Syneos Health Inc

F:8IN

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Syneos Health Third Quarter 2018 Earnings Conference Call. [Operator Instructions] I would like to hand the conference over to Ronnie Speight, Senior Vice President of Investor Relations. Please go ahead, sir.

[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; 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. 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 in considered as supplement to and not a replacement for measures prepared in accordance with GAAP. For a reconciliation of non-GAAP financial measures with the most directly comparable GAAP measures, please refer to the Appendix of our presentation. I would now like to turn the call over to Alistair MacDonald. Alistair?

[Alistair Macdonald, executive]

Thank you, Ronnie. Good morning, everyone, and thank you for joining our third quarter call. As we continue to build momentum with our unique business model, I'm pleased to report a solid third quarter, which exceeded our expectations for profitability. Based on the level of customer engagement we are experiencing, we believe the breadth of our offerings continues to resonate well in the marketplace as we generate awareness and understanding of our combined clinical and commercial offering. Additionally, our integration efforts continue to progress ahead of schedule in all phases of our operations, and our superior customer delivery was recognized with several industry awards during the quarter. I'd like to begin by taking you through some highlights from the third quarter. First, we have solid overall sales performance, with total net awards of $920 million and an overall book-to-bill ratio of 1.17x for the quarter and 1.21x year-to-date. This solid performance was broad-based, driven by contract awards that were fueled by strong collaboration across our Clinical, Commercial and Integrated Solutions teams. Second, our Commercial Solutions segment returned to year-over-year growth, with revenue up 5% compared to the third quarter of 2017 and up sequentially for the second consecutive quarter. Third, we closed our acquisition of Kinapse. This acquisition expands our regulatory, safety and pharmacovigilance consulting and operations in the post-approval arena. It deepens the scale and scope of multiple other facets of our business, including our clinical trial with transparency, medical writing and quality operations, consulting capabilities in the areas of R&D and clinical operations, medical affairs, market access and quality and compliance. Kinapse also expands our Asia-Pacific operational and delivery capabilities and doubles our consulting footprint in Europe. Turning to our results by business. We remain pleased with the progress of our Commercial Solutions offering, as the team continues to build momentum in a strengthening macro environment. In addition to the growth we experienced during the quarter, net awards of $244.2 million were up 19% sequentially, resulting in a year-to-date book-to-bill ratio of 1.08x, which is largely consistent with our target level of 1.10x. Our overall Commercial pipeline is growing in line with expectations, with FDA new drug approvals already exceeding the near record levels of 2017 and customer feedback indicating a growing desire to increase commercial outsourcing over time. Our full-service communications business serves as one of the key differentiators for our Commercial Solutions segment and represents the largest health-care-only network in the world. During the quarter, our communications teams continued to demonstrate their outstanding creative ability to help customers achieve their commercialization goals and were recognized with multiple industry awards. For example, GSW, our largest advertising agency, was named Agency of the Year by Ad Age and Modern Healthcare at the Modern Healthcare Impact Awards. GSW also received awards from medical, marketing and media magazine for the best professional print campaign and the best digital initiative for nonconsumers. Digital excellence is a focus for our customers, and our digitally native commercial experts continue to deliver. Our Clinical Solutions segment also continues to build momentum in the market. Third quarter net awards were $676 million, resulting in a net book-to-bill ratio of 1.24x for both the quarter and the trailing 12 months. These awards were broad based across all customer segments and were particularly strong among our core small- to mid-sized customers. We also remain engaged in ongoing discussions regarding strategic relationships with other large pharma customers. Given our strong year-to-date awards, total backlog has grown 14% since the third quarter of 2017. With regard to clinical net service revenue under ASC 605, we expect growth of approximately 4% this year, up from 2.6% growth in 2017. It is worth noting that this growth rate has been negatively impacted by extended start-up phases on certain programs, driven by the complexity of our new large programs, along with other customer and regulatory delays. While these timing factors are impacting our revenue guidance for this year, our focus on cost management and synergy capture results in only minor adjustments to our expectations for adjusted EBITDA. In the Clinical segment, I also want to highlight our continued strategic focus on investigative site relationships through both our catalyst site programs and site relationships. We use a variety of data-enabled and multichannel approaches to patient recruitment, fueled by the expertise of our communications business to align our customers' studies with the appropriate sites. These efforts continued to be central to our operating philosophy. And I'm very proud to say that we recently won the Eagle Award in the CRO category from the Society of Clinical Research Sites for the second consecutive year. Importantly, this award is voted on by more than 10,000 sites in 47 countries. Next, I'd like to provide updates on some of our ongoing strategic investments. In our Commercial Solutions segment, we are making ongoing investments to further enable integrated offerings. This includes expanding our teams with seasoned strategic commercial talent and investing in specialized technology platforms to support multifunctional multichannel marketing execution. Providing flexible, dynamic services across multiple channels enabled by data and analytics is critical for our customers' success in a rapidly evolving market. For example, we recently initiated a new customer engagement and incorporated our newly developed predictive market modeling, which is being used to inform iterative strategic decisions on media channels, budget modifications and timing of media investments. This is only one example of the dynamic capabilities we are building to support our customers' end-to-end commercialization needs. We've also continued to invest in our integrated solutions, or ISG, team. During the third quarter, we strengthened this team by adding experienced asset strategists to work with our customers to optimize performance across the product development life cycle. We're also bolstering ISG's cross-functional operational capabilities, utilizing the Trusted Process, which enables management and customer assets both across Clinical and Commercial. This team is driving a unique collaborative approach to creating customer solutions. A recent example included utilization of our real-world evidence expertise, robust adherence data and commercial insights to create a unique clinical delivery strategy for a midsized biopharma customer. This strategy results in an award of a large Phase 3 study during the third quarter. We also continued to enhance our data strategy to optimize how data and digitization fuel our biopharma acceleration model, similar to our strategy regarding technology and investigative sites. We believe in a more modern approach to data digital solutions, partnering with best-of-breed third parties, allowing us to remain source agnostic, nimble and ahead of the curve. We call this fluid multiple options strategy dynamic assembly, which enables us to address the nuances of each customer, trial protocol and product launch quickly, while leveraging the best advances in a flexible and capital-efficient manner. Our ability to synthesize data and technologies delivers meaningful customer value through optimization tools, intelligence platforms and predictive modeling. This approach to partnering with like-minded partners was recently recognized when we won the Medidata Accelerator Award as part of the Medidata Architects of Hope program. This recognized our pioneering work with Protocol First to create an integration between electronic medical records and electronic data capture systems to reduce the data-entry burden for investigative sites. This is a tool we are using in complex oncology studies, where we have seen reduced site burden and costs, accelerated study time lines and improved data quality. Finally, our team is also exceeding our expectations on integration activities. We are, therefore, increasing our previous estimate of 2018's realized synergies by $10 million to $75 million to $80 million. We realized approximately $22 million of savings during the third quarter, bringing our year-to-date total to $54 million prior to our strategic reinvestments. We also remain very confident in our ability to realize $125 million in synergies annually by 2020, and we continue to work toward identifying additional opportunities. In closing, let me express my sincere gratitude to my 23,000 Syneos Health colleagues worldwide. You make all of this progress possible, including our new team members from Kinapse. And I wanted to add a special thanks to the teams that participated in our multiple industry awards this quarter. Overall, our teams' engagement, dedication and focus on continuing to deliver to both our new and existing customers truly sets them apart. Now let me turn this over to Jason for more comments on our financial performance. Jason?

[Jason Meggs, executive]

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 third quarter results. A few items I am particularly pleased with include: our strong adjusted EBITDA performance under ASC 606 with 16% sequential growth, exceeding our forecast and establishing strong momentum for the full year; our return to year-over-year growth by the Commercial Solutions segment, along with continued growth in our pipeline of new business opportunities; our accelerated realization of synergies for 2018 and the reinvestments that allows us to make in order to drive future growth; and our progress on the balance to capital deployment strategy with the closing of the Kinapse acquisition; the funding of our accounts receivable securitization facility to lower interest costs; and our continued leverage reduction. 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 third quarter of 2018 was $787.7 million, up 3% compared to $766.6 million for the third quarter of 2017. This was net of a foreign exchange headwind of $3.1 million. The increase was driven by a 2% improvement in our Clinical segment, which grew from $533.4 million in the third quarter of 2017 to $543.6 million in the third quarter of 2018. This growth in our Clinical segment is driven by strong net awards in the last 12 months, although it was partially offset by delays in the start-up of new awards and existing studies and backlog, along with an unfavorable revenue mix during the current quarter. I would also note that under ASC 605, our Clinical quarterly revenue trends during 2018 have fluctuated, due to the timing of customer contract modifications. If normalized for this timing, year-over-year revenue growth rates would have been in the 3% to 4.5% range for each of the first 3 quarters of 2018. Our Commercial segment not only posted another quarter of sequential growth but also returned to year-over-year growth in the third quarter. More specifically, Commercial revenue increased by 5% to $244.1 million in the third quarter 2018, compared to $233.2 million in 2017. Adjusted EBITDA for the third quarter increased by 16%, from $138.9 million in 2017 to $160.5 million in 2018, with the associated margin increasing from 18.1% to 20.4%. This included a foreign exchange benefit of $3.2 million. The benefit of Clinical and Commercial revenue growth, along with other cost savings and realized synergies, were partially offset by an unfavorable revenue mix in our Clinical segment. Adjusted EBITDA for the third quarter included approximately $5 million of benefits that we originally expected in the fourth quarter. For the third quarter of 2018, adjusted EBITDA includes the realization of $22 million in synergies before the impact of our strategic reinvestments to drive growth. Adjusted net income increased by 42% for the third quarter of 2018 to $80.3 million from $56.5 million for the third quarter of 2017. Adjusted diluted EPS grew by 43%, from $0.54 in the third quarter of 2017 to $0.77 in the third quarter of 2018. These increases were driven primarily by a growth in adjusted EBITDA, lower interest expense, the reduction of our non-GAAP tax rate to 27.5% and the impact of our share repurchases during the first half of 2018. Now I want to summarize our results under the new ASC 606 standard. Adjusted total revenue for the third quarter, which includes reimbursable expenses, was $1.12 billion, representing 3.9% sequential growth. This is comprised of adjusted total revenue of $822.1 million for Clinical and $295.7 million for Commercial. Total adjusted EBITDA in the third quarter was $158.5 million, representing 15.7% sequential growth and a 14.2% adjusted EBITDA margin. Total adjusted EBITDA was $424.2 million year-to-date. Under ASC 606, adjusted net income was $78.8 million for the third quarter, resulting in an adjusted EPS of $0.75. Now moving to cash flow and balance sheet. During the third quarter of 2018, our cash flow from operations was $125.8 million on an as reported basis. Our combined net DSO for the quarter was 46 days under ASC 605 and we ended the quarter with $132.4 million of unrestricted cash and total debt outstanding of $2.86 billion. Slide 7 provides an update on our debt management and capital deployment activities. We remain focused on a balanced approach to capital deployment to drive shareholder value. This includes debt repayment, tuck-in acquisitions and share repurchases as determined by available cash flow, as well as market opportunities and conditions. During the third quarter, we achieved several key milestones. First, we utilized $183.6 million in proceeds from the funding of our accounts receivable securitization facility to reduce our outstanding Term Loan B, reducing the related interest cost by 100 basis points. Second, during the third quarter, we repaid an additional $36.7 million of our term loans, bringing our total debt reductions since the closing of our merger to $186.2 million, on track with our plan to reduce our overall ASC 605 net leverage to approximately 3x by the end of 2019. Third, we closed our acquisition of Kinapse, which is immediately accretive to earnings. As Alistair highlighted, this transaction expands our consulting and operational capabilities in multiple disciplines and should help fuel our growth in key markets. We continue to expect our non-GAAP effective tax rate for the full year 2018 to be approximately 27% to 28%. The cash tax rate may fluctuate due to changes in the jurisdictional allocation of our taxable income, but we continue to expect the total cash outlay for these taxes to be approximately $10 million for the year. Turning now to our guidance, as outlined on Slide 8. We've taken into account a number of factors, including our existing backlog, current sales pipeline, trends in cancellations and delays and our estimated merger synergies, net of reimbursements. Further, our guidance is based on current foreign currency exchange rates, expected interest rates and our expected tax rate. Our guidance is also based upon our estimated diluted share count, excluding any share repurchases subsequent to the third quarter. We are adjusting our ASC 606 guidance to reflect the following: incremental foreign exchange headwinds of approximately $28 million since our initial guidance in May, with $8 million occurring during the third quarter; delays in our Clinical backlog conversion as a result of extended study start-up, given increased protocol complexity and other delays; and a somewhat slower ramp of our new strategic relationships and awards compared to our initial expectations. Therefore, we now expect full year revenue in the range of $4.38 billion to $4.44 billion. Despite this lower revenue guidance, due to our year-to-date performance, ongoing improvements in operational efficiency and cost management, as well as accelerated synergies, we are only lowering our adjusted EBITDA guidance midpoint slightly. We now expect adjusted EBITDA in the range of $585 million to $605 million. Lastly, we are increasing our expected adjusted diluted EPS to $2.66 to $2.80. We based our updated adjusted EPS guidance for the full year on, among other things: expectations of interest expense of approximately $127 million; expected merger synergies of $75 million to $80 million before the impact of our related strategic investments; and a fully diluted weighted average share count for 2018 of approximately 104.7 million shares, which will vary by quarter. Since we are focusing our business primarily under ASC 606, we are no longer updating our formal guidance under ASC 605. However, I wanted to provide you with some directional commentary for the fourth quarter. Under ASC 605, we expect mid-single-digit sequential revenue growth in our Clinical segment and mid-double-digit sequential revenue growth in our Commercial segment. We expect adjusted EBITDA sequential growth in the mid-double-digit range. While we are not providing full 2019 guidance, we did want to provide directional commentary on ASC 606 revenue growth, based on what we see today. We expect our revenue growth rate to accelerate further in 2019, assuming reimbursed expenses grow in line with direct fee revenue growth. For our Clinical segment, we expect a more modest acceleration, primarily due to the start-up delays I highlighted earlier, as well as an estimated incremental FX headwind of $35 million, based on current exchange rates. For our Commercial segment, we expect a more rapid acceleration, with the opportunity to exceed our view of the commercial market growth rate. This completes our prepared remarks, and we will be happy to answer any questions. Operator?

[Operator]

[Operator Instructions] And our first question comes from Robert Jones of Goldman Sachs.

[Robert Jones, analyst]

I guess, Alistair and Jason, just looking at the bookings kind of in a vacuum, obviously healthy, 1.24, I think, on the Clinical side, obviously healthy. But year-over-year, it does look like bookings declined a bit. And I think most of us would characterize the environment as pretty healthy right now on the Clinical side. So I was wondering if you could delve a little bit deeper into maybe what drove a little slower bookings growth than at least what we've been seeing. I know you mentioned the strategic partnership wins. Curious how much of that played a part relative to just maybe some of the other underlying business that you have.

[Alistair Macdonald, executive]

Thanks, Bob. Thanks for the question. I think 1.24 trailing 12-months, I think the last in 2017, we're about 1.3 overall. So I think 1.3 was running a little bit hot, to be honest, in that award. And we changed the awards' booking policy to some degree, so it kind of pulls our awards down a little bit, compared to where it used to be. Obviously, we just take the first year of FSPs. We only book stuff that's full service is going to -- that's going to come into backlog within the next 6 months. And we didn't always have that policy in place all the way through 2017, so that naturally pulls it down a little bit. I think the environment is strong. And I think, as an organization, we're seeing good strength and growth in the SMID, which, I think, a lot of people are seeing. That's a very buoyant market, funding -- biotech funding is kind of strong underneath that. And as we transitioned into what we now believe is the #2 CRO by revenue, we've become the new kid on the block in the big pharma. And those negotiations, discussions generate costs and MSAs fully in place, takes a little bit of time. So we expect to start seeing us penetrate that sector, although we've done well in 2018 in that sector, I think, about where we expected to be. I think we can accelerate that a little bit as we go into 2019. Jason, any?

[Jason Meggs, executive]

No, I think, that's a good summary.

[Robert Jones, analyst]

I guess just one quick follow-up on the Kinapse acquisition. I think originally, you guys had mentioned it being kind of immaterial, neutral to this year, sounds like maybe it's helping a little bit this year. So I guess, just an update on what drove what seems like modest accretion or expectations for modest accretion in '18. And then anything you can share with us about how we should think about that asset as part of the enterprise as we look out to fiscal '19?

[Alistair Macdonald, executive]

Yes, absolutely. Yes. Kinapse is an organization we've actually worked with for a couple of years, Bob. So what we saw when we put the merger together and we started to deploy these end-to-end platforms is we have some gaps in the model, not -- more scale gaps than capability gaps. And Kinapse actually closed about 6 of those gaps for us in one single deal. So we saw it as a very valuable asset to us in the end-to-end kind of the ISG platform that we're putting together. And the fact that we've worked with them for a couple of years, we've sent work their way and quarterly strong alignment, and I think it's positive in the fact that it has some high potential growth areas. And we're already seeing, I think, some nice revenue synergies or opportunities to drive revenue synergies from that group. So it gives us a lot more strength in the consulting horsepower in Europe as well as a bigger footprint in Asia-Pac on the service side. Jason?

[Jason Meggs, executive]

Yes. On the EPS accretion, I think we still see as being immaterial to this year, although it is slightly accretive, just given a short period that's in the year. The accretion is coming more from what we're seeing on just lower CapEx and depreciation and some other items there, Bob.

[Operator]

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

[John Kreger, analyst]

Alistair, I think back on Slide 4 of the deck, you guys referred to unfavorable revenue mix in both the Clinical and Commercial Solutions. Can you just give us an update on what you're seeing there? And what specifically is unfavorable in the portfolio?

[Alistair Macdonald, executive]

Do you want to take it?

[Jason Meggs, executive]

Yes.

[Alistair Macdonald, executive]

Excellent.

[Jason Meggs, executive]

John, it's Jason here. So we did see a little bit of unfavorable mix in both businesses, due to the timing of certain items coming through into revenue. In both businesses, one, just driven by, as I mentioned in the call, the fluctuations that we see in contract modifications that we need to look at over the year, instead of quarter-to-quarter and then a little bit of the same on the Commercial side. It's something that we see catching up predominantly in 4Q in both businesses.

[John Kreger, analyst]

Okay. So when we hear that, we should think kind of modifications and adjustments as opposed to certain types of businesses that might have lower margins?

[Alistair Macdonald, executive]

Yes.

[Jason Meggs, executive]

In this instance, yes, it can be both, John. But in this instance, yes, it's the former.

[John Kreger, analyst]

Got it, got it. Okay. And then, Jason, another one for you. I think, in your remarks, you talked about seeing kind of accelerated benefits at the EBITDA line, some things you expected to get in the fourth quarter. Can you just -- was that a $5 million benefit and just elaborate on what that was?

[Jason Meggs, executive]

Yes. So we talked last quarter about the fact that we saw some of the KPI-based bonuses that could come through at the end of the year. We saw some PTO accrual reversals that come through at the end of the year, et cetera. And as we're just continuing to integrate and come together and get a better line of sight on a few of those and closing those things out, some of that benefit came forward into 3Q. So I just wanted to make sure that, that was clear and that it was an additive to what we had already expected in the full year guidance.

[John Kreger, analyst]

Great. And then one last one. Can you remind us how much floating rate debt you have versus the total debt outstanding?

[Jason Meggs, executive]

So we have about 55% is fixed rate as of the end of September and 45% variable.

[Operator]

And the next question comes from David Windley of Jefferies.

[David Windley, analyst]

Alistair, as you're talking about kind of continuing to push efforts around ISG, it prompted a question in my mind as to whether you're dedicating operational resources to that or is ISG primarily kind of the coordination and marketing customer-facing element of the business and then the business you won in ISG has been handed it off to the operational segment. How should I think about that?

[Alistair Macdonald, executive]

Well, Dave, it's a bit of both, actually. So the ISG team is led by -- well, there's about a dozen folks now who have their kind of bandwidth and understanding of both Clinical and Commercial that real-world evidence play in the middle and the connections in and out of our Consulting business to pull that all together. So they're able to prepare and look at the value proposition in a different way of how we accelerate a customer all the way across the continuum, right? So pulling all those fits together. They then lead the coordination role, and I'll let Michelle add, but they lead the coordination role for us to then deliver that work across the Commercial and across the Clinical organizations as they are. The work is the same. It's delivered in a different orientation with a different kind of push. So I think, Michelle, you all view that from the Clinical -- from the Commercial perspective.

[Michelle Keefe, executive]

Sure. So when the ISG identifies these opportunities across Clinical and Commercial, they quickly get our commercial integration team involved. So we have a team that has expertise in really understanding all of the assets that we have under the Commercial umbrella and how to integrate those assets to drive the best launch possible for that particular asset. And so we work very closely with them. But to your point, David, when we get into the day-to-day operations of delivering the work, that does occur in the Commercial unit if it's Commercial business and the Clinical unit if it's a Clinical business.

[Alistair Macdonald, executive]

Yes. I will add one thing also, Dave. There's a lot of operational coordination as well, so it's not just a different kind of sales pitch. It's a different delivery. We're doing the same things in more or less the same order, but in a more expedited, more vigorous manner. So we're lining up, compressing all the kind of dead space in the process and almost negotiating with the customer to say, "In the Trusted Process style, this is what we're going to need. This is when it's going to be needed, and this is what it -- this is how it helps us continue to drive the pace of the development." And I think what we're seeing from customers in terms of the feedback is that they expect that it saves them considerable time from -- to get on to the market and hit peak sales. So then that's what it's all about, right, driving that speed.

[David Windley, analyst]

Sure. And in the past, you've, I think, quantified as much as $300 million or maybe a little over $300 million of wins. Is there an update to that number?

[Alistair Macdonald, executive]

No, not at this time. I think Q3, we had some assists from ISG. We had a big Phase 3 clinical award in the quarter that was a real collaborative effort between our general medicine team and the ISG group, pulling data, building a very strong data digital play that helped us win that award over some usual suspect competitors, if you like. So we're pretty pleased with their contribution, but that wasn't what we would consider a typical ISG win, because it was more clinical. I think it evolves into an ISG award as that company gets through clinical. But they wanted to hold off that conversation until they're through their clinical phasing a little bit more. And that sometimes what we see is people are interested, they want to do it, but they don't want to do it yet because they've still got to get through some of the kind of contingent hurdles of Clinical.

[David Windley, analyst]

Okay. And then one last one real quickly. Jason, sounds -- thinking about EBITDA, fourth quarter, you had some pull forwards in the third. You've identified some things that kind of kick in, in the fourth quarter. Can you help me with the kind of net effect or the sequential impact from third quarter to fourth quarter on EBITDA? I think you've kind of talked about revenue. I missed it if you pointed at EBITDA at all.

[Jason Meggs, executive]

So on the 605 side, Dave, we did talk through that with the sequential double-digit growth. 606, we're solving for the prepared guidance that we have there. And given what we saw in 3Q in terms of sequential growth and what we can see with the growth of the actual revenue line and then some of this mix coming back to us in quarter 4 and then just normal Q4 activity, we feel confident with the 606 side as well.

[Operator]

And our next question comes from Eric Coldwell with Baird.

[Eric Coldwell, analyst]

First one -- and I'm sorry, I'm toggling quite a few calls this morning. Revenue growth, I think you made some comments on 2019 clinical incremental FX headwinds; slower starts, frankly, something we've heard from just about everybody at least once over the last year. Commercial, more rapid acceleration and possibly above market. I was hoping you could be a little bit more specific on that. When you're talking about the acceleration in rates, are you talking about versus what you were seeing in 2018, versus street expectations? I'm not just 100% clear on when you gave that kind of qualitative commentary, what you really were implying with the growth rates for clinical and commercial next year?

[Alistair Macdonald, executive]

Yes. I'll start and I'll pass you over to Jason. Okay? Yes, I mean, I think we see a healthy markets on both sides. As we get back into our stride, if you like, momentum-wise in clinical, we're looking at accelerating the growth from where we are at. And Jason could add a little bit more. And then on the commercial side, I think we've already talked about it a little bit. That environment continues to develop, not just from the number of products going through the approval processes here in U.S. and also over in Europe, but also the kind of intent of the customers that we're having the conversations with in terms of increasing the amount of outsourcing they do in that sector. So that's something we obviously track very closely, because our major competitor, if you like, in that sector in commercial for that outsourcing work is actually pharma itself. So that sentiment on the outsourcing piece is very important for is when we look at forecasting growth and penetration in that sector. But Jason, any...

[Jason Meggs, executive]

Yes, yes, Eric. So the growth is -- if you look at clinical, it's -- we grew 2.5% in '17. We're going to be in that approximate 4% range this year. We've always looked at the market in that 6% range. There, we've got a couple headwinds with the FX and the start-up delays. However, we see acceleration from the 4%. And when you look at commercial rate, we were contracted last year, growing low single digits this year, sort of off an easier sort of launch point. With the backlog growth that we see coming out and the pipeline being healthy, we see that getting up above potentially what we see, what we call there on the market growth of 7% on that business. So that's what we're looking at, the year-to-year acceleration that we're seeing in both businesses.

[Alistair Macdonald, executive]

Yes.

[Eric Coldwell, analyst]

That's super helpful. And then I just kind of a technicality here but -- and maybe it's too early to even know. But this administration, obviously, with the Trump blueprint and what Azar and Trump have recently talked about with forcing pharmas to list their prices in direct-to-consumer advertisements. I'm curious if you see that having any influence, positive or negative, on your business in 2019. And perhaps what customers are talking about as they start to think about some of these changes that are coming in terms of how the administration looks at transparency in the drug pricing marketplace.

[Alistair Macdonald, executive]

Yes. Well, we're not political commentators, right, but thankfully. I think, because I'm not sure politicians know what's going on, let alone for us to commentate on it. But we monitor that market obviously. We're in constant discussions with customers about their approach to what impact drug pricing has on us -- on them. We've seen that threat of being -- growing drug pricing. We operate in the European theater as well, where it's there already. You've got NICE and other agencies around Europe that really -- that kind of helps us drive business almost because our customers don't sit in front of those agencies every day, but we do. And part of our advantage is to bring that current knowledge that we got from a meeting yesterday with one customer into a meeting tomorrow for another customer, where we're getting that intel and what they're expecting to see, what the HEOR packages need to look like. So that's enabling us to help customers in clinical design better solutions, better evidence packages going to -- pass muster when they get to that point. And then, obviously, that information gets carried across into commercial. So Michelle is out and about everyday talking about this. So Michelle, do you want to?

[Michelle Keefe, executive]

Yes. So it's couple of things. We have a public relations practice that we call Reputation and Risk Management, and that team and PR spend a lot of time tracking all what's going on in the pricing and political environment around pharma and life sciences. And they're in constant conversation with C-Suite at a variety of pharma organizations around, how are they interpreting this and how are they reacting to it. And I think right now, it's a -- they're really trying to understand the impact that this may have. And I think it's may, right, may have. And our teams are working with these pharma CEOs and C-Suite on designing strategies on how would you then talk to patients about the medications and how you would make patients aware of things that are available to them in the marketplace to treat their variety of disease states.

So we have our hand on the pulse of that. I don't think we're ready to make a public statement around what we believe is going to happen, because I think we all know that things change over time. But I think we're very well positioned to partner with our life science customers to address whatever situation happens, and I think we're in a position of strength, candidly, to do that.

[Eric Coldwell, analyst]

That's fantastic. My last one, quickly. Jason, I know you've talked about the PTO accrual reversals in the past. It's not a surprise to hear about that. I'm curious if you could possibly quantify the total impact you see on adjusted EBITDA for calendar '18. And any thoughts on whether your policies or planning for 2019 might change as a result of what you're seeing in 2018?

[Jason Meggs, executive]

Yes. So we'll go back to front there, Eric. So we have been looking at that as we've come together this year and are continuing to harmonize that within confines of, obviously, U.S. GAAP and the rules there. We have not quantified what that is this year, Eric, and I don't have that at hand, actually, but don't believe we're going to quantify that. Last year, we did say -- and this is probably the way to think about it, that there will be -- the restart in quarter 1, as you come out of quarter 4, that we'll see the sequential hit to margins. So that's probably the way to think about it, and we could look at that as we head into quarter 1.

[Operator]

And the next question comes from Sandy Draper of SunTrust.

[Alexander Draper, analyst]

A lot of my questions have been asked and answered. So maybe just a capital deployment question. Just get updated thoughts, you commented guidance does not include share repurchases. When you think about share repurchases, paying down debt, tuck-in acquisitions, just any update on sort of how you and the board are thinking about priorities there and willingness to be more aggressive in buying back stock. Or is it more focused on paying down debt and hitting leverage targets? Or do you think the activity level's strong enough in the tuck-in acquisitions that you'll end up using more cash there?

[Alistair Macdonald, executive]

Yes, Sandy. So priority remains getting the debt down, getting the leverage down to 3, approximately 3x on the 605 by the end of 2019. And then looking at probably next priority -- well the next priority for us is being opportunistic. I mean, we knew we wanted to go after Kinapse because of the capabilities that they brought. We like that asset. We like what it does for us in terms of competitive space in high-growing markets, a lot of revenue synergies across clinical and commercial. And then share repurchase probably in third place along those. We want to remain nimble and opportunistic in that M&A space. I think we've got some work to do in both sectors. And as we learn more and more about the model that we have and we listen more and more to customers, we're seeing gaps where we have the capability, but maybe not always the scale. So there's a couple of areas, I think, in and around commercial that we'd be interested in adding capability. And then obviously, we're constantly looking at capability in Asia Pac, where the labor market is tight, et cetera, et cetera on the clinical side. So those 3 are the primary priorities: pay down the debt, M&A and then share repurchase. Jason, anything to...

[Operator]

And the next question comes from Ross of Evercore ISI.

[Ross Muken, analyst]

So just again going back to sort of what happened to the burn and some of the trial pushouts. I guess, how much of this is kind of drug complexity and just the general recruitment time versus sequencing and generally when the pharmas are starting up maybe some of these studies? When I'm getting to is like how much is in sort of your control versus out of your control? And as you think about that moving into next year, given the bookings mix, does that continue to be probably a bigger maybe confidence window, just given the mix of trials that are coming in on net new wins?

[Alistair Macdonald, executive]

Yes. So it is -- I think you hit most of the points, actually. So it's start-up complexity. So some of these trials that we're picking up and delivering now are -- have a tremendous amount of complexity to them, not just in the locations that we're taking them to, obviously, from a regulatory pathway perspective, but also the actual drug type or the class that they are. Cell and gene therapy, et cetera, it's a much heavier lift with IRB, a much heavier lift in the approval pathways, so you've got that factor. Some of it is outside of our control. It's the -- I won't say reprioritization with customers, but a slowing down of a trial to get another one up and running and get it kind of out of the way and kind of an elongation of that decision-making. So trials are awarded. We're not seeing cancellations, et cetera. But the trials are awarded and moving forward. They're just slowing down almost the start point for them, whether that's because the protocol's more complex, the IP is more complex. So we're seeing a little bit of that, and I think somebody else said on the call earlier on that some of our brethren have seen that, which is a trend. And we're taking that into account for future guidance. Because I think as we've gotten more capable in those areas, it does affect the revenue burn on that type of trial. So I mean, Jason, any further thoughts on how that impacts us in 2019? I think we've factored that in, in what we've -- how we've reset, but...

[Jason Meggs, executive]

Yes, yes. I mean, I think the -- we have the FX headwind. We have the delays here that we've looked at and thought about. And ultimately, what we're focused on is the fact that our book-to-bills are where we expected. Our pipeline remains healthy. We've got the growth acceleration. The EBITDA and EPS is there for this year. So those are the things that we're looking at and focused on.

[Operator]

Our next question comes from Tycho Peterson of JPMorgan.

[Tycho Peterson, analyst]

A lot of the questions have been asked at this point, but a couple for Jason. Just to clarify, on commercial, is the fact that the guidance was kept intact here really driven by the Kinapse deal close? I know you talked about EPS. But just curious as to -- on the revenue side, how much you think that adds in the fourth quarter.

[Jason Meggs, executive]

Yes. So obviously, we are rolling that into the commercial segment, so that is in the guidance. That said, the business has returned to year-on-year growth excluding that, and that's what we were looking to drive in the business. And the Kinapse is adding that strategic capability that we're looking to get. So the business is still growing year-on-year, excluding the impacts of Kinapse.

[Tycho Peterson, analyst]

And then I guess, just one clarification on the 4Q EBITDA. You had the question earlier. But if you pull forward the $5 million, I get why 4Q EBITDA would be less by $5 million. But why does annual guidance go by -- down by $5 million, especially with the 3Q beat? Is that FX? Is it revenue mix? Can you maybe parse out the other components of the EBITDA cut, given the 3Q upside?

[Jason Meggs, executive]

It's just related to tightening that revenue range and bringing the overall revenue down, Tycho, just being prudent as we see that come out and tighten up for the volume and the revenue.

[Tycho Peterson, analyst]

And then just lastly, on the cost synergies. Can you maybe just talk on what drove the $10 million increase? And then as we think about implications of that for EBITDA margins next year, can you just provide us any directional color? And then how should we think about upside to that longer-term target of $125 million to $150 million by 2020?

[Jason Meggs, executive]

Yes. So I'll start and Alistair can add any color. Yes, I mean, we're seeing the incremental synergies in 2018 really across the board, whether it's labor, the nonlabor sort of procurement-driven savings, facility, rationalization. The team's just done a great job across-the-board there getting that completed. When you look at next year and thinking about the margins, obviously, we're still going through that process, but we will exit the year with a run rate ahead of 2018. That said, there could be mix differences between the segment, as we talked about earlier on the growth side, that could mute some of that. And then we need to continue to make investments in the business to drive growth. So we're seeing the exit rate improve, but not getting too far ahead of ourselves. And then continuing to look at the $125 million and in 2020, do we see more there? I'll let Alistair comment, but we're still very focused on taking that further if we can.

[Alistair Macdonald, executive]

Yes, absolutely. I mean, we constantly review the structure of both the business, both the big business kind of units, the commercial and clinical, to look at are they optimized for delivery as well as efficiency. We're still going through that work on both units, and I think we're confident in the $125 million for the exiting run rate in 2020. But we still evaluate opportunity to get that up to the potential $150 million that we talked about on day 1 of the merger. So we're continuing to review that. We've had great acceleration for the synergies. And we had a dinner last night with the team that's been driving that and thank them for their efforts and terrific job to get through the ERP consolidations that we've done, HRIS consolidation, structural challenges without missing a beat for customers. So we're really pleased with that. We've got to keep that performance up and keep managing more and more efficiently. And we've got all the bits to come as office consolidations continue to kind of roll out around the world, and they're all kind of well-known on the service time, but they take a while to get out the leases. So we have that to come into 2019, et cetera. So yes, I'm pretty confident where we're at with it. We're very happy with the acceleration that we're seeing in that sector. And I'm constantly asking for how we get from the $125 million to the $150 million. So...

[Tycho Peterson, analyst]

Okay. And if I can just ask one quick follow-up in closing here. Just on the clinical backlog burn, to Ross' question, should we expect it to kind of remain at these levels do you think for 4Q? Or do you have any insight there?

[Jason Meggs, executive]

Yes. I mean -- it's Jason. So the burn rate did tick down in quarter 3 on the clinical side, as you note. Some of that is just the fact that we had a large amount of awards in quarter 2 that just -- those things burning out over 40, 50 months, whatever it might be, right, your rate's going to tick down just mathematically. So we do see that in the guidance sort of staying where it is -- or in the range, not jumping back up to the -- where we were in the last several quarters in that 14%, 14.5%. But looking at that, as we get into '19, to start to normalize a little bit more back up into a higher number, but not necessarily where we are, given the types of studies that we're winning.

[Operator]

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

[Erin Wilson, analyst]

Most of my questions have been taken here. But the overall pricing environment, can you comment on that? Have there been any sort of meaningful changes that you would note?

[Alistair Macdonald, executive]

Erin, no, not really. I think the pricing environment's been pretty robust. So I mean, across FSP, full service commercial as well, we haven't seen any changes in that really.

[Erin Wilson, analyst]

Okay, great. And then can you discuss some of the dynamics you're seeing across working capital count? Are you seeing longer payment times from customers or shorter payment times to investigators? And I guess, were there any sort of anomalies or anything we should be thinking about there in the latest quarter?

[Jason Meggs, executive]

Erin, it's Jason. Of the -- we have been quite vocal that as we move further and further into large pharma, we are going to continue to see extension to payment terms. The good news there is that they do often have supply-chain financing arrangements that are reasonably priced when you look at the cost of our debt. So we will continue to look at that in a period where we're delevering and putting capital to use.

In terms of the quarter, we had nothing really to speak of in the accounts. I mean, we did have the first quarter challenge around getting the ERP, both clinical businesses together and corporate together, where we got a little bit behind on the billing. We got caught up on that in quarter 2, continuing to manage that in quarter 3. So nothing really noteworthy in quarter 3.

[Operator]

And our next question comes from Jack Meehan of Barclays.

[Jack Meehan, analyst]

In the commercial segment, could you help us with the moving parts in terms of the contract starts and the contribution from Kinapse in the fourth quarter, just to get to that mid-double-digit step-up? And then as we think about 2019, could you just remind us of the normal seasonality in this business and just how we should think about the fourth quarter as a leaping off point?

[Alistair Macdonald, executive]

Yes. So you mean from the seasonality from a bookings perspective, Jack, on the commercial side.

[Jack Meehan, analyst]

I mean from a revenue perspective as well. Just that normally, is there a first quarter -- a little bit of a step-down in terms of revenue on the commercial side? Just how we should think about the phasing based off of the step-up in the fourth quarter?

[Alistair Macdonald, executive]

Okay.

[Jason Meggs, executive]

Yes. So Jack, we do see the fourth quarter in the commercial business, where there is a step-up via you finished the -- on the sale and solution side, the full year of your sales KPIs or your performance KPIs and get bonuses, et cetera, which we tend to have, some more heavily proportioned to the fourth quarter. You see where customers want to spend their budgets during the year, so you'll see a ramp in your utilization to get things pushed through, et cetera. So you do tend to see 4Q be a strong quarter. It's not as pronounced in terms of that sort of down in 1Q, depending on what's going on in the businesses because you could be starting up teams and selling solutions in 1Q just the same as you could in 4Q, so it's a little less pronounced than what you might see on the clinical side. And what was the, Jack, the first part of your question there on the commercial side?

[Jack Meehan, analyst]

Yes. Just the bridge going from the third quarter to the fourth quarter, that mid-double-digit step-up, how much is kind of new wins that you've had versus the contribution for a full quarter of the Kinapse acquisition?

[Jason Meggs, executive]

Yes. So the Kinapse acquisition is not driving a material piece of that. It is driving some of it naturally because we closed in August, so we had 1.5 months versus 3 months, so there is some there. But it's really the items I just went through in terms of what you see seasonally in 4Q that we talked about in the second quarter call. And then it's also -- we did have some wins in quarter 3 that we're starting to see those pull through to revenue in quarter 4 in all businesses. But certainly, the selling solutions business is seeing some of that get going.

[Jack Meehan, analyst]

Great. And just as a follow-up, Alistair, I'd be curious to get your thoughts. There's been a few large pharma sponsors have talked about some cost reduction on the sales side. I'd be curious how your discussions are going with some of those customers. Do you view that as a positive? You're getting more outsourcing? Or is there any concerns around potential contracts?

[Alistair Macdonald, executive]

Yes, I think you're spot on there. It's a concern. You have to watch it. You have to be careful with it. But as pharma looks to lower its cost in that sector, we're a variablized option for them for that costs, so whether they can buy a part of an existing team that we already have up and running in the right regions or in the right therapy areas, that's a positive. I mean, Michelle, you live and breathe it every day. Anything?

[Michelle Keefe, executive]

So each quarter, more and more senior leaders in pharma are talking about wanting to variablize their costs on the sales line. And we're having conversations with more and more companies around us being a strategic partner and providing that support. We're also seeing the desire to have more blended teams, so sales reps with nurses and call center and reimbursement specialist. And really looking at a market or a region and saying, what is the right deployment strategy for that geography, based on what's going on with the customer base, the payer base, et cetera. And so because we are purpose built to have that kind of operational backbone and flexibility, more and more customers are coming to us to deploy those kinds of teams. So we do not see -- to your point, we don't see significant growth in the sales channel line, but we do see growth overall in deploying the right people against the right strategy for brands. So overall, we believe that we're well positioned to -- in a scenario where, to your point, the sales rep growth is not going to be significant in the future.

[Operator]

And our next question comes from Daniel Brennan of UBS.

[Daniel Brennan, analyst]

Jason, I wanted to better understand the burn this quarter in the outlook. I know you referenced the strength of your 2Q bookings naturally led to a decline in the burn rate. But at the same time, you guys have discussed study mix issues, and you also did lower the clinical revenue outlook. So I'm just wondering, from current levels, can you comment on your level of visibility and confidence in the forward burn outlook you provided?

[Jason Meggs, executive]

Well, in 4Q, you can -- we've obviously looked at and scrubbed quite rigorously the backlog in what we see coming through in quarter 4, based on the delays that came up in the third quarter that we've talked about. So what we attempted to do there was make sure that we had something that we felt comfortable could come through when we saw visibility to the production metrics and the headcount and everything to actually get the work done. So we did keep it down. And then there's still the larger backlog there from the quarter 2 awards. So I feel like we've looked at it for quarter 4 about every which way we can, Dan, in terms of what we're doing on the updated guidance.

[Daniel Brennan, analyst]

Okay, great. And then I know earlier in the conversation, you guys were asked to clarify a bit of the outlook on clinical indicated by your 2019 commentary. But just so I understand, so if the market is growing 6%, are you implying that your growth will be at 6%, above 6%, bracket 6%. I'm just trying to get a little more clarity on kind of teasing out the qualitative commentary versus that 6% number.

[Alistair Macdonald, executive]

Well, we're not giving for 2019 guidance today. But we're seeing accelerating growth from where we've been. As Jason said, we did the 2.6% in 2017, 4% this year. We'll be accelerating ahead, confident we'll be accelerating ahead of that in 2019. But we're not giving guidance today. We'll follow that up in Q1.

[Jason Meggs, executive]

Yes. The thing to keep in mind is those delays are there, Dan, and the FX headwind that we're looking at, at this point. So just think about the sort of market and then taking those things into account.

[Daniel Brennan, analyst]

Okay. And then if you wouldn't mind, just on the integrated offering, I know there was a couple questions asked earlier on the call. But I believe you mentioned another contract win in your prepared remarks. So can you just provide some details about the bookings this quarter, integrated versus nonintegrated. Just any color on the success you're having there?

[Alistair Macdonald, executive]

Yes, I mean, we won a big Phase III in our gen med group with a big assist from the ISG team. We didn't book it as ISG because we don't actually see it as an ISG model. It's a Phase III award, which would typically just go through our clinical bookings even though the ISG team had a huge assist and a big hand in pulling together the solution that helped win it. When that takes over -- when that organization get into that Phase III, pleased how that's panning out, they wanted us to wait on the conversations of how we then commercialize that drug with them. So if they'd gone ahead with that straightaway, we have booked it as ISG. But they didn't want to do that, so our internal kind of rules and regulations, if you like, say that that's a clinical award, so it goes into the clinical award booking. But we have a nice pipeline of ISG opportunities. The team has grown. We've invested in it, and we're very happy and confident with where that's taking us in the market.

[Operator]

And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Alistair MacDonald for closing remarks.

[Alistair Macdonald, executive]

Okay. Thank you. So we're very happy with the solid quarter. We continued to see good commercial and clinical momentum, with ISG providing a strong differentiator for us. So thank you very much, everybody, for your attendance today, and your continued interest and investment in the company. So have a great day, and be good. Thank you.

[Operator]

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