U.S. Markets open in 9 hrs 4 mins

Edited Transcript of PRAH earnings conference call or presentation 1-Aug-19 1:00pm GMT

Q2 2019 PRA Health Sciences Inc Earnings Call

RALEIGH Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of PRA Health Sciences Inc earnings conference call or presentation Thursday, August 1, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Colin Shannon

PRA Health Sciences, Inc. - Chairman, CEO & President

* Michael J. Bonello

PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary

* Thomas Byrne

PRA Health Sciences, Inc. - VP of Legal Affairs

================================================================================

Conference Call Participants

================================================================================

* Alexander Yearley Draper

SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research

* Daniel Gregory Brennan

UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences

* David Howard Windley

Jefferies LLC, Research Division - Equity Analyst

* Donald Houghton Hooker

KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst

* Erin Elizabeth Wilson Wright

Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst

* Jack Meehan

Barclays Bank PLC, Research Division - VP & Senior Research Analyst

* John Charles Kreger

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

* Juan Esteban Avendano

BofA Merrill Lynch, Research Division - Associate

* Luke England Sergott

Evercore ISI Institutional Equities, Research Division - Associate

* Stephen C. Baxter

Wolfe Research, LLC - Senior Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the PRA Health Sciences Second Quarter 2019 Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the call over to your host, Tom Byrne, Vice President of Legal Affairs. Sir, you may begin.

--------------------------------------------------------------------------------

Thomas Byrne, PRA Health Sciences, Inc. - VP of Legal Affairs [2]

--------------------------------------------------------------------------------

Thank you. Good morning, and thank you for joining us for the PRA Health Sciences Second Quarter of 2019 Earnings Teleconference. Today, Colin Shannon, our Chief Executive Officer; and Mike Bonello, our Chief Financial Officer, will discuss our quarterly financial results. Following our opening comments, we'll be available for questions. In addition to our press release, an investor supplement with additional financial information is available in the Investor Relations portion of our website.

Before we begin, I'd like to remind you that our remarks and responses to question may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business, which are discussed in the risk factors included in our annual report on Form 10-K filed with the SEC on February 28, 2019. Our risk factors may be updated from time to time in our filings with the SEC. Please note that we assume no obligation to update any forward-looking statements.

Certain financial measures we will discuss on this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a more helpful and complete understanding of our financial results and is consistent with how management views our financial results. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure, calculated and presented in accordance with GAAP, is available in the earnings press release and investor supplement included in the Investor Relations portion of our website.

I would now like to turn the call over to our CEO, Colin Shannon.

--------------------------------------------------------------------------------

Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [3]

--------------------------------------------------------------------------------

Thank you, Tom. Good morning, and thank you for joining the conference call covering our second quarter financial results.

I am pleased to report that our second quarter financial results were largely in line with our expectations. Revenue came in as planned, and we continued to generate improving margins. Adjusted EBITDA, adjusted net income and adjusted net income per diluted share continued to grow at double-digit rates.

The second quarter of 2019 produced a satisfactory level of new business awards. We reported $671 million of net new business awards, representing a net book-to-bill of 1.24x revenue, continuing our run of quarters with a net book-to-bill equal to or greater than 1.2x our revenue.

The addition of our second quarter new business awards resulted in our backlog increasing approximately 3% on a sequential basis and 14% year-over-year, finishing at approximately $4.5 billion. Overall, the CRO environment remains stable. We continued to see a steady flow of RFP volume and the concentration of our new business awards continued to be well-diversified.

Total revenue for the second quarter was approximately $763 million, which represents an increase of approximately 6% year-over-year at actual foreign exchange rates and 7% on a constant currency basis. Our client base continues to be well-diversified with our top 5 clients representing approximately 39% of revenues in the quarter, with our largest client representing approximately 9% of revenue. Both metrics exclude reimbursement revenues.

Adjusted net income for the second quarter was approximately $82 million, an increase of approximately 24% versus the second quarter of 2018. Adjusted net income per diluted share was $1.22, a 22% increase versus the second quarter of 2018.

Regarding our Data Solutions segment, we continued to make progress. Revenue grew 5% versus the second quarter of 2018 and 10% on a sequential basis. The leadership changes we made in the first quarter continue to take shape, and we're adding more talent to the team daily. We've continued to focus on the build-out of our commercial team and are close to full strength. We also continued to evolve the business by investing in new offerings, enhancing integration with the Clinical Research segment and look at opportunities to expand international -- internationally, sorry.

As discussed in our press release, we are revising our 2019 revenue guidance and updating our adjusted earnings per diluted share guidance. Mike will provide additional details of our updated 2019 guidance later in the call.

As we noted in the last few quarters, our [strategic solutions] have been growing at the same rate as our product registration business, and client demands have shifted away from North America to geographical locations, where labor rates are lower and hiring cycle times are much longer. Our expectation was that our product registration business would have been able to cover the shortfall in strategic solutions revenue. However, during the second quarter, there were studies that failed and had to be taken as cancellations, which impacts our revenue in the second half of 2019.

In addition, as we have discussed in prior quarters, we continued to experience slower ramp-up in our new awards and that has also contributed to reducing backlog coverage in the second half of the year. With that, our product registration business is still growing at double-digit rates, and we have the highest level of head count needs in our strategic solutions division since May of 2017.

We have successfully completed the buyout of our Japanese joint venture with Takeda on 31st of May 2019. PRA Development Center KK is now a wholly owned subsidiary of PRA Health Sciences and are accepting work from existing and new clients. The new Japanese office grand opening was last week and was attended by a number of dignitaries, including a senior leader from Takeda welcomed as a new organization.

In closing, I'd like to welcome our new Japanese colleagues and thank the rest of our PRA colleagues for all efforts in supporting PRA.

I would now like to hand the call over to Mike Bonello, our Chief Financial Officer, who will go through our quarterly financial results in more detail.

--------------------------------------------------------------------------------

Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [4]

--------------------------------------------------------------------------------

Thank you, Colin, and good morning, everyone. For the second quarter of 2019, our consolidated revenue grew 6% at actual foreign exchange rates and 7% on a constant currency basis. As Colin stated previously, we reported revenue of $763.3 million for the second quarter of 2019 compared to $722.8 million for the second quarter of 2018.

We continue to see some volatility in the amount of reimbursement revenue that is being recognized quarter-to-quarter. However, year-to-date, the amount of reimbursement revenue recognized was in line with our expectations.

We also continue to look at ways of refining our forecasting process to reduce this volatility. However, as we previously discussed, the types of studies we are awarded and our customer preference on the amount of pass-through activity that we will manage continues to be a factor in the amount of revenue that is being recognized and the amount of revenue that will be recognized in the future.

The Clinical Research segment recorded revenue of $702.2 million for the quarter, while the Data Solutions segment reported revenue of $61.1 million for the quarter, increases of 6% and 5%, respectively.

Regarding our revenue concentration, we derived 55% of our service revenue from large pharmaceutical companies, 11% from small- to mid-sized pharmaceutical companies, 16% from large biotechnology companies and 18% from all other biotechnology companies. These concentration metrics exclude our Data Solutions segment and reimbursement revenue and are in line with what we have reported in previous quarters.

Total direct costs were $386.2 million in the second quarter of 2019 compared to $381.7 million in the second quarter of 2018. Consistent with prior quarters, our increase in direct cost was primarily related to an increase in labor-related costs in our Clinical Research segment as we continued to hire staff to ensure that our staffing levels are appropriate for our current studies and our future growth. This increase was offset by a favorable impact of $11 million from fluctuations in foreign currency exchange rates.

Direct costs were 50.6% of revenue in the second quarter of 2019 compared to 52.8% in the second quarter of 2018. The decrease in direct costs as a percentage of revenue is primarily due to favorable currency exchange rate fluctuation and increased utilization of our staff.

Selling, general and administrative expenses were $98.8 million or 12.9% of revenue for the second quarter of 2019 compared to 12.6% for the second quarter of 2018. The slight increase as a percentage of revenue was primarily related to an increase in stock-based compensation. As we have previously discussed, the increase in stock-based compensation expense is related to the initiation of our annual grant program and the expansion of our employee stock purchase plan and is consistent with trends that we've seen in the past few quarters.

Adjusted net income, which excludes certain items whose fluctuation from period to period do not correspond to changes in our operating results, increased 23.8% to $88 million -- $81.8 million in the second quarter of 2019. Adjusted net income per diluted share grew 22% to $1.22 per share in the second quarter of 2019 compared to $1 per share in the second quarter of 2018.

Cash used in operations was $45.8 million in the second quarter of 2019 compared to cash provided by operations of $52.6 million for the second quarter of 2018. The decrease in operating cash flow was primarily the result of the final Symphony earnout payment of $83.2 million made in April as well as an increase in cash outflows from working capital driven by a slight increase in our DSO.

Our net days sales outstanding were 24 days at June 30, 2019, and 19 days at June 30, 2018, and were in line with our expectations.

Capital expenditures for the second quarter of 2019 were $21 million compared to $12.7 million for the second quarter of 2018. As we've previously discussed, the increase in our capital expenditures continue to reflect our investment in information technology and the expansion of our infrastructure to support our growth.

Our cash balance at June 30, 2019, was $141.9 million, of which $52.1 million was held by our foreign subsidiaries. Net debt outstanding, defined as total debt less cash and cash equivalents, at June 30, 2019, was $974.6 million compared to $1.2 billion at June 30, 2018.

Regarding currency concentration, excluding reimbursement revenue and expenses, 85% of our own revenue were denominated in U.S. dollars, while 62% of our total expenses were denominated in U.S. dollars, which is consistent with prior quarters and 2018 levels. Our euro exposure continues to be naturally hedged. As we've discussed in prior quarters, we continue to have exposure to movements in the GBP as less than 1% of our revenue is denominated in GBP, while approximately 6% of our expenses are denominated in GBP.

As Colin referenced earlier in the call, the company is updating its 2019 revenue guidance to between $3.02 billion and $3.10 billion, representing as-reported growth of 5% to 8% and constant currency growth of 6% to 8%. We are also updating our GAAP net income per diluted share to between $3.60 and $3.70, and adjusted net income per diluted share to between $4.98 and $5.08, representing growth of 16% to 19%.

We continue to estimate our effective tax rate at 24%. As we've previously discussed, our effective tax rate may differ from this estimate due to, among other things, changes in the geographic allocation of our pretax earnings as well as changes to interpretation of the U.S. Tax Cuts and Jobs Act.

Please note that our guidance assumes a euro rate of 1.15 and a GBP rate of 1.30. All other foreign currency exchange rates are as of June 30, 2019.

That concludes our prepared remarks. And now, we are happy to take your questions. Operator, you may now open the line.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from David Windley of Jefferies.

--------------------------------------------------------------------------------

David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [2]

--------------------------------------------------------------------------------

Colin, I wanted to follow up on your comments about the environment. Your bookings have remained in a very solid above 1.2, as you highlighted. I think throughout most of last year, certainly, the second half and the early part of this year, you've been pretty enthusiastic about a new MSA that you inked in the fourth quarter, kind of maybe your -- one of your large clients getting back into its groove after closing a large merger. I just wanted to get your kind of qualitative commentary around the momentum of some of your bigger opportunities. And are they flowing into bookings kind of in the early part of the year as expected? Or is that kind of feathering in over a longer period of time?

--------------------------------------------------------------------------------

Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [3]

--------------------------------------------------------------------------------

It actually looks as though it's coming in much later. The one that we mentioned, that was a new provider last year. We had recent meetings with the senior leaders there and interestingly, they were making sure that they were earmarking us for stronger flow and they've got a couple of nice studies identified for later on in the year. So we're actually starting to see things happening on some of the new partnerships that we have signed up.

So all in all, I think that there's been nothing unusual, which actually probably that helped us get stronger book-to-bills had we been successful in actually getting some of the other sort of steadier type of work coming through. So most of that has been our just new business, new flow of RFPs and basically, just a normal type of flow from our typical book of business. So we've been pretty pleased with where we are, and we obviously have got expectations that we can improve with some of our longer-term clients giving us more work in the future.

--------------------------------------------------------------------------------

David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [4]

--------------------------------------------------------------------------------

Right. So -- that's helpful. So to emphasize the point, it's not that any of those larger opportunities have failed -- have gone away -- failed to materialize at all, but rather, just primarily a timing issue?

--------------------------------------------------------------------------------

Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [5]

--------------------------------------------------------------------------------

A lot of it is just timing, yes.

--------------------------------------------------------------------------------

David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [6]

--------------------------------------------------------------------------------

Okay. You mentioned some cancellations that hit in 2Q that had some influence over your full year revenue guidance. Could you cover that -- could you quantify those for us at all? Was that outside of the norm?

--------------------------------------------------------------------------------

Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [7]

--------------------------------------------------------------------------------

Yes. Those -- as you see, there was $100 million -- almost a $110 million in cancellations in the quarter and that resulted in approximately $20 million of revenue dropping out in the back half of the year.

--------------------------------------------------------------------------------

David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [8]

--------------------------------------------------------------------------------

Okay. $20 million. Great. And then finally, your margin performance has been ahead of, certainly, my expectations, and I think ahead of the basic 50 basis points per year that you had talked about as a general structure. Is that -- does that influence your continued ability to expand the margin? Have you essentially pulled anything forward? Or can we view this as a base on which you can continue to grow -- expand?

--------------------------------------------------------------------------------

Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [9]

--------------------------------------------------------------------------------

Yes. We haven't pulled anything forward, Dave. We're just continuing to manage our costs and make sure that we're utilizing staff effectively, and we believe that we can grow slightly on that. I wouldn't say it'll be in increments that you've seen over the last 2 quarters, but we do expect it to be positive.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

And the next question comes from John Kreger of William Blair.

--------------------------------------------------------------------------------

John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [11]

--------------------------------------------------------------------------------

Colin, just building on your comments about the transaction in Japan, can you just give us the broader update on your build-out of the operations in Asia Pac overall? Is that where you want it to be? Or is that still a point of investment?

--------------------------------------------------------------------------------

Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [12]

--------------------------------------------------------------------------------

Thanks, John. It's still a lot of investment there. I mean we're really pleased, obviously, the venture with -- that we started with Takeda. We've now got 450 people in Japan. And it's quite unique in that, obviously, a lot of them have transitioned over from Takeda, so they've got a lot of really strong drug development experience, and it's very appealing as a strong pharma partner. And we're going to be supporting them with some of our new technologies, particularly our C6 platform. We see as we've a great opportunity for them to leverage that in Japan, and we'll be looking for building that out in the next number of quarters.

So overall now, we're getting a lot of strength there. We're still obviously growing in lots of other countries. We've got over 2,500 people there we've built that in Asia. We still feel like there's room to grow. We're still experiencing a lot of demand there, and we'll continue to invest and build that out.

We're very, very pleased with our new offices in Japan, they're now setting a new standard, not only the time line that we got it done in, but it's actually looking really, really smart. So we're very, very pleased with the new office openings last week.

--------------------------------------------------------------------------------

John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [13]

--------------------------------------------------------------------------------

Great. And then the follow-up. If you think about the next 1 or 2 years across the business, where do you see the biggest opportunities for growth from here: existing relationships; new relationships; large clients versus small; the data business versus the clinical business? Just where do you think that the biggest opportunities are for PRA?

--------------------------------------------------------------------------------

Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [14]

--------------------------------------------------------------------------------

We are still looking to be innovative. And we're working on how to utilize like the structural platforms. And we're at the moment, using it in a hybrid fashion to augment the traditional methodology of clinical trials. It's showing very, very good indication that it's improving compliance. It's -- and we can see that continue to advance where the use of data is becoming really of paramount importance. As we start to think about using synthetic arms, et cetera, product development, we're nicely positioned to take care of that in the future.

We're still building out and utilizing adaptive monitoring, and we've hired new resources to really start to optimize that solution. We continue to look at technologies and ways of doing things better and faster.

Obviously, there's still a lot of -- there's quite a resistance in some of our clients where they still want to use their own site mix, their own KOLs, their own SOPs and procedures. But we're finding a lot of the biotech are really very innovative and want to take advantage of what we can bring in some of the offerings that we have.

So overall, from a client mix, we'll continue to support, obviously, all of the clients that we've worked with over the years. We continue to add new clients all the time, particularly in biotechs. And our goal is to make sure that we can get drugs to market as quickly as we can. And it's -- obviously, it's always a shame when we have worked all hard and we find that a drug fails, but it's the nature of our business and it's always unfortunate. It hurts our team just as much as it hurts the pharma because they're all working diligently on it and some things for a long time. So I see a nice mix going forward. I mean it's been a great environment, and we're still seeing a very strong RFP flow and lots of opportunities.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

And our next question comes from Donald Hooker of KeyBanc Capital.

--------------------------------------------------------------------------------

Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [16]

--------------------------------------------------------------------------------

So maybe just diving into Symphony Health. It sounds like you have some fairly good ambitions there, building out those commercial teams, investing in software and whatnot. What is the typical -- how do you think about margins for that business? Like, what is your target for, let's say, gross margin for that business for the revenue line going forward?

--------------------------------------------------------------------------------

Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [17]

--------------------------------------------------------------------------------

Well, Donald, thanks for the question. We've typically been in kind of that -- kind of I'd say 27% to 28% range for Symphony. Obviously, there's peaks and valleys there, depending on how the revenue comes through because, obviously, they're back-end loaded towards September and Q4. But our expectations have been in that kind of, I'd say, 27% to 29% range in terms of where we see their margins.

--------------------------------------------------------------------------------

Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [18]

--------------------------------------------------------------------------------

So if that drifts higher than that, I guess, it sounds like you're going to be reinvesting back to grow that even more, so that it'll sort of stabilize at that level for the next year or so, is that fair?

--------------------------------------------------------------------------------

Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [19]

--------------------------------------------------------------------------------

That's correct.

--------------------------------------------------------------------------------

Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [20]

--------------------------------------------------------------------------------

Great. Super. And then again, understanding Symphony Health because that's a new element to the story, the seasonality there is tough for us on the outside to sort of track. Should we -- how is the seasonality this year do you think comparing to last year? You had a big fourth quarter last year. I think you normally have a big fourth quarter. But should we assume sort of a similar pattern? Or how is that setting up?

--------------------------------------------------------------------------------

Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [21]

--------------------------------------------------------------------------------

Well, so far as we're projecting forward, we're seeing no difference to last year. And we're expecting to see a similar type of effort made. And in the meantime, the team has still been looking to see how we can normalize some of the revenue streams over the year so that we don't have such volatility towards the last quarter. So they're working diligently to look at some other types of transactions where the revenue's spread more evenly, but that might take some time to develop, but they've certainly been working at that.

So far, we've been looking to provide some color around the rest of the year. We feel really -- pretty strong about the business and we think that it's looking very good and there's no reason why we can't achieve exactly what we did last year.

--------------------------------------------------------------------------------

Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [22]

--------------------------------------------------------------------------------

Super. And maybe the last question for me and then I'll hop off and let others in. You might have mentioned this in the prepared remarks, but I think I missed the audible. In terms of sort of shift, the mix shift from functional service provider to full service outsourcing, what are sort of the comparable growth rates between those 2 models? Is there a shift more towards -- is the shift towards full service sort of continuing? Can you maybe quantify that a bit?

--------------------------------------------------------------------------------

Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [23]

--------------------------------------------------------------------------------

Yes. I'll give you give some color on it. We've been mentioning the strategic solutions has been going through less growth, but look, it was actually a lot of our pharma clients were going and they were rebalancing their staffing model with -- between their permanent staff and their flex staff. And as looking through this exercise, they were really looking to see where are the gaps. And we know there's quite a shift moving away from North America to rest of the world. And it's just taking quite a time for them to go through that analysis. And only recently are we now getting all the demands for new job and précis from virtually the rest of the world. So it's been slower growth.

We're actually seeing that, obviously, the strong dollar is meaning that we're moving to the countries where they're getting more inexpensive labor. But -- and so -- in a lot of these countries, it's taking a longer cycle to fill the jobs with notice periods and finding, et cetera. It's just taking a lot longer. So there's been a bit of gap between -- and that we noticed it starting at the beginning of the year. We thought it would actually have ramped-up a lot faster. But we -- it's only recently that we've actually started to get all these job requirements to be filled.

So basically, we're seeing that there's minimal growth within the strategic solutions for the year, but we're seeing product registrations still going well over double digits.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

And our next question comes from Ross Muken of Evercore ISI.

--------------------------------------------------------------------------------

Luke England Sergott, Evercore ISI Institutional Equities, Research Division - Associate [25]

--------------------------------------------------------------------------------

It's Luke on for Ross this morning. Just kind of want to follow up on the guidance. And basically, just if you can walk us through ultimately what changed from when you issued it? Was it more of an -- and the guide down, I guess is it more of just being overly optimistic and having to have those projects come in to hit your guide? Or is it more something going on in the overall market environment?

--------------------------------------------------------------------------------

Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [26]

--------------------------------------------------------------------------------

No, it's actually more -- we -- typically, there's a number of pathways that had just that thing broke in a little bit different or we would have been able to continue with our guidance as such; surprised cancellations, that's one thing. But had we been able to ramp-up the startup of some of our studies the way that we would traditionally see them going, we felt good coverage. But when we're looking through it, we wanted to make sure that we're representing what we're seeing and what the backlog coverage was showing. And with some of the changes in other areas, we just couldn't compensate the product registration to cover everything. So when we did our analysis, we looked hard, because the last thing we want to do is just guidance and then find out that we get everything ramped-up fast now. And so we had a lot of debate over should we wait, but we actually wanted to give our investors color and let them see what we're seeing.

I mean, the good thing is, is that most of the issues was all related to some lower-margin type work. So you can see that we've really held up our earnings well, and we've still not really changed much from that. So we're feeling pretty good that despite reducing revenue, we're actually still producing really good quality earnings.

--------------------------------------------------------------------------------

Luke England Sergott, Evercore ISI Institutional Equities, Research Division - Associate [27]

--------------------------------------------------------------------------------

That's great. And then lastly on the -- I guess, on the margins and go forward. You've had some pretty big moves in FX since your basing your guidance. How should we think about how those pace for the rest of the year and the flow-through of FX to the model?

--------------------------------------------------------------------------------

Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [28]

--------------------------------------------------------------------------------

Sure. We had -- we obviously had a couple cents of FX help in the second quarter. But we've -- with running the rates through the way we've run them and given the fact that we're in those -- a significant number of countries, we're only expecting maybe $0.01 of benefit for the remainder of the second half of the year, so we don't have a lot of FX benefit built in.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

Our next question comes from Sandy Draper.

--------------------------------------------------------------------------------

Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research [30]

--------------------------------------------------------------------------------

Maybe one just clarification first. On the way you guys report book-to-bill, you're essentially reporting it still more on a 605-type basis. Is that correct? So you're not including pass-throughs in either the revenue or the bookings?

--------------------------------------------------------------------------------

Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [31]

--------------------------------------------------------------------------------

That's correct.

--------------------------------------------------------------------------------

Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research [32]

--------------------------------------------------------------------------------

So thinking about comparing your book-to-bill to most of the other peers who are, I would assume your book-to-bill would be higher if you would include the pass-throughs.

--------------------------------------------------------------------------------

Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [33]

--------------------------------------------------------------------------------

That's correct.

--------------------------------------------------------------------------------

Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research [34]

--------------------------------------------------------------------------------

Okay. Great. That's one. I appreciate that clarification. And then maybe back when I'm thinking about the cancellations, and appreciate you calling that out. As I'm looking back at the past sort of 6, 7 quarters, I think there have been 4 of the last 7 quarters you've had cancellations over $100 million. Is there anything you think going on in terms of the types of therapeutic trials you're getting? Is it just -- I mean part of it is you're getting bigger, but I'm just trying to get a sense for should we be thinking about cancellations maybe at this higher dollar level going forward? Or do you think you can start to move back down more towards the sub-hundred million?

--------------------------------------------------------------------------------

Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [35]

--------------------------------------------------------------------------------

We look at that very close, Sandy. We're continuing -- continuously monitoring what's going on from a study perspective. And I think, as we've talked in the past, we have kind of a bucket that we call backlog at risk so that we make sure that we understand what's going on there. In this particular quarter, as Colin referenced, we had some cancellations because of a failure of the drug, which we weren't expecting obviously, so that's had a little bit bigger of an impact from a revenue perspective.

So I would expect -- I'm hoping that cancellations aren't very high and certainly, I'm hoping that the studies work. But I would say, we'll probably be in line with historic levels.

--------------------------------------------------------------------------------

Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [36]

--------------------------------------------------------------------------------

I mean there's no classification here or general categorization that we're seeing that there's a concern. We don't have like high concentration that we can see that this would be something significant. Obviously, we would always -- we always look at class of drugs to make sure that if we're doing anything in a similar vein, that we could expect maybe that would be at risk as well, but there's nothing like that. It's something we do watch. We try our best to determine whether there's any risk. But obviously, until results happen, you can't tell whether a drug works or not. And when there's an interim analysis, we always watch it because you never know what the results will show. Just unfortunate that when it gets pretty well down the road and then it gets -- and then there's -- it doesn't show efficacy, then it's bad news for everybody.

--------------------------------------------------------------------------------

Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research [37]

--------------------------------------------------------------------------------

Okay. That's helpful. And then maybe my final question relates to the hiring and trying to find the people. Is there any -- trying to find the people, is it more a competitive dynamic, where you and several other CROs are chasing the same people? So it's harder to get them because these are -- the wage inflation is out there? Or certain pockets are being split among multiple CROs? Or is it just a function of you're getting the people you want, it's just it takes longer because you're going into geographies where maybe you don't have the HR infrastructure to actually find the people, but once you find them and can identify them, you can hire them pretty quickly? Just trying to get a sense of, is there a risk of wage inflation because as you try to resolve the hiring issue, you're going to have to start paying more?

--------------------------------------------------------------------------------

Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [38]

--------------------------------------------------------------------------------

Well, there's a bit of everything you say there, actually, because each market is slightly different. In fact, even in North America, there are different pockets. So in each area, we're going to see it slightly differently. And we've got a current acquisition group that their focus is on how they're best identifying the needs and out of -- and part of the problem is that, it's still quite a transient workforce. We've had a lot of success in training people and the experiences they've had, they're highly sought after. And a lot of other competitors are paying significantly higher to attract some of our team away. So we're always fighting the retention battle and also hiring new staff. So we always look that when there's openings, that we obviously want to fill them with the best people possible, and we are making sure that we maintain our high standards.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

And our next question comes from Erin Wright of Crédit Suisse.

--------------------------------------------------------------------------------

Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [40]

--------------------------------------------------------------------------------

I'm curious are you seeing any changes in the broader pricing environment? Or is the competitive landscape more aggressive, less aggressive from your vantage point? And can -- what can you do in terms of bundling and leveraging the Data Solutions component in the bidding process or the pricing process at this point?

--------------------------------------------------------------------------------

Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [41]

--------------------------------------------------------------------------------

One of the things about the -- using the data is that it's giving us a good analysis of really getting a true handle on enrollment rates. We've noticed in the past that some of the competitors, they've been a little bit more bullish on enrollment rates, and we've tried to obviously show to the clients that we're supporting it with strong data. But when they're -- getting fixed price contracts, it becomes a balance of how aggressive we want to be in knowing and seeing the data and try to get a balance of the risk versus reward here. And I think we have been sort of standing by our principles of like we've done a lot of work, we know and we've been using and supporting all of our analysis with data. And over time, it's proven that, that ultimately is a better option.

We've mentioned in the past, we see one-off types of pricing situations and that still happens from time to time, whether it's people have been aggressive on enrollment rates or whether they may be using less hours. We never know the mix. All we know is that we try to be as competitive as we can. We know our rates are very comparable with the rest of the industry. And it's really all how best to structure and optimize each bid that comes into play.

--------------------------------------------------------------------------------

Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [42]

--------------------------------------------------------------------------------

Okay. That makes sense. And there were some new headlines, I guess, yesterday from -- this is talking about a drug-pricing standpoint, but in terms of potential new drug importation initiatives. And just given kind of broader drug pricing scrutiny, I mean, are you hearing any sort of feedback from customers on this front? Or is it just too early? Or I'm curious kind of what you're hearing from the sponsor perspective?

--------------------------------------------------------------------------------

Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [43]

--------------------------------------------------------------------------------

Yes. I mean I mentioned that last time, that there's always that type of pressure on our clients with the environment. In the short time -- in the short term, it might impact a little bit, but over the longer term, we do feel that it will ultimately cause the -- a larger pharma to reduce their workforce even more and allow CROs to produce more flex labor and give us more opportunities in the future. So we see that ultimately as being a positive of what might be a little painful in the short term.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

And our next question comes from Jack Meehan of Barclays.

--------------------------------------------------------------------------------

Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [45]

--------------------------------------------------------------------------------

I just had a few model-related questions to clean up. I guess the first is related to the revenue reduction and guidance. Caught $20 million related to the cancellations you talked about. Can you just walk us through the moving pieces on some of the other things that you flagged and how you would quantify those?

--------------------------------------------------------------------------------

Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [46]

--------------------------------------------------------------------------------

Yes. Certainly, Jack. So we -- I think if you look at the midpoint, we're down roughly $85 million. As I said, there's $20 million that's related to the cancellations that we discussed. There's roughly $10 million around the study delays that we're experiencing from how we would have expected it to run. Roughly $30 million worth of pass-through movement as a result of some of these changes; and then about $20 million to $25 million related to the strategic solutions discussion that we had earlier.

--------------------------------------------------------------------------------

Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [47]

--------------------------------------------------------------------------------

Great. And then turning to the cash flow, we've heard from a couple of companies so far related to kind of the increase in DSOs that we've seen. Can you walk us through just maybe the payment terms and whether you think that can start to normalize as you get into the back half of the year?

--------------------------------------------------------------------------------

Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [48]

--------------------------------------------------------------------------------

Yes. We typically -- the second half of our year is typically where you see improvements in our DSOs. I think if you look at it historically, our DSO was a little bit better in the first quarter than I thought it would be. Typically, you see a drop off in the fourth and then kind of a movement back up in the first. I think we're a little flatter in the first quarter than I would have expected. But our second quarter was not higher than that level that we would have expected in the first.

Some of our clients -- and I think we've referenced this in the past where we are seeing some extension on the terms that they're looking for. But I don't anticipate that our DSO would be any worse at the end of this year than it was at the end of last year; maybe a day, but not more than that.

--------------------------------------------------------------------------------

Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [49]

--------------------------------------------------------------------------------

Great. Final cleanup. I guess as I run my math, I have you exiting 2019 with net leverage closing in at around 1.5 turns. So I was just curious, as you look at the deal environment today, and you stack up the different opportunities, just how you feel about the opportunity to maybe continue to add as you looked over the remainder of the year?

--------------------------------------------------------------------------------

Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [50]

--------------------------------------------------------------------------------

Well, I'll let Colin comment on that. But I will tell you that in our current forecast, assuming that a transaction doesn't happen, we have $200 million worth of term debt payments built in.

--------------------------------------------------------------------------------

Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [51]

--------------------------------------------------------------------------------

We've got nothing in the pipeline just now. I mean obviously, something that I've always felt that would be really great to add to us is more real world evidence and get something core to build on. Our data component, we feel that that's very complementary and there's a lot of growth there, and we're seeing our competitors exploit that market very strongly. It's an area that we've always saw as a great growth for our future and we'd like to move more aggressively in there and we've been sort of watching and looking at some opportunities.

As you're probably aware just now, the organizations that have been up for sale are looking for really premium values. And we just don't really want to stretch that far at this point in time. So we are continuing to look and see what opportunities are there that we can take advantage of.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

And our next question comes from Dan Brennan of UBS.

--------------------------------------------------------------------------------

Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [53]

--------------------------------------------------------------------------------

Colin, can you maybe speak to just kind of big picture on kind of the bookings growth that you've seen like over the last, say, couple of years? I know it's continued to turn down here, gross bookings kind of flattish in the last couple of quarters. Obviously, you've talked about some of the opportunity with the big customer that likely you'll see a pickup going forward. But just can you characterize how much the environment? How much of it is PRA? Obviously, you sound really positive about your overall competitive positioning, but I'm just trying to kind of tease out what we've seen and kind of where we go from here?

--------------------------------------------------------------------------------

Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [54]

--------------------------------------------------------------------------------

We're always in the mix of looking for developing new relationships and new clients and sometimes they can take a lot longer than expected. Because we normally have to go to a couple of big things, get close a couple of times before we can make breakthroughs into new relationships.

We've got a good number of core clients that give us work but it's very cyclical. They don't -- when they're working on a number of different activities, they tend to wait as things evolve before there's a next raft of new studies that come out. So it's quite choppy in that fashion. So we -- our business developments team are continuously looking at all the leads and looking at where we're going to be focusing in on. So in any given quarter, we sort of really identify the targets, the shortlist of where we go to and our goal is to try and optimize the winning of these targets.

Obviously, if we miss, that can be slightly less than where we expected, but we've got to keep focused because if we go after everything, we'll end up not being successful. So we target where we need to every quarter and look at opportunities that we think we can land and where we are. And obviously, we give a lot more focus on to our incumbent clients and -- because obviously, we want to ensure that we remain good partners to them and make sure that they get a first opportunity to take advantage of all that we can offer.

--------------------------------------------------------------------------------

Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [55]

--------------------------------------------------------------------------------

Okay. Great. And then I think in the prepared remarks or maybe throughout the Q&A, you did mention the continued elongation in kind of revenue conversion from backlog just given probably the dynamics of some of the business. Can you just give us a little more color there? And kind of what's baked into guidance now in terms of conversion?

--------------------------------------------------------------------------------

Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [56]

--------------------------------------------------------------------------------

Well, we have tailored back, obviously, our sales model as we look at how MBA is coming in. I don't have an actual quantifiable number that would say here's what it was before and here's what it was after. But we have slowed it down to make sure that we're making sure we take into effect what we're seeing in the studies that we're winning. So we have slowed it down, and I would expect, obviously, it to be in line with how our forecast is showing currently.

--------------------------------------------------------------------------------

Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [57]

--------------------------------------------------------------------------------

Okay. And then maybe a final one, just back to Symphony. So it sounds like you continue to add capabilities in people. And I think you said you're still not at the point yet where the Symphony business or the data capabilities are fully integrated with any kind of PRA offering. How do we think about the evolution of that going forward? I know you had basically hesitated from giving us any like formal strategy, if you will, as you put new management in place and kind of how to do a deep dive on that business? So how do we think about the evolution of really weaving in some of what Symphony can offer into the core PRA clinical offering that potentially could help you drive better growth?

--------------------------------------------------------------------------------

Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [58]

--------------------------------------------------------------------------------

Well, that's actually already started, which -- so the teams are now working much more collaboratively. And we do see a lot of synergies there from improving new opportunities and new revenue opportunities. So we continue to look at how we can continue to develop that and take advantage of the strengths of the core parts of the organization. It's an ongoing work in progress. But it's more -- it's not, look, about cost saving, this is all about you creating new revenue opportunities placed by the collaboration between the 2 different groups. It's well underway and it started really in February and we're still working through it and we continue to evolve it as we go through and improve relationships and see new opportunities because of the relationships.

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

And our next question comes from Stephen Baxter of Wolfe Research.

--------------------------------------------------------------------------------

Stephen C. Baxter, Wolfe Research, LLC - Senior Analyst [60]

--------------------------------------------------------------------------------

I wanted to follow up on the conversion rate question. So I'm trying to understand the relationship between burn rate and the revised guidance. So it looks like the burn rate stabilized on a sequential basis, which seems like a pretty good outcome, but that seems to conflict a little bit with the comments around like elongation you guys are making about starts. It looks like from here, the revised guidance roughly requires it to stay consistent throughout the balance of the year. So hoping, maybe you can help us kind of square those things. Help us think about what was embedded in the original guidance for burn rate progression? And if I'm right about the steadiness from here, your confidence level that you can hold it flat just given the comments that you've made about starts getting pushed?

--------------------------------------------------------------------------------

Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [61]

--------------------------------------------------------------------------------

Yes, as Mike mentioned in previous quarters, we were actually starting to envision a slight pickup in our conversion rate during the year and you're correct, that has kind of flattened off. So we didn't get the benefit of seeing that improvement because we'd actually factored in an elongation on the ramp-up and -- but it's still just been taking a little bit longer. So we're continuing to sort of fine-tune our models. Mike's working with his team to just continue to improve our forecasting in that factor. It's been a change that's happened over the last year or so as you're aware. We continue to sort of, like, look at how it's ramping through and maybe, Mike, you want to add?

--------------------------------------------------------------------------------

Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [62]

--------------------------------------------------------------------------------

Yes. And Stephen, you will see a little bit of a decline in that burn rate in Q3 and Q4. As Colin said, we had originally thought that we would see a little bit of flattening in kind of Q1 and Q2 and then a pickup in Q3 and Q4. I think it might be just a slight step down in Q3 and it may be just a slighter step down in Q4.

--------------------------------------------------------------------------------

Operator [63]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Juan Avendano of Bank of America.

--------------------------------------------------------------------------------

Juan Esteban Avendano, BofA Merrill Lynch, Research Division - Associate [64]

--------------------------------------------------------------------------------

Only 1 for me on FX. It seems like your guidance is based on an exchange rate of 1.15 for the euro and 1.30 for the pound. Currently, the spot rates are below that. And so if you could tell us why you're basing your guidance on those spot rates? And then also what's embedded in the guidance given your assumptions on what the impact or benefit of FX through the margins and on an adjusted EPS?

--------------------------------------------------------------------------------

Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [65]

--------------------------------------------------------------------------------

Yes, sure, Juan. I think we've talked about in the past our process for how we look at our exchange rates that we use in our guidance. We take surveys from I think it's roughly 11 banks and we look at what their forward rates are suggesting. The forward rates are suggesting what we guided to as opposed to what the spot rate on those 2 currencies are today. So that's why we've kept them where they are, so obviously, if the rates come in actual a little bit lower than those guidance, we get a little bit of a benefit.

I don't have FX broken out between margin and adjusted net income, but I will tell you that given some great movements in other countries, in the back half of the year, all that we're expecting to see is roughly -- given the rates we have in here currently is $0.01 of benefit and we've baked that into our guidance.

--------------------------------------------------------------------------------

Operator [66]

--------------------------------------------------------------------------------

At this time, I have no other callers in the queue. I'd like to turn the call back over to Mr. Colin Shannon for any closing remarks.

--------------------------------------------------------------------------------

Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [67]

--------------------------------------------------------------------------------

Well, thank you, everyone, for participating in our call today. If you have any additional questions, please feel free to contact us. We hope you have a great rest of the day. Thank you.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation in today's conference. You may now disconnect. Everyone, have a wonderful day.