Syneos Health Inc (SYNH) 2016 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the INC Research first-quarter 2016 earnings call.

(Operator Instructions)

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 Research's first quarter 2016. 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. INCResearch.com within the presentations and events section. An archived version of this Webcast will be available for replay on our website after 1:00 PM today.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 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 Form 10-K for the year ended December 31, 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-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 them 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 18 through 20 in our presentation.

As we will be limiting today's call to one hour, we request that participants limit questions to one each, with an opportunity to ask one follow-up question. I would now like to turn the call over to Jamie Macdonald. Jamie?

Thank you, Ronnie. Good morning, and thank you for joining our first-quarter 2016 earnings call. I am pleased to report that we are off to a strong start for 2016, continuing to execute on our vision for the Company. Our focus remains on providing high-quality service, and a superior experience to our customers through our therapeutic alignment, the trusted process operating model, and our strategic focus on sites and patients.

We grew our net service revenue by nearly 18% compared to the first quarter of 2015. This was net of a foreign exchange headwind of approximately $6 million, resulting in constant currency revenue growth of nearly 21% compared to the first quarter of 2015. Our net new business awards for the quarter were $302.4 million, compared to $255.5 million during the first quarter of 2015, representing an increase of over 18%.

The ongoing strength of our net new business awards resulted in a net book-to-bill ratio of 1.2 for the first quarter and 1.3 on a trailing 12-month basis. We believe book-to-bill is best viewed over the longer term, since net new business awards will continue to vary from quarter to quarter.

Our net new business awards also continued to drive strong backlog growth, with backlog as of March 31, 2016 at nearly $1.9 billion, up over 17% from March 31, 2015. As part of this strategy to expand our addressable market, we continued to invest in additional resources in business development, as well as operations to support the customer proposal process.

Our success to date in this area includes adding 25 new customer relationships during the first quarter of 2016. We are also encouraged by the continued strong demand from our existing customers, which represented 85% of the dollar value of our first quarter 2016 new awards. Our top five customers represented only 35% of our revenue for the first quarter of 2016, down slightly from 36% for the same period in 2015.

Our presence remains strong in areas where clinical trials are particularly complex. With these areas representing approximately 68% of our backlog as of March 31, 2016, we believe our continued strong position in these areas demonstrates the effectiveness of our therapeutically aligned project teams and the quality-oriented approach of the Trusted Process. In this regard, we remain focused on adding further depth to our therapeutic talent, including the recent addition of a Chief Scientific Officer role.

We also continued to adapt our therapeutic model to address our customer needs. We recently completed a re-evaluation of our organizational structure, and as a result we are making certain structural changes to our therapeutic business units to realign management focus and optimize the efficiency of our resourcing.

Specifically, we realigned the therapeutic leadership and resources that are currently under our cardiovascular, endocrinology, and post-approval unit, to report into the three remaining therapeutic units, and established a separate post-approval unit. We believe this new structure will allow us to better meet our customer needs and accelerate the growth of our post-approval services.

Further, we believe this will allow us to serve our customers in a more cost-efficient manner. It is important to note that notwithstanding this realignment plan, we expect to continue the rapid expansion of our overall employee base, to support the growth of our business. We are continuing to invest in our relationships with sites, by working closely with the Society of Clinical Research sites, SCRS, to promote the sustainable participation of sites in the conduct of clinical trials.

In addition to the further enhancement of our collaboration with sites, and optimize our support of their work in the clinical development process, we are continuing the build-out of our Catalyst Site program that we announced during the first quarter. Finally, we recently announced the strategic collaboration with the Center of Information and Study on Clinical Research Participation, CISCRP, to bring greater awareness to the importance of clinical trial participation in advancing public health.

During the first quarter, INC expanded its total employee base to 6,600 staff, compared to 6,400 staff at the end of the fourth quarter of 2015. This continued expansion and our investment in other initiatives are in support of our overall strategic goal, becoming the CRO of choice for all stakeholders, employees, customers, sites, and investors around the globe.

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

Thank you, Jamie, and good morning, everyone. As a reminder, we are presenting our results on an adjusted or non-GAAP basis, and have further normalized certain metrics to improve comparability. The detail of these adjustments are presented on slides 3, 4, and 16.

We grew our net service revenue on a year-over-year basis by nearly 18% to $249 million during the first quarter, up from $211.5 million for the first quarter of 2015. Our growth in revenue reflects a strong backlog as of December, and strong net awards during the first quarter. In addition, in response to a customer request, in March, we significantly accelerated the timetable for delivery of their clinical trial.

As a result, revenue for both the current quarter and full year have and will continue to benefit from this pull-forward of work from 2017. Specifically, our revenue for the first quarter included an incremental $3 million of revenue from the acceleration of this work.

Our direct costs increased 20% from $124.8 million for the first quarter of 2015 to $150 million for the first quarter of 2016, with gross margin declining from 41% to 39.8%. As a reminder, the first quarter of 2015 included certain one-time benefits totaling $1.7 million. Excluding these benefits, gross margin declined slightly from 40.2% to 39.8% over the same periods.

Note, the impact of foreign exchange was de minimis during the first quarter. As a reminder, both the first quarter and first half of the year typically have seasonally lower margins due to the reset of US employment taxes and the annual merit increase for our staff in April of each year.

We continue to drive our margin improvement initiatives, which include improving our facility utilization over time, our consolidation to one clinical trial management system, or CTMS, and realizing the benefits of the improved efficiency of the new CTMS system we adopted. Over the long term, we also look to improve profitability of early phase unit and recently established Japanese operations.

While we expect that these initiatives will continue to produce cost savings and efficiencies in our delivery model, as we outlined on our fourth-quarter call, we are reinvesting these savings in additional resources to support new business acquisition. Due in part to our accelerated delivery from one of our customers, we are utilizing a greater mix of higher-cost contractors during much of 2016, which may result in a slight decrease in gross margins compared to 2015.

We believe this is prudent in the short-term to ensure we manage our delivery for customers and our long term employee resources in an appropriate manner. With respect to our longer-term margins, we continue to see an increasingly tight labor market for CRAs, which may put some pressure on wages, and may also result in the need for us to use a greater mix of higher-cost contractors to service our customers.

Turning to SG&A. SG&A expenses increased from $35.5 million in the first quarter of 2015 to $41.9 million in the first quarter of 2016, though remain flat at 16.8% of net service revenue. We continue to be pleased with our disciplined approach to managing SG&A expenses, as we have held our SG&A costs relatively flat as a percentage of revenue, despite the reinvestments we are making to support the acquisition of new business.

Our strong revenue growth, operational execution, and ability to manage our SG&A costs resulted in our adjusted income from operations increasing 12% from $46.4 million for the first quarter of 2015 to $52.2 million for the first quarter of 2016. When the first quarter of 2015 is normalized for one-time benefits, disclosed previously and detailed on slide 16, our income from operations margin increased slightly on a year-over-year basis from 20.6% to 21%.

Adjusted EBITDA grew by 12% to $57.1 million for the first quarter of 2016 from $51.2 million for the first quarter of 2015. Adjusted EBITDA margins declined to 22.9% for the first quarter of 2016, from 24.2% for the same period in 2015. On a normalized basis, adjusted EBITDA margins remained flat at 22.9%. Foreign exchange had a negative impact of $1.1 million on adjusted EBITDA for the first quarter of 2016, with only de minimis impact on EBITDA margin percentage.

Lastly, due to the implementation of our organizational realignment plan Jamie referenced earlier, we recorded a restructuring charge of approximately $6 million in the first quarter of 2016, which is primarily comprised of employee severance costs. We expect this realignment to foster continued efficiency in our operations, while maintaining our focus on excellent quality delivery for our customers.

Adjusted net income increased to $32.5 million for the first quarter of 2016 from $26.3 million for the first quarter of 2015. Adjusted diluted earnings per share was $0.58 for the first quarter of 2016, compared to $0.42 for the first quarter of 2015. Diluted weighted average shares outstanding were 55.9 million for the three months ended March 31, 2016, which included the impact of 1.9 million shares from equity-based employee awards. At March 31, 2016, the outstanding share count was 54 million.

Slide 7 provides key metrics related to our cash flow and leverage position. During the first quarter of 2016, we utilized $0.6 million of cash for our operations as compared to producing cash of $43.6 million for the first quarter of 2015. This decrease was primarily driven by an increase in our DSO to 18 days at March 31, 2016, from a negative 3 days at March 31, 2015.

The increase in our DSO was primarily due to the timing of billings in the quarter, coupled with a decline in deferred revenue as a result of the recognition of revenue from the utilization of investigator deposits. As mentioned in previous calls, we expected our DSO to increase over the short-term to mid-term to the mid-teens, and over the longer term, to be more in line with the industry. We ended the first quarter of 2016 with $53.2 million in unrestricted cash.

Slide 8 summarizes key metrics related to our backlog. We believe one of the most important leading indicators of future revenue growth is backlog coverage, which is presented in the bar chart in the bottom left quadrant of slide 8. As you can see, we are maintaining a favorable position with 91% coverage of our full-year 2016 revenue forecast as of March 31, 2016. This is within the range of the same coverage percentages as of March 31, 2015 and 2014.

Lastly on slide 8, you can see our backlog burn rate of 13.7% for the first quarter. As we described last quarter, we have seen a slight slowing in our backlog burn rate, primarily driven by growth in our average study duration over the past several quarters. We believe this increase in study duration is primarily driven by the overall increase in the complexity of trials, coupled with our growing average trial size, and increasing mix of oncology, trials which typically have longer duration.

On slide 9, we are providing our updated guidance for key financial metrics for the full-year 2016. This guidance takes into account a number of factors, including the acceleration of revenue I referenced earlier, our current sales pipeline, existing backlog, and our expectations for net awards for the remainder of 2016. Further, our guidance is based on current foreign currency exchange rates, current interest rates, and our expected tax rate.

We expect our net service revenue for the full year 2016 to range from $1.020 billion to $1.030 billion, representing a growth rate of 11.5% to 12.6%. This takes into account a foreign currency headwind estimated at approximately $10 million, a negative impact to our full-year growth rate of approximately 110 basis points. Accordingly, our constant currency growth rate is expected to be between 12.6% and 13.7%.

We currently expect interest expense for the full year to range between $12.5 million and $13.5 million, which is a slight increase from our expectation in February. We continue to expect our effective tax rate to be approximately 34%. We expect our adjusted diluted earnings per share to range from $2.34 to $2.46, representing growth of 22.5% to 28.8%, compared to normalized EPS of $1.92 in 2015.

Lastly, we expect to earn $1.60 to $1.70 per share on a GAAP basis. Included in our GAAP earnings per share guidance is an estimated $0.17 per share impact from share-based compensation.

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

(Operator Instructions)

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

Jamie and Greg, could you just review again exactly how you are investing to better support your growth, and just give us a sense about how long you expect this phase to last? Thanks.

Yes, John, I think the investment is going to be perpetual. You've got a fast-moving industry, you've got a need to help customers be successful. You can only do that by finding motivated investigators, being able to take those institutions up through start up, and have them ready to enroll patients.

So it's about finding more efficiency, not just for us, but really helping customers be more efficient as well. So there's a lot of activity on the sites and patients side. As Greg has referenced, we're also investing in tools and technology, both on the SG&A side, and on the operations side as well.

So I think we don't necessarily have a map for the next three to five years on exactly where we will invest, but I think that it's only prudent to look at ways to be more efficient, more effective. That can include acquiring data to help us better plan protocols, better design studies, better identify which countries we want to run the studies in, and then which sites and which positions we want to work with. I think that's going to be an ongoing effort. As trials become more complex and we move towards personalized medicine, we're going to have to invest to make sure we end up at the right places, with motivated investigators, and eligible consented patients.

And the only thing else I'll add is if you remember from our previous calls, there's really three broad categories we're looking at doing that in. Sites and patients, which Jamie alluded in both technology tools and actually improving the Calayst Site program, which was another one we mentioned on the first quarter earnings call. The second is, we ran very thin last year on staffing. Our staff were very highly utilized, their ability to go out and properly do RFP activity, as you know in our industry the people that do the workalso go out and do sales proposals, and so we're trying to invest some in the gross margin line to make sure that our staff have the ability to go out and do RFP activity. And lastly is BD, we're obviously investing more in our business development team.

Those are the three broad categories. The bulk of those investments you'll see in the gross margin line with a little bit in the SG&A from the additional sales people.

Great, thanks and just one quick follow-up. What staff assumption or hiring assumption is embedded in the revenue guidance that you just updated, and does that include use of contractors throughout the year? Thanks.

I'll address the contractors issue first. A couple things. One, with one of our customers alluded in the prepared remarks, asked us to accelerate the timetable, and we're actually more than willing to do that. We're going to execute for that customer and deliver strong results for them, so that's a very big positive. But when we looked at that accelerated work, two things presented.

One, the ability to get staff up and trained, and ready to go was too tight, so we brought additional contractors to help us on that. And secondly, when that bolus of work ends later in the year, we wanted to make sure that our staffing was right as we look forward to the future. So we did bring in higher cost contractors to help us deliver that, so that will go through much of 2016. I wouldn't say all the way to the end, but much of 2016.

The second aspect is, contractors certainly in this tight labor market, we're seeing a little bit more need to use contractors, just to help supplement your staff, so we're taking aggressive steps to help limit that. Several different programs to bring on additional staff and train them, but contractors certainly will be a little bit higher use. As to your other question about staff, at the gross margin line, we certainly believe that the staffing will keep pace with our revenue growth.

Not a lot to add. John, we do a pretty good job, as you know, of forecasting backlog. And that gives us not just an idea of what revenue is going to be, but particularly the activities at a project level. And it's about finding the right resource and the right locations for the right skills.

There's not a maximum amount of fungibility in our resource. In the US it's relatively straightforward. You can bring people in, and they can travel a little more. We are trying not to hit the utilization levels that we did last year, because having high utilization I think is only manageable in the short-term.

You got to give people a reasonable work load and allow them to get the job done, but if you go outside the US, if you got resource in Spain, and you've got sites in Italy, you don't have a lot of bilingual people that you can move around across borders So it gets a little more challenging as you get into countries where there's maybe language differences, and maybe even work permit differences as well, particularly as you get into Asia and South America.

So we're trying pretty closely to watch backlog, where is our demand going to be, and then satisfy that, if we think it's sustainable demand with permanent resource. If it's a temporary increase in demand, we'll look at more contingent labor, and obviously contractors are a part of that process.

Great, thank you.

Thank you. Our next question comes from the line of Dave Windley of Jefferies.

So Jamie, I wanted to make sure I understood the comments that you made about the therapeutic units. It sounded like you were consolidating some therapeutic units, or reorganizing those in some way. I just want to make sure I understood that, particularly as it relates to the differentiator that you talk about, of being therapeutically aligned down to pretty low levels in the staffing ranks.

Yes, so historically, we've had four main business units, focused at the therapeutic level. The smallest of those business units has been called CEPA, which is cardiovascular, endocrinology, and post approval. What we're doing is we're taking elements of that business and realigning it, actually to better therapeutic focus.

So they also included ophthalmology, which we believe is now better aligned within CNS as a sensory therapeutic area, so it will move across to CNS. Other elements will move to general medicine, where the skill set is broadly applicable.

Those therapeutic project managers and some of that therapeutic leadership will now be part of general medicine. What we're also doing is separating post approval, and giving it its own focus under our COO, to help build-out fit-for-purpose processes and systems, just to be a little more cost effective in the post approval space, which we believe is a key component of winning and growing business in that space.

And Dave just to clarify, all the way down to the CRA, nothing's changed, and you're basically picking up those -- within each of our four business units, we had sub-units below that, that were focused on a particular specialty. All we did was pick up those individual pieces that Jamie alluded to, and moved them under different leadership, effectively.

Got you, so in the post approval, as a follow-up to that, is that an area, it seems like an area that has pretty strong tail wind for the industry, in general. Is that an area where maybe your clients are making requests, or are pushing you to accelerate your development of that capability?

I think we see the market potential there. We obviously look at industry trends. It is a different market, because you're quite often dealing with different buyers and different decision makers at our customer group, so you're quite often into the medical affairs or commercial space. Quite often, you sometimes are dealing with different investigators as well.

So it's a different segment, the work is very similar. It is more cost competitive. We actually see more competition in that space as well, so the study sizes quite often are smaller in that space, and obviously, we would have to take a different approach to make sure that we were competitive in that space. So we have actually done quite a bit of post approval work, everything from registries, health economics, but I think we can maybe pick up more business in that space, with some dedication in that group.

Got you, my last question, I think you mentioned on this accelerated work, two parts to this question. One is, I think you said $3 million of revenue represented by that acceleration in the first quarter. Could you, sounds like you have some visibility to what you were going to do, to continue to accelerate over the balance of the year. Can you quantify that?

And then secondly, and more conceptually, if the client can call you and say -- given speed is so important in the industry, and the client calls you and says, hey, I want to speed this up, I guess I'm curious about why that doesn't happen more often, or why that speed is not baked into the feasibility up front? It's interesting to me that you can kind of flip the switch and pull this forward, thanks.

So I'll do the second part and let Greg do the first part.

Yes, I don't want to quantify individual projects, but certainly, the pull-forward of that revenue was taken into account for our guidance. I think that Q1 was probably a little higher than we'll see in the other quarters, of the pull forward. The other thing I will tell you is while we flipped on the switch in Q1, we anticipated that starting really at the beginning of the fourth quarter, that they made, so we started gearing up for that. So even though the switch was, quote, flipped at the end of March, we had originally expected that switch to be flipped in early Q2, and so by flipping that switch, we signed everything off with the customer, we had the contractors obviously well in advance of the switch, and were doing the work quite honestly in anticipation of them asking us to do that.

As to the second piece, do they do it often? Customers do these decisions all the time. The reason why we called this one out in particular is because it is our largest study by far, and it would have the most impact on our results. But it's our single largest project. Other projects, that happens all the time, and Dave, we don't mention it because it's noise.

Got you.

I think Dave the main driver as you might guess is patient enrollment, so this was a study that was progressing well. We added more sites and more countries, because we saw an opportunity to really advance enrollment ahead of the original schedule.

But when you do that, and you have a lot of patients coming in at the same time, that leaves you a lot of data, a lot of queries, a lot of analysis to be done. And it's really the acceleration of that study, study conclusion or at least getting to some of the early analysis, that drives that pull-forward. But the only way you can do that is by having sites open and patients enrolled.

Got you, thank you. Appreciate that.

Thank you. Our next question comes from the line of Tim Evans of Wells Fargo Securities.

You talked about the study duration phenomenon, studies getting longer, et cetera. And it's certainly not specific to you, but given the degree to which you spend time looking at your backlog, I was wondering if you could comment on how you see this playing out in the future. Do you think that studies are going to continue to elongate, backlog conversion is going to continue to decline, or do you think that we reach a point soon where that stabilizes at a new normal rate? Or do you see it getting better at some point in the future? Any color there would be helpful, thanks.

Let me take the first part, and I'll let Jamie comment too. One, a big part of the reason why studies are elongating is mix. One of the things that you've seen across the industry is oncology is a very big market right now. Oncology studies have always historically been a longer tail, so as your percentage of your backlog grows with oncology, that's going to increase the average duration of your trials, which in turn, has an impact on your backlog burn, because it decreases your backlog burn when the average length of the trials are coming in. So that's one.

Secondly, post approval studies, while it's a very small part of our market today for INC in particular, post-approval studies, as that market grows, they have very long durations also. So those two factors, mix is the biggest issue.

Secondly, as trials become more complex, I don't know that necessarily takes that much longer to do a particular trial, as it is finding the patients. Finding patients and having the global scale that we do and our competitors do is critical in this market, because finding those patients and getting sites up and running is part of the issue that you're seeing.

So those are the two factors that's causing the elongation. As to whether it has stopped, you could see, just as easily see backlog burn increase if the mix changes. But right now if oncology continues to be a bigger market, and take a bigger share, you could continue to see elongation. That's the drivers, the factors.

Pretty good summary from Greg. I think, as we've talked about in the past, we see studies in three components. There is start up, conduct, and close out. If anything close out is probably maxed out as to how efficiently we can gather data, and then conclude studies with tables, listings, figures, clinical study reports. I think everybody does that fairly efficiently.

Conduct, as Greg said, it remains the same across the industry. You treat patients for a defined period of time. In oncology, in early phase studies, you're looking at progression as an end point, so that can be a variable length of time. As you get into later stage oncology studies, depending on the indication, you're looking at overall survival, so you're looking for events in those studies, so that can actually elongate studies in that indication.

Start-up is quite critical. That's finding countries, getting competent authority approval, finding sites, contracting with them, initiating them, and then enrolling patients. That is becoming more challenging, particularly as we're becoming more specific on the patients that we want to treat, and we're moving towards personalized medicine. So I think all that is a headwind in terms of getting studies up, running, and conducted on time.

If you were to look out in the future, if we had maybe more definitive clinical markers that we could measure in early stage, I think in some diseases, we can see the effect of drugs very quickly in patients, and follow patients, maybe for a shorter period of time, particularly as it relates to efficacy. I think on the safety side, you'll want to follow the potential side effects of drugs for an extended period of time.

In the future, you may see studies that progress with some level of conditional approval, based on early data. But I think you're still going to have a commitment from a safety standpoint, either in registration trials or as Greg alluded to, in a post-approval setting, many of these studies now are multiple years, stretching out five, ten years. I think we've even had registries that have run for 20-plus years, in order to follow the true long-term effect of a particular drug in a patient population.

Yes, I guess from a financial standpoint the one thing that seems most critical is, do you feel like you have your hands around it, to the extent that you're not going to be surprised by a sudden step down in conversion? It's going to cause you to come in lower than your guidance? Like do you feel like all of these phenomenon are well contemplated in your guidance?

I think in the way that we contemplate it, yes. I think study by study, the way that we not just phase it at the time that it's won, but phase it as it comes out of our Trusted Process and quick start camps, and then even rephrase as we get new information, and maybe the complete environment changes.

I think I'd almost take a different view, and wonder how it factors into return on investment, as you think of biotech and pharma. If they are going to invest in a study, and it's going to take longer than maybe was originally planned, how does that change some of the ROI viewpoints, on whether the study is commercially feasible or not? That's probably the way I look at most, and I think that's where we could help our customers just be more efficient, more effective.

And then for us, it's about delivering against that original timeline. I think that's the most important thing in terms of customer satisfaction, managing customer budgets. You can only successfully manage a customer's budget if you actually deliver the study on time. If you over run on time, it will likely have negative budget impact, and that's not good for your customer, or your relationship with that customer.

And Tim, I know that people really focus in on backlog burn. As I've said in the past, backlog burn to me is a better indicator of the quality of your backlog, and your order policy, than anything. We look at backlog coverage, and your question is, have we adequately taken what is a derivative of all of the things that goes into guidance, and the backlog burn into account?

And if you look at our backlog coverage, which is what we view as the most important, we're at 91% coverage, and that's compared to say 88% last year, for what we actually did, so obviously, we're assuming we need a little bit more coverage this year in our guidance, taking into account the fact that our backlog is elongating the trials. The other thing that we look at is book-to-bill.

Over a long term, not short-term perspective, but over a longer-term perspective, if your backlog conversion rates -- your average trials are elongating, your book-to-bill probably needs to be a little bit higher than it has historically, to offset that, it takes the same growth rate over a longer period of time. So all of that has been taken into account in our guidance this year, and as we look out into the future. As we think about staffing, we look at that backlog coverage for future years.

Thank you.

Thank you. Our next question comes from the line of Robert Jones of Goldman Sachs.

Great, thanks for the questions. A lot of mine have been asked and answered, but I did want to go back to the third-party contractor commentary, and also the comments you made around the labor market for CRAs tightening a bit. It sounds like there's two different issues at play there, so I was hoping maybe you could parse those out for us.

The first sounds more timing related, and arguably a good problem to have, that a large client wanted to ramp up a trial. The second, though, on the labor market, seems a little bit more worrisome. I'm just wondering if maybe you could talk a little bit on an industry level, if we think about backlog growth and your peers also having success with new awards, what ultimately can help supply and demand meet up on the labor side for CRAs?

You did parse it out correctly. There are two different issues going on with contractors. The first is a timing issue, that's going to cause a little bit of an impact on margins in 2016, because we're accelerating that work for our customers. So you nailed that.

The second issue, I think it's early in the game, as to whether it's going to be a lasting impact. It's certainly something we're starting to see, and we're taking proactive actions to offset it but it's certainly something that's been developing since probably about mid last year, and it's just become more and more acute. I think you've heard all of our competitors talk about it in some form or fashion, about whether new talent acquisition is difficult, particularly in oncology right now. And so whenever you have an imbalance of demand versus supply, that's going to put pressure on wages.

And in addition, our CRAs in this marketplace can make a good living as independent contractors, so you're seeing a lot of them choose to take that route, and as a result, the supply of those drops, and then demand continues to grow, it's a circle. Our competitors are talking about moving things to lower cost markets to help offset that, and develop talent there. We believe with our therapeutic focus, that's probably not the best answer for our business model.

We are looking at bringing in staff, training them early right out of school, getting them to think of it as an internship or apprenticeship with our more experienced CRAs, and then developing talent that way. You can bring them in at a much lower cost, and once they've gained the experience, they are at a little bit lower rate, that helps offset it.

And just being more efficient. All of our cost control initiatives, and in part, the restructuring we did, was to help offset some of that in the future. So those are the things that we're certainly seeing at the early stage, is that just short-term blip?

I can't answer that at this stage. We're just taking the actions developed for the long term, in case if it does stay with us. Jamie, I don't know if you have any additional comments?

That was a pretty good summary. Bob, it's more a phenomenon in the US. People are more inclined to be independent contractors in the US than you'd see in some of the other markets.

So although we see a little bit of that in the established European markets, less so in Asia where it's just not part of the culture. So we're obviously watching it closely. We would normally expect to have some percentage of our workforce, particularly CRAs, as contractors, and we try to manage within certain boundaries.

The other thing is, at an industry level, we've had these discussions to see if there's anything that we can do to really highlight the career path in clinical development, not just at the CRA level, because generally it's not something that people that are coming out of school think about, yet there is a good pathway to come into this industry, not just on the CRO side, but obviously biotech pharma, and build a career through some of the clinical channels.

So we have very well developed career ladders, how to progress people through the organization. Obviously we're working on work/life balance, improving the tools, improving travel for CRAs. All of those are designed to create the right work environment to be able to attract the best people, and keep them within INC.

No, that's really helpful. I guess just one minor follow-up. I think last quarter, you mentioned about $100 million worth of awards that you didn't book in Q4, because it was related to you -- weren't sure if the sponsor was going to proceed with the work. Curious if any of that came into backlog this quarter, and how we should think about, if there's anything within that $100 million that's still yet to come.

Good question. Nothing came in the first quarter related to that, and we do not expect any of it to come forward. We made the right call in the fourth quarter. We had further discussions with both those customers, and I believe those are projects are dead at this point.

Okay great, thanks.

Thank you, our next question comes from the line of Tycho Peterson of JPMorgan.

It's Tejas on for Tycho. First of all, congrats on the quarter. Just had a quick one on the top line.

I know you mentioned this in your prepared remarks, and in some of the earlier questions Jamie, around impact to the top line from the pull forward of revenue. But even beyond that, this quarter was very strong for you. Can you give us some color on what drove that?

And then in terms of the follow-up, looks like the mid-point of the guidance was taken up by $10 million. Is there an element of conservatism baked in over there, given that you have this additional pull-forward going on as well?

So I'll do a little bit about the pull forward. I mean, I don't think we've changed the way we're operating. There's a lot of focus on start-up, getting sites initiated, and then trying to create a conducive environment for those sites to find protocol-eligible patients and take them through the consenting and screening process and we seem to be working on that well, most of the time. I think there are still some studies that we feel are challenged, and that we're working with sponsors to try and improve some of those timelines.

That all factors into backlog management and as work hopefully accelerates as we get sites up quickly and patients in, that then will bring revenue forward in the backlog, and obviously we would expect to earn that, based on that schedule. Maybe, if we have got delayed protocols or delayed drugs, or a competitive environment for enrollment, maybe more so than we had originally contemplated, that obviously pushes timelines out.

So that's part of the study by study management that our project managers, our therapeutic groups, and then our finance team goes through on a monthly basis. So not unusual, just similar to the way we've been working. I don't think we've done anything particularly different. The operating model stays the same. The tools we are using are pretty much the same.

And the only other color I'll give is when we look at our own internal model, we don't give quarterly guidance, as you all know. But the impact of this study on the quarter, we mentioned about $3 million. Other than that, the quarter looked about like we thought it was going to look, quite honestly.

So I know people's revenue are a little bit lower on the consensus for Q1, but at least from our own internal model revenue, came in basically where we thought it would, plus the $3 million. So that's one of the reasons why we highlighted.

As to the year, when we gave guidance in February, we were already working with the customer, and we knew that this work could possibly accelerate. So that was partially, not fully, but partially taking into account when we gave guidance in February.

So the impact of guiding up is really more confidence in the year. Our backlog coverage is at 91% versus 88%.

The question that was asked earlier on the call is, why didn't your guidance go up even more? I certainly think that it has the opportunity to do, if our sales pipeline is strong.

We've got to deliver on the awards. We've got to have a really strong book-to-bill the rest of the year, and if we do that and execute like we are trying to do, there's opportunity. But we think it's prudent that the guidance we gave now is prudent, given our existing backlog and where we see the pipeline today.

Got it, and then in terms of CNS awards, can you talk a little bit about how they've been trending since the end of last year, relative to oncology, particularly among your larger customers? I think earlier this year, you called out that part of the business as being a little bit softer, and oncology being much stronger than your initial expectations. Is that how the business has evolved through April?

We had a really good quarter in CNS. As I've mentioned in the past, part of CNS was where our -- how strong our customers were in their own pipeline. So as those customers finish up studies and have success with their drugs, and they come out with additional studies, and we're doing a good job of winning those, and have a good repeat business, so we had a very good quarter in CNS.

Got it. And then finally just in terms of priorities for cash use this year, beyond incremental pay down of your debt, how should we think about tuck in M&A? Any specific areas, maybe perhaps around patient recruitment or smarter clinical trials, or some such, that you're focused on at the moment? And then maybe just some quick thoughts on broader M&A in this space. Obviously, there's been a lot of speculation around targets out there, and who might buy them, so any thoughts on that would be great.

Thank you for not specifically mentioning the rumor. And in all seriousness, I think that INC has always articulated a view that we believe that we are well-positioned to be an acquirer in this space. We have a good balance sheet to be able to do that.

We plan to look at -- our first focus is on small tuck-in acquisitions. But we've also had a track record with, whether it be Kendall or MDS before that, of doing transformational acquisitions. But our first focus is on tuck-ins and we will certainly be willing to look at larger acquisitions, and we like our position to do that. If there's consolidation in the industry, we hope to be a part of that, and an acquirer in that space.

As to where our focus is in that, post approval is a good market. We will certainly will look at that. We will also continue to look at building out our Asia Pacific presence, and ophthalmology has been an area we have talked about in the past from a therapeutic focus.

So small tuck-ins, picking in those areas where we see growth, and where we see places to augment our strength. Sites and patients, we certainly looked at. I think we look at that more as a partnership than an acquirer, I know there's several people in the industry that have actually bought in that area. We view that as an area we will probably partner versus own, but that's our strategy in that area.

Got it. Thanks so much. Congrats in the quarter again.

Thank you. Our next question comes from the line of Eric Coldwell of Robert W. Baird.

First off, on biotech demand. You've mentioned I think 25 new clients won in the quarter. Also, I guess what I'm really trying to get at is, have you seen any change in the environment, whether it be demand or changes in behavior related to the financing world? And if you could also give us an update on revenue and backlog from pre-commercial accounts, if you can speak to that? And then I have a follow-up, thanks.

Yes, so Eric, it's Jamie. Just on biotech funding, I think if you asked the question maybe two months ago, obviously there had been a big correction in the market, there had been no IPOs out. Even the M&A side had looked pretty flat. I think fortunately, it was a relatively short-term adjustment.

We've seen some IPOs, we've seen some funding coming in, some follow on funding as well. We're also seeing pharma a little more active in some of the licensing agreements that you're seeing on the wire, and even some M&A contemplated. I think both AbbVie and Sanofi have been pretty active even in the last week.

So I think overall, we still feel reasonably positive about the biotech sector, mainly because there's a lot of good science coming out. And as we've said all along, I think good science based on solid fundamentals, where the etiology of the disease is strong, there's good targets, and people are bringing molecules with positive mechanisms, I think that's always going to get funded. So I don't think we have a lot of concern there.

We've heard various numbers in terms of how much cash is on the balance sheet of biotech. I think I have heard up to $380 billion. So I don't see any short-term issues, but it is about funding good science, and making sure that the follow on funding is there for some of the biotech.

I think that was one thing we maybe picked up was, even from the IPO market in the last 18 months, some of the biotech raises may not have been full, in terms of supporting a complete development pipeline. So we're obviously watching that. But some are coming back for the secondary financing as well, so again, good science continues to get funded.

Eric as we talked about in the past, I think the whole biotech thing, at least in the short run is way overblown. The impact on our revenue for this year, if it completely dried up 100%, which it has not -- the first few IPOs were all biotech this year. But if it completely dried up, it would be a 2% impact on our revenue, because our backlog is well funded, it doesn't go in there, without it being funded. So obviously, we were able to raise guidance in a market where people felt like the biotech funding was impacted.

To your question as what percentage of our backlog, it's roughly in line with what it was at the end of December. It's at 15% now, and the reason why it's gone up slightly -- it was 14% at December, is mainly because of a mix of burn. Some of our large customer, that we told you that accelerated their study, is not a biotech. It's a large pharma, and therefore as their revenue continues to burn and backlog decreases for that customer, it makes the biotech piece go up a little bit, because a lot biotech is within oncology, as you know, which is slower burn.

Okay, that's helpful, thanks. And then on this study pull-forward, you talked about the impact on revenue. I'm not sure I got the impact on EBITDA from that?

And then also, did your EBITDA outlook change as the quarter progressed? I felt like there was a little more of a phasing period here in Q1 that really didn't come to fruition. Did anything change as the quarter progressed beyond the study pull forward, that would have impacted your EBITDA dollars positively, as the quarter came to a close?

For the quarter, it certainly was positively impacted by that pull forward. So if you think about, we would have expected our EBITDA margins to be a bit lower in Q1. Everything else held constant, just because of the reset of FICA, and also other timing. But the fact we had to use a little bit more contractors on this study also would have negatively impacted our margin in Q1.

That pull forward of revenues certainly helped in Q1. For the full year, our margins we were still effectively maintaining that EBITDA will be flattish, and it may be slightly down now given the contractors that we're needing to use, but we're still holding with it to be flattish. But Q1 was positively impacted by that pull forward.

Okay, thanks very much.

Thank you. Our next question comes from the line of Greg Bolan of Avondale Partners.

So, just a couple questions. In the slides, there was a mention with regards to an uptick in bookings from the mid-cap, or mid-size biotechs, and just all the commentary you've made thus far, and just digging through the bowels of the results, it just smells to me like, and I know it's very difficult for you to know this for sure, but this seems like your market share increased this quarter, or for that matter, has been increasing, but you did see maybe an acceleration of market share gains this quarter, just from the stand point of RFP bake-off win rate. Is that fair, Jamie, Greg to say?

Well I think we've been gaining market share for the last couple of years. I wouldn't necessarily say that we saw an uptick this year compared to in the past, but the industry as a whole is growing around 6% to 8%, depending on who you talk too and our revenue and bookings each year have been growing at a much faster pace than that, in the high teens.

So I think all of the big guys are taking market share from the small guys right now. It's not good to be small, and you need to have that global footprint, so all of us are benefiting from that.

Oncology and CNS are really growth areas, and we're particularly strong in those areas. So we're probably taking a little bit more market share there and we've gotten rescue studies and some business from some of our fellow larger CROs.

So we feel good about our position, and we feel good about our business model. So absolutely we're really good there.

The other thing I think you're alluding to is on the biotech mix. That's -- one quarter is just timing. That's revenue, by the way, so part of it is just timing. We don't expect to see a significant change in that.

And the way we define our large pharma versus small pharma/biotech is the large pharma is top 50, so that slide that you are referencing is slide 5. We see that just as timing. Over the long term there's not going to be a lot of variation there. We see it as the same mix.

All right any other questions?

Our next question comes from the line of Donald Hooker of KeyBanc.

One of the things that I was impressed with was the ramp of the new clients that you've had in the recent quarter, and the quarter before, I guess, as well. When you think going forward, I think in the past, you've commented that these new clients tend to come in small, and take little bite sizes of your services and ramp over time. So I'm wondering how much of a positive read through to the future this accelerated ramp of new clients has -- maybe if you can discuss who these clients are a little bit, in a qualitative manner, that would be helpful for our forward expectations? Thanks.

Yes, I think we've done a good job of identifying clients that we are not currently working with, and what their potential needs are and it does vary. Some of the new clients are larger, more established customers, as well, that traditionally have not been part of INC's customer set.

So I give credit to the sales team. They've done a good job working on understanding the upcoming pipeline or portfolio for those customers, looking at existing studies and maybe either molecules coming out of pre-clinical, INDs that have been filed, even some life cycle extensions for large pharma.

So it's about getting in front of those customers, I think we've said this all along, well in advance of the RFP process. The more time we can spend with those customers, socializing INC's capabilities, the more likely it is we'll obviously receive an RFP. But if there's an established relationship there, then that then helps obviously in the proposal, bid defense and award process.

I think if all we do is wait to see a request for a proposal land on our desk, the likelihood of winning that is pretty low. So our sales teams are spending time with these customers, well in advance. Our therapeutic people are meeting them at industry conferences.

We are providing some high-level consulting, some of which is paid, some of which is not paid, and that usually then establishes a link to that customer for future opportunities and we're continuing to do that. There are other customers out there that we've not yet worked with, but we've spent a reasonable amount of good quality time with, and as their pipeline progresses, we would expect to be in the mix for future work. And there's some pretty new biotech who have received funding, and haven't really been in clinical development, they're coming out of pre-clinical, they're filing INDs for the first time, they're putting molecules into Phase I and we're following those to hopefully see those molecules progress, and for us to be part of that mix.

Thank you.

(Operator Instructions)

I'm showing no further questions at this time. I'll turn the call back to Mr. Jamie Macdonald for any closing remarks.

Thank you, and thank you everybody, for your time today. Thank you also for your 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 2016. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.