of about that $20 million is on the EBIT line is the benefit that you expect to see from COVID work next year and the remaining of the balance would be just the catch-up work in new trial starts?

Well, again, Ricky, I think we don't plan on kind of breaking out the revenues at this stage I think between revenues excluding from basically COVID, it is something that we may kind of discuss on our quarter four call. That said, qualitatively, we expect to have COVID awards cut through the duration of next year but at a lower average quarterly rate than what we had in Q3 and Q4 of this year.

Non-COVID studies, we do expect that at some point next year with the introduction of vaccines and therapeutics to treat COVID that we're going to see an improvement in conversion rates, but they're likely to kind of remain impacted for some time until we're finally through this.

Okay, so is the right way to think about it at $960 million in EBITDA for next year still has a fairly large component of COVID benefit and may be in the second half of the year? Great, thank you.

And then just for clarification on the site access, as we think about the utilization of these sites, you said that during the pandemic, 90% of visits were remote but now 50% of visits are on-site. So should we assume that if now you have 60% to 70% of sites accessible that these sites are at 50% capacity?

Ricky, this is Bill answering your question here. No, I don't think you should make the connection to capacity based on site accessibility.

The bottom line here is that we're seeing sites get better and better at dealing with the pandemic and their ability to treat patients. And look, patient activity is also improving.

We're talking about site availability here but patient activity is also improving. And I think you're seeing patients and physicians understanding the need to continue health care that's required.

And so the sites are pretty good at doing that. Plus, as I mentioned, we have a lot of alternative strategies available to us at our disposal to keep the clinical trials moving whether there is a resurgence in the virus or not.

So I feel pretty comfortable, but I don't think you should make the correlation that there's only 50% capacity at the sites. We've seen non-COVID site activity increase as well.

Our site activations have had increased and their availability and willingness to see patients is increasing too. Now we're watching that very closely as we move into the winter months and with some of the signals and signs have passed on possible resurgence.

I'm wondering if you could tell us how much of the clinical backlog is still delayed. You'd given that metric in 2Q, I think it was 7% and it was 10% in the first quarter.

Are you able to break that out? And then can you also just talk to what drove that significant growth in September?

You talked about 3x to 4x July, August, and any comments on October bookings?

All right. So unfortunately I may not be able to pursue here so much information on both of your questions, Tycho.

The reason is I don't have an updated metric on the 7%. I would assume that it has kind of come down but it hasn't gone to zero as there is just a piece of it that is still stuck out there, but we certainly haven't seen it get kind of worse by any measures, but likely better, but still some degree of impact, but I don't have the specific figure.

On the second question, we don't have our financial results yet for the month of basically October. Yes, I would kind of say that on our interim metrics, we're seeing that basically kind of - So I can't give you a specific figure, but COVID metrics and progression of those trials is continue to kind of go at a very high pace.

So we haven't seen any drop-off percent is what I would say.

Yes, maybe let me add a couple of - and so I'm spending a lot of time with customers first biotech and large biopharma and planning meetings and status meeting and I think the holds that are driven by customers are insignificant now. That initial pullback, once there was an understanding that these studies across therapeutic areas can be executed with safety of patients in mind and a lot of the technologies that Bill talked about to screen remotely through telemedicine, all that's eased up on the whole impact from the customer side.

There is still the site access issue that's remaining. While it's getting better, it's still does remain, and maybe a way to look at this is, if you take out all the COVID work and you look at just the traditional backlog ex-COVID, on how is our ability to convert that backlog, what would our backlog conversion rates look like.

Well, I won't give you the specifics, I can tell you they improve from Q2 to Q3, which is another element of this traditional backlog is being processed. The industry - certainly PPD is adapting with our customers, very, very well to be able to continue to execute those non-COVID studies.

So that's on the whole piece. I'd like to add in a couple of comments on the authorizations piece as well because I think in Q2, there was a question of what are we seeing an biopharma and biotech and relative to the non-COVID work, in the volume of non- COVID work we're seeing.

I mentioned in Q2, biopharma was back to normal in terms of the competitive decision volumes we would expect to see in the quarter that continued to improve in Q3. I mentioned in Q2, it still looked like biotech was a little bit light on traditional work.

Maybe they were hesitant with the pandemic. In Q3, that phenomenon is gone.

The competitive decision volume that we're seeing from biotech in Q3 excluding COVID was exactly where we thought it would be under normal circumstances. So that's a very positive element.

And just maybe another cut at this, if you look at our awards in Q3 and you take out all the COVID award, we still grew authorizations year-on-year at a double-digit pace. So I think you're seeing there is - we're focusing a lot on COVID, and network is a tailwind to us, especially the vaccines piece in Q3 and going into Q4.

But this traditional book of business, there doesn't appear to be a hold back from other biopharma, biotech of getting back to prosecuting their pipeline of new drugs. Where the issue exists is the ability to prosecute at the site level offset a bit by all these adaptations of remote monitoring, telemedicine, pre-screening visits, and whatnot.

So you put all those dynamics together, that's what makes it a little hard for us to precisely forecast 2021. But as we get each quarter under our belt, we know a little bit more.

So, hopefully, it gives you a little more color on that. Well, I think, that answers your question.

Yes, that's helpful. And then on the site access dynamic, you had previously talked about the improvement kind of 1% to 2% a week.

I know on the call today you talked about the leveling off in recent weeks, which is not a surprising case it's going back up. I mean, should we assume you kind of hover at this 60% to 70% rate for most of the fourth quarter.

And then on enrollment, it doesn't seem like there's any patient enrollment issues. I'm just curious how you think about drop out our patient hesitancy as COVID cases are picking back up as well.

Yes, on the site access. I mean it's.

I'll try to answer the question. But fundamentally, we don't know because we don't know how this resurgence of the pandemic is going to really hit.

I would say maybe to put boundary conditions around this. We saw the world and the U.S.

get hit pretty hard in the second quarter, and maybe in PPD terms without COVID work all that impacted site access got to a level, I think where we were at 50%, and 50% of sites or even less than that, that were accessible and that had our backlog conversion rate drop about 100 bps versus 2019 standard. So that's probably how bad it could get.

Now we would - until proven otherwise we would assume that we're going to stay at the level we're at. While we have seen some plateau and maybe a belief that with the resurgence the way we're seeing it now, I believe that 1% to 2% improvement a week that might be too optimistic.

But especially since we're seeing the plateau, so probably holding that is a fair assumption. And maybe about the - The sites have gotten better at dealing with caseload and processing and access continues to improve.

That would be an optimistic case. So they're probably bound to site access piece that way.

And then last one, just for Chris on CapEx, thinking about - I know you're adding the 75,000 feet of lab space in China and the U.S. Does that kind of get you what you need here in the near term or how should we think about additional capacity expansion maybe in the first half of next year?

Yes. I'll maybe start and Bill may want to kind of add as well.

Right now we don't have any constraints on basically our capacity basically in any of our labs. So again, just like thinking about the way the math kind of works on this is that the places that we historically would have been basically capital constrained would be more BIOA and GMP.

We have ample basically kind of space within our central labs so that we can scale up volumes to a significant degree with any COVID studies or any extra work without any need for basically additional capacity expansion. We may need to add some for instrumentation or kind of other things like that.

But right now we feel perfectly comfortable and executing all the COVID work that we need. On the other two, they're relatively kind of less basically impacted by the demands kind of created by basically COVID studies and it's more or less running the normal way that it would.

So we typically kind of have a lead time where we can see what's required and have ample opportunity over like a six to nine month kind of period to basically make those investments and grow. But right now we don't feel capacity constrained in any of the labs, but we're making the investments today to kind of make sure that we have ample capacity as demand continues to kind of grow ahead.

Anything to add, Bill?

Chris, that's the main point. We're not capacity constrained in any of our labs.

I happened to highlight the China expansion because that's where we want to take advantage of a new market, but we are expanding in our Richmond, Virginia Bioanalytical vaccine lab. We're expanding in our Middleton Madison GMP Lab.

We're expanding in our higher Athlone Ireland Laboratory footprint as well which serves predominantly GMP. And as Chris said, our central lab is an area where we're not capacity constrained by facilities that's high throughput, high automation type of lab, and we have an ability to take on more work and have been doing so.

Thank you, operator. While 2020 has presented several challenges, as I hope you can see from our Q3 results, PPD remains focused on continuing our track record of growth.

I want to thank all of our employees for going above and beyond to deliver for our customers, it's truly inspirational what we're seeing. And thanks for joining our call today and have a nice day.