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Good afternoon, ladies and gentlemen, and welcome to the Syneos Health Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time.
I would like to hand the conference over to Ronnie Speight, Senior Vice President of Investor Relations. Please go ahead, sir.
Good afternoon, everyone. With me on the call today are Alistair MacDonald, our Chief Executive Officer; Jason Meggs, our Chief Financial Officer; Michelle Keefe, our President of Commercial Solutions; and Paul Colvin, our President of Clinical Solutions.
In addition to the press release, a slide presentation corresponding to our prepared remarks is available on our Web site at www.investor.syneoshealth.com.
Remarks that we make about future expectations, plans, anticipated financial results and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995, and we disclaim any obligation to update them. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, 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, 2018, and our other SEC filings.
During this call, we will discuss certain non-GAAP financial measures, which exclude the effects of events and transactions we consider to be outside of our core operations. These non-GAAP measures should be 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?
Thank you, Ronnie. Good day everyone and thank you for joining us.
Before we get into our results, I want to thank our Board, analysts, investors, customers, and employees who have supported us these past two weeks as we've moved through the 10-K filing extension process. I specifically want to take a moment to thank our internal teams for their tremendous effort, fortitude and patience as we have worked through the independent review of our revenue accounting and related internal controls. I am proud of our team's continued commitment and support. And we are pleased to have filed our 10-K today. With that let me turn to our earnings.
Syneos Health had a strong finish to 2018 as we delivered accelerated revenue growth and improved profitability in our fourth quarter and full year results. We believe customers continue to recognize the value of our biopharmaceutical acceleration model as evidenced by healthiness awards across both our clinical and commercial segments for 2018.
Our integration efforts also continued to progress ahead of schedule as we achieved our updated synergy targets for the full year.
Let me begin by reviewing some key performance highlights. First, we had a strong overall sales performance resulting in total net awards of $3.9 billion under ASC 605 and a book to bill ratio of 1.22x for the full year 2018. This is comprised of the clinical book to bill of 1.25x and a commercial book to bill of 1.16x which exceeded our target in 2018. This performance was balanced across customer types and services providing a solid foundation for growth in 2019 across both clinical and commercial.
I'd also like to note that beginning with this quarter, we plan to provide net awards and book to bill on a trailing 12-month basis only as we believe this better represents the overall trends in our business.
Second, revenue growth in our commercial solutions segment continued to accelerate with revenue up 17.5% compared to the fourth quarter of 2017 and up sequentially for the third consecutive quarter. Third, we saw accelerating growth in our clinical solutions segment and near record gross awards for the fourth quarter. This was fueled by maintaining our leadership position in the small to mid-sized market, while continuing to ramp up new large pharma relationships.
Lastly, today we announced our intention to refinance our credit agreement which aligns with our focus on disciplined management of our leverage and interest costs.
Turning to our results by business, we are excited about the sustained momentum in our commercial solutions segment as our integrated capabilities continue to resonate with customers. The team closed 2018 strongly with total net awards of $1.14 billion for the full year. This overall strength in awards as well as selling solutions backlog growth positions us for continued strong growth in 2019. Importantly, our backlog continues to diversify as we are seeing compelling opportunities in the expansion of our European business with momentum not only in selling solutions but also in consulting and medical communications.
Our pipeline and RFP flow remains healthy driven by our strategic investments in commercial business development along with strong customer interest in Syneos One and our other comprehensive outsourcing solutions. We are also seeing the value of our model across the product development spectrum with increased utilization of commercial services among our clinical customers. This is evidenced by recent successes where we have demonstrated greater value for our customers by combining clinical services with our growing commercial presence.
We were recently awarded a REMS program by one of our largest clinical customers, a top 20 pharma company for a compound that we supported through the clinical development process. We secured this win based on our clinical experience with this compound and our ability to bring the customer an integrated solution, which included our consulting and commercial capabilities. This type of award is just one example of the power of our uniquely integrated approach, which provides enhanced value for our customers and positions Syneos Health well for continued growth.
Our clinical solutions segment also delivered a solid finish to 2018, bringing total net awards for the year to $2.75 billion. This performance yielded year-over-year backlog growth of 14% establishing a solid foundation as we entered 2019. These awards were broad based across customer segments with notable strength in the top 20 driven by our developing preferred provider relationships as well as strong performance amongst our core small to mid-sized customers. While fourth quarter gross awards were near a record level, we did experience elevated cancellations during the quarter, driven primarily by drug efficacy, safety, and regulatory issues.
We do not believe this represents a trend, and this fourth quarter increase has been contemplated in our 2019 outlook. Importantly, under ASC 605 clinical solutions adjusted net service revenue growth accelerated to 4.3% for the fourth quarter and 3.6% for the full year 2018 compared to 2.6% for both the fourth quarter and full year 2017. On a constant currency basis, our clinical growth rate was 5.1% for the fourth quarter 2018 and 3.3% for the full year. As an update to an innovative customer relationship, we highlighted in the second quarter that expands our therapeutic footprint, we are pleased to finalize the transition of a therapeutic development operation from one of our large pharma customers. This type of strategic relationship allows us to quickly expand our portfolio of services in a capital efficient manner benefiting both parties in the process. Through this relationship, we've added experienced staff of further therapeutic depth in dermatology, aesthetics, and immunology as well as translational science capabilities and the underlying lab facilities to our European operations. This arrangement also includes a minimum revenue commitment to Syneos Health over the first five years.
Next, I'd like to provide updates on some of our ongoing strategic investments and other activities. We continue to invest in our unique Syneos One offering, which we previously called Integrated Solutions. We believe this updated branding better reflects the unique nature of our end-to-end product development offering. Syneos One collaborates across the business to create custom solutions, encompassing our full suite of capabilities. This team provides customers particularly in the small-to-mid-sized market with an economic alternative to out licensing their assets along with insights that are critical to optimizing their development and commercialization plans.
We believe this approach can expand our addressable market beyond traditional commercialization services. In addition to recent wins by Syneos One, this team's deep experience, expertise, and integrated approach have already proven critical in winning several other key awards for our clinical and commercial businesses. Our integrated work is further fueled by our dynamic assembly and data digital strategy. This open and highly flexible architecture allows us to partner with the best aligned data and technology providers rather than create and rely solely on in-house technologies or solutions.
I'm also pleased to report that we have made significant strides during the fourth quarter and early 2019 in rounding out our talented executive management team. We promoted Christian Tucat, President, Syneos One real-world and Late Phase. Joining the executive team, Christian now represents these critical market opportunities across the organization building on existing results and driving further expansion of this unique combination of offerings.
We also added John Olefson to our executive team as General Counsel. John brings extensive experience in data analytics, intellectual property and global markets with high growth companies. He most recently served as General Counsel with Cotiviti, a healthcare analytics firm.
Finally, Paul Colvin recently joined our team as President of Clinical Solutions. Paul is an industry veteran having joined us from PPD with a history of operational leadership and large pharma experience including more than 15 years at Eli Lilly. He brings a customer focused perspective that we believe will help drive our enhanced key account management structure to better serve large customers and further accelerate our growth.
We also continue to make great progress on our integration activities. We realize approximately $22 million of savings during the fourth quarter bringing our year-to-date total to $76 million prior to our strategic reinvestments. This result is consistent with our increased target for 2018 and we remain confident in achieving $125 million in synergies annually by 2020.
In closing, let me officially welcome our new executive team members and express my sincere gratitude to my 24,000 Syneos Health colleagues for their engagement, dedication and focus on world-class delivery. In 2018, we built a strong foundation for the future by making tremendous progress on integration, building our brand, deploying our innovative product development model and strengthening our management team. I am proud of the progress we've made and where we are headed. Our global team is well positioned for the next chapter of our growth.
Now let me turn it over to Jason for more comments on our financial performance. Jason?
Thank you, Alistair and good afternoon everyone.
Before I get into our financial performance, I want to briefly touch on the material weakness disclosure in our 2018 Form 10-K. As part of our annual review of the effectiveness of our internal controls over financial reporting, we determine that material weaknesses existed in the internal controls related to clinical ASC 606 revenue recognition. This determination was the result of immaterial accounting errors identified during the year-end financial statement audit, which identified design and operating deficiencies related to internal controls developed for ASIC 606.
Importantly, we concluded that no restatement of prior periods was necessary and no adjustments to our financial results have been made. Work to remediate these internal controls is underway and we expect to be fully remediated during 2019.
Now turning to our results. Let me remind you that all 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 two. Consistent with prior periods, we will be discussing the current period adjusted results under the previous revenue standard to facilitate the period-to-period comparisons. For these comparisons under ASC 605, we were discussing adjusted service revenue excluding reimbursable expenses.
Regarding our results, I would like to start with a few key operational highlights. Fourth quarter adjusted service revenue increased 8.3% year-over-year led by strong awards and accelerating growth of 17.5% in the commercial solutions segment. We achieved strong total adjusted EBITDA performance with 15.9% sequential growth during the quarter. This performance along with a lower tax rate and lower interest expense drove a 38.8% increase in adjusted EPS compared to 2017.
Our accelerated realization of synergies in 2018 led to $76 million in savings which further improved our profitability and allowed us to reinvest in future growth. And today we announced that we were working with our lenders to refinance our 2017 credit agreement. In addition, during the fourth quarter we continue to make progress on our balanced capital deployment strategy with $36.3 million of additional debt reduction.
Now I'll review our financial results in more detail. Slide three for your reference includes our GAAP results under ASC 606 along with the same results presented as if ASC 605 had remained in effect for comparative purposes. On Slide four, we show our adjusted results under both ASC 605 and 606, but I'll begin by discussing results under ASC 605.
Our total adjusted service revenue for the fourth quarter of 2018 was $834.3 million up 8.3% compared to $770.5 million for the fourth quarter of 2017. This included a foreign exchange headwind of $5.4 million. The increase was primarily driven by our commercial segment which posted another quarter of strong sequential and year-over-year growth with fourth quarter revenue up 17.5% to $271.9 million compared to $231.4 million in 2017. We primarily attribute this commercial growth to strong net awards during 2018 fueled by our strategic investments in business development and Syneos One along with a strengthening macro environment and the acquisition of Kinapse.
In addition, our clinical segment grew 4.3% to $562.3 million in the quarter compared to $539.1 million in the fourth quarter of 2017. This clinical growth was driven by strong net awards in the last twelve months partially offset by delays in the startup of new awards which we highlighted last quarter.
For the full year, total adjusted service revenue was $3.18 billion up 2.5% from $3.1 billion in 2017. This included a foreign exchange benefit of $8.5 million. Adjusted EBITDA for the fourth quarter was $186.1 million, 19.1% increase compared to $156.2 million in 2017 leading to an adjusted EBITDA margin of 22.3% which is an increase of 200 basis points. This includes a foreign exchange benefit of $5.3 million. The benefit of clinical and commercial revenue growth along with other cost savings and realized synergies were partially offset by increased costs related to our strategic investments.
Adjusted EBITDA for the fourth quarter included approximately $60 million of seasonal benefits related to vacation and accrual adjustments and R&D tax credits, similar to the fourth quarter of 2017. For the full year adjusted EBITDA was $636.3 million up 9.6% compared to $580.7 million for 2017 including a negligible foreign exchange headwind.
Adjusted EBITDA margin for the full year strengthened by 130 basis points 20% compared to 18.7% for 2017. Adjusted EBITDA also includes the realization of $22 million and $76 million of synergies for the fourth quarter and full year respectively before the impact of our strategic reinvestments to drive growth.
Adjusted diluted EPS grew by 50% from $0.70 in the fourth quarter of 2017 to $1.05 in the fourth quarter of 2018. For the full year adjusted diluted EPS improved 38.8% from $2.27 in 2017 to $3.15 in 2018. These increases were primarily driven by our growth in adjusted EBITDA, the reduction of our non-GAAP tax rate to 24.5% and lower interest expense. Specifically, the lower tax rate contributed $0.18 and $0.35 to our growth and adjusted diluted EPS for the fourth quarter and full year respectively.
Now I want to summarize our results under the new ASC 606 standard. Adjusted total revenue which includes reimbursable expenses was $1.15 billion for the quarter, which represents 2.7% sequential growth and $4.4 billion for the full year. This is comprised of adjusted total revenue of $824.2 million and $3.22 billion for clinical and $324.2 million and $1.18 billion for commercial respectively.
Total adjusted EBITDA in the fourth quarter was $173 million representing 9.2% sequential growth and 15.1% adjusted EBITDA margin. Total adjusted EBITDA was $597.2 million for the full year representing margin of 13.6%. Importantly, this includes segment adjusted EBITDA margins that are more closely aligned than those under ASC 605 with clinical at 14.9% and commercial at 13.3% for the full year.
Adjusted diluted EPS was $0.95 for the fourth quarter and $2.87 for the full year. These adjusted earnings per share amounts include the impact of our lower non-GAAP tax rate of 24.5% which contributed $0.11 to both the fourth quarter and full year when compared to our previously estimated tax rate of 27.5%.
Now moving to cash flow and the balance sheet. Cash flow from operations was $112.4 million for the fourth quarter and $303.4 million for the full year 2018 on an as reported basis. Our combined net DSO for the quarter was 49 days under ASC 605 and 39 days under ASC 606. We ended the quarter with $153.9 million of unrestricted cash and total debt outstanding of $2.81 billion.
Now that we have updated our leverage ratio calculation as of the end of 2018 to reflect a full year of ASC 606 reporting, which yields a net leverage ratio of 4.4x compared to 4.2x using ASC 605 adjusted EBITDA. We remain committed to the continued reduction of our net leverage with a revised target under ASC 606 a 3.5x to 3.9x by the end of 2019.
Slide 8 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.
I would like to highlight a couple of key milestones related to the balance sheet that we have achieved. First, we're working with our lenders to refinance our 2017 credit agreement which we expect to close by March 31. This transaction is expected to expand our term loan A facility by $587.5 million to $1.55 billion. Of this incremental capacity, we intend to draw $187.5 million upon closing in order to refinance a portion of our term loan B facility at a lower cost.
We plan to utilize the remaining $400 million of our new term loan A facility to redeem our senior notes during the fourth quarter at the first call date. These transactions are expected to reduce our interest expense for 2019 by $4.2 million and by $15 million annually thereafter. This refinancing also includes the expansion of our existing revolving credit facility to $600 million to provide additional liquidity. Second, during the fourth quarter we repaid an additional $36.3 million of our term loans bringing our total debt reduction since the closing of our merger to $222.4 million.
Turning to the tax line, our final non-GAAP effective tax rate for the full year 2018 is 24.5% approximately 300 basis points below our previous expectations which we expect to continue into 2019. This will lower tax rates stems primarily from our reassessment of the application of certain provisions of the Tax Cuts and Jobs Act based on among other things, new guidance which was released in late 2018.
Importantly, given the benefit of our NOL deductions we only expect our actual net cash outlay for taxes to be approximately $10 million for the year.
Turning out to our guidance as outlined on Slide 9, we've taken into account a number of factors including our existing backlog, current sales pipeline, trends and cancellations and delays and our estimated merger synergies net of reinvestments. Further, our guidance is based on current foreign currency exchange rates, expected interest rates and our expected tax rate. Our guidance is also based upon our estimated diluted share count excluding any share repurchases subsequent to the fourth quarter.
We expect full year total adjusted service revenue for 2019 in the range of $4.62 billion to $4.73 billion representing growth of 4.9% to 7.4%. This is comprised of adjusted clinical revenue of $3.35 billion to $3.41 billion or growth of 3.8% to 5.8% and commercial revenue of $1.28 billion to $1.32 billion representing growth of 8.1% to 11.9%. We expect total adjusted EBITDA to range from $625 million to $660 million growing between 4.7% and 10.5%.
Lastly, we expect adjusted diluted EPS in the range of $3.03 to $3.23 representing growth of 5.6% to 12.5%. We based our guidance for the full year on among other things expectations of interest expense of $125 million to $130 million, which includes the expected impact of the refinancing transaction we announced today. Realize merger synergies of $100 million to $110 million before the impact of our related strategic investments and a fully diluted weighted average share account for 2019 of approximately 106 million which will vary by quarter.
I also want to provide you with some commentary for the first quarter given our typical seasonality and expected 2019 growth profile. We expect total revenue of $1.11 billion to $1.13 billion representing year-over-year growth of 4.1% to 6.5%. This is comprised of clinical adjusted revenue growth of 1.9% to 3.1% and commercial revenue growth of 10.8% to 16.3%.
We expect total adjusted EBITDA of $130 million to $140 million representing year-over-year growth of 1% to 8.8% which reflects relatively flat adjusted EBITDA margin at the midpoint This completes our prepared remarks and we would be happy to answer any questions. Operator?
Thank you sir. [Operator Instructions] Our first question comes from the line of Eric Coldwell of Baird. Your line is open.
Hey thanks very much, and congrats on getting through this so quickly with the solid quarter and outlook. Given all that you had on your plate, I don't think that the material weakness disclosures in your 10-K or the ASC 606 challenges are really that surprising, but it would be interesting if you can give us some anecdotes on the immaterial accounting issues that you cited just so we have something to hang our hat on here. And then I might have a follow up or two.
Okay. Thanks Eric. I'll give you some kind of the environment and then hand you over to Jason for a bit more color. We, I think through 2017 and then through '18, obviously with the scale of the merger, we consolidated on to one ERP platform across clinical to InVentiv obviously from private to public implemented a new revenue standard, a CFO transition. We moved a lot of things and we changed a lot of things and getting the new controls in place to get that testing done was something that we were focused on and conscious about all year.
I’ll just say on record really for the team, very proud of where we got to, substantially complete on our audit, the same with Deloitte and then we get the letter from the SEC before we filed. So we have to pump the brakes rarely and look at and make sure with the audit committee that we had everything -- that we haven't really omitted anything from 606 that we've been looking at. So, it's been not a process I would look to repeat, but obviously we've got through it quite quickly and got to earnings today without any changes. So, I will pass you over to Jason for a bit more color.
Yes. Thanks Alistair. I appreciate the question Eric. Yes, if you look at Item 9a in the 10-K, you'll see some color is in there around because of framework and where things -- where the immaterial accounting errors that we saw were mapped to the framework, and it will give you some sense of sort of what we saw, but we're not going to talk about much more than that publicly. But as part of just our normal annual review of the effectiveness of our internal controls, we did recognize that we had these material weaknesses in the clinical ASC 606 revenue. So this was part of our normal management assessment process for controls and certifications, part of what we do with our external auditors as well as then the audit committee independent review that Alistair mentioned.
So, we went through all of that. And importantly, I think what I'd reiterate again is that we didn't have any restatements from what we saw and we didn't have any changes to the numbers that we were looking at as we started that independent review. So we're getting after the remediation work as quickly as we can and expect to be fully remediated here in 2019.
And just add, sorry, I’d just add on the end of that. I think it's important to note that just to be clear we picked out this material weakness before we received anything from the SEC. So this is not linked to receiving that letter. We've come to this conclusion prior to that with external -- with our auditors. And as Jason said, start remediation work straight away.
That's great. If I could just quickly shift gears, one other item and overall I think it's impressive where you are with guidance given everything that you did highlight is a lot of work the last year and a half or so. But, first quarter EBITDA, just a tad below the street not that surprising you've been there before and things have worked out fine. But you gave some color on 4Q seasonal drivers to the upside. I expect a reversal of that is really the biggest gating factor in Q1. But are there other factors in play that would have that sequential decline from 4Q to 1Q, perhaps be a tad bigger at least nominally than what we've seen in the past. I'll just leave it with that and cede the mic here.
So Eric, what you said is correct, as a driver those seasonal things do reset. You also have all of your other tax resets and things of that nature that flow through in the first quarter that also have that sort of pacing throughout the year and creates that pacing throughout the year. So we also have that -- we've talked about previously new large relationships that we're standing up in both businesses that we will see some drag from that early in the year and then start to see that come out. And if you look at the pacing overall throughout the year, which you alluded to, it's pretty similar to what we've seen in the past.
That's great. Thanks again guys. I'll let others jump in.
Thanks, Eric. Thank you.
Thanks, Eric.
Thank you. Your next question comes from the line of John Kreger of William Blair. Your line is open.
Hi. Thanks very much. Alistair just given what you said a minute ago, can you just maybe fill us in on what your findings were from the internal review that you did over the last few weeks?
So that internal review from the audit committee, as Jason said we haven't changed any numbers. We didn't find anything in the review that we weren't kind of seeing before in the audit. There's nothing really to add extra color around that. We move in through processes as usual now, so we completed that audit, that review some of the forensic work to look through that, and we're happy with where we got to with it. The audit committee is happy and we filed the K.
Great, thanks. And another similar one, are you able to expand at all on your commentary with the SEC either in terms of substance or maybe timing in terms of how their process will proceed?
No, not really. I mean we've told you pretty much all that we had. We got the letter from the Division of Enforcement in 21st to Feb. We've had some ongoing dialogue with them and we've used kind of some of the areas they want to look at which we put out in the press release around book to bill revenue controls and forecast to guide that internal review. So you can get a sense from that of where we've been laser focused as we've gone back over kind of the 606 implementation et cetera. And I thought Jason said we didn't change any numbers. We're pretty happy to have got through that process and be back where we are today following [indiscernible].
Excellent. Thanks. And then maybe one last quick one. You mentioned strategic investments a few times on the call. Can you just remind us what sort of magnitude you're thinking in '19 and what you are putting that money on?
Yes. So we've increased the amount of investment over '18 and prior years this year. Continuing to invest in Syneos One or continuing to invest in building out business development both cross clinical and commercial. And I think we've seen good benefits from that through the year. You saw the book to bill on the commercial side creeping up over the target that we've set for ourselves. So we're pretty pleased with that. And we're getting the return on that investment.
This year we're looking at what we invest in and around our data in digital approach. We've launched kind of -- what we've launched the strategy that we've always had using the best of what's on the market a dynamic assembly model. We've done that before with tech as you guys know and we're doing it now with data. So, we will have to invest in that though because obviously we've got to integrate the data together and drive the analytics and the insights and that kind of thing.
So that's where we'll be spending our money. I think we've identified that those areas have helped us drive growth in 2018 and have helped us really integrate across the model and drive some of Syneos One success. Jason you what to add?
Yes, John. Jason here. Just add to what Alistair said we had talked about 15 million to 20 million in 2018 in the areas that Alistair outlined which as he alluded to as well we did see good progress and awards and things of that nature coming off that. So as we looked at our strategic plan and looked at what we wanted to do in '19, we did take that up to the 25 million to 30 million range is what we're looking at for '19.
Great. Thank you.
Thank you, John.
Thanks. Your next question comes from Robert Jones of Goldman Sachs. Please go ahead.
Great. Thanks for the questions. I guess just to go back Alistair, not to beat this to death but it's not something we come across all the time. It sounds like you're clearly very comfortable that you identified and rectified the material weakness and that didn't result in any restatements or changes to filings. But is there any sense you have from the SEC. on -- I guess a) whether or not this addresses what their concerns were and probably more importantly when they would proceed or wrap up their side of this investigation.
Hey Bob. No. I mean what we said in the press release that we pushed out in the 12b-25, I think is the number of the form. And what we said today that's all we have. We cooperating with the SEC and anything that they want, anything that we're concerned about in that regard. We don't know how long it'll take or what it will constitute. But, we are ready to continue that collaboration with them and that cooperation with them and get through it, how long it's going to take.
Yes. Bob, obviously, Jason here, we will as appropriate we will update disclosures as we move through the periods through the quarters as necessary.
Got it. And then, I guess just on the synergies and the investments, strategic investments you guys hit the number that you had put out there or raised for the full year of synergies. But not a ton of sequential synergies if I just look at what you guys have done cumulatively through 3Q versus what you did for the whole year? Any sense you can give us on kind of what's left the pace at which we should think about that in '19? And then, are the investments Alistair that you just touched on, are they bigger than what is kind of left out there to realize from an identified synergy standpoint?
So as you have already identified that Bob. We've accelerated a lot of our synergies through 2018 through integration and reduction of spend on licensing and consolidation of offices et cetera. So that pace will naturally slow down now between now and the 125 by the end of 2020. So, we know that the pace of reinvestment won't outstrip them. So we will carefully making sure that we reinvest appropriately in the business from the overall synergies gained.
Yes. I mean, Bob in the prepared remarks you identified the 100 to 110 of realized merger synergies during 2019, which will be on the 76 that we did. You can do that math there. And then, if we do have the strategic investments around that 25 to 30 that sort of how we're thinking about that in '19. Do have more things that we are proactively doing in early '19 as we move through whether it continues to be headcount related or procurement related or whatever it might be lower cost opportunities that we might have in the operation. So those are the things that we are looking at in 2019.
Great. That's helpful. Thanks so much.
I'll add one thing, Bob. We still are on track. We're still targeting the 125 by 2020.
Okay. Got it, right. Thank you.
Thanks, Bob.
Thank you. Our next question comes from David Windley of Jefferies. Your line is open.
Hi, good evening. Thanks for taking my questions. I wanted to circle back to the -- I think strategic partnership that you talked about. And I think Alistair, you described it as a therapeutic area -- therapeutic operations develop and transfer something to that effect. And I wanted to understand from the magnitude of that, what the client's expectations are around that. And I think you mentioned that there's a minimum revenue amount that goes along with that. If you can give us any color around that would be great.
Yes. So this is something we talked about with customer. I think Q2 muster in 2018 and put that in place in that period. And it constitutes Syneos help taking on employees from that organization, so rebadging them. And then as part of that rebadging, we have both skilled ourselves in the areas that we talked about immunology, aesthetics, dermatology translational sciences and that translational science piece enables us to stretch that Syneos One model who wants that further forward. So we could literally take people off the bench and into formulations et cetera. There is a minimum revenue commit around that from that organization for that period of time. We've not disclosed the value of that because I think that's some competitive information. But we're pleased, I think we've created a relationship there. The expansion of an existing relationship that was a real kind of win-win for both of us. It enabled us to secure new talent in the therapeutic areas that we're seeing some good growth and expand that Syneos One footprint into the translational sciences arena.
And also get that revenue commit for taking on some very talented people as well. So and it helps our customer achieve some of their corporate goals. So we're pretty pleased to have got that done. So Jason any?
Yes. Dave, I'll just add to that. That there is that commit there. However, there's also -- we also received a large Phase 3 study that as well as other work that right now we are seeing that ramp up. So the commit while there, we are relying less on that and just trying to get the teams up and working and running their study well.
And the revenue commit, it sounds like the basic structure of this would kind of fall into the FSP style bucket. The broader question here is, how are you dealing with the backlog recognition related to this. Is it kind of a rolling 12-month FSP style or I guess that project that you just mentioned probably goes into more of a full service bucket?
Yes. That's right. That's exactly right.
They're actually more full service orientation Dave. So basically we just pull the revenue through as we execute that Phase 3 program. So, yes, I mean I can see why you think, yes, they would be more of an FSP style, it's actually more of a full service because a lot of the people that we took in are actual therapeutic -- therapeutically focused not functionally focused. And therefore, we can expand that full service on the therapy side rather than kind of on that functional horizon -- horizontal kind of layer.
I mean there is a small portion of Dave that's just -- just real quick Dave, sorry to interrupt there. But, that there is a small portion that is functional folks but it's an animal and only thing that we've put into our awards is the Phase 3 study that has been booked full service wise that we are running actively.
Okay. All right. Good clarification. One last quick clarification. So you said guidance is based on current FX rates, it seems like CFOs in the space have had some different kind of views on what current means. Could you tell us is that March 15, is that the end of February, is that January 1, what is current?
That's last week.
Great. Thank you.
You are welcome.
Thanks, Dave.
Thank you. Our next question comes from the line of Tycho Peterson of JPMorgan. Question please.
Hey, guys. Thanks for taking the questions here. So, Alistair, I just wanted to pick your brains a little bit on the overall environment here. One of your peers pointed to a bit of a slowdown in RFP flow and elevated cancellations, possibly over-indexed to the small players within mid-cap biotech. Was that what you were alluding to in terms of some of the similar dynamics that you saw? And what gives you confidence that this won't be a drag on the remainder of the year, is it just healthy pick up in 1Q year-to-date?
Yes. I'm not sure we've seen that slowdown really in those small-to mid-sector. I mean, we're coming on that now in a couple of ways, does that say just, by the way, on the phone.
Yes, it is.
Yes, it states. We are coming out of it with a couple of assets right now. So, we've got the normal approach that we would take with full service clinical, fit to those small to -- the SMID players. But also with the Syneos One model. And I think the Syneos One model resonates quite well in this. So, maybe with the two models now looking at that, we're seeing -- we're maintaining a position and not seeing that dip. I got Paul Colvin here with us as well. Paul, any -- have you seen anything on that small to midsize on the clinical side?
No. I see you hit the nail on the head there. We have not seen a decline in that sector. I think, again, as we ramp up some of our large partnerships, we're likely to see that help from the pipeline growth as well in the future.
Yes.
Got it. And then just switching gears to commercial here for a second, what -- any color that you can share on recent pricing trends? And is there anything that we should be thinking about in terms of lumpiness in the selling dilutions part of the business over the course of the year?
Okay. When you talk about pricing trends, Tycho, you're talking about drug pricing or our actual pricing to our customers?
Your actual pricing to your customers within commercial? Yes.
I think the environments. Tycho, Michelle's here. So Michelle, do you want share some detail on that?
Sure. So, first question on the pipeline. Our pipeline continues to be strong as we've said. We're very confident about going into 2019, we've said before that our selling solutions backlog has grown significantly from '18 over 2017. So we're going in with a much stronger backlog than we had previously.
As you saw, our 12 months book-to-bill is at where we wanted, at 1.1. We ended up at around 1.16 for the full year. So the pipeline looks strong and the conversion more importantly looks strong of book-to-bill. And we are seeing more and more of integrated offerings and working closely with Syneos One to bring integrated offerings into the commercial business line. So all those things combined give us confidence that we're in good shape for 2019 to achieve what we shared in guidance.
Your specific questions about lumpiness, I think a couple of things, when we look at the 59 products that were approved by the FDA in 2018, a lot of them are orphan and specialty products. And so you're seeing a much more diverse -- a larger diversification of the backlog of the kinds of services that we're delivering even in selling solutions. So there are smaller teams, there are integrated teams, they are not just sales reps, they have reimbursement specialists, they are multi-channel, call centers, et cetera. So all those things are the reasons why we are confident in the guidance we just shared on commercial.
Yes. I think one interesting stat that, Tycho, I think is, over the last 18 months or so on the Michelle's guidance and the build out that we've done on commercial, we've seen a big transition from selling point solutions where we would -- I think we only have 5% of our sales. It's straight out of the merger that incorporated multiple service lines across the commercial engagement. Now, we're looking at 55% to 60% of our sales have a field team, some support from digital comms, some support from the call center, reimbursement specialist, et cetera, et cetera. So we're building a very integrated solutions within commercial as well as the Syneos One, so it stretches right across from clinical into commercial as well. So they are helping us drive that diversification of the backlog across the business not just in selling solutions.
Got it. Thanks so much for the color, guys.
No worries. Thanks, Tycho.
You're welcome.
Thank you. Our next question comes from the line of Erin Wright of Credit Suisse. Your question, please.
Great. Thanks. Can you elaborate a little bit on the cancellations. You mentioned the nature of the cancellations, was this across commercial and clinical or just clinical and can you quantify how that business will roll off in 2019?
Yes, sure. Thanks, Erin. So you occasionally get these spikes in cancellations, I guess that's the nature of the beast, right. In clinical, majority of cancellations are in clinical. I think, I mean, Jason, will give you a better call on that. But really through efficacy, regulatory changes, not really Syneos performance related, so it's just one of those timing things and I don't think we see -- well, we don't see as a trend, if you look at -- when we -- obviously we see more detail, but you look at why they cancel it makes a lot of sense from an efficacy perspective and obviously there is the ethical obligations of stopping the trial that's we're already doing and I think so. But, yes, you just got these peaks now and again, I think we had one in 2017 and sometimes you just got a miracle, but we don't see as a trend, it was just a little peak. Jason, any more color on it for Erin.
No. I mean the only thing I would add is that it was -- when we mentioned it, it was clinical, we were referring to not commercial Erin. And, as Alistair said, we don't see it as a trend at this point and it's all factored into how we're looking at our guidance in 2019.
Okay, great. And you alluded, I guess, in the incremental expenses, I think in the 10-K associated with the SEC investigation, is that something that's embedded in your 2019 guidance or should we anticipate that that's excluded from an adjusted metric or how should we be thinking about that?
Yes. Good question. It is not in the current guidance, it's too early for us to have a really good sense of what that will be. But, as we've talked about it, the thought is that we would talk about that separately and show that separately from an ongoing operating standpoint.
Okay. Thank you.
Thank you. Our next question comes from Ross Muken of Evercore. Your line is open.
Hey, guys. It's Luke on for Ross. Just kind of wanted [indiscernible] you seem to be gaining a lot of traction in those Syneos One, can you talk about, just give us anecdotally what you guys are seeing win rates there versus peers with maybe just a data asset or just a full versus what your total offering is?
Yes. Sure. Hi, Luke. So, we are basically the only people who have the offering. So, when we get in front of the customer, it's more of an outsourcing style than an RFP-driven thing. We're working with customers who want to be virtual, they're small to mid, maybe they are U.S.-based, some are into Europe or vice versa. We've got Asian customers who are connecting into as well, which is why I massively encouraging obviously.
I mean it's really think about it is as -- we actually push the asset all the way through the organization rather than taking point awards of all the different things that we could deliver. So once we get -- Christian Tucat, who we have promoted to the executive team has done a really, really nice job of getting this model launch with support from Michelle and Paul and all the SG&A team, because obviously, we have to look at it right across the business of its impact.
Once we get that team in front of a customer, it just -- I think it makes the customer's life so much easier, because they've got the compound, they've got the money, we've got all the operational capabilities, the advisory capabilities, the insights to be able to take them all the rest of the way. So, they're dealing with one group who is going to take the asset all the way across effectively a CRO and the CCO, that might be, if you did it yourself, it might be, what you reckon, 50 contracts, 50 or 60 outsourcing decisions. You made one decision at the beginning and Syneos Health -- the Syneos One team drives it all the way through the model with Syneos Health.
So, I think it's a matter of -- it makes us really quite easy to work with to -- easy to do business with from that small company perspective and it's a significant spend for them. So it's on our radar. These relationships are $80 million to $120 million normally, something in that range, right? I mean they vary, some of the bigger ones are. And that gets our attention even as a large organization, that's an attention grabber. So it's a good model, it's a unique model and once we get it in front of the right kind of customer, it becomes very compelling, I think.
Okay. That's helpful. And then, I guess, just a little bit more on the margin cadence of -- through '19, you guys have the investment probably in the first half and then also the synergies, kind of how does this offset themselves on top of -- you have the mix dynamic going on as well?
Yes. I mean, I think you hit a good bit of it there, also when you look at the first half, as I mentioned earlier, in addition to those items, you come out with the seasonal benefits again in the second half that we typically have. But also, if you parse out the growth in between the two segments in the first quarter, early half of the year, as we're standing up some of these new clinical relationships that we've mentioned, just a headwind early on in the year. So, as we come out of that, it also starts to increase the margin percentage in the second half. So those are the things that we're looking at the synergies, the investments, the seasonal items and then standing up these larger relationships.
Okay. That's helpful. Thanks.
Thanks, Luke.
Thank you. Our next question comes from Sandy Draper of SunTrust. Your line is open.
Thanks very much. Most of my questions have been asked and answered, but maybe just a couple of quick ones. Just following up on the cancellation topic. Alistair, was there any pattern around any therapeutic areas that tended to get a little bit more, or was it really just spread out and just seemed somewhat random?
Hey, Sandy. I'm just looking at my paper on that. I don't think there's any real patent to them in terms of therapeutic area, it's more random.
Okay. That's helpful. And then maybe not sure if this is for Jason or Michelle, in terms of the margin impact of some of the mix -- revenue mix, putting more pressure on commercial. When you think about that, is that something -- I know we're just starting '19, but when you think longer term, is this something that can bounce back year-to-year and just depending on the selling it, it snaps back and you could have a notably positive margin mix or do you think this is sort of a longer-term trend that the mix of business you're sort of going to be seeing for a few years is likely that, obviously, hopefully, you scale the margins up as you get synergies and you get it, but you're not going to have a big step-up because of mix or do you think year-to-year, we could see this type of movement? Thanks.
So, Sandy, I'll start and I think if I'm not answering the question just come back please. But, the commercial business will see margin improvement in 2019. When you look at the different -- all the businesses are growing in the main and selling solutions, which is the largest business that has historically carried the lowest margin. Actually, as Michelle mentioned earlier, the growth areas underneath that and the type of field teams, the smaller field teams, the nurse educators, the reimbursement specialist, the MSLs, they carry a higher margin than your traditional sales rep. So, we see a lot of things that are actually very helpful for the margin in that business after having a tough first half of '18 from a margin perspective. Does that answer your question?
Yes. I guess, that was really -- actually I was thinking, when I was flipping through the slides, I was looking at '18 comment about unfavorable revenue mix and you are stepping up. So, I guess that goes back to the question of year-to-year, there can be -- it's about anything to general trend as more toward the better margin. I guess, I'll maybe rephrase the question.
Yes. And then there is some things in 2017, Sandy, that were sort of one-time-ish, where a lot of larger field teams were coming down and you get sort of positive cancel fees or risk pair fees and things of that nature from that, that sort of one-time-ish. So that's some of that mix as well.
Okay. That's helpful. Thanks.
Thanks, Sandy.
Thank you. Our next question comes from the line of Jack Meehan of Barclays. Your line is open.
Thanks. Good afternoon. I wanted to follow up on some of the commentary around the seasonality, appreciate some of the comments on the revenue line. I was curious what you're seeing on the bookings line to start the year. I know last year on the clinical side, you got off a little slower, do you think that's kind of normal cadence you would expect this year as well?
So, we've been looking at -- well, I think, we're just a different organizations to what we were in the past. So, we are seeing good RFP flow, seeing what we would expect to normally see quarter-on-quarter. I think we've got a better business development engine, I think we have got more engaged in a broader operational footprint that's driving great RFP flow. So, I'm not going to give you any intra-quarter information on that, but other than to say I think the environment we're in, like all the other CROs have said is, it remains strong.
Helpful. And then, one follow-up on the guidance for 2019. Just looking at some of the adjustments, I think share-based comp, $56.5 million, or quite a little bit of a step up from 2018, was there any change in the compensation policies or anything just worth noting on that line?
No. I think Jack, it's Jason, I think we just had some things in '18 that were good guys with some turnover. And then, also, we didn't have a change in compensation philosophy or methodology, but we did have expanded grants early in '18 that you're seeing come through for the full year without those good guys coming through in '19.
Yes.
Appreciate it. Thanks, guys.
Thanks, Jack.
Thank you. Our next question comes from Daniel Brennan of UBS. Your question, please.
Great, thanks. Thanks for taking the question. I just wanted to ask a question on the -- back to the investigation, if you don't mind. Can you just comment that this was a formal or informal investigation? And did M&A from the SEC is like normal review was like your -- of your financials, which we think is necessary as part of Sarbanes-Oxley or do they come from somewhere else maybe like a whistleblower or third-party?
So, Dan, we have talked about -- it came from Division of Enforcement. So the letter arrived before we filed the K. And I don't want to speculate on why we came to their attention. I mean, we'll find out as we get more engagement from the SEC as we go through the investigation. We've told you everything we've got. So we'll continue to be transparent. And we did the extra work on the investigation -- independent investigation by the Audit Committee, because we wanted to make sure that we implemented 606. We haven't missed anything fundamental and our [Technical Difficulty] so and that's what we've got. And we are continuing to cooperate and engage with the SEC on their timeframe, but we don't know what that is yet and we don't know what they'll come and look at.
Great. Thanks, Alistair. And then maybe just on the clinical side, can you just discuss, we haven't done all the math yet, but kind of what's the implied burn rate in your Clinical guidance for the year and how do we think about kind of that -- assuming that the burn rate is coming down, how do we think about it stabilizing, what are the drivers for that?
Yes. So, hi, Dan, it's Jason. So we saw that stabilizes as you probably have noted in quarter four relative to quarter three in the first half. We are continuing to see our average project life lengthen. I think we're up to 52 months, or something like that now from high-30s, low-40s, just a couple two short years ago as we're winning more oncology where, as you know, the large partnership we won in the second quarter is oncology. That's going to extend things out. Larger partnerships, generally speaking, whether it's oncology or what it is with larger studies tend to have a slower ramp. And then, we have some of our SMID customers that despite our best efforts, we just don't seem to get those moving as quickly as anticipated, although all within policy, it just doesn't move as quickly. So, all of those factors are putting pressure on that burn rate. We are projecting it to tick down throughout 2019, but nothing quarter-to-quarter as significant as what we saw from quarter two to quarter three of '18.
Got it. Great. And maybe just one final one just on the commercial business. Can you just discuss what the environments, like, on the large pharma, I know with Syneos One you discussed throughout the call kind of the trend and the excitement over [indiscernible], I think with large pharma, what's the trend like kind of what you're seeing in the U.S. and kind of overseas in terms of your appetite?
Yes. Sure. Let me start with that, Dan, and I'll pass you over to Michelle. So, I think the thing we are excited about is we're seeing engagement across all the sectors in commercial, small to mid, 21 to 50 kind of group and the large pharmas, where we've traditionally had good connection, where the scale player in the commercial space and we're using that to our advantage. Michelle?
I think that's something that's evolving with large pharma and outsourcing is the way they look at outsourcing. They traditionally would outsource for capacity with sales representatives, that's the conversations with large pharma are candidly much more strategic than they were maybe three or four years ago, discussing opportunities to think through more holistically and integrated offering, what is the full commercialization strategy and which pieces of that strategy should be outsourced for flexibility and scalability.
So, we're having a much greater, I think, a different type of conversation with large pharma than we've had in the past and we're seeing some early successes and some of the more diversified offerings. And I think, Alistair referenced one feature around the fact that, we are now -- we just awarded a REMS program from a top 20 pharma company, which is a piece of our business and consulting that REMS around. So, we're starting to see much more -- a differentiated way they're looking at it moving forward.
And Dan, this is Paul. I think just the continuity of service is, they're starting to think about that a lot more than they have in the past when you move from Phase III into late stage in real world, you can keep the same team and the same knowledge base. There's a lot of synergies to be add on by our clients. I think we're seeing more of those discussions occur on a larger scale.
Great. Thank you.
Thanks, Dan.
Thank you. At this time, I'd like to turn the call back to Alistair Macdonald for any closing remarks. Sir?
Thank you. As we've highlighted, we are well positioned to accelerate growth in 2019. Our pipeline of opportunities and RFP flow remains healthy, driven by our strategic investments and strong customer interest in our integrated outsourcing solutions. So, thank you for your attendance today and for your interest and investment in Syneos Health. Have a great evening and be good. Thank you.
Ladies and gentlemen, this does conclude your program. Thank you for your participation and have a wonderful day. You may disconnect your lines at this time.