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Edited Transcript of SYNH earnings conference call or presentation 6-Aug-19 12:00pm GMT

Q2 2019 Syneos Health Inc Earnings Call

RALEIGH Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Syneos Health Inc earnings conference call or presentation Tuesday, August 6, 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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* Daniel Gregory Brennan

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

* David Howard Windley

Jefferies LLC, Research Division - Equity Analyst

* Donald Houghton Hooker

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

* Erin Elizabeth Wilson Wright

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

* Jack Meehan

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

* John Charles Kreger

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

* 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, Head of Healthcare Services & Technology and Fundamental Research Analyst

* Stephen C. Baxter

Wolfe Research, LLC - Senior Analyst

* 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 Second Quarter 2019 Conference Call. (Operator Instructions) I would 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 factor 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, and 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 the Syneos Health Q2 2019 Earnings Call. Our results for the second quarter exceeded the midpoint of our guidance for revenue and profitability with strong performance across both segments, fueled by accelerated growth in Clinical Solutions and strong growth in Commercial Solutions.

We continue to see growing market interest in our comprehensive integrated offerings as evidenced by strong RFP flow and robust clinical and commercial pipelines. This customer interest is further demonstrated by the opportunities generated by our unique Syneos One product development team. Let me start with a few key performance highlights.

First, our adjusted revenue growth increased 8.6% or 9.6% in constant currency compared to the second quarter of 2018. This was driven by accelerated Clinical Solutions growth of 8.2% or 9.4% in constant currency and strong continued Commercial Solutions growth of 9.6% or 10.3% in constant currency.

Second, we had solid overall sales performance with net awards of $5.3 billion and an aggregate book-to-bill ratio of 1.16x for the trailing 12-month period. This was comprised of a clinical book-to-bill of 1.2x and the commercial book-to-bill of 1.04x. Third, we are excited to announce that we were awarded a significant clinical preferred provider relationship subsequent to the end of the second quarter. This win further validates our merger thesis that top tier scale would enhance our large volume of the penetration. This particular client is already one of our largest commercial customers and adding clinical services showcases the unique integrated capability and value proposition we've created with our end-to-end model.

We expect this new relationship to contribute somewhat to our new business awards for the remainder of 2019 and anticipate a more meaningful contribution to awards and revenue in 2020 and beyond.

While this new award represents the second new clinical preferred provider relationship we've secured with the top 20 pharma companies since the first quarter of 2018, we have also maintained our strength in providing strategic comprehensive solutions for the small to midsize market. This is evidenced by double-digit growth in this customer segment across clinical and commercial combined for the first half 2019 compared to 2018.

Now turning to our results by business. Our Clinical Solutions segment achieved solid net awards in the second quarter with a quarterly book-to-bill of 1.25x. This brings the total clinical net awards for the trailing 12-month period to $4 billion, producing a book-to-bill ratio of 1.2x.

This resulted in year-over-year backlog growth of 9.1%, which we expect to drive continued growth as we move through 2019. These second quarter awards were particularly robust with our core small and midsize customers highlighting our continued strength in this critical segment.

Our Commercial Solutions segment delivered net awards of $1.3 billion for the trailing 12-month period or a book-to-bill of 1.04x. Similar to 2018, we experienced seasonal pressure in awards during the second quarter, resulting in a quarterly book-to-bill of 0.71x.

However, year-over-year backlog growth in Deployment Solutions, formally selling solutions remained strong at 12.9%. In addition, we have a strong pipeline of commercial opportunities driven by our ability to offer comprehensive strategic solutions to customers across all segments.

This includes our sophisticated omnichannel offering, where during the second quarter, we were awarded a significant project from biotechnology customer developing a novel class of therapies for certain chronic diseases. This award includes not only field and contact center resources but also a comprehensive omnichannel launch program, including channel management through data science, analytics and integrated measurement.

This is further evidence that we continue to realize one of our key merger strategies, driving over 30% year-over-year commercial revenue growth into the small to midsize customer segment for the first half 2019.

Within Commercial Solutions, we are extremely proud of the continued recognition of the scale and capabilities of our world-class communications organization. As the largest independent health care-focused network in the world, our communications business was recently recognized as the #2 communications business in North America as part of the prestigious 2019 top 100 agencies ranking by medical market in a media magazine.

Our communications organization collaborates daily to deliver creative, differentiated solutions, including deep behavioral insights to accelerate customer performance and improve experiences for patients.

We continue to see strong interest in our unique Syneos One product development offering, enabling customers of all sizes to accelerate their development and commercialization timelines. This integrated and streamlined offering, which has influenced over $250 million of our awards for the first half 2019, is ideally positioned for small to midsize customers as an alternative to efficiently deploy capital and provide a seamless infrastructure.

This unique model is also differentiating our core services within the midsize and large pharma segments as these customers look to Syneos One to help optimize portfolio management. Syneos One is a critical element in driving our future growth and an area of ongoing strategic investment.

We also continue to invest in top talent and drive our business development and therapeutic capabilities as we look to drive further growth across all market segments. As we discussed last quarter, we launched our new Global Client Solutions functions to enhance integrated management of key customer accounts across our clinical and commercial continuum.

To lead this effort globally, I am pleased to announce the addition of Lisa Rometty as the President of Global Client Solutions. Lisa is ideally suited for this role, bringing more than 25 years of experience in business development, strategic partnerships and key account management.

We believe she will strengthen relationships, drive brand awareness and introduce new channels and innovative models for growth of Syneos Health. She was most recently the General Manager of IBM Watson Health's Oncology and Life Sciences organization, and we know she will be a great addition to the Executive team.

Top talent acquisition also continues within our Clinical segment, with the addition of Patrick Nealon as the Executive Vice President and General Manager for our Global Oncology team. Patrick has a wealth of experience in oncology drug development, with 30-plus years across the pharmaceutical, biotech and medical device sectors.

Patrick will continue to drive growth and operational excellence in this critical therapeutic area while embedding important therapeutic insights within our Commercial Solutions.

As we recently celebrated our second anniversary of the merger, we continue to realize the benefits of creating the industry's only end-to-end biopharmaceutical accelerator. We are validating our merger thesis through our increasing penetration of large pharma customers while enhancing our sophisticated integrated commercial offerings for our SMID customers.

Importantly, the new large pharma clinical relationship I highlighted was awarded in part because of our existing commercial relationship and our ability to provide sophisticated product development insights with seamless delivery.

This quarter's performance, continued innovation and awards recognition further reinforce our unique value proposition in the marketplace. I'd like to close once again by sharing my appreciation to all the employees of Syneos Health. Our efforts every day are helping us to deliver better model to our customers across all sectors that achieves our vision, shortening the distance from lab to life.

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. As a reminder, our results are discussed 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, which include reimbursable expenses.

Let me begin by reviewing our financial results in detail. As shown on Slide 4, our adjusted revenue for the second quarter of 2019 was $1.17 billion, up 8.6% compared to the second quarter of 2018 and up 9.6% in constant currency when excluding a foreign exchange headwind of $11.7 million.

This growth was driven by both segments as Clinical Solutions growth accelerated and Commercial Solutions growth remained strong. Our clinical segment adjusted revenue grew 8.2% year-over-year to $851.5 million or 9.4% on a constant-currency basis. Clinical revenue growth was driven by solid net awards over the last 12 months, favorable revenue mix and higher growth in reimbursable expenses, partially offset by the impact of FX.

Commercial Solutions adjusted revenue was up 9.6% year-over-year to $316.9 million and up 10.3% in constant currency. Commercial Solutions growth was largely attributable to net awards over preceding 12 months and the acquisition of Kinapse, partially offset by lower growth in reimbursable expenses and the impact of FX.

Adjusted EBITDA for the second quarter was $153.8 million, an increase of 12.2% year-over-year, resulting in adjusted EBITDA margin of 13.2%, an increase of 50 basis points.

This includes a foreign exchange benefit of $6.7 million consistent with the impact contemplated in our guidance. This growth in adjusted EBITDA and related margin was driven by overall revenue growth, favorable revenue mix, the increase in net realized synergies and improved operating leverage.

These benefits were partially offset by costs associated with startup of large new customer relationships and higher growth in reimbursable expenses. It is also important to note that under ASC 606, our segment-adjusted EBITDA margins are much more closely aligned with only 200 basis points of separation on a year-to-date and constant-currency basis.

Adjusted EBITDA includes the realization of approximately $27 million of synergies during the second quarter before the impact of our strategic reinvestments to drive growth. This is consistent with our target for 2019, and we remain on track to achieve $125 million in synergies annually by 2020.

Adjusted diluted EPS of $0.74 grew by 19.4% year-over-year primarily driven by our growth in adjusted EBITDA and our lower non-GAAP tax rate. Specifically, the improved tax rate contributed $0.03 to our growth in adjusted diluted EPS for the second quarter of 2019.

Now moving to cash flow and the balance sheet as summarized on Slide 7. During the second quarter, our operations provided $96.8 million in cash on an as-reported basis. This represents an improvement of $110.1 million compared to the first quarter as cash flow normalized for the temporary integration-related delays we previously highlighted.

DSO for the quarter was 44.9 days, elevated by the delay of collections on a few large accounts. The majority of these have already been collected, so we expect DSO to decline to the low 40s during the third quarter of 2019.

We ended the quarter with $105.2 million of unrestricted cash and total debt outstanding of $2.76 billion.

Slide 7 also provides an update on our debt management and capital deployment activities. We remain focused on the 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.

During the second quarter, we repaid an additional $40 million of our term loans and repurchased $23.1 million of our outstanding common stock, leaving $125.3 million of stock repurchase capacity available to be utilized at the end of this year.

From a tax perspective, our non-GAAP effective tax rate for the second quarter was 24.5%, remaining 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 only be $15 million to $20 million for the full year 2019.

I am also pleased to report that our teams have continued to focus on remediation of the previously disclosed material weaknesses in internal controls. We believe we have largely completed our remediation process, although final testing and certification will occur as part of our annual internal control evaluation and audit process later this year.

We also continue to fully cooperate with the SEC as it relates to the investigation we disclosed in the first quarter of 2019, but have no new developments to report or any additional information regarding the ultimate timeline for resolution.

Turning now to our guidance on Slide 8. We are updating our expectations for full year 2019 adjusted revenue to the range of $4.64 billion to $4.75 billion, representing growth of 5.4% to 7.9%. This is comprised of adjusted Clinical revenue of $3.37 billion to $3.43 billion or a growth of 4.4% to 6.4% 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 $630 million to $660 million, growing between 5.5% and 10.5%. Lastly, we expect adjusted diluted EPS in the range of $3.08 to $3.26, representing growth of 7.3% to 13.6%.

This guidance reflects second half performance that is consistent with our prior guidance, with updated full year expectations driven by our second quarter results and year-to-date share repurchases.

This guidance is based on the following key assumptions: our existing backlog and sales pipeline, including 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 105.2 million shares, which will vary quarter-by-quarter and excludes any share repurchases subsequent to the second quarter.

I also want to provide you with some commentary for the third quarter, given our expected 2019 growth profile. We expect adjusted revenue of $1.17 billion to $1.19 billion, representing year-over-year growth of 4.7% to 6.5%.

This is comprised of adjusted Clinical revenue growth of 4.6% to 5.8%, and adjusted Commercial revenue growth of 4.8% to 8.2%. We expect total adjusted EBITDA of $160 million to $170 million, representing year-over-year growth of 1% to 7.3%.

As we highlighted last year, the third quarter of 2018 included $5 million of benefits in adjusted EBITDA that we originally expected in the fourth quarter. When normalizing for these items, our updated guidance for the third quarter 2019 reflects 25 basis points of adjusted EBITDA margin expansion at the midpoint.

This completes our prepared remarks. And we would 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 Robert Jones with Goldman Sachs.

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Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [2]

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I guess, Alastair, just to go back to the large strategic win on the clinical side that you mentioned that came from a legacy commercial client, just looking for any more detail there. Was it a competitive RFP process? Were they currently or historically using other clinical outsourced providers? Just trying to get a little bit of a better sense of the size of that opportunity and how it came about.

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

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Yes, Bob, thank you. Yes, so large customer for us on the commercial side and a customer that we've done work for before clinically, but in more of a transactional basis, competitive process last several months, as you guys know, these big processes last for a long time now. And I think the combination that we have between clinical and commercial was a big factor in that plus the scale. That was one of our big merger imperatives was to create a CRO with the right kind of scale to compete for those kind of opportunities. Because I think on a legacy basis, both organizations were under indexed in large pharma and not really have the requisite scale to be a player at that top end. So we see that as a critical win, something that we see starting up over kind of towards the end of 2019, driving awards there, but also revenue into 2020.

We're very pleased to dislodge some of our competitors in that space and to take a seat at that table.

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Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [4]

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No, that's helpful. And then I guess just if I could follow up with one on the backlog conversion. Sequential improvement on the clinical side, I think compared to the previous communication that we should probably be thinking more about the conversion rate eroding throughout the year. Obviously went the other way. Just curious kind of what drove that? And then how should we think about that conversion continuing to potentially accelerate over the balance of the year?

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Jason M. Meggs, Syneos Health, Inc. - CFO [5]

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Yes, Bob, thanks. It's Jason. So the backlog conversion, we had laid out that we felt like it would be sort of flattish in the range of the last couple of quarters, and it did come out a little bit ahead. The business did a nice job on getting projects, pushed through start-up process during the quarter. And we also had some of the timing items that we mentioned in the first quarter come through during the second quarter that always helps that revenue and that burn rate.

When you look at the second half, if you look at the guidance we've given, you're going to be in a similar range of quarter 1 and quarter 4 instead of the 11.2%. So we do see it normalizing a bit given the timing items that came through in the quarter.

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Operator [6]

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Our next question comes from David Windley with Jefferies.

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

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Alastair, I believe that I caught you saying that the Syneos One activities contributed something like $250 million to your bookings in the first half of the year. Did I hear that right?

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [8]

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Yes.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [9]

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And if so, can you -- when I saw you in June, you talked about a $700 million-plus number that, that had kind of climbed to. Can you kind of roll us forward like what's the total amount of wins? And what's the amount that has kind of gotten close enough in the windshield that you're now taking that into bookings. Just help us to understand how that's flowing?

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [10]

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Yes, sure. Thanks, Dave. Yes, you did hear that correctly. But remember on Syneos One awards, we take them in a very conservative manner into bookings because it's multiple service lines. And we only take them into bookings when we're within that 6-month window of that service line starting up its work. So that $250 million is what we've taken in. But obviously, there's a bigger part almost presold, if you like, that sits there waiting for those elements within those projects to hit the window.

So but, Jason, I think you...

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Jason M. Meggs, Syneos Health, Inc. - CFO [11]

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Yes. David, just add a little bit more color there. So the -- what we talked about in June is what we look at from a Syneos One perspective as true end-to-end deals where we have an asset that we're going to be working on from end to end. We have an asset strategist assigned. And as Alastair said, as we get certain pieces of work under contract and we're starting within our policy, they will come into bookings.

The 200 -- greater than $250 million that we articulated in the prepared remarks is really incremental to that, and that's where Syneos One is helping the segments, Clinical and Commercial, in terms of their efforts to get projects awarded. We have an asset strategist assigned. They're working with the business on strategy of how to deliver the project, et cetera, and it's been awarded. And we're working to make that an end-to-end deal, hopefully, over time. But it's not in the end-to-end deals that we currently articulated.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [12]

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Interesting. Okay. So the $250 million is totally incremental to what I assume is still $700 million or more than that, that you talk about in terms of true end-to-end deals. Is there amount of the $700 million that you can speak to that you've begun that you've also been able to take into bookings? Or is that part of the quantifier?

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Jason M. Meggs, Syneos Health, Inc. - CFO [13]

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Yes. David, like we -- I think we had given a little bit of color on this at -- in June, but it's actually right around the same number of around $250 million of the $700 million has gotten to the point where it meets our policy and has come into our bookings.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [14]

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Okay. But distinct numbers, 2 times $250 million.

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Jason M. Meggs, Syneos Health, Inc. - CFO [15]

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Yes.

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [16]

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Yes. Yes.

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

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That's right. That's right.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [18]

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Okay. Definitionally, Alastair, you are talking about this clinical preferred providership and about a year ago, a little less than a year ago, you talked about the kind of the traction that you had gotten in breaking into large pharma and getting preferred providerships, but at that time, what I'm remembering is you kind of talked to about those as hunting licenses.

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [19]

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Yes.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [20]

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More of the "old preferred provider, not partner." What I hear you describing today sounds a little bit more partner. Am I hearing that right or am I over-interpreting?

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [21]

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No. I think your interpretation is a good one. So this is more than a hunting license.

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Jason M. Meggs, Syneos Health, Inc. - CFO [22]

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Yes. I'm just going to add to that, that this is more like what we talked about last June in terms of the oncology partnership that we were awarded. So this is where we have -- we'll have a line of sight to the book of work and we'll be taking projects, and we're 1 of 2 providers for this company.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [23]

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Got it. Okay. Last question quickly. Could you -- would you mind to make it easy on us and give us the Kinapse inorganic contribution to commercial? And that would be my last one.

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Jason M. Meggs, Syneos Health, Inc. - CFO [24]

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Yes, I mean, we -- so we were still high single-digit organic growth, Dave, in the quarter, excluding Kinapse.

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Operator [25]

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Our next question comes from Erin Wright with Crédit Suisse.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [26]

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In light of the new large clinical win, I guess should we anticipate stepped up hiring ahead of more meaningful contribution from that relationship? And how should we think about the overall hiring environment at the moment?

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [27]

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Yes. Erin, I'll start you off and then Paul will give you a bit more of the detail. So yes, we --well, let's start with the general environment. There are hotspots as always, specific therapeutic areas, some geographies are just harder generally to recruit in others because there's more demand going there and there might not be the traditional supply. So we're talking Japan, China, places where the market is really opening up clinical work, which I think, probably is the same for every single CRO out there to upscale.

On the partnership, yes, we will be recruiting ahead of that a little bit. When you stand these things up, I think you've got to have the key personnel in place to help create the work streams, ensure that the connectivity between the organizational systems is appropriate and operational. But some of that cost actually is already been kind of taken care of, I suppose in the start of the last one because some of those systems associated views on our side are already up and running.

So it will be more purely around hiring new heads for operational delivery purposes. Paul, you want to add anything to that?

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Paul D. Colvin, Syneos Health, Inc. - President of Clinical Solutions [28]

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Yes. No, I appreciate the question. And I think the important thing to remember as you start up with any partnership is, you've got that initial startup phase. I think what you've seen in this quarter was really strong performance activating sites. That gives you really a pressure valve there as you're ramping up your staffing. You got at least 6 months of steady startup and view into when you'll need the staff around the globe. And that's what we do with a business, right, is to staff up. So we've got a very strong internal engine, and we'll be forecasting that out, so we'll have a nice runway to see what's coming from the pipeline of this partnership as we go forward. So I don't worry about that.

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Erin Elizabeth Wilson Wright, Crédit Suisse AG, Research Division - Director & Senior Equity Research Analyst [29]

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Okay. Okay. That's helpful. And then can you parse out some of the components in the growth in commercial? I guess whether it would be advertising versus consulting as well as trends across that more traditional CSO offering as well?

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

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Yes. Erin, it's Jason. I'll start and then Michelle can add. So we're seeing growth across Deployment Solutions, really quite strong growth in that area. Growth across the other businesses as well, but the one that is growing strongest at the moment is Deployment Solutions. And that -- and Michelle can add some color, but that's evolving from your traditional CSO right with what is now a little bit more omnichannel work and non-personal promotion tied into other pieces of the business, but also just different types of field teams where you have your MSLs, nurse educators, reimbursement specialists, et cetera. So the -- underneath that it's a little bit of a different profile as well.

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Michelle Keefe, Syneos Health, Inc. - President of Commercial Solutions [31]

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Yes, absolutely. And what I would also add is that much more of our opportunities that we're winning are integrated. So with -- it's almost difficult to slot it into a business unit, right, because we're going to market. It might come in as an RFP opportunity, the Deployment Solutions. And when we respond, we're responding with an integrated solution that includes communications, omnichannel and may include call center, a variety of different things depending on what frankly the market needs at that time and what we believe is going to maximize the performance of that brand. And so I think more and more of our wins, I think you heard us say last quarter that over 50% of our business is now being won with services for more than 1 business unit. And so I think that, that's really when we really look at our wins, we're seeing a lot more integrated wins. And so that's important because that's been a big part of our -- what we believe will be the success of Syneos Health is that we're able to integrate our capabilities across the board, to be able to deliver best-in-class solutions for customers.

So that's just very reinforcing, that customers are very interested in what we have to offer.

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Operator [32]

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Our next question comes from John Kreger with William Blair.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [33]

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Question for Paul. Paul, can you just -- since you've been there, reflect a little bit more on the type of business where the integrated offering kind of the Syneos One offering resonates with clients? Is there a certain client type or a certain type of project where it really seems to make the most sense?

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Paul D. Colvin, Syneos Health, Inc. - President of Clinical Solutions [34]

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Well, I think it gets -- we're seeing it starting to cross segments. I think we first started, I think we thought it was going to be more in kind of the small and mid-cap. What we're starting to see though is large pharma, as they are integrating their pipelines and bringing in assets from the outside or even as they develop their own internal assets, they're wanting to see what capabilities we can bring earlier to help them think about that life cycle development. So I think we're seeing it across the sectors, but I've been really happy to see that moving into the large pharma sector going forward. And in particular, I think as you think about forecasting development, they're bringing together that commercial information, behavioral data of patients in combination with clinical information is a particular point of interest where they see that as something that can add value much earlier in that life cycle development.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner & Healthcare Services Analyst [35]

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Got it. And I think you guys said that mix was a positive driver for the clinical business. Is that right? And what does that tell us about how FSP-type work is trending versus traditional?

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

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Yes. John, so mix was positive in clinical. That's correct. When you think about the underlying sort of FSP versus full service, we're seeing more strength on the full service side, which is helpful, but do keep in mind under 606 basis, where FSP has minimal reimbursable expenses, the margin profile there starts to come together quite a bit as well in terms of separation we used to see.

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [37]

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Yes, I think just want to -- John, it's Alastair. Just to add one more thing to that. I think as we're penetrating large customers, we're seeing more kind of the hybrid. We've got the FSP in certain functional areas with full service kind of sitting across the top of it. And that works very well for us because it helps us to integrate our system. So we're able to drive a pretty good margin in comparison with full service work from that style as well. So we see -- one of the big points of doing this whole kind of merger was around can we create an organization that has really strong clinical full service, really strong clinical FSP and then hybridize the 2. That's what FSP 360 is about. It's not just hybridization of the typical FSPs you might see monitoring and clinical data management, project management. It's all the other pieces as well, investigator payments, site start-up, all those other aspects, all bolted to it. So it makes a lot more efficient when we're doing bigger and bigger scale like that in a hybrid manner.

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Operator [38]

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And our next question comes from Ross Muken with Evercore.

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Ross Jordan Muken, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Healthcare Services & Technology and Fundamental Research Analyst [39]

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Just on the client side, could you just give us a little bit of color for sort of trend within the biotech base, just given all the sort of uptick in fundraising we've seen again, lot of activity? And also with the new launch calendar in that, we're all sort of -- with some of the more specialized therapies, how that's impacting on the commercial business?

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [40]

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Thanks, Ross. We -- you broke up right at the beginning. Can you ask -- can you say the first sentence or 2 again, please?

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Ross Jordan Muken, Evercore ISI Institutional Equities, Research Division - Senior MD, Head of Healthcare Services & Technology and Fundamental Research Analyst [41]

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Sorry. Just in terms of the biotech, right? Just that part of the customer base, given all of the fundraising, how that's translating both on the clinical side in terms of the trend of demand and then given sort of the new age launches, more on the gene therapy, more on the specialized side, what that's meaning for the commercial business?

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [42]

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Yes, okay. Yes, sure. So I think we've seen a healthy progression on the biotech side. We've actually seen as it penetrate that market more than we have before. And I think it's because of the fact that we have this integrated offering, we can take people out of clinical and through the more and more specialty the gene therapy, it's pushing the price point upwards constantly on these new drugs as they target more and more specific patients. The science is higher. And I think when you're bringing a drug to market like that, you can start and repairing the market what the price point might be in terms of the benefits to the patient, the benefits to the health care provider and the insurer, who is reimbursing it, what that overall impact is on the patient's life and the value that it brings.

I think it plays very nicely to our suite of consulting services, the market access team that kind of HEOR value and access group. And then you're preparing that material for the commercial launch in terms of comms capabilities, omnichannel, field support mostly MSL nurse educators for that type of drug or that type of treatment, than the traditional sales force, which is higher margin, but more specialized, smaller, but at a better margin. I think our place very nice that shift is specialty and the ongoing shift in gene cell therapy fits very nicely with what we're doing, particularly as we were able to provide all that infrastructure to small organizations who are developing that high-level science, who don't have any of that infrastructure. So I think for us, it plays very nicely. And Michelle, anything to add on the commercial side?

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Michelle Keefe, Syneos Health, Inc. - President of Commercial Solutions [43]

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I think it's really about that seamless continuity of how we do product development, right. I think that that's really what our opportunity is there. And I think we're seeing that's an area that we're doing quite well, and frankly, people see the opportunity that they have to work with us in that way in this sector because the patient populations tend to be smaller, really understanding what's going on with the patient and the caregiver, and we are thinking through what it's going to take not just to support the patient, but to ensure they have access to the medicine and that they have all the resources that they need. Also patient identification at some of the -- with these biotech product is really difficult, right. It's not easy sometimes to identify those patients. So us really thinking through that seamless continuity of what is going on not just through the product development, but ultimately, when it gets on the market, what it's going to take to really support the patient in their therapy, I think that's a unique value that we bring to the market.

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Operator [44]

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Our next question comes from Stephen Baxter with Wolfe Research.

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Stephen C. Baxter, Wolfe Research, LLC - Senior Analyst [45]

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It looks like the revenue concentration for your top 20 customers was down a little bit more than in the first quarter, which implies the growth outside of that was obviously pretty robust. I was hoping you can contrast what you're seeing from your largest customers, where it looks like revenue is flattish on a year-to-date basis versus what you're seeing at the smaller end of the spectrum? And I know that you're adding a preferred provider relationship, but absent that sort of what needs to happen for the other parts of the top 20 to return to showing some growth and moderating the drag on your overall top line?

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Jason M. Meggs, Syneos Health, Inc. - CFO [46]

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Yes. I'll start and then others can chime in there, Steve. So you're right, I mean we are seeing significant -- and we talked about this in the prepared remarks, significant growth outside of the top customers and specifically on the SMID side of the portfolio in the commercial business. Really strong growth there. Pipeline is well in terms of both revenue and pipe. On the clinical side, the story is the same, right? The INC business grew up, legacy SMID business, complex trials plays well to what's coming through cell and gene therapy, et cetera. We're continuing to see that on the revenue and the pipe as well. There are opportunities that we have on the large pharma side on existing customers in both businesses to expand that in the second half and beyond in 2020. And that's what we're currently focused on in addition to the new partnership that we have. I don't know, Paul, if you want to talk a little bit about clinical and, Michelle, on commercial?

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Paul D. Colvin, Syneos Health, Inc. - President of Clinical Solutions [47]

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Yes. Thanks, Jason. I mean from a clinical perspective, I think there's a few things. One is obviously the new partnership we won is going to take time to ramp. That doesn't come with an existing backlog. So I think that's, again, as Alastair has mentioned, more of a second half of '19 and into '20 as we see that ramp. I think if you look across our other partnerships, what we've seen is through some of the consolidation and others that there will be some re-prioritization as they put those pipelines together, we don't see that as a long-term delay. We actually see it as a large upside, but it's not something that will play through in this part of the first half. It will be a second half of '19 into '20. And I'd say the third is, we've seen with a couple of large partners is they're just revamping their pipeline. As it churns out through Phase III and they go in through Phase I to Phase II, those assets come through and you'll see those pipeline cycle from time to time, so I think it's a combination of those things.

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Michelle Keefe, Syneos Health, Inc. - President of Commercial Solutions [48]

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So from a commercial perspective, I think, the first thing I'll share is, it was very purposeful to diversify our backlog. I mean we've been talking about how important that is to the commercial business. And we've been focusing on that. And so I think we're pleased with that diversification of the backlog and we're going to continue to focus on that. From a top customer perspective, we have multiple opportunities in the pipeline with our top customer. So we're confident that, that's going to continue to be an area that we focus on. And I think our investment in our key account management strategy to really leverage commercial and clinical together and the power that I think it can bring to a top customer. I think we're scratching the surface on that. I think that's a huge opportunity for us moving forward.

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Stephen C. Baxter, Wolfe Research, LLC - Senior Analyst [49]

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Great. And next as a quick follow-up, was hoping you can tell us the impact pass-throughs had on your clinical revenue growth relative to the guidance. So basically, I'm trying to understand whether the service revenue component for clinical was in line with your guidance or also better as in line with the consolidated metrics?

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Jason M. Meggs, Syneos Health, Inc. - CFO [50]

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Yes. So the -- as we said there, our reimbursable expenses did grow faster than we had anticipated. And if you look at the -- across the guidance outside of that we were pretty much bang on what we had anticipated.

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Operator [51]

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Our next question comes from Tycho Peterson with JP Morgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [52]

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Jason, one quick follow-up for you over here on the guidance. Looks like for 3Q, you're essentially guiding to flat EBITDA margins year-over-year. 4Q is obviously going to see a little bit more of a year-over-year improvement. I was just wondering whether we can start thinking of a more sustained pickup in EBITDA over the next 12 to 18 months here, just given that some of these large strategic pharmaceutical contracts and other earlier-stage projects will begin to ramp over that time frame?

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Jason M. Meggs, Syneos Health, Inc. - CFO [53]

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Yes. Tycho, thanks. So the -- one of the nuances to the second half year relative to last year that we mentioned in prepared remarks is we did have a $5 million benefit in Q3 of '18 that was pulled forward from 4Q. So when you normalize that, we're seeing about 25 basis points of expansion in quarter 3 year-over-year. And then still targeting the same margin benefit and growth year-over-year per the revised guidance as our original guidance.

When you look longer term, right, we still are focused on how we can grow the EBITDA margins in that 30, 40 -- say 30 to 50 basis points, I think is what we've talked about in future years. So we're still focused on that.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [54]

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Got it. And then one quick follow-up on the trailing 12-month net awards. Is there anything to read here in sort of the quarter-over-quarter decline looks like in both clinical as well as Selling Solutions that ticked down by, like by 10% or so? Or is that just regular seasonality or lumpiness as certain quarters drop out of the calculation?

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

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Yes. So on the clinical side, we had the 1.25 book-to-bill in the quarter, which is right in line with the range we want to keep it in. We are lapping a very strong quarter 2 '18 where we had 1.6 on an ASC 606 basis. So that's the pressure you see there. Looking forward, with all the things we've talked about and if you look to the quarter 3 of last year, the comps a little bit easier. So we're focused on that, creeping back up in the second half of the year from that 1.2 trailing 12-month. On the commercial side, we had a strong first quarter of last year, the seasonal second quarter that we typically see. We saw that again. We did see a little bit of an uptick in some risk adjustments in the quarter in the first half really on commercial. The good news is that impacts -- that doesn't impact the full year revenue guidance range because we built that into our revenue forecast, but it does impact your book-to-bill a little bit.

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Operator [56]

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Our next question comes from Jack Meehan with Barclays.

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Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [57]

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I was wondering if there were any updates you can provide just on the international side, how new business development is going there, notably in China.

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [58]

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Yes, Jack. Yes, so a pretty strong BD team out in Asia Pac, in general. I think we would see that they -- what they are winning is both local and global. So we're seeing projects come out of Asia Pac from biotech startups, et cetera, and be delivered by us globally for them. In fact, I think in 2017, our biggest single award came in that style. So we see it's very important region, not just for delivering work, but from also winning work both, as I said, locally and more globally.

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Jason M. Meggs, Syneos Health, Inc. - CFO [59]

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Yes. And Jack, just to add to that, I mean we see the clinical market in Asia Pac as being the strongest growth market available. So we are very focused on that. And as Alastair said, we have a good footprint there including the front-end BD. But equally, we're focused on Europe and the commercial, right? Because that is a market that we have relatively strong scale in but want more and it becomes more and more important when you look at these end-to-end deals that you have that scale and reach in Europe from a commercial perspective too.

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [60]

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I think -- well, I just want to add one thing actually. Strategically, we've always wanted to be able to provide the same services to all customers wherever we are, geographically. And that includes Syneos One. So I think we've seen a lot of interest in Syneos One coming out of Asia supported by investors as well as the biotech companies because they have no experience in launching a drug in the West. They have no infrastructure in the West, so it becomes a very compelling model in that market.

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Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [61]

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Great. Jason, I also want to follow up on the clinical research side, you obviously had a pretty nice revenue be in the quarter. I was wondering if you could just parse out what was -- is their way to think about what was quarter versus the timing maybe with performance obligations and then pass-throughs. Is there a mix of those which drove the upside you could provide?

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Jason M. Meggs, Syneos Health, Inc. - CFO [62]

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Yes. I mean it was -- so we did -- our guidance, we basically achieved other than we had a little -- well, quite a bit faster reimbursable expense growth in the quarter. So that was a good bit of what we saw there and then underneath that we did see some of the timing items that we talked about in quarter 1 that slowed us down and put a little pressure on margin come through in quarter 2. So if you look at it, these reimbursables, the project life cycles, they can move around, quarter 1, on a lag; quarter 2, strong. Had some timing items in quarter 1. That hurt quarter 1, helped quarter 2, so just think about it in terms of first half and then you can plot out your growth there in second half.

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Jack Meehan, Barclays Bank PLC, Research Division - VP & Senior Research Analyst [63]

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Okay. And if I can squeeze in one more, just related to the interest assumption and guidance. Could you just give us an update in terms of timing for when you might be in the market? And also just how you're thinking about interest rates obviously with the Fed, do you think maybe there could be a little bit upside related to that?

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Jason M. Meggs, Syneos Health, Inc. - CFO [64]

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Yes. So we have the range there that we gave that is consistent with what we said previously. When we gave guidance in May, Jack, we had already finalized the refinancing in late March where we have the delayed draw feature of our term loan A, where we can take out the high-yield bonds, the 7.5% bonds in early October first call date. So all of that's baked into our original guidance, which we held. If rates continue to go down, and we're 45%, 50% variable there, we could see some benefit, but just too early to call on that.

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Operator [65]

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Our next question comes from Donald Hooker with KeyBanc.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [66]

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Just dovetailing off of an earlier question in terms of mix, kind of in the quarter I think there was a shift. I think you mentioned more for full service arrangements. It feels like that's kind of where the market's going. So I'm just curious if you might be able to comment kind of looking at your pipeline, looking ahead, is there some sort of structural move towards full service, which I guess makes some sense given the complexity of trials coming to market?

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [67]

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Yes. I'll start and hand to Paul. But I think we've seen this over the years more of an oscillation rather than a move, particularly in the larger pharmas, there's lot of efficiency in FSP hybrid as well as the kind of clinical precision you get from a full service project. But it depends on -- I think it depends more on an organization -- outsourcing organizations kind of psychology around how they want to outsource. I mean I don't think we're seeing a shift. I think we're seeing a combination in some of the larger pharmas towards hybrids, where you get a bit of the best of both. And the small to mid-market is, as you guys know, is growing very well. So yes, they don't use FSP because they don't have the scale to outsource through it. So you -- if that's helping to drive the full service market.

[See anything] different to that, Paul?

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Paul D. Colvin, Syneos Health, Inc. - President of Clinical Solutions [68]

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No. I think it's well said. I think we are seeing still strong growth in that mid to small market grew. They are going to be predominantly FS, I mean, a full service contract that's flowing through. But I agree, I think we're seeing more of a shift to hybridized models where what can you do to build a bespoke custom-bit model is going to allow me to drive the most efficiency across my entire portfolio of work. I think we're uniquely positioned to do that because the size and scale we have in both the FSP and the full service. So I think it's going to continue to be that hybridized model looking for efficiencies across the entire portfolio of work.

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Donald Houghton Hooker, KeyBanc Capital Markets Inc., Research Division - VP and Equity Research Analyst [69]

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Got you. Maybe just a quick follow-up. Maybe I don't know if you're -- how much you're willing to elaborate here but over the next few quarters given the general strength of the market backdrop for you guys, what's -- how do we contemplate sort of a book-to-bill ratio for you? What are you sort of targeting for the Clinical Solutions segment?

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Jason M. Meggs, Syneos Health, Inc. - CFO [70]

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Yes, it's Jason. So we're unchanged. We're targeting 1.2 to 1.3 on a trailing 12-month basis for the clinical business.

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Operator [71]

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Our next question comes from Dan Brennan with UBS.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [72]

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I was hoping to go back to the large clinical win that you announced, the relationship. Any more color there in terms of therapeutic category, kind of global or kind of retail focus? And any way to think about sizing impact? I know you're not going to give numbers, but just trying to get a frame of reference there.

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

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Yes. Paul, you want to come -- well, let me start. So certainly global, big relationship, not -- a bit broader therapeutically -- therapeutics than the previous one, which we talked about last year, which was mainly -- well, actually almost all exclusively oncology. So this new one is more diverse in terms of its therapeutic orientation, which actually makes it a little bit easier for us I think because we can -- we roll projects in off of the available time as they finish. And it enables us to build teams that match pretty well to varied therapeutics. But Paul, anything...

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Paul D. Colvin, Syneos Health, Inc. - President of Clinical Solutions [74]

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Yes, I would agree. I think it's going to be a mix of therapeutic areas. I also think that -- it's not going to be heavily weighted in one region versus another. That portfolio is pretty balanced. So I don't see it being heavily weighted in one area or another, outside of the norms that we're seeing in the industry.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [75]

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Okay. Maybe second question is on just the competitive and pricing environment. I know -- I don't think that was really addressed, certainly quarters to-date had been pretty good, but just wondering kind of what you're seeing on kind of a pricing front.

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [76]

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Price has been pretty normal. I mean we've -- I don't think we've seen any strange behavior out in the market. In commercial or clinical there.

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Paul D. Colvin, Syneos Health, Inc. - President of Clinical Solutions [77]

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No.

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Daniel Gregory Brennan, UBS Investment Bank, Research Division - Senior Equity Research Analyst of Healthcare Life Sciences [78]

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And in terms of -- just in terms of the overall noise in the marketplace with drug price concerns. Has there been any impact whether positive or negative in terms of your impact with -- or your relationship with customers in terms of decision-making, timing, things like that?

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [79]

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I think on a clinical side, the answer is no yet. I think on the commercial side, it's a bit of a driver for us particularly in health economics, market access, consulting that kind of stuff. Michelle?

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Michelle Keefe, Syneos Health, Inc. - President of Commercial Solutions [80]

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Yes. So anything that's going on with our customers, we're always interested in helping them address whatever marketplace that they're going to be competing in, right. And I think one of the things that we are uniquely positioned to do is to help them with that regardless of where the policies land. We have expertise in reputation and risk management, public relations, really thinking through what value and access looks like in a world where pricing could be different. How do you develop that value and ensure that patients can get access to the medicines they need for the diseases they have.

And so these things are going on. All of us have no idea where it's going to land, right, but wherever it lands, I think we're in a good position to partner with our customers from a service perspective to support them in whatever environment they end up operating in.

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Operator [81]

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And we have a question from Michael Polark with Baird.

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Michael K. Polark, Robert W. Baird & Co. Incorporated, Research Division - Research Associate [82]

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Just one for me. Seems like Kinapse has largely met expectations. Curious for an updated comment on appetite for additional tuck-in acquisitions over say the next 6 to 12 months, should we expect new deals, areas of interest, something like that would be great?

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [83]

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Yes. Mike, yes, I mean capital deployment priority is still paying down the debt, and we want to stay opportunistic. We're seeing a lot of assets being brought to market. But the multiples at the moment are -- they're very high. So it'd have to be something that really ticked a lot of strategic boxes for us. The scale and the scope that we have, we've got a lot covered. So to find an asset that we'd really go to bat for in terms of multiples, et cetera, that fitted one of the remaining gaps that we feel that we have would be -- that would be the only thing that we really be interested at this time, with the multiples being the way that they are.

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Operator [84]

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And I'm not showing any further questions. I'd like to turn the call back to Mr. Alistair Macdonald for any closing remarks.

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Alistair Macdonald, Syneos Health, Inc. - CEO & Director [85]

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Thank you. So we're very pleased with our strong growth in the second quarter and believe we are well positioned to drive growth throughout the remainder of 2019 and beyond. Our pipeline of opportunities and RFP flow remains very robust driven by our strategic investments and strong customer interest in our integrated outsourcing solutions. So thank you very much for your attendance today and for your interest in investment in Syneos Health. And have a great day and be good. Thank you.

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Operator [86]

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