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Edited Transcript of SYNH earnings conference call or presentation 9-May-19 12:00pm GMT

Q1 2019 Syneos Health Inc Earnings Call

RALEIGH May 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Syneos Health Inc earnings conference call or presentation Thursday, May 9, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alistair Macdonald

Syneos Health, Inc. - CEO & Director

* Jason M. Meggs

Syneos Health, Inc. - CFO

* Michelle Keefe

Syneos Health, Inc. - President of Commercial Solutions

* Paul D. Colvin

Syneos Health, Inc. - President of Clinical Solutions

* Ronnie Speight

Syneos Health, Inc. - SVP of IR

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Conference Call Participants

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* Courtney Patrice Owens

William Blair & Company L.L.C., Research Division - Associate

* 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

* Jack Meehan

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

* Michael K. Polark

Robert W. Baird & Co. Incorporated, Research Division - Research Associate

* Robert Patrick Jones

Goldman Sachs Group Inc., Research Division - VP

* Ross Jordan Muken

Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Healthcare Services & Technology

* Stanislav Berenshteyn

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* Tycho W. Peterson

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Syneos Health First Quarter 2019 Earnings Conference Call. (Operator Instructions)

I would now like to hand the conference over to Ronnie Speight, Senior Vice President of Investor Relations. Please go ahead, sir.

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Ronnie Speight, Syneos Health, Inc. - SVP of IR [2]

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Good morning, everyone. With me on the call today are Alistair Macdonald, our Chief Executive Officer; Jason Meggs, our Chief Financial Officer; Michelle Keefe, our President of Commercial Solutions; and Paul Colvin, our President of Clinical Solutions. In addition to the press release, a slide presentation corresponding to our prepared remarks is available on our website at investor.syneoshealth.com.

Remarks that we make about future expectations, plans, growth, anticipated financial results and prospects for the company constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995, and we disclaim any obligation to update them. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. These factors are discussed in the Risk Factors section of our Form 10-K for the year ended December 31, 2018, and our other SEC filings.

During this call, we will discuss certain non-GAAP financial measures, which exclude the effects of events and transactions we consider to be outside of our core operations. These non-GAAP measures should be considered a supplement to, not a replacement for measures prepared in accordance with GAAP. For a reconciliation of non-GAAP financial measures with the most directly comparable GAAP measures, please refer to the appendix of our presentation.

I would now like to turn the call over to Alistair Macdonald. Alistair?

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [3]

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Thank you, Ronnie. Good day, everyone, and thank you for joining us. I'm pleased to report that we delivered results for the first quarter that were consistent with our revenue and profitability guidance, strengthening our foundation for accelerating growth in 2019. Our strong RFP flow and robust pipeline of opportunities across all sectors in both our clinical and commercial businesses, including increasing interest in our integrated end-to-end solutions prove that our comprehensive range of offerings is resonating with the marketplace.

Let me begin by reviewing some key performance highlights. First, we have solid overall sales performance with aggregate net awards of $5.52 billion and a book-to-bill ratio of 1.24x for the trailing 12-month period, both of which now include reimbursable out-of-pocket expenses under ASC 606. This was comprised of a clinical book-to-bill of 1.29x and a commercial book-to-bill of 1.08x. Second, we continue to experience strong revenue growth in our Commercial Solutions segment with adjusted revenue up 16% compared to the first quarter of 2018. Third, we launched our new enterprise-wide global client solutions function designed to deepen our relationships with key accounts to drive growth through improved strategic planning and operational delivery.

Now turning to our results by business. Our Commercial Solutions business continues to show strong momentum as our integrated capabilities and diverse field team resources drive additional opportunities with both new and existing customers. In addition, as we highlighted last quarter, our business continues to strengthen geographically and we are encouraged by our growing opportunities in both Europe and Asia. We delivered commercial net awards of $1.32 billion consistent with our trailing 12 months target. We also have a robust pipeline of commercial opportunities, largely driven by our comprehensive selling solutions offering as customers look to reduce fixed overhead costs through further outsourcing.

Our ability to deploy tailored strategies based on our comprehensive commercial capabilities continues to drive our leadership position in the market. This foundational strength has driven year-over-year backlog growth of 14.2% in our selling solutions business. In addition, we are proud that our efforts continue to generate industry-wide recognition. For the fourth consecutive year, Forbes named our consulting business to its list of America's Best Management Consulting Firms. GSW, our flagship advertising agency, was recognized at the Manny Awards, which honor the most creative work among agencies serving the health care industry. GSW received nominations in 8 categories, showcasing its strength across numerous platforms and won awards for the most creative agency of the year and best consumer campaign.

Lastly, our European communications business was honored by the Pharmaceutical Marketing Society with awards for best advertising campaign, best film and animation and best use of insights. These awards showcase the tremendous talent we have within Commercial Solutions, underscore our understanding of patient communities and demonstrate the industry-leading engagement we deliver for our customers each and every day.

Our Clinical Solutions segment also had a solid start to 2019 with net awards for the trailing 12 months of $4.19 billion. We had year-over-year backlog growth of 13.1%, which we believe will help accelerate our growth as we move through 2019. In addition, as I mentioned earlier, we experienced strong RFP flow in the first quarter. Our first quarter awards were broad-based across customer segments, with particular strength in our core small and midsize customers.

Clinical Solutions' adjusted revenue grew by 2.1% for the first quarter of 2019 compared to the same period of 2018, and by 3.8% on a constant-currency basis. As we ramp new customer relationships that we previously highlighted, we expect our quarterly year-over-year growth rate to be higher during the remainder of 2019.

I'm also pleased to highlight that our Clinical Solutions segment won best CRO at the Vaccine Industry Excellence award presented at the World Vaccine Congress. This award recognizes our strong global vaccine trial execution, consistent focus on site relationships through our vaccine catalyst site network and the alignment of our therapeutic expertise and processes to improve efficiency. Importantly, this award was based on voting by vaccine industry leaders on their preferred provider as well as an evaluation by an expert panel on a variety of key performance criteria.

We also continue to invest in Syneos One, our unique product development offering that leverages our full suite of comprehensive capabilities. As we advance our operational capabilities and infrastructure for Syneos One, we are developing innovative new solutions to create additional value for customers of all sizes. These include turnkey, integrated solutions that allow customers with multi-asset portfolios to completely outsource the development of certain assets that may be outside of their core therapeutic focus or capabilities. This handoff drives greater efficiencies, allowing these customers to focus on their core pipelines and high-performance therapeutic candidates.

As I previously mentioned, another key area of investment is our enterprise-wide global client solutions function, which we have evolved from a previous model to enhance our approach to managing key customer relationships. This function will support our largest customers to deliver strategic insights and seamless operational delivery across both Clinical and Commercial Solutions. We expect this approach to enhance our culture of service excellence, creating value for our customers, while driving new avenues for organic growth. We recently leveraged the power of this new structure to expand a long-standing key customer relationship in CNS and are now also the sole clinical provider for their complete oncology portfolio under a new collaborative business model.

Lastly, we have continued our disciplined integration approach, realizing approximately $26 million of savings during the first quarter prior to our strategic reinvestments. This result is consistent with our target for 2019 and we remain on track to achieve $125 million in synergies annually by 2020.

In closing, I would like to express my sincere gratitude and admiration to my multiple award-winning Syneos Health colleagues, who collectively work with our customers every day to help shorten the distance from lab to life. This quarter's performance, continued innovation and awards recognition further reinforces our unique end-to-end position in the marketplace.

Now let me turn it over to Jason for more comments on our financial performance. Jason?

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Jason M. Meggs, Syneos Health, Inc. - CFO [4]

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Thank you, Alistair, and good morning, everyone. Let me remind you that all results are on an adjusted or non-GAAP basis as defined on Slide 2. We will be discussing the current period adjusted results and period-to-period comparisons on an ASC 606 basis, including reimbursable expenses.

Let me begin with a few key operational highlights for the first quarter. First quarter adjusted revenue increased 5.6% year-over-year led by growth of 16% in the Commercial Solutions segment. We delivered 7.3% year-over-year growth in adjusted EPS, despite a higher-than-expected seasonal increase in expenses and from a capital management perspective, we closed the refinancing transaction we highlighted on the fourth quarter call.

Now I will review our financial results in more detail. For your reference, Slide 3 includes our first quarter results on a GAAP basis compared to the same period in 2018. As shown on Slide 4, our adjusted revenue for the first quarter of 2019 was $1.12 billion, up 5.6% compared to the first quarter of 2018 and up 7.1% in constant currency when excluding a foreign exchange headwind of $16.1 million. This increase in revenue was driven by both segments led by particularly strong growth in Commercial Solutions with first quarter revenue up 16% year-over-year to $314 million and up 16.8% in constant currency. This growth was largely attributable to strong net awards during 2018 and a favorable revenue mix, along with the acquisition of Kinapse.

Our Clinical segment revenue grew 2.1% year-over-year to $806.6 million and grew 3.8% on a constant-currency basis. This clinical growth was driven by strong net awards in the last 12 months, partially offset by an unfavorable revenue mix, slower than expected growth in reimbursable expenses and the ongoing startup of new strategic large pharma relationships.

Adjusted EBITDA for the first quarter was $134.9 million, up 4.8% year-over-year resulting in adjusted EBITDA margin of 12%. This includes a foreign exchange benefit of $7.3 million. This growth in adjusted EBITDA was driven by overall revenue growth, a favorable commercial revenue mix and the increase in realized synergies net of cost related to our strategic investments.

It's important to note that the first quarter growth in adjusted EBITDA was offset somewhat by an unfavorable clinical revenue mix and higher than expected seasonal expenses for items such as vacation and payroll taxes. The majority of the items that negatively impacted first quarter adjusted EBITDA growth are timing related and do not materially impact our view for the full year 2019.

Adjusted EBITDA also includes the realization of approximately $26 million of synergies during the first quarter before the impact of our strategic reinvestments to drive growth.

Adjusted diluted EPS of $0.59 grew by 7.3% year-over-year, primarily driven by our growth in adjusted EBITDA and the reduction of our non-GAAP tax rate to 24.5%, partially offset by the timing items I highlighted earlier. Specifically, the lower tax rate contributed $0.02 to our growth in adjusted diluted EPS for the first quarter of 2019.

Now moving to cash flow and the balance sheet. During the first quarter, our operations used $13.3 million in cash on an as-reported basis, representing an improvement of $33.7 million compared to the first quarter of 2018. Although we typically experience lower cash flow in the first quarter of each year, 2019 performance was further impacted by our Commercial segment's system and process integrations during the fourth quarter of 2018. We're making good progress on the integration and anticipate normalizing over the balance of 2019.

We ended the quarter with $105.9 million of unrestricted cash and total debt outstanding of $2.81 billion. Slide 7 provides an update on our debt management and capital deployment activities. We remain focused on a balanced approach to capital deployment to drive shareholder value. This includes debt repayment, tuck-in acquisitions, investments and share repurchases as determined by available cash flow as well as market opportunities and conditions.

I would like to highlight 2 key milestones related to the balance sheet that we achieved during the first quarter. First, we closed the refinancing transaction we highlighted last quarter and repaid an additional $37.5 million of our term loans. Second, we repurchased over 670,000 shares of our outstanding common stock for $26.6 million, leaving a $148.4 million of capacity to be utilized through the end of 2019.

From a tax perspective, our non-GAAP effective tax rate for the first quarter was 24.5% consistent with our expectations for the full year 2019. However, given the benefit of our NOL deductions, we expect our actual net cash outlay for taxes to be only $10 million to $15 million for the full year of 2019.

I'm also pleased to report that our teams are working hard to remediate the material weakness in internal controls that we disclosed last quarter. I'm very proud of their discipline and focus and we remain confident that these issues will be fully remediated during 2019. As a reminder, although these issues were highlighted as part of our 2018 financial statement and internal control reviews, they did not result in any adjustments to our reported results.

Lastly, we are continuing to fully cooperate with the SEC as it relates to the investigation we disclosed last quarter, including producing requested documents, but have no indication of the ultimate time line for resolution.

Turning now to our guidance on Slide 8. We continue to expect full year 2019 adjusted revenue in the range of $4.62 billion to $4.73 billion representing growth of 4.9% to 7.4%. This is comprised of adjusted clinical revenue of $3.35 billion to $3.41 billion or growth of 3.8% to 5.8% and adjusted commercial revenue of $1.28 billion to $1.32 billion, representing growth of 8.1% to 11.9%. We expect total adjusted EBITDA to range from $625 million to $660 million growing between 4.7% and 10.5%.

Lastly, we expect adjusted diluted EPS in the range of $3.03 to $3.23 representing growth of 5.6% to 12.5%. This guidance is based on the following key assumptions. Our existing backlog and sales pipeline, trends in cancellations and delays, current foreign currency exchange rates, estimated merger synergies of $100 million to $110 million prior to reinvestments, expected interest rates resulting in interest expense of $122 million to $127 million, our non-GAAP expected tax rate of 24% to 25% and our estimated diluted share count of 106 million shares, which will vary by quarter and excludes any share repurchases subsequent to the first quarter.

I also want to provide you with some commentary for the second quarter, given our expected 2019 growth profile. We expect adjusted revenue of $1.14 billion to $1.16 billion, representing year-over-year growth of 5.9% to 7.8%. This is comprised of adjusted clinical revenue growth of 5.2% to 6.4% and adjusted commercial revenue growth of 7.9% to 11.4%. We expect total adjusted EBITDA of $145 million to $155 million representing year-over-year growth of 5.8% to 13.1%, which reflects 30 basis points of adjusted EBITDA margin expansion at the midpoint.

This completes our prepared remarks and we'd be happy to answer any questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) And 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 start in the -- in margin topics and looking at your service mix at a high level, it doesn't look like that changed very much, Alistair, you and Jason, both I think called out some shift in mix or some unfavorable mix. Could you peel that back a little bit for us and help us to understand some of the moving parts large pharma versus SMID, FSP versus full service, things like that, that may have influenced your mix?

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [3]

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And thanks for the question. Yes, I think, what we've been seeing is consistent kind of flow across all the different segments through RFP and things like that and it ebbs and flows a little bit in terms of delivery. And you sometimes get a higher amount of revenue pulling through FSP or slightly or you get a higher amount coming through full service and it can have that swing that will impact our margins. I mean, I'll pass it to Jason for a bit more kind of clarity and depth on it, but I think we're seeing a fairly consistent flow across the different sectors.

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Jason M. Meggs, Syneos Health, Inc. - CFO [4]

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Yes. Dave, just add to add to that, I mean, when you look at the -- what we saw and what we're pointing out here, it's a little bit more, I guess, episodic. It's not something that we see that's a change in the profile of regions or type of customer or type of work. We did see a little bit more growth in FSP in clinical in quarter 1. But when you look at clinical, it's more about -- we did some additional procedures to get some milestones across the line during the quarter. That revenue can come back in a different period once we get the paper work caught up and et cetera. And then on the commercial side, it's more around in quarter 1 this year, we saw a bit more from risk share and termination type fees than we did in quarter 1 of last year, but nothing sort of underneath the commercial side either, that's more longer term.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [5]

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So sorry, just to clarify, so on the risk share, meaning, you got some risk share type payments in this quarter that were richer?

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Jason M. Meggs, Syneos Health, Inc. - CFO [6]

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Yes. We got them in both first quarters, but we got more in the first quarter of 2019.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [7]

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Okay. And on clinical, did I understand you said part of the clinical revenue performance was -- I think one of your call outs was slower growth in reimbursed revenue, which would suggest to me like a shift in mix toward at-risk revenue or margin-driving revenue, which would enhance -- I mean, again, trying to understand the margin, I think, was the primary issue that was low in the quarter relative to expectations, just trying to understand the factors that would have caused that to happen.

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Jason M. Meggs, Syneos Health, Inc. - CFO [8]

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Yes. I mean, we pointed out that reimbursement expenses growth, Dave, just given the overall performance and we thought it was going to grow a little bit more. But as you know, the pass-throughs can be a bit difficult to nail in terms of forecasting. That would be a margin benefit if you look at it from that perspective, what we're calling out in terms of the unfavorable mix and what net margin was more around what I mentioned earlier in terms of the -- performing some work to get the milestones over the line, we'll get the revenue back in later periods, a little bit more FSP growth during the quarter are the primary contributors.

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Operator [9]

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And our next question comes from the line of Tycho Peterson with JPMorgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [10]

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Alistair, can you maybe comment on how much Kinapse contributed to the 16.8% constant currency growth in commercial and just talk a little bit about what that acquisition brings?

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [11]

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Yes. I don't think we've ever really broken out an absolute number, but that acquisition brings us good penetration in the strategic kind of imperatives for going after Kinapse and making it part of our overall model is the strength really in Europe, good strong presence in an area for us in consulting where we didn't traditionally have that. So we're utilizing that to penetrate European customers and getting into that market. Also from a pharmacovigilance and regulatory standpoint, they bring a lot of horsepower to the organization, not just in advisory expertise, but also in the actual operation of those elements at scale in FSPs that we deliver from a lower cost base out in India. So looking at things like clinical trial redaction, safety reporting globally country by country. And unique parts like that in that post-approval space that we need to operate the end-to-end Syneos One model. So that is very complementary to the work that we're doing in Syneos One, and it's becoming a part, a kind of a hand-in-hand part of that package that we're rolling out to -- in many of our customers now who are interested in us taking over kind of the whole delivery of an asset all the way from lab to life really I suppose as the tag line goes, but -- so that's -- that are kind of the key aspects of it.

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Jason M. Meggs, Syneos Health, Inc. - CFO [12]

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Yes. And Tycho, it's Jason here, just to add to that. I mean, the organic side of it was still low teens, so still strong growth in the quarter.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [13]

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Okay. And then within your CNS portfolio, have you kind of seen any change in either reprioritizations or cancellations following the Alzheimer's trial failure or do -- your customers are kind of revisiting those programs?

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [14]

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No, I don't think we have. I mean, Paul is here, I'll pass you over to him for a bit more detail on that as well, but we've seen a pretty steady mix. We've seen good penetration in CNS over the last couple of quarters. As you know, we've always been one of the leaders, if not the leader in that CNS space therapeutically. So, Paul, any -- what have you seen on that?

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Paul D. Colvin, Syneos Health, Inc. - President of Clinical Solutions [15]

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No, I actually have not seen anything. I mean, we haven't been impacted by any of the cancellations that you've seen around the industry. And I think we continue to be the market leader in that space and see strong RFP volume coming in our neuroscience group.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [16]

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Okay. And then just last one on the SEC investigation. You just said, you're not sure of the time line. Are there next steps that we need to pay attention to or anything else you can comment on?

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Jason M. Meggs, Syneos Health, Inc. - CFO [17]

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Yes. So we -- as we mentioned they did -- you know about the notification of the investigation in February, we did disclose that we received the formal subpoena which was not a surprise in March and we're continuing to cooperate, provide the documents, but yes, we do not have anything further in terms of time line that we're aware of.

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Operator [18]

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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 [19]

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Great. I guess, just one on the transition from 605 to 606 and I imagine the further we get away from this transition, the less we'll talk about it. But just in the quarter, is there any sense you can give us on what the book-to-bill, even on a trailing basis, would have looked like on a 605 basis? Just trying to get a sense of how different it might have been? And then -- and more importantly as we think about the balance of 2019, any comments around how we should think about conversion now that we're on a 606 bookings and backlog basis?

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Jason M. Meggs, Syneos Health, Inc. - CFO [20]

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Yes. Bob, it's Jason. So we're pointing everyone to 606, given that's the law of the land, right, but, yes, I mean we obviously are continuing to pay attention to all of it on the fee side as well as with the pass-throughs and spent quite a bit of time on it and don't see any material difference from that perspective between the 2 on a trailing 12-month basis. When you look on the clinical side, the conversion of the burn rate I think was your second question there. We did provide some historical context for you to help with the modeling as everyone have seen in the industry, we did -- we do see that taking down, although I don't think ours has picked down quite as much as the industry average. And when we're looking forward, we're sort of thinking it's holding in that range where we had it in quarter 1.

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Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [21]

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Got it. And then if I could just follow-up on synergies a little bit better in the quarter than what we were expecting, I guess, just 2 parter, what should we think for synergies going forward? And then are these synergies dropping to the bottom line? Or are you reinvesting them, like, specifically within each segment?

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [22]

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Yes. Bob, Alistair. Yes, we're reinvesting as we go to drive growth. We got to constantly look at how we modernize and how we evolve the model. So a lot of investment in Syneos One. We've talked about today, we've taken out all the strategic model and repositioned it, reframed it so that it can -- so that those folks can actually sit across clinical and commercial in the same relationships. But also investing in the ability to take Syneos One models all the way through the organization. So it's kind of this global client solutions platform has a couple of methodologies of working at scale across the model, but also with Syneos One, working right across the model. So we continue to take some of that synergy and reinvest it into making our model work both operationally and commercially in the eyes of customers.

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Jason M. Meggs, Syneos Health, Inc. - CFO [23]

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Yes. And Bob, we -- I think mentioned in the prepared remarks, the range for the synergies for the year, the $110 million to $115 million and we have previously said that we're doing -- oh, I'm sorry, $100 million to $110 million on the synergy level. And then we've mentioned before, we've got $20 million to $30 million of reinvestment that we're doing similar to what we did last year.

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

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Okay. Got it. So just for clarity then, so no major impact on the EBITDA margins in either segment as a result of synergies. Is that fair to say?

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Jason M. Meggs, Syneos Health, Inc. - CFO [25]

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Yes. I think, that's probably fair to say. I mean, we got a lot of synergies out of our clinical business in 2018, continuing to focus on clinical, but it's across the SG&A, it's across clinical, not so much commercial given there was nothing to really consolidate.

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Operator [26]

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

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Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [27]

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I just wanted to follow-up on the bookings methodology moving from 605 just because obviously, we don't have the historicals under 606. If I look at the trailing 12-month book-to-bill, would it have been lower or higher under 605 versus what was reported under 606? Just how did the pass-throughs impact it?

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Jason M. Meggs, Syneos Health, Inc. - CFO [28]

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Yes. Jack, we obviously did disclose 605, but as I mentioned earlier, Bob's question there. We don't see any material differences between the 2 methodologies on a trailing 12-month basis.

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Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [29]

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Okay. And then could you just remind me for the full year what the guidance has assumed around reimbursable expense? And is there anything to know related around the pacing in the second quarter?

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Jason M. Meggs, Syneos Health, Inc. - CFO [30]

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We haven't provided specific guidance on reimbursables, Jack.

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Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [31]

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Okay. Do you think it could actually, within the guidance that you provided for the second quarter, would it be a relevant tailwind on the gross revenue line?

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Jason M. Meggs, Syneos Health, Inc. - CFO [32]

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We believe the entire business is going to continue to sequentially increase like I said in quarter 2, and I don't -- we don't see any material mix change coming at us from prior trends.

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Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [33]

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Got it.

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [34]

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Yes. I think one of the things that drives reimbursable is obviously the style and therapeutic alignment of this study. And we have a pretty consistent balance of where that comes through, whether it's oncology, gen med, CNS, FSP. And obviously on FSP there is very low reimbursable. So we have a very consistent balanced throughput of that work from big pharma and from small to mid. So I don't think that will change, the trend will change substantially from what we've seen, so.

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Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [35]

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Got it. Sorry, to nit pick. And then just as a follow-up on the buyback front, I was just curious -- well, I'm sorry, on the interest expense. Just any updated thoughts on the -- as we get into the fourth quarter around the unsecured debt and what you plan to do with that?

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Jason M. Meggs, Syneos Health, Inc. - CFO [36]

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Yes. So right now, as we mentioned on the prior call and in the materials, the plan is to use the delayed draw feature that we have to -- from the Term Loan A refinancing to pay those bonds off.

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Operator [37]

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And our next question comes from the line of Ross Muken with Evercore.

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Ross Jordan Muken, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Healthcare Services & Technology [38]

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On the clinical business, are there any segments in the market or customer segments where you're seeing any sort of shift in kind of competitiveness or aggressiveness from any of the various different players? And it seems like you also highlighted sort of the -- some of the cross-sell opportunities. Do you feel like on a sequential basis -- or what kind of anecdotes can you give us to sort of suggest that you're starting to get either into more RFPs in one of the 2 business or you're getting more share at may be certain types of customers? Just trying to get a feel for kind of share dynamics across both the market and then specific with your efforts on the cross sell in your business?

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [39]

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Yes. Thanks, Ross, it's Alistair. So I think we're seeing more engagement with large pharma. We are in -- continuing to see interest in the Syneos model from large pharma, both in commercial and in clinical, although commercial has traditionally played in the large pharma sector more so in the past. And I think that we're seeing a great amount of interest in the Syneos One model in small to mid, as we expected, as we -- it was one of the big theories behind the merger. So we are continuing to see that. We're actually starting to see -- well, we continue to see interest in Syneos One from large pharma customers as well because they have assets that they might have acquired in an acquisition of a smaller company that a rather rare disease space, orphan disease or a trial delivery, operational delivery is not suited to a big FSP or something like that. So they are at -- looking at whether we could take the asset running across Syneos One model. We talked in the prepared remarks a little bit about one of our customers we've had a long traditional CNS relationship with, we've enhanced that through some outstanding delivery from the CNS team and with the customer, a great team effort. And now are the sole clinical provider on the oncology portfolio. And that will take -- that will carry that through clinical and through commercial as well. So blending our traditional operational delivery capabilities with new capabilities around Syneos One is a big help. But I think overall, we're seeing that maintaining our position in the SMID market and growing that to some degree with Syneos One platform, but then with the scale that we've achieved here, we're becoming very compelling to the -- to our large pharma customers across clinical as well as traditionally where we played with them in commercial.

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Ross Jordan Muken, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Healthcare Services & Technology [40]

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That's helpful. And maybe just on the commercial business with the move to sort of TTM obviously it's going to smooth out some of the Q-to-Q volatility. I guess, maybe Jason, if you just can give us a little bit of flare now since we don't exactly have a comparable with some of the reimbursables there? Anything to note sequentially through the year of how that TTM will look? Is it -- again, I'm assuming it's smoother, but still maybe some modest volatility as we obviously still have more extra normal bookings in Q1 and Q4?

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Jason M. Meggs, Syneos Health, Inc. - CFO [41]

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Yes. Ross, I'll start and then Michelle can provide some color. But yes, we are still very focused on the trailing 12-month 1.1x even with the pass-throughs and the commercial business as a lower proportion of pass-throughs in the clinical business, a marked difference actually. So still looking good, the pipe is strong. Everything looks fine there. We do believe that as we get more rigor and discipline around the process, we'll -- we could have the continued Q1, Q4 sort of increase the seasonality, but it could smooth out a little bit, but not anything related to pass-throughs, it's more just our process of managing how the pipe looks. And right now, Michelle can take this, the pipe just continues to be strong.

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Michelle Keefe, Syneos Health, Inc. - President of Commercial Solutions [42]

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So just a little more color. I think, one of the things that we've been seeing is a consistent RFP flow and a consistent pipeline, which gives us confidence that the trailing 12 months number of 1.1x is the right number to be looking at. We're seeing much more diversity in the types of business that we're winning. We're diversifying the backlog. Over 40% of our wins are now more than 1 service line. So we're seeing much more integrated solutions in regards to how we're winning the business. And so we are confident that the 1.1 trailing 12-month is the right metric to achieve the guidance that we shared today.

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Operator [43]

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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 [44]

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I wanted to go to the clinical book-to-bill this quarter. So I think you in the prepared remarks called out several factors, I think you cited strength in small emerging biotech. Maybe could you just provide a little color on kind of the overall environment, I mean, we calculate a pretty robust book-to-bill this quarter. And how much of this is the environment, you taking share? And how much is it related to the enterprise solutions, is this that you're highlighting?

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [45]

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Yes. Thanks, Dan. Yes, we are seeing a pretty robust RFP environment. And also discussions on relationships, which we don't always put into the RFP flow or the pipeline. So I think we've seen good continuing conversations that we started in 2018 carrying on through the quarter. We're seeing good RFP flow across the sectors in clinical, certainly from small to mid. And small to mid tends to, I feel, get something going a little bit faster sometimes in Q1 than large pharma. So we're seeing good flow from that. I think, the fact that we have a compelling delivery model and track record in small-to-mid both in clinical and we take the opportunity to go down the Syneos One path in those conversations as well, so they can realize how they're going to get all their commercial planning and execution done at that point. So I think we're very compelling in terms of track record and history, capability as well as the new capabilities that we have for -- and take them all the way through commercial. Paul, any comments on RFP plans?

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Paul D. Colvin, Syneos Health, Inc. - President of Clinical Solutions [46]

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Yes. Just to echo what Alistair said, I think that we have continued to see some growth actually in the volume from the biotech sector, in particular, as well as the ramp-up of our partnerships. So we're seeing really healthy flow. To your secondary question around how much of that is driven by the synergies with commercial, well, I would tell you that I continue to see as new partnership opportunities become available, a lot of questions and asking us how we can bring that commercial power into both the protocol development as well as the sourcing of patients. So I think that we are continuing to see that as a strong view from large pharma into how we can add a differentiation in the market as a competitor.

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [47]

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And let me set one thing actually, Dan. Also around those conversations with the small to mid-sector, taking commercial into that -- taking that consulting representatives into those means is tremendous differentiator for us because we're able to have a grown-up conversation around where this product ends up in the marketplace. What's the real driver of developing this product, what the protocol is going to have to have in it, what the real world evidence requirements are going to be, what payers are going to look for, what they're looking for now, what we think they're going to ask in the future. And that's a very compelling conversation and that's a conversation that Syneos Health can have and nobody else can have because they don't have the end-to-end capability like we do. And I think that's really starting to hit home in that small to mid market for us to our advantage because we're able to give them a whole picture of where they're heading, not just what this landscape will look like when they have got through the development life cycle, but actually what it looks like when they get through the commercialization life cycle as well, and when revenue can come back to them, and how big it will be, what the markets are. That's a compelling argument. If you're going to spend $1 billion or a significant amount of money on developing a product, I'd want to know all that information before I spend a penny. And I think that's really starting to resonate with that sector.

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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 maybe just as a follow-up. I know the burn question was already addressed, but I think you also called out maybe some slower start ups from some large pharma customers, maybe can you just put that in the context with the expectation to have kind of flat sequential burn from here, how these large pharma customer startups are kind of incorporated into that?

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Jason M. Meggs, Syneos Health, Inc. - CFO [49]

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Yes. Yes. Well, as you know, Dan, we use and rely on our backlog phasing more so than the burn rates. So we're looking at these projects as they're coming into the backlog and getting staffed and how the burn profile is going to be from a backlog slotting and phasing perspective. And then we provide the burn rate for the benefit of you guys when you're looking at your models. But we look at it and there are moving parts of these large partnerships and Paul can add to this, but as we've gone through the fourth quarter and first quarter and learned more about these partnerships and how these projects are going to stand up, we believe we have better information now from the customer and what we're going to need to do and when and where. So all of that is inherent in the backlog phasing and therefore, the burn rate that we've put out there. Just Paul, anything you...?

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Paul D. Colvin, Syneos Health, Inc. - President of Clinical Solutions [50]

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Yes, I think the way to view it is, when you think of large pharma versus the SMID market -- Alistair has already alluded to it, and I think that the SMID market tends to from award to start few months faster in moving forward. What we're seeing with large partners is, because you have that partnership, you have the award much earlier in the process than you would with the SMID marketplace. So I think it's more just the timing of that ramp-up than anything else, it's not a change in how we look at the burn rate of our backlog.

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Operator [51]

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

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Courtney Patrice Owens, William Blair & Company L.L.C., Research Division - Associate [52]

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This is Courtney. You grew pretty well in Commercial this quarter. Can you guys kind of suggest on if you have any updated thoughts on the longer-term growth expectations for the business just given how kind of the competitive dynamics have shifted?

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [53]

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Thanks, Courtney. Yes, I mean, a good quarter. I think, we've continued to execute and we've been telling you guys that since the day of the merger, this is all we were going to do in commercial. We see it as a very important part of our overall business, it's a very strong complement now to the clinical and important part of our overall business. It's a very strong complement now to the clinical work and how we deliver the overall Syneos One model. So we continue to see work being delivered into commercial from the Syneos One model, as well as the work that Michelle has done in building the team, we continue to attract the top talent in the industry, across communications, across the field forces, we are seeing stronger growth in Europe, more interest in Asia. So we're pretty happy with where that's got to and where that continues. And the conversations that we're having with major customers on that commercial side are very encouraging. They see our model as something that's pretty robust, something that enables them to variabilize their spending in that commercial sector and helps them focus on whether it helps them focus on primary assets by having us manage mature products or vice versa.

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Michelle Keefe, Syneos Health, Inc. - President of Commercial Solutions [54]

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Sure. So just to add on to what Alistair already shared. We do have a strong macro environment. We had the 59 FDA new drug approvals in 2018. This year, we are already 1 ahead of where they were last year on drug approvals by the FDA, even with the first months of concern around FDA approvals and the budget, et cetera. So the macro environment is absolutely supporting the growth of the commercial business. When we look back 5 years, the commercial business at Syneos Health has touched over 90% of new molecular entities, that has been approved by the FDA. So when you think about the broad array of services that we do have, we're discussing with customers on a regular basis the commercialization of their assets, whether it's through field teams or communication strategies, consulting, pricing and market access, we are partnering with customers on a regular basis in this area. So we do think that we are being seen as a trusted partner because of our unique model of really understanding product development, not just commercializing an asset. I think that's our unique position in the market and why we're seeing the growth we're seeing.

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Jason M. Meggs, Syneos Health, Inc. - CFO [55]

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Yes. I mean, we -- just to add to that, Courtney, the -- we still firmly believe that the market's growing around 6% and given our scale and everything that Michelle and Alistair just mentioned that we should be able to go a little bit ahead of that.

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Operator [56]

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And our next question comes from the line of Michael Polark with Baird.

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Michael K. Polark, Robert W. Baird & Co. Incorporated, Research Division - Research Associate [57]

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Jason, I was hoping you could quantify the unfavorability in seasonal expenses in the quarter, perhaps the dollar unfavorability versus the expectation?

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Jason M. Meggs, Syneos Health, Inc. - CFO [58]

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Yes. Mike, thanks. So not quantifying it, but I think what I would say is that we would be in the higher end of our range if we had nailed those estimates exactly right in terms of the vacation and the tax items that I mentioned.

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Michael K. Polark, Robert W. Baird & Co. Incorporated, Research Division - Research Associate [59]

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Second one from us. Just to clarify on the SEC topic, February notification, a March subpoena, I want to confirm, it sounds like the subpoena is formalizing that, which was already expected by Syneos. Is that fair? Or yes, is that a fair interpretation?

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Jason M. Meggs, Syneos Health, Inc. - CFO [60]

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Yes. Yes. Yes. I mean we expected that we would get the subpoena and we did.

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Michael K. Polark, Robert W. Baird & Co. Incorporated, Research Division - Research Associate [61]

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Got it. And then, one bigger picture for Michelle.

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finalize the DTC price disclosure rule, obviously there may be legal challenges, curious how do clients feel about this? Is this an opportunity consideration for the communications platform? Any color flavor on this topic would be interesting.

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Michelle Keefe, Syneos Health, Inc. - President of Commercial Solutions [62]

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Yes. I think we all know the environment around pricing, DTC pricing for commercials on TV et cetera is a hot topic. It's interesting. I think, one of the things that we've really had a lot of success with our customers is because we have some really unique capabilities in our PR and consulting businesses as well as communications businesses. We've really been advising customers around how to manage their communications to all their stakeholders, whether it's HCPs or patients and really looking at innovative ways to do their media planning and their deployment of their strategies, so that, that they can effectively communicate with patients. I don't think we know yet what the outcome of that is going to be. I mean, I know that the first -- this summer, you're going to see the first commercials with pricing at the end and I'm sure people would be very interested to see that scrolling down after they hear about their -- about to hear about the benefits of the products in the different therapeutic areas, but we spend a lot of time on the strategic planning of how to communicate to patients. We don't actually do a lot of media buying. So that doesn't really impact our commercial business the way it probably does to other agencies. So hopefully that's helpful.

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Operator [63]

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

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Stanislav Berenshteyn, SunTrust Robinson Humphrey, Inc., Research Division - Associate [64]

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This is Stan on for Sandy. I'm just curious on the call -- I mean on -- in the prepared remarks you said that there's an unfavorable clinical mix that hit revenue. I'm just curious if you can tease out some more color on the what the clinical mix was? And then maybe as a follow-up, I'm just curious, have you seen any changes in the sponsor mix or therapeutic mix that comprised clinical bookings in the quarter?

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [65]

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Well, it's Alistair, Stan, I'll start with the second piece first. I don't think we have seen a substantial change in the mix in Q1. The balance of FSP versus full-service and then within therapeutics, I don't think we see much of a change of that from one quarter to the next really. So that's all pretty standard. Jason, any comments on the margin?

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Jason M. Meggs, Syneos Health, Inc. - CFO [66]

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Yes. I guess, Stan, we mentioned earlier, I did, perhaps you weren't on, but yes, the -- it was -- during the quarter we had a couple of things, one, we did some work to achieve some milestones and things on projects where we'll get the revenue back for that in later periods. So that's a mix hit. And then the other area we saw a little more growth in FSP during the quarter, so that is a little bit of a mix hit, but nothing sort of permanent or structural there, which I think was Dave's question earlier.

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Operator [67]

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And our next question comes 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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Circling back around. I just had a couple of cleanups. So Jason, in the deck where you quantify the expansion and extension of the debt agreements and the interest savings on the $15 million annually, it sounds like a great number. Is -- was the $4.2 million incremental to your guidance or was that something that when you provided guidance originally was basically contemplated?

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Jason M. Meggs, Syneos Health, Inc. - CFO [69]

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It was in the guidance that was originally issued, Dave. It was contemplated.

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

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Okay. So already assumed. And then secondly, if I -- in your appendix today, if I take your backlog, your historical backlog numbers that you provided on a 606 basis, which I appreciated, thank you, and kind of use those to roll forward, I have a couple of questions. One is, I come up with about 1.14x clinical book-to-bill for the quarter on a 606 basis. Is that about right, is that ballpark? And then secondly, as I look at the second half of last year and kind of compare the 606 numbers that I'm able to calculate with what was originally reported on 605, there is some variability like third quarter 1.24x is originally reported 1.1x it looks like on 606. Is that the kind of quarterly lumpiness that you see as reimbursement versus FSP and stuff like that as that varies from quarter-to-quarter? Is that common? I guess, is the second part of that question.

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Jason M. Meggs, Syneos Health, Inc. - CFO [71]

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So I think -- so good quick math, I agree with most of everything there. I think, the 1 item is on the book-to-bill, Dave, is the numerator and the denominators. So you can have something moving on your denominator as well that can cause a little bit of compression or expansion as well, but generally, yes, when we looked at it, we didn't see anything from quarter-to-quarter where it was outside of, say, a 0.1 or something on the round in that range.

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Operator [72]

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Thank you. And I'm not showing any further questions. So with that, I'd like to turn the call back over to CEO, Alistair Macdonald, for any further remarks.

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [73]

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Okay. As we've highlighted today, we are well positioned to drive growth throughout 2019. And our pipeline of opportunities and RFP flow remains very strong, driven by our strategic investments and strong customer interest in our integrated outsourcing solutions. So thank you very much everybody for your attendance today and questions, and your continued interest and investment in our organization. Have a great day and be good. Thank you.

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Operator [74]

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