Syneos Health Inc

F:8IN

Earnings Call Transcript 2020-Q2

[Operator]

Good morning and welcome to Syneos Health Second Quarter 2020 Earnings Conference Call. [Operator Instructions]

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

[Ronnie Speight, executive]

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 and our expectations regarding the COVID-19 pandemic, including our expectations regarding a recovery and its impact on the company, constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995, and we disclaim any obligation to update them. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. These factors are discussed in the Risk Factors section of our Form 10-K for the year-ended December 31, 2019 as updated by our subsequent 10-Qs and 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.

Finally, in accordance with social distancing protocols, all of the executives participating on this call have dialed in remotely from separate locations. We apologize in advance for any potential technical issues or delays and appreciate your patience.

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

[Alistair Macdonald, executive]

Thanks, Ronnie. Good morning, everyone, and thank you for joining us today. I hope you and your families are in good health and staying safe.

As our business recovers from the COVID-19 pandemic and we advance customer projects, our teams remain focused on the safety of our colleagues, customers and the patients we all serve. Our financial results for the second quarter were very solid, particularly given the backdrop of the environment during the period. Our decisive actions to mitigate the revenue impacts of COVID-19, along with our cost management initiatives, provided resilience in our revenue, profitability and cash flow. Our overall net awards also remained strong despite ongoing delays in customer decision-making. We are well positioned to weather the near-term challenges and remain confident in the long-term strength of our business and strategy, given our robust backlog and unique market position. We are continuing to leverage our end-to-end biopharmaceutical acceleration model as the effects of COVID-19 on our business subside. And assuming the recovery progresses as we anticipate, we expect strong growth in both our segments in 2021.

Let me start with our key highlights for the quarter. First, we closed Q2 with strong net new business awards, resulting in book-to-bill ratios of 1.58x for Clinical Solutions and 0.68x for Commercial Solutions and 1.34x for our total organization. This brings us to $5.8 billion of net awards and an aggregate book-to-bill ratio of 1.27x for the trailing 12-month period.

Second, our Clinical business continues to build a strong position for our return to revenue growth, with year-over-year backlog growth accelerating to 14.8%.

Third, we won 2 new strategic commercial relationships during the second quarter, one of which was with a Top 20 pharma company to provide integrated product launch services. Although these wins did not contribute materially to Q2 net new business awards, we believe our momentum with strategic relationships of this nature demonstrates the value of our unique integrated offering, and these types of new relationships will fuel our Commercial revenue growth in 2021 and beyond.

Finally, we generated operating cash flow of $193.8 million during the second quarter, further strengthening our overall financial position and liquidity. After repaying $150 million of our revolving credit facility, we ended the quarter with $431.1 million of remaining capacity and $342.8 million in cash. Further, we made an additional payment of $150 million after quarter end, paying off the remaining balance outstanding on our revolving credit facility.

Now getting into the details of our results. Across the business, we have a sharp focus on mitigating the impacts of COVID-19. Although total revenue was down 13.3% and 12.8% in constant currency, our teams executed well on our mitigation strategies through virtual operations and continue to work very closely with our customers to return to a more normalized operation. We saw improvement in the operating environment throughout the second quarter, following its low in April and have seen that momentum continue through the month of July.

Clinical Solutions revenue declined 12.3% for the quarter and 11.6% in constant currency, but we remain well positioned to accelerate growth as the recovery continues. Clinical Solutions delivered a strong second quarter of net awards, growing nearly 11% compared to last year, resulting in clinical net awards of $4.6 billion and a book-to-bill ratio of 1.35x for the trailing 12-month period. These awards were broad-based, with strong contribution from our new preferred provider relationships with Top 20 pharma customers. We are also excited to have recently announced the extension of our long-standing relationship with Pfizer, one of our largest customers.

We won 35 COVID-related projects through the end of Q2, representing less than 5% of our awards for the first half of the year, and have a substantial pipeline of additional COVID-related opportunities. Though some customers have delayed award decisions or postponed start dates for awarded programs. We have not experienced meaningful cancellations in our Clinical segment as a consequence of COVID-19, and our total Clinical pipe remains robust.

Our Commercial Solutions segment experienced a revenue decline of 16% compared to the prior year and 15.8% in constant currency, primarily related to the impacts of COVID-19. Commercial gross awards were consistent with prior year. However, net awards were lowered due to elevated cancellations, which were largely attributable to product-related decisions by our customers. These dynamics resulted in a $1.2 billion of net awards and a book-to-bill ratio of 1.04x for the trailing 12-month period. Our Commercial pipeline also remains healthy, although we continue to see delays in customer award decisions.

Further, the 2 strategic commercial relationships I highlighted earlier have not yet contributed meaningfully to awards since most of this work is currently outside of our policy window for award recognition or is subject to regulatory product approvals. One of these relationships includes providing support for the launch of a biotech customer's flagship product beginning in 2021. Importantly, this win was driven by our deep commercial launch experience and further reinforced by our Syneos One product development model. During the second quarter, we also executed a 3-year MSA extension with one of our largest commercial customers, also a Top 20 pharma company.

We believe these wins establish a strong foundation for a return to growth in Commercial Solutions as the impacts of COVID-19 subside, which we expect to be primarily in 2021 and beyond, assuming no significant setbacks.

Apart from COVID-19, the macro environment continues to provide a favorable setup for commercial growth beyond 2020, fueled by the growing complexity of customer product strategies and the rapid pace of FDA new drug approvals, which are consistent with the record pace seen in 2018.

With that broader context, I thought it would be helpful to provide an update on some of the COVID-19 impacts we highlighted last quarter, along with our mitigation efforts and specific recovery trends.

Last quarter, we provided important statistics regarding the profile of each service line within our segments, and we are providing these again on Slide 6 for your reference. We believe these statistics provide helpful background for understanding the impacts of COVID-19 across our service lines.

I'll start with the full-service portion of our Clinical Solutions segment, which represents roughly 60% of our total revenue. Our Clinical teams continue to see certain limitations on their physical access to investigative sites, although only about 10% of sites remain completely inaccessible. Where sites are inaccessible to physical visits, we have been able to mitigate this through a remote monitoring. Importantly, about 40% of sites now permit physical visits, and that rate has been steadily increasing since late April. In fact, since mid-June, weekly physical site visits have exceeded the number of remote visits. The percentage of sites permitting physical visits has been increasing at about 3% per week, although that rate has slowed recently. We believe this slowing is a reflection of sites being cautious given the fluid environment and localized increases in COVID-19 cases.

Although our Clinical teams continue to experience delays in both patient enrollment and the start-up of new clinical trials, we have begun to see these areas recover as well. Since dropping to about 25% of pre-COVID levels in late April, the level of new patient enrollment has recovered to about 60% of those prior levels during July. We have also continued to experience some delays in study start-up, but most of our customers and sites have resumed these activities, and overall new site activations have recently returned to pre-COVID levels. Where these delays still exist, we continue to make progress on the regulatory, ethics and other work that precede site activation itself, such that we stand ready to move quickly on the final start-up activities.

Our clinical Functional Service Provider, or FSP business, represents about 12% of our total revenue. Although these teams have seen similar trends in the accessibility of investigative sites, this revenue has been more resilient since the majority of these teams are contracted on an FTE basis. This was evident in our second quarter results as our FSP revenue experienced a much lower percentage decline compared to our full-service Clinical revenues.

Our early phase business within Clinical, which represents only about 2% of our total revenue, includes clinics representing a portion of our business that requires on-site operational staff. While we had temporarily scaled back our clinics due to patient safety concerns, these clinics were reopened by the end of the second quarter. Our bioanalytical and translational medicine labs continue to operate throughout the quarter. Further, we have a strong backlog and pipeline of early phase opportunities, driven by the pent-up demand for our expertise in this area.

In our Commercial Solutions segment, Deployment Solutions represents the largest component at about 15% of total revenue. While our Deployment Solutions field teams experienced limitations early on with physical visits to healthcare providers, they have now quickly returned to in-person visits where possible in about 50% of our territories in July and have implemented advanced omnichannel capabilities to ensure continuity and seamless interactions with targeted customers. Omnichannel represents our advanced analytics capability that combines data, technology and behavioral science to optimize the communication experience for HCPs. Beyond field team interaction, we have evidence across multiple teams that HCPs have also incorporated virtual communications into their practices. These experiences validate our belief that the omnichannel-enabled field representative is here to stay, further reinforcing the value proposition of our field teams.

The primary impact of COVID-19 on Deployment Solutions continues to be delays in the start-up of new customer programs, along with reduced revenue from reimbursable expenses associated with travel. While the extent of COVID-19 impact on Commercial revenue for the remainder of 2020 will depend upon the course of the pandemic in key markets, if we see continued progress through 2020, then we expect a strong rebound in Commercial revenue growth during 2021.

The communications business, which is comprised of advertising, public relations and medical communications practices represents about 8% of our total revenue. During the COVID pandemic, we've experienced an increased demand for integrated communication solutions, specifically public relations clients, deploying strategies for COVID-19 treatments and vaccines and corporate communications addressing social equity.

While the primary COVID-19 revenue impact in communications has been within our medical communications practice which hosts live investigator meetings. We have been able to transition to virtual meetings and areas like publication planning and other medical communications continue to generate strong demand. Additionally, we have a record communications pipeline and have been winning integrated communications relationships that bring together advertising, public relations and medical education.

Lastly, within Commercial Solutions, our consulting business represents about 3% of our overall revenue. There has been significant demand for our consulting services as biopharma clients navigate the change in the potential payer mix due to the impact of the pandemic and are further evaluating their commercial launch strategies. This business continues to demonstrate strong performance across its diverse healthcare practice areas, and it's been largely unaffected by COVID-19. Our teams also have a strong backlog of work entering the third quarter.

Overall, we are pleased with our second quarter results and believe we are well positioned for a robust recovery in the second half of 2020 and poised for strong growth in 2021 and 2022.

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

[Jason Meggs, executive]

Thank you, Alistair, and good morning, everyone. First, I want to take a moment to thank the entire Syneos Health team for their incredible work to support the company and all of our stakeholders during this challenging time. Our strong, resilient organization and collaborative culture continues to help us navigate the unprecedented circumstances of a global pandemic and its impact on our business.

As we mentioned during our first quarter earnings call, we prepared a forecast in a variety of different scenarios to evaluate the potential impacts of COVID-19 on our business.

We experienced revenue impacts in the second quarter in line with our expectations, and believe the second quarter will be the most heavily impacted as we continue to monitor the shape and trajectory of the recovery. The proactive cost savings measures we implemented successfully minimized a portion of the margin impact in the quarter.

As shown on Slide 4, our revenue for the second quarter of 2020 was $1.01 billion, down 13.3% and down 12.8% in constant currency compared to the second quarter of 2019 on an adjusted basis.

Slide 5 shows that our Clinical Solutions revenue declined 12.3% or 11.6% in constant currency to $747.2 million for the second quarter on an adjusted basis. This anticipated decline in Clinical Solutions revenue in the second quarter was primarily driven by reduced physical site monitoring visits and out-of-scope work related to COVID-19, the associated decline in reimbursable expenses and the divestiture of our lower-margin contingent staffing business as part of our portfolio rationalization. Similar to the first quarter, our Clinical team continued to work on trial continuity and monitor patient safety through remote activities. We ultimately expect to recover revenue for the majority of these incremental COVID-related activities.

Our second quarter Commercial Solutions revenue declined 16% or 15.8% in constant currency to $266.2 million. The decline in Commercial revenue during the second quarter was driven primarily by the impact of COVID-19, including a decline in reimbursable expenses associated with reduced field team travel and lower investigator meeting expenses, as well as Deployment Solutions project start-up delays.

Adjusted EBITDA for the second quarter was $118.7 million, a year-over-year decrease of 22.8%, resulting in adjusted EBITDA margin of 11.7%, a decrease of 150 basis points compared to the second quarter of 2019. This includes a foreign exchange benefit of $5.4 million, which is consistent with the benefit reflected in our second quarter guidance. The decline in adjusted EBITDA margin for the second quarter was primarily driven by the revenue decrease in both our Clinical Solutions and Commercial Solutions segments, partially offset by the impact of our cost management initiatives, including ForwardBound and lower reimbursable expenses. It is important to note that approximately 70% of the total expected 2020 impact of our COVID-related cost savings initiatives represent temporary programs.

Adjusted diluted EPS of $0.58 for the second quarter declined by 21.6% year-over-year, primarily driven by the decline in adjusted EBITDA, which was partially offset by lower interest expense.

Now turning to cash flow and the balance sheet as summarized on Slide 7. During the second quarter, our operations generated a record $193.8 million in cash flow. This strong cash flow from operations is a result of solid collections during the quarter, coupled with lower cash operating expenses and interest expense. DSO for the quarter improved to 46.3 days. We ended the quarter with $342.8 million of unrestricted cash and total debt outstanding of $2.79 billion, resulting in net leverage of 4x.

Slide 7 also provides an update on our debt management and capital deployment activities. We maintained our balanced approach to capital deployment to drive shareholder value while focusing on capital preservation given the current environment.

During the quarter, we repaid $150 million of our revolving credit facility, leaving $431.1 million of capacity available as of June 30. Further, during July, we repaid the remaining $150 million of borrowings outstanding under this facility. We also repaid $19.4 million of our term loan A and did not repurchase any shares during the quarter. We have $136.3 million of share repurchase authorization remaining for utilization through the end of this year.

Our non-GAAP effective tax rate for the second quarter was 24% and we expect to maintain that rate for the full year 2020. Given the benefit of our NOL deductions, we expect our actual net cash outlay for taxes in 2020 to be approximately $20 million.

Turning now to guidance on Slide 8. This guidance reflects our estimate of the impact of COVID-19, including the pace of the recovery, which is inherently uncertain. We currently expect our site access within Clinical Solutions to return to approximately 90% of normal levels by the end of 2020. For Commercial Solutions, we currently expect our HCP access to also return to approximately 90% of normal levels by the end of 2020.

Accordingly, we expect full year 2020 revenue in the range of $4.47 billion to $4.57 billion and total adjusted EBITDA in the range of $600 million to $640 million, representing an adjusted EBITDA margin of 13.7%. Lastly, we expect adjusted diluted EPS of $3.16 to $3.38, up year-over-year at the midpoint.

I also want to provide you with some commentary for the third quarter, given our current expectations for the continued pace of the recovery from COVID-19. We expect revenue of $1.1 billion to $1.15 billion and total adjusted EBITDA of $160 million to $180 million. While we expect a strong recovery in Clinical Solutions, we expect a slower recovery in Commercial Solutions primarily due to the ongoing start-up delays we've highlighted.

Finally, I wanted to echo Alistair's commentary earlier regarding 2021. Assuming the recovery in 2020 progresses as we anticipate, we expect to resume the momentum we carried into the year. Given the strong backlog we have built, our strategic awards across Clinical and Commercial, our current pipeline of opportunities and the continued success of our ForwardBound program, we expect robust revenue and profitability growth in 2021.

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

[Operator]

[Operator Instructions] Our first question comes from the line of Eric Coldwell with Baird.

[Eric Coldwell, analyst]

It's a couple of questions around Commercial, probably starts with Michelle. I know the FDA, at least at last check, FDA approvals of new drugs this year is basically flat to up from last year. So we've been working under an assumption that there's going to be a lot of pent-up demand for launches, these delayed face-to-face activities. I'm curious, Michelle, do you have that same opinion? Or perhaps does COVID somehow change how pharmas think about going to market and maybe is accelerating the secular shift to other modalities of marketing and communicating with clients? I'm just curious how you think COVID is impacting this. And then as a byproduct of that, when do all of these new launches or new drugs actually get launched with live sales forces?

[Michelle Keefe, executive]

Thank you for the question. So there's a lot in that question. So let me start with, we do know that the FDA, right, is on pace to approve products at the same rate it did in 2018, which was a record year, right? So launches are still looking really good for pharma companies.

I think we've seen that the overall market is -- right now, I think I would call it delayed in deploying field teams right now. And what I mean by that is a traditional field team. They are seriously considering how do they launch in a world where it's probably going to be a mix of face-to-face along with other modalities, remotely along with digital, right? And we've seen, and we've been very successful over the last 5 months in converting our own sales teams to using remote detailing, video platforms, augmenting our efforts with digital amplification. And there seems to be a willingness from HCPs to communicate in that fashion.

I think one of the things that's going on in the market right now is HCPs themselves have gone from 19% telehealth to 59% telehealth. And when you talk to them about a post-COVID world, do they see themselves continuing to use telehealth as a strategy to manage their practices? They say, yes, that they are absolutely going to continue to incorporate it into their practice. So the fact that physicians are communicating remotely with their patients makes it a natural extension for them to communicate remotely with sales representatives or nurses or MSLs. So I do think that is going to be a critical part of the strategy for launch.

Our communication business and our consulting business is as busy as ever. I think you've seen the holding companies and communications talk about the fact that their health care sectors have been the most resilient and have been the busiest of all the sectors that they have been working in. And our consulting business is very busy because they're really relooking at launch plans for these companies that you're referencing and how to launch into a market that's probably not as predictable as it used to be. And how to launch into a market, understanding that the payer strategies might change a bit with the large number of patients that are now in an unemployed situation.

So I do think that we are kind of in a pause from a deployment of face-to-face sales teams as 100% face-to-face. And that's the delays that we're seeing in Deployment Solutions right now. They're delays, they're not -- there's still absolute commitment to wanting to continue to deploy field representatives, just making sure that they have the ability to communicate with a physician regardless of the environment around them. So hopefully, that answers your question.

[Eric Coldwell, analyst]

Yes. It's really helpful. My follow-on, and I'll leave it at this. You talked about the 2 new strategic commercial accounts, one of which is interesting, a biotech with a flagship launch. I'm curious if you can give us a sense on the totality of what you're doing for clients like this or maybe that client, obviously, without naming them, what does that kind of relationship or contracting encompass in terms of the services you're providing?

And then maybe a technical one perhaps for Jason. But a launch in '21, I assume there's a lot of prework financially. How does that work for you? Are you eating those costs upfront and then you have the bonanza after the drug is launched? Or do you get some compensation upfront to cover any prework done in advance of the actual kickoff date of that product? Just curious technically how that works.

[Alistair Macdonald, executive]

Eric, it's Alistair. Let me kind of -- again, let me unpack that question a little bit. So relationship, new commercial relationships, both pretty significant. We're very happy with them both, obviously, and shows the strength in the model. Again resonates with biotech as well as large pharma. But they're very similar in terms of the deployments. So these are really what we consider now more of a full-service launch. You think back in the early days of CRO, we're doing FSP and it evolved to full-service clinical. This is what we've been working towards in Commercial and Michelle's efforts with that team to build a much more integrated offering and a much more kind of connected launch platform with the tech, with the communications, with the call centers, with the reps, whether the reps are straight sales reps, hybrid reps, more digitally oriented MSLs, nurses.

So it's what -- these programs we've won, these relationships that we've won are focused on full-service commercial, and we're really pleased to see that. We actually won 1 similar to this in Q1. So -- and again with a big pharma. So we're happy to see our customers picking up the thread on fully integrated outsourced launches.

On the second part of the question, kind of the financial piece, these launches are contingent upon final approval. So that doesn't meet our criteria for us to take them into bookings. And there's a win -- we have a time window where these will -- these launches will officially happen beyond the end of that time window at the moment. So 2 reasons why we don't take them into bookings. There is an element of one that we have taken into bookings because it has a lot of that lead-up work that you spoke to in its service portfolio. So we've taken a little bit of one and the bulk of it is out there to take. But as you say, as we get into that window, as the product gets approved, that's when we get to take the award into bookings. And then obviously, revenue -- we start working and the revenues and so on and so forth follow that.

So very pleased with it. It's a big combination of our technology, our data, the Syneos One team, the commercial integration that we've been working towards. And these things are starting to bear fruit. So although we are a little light on the net bookings, we've got these 2 big platforms sitting there, waiting to come into bookings that will help us drive '20 and '21 -- '21 and '22, I should say.

[Operator]

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

[David Windley, analyst]

Eric unpacked a bunch on Commercial. I'll pivot over to Clinical. You've had 3 really solid, really strong bookings quarters in a row on the Clinical side. And obviously, COVID has been in kind of an interruption to what might have otherwise been some pretty strong momentum building for the company on the revenue line with the prior 2 quarters of bookings. So I wanted to get a sense for the -- maybe the duration, the composition of the bookings, particularly in this quarter, and how those roll out into revenue over the balance of the year and into '21, kind of leading into your 2021 growth comments.

[Alistair Macdonald, executive]

Yes. Well, thanks, Dave. I'll start, and I'll pass you over to Paul. And congratulations on your 20-year anniversary, by the way. I saw that one on the social media the other day.

So bookings this quarter are quite -- they're the same as really our normal bookings. And I think that plays through to the durations as well. Now we're seeing sites reopen, starting up trials, starting up new trials. So I'll ask Paul to comment on that.

We won a fair amount of COVID work, but only a very small percentage of our overall, and we kind of like that balance. It keeps us in line with what we would normally expect to see. We have had good bookings over the last 3 or 4 quarters. We're very pleased with it.

But again, -- and it's similar to the Commercial story. We went through the merger. We put a lot of effort into that. We've got the integrations done. We've got a lot of innovation out into the model. The scale that we have has enabled us to get into the large pharmas, and we've been very competitive there, winning much more of our fair share than we've ever done before. So a lot of the kind of promises of the merger are coming through and driving that consistency. Still very credible and winning our fair share in the SMID market.

So it's a balance between winning those big pharma relationships, winning our -- find our corner in the SMID market and winning in the SMID market. And I think it just helps us be more consistent as we go. But I don't think we've seen a big difference in the burn rates or the durations of the trials or when they'll start up in Q2. Otherwise, we wouldn't have been able to take them into our bookings policy. So Paul, any further detail on that? Any more color for Dave?

[Paul Colvin, executive]

Well, no, I think you hit that pretty well. So I would say that we've seen -- we've said we wanted to continue to grow in the Top 20. I think you'll see in the mix that there's some good growth there as well. So I think we continue to see some strength in that segment. And as Alistair said, we've maintained the SMID. So it's been a pretty balanced portfolio of wins across the board. So I don't anticipate that having any impact as far as, I think, the burn rates or how we'll see that roll out in 2020. I think we continue to build that backlog. And as soon as we get back to 90% or greater, with what we're seeing from site access, I think you'll continue to see that strength to come back and the momentum flow through the rest of the year and into '21.

[David Windley, analyst]

Great. If I could follow up, I've got a 2-parter. I think this is for Jason. So one, could you get the -- could you give us -- I apologize if I should already know this, but give us the size of the divestiture that was mentioned. How much kind of negative revenue impact in the quarter?

And then two, Jason, in your prepared remarks, you mentioned -- I think you mentioned out-of-scope work as a reason for pressure on revenue. And so I wanted to understand kind of the, call it, change order dynamic as it might come back to you and when those change orders or out-of-scope factors get approved?

[Jason Meggs, executive]

Yes. Dave, yes, so the contingent staffing business, that was a part of our FSP business. Good business. However, it wasn't exactly core for us as we were looking to the future. So we, as part of our portfolio rationalization, we did sell that business in quarter 2. And it was less than $10 million headwind in quarter 2. So not meaningful. And I think it's probably about, on the Clinical side, 100 basis point headwind for the year. So not huge, but some headwind there.

And then on the out-of-scope, yes, I mean, when I look at the -- and think about the quarter 2 impacts from COVID, they are really two. One, just all the delays and things for start-up and enrollment and customers pushing things out, so backlog moving out and shifting to the right. The other is where we were performing work to transition to remote monitoring or doing site management related to COVID or all the things that come along with actually managing COVID and out-of-scope work, that we had utilization, say, up but our realization or billability is down. And that is a headwind in the revenue and the margin in the quarter in a pretty significant way that, yes, over time, we believe we will be able to work with our customers to collect a large majority of that, and that will come in second half and into 2021.

[Operator]

Our next question comes from the line of Patrick Donnelly with Citi.

[Patrick Donnelly, analyst]

Great. Alistair, maybe one for you just on the Clinical business. I know you talked about some delays in the award decisions there. I guess, can you just talk about the conversations you're having with customers? Do you expect this to kind of loosen up as we go through the second half and see maybe a bolus or an increased flow kind of in the back half and into '21?

[Alistair Macdonald, executive]

Yes, Patrick, it's -- so the conversations vary between customers. And we're having good conversations now and some customers are moving things forward. But that bolus will take a little -- I think will take a little period to kind of move through their organizations, because when customers outsource a trial, it's not -- they don't just wring their hands of it and there's no resource effort on their side. There's a lot of effort on the pharma side still to get their outsourcing done. And oftentimes, your teams are plugging together. So that bolus of work is jamming up some of the customers as well as they can't get the work processed to outsource and get their own teams revved up.

So I expect there will be a bolus. Whether it will be spread across 1 and 2 quarters or whether it will spread a bit further than that into Q1 and Q2 of next year, I'm just not sure. I think that's -- I think it's likely it will take 2 or 3 quarters for that, assuming that COVID goes away, the vaccine comes through and mitigation strategies that are helping us to manage through it as a planet, I think probably 2 or 3 quarters. But conversations are getting pretty much back to normal. We're doing exec steering committees. We're doing discussions, bid defenses, et cetera. So it feels like it's getting back to normal pretty well.

[Patrick Donnelly, analyst]

Okay. That's helpful. And then maybe this one might be for Jason. You talked about the site opening rates slowed a little bit due to the increase of the recent new COVID cases. I think they're ticking up around 3% each week before that. Can you just talk us through what you factored in there in the 2020, in the back half? Do you think things normalize, kind of tick back up? Or are we assuming some flattening here?

[Jason Meggs, executive]

Yes, I'll start, Patrick, and then Paul can chime in. In the prepared remarks, what we have considered in the guidance is we're getting back to sort of 90% on-site and things being relatively normal into quarter 4. So quarter 2, most heavily impacted. We'll continue to see progress as we move through quarter 3, and it has been impacted a bit here with some of the states around the country had an impact in the U.S., but nothing that's outside of the pace that we had factored into our guidance and our models. So that's why we're thinking about the recovery in the second half and the related impact on guidance.

[Paul Colvin, executive]

Yes. And Jason, I'm happy to comment there as well. I think what we've seen is a consistent growth in the number of sites along live visits, that continues to trend up. And we're continuing to see our start-up activities actually in the last few weeks at or above what we've seen post-COVID. So we're starting to see those things ramp up. And as Jason said, I think they'll flow through in the second half, starting in Q3 and hopefully ramping then well back to normal in Q4 and early '21.

[Operator]

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

[Daniel Brennan, analyst]

I was just hoping to maybe get a little more clarity on kind of COVID. I think, Alistair, I know you gave the first half percentage of bookings coming from COVID. I think you said you're comfortable with where you're at. Just some of your peers have, I think, reported some bigger percentage of awards coming from COVID. So just can you give us a little color on what you're seeing from COVID? What's the opportunity? And kind of what's baked in, in the back half?

[Alistair Macdonald, executive]

Yes, sure, Dan. Yes, we're pretty happy with the balance of the work that we've won. I think we talked about 5% of the awards came from COVID during -- are COVID-related during and Q2. And yes, some of our peers have won more than that, but a lot of our peers have a lot more penetration than we do into large pharma accounts on that vaccine side. So I'm happy in a way that we're winning our normal balance of work with a little top-up from COVID. The COVID revenue is quick. It's -- vaccine trials are always a little bit faster. The revenue burn's faster. So a lot of companies will get an uptick in that revenue burn initially.

My concern around the amount of COVID work out there is how quickly it gets done, but also if the virus mutates out, which there's some hope that, that happens, or if somebody comes up with a virus -- with a vaccine pretty quickly, the stability of all that COVID work in your backlog, it could be a big rush into backlog and a big rush back out of backlog. So I want to make sure that we build a balanced portfolio. It's what we've been working for and working towards for a long time, to balance our portfolio between SMID and large and all the different indications, et cetera. And if you get relying on any one, it can be a danger.

We've won a lot of earlier-phase COVID work, phase I, Phase II, which could pop into a Phase III pretty easily. And we've got quite a big pipeline of COVID work. So we're going after it. We are competitive with the customers, where we have a presence and we have vaccine experience, et cetera. But just some of those ones, some of those organizations, the CROs have won the really big ones. Good luck to them. That's great. They've got those relationships. They won their fair share, and we'll see how that plays out.

[Daniel Brennan, analyst]

Great. And then maybe just a second question, maybe a 2-parter. So Jason, can you help us think about how you think about the progression of Clinical and Commercial as we look in the back half of the year?

And then I know there -- Eric asked a bunch of questions to Michelle early on. But I'm just wondering if the future holds more of a hybrid model as opposed to full kind of physical access, kind of what are the -- what's kind of the impact on revenue capture and our economics from Syneos? And then I know it's hard to answer because there's a lot of permeation, but I'm wondering, is it kind of less of a revenue capture but maybe a higher-margin because you have less people? So any thoughts on that would be helpful.

[Jason Meggs, executive]

It's Jason. So yes, looking at the second half, Clinical was the most impacted from the COVID perspective on the revenue side during quarter 2. And when you think about the backlog pushing out and the recovery taking hold, we see that bouncing back nicely in quarter 3, plus the whole out of scope work that we -- that side of things and getting that minimized in quarter 3 and quarter 4 and actually starting to push through some level of modifications of scope should help us see Clinical getting back to growth in the second half.

On the Commercial side, it's going to be a little bit -- there was a little bit less of a COVID impact in the actual revenue in quarter 2. Some of the delays and cancels that we've talked about will impact quarter 3 and quarter 4. So really getting back to growth year-over-year in that business in 2021, but sequential growth in quarter 4.

[Michelle Keefe, executive]

And Jason, do you want me to -- to the second part of the question. So I think what's really interesting is integrating services is a skill set, right? And our company has been investing for almost 3 years now in how we integrate omnichannel experience into everything we do and how we integrate commercial services horizontally. And so when you think about outsourcing your commercial footprint, including tech or data-enabled representatives, again that is a unique skill set that not everyone can do, and we are uniquely positioned to do that. So when we look at -- when we're looking at the business, we see it as we're enhancing our current business. We're not replacing our business, right? So I think it's really, really important that the way we've been looking at this is this is enhancing the growth that we've been talking about all along in Commercial.

[Operator]

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

[Eleni Apostolatos, analyst]

This is Eleni on for Tycho. First, just following up on Patrick's question on the risk that the resurgence of COVID infections poses to the business. Reopening of sites has slowed, but wondering whether you have seen a similar impact on patient enrollment trends? And also, can you give us an update on patient dropout trends?

[Alistair Macdonald, executive]

Sure. Eleni, I think -- I mean, that the trend for site reopening is a little bit different region to region, obviously, as different places are going through it at different paces. The -- we've been seeing about 3% per week overall. That slowed a little bit recently as little local outbreaks have been clamped down and things like that, and I think sites have been evaluating kind of local procedures and stuff. But generally, that trend continues. So pleased about that.

I think in terms of enrollment, we're about 60% of where we were pre-COVID, and that's come back from about 25%, which was the low point in April. And again, that's therapeutically related. So some therapies, we're not seeing much, but others are back to fully normal.

The dropout trends, I'll have to push you over to Paul. I don't think we've noticed too much in that area. I know Paul has been tracking that pretty closely with the team. So Paul, any comments on the dropout trends, patients dropping out?

[Paul Colvin, executive]

Yes. What I would say is we're seeing that certain therapeutic areas, obviously, are more impacted than others. But we are tracking that. And I think because we've been able to shift to remote visits, we're doing everything we can to help that site, to help the patient feel comfortable to come in. It is something we are continuing to track. And I think the industry is -- it's not an issue with just us. Industry concern is patients' up in that dropout rate. So we're monitoring that with our clients across the board. I think it's too early to tell what that impact is across a broad swath at this point.

But again, I think in a lot of the therapeutic areas we work, I think it's less of a concern than it is if you're working in some of the less complex TAs and programs. But certainly, something we have an eye on and are working with our clients to make sure we're proactively thinking through as you think about the powering of each of the trials.

[Eleni Apostolatos, analyst]

And then one follow-up on net bookings in Commercial. I was wondering, how should we think about sort of what went into the product decisions you cited or the changed orders or cancellations? Is there any structural trends you're seeing? Or is there a specific customer group that stands out?

[Alistair Macdonald, executive]

Michelle, do you want to answer that?

[Michelle Keefe, executive]

Sure, sure. So we had a couple of things, right? So we had mostly product delays, right, most -- like delaying of launches of the teams in DS. And I think it's really important that it's a delay, right? It's not a cancellation. It's just delaying the launch of the team. So that's been the main area of focus for the commercial awards. The pipeline for Q3 is strong. It looks good. And as we shared, the 2 Commercial strategic partnerships are not significantly contributing to our gross awards at this time. They will start to really drop in heavily in 2021 and 2022. So that is kind of the complexion. And you do have customers that their portfolio priorities change over time and so they may switch sales teams between products and things like that. But we didn't see anything that would lead us to any great long-term concern. I think it was just mostly product release.

[Jason Meggs, executive]

Yes, it's Jason. I would just add to that. To Michelle's point, at least a couple of the sort of later June cancels we saw were actually just policy cancels for us where the start moved outside of our window. So those very well could come back once we get into our bookings policy window and backlog policy window.

[Operator]

Our next question comes from the line of Courtney Owens with William Blair.

[Courtney Owens, analyst]

This is Courtney on for John Kreger. Just another question on the kind of 3% metric that you guys mentioned earlier. Geographically, kind of how is that trending? Just kind of between -- not necessarily just domestically, but between Europe and Asia as well?

[Alistair Macdonald, executive]

Paul, you got the stats on Asia and Europe and how that kind of compares to the U.S.?

[Paul Colvin, executive]

Yes. Sorry, I was on mute. Yes, so -- and are you -- you're talking just in particular around site activities, just to clarify?

[Courtney Owens, analyst]

Yes, yes. yes.

[Paul Colvin, executive]

So what I would say is right now, obviously, we saw a big return in Asia. And then when they've had a secondary spike, that slowed. But at this point, we're continuing to see fairly balanced return. Europe is also coming back fairly well. I'd say the U.S., we're probably doing more remote than we are in others. But right now, it's a hybrid in the U.S., probably more leaning towards remote. I'd say the live visits are increasing more in Europe and in Asia than they are in the U.S. because for obvious reasons that we've seen with some of the rates in certain regions of the country.

[Operator]

Our next question comes from the line of Bob Jones with Goldman Sachs.

[Robert Jones, analyst]

I guess maybe just on the remote capability topic, I think it's clearly a growing trend across the clinical providers. I'm just curious if maybe you could weigh in a little bit to help us understand how your capabilities may be compared to some of your peers. Is there a real differentiation as far as the different remote capabilities from one CRO to the next?

[Alistair Macdonald, executive]

Bob, it's Alistair. Yes, I think there is. I mean because the service provision is -- well, it's like any other service provision, right, it's about tech, it's about the people, the motivation, the training, et cetera. I think the way that you design and implement the remote monitoring protocols, what protocols are suited to it more than others and then how you can operationalize it are all very differentiated. I mean you can look at a lot of the big CROs. Well, you can look at all CROs really and say, well, you essentially do the same thing. But the differences and nuances are in kind of how you deploy the tech, how you do it, the insights that you drive from it and the way it's ultimately delivered.

I mean, Paul, any thoughts on it, above and beyond that?

[Paul Colvin, executive]

Yes. No, I think the way we viewed this is we're taking a really targeted approach, right? There isn't a -- right now, when you look at the different countries and you look at the different rates that are ongoing I think -- and different trials and indications, there's not a one size fits all out there. So we've taken a very targeted and customized approach for each individual program. And I'd say when you talk about virtual trials, telemedicine, decentralized trials, we have been working across all of those and continue to refine what does that post-COVID platform look like. But again, I think it's a targeted approach. There are a number of indications and therapeutic areas that don't lend themselves as well to a long-term telemedicine approach. So we're taking a very customized approach and working with our clients to put forward what we think is the best and most efficient way to manage that during COVID and also working with them on what does post-COVID would look like.

[Robert Jones, analyst]

Got it. And then I guess maybe just one on the Commercial side. A lot of the more practical questions have been asked and answered. But we talked about the COVID opportunity on the Clinical side, it might be a little early, but any discussions with biopharma and how they're thinking about the COVID category overall as it relates to commercialization? Do you anticipate these companies leveraging the typical suite of commercial services that you offer?

[Alistair Macdonald, executive]

Well, Bob, I'll give you some top and then ask Michelle for her comments. But yes, we're already seeing in our consulting business and in our communications business, there's work being won there right now helping people deal through and navigate their way through COVID operationally and kind of socially on the commercial -- on the consulting side, the projects we do there. But then on the communications side, the PR, the messaging internally and externally for our customers on their approaches to COVID and how they're handling it. So this work being won and delivered by Michelle's team in those areas already.

And I think, yes, the -- this COVID issue is going to be with us and people are going to build products and put them out into the market. There's going to be commercial support required for that. So I do think there's an opportunity in that sector. Probably a little bit further down the line, obviously, from timing, but we'll be armed and dangerous when that comes through. So Michelle, any other thoughts?

[Michelle Keefe, executive]

Yes. I mean, the one thing I would say is, when you think about this is like, hopefully, the only public health issue of our lifetime, right? Major public health issue of our lifetime. When you think about the amount of communication that's going to have to occur to all stakeholders, it's going to be a huge initiative and a huge lift. And the fact that we have relationships with most of the companies that are doing either the vaccine trials or the treatment trials and working with them right now, I think our expertise around using omnichannel and integrated commercial solutions to get to the right patient or HCP or payer at the right time, to make sure that the effort is coordinated, I think we're going to be very well positioned to compete in that space.

[Operator]

Our next question comes from the line of Donald Hooker with KeyBanc.

[Donald Hooker, analyst]

Great. Great. Yes, obviously, a lot of questions have been asked. Maybe a more detailed question. In the Phase I area, obviously small for you, I grant you that. But my understanding was that was almost completely shut down by you guys in the second quarter and it's now reopened and across the industry as well. And you can't really rush patients back into a clinic, certainly. So is there any therapeutic areas where you could have a bottleneck or you kind of need that Phase I work to move into Phase II? How do we think about a bottleneck in Phase I in various areas impacting progression into Phase II and III as we think about the next few quarters?

[Alistair Macdonald, executive]

Yes. Well, I think the shutdown of Phase I clinics is quite short. We've put in place, I'm sure everybody else is, rigorous testing protocols and screening protocols for both staff and patients or volunteers as they start the trial and then regular testing as we go through. So probably our clinics were closed for 6 weeks or so. And that will have a knock-on effect. You create a pent-up demand by the fact that the capacity went down for a period. So yes, I think that will cause a ripple downstream. But there's plenty of Phase I capacity out there, so as people need to get projects placed in early phase treatment, I think some of the clinics that were less well utilized will be able to pick up some of that work which will help clear some of that backlog.

I don't think any one therapeutic area over another would be affected by it. I mean, obviously, lot of Phase I in a lot of the treatment trials happens in regular locations. Phase I oncology, et cetera, you treat an actual patient rather than healthy volunteers. But for the healthy volunteers, look, I don't imagine there will be an impact in any specific therapy. And I don't think the impact -- I don't think the delay and -- or the closure of Phase I clinics will create a huge demand, quite a lot of overcapacity in that sector anyway.

[Donald Hooker, analyst]

Okay. And maybe just one quick follow-up and then I'll jump off, again on that Phase I topic. Would you ballpark a guess as to, you guys are open, but would you -- I kind of get a sense, there's still a lot of clinics in Phase I that are shuttered or significantly curtailed. Is that fair? Would you venture a guess as to what percent of that Phase I capacity is open?

[Alistair Macdonald, executive]

I wouldn't venture a guess to that. I don't think if Paul's got a feel for it. But I think we found it relatively straightforward to get our capacity open again. So I can't imagine that it's too badly affected. I mean, Paul, you heard anything about the early...

[Paul Colvin, executive]

I haven't done an analysis of it, but the sense I get is there are other competitors out there that have opened back up as well. And I would say there certainly is demand that we're seeing coming from a number of fronts. So I don't have data to answer that question. But my sense is that we're not the only ones. We see competitors out there that have opened as well.

[Operator]

Our last question comes from the line of Jack Meehan with Nephron Research.

[Jack Meehan, analyst]

I had two more follow-ups. First was on the Commercial segment. So revenue was down 16% in the quarter, but I was actually surprised, profitability was flattish year-over-year. So I know you talked about the pace of the recovery in the second half, but I was curious to get your thoughts on how profitability on the Commercial segment was expected in the second half? Do you think the level of profitability in 2Q is sustainable as teams start to travel again?

[Jason Meggs, executive]

Jack, it's Jason here. We did have mix benefits there in quarter 2. We had really strong performance in consulting and actually kind of up relative to last year. And we had lower reimbursable costs during the quarter. However, right across the business with ForwardBound and just good matching of heads to work and utilization, the business did a nice job on managing the cost side of the equation.

As we go into quarter 3, probably not a significant difference. But as we start getting more of those pass-throughs and investigator meetings start to creep back into face-to-face and that sort of thing, we will see the mix shift a little bit. And then as Deployment Solutions gets these projects started, which the good news is we are starting to see some starts, that will be a mix challenge or it will go the other way slightly, but not huge because quarter 4 is always our best quarter in terms of utilization. And we get a lot of the bonuses and things that we achieve for our sales teams and things of that nature in quarter 4 as well. So that's how we're looking at it as we look in the second half.

[Jack Meehan, analyst]

Great. And then maybe for Alistair, Paul. I was curious to get your thoughts on workforce management. Some of your competitors are aggressively hiring to staff some of these big vaccines which are about to kick off for COVID. So how are you managing the workforce? What have your turnover rates been amidst the pandemic? And do you think you'll see any pressure on wages?

[Alistair Macdonald, executive]

Well, we're doing what we normally do, Jack, which is building the overall culture that people want to work in. So -- and that's a differentiator from a lot of competitors. So we've seen pretty -- well, through the pandemic, I think you saw an initial dip in turnover quite significantly while people hunkered down. It started to come back up to more normal levels as, like you say, people are aggressively trying to build their staff rosters to provide the people that they promised for projects, and that's normal business. So it's just an indicator that our industry and sector as a whole is just going back to normal. We're in a very competitive industry. There's very little barrier to -- for people moving from one CRO to another in some jurisdictions. Europe is a lot harder for people to move roles and a lot -- takes a lot longer. So you generally get that pressure in the quicker turnaround locations such as the U.S.

So a big organization like ours, we expect to see a certain level of turnover. It's not back to anywhere near that. And I think the way that we've treated personnel through the lockdown, where we all shared in cost containment, et cetera, and the amount of communications we've done and the cultural efforts that we've had throughout and the engagement we've had with the staff stand us in good stead with that. So it's not anything unusual. There's nothing that we won't expect to see. So it feels pretty normal from that perspective.

[Operator]

This concludes today's question-and-answer session. I would now like to turn the call back to Alistair Macdonald for closing remarks.

[Alistair Macdonald, executive]

Thank you. So again, our sincere thanks go out to the whole Syneos Health team for all they've done in the face of these unprecedented conditions that we've experienced through the first half of the year. We remain very confident in our long-term momentum and the market position that we've taken with our unique model. We look forward to building on our momentum as the recovery from COVID-19 continues through the end of the year. So thank you very much for your attendance today and the interest in and the investment in Syneos Health. Please be safe. Have a great day, and be good. Thank you.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.