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Edited Transcript of PRAH earnings conference call or presentation 28-Feb-19 2:00pm GMT

Q4 2018 PRA Health Sciences Inc Earnings Call

RALEIGH Mar 7, 2019 (Thomson StreetEvents) -- Edited Transcript of PRA Health Sciences Inc earnings conference call or presentation Thursday, February 28, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Colin Shannon

PRA Health Sciences, Inc. - President, CEO & Chairman of the Board of Directors

* Michael J. Bonello

PRA Health Sciences, Inc. - Executive VP & CFO

* Thomas Byrne

PRA Health Sciences, Inc. - VP of Legal Affairs

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Conference Call Participants

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* Alexander Yearley Draper

SunTrust Robinson Humphrey, Inc., Research Division - MD

* 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

* Eric White Coldwell

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Erin Elizabeth Wilson Wright

Crédit Suisse AG, Research Division - Director & Senior Equity 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

* Mitchell Frank Petersen

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the PRA Health Sciences Fourth Quarter 2018 Earnings Release Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to introduce your host for today's call, Mr. Tom Byrne, Vice President of Legal Affairs. Mr. Byrne, you may begin.

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

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Great, thank you. Good morning, and thank you for joining us for the PRA Health Sciences Fourth Quarter of 2018 Earnings Teleconference. Today, Colin Shannon, our Chief Executive Officer; and Mike Bonello, our Chief Financial Officer, will discuss our fourth quarter and full year 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 during this teleconference 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 22, 2018. 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 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'd now like to turn the call over to our CEO, Colin Shannon.

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

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Thank you, Tom. Good morning, and thank you for joining the conference call covering our fourth quarter and full year 2018 financial results. I am delighted to report that the fourth quarter was another strong quarter for PRA, which produced solid revenue growth and double-digit adjusted net income growth. We also continued to see strong growth in our new business awards and our backlog. Net new business increased approximately 3% when compared to the fourth quarter of 2017. We had $667 million of net new business awards, representing a net book-to-bill of 1.3x revenue. Continuing our consecutive quarter-run of net book-to-bill equal to or greater than 1.2x revenue.

For full year 2018, with a record level of $2.6 billion of net new business awards, representing growth of 10% and a net book-to-bill of 1.29x. As we have previously discussed, our new business awards and calculation of net book-to-bill ratio excludes the revenue impact of adopting ASC 606, excludes reimbursement revenue and excludes revenue from our Data Solutions segment. The addition of our new awards has resulted in our backlog increasing approximately 4% on a sequential basis and 20% year-over-year, finishing at approximately $4.2 billion.

As we've previously disclosed, our backlog does not include our Data Solutions segment. And in addition, we exclude pass-throughs and investigator revenue from backlog. The diversity of our new business awards continues to be consistent with previous quarters with approximately 58% of our new awards coming from the pharmaceutical sector and approximately 42% coming from the biotech sector.

Revenue for the fourth quarter was approximately $730 million, which represents an increase of approximately 11% year-over-year at actual foreign exchange rates and 12% on a constant currency basis. Revenue growth, excluding the impact of the adoption of ASC 606 and reimbursement revenues, was approximately 4% year-over-year at actual foreign exchange rates. Adjusted net income for the fourth quarter was approximately $87 million, an increase of approximately 26% over the same period last year. Adjusted net income per diluted share was $1.31, a 26% increase versus the fourth quarter of 2017.

Our client base continues to be well diversified with our top 5 clients representing approximately 36% of total revenue for the quarter. And our largest client representing approximately 9% of total revenue. Both metrics exclude the impact of adopting ASC 606.

Our full year 2018 financial results continue to trend at consistent and strong growth. We reported solid revenue growth and improved our overall operating margins. We drove our full year revenue of approximately $2.9 billion, representing growth of approximately 27% of actual foreign currency exchange rates and 26% on a constant currency basis. Organic revenue growth, which excludes the impact of the adoption of ASC 606, reimbursement revenue and our 2017 acquisitions, was approximately 10% year-over-year at both actual foreign exchange rates and on a constant currency basis.

During 2018, we made significant investments in our business and enhanced our service offerings. We believe that we have established a foundation that will allow us to provide long-term and sustainable growth and believe we are well-positioned to offer a wide variety of services to our clients. Due to our solid performance in 2018, we are anticipating a 2019 adjusted earnings per diluted share between $4.93 per share and $5.08 per share. Mike will provide additional details about our 2019 guidance later in the call.

During 2018, many of you raised questions about the stages of studies that were canceled heading into 2018, the impact of the Pharma industry M&A activity on our business and the integration of our Symphony business, I would like to take a moment just to provide a brief update on each of these items. Regarding the canceled studies, as I've mentioned in the past, these were replaced and have been up and running since the latter half of 2018. And as we've mentioned previously, our client had re-prioritized their pipeline and as a result, canceled and then subsequently replaced the studies. The replacement studies were of a similar value, but have a longer duration than the original studies.

As you are aware, the Takeda and China transaction closed on January 8, 2019. We don't anticipate the closing of this transaction to have an impact of studies we are currently running for Takeda and we are optimistic about the impact the transaction will have in our new business in the future. We look forward to continuing our partnership with Takeda as it heads into year 4 of our relationship.

Regarding our Data Solutions segment, I am pleased that we have finalized the [MIPD] and we are now in a position to complete our integration plans and expand in our service offerings. As anticipated, we saw the unusual -- the usual seasonality in this business, and we are able to meet our forecast for the year.

In closing, I would like to thank our entire staff and our clients for their continued commitment to PRA Health Sciences. We are delighted with our strong financial results and believe we are well positioned for 2019. I would now like to hand over the call to Mike Bonello, our Chief Financial Officer, who will go through our quarterly and full year financial results in more detail.

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

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Thank you, Colin. Good morning, everyone. For the fourth quarter of 2018, our consolidated revenue grew 11.2% at actual foreign exchange rates and 12% on a constant currency basis.

We reported revenue of $729.6 million for the fourth quarter of 2018 compared to $655.9 million for the fourth quarter of 2017. When comparing recorded revenue to our third quarter guidance, fourth quarter reported revenue was negatively impacted by foreign currency fluctuations of approximately $3 million and lower-than-forecasted reimbursement revenue of $8 million. Our guidance assumed a reimbursement revenue of approximately 28.5% of ASC 605 revenue, while actuals came in at 27%.

Revenue excluding the impact of the adoption of ASC 606 and reimbursement revenue increased 3.6% at actual foreign exchange rates and 4.2% on a constant currency basis. Revenue by segment for the fourth quarter of 2018 was $655.6 million for the Clinical Research segment and $74 million for the Data Solutions segment. Regarding revenue concentration for the fourth quarter of 2018, we derived 54% of our service revenue from large pharmaceutical companies, 11% from small-to-midsized pharmaceutical companies, 16% from large biotechnology companies and 19% from all other biotechnology companies. These concentration metrics exclude our Data Solutions segment, the adoption of ASC 606 and reimbursement revenue and are in-line with what we've seen in previous quarters.

Total direct costs were $365.7 million in the fourth quarter of 2018 compared to $368.9 million in the fourth quarter of 2017. The decrease in direct cost was primarily related to a favorable impact of $8.6 million from foreign currency exchange rates, which was offset by an increase in labor related costs in our Clinical Research segment as we continue to ensure appropriate staffing levels and an increase of $1.6 million in our Data Solutions segment. Excluding the impact of the adoption of ASC 606 and reimbursement revenue, direct costs were 62.1% of service revenue in the fourth quarter of 2018 compared to 64.9% in the fourth quarter of 2017. The decrease in direct costs as a percentage of service revenue is primarily due to favorable currency exchange rate fluctuations discussed earlier and an increase in utilization of our staff.

SG&A expenses were 94 -- $96.4 million or 16.4% of revenue, excluding the impact of the adoption of ASC 606 and reimbursement revenue for the fourth quarter of 2018, compared to 16.2% for the fourth quarter of 2017. The slight increase in SG&A expenses as a percentage of service revenue is primarily related to an increase in stock-based compensation during the current year. The increase in stock-based compensation expense is primarily related to the initiation of our annual grant program and the adoption of our employee stock purchase plan and is consistent with the trend we saw in the third quarter of 2018.

During the fourth quarter of 2018, we incurred transaction-related expenses of $3.1 million compared to $75.9 million during the fourth quarter of 2017. Both amounts were primarily related to changes in the fair value of earn-out liabilities associated with our acquisitions.

Adjusted net income, which excludes certain items whose fluctuation from period-to-period does not necessarily correspond to changes in our operating results, increased 26.4% year-over-year to $86.9 million in the fourth quarter of 2018. Adjusted net income per diluted share grew 26% to $1.31 per share in the fourth quarter of 2018 compared to $1.04 per share in same quarter last year.

For the 12 months ended December 31, 2018, our consolidated revenues grew approximately 27% at actual foreign exchange rates and 26% on a constant currency basis. Revenue, excluding the impact of the adoption of ASC 606 and reimbursement revenue, increased 18% at actual foreign exchange rates and 17% on a constant currency basis.

We finished the year with approximately $2.3 billion of revenue, excluding the impact of the adoption of ASC 606 and reimbursement revenue compared to $1.9 million in the comparable prior year. Cash provided by operations was $131.2 million for the 3 months ended December 31, 2018, compared to cash provided by operations of $102.6 million for the 3 months ended December 31, 2017.

For the 12 months ended December 31, 2018, cash provided by operations was $329.8 million compared to $220.4 million for the 12 months ended December 31, 2017. The increase in operating cash flow was a result of an increase in operational performance and optimization of our working capital. Our net days sales outstanding were 16 days at December 31, 2018, compared to 20 days at December 31, 2017. Capital expenditures were $15.8 million for the 3 months ended December 31, 2018, compared to $22 million for the 3 months ended December 31, 2017.

Capital expenditures were $55.9 million for the 12 months ended December 31, 2018, compared to $61.3 million for the 12 months ended December 31, 2017.

Our capital expenditures continue to reflect our investment in information technology and the expansion of our infrastructure to support our growth. Our cash balance was $144.2 million at the end of the fourth quarter, of which $63.2 million was held by our foreign subs. Net debt outstanding defined as total debt less cash and cash equivalents at December 31, 2018, was $942.3 million compared to $1.16 billion at December 31, 2017. During the fourth quarter of 2018, we made additional voluntary principal payments of $110 million. During 2018, total principal payments on long-term debt were $224 million.

Regarding currency concentration at December 31, 2018, excluding the impact of the adoption of ASC 606 and reimbursement revenue, 84% of our revenue were denominated in U.S. dollars and 62% of our total expenses were denominated in U.S. dollars, which is consistent with prior quarters and consistent with 2017 levels. Our euro exposure continues to be naturally hedged. As we've discussed in prior quarters, we have exposure to movements in the GBP of less than 1% of our revenue was denominated in GBP while 5% of our expenses are denominated in GBP. We continue to look at ways to reduce this exposure.

Turning to our net guidance for 2019, we are estimating revenues between $3.09 billion and $3.2 billion, representing as reported and constant currency growth of 8% to 11%. On an ASC 605 basis, we're estimating revenues between $2.475 billion and $2.57 billion, representing as-reported and constant currency growth of 8% to 12%. We are anticipating GAAP earnings per diluted share between $3.65 and $3.80 per share and adjusted earnings per diluted share between $4.93 and $5.08 per share.

We anticipate that our annual effective income tax rate will be approximately 24%, which incorporates the expected changes from the U.S. Tax Cuts and Jobs Act. Our effective rate may differ from this estimate with the geographical distribution of our pretax earnings changes from what we've estimated, or if there are changes in the interpretation analysis, or if additional guidance is issued related to the U.S. Tax Cuts and Jobs Act.

Regarding Q1 2019 guidance, we are estimating revenues between $720 million and $740 million, representing as-reported growth of 3% to 5% and constant currency growth of 4% to 7%. On an ASC 605 basis, we're estimating revenues between $575 million and $595 million, representing as-reported growth of 3% to 6% and constant currency growth of 4% to 7%. As a reminder, we reported organic revenue growth excluding ASC 606 reimbursement revenue in the Data Solutions segment of 17.8% on an as-reported basis and 15.2% on a constant currency basis in the first quarter of 2018. We are anticipating GAAP earnings per share between $0.74 and $0.79 per share and adjusted earnings per diluted share between $1.05 and $1.10 per share.

Like our full year guidance, we expect our effective income tax rate to be 24%. Consistent with prior years, we are including Q1 guidance to ensure that expectations around sequential quarter earnings growth are in-line with our expectations. This guidance includes the impact of the seasonality in our Data Solutions segment and the impact of first quarter recurring expenses such as payroll taxes and employee benefits and expenses incurred related to internal organizational meetings.

Finally, our guidance assumes a euro exchange rate of 1.15 and a British pound exchange rate of 1.35. All other foreign currency exchange rates are as of January 31, 2019. Our process for determining exchange rates is consistent with prior years where we used several bank resources to evaluate expected rate movements for the next 12 months.

That concludes our prepared remarks and now we'd be happy to take your questions. Please provide your name and affiliation when asking a question.

Operator, you may now open the line for questions.

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Questions and Answers

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Operator [1]

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

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

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Wanted to focus on revenue first. Colin, I think you had talked about the replays -- the canceled and then replay studies from your -- one of your key clients as having had or expected to have had an impact in 2018, particularly in the second half, and we see that in the growth rates. And then in your guidance for the first quarter, it looks like that growth rate is beginning to improve, but still somewhat depressed. And so I wanted to get a perspective on how your conversion rate -- how the backlog is flowing into revenue? And what will drive the acceleration of your revenue growth through 2019?

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

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Thanks, Dave. We did mention obviously, the cancellations had an impact. There were some studies as well during the summer that we said were seeming to start a little bit slower than we anticipated. But the teams have been doing a phenomenal job watching costs. But then as we're approaching Q4, we needed to completely change our goals and start getting into the hiring -- very, very rapid hiring mode. Our company had to hire over 300 net new people a month. And it was hard to switch that back on again after such conservative cost constraints and we managed to hit over 300 net new hires per month, which is great stuff, but we could have done more. And it's been taking us a little while to really get back in our stride again. So we really know we're starting to hit on all cylinders so we're moving pretty much rapidly again. So we'll start to see that improve as the year goes on. Everything starting to go nicely again, we're smoothing everything out. So we remain optimistic obviously that we are setting ourselves up nicely. We did see the Q1, we're still getting a little bit of after-effect as we ramp up. So I'm pleased to see that it starts to improve as we go down later on in the year.

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

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Okay. Second question might be for Mike. So my follow-up is around 606 and 605 and you guys, it appears are choosing to continue to give guidance on both, which I'm sure we all find interesting. I guess the 2-parter would be, if you could help us to understand how your systems allow you to continue to provide guidance on both and kind of as a read through, do you -- I guess, do you feel comfortable that you're going to be able to follow your 10-K cleanly, given some headlines lately.

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Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP & CFO [5]

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Yes, sure Dave. So from a revenue perspective, we were on an input-based methodology prior to the adoption of 606. So we've always been able to forecast the service component of our revenue unlike some of our competitors. And what we've been able to do is we've been able to separate out how we phase service and how we phase investigator and pass-through. So we're watching those separately and that's what allows us to be able to give you guidance on a 606- and 605- basis. Regarding the 10-K, we're planning on filing as soon as the call's over.

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

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Okay. Great. And no internal control weakness that we should be anticipating?

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

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No.

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Operator [8]

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Our next question comes from John Kreger with William Blair.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [9]

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Colin, can you just expand a little bit about your comments around Data Solutions as the earn-out period ends. Just sort of refresh our memory, what kind of synergies do you see across the 2 businesses? And maybe if you could give us a preview on sort of product expansions that you mentioned as we moved through '19.

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Colin Shannon, PRA Health Sciences, Inc. - President, CEO & Chairman of the Board of Directors [10]

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That's great. Thanks, John. There's a few things in that question because some of them are not quite related to Data Solutions. But on the Data Solutions, the first thing that -- we moved the location, the Philadelphia location all into our Bluebell office. So the team has now integrated with our main team, as one of our largest offices that we have, in fact, the largest office we have in the company is now Bluebell. And so that's helped with the integration. We have made some adjustments to leadership just to help with the integration and culture shift because where we're seeing the synergies it was not about cost savings, its revenue opportunities and working in collaboration together. We see great opportunities, and we've had to make sure that we had the right fit to make sure that we enabled all these connections to what was in the organization. These things have been put in place at the beginning of the year, as I said I would do and we're looking forward to building on that basis for the rest of the year. I mean regarding all our service offerings, we have been continuing to enhance what we're doing on the virtual trials. We've, as you know, invested in the Parallel 6 and the C6 platform and it's taken a lot of traction. We are seeing a lot of interest on clients who are really wanting to be more innovative and do things differently and not exactly the same old ways of getting things done. So we're excited with that taking off and it's helping us with bring new offerings to clients with new solutions. We still utilize our data very differently from our competitors. That again is giving us new insights in different ways of working with them. We see great opportunities on the -- more on the commercial side where we can start linking things together and we take advantage of some of our Symphony data assets and the acquisition of that company, we continue to pursue some opportunities in that direction. All in all, we feel very nicely positioned that we're helping to shift the mindset. And really look differently and actually offer different solutions to our clients.

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

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Great. And maybe just a quick follow-up. How is Strategic Solutions doing? And are you seeing the mix of your award shifted out towards either full-service or the staffing business?

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

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Very good question because interestingly, we are much -- we are seeing much more solid growth on the old traditional product registration part of the business. And as part of our build-up for our guidance, I do admit to being slightly more conservative on our strategic solutions part of the business. I mean part of that, as you're well aware with the pricing discussions going on with the Capitol Hill and with the biopharmas testifying on Tuesday, that always seems to cause a little bit of issue with the expenditure within the biopharma companies. We have been duly -- a little bit cautious knowing that they may be squeezing the budgets and things of that sort. We wanted to make sure that we can set-up as we are preparing our guidance.

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Operator [13]

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Our next question comes from Eric Coldwell with Baird.

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Eric White Coldwell, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [14]

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The 2 smart guys asked a couple of my questions. But I'll just follow-up with maybe a couple of easier ones hopefully. Good answer on Data Solutions. I'm just curious if you can tell us what your growth outlook is for this year, is it 5%, is it 10%? And then second one, I'm curious if -- a couple of your peers have thrown out provocative terms or said, "Hey, maybe there was a little bit of softness in the market at a certain point in the third or fourth quarter." I'm just curious, did you see any of those air pockets maybe with a certain client cohort or in a certain geography or was your pipeline in RFI activity pretty similar as the year concluded?

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Colin Shannon, PRA Health Sciences, Inc. - President, CEO & Chairman of the Board of Directors [15]

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Okay. Well on the Data Solutions side, I have to come back to you on where we're seeing the growth. We're just in the process of planning. We just finished our business development meeting with the new leadership team. And so I'd really like to give them a little bit more time to really look at how we can build that plan together. We've set some pretty tough objectives though and so I think, we've watched a little bit going through the first few weeks of the year, but I expect it to make up and more -- so because we're going to be utilizing the whole organization behind them. So if you don't mind, I'll get back to you on that aspect as we finalize some plans. We've just completed the year now and we are sort of rebuilding, we are re-looking at opportunities where we want to see what we can do there. Regarding RFP flow, I did not notice anything that was majorly different. I think, we're into the beginning of the quarter, we're a little bit soft in one of the months and started to recover it. Trends-wise, it's still kind of upwards and strong. And we are seeing new opportunities, which are always more difficult for us to win because you're always got to displace an incumbent. But that always gives us exciting opportunities. We like to have these discussions to offer our new approaches and we like that challenge. We have been excited about the flow. We are seeing new progress. All in all, I think that things are holding up nicely. I mean I'd obviously have -- the competitors, we're seeing a little bit of weakness on the biotech and maybe they're looking at different level of the maturity of the biotech or whatever. I don't know the answer, but we're seeing regular decent-sized opportunities, and we know that it's not a lot of funds sitting within biotech, they need to spend on later-stage development.

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Eric White Coldwell, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [16]

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Colin, that's really helpful. Just one quick one that came to mind. I did hear recently that maybe there was a little bit of softness in Asia PAC, specifically China, due to some of the ill-will let's say between our 2 governments. Are you seeing any change in growth in Asia PAC, any change in client interest in China in particular? And if so, how is that impacting you, how are you responding?

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Colin Shannon, PRA Health Sciences, Inc. - President, CEO & Chairman of the Board of Directors [17]

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We've always mentioned that as one of the areas that we feel like we have been a little bit behind in our growth levels there, so it's really not impacting us because we are still growing. And we still have a lot of vacancies. So we're kind of a little bit sheltered from that at the moment because we have been -- we are still building out our infrastructure. We have a really solid operations now. We got good leadership there and we're growing it very nicely. We chose to continue that organic growth. And so far, we are still continuing to hire quite rapidly and build-out that area.

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Operator [18]

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Our next question comes from Donald Hooker with KeyBanc.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [19]

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I'm curious with Symphony Health, we'll wait to hear back from you on some of the growth outlook objectives there. But are you needing to put more capital into that business to kind of to grow it overseas or add in new solutions, how should we think about maybe capital in 2019?

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Colin Shannon, PRA Health Sciences, Inc. - President, CEO & Chairman of the Board of Directors [20]

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Yes, we certainly are considering that. We've got a couple of initiatives ongoing just now. One of them we are looking how to expand within Canada, the other -- and some overseas opportunities. We certainly are looking to make sure that we did that in a disciplined format. But yes, we see a lot of opportunities, a lot of enhancements and we're excited about the growth potential within that area. So we continue to evolve and look at that as an opportunity.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [21]

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And then my follow-up question similar to that is, is it fair to think that there could be, maybe, some upside in gross margins as you can integrate some of those data assets and tools? And as you get more aggressive synergizing that acquisition, how should we think about that impacting gross margins over certainly the next 12 to 13 months?

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Colin Shannon, PRA Health Sciences, Inc. - President, CEO & Chairman of the Board of Directors [22]

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We've kind of self-guided where we feel things are going to be an outcome. We've typically mentioned some improvement every year. And we don't see any dramatic change this year. But you're absolutely correct that further down the line, we do see that there is opportunities. We are still in this investment phase just now and building out and there's lots of opportunity. We want to get the growth back in track the way we'd like to see it going, so that takes a little bit of investment. So at this point, we are going to be making sure that we'll be hiring the appropriate staff, we're getting the right ingredients from the country mix and various other things that we're looking at. So this year, we're really concentrating really on expansion.

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Operator [23]

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Our next question comes from Sandy Draper with SunTrust.

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Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD [24]

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So a lot of my questions actually just got asked by more smarter people than I am. So my question I guess, Colin, would really be around the hiring and the costs. As you said, you're putting the foot on the pedal for hiring 300 people a month, is a lot. Are you seeing any wage inflation and when you hire to speed it up, does that mean you're going to have to spend more or what you do, exactly, to hire faster and are there sort of hiring marketing cost that you have to undertake?

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Colin Shannon, PRA Health Sciences, Inc. - President, CEO & Chairman of the Board of Directors [25]

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So we've actually got a really good machine and it's not just our talent acquisition group. It takes the whole organization because a lot of interviews, a lot of time and effort and that's 300 net new employees so that's way over 400 that we're hiring in a month. So there's a lot of work to do that and so it's a good question you're asking because when -- the inflation part is -- it's mainly can be geographical. It depends on which country you are looking at. You might see a little bit of spike in certain areas. I think the only area within the U.S. we saw some problems was highly qualified oncology specialists. We had to actually, in January make a decision to use an agency to speed up some of the hirings that augment what we're doing because we were in a real pinch to get quite a number of well-qualified people onboard very quickly to meet our client needs. So yes, so sometimes, it can cost a little bit more to bring them on onboard. But overall, as within plan and we have the engine there. A lot of it was just getting it going again and getting back into the right cadence.

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Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD [26]

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Okay. That's helpful. And I guess, maybe just a follow-up to that. When you're in the hiring process and that is getting down into the weeds, how often do these -- are these people sort of playing you versus ICON versus IQVIA. The multiple CROs and just trying to pick the highest pay versus -- or maybe a different way to think about it, how do you sell PRA? Is the place you want to work decides just, "Hey, we're going to pay you a little bit more money."

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Colin Shannon, PRA Health Sciences, Inc. - President, CEO & Chairman of the Board of Directors [27]

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Well, that's a deep question, have you got a day to spare? I mean if you want me to wax lyrical about PRA, you'll probably need a long time. Obviously, our talent acquisition people are very well up-to-speed on all the things and differences that we bring to a potential candidate. We do focus very much on our culture and bring the right people onboard. People are willing to understand that we are very patient, focused in driving science and results to ensure that the well-being of patients is the goal. They'll find a good warm reception within our organization. And we obviously -- the rate we're going as continually gets opportunity. So people can see that it's a good place to join because with our expansion -- there's always a lot of people to be promoted and continue to grow within the organization. So we still have a lot of offerings in some of the regions we're in, we are still relatively small in comparison to others, which again gives rapid growth and opportunities for these people as well joining us. So I think we've got a really good story. We continue to focus on innovation and doing things in a different way. People are excited for that prospect. It helps particularly where you've got more senior people who don't want to do same old-same old, and they see this as an opportunity to help as we define and help transform the industry. So that's kind of where we are driving and the type of message that we're bringing to the organization.

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Operator [28]

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Our next question comes from Jack Meehan with Barclays.

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Mitchell Frank Petersen, Barclays Bank PLC, Research Division - Research Analyst [29]

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This is actually Mitch Peterson on for Jack this morning. So maybe one for Mike. Guidance assumes some pretty nice operating leverage in 2019. I was hoping -- obviously, the color has been really helpful on the hiring side, but I was hoping we could put some numbers behind that, just your expectations between leverage on the gross margin line and the SG&A line in 2019. I would imagine just given the commentary, it's more going to be on SG&A line. But I wanted to get your thoughts.

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Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP & CFO [30]

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Well, there is going to be some gross margin improvement we've -- as we have communicated previously. We're looking for 50- basis points of overall improvement. The majority of that is going to come from gross margin, Colin's point, we'll start to leverage as people -- as the revenue ramps towards the back-end of the year. From an SG&A perspective, this probably -- maybe 20 or 30 bps coming from that as we continue to leverage our SG&A team. So we're looking in at that kind of 50, 60 bps of total.

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Mitchell Frank Petersen, Barclays Bank PLC, Research Division - Research Analyst [31]

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Got it. And then maybe just as a follow-up. Could you expand on your capital deployment expectations for 2019? And absent any M&A, should we assume debt repayment or is share repurchase going to be on the table in 2019?

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Colin Shannon, PRA Health Sciences, Inc. - President, CEO & Chairman of the Board of Directors [32]

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Yes. We've obviously -- we're looking for any interesting opportunities to help augment our Data Solutions, which we alluded to earlier. There are some exciting things out there that we would like to see how -- where that would take us. Nothing is imminent for share, but we certainly are having active discussions with some really nice opportunities. And absent that, we have been paying down debt. Yes, you're correct at some point we'll have to rethink about what should be our rate leverage ratio. And that's a nice problem to have and we'll certainly consider that with the board should some of these other things we're looking at not be fruitful.

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Operator [33]

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Our next question comes from Erin Wright with Crédit Suisse.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [34]

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I'm curious what you're seeing in terms of the mix of business coming in. I think you commented a little bit on the full-service versus FSP. But as it relates to therapeutic class or any abnormally disproportionate demand dynamics around large versus small pharma or biotech and overall success in win rates thereon?

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

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Yes, there hasn't been that a big shift. I think you know as we talked about kind of concentrations from a large pharma versus biotech, that revenue coming in is relatively the same. And I think Colin commented on the mix of MBA and that's been consistent quarter-over-quarter. We are seeing from an awards perspective, a concentration or -- around oncology and immunology. As you -- if you compare 2018 to 2017, so that makes us change slightly and that also references Colin's point earlier about the elongation of some of those studies because of the types that we're getting.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [36]

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Okay, got it. And then random question here, but how is the early development business performing? What percent of the -- of that is your business now, as a percentage of revenue?

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Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP & CFO [37]

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It's performed very well in 2018. It's still roughly -- it's probably less than 10% of our business right now, but it has performed very well.

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Operator [38]

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(Operator Instructions) Our next question comes from Juan Avendano with Bank of America, Merrill Lynch.

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Juan Esteban Avendano, BofA Merrill Lynch, Research Division - Associate [39]

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Regarding your gross wins data declined 6% year-over-year despite a very strong CRO industry backdrop, can you tell us what drove the decline, was it just a prior difficult year comp? And then talk to us about your ability to actually book business on an incremental basis from now on?

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Colin Shannon, PRA Health Sciences, Inc. - President, CEO & Chairman of the Board of Directors [40]

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Well, we did have quite large comps, as you say and that's a pretty fair point. And as we were looking into the year, there was a number of typical larger clients that we knew that would be -- have a much stronger 2019 that they were coming today into some of the cycles of the current work last year and they would be doing new work this year. We've mentioned that we had won a new preferred partnership in Q2 last year and we had anticipated what coming in on that towards the end of the year. That actually didn't get all finalized until the end of the year, but just recently, we got our first decent-sized award from that new client. So we're starting to see all the things that we've put in place starting to come through. It's hard to decide the best way and exactly the time it's going to happen. We always hope that when things will pick up, but we were very pleased with the way things progressed. It gave us time to consolidate things within our organization and watch the cost, bring in new systems and tools, help with things that we were having to put on the back burner while we were focusing on bringing in all the people and training and getting them working on this study. So it helped us really solidify our foundation again and get ready for growth, which I feel really good about.

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Juan Esteban Avendano, BofA Merrill Lynch, Research Division - Associate [41]

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Okay. Good. The other data point, I guess, regarding bookings is that the cancellation rate was the lowest that you had ever since you IPO'd at 1.7. That did help the net book-to-bill and so did you take less proactive write-offs on your backlog this quarter? Or if that was not that then can you maybe talk about the quality of your backlog and what drove the super-low cancellation rate this quarter?

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Colin Shannon, PRA Health Sciences, Inc. - President, CEO & Chairman of the Board of Directors [42]

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I actually think the low cancellation really drives home the quality of our backlog. We have been careful about what we take into backlog and anything that has been looking as if there's any risk, we've been measuring that very carefully and watching it very closely. So it's nice, yes, we are in more in the prudent side and I'm sure you can realize that we could probably, at some point, have taken larger amounts of the new business. But we'd rather be more prudent. We want to build up a sustainable growth business and we want to make sure that what we are reflecting to our investors is things that we feel confident that we can achieve. And we don't want this swings and roundabouts, where we've got -- high gross -- high grossed MBA followed by large cancellations.

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Juan Esteban Avendano, BofA Merrill Lynch, Research Division - Associate [43]

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Got it. And just one quick one. I mean, can you -- I mean, can you reassure us that the net book-to-bill, is that necessarily going to decline throughout 2019 as perhaps -- according to my model, unless you do over a $100 million in gross wins and about $750 million on average on a quarterly basis. That net book-to-bill would be declining.

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Colin Shannon, PRA Health Sciences, Inc. - President, CEO & Chairman of the Board of Directors [44]

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When we did our IPO, we modeled and stated a great really long-term deal would be some are book-to-bill of somewhere between 1.1x and 1.15x, which would actually provide very decent growth. What we have been seeing just now is quite exceptional times, so no I can't guarantee anything. I mean, I think that we are in a nice position with good offerings that we can continue to win good opportunities and we certainly have goals that are very strong. And we're optimistic that what we're putting together is going to allow us to continue this type of high book-to-bills. A lot depends on the marketplace and what's going on there, but we feel that we've got good product offering. We've gotten nicely positioned for growth with a lot of the good dynamics and we're certainly setting targets, are very aggressive.

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Operator [45]

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And our next question comes from Dan Brennan with UBS.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [46]

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I just wanted to go back, if you will, back to one of the earlier questions just on conversion rates throughout the year. So Colin, I just wanted to make sure I understand, is it -- basically you talked about the aggressive hiring that you had to do and it sounds like kind of maybe being a little bit behind on that and now that you're ramping and that effectively is what's going to enable you to kind of see this conversion rate go up, having the right people in place at the right -- kind of at the right time.

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Colin Shannon, PRA Health Sciences, Inc. - President, CEO & Chairman of the Board of Directors [47]

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Well, there's a couple of things there. Yes, that certainly will help but as we've been watching the trends evolve, part of the issue is that -- as you know our strategic solution division, we are very prudent on the way we recognize our new business there. We only take 12 months of any new contract and as that proportion of our revenue is starting to sync with the other pieces, it's not growing quite as fast as a traditional project work. You're getting that 12-month PD that's in backlog, which you're seeing -- and therefore causing a difference to the conversion rate, coupled with the more complex study to optimize that everybody's seeing, given we're doing longer-term or long, more complex oncology trials et cetera. So that's having an effect as well. And we've been modeling it through and we, obviously, our conversion rate is a good metric, but we are looking at in much more detail by study and our planning is all about the resources we need to perform everything and the growth is actually much more predetermined. The conversion rate is a good proxy for you guys. And I mean, at the time we continue to manage and look at it and it throws in even more issues when you're looking at 606 and the issues there because we know that 606 is roughly adding an extra 28%. But in Q4, only adding 27%, so we are still getting to grips with the true flow of that and how that works and how we can make sure that we get really good at forecasting that. I think that what we've done with our systems and processes has helped us really understand a lot quicker than most. But even we are still trying, fine-tuning and understanding the complexity there. But overall, when we -- if we start to see the trends stabilize, at least we'll certainly give an indication. At this moment, it's still a little bit erratic looking forward. There's no real path on that we are seeing up. This is the reason why our conversion's changing, that is just a mixture of mix both between strategic solutions and product registration and complexity of trials. The hiring of people getting on top of things would certainly be helpful as well.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [48]

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Great. And then maybe just as a follow-up, just on the, I think back to Eric's question on Data Solutions. So we'll wait obviously as the team and yourself come out with more details about the plan, but could you at least just maybe speak to the opportunity or how you've characterized it in the past to incorporate what Symphony offers back in your core clinical CRO offering. Is that something that we should be -- shouldn't be surprised to see more a forceful push in 2019 or is that something you think that evolves over the course of the next couple of years in terms of integrating the data into how you're delivering your CRO business?

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Colin Shannon, PRA Health Sciences, Inc. - President, CEO & Chairman of the Board of Directors [49]

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We absolutely have the data part with our Symphony that we utilize within our CRO piece has been fundamental for the last 10 years. If you recall part of the reason that we acquired Symphony was to secure that data because we became so dependent upon it for our core service delivery that it was important that we capture the sources that we could actually have that data available. The nice thing is, is that by owning Symphony, we get all that data to use and expand upon and it gives us new looks and new ways of actually helping our clients. Regarding the push, we also made sure that Symphony would be able to stand-alone and at least meet our goals of trying to get double-digit growth and we feel that there's strong potential, even organically. So adding on any potential future acquisitions that may help support the data from international offerings et cetera, we just see some more upside. As I've mentioned, a lot of the timing has still got to be put in place, but back to our original agreement, which is what we see a nice runway of good double-digit growth for the next few years, there's a lot of work to get that done what we do see opportunities, and we do see other new opportunities that we can expand within [real water davidson] and others, which helps us going to markets that we've never really been present in before.

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Operator [50]

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Ladies and gentlemen, thank you for participating in the question-and-answer session of today's call. I would now like to turn the call back over to management for any closing remarks.

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

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Okay. No questions. 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 your day. Thank you very much.

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Operator [52]

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Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect and have a wonderful day.