Syneos Health Inc (SYNH) 2022 Q2 法說會逐字稿

Good morning and welcome to the Syneos Health Second Quarter 2022 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 morning, everyone. With me on the call today are Michelle Keefe, our CEO; Jason Meggs, our CFO; and Michael Brooks, our COO. 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, growth, trends, anticipated financial results and expectations regarding the COVID-19 pandemic and the war in Ukraine 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, 2021, 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 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 Michelle Keefe. Michelle?

Thanks, Ronnie. Good morning, everyone, and thank you for joining us today. Syneos Health delivered another solid quarter despite incremental revenue growth headwinds from foreign exchange and reimbursable expenses related to our COVID vaccine portfolio, which Jason will address in more detail. We continue to advance our integrated value proposition, working across the organization to accelerate product development for our customers.

Before I discuss several takeaways from my first few months as CEO, I want to share our view of the macro environment. Market demand is healthy, and our pipeline of opportunities remains comparable to 2021. Specific to our clinical SMID portfolio, our total pipeline of opportunities is up double digits compared to 2021, and we had record net awards during Q4 '21 and Q1 '22. We experienced delays in customer award decisions late in the second quarter and some moderation in RFP flow.

In large pharma, we have double-digit growth in our TTM RFP flow and are encouraged by the number of opportunities to win additional preferred provider relationships in service areas, including clinical monitoring, pharmacovigilance and biometrics. We also saw delays in large pharma award decisions in the second quarter. We believe the higher-than-normal award delays are a product of customers taking a more deliberate approach to their development plans.

Our clinical win rates remained consistent with prior periods. Given our clinical TTM book-to-bill of 1.29x and 12.1% backlog growth, excluding reimbursable expenses, as well as the market indicators, we remain confident about our ability to drive clinical growth. The commercial business remains strong and poised for further growth.

As I shared with you last quarter, I've been spending time listening to our key stakeholders, customers, employees and investors to further inform my view about our business, organic investments and where the industry is headed next. These discussions have validated my confidence in our culture and long-term strategy. We are continuing to focus on delivering the right mix of capabilities at the right time while building an even more intelligent technology-enabled approach to better serve our customers.

Let me share with you what I've learned. First, customers are looking to partner with a solutions provider who can deliver data-driven, integrated solutions that leverage the right technologies to address their opportunities. In partnering with Syneos Health, they understand and appreciate our unique value proposition, where we work across the product development continuum to create customized solutions. This is becoming increasingly important as they address more complex therapeutic areas, where our integrated clinical to medical affairs to commercial capabilities matter.

Our next step is to further invest in and grow our medical affairs offering and continue to invest in our technology-enabled intelligent solutions, specifically targeting large pharma while maintaining our leadership position in SMID.

Second, the people who power these innovative solutions, our employees, are passionate about delivering customized, high-quality solutions that solve complex customer problems. As we continue to simplify and streamline the business, our priority will be to provide ongoing professional development for our colleagues with a focus on building diverse teams and a highly engaged culture, which leads to high performance.

Third, our investors recognize the advantages of our strategy and believe continued execution will drive growth and unlock shareholder value. As we consistently execute our strategy and deliver results, we will communicate transparently and share our progress against our goals. We are committed to these strategic initiatives and are accelerating investments during 2022 and 2023 to drive further performance and consistency.

As a result of those conversations, my focus is streamlining operations for innovation, integration and simplification. You're already seeing this in my appointment of Michael Brooks as COO to seamlessly lead across our product development continuum. Michael has made significant progress with our clinical reimagined initiative, realigning the leadership team and redesigning the organizational structure, systems, processes and innovation to fuel growth. We plan to increase our investments in this initiative and expand these efforts across the enterprise.

Next, in addition to leading our ForwardBound programs, Jason is partnering with the business leaders to implement a unified cloud-based enterprise resource planning platform. This initiative will encompass resource management, human resources, finance and procurement, driving simplification, automation, improved visibility and margin enhancement. We have selected the best platform and partners in the market and have a strong, dedicated internal team to drive this transformational initiative.

Finally, further digitalizing our capabilities to unlock additional value. Under the direction of Baba Shetty, President of Technology & Data Solutions, we'll continue to make investments that we believe will allow us to design and develop new systems and solutions across the company. We've already seen firsthand how our recent technology acquisition, such as RxDataScience, has given us new rapid development capabilities, particularly for advanced analytics and AI use cases.

Given these early successes, I believe there are many possibilities for technology and data to drive performance in our business. To capitalize, we are conducting an in-depth assessment of other opportunities to accelerate value creation and build a more intelligent enterprise, leveraging AI to guide operational decisions. We anticipate this will drive growth and margin accretion as we launch new solutions over the coming quarters.

And to further our strategy and capitalize on our unique market opportunity, I am delighted to have recently appointed Christian Tucat as Chief Business Officer. Christian is the architect of our innovative Syneos One offering and a global operations leader with significant global business development experience. His ability to lead with a product development mindset will enhance our single-service, integrated and end-to-end offerings. We continue to see large pharma penetration in our clinical business as our most impactful organic growth opportunity. Christian and the team will continue to focus in this area.

I expect these go-forward actions and accelerated investments will transform the customer-facing experience as we accelerate digital enablement and automation and further penetrate large pharma and provide incremental long-term growth while realizing the impact of our ForwardBound margin enhancement programs as we move through 2023 and beyond.

This is the right team with the right culture, ready to execute and accelerate our strategy. We are moving forward with a shared vision and purpose. I look forward to sharing updates on these strategic initiatives and investments as we progress through the coming quarters.

Now, some key observations from this quarter's results. First, we maintained strong backlog growth in both businesses, excluding reimbursable expenses, driven by 12.1% growth in Clinical Solutions and 19.6% in Commercial Solutions. Second, the strength in our Commercial Solutions business continued, driven primarily by Deployment Solutions and the Syneos One portfolio, resulting in 15.7% revenue growth.

Third, we had a strong quarter of operating cash flow at $99.9 million, allowing us to repay $95 million of our outstanding debt and reducing our net leverage to 3.4x at the end of the quarter.

Now moving into further details on our results. We delivered total company year-over-year revenue growth of 6.1% for the second quarter driven by robust growth across both segments, which was partially offset by the impact of clinical reimbursable expenses. In Clinical Solutions, revenue grew 3.3% compared to the second quarter of 2021, including the impact of acquisitions. Excluding reimbursable expenses, Clinical Solutions revenue grew 9.6%.

Our growth was primarily driven by strength in our top 50 pharma customers, including FSP and the continued ramp in our key large pharma relationships. We are excited about the progress we are making on our top 50 pharma strategy, including a recent sole provider pharmacovigilance partnership scheduled to start towards the end of this year and the rapid expansion of another relatively new clinical partnership. We continue to enhance our go-to-market approach for large pharma, leveraging our unique breadth of product development expertise and flexible, customized operating models that accommodate their individual outsourcing needs.

Even with these continued successes, our net awards for the quarter were impacted by higher-than-normal delays in customer decisions as cancellations were within our normal range. Clinical Solutions book-to-bill ratio was 1.06x for the second quarter, excluding reimbursable expenses, maintaining a 1.29x TTM book-to-bill at the upper end of our target range. As I mentioned, we are aggressively driving our Clinical Reimagined program, accelerating our initiatives to streamline the organization, simplify processes and drive automation projects. These initiatives are focused on driving efficiency and margin enhancement while optimizing delivery for our customers. This includes simplifying our structure and ensuring our leaders are closely aligned to the execution of customer projects while enhancing our underlying technology and data capabilities as part of our accelerated investments. We believe these initiatives are already improving our employee engagement as evident in their feedback and improving retention and are consistent with the Syneos Health culture.

Turning to Commercial Solutions. Revenue growth remained strong this quarter at 15.7% compared to 2021. Commercial growth was primarily driven by global growth in Deployment Solutions fueled by continued strength in our SMID customer segment, including the contribution from our Syneos One portfolio. With another strong quarter of new team starts, Deployment Solutions reached a new 5-year high in deployed resources, spanning a variety of specialized types of professionals across our field teams and in our engagement center. The commercial team also had a solid quarter of net awards, consistent with our normal seasonality, resulting in a book-to-bill ratio of 0.83x for the quarter and 1.11x on a trailing 12-month basis, excluding reimbursable expenses.

In closing, I want to thank all of my 29,000 Syneos Health colleagues for their energy and collaboration as we move forward together to drive performance every day. We remain confident in our market positioning and growth initiatives and look forward to successfully delivering projects for our customers and their patients.

Jason will now provide additional comments on our financial performance and guidance. Jason?

Thank you, Michelle, and good morning, everyone. Our total revenue for the second quarter of 2022 was $1.36 billion, up 6.1% and 8.3% in constant currency compared to the second quarter of 2021. Excluding reimbursable expenses and on a constant currency basis, our revenue increased 12.4% compared to the second quarter of 2021.

Revenue came in below the midpoint of our guidance due to lower reimbursable expenses in Clinical Solutions and incremental headwinds from foreign exchange. The unexpected headwind in reimbursable expenses was primarily related to lower investigator payments on our COVID portfolio, including the impact of regulatory delays and the early wind-down of a large program. That said, our adjusted EBITDA margin came in above our expectation given the lack of margin associated with reimbursable expenses as well as robust growth in the underlying business.

Our Clinical Solutions revenue for the second quarter was $1.03 billion, up 3.3% as reported or 5.6% in constant currency compared to the second quarter of 2021. Excluding reimbursable expenses and on a constant currency basis, Clinical Solutions revenue increased 11.7%. These increases were driven by growth across our full-service and FSP portfolios with particular strength in our top 50 pharma customers. Total as-reported clinical revenue growth includes a 90 basis point contribution from acquisitions and a 630 basis point headwind from reimbursable expenses.

Our second quarter Commercial Solutions revenue was $335 million, up 15.7% or 17.5% in constant currency compared to the second quarter of 2021. Excluding reimbursables and on a constant currency basis, Commercial Solutions revenue increased 14.2%. Growth in commercial revenue was driven primarily by Deployment Solutions, including a growing contribution from the commercialization of our Syneos One portfolio. Total as-reported commercial revenue growth also included a tailwind of 330 basis points from reimbursable expenses.

Adjusted EBITDA for the second quarter increased 19.2% to $208.1 million, representing an adjusted EBITDA margin of 15.3%, an increase of 170 basis points compared to the second quarter of 2021. The increase in adjusted EBITDA margin for the second quarter was primarily the result of the benefits of revenue growth, foreign exchange, ForwardBound and reimbursable expenses, partially offset by less favorable revenue mix, use of contractors and the impact of organic investments. In addition, unadjusted EBITDA for the second quarter was $183 million, an increase of 39.3% compared to the prior year.

Adjusted diluted EPS of $1.25 for the second quarter, increased 28.9% year-over-year, primarily driven by the increase in adjusted EBITDA and lower interest expense. Operating cash flow was $99.9 million for the second quarter, an increase of 12.6% compared to the prior year, driven primarily by the timing of collections activity during the first half of the year, partially offset by increased cash taxes as we begin to fully utilize our net operating losses this year.

DSO was 48.1 days, increasing from the prior year, mostly driven by increased growth in accounts receivable related to large pharma customers with longer payment terms. Our capital expenditures were $24.4 million for the second quarter.

During the second quarter, we repaid $95 million of our outstanding debt. We ended the quarter with $105.9 million of unrestricted cash and total debt outstanding of $2.89 billion, resulting in net leverage of 3.4x. In addition, during the quarter, our Board approved a new share repurchase authorization of $350 million available through the end of 2024, primarily designed to provide for our goal of offsetting the annual dilution from our equity compensation programs. Our non-GAAP effective tax rate for the second quarter was 23.5%, consistent with our estimate for the full year 2022.

Turning now to our updated 2022 guidance. This updated guidance contemplates our current view of the estimated impacts of ongoing developments, including the COVID-19 pandemic, the war in Ukraine and the related Russian sanctions, and the evolving interest rate, foreign exchange and inflationary environments. Our updated guidance is based on foreign exchange rates as of July 15.

We now expect total revenue of $5.44 billion to $5.54 billion, representing growth of 4.4% to 6.3%. It is important to note that we have reduced our as-reported revenue guidance due to our current expectations for the incremental impacts of foreign exchange and lower clinical reimbursable expenses, primarily related to changes in our COVID portfolio.

An important point to highlight: our expectation for constant currency revenue growth, excluding reimbursable expenses, remains unchanged from what was included in our prior guidance. Total revenue growth includes an estimated contribution from acquisitions of approximately 70 basis points and an estimated net headwind of 460 basis points from reimbursable expenses. We now expect our total adjusted EBITDA to range from $835 million to $865 million. This reflects an adjusted EBITDA margin of 15.3% to 15.6%, up approximately 80 basis points from 2021. Lastly, we now expect adjusted diluted EPS to range from $4.97 to $5.11, representing year-over-year growth of 11.4% to 14.6%.

These revisions to adjusted EBITDA and adjusted EPS are made to reflect the accelerated investments in our operations during the second half of 2022. As Michelle highlighted, we are accelerating investments in the following key areas: Clinical Reimagined, Medical Affairs, Business Development, and Technology & Data Solutions, all designed to enhance scalability and operational excellence while driving long-term growth and margin enhancement.

Our guidance incorporates interest expense of $77 million to $86 million. This range is based upon current market forecast for LIBOR and reflects that 40% of our debt is currently variable rate. Guidance also assumes a non-GAAP effective tax rate of 23.5% and an estimated diluted share count of 103.6 million shares. We expect our net cash outlay for income taxes during 2022 to be approximately $75 million.

We expect third quarter revenue of $1.365 billion to $1.395 billion and total adjusted EBITDA of $220 million to $230 million. This reflects as-reported revenue growth of 1.2% to 3.5% and adjusted EBITDA growth of 8.6% to 13.5% compared to the third quarter of 2021. Excluding reimbursable expenses and on a constant currency basis, this reflects expected revenue growth of approximately 12.6% compared to the third quarter of 2021. This revenue growth includes an estimated contribution from acquisitions of approximately 90 basis points and expected foreign exchange headwind of $37 million and an expected headwind of approximately 770 basis points due to reimbursable expenses.

I'm now going to turn it back over to Michelle for some final comments. Michelle?

I committed to you when I was appointed as CEO that I would evaluate what we need to do to drive long-term success. As I have outlined, we are taking decisive action. We are committed to making the appropriate investments to drive long-term growth and margin expansion.

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

(Operator Instructions) Our first question comes from Luke Sergott of Barclays.

Michelle, just a follow-up on the actions that you're taking and laying out for the future. Can you flesh out any of this as to -- and throw some numbers around it? Or is this more of just operational kind of reorganization for more efficiency?

Luke, thank you for the question. So a couple of things. Yes. So the 4 areas we outlined, right, were Business Development, Medical Affairs, Clinical Reimagined and our data and tech team as well for additional investments. So we're planning on really laying all this out for you in early 2023 as we put together our 2023 to 2025 strategic plan. However, I can tell you that where we're accelerating the remainder of the year is in really doubling down on Clinical Reimagined. Michael is having a lot of early success on some of the things that he's doing in that particular initiative. And so we're going to double down there.

We're having early success as well in Medical Affairs and some of the things that we're developing in our data and tech solution stack. So that's where some of the investment from an acceleration perspective is happening in the back half of 2022. But I'll let Michael give you a little more color on what he's doing with Clinical Reimagined.

Sure. Thanks, Michelle. Luke, so first of all, really pleased with the results that we've achieved so far this year with the investments in our people and our technology. Clinical Reimagined was actually born from feedback we received from our customers. So I'll talk into the small, midsized, large customers, what are they looking for in a post-COVID world, what are the frustrations that they're experiencing from other clinical providers and vendors. And we saw an opportunity. We saw an opportunity to better engage with our people; to develop new classes, adopt families; to actually invest in how we can provide better decision analytics, greater visibility to our project critical paths; and bringing our patient and health care provider insights forward in clinical development, which is really the superpower of our organization.

If you think about what we do in commercial vertically, in medical affairs vertically and clinical vertically, I now want to invest in how I bring those across each other. And we're getting really good results already in terms of our sales cycles, being able to accelerate patient recruitment in certain projects and things of that nature.

Thanks, Michael.

And then just one last one here. You guys talked about the delays in SMIDs. That follows kind of one of your smaller peers on the -- said earlier in the week. And then your large pharma delays, this is new to the rest of the space. So can you talk about what you're seeing there and maybe how you guys are positioned where they aren't? Is it a specific indication? Or is it just your strategic relationships? Can you just unpack that a little bit for us, please?

Sure, Luke. Okay. So a couple of things. We'll start with large pharma. I think that's where we can start. So as you know, we've been very focused on winning large pharma partnerships. I think we've been very transparent that we're undersized in the number of large pharma partnerships that we have, and we feel like that's our greatest growth opportunity. And so working with them to ensure that we have our win in Q1. We added an additional large pharma partnership, and that's starting to ramp now. And so we're going to continue to focus on winning those large pharma partnerships, and I'll let Michael give you some color on that in a second.

In regards to our SMID portfolio, we did have some delayed decisions in our SMID portfolio, but I think it's important to note that of the awards that were won in Q2, we actually kept our hit in our strike right in that particular segment. So we continue to have strength there. But I'll let Michael give you a little more color on the large pharma strategy.

Yes, absolutely. There's 2 key things that are going on. Right now, we're in active discussions with several customers around potential preferred or sole provider opportunities that includes clinical monitoring, pharmacovigilance and in records management. And in fact, we're really pleased in the second quarter to add a sole provider partnership in the safety space. And so right now, we're working with that customer around the strategy for consolidating their existing work, bringing it over to us, estimating the volumes and getting that kicked off at the end of this year.

The second phenomenon that's actually really interesting as well is that there are customers that were currently locked out because of contracts they have with other providers, but they're contacting us now about potential opportunities that are not a part of these partnerships. They're really interested in our therapeutic expertise. They're interested in our commercial insights. And there's one example we had in Q2 where we won a large Phase III even though we were not a preferred provider currently for that customer. So it's really interesting how they're engaging with us in different ways now.

Our next question comes from Dave Windley of Jefferies.

I'll start there, where Luke ended off. Michelle in your opening remarks, you talked about the '22 pipeline being comparable to '21. If -- correct me where I'm wrong, but I'm going to interpret pipeline as being kind of the sales funnel, total RFPs received. You said RFPs for SMID are up double digits. So am I right in thinking that large pharma is down double digits or more as the offset to get back to kind of flat year-over-year? Help me with the bridging there, please.

Sure, David. Thanks for the question. No, I don't think that's accurate, but I'm going to let Jason walk you through that from the pipeline. But you are correct that it is the total pipe that we shared the numbers on. But a lot of this is delays. It's not decisions, right? So I want to let Jason kind of give you a little more color there.

Yes. Thanks, Michelle. On the pipeline comments being up, that is all-in pipeline in terms of what was there at the beginning of the quarter, the RFP flow, these delayed decisions, et cetera, right? So that's the overall pipeline inclusive of RFP flow and activity. You are, I guess, correct in that in the top 50 the pipeline is down a bit, and that's due to some of the award decisions and things of that nature. And that's the reason we laid out that TTM large pharma RFP flow is up significantly year-over-year.

And the reason we believe that TTM cadence is right there or time frame is right there is given the fact that we are still underweight in large pharma and need to continue to grow those partnerships, which Michael just walked you through. So we do want to continue to see those partnerships come through and continue to have more opportunities, see more of the universe than we do today.

And back to Luke's comment or question, we did have some large pharma delays in decisions as well. One of those was related to a new opportunity that Michael outlined that we're looking to pull across the line in Q3 or Q4. And then the other was specific to a strategic partnership that we do have already, where we just had some delays in their decisions for opportunities in the pipeline.

Okay. Shifting to commercial. We listened in on Idorsia's conference call, and they seem to have fairly positive comments about the early-launch activities with them. And I believe you guys have been public about that being a partner of yours. Perhaps you could talk about how Syneos won or full-service launch-type activities are progressing in general and the kind of the pending pipeline when we might see additional layers folding into your revenue stream there.

Sure. David, thanks. So I think we're very excited about our Idorsia partnership, and we really appreciate the fact that they have named us as their partner, not just in the U.S., but as -- in their imminent European launch. They have a very fulsome strategy for launching in the United States. They have a really strong direct-to-consumer campaign to get right directly to the patients who are suffering from insomnia. We're completely integrated with them in that messaging and that delivery. And so we feel really good about that partnership and the opportunity that's going to bring, frankly, with other customers who are watching how Idorsia is performing. And so we're excited about that. So that's the first thing.

We have not updated the Syneos One numbers. We will do that in the coming months for January, I think, is when we do the update there. But I think the last number we gave you, David, was overall $3.3 billion pipeline. I think $1.3 billion has already been taken into backlog. And I think we still have like another [1-point] whatever, I'm not sure the exact number. I'll get to the exact numbers of opportunities still in front of us.

So we have a nice, I think, over 25 assets sitting in clinical development right now for Syneos One. And we're confident that based on the experience that we've had so far that if those make it through clinical development and they're going to commercialize them that we'll have our opportunity to work with those customers to commercialize those assets. So we still think it's a great feeder to commercial growth over time.

Great. Appreciate that -- sorry, go ahead.

Maybe you -- do you have the numbers, Jason?

Yes. I just want to add a little bit of color there. So on the folding into the commercial revenue and things come through the pipe, so we are in the process of launching the additional regions of Idorsia, as you know, in terms of the back half of this year and into next year. So that will fold in into the revenue as that stands up. We have a couple more that are slotted in 2023 that will launch. If you go back and look at the last update, as Michelle mentioned, we kind of lay out how they will fold in. At this point, none of those are as large in terms of volume as Idorsia. So they're more, I'd say, akin to the first launch we had in the second half of '21. Still very important to us. They just don't have the same scale as Idorsia.

Okay. And if I could just ask one more quick one on kind of numbers clarification. The -- your -- I believe your revenue and expense by foreign exchange is a fairly wide spread, which would typically yield a positive benefit to EBITDA. Could you quantify the FX benefit to EBITDA for 2Q? And then what's in the guidance?

Well, the Q2 benefit is the $1.7 million, but maybe you can walk through guidance, Jason.

Yes. On the -- so on the Q2 margins, we obviously were pleased with how we finished up with the margins where they were. And we talked about in the prepared remarks the different contributions. The FX benefit in quarter 2 was less than $2 million, as Michelle highlighted. When we think about the back half, considering where the rates are right now, it does increase quite a bit, Dave, to your point on the EBITDA side.

We don't typically quantify it and guide. We do quantify it when we report our actual results, oftentimes in terms of the impact on the margins. What I would say on the back half margins, though, which I think is ultimately probably what you're interested in is that we'll continue to see the benefits of growth in the business. We'll continue to see benefits of the pass-throughs being lower than we had expected in our April guide. We'll continue to see the benefits of ForwardBound and things of that nature that you've come to understand from us.

We are seeing a little bit of a mix headwind in the back half, specifically in commercial as Deployment Solutions is growing faster than the other businesses, even relative to our April guide. And then we're seeing a little bit on the technology business unit side where we've actually -- and this is within the M&A as well. We've actually pointed a little bit of that toward internal work versus focusing on the external work. And that's a little bit of a margin headwind.

And then finally, as Michael alluded to, we are investing more in Clinical Reimagined. And that can include what we're doing around overall employee cost and retention planning that we need to do there, investments in CRA training academy-type activity. And I think Michael has said before, right, we need to invest on the front end or we'll invest on the back end, and we're choosing to do it on the front end. And then Michelle also outlined as well as I did that we're also investing incrementally in the business in the back half. That takes us down to that 8 50. So all that in the back half, Dave, is sort of the puts and takes on the margin side.

Dave, it's Ronnie. You asked one question earlier about the latest Syneos One numbers, just to provide those quickly. We reported those midyear through 3 31, and that was currently at $4.0 billion in total potential value and $875 million in TTM awards contribution through the end of the first quarter.

Our next question comes from Patrick Donnelly of Citi.

Maybe another one on the large pharma side. Michelle, I don't know if you can kind of quantify or talk a little bit about -- it seems like you're talking about maybe some delays, some kind of targeted discussions where things are softening a little bit. And then you also kind of during the prepared remarks said you're kind of seeing broadly a more deliberate approach to development plans there. Can you just talk about, I guess, is it kind of more broad in large pharma where you're seeing some slowdowns? Or is it more a few things here and there and overall, things are still relatively healthy? Just trying to get a better sense of kind of the moving parts on that piece.

Yes. So -- yes, thank you for the question. I'm going to actually let Michael walk you through it because Michael is really close to it. So go ahead, Michael.

Sure. On the clinical large pharma, I would say much more the latter here and there. Each of our customers is reevaluating their strategic approach to the back half of this year and going into next year, whether that's acquisitions they've made or may be making and how does that fit into their outsourcing strategy, whether it's the mix of FSP versus full service that they're looking at. And even in a couple of instances, there have been new leaders that have come in who are evaluating how they want to engage with their internal teams and engage external.

So as Jason mentioned, we've got several key opportunities. Customers are deliberating about how they want to outsource it to us, what shape it's going to look like, what services, things like that. So I've not seen anything that's widespread across large pharma gives me any concern.

Okay. That's helpful. And then, Michelle, I think it was kind of intra-quarter at a couple of conferences you were talking about, if things remain a little more muted on the funding environment, you could see a scenario where things in 2023 kind of soften to more mid-single, kind of putting out that scenario of things aren't a disaster, but they could soften a little bit. I guess with what you're seeing now, you add in kind of the large pharma deliberate approach, let's say, is that the right way to think about it? Maybe just kind of help us frame the '23 scenarios given what you're seeing now.

Sure. Sure. I could do that. So if you recall, the context of that conversation was the concern about the biotech funding index. And as we shared in our prepared remarks that we believe the market demand remains healthy. We're not seeing anything that is making us concerned from a macro environment perspective. So I'll start there.

We did say and was kind of under the umbrella of the biotech funding environment, but it applies regardless of where we get the business from that if our trailing 12-month book-to-bill in clinical falls below 1.2 for multiple quarters, we could see some softening of the 2023 clinical growth profile. Obviously, we're at a trailing 12 month of 1.29 for clinical development. So obviously, we're going to watch that closely. Jason, do you want to add something?

Yes. I would just add to that, Patrick, just a little more color, right, that we're in the early stages of what we do for 2023 budgeting purposes. And we tend to think about trying to get some direction relative to what we're seeing when we release our Q3 earnings.

I don't see anything right now that would change sort of that timing. As Michelle said, healthy pipelines, good backlog growth, healthy end market. We're focused on execution in the back half, right, to set up a good 2023. So that's what we're -- we continue to believe in what we said, right? If we had multiple quarters of book-to-bill below 1.2, that could bring in a mid-single digit instead of 7 to 10. So still very much -- that's how we're thinking about it, but we're just going to wait until we get through our process to provide any formal update.

Our next question comes from Christine Rains of William Blair.

My first one is just overall on what your strategy is to maintain or expand margins if the company's commercial business continues to exhibit outsized growth as it has for the past several quarters. How do you come back to potential negative mix shift here?

Christine, thanks for the question. I'll start and then if anybody wants to add in, they can. So when we're looking at our margin expansion, obviously, revenue growth helps us with margin expansion, right, because we get operating leverage. So that's definitely an opportunity for us, for sure.

I think secondly, you know that our ForwardBound initiative, which is around automation initiatives, along with offshoring certain roles in the organization, as Jason has shared in the past, we kind of got to that party late. So there's still opportunity for us from a ForwardBound perspective to continue to have opportunities in lower-cost jurisdictions, right? So we're going to continue to do that. And so we feel confident that we can -- with the balance of the revenue growth along with operating leverage and ForwardBound that we can continue to deliver against the growth in EBITDA, and I think you're even seeing it in Q2. But I don't know if Jason wants to add or Michael.

Yes. So it's a good question. And Michelle hit on a lot of the points there. I think I would just add, when we're looking at some of the investments that we talked through, whether it's our technology and data solutions capabilities, it's our enterprise resource planning capabilities, it's what we're doing in medical affairs, all of those areas, even some of the areas, say, Asia Pac, et cetera, that are still under scale for us or where we want to be and where we believe we can be, areas like real world that's growing quickly and is an excellent opportunity within med affairs as an example. As those businesses get to scale, those investments mature, there's going to be plenty of margin-accretion opportunity across the business. And I think that's going to be in commercial and clinical, and then certainly, how we continue to leverage the G&A functions of the company.

Okay. That's really helpful. And then the next thing is, given it seems like booking deceleration was primarily because of delays, do you expect bookings to be shifted now into the back half of the year? Or I guess, in other words, why are you comfortable with 2H and full year guidance on a constant currency non-pass-through basis when Q2 bookings were light and clinical? And then if you just have any thoughts on how this potentially could impact your 2023 outlook?

Sure. I'll start. So as you know, our backlog growth in clinical is strong. And so that's what's right in front of us. And we're very focused on delivering against that. And our Deployment Solutions backlog growth is very strong, right? So the trailing 12-month indicators demonstrate that we have that work right in front of us. So we're very confident in the half -- the back half of the year in regards to delivering against our guidance.

In regards to ongoing quarterly sales, based on all our indicators, we're very, very focused on making sure we convert every opportunity that's available to us. We are, obviously, also evaluating the pushes, the things that did get delayed and making sure that we're -- really making sure we can convert as many of those as possible to -- at a minimum, hit our normal hit-and-strike rate there. But we do have -- we do know that we have -- we had a very strong Q3 in 2021 as a compare. And so we're very focused on making sure that we can convert as much as possible. I don't know if anybody wants to add anything to that.

The only other thing I would add is if you look at our Q1, Q2 sales mix, it was intentionally weighted towards the neuroscience, general medicine area, which are faster burn for us. And so it enables us to fill in on the backlog phasing for the back half of this year and heading into 2023 compared to prior years where we were heavily -- more heavily oriented towards hematology, oncology.

Thanks, Michael.

Our next question comes from Casey Woodring.

So the full year revenue guide down aside from FX is attributable to lower reimbursables related to COVID contracts growing off faster than expected. So can you elaborate a little bit on this? What was canceled in the quarter? And is that for the downside from more COVID roll-off in the back half of the year versus what's contemplated in the new guidance?

Sure. So you're correct. The lower revenue guidance is primarily the COVID vaccine portfolio. I think it was addressed in the earnings script, where it's basically 2 things, right? We had a delay in the start of one of our COVID programs. So that was an FDA delay, right? The FDA delayed it. And so that was one piece of it. And the second was we have a customer where we were managing their investigator payments, and we're no longer managing those, right? So those are -- and they took that in-house. So those are the 2 things that affected -- that are the reimbursable piece there.

In regards to our revenue guidance, nothing has changed in our underlying demand around our net service revenue, underlying demand. It is a combination of that, what we just discussed, and the additional FX headwinds. Anything else we need to add there, Jason?

Yes. I would just say, we've -- we obviously understand the frustration that The Street might have with reimbursables. Last year, we talked in the fourth quarter about our pass-through costs related to decentralized trials and remote monitoring and other things that we were seeing and investments we had made in a post-COVID world. This is separate and very different from that. This is specific to investigator payments in the COVID portfolio primarily, as Michelle outlined.

There are a couple of other programs within the COVID portfolio that didn't necessarily impact quarter 2 as much that are impacting the back half that we have reflected. We believe, in addition to that, we've scrubbed and ensured that we do not have a further reduction in the back half. So we've certainly worked diligently to ensure that we have it where we believe that it will land at this point.

Got it. That's helpful. And then just in terms of the step-down in awards quarter-over-quarter on clinical, do you have a split in terms of the percentage of those delays, kind of in SMID biotech versus large pharma? Do you have a sense of which customers that had more of an impact there?

Yes. I think at a macro level, we probably saw 15% to 20% more decision delays than we have in prior periods, just to size it from that perspective. Within that, the lion's share was small to mid, but there were notable large pharma examples as well, and that's the reason we wanted to comment on that. So I would say the lion's share was on the small to midsize. And in quarter 3, complete transparency. We've won some, we've lost some and some we feel really good about at this point, but not many have gone to a decision at this point in the quarter.

Our next question comes from Sandy Draper of Guggenheim.

Most of my questions have been asked and answered, so I appreciate all the commentary. But maybe one follow-up. And Jason, I don't know if you're willing to sort of give some context. I don't need exact numbers. But when I think about, as you said, the fourth quarter write-down of the reimbursables and then what's happened here, the last sort of thing about it is, in general, pre-COVID and vaccine trials, a sort of normal rate was maybe high 20s to maybe low 30s in terms of reimbursables as a percent of revenue in COVID with the vaccine trials that the vaccine trials were pushing 40% to 50%. And that's starting to wind down.

One, does that seem right to you? And then maybe where are you now? I'm just trying to think, are you back to what would be sort of what the write-down and what's happened here at a normal level of reimbursables as a percent, and that's where you're going to be going forward. Just help us understand how high it got, where it is and as you said, how much -- how scrubbed this is. That would be really helpful.

Yes. Sandy, if you look at the back half, right, you're going to see the lowest percentage that I think that we've probably seen as a percentage of our fee revenue. And I do believe that is related to the COVID-specific opportunities we've talked about as well as just the underlying therapeutic mix in the business and what we're seeing in the back half when we look at the backlog by project.

Now when you think about future years, we're not going to comment yet on '23, as Michelle mentioned earlier and I expanded on a bit. I do anticipate, though, that we will see '23 tick back up relative to the back half of this year as a percentage but likely not up to the high 40% range that we anticipated we might based on what we're seeing in the portfolio at this point, but too early to call.

If you go back pre-COVID given what we were -- the portfolio of what we were managing, the SMID profile of our customer base and percentages versus large pharma, right, we've always said that given our SMID heritage, the amount of SMID work that we were doing, it was 50-plus percent of the business, we carried a higher pass-through load and that over time, that would come down as we move more into large pharma. I think we're seeing some of that now because even pre-COVID, we were in the high 40s, low 50% per quarter in terms of reimbursable load of revenue. So I think that continues to come down over time, given those dynamics, the COVID, the large pharma mix and what we're driving at over time.

Okay. That's really helpful. So basically, back half is going to be a little bit swinging the other way. But when you think about '23, it comes back up. But generally, you should start to get a more normalized on an annual basis level with obviously some quarterly volatility. Is that sort of a fair summary?

I think that's right. I mean I don't think we, at this point, see where we're down where some of our competitors are in terms of their reimbursable load given their mix of clients and their mix of therapeutic areas. But I do believe what you said holds up. And it will tick back up some, but not where it was.

(Operator Instructions) Our next question comes from Elizabeth Anderson of Evercore.

Maybe a quick follow-up to Sandy's question. With the trial that you said was -- the COVID trial that was delayed on the FDA's part, is that an example -- like is that one still in your guidance for 2022? Is there -- that's something that's sort of pushed off indefinitely given sort of the more uncertain timing of that one?

So I can start. Yes -- no, it is going to start. They just had some things that to work through, and we're confident it's going to start. I don't know, Michael, if you want to give any color to that.

Yes. Routine regulatory interactions and delays. We're still moving looking ahead.

Okay. That's really helpful. And one of your competitors pointed out that on some of the RFP flows that they thought that some of it, particularly in the SMID cap kind of biotech range, was really focused more on like funding projects or sort of scenario planning. Is that something that you could say you saw as well in the quarter that might explain some of the war delay? Or is that not some big guys saw as a general rule of thumb?

So Elizabeth, I think what you're asking is, was it around portfolio prioritization or that the RFP, they were just trying to get a sense of what was kind of going on and what it was going to cost them. Is that what you're asking? I just want to make sure I have the question right.

Yes. That's exactly right.

Okay. Yes. So I don't think we've seen that at any higher rate than we've ever seen that in the past. I mean, I think we feel that we vet our opportunities really clearly. We make sure that we believe that these customers either, a, have the funding; or b, will be -- have a means to get the funding to start the work. So I don't think we've really seen anything significantly different than we have in the past. But Michael, I don't know if you want to add anything.

Yes. Elizabeth, we've obviously been talking to our customers in depth over the last quarter about what are they seeing, what are the pressures they're facing. And right now, the words that come to mind for me is they're being very thoughtful, very intentional about the timing of programs going forward. I'm not hearing or seeing anything to suggest that we're at a precipice of anything negative.

We have to continue to support them with good strategies and good solutions and the right pricing. But as they're making their decisions, what they really talk to us about is value, value, value rather than should I go or not go. And that's how we view the competitive marketplace right now is what is our value versus what is our price.

Our next question comes from Eric Coldwell of Baird.

I think that was me. Can you hear me?

Loud and clear.

Yes, Eric.

Okay. Yes. So 2 questions. I'll start with COVID. Could you give us the COVID revenue in 2Q for clinical? If there was any for commercial, your estimate for COVID revenue as a percent of the total for 2022? And then what percent of backlog COVID currently makes up? So it's a 4-part one question.

Okay. I'm going to -- you know I'm going to hand that to Jason, Eric.

So I think if you look at the clinical backlog, Eric, at the end of the quarter, it's right around 2%, 2.5% of the total backlog. For the year, the revenue, it's higher than that. It's probably roughly double that in terms of the total revenue contribution. Within the quarter 2, I don't have that top of mind, but I think it's relatively consistent to the full year number that I just gave you in terms of contribution.

Great. And then the second one is a little trickier. Last year, there was a lot of debate about the firm's activity around bonuses, variable compensation. This year, I'm curious if you can give us any sense on how your bonus accruals have played out through the year and if there's any year-over-year meaningful delta in performance in the first 2 quarters of the year based on either an easy comp or a tough comp or a change in estimate for the full year.

Okay. Eric, I'll walk you through it. So let's start with 2021. So if you recall, in the proxy, it said that we did not pay the management incentive plan, right? And what that meant was that the senior leaders have a management incentive plan that's tied to company performance. And the senior leadership team did not get paid MIP. We did not fund MIP based on the performance metrics that are there to fund that bonus pool.

However, and this is really important, the Board did approve a discretionary bonus pool for that same group of people outside of the executive leadership team. The executive leadership team did not get paid. However, there was a pool for senior leaders that were in the MIP. We paid that. We paid our operational bonuses to the -- we have lots of operational bonuses to people who do the day-to-day work that are not part of the management incentive plan. We paid that bonus. Obviously, we paid our business development commission, the bonuses on the business development team. And the Board did approve some additional long-term incentives for the senior leaders that were going to work with the ELT to take Syneos Health forward to achieve our revenue and margin targets. So that's what happened in 2021.

In 2022, we funded the management incentive plan, right, as we do the start of every year. It was funded. It's still funded and exactly the same amount it was funded on January 1, 2022. Now having said that, we have to hit our targets for the remainder of the year. And until our books are audited at the end of the year by our auditors and we know what our final revenue and margin is, well, we know what our bonus payments will be. However, as of today, it is funded at the same rate it was funded at the beginning of the year. Is that helpful?

That's extremely helpful and just the answer I was hoping for.

Our next question comes from Ann Hynes of Mizuho.

So my first question has to do with the variable debt. I know that you have swapped through March 2023. Can you remind us what happens to your variable debt exposure in 2023 and how we should think about interest expense then? And can you just explain what's the delta between the high and low end of the guidance range for interest expense?

Sure. I will turn that over to Jason to walk you through that. Thanks, Ann, for the question.

Yes. Ann, it's Jason. So the variable rate debt component of the portfolio right now is around 40%. When the swaps roll off at the end of March, that goes up to 75% of variable rate. The midpoint of our guide right now is, I think, around $81 million this year. And that contemplates the 1-month LIBOR moving up into the mid- to high 2% at the end of the year, which I think is based on the curve that we look at right now.

When you think about next year, we're obviously very focused on how we want to take the debt stack forward. And we're working on that now and evaluating the different options that we have as we move ahead. We still like being in the 40%, 50% sort of fixed rate versus variable rate structure, and that's where we've been. So we're looking at that. We're also looking at -- we have our term debt that comes due in August of 2024. So we want to ensure that this time next year, we have worked through the different opportunities that we have and refinance that, inclusive of getting up into that 40%, 50% fixed in that range.

So I mean that's how we're thinking about it. If you look at interest expense next year, and I've looked at The Street from time to time to see where the models are, I still think it's a little bit light last time I looked. So I would think about that 75% variable where the rates are in the curve and think about it that way as you think about 2023.

Great. And just your stock is down a lot today, down 18%. Maybe just address where you think The Street might be getting it wrong because, obviously, you kept your revenue guidance. You focus on trailing 12 months, but -- and maybe just a clarification. When you say if you have book-to-bill below 1.2x 2 to 3 quarters in a row, is that quarterly or is that (inaudible)? But obviously, if you can just address like where do you think The Street might be getting it wrong right now.

So yes, so we say quarterly book-to-bill of 1 point were lower consistently over time. And then obviously, that would then start pulling the trailing 12-month book-to-bill down over the course of time, yes. That's the clarification. I don't know, Jason, if you want to add anything.

Yes. I mean, I think -- well, in terms of where The Street is getting it wrong, I'm not to say anyone is wrong, but I mean, how we think about it is the business has good growth, excluding reimbursable expenses and on a constant currency basis, right, 12.4% in the quarter and almost 12% for the year. And our adjusted EBITDA margins are growing and getting better, and cash flow is growing and getting better. And our backlog growth is at 12% in clinical and almost 20% in Deployment Solutions, excluding reimbursables.

We have a good pipeline in the business right now. We've talked about that. We have great visibility to additional preferred provider relationships. We have a good strategy that Michelle has articulated. We're putting dollars behind our investment thesis to grow revenue and margins in the out-years. We've good operational teams, turnover is down in the business, which is all very positive. So that's what we see and what we're focused on driving. And hopefully, we're able to properly articulate that to The Street.

Yes. And just to add, what we're doing is resonating with our customers and things Jason described, we're investing in our people, getting our retention from a low last year of 72% up into the 80s now and now working to accelerate that more with future investments. The superpower of our organization with these solutions crossing over from clinical to commercial to medical affairs is coming to life. We have many examples already just in the last 2 quarters, where our commercial and clinical leaders are working together on strategic opportunities, creating introductions into customers that we didn't previously have.

And the succession around delivery and quality of customers is resonating. Our customers are saying in the current landscape, "We want more of that versus what we're getting in other places." So we're in this for the long haul, and we feel it's going to show through in the coming quarters as we build into next year.

And just to summarize, as I said in the prepared remarks, I mean we're excited about the team that we have that's going to bring this strategy forward. I'm excited about our go-to-market strategy. I've got a ton of confidence in Michael's ability to really deliver in commercial and clinical and the power of combined. And we're making the investments we need to, to ensure that we're competitive, and we feel really good about where we're going. So I guess that would be my summary. I mean we feel really good about the strategy and where we're going. Okay. So...

Go ahead. I'd like to turn the call back over to Michelle Keefe for any closing remarks.

So thank you, everyone, and I want to offer our sincere thanks to the entire Syneos Health team. I'm motivated and inspired by their commitment to our customer sites and patients. We remain confident in our market positioning, and we're looking forward to continuing to grow and strong profitability in 2022 and beyond as we execute our value-creation plan. Thank you, everyone, for joining.

Thank you. This concludes today's conference. Thank you all for the conference. Thank you all for participating. You may now disconnect. Have a great day.