Syneos Health Inc (SYNH) 2015 Q1 法說會逐字稿

Good day ladies and gentlemen, and welcome to the INC Research First Quarter 2015 Earnings 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 now like to turn the conference over to Ronnie Speight, Vice President of Investor Relations.

Please go ahead.

Good morning everyone.

The purpose of this call is review the financial results for INC Research's first Quarter 2015. With me on the call today are Jamie Macdonald, our Chief Executive Officer, and Greg Rush, our Chief Financial Officer.

In addition to the press release, a slide presentation corresponding to our prepared remarks is available on our website at wwwinvestor.incresearch.com within the Presentations and Events section. As a reminder, and archived version of this webcast will be available for replay on our web site after 1 o'clock today. As outlined in our press release, there will also be a telephone replay of this conference available for the next seven days.

Remarks that we make about future expectations, plans, and prospects for the company constitute forward looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. 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 2014 form 10K as filed with the Securities and Exchange Commission on February 24th, 2015, our form 10K for the first quarter 2015, as well as our other SEC filings.

In addition, any forward looking statements represent our views of today, and should not be relied upon on as representing our views as of any subsequent date. While we might update forward looking statements at some point in the future, we specifically disclaim any obligation to do so.

During this call we will discuss certain non-GAAP financial measures, which exclude the effect of events we consider to be outside of our core operations. These measures should be considered a supplement to, and not a replacement for measures prepared in accordance with GAAP. We believe that providing investors these measures helps investors gain a more complete understanding of our financial results, and is consistent with how management views our financial results.

For a reconciliation of the non-GAAP financial measures with the most directly comparable GAAP measures, please refer to slides 19-22 in the presentation posted on our website. As we will be limiting today's call to one hour, we request that participants limit questions to one each with an opportunity to ask one follow up question.

I would now like to turn the call over to Jamie Macdonald.

Jamie?

Thank you Ronnie.

Good morning, and thank you for joining our First Quarter 2015 Earnings call.

I am pleased to report that we are building on our momentum from 2014 with a strong start to 2015. We have continued to focus on delivering high quality service to our customers through our therapeutic alignment, and strong execution via our Trusted Process.

I would like to highlight our progress during the first quarter with some key metrics outlined on slide three of the presentation before Greg provides you with more details on our financial performance.

First, we grew our net service revenue by approximately 15% compared to the first quarter of 2014. This was despite a significant foreign exchange headwind primarily due to the impact of the continued strengthening of the US dollar against the Euro, and the British pound.

We estimate that the impact of foreign exchange on our revenue was approximately $9 million in the first quarter. Accordingly, on a constant currency basis, we grew revenue by nearly 20% from the first quarter of 2014.

For the first quarter our net new business awards were $255.5 million compared to $280.9 million during the first quarter of 2014. New business awards have varied, and will continue to vary from quarter to quarter due to the fact that we may receive a small number of relatively large orders in any given period.

Our net new business awards in the first quarter of 2015 resulted in a net book to bill ratio of 1.2, driven by consistent awards and change order activity, modest cancellations, and a solid new business pipeline. We are particularly pleased with this strong book to bill ratio given that we are growing revenue at nearly 20% on a constant currency basis, a rate faster than the industry.

Our back log remains strong at $1.6 billion as of March 31st, 2015 despite a reduction of $88 million since the first quarter of 2014 due to the impact of foreign exchange. We believe that we can continue to win a significant portion of our new awards from repeat customers by delivering high quality work, and providing added value through our therapeutic expertise.

In that regard we are encouraged by the positive on going discussions with one of our largest customers for whom we are currently the primarily functional service provider.

As we've discussed in the past, we have been working with this customer to evolve our over three year relationship from primarily a functional service provider relationship to a more traditional full service arrangement. We believe this will allow our customers to take better advantage of our therapeutic expertise across their studies, and will also allow us to compete, and win additional full service work on other studies going forward.

We are making good progress in this transition as we have extended our agreement through June 30th, 2015 allowing us time to continue our work on existing studies, win new awards for full service studies, and complete the transition from an FSP relationship to a full service relationship.

In this regard I am happy to report we are already winning full service work under this new model, as we were awarded three new full service studies in the first quarter of 2015 under this approach, and expect the customer to remain one of our most valued, and top customers going forward.

We also continue to have a very diverse customer base, with our top five customers resenting only 36% of our revenue in the first quarter of 2015, down slightly from the 37% for both the first quarter and full year 2014.

INC Research was built on a legacy of excellence in CNS, and we have continued to expand that expertise into Oncology, and other areas where clinical trials are particularly complex. These areas represented approximately 67% of our back log as of March 31st, 2015 compare red to 73% as of December 31st, 2014. The decrease is primarily due to the mix of revenue and net awards in the first quarter, and will vary from quarter to quarter.

We believe our continued strong position in these demonstrates the effectiveness of our therapeutically focused project teams, which extend down to the CRA level, coupled with the therapeutic expertise of our business leaders. Based on industry data, these complex areas now represent approximately 60% of the phase three drugs under development, which we believe continues to favor our strategy.

We continue to strengthen our industry leading relationships with principal investigators and clinical research sites. Specifically we have recently announced our ranking as the top CRO to work with among large global CROs in the 2015 CenterWatch Global Investigative Site Relationship Survey.

This is the second consecutive time we have ranked at the top of the large global CROs in this bi-annual survey, and we have ranked among the top three CROs in the last seven consecutive CenterWatch surveys. Our consistency in this area demonstrates our passion for supporting sites with an approach of continuous improvement.

We also continue to strengthen our relationships with investigative sites through our collaboration with the Society of Clinical Research Sites, where we are a Global Impact Partner, their highest level of membership.

During the first quarter we achieved two milestones through our new programs with SCRS, including reaching 100 scholarship awards in the first, and only, scholarship program for site training and education, as well as the creation of site advocacy groups. These groups are designed to provide sites with a strong voice in the strategic direction of clinical trial conduct helping to address operational changes while improving quality of the clinical trial process, data, and patient interaction.

In support of global delivery for our customers, we continue to expand our total employee base to over 5,800 staff during the first quarter, up from approximately 5,600 at the end of 2014. We have continued to broaden our capabilities globally through organic expansion of our presence in important markets like Japan where we now have approximately 50 staff compared to only 10 for the same period in 2014.

Lastly, I would like to point out that as of this morning we filed a follow on underwritten public offering registration statement on form S-1 with the SEC to register the sale of shares by our two largest stock holders, Avista and Teachers, and certain of our current and former employees.

As described in the S1, in conjunction with this offering, we expect to repurchase approximately $150 million worth of shares from Avista and Teachers. We expect this repurchase to be accretive to our earnings per share. Please review the registration statement for further details.

Let me now turn it over to Greg Rush for more detailed comments on our financials.

Greg?

Thank you Jamie, and good morning everyone.

I would like to start by making additional comments regarding our financial performance, highlighting some of the key metrics on slide three, which are presented with a more detailed view on slide four.

Please note that we are presenting our key metrics on an adjusted or non-GAAP basis, which excludes the impact of items, which we believe our not representative of our core operations. For clarity we have included detailed reconciliations of these adjusted metrics in the appendix our slide deck showing the relevant adjustments to their GAAP equivalent.

As Jamie highlighted, on year over year basis we grew our net service revenue by approximately 15% during the first quarter to $211.5 million from $184.7 million for the first quarter 2014.

On a constant currency basis, excluding foreign currency headwind of $9.1 million, our net service revenue grew by 19.5% year over year, reflecting our continued strength in net new business awards over the last 18 months, and the resulting strong backlog coverage coming in to 2015.

Consistent with our long term goals, our net new business award for the first quarter 2015 were $255.5 million, producing a book to bill ratio of 1.2. For your reference, on slide 14 or the appendix, we have included our historical book to bill ratio on both a quarterly and trailing 12 month basis since the beginning of 2014.

On slide five you can see the continued diversity of our customer base. We continue to see revenue from a broad cross section of small, mid-size, and large biopharmaceutical companies.

On slide six we have provided trending of our adjusted gross margins, adjusted income from operations, adjusted SG&A expenses as a percentage of revenue, and adjusted EBITDA margin by quarter since the first quarter 2014.

As you can see, we continued to improve our margins throughout these periods, effectively managed pricing and expenses, and executed on delivery for our customers. We have also closely managed our SG&A expenses holding them relatively flat as the percentage of revenue despite the beginning to incur increasing cost from being a public company, which we expect to total three to five million annually.

On slide six I would like to point out that each of the metrics for the first quarter 2015 were positively impacted by the settlement of approximately $6.2 million of liabilities at less than original estimates. Specifically, in late March we achieved favorable resolution of several VAT and other tax items, determined a favorable change in estimate related to our 2014 employee incentive compensation, and resolved several disputed reimbursement cost obligations with customers.

The favorable settlement of these obligations resulted in a reduction of direct costs by approximately $5.1 million. Further, within SG&A expenses, we also had favorable settlements of certain employee related obligations totaling approximately $1.1 million.

We do not believe these expense reductions included both indirect costs, and SG&A are indicative of future expense run rate levels. Direct costs increased from $120.4 million for the first quarter 2014 to $124.8 million for the first quarter 2015, with gross margins expanding from 34.8% to 41%. We are certainly seeing the benefits of our cost management initiatives.

First, we continue to leverage the therapeutic management overhead as we expand our revenue base. Second, we are seeing the benefit of improving the utilization of our facilities from 77% at December 31, 2014 to 79% at March 31, 2015.

Finally, we are making good progress with our CTMS consolidation. As we expect to eliminate two of our five clinical trial management systems by the end of the year, and we continue to gain efficiencies with the new systems on which we have standardized.

While these initiatives played a role in our margin improvement in the first quarter, and are key to sustainable long term improvement, as I just mentioned, the first quarter gross margin includes non-recurring benefits of $5.1 million, or approximately 250 basis points of gross margin.

Therefore, they are not representative of our future gross margin levels. In addition, we will continue to add staff to support our growing business, which may have a slight negative on gross income margin levels relative to the first quarter in the short run.

Lastly, the impact of foreign exchange reduced our direct cost by a greater percentage than our revenue, and thereby positively impacting our gross margin percentage by approximately 80 basis points. Considering these factors, we expect our normalized gross margins for the remaining nine months of 2015 to range from 36% to 38%.

Also, due to the fixed nature of many of our costs in the short term, we continue to expect our gross margin to vary from quarter to quarter.

SG&A expenses increased from $31.8 million in the first quarter 2014 to $35.5 million in the first quarter of 2015, while declining from 17.2% to 16.8% of net service revenue over the same period. Similar to direct cost, we continue to make progress against our margin improvement initiatives by leveraging our global infrastructure, and thereby growing SG&A at a slower rate than revenue. We are pleased with this improvement particularly given the headwind discussed in the past from the increased cost associated with being a public company.

While not a significant contributor to the improvement, as I mentioned earlier, SG&A expenses for the first quarter 2015 include $1.1 million in reductions for the favorable settlements of certain employee related obligations. The impact of these items reduced SG&A expense as a percentage of revenue by approximately 50 basis points.

Our strong year over year revenue growth, operational execution, and ability to leverage our SG&A infrastructure resulted in adjusted income from operations increasing 80.6% from $25.7 million for the first quarter 2014 to $46.4 million first quarter 2015 with the associated margin increasing from 13.9% to 22%.

Similarly, adjusted EBITDA grew by 57.1% for the first quarter to $51.2 million first quarter 2015 from $32.6 million first quarter 2014. Adjusted EBITDA margins improved to 24.2% for the first quarter of 2015 from 17.6% for the same period in 2014.

Given the non-recurring direct costs and SG&A items previously discussed, we would expect adjusted EBITDA margins to be approximately 18.5% to 19.5% for the remaining 9 months of 2015. Adjusted net income increased to $26.3 million for the first quarter 2015 from $6.2 million for the first quarter of 2014. Adjusted earnings per share was $0.42 for the first quarter of 15' compared to $0.12 for the first quarter of 2014. The non-recurring items previously noted positively impacted the adjusted earnings per share by approximately $0.06 per share during the first quarter of 2015.

Fully diluted weighted average shares outstanding using calculating adjusted net income per share were $63.1 million for the three months ended March 31, 2015. The diluted share count for the first quarter 2015 includes the impact of 1.9 million shares from equity based employee awards. At March 31, 2015 the outstanding share count was 61.3 million.

The overall impact of foreign exchange on our adjusted EBITDA and adjusted net income was de minimis for the first quarter as the overall reduction of our total cost approximately offset the negative impact to revenue. However, as I pointed out earlier, because of the reduction of revenue foreign exchange did positively impact all of our margin percentages.

Slide seven provides some key metrics demonstrating our improving cash flows in a leverage position. Our cash flow from operation was $43.6 million for the first quarter 2015 as compared to $31.2 million for the first quarter 2014. This increase is driven by our growth in revenue and margin improvements highlighted previously, coupled with ongoing working capital management. We ended first quarter 2015 with $156.3 million in unrestricted cash, up $42.2 million from the first quarter 2014.

On slide seven we also provide our net DSO. We continue to report overall strong performance in our customer portfolio with net DSO of a negative 2.9 days, which includes the impact of customer deposits, and other pre-payments. While we are pleased with this performance, over time we expect our DSO will return to more normalized levels, in the low teens.

On slide 16 and 17 of the appendix, we have provided charts of both overall DSO, as well as DSO associated with only our net service revenue.

I am also pleased to announce that earlier this month we arranged the terms of a new $675 million credit agreement comprised of a $525 million term loan, and $150 million revolving credit facility. We expect to enter into this new credit agreement in the second quarter 2015 upon the satisfaction of customary closing conditions. We expect this refinancing to lower our average interest rate from 4.5% to 2.3% based on current LIBOR rates, saving us approximately $4 to $5 million in interest costs for the remainder of 2015 at our current debt levels of $424 million.

We expect to use the $100 million of incremental borrowings along with cash on hand to fund the share repurchase of up to $150 million that Jamie mentioned earlier. We expect that this re-purchase,net of the incremental interest cost of approximately $2.3 million associated with the additional debt of $100 million, will be accretive to our earnings per share.

On slides eight and nine, we provide a view of the overall sources and uses of funds in this refinancing, the pro forma capitalization, and the key terms of the new credit facility.

Turning to backlog, slide 10 includes a roll forward of our backlog for the current quarter, and in addition to summarizing other key metrics we believe are important to understanding the expectations of future growth. On the roll forward of our backlog note the net impact of foreign exchange with a reduction of backlog of $38.9 million for the first quarter 2015.

The pie chart on the right of slide ten illustrates the concentration of our backlog with 67% in the areas of CNS, Oncology, and other complex diseases. We believe these represent areas where we excel due to both our therapeutic expertise, and the rigor of our Trusted Process. We also believe these areas include some of the largest and fastest growing therapeutic areas in a broader market, and currently represent approximately 60% of the phase three drugs in development.

Further, as Jamie indicated earlier, we continue to leverage our expertise to expand and strengthen our business to areas such as Ophthalmology and post-approval services.

With regards to the leading indicator of future revenue growth, we believe that one of the most important indicators is backlog coverage, which is presented in the bar chart in the bottom left quadrant of slide 10.

As you can see from this chart, we are maintaining a favorable position with 90.4% coverage of the current year's total revenue forecast as of the end of the first quarter, up from 89.4% as of the beginning of the year. This is based upon the mid-point of our guidance range. This compares to 94.5%, and 88.5% for similar periods as of March 31, 2014 and 2013 respectively.

Lastly, in the bottom right of slide 10 we provide our backlog burn rate. We believe our strong operational execution coupled with our conservative and disciplined approach to recording awards and backlog burn rate, which range between 12% and 14% in recent quarters, and was 13.3% for the first quarter of 2015.

On slide 11 we are providing a revised guidance for key financial metrics for the full year 2015. This revised guidance takes into account a number of factors including our strong performance in the first quarter, expectations for the remainder of the year, the expected refinancing of our debt, current foreign currency exchange rate, and our expected tax rate.

Due to the number of variables related to the proposed share repurchase, our revised guidance does not take into account the net impact of the $100 million of incremental borrowing in the subsequent $150 million in share re-purchase.

However, we do expect the net impact of this transaction, including the impact of the $100 million of additional debt, to be accretive to earnings per share.

Expect our net service revenue for the full year 2015 to be between $880 million and $905 million, representing a gross rate of 9.9% to 13%. This takes into account a foreign currency headwind estimated at approximately $40 million, a negative impact to our gross rate of approximately 500 basis points. Accordingly, our constant currency gross rate is expected to be between 14.9% and 18%.

We are forecasting adjusted EBITDA to range from $175 million to $185 million, growing at approximately 20.5% to 27.3%.

In addition, we expect our adjusted net income to range from $89.5 million to $97 million, growing at 100.5% to 117.3%. This results in adjusted diluted earnings per share of $1.40 to $1.52. Lastly, we expect to earn $1.13 to $1.29 a share on a gap basis.

Included in our advised gap earnings per share guidance is an estimated four cents per share impact for stock base compensation. Given our projected mix of revenue and expenses by currency, the foreign currency headwind on revenue that I mentioned earlier, is expected to only have a modest impact on our earnings for the year.

Specifically we currently expect our earnings per share to be negatively impacted by one to two cents per share. This is impact is reflected in the earnings guidance I just provided.

This completes our prepared remarks, and we would be happy to answer any questions.

Operator?

Thank. (Operator Instructions)

Our first question comes from Robert Jones with Goldman Sachs. Your line is open.

Thanks for the questions.

Just looking at the gross margins, strong performance in the quarter, even when we adjust for the $5.1 million in settlements that you mentioned, I just wanted to get a better sense of what drove the performance. It looks like based on guidance, you are expecting gross margin to be a little bit lower than what you saw this quarter for the balance of the year.

Curious what's driving that? Is it hiring, or is there other factors at play?

I will take your first part of the questions, Bob.

The driver is really a lot of the cost control initiatives we talked about earlier. We are getting some improvement of facilities consolidation, so we are doing that. Also, given our discipline at backlog we are doing a pretty good job of managing headcount as that comes on board.

As to your second part of the question, why is gross margins going to be a little bit lower in the last nine months compared to the first quarter, we are winning a lot of good business, you saw in Q4, so were starting to hire up for that, and as those projects start to start up you will have a little bit of a decrease in margins, mainly from the hiring of those people, getting them on board -- their utilization is a little lower, so we are taking all of that into account.

Got it.

And I guess my follow up then is just looking at your customer concentration you noted that Otsuka had fallen off quite a bit year over year. No longer broken out as a top 10% revenue contributor.

I am just wondering if you could provide an update on the work and relationship with this important client.

Yes, we don't usually give customers that are below 10% -- every quarter is going to vary slightly. We expect them to be a 10% plus customer this year. Just for your information, they were 9.4% in this quarter, so they were right at the 10% breakout distribution, but it varies quarter to quarter.

Great.

Thanks so much.

Our next question comes from Jeff Bailin with Credit Suisse.

Your line is open.

Good morning. Thanks for taking the questions.

Jamie, you mentioned transitioning the relationship with one of your top customers from a functional to more full service basis. Just curious is that an exclusive, or preferred relationship, and also is it fair to assume that as it moves to full service work that it might be more profitable than the previous FSP work?

In terms of it being exclusive, no it has not been at any stage. I think we have some preferred positions in certain therapeutic areas, but the -- there is a good amount of that business that will be tendered on a competitive basis, and on a more full service basis going forward, which we are pretty comfortable with.

It is just taking a little bit of time to do the reconciliation, and move it from an FSP to full service. In terms of margin, we expected to be broadly similar to where it's been in the past. It will all obviously depend on the volumes they hit, and whether that triggers maybe higher tiers in terms of discounts and rebates. But, overall we expect it to be roughly the same as where it's been in the past.

Got it. Thank you.

And just a quick follow up for Greg.

In terms of the share purchases you discussed this morning, how should we think about that along with the refinancing activities impacting your broader thinking about long term capital deployment priorities in M&A?

Yes, I think from the share repurchase, this is definitely a new capital allocation strategy. When you look at the -- where the acquisition pipeline is today, as we talked about in past, we always plan on using our cash for highest and best use for shareholders, there was not an acquisition in our near term future, and we had a lot of excess cash, and we felt like this transaction would be accretive, and as you know we are doing a secondary offering that we announced, and we wanted to be supportive of the stock during that time frame.

So, this is more of a case by case, but a new strategy to do share repurchases.

Great, thanks for the color.

Our next question comes from John Kreger with William Blair.

Your line is open.

Hi. Thanks very much, and thanks for all the detail.

Jamie, your comments on the renewal that you started the call out with. Just another follow up there.

When all that is buttoned down, would you expect it to be roughly the same size relative to your overall business, or go up, or go down as a percentage?

I think it's going to be where it's been year over year, but obviously we've got a growing revenue base. So, dollars, broadly similar to where it's been. Percentage will probably decline a little bit over the coming next 18 months or so.

Great thank you.

Any broad comments that you could give us on the environment, either in terms of demand trends, or pricing environment, particularly thinking about your smaller bio-tech oriented clients?

Yes, I think the market stayed pretty much where it's been for the last few quarters. We are seeing generally decent pipelines from large pharma down to bio-tech. I think the funding of bio-tech has remained reasonable strong. I think it's probably just taking a little bit longer to close some of the opportunities. That seems to be a more recent trend. I wouldn't have said it was anything new in quarter one.

So, we see opportunities, and we go through a little bit more of an iterative process, but that's part of the consultative process, particularly with small pharma and bio-tech trying to lock in protocols, strategy, country selection, and then that will, obviously, allow us to finalize budgets and final proposal.

Great. Thanks.

One last one. Greg, with your updated revenue guidance what sort of net hiring growth do you expect in '15 overall?

We are -- for the remaining nine months, I think our hiring will probably out pace a little bit what it did in Q1. I think we added 200 headcount in the first quarter, so we do expect that to accelerate slightly in the second half.

Great. Thank you.

Thanks John.

Our next question comes from Tim Evans with Wells Fargo Securities.

Your line is open.

Hi, thanks.

Greg, can you clarify on the guidance, I believe in your press release it said that the impact from the financing was included in the guidance, not the share repo, but the financing stuff. And I believe you said something different in your comments. I just want to -- is the reduction in interest expenses factored into your updated guidance?

It is. If you look at slide 12 in our presentation, we actually do a complete break out of our updated guidance, and so if you look at that we basically said that -- we obviously from our own internal forecast beat in the first quarter by about $0.12, and we break that out. And then we talk about updated guidance for over-performance in the second half, which we said is about $.05 to $0.06. And then for the impact of the financing we said it's about 4.5 -- $0.04 to $0.05 a share for the remainder of 2015.

We did not include the share repurchase itself, and there is another $100 million of debt that we will be adding to the existing debt. The net impact of that -- neither one of those is in the updated guidance.

Okay, so ok. I understand.

So, the other question I had was the range that you gave for the next nine months on the gross margin, 36% to 38%, it is still a pretty wide range. Can you help us understand how you think the pacing of that might progress through the year?

I think that as the year goes on the, as we hire people, that you will end up towards the middle, or lower end of that, but it varies from quarter to quarter based on timing of milestones. So, that's why we try to focus just on the next nine months guidance to give you a range versus a quarterly. But it will vary by quarter to quarter.

Okay. Thank you.

Our next question comes from Donald Hooker with KeyBanc.

Your line is open.

Hey, good morning.

So, I think in the press release you all talked about cancellations being a bit lower in the quarter. Is that fair, because I guess you report bookings on a net basis.

We said that cancellations over the last, let's say, a year have been lower. Q1 also was lower than normal, so we continued to see an improvement relative to 2013 and '12, and that lower cancellation rate began in 2014, and I think we talked about that on our February call, so we have definitely seen an improvement of that, and particularly in the last nine months.

Can you quantify that a bit, or what is the typical cancellation rate now versus before?

Yes, I think its improved by double digit percentage wise in terms of-- we don't give the cancellation rates, I am not going to start now, to be honest with you, but I think if you look at the industry they are typically in the 16% to 18%, and we feel like we are -- historically if you like at 13'/12' we are well above that, and we've talked about, in prior calls, why that was. A lot of it was getting through the old Kendle backlog, and making sure that we pulled it out.

When 14' came, and then 15' we are starting to see us get into the industry range.

And I guess just another basic question, and then I will hop off. In terms of can you just maybe talk about the composition of the bookings in the quarter? Were they -- any particular concentrations to call out, or was it pretty much diverse? I think last quarter you said it was pretty diverse.

It was very diverse this quarter. I don't think we had any over the $50 million mark, so very broad based, lots of customers, and it's fairly consistent with the typical mix of bio-tech and pharmaceutical versus large pharma. So, consistent with what we've seen in the past on that metric, but very diverse. No one customer made up a significant piece of it.

Thank you.

Our next question comes from Michael Baker with Raymond James.

Your line is open.

Yes. Thanks a lot.

Jamie, first question is, obviously there is a lot of focus in trying to make the clinical trial process more efficient and effective, and recent announcement was once again kind of focused on the central lab piece, in terms of patient identification and enrollment around that.

I was wondering if you could update us with your thoughts around the central lab, and I know there are different ways to skin the same cat, so to speak, so maybe give us a sense of what your approach is in terms of the clinical trial process more broadly speaking.

I think that is a good question. We could be here for a long time discussing how to improve the clinical trial process.

But, I think a large part of it is finding the right investigators. They've got to be motivated to run the protocol, and they have to have access to protocol eligible patients.

I think lab data is one component of that. We have access to various data coming either from Central Labs or reference labs, but there are other sources of data as well, so, companies like IMS, and Drug Dev, and others. We believe that the right strategy is to look at multiple data sources, and decide which piece of data is most fit for purpose for answering a specific question, and from there can we then triangulate that to physicians that are acting as investigators.

I think we've got to remember that generally lab data, particularly reference lab data, so if you are talking about either LabCorp or Quest from a US basis, covers a whole realm of physicians, and only about two to three% of physicians that are active in clinical practice actually participate in clinical research. So, you've got a whole data lake, if you want to call it that, but really not the opportunity to then triangulate that to physicians that are acting as investigators.

So, it's helpful for protocol development, developing inclusion/exclusion ranges for studies with some of the HIPAA requirements and restrictions, it's not easy to take that data, and then apply it to specific investigators who have potential patients who -- it's got a little bit of ways to go before it can be that definitive.

I think there is other avenues of bringing patients into trials. Some of that can be more direct patient outreach. Some of the social media and advertising tools, staying on the right side of HIPAA, will allow us to do that, so we feel fairly good that the current approach allows us to be effective.

Thanks for the update.

(Operation Instructions)

Our next question comes from Dave Windley with Jefferies.

Your line is open.

Hi. Good morning. Thanks for taking the question.

I was curious -- you focus on your percentage of your backlog that is focused on the high complexity studies. When that moves, do you view that as correlated in any way to the underlying margin in the backlog? Taking it to the specific first quarter, when that moves down several percentage points, does that then indicate that cohort of studies that came in the first quarter is a different, and in this case lower margin than what you had before?

No.

We actually have-- reports into me-- all of our sponsor contracts, and we price the studies relatively consistent-- it varies by bid to bid. But I would not say that the complex studies have a different price point, necessarily than what we would call a non-complex, and the divide line between what a complex study is, and the easier spectrum is not like you all of a sudden cut off. A good example is Ophthalmology, we talked about that -- if you talk to an Ophthalmology investigator they would say that is very complex, an extremely complex study, but we don't actually put that into our complex bucket. So, there is a good example of something that has drove some of our Q1 bookings -- strong in that area, but is not in the complex area.

Okay

But I think one way of thinking about it is, complex studies usually require a lot of procedures with patients, and therefore the cost per patient can be quite high. But I don't think it effects margin, because the effort that goes in with that additional amount of data is sort of equivalent. So, we've got pretty good pricing discipline throughout the organization.

And Dave, the other thing I would mention is I wouldn't be surprised if the complex area pops back up in the later part of the year. That varies from quarter to quarter. we had a really strong revenue quarter in those complex areas, and the bookings were a little bit lower in that area, but was we look at our pipeline -- that's just going to vary from quarter to quarter. I wouldn't get too hung up on a big move in Q1.

In addition, it just so happens that several of those studies that are in the complex, or particularly in CNS, are -- that area is more concentrated in some of the FX areas, so as you know we had an almost $40 million reduction due to FX, so that impacted the backlog for those studies also.

Okay.

So, my follow up then, Jamie is around your comments on the renewal. I wanted to try to square -- I think in your opening remarks you commented about moving that forward, getting an extension, bidding on and winning some programmatic type studies, and then you're working to map that over to a conversion, and then to an earlier question it sounds like you expect the revenue run rate from that client, though, to be fairly stable, and the margins as you shift from FSP to full service to also be pretty similar. Is that -- I guess, are those conditions that INC is agreeing to in order to move that forward -- it seems like you would want that opportunity to expand, and the profitability to expand, I am curious about why you don't expect that to happen.

Because we are still in the negotiation phase. So, at this point you could assume that everything we've seen so far in the discussions would suggest that it will be broadly similar in size, and we are obviously looking at the study by study level just to see where the costs are, and we are trying to be as efficient in terms of resource allocation and units in those transition budgets.

So, at this point I think it's prudent for us to assume that margin won't be any higher than it's been previously. Obviously, we will have the opportunity to bid on new studies, and obviously we will be able to make a better assessment on how that portfolio moves once we get beyond the three we won in quarter one when those new studies come into backlog.

The other thing, Dave, just on that-- is that our book of business also depends on the size of all of our customers internal pipeline, and that is going to vary as they initiate new studies in their own R&D budgets. So, we try and take that into account when we look at the size of it.

Got you.

So, it sounds like opportunity can unfold over a longer period of time.

Yes.

Okay, great.

Thanks.

Thanks Dave.

Thank you.

I am showing no further questions.

I will now turn the call back over to Jamie Macdonald, CEO, for closing remarks.

Thank you ladies and gentlemen for you attendance today, and for your interest and investment in our company. We look forward to reporting back to you on our next call with further progress made during the second quarter of 2015.

Have a great day.

Thank you ladies and gentlemen. That does conclude today's conference. You may all disconnect, and everyone have a great day.