Max Smock

Max Smock asked for Fortrea's expectations regarding the split between direct fee revenue and pass-through revenue in 2026, and how anticipated changes in this mix are projected to impact margins for the year.

Answer

CFO Jill McConnell indicated expectations for continued growth in the clinical pharmacology business, with more stabilization in pass-throughs compared to the significant growth seen last year. She noted anticipated further headwinds in FSP. The projected year-on-year revenue reduction for 2026 is roughly split half and half between service fee and pass-through, primarily impacting the full-service business, as certain high pass-through studies from 2025 wind down.

Max Smock asked for details on Fortrea's expectations for direct fee revenue versus pass-through revenue in 2026 and how changes in this mix are anticipated to impact margins for the year.

Answer

Jill McConnell, Chief Financial Officer, explained that Fortrea expects continued growth in clinical pharmacology, with more stabilization in pass-throughs compared to last year's significant growth. She noted projected headwinds in FSP. The year-on-year revenue reduction is roughly split between service fee and pass-through, with clinical pharmacology growing and impacts on other businesses. She highlighted that a handful of studies in 2025 drove high pass-through rates, one of which finished early, contributing to the projected impact in 2026.

Max Smock of William Blair asked CEO Anshul Thakral about strategic priorities among FSP, large pharma, and small biotech. He also questioned the drivers behind the significant step-up in the backlog burn rate in Q2 and why it is expected to stay elevated.

Answer

CEO Anshul Thakral deferred a detailed strategic answer for 90 days but noted the recent win rate dip was isolated to new biotechs amid the leadership transition. CFO Jill McConnell attributed the higher burn rate to growth in the faster-burning Clinical Pharmacology unit and the progression of newer awards into more intensive phases. She projected the burn rate would remain elevated in the 8.5% to 9% range for the second half of the year.

Max Smock followed up on margins, asking if the guidance implies a 100 basis point gross margin expansion for the year, how gross margin is expected to trend, and what this suggests for the adjusted EBITDA margin exit rate.

Answer

CFO Jill McConnell described the gross margin trend as 'choppy' but improving throughout the year as savings initiatives take hold, though this will be partially offset by variable compensation and merit increases. For SG&A, she reiterated the target of $40-$50 million in net savings, which will drive margin improvement more heavily in the second half of the year.

Max Smock requested further clarification on why the discovery of less remaining revenue in pre-spin projects resulted in a lower burn rate forecast rather than a direct write-down or adjustment to the backlog.

Answer

CEO Tom Pike provided a key clarification, stating the issue is not less total backlog value, but a slower conversion of that backlog to revenue. He explained that older projects have extended their timelines significantly, in some cases by 40-50%, causing them to burn more slowly. Since these projects are a large part of the 2025 mix, they drag down the overall burn rate forecast.

Max Smock asked if Fortrea's pipeline is strong enough to sustain a 1.2x book-to-bill beyond the next two quarters and whether small biotech decision-making timelines have improved recently.

Answer

CEO Tom Pike expressed comfort that the company can achieve its 1.2x target over the next two quarters based on a rigorous pipeline review but refrained from commenting further out. He stated that while a better macro environment would help the industry, the current 'solid' biotech funding environment is adequate for Fortrea to achieve its goals with strong execution.

Max Smock asked if the BENEFIT-HF trial could create a tailwind for the core business while it is ongoing, and for anecdotal examples of how the Category I CPT code, effective January 1st, 2026, has helped lower treatment barriers and how this tailwind might build throughout the year.

Answer

Kevin Hykes (President and CEO) confirmed that the BENEFIT-HF trial is expected to generate goodwill and credibility, acting as a landmark trial for the therapy. Regarding the Category I CPT code, Kevin Hykes noted that while still in transition, early positive signals include payers historically rejecting prior authorizations now beginning to approve them, and Medicare Advantage payers approving at a higher rate and more quickly.

Max Smock asked if the ongoing BENEFIT-HF trial could create a positive tailwind for the core business, and sought anecdotal examples of how the Category I CPT code, effective January 1, 2026, has begun to lower treatment barriers.

Answer

President and CEO Kevin Hykes confirmed that while not expecting significant immediate revenue, the BENEFIT-HF trial is anticipated to generate goodwill and credibility within the heart failure community due to its scientific rigor and scale. Regarding the Category I CPT code, Mr. Hykes noted that while still in transition, early positive signals include payers historically rejecting prior authorizations now approving them, and Medicare Advantage payers showing faster approval rates.

Max Smock of William Blair inquired about the incremental revenue from Lifecore's largest customer, the potential for volume ramp-ups ahead of 2027, details on the new GLP-1 agreement, and the margin outlook for the upcoming seven-month transition period.

Answer

CFO Ryan Lake explained that increased demand from the largest customer is part of their strategic initiative to move volume from another supplier to Lifecore. President & CEO Paul Josephs noted that while terms of the new GLP-1 agreement are confidential, they are excited for the collaboration, targeting commercialization around 2029-2030. Ryan Lake then provided margin guidance for the transition period, expecting gross margins in the low 30% range and detailing the expected cadence of gross profit and adjusted EBITDA.

Max Smock of William Blair asked for context on the QSP business before the FDA's animal testing guidance and questioned the drivers for the guided margin step-down in the second half of 2025, as well as whether Q4 would be a good jumping-off point for 2026.

Answer

CEO William Feehery explained that Certara has long worked on monoclonal antibodies and the FDA announcement amplified an existing trend. CFO John Gallagher attributed the margin outlook to investment and hiring plans ramping up in the second half, stating that Q2's 30.5% margin is a better proxy for the rest of the year and that Q4 would be a decent proxy for 2026.

Max Smock asked for financial details on the Chemaxon acquisition, including its Q4 revenue contribution and margin profile, and also requested the size of the regulatory services business currently under strategic review.

Answer

Executive John Gallagher confirmed the Chemaxon acquisition is expected to contribute approximately $5 million in Q4 revenue, with a 90% software mix. He noted its margin profile is currently below Certara's but is expected to reach the corporate average by the end of 2025. Executive William Feehery added that Chemaxon has a healthy pipeline and strategically enhances the biosimulation platform. Gallagher also specified the regulatory services business generates $50 million to $55 million in annual revenue.

Max Smock of William Blair requested a technical clarification on how strong Q1 bookings, which were already known, drove the Q2 outperformance in the DSA segment. He also asked for quantification of headcount growth and whether it could serve as a proxy for 2026 segment growth.

Answer

CEO James Foster attributed the outperformance to a significant volume of work from pent-up client demand, a favorable mix, and clients wanting to move quickly. CFO Flavia Pease added that favorable FX and better-than-expected operational execution also contributed. Regarding headcount, she quantified the second-half cost headwind at approximately $10 million but noted that total headcount would likely not be up year-over-year, though it is increasing from the start of the year.

Max Smock asked about the impact of the FDA's mixed messaging on reducing animal testing and whether it will lead to real changes, and also questioned the adoption hurdles for biosimulation approaches in preclinical studies.

Answer

CEO James Foster explained that the evolution of New Approach Methods (NAMs) is not new and the pace of change will be driven by scientific validation, which takes significant time. He noted that biosimulation is currently more applicable to drug discovery than safety assessment, as safety requires evaluating complex, multi-organ systemic reactions that current technologies cannot fully replicate, and patient safety remains the top priority for regulators.

Max Smock expressed surprise at the goodwill impairment charge related to the biologics testing business, given its recent strong performance, and asked for clarification on the issues facing that business and its long-term growth outlook.

Answer

EVP & CFO Flavia Pease clarified that the impairment charge was recorded for the Manufacturing segment, which includes both CDMO and biologics testing. The charge was primarily driven by the loss of two commercial CDMO clients and a lower long-term growth outlook for that business compared to assumptions at the time of acquisition, not by issues in the biologics testing business itself.

Max Smock of William Blair & Company inquired about the specific 'puts and takes' affecting the biotech funding environment and the potential impact of the recent election. He also asked for clarification on the size of the benefit from lower performance-based compensation in the quarter.

Answer

EVP and CFO Flavia Pease detailed the funding environment, noting a robust start to the year followed by a slower pace, but highlighted that demand indicators for biotech are stable and more favorable than last year. Chairman, President and CEO James Foster added that the election might lead to less focus on drug pricing. Pease clarified that the incentive compensation adjustment was not a meaningful factor in Q3, as the primary adjustment occurred in Q2.

Max Smock from William Blair asked about the backlog burn rate, noting that the full-year guidance implies a second-half step-down despite the start of a faster-burning COVID trial, and questioned if this was conservatism.

Answer

CFO Nigel Clerkin clarified that the company's view is for the burn rate to be 'broadly stable' through the year, with the full-year rate expected to be around 8%. He stated that the underlying assumptions from April remain the same and that the increase in the revenue guide is fundamentally driven by higher pass-throughs, not a change in the burn rate outlook.

Max Smock of William Blair & Company asked for an update on the full-year adjusted EBITDA target and the expected margin cadence, questioning if Q1 represented the floor.

Answer

CFO Nigel Clerkin confirmed no significant change to the full-year margin outlook, which is expected to be about 1% lower than the prior year. He stated that the 19.5% margin in Q1 was better than anticipated and expects a gradual increase through the year, exiting near 21%.

Max Smock followed up on the COVID-related commentary, asking for specifics on how much of a particular COVID contract remains in the backlog and how much revenue from it is included in the 2025 guidance.

Answer

CEO Dr. Steve Cutler confirmed that work from the contract is still in the backlog, with one study proceeding and another delayed but not canceled; this is factored into guidance. He noted vaccine work is a low single-digit portion of the backlog. Executive Kate Haven added that total COVID-related business is expected to represent a low single-digit percentage of total revenue in 2025, a slight increase from 2024, but did not break out individual contract contributions.

Max Smock sought to clarify the drivers behind the miss on gross bookings, asking if the shortfall was primarily due to award delays from small biotech companies.

Answer

CEO Dr. Steve Cutler confirmed that the primary reason for the bookings shortfall was delayed decision-making from smaller and biotech customers. He attributed this to the volatile capital market environment, which has made clients cautious. Despite this, he noted that RFP flow remains solid and reiterated that a trailing 12-month book-to-bill ratio of 1.2x to 1.3x is still an achievable goal.

Max Smock from William Blair sought clarity on the 1.15 book-to-bill target, asking if it requires further macro improvement, and also inquired about competitive win rates and potential market share gains.

Answer

CEO August Troendle explained that achieving a 1.15 book-to-bill ratio depends more on cancellations remaining low than on a stronger new business environment. He surprisingly revealed that the competitive win rate was "not great" in Q2 due to losing a couple of very large projects, and that strong awards were driven by a higher volume of client decisions rather than a higher win rate.

Max Smock of William Blair asked for Medpace's outlook on its book-to-bill ratio if the current challenging business climate persists, and the potential impact on revenue for 2025 and 2026. He also inquired about the company's rare disease exposure and the long-term implications of potential FDA policy changes that could reduce trial requirements.

Answer

CEO August Troendle estimated that the book-to-bill ratio would likely remain around 1.0 if the environment does not improve, but stated that H2 2025 revenue is largely secure. Regarding the FDA, he viewed the discussion as hypothetical, suggesting that easier development could spur more activity, and confirmed that while rare disease is a meaningful part of Medpace's business, he does not see a structural headwind.

Max Smock from William Blair asked for reasons behind the recent deterioration in the business environment despite better funding, questioned the visibility on delayed projects converting to bookings, and sought clarification on whether elevated 2024 cancellations created an artificial tailwind for gross margins.

Answer

CEO August Troendle acknowledged a subjective weakening in the qualitative aspects of RFPs but noted Q4 cancellations were closer to normal. He expressed confidence that most delayed projects would become bookings in H1 2025. Regarding margins, both Troendle and CFO Kevin Brady stated that while cancellations provide a minor tailwind, the primary driver of margin strength was the significant productivity of the existing employee base, not cancellation-related payments.

Max Smock asked for a quantification of the impact of elevated cancellations on the net book-to-bill ratio, similar to disclosures from the prior quarter. He also inquired about trends in gross bookings, win rates, and the demand environment, specifically asking about RFP flow in Q3 and early Q4.

Answer

CEO August Troendle explained that quantifying the impact this quarter is complex due to the cumulative effect of cancellations from Q1-Q3 on the pipeline, which depressed Q3's gross awards. He stated that even with normal cancellations in Q3, the book-to-bill would have been below their 1.2x target range. He noted win rates remain solid but RFP dollar volume was down modestly year-over-year and sequentially in Q3.

Max Smock inquired about the 2025 financial guidance, specifically the expected contribution from the Yuwell agreement and its impact on gross and operating margins.

Answer

CFO Mike Bourque stated that the Yuwell agreement's impact on 2025 results will not be significant as the deal just closed. He clarified that the guided gross margin headwind of about 100 basis points is a combined one-time effect from both the Yuwell and Simeox product introductions and some raw material costs. CEO Kevin Smith added that future synergies could arise from leveraging combined purchasing power for raw materials with Yuwell.

Max Smock, on behalf of Margaret Kaczor, questioned the key drivers behind the 8-10% revenue growth guidance for 2025, seeking confidence in the acceleration from 2024's 7% growth. He also asked for details on the adoption and rollout of the new e-prescribing tool.

Answer

CEO Sheri Dodd attributed the confident outlook to several factors: the recent launch of a new CRM system, the full rollout of the Nimbl system for lower extremities, improved back-office support, and a more favorable payer environment under the new National Coverage Determination (NCD) policy. Dodd noted that while the company is not providing specific adoption targets for the e-prescribing tool, it is part of a broader strategy that includes AI tools to reduce documentation friction for physicians.

Max Smock inquired about services staffing, attrition's impact on margins, and hiring plans for 2025. He also asked about Pro-ficiency's competitive position relative to CROs and requested a breakdown of the Q4 revenue contribution from the Pro-ficiency and Immunetrics acquisitions, including the split between software and services.

Answer

Executive Shawn O'Connor acknowledged that lower-than-expected attrition impacted service margins in the second half of the year but stated that recruiting plans have been adjusted, with margins expected to normalize in the first half of fiscal 2025. He clarified that Pro-ficiency's offering is complementary to CROs and that a clinical trial uptick would be favorable. O'Connor also noted Pro-ficiency's Q4 revenue was about $2.2 million, slightly below expectations due to project timing, but this does not change the full-year guidance of $15-$18 million.

Asked for more detail on customer reactions to the Biosecure Act, an update on the Halozyme relationship and revenue trends, and expectations for margins and EBITDA for fiscal 2025.

Answer

The executive noted that conversations around Biosecure are increasing, particularly from companies with later-phase candidates. They affirmed a strong, ongoing relationship with Halozyme while emphasizing the strategy of diversifying the customer base. Regarding margins, the CFO expects EBITDA to grow with revenue but noted that quarterly results can be lumpy.

Sought to reconcile the flat year-over-year backlog with the strong 17% revenue growth guidance for fiscal 2025. Asked for clarification on modeling margins and inquired about the revenue composition and growth from Halozyme versus other customers.

Answer

The executive explained that as the backlog's time-to-revenue recognition stabilizes, more revenue can drop through, explaining the dynamic. For margins, the Q4 gross margin is a reasonable starting point, but full-year costs like increased depreciation must be considered; the company does not guide EBITDA. The vast majority of fiscal 2025 growth is expected to come from non-Halozyme customers, continuing a diversification trend.

Questioned the impact of potential industry overcapacity in small-scale mammalian manufacturing, asked about booking seasonality for Q4, and sought clarity on the margin ramp and EBITDA drop-through from incremental revenue.

Answer

Executives stated they are not experiencing an overcapacity situation and are seeing good demand. They reiterated that bookings are lumpy rather than seasonal. On margins, they expect a gradual, though lumpy, expansion towards a 40%+ gross margin as revenue grows and they gain operating leverage from new facilities.

Questioned the financial impact of a change in variable consideration and a deferred PPQ campaign, the quality and status of the current backlog, and the outlook for future bookings.

Answer

The change in variable consideration and the deferred PPQ campaign each had an approximate $2M (8 percentage point) negative impact on gross profit for the quarter. The backlog is considered high quality with a >95% conversion rate and is not on hold. Future bookings are lumpy, but the outlook is cautiously optimistic.

Asked for confirmation on the percentage of Sarepta revenue tied to ELEVIDYS, what the FY24 revenue translates to in patient doses, and clarification on the fungibility of gene therapy capacity and the ability to backfill it if Sarepta's label is not expanded.

Answer

Executives confirmed that approximately 90% of Sarepta revenue is tied to ELEVIDYS. They declined to comment on patient doses. They reiterated that gene therapy capacity is highly fungible and can be reconfigured for other programs, but they do not currently see a need to do so as they are focused on meeting Sarepta's demand.

Sought clarification on whether the company is involved with more than one major GLP-1 program. Also asked for confirmation that the Sarepta (SRP-9001) guidance assumes no label expansion and inquired about the potential manufacturing impact of a positive data readout.

Answer

Almost all of the company's sterile fill and finish facilities are involved with the GLP-1 therapeutic area, implying broad involvement beyond a single program. Management confirmed that guidance does not assume a positive label expansion for SRP-9001, but noted that such an event would be important for future growth.

Asked for clarification on the breadth of their GLP-1 involvement and for more detail on the potential impact of a positive clinical trial outcome for Sarepta's gene therapy.

Answer

The company stated its GLP-1 involvement is broad, spanning multiple facilities and services (filling, packaging, assembly), and is expected to grow. Regarding the Sarepta gene therapy, they confirmed the upcoming data is an important event for future growth but did not quantify the potential upside, reiterating that any such upside is not included in the current guidance.