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Edited Transcript of PRAH earnings conference call or presentation 31-Oct-19 1:00pm GMT

Q3 2019 PRA Health Sciences Inc Earnings Call

RALEIGH Nov 3, 2019 (Thomson StreetEvents) -- Edited Transcript of PRA Health Sciences Inc earnings conference call or presentation Thursday, October 31, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* Alexander Yearley Draper

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

* Andrew Brooks Wald

Barclays Bank PLC, Research Division - Research Analyst

* 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

* 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

* Robert Patrick Jones

Goldman Sachs Group Inc., Research Division - VP

* Stephen C. Baxter

Wolfe Research, LLC - Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the PRA Health Sciences Third Quarter 2019 Earnings Release Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would like to hand the conference over to your speaker today, Mr. Tom Byrne, Vice President, Legal Affairs. Sir, please go ahead.

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

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Thank you. Good morning, and thank you for joining us for the PRA Health Sciences Third 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 questions 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.

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

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Thank you, Tom. Good morning, and thank you for joining the conference call covering our third quarter financial results. I am pleased to report that our third quarter financial results produced solid revenue and earnings growth. Revenue growth for the quarter was approximately 9% year-over-year on an as-reported basis. On a constant currency basis, revenue grew 10% year-over-year and 3% sequentially. I am happy to report that we continue to see gross margin expansion and double-digit growth and adjusted EBITDA, adjusted net income and adjusted net income per diluted share. As you all are aware, since the adoption of ASC 606, our reporting of new business awards has excluded reimbursement revenue.

For third quarter of 2019, we reported $669 million of net new business awards which represents a net book-to-bill of 1.22, continuing our run of consecutive quarters with a net book-to-bill equal to or greater than 1.2. I have been asked a number of times to also provide new business awards inclusive of reimbursement revenue, and that would have produced a book-to-bill of 1.65. The addition of our third quarter new business awards resulted in an increase in our backlog of 13% year-over-year and 3% on a sequential basis, with backlog finishing at approximately $4.6 billion at September 30.

Our mix of new business awards remains well balanced with 50% coming from pharmaceutical companies and 50% coming from biotech companies. The environment for research spending and CRO outsourcing remains stable from our perspective, and we continue to see a healthy flow of RFPs. Our client base continues to be well diversified, with our top 5 clients representing approximately 39% of revenue for the quarter and no single client representing more than 10% of revenue.

Adjusted net income for the third quarter was approximately $87 million, an increase of 17% versus the third quarter of 2018. Adjusted net income per diluted share was $1.32, a 17% increase versus the third quarter of 2018.

Turning now to our Data Solutions segment. As you may have seen in August, we announced a strategic alliance with Close-Up International, a leading Latin America-based provider of medical prescription and sales data to pharmaceutical companies. In September, we also announced the launch of a new national market measurement tool called Metys. The Metys platform is a first of its kind and delivers pharmaceutical market analytics and intelligent capabilities to our customers. These 2 announcements are significant milestones for the Data Solutions segment and show our commitment to enhancing our service offering and expanding our services internationally.

The other major event this quarter was a secondary offering by KKR and our concurrent repurchase of approximately $300 million of stock. We believe that repurchase of our shares is a good use of our cash, and we continue to have adequate resources to continue to grow the business should an opportunity arise.

I would also like to note that just this week, we completed the refinancing of our 2016 credit facilities, entering into a new credit agreement with a term loan of $1 billion and a revolving line of credit of $750 million. Mike will provide additional details about this later on in the call.

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

In closing, I would like to thank our entire staff and our clients for their continued commitment to PRA Health Sciences. We have a strong business and believe we are well positioned for the remainder of the year and leading into 2020. I would now like to hand over the call to Mike Bonello, our Chief Financial Officer, who will go through our quarterly financial results in more detail.

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

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Thank you, Colin, and good morning, everyone. For the third quarter of 2019, our consolidated revenue grew 9% at actual foreign exchange rates and 10% on a constant currency basis. As Colin stated previously, we reported revenue of $780.7 million for the third quarter of 2019 compared to $717.6 million for the third quarter of 2018. The Clinical Research segment reported revenue of $719 million for the quarter, while the Data Solutions segment reported revenue of $61.7 million, increases of 9% and 2%, respectively.

Regarding our revenue concentration, we derived 54% of our service revenue from large pharmaceutical companies, 10% from small to midsized pharmaceutical companies, 16% from large biotechnology companies and 20% 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 $389.3 million in the third quarter of 2019 compared to $371.4 million in the third quarter of 2018. The increase in direct costs continues to be driven by increased labor costs in our Clinical Research segment as we continue to add staff to support growth in the business and increased data cost in our Data Solutions segment. This increase was offset by a favorable impact of $7 million from fluctuations in foreign currency exchange rates. Direct costs were 49.9% of revenue in the third quarter of 2019 compared to 51.8% in the third quarter of 2018. The decrease in direct costs as a percentage of revenue is primarily due to favorable currency exchange rate fluctuations and increased utilization of our staff.

Selling, general and administrative expenses were $95.5 million or 12.2% of revenue for the third quarter of 2019 compared to 12.9% for the third quarter of 2018. The decrease in selling, general and administrative expenses as a percentage of service revenue is primarily related to continued efforts to leverage our selling and administrative functions.

Adjusted net income, which excludes certain items whose fluctuation from period-to-period do not correspond to changes in our operating results, increased 16.6% to $87.2 million in the third quarter of 2019. Adjusted net income per diluted share grew 17% to $1.32 per share in the third quarter of 2019 compared to $1.13 per share in the third quarter of 2018. The reduction in the share count from the stock repurchase contributed to $0.01 of EPS in the quarter. Cash provided by operations was $70.8 million in the third quarter of 2019 compared to cash provided by operations of $111.4 million for the third quarter of 2018. The decrease in operating cash flow was primarily the result of an increase in cash outflows from working capital, driven by an increase in our days sales outstanding.

Our net days sales outstanding was 27 days at September 30, 2019, compared to 18 days at September 30, 2018. Our DSO was slightly higher than what was included in our guidance. However, as we stated in previous quarters, we've always expected our DSO to trend more in line with industry averages. The slight increase during the third quarter was purely timing related and does not reflect the change in our collection dynamics. Consistent with prior year trends, we expect our DSO to improve in the fourth quarter.

Capital expenditures for the third quarter of 2019 were $20.3 million compared to $13.6 million for the third quarter of 2018. As we've previously discussed, the increase in our capital expenditures continues to reflect our investment in information technology and the expansion of our infrastructure to support our growth. Our cash balance at September 30, 2019, was $181.8 million, of which $56 million was held by our foreign subsidiaries.

Net debt outstanding, defined as total debt less cash and cash equivalents at September 30, 2019, was $1.2 billion compared to $1.1 billion at September 30, 2018. The increase in our net debt is due to the $300 million of incremental borrowings required to cover the share repurchase we referenced earlier.

As Colin mentioned, on Monday, we finalized the refinancing of our 2016 credit facility. The new $1.75 billion credit facility consists of a $750 million revolving line of credit and a $1 billion term loan, both of which have maturity dates of October 28, 2024. The proceeds from the 2019 credit facility were used to repay the 2016 credit facility in its entirety. The term loan has scheduled fixed quarterly principal payments of $6.3 million through September 2024, with the remaining balance due at maturity. The 2019 credit facility also has customary representations, warranties, affirmative covenants and events of default, all of which are consistent with our 2016 credit facility. We are happy to have this refinancing behind us, and I'd like to thank everyone involved for their support of PRA and their hard work in getting this finalized.

Regarding our currency concentration, excluding reimbursement revenue and expenses, 84% of our revenue and 62% of our 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 maintaining 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 updating our GAAP net income per diluted share to between $3.58 and $3.64 and updating our adjusted net income per diluted share to between $5.07 and $5.12, representing growth of 18% to 20%. We continue to estimate our annual effective income tax rate at approximately 24%, and as we previously discussed, our effective tax rate may differ from this estimate due to, among other things, changes in geographic allocation of our pretax earnings as well as to changes in applicable tax law. It should also be noted that our guidance assumes a euro rate of 1.15 and a GBP rate of 1.30, while other foreign currency exchange rates are as of September 30, 2019.

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

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Questions and Answers

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Operator [1]

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

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

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I wanted to focus on revenue. And your clinical, in particular, total revenue, but clinical in particular, advanced more faster than we expected in the third quarter, so was attractive relative to our expectations. I think the -- our expectation was based on kind of a progressive acceleration through the back half of the year. I'm wondering if those factors that were building in the third quarter and where I think our expectation was that you would get more of a full contribution in the fourth quarter from things like rehiring in your strategic solutions business, if -- if that is still a correct progression to think about? In which case, I would think you would kind of err toward the high end of your revenue guidance. So I wanted to kind of understand how that's progressing through the back half.

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Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [3]

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Yes. Dave, I think our revenue, from our perspective, was in line with where we thought it would be. We've been able to hire the heads that Colin referenced last quarter in strategic solutions, so we've been able to generate the revenue we were looking to there. Our -- again, our guidance is consistent in that we think we're going to be at that midpoint range. But we do expect to see some progression in the fourth quarter from what you saw in the third quarter.

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

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Okay. Helpful. And then on Data Solutions, you've, over the last, I think, 6, 7 months, been able to make some management changes, I think, make some investments in sales force. Colin, you had talked on the last call how important it was to kind of get those things in place ahead of -- enough ahead of the strong fourth quarter seasonal period. What's your comfort level with the changes you've made? And how do you think Data Solutions is set up to finish the year?

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

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Dave, obviously, when you make management changes, it takes a little while to get, as we say, working well, but we're very positive in the fact that we're seeing progress. We're feeling well positioned that we got a good team in place to continue into Q4. They're obviously still building, and there's still training going on. And they're making this service offering, so there's a lot going on. We've actually noticed that -- a little bit of increase in our data acquisition costs, and that's not fed through into our model yet for pricing. But all of that will be sort of look forward for next year. So we've always saw this year as being like the building block, getting things in place, and I think we're nicely positioned. If we can hit the same or just a little bit better than we achieved last year, I'll be very, very pleased with that achievement.

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

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So pleased with a dollar -- a similar dollar amount as the fourth quarter of last year, just to clarify?

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Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [7]

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Correct.

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Operator [8]

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And our next question comes from the line of 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, just building on Dave's last question. How do you think about the Data Solutions business trending into '20? Can it have growth similar to the clinical business?

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

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I think that there's a lot of possibilities with this business, but we're also finding that it's allowing us to progress other strategic discussions that we were never able to have before that are much longer cycle times. The discussions have been started that may, at some point, come to fruition in the next year or so. It could be as soon as next year. It may -- because they're quite dramatic in size and scale. And I think people are being short-sighted, that the data was just purchased as an ongoing business.

It was actually quite instrumental in the way that we are shaping and seeing the way things are moving forward in the future. It's helped us continue to excel and managing data and the use of data within clinical trials, and it's kept us with a good advantage and how actually the data works and what works best and what doesn't. So part of it is that I would love to see the sensitive core piece to continue a good growth, and we'll continue to support that business. We'll continue to help them with new offerings, we'll continue to look for new data sources to help round out our offerings. I think there's some low-hanging fruit to actually grow that business and certainly in the next couple of years. And in the meanwhile, anything of a different strategic nature is icing on the cake.

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

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That's helpful. How is the strategic solutions business going versus traditional? And as you think about your bookings in the third quarter, which was more popular at the moment?

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

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I've mentioned in the last few quarters that strategic solutions has definitely been flatter than we would like it. It's showing very low growth in the last few quarters. And a lot of that was swinging away from hires being done in lower cost markets. So and we're finding that, that then, for the last number of quarters, have been replacing U.S.-based employees overseas, particularly Latin America, Asia and Eastern Europe. That trend seems to have shifted a little bit in this quarter and was started by -- I mentioned last time that we saw the hiring plan. We are now in the process of hiring. There's still is -- it's -- the clients are now more looking for efficiencies, and we're bringing in some of the tools and processes that we use within the product registration to help support and optimize productivity in some of these larger clients.

So part of it is how do we help clients get more for their money, using some of the tools and developments that we've got to use our training programs and various other aspects, but it's definitely showing a low or flat growth than expected. We'll see how things generate from next year when we discuss the clients' needs as we move forward. Obviously, we're still pleased with that business. I was actually at a client meeting earlier on this week, and we got resounding thanks for all the work we do, and it's one of our larger clients. So it's nice to know that they -- it's well appreciated and they expect it to continue to grow and -- although not at the same rate as it's been in past years.

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Operator [13]

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And our next question comes from the line of Juan Avendano with Bank of America.

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Juan Esteban Avendano, BofA Merrill Lynch, Research Division - Associate [14]

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My first question is on capital deployment. I guess can you talk to us about your M&A pipeline? And whether or not you actually see any real attainable deals that you could complete in the near future? And related to that, if you could share with us what is your long-term target in net leverage, absent of any M&A deals? And confirm or refute my sense that perhaps do you foresee doing more share buybacks than you've traditionally done in recent history going forward?

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

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We're always looking at little tuck-in acquisitions. We've always got something exciting, and lots of times it just don't make it through diligence, but we're always working on something. And if that makes sense, and it makes the right [portfolio] from a pricing, from a business strategic point of view, it's certainly something that we're definitely looking at. And we'd love to find something that would help us capitalize on our data assets. We feel that there's still some untapped potential there. And when you look at what we've got with both our Clinical 6 platform and Symphony, we feel that there's something in the midst there that we could maybe acquire that would help be a catalyst to help improve both -- all these businesses together. So that's an ongoing review, and we continually meet with banks to discuss opportunities.

We've never really set a targeted leveraging ratio. We've always said that when clients don't like any time if you're levered over 5x, so we're a long way before we ever reach anywhere where our clients become a little bit skittish. So from that point of view, we always want to just look for what is the best use of cash. If it means repurchasing shares, we would do so. But when you think about what's best for the shareholders at any given time, we'd releverage. We're nicely set up for a situation for any acquisitions in the short term. We're [already] still looking. And hopefully, we find something that we can actually we can take advantage of in the near term.

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Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [16]

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And Juan, that's why we set up with the refinancing, a slightly larger revolving line of credit, so we have the flexibility to pay that down, but have it available to do any acquisitions that we needed to do and keep the term A out there, if that's the case.

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Juan Esteban Avendano, BofA Merrill Lynch, Research Division - Associate [17]

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Okay. And then my second question is, did I hear you correctly in your prepared remarks that your net book-to-bill, including pass-throughs, would have been 1.65? And related to that question, I mean I'm well aware that the credibility of the net book-to-bill metric has further deteriorated with the inclusion of reimbursable expenses. But doesn't -- have you given any consideration to start reporting backlog metrics, including pass-throughs, just like most of the other CROs? That's it.

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Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [18]

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I guess to your first question, you're correct. If we would have included reimbursables, it would have been 1.65 for the quarter. We have not thought about including reimbursable revenue into backlog, mainly because we want to be clear to the investment community on what we feel like the core business is doing. Part of that increase from a book-to-bill perspective, there were a couple of studies in there that had significantly larger-than-usual reimbursable portions. And we just feel like it's clearer and easier to understand what's going on in the business if we keep it on a 605 basis.

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Operator [19]

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And our next question comes from the line of Robert Jones with Goldman Sachs.

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Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [20]

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Colin, I appreciate the breakdown you provide from the contribution from the various bands of clients. So sorry if I missed this, but what was the contribution from the top client? I think it had been trending around 9%. I was curious if that changed at all?

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Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [21]

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No. It was right about that. It was roughly like 9.4%, 9.5%.

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Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [22]

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Great, great. And then just over on the bookings, you mentioned that it was a 50-50 split this quarter from biotech and pharma. I think this is more heavily weighted towards biotech than previously. Anything different we should think about from the perspective of inherent risk to bookings, given the larger portion from biotech? And I guess, related to that, anything different we should think about as far as conversion of these bookings, given a bit of a shift or mix balance between pharma and biotech?

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

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We've always typically been very strong in the biotech arena. And we've been highly focused on it in the last couple of quarters. Actually, it was quite the opposite. We're finding that it was the big pharma that were actually changing their mind and altering studies and just about to get started and they were altering and it was causing us a lot of changes. And sometimes, we've taken them as cancellation because it comes back as a complete new study. The biotechs are -- we find them, once we've agreed and we move forward, it's actually quite robust. And we spent the last couple of quarters actually having a much more heavier focus on our biotech, again. That's an area we've always been strong in, and we want to get back to our roots. So that's been a deliberate focus. It means that when the big pharma start to come through again, it will give us a much stronger book-to-bill, which we're anticipating at some point. But it all goes in cycles. We've been happy with what we're doing just now taking on the right balance of risk versus the reward here. So I think that's well calculated. There's lots of times when we could go after and chase business, but it wouldn't be at the margins for the risk associated with it that we would like. So we try to get as balanced and very conservatively during the quarter.

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Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [24]

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Great. So Colin, just to be clear, no impact on conversion, given this mix shift? It's just...

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

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No.

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Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [26]

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It should be business as usual?

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

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Just normal. Correct.

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Operator [28]

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And our next question comes from the line of Jack Meehan with Barclays.

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Andrew Brooks Wald, Barclays Bank PLC, Research Division - Research Analyst [29]

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This is Andrew Wald on for Jack. Could you provide an update on your preferred partnerships? And specifically, have you seen any changes in the structure of any of these partnerships?

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Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [30]

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We try not to talk too much about because we've got lots of preferred partners. And there's only one that's been public, and it seems to get an undue amount of attention. So we do have many partnerships that we work with clients. And every client is to different stages of work cycles, and we have a large biotech, for example, who had a slowish year and all of a sudden is picking up with some good studies coming through towards the latter part of the year. That's a focus as you go through development, but they move fast when it happens. And that's very positive for us. And they're all changing. A lot of them have been going through mergers and acquisitions and that's changing the dynamics and the speed of outsourcing. All we do is continue to support our clients as best we can, offer them areas of advice where we see opportunities for them. We try to support them through the change and make sure that we keep delivering high-quality products for them.

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Andrew Brooks Wald, Barclays Bank PLC, Research Division - Research Analyst [31]

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Great. And in the quarter, how did growth compare across full-service and FSP? And maybe you could talk a little bit more about how hiring is going in the FSP business?

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Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [32]

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Yes. Andrew, we don't disclose that because it's all part of one segment, and we don't want to run afoul of our segment disclosure. So we've never disclosed that separately.

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Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [33]

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Regarding the hiring, been very positive. We've been addressing -- we've got -- we've still got a substantial amount of hiring to do, but we're going through a great clip and everybody has been giving it full attention and we're hiring a good number, and that's obviously helping support, particularly the strategic solutions part of the business. But on product registration, in the last year, we've actually gone through quite a number of management changes. And as with -- the new management are now bringing in a lot more of their team. And that's now been taking shape. And just a couple of weeks ago, we actually had a leadership meeting and really pooling our top talent, a number of our top talent together and really focusing in on the way forward. And it was an exciting time because we all feel like we have come through a time of change, and we're ready for the next -- the next evolution of our company.

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Operator [34]

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Our next question comes from the line of Eric Coldwell with Baird.

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Eric White Coldwell, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [35]

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So in your prepared remarks, you define clients 2 ways. 50% pharma, 50% biotech was the first way, and then you gave a more segmented approach where it sounded like 20% was some bucket of all other that would, I think, probably include pre-commercial clients as well as others. I think, first question, how many clients would you define in that 50% pharma bucket versus how many clients that you have that are in the 50% biotech bucket?

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Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [36]

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Dave, I don't have that -- or I'm sorry, Eric, I don't have that number off my -- top of my head. I'll have to get back to you on that one. Because it's quite a -- because the one -- the 50-50 was MBA, the other was coming out of my prepared remarks, and that was around revenue concentration.

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Eric White Coldwell, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [37]

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Okay. So I guess what I'm trying to get to is, I mean ultimately, I don't think we want people to walk away from the call thinking 50% of your client base are biotech. And the Wall Street mindset of biotech is typically more pre-commercial, relying on outside capital sources to fund R&D. I mean my sense is that number for you, these pre-commercial early-stage companies without commercial products, my sense is that's some number at or less than 20% of your business today, but I'm just hoping to get a finer point on that.

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

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I thank you for allowing us to give some clarification there, Eric. You're absolutely right. The biotechs that we work with are well-funded biotechs that have a good, robust development plan in place, that we have got an agreed protocol, that we're working closely with them and that we are the development arm. And obviously, the funding part is critical for us. And it's the way we've always worked.

So that's why it's typically faster-starting, it's much more predictable. And they are, in a lot of times, it might be one of just a few key products they have under development, but we do vary from that type of company all the way through to the very large biotechs, where we get a lot of repeat work from them. So when we're talking about 50% of biotechs, this is all solid companies with good strong cash positions, with a good plan in place. And even with some of our larger pharma clients, a lot of that mix comes from strategic solutions, but we also do a lot of product registration work and it's more like where they've got biotech divisions, maybe they've acquired biotechs in the past that we were working with. And so we work in type of that fashion. So yes, it's no dramatic shift or change from the past. But we have certainly noticed that we are targeting more in new clients, new biotechs and nurturing and growing and growing out our new franchises for the future.

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Eric White Coldwell, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [39]

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That's really helpful. And just a quick different slant here. Two of your public peers have, in the last few quarters, announced some outsized cancellations relating to CNS categories like maybe Alzheimer's and others. I'm just curious, can you talk a little bit about your exposure in the CNS category? Is there any abnormally large contract exposure that you worry about these days based on what we've seen with some of the gyrations around CNS and Alzheimer's in particular?

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

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We don't have anything that -- I mean we always get surprises. We've had a couple this year already, where there's -- we find it typically that there's more modifications on the conduct of the trial; as we progress, they may want to change scope dramatically. We're seeing a lot more of that as we're going through, if we can accelerate in any ways, or there's maybe some change that they may want to either include or exclude certain geographies. And we're finding a lot of choppiness and just changing their mind. And that reflects, in sometimes, some of these cancellations that we've been seeing coming through. It's not really from a big category we're seeing, "Oh, it's going to cancel." But a lot of it is, in some cases, and it's particularly with the pharma clients, we're finding that they -- before we even start, they may want to modify. And we're always looking at it. Do we think this is a cancellation? Is the new study that they're giving us close enough that we could just actually rerun it as -- and without taking a cancellation? And we're always making that judgment. So -- but we do look at our book of business, we will look at any categories. We put things that we think may cancel into backlog-at-risk. That's a category we always watch very, very closely because it helps us determine the risk associated with our backlog conversion in the next quarter. So we don't really forecast much revenue from anything in that backlog-at-risk. So we can actually help project and make sure that we've got a pathway to our guidance.

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Eric White Coldwell, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [41]

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That sounds really good. I'm not sure you guys get full credit for the quality of your bookings, but that's one guy's opinion.

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Operator [42]

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And our next question comes from the line of Sandy Draper with SunTrust.

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Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research [43]

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Just a couple, hopefully, fairly quick ones. And I jumped on a little late, so I apologize if either of you mentioned this in the prepared remarks. It wasn't a huge drop, but your backlog conversion dropped down to 12.5% after being stable at 12.7%, just wanted to see if you guys have thoughts on -- is that sort of a new stabilization level, if it goes up? Or if we're sort of going to be persisting in this sort of gradual downward trend?

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Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [44]

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No. Sandy, this is Mike. We continue to believe that this is kind of the bottom of the trough. If I would have adjusted my revenue towards the guidance rates that we used when we issued our guidance after June 30, it'd have been at 12.6%. So I think we've hit that trough, and that's our expectation, is that we'll start to trend up from here. We don't expect a significant step down going forward.

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Alexander Yearley Draper, SunTrust Robinson Humphrey, Inc., Research Division - MD of Equity Research [45]

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Okay. Great. That's helpful. And then on the margins, I think I remember you giving a comment back at maybe the fourth quarter about taking about 20 to 30 basis points of gross margin expansion for this year. It looks like, by my calculation, both on a reported basis if I just look at service revenue and costs, direct costs, you're actually trending a little bit above that. Is that accurate? And sort of what's going better? And how do you think about longer term, where you see gross margins shaking out?

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

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Sure. We had said 50 to 60 basis points of improvement, it was what we had quoted historically. We knew that the first half of this year was going to be slightly ahead of that number because if you'll recall, we had some heads that we had hired back in the end of '17. We had reprioritization of some big studies, and we kept those staff on hand to redeploy them later in the year. But I do expect that you will see margin -- continued margin expansion in the remainder of 2019, but it'll be more in line with what you saw in Q3 as opposed to what you saw in Q1 and Q2.

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Operator [47]

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

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [48]

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Great. So some just modeling questions here. I guess can you speak to plans for debt pay down on the back of the repurchase? And activity in the quarter in, I guess, quarter-to-date from a repurchase perspective? And what does guidance assume in terms of share count and interest expense?

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Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [49]

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Sure. So depending on the acquisition front, I would hope that given how the refinance has worked out, there's roughly $200 million that will be outstanding on the revolver, and then we'll have the $1 billion on the term loan A, I would hope to pay down that $200 million, if possible, in the quarter because we did cut off our Q3 debt payments as a result of entering into the refinancing.

On the share count front, I think we'll probably -- I think we should be in that kind of 60 -- let's say, for the quarter itself, say, somewhere between roughly 64, 5 -- to 65,000 (sic) [65 million] shares outstanding, depending on where the price moves and the dilutive impact of our outstanding options. And with respect to interest, I expect it, obviously, to be higher than it was in Q3. And depending on where we -- what payments we make on the revolver, I'd say it's probably going to be somewhere between probably, say, $11 million and $12 million.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [50]

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Okay, perfect. And then on just general trends in the competitive landscape, I should say, across the CRO space. Any sort of changes in the pricing environment that you're seeing? Any creative bundling tactics or anything that has come out of the woodwork in the past quarter?

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Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [51]

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I don't think I've seen anything from a pricing perspective that's been any different than what we've seen in the last 3 quarters or 2 quarters. Anything on -- from your perspective, Colin?

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Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [52]

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I mean the only thing I would say is that we are -- we have now seen more use of our mobile platform, Clinical 6. We're seeing that it's being used more and more in our clinical trials. And currently, we've got 30 trials that are in flight at various stages of being -- and working closely with using the mobile technologies in this decentralized model. So we can continue to expand that. And of course, that, in conjunction with our Symphony data and the real-world evidence, is really how we're helping shape where the market is going, and we are at the forefront of ensuring that we're there to support our clients as we get through this change.

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Operator [53]

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And our next question comes from the line of Dan Brennan with UBS.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [54]

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I wanted to go back just to the Data Solutions business, if you don't mind. So I know going into the quarter, I believe it was about 2%. So kind of how did that compare to your own expectations? What's assumed in the fourth quarter guide? And what's realistic as we move beyond the fourth quarter?

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Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [55]

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It was slightly behind where we thought it was going to be for the quarter, to be honest. There were a couple of projects that ended up, because of trying to get the deliverables finalized, ended up pushing into the fourth quarter. But I think overall, we're still expecting the full year to be in line with where we thought it would be when we reissued our guidance at the end of Q2.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [56]

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And then I know you made several comments about kind of opportunities and the recent deals that you did about enhancing that product offering. But can you just remind us in terms of how we think about not necessarily what's going to be for 2020, but how do we think about the trajectory of the business over time? Kind of what do you aspire to get that business up to, just maybe a range of growth?

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Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [57]

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We've actually -- we see this as an opportunity. There's a -- we have a lot of growth potential because we don't -- we're a strong competitor in the field, but we don't have a huge amount of market share, and we believe there's a lot of low-hanging fruit. And when we actually modeled when we acquired it, we thought it would get, once we got it under our belt and getting going, it could easily get to sort of like double-digit growth. It's certainly going to be the challenge that we're throwing out there, is that how do we get to a period of double-digit growth year-on-year for the next few years.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [58]

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Okay. And then Colin, I think you were one of the only CEOs a few quarters ago to discuss maybe a pause with some of the customers around for price concerns, I don't think that's come up again. So maybe that was just more of a temporary factor, but how do you characterize the decision-making and/or the tone of business, vis-à-vis what's going on in Washington?

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Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [59]

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Well, I mentioned these things because when I'm talking with the clients, they've obviously got concerns. And part of our whole rationale about refocusing on biotech was it's the big pharma that have actually shown more concerns with the political landscape and with pricing.

And they're always preparing for worst case scenarios. They're trying to derisk as best as they can, and we've seen that impact. We stay close with them. We've got large proportions of our business that work closely with their leadership team because of the strategic solutions nature of their business. And they're obviously -- they take it as a strong concern. Obviously, just now -- who knows what it's going to shape up like. But it certainly is on their radar, big time, and we try to make sure that we understand the effect of that and if there's anything we need to consider to do today.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [60]

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Okay, great. Maybe final one, just on the burn. Just wondering how we think about -- I know last quarter, you talked about maybe an increase in mix of business ready to burn. So how do we think about the outlook for your burn?

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Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [61]

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I think I wouldn't -- I think for fourth quarter, I think as I said earlier, I think it's going to be in line with what you saw in Q2 and Q3. I think as we push forward into 2020, our expectation is that, that will pick up. It obviously will not get back to the levels that you saw in 2017 because I think we've talked about that [flu story] that we had there in 2017 that we felt like artificially inflated that number, but I do think you should see an uptick going forward. But obviously, we're in the process of preparing our 2020 budget, and I'll be in a better position in February to give you an idea where I think that goes once we're done with that.

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Operator [62]

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

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Stephen C. Baxter, Wolfe Research, LLC - Senior Analyst [63]

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I wanted to ask about gross bookings. When I look back to years prior to 2018, Q4 typically represents the largest contribution to the full year amount, which, I assume, is driven by the planning and budgeting process at large pharma clients. I was hoping you could discuss your expectations for bookings seasonality this year? And whether you think this looks more like a normal year? Or is there some other progression that we should keep in mind? And then I have a follow-up.

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Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [64]

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No. When we're looking at the quarter, I think we see a pathway for getting to the bookings we're looking for. But there are so many different factors that fall into that. I need to have strong operational teams ready. So we try to pick where are the areas that we feel strong, and yes, there's a couple of clients that are giving us some work this year, but it's not typically around the business cycle because when they're -- they've really got to get these studies started up as and when. And you can't just wait until end of the year. Maybe some things past have come out that way, and we certainly have pushed. And we -- maybe even biotechs who just want to get it started, and there's maybe some other metric that they're doing to get it started in the year, and there is some natural push, but there's nothing on our RFP view that's seeing that there's a spike or anything in Q4. And I think there's -- we've got a good pipeline that we see, and we've certainly got a pathway to have the number that we're wanting to achieve.

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Stephen C. Baxter, Wolfe Research, LLC - Senior Analyst [65]

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Got it. Okay. And then just drilling down a little bit on the customer segment. I believe that I heard you right when you said that about 50% of bookings are coming on the biotech side. So even with flat gross bookings at the company level, that would imply biotech bookings are growing at a fairly strong pace. But I guess the other side of that coin is that it would imply pharma bookings are down. And you did talk about some of the challenges there with reprioritizations and the like, so I'm wondering whether we should think about that as widespread within your large pharma customer base? Or isolated to a smaller group? And then finally, do you have any visibility into when you should sort of flatten out or normalize?

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Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [66]

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Yes. That's interesting because we've -- that's how we felt during this whole year. There's been more sort of like flattening off in the large pharma. And fortunately, we got ahead of that by the business development team focusing in on biotech. And we've got a lot of new clients this year spending that time and nurturing them and bringing in new opportunities. So on the large biotech, I mean that you'll recall that last year, we won a new preferred partnership, where we won a large study with that new partnership. But which we actually took into backlog. But then because we're about to start, they wanted to change priority. And so we've actually had to take that as a cancellation, and it was quite substantial. But to get something else redone and we're expecting to get the re-award and a new guidance of whatever it's going to be very shortly. So there's a lot of the big pharmas where we're finding that they're going through, very carefully their reprioritizations. They are thinking about what steps they are going to do. And there are other factors that come into play that we just don't get shared or the opportunities to discuss with them. So some things come that are about a surprise to us.

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Operator [67]

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(Operator Instructions) We do have a follow-up question from the line of David Windley with Jefferies.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [68]

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I just had 2 quick follow-ups. Colin, Mike, we had talked about some line of sight that you had to -- efficiency improvements from rollout of technology, but one platform last year that's helping this year and one platform that's rolling out now, implementing now that gives you, I think, some line of sight to some nice cost detail in 2020. I wondered if you could elaborate on that. How much of your margin improvement outlook does that kind of give you line of sight to next year?

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Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [69]

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I mean Dave, until we actually -- we're just into our budgeting exercises now, but you're correct, there is the 2 new systems. One has been rolling out this year and that will really take another year before we get the full effect of the efficiency. The other one has actually been causing us a lot of manual rework and that will not be implemented till the end of Q1 next year. And we'll begin through that year. So I don't really expect huge benefits from it next year, but it will certainly pave the way for future. We always look at it, as we say, for improvements in our margins every year. And we've got a number of little things that we are looking at to help that improvement. So we -- as we approach and look for guidance, we'll be ferreting out how we continue to enhance our performance for delivering an improvement to bottom line.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [70]

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And then my second question is, you made some general reference to bringing in new leadership. I think in the last just couple of months, Margaret Keegan has gone live with you from IQVIA. I wondered if you could talk about what she's bringing to the organization.

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Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [71]

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Well, obviously, a lot of experience. She's been in the industry a long time. She's been a senior leader, and she had an immediate strong fit within our company culture. And so we were carrying the burden between the rest of the management team. And not only with Margaret Keegan, but with Chris Gaenzle. It meant that all of a sudden, we were able to have much more attention on our day jobs rather than covering the -- all these extra duties. And so Margaret and Chris have both come in and made an immediate impact. Have taken a lot of burden off of the rest of the management as well as just to give us more focus -- management able to then get the hiring done and the discipline. So I think that it's helped us get to a really strong position. That's why I was mentioning we had everybody together at the retreat and the productivity was just palpable. It was great to hear and see the energy that everybody had, and we're starting to see things coming through that's really positive, that we feel is setting ourselves up really nicely for next year.

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Operator [72]

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And we have another follow-up question from the line of Juan Avendano with Bank of America.

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Juan Esteban Avendano, BofA Merrill Lynch, Research Division - Associate [73]

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So this is related to the very first question on the Q&A. And so organic growth did come in ahead of our expectations in 3Q, but yet you said that it was in line with your expectations. And so looking into 4Q, we do know that, I guess, seasonality in the Data Solutions business is typically strong, and you're also all around, on the overall company basis, you're facing an easier prior year comp. And so can you tell us why you still expect to come in at the midpoint of your organic growth guidance of 6% to 8%? And because that would essentially imply a sequential deceleration from the third quarter. Did you have any pull-forwards into the 3Q from 4Q?

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Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [74]

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Yes. No, we still want to see acceleration in the fourth quarter from an overall dollar perspective from revenue. But the thing you got to remember is that there's a lot of vacation and holiday time in that fourth quarter that creates a little bit of fluctuation in the number of hours that are available to work, especially on the product registration side. So I do expect to see growth from a revenue perspective, and obviously, the pickup that you'll see in strategic solutions. I just -- I think Dave's question was more moving us towards the high end of our guidance. And I just wanted to set everyone's expectation in terms of where we feel that we're going to fall out is more around the midpoint. Now it may be slightly above the midpoint, but I didn't want to get everybody's expectations outpacing reality.

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Juan Esteban Avendano, BofA Merrill Lynch, Research Division - Associate [75]

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And do you expect the gross margin to expand on a year-over-year basis in 4Q as well?

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Michael J. Bonello, PRA Health Sciences, Inc. - Executive VP, CFO & Corporate Secretary [76]

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I do.

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Operator [77]

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Thank you. And I'm showing no further questions at this time. And I would like to turn the conference back over to CEO, Colin Shannon, for any further remarks.

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Colin Shannon, PRA Health Sciences, Inc. - Chairman, CEO & President [78]

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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.

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Operator [79]

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Ladies and gentlemen, this concludes today's conference. You may all disconnect. Everyone, have a great day.