Syneos Health Inc (SYNH) 2015 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the INC Research Second 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 like to hand the conference over to Ronnie Speight, Vice President of Investor Relations.

Please go ahead, sir.

Good morning everyone. The purpose of this call is to review the financial results for INC Researcher's second 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 investor.increasearch.com within the presentations and event section.

As a reminder, an archived version of this webcast will be available for replay on our website after 1 o'clock pm today. As outlined in our press release, there will also be a telephone replay of this conference call 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 Provision 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 very important factors. These factors are discussed in the risk factors section of our form 10K for the year ended December 31st 2014, our form 10Q for the quarter ended March 31st 2015, as well as our other SEC filings.

In addition, any forward looking statements represent our views as of today, and should not be relied upon as representing our views as of any subsequent date. 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-gap 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 slide 16 through 21 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 second quarter 2015 Earnings Call. I am pleased to report that we are continuing to maintain our strong momentum with excellent results for the second quarter of 2015.

We have continued to focus on delivering high quality service to our customers through our therapeutic alignment, and strong execution by our trusted process. I will highlight our progress during the second 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 adjusted net service revenue by over 14% compared to the second quarter of 2014.

This was despite a foreign exchange headwind primarily due to the impact of the strengthening US dollar against the Euro, and British pounds in the second quarter of 2014. We estimate that the impact of foreign exchange on our revenue was approximately $11.3 million in the second quarter 2015. Accordingly, on a constant currency basis, we grew adjusted net service revenue by nearly 20% year over year during both the second quarter, and first half of 2015.

For the quarter, our net new business awards were $295.9 million compared to $103.4 million during the second quarter of 2014. Our net new business awards in the second quarter of 2015 resulted in a net book to bill ratio of 1.3, driven by strong new award activity, modest cancellations, and a solid new business pipeline.

As a reminder, the second quarter 2014 included a $132 million cancellation due to regulatory concerns of our customer, thus negatively impacting that quarters net awards, and book to bill ratio.

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. Therefore, we believe that this important metric is best viewed over the longer term. Accordingly, we are also providing our trailing 12 months book to bill, which stands at a healthy 1.3 as of June 30th, 2015.

We are particularly pleased with this strong book to bill ratio given that we are growing adjusted net service revenue at nearly 20% on a constant currency basis, a rate faster than the industry.

We also experienced strong backlog growth during the second quarter with backlog as of June 30th 2015 at approximately $1.7 billion, up 12.3% from June 30th 2014. This growth occurred despite an accumulative reduction in backlog of $73 million since the second quarter 2014 from the impact of foreign exchange. We 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.

Our success with this approach is evident in the composition of new business awards for the second quarter, which includes broad-based new wins from existing customers, in addition to business from new customers. We are also successfully expanding our business in complex therapeutic areas, like phase one oncology, where we have built a dedicated group of expert resources within our broader oncology team to support this growing specialty area.

In addition, we have successfully completed the conversion of one of our largest customers from primarily a functional service provider relationship, to a more traditional full service arrangement.

During the second quarter we executed a new three year, full service, master service agreement with this customer. We believe this arrangement demonstrates their commitment to this long term relationship, and allows them to take better advantage of our therapeutic expertise.

I am also happy to report that during this transition, we continued to win full service work during the second quarter, and expect this customer to remain one of our most valued, and top customers going forward.

We are also improving the diversity of our customer base, with our top five customers representing only 34% of our revenue in the second quarter 2015, down from 40% for the second quarter of 2014. Similarly, for the first half of 2015, our top five customers comprised 35% of our revenue, down from 38% for the same period in 2014.

We continue our strong presence in CNS oncology, and other areas where clinical trials are particularly complex. These areas represented approximately 68% of our backlog as of June 30th 2015, compared to 67% as of March 31st 2015.

We believe our continued strong position in these areas demonstrates the effectiveness of our therapeutically focused project teams, which extend to the CRA level, coupled with the therapeutic expertise of our business leaders. Based on industry data, these complex areas represent approximately 60% of the phase 3 drugs under development, which we believe continues to favor our strategy.

Site relationships continue to be a key differentiator, and important area of focus for INC Research, as demonstrated by our ranking as the top CRO to work with among large CRO's in the 2015 Center Watch Global Investigative Site Relationship Survey.

We believe that our ability to collaborate effectively with, and leverage insights from this important stake holder group can deliver significant effigies for our customers, and transform how clinical trials are conducted. As an example during the second quarter, INC in collaboration with The Society of Clinical Research Sites, held the official launch of the CRO industry's first site advocacy group.

This group is focused on incorporating the voices of sites and patients into the evaluation of psychiatry study protocols for scientific merit, and operational success. Several protocols have been reviewed to date through the site advocacy group forum, enabling us to make significant recommendations to our customers, which could result in time, and cost savings.

Collaboration with sites across therapeutic areas in geographic regions is key to INC's strategy. During the third quarter we will be meeting with sites in the Asia Pacific Region as part of The Society for Clinical Research Sites Asia Pacific Sights Solutions Summit. Our involvement in this event further reinforces the importance of Asia Pacific as a critical region for growth for INC, where we have increased our head count by approximately 25% over the last year.

The Society of Clinical Research Sites, or SCRS, continues to be a driving influence in improving sites sustainability worldwide, and we continue to partner actively with them on a number of fronts. Combined, these efforts further underscore INC Researches commitment to fostering strong site relationships globally to bring new medicines to market to patients in need.

In support of global delivery for our customers, we continue to expand our total employee base to approximately 6,100 staff during the second quarter, up from approximately 5,800 at the end of the first quarter 2015. We have continued to broaden our capabilities globally through organic expansion of our presence in important markets like Japan where we now have approximately 80 staff, an increase of over 5 fold compared to the same period in 2014.

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 some additional comments regarding our financial performance, highlighting some of the key metrics on slide 3, which are presented with a more detailed view on slide 4.

As a reminder, we are presenting our results on an adjusted, or non-GAAP basis.

As Jamie mentioned, we had a strong quarter, six months and trailing 12 months, related to net awards and book to bill, which is helping to support our strong financial performance.

Let me start with revenue. We grew our adjusted net service revenue on a year over year basis by 14.2% to $227.4 million during the second quarter of 2015 from $199 million for the second quarter of 2014. On a constant currency basis, excluding foreign currency headwind of $11.3 million, our net service revenue grew by 19.9% year over year reflecting our strength in net new business awards, and a resulting strong backlog coverage.

As a result of our continued strong operational execution, and disciplined approach to executing change orders, second quarter benefited from a slight increase in revenue from this acceleration of work in contract executions.

We estimate the impact to be an increase of approximately $1 million to $3 million. On a year to date basis, we grew our adjusted net service revenue by 14.4% from $383.7 million for 2014, to $438.9 million for 2015. Excluding a foreign currency headwind of $20.4 million, our revenue grew by 19.7% compared to the first half of 2014.

Please note that these quarterly and year to date revenue growth rates exclude an estimated $4.5 million of revenue from higher than normal change order activity occurring in second quarter of 2014.

On slide five you can see the improving diversity of our customer base. We continue to see revenue from a broad cross section of small, mid-sized, and large bio-pharmaceutical companies, as well as significant percentage of new awards originating from existing customers.

On slide six we have provided trending of our adjusted growth margin, adjusted income from operations, adjusted SG&A expense that is a present age of revenue, and adjusted EBITDA margin by quarter since the first quarter of 2014. Although there is normal quarterly variations, these charts highlights our ongoing margin improvements, effective management of pricing and expenses, and execution on delivery for our customers.

We have also closely managed our SG&A expenses demonstrated by the overall improvement and percentage of revenue. This improving leverage of our SG&A infrastructure is a trend despite our increasing cost from being a public company.

Direct costs increased by 5.6% from $130.3 million for the second quarter of 2014 to $137.5 million for the second quarter of 2015. This growth margin is expanding from 34.6% to 39.5%. For the first half of 2015 direct costs were $252.4 million compared to $250.6 million for 2014. This growth margin in increasing from 34.7% to 40.2%. As a reminder, direct cost for the first quarter of 2015 included $5.1 million, or 120 basis point improvement in margin from non-recurring benefits due to the favorable settlement of certain liabilities, which we do not believe were representative of normal operations.

We are very pleased with our continued progress and improving growth margins. These improved margins are primarily driven by strong execution by our operational teams, our disciplined approach to cost management, and our ability to better leverage the therapeutic management overhead as we expand our revenue base. We are also seeing the benefit of improving the utilization of our facilities from 71% at June 30th 2014, to 80% at June 30th 2015.

Finally, we are on track to eliminate at least 2 of our 5 clinical trial management systems by the end of the year, and we continue to gain efficiencies with the new systems in which we have standardized. These improved margins also reflect a favorable revenue mix, which included the acceleration of revenue I mentioned earlier.

As I mentioned on our first quarter call, we continue to add staff to support our growing business, which may have a slight negative impact on growth margin levels relative to the first half of the year.

Lastly, the impact of foreign exchange reduced our direct cost by a greater percentage than our revenue, and thereby positively impacted our growth margin percentage by approximately 135 basis points for the second quarter, and 115 basis points for the first half of 2015.

In light of these factors, we have increased our expectation for normalized growth margins for the remaining 6 months of the 2015 to range from 37% to 39%. Due to the fixed nature of many of our costs in the short term, we continue to expect our growth margin to vary from quarter to quarter.

SG&A expenses increased from $33.2 million in the second quarter of 2014 to $36.6 million in the second quarter of 2015 while declining from 16.7% to 16.1% of net service revenue over the same period. On a year to date basis, our SG&A expense have increased from $65 million to $72 million while declining from 16.9% to 16.4% of net service revenue.

We continue to make progress against our margin improvement initiatives by growing SG&A at slower rate than revenue. Our strong revenue growth, operational execution, and leverage of our SG&A infrastructure resulted in adjusted income operations increasing 60.1% from $30.5 million for the second quarter of 2014 to $48.8 million for the second quarter of 2015 with the associated margin increasing from 15.2% to 21.5%. On a year to date basis, adjusted income from operations increased from $56.2 million in 2014 to $95.3 million in 2015, with the related margin improving from 14.7% to 21.7%.

Adjusted EBITDA grew by 49.9% for the quarter to $53.3 million for the second quarter of 2015, and $35.5 million for the second quarter of 2014. Adjusted EBITDA margins improved to 23.4% for the second quarter of 2015, from 17.9% for the same period in 2014.

For the first half of 2015 adjusted EBITDA increased by 53.4% to $104.5 million, up from 68.1 million for the first half of 2014. Over the same year to date periods, adjusted EBITDA margins increased from 17.7% to 23.8%.

The overall impact of foreign exchange on our adjusted EBITDA was de minimis for the second quarter, and first half of 2015 as the overall reduction in our total costs approximately offset the negative impact revenue.

However, as we pointed out earlier, because of the reduction in revenue, foreign exchange positively impacted our adjusted EBITDA margin percentage by approximately 130 basis points for the second quarter, and 100 basis points for the first half of 2015.

Given our strong performance in the first half, and the progress against our cost initiatives, we currently expect adjusted EBITDA margins to be approximately 20% for the second half of 2015, but may vary in any individual quarter. Adjusted net income increased to $28.6 million for the second quarter of 2015 from $11.1 million for the second quarter of 2014, and increased to $54.9 million from $17.3 million on a year to date basis. Adjusted earnings per share was $0.47 and $.89 for the second quarter and first half of 2015 respectively, compared to $0.21 and $0.33 for the second quarter and first half of 2014 respectively.

Fully diluted weighted average shares outstanding were 60.5 million for the three months ended June 30 2015, which includes the impact of 2.2 million in shares from equity based employee awards. At June 30 2015, the outstanding share count was 56.3 million.

Slide seven provides some key metrics demonstrating our improving cash flows, and leverage positions. Our cash flow from operations was $51.6 million for the second quarter of 2015 as compared to $49.2 million for the second quarter of 2014. Cash flow from operations for the first half of 2015 was $95.3 million, an increase of $14.9 million, or 18.5% over the first half of 2014.

These increases were driven by our growth in revenue, and margin improvements highlighted previously, coupled with ongoing working capital managements. During the second quarter we closed on our new $675 million credit agreement, which was comprised of a $525 million term loan, and a $150 million revolving credit facility. This new credit facility allowed us to lower our overall interest rate from 4.5% to 2.2% based on current LIBOR rates.

Given our excess cash position at the end of the second quarter, we elected to make a voluntary pre-payment of $50 million of the facility to better allocate our capital in the short term. We ended the second quarter 2015 with $98.5 million in unrestricted cash.

On slide seven, we continue to report overall strong performance in our net DSO of negative 5.6 Days, which includes the impact of customer deposits, and other pre-payments. While we are pleased with this performance, over time we expect that our DSO will return to a more normalized level in the low teens.

Turning to backlog, slide eight summarizes key metrics related to our backlog. On the roll forward of our backlog, note that the net impact of foreign exchange was an increase in backlog of $13 million for the second quarter of 2015, but on a year to date basis was a reduction of $26 million. The cumulative impact of foreign exchange since June 30 2014 has been a reduction of $73 million.

On the right side of slide eight, the pie chart illustrates the concentration of our backlog with 68% in areas of CNS, oncology, and other complex diseases. We believe one of the most important leading indicators of future revenue is backlog coverage, which is presented in the bar charts in the bottom left quadrant of slide eight. As you can see from this chart, we are maintaining a favorable position with 96.3% coverage of the current year's total revenue forecast as of the end of the second quarter, up from 90.4% as of the end of the first quarter. This is in line with the 97.2%, and 95.3% for the similar periods as of June 30 2014, and 2013 respectively.

Lastly, in the bottom right quadrant of slide eight, we provide our backlog burn rate. We believe our strong operational execution, coupled with our conservative and disciplined approach to recording awards and backlogs drives our quarterly burn rate, which was 14.3% for the second quarter of 2015.

On slide nine, we are providing our 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 half of the year, expectations for the remainder of the year, our recent refinancing and share repurchase transactions, current currency exchange rates, and our expected tax rates.

We expect our net service revenue for the full year 2015 to be between $900 million and $910 million, representing a growth rate of 12.4% to 13.6%. This takes into account a foreign currency headwind estimated at approximately $35.5 million, a negative impact to our growth rate of approximately 445 basis points. Accordingly, our constant currency growth rate is expected to be between 16.8%, and 18.1%.

We are forecasting adjusted EBITDA to range from $195 million to $205 million, growing at approximately 34% to 41.1%. We expect our adjusted net income to range from $102 million to $109 million, growing at approximately 128% to 144%. This results in adjusted diluted earnings per share of $1.69 to $1.80. Lastly, we expect to earn $1.44 to $1.60 per share on a GAAP basis.

In quoted in our revised GAAP earnings per share guidance, as in estimated $0.06 per share impact from stock based compensations. Given our project mix of revenue, and expenses by currency, the foreign currency headwind on revenue, as I mentioned earlier, is expected to only have a nominal impact on earnings for the full year.

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

Thank you.

(Operator Instructions)

Our first question comes from the line of John Kreger from William Blair.

Hi, thanks.

I have two questions on the backlog. Some of the stats that you gave on slide eight.

Jamie, I noticed that the therapeutic area mix seemed to move a little bit from the first quarter. Do you view that as just sort of typical volatility quarter to quarter, or is there something going on in terms of oncology moving up, and CNS moving down?

I think it's fairly typical.

We are going to see some ebbs and flows. I think the oncology market is going to continue to be strong, I think that is very clear. I think, as we may have suggested in the past, on the CMS side, you have probably got a limited pool of customers that are active in the neuroscience space, so therefore, it just depends on where they are with their development pipeline, what new studies are coming through, and what stage those studies are at.

So, just normal ebb and flow, I think.

Great, thanks.

And then a follow up again on backlog. As you look at the makeup of the backlog by client type, how is that changing, if at all, and we would think of it as sort of small, mid-size, and large. Are you seeing any shifts?

No, not really. I think if you look at our composition of orders and revenue, which our backlog approximates, you can see that our customer profile, the large bio-pharma revenue is 56%, if you look at last year it was 57%, so we are sort of seeing the same mix there. We are growing across all customer sizes.

John, as we've said in the past, we obviously think of customers in some of those categories, but where large pharma sort of then -- and big biotech, merge, it's hard to tell. Where do you put somebody like Amgen or a Biogen, or others. And with all the M&A activity going on, it's sometimes hard to keep track of who is in which bucket.

So, we spend a little less time on that, we obviously look at propensity to outsource development spends. And some of the mid-size pharma, and some of the smaller biotech are much more virtual, and have a higher likely hood of outsourcing their work.

Some large pharma remains more focused on either internal resource, or insourcing from a staff augmentation standpoint. So, we do segment it that way, but we don't spend a lot of time trying to analyze it.

Understood, thanks much.

Thank you, and I our next question comes from the line of Robert Jones from Goldman Sachs.

Great, thanks for the questions.

Just on margins, you can start with growth margins. You previously talked about 36% to 38%, now its sounds like we are looking at 37% to 39% for the balance of the year. It looks like this quarter 39% -- first half, actually, probably around that, I forget, just from the onetime benefit from last quarter.

Any sense of what is driving, I guess, the front half strength, and then why, I guess just implicitly, why would you expect that to kind of moderate a bit on that range versus what you guys have been able to put up in the front half?

Thanks Robert.

I would tell you that one, we are very proud that we are improving new growth margins, so we feel good about that, and one of the things that is proving out is our trusted process is really helping us get through with the startup phase pretty well, in addition to the therapeutic expertise and relationship with sites is helping us there. So, that's a strategy that is proving out, and growing our growth margins. Then we've talked about all those initiatives that we are getting a little bit faster adoption of our new CTMS systems than we previously expected, so that has helped a little bit with our improvement in the second half.

With regard to why is it sort of moderating in the second half, using your 39%, we did see a little bit of timing of revenues that I mentioned in the prepared remarks where we were able to get some site visits, and also some executions from change orders a little faster, which is a couple million call it at the midpoint in Q2. That is really timing pulling it forward. That all comes in when you get that revenue with the fixed call space, that is probably about a margin point.

So, if you take the 39% in the second quarter, take out about a point, you are in that 38%, which is right in the midpoint of where we expect. So, some of it is timing, but a lot of it is just our ability to execute.

No, that's fair, and then I guess the follow up, then, might be a similar answer Greg.

I think if I heard you correctly, you're calling for about 20% EBITDA margin in the back half, which obviously, again, looks couple hundred -- several hundred basis points below what you guys were able to post this quarter, which seemed like a family clean quarter.

So, I guess similar questions. Is there anything that we should think about as far as moving pieces in the back half that might weigh on EBITDA margins?

Yes, part of it is we have talked about the public company cost. A lot of the stocks testing, and audit related stuff is in the back half of the year. You also have your DNO renewal in the second half. So, we do sort of see a little uptake there. The other thing is you look in our cash flow statement, you can see our bad debt expense is basically zero in the first half, and that's not normal. Usually you are about a half point at any point in time.

Obviously if we knew which receivables were going to go bad we would go ahead reserve them today, but based on our experience you can expect about a half point of bad debt expense in any period. So, we are giving guidance assuming there is something going to happen in the second half.

Okay, yes that is helpful. Thanks.

Thank you, and our next question comes from the line of Dave Windley from Jefferies.

Hi, good morning.

Thanks for taking questions.

Jamie, on the therapeutic area concentration diversification, and focused on complex areas that -- your impression, and your company's views on this is the complex trials conversation seems to be ramping pretty significantly among all your peers. How are you seeing, I guess, first of all, the landscape for these more complex trials where you view your skill sets as really well -- or very adept in applying to the studies, and how do you stay ahead of the competition, and differentiation on this message?

That is going to be a tough question for a consolidated answer. I mean, with complex studies, the answer is obviously long and complex. Essentially, our view is the following, I think we are moving towards personalized medicine. I think that is becoming pretty clear, and then therefore the identification of, essentially, smaller patient populations under any disease type is going to be part of medicine on a go forward basis.

Therefore, sort of, diagnostics, biomarkers, some of the genetic mapping that is going ahead will mean that we are looking for a rarer and scarcer patient for any particular therapy. That doesn't apply just in oncology, it's in other indications as well.

But therefore being able to identify that patient, really map them towards an investigator in a clinical research site that is able to take them through the consenting process, screen them, and then hopefully enroll them in a clinical trial is a challenging process.

Additionally, understanding how that patient will likely progress from a disease standpoint while participating on a clinical trial with all of the analysis that goes with that, and obviously care for that patient is a pretty challenging task.

So therefore, we've got to be well aligned with the sponsor, we've got to understand the disease and the indications, and the subpopulation that we are likely to be identifying, and work to find the right site to have those pro eligible patients.

That is something that we have done very well for an extended period of time, it takes deep knowledge of the therapeutic area indication, it takes very good planning and design, we call that trusted process, around identification of feasibility, site id, and the right investigators.

So, it's nothing unusual for us. We are not surprised that the industry is seeing additional complexity, that is just the way it's going to go as diagnostic techniques, and better understanding of genetics drives us that direction.

I think it's better for patients, ultimately. If you look at the analysis, we always knew that most drugs only work in a subset of patients that they were prescribed for, particularly in oncology, psychiatric disease, some of the inflammation diseases, as well. We are now able to get to much targeted patient populations where response rates are much improved.

I think that's good from a drug development standpoint, I think its particular good for patients.

The only other color I would add after that is if you think about our trusted process, that the themes that we've talked about the last year, our therapeutic expertise in relationship with sites, we really do think that is helping us get through some of the bumps you typically see in startup, and allowing us to execute, and drive very good results for customers. If we can get that through faster, our customers are very happy with that, and then we obviously get the benefits of that in our growth margins, and being able to recognize revenues.

So, you are always going to have same things outside your control. We didn't have anything that happened in the first half that was bad for us. Sure enough in the future we will probably see something, but our execution, and ability to do that proves out our thesis of the trusted process, therapeutic focus, and site relationships.

Got it. Thank you for that.

And then my follow up is around backlog growth. So, having lapped your larger cancellation last year, backlog growth year over year is a pretty attractive number. It is still a little lower than what your revenue growth activity, and I think outlook is, and I wondered, this kind of gets at the conservatism of your backlog, could you talk about what your views are in terms, maybe not next quarter, and second half, but just kind of longer terms sustainable growth rate relative to how fast your growing backlog.

We've talked about, over the long term, our growth rate and revenue, we think will be in the low double digits, 10% to 12%. Certainly in the midterm we are forecasting higher than that, and part of that is the mix of studies. We have a few studies that are six to 10 years, so they are small in value. Most of the meat of our studies are in the three year mark. So, part of it is where is your sweet spot, and in addition your ability to execute, and get those started, and completed on time.

We are doing that, and that allows us to grow the revenue. And as you pointed out, we are very conservative with what goes into our backlog that helps -- what goes in comes out.

Yes, I think we are appropriately conservative. I think the backlog phasing is obviously something that we focus a lot on. Book to bill is an important metric, overall backlog is an important metric, but line of sight on what we see in front of us for the short term guides everything that we do around resourcing, forecasting, and managing the business day to day.

Yes, we have backlog that sits out in 2017 and 2018, but it doesn't form how we manage the business in the short term. So, it's really about getting projects aligned to the right groups in the organization, getting them phased correctly, the resource planning in place, it's getting those requisitions out into the market, getting those staff brought in to the organization in time to be orientated and trained to be productive when the project is up and running.

That is about managing the business. Backlog that sits out more than a year, it doesn't form what we do in the short term. May have a slight impact on whether we take on permanent staff, or contingent labor, but outside of that it's not a big factor in what we do day to day.

Very good, thanks for the answers.

Thanks Dave.

Thank you. (Operator Instructions)

Our next question comes from the line of Michael Baker from Raymond James.

Yes, thanks.

Jamie, relative to the commentary you provided on increasing crowd complexity moveing to personalized medicine, I was wondering if you could provide us your updated thoughts on whether or not you would reconsider your stance on ownership of lab capabilities versus doing it on an outsource basis.

Yes, I mean we have some great outsource partners on the lab side, who provide us access to all the latest testing bio markers, so we are very happy with those relationships. It is not something that we are contemplating in the short term. The science is moving pretty quickly, the capital expenditure needs are pretty high, there are already a couple of large providers in the central lab space, so that -- those are providing support for clinical trials.

You've also got remember there is a pretty large market out there on, what I would call, the clinical reference lab space, but there is also a lot of smaller niche firms providing some of the new science, and the bio markers. And our ability to access best in class labs with the testing capabilities that are most relevant for a particular disease. That is -- we want that flexibility.

Thanks, and then my follow up. I was wondering if there have been other players this go around in the quarterly announcements tying potential changes to burn rate to the rising complexity, and I know you guys take a more conservative stance on your backlog. I was just wondering whether we should anticipate any influence on the complexity as it relates to your burn rate?

Yes, I will, maybe take that first then maybe Greg will talk a little bit about it.

Yes, the complexity is certainly there. We look at our backlog, and we anticipate how long it is going to take to essentially go through the startup process, and if you think about start up, you're really moving from a final protocol, which is your scientific hypothesis, how you are going to test whether this drug is safe in application, and you've got to place that in particular countries, so you go through competent authority approvals, and then you've got to place that at certain sites.

So, you go through CTA, clinical trial agreements, with sites, ethics approval, so IRB's, and others. So, it's a complex process that I think the discipline that we have through the way that we manage trials, and our trusted process allows us to do that very effectively, and that gets phased in to our thinking, our planning, our timing, but also into the contracts, and the expectations we set with customers.

So, we are trying to satisfy customer's needs, because we know they are guiding the street, and their invested in others. We don't want to be in a position where wave given customers' expectations of a trial starting, and enrolling faster than is feasible given the complexity of the trial.

And I think a lot of our customers appreciate that we are trying to help them manage expectations both internally, and with their investors, and if it's a novel compound in a new indication, that looks different than the standard of care, then you are likely to get questions from competent authorities. They are going to ask you why you are doing the trial, what is the purpose of the trial, what is the risk benefit to the patient, and you are going to have a more intricate process with the competent authorities, those sites, and those ethics organizations.

And that should be part of your planning, that should be part of your discussion with your customer, and that should be part of the way you phase your backlog.

Very helpful. Thank you.

So yes there is some complexity, but it's going to be in your forecast at the outset.

Very helpful. Thanks for the color.

[Not only that]

Any other -- I think we have one other question.

Yes, our final question for today comes from the line of Donald Hooker from KeyBanc.

Hey, good mooring.

So, in the prepared comments you all referenced some investments in phase one oncology, and I know that's from a numbers standpoint, small, as a present of revenues, and what not, but suspect there is a strategy there, or some sort of pull through.

Can you talk about the linkages between that, or is that part of a broader strategy to kind of drive the bigger dollar later phase opportunities?

Yes, good observation.

Phase one oncology, where we normally reference phase one, historically the Industry always thought of about healthy volunteer studies being in their own in house faculties.

Phase one oncology are patient trials, generally. They are run at the usual academic and research centers, so Sloan-Kettering, Dana-Farber, Anderson's -- it's the usual sort of centers, it's usually a limited number of investigators, and a limited number of patients. Having incumbency on those trials, and understanding how the drug works in that patient setting is important should there be follow on work.

Additionally a lot of the new molecules coming in to oncology have applicability in multiple indications, so one small phase one study, one indication might lead to future phase two studies in multiple tumor types in different patient populations. So, getting early incumbency on those new molecules, and how they work, and how they are received by patients, how well the site deals with the protocol is an important incumbency position, and sort of bodes well for those molecules as they advance in development.

I think it just builds on our thesis that therapeutics are extremely important, and I think every story you see out there is the number one reason why our customers choose CRO, and we go deeper than anyone else in the industry, always plus CRA, and that really does help us leverage growth in both winning new businesses awards, helps us in the startup phase, and executing, and ultimately delivering what we tell the customer we are going to do.

And I think all of that is what we are trying to message, is that therapeutics are important, and we think our business strategy is the right strategy, and I think our numbers are proving that out.

And almost done.

Going back to a comment, I think David Windley had, how you keep the differentiation there.

It's about retaining talent, I think that is a key component, but also bringing in new talent that has the latest experience, and quite often they come from, yes, from pharma and biotech, but they also come from the academic and research side as well.

So, we have done well in retaining therapeutic talent, but also augmenting that by bringing in new additional experience, not just from pharma and CRO, but from the clinical and patient side of research and development as well.

Okay, great, and I guess my one follow up would be, and I apologize if I was scrolling too fast and missed it, but in the second quarter bookings, obviously we are amazingly high, that's great, but just to understand the components of that. Can you just -- was there a renewal, like a functional agreement in there.

I think you referenced I think Astellas kind of moving around a little bit, the structure of that relationship changing, and sort of the cancellation profile in there that was with the -- I think you reference that was a little bit lower.

Can you clarify a little bit on that?

Yes, I think cancellations in the number were comparable to the first quarter. so, we certainly have seen the moderation of that since 2012 and 13, so our cancellation rate is improving, but it's in line with the industry, so I wouldn't call it unusually low compared to the industry it's probably comparable with the industry. It's just relative to where ours was higher in 12 and 13 for the reasons we talked about in the past. It's gotten closer to the industry.

With regard to the renewal, we converted that from an FST relationship to a full service, so now going forward that relationship is no different than any other customers. They put out a bid for new work, and we will record those awards as awarded. So, there is no large major impact to the awards. I think the actual impact of converting the remaining FST that tell of the work that we had under the old arrangement, we still would have had approximately a 1.2 book to bill if you excluded that.

So, there is not significant impact to our book to bill from a renewal.

Great, thank you, and congratulations.

Thanks.

Thanks Donald.

Any other questions on the line?

I have no further questions at this time.

Therefore we are going to wrap up.

Thank you ladies and gentlemen for your 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 third quarter 2015.

Have a great day.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a good day.