Q3 2020 Syneos Health Inc Earnings Call
At this time all participants are in a listen only mode.
Later, well conduct a question and answer session and instructions will be given at that time.
I'd like to hand, the conference over to Connie <unk> Senior Vice President Investor Relations. Please go ahead Sir.
[music].
Good morning, everyone with me on the call today are Alistair Macdonald, our Chief Executive Officer, Jason Mags, Our Chief Financial Officer show keep our president of commercial solutions and Paul Colella, Our president of course.
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In addition to the press release slide presentation corresponding to our prepared remarks is available on our website at Investor day scenario sales Dot com.
Remarks that we make about future expectations plans growth.
Despite the financial results and prospects the completion of acquisitions and.
And our expectations regarding the COVID-19 pandemic, including our expectations regarding a recovery and its impact on 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 factor section of our form 10-K for the year ended December 31st 2019 as updated by our subsequent 10 Qs and other FCC filing.
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 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 Alister Macdonald Alistair.
Thanks, Tony Good morning, everyone. Thank you for joining us today I Hope you and your families are in good health and strength. Thanks.
Financial results for the third quarter was solid as we remain resilient in managing through the impacts of COVID-19.
We delivered strong sequential revenue growth would probably its outperformance in the third quarter and I'm pleased with the ongoing market receptivity for our innovative integrated solutions.
Total revenue for the quarter was below guidance solely due to the slow recovery in reimbursable out of pocket expenses across both segments, which was driven by an increase in virtual operations on a slow recovery in patient enrollment.
Excluding the impacts of Reimbursable expenses clinical solutions revenue was in line with our expectations and commercial solutions revenue exceeded our expectations for the quarter contributing to the strong performance in our adjusted EBITDA margin.
I'm pleased with the strength of our margins during the quarter, which was partially driven by lower mix of Reimbursable expenses. We expect this trend to continue as reflected in our updated guidance and we believe that this shift could provide a structural margin benefit over the long term.
We continue to deliver on our strategy and remain confident in the long term strength of our business given our robust backlog and differentiated model. We expect strong growth in both of those segments in Twentytwenty. One. Despite recent increases in kind of that 19 cases slowing the pace of recovery.
Further amplifying our industry, leading end to end capabilities last night, we announced an agreement to acquire interact since.
Since rack to the mid size full service see already focused on the emerging biopharma sector, where we have limited customer overlap sensor actually is on the line philosophy around operational excellence therapeutic expertise in focus areas, including oncology rare disease day, metallurgy, CNS and the specialty in pediatrics and the belief in deploying the right technique.
Oh jeez to accelerate performance.
Its completed we believe this acquisition with some men our already leading position in the small to mid size space extending out support say managing by pharmaceutical companies.
This market segment is experiencing rapid growth given the ongoing strength of the biotech funding and he is ideally suited for Acenine Swan and consulting offerings. These.
These favorable dynamics create the opportunity to capture revenue synergies, including using our global scale to increase their conversion of phase two trials into larger phase three.
Improving their ability to win new business based on our scale and broad capabilities and leveraging the strength of our combined pipelines.
Since rack strong management team will continue to lead an emerging biopharma unit within scenario, south and retain a well regarded brand.
We're looking forward to this next chapter of growth I shared cultural commitment to changing patient lives and look forward to welcoming since tracked to the scenarios how family.
Additionally, we continue to fuel innovation as highlighted by the launch of out kinetic customer engagement capability.
While also receiving recognition for our collaborative culture without recent selection to the Forbes Twentytwenty best employer list, we ranked highest among by pharmaceutical outsourcing organizations for this award based on independent polling of employees throughout the industry.
Its success would not have been possible without the work about 24000 employees around the world and I want to thank each and every one of them contributing to the company we have become.
Now I'll turn to key highlights from the quarter.
First we closed Q3 with solid net new business awards, including clinical solutions year over year growth of 16.9%, resulting in book to Bill ratios of 1.2 times. The clinical solutions No 0.78 times for commercial solutions and 1.1 times for our type of organization. This.
This brings us to $5.9 billion of net awards and then I could good book to Bill ratio of 1.31 times for the trailing 12 month period.
Our clinical business. This builds a strong position for accelerating revenue growth with two.
20.4% growth in net awards for the trailing 12 month period and year over year back on growth improving to 18.2%.
Secondly, we experienced strong profitability for the third quarter was 8.9% year over year, adjusted EBITDA growth and the 240 basis point margin increased 16.6%.
On the weekends.
We generated robust operating cash flow of $156 million during that period further strengthening our overall financial position and liquidity, we ended the quarter with $248.6 million of unrestricted cash and $591.4 million of availability on our revolving credit facility with net leverage of 3.7.
Times.
Now getting into the details of our results we saw a strong sequential recovery during the third quarter with total revenue growth.
8.9% compared to the second quarter, excluding the second quarter divestiture about contingent staffing business.
Our teams continue to work closely with customers investigates excite and HCP to balance your <unk> operations with the progressive transition back to face to face operations.
Clinical solutions revenue showed the strongest sequential recovery during the quarter growing 11.6% over the second quarter when normalizing for the divestiture about contingent staffing business plan.
Clinical solutions also delivered a solid third quarter NAV towards growing 16.9% compared to last year.
Gross awards remain very strong, including a record quarter of awards are not small to mid size customer segment.
Next awards were impacted by backlog adjustment, reflecting changes in our expectations for Reimbursable expenses.
That's a legacy of the pandemic coupled with the ongoing centralization of remote operations in our global operations that would anticipate an ongoing reduction in these costs driven by lower travel expenses and an increase mix of remote site visits.
This brings clinical next awards to 4.7 billion for the trailing 12 month period, increasing our book to Bill ratio for the same period to 1.41 times.
Clinical pipeline remains robust across customer segments fueled by double digit growth in Smith RFP flow year to date, including a record third quarter.
We have also won approximately 60 coated related clinical projects through the end of Q3. These awards are primarily for Cobi treatments with a similar burn profile to much of our existing backlog. Although at the end of Q3, we did secure large scale vaccine study that will have a more rapid than probably fall with anticipated starts.
Nearly 2020 one.
This represents less than 10% of our year to date gross awards and we continue to see a substantial pipeline of additional kind of bid related opportunities.
Outside of the backlog adjustment Reimbursable after pockets expenses, we have experienced no meaningful cancellation activity as a consequence of covered 90. However.
However, we continue to see operational delays in studies created by the resurgence of kind of use cases. This has resulted in a high utilization of remote monitoring and slower than expected patient enrollment compared to our original expectations for this stage of the recovery.
We were also on it so I've recently received the Eagle Award for the fourth consecutive year and notable achievement, recognizing our industry leadership insight relationships.
Yes health was selected by nearly 10000 investigative sites across 47 countries that spoke to the sea all right. They believe best demonstrates a strong commitment to cite partnership I.
I applaud our employees inside that are adapting seamlessly across both face to face and virtual settings to continue to deliver for our customers.
Commercial solutions outperformed after quarter expectations with sequential revenue growth of 1.4% commercial solutions also had a solid awards quarter, resulting in $1.2 billion of next awards for the trailing 12 month period, maintaining our book to Bill ratio of 1.74 times theirs.
This performance drove total commercial backlog growth of approximately 6% compared to the third quarter was 2019.
Since the end of the call that that commercial solutions team also was awarded integrated launch programs with a top 20 pharma because that makes it so that they can get 90 therapies, which are expected to be approved in 2021.
Commercial pipeline remains robust demonstrating strong demand in the market, even as customers evaluate the timing of their revolving product strategies in light of kind of the 19.
We remain confident that our backlog growth robust pipeline the recovering macro environment will position. It's just commercial solutions growth in Twentytwenty Wanna beyond fueled by the growing complexity across the product strategies and the rapid pace that FDA new drug approvals.
That broader context, let me provide an update and some of the key operating metrics. We have highlighted in recent months.
Our clinical teams continued to see steady improvement and physical access the investigative sites with about 70% of size now permitting some level of physical visits. However, some of these sites are facing capacity constraints, requiring a high mix of remote monitoring visits than we previously anticipated I.
Another 20% of our sights remain accessible only by some level of remote monitoring activity, leaving about 10% of sites and accessible.
Sites generally continue to be somewhat cautious amid localized increases in COVID-19 cases, we still expect around 90% about sites to be physically accessible to at least some degree by yearend.
We also expect remote monitoring visits to represent a higher percentage of our future visits compared to pre COVID-19 levels.
<unk> customers and sites have accelerated their adoption of more efficient technologies where possible.
He is evolving dynamics create a headwind to revenue growth in the fourth quarter and into Twentytwenty one.
In terms of lower Reimbursable expenses and reduced site visit revenue.
It should be offset somewhat by the increased efficiency of remote activity supporting continued expansion of our adjusted EBITDA margin.
Our clinical teams are also experiencing continued improvement in the patient by patient enrollment and the startup of new clinical trials.
The level of new patient enrollment as recoup its about 75% pre cabbage levels. During October a new site activations are trending at 115% free Cabot levels, while the trailing recovery and enrollment will impact the pace of revenue recovery nearly 2021.
Spectra site Activations trend to provide a strong foundation for clinical growth in 2021, and beyond and patient enrollment fully recovers.
Clinical FSP business has remained resilient experiencing year over year revenue growth, excluding the impact of Reimbursable expenses on the divestiture about contingent staffing business.
Within commercial solutions out deployments solutions field teams have continued to execute on their omni channel strategy and are experiencing a gradual return to in person visits currently in about 55% about territories.
The pace of this return to physical visits varies by customer with some of our large pharma customers, taking a cautious stance on allowing that seems back into the field, that's kind of at levels and increase the gagnon certain areas.
We now expect approximately 70% of these teams to be permitted to condo physical visits to the HCP customers by year end. However, given historical deployment approaches in certain therapeutic areas on the success of our virtual interactions. We believe that 100% physical access is no longer required for our field teams to be fully effective.
This promotional agility is further advanced by a leading omni channel expertise that we have now branded as kinetic our advanced analytics capability that combines data technology and behavioral science to optimize HCP engagement.
During tell you that we have seen had she piece more rapidly incorporate these virtual communications into their practices I know now seeing compelling evidence of the effectiveness of hybrid interactions in driving prescribing behaviors.
Within deployments solutions the primary impact of Cove at 19 continues to be the delayed start up of new customer programs, along with reduced revenue from Reimbursable expenses.
Our communications business continues to see increased demand for integrated communication solutions, where we currently have a record pipeline and continue to win projects by collaborating across advertising public relations a medical communications.
This consulting practices also continued to perform well, helping our clients navigate the changing commercial landscape with a strong backlog of work entering the fourth quarter.
Before I turn the call over to Jason I want to recognize our team around the globe once again not only for the folds in Eagle accolades, but for the numerous awards we've collected over the last quarter, we have demonstrated our resilience focusing collaborative culture as we continue to face the challenges of COVID-19, together, while providing excellent execution practice and as Jason will.
Now I'll provide additional comments on our financial performance Jason.
Thank you Alister and good morning, everyone.
Let me start by thanking the team for a solid third quarter and setting us up for robust growth and 2021 and beyond.
Given the kind of the 19 headwinds, we had a strong quarter across our operating and financial metrics, including gross awards backlog growth profitability.
And cash flow demonstrating our unique value proposition continues to resonate with our customers and our team continues to execute.
Our total revenue for the third quarter of 2020 was $1.1 billion down, 6.8% and down 7.5% in constant currency compared to the third quarter of 2019 on an adjusted basis.
Our clinical solutions revenue for the third quarter was 829.2 million.
Around 4.6% or 5.4% in constant currency.
Excluding the impact of the sale of our contingent staffing business clinical solutions revenue was down 3.3% and excluding the impact of Reimbursable expenses clinical solutions revenue grew 1% compared to the third quarter of 2019.
As alister highlighting clinical solutions revenue was lower than our forecast due to lower than anticipated reimbursable expenses, which is driven by reduced investigator and travel expenses.
These expenses were impacted as more of our site visit activity continued to be remote and patient enrollment recovers more slowly than anticipated.
Further we expect these costs to be somewhat lower going forward as our customers and investigative sites maintained higher levels of remote visits in response to near term site capacity constraints and generally increase the adoption of remote monitoring.
Our third quarter commercial solutions revenue was 269.8 million down, 12.8% or 13.2% in constant currency.
The decline in commercial revenue was primarily due to the impact of COVID-19, including.
Including a disproportionate decline in Reimbursable expenses associated with reduced sales team travel and lower investigator meeting expenses as well as delays in new project starts.
Importantly, excluding reimbursable expenses commercial solutions revenue was down 6% and came in ahead of our expectations.
Adjusted EBITDA increased 8.9% $282.8 million, representing an adjusted EBITDA margin of 16.6% and the year over year increase of 240 basis points.
The increase in adjusted EBITDA margin for the third quarter was the result of our cost management initiatives, including fall are bound and lower Reimbursable expenses.
As a reminder, about 70% of our expected 2020 coded related cost savings, resulting from temporary programs the.
The majority of which are expiring over the course of the fourth quarter and into 2021.
Adjusted diluted EPS of one dollar for sales for the third quarter increased by 19.5% year over year.
Partially driven by increase in adjusted EBITDA and lower interest expense.
Now turning to cash flow on the balance sheet.
During the third quarter, our operations generated $156 million in cash flow.
Yeah, so for the quarter was 46.4 days.
We ended the quarter with 248.6 million of unrestricted cash and total debt outstanding of $2.58 billion, resulting in net leverage of 3.7 times.
During the quarter, we repaid $59.4 million of our term loan a and $35 million of our term loan b after expanding our AR securitization facility by $25 million and extending its term until October 2022.
Further in conjunction with the secondary offering by our private equity sponsors in September we repurchased $30 million of our outstanding shares.
As of September 30.
We had $106.3 million of share repurchase authorization remaining for utilization through the end of this year.
As part of our value creation plan, we continue to evaluate the best opportunities to fuel our growth through M&A that expands our capabilities and our market position.
As Alister outlined earlier last night, we announced the acquisition of Sunrise.
Centre at represent a bolt on acquisition that had strong capabilities and an important inorganic growth driver be as fast growing emerging biopharma customer base and operational delivery model.
While we continue to prioritize deleveraging, we adjusted our net leverage target for the end of 2021 to three to 3.5 times to reflect M&A activity.
Our non-GAAP effective tax rate for the third quarter was 24% and we expect to maintain that rate for the full year 2020.
Given the benefit of our Interwell deductions, we expect our actual net cash outlay for taxes in 2022 will be approximately $20 million.
Turning now to our 2020 guidance.
This guidance represents our best efforts to estimate the impact of Carbonite seen on our business right.
Recognizing the factors related to COVID-19, including its severity and duration or outside of the company's control.
We currently expect our site access within clinical solutions to return to approximately 90% of normal levels by the end of 2020, although.
Although we now expect a higher mix of remote monitoring activity.
Additionally, we expect new patient enrollment to recover more slowly than originally anticipated lagging the recovery, we are experiencing a new site activations.
For commercial solutions, we now expect our HCP access to return to approximately 70% of normal levels by the end of 2020.
These changes in recovery trends have had an impact on pace of revenue recovery, primarily in Reimbursable expenses.
Based on lower Reimbursable expenses across both segments.
We now expect full year 2020 revenue in the range of $4.37 billion to $4.44 billion.
That said the strong cost management, we now expect total adjusted EBITDA in the range of $620 million to $640 million, representing an adjusted EBITDA margin of 14.3%.
50 basis points from 2019.
Lastly, we expect adjusted diluted EPS of $3.33 to $3.46 up year over year at the midpoint.
This updated guidance does not reflect our acquisition of center at pending our expected fourth quarter closing.
I also want to provide an early outlook on our expected growth in 2021 as compared to the midpoint of our updated 2020 guidance.
Given the strong backlog growth across both segments.
I mentioned, the strategic awards and our current pipeline of opportunities.
We expect total revenue of $4.9 billion to $5.1 billion.
This reflects as reported growth of 11.2% to 15.8%.
Formalizing for the divestiture of our contingent staffing business earlier. This year. This outlook reflects year over year growth of 11.7% to 16.2%.
No this outlook excludes the acquisition of setback.
Which if successfully closed we currently estimate will add $200 million to $220 million of revenue and 2021.
This further assumes that the COVID-19 recovery continues to progress based on our revised expectations, including decreased restrictions on site access and 2021 and patient enrollment rates returning to pre committed levels along with a sustained increase in the use of remote monitoring and filtering visits.
With a return to strong revenue growth and the continued success of our forward bound program. We also expect to continue our margin growth trajectory of 30 to 50 basis points in 2021.
This completes our prepared remarks, and we'd be happy to answer any questions.
Operator.
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Our first question comes from the line of Robert Jones with Goldman Sachs. Your line is open. Please go ahead.
Great. Good morning. Thanks for the question I guess, maybe just to start on.
The reimbursable travel since it obviously seems to be causing some noise for you and others.
More than expected this quarter I just wanted to understand this little bit better. So you mentioned, the 400 basis point headwind for the quarter or how does that compare to QQ and then what's assumed as far as this headwind in the Fourq Guide and then I guess similarly.
Anything you can share around what that impact was on the revised reimbursed reimbursable travel in the bookings number.
Yeah, Hey, Bob Good morning, as Jason I'll start so when you look from quarter to quarter three the performance in terms of year over year contraction in the Reimbursables.
Well similar across the company and it was.
Yes, a little bit worse, and commercial actually and a little bit better and and clinical but roughly offsetting there for similar performance you know year over year.
That's the reason you know you see that the direct revenue is performing better proportionately and then when you think about the fourth quarter, we do see based on the metrics and you know the amount of visits that were doing on site and the patient enrollment trends.
And the number of of Ti field teams, we have getting into the field improvement so sequentially, improving but still down from our original expectation.
You know with approximately 90% of our field teams set to be in the field. When we set guidance in August now that's closer to 70, and then you know we were in the sort of thinking 10, 15% of of ER visits being remote and that's actually up 20% plus so it's really that it's an improvement sequentially.
Really but it's just different than the expectation of what we had based on the trends that we're seeing with with kind of the right now.
When you think about the backlog.
The adjustment and clinical Oh, we <unk> if you just take out the backlog adjustment our book to Bill in the quarter and clinical would have been north of one for again.
So you know it was it was a good quarter and we feel good about the bookings that we had and it was you know something when we looked at it and thought about you know what are we hearing and seeing we don't yet have the coveted.
Impact in our business that others are having so we see a clear picture of what's happening at the project level on the study level than what we're seeing a new bids going out and that's our focus.
And you know we felt like gets the most prudent thing based on what we're seeing in to go into just that backlog down given we believe you know in the non coded work. That's the experience we're going to have going forward in terms of sustainable remote monitoring.
And you know as as we mentioned in the prepared remarks more of our work being centralized in our sales operations networks.
Okay. No. That's that's really helpful. And then I guess, maybe just a follow up alister on on the coated related work I know in Twoq. You you said about 5% of bookings came from Cove. It.
I think as an opportunity for the company you kind of downplayed it a little bit and now you're saying year to date, it's been greater than 10, So you know.
Clearly that implies a pretty big step up in Threeq, you bookings related to Cove. It I'm. Just wondering you know there's rough estimates out there that there's you know over 1600 kobin related vaccine and treatment trials going on going seems like you know senio says getting a greater share of that work you know any change in view of of how viable are sustainable the cove.
And related work could be as a category.
Yeah morning book No. It's good question I think you have to look at it and two in two ways. You know the treatment work. We're working on you know how people recovering from coda that people with long cobot trials to look at how we eat the Simpsons treat people in hospital with Kobe.
The I think the profile of those the you know the impact of CODI is going to be around for a while on people, who already cool to need treatment for et cetera et cetera.
And they have a very different profile to the trials of the vaccine because you have a longer follow up period on the treatment trials than purely a vaccine treatment you know.
Measuring the antibody effectiveness.
And looking for the reaction so.
You know I think that that is robust I think we'll see more of that we have a good pipeline of that work, which would suggest to you know people investing in more on the treatment side, we have one more vaccine working in a Q3 right at the end of Q3, so expect that to drive some.
Good activity for us in the only a positive 2021 and also actually on the commercial side as we mentioned, we're starting to see an RFP flow from customers on how did they get their treatments into the field how do they support people medical communications meetings support in the field educate.
Additional work et cetera, and I saw work so yes.
Yeah, it's a bit more balanced for us now think we missed out on the early wave. The wolfspeed stuff was allocated to those seal rose to you know how of much broader and pick a history in vaccines and sitting I still as you know and in any way as Jason said, what you're seeing in our numbers is the is the effect. It has on the underlying backlog without.
That kind of up without a big kind of code that vaccine blanket right out of the top side.
Sustainable yet we win more in Q3 than we had in Q2, but again the majority of it was on the on the treatment side.
Okay, great. Thanks, so much.
Thanks, Bob.
Thank you.
And our next question comes from the line of Eric.
Coldwell with Baird. Your line is open. Please go ahead.
Oh, thanks, very much so I guess I'll start with Center Act a I think we found in the 10-Q that you paid 400 million you said on the call 200 to 220 million of potential revenue if it closes as expected.
I'm curious if you can give us a sense on that revenue is what kind of growth would that represent force interact and how if they held up dirt.
During the pandemic I know yeah going back to early in the year that was a very strong go growing company with a incredible growth in bookings before the pandemic, but how have they held up over the last six months, let's say.
Yeah. Good morning, Eric So we.
We I've known since ripe for a long time, obviously, we all well connected to the organization through relationships and we wash up business for a while very impressive growth. They really focused in on a few a therapeutic areas and to really penetrate the dot market you know, it's a market that.
Well from that it's you know respond very quickly to biotech funding, which we've seen an incredible amount of money going into.
They've held up very well through kind of it we were very pleased to see that I think they moved and made changes to their operations. The same way that city or state I was able to switch to remote and I think it speaks to their capability more than some of the other mid sized sales rose who you know we've seen struggle a little bit through cobot.
And being able to you know adjust the cost base moved to a remote operations et cetera. So it's an impressive group.
That growth rate is still pretty hard I think they were hit fairly hard hit in terms of winning New awards. In Q2, you know what I think are quite a few people saw that.
Q3 could bounce back Q4, great pipeline and I think that sector. The rent is really halts and it's you know you've got to look at the speed as we've as we've grown up in the Smith, we kind of have that appreciation for it and the fact that it that is really still categorized into the emerging biotech with since rack test great penetration and we don't have a lot of overlap of their costs.
Some as and then the high a kind of mid to higher end of the Smith with most people with multiple products, maybe one or two on the market, which is where scenarios is traditionally played as we've grown we've kind of grown into that sector.
And the second was really hot floors in Q3, I mean, it's kind of a record of pipe in the smid record sales in the smid. The Q3, and we just see that sex getting hotter and hotter, so being able to lengthen tracks, having a good cultural fit and relationship with their executive team already you know, we're going to hold as a separate business unit. That's that's free to go out.
Did I emerging biotech and then give it to support that.
Scenario springs globally because of Paul They model right. Now is you know that when a project and they don't have people in a specific territory. They you know have to partner that out with another sale right. So it gives us an opportunity to drive good revenue synergies as well on top of a until today right.
That's a that's great. The <unk> I think the comments on the net book to Bill in clinical if we exclude the.
Backlog adjustment for pass throughs would have been 1.4, if I heard you correctly, but that yeah with the math on our side be as simple as taking the delta from what was reported in that you know some estimate of up 1.4 and in seeing what the total adjustment to backlog on pass throughs was or is there. Some other NAF that might be needed here are you know.
Just a quick clarification.
Did you say that you won a large scale vaccine award in Threeq, you or after Threeq I'm curious if that contributed to bookings number one and then.
Also on the Cobot Awards you said you won two integrated launch programs I believe for COVID-19 therapies.
A little more there.
Yes, both true statements Eric's arrival into Q3.
Award on a large vaccine program and we expect that to get going a little bit in Q4, and then contribute more in terms of revenue saw him in Q1 Q2 and the.
Then on the commercial side, Yeah, we we've been kind of anticipating and working proactively with.
People. We know obviously you are developing treatments and vaccines to support to take that service line to them an offer that.
Integrated launch package, because it's got to move quickly. We are the biggest in the field and we think that that will give us some nice growth.
Some nice backlog as we go through 21 and 22. These these vaccines are fairly straightforward right, but you still got to have that monitoring that engagement with caregivers in the community.
And then on the on the treatment side some of the treatments are lot more complex because of the immuno response.
So making sure that training materials throughout the call centers are available that we have MSR sales in the field supporting those products is something I think we'll be well positioned to capitalize on.
Hey, Alastair I hate to.
Still the the parade here I promise this will be the last follow up but the vaccine award in Threeq you, we've seen Crs, taking very different approaches to bookings some discounted those awards tremendously number one number two.
In this way and we did discount it.
To some extent however, it was a large component of of.
Passthroughs during the quarter with less on the direct so if you look at just the direct impact to our bookings and we said less than 10% year to date is going to be far lower than that so we are seeing that it's just not coming through and coming up until 2021.
Thanks, very much guys appreciate it.
Thanks.
Thanks.
Thank you and our next question comes from the line of Dave Windley from Jefferies. Your line is open. Please go ahead.
Hi, Good morning, Thanks for taking my questions couple of kind of I think philosophical ones.
One on the patient recruitment comments.
I think so far this year as we've learned more and more detail than we ever thought we would about how how.
How revenue is recognized in the different contributors the comment has been.
That not all revenue for a COO requires site access.
Lots of other things to do but I think.
Longer term horizon type thinking if.
If you don't have patients in the trial you don't have revenue and so I'm wondering how.
How the change in your thoughts about patient recruitment in impacts are clients desire to move forward, obviously book to Bill seems good and so demand seems to be there, but how does that how does that patient recruitment change in thinking impact.
You know duration of studies values studies appetite to push forward. Some of these studies I'd be curious your comments on that Alister.
Morning, Dave.
It's a good question I mean, you know.
And I think we talked a little bit about the same kind of thing. The last couple of earnings you know, it's the the projects that we run a part of larger programs. So I think philosophically people are looking at co that the impact of coated trial is still enrolling right were what we say 70%.
75% of the pre coated levels of enrollment.
So the enrollment delays tend to be in specific studies rather than every study. So some studies of right on it some studies.
Falling behind because of the patient.
Kind of willingness to go into the site that's basically it.
But I think when people look at it there in the code that is affecting a project within a program and people don't if somebody's got a program that's going to be approved in 2025 lets say I believe philosophically. They hope will be we've got to get through this study and we've got to we got to work out ways to access.
Right the rest of the program and Thats doable right you want if you got a study that is going to take three years ago hundred sites. How is it going to take me if I have 150 sites. So I think we might see peak.
People coming through and sign off I need this project doing still want to keep a program on time, how to accelerate to knit and there's a cost time tradeoff in any study or in 90% of the studies that you can do so I think people will come at it that way you're absolutely right about enrollment.
Outpatient I mean, you get revenue from getting the sites open and engage them, besides et cetera, et cetera, and the project management fees, but a lot of our revenue obviously keys off with the patient being active in the study the monitoring needs to be done if not patients the data management analytics et cetera et cetera. So.
I think philosophically, that's where people are assets, where our customers around we've had conversations with customers around.
You know if we're delivering that whole program you know we got program level Awards, obviously, how do we accelerate how do we think about shortening the rest of the program will be.
Because of the delay to a project by code. It. So does that mean that makes sense. It does yes. Thank you yeah. It's a good reminder, on the broader perspective on.
The the second question for you is on the M&A.
I want to try to understand a little more specifically the <unk> I think you touched on it maybe as the smallest biotech level, but.
But I can see research legacy certainly has that that client strength in small mid in general and and so the basic question is as you think about M&A here buy versus build so you can't you seem to already kind of be in that client base, what specifically does center at.
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For four scenarios that you couldn't have grown into yourself.
Well I think you're right, we could grow into it over time.
As we become bigger we've tended to do about developed relationships with SMIC companies that become bigger themselves and I think that that smaller end of the Smith, the emerging biopharma emerging biotech with since right place.
We went through diligence with them when we look to our customer list. The nicolelis. This burgeoning virtually no overlap there is a little bit but virtually non.
And their customers that it's a huge Patrick territory there're hundreds maybe thousands of customers in that patch that we can't get too. So it helps us expand into that patch I think when you look at what they can bring in terms of their customer touching their BD team. It's an expansion of our efforts into into that Smith.
Sector, I think the emerging sector, which we the our organization has kind of grown away from a little bit you know only 7% I think by revenue comes out of that sector.
It gives us an opportunity to service more customers in there I think is a very strong fit price scenarios one methodology because these are organizations that off.
Small have left less infrastructure et cetera, and then you know for us kind of financially the revenue synergies from has been out to deliver behind since or act. If you like with our extended kind of geographic reach which is one of their issues for winning work and don't have that.
Enables us to drive revenue synergies with them and really take the scenarios, one offering into a broader customer set and penetrate that fast growing well funded emerging biotech sector there.
We have a history and as you say that was sciences legacy, but as we've grown and as we've developed we've tended to develop the chain within Smith to those larger to the larger end of if you like.
Okay, and a quick comment on leaving them standalone as opposed to integrating <unk>.
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Yes, I mean, if you think about our integrated business units as they stand now they are armed and dangerous when they're working with bigger companies our processes.
Working with a large pharmas et cetera. So we don't want to lose that focus by emerging since ranked into that we want to be part of our clinical offerings, obviously, but it will be a standalone unit that has that nimbleness that ability to engage with customers quickly without encumbrance of of.
The bureaucracy of a massive.
CRM, so we want to make sure that we bring in so we don't break it we keep them focused on emerging biotech and then we give them that freedom and ability to stay nimble was having that horsepower sat behind them for when they need it got.
Got it. Thank you appreciate it Dave just to add a little bit on that so so we are going to integrate when you think about some of the the back office.
Functional are enabling functions. So we will integrate as we normally do and then there will be some portion of the.
Business side that make sense to go into our operations network et cetera, but when you think about the front end go into market managing projects dealing with.
With the customers want to keep that independent for the for the reasons Alister mentioned.
That's helpful. Thank you.
Thanks. Thanks.
Thank you.
Thank you and our next question comes from the line of Erin Wright with Credit Suisse. Your line is open. Please go ahead.
Hi, Thanks, I don't want to be over call here with me questions I do have a follow up there I guess are you assuming any sort of synergies with this our transaction as we know from kind of acquisition the process industry. When you combine two euros is not always smooth.
No I just want to make sure that there is not any sort of synergy that we should be aware of and then also is it an inherently higher margin business that the core relative to your core given that's primarily biotech focus.
Yeah. So on the dis synergy side the answers very quick in the answer is no because of the lack of course I mean, one of the things you look at really is closely in diligence is the coverage in terms of overlap customers and we don't really have any.
So we're very happy with that then on the margin side. They I think with the goal for US is to bring their margins up to the sending us level that slightly lower because the rest DNA load. So as we work to integrate some of that back and we hope to help them bring their margins are more in line with where era.
Okay, perfect and then on the commercial segment, how should we be thinking about the quarterly progression there and you mentioned stronger communications consulting segments, but when you dig into some of the drivers for these headwinds across that that segment given it can be a little bit volatile quarter to quarter. Thanks.
Yes, Hey, Aarons, Jason so.
We expect to continue to see sequential growth there and in quarter four.
As we outlined at a you know in our August guidance. The business has really held up well continue to win.
Projects are beginning to start which has been encouraging for us.
So we expect to see that sequential improvement and then sequentially up you know into the 21 as well getting into a two year over year growth.
Growth at that point is how we're thinking about it at the moment.
Okay, great. Thanks.
Thanks.
Thanks.
Thank you and our next question comes from the line of tanker Peterson with JP Morgan. Your line is open. Please go ahead.
Hey, Thanks, Alister I'll start with following up on some of your comments on recruitment and site access you talked about 70% of sites now allowed visits but have capacity constraints is that is that the majority of sites that cell capacity constraints.
I think it's a good proportion of them I I think is probably around 50, it's about it's about split pretty evenly from sites able to cope and some sites just threes.
Physical space more than anything else or more restrained. So you know, it's very hard to get multiple days, it's hard to get multiple monitors on site in some locations. So its bit of a mixed bag rates I guess.
And then on the delays.
Slide down a couple of times can you maybe just help us think about what percentage of your trials are currently delayed at this point.
It's good question I'm not sure I have that essentially pulls on I don't know if you pull have.
A handle on that number if we don't we can get back to you on it talk about that.
It depends it's more by therapy say obviously.
We're catching up on oncology, where you know obviously oncology patients when going into clinics during the first our lockdowns.
Some of the.
Some of the dermatology projects, Oh delayed but catching up.
And so I think it's a hard question to answer because some of them into late but some of them are right actually enrolling slightly faster than we would expect so catching up whereas some of them are delayed and we're going to always have that delay in that but I don't have the percentage and it will be pretty hard to dial into it unless you did it by therapy.
Yes, I mean after this is Paul I think it's not just therapy, but regional and country mix too on the so it's there's no one size fits all around that answer each trial is somewhat dependent on regional split and then the indication as to whether or not those patients are going into site or not.
Okay, and then for Jason one or two quick ones just on the guidance I know you talked about 10% of bookings are covered related you able to talk to 2021, what you're actually assuming for comment you know revenues and then as we think about the EBITDA guidance here for the fourth quarter is the margin leverage all from.
What we are bound or are there additional cost levers you're pulling geared in your end.
Yeah, Hey talked out so on the first question.
You know we're seeing.
We really had immaterial revenue very immaterial in quarter, three and quarter two relative to kind of it it's starting to ramp on the awards that we have in quarter four but still relatively minor when you look to 2021. It is picking up however.
However, we feel like we've we've looked at it pretty closely and on particularly on on the vaccines that we have we're being balanced in terms of how those can play out and you know as many have started talk about if you get one or two that work what happens to the other so yeah, we've tried to be.
Relatively balanced there.
Tyco could you just asked the second question again, please just on the EBITDA margin leverage you know your guide for the fourth quarter is that all coming from forward bound and.
The lower cost from remote monitoring are there additional cost leverage you're pulling here that was the question.
Yeah. So.
It's it's really fall are bound continuing on and revenue continuing to make progress on the direct inside the normal seasonal items that we see right in quarter four was.
Go to four is always our seasonally strongest margin quarter, whether its contract change orders.
Risk share type items on the commercial side. These sorts of things and then on the expense side. You know you cap out on your taxes and you have your vacation PG. Other changes. So it's really those those things that are driving that that increase sequentially.
Okay, and then just last one on commercial how should we think about the decline in backlog for deployment solutions. Yeah. Do you think that that starts to reverse in the fourth quarter.
Yes, so it's been on the deployment solution side, while we Havent you know experienced meaningful co. The cancellations that's put a debit right in front of US we have seen things that had been delayed pushed out and canceled whether it's product strategies that are changing or.
It is co the decisions, where they're looking at their portfolio their funding whatever it might be of how they want to allocate things and and we have seen some cancellations that that did start to moderate for us in quarter, three and we see that continuing to happen in quarter four and beyond.
We have good pipeline, we're looking at next year, we have talked about the partnerships that we were awarded in quarter two and now we have these two integrated launches were the top 20 pharma on the cold side.
Not really any of that in our bookings yet. So you know as we look at those opportunities. We did we do expect to see our backlog start to grow in that on the deployment solution side in quarter, four but really its quarter fourth quarter to where you need to see that growth come in to to be able to drive the fourq.
Asked and we feel like we have good line of sight to a pipe to to do that.
Okay. Thank you.
Thank you and our next question comes from the line of Patrick Donnelly with Citi. Your line is open. Please go ahead.
Great. Thanks, Jason maybe just expanding on that last piece.
When we look at the 21 guide can you just give a little more color and talk through kind of the progression and how we should think about clinical versus commercial particularly commercial ramping through the year. What assumptions are made there both on the growth side. The conversion side just want to make sure we're thinking about it right there.
Yeah, Hey, Patrick good morning.
So when.
When you think about the growth of the businesses and Alister hit on this you know.
We're seeing you know so.
Strong growth in both businesses.
Next year and that is a little stronger growth on the direct side. Then then the reimbursables.
Given what we've been talking about so.
Thinking about that on the clinical side when you look at the burn rate.
We expect to see that to continue to progress from benign to up throughout the year with it being a little lower first half and second half and again being balanced on the vaccines and things of that nature on the coated side.
From from that perspective.
Commercial will be like I mentioned earlier.
And you know, we'll start to see year over year growth in the first half.
And then these opportunities that we have out there that aren't in backlog yet on the on the deployment solution side will start to come in and feed you know.
Second quarter and beyond so we'll really start to show the growth in quarter, two and beyond there and communications and consulting have continued to build backlog had strong pipes and performed well this year, so relative to our expectations. So yeah, that's kind of how we're thinking about it in on the margin side.
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Where we're obviously guided to a midpoint of 14.3%, which is up 50 basis points from 2019 and were from that 14, three were continuing to focus on that.
That 30 to 50 basis point progression and then obviously, we need to layer in center act to get to those.
To those assumptions, which we gave the high level revenue there. So that's how we're thinking about it Patrick.
Yeah, No. That's helpful. Maybe just quickly expanding on the margin side 30, or 50 appreciate that color how should we be thinking about some of the temporary cost reduction do you guys have made on <unk> given good color about which how much that makes a lot of the expansion. This year how much of those costs come back next year, maybe just talk through.
Some assumptions around what makes up that 30 to 50 of expansion.
Yeah, well, it's obviously growth so you think about the growth.
The underlying business coming back as we continue to recover from Covidien, you get leverage out of that offset by some of these things like the compensation adjustments, we may travel expenses being down other things that we have done.
Delaying merit and promotion type items to offset the revenue reduction this year. They start to come back I don't necessarily have the percentage at this point, we're still working through the the bottoms up detailed budget.
Budget. However, we have good line of sight to the revenue growth and the new customer relationships standing up and underneath all the code that you know this year and in 2020 the relationships that we have in clinical that we talked about as a margin drag this year actually starting to get better and better. So you start to see some leverage there and then we have the new.
Projects and relationships that we've talked about you know standing up.
And forward bound is is we talked about in September pulling forward bounce up and pulling it forward and we continue to see more and more opportunity. There in terms of our operations network and other automation opportunity. So far we are bound to a key driver to that as well.
That's really helpful. Thanks, Jason.
Thank you and our next question comes from the line of John Kreger with William Blair. Your line is open. Please go ahead.
Hey, guys. Thanks.
And going back to Ciner Act I know, a pandemic has distorted things, but what sort of growth or were they getting sort of pre pandemic and is that a reasonable expectation going forward as well.
Yeah, Hey, John Yeah, I mean, good growth from them I think the dry they've had in focus there is really helped to power that and.
I think what we've seen in terms of the sales conversion when they're looking at due diligence, obviously through Q3 and into Q4 little bit that back to those conversions that we saw pre pre cove. It. So they have headwind like everybody's had in Q2, but they've recovered very strongly from a very encouraged by that.
I think we can help them drive more of that as we bring more services and more capability to them.
Great. Thanks, Alister and us interact allow you to does that help or hurt the sort of 30 to 50, bips and margin improvement or annual though.
Hey, John its Jason.
Those guys have done a nice job of you know over the last several years.
You know getting capabilities built out acquiring companies growing organically getting the the the infrastructure built out or to grow and that you know that has put them in a little bit of a position where their margins are.
An opportunity for us as we look to 2021 and beyond so think about it as coming in you know we have an opportunity to optimize over the year as we grow more drive those revenue synergies, we have opportunity to take revenue that they the CEREC might outsource today bring that into our.
Employees its revenues revenue, but it comes at a higher margin their utilization is strong, but not as as optimized as they believe it can be when you think about the broader scenarios health and what we can put into the top of their funnel.
S. You in a structure as I mentioned today right, we have an opportunity to to to pull things in there and just make it.
More.
Efficient for them.
And their customers and then your your your regular procurement items et cetera, So it's going to be a.
Immediate opportunity to optimize that and it will help us overtime, but 2021 will be a a year to get to work on it.
Great. Thanks, and Jason just one more yeah. The the early look at 21 is really helpful. In terms of the the top line can you help us understand are you assuming much in the way of a change for some of the operational metrics that you you talked about which have been challenging in other words are you assuming much in the way of improving enrollment.
And growth.
<unk> ability to do on site monitoring things like that.
We are are we.
We we factored it and John for sure, but we are expecting improvement once we get through this were a quarter one quarter two and then starts to level out. So first half I would say you know still impacted by these items that weve talked about today and then you start to to come out of that in the second half.
Great. Thank you.
Thank you and our next question comes from.
Our next question comes from the line of Jack Meehan with Brian. Your line is open. Please go ahead.
Thanks, Good morning.
First just a clarification so the large.
Vaccine study that you won in the quarter is that one that's affiliated with operation more speed.
No it's.
Well different geography, if you if you want to think of it that way so.
But supported by government like Wolfspeed is in the U.S.
Okay understood and then back.
Back on Center Act. So I appreciate the color around revenue profile anything that you can add around margin profile is that similar to.
The make of UBS anios today.
Hey, Jack shaping up going guys and I was going to say I think we covered it but yes, we have some margin improvement opportunity with them.
We take out some action I leverage Oh bring in more US you know leverage, but Jason I think you're going to answer.
Yes, I mean, if you look at our clinical business now and then really overall the total company. It's it's lower for the reasons outlined in terms of they've been building scale you know bill.
Building out global capabilities et cetera, So all the things now that that that's solved for them their technology investments. Our go to market investments, we're going to be able to help with that so it's going to be lower coming in but the opportunity to that that we have line of sight to.
Be able to to drive that up.
Got it I guess I was just trying to think about what it could add in terms of earnings contribution and how that might impact. The 2021 guidance you laid out.
Okay.
Well I would I would think about it in terms of it being inherent in the range that that I gave in terms of the 30 to 50 Bips. Just could result in you know we need to get it in and look at it see what all the opportunities and how quickly we can get after it but it's going to be potentially.
Potentially driving towards the lower end of that range. At this point is how I would think about it.
Great. Thanks, guys.
You're welcome.
Thanks Jack.
Thank you and our next question comes from the line of Elizabeth Anderson with Evercore. Your line is open. Please go ahead.
Hi, guys. Thanks for the question. So I was just thinking as we're thinking about 2021 on how to think about like some of the FDA guidance when times on how to deal with trials that have been paused or delayed or some other kind of disruption and what kind of opportunity that could create.
Can you guys in terms of like new additional work or is it you know does some of that fall into some more like fixed more fixed price type of things. Thanks.
Hi, it's a good question its both I think it's.
As we get project each project almost would have to be considered a piece by piece that we're at that in terms of its overall completion enrollment you know the regulations around that.
Patient way you guys.
Project deviations etcetera or needs to be addressed so at the end of the day.
Each project that's affected you want to be able to put together a package that is going to go into the regulator that explains what happened and what was done to cover it. So yeah I do think there's opportunity today, obviously some of that will be worked as covered by changes in scope and additional scope to make sure things are covered.
But I think for us as with everybody out those that review process on a project by project level will will be the key to kind of identifying that.
Okay, that's helpful and I'm, sorry to beat a metaphorical dead mice, but that's 30 to 50 Bips of margin expansion that you talked about 21 that the core business ex interact yes.
It is however, I would think about bringing center act in in terms of not being captured in that range. We just have to get it in and figure out exactly what it allows us to do within the range.
Okay. Thank you.
Mhm.
You know share in that space. So that's how we think about it but it could be that is just not as as you.
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Consistent as say the clinical businesses from quarter to quarter.
That makes a wonderful sense and thank you for that perspective.
You're welcome Thanks, Tom Thanks.
Okay.
Thank you and our next question comes from the line of Dan Fannon with you. The S. Your line is open. Please go ahead.
Hey, Thanks, guys. Thanks for the question if you could just a question on yes. Some of the metrics you gave on enrollment.
Coburn Im just wondering how sensitive are strike patients to covert out you know I think since whose case, it's picked up early October hero stocks of lag.
It is a concern that you know that.
Trials are really going to be impact lingers wondering I would think would be a lot of lessons learned a lot of ways to mitigate that so is there any way just to give us a flavor for you know kind of what you see in front end with clinical trials as we watch these cobot cases move around.
Yes sure. It's good question Don.
It is it depends on therapy, I keep going back to the sense of it depends on the therapy depends on.
The is the treatment supercritical for the patient they have to go in as a matter of life and death, almost so ecology patients is going to go in now and I think the difference were seeing now versus the deferred versus what we saw in kind of the May April timeframe is because sites have.
You know.
Social distancing set so they have that put us back screens or have the Senate sanitizer. They have no Matt yes. They they can give assurance I think the if a patient comes in they're not going to put themselves the extreme risk as long as they follow the social distancing and wearing a mask and all that kind of job so identical.
Back to pull back markedly, but a downtick I I think this next wave of colitis, we will fight through it will will it slows down the the ongoing increase in enrollment and engagement right, so rather than at creating rather than a cratering everything back down market, where like we saw in a you know them.
Gotcha April time frame I think it just plateaus it and you will see or we expect to see continued increase but at a slower pace and hence some.
Some of the pullback on on the guide for Q4, because we anticipate that the pass throughs and come up with that additional enrollment will slow down. So that's kind of how we think about it right now.
Got it and then maybe just one other just in terms of.
The impact you look out with remote monitoring and on the deployment.
Your goal.
I be seeding.
Stepping back if you look out whether it be 21 22, how lasting of these solutions and is it is.
Is it is it is it hit the revenue is a little bit negatively, but it's a neutral EBITDA is there because it's lower cost anyway to think through what this means you know beyond 20 or 2020.
Yeah, you bet you broke up there in the question like weather, but I get the general just I think we expect to see an elongation of more remote in a more adults and more adoption of remote monitoring in future projects right. So that lowers the pass through yield.
And any it pulls back a little bit on the per unit revenue. So you can get more units don't because you not track monitor is not traveling for day to the site and a day back they're doing a remote visit right till that day. They do remote visit the next day. So you can actually get a bit more production, which I think is positive to the margin and obviously there's.
The reduction in travel expense, there, which you know it.
It's just empty revenue anyway, so again, which kind of dilutes down the margin. Obviously, so again, you get a bit of margin lift there. So I think as an ongoing on the clinical side to get those so I think we've proven michelles team has done a fantastic job of shifting to the more omni channel Weve Chris.
Christian the the system now is kinetic I think the engagement, we're seeing the kinetic and the results that we've seen from kinetic we are putting together a white paper on.
On a.
An experience that customers had with using the kinetic system and the uplift that they've seen in their overall sales because of the use of kinetic as a more engaging more multi channel.
Methodology to speak take HCP, so I think that will be a longer lasting and we set a little bit in the prepared remarks.
Well, we don't anticipate having to go face to face 100% of the time in commercial now to drive success of a launch or success of the sales Pat.
Sales for a drug gets it I.
I think that will be one of those that would be the big lasting change in the commercial side, which will help margin I think.
Great. Thanks Allison.
Thank you.
Thank you and I'm showing no further questions at this time and I would like to turn the conference over to Mr. Alistair Macdonald for any further remarks.
Okay. Thank you Michel so again, everybody a sincere thanks today to the anti scenarios team for all they have done in the face of what had been unprecedented conditions throughout the year, we remain very confident in our market position and I look forward to building on our long term momentum as the recovery from Cobot continues so thanks everybody.
Your attendance today and for your interest and investment in our organization please be safe Haven.
Have a great day and be good. Thank you very much.
Yeah.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect everyone have a great.
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