Syneos Health Inc

F:8IN

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Syneos Health's Second Quarter 2018 Earnings Conference Call. [Operator Instructions]

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

[Ronnie Speight, VP, IR]

Good morning, everyone. With me on the call today are Alistair Macdonald, our Chief Executive Officer; Jason Meggs, our Chief Financial Officer; and Michelle Keefe, our President of Commercial Solutions.

In addition to the press release, a slide presentation corresponding to our prepared remarks is available on our website at www.investor.syneoshealth.com. Remarks that we make about future expectations, plans 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, including the impact of the changes to the revenue recognition accounting standard. These factors are discussed in the Risk Factors section of our Form 10-K for the year ended December 31, 2017, and our other SEC filings. In addition, any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date.

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 as supplement to, and not a replacement for, measures prepared in accordance with GAAP. We believe that providing investors with these non-GAAP measures and the combined company presentation helps them gain a more complete understanding of our financial results because management uses such measures for operating, budgeting and financial decision-making and reporting. For a reconciliation of the non-GAAP financial measures with the most directly comparable GAAP measures, please refer to the appendix of our presentation. [Operator Instructions]

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

[Alistair Macdonald, CEO]

Thank you, Ronnie. Good morning.

Yesterday, we marked the first anniversary of the closing of our landmark merger and the whole of Syneos Health should feel very proud of the progress that we have made in building a truly unique biopharmaceutical outsourcing organization. We continued to experience great engagement with our customers, and believe the breadth of our offerings is resonating strongly in the marketplace.

I am pleased to report that we built strong momentum in the second quarter, delivering a record quarter of clinical net awards and revenue, plus we saw our commercial business return to sequential quarterly growth. We continued to validate our end-to-end business model, winning multiple new strategic relationships with both mid- and large customers across our combined businesses.

These are awards that neither organization could have won before our merger. Additionally, our ongoing integration efforts continued to progress well, both in terms of synergies achieved and more importantly, with regard to operational delivery for our customers.

Today, I will provide more detail on a few of these second quarter achievements, and how we continue to strengthen the business for the long term. First, we are capitalizing on our robust pipeline of opportunities, with total net awards of $1.1 billion and an overall book-to-bill ratio of 1.32 times.

Our strong performance was driven by record awards in our Clinical business across a broad cross-section of customers and a diverse mix of delivery platforms. Our total awards, which included multiple new strategic relationships, were fueled by collaboration and cross-selling by our Clinical and Commercial organizations as well as an outstanding performance by our Integrated Solutions Group.

Secondly, our strong commercial awards to start the year drove our first quarter sequential growth in Commercial revenue since the merger, with growth in all of our Commercial service lines. I am particularly pleased with the ongoing integration of our Commercial offerings, including growth in our consulting business, which is driving connections to our other offerings. We are also seeing tremendous commercial traction as we leverage insights and expertise from our Clinical group.

Thirdly, we continued to execute on our plans to manage our capital structure and related costs, while taking a balanced approach to capital deployment. We recently announced that our accounts receivable securitization facility, which will provide further capital flexibility and interest expense savings, and implemented a new interest rate hedging program that results in approximately 60% of our debt now being fixed rate. In addition, during the second quarter, we repaid $66.3 million of debt and repurchased $37.5 million of our own stock.

Focusing on the Commercial segment. We are very pleased with our progress this year. Consistent with the seasonality we highlighted in our first quarter call, second quarter net awards was sequentially lower at $206 million, but are tracking toward our target book-to-bill ratio for the year with a year-to-date ratio of 1.12 times.

The macro environment remains favorable. New FDA drug approvals are on a similar pace to 2017, which was the highest level since 1996, and customer feedback indicates the desire to increase outsourcing due to pricing pressures, coupled with the flexibility we provide given our broad capabilities.

Our overall Commercial pipeline remains healthy and is also well supported by strong collaboration with our clinical and ISG teams. For example, in the second quarter, our ISG team was awarded a strategic relationship valued at more than $100 million, which includes medical device trials and real world evidence studies plus 4 commercialization services.

We are assisting these customers with strategy development, trial execution, regulatory and evidence dossier generation and full global commercialization. This partnership is the hallmark of our newly integrated model as we are truly delivering a full lab-to-life solution. The nature of this relationship demonstrates of the full power of our new integrated model and reinforces our merger thesis, as we have the industry's only fully outsourced end-to-end product development partner.

In addition, we are seeing strong demand for our Commercial strategy consulting services, which helped clients optimize their product launch and commercialization results. Although only a subset of our consulting services, it represents one of our fastest-growing lines of business.

These services are particularly powerful from a business development perspective as they often lead to expanded relationships as we help our customers identify needs for other services throughout the product development life cycle. Syneos Health Consulting was recently named to Forbes' list of America's best management consulting firms for the third year in a row. Congratulations to that team, and thank you.

Now moving on to our Clinical Solutions segment. Second quarter net awards of approximately $850 million represent a record for our Clinical business and growth of 18.6% compared to the second quarter of 2017. This results in a net book-to-bill of 1.52 times for the quarter and elevates our trailing 12-month ratio to a healthy 1.26x.

This strong performance was broad based and fueled by multiple new strategic relationships in both midsize and large pharma. In particular, we are excited about a new preferred provider relationship we secured for the full service oncology portfolio of a top 20 pharma company.

Importantly, our bookings policy limited the amount of these awards that we were able to record in the second quarter, and we expect future bookings as additional studies meet the requirements of our awards policy. We were also awarded a strategic relationship wherein Syneos Health will hire employees from a customer's therapeutic development group in exchange for a long-term revenue commitment.

Finally, Syneos Health has also been added to several preferred provider engagements in the functional services realm, enabling as the further penetrate large pharma customers.

We continue to work with these new customers to better understand the ramp of services and the staff required to successfully deliver their studies. We also remain engaged in ongoing discussions regarding other strategic relationships. This success is a direct result of the increased scale and scope of Syneos Health capabilities, helping us continue to expand our presence and take market share. We continue to be pleased with our RFP flow and the pipeline of Clinical opportunities, including those being driven by our Integrated Solutions Group.

Next, I'd like to provide updates on some of our ongoing strategic investments. We continue to strengthen our Commercial Solutions organization to drive additional business development activity and more integrated service offerings, while expanding our operational resources to ensure impeccable delivery.

During the second quarter, we launched our Commercial Innovation and Solutions Group, which designs integrated multi-business line solutions tailored to address specific customer commercialization needs.

In addition, we added a dedicated executive with more than 25 years of commercial experience to lead our commercial integration team. This team utilizes the discipline of the Trusted Process to ensure all of our full commercialization projects are planned and executed successfully.

This enables our customers to commercialize their assets beyond traditional options, whether they are new to commercialization, new to a specific market or looking for alternatives to more efficiently support and promote in-line brands. Importantly, this includes execution of the strategic product development program secured by our ISG team.

We continue to expand our ISG team to capitalize on the full potential of our end-to-end model. As I highlighted earlier, this team is responsible for key wins that demonstrate the attractiveness of our new model, particularly within the small to midsized biopharma market.

We also have a strong diverse pipeline of ISG opportunities to support building a broader portfolio, while at the same time identifying incremental opportunities for our Clinical and Commercial Solutions organizations.

We continue to enhance our data strategy to optimize how data and digitization fuel our biopharma acceleration model. Our strategy is about better data, not just Big Data. We believe we can deliver the best patient-oriented solution by combining our robust data, advanced analytics and therapeutic commercial expertise with best-of-breed third-party data and technology. This multiple option strategy allows us to remain nimble, leveraging the most current fit for purpose data without major investment or reliance on a single data or technology platform.

This flexible architecture enables us to link the right data and technology to synthesize rich insights, impacting all phases of drug development and delivery. Our recently announced strategic collaboration with Elligo is a good example of data and behavioral synthesis.

This collaboration will leverage our ability to generate therapeutic and behavioral insights to define meaningful real-world patient protocols with Elligo's ability to reach of the 97% of physicians currently not participating in clinical trials. The ability to reach patients in new ways and empower physicians with infrastructure and support is another meaningful step toward reaching real people to generate evidence in real-world settings. These efforts further demonstrate the value of our brand model as we deliver on our vision to shorten the distance from lab to life.

Our team is also making great progress on our integration activities. We remain on track to achieve our synergy targets of $65 million to $70 million in 2018. We realized approximately $17 million of savings during the second quarter, bringing our year-to-date total to $32 million prior to our strategic reinvestments. We remain very confident about our goal to realize $125 million in synergies and nearly by 2020 and continue to work toward our identifying additional opportunities.

As we celebrate the 1-year anniversary of our merger, let me express my sincere gratitude to my 22,000 Syneos Health colleagues worldwide who make all of this progress possible. Their engagement, their dedication and their focus on continuing to deliver for our customers, both new and old, sets them apart from the rest.

I will particularly like to send my appreciation to all those employees who have been in the engine room of this merger, our TMO team who have tirelessly driven Syneos Health through a transformative 12 months. My sincere thanks to everyone involved in these efforts.

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

[Jason Meggs, CFO]

Thank you, Alistair, and good morning, everyone.

Let me remind you that our results are on an adjusted or non-GAAP basis as if the merger closed at the beginning of the earliest period presented as defined on Slide 2.

Consistent with prior periods, we will be discussing the current period results under the previous revenue standard to facilitate the period-to-period comparisons. For these comparisons under ASC 605, we will be discussing adjusted service revenue, excluding reimbursable expenses.

I would like to start with a brief summary of our second quarter results. As Alistair highlighted, we had a solid quarter in terms of business development, operational progress and financial performance, which I believe sets us up for continued growth.

A few items I am particularly pleased with include: Our execution against our pipeline of opportunities, not only in new awards but recovering the contract modifications that were delayed from the first quarter; our progress in driving cash flow following our temporary billing delay in the first quarter, with record billings and collections setting stage for further DSO improvement in the second half of the year; the collaboration across our entire organization to land multiple new strategic relationships that represent key growth drivers for the future as we continue to work closely with these customers to evaluate their startup profile and resourcing requirements; and lastly, the significant progress we made on our capital management goals with our accounts receivable securitization facility, interest rate hedging program, debt repayment and share repurchases.

Now I will review our financial results in more detail. On Slide 3, we show our results under both ASC 605 and 606, but I'll begin by discussing results under ASC 605. Our total adjusted service revenue for the second quarter of 2018 was $797.5 million, up 2% compared to $779.1 million for the second quarter of 2017. This includes a foreign exchange benefit of $5.9 million.

The increase in adjusted service revenue was driven by a 6% increase in our clinical segment, which grew from $526.2 million in the second quarter of 2017 to $557.6 million in the second quarter of 2018. This accelerating growth in our clinical segment is driven by strong net awards in the last 12 months, coupled with a favorable revenue mix.

This increase in Clinical revenue offset the 5% year-over-year decline in our Commercial segment, which decreased from $252.9 million in the second quarter of 2017 to $239.9 million in the second quarter of 2018. That said, we are pleased that our Commercial segment returned to sequential quarterly growth rate, with revenue up 4% compared to the first quarter of 2018.

Adjusted EBITDA for the second quarter increased from $138.8 million in 2017 to $157 million in 2018, with the associated margin increasing from 17.8% to 19.7%. This was net of a foreign exchange headwind of $1.3 million.

The benefits of revenue growth and a more favorable revenue mix in our Clinical segment, along with realized synergies, were offset by a decline in Commercial volumes. Further, the adjusted EBITDA margins in our Commercial segment are negatively impacted by an unfavorable revenue mix in our selling solutions business.

For the second quarter 2018, adjusted EBITDA includes the realization of $17 million in synergies before the impact of our strategic reinvestments to drive growth.

Adjusted net income increased by 50% for the second quarter of 2018 to $78.4 million from $52.3 million for the second quarter of 2017. Adjusted diluted EPS grew by 50% from $0.50 in the second quarter of 2017 to $0.75 in the second quarter of 2018. These increases were driven primarily by lower interest expense and the reduction of our non-GAAP tax rate to 27.5% as well as the impact of our share repurchases during the first half of the year.

Now I want to summarize our results under the new ASC 606 standard, which are also included on Slides 3 through 5. Adjusted total revenue for the second quarter, which includes reimbursable expenses, was $1.08 billion, 1.9% lower than ASC 605. This is comprised of adjusted total revenue of $787.3 million for Clinical and $289 million for Commercial.

On a year-to-date basis, adjusted total revenue was $2.1 billion, 1.4% lower than ASC 605. Total adjusted EBITDA in the second quarter was $137 million and $265.7 million year-to-date. The larger variance between ASC 606 and ASC 605 revenue for the second quarter compared to the first quarter was primarily driven by higher volume of revenue related to customer contract modifications, some of which cover work performed in premerger periods.

Under ASC 606, less revenues recognized in the current period related to these modifications and any premerger amounts are recovered over the remaining life of the contract. Although the second quarter adjusted EBITDA variance between these two methods was $20 million, we expect future contract modifications to include a decreasing level of premerger activity, and therefore have a reduced impact during the second half of the year. Under ASC 606, adjusted net income was $64 million for the second quarter, resulting in an adjusted EPS of $0.62.

Moving to Slide 6. You can see that our clinical backlog coverage for the full year 2018 is at 94.2% under ASC 605. The backlog coverage for the selling solutions component of our Commercial segment is 89.6% under ASC 605.

Slide 7 provides key metrics related to our cash flow and leverage position. During the second quarter of 2018, our cash flow from operations was $112.2 million on an as-reported basis. Our combined net DSO for the quarter was 47 days under ASC 605. The increased cash flow from operations for the second quarter was driven by record collections as we continued to overcome the temporary delay in billing and collections we highlighted on our first quarter call.

Since we also had record billing performance in the second quarter, we expect our DSO to continue to improve during the second half of the year. We ended the quarter with $171.5 million of unrestricted cash and total debt outstanding of $2.88 billion.

Turning to Slide 8. I want to provide you with an update on a variety of initiatives we have undertaken as part of our continued focus on debt management and capital deployment. We remain committed to a balanced approach to capital deployment, including both debt repayment and share repurchases, as determined by available cash flow and market conditions. We also continue to review potential tuck-in acquisitions that we believe will enhance our ability to execute on our long-term strategy and drive shareholder value.

During the second quarter, we achieved several significant milestones. First, we entered into an accounts receivable securitization facility to provide financing at LIBOR plus 100 basis points at lower cost compared to our term loans. Second, we entered into 2 new interest rate swaps in an effort to limit our exposure to variable interest rates on our term loans. This interest rate hedging program brings a percentage of our debt that is fixed rate up to approximately 60%.

Third, during the second quarter, we repaid $66.3 million of our term loans, bringing our total debt reduction since the closing of our merger to $149.5 million, continuing with our plan to reduce our overall net leverage to approximately 3x by the end of 2019.

Finally, we repurchased $37.5 million of our outstanding shares during the second quarter under the program we announced previously, bringing our total repurchases year-to-date to $75 million at a weighted average price of $38 per share.

We continue to expect our non-GAAP effective tax rate for 2018 to be approximately 27% to 28%, with a cash tax rate for 2018 of 10% to 15%. Although the cash tax rate may fluctuate due to changes in the jurisdiction and allocation of our taxable income, we do not expect any material change in the actual cash outlay for these taxes.

Turning now to our guidance as outlined on Slide 9. We have taken into account a number of factors, including our existing backlog, current sales pipeline, trends and cancellations and delays and our estimated merger synergies net of reinvestments.

Further, our guidance is based on current foreign currency exchange rates, expected interest rates following our repricing, securitization and interest rate swap transactions and our expected tax rate. Our guidance is also based upon our estimated diluted share count, excluding any share repurchases subsequent to the second quarter.

We have provided an updated view of our full year 2018 guidance and growth rates under ASC 605, solely to facilitate comparison to the guidance we previously issued on May 9. We are maintaining our previous guidance ranges for revenue despite an incremental foreign exchange headwind of $10 million, driven by the adverse movement in rate since our first quarter call. We are also maintaining our adjusted EBITDA guidance due to ongoing improvements in operational efficiency and in cost management and updating our guidance for adjusted net income and EPS to reflect our actual results and the impact of share repurchases.

Accordingly, we now expect our adjusted diluted EPS to range from $2.84 to $3.10 under ASC 605. We are also maintaining our revenue guidance under ASC 606 despite an incremental $20 million FX headwind to revenue and making similar updates to adjusted net income and EPS to those we made under ASC 605. We now expect our adjusted diluted EPS under ASC 606 to range from $2.55 to $2.83.

We are maintaining our previous guidance for adjusted EBITDA even though we now expect the negative impact of ASC 606 to be greater than originally anticipated, largely attributable to our second quarter results.

We based our updated adjusted EPS guidance for the full year on, among other things, expectations of interest expense of approximately $128 million, expected merger synergies of $65 million to $70 million before the impact of our related strategic investments and a fully diluted weighted average share count for 2018 of approximately 104.9 million shares, which will vary by quarter.

Lastly, to help you with your models, I want to provide some directional commentary on the third quarter. Under ASC 606, we expect to see low to mid-single digits sequential revenue growth and high single digits sequential adjusted EBITDA growth.

With that, I'll hand it back to Alastair for closing comments.

[Alistair Macdonald, CEO]

We are pleased with our solid second quarter results and are successfully leveraging our collaborative cross-selling capabilities. We've had significant wins across both SMID and large customers, including a large lab to life ISG deal, which further validates the relevance of our integrated business model. We believe we are poised to capitalize on our robust pipeline to generate strong results in the second half of the year.

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

[Operator]

[Operator Instructions] Our first question comes from the line of John Kreger from William Blair. Your question please.

[John Kreger, William Blair]

Alistair, earlier this year you sort of described a new system you had in place to provide better visibility on the Commercial side of the business. Now that you've got another quarter under your belt, can you just give us an update on how that's working? And my follow-up would be from a longer-term perspective, given that, what sort of growth trajectory do you think Commercial can do?

[Alistair Macdonald, CEO]

Well, thanks, John. Got Michelle here as well so she can help out with some of the answers but yes, the system that we've put in place really connects our - the visibility of our pipeline in commercial through, so we can see what's coming through, what kind of business is coming through and then how we connect to it, what people would put in front of that, how we can help to enhance our chances by putting somebody in from a clinical perspective as well.

So it really just provides visibility, which then feeds into the conversion rates that we expect to see on the different sides of work and then obviously feeds into things like guidance, et cetera, et cetera. So we can see how that pipeline fluctuates through the year. We talked about the end of Q1, we had a great book-to-bill in Q1 in Commercial, 1.4, less than that in Q2.

Again, to the trailing 12-month target that we had at 1.1 because we see that seasonality in the pipeline, and therefore, we can respond to it and drive teams against that. Michelle, anything extra to add and then also kind of what we look out for the rest of the year?

[Michelle Keefe, President Commercial Solutions]

Yes, absolutely. So a couple of things. Two metrics that we are providing right now for the Commercial business are backlog and selling solutions, and we're providing net awards for the Commercial segment. And we are, as we said, we're looking for a trailing 12-month net awards of being 1.1.

So right now, when we have visibility into the pipeline for all Commercial and our traditional conversion rates of those - of that pipeline, how we've done consistently over time, we're confident that we're on track to achieve that 1.1 trailing 12-month book-to-bill based on that visibility into the pipeline.

So we're bullish on that, that we'll be able to achieve that for the 2018 year. In regards to from a market perspective and how we see how we're going to perform over time, we're getting what I would call leading indicators that say to us that what we're presenting to the market, there's a high level of interest in both taking advantage of our lab to life offering with small to mid-pharma, either through ISG, the Integrated Services Group, opportunities that they're bringing us as well as just the fully integrated Commercial offering that we are bringing to customers. It's a different way to buy our services, and we're very, very encouraged by the positive feedback we're getting and the types of RFPs that are coming in for Integrated Services.

So we really feel like the pipeline is converting to one that looks more like the things that we want it to look like, so I think that, that's exciting. Obviously, we have to close those deals, but the things that we think are important are coming through. I think that's really, really critical to our long-term success of being able to drive the growth in Commercial that we've talked about in the past.

[Operator]

Our next question comes from the line of Robert Jones from Goldman Sachs. Your question please.

[Robert Jones, Goldman Sachs]

I guess, just on the bookings strength, Alistair. I know you touched on - you and Jason touched on a number of things in the prepared remarks. But I was wondering if maybe you can delve a little deeper into the strength you saw in the 2Q performance, specifically what came from some of these new strategic arrangements that you discussed versus maybe some of the recouping of those contract modifications that you discussed last quarter.

[Alistair Macdonald, CEO]

So a bit of both. Obviously, we're happy to say that we got those contract mods sorted out and just executed with customers through Q2. So it was good to get those done and out of the way. And so a little bit of it is from that. Then, the rest, I mean, we did have a strong performance in Q2.

We're very, very pleased with that obviously. I think it's the best we've ever done. So that came from a whole host of different opportunities, so Big Pharma, so using our scale to win bigger seats at bigger tables effectively, so full-service providerships. Some of them are more preferred providerships that give us a hunting license in territory we'd not been allowed to hunt in before, so adding us to the preferred provider kind of landscape.

And nothing really comes from those yet, so we have to work our way into those and establish ourselves in those accounts as we go. Some of the big awards that we got, we've been able to take some of it. We haven't taken all of it in line with our bookings policy.

So in those accounts where we've won the partnerships, the work that starts within the next six months is what we put in the book-to-bill, so it's a little bit more from those to come over the following quarters. We had a great performance in the SMID market again. ISG, a huge opportunity and the neat kind of thing about that is we're the only people with that model now.

So if customers want to work in an environment where they're using one partner to go from early Phase 2 or Phase 3 all the way through planning and commercialization, it's a huge opportunity for us. So as we roll out that model, we are seeing more customers that are interested in that. Interesting thing with the ISG award this quarter was it's an approved product that's been kind of rolled out in a soft manner and now they want to do a for commercialization across really, across the globe. So it's not as contingent at some of those ISG awards that we've had in the past.

So you were able to book some of that around our bookings policy. So great performance all around, really happy with where we came out in the SMID market, really delighted with the ISG performance as you continue to put the end-to-end model. And then we're really starting to see the - to see as capability, again used to using our scale in those bigger pharma deals and relationships. So pretty broad across all categories.

[Robert Jones, Goldman Sachs]

That's super helpful. If I could just ask one clarification question, Jason, I think you said high single digits EBITDA growth into 3Q. Rough math looks like that would call for a lot more sequential EBITDA growth into 4Q. Could you just maybe walk us through some of the puts and takes on the cadence of EBITDA growth in the back half?

[Jason Meggs, CFO]

Yes, sure, Bob. Thanks. We do see that step and obviously, some of that spilling through from what Alistair just hit on in terms of the clinical bookings that we had in the second quarter. Once you get those in-house and well understood, you're going to have a 2- to 3-month period before you launch and start ramping that backlog.

So you do have that, then you've got the normal on the clinical side, our normal sort of every - at the end of the year, everyone wants to push everything through in terms of getting everything signed off and through the fiscal year, scored through the year. Then, when you look at the pipeline that we have in front of us in Q3, obviously, there's opportunities there that we see that we can close out early in the quarter that will help us there and then that will pull through in terms of leverage of cost base on the Clinical side. Commercial is similar in terms of what we see.

And again, that's - there's some seasonal factor to that, Bob, particularly in the communications and medication adherence and even the consulting business where every year, 4Q is the biggest year hands down, no question. And then on the selling solutions side, which is the largest piece, we do have the backlog visibility there and again pipeline where I say when Michelle might say if and when, but we get those closed out, they're going to drive that step up in 4Q as well and some of those obviously are under contract now as we sit here in August.

So that's how we're looking at it, and that will flow through to EBITDA and then the normal sort of savings that we have on the PTO resets and things of that nature will help drive the EBITDA. And if you look last year, you'll see a similar sort of bump in 4Q.

[Operator]

Our next question comes from the line of Erin Wright from Credit Suisse. Your question please.

[Erin Wright, Credit Suisse]

A follow-up on those new strategic partnerships and relationships that you were seeking, too. I guess, can you speak to that spillover that you were alluding to from those relationships and how we should think about that book-to-bill trend and what's implied in the second half of the year? And then also could you just speak to the broader kind of RFP environment that you're seeing?

[Alistair Macdonald, CEO]

Yes. So let me start with the last bit. Our broader RFP environment seems pretty strong. Our - we closed obviously, as you see in the awards number, we closed a lot of the pipe that we have in Q2 so the pipe is very strong still but not quite as high as it was at this time in Q2. So 3 months ago, whatever, because of the amount of work that we closed, but that environment is still strong. We're still seeing a lot of RFPs come through both from the SMID and from large pharma and full service and hybrid and FSP.

So in broad terms, there's still a very good strong environment. In the preferred relationships, some of them are FSP relationships, so they will build slowly over the coming quarters. Some of them we know what that looks like, some of them we don't yet. Some of them are mix of hybrid, so some full service awards, which we are costing right now and looking at how they fit into the backlog. Those awards won't come through until Q3, Q4 probably and maybe even into the first half of 2019.

And then some of the larger ones we know what the book of work looks like, we costed it all out. We are bringing those through and some of those awards will come through in Q3 and Q4 as well. So it's a bit of a mixed bag, Erin, to be honest. It's hard to kind of say exactly when they will cascade through because they're all different.

We're being very careful and judicious to make sure that we have the resources at hand to be able to deliver them and looking forward into the resource group of how we make sure that we service all the work that we're bringing in because there is a uptick as you saw in the-book-to-bill. You just got to make sure that we are on our marks to deliver that work as it starts to flow through the organization.

[Erin Wright, Credit Suisse]

And a broader question here. I'm curious if you're hearing anything from our customers as it relates to the greatest scrutiny over drug pricing in Washington and if that's influencing decision-making at all among your customers.

[Alistair Macdonald, CEO]

Yes, I mean, it's - a year ago when we were - before the merger, it wasn't such a big deal for us, I don't think. But obviously now with the merger and our capabilities in and around Commercial, but also the planning, payout strategies, market access strategy, et cetera, it's a key issue for us.

And the more pressure we feel, the more pressure that comes on to the pharma companies about pricing plays further and further into the model that we've put together because, again, it becomes more important to understand what product we'll be developing, what price it will be able to achieve, what reimbursement it will be able to achieve and its position in the market. That's what our end-to-end model is built to solve, so it's not - we don't not just a company gets you to approval, and then you're on your own, good luck, hope you get some money back on that product.

We're actually working with customers to go right through that life cycle and as we deal with payers, health care networks every day, we get much clearer insight into that and much clearer into the pressure from governments, U.S. government, European governments, et cetera on pricing but Michelle any...

[Michelle Keefe, President Commercial Solutions]

We're definitely seeing it in the Commercial business as an opportunity. We're having lots of discussions around market access strategy and launch strategy through our consulting team. It's becoming a more and more of, as Alistair shared, a growth opportunity in our consulting business, which is also leading to integrated communications and deployment strategies with the complexity of some of these products and the hurdles that people have to go through to get these products in hand, due to the control and the regulation around them from the payers.

You're seeing more reimbursement specialists being deployed in the field. You're seeing more communication strategies around access, more PR strategies around the value of medicine. And so it's really creating a lot of opportunity in the Commercial segment of our business, and we're having more and more conversations around how we can support our customers in this new environment.

[Operator]

Our next question comes from the line of David Windley from Jefferies. Your question please.

[David Windley, Jefferies]

I guess, I wanted to visit the visibility. I appreciate a lot of the kind of the qualitative commentary. Clearly, you're seeing momentum in a lot of different avenues of your business. As I look at the backlog coverage statistics that you have on Slide 6, in each case, Clinical and selling solutions, your percentage coverage of the year is a little lower this year than it was last year or was last year.

And I wondered how we should - could you perhaps bridge the qualitative commentary with the numerical outlook here in terms of are there things that you know about that somehow aren't reflected in the coverage that are going to kick in and turn into revenue quickly or more quickly than the normal lag time between recognition of bookings and ramp-up of study?

[Alistair Macdonald, CEO]

Yes, I think essentially your comment there is correct. We - because of some of the bigger relationships that we've formed over the last 6 months or so, as we've been more successful in the large pharma accounts, you know a bit more about what's coming down the pipe. From then, you have more visibility into that. So those customers are able to say, "Look, here's our portfolio. This is how it stands right now. This is what's coming your way in future quarters." But that could change.

Some things get deprioritized, some things come back into replace new products come on to replace them. So we have a little bit more kind of future foresight into that sales pipe than I think we would traditionally have, which gives us that confidence that the difference in percentage point, although a point well raised and able to - still together but Jason, any insight on that?

[Jason Meggs, CFO]

Yes, I mean - so when you look at Clinical last year, you probably recall one of the things that we saw was the delays that we were experiencing. So there are some of that, that's just an artifact over the last year.

We also do have improved visibility at least from my perspective on what the operational teams are looking at around the metrics and what's coming that will help close that gap, to some extent, and then certainly, the Commercial business is exactly what you said around there are things that, within the business portfolio, there are businesses that have more momentum at the moment that you don't see here.

And then on the selling solutions specifically, there are items that we either won already in July that give us visibility or they are new to us in terms of sort of bonus schemes and other things that we might have that we don't put in our backlog that we had to add in prior years.

So there are things that give us more comfort when we look at it from a quantitative perspective for sure. And if you remember in the Clinical side, we were having 3.5 or so points shy coming out of March, and now we've closed that gap considerably.

[David Windley, Jefferies]

Maybe more mix of business question around backlog burn rate on the same slide. The trend there for the industry has been down for a long time. I think most of the peers are also seeing recent continued modest step downs with the attribution being to increasing mix of oncology and the length of studies in oncology traditionally. Yours ticked up a little bit in this quarter, which catches my attention. Wondered if that - if there's - if that's anomalous or if you're seeing a different mix of studies that might be driving that and make that sustainable.

[Alistair Macdonald, CEO]

Yes, so on the clinical side, Dave, I think we have seen the same trend. As you note here, we did talk about in quarter 1 that we would have been a little bit higher than we were had we gotten the contract mods taken care of in quarter 1. So if you sort of flatten that out, you would be a little bit sequentially more flat than you see.

We did see a little bit of the - of a slowdown in the extension of our project life - project lives in Clinical. So hopefully that trend will remain. However, with the bookings that we've had and when we're looking out to the second half and the burn rates, we do believe that it will tick down a bit certainly just mathematically because that work is going to be longer term.

[Operator]

Our next question comes from the line of Jack Meehan from Barclays. Your question please.

[Jack Meehan, Barclays]

Alistair, I was hoping you could give us an update on some of the reinvestments that you're making back into the business and whether there are any highlights you'd point out there related to data investments.

[Alistair Macdonald, CEO]

Yes, so we are reinvesting obviously as we said in the earnings growth in ISG, investing in that new model that we built and it goes end to end, investing across the Commercial business in capabilities to drive predictable outcomes constantly so investment in the Trusted Process, bringing in best technology, continuing to invest in better talent, improving the talent, helping us drive a more digitally based approach to Commercial.

So a lot of those investments are ongoing on the way. New people are arriving every day, which is great and engagement with customers, so we're pretty excited about that. On the data side, we continue to follow the path of partnering. It talks about our partnership that we announced with Elligo.

We're looking for smart solutions, enable us to get to the patients and to be able to deliver the trials as fast and as effectively as possible, whether they are full clinical trials, whether that's more real-world evidence-based. And what I believe, I think what we believe, in general, is there's no one solution that is the same kind of solution to all the questions that we're asked, basically working and it's very complex.

When somebody comes to you with a trial that's looking for real-world evidence compared to a trial that's Phase 2 oncology study, you don't look for the same data in the same data sets to solve those different issues.

So we want to be nimble with the data, we want to partner with people who can provide us the right data to answer the right questions to provide the right solutions to the right questions and challenges for our customers' space.

So continuing to partner, I think it's more cost efficient way to do it, enables that nimbleness and enables us to stay current with the latest in the industry. It's pretty much the same as the technology strategy we've always had historically, where we want to be on the leading edge working with organizations who can bring innovation much more rapidly than we ever could in that space, so more strategic collaborations, partnerships than raw investment from it.

[Jack Meehan, Barclays]

That was great color. I had one follow-up for Jason also on the Clinical segment. I know you gave some color already on the margin expansion in the quarter, but I was just hoping you can drill on it a little bit more. The revenue mix, was that unrelated to some of the change orders? Or was there any FSB versus full-service benefit as well? Maybe just anything else that's worth flagging would be great.

[Jason Meggs, CFO]

Yes, it's both actually. So the items you mentioned within clinical and then just continuing to be prudent and getting leverage out of the fixed cost based on the SG&A and then the fixed piece of the billable side of the house, too.

[Operator]

Our next question comes from the line of Tycho Peterson from JPMorgan. Your question please.

[Tycho Peterson, JPMorgan]

I'll start with a couple of follow-ups on Commercial. I appreciate the commentary on the year-over-year backlog burn. It was down sequentially though. Alistair, can you just comment on it was about 200 - down about 230 basis points sequentially. Can you just comment on that and then how much of the book-to-bill at this point are kind of multiyear wins? And can you also comment on pricing in Commercial?

[Alistair Macdonald, CEO]

Yes, I think - Jason I'll give you some color on that. I think on commercial, we're seeing an increase in the amount with what we're doing on the communication side, which is helping us to - it's changing the dynamic a little bit on the burn rate.

So I think in the script, we talked about the expansion in all of the elements of the Commercial group, which we're really pleased about, the connections through consulting, communications, filtration, new tenants business all starting to head in the right direction. But Jason?

[Jason Meggs, CFO]

It's Jason. On the burn rate in Commercial, it's actually - it was one, primarily one opportunity that was an extension and an expansion that we got done in March that was signed and put into backlog. But the extension doesn't cover the revenue base until the second half.

So historically, that would have probably been scored in the second quarter based on the history here. So it's kind of a little bit of applying our policies and pulling things a little bit forward that pop that up in the first quarter relative to the second quarter, if that makes sense.

[Tycho Peterson, JPMorgan]

And then can you comment on commercial EBITDA margins? I think they were down about 370 basis points under the old basis. To what extent do expect these to kind of bounce back, while you wait for lower net awards and the cancellation impact to abate? Can you also talk on cost levers? I think, Alastair, you alluded to maybe some additional cost synergy target that you might try to drive. Where would those come from?

[Alistair Macdonald, CEO]

Yes, I'll start with those first. We continue to look across the business really that have potential for further cost synergies. We have a pretty clear path I think now for that once we find previously announced. We continue to look beyond that in terms of further consolidation of smaller systems around the organization, continued kind of span of control assessments down through the management layers, et cetera.

And also looking at just running the business, in general, more efficiently, how do we use digital to be more effective in terms of processes, both delivering revenue as well as SG&A processes. So and I also think the implementation of the Trusted Process across Commercial is making a little bit - helps us with that a little bit because it just tends to make us do the right thing the first time more often.

So there's less rework loops in the system when you do that. We saw that when we implemented the Trusted Process on the clinical side many years ago. It just made us a little bit more efficient and if you remember, INC margins historically we're able to drive some pretty high margins because we tended to do things right more often than the first time than others. So I can't remember the other half of the question.

[Jason Meggs, CFO]

So I'll just add to the Commercial margin there. To some extent, obviously, you hit on it in terms of the volume and needing to come back here in the second half and beyond, and we'll get some expansion out of that. But there's also just a feature of lapping some of the things that were in the first half of last year prior to the merger with just some termination fees and things of that nature as large contracts and things have come down are coming to an end and just some other balance sheet items that were coming through.

So when you look at it combined year-on-year, it's a little bit of a headwind there. That is being offset by what we're doing on the cost side as Alistair mentioned.

[Tycho Peterson, JPMorgan]

One final one. Anything from a capital deployment standpoint that we should be thinking about differently given the $250 million AR securitization? I know you've got about $175 million left under the repo so should we just assume that, that's the priority?

[Jason Meggs, CFO]

So we continue to focus on getting the debt down to around that 3 times by the end of next year so that remains the priority. Certainly, we feel like having the facility available for the repurchases is beneficial when there is dislocation from our perspective. And then we've talked about the fact that we continue to look at M&A opportunities opportunistically to round out the strategy and to help drive overall growth across the company. So I think everything is consistent with what we've said in the past.

[Operator]

Your next question comes from the line of Sandy Draper from SunTrust. Your question please.

[Sandy Draper, SunTrust]

Most of my questions have been asked but maybe a follow-up for Michelle primarily on the commercial side. Just your thoughts on - obviously, the business - your execution's gotten better. You're targeting that 1.1. If you think about the ability to beat that or miss that and/or generally hit it, is it more dependent on company specific execution or continued stability in the marketplace or improvements or not? Just trying to understand in terms of the movement in that business. Is it more about Syneos' execution or some improvement stability or deterioration in the market that's going to cause variance?

[Michelle Keefe, President Commercial Solutions]

Thank you for the question. So I think it's a little bit of everything. So the first, I think you hit on the first thing, which is Syneos' execution. I think our ability to execute against the strategy is the numbers one thing that gives us confidence around our 1.1 trailing 12-month book-to-bill number. As I said, I think it's the rigor we're putting in place around executing against the opportunities that are truly integrated, so I think that's the first thing.

The second thing again, which is more qualitative, but I think it's critically important, is the amount of positive feedback that we're getting, not just from small to mids, which has really been I think our unique differentiator for our organization, the fact that we can do things end to end for small to mids and we're getting a lot of traction there. It's also the fact that there's been a lot of interest from large pharma in our model, which was a pleasant surprise for us as we went in and started talking about integrated offering.

And we're having very high-level conversations with multiple larger pharma organizations around how we can work with them in a more integrated fashion. And they can take advantage of like an enterprise vendor relationship across Clinical and Commercial. And those conversations continue, so there's qualitative things that are happening that are giving us confidence that what we're talking about is resonating with the customer. So it's execution and the market responding to the value proposition.

[Operator]

Your next question comes from the line of Donald Hooker from KeyBanc. Your question please.

[Donald Hooker, KeyBanc]

So in turn, I'll just ask one question here on the Commercial Solutions segment. Mix, obviously, impacts margins there. I would guess that the mix of business varies pretty dramatically. Maybe going forward to help us model the company, what are sort of the up and down side margin that we should expect in that segment over time? What's sort of the high and the low between the different businesses?

[Jason Meggs, CFO]

So I don't - we haven't I think provided specific margin guidance for Commercial. But when you look back over time, obviously, the bookends are going to be sort of 13% where we are sort of in that range, and it can go up north of 17%, 18%. So that's the path that we're marching to. I don't want more of the upside of that range. But I don't want to indicate timing on that based on what we see now. It's a little too early to call when that might happen, Don.

[Donald Hooker, KeyBanc]

And yes, I was just thinking sort of the range of bookends here, and I guess, right now we're sort of, generally speaking, with a higher mix of the contract sales, I would assume we're pretty low on what you would think the range might be, over like multiple years.

[Jason Meggs, CFO]

Yes.

[Operator]

Our next question, our final question comes from the line of Justin Bowers from Bloomberg. Your question please.

[Justin Bowers, Bloomberg]

Just two quick ones, one on clinical. And I know there were some - just wondering what the pricing environment looked like in 2Q relative to Q1. It sounded like there were some, maybe some bad actors out there. And then on commercial, just in light of the accelerating FDA approvals to date since Q1, are you seeing like more of those bulky sales force opportunities out there or is it mostly the high touch kind of service portfolio offerings?

[Alistair Macdonald, CEO]

Yes, so on the Clinical side, I don't see any marked difference between Q2 and Q1 in terms of pricing behavior. I didn't recognize any bad acting out there in the marketplace. On Commercial, no, I think the trend towards specialty pharma continues.

So we don't see the - we occasionally see the 100 sales teams, which is generally a mix these days between nurse educators, MSLs, so the higher science and yes, there are some sales reps mixed into that as well, but not predominately, don't see the big couple hundred sales rep teams really anymore. Michelle any...

[Michelle Keefe, President Commercial Solutions]

Yes, we're actually excited about where the pipeline is going because we're going to be able to diversify our backlog among a larger number of clients with much more integrated teams, which are stickier, which are tied to multichannel solutions, which we believe is what is going to help us with the variability that was traditionally in this business model in the past.

We feel that the way we're approaching it will create greater stickiness with customers over the long term. So I do think it's moving more towards specialty with integrated services, with multiple types of deployments of different types of field and non-field resources.

[Alistair Macdonald, CEO]

Yes, I think that's a great way to think about it is the teams get more specialized, get smaller, but we're bringing a multichannel solution to a customer. Rather than providing just one piece of a solution, we're providing the whole solution. So I think that will make it tremendously more sticky. And we like the fact that we're building a much more resilient, diverse backlog in Commercial because it's not reliant on a couple of huge teams. It's more stratified like we see over in Clinical.

[Operator]

This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Alistair Macdonald for any further remarks.

[Alistair Macdonald, CEO]

Okay. Thank you. So thanks, everybody, for your attendance today and continued interest and investment in our company. Have a great day and be good. Thank you.

[Operator]

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.