Syneos Health Inc (SYNH) 2019 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Syneos Health Fourth Quarter and Full Year 2019 Earnings Conference Call. (Operator Instructions)

I would like to hand the conference over to Ronnie Speight, Senior Vice President of Investor Relations. Please go ahead, sir.

Good morning, 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 Litigation Reform Act of 1995, and we disclaim any obligation to update them.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. These factors are discussed in the Risk Factors section of our Form 10-K for the year ended December 31, 2019, and our other SEC filings.

During this call, we will discuss certain non-GAAP financial measures, which exclude the effects of events and transactions we consider to be outside of our core operations. These non-GAAP measures should be considered a supplement to and not a replacement for measures prepared in accordance with GAAP. For a reconciliation of the 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?

Thanks, Ronnie. Good morning, everyone, and thank you for joining us today. During the fourth quarter, we saw strong net awards and revenue growth, realizing the power of our unique value proposition to speed therapies from lab to life.

Our Clinical Solutions segment closed the year strongly, returning to market-level growth for the year while expanding profitability. As reflected in our guidance, we expect continued strength across both of our businesses in 2020 as we ramp up our new large pharma preferred provider relationships while maintaining our leadership position with small to midsized customers. We are further encouraged by the continued strong customer interest in our unique model with healthy RFP flow and pipelines across segments, including a record new business pipeline in Clinical Solutions at the start of 2020.

Before I get into the details, I'd like to start with a few key performance highlights. First, we closed the year with record awards performance, resulting in fourth quarter book-to-bill ratios of 1.46x for Clinical Solutions and 1.53x for Commercial Solutions. We delivered $5.4 billion of net awards and an aggregate book-to-bill ratio of 1.16x for the full year.

Second, our adjusted revenue growth for the full year 2019 increased 6.3%, or 7.2% in constant currency, comprised of Clinical Solutions growth of 6.3% or 7.4% in constant currency and Commercial Solutions growth of 6.3% or 6.7% in constant currency.

Third, we continue to improve our cash flow and make steady progress on our balanced capital deployment plan. During the fourth quarter, we repaid an additional $67 million of our term loan debt, achieving our 3.9x net leverage target.

We also exercised the delayed draw feature on our Term Loan A to redeem our 7.5% senior notes to further reduce our cost of debt. We remain focused on debt reduction and are targeting net leverage of 2.5x to 3x by the end of 2021. Finally, I want to express a special thanks to our teams, particularly those in finance and Clinical Solutions, for their tremendous efforts in successfully remediating the material weaknesses in internal controls that we reported in our 2018 10-K.

Now turning to our results by business. Clinical Solutions delivered record awards in the fourth quarter, resulting in total clinical now awards of more than $4.1 billion and a book-to-bill ratio of 1.21x for the year. These awards were broad-based, with particular strength in top 20 pharma as we continue to ramp up our new preferred provider relationships. Our backlog grew 9.6% year-over-year, and our pipeline of new opportunities remains at a record level, fueling our growth expectations.

Our Commercial Solutions segment also finished 2019 with record awards in the fourth quarter, resulting in $1.3 billion of net awards and a book-to-bill ratio of 1.04x for the year. In addition, our pipeline of opportunities remain strong, which we expect to help drive the mid-single-digit full year growth outlined in our 2020 guidance. Importantly, during 2019, we saw 24% growth in Commercial Solutions revenue with our small to midsized customers, demonstrating significant progress on one of the key initiatives of our growth strategy. In addition, we are also experiencing strong growth in Europe as part of our strategic expansion into that market.

Our unique Syneos One product development offering continues to resonate with customers of all sizes, providing comprehensive end-to-end outsourcing solutions to accelerate clinical development and commercialization time lines. As we highlighted last quarter, our latest large pharma preferred provider relationship utilizes Syneos One's capabilities to manage the development of a portfolio of assets. Syneos One continues to drive awards across our clinical and commercial segments, and our team of asset strategists is currently managing customer projects with a total potential lifetime award value of over $1.3 billion. We expect this portfolio to provide an additional pipeline of commercial awards over the coming years as these products move through their product development life cycle.

We continue to grow and invest in our Dynamic Assembly data and technology network, bringing further tech enablement to our industry-leading model. During the fourth quarter, we made 2 important strategic additions to its network. First, we entered into a strategic partnership with AiCure, an AI and advanced analytics company. This collaboration combines AiCure's proprietary intelligence software and AI-driven insights with Syneos Health's behavioral insights to capture, analyze and predict patient behaviors to improve clinical trial adherence and patient outcomes.

Second, we announced the strategic collaboration and minority investment in Indegene Omnipresence, a customer experience management platform that brings the power of Microsoft's AI capabilities to the health care industry. This platform improves traditional CRM multichannel technologies by tracking health care professionals' end-to-end experiences while combining CRM and omnichannel technology with advanced analytics and AI capabilities. We believe these new relationships and underlying advanced technologies will further enable our unique, integrated clinical and commercial capabilities.

In closing, I would like to express my sincere gratitude to my 24,000-plus Syneos Health colleagues, the health care providers, sites and patients we engage with daily as we collaborate to find ways to shorten the distance from lab to life. What we do every day is making a difference in the way products come to market and in patients' lives, and Q4's performance represents just how important this is to our customers.

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

Thank you, Alistair, and good morning, everyone. As a reminder, all results are discussed on an adjusted or non-GAAP basis as defined on Slide 2.

Let me begin by reviewing our financial results in detail. As shown on Slide 4, our adjusted revenue for the fourth quarter of 2019 and was $1.21 billion, up 5.8% compared to the fourth quarter of 2018 and up 6% in constant currency. For the full year 2019, adjusted revenue was $4.68 billion, up 6.3% and up 7.2% in constant currency.

Slide 5 shows that our Clinical Solutions adjusted revenue grew 9.3% year-over-year to $900.9 million for the fourth quarter or 9.7% on a constant currency basis.

The growth in Clinical Solutions revenue in the fourth quarter was primarily driven by higher revenue from net new business awards, partially offset by the impact of FX. Our clinical revenue growth in the fourth quarter exceeded our anticipated growth, largely due to higher growth in reimbursable expenses. For the full year 2019, Clinical Solutions adjusted revenue was $3.43 billion, representing growth of 6.3% or 7.4% in constant currency.

Moving to Slide 6. As expected, our fourth quarter commercial segment adjusted revenue declined 3.3% year-over-year to $313.7 million and declined 3.4% in constant currency. The decline in commercial revenue during the fourth quarter was driven primarily by the previously discussed impact of the project cancellations and delays from earlier in 2019 and the decline in revenue from our medication adherence business, partially offset by higher revenue from net new business awards.

For the full year 2019, Commercial Solutions revenue increased by 6.3% to $1.25 billion, representing 6.7% in constant currency growth. Adjusted EBITDA for the fourth quarter was $188.6 million, an increase of 9% year-over-year, resulting in adjusted EBITDA margin of 15.5% an increase of 40 basis points compared to the fourth quarter of 2018. When adjusted for the fourth quarter of 2018 timing benefits highlighted last year, our adjusted EBITDA margin was relatively flat. The increase in adjusted EBITDA and margin for the fourth quarter was primarily driven by overall revenue growth and the increase in net realized synergies, partially offset by the impact of growth in reimbursable expenses and a decline in our medication adherence revenue. Adjusted EBITDA for the full year 2019 was $645.2 million, representing growth of 8% and margin of 13.8%, up 20 basis points compared to 2018.

We have increased our estimate of merger synergies for 2020 from $125 million to $140 million. For the fourth quarter of 2019, we realized $32 million of synergies, bringing our total for 2019 to $116 million prior to the impact of our strategic reinvestments. As we highlighted in mid-January, we have also formally launched an additional series of margin enhancement initiatives, which we call ForwardBound. These initiatives include further organizational and operating model efficiencies, labor arbitrage from lower-cost jurisdictions, process automation and other technology initiatives and operating leverage. We expect ForwardBound to yield an additional $75 million to $100 million of run rate savings exiting 2021. We estimate that these increased merger synergies, coupled with the impact of ForwardBound, will yield 30 to 50 basis points of annual adjusted EBITDA margin expansion at least through 2021, net of our strategic reinvestments.

Adjusted diluted EPS of $1.03 for the fourth quarter grew by 8.4% year-over-year, primarily driven by our growth in adjusted EBITDA and lower interest expense. Adjusted diluted EPS for the full year 2019 was $3.23, representing growth of 12.5% compared to 2018.

Now turning to cash flow and the balance sheet as summarized on Slide 7. During the fourth quarter, we had cash flow from operations of $160.5 million, a record level. Cash flow from operations improved compared to the fourth quarter of 2018, primarily due to stronger billing and collections performance. DSO for the quarter was 46.4 days. We ended the quarter with $163.2 million of unrestricted cash and total debt outstanding of $2.68 billion.

Slide 7 also 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, investments and share repurchases as determined by available cash flow as well as market opportunities and conditions while optimizing our capital structure.

During the fourth quarter, we executed the $400 million delayed draw feature on our Term Loan A and redeemed our 7.5% senior notes to further reduce our overall cost of debt. We also utilized free cash flow to repay an additional $67 million of our Term Loan B, achieving our net leverage target of 3.9x. As Alistair mentioned, we are also targeting net leverage of 2.5x to 3x by the end of 2021. Although we did not repurchase any of our outstanding shares during the fourth quarter, our Board approved a $50 million expansion to our share repurchase authorization, which now totals $300 million and also extended the term until the end of 2020. This leaves an additional $168.3 million of stock repurchase capacity available to be utilized through the end of 2020.

Our non-GAAP effective tax rate for the fourth quarter and the full year 2019 was 24%. Our actual net cash outlay for taxes was approximately $15 million for the full year 2019 given the benefit of our NOL deductions.

As Alistair highlighted, we are pleased to report that we have successfully remediated the previously disclosed material weaknesses in internal controls as part of our annual internal control evaluation and audit process. I would like to express my sincere thanks to our team and our advisers for their tireless efforts to work through this process during 2019 as part of the continued strengthening of our internal control environment.

Turning now to our guidance on Slide 8. As a reminder, we issued our initial view of guidance in mid-January. We continue to expect our full year 2020 revenue to range from $4.88 billion to $5 billion, representing growth of 4.2% to 6.8%. This includes clinical revenue of $3.59 billion to $3.66 billion or growth of 4.6% to 6.6% and commercial revenue of $1.3 billion to $1.35 billion or growth of 3.3% to 7.2%. Our expectations for total adjusted EBITDA range from $680 million to $720 million, representing growth of 5.4% to 11.6% and margin expansion of approximately 40 basis points at the midpoint. We expect our adjusted EPS to range from $3.58 to $3.78. As outlined on Slide 8, our guidance incorporates interest expense of $106 million to $108 million and a non-GAAP effective tax rate of 24% and an estimated diluted share count of 106.2 million shares.

I also want to provide you with some commentary for the first quarter given our expected 2020 growth profile and normal seasonality. We expect revenue of $1.15 billion to $1.17 billion, representing year-over-year growth of 2.2% to 4%. This is comprised of clinical revenue growth of 5.4% to 6.6%, partially offset by a decline in commercial revenue of 2.9% to 6.1%. Clinical revenue guidance for the first quarter reflects our current estimate of the impact of the coronavirus outbreak on our operations in the Asia Pacific region, representing a revenue headwind of $5 million to $10 million. Commercial revenue guidance for the first quarter reflects the impact of the delays and cancellations we highlighted previously as well as continued headwinds from the medication adherence business before returning to year-over-year growth for the balance of 2020. We expect total adjusted EBITDA of $135 million to $145 million, representing year-over-year growth of up to 7.4%.

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

(Operator Instructions) Our first question comes from Eric Coldwell with Baird.

I wanted to dig in a little bit on the commercial expansion in Europe. I was hoping you could give a few more details on investments you're making and the steps that you're taking, anything you can share on sizing your growth in that business in that geography. And then maybe lastly, how your suite of services in the U.S., where you have a stronghold, how that compares with what clients want in Europe and the U.K.?

Got you. Thanks, Eric. Good question. I think in commercial in Europe, it's a different landscape to the commercial market in the U.S. So we're investing in communications, digital comms, consulting. And then you have to be careful with the placement of field deployment solutions in Europe because you get into all sorts of co-employment agreements and that kind of thing. But we've been growing that slowly country by country.

I think in terms of suite of services in Europe compared to the U.S., we're fairly comparable in terms of what we can do. I think that we get a lot of Syneos One work coming out of Europe because there are customers who want to bring product to the U.S. market and don't have that infrastructure or experience of delivering a product into the U.S. And we're actually seeing that starting to show in Asia as well. When the investment rules changed in China and Hong Kong and people are investing in pre-revenue organizations, they're also pretty attracted to -- or pretty attracted to the Syneos One model. I mean, Michelle's here. Michelle, what are your thoughts on Europe?

Sure. I think we're seeing in Europe, as Alistair said, especially with the small to midsize customers, a real desire to buy a truly integrated commercial solution. And we're really uniquely positioned to do that with our consulting, communications and Deployment Solutions businesses there. And we've really been growing that business based on a desire of 2 things, right: small to mids wanting to do commercial integration, and our large clients in the U.S. asking us to go into other markets for them. And so that's been another place where we've seen opportunity as long-standing customers in the U.S. asking us to compete for business outside of the U.S., specifically in the EU 6.

That's great. I was just -- as a quick follow-up, Syneos One, can you talk about recent wins and any mix shift that you're seeing in that business? Or is it pretty consistent with what you're seeing today?

Yes. I think it's pretty consistent. Mix-wise, we were seeing, I think, some of the early customers were device customers, but I think that was just a coincidence. So the mix has been pretty steady. Obviously, we have the Big Pharma wins for Syneos One back in 2019, which we're pleased about, and we continue to use it as a differentiator in those Big Pharma discussions as well as with small to mid. It's something that piques people's interest seemingly, piques their interest in all sorts of discussions. And like Michelle said, it's a package that gives people everything that they need to go from "I have a product that I'm in development with," to "I have a product that I'm on the market with." So I think told you this before -- sorry, we had a CEO tell us, he said, I thought I could hire 20 people in outsourcing and write 200 contracts or I could just write 1 contract with you and obviously, what you guys do. So it's kind of a model that enables -- it's a model that's easier to do business with than writing hundreds of different individual contracts. So it resonates pretty well. But I don't think we've seen any mix shift in it.

Our next question comes from Dave Windley with Jefferies.

I wanted to focus on a little bit of the timing or gating of bookings in the fourth quarter through 2020. The -- obviously, the fourth quarter bookings were very good. You've given us some guidance for 1Q. I think that seems logical that the fourth quarter bookings wouldn't necessarily kick in as early as the first quarter. I was hoping maybe you could guide us to the gating of growth as it phases out through the rest of the year.

Yes. Well, I'll start and then I'll pass you over to Jason. Yes, we're very pleased with bookings in Q4. Obviously, we needed a good quarter of bookings, and we saw good pipes going into Q4 and that's continued into 2020. We saw good progress with our large preferred provider partnerships starting to put awards through. So we expect that to continue to flow through the numbers as we go into -- from here on out, I suppose. Some of those are still slow to start, but everything in there is obviously in line with our bookings policy. So everything in there is starting up within the next 12 months or 6 months depending on kind of which flavor it comes in.

So yes, I think that we're pleased to see that level of bookings right across the business, not just in clinical. Michelle's team did a fabulous job in Q4 bringing a lot of work through, and it's broad sector. So yes, we've got the start of the flow from those relationships. But also, we saw a lot of strength in the small to mid-market continue in Syneos One. The transactional stuff that we've always had as well. So yes, good all-round growth.

I mean, Jason, in terms of the gating on the growth.

Yes. I mean, I would just say, Dave, when we -- when I've looked at it, clinical is going to perform across the year proportionately very similar to how we did in '19 given the backlog is up 9.6%, and we do have those large pharma partnerships standing up that are burning now, but really, will start accelerating in the second half. And at the same time, have those cancellations that we've talked about previously in clinical that are going to be an offset to that in the second half that will limit growth for the full year.

When you look at commercial, the pacing is going to be similar to '18 because we're coming into the year with good backlog coverage, however, we've got to get through this headwind from medication adherence and then these cancels, which we will do in the first half, and then the bookings that we won in 4Q and then the pipeline that we see, the pipeline is up over 30% in clinical -- or in commercial as well as of the beginning of 2020. So all of that is sort of driving that pacing. So I'd look at '18 for commercial and '19 for clinical when you think about proportioning it.

Okay. And then just a quick follow-up there on the partnerships with your large pharma, that you've talked publicly about how it's taken a little bit of time to stand those up and kind of get to the point of awards, which it seems like those are now starting to flow pretty nicely. If we look at the experience of your peers with larger pharma partnerships over the years, that has been fairly common, that longer time to stand them up. It has also been common that from award to kind of material revenue recognition has taken longer. Have you taken that into account as you thought about your guidance for 2020?

Yes. I mean, the -- some -- the second partnership that we talked about -- or I guess, it would have been the third partnership we talked about in '19 where we're doing the Syneos One model on the assets, we're already working on a couple of those assets. So we sort of know how they're going to behave and, obviously, we have -- and have had a really good relationship there and have good visibility to the other assets.

On the June '18 partnership that -- where we had the environmental factors that slowed that down, as we talked about in quarter 4, that has shaken loose. And we have good visibility to their pipeline and the protocol approvals and the expectations there. And we're already working on several of the projects, just to be clear. And the good news is we're ahead of a lot of the dates there that they have put in front of us. So yes, we feel like we factored all that into the guidance that we've given.

And our next question comes from Erin Wright with Crédit Suisse.

A follow-up on the commercial bookings in the quarter. I guess can you break down CSO wins versus advertising versus consulting, kind of break that down for us in terms of the new business wins? How much was driven by Syneos One in particular? That would be great.

Yes. I'll start and Michelle can chip in. I mean I think in -- and when you look at the Syneos One awards that we talked about in mid-January, that was primarily in '19, push more towards clinical. So Syneos One, that's what we've seen there. When you look across commercial in quarter 4, we had good bookings and awards across all the businesses. And quarter 4 and quarter 1 tend to be the big quarters there as projects and POs are getting renewed and budgets are finalized with our customers, and they know what they're going to spend in the next year. So we were delighted to see that good performance right across all of the business units and, frankly, across our different customer segments, too. So it was a good finish for us.

Yes. Think the only thing I would add is, a nuance you can't see in the numbers that I think is really important is we had a lot of commercial integration wins in Q4. And that just kind of reinforces that our unique model is resonating with customers, so their multi-capability, integrated offerings. So they are feeding Deployment Solutions and communications and consulting, but they're integrated offerings where customers are coming to us for all the services. So as you know, that's a big part of where we believe the market is going, and we're starting to really see that pick up.

Okay. Great. And then some of the rationale behind the inVentiv and INC merger, when that was first announced, was about quickly scaling up in FSP. I haven't really heard you talk about it that much. I was wondering if you could give us an update on that front. And how that business is progressing?

Sure can. Yes, I mean, we've rebranded it to FSP 360, Erin, because we had a lot of different services. I think that business is doing very well. It's a big part of winning in large pharma, because you have to be able to build hybrids. We can do full FSPs. We can do hybrids. We do -- we follow in-sourcing work. We've got people placed inside large pharma with it as well as working on our own systems with it. Strong global reach, good balance between nearshore and offshore choices as well, so we can drive different operational solutions, drive different price points, et cetera. We're very happy with that progress. That was a key part, I think, of our approach to large pharma that was missing. Paul, any additional thoughts?

I think you've covered that. I think the other key is, I mean, we have some nontraditional services we can provide in the FSP 360 that I think provide some enhancements in customization for some of our large pharma clients that they've appreciated.

Yes. I mean, Erin, we're on the road all time with FSP and talking about FSP at conferences and stuff like that as well. So it is a big part of the overall -- we focus a lot on the end to end. But key elements for us are obviously still selling large clinical, whether it's FSP or service to large clinical customers, and likewise for commercial, selling commercial to commercials and then the integrated platforms across the top. So yes, it's a key -- kind of a foundation of what we do on the clinical side.

Our next question comes from Tycho Peterson with JPMorgan.

I'll start with clinical. Just you had a nice uptick in the burn rate versus prior quarters where it kind of been declining. Can you maybe just talk to that dynamic? And then on the preferred provider front, can you maybe just talk about how we think about the announced deal ramping this year and then just the outlook for additional preferred provider deals going forward?

Yes. Let me start with the preferred providers, and then pass you over to Jason for burn rate and stuff. So yes, we have line of sight, I think, to a couple more large pharma opportunities that we're tracking against with the GCS team and Paul's team and myself, et cetera. So I think that what we've done is created -- Erin talked about one of the imperatives of the merger. This was kind of another one. Creating the scale to be invited to talk to large pharma is certainly something that we achieved. We're the second largest CRO now and that can efficiently help target that. So we are right at the front of that queue when these discussions get brought through.

But I think what we're seeing more than ever from our large pharma customers is a desire to see differentiation. So when we're able to go, we're big. We're scale -- at scale everywhere we need to be across the world. But also, we have a big capability service capital or whatever you want to call it, where we can show people new things, new innovation. We just plugged in AiCure into the Dynamic Assembly model, made the investments in Indegene Omnipresence. All those pieces are critical, and they're critical in the wins that we have.

If you think about the second large pharma win we had, it was our combination of capabilities around clinical and commercial that appealed to them, plus the trusted process, plus the therapeutic depth. You think about the one -- the third one last year, it was all about a dynamic model, Syneos One, how can we bring asset strategies to -- how can we drive products across? How can we take capacity from them, take an asset and drive it across the development paradigm?

So it's -- the scale achieved is one of the big imperatives that we had in the merger, but also the differentiation that we've created through the different models we put on the ground, through this -- Dynamic Assembly enables us to plug technologies and data in different platforms in very quickly. It's about integrating the data from there, and we're very good at that. It just gives us that differentiation to win.

So I think we'll be well positioned for future preferred provider bake-offs. And as I say, we're tracking a couple of that. I think we fancy our chances on at least getting a seat at that. So yes, we feel pretty confident of that as we go into the future. Jason, on burn rates?

Yes. So on the burn rate, yes, we did see that tick up and that -- some of that is just mathematics, right, where you had the backlog in end of September come down given the cancels that we experienced. And then we also had reimbursable expenses that came in ahead of what we expected that drove up the burn rate in quarter 4. I think when we look at it, as you know, we look at each project and our backlog phasing and the coverage that we see, et cetera. That's how we sort of look at our forecasting and then sanity check it equal for purposes of what we talked to you guys out on the burn rate.

When you look at quarter 1, that burn rate will come back down, again, strong awards. That's going to -- with a 55-month average study period, right, that's going to result in that burn rate ticking down. And then just quarter 1 seasonally is our lowest quarter. So -- but it will start to tick back up sequentially throughout 2020 when you think about your models.

All right. And then just a follow-up on commercial. And following up on David Windley's question earlier on just the pacing over the course of the year. You've got the medication adherence headwind in the first half of the year. As we think about your guidance, the high end of that 7.2%, does that assume some of the medication adherence headwinds are recaptured in the back half of the year? Or what could get you to the higher end of the commercial guidance given the headwinds in the first half?

Yes. So some of those medication adherence headwinds are already peeling off the programs that were affected by some of the technical issues outside of our control, are already starting up and back up and running. So in terms of pacing, that -- we expect to see that come up to kind of full pace, I suppose, by Q3 or Q4 or maybe even sooner. So...

Yes. I mean -- and I would just say, Tycho, with the top end of that guidance comes into play, given the pipeline that we see and the sort of strike hit rates that we have with a pipeline that's up 30% year-over-year, if we have a stronger strike rate and cancel, stay and check for the year, that's when you're going to start to see us getting up in the higher range.

Our next question comes from Jack Meehan with Barclays.

I was hoping you could unpack a little bit more the 1.46 book-to-bill on the clinical side. Was there -- I know reimbursed revenues helped the revenue side of the equation during the quarter. What would the bookings have looked like on a 605 basis? And was there anything notably chunky that might have influenced in the quarter versus the trend for the full year?

Yes. So I'll start, Jason, and then hand over to Paul or Alistair. So I mean when you look across the customer segments and you think about the revenue performance we have there in terms of '19 allocations, it's not materially different, although we are starting to see our top 20 partnerships pick up in the bookings, as we've said, right? So it is a little more heavily weighted towards that. However, the SMID business and SMID pipe and RFP flow and everything there remains strong.

In terms of 605, A 606, we -- 606 is the law of the land and the reporting requirements of the land. But when we look at that and what we've always talked about is that we see a 0.1 or less difference between those 2 when you look at any TTM period that we've measured. So not a huge difference there in terms of what we see in a given quarter.

And Paul, I don't know if you want to talk any more about that in detail.

I mean I think you hit it really well, Jason. I think in -- when we think about the wins in Q4, I think, again, seeing the ramp of some of those top 20 partnerships and assets that they're developing coming our way. So it's really what's been driven there. And I haven't seen any shift outside of normal from how we would see that, say, a lot of oncology work we've seen in the pipe. But it's also starting to pick up in other TAs as well.

Great. And then just to follow up on what Dave and Tycho were getting at in terms of the commercial growth. Just because I think I heard right, the first quarter, down 3% to 6% for commercial. But just bridging to the full year, can you just maybe just give a little bit more color in terms of what steps up into 2Q versus 3Q? And what would put you at the lower end of the full year range versus the higher end?

Yes. Jack, it's -- obviously, we had the cancels that we talked about in quarter 3 of '19 that impacted quarter 4. That was primarily in Deployment Solutions, and then that was exacerbated by the situation with the medication adherence business that we've talked about with a supply issue for one product as well as a retailer issue on their data breaches. Both of those issues are behind us now. However, the carryover into quarter 1 is still there for both of those items. But when we get to the second half of the year, we start lapping those things, and that makes for a pacing, as I said, of something similar to what we saw in 2018.

With the pipeline where it is, as we sit here today, like I said, if we sort of drive a higher -- or if we do drive a higher strike rate on that pipeline and our cancels stay in check relative to where they ended 2019, so go back to a more normalized level, that's where you're going to see us at the higher end of that range.

Our next question comes from Sandy Draper with SunTrust.

Just maybe a couple of housekeeping questions. Most of my big-picture questions have been asked. I noticed a footnote in the slides at FX. It says assuming FX of December 31. But is there still any material drag or benefit from FX as we head into 2019 -- I'm sorry, 2020?

Sandy, so the rates are as of December 31, and there was basically a push at that point. As we look at it right now there's, I think, approximately a $10 million headwind or something like that. So we felt like that's not material enough to talk about at this point, but we're going to keep an eye on it.

Okay. Great. That's helpful. And then the follow-up. Also noticed you said no further share repurchase built into model. One, can you remind me how much you have left? And then talk a little about, as you think about the cash use or cash priorities in terms of thinking about repos? I don't know if M&A is back on the table, paying down debt. How you're sort of thinking about 2020?

I think we have $168 million left in the approval, and that goes through the end of 2020 this year. And the priorities are as they were. We got down to the leverage target that we said we would. We're at 3.9x, so we're happy with that. We continue to delever as a priority. We want to drive that debt down and give us some flexibility. But then if things come along that we can add to the model that, like I said before, I remember this question I was answered in Dave maybe Erin's about differentiation. You've got to keep these models moving. The first day you're not, you're not bringing something new to the market is the first day you start dying. And we've got some sharp competitors out there. They're always on the move, so we need to do the same. So if we see opportunities to add to the model, whether it's a tech capability, a therapeutic specialty, we would look at that as a next priority. And then probably share repurchase is third on the list for us.

Yes. And just to add to that, Sandy, we set the leverage target at the end of 2021 to 2.5, 3x, so we're still very focused on that and that's the priority. And then on the share repurchases, each year, we're going to look to -- assuming we have the cash available to take the...

Dilution.

Dilution from the options and restricted stock off the market. So that's the plan.

Our next question comes from Robert Jones with Goldman Sachs.

Great. I kind of want to go back to FSP 360. We've heard some positive early feedback around the offering. And I know you guys have talked more about it recently. I'm wondering if there's any way you could share as far as how much of that is helping drive bookings today. So that would be the first part of the question.

And the second part is, as we think about offering more optionality to your customers, how do you strike that balance between the flexibility of FSP 360 versus wanting to obviously continue to win full-service work?

Well, go on Paul.

I think the way I think about this is, again, if you think about nontraditional ways we can support, especially the large pharma, more in the top 50, there are tasks and work as they become larger as well that we can take off their plate. So I don't view this really as a difference between full-service and FSP as much as I do, how do we create a customized solution? Each pharma is in a different stage of their pipeline. Each of them have different splits, potentially regionally, therapeutically. So by looking at some of the nontraditional tasks that they have to do across the globe, we've been targeting that to give them a real offering that allows them to cover all of their assets from the top priority to the lower-priority assets that they have to develop.

So I don't really view it as an either/or. It is hybridized solution that helps them fill the needs they have and take some of their really nontraditional, noncore tasks and put them into an FSP, and that's what we try to think about with FSP 360.

Yes. And then how much is driving bookings? And any kind of color you can give around that?

Yes. Bob, it's Jason. So when you look at the growth in that business, it's been good. And when you think about these large partnerships, particularly the one that we announced in 2018, right, there is a meaningful portion of that, that is FSP 360. So it's involved in winning these awards and then in the bookings as we move through those relationships.

Yes. I'll just add a little bit, too. When I sit down with customers, Bob, and talk about what we can bring to them, they're under tremendous price pressure or under tremendous cost pressure. And being able to build them a platform that is FSP 360 in the flavor that they want, so is it nearshore, is it offshore, what are the combinations, what are the reach that, that provides, obviously, that drives a lot of economies of scale and we can pass those discounts through -- all those economies through, efficiencies through to the customer.

But then the drugs that we see coming through the pipe, very high science, complex products, that would get lost in a big FSP if you deliver them that way fully. So that's where you need to be able to put that clinical position on the ground through a team that's really up to speed, got the experience in delivering a project in that style. Yes, you can still plug it on top of the data and the monitoring FSP. But the project management, the leadership, the medical monitoring all has to be very sharp, very crisp, very precise around that therapy. So you got to build those pieces together and having the ability to oscillate up and down the model. Our customers -- our large customers don't go full FSP, and they don't go full, full service. They kind of oscillate and swing around in the middle a little bit. So having the ability to go either way, whichever -- to play defense and go each way they want to go, that's what it's a part of as well when you build these hybrids.

No, that's really helpful. And then just my follow-up around coronavirus. Jason, if I heard you correctly, you said $5 million to $10 million headwind in 1Q. Just was wondering how much of that drops straight through to EBITDA? And then is there any headwind baked in or contemplated in the balance of the guidance for next year ex Q1?

Yes. So the -- there's some of that, Bob, that's associated with reimbursable. So I would think about it being sort of 60%, 70% drop-through to EBITDA. And then as we look at it right now, based on what we know, obviously, we're in mitigation planning, on trying to understand exactly what's going on and keep the studies moving, et cetera. We believe if it stays contained to China, the way that it is now, right what we see, this is sufficient. And it's just a quarter 1 headwind. However, we'll have to see if it starts to impact other countries and the broader region and just see how it plays out. But right now, it's just quarter 1 is what we see.

Our next question comes from Dan Brennan with UBS.

I wanted to understand a little bit on the clinical book-to-bill in the quarter. Obviously, very strong as well as commercial. But I know there are a few questions asked on this front. But if you were to tease out the impact from the 3 large pharma partnerships that you signed, would that book-to-bill deviate much? So I'm really just trying to figure out how much they contributed to the really strong fourth quarter book-to-bill.

Yes. I think -- like I said before, it's broad-based, so we did really run in the SMID as well as in the large pharma. I mean, the point of those large pharma relationships is they build a foundation in the bookings, build a foundation in your revenue. And -- but you still got to be successful in the small to mid. I mean, you see the uplift in the bookings. We do very well every quarter in the small to mid sector. So you can assume some of that uplift is, obviously, from these large partnerships. But we're not going to break it out down to subsectors and things like that or we'd be here all day.

But yes, I mean, that's what we said would happen, right? We said we were expecting the large pharma partnerships to start to contribute in Q4. We have the delays in the first one through environmental factors outside of our control. And they've all started to flow. And I think the setup that we've had, spending money ahead of the curve to get the teams ready, to get the tech in place, to get the data connections into the systems, that's all investment that we made through 2019 as well and continues into 2020 to some degree. But yes, all those partnerships are coming on stream.

Great. And then maybe a follow-up just on Syneos One. Can you just give a little more flavor towards -- I know you've discussed well north of $1 billion in potential pipeline. Just -- I may have missed it in the prepared remarks, but kind of where does cumulative actual backlog stand for Syneos One? And any update there in terms of the interest level from customers? How that's evolved as you've rolled that out? And what's the potential to kind of begin to capture a bigger share of that potential $1.3 billion, whether in 2020 or beyond?

Yes, let me point you in the right direction on that a little bit, Dan. It's -- the $1.3 billion is work that's committed to that model, right? So should that work -- should that product make it all the way through its journey, get approval, get funded, go to launch, that's the value of all that work going all the way through the model. The reason we leave a big piece of it contingent is because we don't expect all those products to make it through approval. It would be a much easier business if every product that went into development came out the other end. But that just doesn't happen. So we expect some of those products to fall by the wayside. So we don't book it because it's not in line with our bookings policy, so we keep it contingent.

So that's not a market that we're playing in, the $1.3 billion. The market is much bigger than that. It's -- this is a tool that we attack the small to mid with as well to give them optionality as well as take the small, the functional -- not functional, sorry, the therapeutic model to them through the different business units. So Syneos One gives us optionality around not just how we develop in clinical but actually attaching those customers all the way through commercial. So there's a bigger relationship. It's a bigger market. We're trying to -- we are actually making that market. We're the only people with this platform, with this capability, which is obviously very attractive to us because we can pull people in and give them the capability to hold on to their drug all the way through, well-capitalized specialty products. You don't need massive sales teams for it, which is also helping us to diversify and the commercial backlogs. So I mean, any additional thoughts, Jason?

Yes. I would just say, on the backlog, Dan, and the awards, I think we talked about in mid-January that we've had over $300 million of awards that have gone into backlog of that $1.3 billion total potential during 2019. So that's sort of what's in there. And there was a bit that has gone into the backlog in prior years, but it's far lower -- or in '18, but it's far lower than that $325 million that went in, in 2019.

And then, as Alistair mentioned, what we're getting most excited about is we have 26 assets under management right now. That pipeline there is strong. We can see when those PDUFA dates are, those approval dates are and the backlog that, that's going to drive into commercial over the next 3 to 5 years. And that's the piece that we're continuing to focus on building up because we know some aren't going to make it, so some are going to get killed in clinical. But there will be some that do make it. So the more assets we're managing, the better that's going to be in terms of visibility for commercial over the years.

Our next question comes from Donald Hooker with KeyBanc.

Great. I wanted to get a better sense of the incremental economics on the revenue growth. You guys, I think you commented, I believe, kind of 30 to 40 basis points of EBITDA margin expansion annually for a couple of years. That's also assuming, I think, probably some more of these large pharma preferred provider relationships, which I assume is dilutive. So -- but sort of on a normalized incremental basis when these things are ramped, I mean, is it fair to think that EBITDA margin should be expanding kind of above 40 basis points?

So we -- yes. So Don, it's Jason. So we haven't specifically assumed additional partnerships over the 3, right? We just -- we have visibility to the market growth, our opportunity set where we think we can go. When we look at the large partnerships that we've had, and we do want to add more, as Alistair mentioned, there could be some headwind when you start those up, like we experienced in '19 as we were investing in new partnership and now that's starting to flow revenue through the model. We see a short-term headwind potentially, but nothing material. But longer term, when you're at a volume that we believe these can be as being top 5 or top 10 customers of ours, the margins are very competitive, right, so we don't see it as a headwind longer term. And if you look at some of our competitors who have a large book of business in top 20, they have very strong margins. So it's just about getting them stood up efficiently and getting that volume in.

Okay. And then maybe a quick follow-up. I wanted to hear a little bit more about your CRM strategy. You announced a partnership and an equity investment in a company there, I believe. Why are you investing in this other company? And can you -- how does that sort of impact your other sort of software relationships there?

Yes. I mean, we said -- I think I can remember this call -- this discussion was. We were talking about the differentiation. We believe that through the Dynamic Assembly model, we make investments in platforms like that because we think it has great potential. We looked at it, we saw what they were doing. Syneos is an attractive partner for them to have in that stable. Microsoft want to be more invested in the health care space. And for us, it looks like a very good opportunity for us to bring a new platform with a much bigger, more capable, enhanced capability set to our teams, which enables them to be more effective in the market. So we try and give out -- our teams the best tools and systems and data and platforms that we can so they can master their jobs and get good fulfillment out of it and give a better service to customers and their health care providers.

So the -- for us, a big part of our model is bringing -- is access, is getting access for patients, and getting access to patients is making sure the health care providers understand the drugs more. You don't sell these new drugs to health care providers. You educate them. And the Omnipresence platform will help us identify the best channels, the most effective channels per health care provider to get that data and information to them for them to absorb so they can treat their patients most effectively. And that's pure and simply part of the model. Michelle?

Sure. I mean, so when you go back to our Dynamic Assembly strategy, right, we work with multiple CRM providers. I think you know that. I mean, that is always going to be our strategy: basically choosing partners that make the most sense for the opportunities we're trying to take advantage of for customers, right? So that's like -- that's our first -- the first thing that we do.

The second thing that I think is important around Omnipresence is the reason we like them is we see a huge unmet need in the marketplace to give real-time predictive analytics to our customers. And because Omnipresence was built on top of the AI engine for Microsoft, we think it is the best tool that's out there to do that, right? And so as you know, we have an omnichannel strategy. We have a ton of interest from customers in it, and this was just like putting another tool in our toolbox, partnering with Omnipresence because we see that they are creating a unique niche in the market that we see as an unmet need that we want to take advantage of.

Our next question comes from Elizabeth Anderson with Evercore ISI.

I was wondering if you could talk back to -- this is referring back to Eric's first question about the commercial European margin expansion impact in 2020. What do you see is the areas that you -- the biggest investment areas that we have there (inaudible).

Elizabeth, you're a little bit hard to hear there. But we've had a similar question earlier on. So around consulting, communications, med comms, things like that, the difficult -- it's harder in Europe in terms of Deployment Solutions, but we're growing that country by country as we roll out more global platforms. So yes, the focus for us in terms of investment in commercial in Europe will be communications and consulting. And they typically are the higher-margin elements of that commercial work as well.

So that sounds like it's more of like a multiyear sort of investment process. Is that how we should sort of think about it as we're modeling?

Yes, absolutely. I mean, we've -- I mean, gosh, I don't know how many sims we see on a monthly basis, but it's a lot. But yes, and you have to be careful with the stuff like that. Because buying consulting shops can throw your hand sometimes. But we bought Kinapse in 2018. That's been pretty successful for us, and that gave us the platform around which to build out consulting in Europe. We're already had a good communications platform on the ground. So we're just adding on to it. It's not a revolutionary kind of transformational thing. It's just add-ons that we do, and we've seen good organic growth there.

Our next question comes from Patrick Donnelly with Citi.

Maybe just a couple for Jason. Just on some of these large partnerships, can you talk through some of the cost expectations on these hiring, things like that? I think with the big one from 2018, you incurred some costs in 2019. Is that going to help on the margin ramp front just given that some of those costs got pulled forward to last year?

Yes. It's -- yes, I mean, that's exactly how we're thinking about it, right? We put in a base of investment. That partnership is starting to stand up. We have different types of partnerships. So that particular partnership has a little bit more of an infrastructure around it given what we needed to do to be flexible for the customer and how they wanted us to run their partnership. The other 2 have less infrastructure associated with them. They'll go more down our therapeutic business lines, the infrastructure that we already have, but we will hire ahead to ensure that we deliver on time. And as I mentioned earlier on that partnership, the good news is the 3 subprojects we're running now, we're ahead of the KPIs we have. So we're pleased with that. So that's the way we think about it, that, that base layer is in now and then we'll start dropping in new partnerships over the year.

Okay. And then maybe just on the ForwardBound initiatives, can you just give a bit more color on the cadence of some of the incremental savings there? Which levers you're pulling in 2020 rather than next year?

Yes. Sure. So it's -- the first -- so we launched ForwardBound in Q4 of '19, so we are getting savings in 2020. And that's part of that 30 to 50 basis points of expansion that we're driving at. The first order of business is looking at the continued evolution of the model. So we've turned the page on integration in many respects, right? There's a little more work to do in 2020. But in many respects, it's, okay, we've got integrated. Now let's look at how we optimize the model. And that can be the SG&A model. That can be the clinical delivery model. That can be the commercial delivery model and where we have an opportunity to grow headcount and have lower-cost resources around the globe in the 4 sites that we have that we're going to focus on for that.

So that's the first sort of order of business in 2020 as well as operating leverage, right? So we've said, look, for the fixed cost pieces of the business, whether it's the cost of sales or the SG&A, the areas that do not need to move up with revenue growth, the expectation is that you will grow at X percent of revenue growth, and we're going to track that, and that's good operating leverage out of the business. So those are the 2 first areas that we're focused on.

(Operator Instructions) Our next question comes from Stephen Baxter with Wolfe Research.

From your slides on customer mix, it looks like your revenue growth in SMID across the company was nearly 20% this past year. So as we look at your guidance for 2020, how should we think about the SMID growth that you're planning for relative to 2019? And then for the clinical business in particular, trying to understand how this is evolving relative to the wins that you've had with large pharma and your expectation. You discussed that those wins are going to start burning in the relative near future.

Yes. It's Jason. That's right. I mean, we had a great year with SMID, and we continue to be very focused on SMID as we move ahead. That said, as you know, our strategy has been, particularly on the clinical side, to continue to penetrate top 50 pharma where we're under-indexed compared to the market. We do see that picking up given these new partnerships that we have. But like I mentioned, this SMID pipeline and the SMID backlog and our focus on SMID, that's our heritage, is the same as it has been. And the really good news, we talked earlier about the merger thesis in the FSP 360. Another key component of the merger thesis was driving that SMID behavior and SMID customer mix into commercial, and we're seeing that happen well ahead of the schedule that we would have had in mind. So we're focused on all of it, but the large pharma growth in those partnerships will start to show up in that 2020 growth.

I'm not showing any further questions at this time. I would now like to turn the call over to Alistair Macdonald for any closing remarks.

Okay. Well, I'd just like to say thank you, everybody, for your interest today and attendance and investment in the organization. So wish you a good day, and be good. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.