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Good morning, ladies and gentlemen, and welcome to the Syneos Health Fourth Quarter and Full Year 2017 Earnings Conference Call. [Operator Instructions]
I would now like to hand the conference over to Mr. Ronnie Speight, Vice President of Investor Relations. Please go ahead, sir.
Good morning, everyone. The purpose of this call is to review the fourth quarter and full year 2017 financial results for Syneos Health.
With me on the call today are Alistair MacDonald, our Chief Executive Officer; and Jason Meggs, our Interim Chief Financial Officer. Also, with us today on the call is Michelle Keefe, 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. An archived version of this webcast will be available for replay on our website after 1:00 p.m. today and there will also be a telephone replay available for the next 7 days.
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. These factors are discussed in the Risk Factors section of our Form 10-K for the year ended December 31, 2017, and our other SEC filings.
In addition, any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date.
During this call, we will discuss certain non-GAAP financial measures, which exclude the effects of events and transactions we consider to be outside of our core operations. These non-GAAP measures should be considered as a supplement to, and not a replacement for, measures prepared in accordance with GAAP.
We believe that providing investors with these non-GAAP measures and the combined company presentation helps them gain a more complete understanding of our financial results because management uses such measures for operating, budgeting and financial planning, decision-making and reporting. For a reconciliation of the non-GAAP financial measures with the most directly comparable GAAP measures, please refer to the Appendix of our presentation.
As we will be limiting today's call to one hour, we request that participants limit questions to one each with an opportunity to ask one follow-up question. I would now like to turn the call over to Alistair MacDonald. Alistair?
Thank you, Ronnie. Good morning, and thank you for joining our fourth quarter and full year 2017 earnings call. I'm pleased to report that we delivered strong financial performance in the fourth quarter with total revenue above the midpoint of our guidance while generating adjusted EBITDA and EPS that surpassed our guidance ranges.
We are also exceeding expectations for accelerating our transformation. Today, I will focus on our strong foundation for long-term growth and why I am so optimistic for the future. I'd like to highlight three key points: first, we have made significant progress on the merger integration. We now expect to achieve $125 million of annual cost savings through 2020, with the potential to realize an additional $25 million while reinvesting strategically in the business to drive future growth.
Second, our innovative Biopharma Acceleration Model continues to resonate with customers, and we are deploying our Integrated Solutions Group to power the cross-sell across both Clinical and Commercial. And third, our strong fourth quarter performance, including solid performance in Clinical and increases in new wins and proposal volume in Commercial during the second half of the year.
I'll delve into all of this later in the call. First, this is our inaugural earnings call as our new singular brand, Syneos Health. We are incredibly excited about our new identity and believe the brand perfectly conveys our unified vision of optimized clinical and commercial solution delivery to accelerate our customers to their goals.
The Syneos Health name and brand represents the culmination of a tremendous amount of collaborative work by our teams, most notably, the work of our industry-leading branding agency, Addison Whitney, which has named half of the top 200 medicines approved and launched in the last 10 years. The results of our rebranding offer just a glimpse of the broad communications expertise and experience within our fully integrated commercial solutions business.
Turning to our ongoing integration. In the first few months following the closing of our merger, we have made significant progress toward realizing our initial strategic objectives. In Clinical, we are already operating in a seamless fashion, maintaining an intense focus on serving our customers. As of January 1, 2018, we successfully combined the majority of our clinical operations into a single ERP platform for finance and human resources, paving the way for realization of further efficiencies.
ERP and HRIS integration are two of the most significant elements of any merger, and we were able to combine them quickly without disruption to the business, while continuing to aggressively combine the back-office operational support systems. We are very pleased with this progress.
Additionally, we are initiating all new studies on our industry-leading technology platforms and utilizing our differentiated Trusted Process methodology to accelerate customer success. We are also maintaining a keen eye on monitoring our people in their integration experience. We continue to be very pleased from an employee retention perspective, specifically our voluntary clinical employee attrition rate, which remained level with last quarter. We believe we achieved this low attrition rate by focusing on employee empowerment, our belief in collaboration and the investment we've made in developing, communicating and evaluating the Syneos Health culture.
We also recently announced that Lisa van Capelle has joined us as our new Chief Human Resources Officer. Lisa is an industry veteran with over two decades of experience, including 12 years in HR leadership roles at Quintiles, now IQVIA. She also has extensive business-to-business and M&A experience, helping to lead organizations through mergers and strategic evolution milestones. We are delighted to have her on board.
As for merger-related cost savings, we now believe annual cost savings realized by 2020 will be approximately $125 million, up from our initial estimate of $100 million. We also continue to evaluate other potential synergies within the remaining $25 million of opportunities that we initially outlined. This could result in a total of up to $150 million in savings by 2020. We are not only increasing the total amount of expected synergies, but also accelerating the amount we expect to realize in 2018 from $25 million to a range of $65 million to $70 million.
This compares to realized synergies in 2017 of approximately $13 million. These revised expectations reflect our significant progress in systems consolidation, facility rationalization, vendor savings and headcount optimization in our SG&A and Clinical business. Although a great deal of work remains, achieving these integration milestones unlocks additional cost savings, provides streamlined and efficient support to our long-term growth and allows us to make strategic investments.
Lastly, given this increased estimate of merger synergies, we expect the corresponding increase of approximately $25 million to $35 million in total cost to achieve synergies through 2020. Please refer to Slide 13 for updated estimates.
Now I’d like to spend some time reviewing our business fundamentals, specifically our Commercial solutions road map, where we are focused on developing a more cohesive, integrated and an innovative model to fuel future growth. We continue to deepen the leadership of our Commercial team with senior hires who have significant technical expertise and strong client relationships.
Many of you have already had the chance to meet or hear from Michelle Keefe, who joined us as our new Commercial Solutions President. We are very happy to have her as part of the Syneos Health team. Under her leadership, the Commercial organization is moving rapidly on several key initiatives, including bolstering the business development function, integrating this function to our overall global business development organization and fueling our innovative capabilities.
Michelle has also worked to further build out the leadership team within Commercial Solutions. We are confident that with this additional strength added to the team, they will deliver results utilizing their subject matter expertise and deep client relationships.
Additionally, we are confident that they will deliver tremendous value to our customers while realizing additional cross-selling opportunities across our Clinical and Commercial continuum. As mentioned above, we continue to focus efforts on realizing the full potential of our Biopharma Acceleration Model through our Integrated Solutions Group, which we announced last quarter. This group is designed to identify and capitalize on any cross-selling opportunities for clinical and commercial services, particularly in the small to midsized market.
To date, the response from our customers to this innovative approach has exceeded our expectations. Deploying the full spectrum of our clinical and commercial expertise and services, we have already secured two key wins with midsize pharma companies, totaling nearly $300 million in potential revenue over the next five to seven years.
The services we will provide related to these Phase 3 compounds range from product launch and market access advisory services to real-world, Late Phase studies to a full suite of commercialization solutions. We believe these wins represent the underlying market demand for our unique business model. Of course, realizing the full value of these wins is contingent on a number of factors, such as regulatory approval and funding.
In the Commercial segment, we continue to believe that this underpenetrated market has significant long-term growth opportunities. We see further signs of improvement in the macro environment, including the rapid pace of new drug approvals, which continued in the fourth quarter, resulting in 46 FDA approvals in 2017, and the expectation of continued strong approvals over the next three to four years. Both overall proposal volume and new business wins have increased and our selling solutions pipeline is approximately 30% larger than at the same point in 2017. As always, there is work to do to convert this increased pipeline into revenue-generating opportunities.
Additionally, we are strengthening our processes to improve forward revenue visibility and to help manage volatility where possible. These steps include ongoing efforts to solidify forward-looking metrics, including a disciplined view of backlog and related coverage, particularly in selling solutions, which represents 60% to 65% of the Commercial segment's revenue. Driving detailed gross award targets by business line and proactively tracking and managing revenue and backlog concentration to ensure we are disciplined around managing volatility.
Now moving to performance in our Clinical Solutions segment, we continue to see healthy growth in net awards with fourth quarter net awards of $622.9 million and full year 2017 net awards of $2.55 billion for growth of 16%, compared to full year 2016. This resulted in a net book-to-bill ratio of 1.16x for the fourth quarter and 1.2x for the full year 2017. These awards continue to be well-diversified across top 20 pharma and small to midsized biopharmaceutical companies, along with a diverse mix of therapeutic areas and delivery platforms.
One of the hallmarks of our Clinical Solutions business has been to differentiate itself in a competitive market through deep therapeutic expertise and an innovative delivery, in addition to scale. So we are always excited to engage with our customers on cutting-edge medicine and with best-of-breed technology providers on new innovation, especially, when these two priorities combine for the direct benefits of patients. A prime example of this engagement culminated in the recent U.S. FDA approval.
Otsuka Pharmaceuticals, supported by its U.S. affiliate and one of our key customers, Otsuka Pharmaceutical Development and Commercialization and Proteus Digital Health received FDA approval for Abilify and MyCite, their groundbreaking drug-device combination product, comprised of aripiprazole tablets embedded with an Ingestible Event Marker or IEM sensor. This represents the first approval by the FDA of a digital medicine system. When the sensor is ingested, it transmits a signal to a wearable sensor and ultimately to a smartphone app to track drug ingestion.
I'm proud that the Syneos Health team worked closely well with Otsuka and Proteus to conduct clinical trial activity related to this approval. I mentioned earlier, the progress we are making on merger-related cost synergies. We believe there remain significant opportunities for revenue synergies, evidenced by the two awards from our ISG Group in Q4 that I've already referenced. We will continue to capitalize on this potential and accelerate Clinical and Commercial solutions growth through important investments we are making in 2018.
First, we will continue to expand our Integrated Solutions Group, powering the cross-sell, utilizing all of our services. This is the power of our model and where we believe we can add significant value and bring a strong differentiator to the marketplace. Secondly, we will continue to improve our commercial expertise and business development efforts, integrating these services across our organization to customers of all sizes, while continuing to build a strong pipeline of opportunities. Thirdly, we will continue to invest in optimizing our data assets.
We have daily access to more than 50% of the prescription volume in the U.S. through our partnerships with 32 major pharmacy chains, representing approximately 29,000 pharmacies. This data represents nearly 200 million patients and more than 2.2 billion prescription records annually.
Beyond this, our third-party relationships expand our access to similar data for more than 400 million patients throughout North America and Europe. We recently leveraged these data assets, combined with our therapeutic expertise, to greatly improve the feasibility and timeline of a key customers clinical program. It's an example of how such data assets can be deployed to decrease time and cost while increasing the relevance of the results to real-world clinical populations.
Finally, we continue to focus on delivering exceptional customer service. We are constantly working to identify, recruit and deploy the best talent in the industry with the goal of becoming the leading biopharma solutions organization. In summary, the strong macroenvironment in clinical, coupled with the progress I've outlined on integration, business development and our approach to the market, lead us to believe that Clinical Solutions should return to growth in the mid to high single digits for 2018. In addition, we expect improving commercial market, also coupled with the investments outlined, will return our Commercial business to sequential quarterly growth in 2018, resulting in low single-digit growth for the full year.
Lastly, I am pleased to highlight the share repurchase program we announced today, under which our Board of Directors authorized the repurchase of up to $250 million of our outstanding common stock. We believe this demonstrates our commitment to driving shareholder value, not only through the execution of our strategy and accelerating growth, but also through a broad approach to capital deployment. I would also like to express my sincere gratitude to my 21,000 Syneos Health colleagues worldwide, who continue to focus on our highest priority, serving our customers with the highest levels of innovation, professionalism and integrity.
I'm also delighted to introduce Jason Meggs as our Interim Chief Financial Officer. Jason joined INC Research in 2014 and has held senior financial and operational leadership roles in our Clinical Solutions segment and was most recently the CFO of our Commercial solutions segment following the closing of our merger. Prior to joining INC Research, Jason spent approximately nine years with Quintiles in roles of increasing responsibility, including the CFO of Central Labs and the Head of Internal Order. I know Jason very well, and we have worked closely together for a number of years, beginning from when I was previously COO of INC Research. Having held senior positions in both Clinical and Commercial, he brings a deep understanding of our entire business and is uniquely positioned to serve as our interim CFO.
Before I outline our detailed guidance for 2018, let me turn it over to Jason for more comments on our financial performance. Jason?
Thank you, Alistair, and good morning, everyone. Let me remind you that all of 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 3. We have also made certain minor reclassifications between direct costs and SG&A expenses, which are reflected in their historical comparisons. And we will continue to evaluate these policies on a combined basis.
In addition, we have made certain final adjustments to historical net awards and backlog for our revised policies. Our net service revenue for the fourth quarter of 2017 was $770.5 million, a decline of 6% compared to $815.9 million for the fourth quarter of 2016.
The decline in net service revenue for the quarter includes a foreign exchange benefit of $5 million. The decline in net service revenue was driven by a 20% decline in our Commercial segment, which fell from $290.6 million in 2016 to $231.4 million, primarily due to the impact of cancellations at the end of 2016 and during 2017, lower year-over-year new business wins and lower new drug approval activity in 2016.
This reduction was partially offset by 3% net service revenue growth in our Clinical segment, which increased from $525.4 million in the fourth quarter of 2016 to $539.1 million in the fourth quarter of 2017. The growth in our Clinical segment was due to strong bookings in 2017, partially offset by higher levels of cancellations and project delays compared to prior years.
For the full year 2017, our net service revenue declined by 4% from $3.24 billion to $3.1 billion. This decline in net service revenue for the full year includes a foreign exchange headwind of $9.2 million. Similar to the results for the quarter, the decline in net service revenue was due to a 16% decline in our Commercial segment revenue from $1.18 billion to $984.2 million for the reasons I discussed earlier. This was partially offset by 3% net service revenue growth in our Clinical segment from $2.06 billion to $2.12 billion due to our strong bookings in 2017, partially offset by higher levels of cancellations and project delays.
Our gross profit decreased by 5% to $257 million in the fourth quarter 2017 compared to $269.7 million in the fourth quarter of 2016, with an increase in our gross profit margin from 33.1% to 33.4%. For the full year 2017, gross profit decreased by 4% to $1 billion from $1.05 billion for 2016, with a decrease in our gross profit margin from 32.3% to 32.2%. Foreign exchange had a negative impact of 75 basis points on our gross margin for the fourth quarter, while having a positive impact of 25 basis points for the full year 2017.
The decrease in our gross profit for the fourth quarter and full year was primarily driven by the revenue decline and increased project startup cost in the Commercial segment. The increase in gross profit margin for the fourth quarter was primarily driven by revenue growth, coupled with higher-than-normal R&D tax credits and the realization of synergies in our Clinical business, partially offset by declining Commercial margin.
SG&A expenses decreased from $110.3 million in the fourth quarter of 2016 to $100.8 million in the fourth quarter of 2017, decreasing from 13.5% to 13.1% of net service revenue. For the full year, SG&A expenses decreased from $446.8 million in 2016 to $419.5 million in 2017 with the related margin decreasing from 13.8% to 13.5%. SG&A expense decreased in both the fourth quarter and full year due to lower incentive compensation, realized synergies and continued expense management.
Adjusted EBITDA for the fourth quarter decreased from $159.4 million in 2016 to $156.2 million in 2017, with the associated margin improving from 19.5% to 20.3%. For the full year, adjusted EBITDA decreased from $598.9 million in 2016 to $580.7 million in 2017, with the associated margin improving from 18.5% to 18.7%.
The decrease in EBITDA for the fourth quarter and full year was primarily due to the decline in revenue from our Commercial segment partially offset by lower incentive compensation expense. Adjusted EBITDA benefited from the seasonal adjustment to our vacation accrual and higher-than-normal R&D tax credits, which collectively totaled approximately $15 million in the fourth quarter and impacted about 190 basis points on EBITDA margin. In addition, for the full year 2017 we realized $13.2 million in synergies.
Foreign exchange had a negative impact of 95 basis points on adjusted EBITDA margin during the quarter, while having a positive impact of 30 basis points on a full year basis. Adjusted net income increased to $74.1 million for the fourth quarter 2017 from $44.7 million for the fourth quarter of 2016, and increased to $238.3 million for the full year 2017 from $180 million in 2016.
Adjusted net income increased significantly more than adjusted EBITDA in each of these periods, primarily due to lower interest expense stemming from the refinancing transactions inVentiv completed in 2016 and the partial redemption of the inVentiv's senior unsecured notes as part of the 2017 merger financing. Adjusted diluted EPS grew by 63% from $0.43 in the fourth quarter of 2016 to $0.70 in the fourth quarter of 2017, while also increasing from $1.71 to $2.27 for the full year.
Slide 10 provides key metrics related to our cash flow and leverage position. For the full year 2017 our operations produced $198.3 million of cash on an as-reported basis. Our combined net DSO for the quarter was 38.8 days. We expect our DSO will vary quarter-to-quarter based on seasonal trends in collections and billings and to range from the high-30s to mid-40s over time. We ended the quarter with $321.3 million of unrestricted cash and total debt outstanding of $2.99 billion.
As Alistair highlighted, our board authorized a repurchase program of up to $250 million of our outstanding common stock. We intend to fund these share repurchases with a combination of cash on the balance sheet and cash flow from operations. Additionally, we remain committed to achieving net debt to adjusted EBITDA leverage of approximately 3x
Slide 11 provides additional backlog metrics for Clinical Solutions, including our backlog go forward. We have also included a view of our backlog by primary therapeutic area, also showing the portion related to our FSP services. Finally, you can see in the bottom left quadrant that our backlog coverage for the full year 2018 is at 82.8%, consistent with the levels for the previous two years.
Lastly, I would also like to briefly cover two rule changes that will have a material impact on our financial and tax reporting, the new FASB revenue standard, ASC 606 and the recently enacted Tax Cuts and Jobs Act.
First, we adopted the new revenue recognition standard on January 1, 2018, using the modified retrospective approach. As a result, our future revenue recognition may be delayed at certain phases of the customer contract by cycle, particularly during the first couple of years of a contract, which may differ materially from the previous standard. It is important to note that we do not expect any changes in the total revenue or profitability recognized over the life of the contract. Further, any impact from delays in the early stages of the contract may be partially mitigated on an aggregate basis because at any given time, our portfolio consists of contracts in varying stages of completion.
During 2018, we will continue to provide revenue as it would have been reported on the previous recognition standard in our footnote disclosures. Second, regarding the Tax Act, I would like to focus on the expected impact to our non-GAAP tax rate as well as the implications on our 2017 GAAP income tax expense. For 2018, we expect our non-GAAP effective tax rate to be between 30% and 32%.
Our effective tax rate is higher than might be expected, given the lower statutory rate in the U.S. of 21%, which is mainly due to certain provisions in the Tax Act that adversely affect us because of our global operating profile. This impact is exacerbated by our NOL carryforward position because certain deductions are disallowed and we are not able to claim a credit for taxes paid in international jurisdictions. The impact of these provisions effectively results in double taxation on the significant portion of our international profits. This estimate of our tax rate is preliminary and may change as we continue our analysis and the IRS issues more interpretive guidance.
While this would negatively impact our effective tax rate in the short run, we continue to expect to pay minimal cash taxes in the U.S. for 2018 due to the utilization of our NOL carryforwards. For context, we expect our cash income tax rate to be only 10% to 11% in 2018, which is a function of our expected global cash tax payments. Further, once we utilize our NOL carryforwards and become a full U.S. taxpayer, we expect our non-GAAP effective tax rate to decline to the mid-20s.
Since the Tax Act was passed on December 22, 2017, there were certain provisions the accounting rules required us to consider in 2017, which requires to record a $94.4 million non-cash charge to income tax expense in the fourth quarter of 2017. This charge is excluded from our non-GAAP results, and due to our current NOL position, we do not expect to pay any cash taxes related to this charge. The details of this charge can be found on Slide 34.
Now let me turn it back over to Alistair to provide our detailed 2018 guidance. Alistair?
Thanks, Jason. We will now provide a more detailed view of our 2018 guidance as well as our expectations for the first quarter, as outlined in Slide 12. Our guidance takes into account a number of factors, including our existing backlog, current sales pipeline, trends in cancellations and delays and our estimated merger synergies. Further, our guidance is based on current foreign currency exchange rates, expected interest rates and our expected tax rate.
Importantly, our guidance is based up on ASC 605, the revenue recognition standard in effect during 2017. Our preliminary estimate of the impact of adopting ASC 606 on future revenue is a slight decrease in revenue of approximately 1% to 2% as compared to revenue recognized under ASC 605. As the year progresses and we have conducted our operations on both standards, we will update our estimated impact.
We expect our total net service revenue for 2017 to range from $3.24 billion to $3.34 billion, representing growth of 4.3% to 7.7% compared to 2017. This includes revenue for Clinical Solutions ranging from $2.25 billion to $2.3 billion and revenue for Commercial Solutions ranging from $990 million to $1.04 billion.
For the first quarter of 2018, we expect our total net service revenue to range from $755 million to $785 million. This includes revenue of $530 million to $545 million for Clinical Solutions and $225 million to $240 million for Commercial Solutions. We expect our adjusted EBITDA to range from $620 million to $660 million for the full year 2018, and $132 million to $142 million for the first quarter.
Lastly, for the full year 2018, we expect EPS on a GAAP basis to range from $0.63 to $0.89 per share, and we expect to earn $2.68 to $2.94 on a non-GAAP basis. For the first quarter of 2018, we expect to earn $0.54 to $0.60 on a non-GAAP basis.
We recognized that our adjusted EBITDA guidance for the first quarter 2018 is at the lower end of the range we have seen in previous years. As I highlighted earlier, we are using a portion of the synergies achieved through the integration to power our strategic investments in both Clinical and Commercial in 2018. We will continue to expand our Integrated Solutions Group, improve our commercial expertise in business, invest in optimizing our data assets and deliver exceptional customer service. We are confident that these strategic investments in our business will drive growth over the long-term.
We based our updated adjusted EPS guidance for the full year on, among other things, an expectation that interest expense will be approximately $125 million, an expected tax rate of 31% and adjusted EBITDA margins of approximately 19% to 20%. Our guidance also considers the impact of our expected merger synergies of $65 million to $70 million and the related strategic reinvestments. We expect our fully diluted weighted average share count for 2018 to be approximately 106.4 million shares, which will vary by quarter. Our guidance excludes the impacts of any potential share repurchases that we may make pursuant to the equity repurchase plan announced today.
This completes our prepared remarks, and we will be happy to answer any questions. Operator?
Thank you, sir. [Operator Instructions] And our first question will come from the line of Robert Jones with Goldman Sachs. Your line is now open.
Great, thanks for the questions. Just starting on synergies, encouraging to see the $25 million raise longer-term, but actually want to go back to what you're now expecting to realize in 2018 looks like now targeting $65 million to $75 million versus $25 million previously. And I know, Alistair, you talked about some of the areas, but I was hoping you could delve a little bit more into what gave you the confidence or what gives you the line of sight to realize these synergies much quicker this year than previously thought.
Yes, thanks, Bob. I think $65 million to $70 million is the range that we gave, not to $75 million. We've – over the years, actually here, we learned a lot during the MDS and the Kendall integrations. Now, working on this INC/inVentiv integration, it's much bigger. We have got off to an incredibly rapid start. I think the cultural alignment between the organizations right through the teams, not just customer-facing, but also on the SG&A side, has enabled us to identify what we are moving to very quickly and get that work done. It gives me an opportunity to thank the teams that have been working on that since August 1 as well. Again, it's an incredible amount of heavy lift done by an incredible team in an incredibly short amount of time.
But getting to that point where we could get the ERP, HRIS systems consolidated and rationalized by January 1 this year gives us a clean shot of the whole of 2018 on one system, so it gives you much just cleaner line of sight on structure, on efficiencies, on delivery in revenue, just makes it all of that so much easier. So being able to move back quickly on that side of the business gives us clear lines of sight on all those efficiencies. We can identify very quickly, moving through office rationalization, obviously, the two organizations together have a lot of office space and some of that footprint overlaps and not all that space is utilized, so we're able to move those out very quickly. And that's a significant part of it.
I think the business technology team has done an amazing job sitting down with our biggest software partners to renegotiate contracts, move off of old contracts, consolidate onto one thing. All of these different elements continue to help us bring the SG&A cost down, the cost of running the business down from a physical footprint kind of technology footprint basis. And, obviously, then moving over into Clinical, consolidating those teams down, making sure we've got the right levels of spending control, and we've been able to do all that very quickly.
So the $25 million that we have on deck for 2018, we've got very clear line of sight now all the way up to the $65 million, $70 million range. When you look at labor savings, non-labor savings, all the licensing structure, et cetera, et cetera, so the transition management office that we've always used, that kind of model to drive this integration, has pulled out together incredibly quickly for us. And we're very confident in those numbers.
That's very helpful. I guess just a related question. If I do look at guidance and I adjust out the synergies that you're now providing, that $65 million to $70 million, it does seem like you're guiding core margins down for 2018. So I just want to get a sense of what could potentially pressure margins in 2018. Is it anything around mix and bookings between full-service and FSP? Or just anything else that play that may weigh on margins in 2018 versus 2017? Thanks.
Yes, there's a bit of mix because, obviously, we have one of the two top FSP solutions, and that's powering forward that we are making great steps with some of our biggest customers with that. But also we're very conscious to make sure that we reinvest in the business in the right way, because we've got to carry on powering the cross-sell, the ISG investments, the investments we've made to get commercial turn in that corner and getting back to growth, bringing in Michelle, reconfiguring that business development team, really driving that business forward and working strategically to continue to bring in high performance who can drive that model forward.
So some of that is, yes, there's a mix difference in both clinical because we now have a bigger proportion of our work coming from FSP, but that also brings advantages in long-term relationship, scale, revenues, et cetera. Also we had a mix shift slightly in commercial because of the cancellations we had in the communications business, which is the highest margin business on that side. We're starting to regrow that back but also, obviously, growing the selling solutions piece.
So a couple of margin shifts cause a couple of mix shifts, but that reinvestment we're making in the business is very important, not just for 2018, continued health of that growth but also the longer-term, 2019, 2020 and beyond.
Great, thanks for that.
Thanks, Bob.
Thank you. And our next question will come from the line of Dave Windley with Jefferies. Your line is now open.
Hi, thanks for taking my questions. Good morning. I wanted to focus on bookings. Alistair, you're highlighting not only kind of total bookings for the fourth quarter for clinical but also some integrated solutions wins and some kind of anecdotal commentary around proposal flows in commercial.
I think in that context, maybe earlier in the year, there were some foreshadowing that cancellations may have been a little higher in the fourth quarter, so I think expectations were appropriately set for maybe not a 1.2 or higher book-to-bill. But if you could just talk about the pieces, clinical, how's the demand, what are clients saying. And then in commercial, help us to understand how you get to flat to 5% commercial growth. And then specifically on the five- to seven-year deals and all the pieces of those, when does that revenue start?
Okay. Well, let me start with that one because it's probably the easiest answer. That revenue has started already, so we’ve booked revenue from some of those deals in Q4. We haven't taken all those amounts into bookings, so those bookings stretch out according to our awards policy. So we'll be driving those through the model over the next five, seven years.
And as we've said from day 1, those ISG awards, it's very contingent on product approval, funding, et cetera, et cetera. So we were conscious of the fact we can't take two – we can't aggressive taking those things into bookings because we know that we'll have to further them in quarter-by-quarter as we move forward. So that work started. We are doing communications work for those organization through 2018. And those deals actually continued to expand as we are able to provide more and more services to those customers.
The pipeline for ISG looks healthy. The team is working on deals that are range from $2 million to $200 million, and they won't all be in the $150 million range, so I don't want everybody to think that we've got a big pipeline of $150 million ISG things. They're very varied in their nature, some of it will go into Commercial, some into Clinical and some will be across the business.
I we had a terrific result from our sales team. They were aggressive. They were dedicated. They were committed. I don't know if we closed something on Christmas Day, but I wouldn't be surprised. The team went after it hard. We had great collaboration between the operations team, the sales team, the finance team. Everybody is supporting that effort and the real focus on ensuring that we closed out 2017 as strongly as we could. So we're very confident with that. We're very happy with that. The pipeline in Clinical is robust. We're seeing good opportunities right across the spectrum from Big Pharma deals with preferred provider relationships that are opening up for discussion, all the way through to small to mid.
And as we've talked about before, for me that was the sector that I was most worried about by consummating this merger. Do we lose connectivity to that small to mid-group, the legacy INC was always so productive with. It seems that the scope of the merger, not just the scale, but the scope of the merger, being able to bring them more services through planning, through payer and access planning from the consulting teams and the opportunity to go full life go through their full life cycle with one organization and into Commercial is really compelling.
And we've great engagement with them, great conversations with them and converted to them into ISG deal that goes right across the business. I am going to actually, Michelle's here on the phone as well, from the Commercial perspective. I'll give a bit of topping to her and then hand off to Michelle, but we've really invested in several things in and around the Commercial team, culturally embracing them and making them feel part of the whole organization.
And I think that's critical when you're going to go out and launch a new model, and you're going to talk about being an integrated organization, you have to walk that walk as well. So we've done a lot of work culturally with that team. We brought Michelle in, and she replaced Mike. And bought in – that expertise, really, that operational kind of executive insight into the way that Commercial actually runs and how we join all the bits and pieces together. We've gotten an integrated fashion just for Commercial.
So forget about doing integration integrated service delivery across Clinical and Commercial, we just needed to get to a point also where we are doing integrated delivery across Commercial, and Michelle has really hit the ground running on that, started bringing in more people with that same level of caliber, that same expertise in Commercial and starting to drive us back towards growth.
But I'll hand off to Michelle for a little bit more details.
So, good morning everyone. So a couple of things that I think are really exciting. Alistair referenced it earlier in the call. Selling solutions pipeline is the highest pipeline we've had in January, 30% higher than January of 2017. So the fact that the pipeline is so robust in the largest segment of our Commercial business is very exciting for us. And obviously, we need to convert the pipeline. But we're very confident we can do that because the value proposition we're marketplace over integrated end-to-end solution, not just across Commercial but Clinical as well, is resonating with our customer base.
We're getting a lot of positive feedback about the new model. And when you look at the products that are being approved over the next three or four years and the height of approval of new products in 2017, the are highly specialized products, they have complex delivery systems and payer reimbursement schemes and it really plays to our strength, which is to bring fully integrated solutions that wrap the services around the patient and ensure that they're able to get these great medicines in their hands.
So it's been a great sense of buying from our customers. And it has been very encouraging because both our small to midcustomers, size customers are very excited about this integrated offering but large pharma is very interested in it as well because they're very excited about the insights that we are able to provide for any solution in Commercial that we deliver due to the fact that we have such deep insights from Clinical.
Our consulting team was pricing and market access as well as their expertise and watch excellence. So we're very bullish about the Commercial business. We expect to see it to grow Q2 and forward. And we do still have a strong belief that over the long-term, the Commercial business will grow in higher single-digit growth.
I’ll pass my follow-up to the next guy, since that was enough time thank you.
Thanks Dave.
And our next question will come from the line of John Kreger with William Blair. Your line is now open.
Hey thanks very much. Maybe just sticking with Michelle. Michelle, given that long-term goal that I think you just said of high single digits, can you talk a little bit more about the selling solutions bucket? Can that also grow high single digits in your view? Or should we be thinking about that as more of a stable or a low single-digit growth business and my follow-up, I’ll just ask it now. I think historically that business has been generally one where you can win new mandates late in the year. Is that still we should be thinking about? Or is there an opportunity to continue to build on this momentum through the first three quarters of 2018? Thanks.
Hi John it is Alistair. I’ll start with that. I think you are right because of the nature of the Commercial business, it's not you don't go through that approval cycle and the start-up timeline that you see in Clinical. So yes, I think we are confident that we could win something kind of early Q4 and be burning revenue in that. You can win something early in the quarter and be burning revenue in that quarter from that relationship. At fairly significant volumes as it comes up quickly.
So the selling solutions business is something – we have great strength in that in U.S. and Japan. We're looking at how we strengthen that strategically globally. We are assessing what our strategic gaps are on the new platform and looking at how we fill those. So not only we'll be improving that service where we have that now, we'll also be looking to expand that strategically, either organically, as we win work that goes into Europe or inorganically potentially as we go through the year and we see things that might fit the model.
But I'll – kind of just wanted to be bit of a flavor around the whole situation. And then Michelle?
So you look at the macro environment, there seems to be an increased interest in outsourcing and variabilizing costs, and that is not just from small to mid, but that's for large pharma as well. They're very interested in these partnerships. And it's truly becoming an integrated offering right, so that's the real value of what we offer is the fact that we can combine our insights across the continuum, the information and the data that we have from here it really helps us in both Commercial – in both selling solutions and communications.
And we're able to provide an integrated solution that is a combination of all of our capabilities. And that's where the high level of interest lies. So – and when you couple it with the types of products that are going to be just been approved [indiscernible] enter the market, there are complex specialty products that are candidly custom-made for an integrated solution because it's really not just about people in the field or your PR strategy, et cetera, it's a combination that makes our value proposition so strong in – with our clients so – and with our customers.
So I think it's this integration that's really got us excited about the long-term single-digit growth of the commercial business.
Alright thank you.
And our next question will come from the line of Tim Evans with Wells Fargo. Your line is now open.
Hi, thank you. Alistair, I’d like to ask a little bit of unorthodox question, one that I think needs to be asked. The last couple of months have been difficult for your shareholders, and I think it would help to understand your thinking as we go back to early January when there was announcement about an executive turnover, but you decided at that point not to reiterate Q4 guidance or 2018 color. Then you did do so at a conference in early January on Q4, but not 2018 and then there was more executive turnover and still no reiteration of guidance. I'm sure you had some feel for what the 2018 was going to look like or how Q4 was going to come in. Why not help us get confidence in that as you had these periods of executive turnover? I think it would just help kind of rebuild the confidence level here if we could understand your thinking.
Well, thanks, Tim. I think when we came out to JPM, we are closing the year, we are in the middle of an ERP consolidation and transition. So as we said at the time, providing any reassurance on Q4 or any guidance to 2018 at that time was not possible because we hadn't got the books closed. We were able to do it – well actually, yes, we are able to confirm Q4 at JPM.
We didn't confirm it when Greg's announcement went out because we just weren’t in a position to give any assurance at that point, books unclosed. And then also for 2018 guidance, we don't – our process is to push the new awards from Q4 through the project managers to ensure that the backlog is phased appropriately, that they are in control of the way that, that stages out and that process normally takes probably, what, the best part of five or six weeks at the end of a quarter to really get tied down and in place.
So for those elements, just too close to the end of 2017, which was obviously an incredibly busy year for us but also add that to – add to a normal close in the transition from the $2 billion – the two $1.1 billion companies onto an individual ERP that's just – there's too many risk factors there to come out with that kind of statement on January 3 or whatever the date was when we announced Greg's transition.
In terms of the recent acceleration, we feel very confident where we're at. You see the numbers today, the acceleration of the synergies because we're in a good place in terms of the integration we've done in that finances. And Greg was a big part of that, we thank him and wish him good luck in the future, his new opportunity. But it was time to bring Jason through, and to clarify who's leading the finance organization, to make sure you guys hear future guidance and our thoughts on where we're heading from kind of the new guy, if you like, running finance certainly on an interim basis.
So we wanted to make sure that we gave you that clarity, gave people that clarity. We accept the comment. It is difficult. And then, obviously, the recent activity is so close to the end of the quarter. We were probably about preannounced earnings, et cetera. We just weren't in place to do that as we kind of ticked inside the whole process out. So I can understand the frustration. We're going to an incredibly busy period internally of integration, consolidation, et cetera, and we just want to make sure that what we state to you is right and it's correct.
Okay, thank you. I just do want to ask one quick follow-up for Jason. You've guided under ASC 605, and you've said that there'll be maybe 1% to 2% negative impact on your revenue growth under ASC 606. How might ASC 606 affect the EBITDA and EPS to what you guided to? Would you expect any adverse impact on your profitability metrics as well?
Yes, thanks for the question, Tim. So we obviously put these two companies together and – as of August 1 and have been rapidly moving toward 606 at the same time we're working on ERP conversion. So when we look at the 1% to 2%, that's predominantly going to be the revenue that's impacted our – that's impacting our full service Clinical business but also our selling solutions business in the Commercial side. You kind of have two varying profit impacts from that. So over the life of the contract, as we've said in the prepared remarks, there is no impact on the profit. But in a given period, annual period or quarter, the cost on the Clinical side will not change.
However, on the selling solutions side, you do have some cost deferrals under the ASC 606 to help match the revenue and the costs. So we will see some profit impact. What we have done is to adopt under the modified retro so we haven't restated 2017. However, if you were to think back to the 2017 gross revenue and look at a similar impact that would be your starting point for a compare on the profit side as well.
Okay, thank you.
Thanks Tim.
Thank you. And our next question will come from the line of Erin Wright with Credit Suisse. Your line is now open.
Great, thanks. I have a general question kind of on the Clinical segment. I guess, can you sort of describe sort of the fundamental or broader kind of RFP environment right now. Do you think there are more or less opportunities out there? And can you kind of characterize the pricing environment as well? Thanks.
Yes. Sure. Thanks, Erin. I think the RFP environment is pretty stable right now. If you think about small to mid, the flow seems to be as it's been for the last few quarters, which is fairly strong. We see a bit of a difference in the big pharma sector because – and I think it's more of a function of where we are in our evolution than a change in the marketplace, but we are seeing a lot more interest in our model from that sector. So discussions around we've gone through this RFI around what pharma refers to as request for information, where people are going through a cycle of finding what Syneos Health is about, what the differentiators are, scale, size, that kind of thing. And it takes time for that to work through around to a selection for preferred provider or – then starting to receive RFPs.
And we have several of those going along, so I think our RFP flow is robust. We haven't seen much of an inflection in that at all. And that's good, obviously, going through a merger at the scale, you always worry about, well, will customers pull back? Will they be nervous about the model? And as you've seen in our bookings through Q3 and Q4, we haven't seen any of that. And I think we're particularly strong in Q4 as we closed that out. So I think that environment is pretty stable.
Pricing, there has been a bit of price – there's been somebody out there who's been going in low on a few things, but not widespread, so we are conscious of seeing that. Pharma, our customers know, our customers see a lowball, they'll take three or four RFPs and if somebody low balls in there, 20% out of the range for everybody else, they just get asked the question, is this a complete bid, sometimes you get it wrong, sometimes you get it right. I think our customers are sophisticated enough to pick those out and ensure that the pricing stays where it needs to be. Because if somebody goes in with a lowball, the customer knows it's going to be a change order on the end of it somewhere.
And that doesn't do anybody favors in terms of cash flow and going back to their bosses to ask for the other $10 million to finish the study. And that's something traditionally we've never done. We are very transparent with our customers. We tell them what we think it's going to cost to run their study on the scope that they provided to us.
Okay, great. That’s really helpful. And just a really quick clarification on, did you break out the FX impact implied in 2018 guidance specifically for each segment?
No, I don't think…
Not for each segment.
Okay, thank you.
Thanks Erin.
Thank you. And our next question will come from the line of Tycho Peterson with JP Morgan. Your line is now open.
Hey, good morning. Question on backlog conversion, obviously, there's been a broader market trend around, increasing trials, complicates to the inside. I think the drop-off you guys has been a little bit steeper, down to about 14.5% this quarter. Can you maybe just talk about that dynamic a little bit?
Yes, sure, Tycho. Thanks. I’ll pass this over to Jason because he spent a year in our oncology team running the operations on that side, so – it's a mixed thing as well. You’re right, trials in general are getting more complicated. And they are – there's some acceleration in trials, but typically because of the complexity of the protocols are coming out, you see an elongation in the trial itself. And our mix has changed. We have a bigger proportion of oncology coming through. And Jason can explain that to you as he was in that group.
Yes, I mean just to add on to that. So when you see that oncology come through and representing a large part of the backlog, it's got to show – extend your project timeline and life, which we are seeing that, experiencing that. The other thing that we are seeing is with the small and mids, it's a little bit longer from the time you get an award to when you actually launch, which played through some of last year and that is obviously impacting our burn rate as well. And then finally we had robust bookings in the second, third and even fourth quarter, which some of those haven't sort of got to that launch phase yet, which is going to mathematically decrease your burn rate.
And then question on FSP, about 17% of Clinical as you highlighted in your slide. Where do you think that goes in the next couple of years? And is there a big delta in the EBITDA margin between FSP and the full-service piece, I know your segment averages 22% just curious on the relative margins.
There is a delta. It's lower margin work, but there's – I think the realization through it is higher. So it’s more – it becomes more of a kind of an annuity profile in the revenue. It is a – it’s an important strategic element as well for us to be able to deliver right across the model, so from full-service all the way through full FSP’s and then hybrids in between.
So yes, I think on the pure finances side, it is a lower margin business, but it makes up for that in volume, predictability, stability and it’s a strategic asset to work with the large pharma’s, that’s the model that I preferred. So if you want to drive the growth, if you want to drive the connectivity and the engagement with the pharma, it’s a space that you really have to be in.
Okay. And then last one on Commercial, I appreciate all the color and it’s great to hear from Michelle. One thing would be helpful to hear is if there any comments you can make on the pricing side for Commercial. And then also on your initiative to improve visibility, I mean obviously the overall market seems like…
Yes.
It’s a big wins, but curious on your own internal efforts to improve visibility today.
Yes, well. I’ll comment on – we’re still cooking that recipe in terms of seeing that visibility into Commercial. Obviously, where one of the efforts around making it professionalized business development platform is to give us better insight into the pipeline, what the probability is on that work, you raised pricing on there, I’ll let Michelle answer that piece. But it gives us the ability to say, here’s the – here’s our pipe, here’s where it cascades into our backlog potentially and then match that to any spots in the backlog, where we might be over reliant on an individual client or an individual product, et cetera.
So taking a full kind of walk-through of pipeline to look at probability, assess how it helps us strategically whether it mitigates the risk further in the – where we get over reliant among customer and help us diversify that backlog. So a lot of the efforts we going through in the Commercial side, including kind of the feeds from the ISG team actually is to help us identifying the strategic value of work that were chasing out there, where it fits into backlog, how it helps us diversify that backlog and how it makes that backlog more resilient.
So we want to make sure that we put some, I won’t say, guarantees, but I want to make sure that we put a lot of effort into diversifying that backlog so it makes it resilient against cancellation because we know the Commercial business is choppy. We know that work can switch on very quickly, but we know it can switch off very quickly as well. So we need to make sure that we have a diversified backlog. And the move, I think, away from kind of the big blockbusters to the specialty products actually help us do that because there are a lot more deals you saw the 46 approvals in 2017 versus 22 in 2016. And a lot of those are smaller products, which enables you to diversify that backlog as you win smaller but more relationships. So Michelle, any comments or thoughts on that in pricing?
Sure. So couple of things, one of the unique values that we have is an organization is our ability to integrate our offerings across consulting, the adherence business as well as communications platform and selling solutions. And the opportunity for us from the pricing perspective is to sell these integrated solutions. When you’re selling an isolated salesforce versus an integrated solution that is your field team along with your communications platform, your digital strategy and your insights around market access and pricing. When you’re selling those types of integrated solutions, you’re putting yourself in a position to demonstrate more value to the customer, which, as we know, value demands price.
So we are very focused on that moving forward, and we’re getting a lot of good feedback about our integrated offerings. And so I think that, that’s really our focus. And I think we’re very confident on the numbers we put out in our guidance in 2018.
Okay, thank you.
Thanks.
Thank you. And our next question will come from the line of Sandy Draper with SunTrust. Your line is now open.
Thanks very much. Most of my questions have been asked and answered. Maybe just a little bit of a follow-up on that last question. Not sure if this is for Michelle or you Alistair, but when you think about the sales organization, clearly what Michelle just articulated around the more integrated selling strategy, my question is does it – is it changing way customers look at you under the new brand? Or do you try to sell not just broad commercial, but high end clinical? Or obviously, those are different buyers, so is there really no way to leverage that across and to change the way see people see you? Just trying to taking one step further versus integrating commercial versus integrating a much broader [indiscernible], is that even going to happen. Thanks.
Sorry, Sandy, you were a bit broken up on that, but I got the gist of the question. So a couple of flavors really, if you think about how our whole organization, if I could say it, if you think about our whole organization the way we address the market with it. We have clinical, the way that we’ve always done it, response to RFPs, talking to customers about how we can drive that clinical engagement, whether it’s – now we have the ability to do that on the full-service side, the FSP side or the hybrid. They’re one set of buyers. Procurement and big – in the large pharmas, which is really – I’m going to break it down into kind of large pharma and then small to mids. The procurement in large pharma buys along that clinical pathway. It’s well-organized, well structured in general. I’ve already gone through years of vendor consolidation to a certain degree, so it’s a well structured, well-organized piece.
On the Commercial side, you also have buyers who are buying Commercial product, but they seem to be less mature in terms of the model evolution than the Clinical side. When you think penetration into market, you kind of expect that. So what we’re seeing on that side of the business is people buying commercial from hundreds of vendors, if not more, and not getting the economies out of their buying patterns by consolidating. And they are a set of buyers. So we’re taking – we’re taking out consolidated – our integrated Commercial model to them to show them the value of what happens when you do the communications, the field solutions, the data, the – all of the planning and access to med coms, et cetera, all is one piece.
So the synergies there for us to be able to take for customer and say, look we can all do this as one package, you reduce your internal cost by using just one vendor or consolidating down a whole host of vendors and we’re able to do it more efficiently, because we are all in the same room, we are in the same team, et cetera, et cetera. So we’re getting good traction there. Then over-the-top of that, like you said – you asked the question, is there a way to bridge the whole thing?
That’s what the ISG group does. But it’s a different sector right now, so we are approaching Big Pharma as kind of down the Commercial channel and down the Clinical channel, and we are getting some people are asking us to come in and talk about both channels together in one combined procurement package. They’re getting pressure seems from the centralized procurement groups to maximize the spend, minimize the number of vendors. So that’s very encouraging for us, obviously.
Now in small pharma, in the small to midsector, you don’t get that procurement structure so predominantly. We are able to go in with the ISG team as the lead, where we’re seeing an opportunity to talk with the C-suite directly. I spend a lot of my time talking with customers about what that combined model looks like. Are they in a position where they’re going to move from Phase III or Phase II into the Phase III and into commercialization? And I think it’s quite compelling that the small to mids are talking to us about their confidence in going – in commercializing their own product themselves, the cost of capital for them is low – is lower than it has been historically, I think, to do that kind of work.
And I think they recognize that the pathway to approval is fairly well trodden. People know that where the good drug that has efficacy and is not – doesn’t have a safety issue, obviously, that you can get an approval. Now the big challenge is, who is going to pay for that drug, what’s the payer access planning, what’s your market access planning, what are you going to call the drug, how you’re going to sell it, is it educators, is it specialty, are you going to use MSO’s? Are you going to use field sales forces? We’re able to put all the advisory work in with them when they’re in Clinical and bridge that gap.
Now what we’ve seen with our ISG award so far is we sold when the customer is in Phase III, we sold them package of worth that takes them through the market access planning strategies, all that payer management, all the med comps pieces and the commercialization. What those customers are come back to us for now is actually with RFPs for early phase in different programs. So I think that relationship is enabling us to open doors back into Clinical, which again is great news for us we didn’t expect it, we haven’t built any of that in terms of revenue synergies, but I think it’s really opening a lot of doors to talk about full-service Commercial, Clinical and then having ISG we are now to bridge the whole thing.
Okay. That’s really helpful. In some ways, if you’re looking at smaller biopharma, it’s a way for them, the offering both to the Clinical and the Commercial, they can maybe take a different look of do we actually need to partner with big pharma and not only get their money but get their expertise, if we can get the money, we may be able to use some one like Syneos to help us bridge not just the trial piece but also going Commercial. And it gives them an alternative to think about do we need to have to partner or give away certain amount of the upside because we actually can leverage this with an outsourced partner?
Well Sandy, I think if that was an audition to become one of our ISG sales guys, you hit it straight out of. That’s exactly what the model is.
Okay. Got it. Thanks very much.
Thank you. And our next question will come from the line of Jack Meehan with Barclays. Your line is now open.
Thanks. This is actually Mitch Petersen on for Jack this morning. I was just hoping to get some more detail on your expectations for this EBITDA margin expansion between Clinical and Commercial. Where do you see more opportunity? And then specifically in Commercial, what are the puts and takes that get you to margin expansion in 2018?
Yes. Thanks Mitch. So we’re looking at several – we’re not integrating Commercial into – there’s no integration around Commercial right now, because we didn’t have anything on the legacy INC side to integrate it into. So but some of that margin expansion on the Commercial side, they have, I think, 6 ERP – am I right, Jason, six?
Yes.
5 or 6?
5.
5, sorry. That 5 ERP systems underlying that business right now. So project in 2018 is going to be consolidating that down to – suppose to a couple of those platforms and then to one. So that will help this drive. Michelle looking at the span of control in that business, what – where we’re at in terms of office locations, et cetera. So there are things that we can do to help drive that margin. Obviously, we had a – we took a hit in Q3 on the communications side. We had a cancellation, it’s well documented. But we’re working on – or we have brought in more leadership in that communications business. It’s higher-margin and we’ll be driving to increase the balance again from that communications business as we go through 2018.
So some things on the SG&A side, rationalization of some locations potentially pulling out some of that underlying cost in the structure of the group. That had a very decentralized model for HR, finance, QA et cetera. Those general kind of legal functions as well. And we are centralizing that model. So that will pull out some of that cost but also the consolidation of the ERP platforms and then they strive back towards a stronger balance in the communication side as well.
Okay. Helpful. And then just as a follow-up just on your capital deployment priorities for 2018. How are you weighing opportunities for debt repayment and share repurchases? And then does your 3 times leverage target include any assumption on share repurchase for the year? Thanks.
So we have come out today with a stock repurchase plan. I think we want a balanced approach to capital deployment. It’s still our intention to pay down debt and drive to a net leverage position that we’re comfortable with by the end of 2019. But we want to make sure that we drive the top line of the business and drive shareholder value. So having a more agile approach to that, we’ll be interested in kind of tuck-in opportunities. I think we have continued to strategically grow the organization to bring new innovations to customers.
And if we can find tuck-ins that help capitalize a part of that business, whether it’s a piece that drives a better data insight, a better production at our Clinical or Commercial, they are things that we’re interested in. The share repurchase program, I think, is a good mechanism for us right now to really help drive shareholder value as well. And balance that with overall debt repayment. So a much broader, much more holistic view of capital deployment strategy. Then on the net leverage piece with the repurchase.
Yes. There is nothing included in there for the share repurchase.
Great. Thank you.
Thank you.
Thank you. And our next question will come from the line of Donald Hooker with KeyBanc. Your line is now open.
Good morning. Interested in that comment around your pipeline in the Commercial segment and that seems impressive. And I was wondering if there's any kind of nuance there geographically versus some of your publicly traded peers. I think you guys have some business in Asia-Pac and some other, I would presume, high growth areas. Can you comment kind of where you're seeing that grow? And kind of where you're positioning that business geographically?
Yes. Good question and I think Tim did a nice article earlier in the week about some of the other players in that public space the IQVIS Commercial business and EDG as well. And I think we do that the market is not as well developed as the CRO space, so there are differences between the organizations that we are in the space geographically. We have a strong presence in the U.S., we have a strong presence in Japan, we have a good presence in China, so we're seeing good growth in those locations. Europe is kind of our strategic gap. We have a couple of hundred people in the Commercial business there, maybe a little bit more, who are really focused in our own communications. We're starting to see growth in the selling solutions sector there.
So there is a geographic difference. And as I mentioned earlier on, somebody else asked a question, a related question. We're looking to grow strategically as well as organically in these areas. So we're seeing, we're really [indiscernible] at the moment in the U.S. market. A lot of the kind of salesforce power that we've been able pull on the ground has been here in the U.S. but we're starting now, how we would improve by any of the geographic locations. Michelle, any…
Yes. I think that's I interested on. The pipeline is very strong in the U.S. and we are spending a lot of time looking at these other markets and how to even become more competitive there than we are today.
Great. Maybe a quick – yes, as also you had commented around in the past around staff retention, obviously, with the merger everyone sort of focused to that. I think trends there have been favorable. Can you just maybe update that? And I'll leave it there. Thank you.
Yes. We're very – I'm really, really pleased with the retention that we did. We deployed retention program as well as all the cultural work we did in – my experience, when did MDs as well when we did Kendle we had a big spike in attrition. We haven't seen that. So I think we have learned a lot from those two mergers that well acquisitions that we did in the past. And then this merger, I think we have a strong cultural bond with inVentiv, INC inVentiv, similar cultures, commitment to excellence, commitment to the organization and to drive forward. And I think we've really done a really nice job to the communications team has been spot on with the information.
One of the purposes of rebranding so early was to get that new identity out there and give everybody an identity that they belong to. We don't care, if people came from INC or inVentiv, it's about what we're doing in the future for Syneos Health. So we're really pleased with that. It makes it a lot easier, brings a lot of stability to the delivery teams. And people have, obviously, opting in of – to what we're doing and driving forward with us, and that's really good – that's really pleasing to see. And it will help us drive the results because I think we've got, people who are dedicated and want to see us do well and want to be a part of it and that – all that messaging has been focused on that from August 1. So thanks for that question because it does a point we're particularly proud of so.
Thank you.
Thank you. Ladies and gentlemen, this is all the time we have for questions today. So it's my pleasure to hand the conference back over to Mr. Alistair MacDonald, Chief Executive Officer, for some closing comments remarks.
Thank you. Well, thanks, everybody, and thanks for your attendance today and for your interest and investment in Syneos Health. Hope you have a great day and I look forward to some of the follow-up calls.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody, have a wonderful day.