Syneos Health Inc (SYNH) 2018 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Syneos Health Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to Ronnie Speight, Senior Vice President of Investor Relations. Please go ahead, sir.

Good afternoon, everyone. With me on the call today are Alistair Macdonald, our Chief Executive Officer; Jason Meggs, our Chief Financial Officer; Michelle Keefe, our President of Commercial Solutions; and Paul Colvin, our President of Clinical Solutions.

In addition to the press release, a slide presentation corresponding to our prepared remarks is available on our website at investor.syneoshealth.com.

Remarks that we make about future expectations, plans, growth, anticipated financial results and prospects for the company constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities and Litigation Reform Act of 1995, and we disclaim any obligation to update them. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including the impact of the changes to the revenue recognition accounting standard. These factors are discussed in the Risk Factors section of our Form 10-K for the year ended December 31, 2018 and our other SEC filings.

During this call, we will discuss certain non-GAAP financial measures, which exclude the effect of events and transactions we consider to be outside of our core operations. These non-GAAP measures should be considered as supplement to and not a replacement for measures prepared in accordance with GAAP. For a reconciliation of non-GAAP financial measures with the most directly comparable GAAP measures, please refer to the appendix of our presentation.

I would now like to turn the call over to Alistair Macdonald. Alistair?

Thank you, Ronnie. Good day, everyone, and thank you for joining us. Before we get into our results, I want to thank our board, analysts, investors, customers and employees who have supported us these past 2 weeks as we've moved through the 10-K filing extension process. I specifically want to take a moment to thank our internal teams for their tremendous effort, fortitude and patience as we have worked through the independent review of our revenue accounting and related internal controls. I am proud of our team's continued commitment and support, and we are pleased to have filed our 10-K today.

With that, let me turn to our earnings. Syneos Health had a strong finish to 2018 as we delivered accelerated revenue growth and improved profitability in our fourth quarter and full year results. We believe customers continue to recognize the value of our Biopharmaceutical Acceleration Model as evidenced by healthiness awards across both our clinical and commercial segments for 2018. Our integration efforts also continued to progress ahead of schedule as we achieved our updated synergy targets for the full year.

Let me begin by reviewing some key performance highlights. First, we had a strong overall sales performance, resulting in total net awards of $3.9 billion under ASC 605 and a book-to-bill ratio of 1.22x for the full year 2018. This was comprised of a clinical book to bill of 1.25x and a commercial book to bill of 1.16x, which exceeded our target in 2018. This performance was balanced across customer types and services, providing a solid foundation for growth in 2019 across both clinical and commercial.

I'd also like to note that beginning with this quarter, we plan to provide net awards and book to bill on a trailing 12 month basis only as we believe this better represents the overall trends in our business.

Second, revenue growth in our Commercial Solutions segment continued to accelerate, with revenue up 17.5% compared to the fourth quarter of 2017 and up sequentially for the third consecutive quarter.

Third, we saw accelerating growth in our Clinical Solutions segment and near record gross awards for the fourth quarter. This was fueled by maintaining our leadership position in the small to midsize market while continuing to ramp up new large pharma relationships.

Lastly, today we announced our intention to refinance our credit agreement, which aligns with our focus on disciplined management of our leverage and interest costs.

Turning to our results by business. We are excited about the sustained momentum in our Commercial Solutions segment as our integrated capabilities continue to resonate with customers. The team closed 2018 strongly, with total net awards of $1.14 billion for the full year. This overall strength in awards as well as selling solutions backlog growth positions us for continued strong growth in 2019.

Importantly, our backlog continues to diversify as we are seeing compelling opportunities in the expansion of our European business with momentum not only in selling solutions, but also in consulting and medical communications. Our pipeline and RFP flow remains healthy, driven by our strategic investments in commercial business development, along with strong customer interest in Syneos One and our other comprehensive outsourcing solutions.

We are also seeing the value of our model across the product development spectrum with increased utilization of commercial services among our clinical customers. This is evidenced by recent successes where we have demonstrated greater value for our customers by combining clinical services with our growing commercial presence.

We were recently awarded a REMS program by one of our largest clinical customers, a Top 20 pharma company, for a compound that we supported through the clinical development process. We secured this win based on our clinical experience with this compound and our ability to bring the customer an integrated solution, which included our consulting and commercial capabilities. This type of award is just one example of the power of our uniquely integrated approach, which provides enhanced value for our customers and positions Syneos Health well for continued growth.

Our Clinical Solutions segment also delivered a solid finish to 2018, bringing total net awards for the year to $2.75 billion. This performance yielded year-over-year backlog growth of 14%, establishing a solid foundation as we entered 2019. These awards were broad based across customer segments, with notable strength in the Top 20, driven by our developing preferred provider relationships, as well as strong performance amongst our core small to midsize customers.

While fourth quarter gross awards were near record level, we did experience elevated cancellations during the quarter, driven primarily by drug efficacy, safety and regulatory issues. We do not believe this represents a trend, and this fourth quarter increase has been contemplated in our 2019 outlook.

Importantly, under ASC 605, Clinical Solutions adjusted net service revenue growth accelerated to 4.3% for the fourth quarter and 3.6% for the full year 2018, compared to 2.6% for both the fourth quarter and full year 2017. On a constant currency basis, our clinical growth rate was 5.1% for the fourth quarter 2018 and 3.3% for the full year.

As an update to an inVentiv customer relationship we highlighted in the second quarter that expands our therapeutic footprint, we are pleased to have finalized the transition of a therapeutic development operation from one of our large pharma customers. This type of strategic relationship allows us to quickly expand our portfolio of services in a capital-efficient manner, benefiting both parties in the process. Through this relationship, we've added experienced staff and further therapeutic depth in dermatology, aesthetics and immunology as well as translational science capabilities and the underlying lab facilities to our European operations. This arrangement also includes a minimum revenue commitment to Syneos Health over the first 5 years.

Next, I'd like to provide updates for some of our ongoing strategic investments and other activities. We continue to invest in our unique Syneos One offering, which we previously called integrated solutions. We believe this updated branding better reflects the unique nature of our end-to-end product development offering.

Syneos One collaborates across the business to create custom solutions encompassing our full suite of capabilities. This team provides customers, particularly in the small to midsize market, with an economic alternative for out licensing their assets along with insights that are critical to optimizing their development and commercialization plans. We believe this approach can expand our addressable market beyond traditional commercialization services. In addition to recent wins by Syneos One, this team's deep experience, expertise and integrated approach have already proven critical in winning several other key awards for our clinical and commercial businesses.

Our integrated work is further fueled by our dynamic assembly data digital strategy. This open and a highly flexible architecture allows us to partner with the best [aligned] data and technology providers rather than create and rely solely on in-house technologies or solutions.

I'm also pleased to report that we have made significant strides during the fourth quarter and early 2019 in rounding out our talented executive management team. We promoted Christian Tucat to President, Syneos One, Real World and Late Phase. Joining the executive team, Christian now represents these critical market opportunities across the organization, building on existing results and driving further expansion of this unique combination of offerings.

We also added Jon Olefson to our executive team as General Counsel. Jon brings extensive experience in data analytics, intellectual property and global markets with high-growth companies. He most recently served as General Counsel with Cotiviti, a health care analytics firm.

Finally, Paul Colvin recently joined our team as President of Clinical Solutions. Paul is an industry veteran, having joined us from PPD, with a history of operational leadership and large pharma experience, including more than 15 years at Eli Lilly. He brings a customer-focused perspective that we believe will help drive our enhanced key account management structure to better serve large customers and further accelerate our growth.

We also continued to make great progress on our integration activity. We realized approximately $22 million of savings during the fourth quarter, bringing our year-to-date total to $76 million prior to our strategic reinvestment. This result is consistent with our increased target for 2018, and we remain confident in achieving $125 million in synergies annually by 2020.

In closing, let me officially welcome our new executive team members and express my sincere gratitude to my 24,000 Syneos Health colleagues for their engagement, dedication and focus on world-class delivery. In 2018, we built a strong foundation for the future by making tremendous progress on integration, building our brand, deploying our innovative product development model and strengthening our management team. I am proud of the progress we've made and where we are headed. Our global team is well positioned for the next chapter of our growth.

Now let me turn it over to Jason for more comments on our financial performance. Jason?

Thank you, Alistair, and good afternoon, everyone. Before I get into our financial performance, I want to briefly touch on the material weakness disclosure in our 2018 Form 10-K. As part of our annual review of the effectiveness of our internal controls over financial reporting, we determined that material weaknesses existed in the internal controls related to clinical ASC 606 revenue recognition. This determination was the result of immaterial accounting errors identified during the year-end financial statement audit, which identified design and operating deficiencies related to internal controls developed for ASC 606.

Importantly, we concluded that no restatement of prior periods was necessary and no adjustments to our financial results have been made. Work to remediate these internal controls is underway and we expect to be fully remediated during 2019.

Now turning to our results. Let me remind you that all results are on an adjusted or non-GAAP basis as if the merger closed at the beginning of the earliest period presented, as defined on Slide 2. Consistent with prior periods, we will be discussing the current period adjusted results under the previous revenue standard to facilitate the period-to-period comparisons. For these comparisons under ASC 605, we will be discussing adjusted service revenue, excluding reimbursable expenses.

Regarding our results, I would like to start with a few key operational highlights. Fourth quarter adjusted service revenue increased 8.3% year-over-year, led by strong awards and accelerating growth of 17.5% in the Commercial Solutions segment. We achieved strong total adjusted EBITDA performance with 15.9% sequential growth during the quarter. This performance, along with the lower tax rate and lower interest expense, drove a 38.8% increase in adjusted EPS compared to 2017. Our accelerated realization of synergies in 2018 led to $76 million in savings, which further improved our profitability and allowed us to reinvest in future growth. And today we announced that we are working with our lenders to refinance our 2017 credit agreement. In addition, during the fourth quarter, we continued to make progress on our balanced capital deployment strategy, with $36.3 million of additional debt reduction.

Now we'll review our financial results in more detail. Slide 3 for your reference includes our GAAP results under ASC 606, along with the same results presented as of ASC 605 had remained in effect for comparative purposes.

On Slide 4, we show our adjusted results under both ASC 605 and 606, but I'll begin by discussing results under ASC 605.

Our total adjusted service revenue for the fourth quarter of 2018 was $834.3 million, up 8.3% compared to $770.5 million for the fourth quarter of 2017. This included a foreign exchange headwind of $5.4 million. The increase was primarily driven by our Commercial segment, which posted another quarter of strong sequential and year-over-year growth, with fourth quarter revenue up 17.5% to $271.9 million compared to $231.4 million in 2017. We primarily attribute this commercial growth to strong net awards during 2018, fueled by our strategic investments in business development and Syneos One, along with a strengthening macro environment and the acquisition of Kinapse.

In addition, our Clinical segment grew 4.3% to $562.3 million in the quarter compared to $539.1 million in the fourth quarter of 2017. This clinical growth was driven by strong net awards in the last 12 months, partially offset by delays in the startup of new awards, which we highlighted last quarter. For the full year, total adjusted service revenue was $3.18 billion, up 2.5% from $3.1 billion in 2017. This included a foreign exchange benefit of $8.5 million.

Adjusted EBITDA for the fourth quarter was $186.1 million, a 19.1% increase compared to $156.2 million in 2017, leading to an adjusted EBITDA margin of 22.3%, which is an increase of 200 basis points. This includes a foreign exchange benefit of $5.3 million. The benefit of clinical and commercial revenue growth, along with other cost savings and realized synergies, were partially offset by increased costs related to our strategic investments.

Adjusted EBITDA for the fourth quarter included approximately $16 million of seasonal benefits related to vacation accrual adjustment and R&D tax credits, similar to the fourth quarter of 2017. For the full year, adjusted EBITDA was $636.3 million, up 9.6% compared to $580.7 million for 2017, including a negligible foreign exchange headwind. Adjusted EBITDA margin for the full year strengthened by 130 basis points to 20% compared to 18.7% for 2017.

Adjusted EBITDA also includes the realization of $22 million and $76 million of synergies for the fourth quarter and full year, respectively, before the impact of our strategic reinvestments to drive growth. Adjusted diluted EPS grew about 50% from $0.70 in the fourth quarter of 2017 to $1.05 in the fourth quarter of 2018. For the full year, adjusted diluted EPS improved 38.8% from $2.27 in 2017 to $3.15 in 2018. These increases were primarily driven by our growth in adjusted EBITDA, the reduction of our non-GAAP tax rate to 24.5% and lower interest expense. Specifically, the lower tax rate contributed $0.18 and $0.35 to our growth and adjusted diluted EPS for the fourth quarter and full year, respectively.

Now I want to summarize our results under the new ASC 606 standard. Adjusted total revenue, which includes reimbursable expenses, was $1.15 billion for the quarter, which represents 2.7% sequential growth and $4.4 billion for the full year. This is comprised of adjusted total revenue of $824.2 million and $3.22 billion for clinical and $324.2 million and $1.18 billion for commercial, respectively. Total adjusted EBITDA in the fourth quarter was $173 million, representing 9.2% sequential growth and a 15.1% adjusted EBITDA margin. Total adjusted EBITDA was $597.2 million for the full year, representing margin of 13.6%. Importantly, this includes segment adjusted EBITDA margins that are more closely aligned than those under ASC 605 with clinical at 14.9% and commercial at 13.3% for the full year.

Adjusted diluted EPS was $0.95 for the fourth quarter and $2.87 for the full year. These adjusted earnings per share amounts include the impact of our lower non-GAAP tax rate of 24.5%, which contributed $0.11 in both the fourth quarter and full year when compared to our previously estimated tax rate of 27.5%.

Now moving to cash flow and the balance sheet. Cash flow from operations was $112.4 million for the fourth quarter and $303.4 million for the full year 2018 on an as-reported basis. Our combined net DSO for the quarter was 49 days under ASC 605 and 39 days under ASC 606. We ended the quarter with $153.9 million of unrestricted cash and total debt outstanding of $2.81 billion. Note that we have updated our leverage ratio calculation as of the end of 2018 to reflect the full year of ASC 606 reporting, which yields a net leverage ratio of 4.4x compared to 4.2x using ASC 605 adjusted EBITDA. We remain committed to the continued reduction of our net leverage for the revised target under ASC 606 of 3.5x to 3.9x by the end of 2019.

Slide 8 provides an update on our debt management and capital deployment activities. We remain focused on a balanced approach to capital deployment to drive shareholder value. This includes debt repayment, tuck-in acquisitions and share repurchases as determined by available cash flows as well as market opportunities and conditions.

I would like to highlight a couple of key milestones related to the balance sheet that we have achieved. First, we are working with our lenders to refinance our 2017 credit agreement, which we expect to close by March 31. This transaction is expected to expand our Term Loan A facility by $587.5 million to $1.55 billion. Of this incremental capacity, we intend to draw $187.5 million upon closing in order to refinance a portion of our Term Loan B facility at a lower cost. We plan to utilize the remaining $400 million of our new Term Loan A facility to redeem our senior notes during the fourth quarter at the first call date. These transactions are expected to reduce our interest expense for 2019 by $4.2 million and by $15 million annually thereafter.

This refinancing also includes the expansion of our existing revolving credit facility to $600 million to provide additional liquidity.

Second, during the fourth quarter, we repaid an additional $36.3 million of our term loans, bringing our total debt reductions since the closing of our merger to $222.4 million.

Turning to the tax line. Our final non-GAAP effective tax rate for the full year 2018 was 24.5%, approximately 300 basis points below our previous expectations, which we expect to continue into 2019. This lower tax rate stems primarily from our reassessment of the application of certain provisions of the Tax Cuts and Jobs Act based on, among other things, due guidance, which was released in late 2018. Importantly, given the benefit of our NOL deductions, we only expect our actual net cash outlay for taxes to be approximately $10 million for the year.

Turning now to our guidance as outlined on Slide 9. We've taken into account a number of factors, including our existing backlog, current sales pipeline, trends in cancellations and delays and our estimated merger synergies net of reinvestments. Further, our guidance is based on current foreign currency exchange rates, expected interest rates and our expected tax rate. Our guidance is also based upon our estimated diluted share count, excluding any share repurchases subsequent to the fourth quarter.

We expect full year total adjusted service revenue for 2019 in the range of $4.62 billion to $4.73 billion, representing growth of 4.9% to 7.4%. This is comprised of adjusted clinical revenue of $3.35 billion to $3.41 billion or growth of 3.8% to 5.8% and commercial revenue of [$1.28 billion to $1.32 billion] (Sic-see presentation slide-$1.275b to $1.32b), representing growth of 8.1% to 11.9%.

We expect total adjusted EBITDA to range from $625 million to $660 million, growing between 4.7% and 10.5%.

Lastly, we expect adjusted diluted EPS in the range of $3.03 to $3.23, representing growth of 5.6% to 12.5%.

We based our guidance for the full year on, among other things, expectations of interest expense of $125 million to $130 million, which includes the expected impact of the refinancing transaction we announced today; realized merger synergies of $100 million to $110 million before the impact of our related strategic investments; and a fully diluted weighted average share count in 2019 of approximately 106 million shares, which will vary by quarter.

I also want to provide you with some commentary for the first quarter given our typical seasonality and expected 2019 growth profile. We expect total revenue of $1.11 billion to $1.13 billion, representing year-over-year growth of 4.1% to 6.5%. This is comprised of clinical adjusted revenue growth of 1.9% to 3.1% and commercial revenue growth of 10.8% to 16.3%.

We expect total adjusted EBITDA of $130 million to $140 million, representing year-over-year growth of 1% to 8.8%, which reflects relatively flat adjusted EBITDA margin at the midpoint.

This completes our prepared remarks, and we will be happy to answer any questions. Operator?

(Operator Instructions) Our first question comes from the line of Eric Coldwell of Baird.

Congrats on getting through this so quickly with the solid quarter and outlook. Given all that you had on your plate, I don't think that the material weakness disclosures in your 10-K or the ASC 606 challenges are really that surprising, but it would be interesting if you can give us some anecdotes on the immaterial accounting issues that you cited just so we have something to hang our hat on here. And then I might have a follow-up or 2.

Okay. Thanks, Eric. Yes, I'll give you some kind of the environment and hand you over to Jason for a bit more color. We, I think through 2017 and then through '18, obviously, with the scale of the merger, we consolidated on to one ERP platform across the clinical to inVentiv, obviously from private to public, implemented a new revenue standard, a CFO transition. We moved a lot of things and we changed a lot of things. And getting the new controls in place to get that testing done was something that we were focused on and conscious about all year. I'll just say on record, really for the team, I'm very proud of where we gotten to, substantially complete on our audit, the same with Deloitte, and then we get the letter from the SEC before we filed so we have to pump the brakes really and look out, make sure with the Audit Committee that we had everything -- that we hadn't really omitted anything from 606 that we've been looking at. So it's been not a process I would love to repeat, but obviously, we've got through it quite quickly and got to earnings today without any changes. So I'll pass you over to Jason for a bit more color.

Yes. Thanks, Alistair. I appreciate the question, Eric. Yes, if you look at Item 9a in the 10-K, you'll see some color is in there around because of the framework and where things -- where the immaterial accounting errors that we saw were mapped to the framework, it will give you some sense of sort of what we saw, but we're not going to talk about much more than that publicly. But as part of the -- as part of just our normal annual review of the effectiveness of our internal controls, we did recognize that we had these material weaknesses in the clinical ASC 606 revenue. So this is part of our normal management assessment, process for controls and certifications, part of what we do with our external auditors as well as then the Audit Committee independent review that Alistair mentioned. So we went through all of that. And importantly, I think what I'd reiterate again is that we didn't have any restatements from what we saw, and we didn't have any changes to the numbers that we were looking at as we started that independent review. So we're getting after the remediation work as quickly as we can and expect to be fully remediated in 2019.

Yes, and just to add. I'm sorry, Eric. Just to add on the end of that. I think it's important to note that just to be clear, we picked out this material weakness before we received anything from the SEC. So this is not linked to receiving that letter. We've come to this conclusion prior to that with external -- with our auditors, and as Jason said, start remediation work straightaway.

No, that's great. If I can just quickly shift gears. One other item and overall, I think it's impressive where you are with guidance given everything that you did highlight as a lot of work for last 1.5 years or so. But first quarter EBITDA, just a tad below the Street, not that surprising. You've been there before and things have worked out fine. But you gave some color on 4Q seasonal drivers to the upside. I expect the reversal of that as really the biggest gating factor in Q1. But are there other factors in play that would have that sequential decline from 4Q to 1Q, perhaps be a tad bigger at least nominally than what we've seen in the past? I'll just leave it with that and cede the mic here.

Yes. So Eric what you said is correct. That's a driver, the seasonal things do reset. You also have all of your other tax resets and things of that nature that flow through in the first quarter that also have that sort of pacing throughout the year and creates that pacing throughout the year. So we also have that -- we've talked about previously new large relationships that we're standing up in both businesses that we will see some drag from that early in the year and then start to see that come out. And if you look at the pacing overall throughout the year, which you alluded to, it's pretty similar to what we've seen in the past.

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

Alistair, just given what you said a minute ago, can you just maybe fill us in on what your findings were from the internal review that you did over the last few weeks?

So that internal review from the Audit Committee, as Jason said, we haven't changed any numbers. We didn't find anything in the review that we weren't kind of seen before in the audit. There's nothing really to add. There's no extra color around that. We're moving through processes as usual now. So we completed that audit, that review. Some of the friends at work to look through that. And we're happy with where we got to, and the Audit Committee is happy, and we filed the K.

Great. And another similar one. Are you able to expand at all on your commentary with the SEC there in terms of substance or maybe timing in terms of how their process will proceed?

No, not really. I mean, we've told you pretty much all that we had. We've got the letter from the division of enforcement in the 21st of February and we've had some ongoing dialogue with them and we used kind of some of the areas they wanted to look at, which we put out in the press release, around book to bill revenue controls and forecast to guide that internal review, so you can get a sense from that of where we've been laser-focused as we've gone back over kind of the 606 implementation, et cetera. And as what Jason said, we didn't change any numbers. We're pretty happy to have gotten through that process and be back where we are today, filing the K and doing the earnings.

Excellent. And then maybe one last quick one. You mentioned strategic investments a few times on the call. Can you just remind us what sort of magnitude you're thinking in '19 and what you're spending that money on?

Yes, so we've increased the amount of investment over '18 in the prior years this year. We're continuing to invest in Syneos One. We're continuing to invest in building our business development both across clinical and commercial. And I think we've seen good benefits from that through the year. You saw the book to bill on the commercial side creeping up over the target that we set for ourselves, so we're pretty pleased with that. And then we getting a return on that investment. This year, we're looking at what we invest in and around our data and digital approach. We've launched kind of -- we've launched the strategy that we've always had using the best of what's on the market in a dynamic assembly model. We've done that before with tech, as you guys know, and we're doing it now with data. So we will have to invest in that, though, because obviously, we've got to integrate those -- the data together and drive the analytics and the insights and that kind of thing. So that's where we'll be spending our money. I think we've identified that those areas have helped us drive growth in 2018 and have helped us really integrate across the model and drive some of Syneos One success. So Jason, do you want to add?

Yes. John, it's Jason here. Just to add to what Alistair said. So we had talked about $15 million to $20 million in 2018 in the areas that Alistair outlined, which as he alluded to as well, we did see good progress and awards and things of that nature coming off that. So as we look at our strategic plan and look at what we wanted to do in '19, we did take that up to the $25 million to $30 million range is what we're looking at for '19.

Our next question comes from Robert Jones of Goldman Sachs.

I guess just to go back, Alistair, not to beat this to death, but it's not something we come across all the time. It sounds like you're clearly very comfortable that you identified and rectified the material weakness and that didn't result in any restatements or changes to filings. But is there any sense you have from the SEC on, I guess, a, whether or not this addresses what their concerns were; and probably more importantly, b, when they would proceed or wrap up their side of this investigation?

Bob, no, I mean, what we said in the press release that we pushed out in the 12b-25, I think is the number of the form, and what we said today, that's all we have. We cooperate with the SEC in anything that they want, the only thing that we're concerned about in that regard. And we don't know how long it'll take or what it will constitute, but we are ready to continue that collaboration with them and that cooperation with them and get through it however long it takes.

Yes. And Bob, obviously, Jason here. We will, as appropriate, we will update the disclosures as we move through the periods, through the quarters as necessary.

Got it. And then I guess just on the synergies and the investments -- strategic investments, you guys hit the number that you had put out there or raised for the full year of synergies, but not a ton of sequential synergies if I just look at what you guys had done cumulatively through 3Q versus what you did for the whole year. Any sense you can give us on kind of what's left, the pace at which we should think about that in '19? And then are the investments, Alistair, that you just touched on, are they bigger than what is kind of left out there to realize from unidentified synergy standpoint?

So as you have already identified there, Bob, we've accelerated a lot of our synergies through 2018 through integration and reduction of spend on licensing and consolidation of offices, et cetera. So that pace will naturally slow down now between now and hitting the $125 million by the end of 2020. So and -- no, the pace of reinvestment won't outstrip them, so they will be -- we're carefully making sure that we reinvest appropriately in the business from the overall synergies gained.

Yes, I mean, Bob, in the prepared remarks, we identified $100 million to $110 million of realized merger synergies during 2019, which will be on the [76] that we did. You can do that math there. And then if we do have the strategic investments around that $25 million to $30 million, that's sort of how we're thinking about that in '19. We do have more things that we are proactively doing in early '19 as we move through, whether it's -- it continues to be headcount related or procurement related or whatever it might be, lower-cost opportunities that we might have in the operation. So those are the things that we're looking at in 2019. And one thing, Bob, we still are on track. We're still targeting the $125 million by 2020.

Our next question comes from David Windley of Jefferies.

I wanted to circle back to the, I think, kind of strategic partnerships that you talked about. And I think, Alistair, you described them as a therapeutic area -- therapeutic operation and development transfer or something to that effect. And I wanted to understand kind of magnitude of that and what the client's expectations are around that. And I think you mentioned that there's a minimum revenue amount that goes along with that. If you could give us any color around that, that would be great.

Yes, yes. So this is something we talked about with the customer, I think, Q2 last year in 2018 and put that in place in that period. And it constitutes the Syneos Health taking on employees from that organization, so rebadging them. And then as part of that rebadging, we've upskilled ourselves in the areas that we've talked about, immunology, aesthetics, dermatology, translational sciences. And that translational science piece enables us to kind of stretch out Syneos One model one step further forward, so we can literally take people off the bench and into formulations, et cetera. There is a minimum revenue commit around that from our organization for a period of time. I don't -- we've not disclosed the value of that because I think that's some competitive information, but we're pleased. I think we've created a relationship there or the expansion of an existing relationship that was a real kind of win-win for both of us. It enabled us to secure new talent in the therapeutic areas that we're seeing some good growth in and expand that Syneos One footprint into the translational sciences arena and also get that revenue commit for taking on some very talented people as well. And it helps our customers achieve some of their corporate goals. So we're pretty pleased to have got that done. So Jason, any?

Yes, Dave, I'll just add to that, that there is that commit there. However, there's also -- we also received a large Phase III study that, as well as other work that, right now, we are seeing that ramp up. So the commit, while there, we are relying less on that and just trying to get the teams up and working and running their study well.

And the revenue commit, it sounds like a basic structure. As we kind of follow into the FSP style bucket, are you -- the broader question here is, how are you dealing with the backlog recognition related to this? Is it kind of a rolling 12-month FSP style? Or I guess that project that you just mentioned probably goes into more of a full service bucket.

Yes, that's right. That's exactly right.

Look, they're actually more of a full service orientation, Dave. So basically we just pull the revenue through as we execute our Phase III program. So it's -- yes, I mean, I can see why you think they would be more of an FSP style. It's actually more of a full service because a lot of the people that we took in are actual therapeutic -- therapeutically focused, not functionally focused. And therefore, we can expand that full service on the therapy side rather than kind of on that functional horizon -- horizontal kind of layer.

I mean, there is a small portion, Dave, that's -- just real quick, Dave. Sorry to interrupt you there. But there is a small portion that [are] functional folks, but it's minimal and the only thing that we put into our awards is the Phase III study that has been booked full service-wise that we are running actively.

Okay. All right. Good clarification. One last quick clarification. So you said guidance is based on current FX rates. It seems like CFOs in this space have actually different kind of views on what current means. Could you tell us is that March 15? Is that at the end of February? Is that January 1? What is current?

That's last week.

Our next question comes from the line of Tycho Peterson of JPMorgan.

So Alistair, I just wanted to pick your brains a little bit on the overall sort of environment here. One of your peers pointed to a bit of a slowdown in RFPs, slow and elevated cancellations. Possibly over-indexed to the small players within the cap biotech. Was that what you were alluding to in terms of some of the similar dynamics that you saw? And what gives you confidence that this won't be a drag on the remainder of the year? Is it just sort of healthy pickup in 1Q year-to-date?

Yes. I'm not sure we've seen that slowdown really in that small to mid sector. I mean, we're coming at that sector now in a couple of ways because that's in phases, by the way, I would say. We're coming at it with a couple of assets right now. So we've got the normal approach that we would take with we have full service clinical fit to those small to -- those SMID players, but also with the Syneos One model. And I think the Syneos One model resonates quite well in there. So maybe with the 2 models now, looking at that, we're seeing -- we're maintaining a position and not seeing that dip. I've got Paul Colvin here with us as well. Paul, any -- do see anything on that smaller -- small to midsize on the clinical side?

No, I don't see (inaudible) there. We have not seen a decline in that sector. I think, again, as we ramp up some of our large partnerships, we're likely to see that help from the pipeline growth as well in the future.

Got it. And then just switching gears to commercial here for a second. Any color that you can share in recent pricing trends? And is there anything that we should be thinking about in terms of lumpiness in the selling solutions part of the business over the course of the year?

When you talk about pricing trends, are you talking about drug pricing or our actual pricing to our customers?

Your actual pricing to your customers in the commercial, yes.

I think the environment has been pretty good -- but thank god Michelle is here. So Michelle, do you want to share some detail on that?

Sure. So first question, the pipeline. Our pipeline continues to be strong, as we've said. We're very confident about going into 2019 because we've said before that our selling solutions backlog has grown significantly from 2018 over 2017, so we're going in with a much stronger backlog than we had previously. As you saw, our 12-month book to bill is at -- we wanted it at 1.1. We ended up at around 1.16 for the full year. So the pipeline looks strong and the conversion more importantly was strong of book to bill. And we are seeing more and more of integrated offerings and working closely with Syneos One to bring integrated offerings into the commercial business lines. So all those things combined give us confidence that we're in good shape for 2019 to achieve what we've shared in guidance. Your specific question about lumpiness, I think a couple of things. When you look at the 59 products that were approved by the FDA in 2018, a lot of them are orphan and specialty products. And so you're seeing a much more -- a larger diversification of the backlog of the kinds of services that we're delivering even in selling solutions. So they're smaller teams. They're integrated teams. They're not just sales reps. They're reimbursement specialists. They're multichannel, call centers, et cetera. So all those things are the reasons why we're confident in the guidance we've just shared in commercial.

Yes, yes. I think an interesting stat to add to that, I think is over the last 18 months or so, with Michelle's guidance and the build-out that we've done on commercial, we've seen a big transition from selling point solutions, where we were, I think, we only had 5% of our sales that's straight out of merger that incorporated multiple service lines across the commercial engagement. Now we're looking at 55%, 60% of our sales have a field team, some support from digital comms, some support from our call center reimbursement specialists, et cetera, et cetera. So we're building a lot -- we're building very integrated solutions within commercial as well as the Syneos One stuff that stretches right across from commercial into, sorry, from clinical into commercial as well. So they are helping us drive diversification in the backlog across the business, not just in selling solutions.

Our next question comes from the line of Erin Wright of Cr�dit Suisse.

Can you elaborate a little bit on the cancellations you mentioned, the nature of the cancellations just across commercial and clinical or just clinical? And can you quantify how that business will roll off in 2019?

Yes, sure. Thanks, Erin. So yes, we occasionally get these spikes in cancellations. I guess that's the nature of the beast, right, in clinical. A majority of the cancellations were in clinical, I think. I mean, Jason can give you a bit more on there. But really, through efficacy, regulatory changes, not really Syneos performance related. So it's just one of those timing things. I don't think we see -- well, we don't see it as a trend. If you look at when we -- obviously, we see more, detail but if you look at why they canceled it, it makes a lot of sense from an efficacy perspective. And obviously, there's the ethical obligations of stopping the trial that's not really doing anything. But yes, you just got these peaks now and again. I think we had one in 2017. And sometimes you just get it in the course of it, but we don't see it as a trend. It was just a little peak. Jason, any more color on it for Erin?

No. I mean, the only thing I would add is that it was when we mentioned it, it was clinical, we were referring to the non-commercial, Erin. And yes, as Alistair said, we don't see it as a trend at this point and it's all factored into how we're looking at our guidance in 2019.

Okay, great. And you alluded, I guess, the incremental expenses I think in the 10-K associated with the SEC investigation. Is that something that's embedded in your 2019 guidance? Or should we anticipate that that's excluded from an adjusted metric? Or how should we be thinking about that?

Yes, good question. It is not in the current guidance. It's too early for us to have a really good sense of what that will be. But as we've talked about it, the thought is that we would talk about that separately and show that separately from an ongoing operating standpoint.

Our next question comes from Ross Muken of Evercore.

It's [Luke] on for Ross. I just kind of wanted to talk to you. You just seem to be gaining a lot of traction in Syneos One. Can you talk about -- just give us anecdotally what you guys are seeing win rates there versus peers with maybe just a data asset or just a full versus what your total offering is?

Yes, sure, Luke. So we're basically the only people that have that offering. So when we get it in front of a customer -- it's more of an outsourcing style than an RFP-driven thing. We're working with customers who want to be virtual. They're small to mids. Maybe they're U.S.-based and want to enter Europe or vice versa. We've got Asian customers who are connecting into it as well, which is massively encouraging, obviously. And it's really, think about it as it's -- we actually push the asset all the way through the organization rather than taking point awards of all the different things that we can deliver. So once we get -- Christian Tucat, who we promoted up to the exec team, he's done a really, really nice job of getting this model launched with support from Michelle and Paul and/or the SG&A team because obviously, we have to look at it right across the business of its impact. Once we get that team in front of a customer, you just -- I think it makes the customers' life so much easier because they've got a compound, they've got the money. We've got all the operational capabilities, the advisory capabilities, the insights to be able to take them all the rest of the way. So they're dealing with one group who is going to take that all the way across effectively a CRO and a CCO. That might be -- if you did it yourself, it might be, I reckon, 50 contracts, 50 or 60 outsourcing decisions. You make one decision at the beginning, and Syneos Health, the Syneos One team drives it all the way through the model with Syneos Health. So I think it's a matter of it makes us really quite easy to work with, easy to do business with from that small company perspective. And it's a significant spend for them. So it's on our radar. These relationships are $80 million to $120 million normally, something in that range, right?

They vary.

It varies. Some of the bigger ones are. And that gets our attention even as a large organization. That's an attention grabber. So it's a good model. It's a unique model. And once we get it in front of the right kind of customer, it becomes very compelling, I think.

Okay, that's helpful. And then I guess just a little bit more on the margin cadence through '19. You guys have the investment probably in the first half and then also the synergies. Kind of how do those offset themselves on top of -- you have the mix dynamic going on as well?

Yes, I mean, I think you hit a good bit of it there, Luke. When you look at the first half, as I mentioned earlier in addition to those items, you come out of the seasonal -- with the seasonal benefits again in the second half that we typically have. But also, if you parse out the growth between the 2 segments in the first quarter and early half of the year, as we're standing up some of these new clinical relationships that we've mentioned just a headwind early on in the year. So as we come out of that it also starts to increase the margin percentage in the second half. So those are the things that we're looking at, the synergies, the investments, the seasonal items and standing up these larger relationships.

Our next question comes from Sandy Draper of SunTrust.

Most of my questions have been asked and answered, but maybe just a couple of quick ones. Just following up on the cancellation topic. Alistair, was there a pattern around the therapeutic areas that tended to get a little bit more? Or was it really just spread out and just seemed somewhat random?

Sandy, I'm just looking at my paper on that. I don't think there's any real pattern to this in terms of therapeutic areas. It's more random.

No, there wasn't a pattern.

Yes. So no.

Okay. That's helpful. And then maybe, I'm not sure if this is for Jason or Michelle. In terms of the margin impact of some of the mix -- revenue mix putting [more] pressure on Commercial, when you think about that, is that something -- I know we're just starting '19. But when you think longer term, is this some that can bounce back year-to-year and just depending on selling it, it snaps back and we could have a notably positive margin mix? Or do you think this is sort of a longer-term trend that the mix of business you're sort of going to be seeing for a few years is like obviously, hopefully you scale the margins up as you get synergies and you get it, but you're not going to have a big step-up because of mix? Or do you think year-to-year we could see this type of movement?

So Sandy, I'll start. I think if I'm not answering the question just come back, please. But the commercial business, we'll see margin improvement in 2019. When you look at the different -- all the businesses are growing in the main. And selling solutions, which is the largest business, that has historically carried the lowest margin. Actually, as Michelle mentioned earlier, the growth areas underneath that and the type of field teams, the smaller field teams, the nurse educators, the reimbursement specialists, the MSLs, they carry a higher margin than your traditional sales reps. So we see a lot of things that are actually very helpful for the margin in that business after having it tough sort of the first half of '18 from a margin perspective. Does that answer your question?

Yes, I guess, I realized -- actually, I was thinking when I was flipping through the slides, I realized I was looking at the '18 comment about unfavorable revenue mix and you're stepping up. So I guess that goes back to the question of year-to-year, there can be volatility. Or do you think general trend is more towards the better margin, I guess, so maybe to rephrase the question?

Yes, and then there are some things in 2017, Sandy, that were sort of onetime-ish as a lot of larger field teams were coming down and you get sort of positive cancel fees or risk -- shared fees and things of that nature from that. That's sort of onetime-ish. So that's some of that mix as well.

Our next question comes from the line of Jack Meehan of Barclays.

I wanted to follow up on some of the commentary around the seasonality. I appreciate some of the comments on the revenue line. I was curious what you're seeing on the bookings line to start the year. And I know last year on the clinical side got off a little slower. Do you think that's kind of normal cadence you would expect this year as well?

So we've been looking at -- well, I think we're just a different organization to what we were in the past. So we are seeing good RFP flow, seeing what we would expect to normally see quarter-on-quarter. We've got a better business development engine, and we've got more engaged and a broader operational footprint that's driving great RFP flow. So I'm not going to give you any inter-quarter information on that other than to say I think the environment we're in, like what others said, is it remains strong.

Helpful. And then one follow-up on the guidance for 2019, just looking at some of the adjustments, I think share-based comp, $56.5 million were quite a little bit of a step-up from 2018. Was there any change in the compensation policies or anything just worth noting on that line?

No. I think -- Jack, it's Jason. I think we just had some things in '18 that were good guys with some turnover. And then also, we didn't have a change in compensation sort of philosophy or methodology, but we did have expanded grants early in '18 that you're seeing come through for a full year without those good guys coming through to 2019.

Yes.

Our next question comes from Daniel Brennan of UBS.

I just wanted to ask a question on back to the investigation, if you don't mind. Could you just comment if this was a formal or informal investigation? And did the M&A from the SEC is like a normal review of like your financials that I think is necessary as part of Sarbanes-Oxley? Or did it come from somewhere else, maybe likely a whistleblower or third party?

So Dan, we've talked about it came from the Division of Enforcement, so the letter arrived before we filed the K. And I'm not -- I don't want to speculate on why we came to their attention. I mean, we'll find out as we get more engagement with the SEC as we go through the investigation. We've told you everything we've got. So we'll continue to be transparent and we've -- we did the extra work on the investigation -- independent investigation by the Audit Committee because we wanted to make sure that we implemented 606. We haven't missed anything fundamental in our audit efforts, too. And that's all we've got there, and we continue to just cooperate and engage with the SEC on their time frame, but we don't know what that is yet and we don't know what they're going to look at.

Great. And then maybe just on the clinical side, can you just discuss -- we haven't done all the math here, but kind of what's the implied burn rate in your clinical guidance for the year? And how do we think about kind of that -- assuming that the burn rate is coming down, how do we think about it stabilizing? What are the drivers for that?

Yes. So Dan, it's Jason. So we are -- we saw that stabilizes, as you probably have noted, in Quarter 4 relative to Quarter 3 and the first half. We are continuing to see our average project life lengthen. I think we're up to 52 months or something like that now from high 30s, low 40s, just a couple of 2 short years ago as we're winning more oncology work. As you know, the large partnership we won in the second quarter is oncology. That's going to extend things out. Larger partnerships, generally speaking, whether it's oncology or what it is, with larger studies tend to have a slower ramp. And then we have some of our SMID customers that despite our best efforts, we just don't seem to get those moving as quickly as anticipated. Although all within policy, it just doesn't move as quickly. So all of those factors are putting pressure on that burn rate. We are projecting it to tick down throughout 2019, but nothing quarter-to-quarter as significant as what we saw from Quarter 2 to Quarter 3 of '18.

Got it. Great. And maybe just one final one, just on the commercial business. Can you just discuss what the environment is like in the large pharma? I know that Syneos, one, you discussed throughout the call kind of the trends and the excitement of (inaudible) with large pharma. Like what's the trend like? Kind of what are you seeing in the U.S.? And kind of what you're seeing overseas in terms of appetite?

Yes, sure. Let me start with that, Dan, and then I'll pass you over to Michelle. So I think the thing we're excited about is we're seeing engagement across all the sectors in commercial, small to mid, the 21 to 50 kind of group, and the large pharmas, where we've traditionally had good connection with the scaled player in the commercial space, and we're using that to our advantage. Michelle?

Yes, I think that it is something that's evolving with large pharma, and outsourcing, it's the way they look at outsourcing. They traditionally would outsource for capacity with sales representatives. But the conversations with large pharma are candidly much more strategic than they were maybe 3 or 4 years ago. Discussing opportunities to think through more holistically an integrated offering, what is the full commercialization strategy and which pieces of that strategy should be outsourced for flexibility and scalability. So we're having a much greater, I think, a different type of conversation with large pharma than we've had in the past, and we're seeing some early successes in some of the more diversified offerings. And I think Alistair referenced one in his speech around the fact that we're now -- we're just awarded a REMS program from a Top 20 pharma company, which is a piece of our business in consulting that runs REMS. So we're starting to see much more a differentiated way they're are looking at it moving forward.

Yes. And this is Paul. I think just for continuity of services, they're starting to think about that a lot more than they have in the past when you move from Phase III into late-stage and real world, you can keep the same team and the same knowledge base. There's a lot of synergies to be had on our clients. So I think we're seeing most of those discussions occur on a larger scale.

Thank you. At this time, I'd like to turn the call back to Alistair Macdonald for any closing remarks. Sir?

Thank you. As we've highlighted, we are well positioned to accelerate growth in 2019. Our pipeline of opportunities and RFP flow remains healthy, driven by our strategic investments and strong customer interest in our integrated outsourcing solutions. So thank you for your attendance today and for your interest and investment in Syneos Health. Have a great evening and be good. Thank you.

Ladies and gentlemen, this does conclude your program. Thank you for your participation and have a wonderful day, you may disconnect your lines at this time.