Syneos Health Inc

F:8IN

Earnings Call Transcript 2021-Q4

[Operator]

Good morning, and welcome to the Syneos Health Fourth Quarter and Full Year 2021 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Ronnie Speight, Senior Vice President of Investor Relations. Please go ahead, sir.

[Ronnie Speight, SVP, Investor Relations]

Good morning, everyone. With me on the call today are Alistair Macdonald, our Chief Executive Officer; Jason Meggs, our Chief Financial Officer; Michelle Keefe, President, Medical Affairs and Commercial Solutions; and Michael Brooks, Chief Development Officer and Global Head, Clinical Development Solutions. In addition to the press release, a slide presentation corresponding to our prepared remarks is available on our website at investor.syneoshealth.com. Remarks that we make about future expectations, plans, growth, trends, anticipated financial results and prospects and our expectations regarding the COVID-19 pandemic 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, 2021, 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 considered a supplement to and not a replacement for measures prepared in accordance with GAAP. For a reconciliation of non-GAAP financial measures with the most directly comparable GAAP measures, please refer to the appendix of our presentation. I would now like to turn the call over to Alistair Macdonald. Alistair?

[Alistair Macdonald, Chief Executive Officer]

Thanks, Ronnie. Good morning, everyone, and thank you for joining us today. The strong fundamentals and ongoing execution across our business drove over 20% revenue growth in the quarter and 18% growth for the full year accompanied by robust earnings and cash flow growth. We are pleased with how our unique product development strategy and mindset continue to resonate in the market and drive strong demand for our innovative solutions. The demand environment remains healthy, both in terms of macro market dynamics and robust new business pipelines across our organization. We are proud of the progress we have made over the past several years as we have continued to evolve our business model by developing innovative integrated offerings enabled by data and technology to position our business for long-term growth. Dynamic Assembly investments that are fueling growth include Kinetic, our modern customer engagement capability and the expansion of our DCT Solutions through Illingworth and StudyKIK. Specifically, in our clinical business, we've expanded our digitally enabled delivery in response to the pandemic, which catalyzed the rapid deployment of decentralized trial capabilities and drove greater acceptance of these methods by regulators, customers, sites and patients. While these innovations streamline the clinical development process for our customers, they also result in a lower mix of reimbursable expenses, a dynamic that we now expect to have a lasting impact on our revenue profile. We saw the continuation of this revenue mix change in the fourth quarter, which, along with reduced COVID work and foreign exchange headwinds, caused revenue to come in below our expectations. To better reflect this dynamic, we've adjusted our future expectations for reimbursable expenses, which impacted our total book-to-bill net awards and backlog metrics for the fourth quarter and full year 2021. Jason will go into further detail on these adjustments and the additional information we are providing to improve your visibility into these trends. Importantly, we remain confident in our expectations for low double-digit clinical revenue growth for 2022, excluding the impact of reimbursable expenses, along with continued margin expansion. Now for some key highlights from the quarter. First, we reported solid book-to-bill ratios of 1.26x for Clinical Solutions and 1.48x for Commercial Solutions for the fourth quarter, excluding the impact of reimbursable expenses, resulting in trailing 12-month book-to-bill ratios of 1.34x for clinical and 1.15x for commercial. Total company net awards for full year 2021 grew 19.4% compared to 2020, excluding reimbursable expenses, driven by a 17.5% increase in clinical and a 25.6% increase in commercial. Second, our Commercial Solutions business continues to demonstrate strong performance with our full-service approach resonating with customers and the Syneos One portfolio beginning to achieve commercialization milestones, resulting in 19.8% revenue growth. With Deployment Solutions ending backlog growth of 20.9% for 2021, our commercial business remains well positioned for low teens growth in 2022. Third, we generated operating cash flow of $186 million during the fourth quarter, resulting in a record level of $450.3 million for the full year. This enabled $120 million of net debt reduction during Q4, reducing our net leverage ratio to 3.6x. Now moving into further details on our results. In the fourth quarter, we delivered total company revenue growth of 20.5% year-over-year as we continue to manage through the recovery from the pandemic. In Clinical Solutions, revenue grew 20.7% compared to the fourth quarter of 2020, including the impact of acquisitions. Our organic growth was driven by our full service portfolio, primarily the ongoing ramp in our larger pharma relationships accompanied by continued strength in our SMID customer segment and our oncology business. Including reimbursable expenses and the impact of the related backlog adjustment, our clinical book-to-bill ratio for the fourth quarter was 0.34x, resulting in a trailing 12-month book-to-bill ratio of 1.09x. Excluding reimbursable expenses, our clinical book-to-bill ratio was 1.26x for the fourth quarter and 1.34x for the trailing 12-month period, resulting in year-over-year ending backlog growth of 15.4%. Turning to Commercial Solutions. Revenue growth accelerated to 19.8% compared to the fourth quarter of 2020. The market for our Commercial Services remains significant, driven in part by the pace of innovation, new drug approvals and the biotech funding environment. Our growth remains broad-based with our highest growth rates in Deployment Solutions and consulting, including continued strength in our SMID customer segment. Deployment Solutions reached a new 5-year high in deployed resources and record ending backlog along with record new team starts during the full year 2021. We also saw strong growth in our public relations and medical communications businesses. The commercial team had another strong quarter of net awards with a book-to-bill ratio of 1.47x for the quarter and 1.14x for the full year 2021, when including the impact of reimbursable expenses. Full-service commercial gross awards remained robust through the fourth quarter, resulting in full year growth of over 70% compared to 2020. With the continued success of these offerings, the impact of Syneos One and our strong backlog, we expect commercial revenue growth rates to lead the way for the total company in 2022. As we drive innovation, we see continued customer adoption of integrated product development solutions that work across our clinical to commercial capabilities. We recently introduced a full-service medical affairs offering, which will be under the leadership of Michelle Keefe, who has deep expertise in development and integrated solutions. Similar in concept of Syneos One, this unique approach combines our medical affairs capabilities from across all parts of our business into an integrated offering, connecting our real-world evidence, health economics, outcomes and research, medical science liaisons, medical communications and specialized consulting disciplines. Today, customers have had limited access to medical affairs outsourcing alternatives, which are growing in importance as better evidence is required to ensure relevance of payers, providers and patients. Syneos Health is ideally situated to grow this high-value category as we believe our breadth of clinical and commercial capabilities, combined with our integrated product development mindset, positions us to become a leading brand in the medical affairs space. Continuing the integration focus, our end-to-end fully integrated product development offering, Syneos One, continues to resonate with our customers, providing an attractive alternative to traditional limited outsourcing options. The second commercial launch from this portfolio is now underway following receipt of FDA approval for the underlying product in January. Planning activities have also started for other product launches in 2022, subject to final regulatory approval with additional launches expected in 2023 and beyond. In addition to the substantial awards, the growing Syneos One portfolio is already driven into our clinical business, we expect it to increasingly contribute to commercial awards and revenue over the coming years. Finally, before I hand over to Jason, I wanted to highlight the recent additions to our Board of Directors, along with our other areas of ESG progress. We are pleased to welcome Barbara Bodem and Alfonso Zulueta and are excited about the additional depth of biopharma expertise and unique perspectives they add to our already strong Board. Our other notable ESG accomplishments include our recent commitment to net-zero emissions by 2040 and our participation in the Human Rights Campaign's Corporate Equality Index. In closing, I want to thank all of my 28,000-plus Syneos Health colleagues for their innovation and dedication as they continue to work tirelessly to provide new solutions and excellent service to our customers, sites and patients. Jason will now provide additional comments on our financial performance and guidance. Jason?

[Jason Meggs, Chief Financial Officer]

Thank you, Alistair, and good morning, everyone. Before I discuss the details of our results, I want to provide some additional context on the trends and reimbursable expenses that Alistair highlighted. Since the start of the COVID-19 pandemic, we have experienced lower reimbursable expenses as remote monitoring and other DCT approaches have become a more prevalent part of our clinical trials. This decrease in reimbursable expenses is primarily due to items such as lower travel expenses for our staff due to sustained levels of remote monitoring, investigator meetings remaining virtual and reduce cost for study medications. We are at the forefront of this transition with our customers and sites and given the long-term benefits it provides, we expect this trend to continue. As such, we have proactively adjusted our ending backlog to reflect our expectation of reduced reimbursable expenses going forward, mirroring what we are seeing across our existing portfolio as well as in our new awards. These adjustments only impact our outlook for reimbursable expenses, not our view of underlying demand or profitability. We, therefore, remain confident in our expectations for strong growth and profitability in 2022. Further, in response to feedback we've received from investors asking for deeper insights into key business drivers, we are providing additional information on our awards, book-to-bill and backlog metrics, excluding the impact of reimbursable expenses. We are also including the amount of quarterly reimbursable expenses in the appendix of our earnings presentation. Although there is diversity in practice across our industry regarding these disclosures, we believe they improved investors visibility into the underlying strength of our business and the leading indicators and revenue trends that continue to drive the expansion of our adjusted EBITDA margins. Now moving to the details of our financial results. Our total revenue for the fourth quarter of 2021 was $1.37 billion, up 20.5% and 20.8% in constant currency compared to the fourth quarter of 2020. This included continued strong growth with SMID customers across both clinical and commercial, bringing full year growth for this customer segment to over 30%. Revenue came in below our expectations due to foreign exchange headwinds, lower reimbursable expenses in Clinical Solutions driven by the DCT trends we highlighted earlier and the faster-than-anticipated wind down of certain COVID-related projects. However, this also resulted in an improved revenue mix, driving higher-than-expected adjusted EBITDA margin. Our Clinical Solutions revenue for the fourth quarter was $1.04 billion, up 20.7% as reported or 21% in constant currency compared to the fourth quarter of 2020. These increases were driven by growth in our full service portfolio, including the ramp in our large pharma relationships and strengthen our oncology business. This total growth includes a 1,000 basis point contribution from acquisitions and a 70 basis point tailwind from reimbursable expenses. This reflects the recovery of reimbursable expenses compared to 2020, although not to the level we anticipated in our guidance. Our fourth quarter Commercial Solutions revenue was $330.9 million, up 19.8% or 20.2% in constant currency compared to the fourth quarter of 2020. Growth in commercial revenue was driven by expansion across our core commercial businesses, with particular strength in deployment solutions and consulting. This growth includes a 260 basis point tailwind from reimbursable expenses and a 300 basis point headwind from the 2020 divestiture of our Medication Adherence business. Adjusted EBITDA increased 21.6% to $237 million, representing an adjusted EBITDA margin of 17.3%, an increase of 20 basis points compared to the fourth quarter of 2020. The increase in adjusted EBITDA margin for the fourth quarter was primarily the result of the benefits of revenue growth and the cost management initiatives in our ForwardBound program, partially offset by a higher mix of contract labor and a less favorable revenue mix. For the full year 2021, adjusted EBITDA increased 20.8% to $765.3 million. This represents 14.7% adjusted EBITDA margin and year-over-year expansion of 40 basis points. In addition, it is important to note that our unadjusted EBITDA grew by 21.9% in 2021. This was primarily driven by growth in operating income and related margin, given the benefits of robust revenue growth and our full bound initiatives. We expect this growth trend to continue in 2022 as we maintain our focus on driving cash flow conversion. Adjusted diluted EPS of $1.48 for the fourth quarter increased by 33.3% year-over-year, primarily driven by the increase in adjusted EBITDA and lower interest expense. This resulted in full year 2021 adjusted diluted EPS of $4.46, up 30.8% from 2020. Our operations generated strong operating cash flow of $186 million for the fourth quarter, bringing our 2021 total to a record level of $450.3 million. This performance was driven by strong cash net income and billing and collections activity, partially offset by deferred payroll tax payments under the CARES Act. DSO for the quarter declined to 44 days. Our capital expenditures were $26.9 million for the fourth quarter. During the fourth quarter, we reduced our outstanding debt by $120 million, consistent with our balanced approach to capital deployment. This was accomplished through voluntary repayments on our revolving credit facility and our Term Loan A, partially offset by the expansion of our lower-cost AR securitization facility. We ended the quarter with $106.4 million of unrestricted cash and total debt outstanding of $2.84 billion with net leverage declining to 3.6x at the lower end of our targeted range for year-end. Our non-GAAP effective tax rate for the fourth quarter was 22.5% to reflect our lower full year rate of 23.5%, driven by increased growth in earnings outside of the U.S. Given the benefit of our NOL deductions, our actual net cash outlay for income taxes in 2021 was approximately $35 million. Turning now to our updated 2022 guidance. This guidance contemplates our current view of the estimated impact of COVID-19 on our business, recognizing the factors related to COVID-19 are outside of the company's control and subject to change. We expect our total revenue for 2022 to range from $5.6 billion to $5.75 billion, representing growth of 7.4% to 10.3%, including a foreign exchange headwind of approximately $40 million. This also reflects the expected revenue headwind in Clinical Solutions from reimbursable expenses. Excluding this headwind, we expect clinical revenue growth in low double digits. It also reflects the continued strength in our commercial business for which we expect revenue growth in the low teens. Total revenue growth also includes a contribution from acquisitions of approximately 100 basis points and an estimated net headwind of 190 basis points from reimbursable expenses. We expect our total adjusted EBITDA to range from $840 million to $880 million. This reflects an adjusted EBITDA margin of 15% to 15.3%, up approximately 45 basis points from 2021. Lastly, we expect adjusted diluted EPS to range from $4.98 to $5.24 or year-over-year growth of 11.7% to 17.5%. Our guidance incorporates interest expense of $70 million to $72 million, a non-GAAP effective tax rate of 23.5% and an estimated diluted share count of 105.7 million shares. Further, we expect our net cash outlay for income taxes during 2022 to range from $70 million to $75 million. We expect first quarter revenue of $1.315 billion to $1.335 billion and total adjusted EBITDA of $163 million to $173 million. This reflects as-reported revenue growth of 8.8% to 10.4% and adjusted EBITDA growth of 7.9% to 14.5% compared to the first quarter of 2021. This revenue growth includes an estimated contribution from acquisitions of approximately 90 basis points, an FX headwind of approximately $14 million and a headwind of approximately 200 basis points due to reimbursable expenses. This reflects modest pressure related to the impact of the Omicron variant on staff and site productivity, along with normal seasonality. We expect the quarterly pacing of 2022 to be similar to that of 2021 as the impacts of Omicron subside, and we see an accelerating ramp in our clinical large pharma partnerships as well as Syneos One product launches in commercial. This completes our prepared remarks, and we would be happy to answer any questions. Operator?

[Operator]

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

[Eric Coldwell, Baird]

Not sure which CRO optical headwind we're supposed to focus on today. So I'm sure there will be a lot of Q&A on the pass-through situation. But I want to focus on the prior industry concern, which is small biotech exposure. And in a nutshell, you guys report mid clients at about half of your total revenue. I was curious if you could give us more detail on the client mix within the company, maybe even by division? But in total, have you taken a look at truly small biotech, even if it's precommercial account and what that might represent as a percent of your total revenue mix, bookings, backlog, whatever? Would love to get some details on that.

[Alistair Macdonald, Chief Executive Officer]

Yes. Eric, a lot -- we'll unpack some of that as we go through it. But yes, we have looked at that, obviously, I think with the earnings comments earlier in the week, we've taken a good walk through all of that element expecting questions on that today. So we've been very strong in the SMID, and I'll start from kind of where the environment is. We see great strength in the SMID at the moment. We've seen that across both kind of ends of the SMID as well, the emerging biotech as well as the more mature, larger customers in the SMID that we've kind of do the majority of our work in. I think across the company, when we look at where we sit with that, we're sub-15% on what we would -- I think, what you would call pre-revenue SMID. But that for us includes people who have incredibly strong funding through funding partners, private equity houses that are pulling money through clinical development, et cetera. So we look at that, see very healthy trends, see good solid RFP flow. And I think the tool set that we take to that market, the go-to-market approach we have with the kind of transactional let's go out and win standard project that we do through kind of the Synteract model as well as the old Syneos kind of SMID model. You've got that also it's very attractive to Syneos One because they don't bring the infrastructure. They want to keep it light. They can use it to clinical development, medical affairs for commercial. So I think we have a very attractive proposition to that. sector in the market, both here domestically in the U.S. as well as internationally. And a lot of our work that come through when we look at our pipelines, it's diverse, not just by market sector, but also by jurisdiction. So we're seeing a lot of work that we are winning in Asia Pac, Europe, where we've always been strong and the U.S. So we see a healthy environment. We don't see problems in that sector. And when we look at where we were last year, we're actually well positioned against where we were at this time last year, which was very strong as well. So I hear the concerns around funding. We're not seeing that. We're seeing good, strong, healthy pipelines, good engagement with those customers, cash on the balance sheets for them, a well-funded environment.

[Eric Coldwell, Baird]

Alistair, that's a great response. I think your pre-commercial mix is probably a lot less than people feared that we’re thought. Ironic to say fear when that was -- has been a big growth driver in the past, but any chance you could break that out between clinical and commercial? And then just any -- you've made some qualitative comments on what sounds like a strong environment, no change in demand. But any update on what you're seeing in the pipeline overall volumes, values, any additional commentary?

[Alistair Macdonald, Chief Executive Officer]

Well, I'll give you -- I'll start you on the volume of the pipeline, the values of the pipeline. They're very strong. I mean I think when you look back at where we were Q1 last year, you had a lot of the COVID catch-up in that kind of time period. So there were record levels. We're not far off of that. It's a healthy environment across the space, SMID, large and small SMID and in the large pharma. And we see, we have a go-to-market philosophy that attacks all parts of that market, like our big competitors. And we see a strong healthy environment. We see a lot of compounds going -- well, probably record levels of compounds going through development, devices, et cetera, biologics. We don't see a problem. So Jason, I think you got thoughts on the split of the pre-revenue?

[Jason Meggs, Chief Financial Officer]

Yes. I mean, Eric, if you remember back during 2020, we -- for a different reason, we were looking at liquidity and being able to pay on time, but we were providing metrics around pre-revenue biotech by segment. So in 2020, we continuously said pre-revenue biotech in commercial is less than 5% and in clinical is less than 10%. Fast forward now, and obviously, we acquired Synteract and that's been a strong market. Those numbers have ticked up a bit, but commercial is still well below 5% and clinical is going to be below 15% or right at 15% as well. So that's how you get to the math of overall and just a data point from 2020 when we were talking about this as well.

[Operator]

Our next question comes from David Windley with Jefferies.

[David Windley, Jefferies]

Picking up on Eric's question. Could you elaborate, Alistair, on the year-over-year part of your response where you commented on last year had a lot of COVID catch-ups in it. And so it sounds like you're down a little bit from that level but you still view that as strong. Maybe help us a little bit more to understand why not above last year is still okay?

[Alistair Macdonald, Chief Executive Officer]

Well, I think you've got to look at the trends over the last 2 or 3 years, and you've got a big -- when COVID start to go away, we know right, if you go back into the middle of the COVID pandemic in card the middle of 2020, people put programs on hold. Larger pharma programs on hold. SMID is kind of carried on because time is really money for them. So we didn't see much of a difference in kind of that SMID pacing, but we did in large pharma. The energy came out of the pandemic kind of Q4 of '20. Q1 of '21, you saw those programs coming back through the pipes, right, to get into the market and caught up. So you don't have that catch-up, so to speak, as we go into 2022. But when you look at where we were in 2020 at this time, just before we went into the pandemic and the quarters beyond that, we are seeing great pipelines across all sectors. Large pharma, larger SMID, emerging SMID biotech, whatever you want to call them. So we don't see an issue with that. We expected that peak of catch-up to be the peak, and it was the kind of record. But when I say we're not far off that, I mean, we're not far off that at all. So we have strong pipes, strong throughput of RFPs. And we don't see it as a big concern. I mean I think we were surprised with some of the commentary earlier in the week, there's anybody.

[David Windley, Jefferies]

Appreciate the additional color there. So pivoting then, the first thing I want to ask, just to confirm, the guidance that you're giving today and particularly on the revenue line, is that consistent? Is that basically exactly on top of what you told us to expect in early January at Tycho’s conference?

[Jason Meggs, Chief Financial Officer]

Yes, Dave. I mean there's been a little bit of change in terms of the FX headwind. But this is exactly, as we said then, we obviously had line of sight to what was going on in the pipe and the backlog build in the phasing and also in the reimbursable expense flow.

[David Windley, Jefferies]

So the -- to say it differently, the significant adjustment to backlog that we're seeing today is really not incremental information or incremental action to you relative to your expectations for '22?

[Jason Meggs, Chief Financial Officer]

That's correct. I mean if you look at the trends that we've seen, Dave, if you just take clinical reimbursable expenses, and you go back pre-COVID, right, we were -- as a percentage of our direct fee revenue, our net service revenue, right, we were in a 50%, 55% range. COVID hit, you go down into low 40s per quarter. And then we came out of that, and we sort of saw it in the mid to high 40% range. And then you dump a vaccine on top of it, and that kind of shields what's happening in 2021 on the reimbursable. So we knew the underlying portfolio was in that mid to high 40%, and that's what we're looking at as we go forward. And the adjustment reflects.

[David Windley, Jefferies]

Okay. And then, I guess, finally, in terms of the nuance, I think this is the second time that you've made an adjustment to the backlog relative to your reimbursement estimates. You kind of answered where you're triangulating to. Do you think that your go-to-market strategy and your execution strategy is different than your peers as it relates to remote and DCT that would be influencing how much reimbursement load you have that might be different than your peers?

[Alistair Macdonald, Chief Executive Officer]

Yes. I think there's 2 factors to that, actually, Dave. I think we do have -- we've bought some things in-house that are instrumental fundamental in delivering DCT properly, StudyKIK, Illingworth, et cetera. And that kind of converts revenue that would have been 606 pass-throughs to actually 605 direct. So that's good for us, and we're driving profitability off of that. The other factor, I think, is we were probably behind the 8 ball in terms of overall DCT provision when we went into the pandemic. So I think we started from a lower level, and I've caught up and probably one of the leaders now in that delivery. And so some of this adjustment is taking that it kind of bridges some of that gap where we started from an inferior position have moved faster quarter overtaken and -- but it reflects higher in our reimbursables because it shifts the model more.

[Operator]

Our next question comes from Tycho Peterson with JPMorgan.

[Tycho Peterson, JPMorgan]

Maybe just following up on that theme. Alistair, can you just talk a little bit about on decentralization and where do you think we are today and where you think we're headed here in the near term in terms of kind of percentage of trials?

[Alistair Macdonald, Chief Executive Officer]

Yes. We -- I think about probably half of our trials have some form of decentralization on them now, either heavily or partial elements. And that's a big uptick from where we used to be. I think people are -- we've kind of been in the evaluation phase, I think, across the industry, where people are thinking about what their delivery platform will look like for their trials as to bring them into market, what they're comfortable with in terms of decentralization as it's kind of become easier to do. People are thinking about it more. We get -- certainly get a lot more questions about what kind of operational footprint would be put together for a trial. We have a -- we have a DCT wizard that we can put information in and it kind of pops out the most kind of ideal operational setup, the most implementable, most pragmatic kind of settle. So I think it's here to stay. We certainly believe that. I think it drives better execution. It certainly opens up the trials to more potential participants, which should then drive better enrollment, better engagement, et cetera, more diversity include -- more inclusive more diversity as well. So I think they're all very good things. And I think we're long overdue for modernization of clinical trials in terms of technology and being able to engage with patients and sites more remotely. So I think it's a very good thing. I think it's here to stay. Where it goes from here, I think it will be a -- I don't think it will be a sudden overnight. Everything is fully decentralized. I think it will be a slow progress now. But certainly, that first big step has been made right across the sector, regulators, customers as patients, et cetera, people are keen to try and less kind of suspicious about it on the regulatory side.

[Tycho Peterson, JPMorgan]

And then how should we think about the adjustments you're doing today in terms of the long-range guidance you gave at the December Analyst Day, 10% top line and 11% to 14% EBITDA growth through '23?

[Alistair Macdonald, Chief Executive Officer]

What was the question -- sorry, Tycho we missed the start of the question.

[Tycho Peterson, JPMorgan]

The guidance from your December 20 Analyst Day, you had given guidance through ‘23. How do we think about the adjustments you’re making here today in context of that prior longer-term guidance?

[A –Jason Meggs]

Yes. I mean if you look at 2022, obviously, we’re at the upper end of that range despite this reimbursable headwind that we’re talking about is now flowing through the numbers. When you look overall at the position of the company and as Alistair mentioned, right, we had – in clinical, we have a very strong pipeline. We have a very robust end market that’s right across all customer cohorts. We have 15-plus percent backlog growth, excluding reimbursables and clinical, 20-plus percent in Deployment Solutions, book-to-bills are 134 TTM and 114 TTM in both businesses. So we feel very well positioned to continue our journey on that 7% to 10% through 2023.

[Alistair Macdonald, Chief Executive Officer]

Yes. Let me add something to that as well, Tycho. If you think about a 605 world, we used to shoot for a 1.2 book-to-bill, and we were all happy with that. We’re at 1.34, we’re very happy with that. It’s driving strong growth. The reimbursable adjustment zero-calorie revenue, and that’s spread across the whole of our backlog that goes out, what, 5, 6 years. So it’s – it will pace in over time. You’ll see that difference in the reimbursables over time, but the backlog, the book-to-bills that we’re driving across both sectors are super healthy compared to where we need them to be to drive that revenue growth and that EBITDA growth. So we’re very comfortable with that. We made this adjustment. We’ve given you more visibility to the reimbursables, the book pacing of those over the last 2 years in the materials that we posted. So gives you better visibility as to how we handle it. You see in there the variability in pass-throughs and why they’re so tricky to kind of manage through and handle. So hopefully, you guys see that as we move forward that underlying business, that real kind of revenue and EBITDA generating work that we do is on a very healthy upward swing.

[Q –Tycho Peterson]

Great. Just lastly, you are guiding 45 bps of EBITDA margin expansion this year in a wage inflationary environment and that’s been the other topic -- so can you maybe just comment on some of the levers you’re pulling to get that expansion this year?

[A –Alistair Macdonald]

Yes. I mean, we continue with the ForwardBound program that we’ve had. That’s been really productive, very good for us in terms of handling increases in the cost base. We have a big portion of our revenue comes through FSP and deployment solutions, et cetera. So that’s a cost-plus model. So it adjusts as it goes through. We’re able to sit down with customers and have a sensible conversation about the rate adjustments, et cetera, as we go through the year, we visit that a couple of times a year, and we’ve been working on that since we started to see this at the start of 2021. We’re a second employer on the Forbes list. We’re on the Fortune list. We’ve been noted for our approach to D&I. We’re a good place to work. We have a good culture. People want to come here. We hired 3,300 people net into clinical last year alone plus commercial on top of that. We’ve got powerful recruitment and reasons for people to want to be at Syneos Health in terms of the culture we provide, the benefits, et cetera, et cetera. So we’re handling it. It is a tough environment, but it’s steady. It’s not swinging up and down. It’s just steady. The level of turnover in our business and everybody else is not just our sector, but it seems to be across the west of the world is higher, and we’ve adjusted to it. Our current recruitment engines are in place. We bring people straight out of college into great careers and they do well. So we’re, I think, very well equipped to handle it.

[Operator]

Our next question comes from John Kreger with William Blair.

[John Kreger, William Blair]

I had 2 kind of follow-ups, again, relating to the sort of pass-through, Alistair. So I guess the first, and this one might be more for Jason. Since it seems like this sort of shift in the business has picked up of layer is accelerating. As you think about how this filters through the P&L as you move through '22 and beyond, does the impact kind of get larger in the second half of '22 versus the first half? And should we assume the impact is maybe larger in '23 relative to '22, if you could just speak to that. And then the other question is, from an operational standpoint, what does this mean to you? And is it really only clinical? Is it commercial? Does this change the way you think about sort of staffing and really building the operations of the business?

[Jason Meggs, Chief Financial Officer]

John, when you look at the sort of sequencing of the reimbursables next year on the clinical side, you're going to see the most pressure in the -- probably in the second and third quarters of the year relative to 2021 just because we did have -- we still had some pressure in quarter 1 of last year, the most pressure from the pure pandemic impact, right? So lowest travel and all that. But by and large, you're going to be flattish to down a little bit in the first 3 quarters. And then we'll start to get back to a little bit of growth, I would imagine, on the reimbursables in quarter 4. By the time we work through all that into 2023, and some of this depends on what happens with COVID vaccine type work, right, because that type of work does continue. But we expect it to sort of trend out and flatten out and just be consistent. But we'll have to continue to monitor it, but that's how we think about 2023. And what was the second part of the question, John?

[John Kreger, William Blair]

Operational. So it sounds like you're communicating that this is a relatively significant change in the business and a durable change. Does that impact the way you think about where you want to add staff? What sort of staff you're adding? I guess, it goes the difference -- an accounting shift and really in the business.

[Alistair Macdonald, Chief Executive Officer]

John, it's Alistair. Yes, it does. I mean fundamentally, as trial designs change and trial execution changes, more technically, more digitally, more remotely, you do need different skill sets. And I think we've been bringing them in, training people in them. There's more vendor management. There's more kind of dealing with more aspects of the trial because it's not just 1 model. I mean, when I think about trials, kind of trials of the future, what we've seen in the past, you've found a bunch of investigators and you went out and find patients and you kind of had 1 model in each trial. What I think we'll see as we now move into the future is you'll have that piece. There are jurisdictions where that will always remain certain therapies will that will remain. But then you'll have an arm in the trial or PCP trial will come through a DCT channel, and the PCP trial might come through community sites, something like Algo a delivery model like that. So you're going to have to have project managers who can handle those different streams. You're going to have to have clinical staff who can work in a stream. We deploy the with Home Health folks. So we've already changed that model by buying some of that in-house to deliver before we just dispatched, we plugged somebody in from Illingworth when there weren't part of Syneos in the way they went. Now we own that organization. We cross-train them. We're deploying them in -- from within the company. So yes, it does change the nature. It doesn't change it overnight. It's an evolution, not a revolution in that sense, but it does change the way that you think about people, bringing in things like RxDataScience solutions. How do we look for the patients differently, how do we design things that are more productive, et cetera, et cetera. So it becomes a more complicated market, but we're already on that transition.

[Operator]

Our next question comes from Patrick Donnelly with Citi.

[Patrick Donnelly, Citi]

I guess on the remote monitoring and decentralized trials, I mean it certainly sounds like those are here to stay. Obviously, Alistair, you talked a little bit about the percentage that they are making up. I guess how does that change in terms of the structure of some of those orders? Even on the margin side, financially, I'm just wondering how that changes relative to the orders of old versus this? If you can give us any metrics around that would be helpful.

[Alistair Macdonald, Chief Executive Officer]

Yes, I'm not sure I have any metrics to handle on that. But when I look at where we're at on those decentralized trials or there's elements of it, I don't see any real difference in margin. Actually, I see a little bit of an improvement in the margin.

[Jason Meggs, Chief Financial Officer]

Yes. I mean, Patrick, we've talked about over time and maybe -- and Michael Brooks is here with us, he can comment as well. But reimbursable expenses obviously come down, right? So that is a margin help, and that's what we saw in quarter 4. That's what -- that certainly is a part of our margin story in 2022 as well with these reimbursables coming down in clinical. I do think it shifts some of the -- on the lower end of the margin side of the traditional clinical trial around monitoring and perhaps moves a little bit more into higher-margin data capture, data management services that we provide to enable that, home health probably a little bit better than the traditional monitoring, et cetera. So I do think there's some benefit on the direct fee side, the net service revenue as well, but more to learn there. I don't know, Michael, if you want to comment.

[Michael Brooks]

Yes, when I look at the service fee revenue side, we are seeing those dollars are being shifted into different types of solutions. So the data scientists, remote monitoring or medical leads, things like that, there are some benefits to our customers that we're able to return to them. But the margin of those, I think, will be higher over time, particularly as automation comes into play and more sophisticated tools that we're deploying into those trials. We have some really good examples when we've been able to work with our clients over the last 2 years to help shape the clinical trials using that product development mindset has brought really good value to them that also give us benefits at the exact same time. And I agree with Jason. I think on the indirect side, our customers are going to see a lot of benefit from that as well.

[Patrick Donnelly, Citi]

And then, Alistair, maybe just to circle back on the biotech funding, I apologize, but obviously a lot of focus there. I mean it sounds like you're pretty confident on the durability of cash on the balance sheet, maybe the public market might be a little bit quiet here but the elevated levels of funding from the last couple of years, I guess, are sufficient to continue to execute on it. I guess, can you just talk about particularly that small biotech that you talked about the durability of cash and the balance sheet, visibility that you guys have relative to maybe past quarters, visibility maybe even into '23, it would be helpful just to touch on that. I appreciate it.

[Alistair Macdonald, Chief Executive Officer]

Yes, a little bit there -- but I think we got the gist of it. Yes, I mean, I think when we look at the Biotech Funding Index as an indicator, it captures a part of the funding that comes into this market, right? So we have a truly global business development team that are bringing in projects that are coming out of Asia Pac, Europe and America, like I said before. We're working with companies Blackstone and Vein and people like that who fund clinical development through biotechs, et cetera, through portfolios, and we see a lot of money going into the emerging biotechs. They've got great science. They are driving things forward. When we obviously do credit checks and all that kind of stuff on customers, we don't have any problems at the moment that I'm aware of anyway, looking at Jason that he is shaking his head, on cash collection and things like that from that sector. All the indicators that we look at and think about that kind of raise flag to you that somebody might be having problems, we're not seeing. I mean I remember back in the financial crisis to '09 -- 2009 was, we saw problems there for sure, but we don't see any of that now. And it's good signs incredible amount of assets that are coming through for development, cell and gene therapy, you've got now obviously with the COVID, the vaccine technologies, mRNA people are looking at, well, can our product be delivered through an mRNA technology, et cetera. We're seeing a lot of investment in that kind of stuff. So we're just not seeing it. And we -- I can assure you, we look at our pipelines a lot because it's the tip of the spare. And also, we look at where we're at in the early phase -- with the early phase businesses, translational science guys, our early phase science team in the clinics, and we have record demand in that sector. And that's our canary in the coal mine is looking at that. It's looking as far forward in the process as you can of compounds where they're going to go from Phase I to Phase II and onwards. And we haven't seen a problem.

[Operator]

[Operator Instructions] We have a follow-up from Eric Coldwell with Baird.

[Eric Coldwell, Baird]

I apologize if I somehow missed it. If I had more time and more brain cells, I'd probably be able to figure it out. But did you quantify the backlog adjustment separate from the quarterly pass-through bookings in 4Q? So there's kind of a couple of components here to, I think, to get to the math, but maybe you could just spoon-feed us on that a little bit.

[Jason Meggs, Chief Financial Officer]

Yes. Eric, it's Jason. No, we didn't quantify it. And at this point, not thinking that we will. I think if you -- and Dave mentioned this, if you think back to quarter 3 of '20, when we made our first adjustment, we talked about sort of size of that at the time, I think, in the 250 range. This is going to be well above that because we're -- as we've continued to look at 2021 and the new awards and the trends that we're seeing in the existing portfolio, we just wanted to take all of it out that we believe that we can. So -- and just so everybody is on the same wavelength, excluding the reimbursables, right, we still had a really strong quarter of book-to-bill 126 in clinical and a 134 TTM. But that's the way to think about it, Eric, in terms of sizing it.

[Eric Coldwell, Baird]

Okay. I wasn't sure if you did or would, but I think we get the optics part of it. So thanks, again.

[Operator]

And there are no other questions in the queue. I'd like to turn the call back to Alistair Macdonald for closing remarks.

[Alistair Macdonald, Chief Executive Officer]

Thank you. So again, our sincere thanks to the entire Syneos Health team for all they continue to do to manage through the pandemic while delivering for our customers. We remain very confident in our market positioning and look forward to a strong growth in profitability in 2022 and beyond as we execute on our value creation plan. So thank you for your attendance today, your interest and investment in our organization. And please be safe. Have a great day and be good. Thank you very much.

[Operator]

This concludes today's conference call. Thank you for participating. You may now disconnect.