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spk06: Good morning and welcome to the Cineos Health second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. I would like to hand the conference over to Ronnie Speight, Senior Vice President of Investor Relations. Please go ahead, sir.
spk05: Good morning, everyone. With me on the call today are Alistair McDonald, our Chief Executive Officer, Jason Meggs, our Chief Financial Officer, Michelle Keefe, our President of Commercial Solutions, and Paul Colvin, our President of Clinical Solutions. In addition to the press release, a slide presentation corresponding to our prepared remarks is available on our website at investor.cineoshealth.com. Remarks that we make about future expectations, plans, growth, anticipated financial results, and prospects, and our expectations regarding the COVID-19 pandemic 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, 2020 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 Alistair MacDonald. Alistair?
spk07: Thanks, Ronnie. Good morning, everyone, and thank you for joining us today. I hope you and your families are in good health. I'm excited to share another strong quarter of results, which demonstrate that our differentiated product development strategy continues to resonate in the market. We exceeded the midpoint of our guidance across all financial metrics for the second quarter, and our integrated product offerings powered strong awards and backlog growth for both segments. Most importantly, both clinical and commercial revenue returned to robust year-over-year growth, a trend we expect to continue for the balance of 2021. Now for some key highlights from the quarter. First, overall net awards grew by 25.6% year-over-year, including clinical growth of 21.2% and commercial growth of 55.3%. This award strength drove second quarter book-to-bill ratios of 1.45 times for clinical solutions and 0.94 times for commercial solutions, resulting in robust TTM back book-to-bill ratios of 1.37 times for clinical and 1.14 times for commercial. Second, we achieved strong profitability gains with 47.1% year-over-year adjusted EBITDA growth and a 190 basis point improvement in adjusted EBITDA margin compared to the second quarter of 2020. Thirdly, we continue to attract world-class leadership talent, and I'm excited about the addition of Michael Brooks as our Chief Development Officer. Michael's deep experience and connections in clinical development and commercialization will drive our go-to-market strategy advance innovation, and enhance the voice of the customer across the product development continuum to create better patient outcomes. Also, at the board level, we are enthusiastic about the recent addition of Dr. David Wilkes. As a champion for addressing disparities in healthcare, Dr. Wilkes shares our passion for positively impacting patients' lives. We look forward to benefiting from his impressive industry experience and medical expertise. Now, moving into further details on our results. We continued to recover from the impacts of COVID-19 as our total company sequential revenue growth strengthened and year-over-year revenue growth accelerated to 26.6% compared to the second quarter of 2020. Clinical solutions revenue grew 31.1% compared to the second quarter of 2020, driven by accelerating startup of both non-COVID and COVID clinical projects. and contributions from our 2020 acquisitions. Our clinical team also closed the record quarter of net awards that were fueled in part by continued strength in the SMID segment. These awards also included three large-scale FSP360 wins where we are replacing existing providers, demonstrating the competitiveness, scale, and flexibility of our solutions. Under our awards policy for FSP services, we only included 12 months of services in our bookings, even though each agreement represented an initial term of at least three years. The remainder provides further fuel for growth in addition to our reported backlog. Driven by these strong sales, record-ending backlog that is up 21.5% and a robust pipeline of new opportunities, Clinical Solutions remains well positioned for strong revenue growth in the second half of 2021 and beyond. Our second quarter clinical awards also included several COVID-19 related projects, although this category, including treatment therapeutics, remained at less than 4% of our backlog at the end of the quarter. Given this limited backlog concentration of COVID studies, we expect our robust revenue growth in 2022 will be driven by the strength of our non-COVID backlog. Given growing customer demand for decentralized clinical trials, we continue to enhance the way we engage with sites, patients, and physicians. Our decentralized trial solutions are designed to bring trials closer to the patient, reducing site and patient burden while expanding participant diversity. We recently launched two initiatives to foster improved engagement. First, we established a dedicated decentralized trials site advocacy group. focused on new technology optimization to make trials more accessible while improving data capture along with participant diversity and retention. Second, we launched our Patient Voice Consortium, a cross-functional hub that integrates strategic patient perspectives throughout the product development lifecycle. We believe these efforts set the standard for best practices in incorporating patient insights into clinical trial design, communications, access initiatives, and launch strategies. We also continue to expand our dynamic assembly network of DCT data and technology providers in order to best serve our customers with the recent announcement of our relationship with ATEON. ATEON provides regulatory-grade data and analytics to produce real-world evidence on the safety, effectiveness, and value of treatments for patients and other stakeholders. These initiatives, in combination with our Illingworth Home Health Services, represent significant inroads toward improving the patient experience and realizing our vision of shortening the distance from lab to life. Turning now to commercial solutions. We saw accelerating sequential recovery and a return to year-over-year revenue growth of 13.2% compared to the second quarter of 2020. Year-over-year growth in our core business was even stronger, but was partially offset by the headwind from the divestiture of our medication adherence business in the fourth quarter of 2020. All of our core commercial businesses posted a return to strong year-over-year growth. Deployment solutions had another quarter of strong new team starts, and the number of deployed resources reached a four-year high. Consulting completed a very strong first half of the year, and communications continues to see strength in the public relations and medical communications businesses. Importantly, full-service commercial growth awards, where we strategically combine these capabilities, have more than doubled on a year-to-date basis compared to 2020. This performance highlights the continued success of our integrated model, fueling growth across our commercial portfolio. Additionally, several key factors are contributing to the ongoing diversification of our deployment solutions business, which we expect to improve the consistency of future commercial growth, including our ability to deliver sophisticated solutions the continued evolution toward more targeted therapies, and the strong biotech funding environment. These dynamics have supported a migration towards smaller average field team sizes, a lower concentration of sales-only teams and revenue, and longer project durations. Our commercial expertise also continues to fuel innovation across the product development continuum, with dynamic engagement capabilities such as Kinetic, which seeks to optimize HCP engagement through a combination of face-to-face and virtual field team activities. Additionally, we are seeing increased adoption of the digital amplifier component of Kinetic by our clinical customers, where this capability is designed to accelerate patient engagement and enrollment by driving patient referrals by physicians into clinical trials. We believe this unique suite of capabilities differentiates Cineos Health and is a key factor in driving our strong new business awards. Lastly, Cineos One, our innovative end-to-end product development methodology, continues to provide a competitive advantage across both segments. We are particularly excited about the Cineos One contribution to growing the pipeline of potential commercial awards and revenue, with the first of many Cineos One portfolio assets set to begin commercialization in the third quarter. Although these assets have not featured prominently in commercial awards or revenue to date, We expect the Cineos One portfolio, along with our integrated full-service commercial and innovative kinetic capabilities, to position us well to capitalize further on strong market demand and drive robust commercial revenue growth over the long term. Before I turn the call over to Jason, I want to thank the entire Cineos Health community for their ongoing resilience, focus, and collaboration as we work together to help our customers improve and accelerate the delivery of therapies that impact health worldwide. Their continued commitment to collaboration, inclusive thinking, and use of insights is helping build a superior culture to deliver high levels of innovation for our customers and their patients. Jason will now provide additional comments on our financial performance and guidance. Jason?
spk11: Thank you, Alistair, and good morning, everyone. Our total revenue for the second quarter of 2021 was $1.28 billion, up 26.6%. 23.6% in constant currency compared to the second quarter of 2020, which was significantly impacted by the COVID-19 pandemic. Our clinical solutions revenue for the second quarter was $991.1 million, up 31.1%, or 27.5% in constant currency compared to the second quarter of 2020. These increases include increased startup activity across both our COVID and non-COVID projects, a 795 basis point contribution from acquisitions, and a 240 basis point tailwind from the faster recovery and reimbursable expenses. This growth was partially offset by a headwind of 85 basis points from the 2020 divestiture of our contingent staffing business. Our second quarter commercial solutions revenue was $291.5 million, up 13.2% or 12.2% in constant currency compared to the second quarter of 2020. This robust growth in commercial revenue was driven by broad, double-digit expansion across our core commercial businesses with particular strength in consulting and includes a 75 basis point tailwind from reimbursable expenses. This growth also includes the impact of a 250 basis point headwind from the 2020 divestiture of our medication adherence business. Adjusted EBITDA increased 47.1% to $174.6 million representing an adjusted EBITDA margin of 13.6%, an increase of 190 basis points compared to the second quarter of 2020. The increase in adjusted EBITDA margin for the second quarter was primarily the result of revenue growth and our forward bound program, including operating leverage. These benefits were partially offset by increased costs from the expiration of temporary savings programs instituted in 2020, a higher mix of reimbursable expenses, and the impact of foreign exchange. Adjusted diluted EPS of 97 cents for the second quarter increased by 67.2% year-over-year, primarily driven by an increase in adjusted EBITDA. Our operations generated $88.7 million in cash flow for the second quarter. Our year-to-date 2021 cash flow from operations has been very strong, reaching a record level of $215.8 million, driven primarily by our net income as the impacts of the pandemic subside. DSO for the quarter was 40.3 days, and our capital expenditures were $11.2 million. We ended the quarter with $260.9 million of unrestricted cash and total debt outstanding of $2.92 billion, resulting in net leverage of 3.8 times. During the quarter, we amended our credit agreement to increase Term Loan A by $495 million and use the proceeds to fully repay our outstanding Term Loan B in order to further reduce future interest expense. We also repurchased $73 million of our outstanding shares during the quarter in conjunction with the sales of the remaining ownership interests of our private equity sponsors. Our non-GAAP effective tax rate for the second quarter was 24%, consistent with our expectations for the full year 2021. Turning now to our 2021 guidance. This guidance contemplates our current view of the estimated impact of COVID-19 on our business, recognizing that factors related to COVID-19 are outside of the company's control and subject to change. We now expect full-year 2021 revenue in the range of $5.18 billion to $5.3 billion, representing growth of 17.3% to 20%, an increase of $15 million at the midpoint, primarily due to higher reimbursable expenses. This growth includes an estimated contribution from acquisitions of 540 to 580 basis points and a headwind from our 2020 divestitures of approximately 110 basis points, both of which are unchanged. we are narrowing our expected range of total adjusted EBITDA to $750 million to $780 million. This continues to reflect an adjusted EBITDA margin of 14.5% to 14.7%, up 30 basis points from 2020 at the midpoint, which now incorporates a higher mix of reimbursable expenses compared to our original expectations. Lastly, we are increasing our expected adjusted diluted EPS to a range of $4.25 to $4.43, where year-by-year growth of 24.6% to 29.9%, primarily to reflect the impact of our second quarter share repurchases and lower interest expense. Our guidance incorporates interest expense of $84 million to $87 million, a non-GAAP effective tax rate of 24%, and an estimated diluted share count of 105.2 million shares. Further, we continue to expect our net cash outlay for income taxes to range from $50 million to $60 million. Turning to our outlook for the third quarter, we expect year-over-year growth to moderate somewhat given the sequential recovery that began in the second half of 2020, but remain strong in both businesses. We expect third quarter revenue of $1.315 billion to $1.365 billion and total adjusted EBITDA of $195 million to $205 million. This reflects as reported revenue growth of 19.7% to 24.2% compared to the third quarter of 2020. It is important to note that this reflects an adjusted EBITDA margin of 14.9% of the midpoint, which is down from Q3 2020 due to the impact of our temporary cost-saving measures instituted in 2020 in response to the COVID-19 pandemic. However, we remain on track for achieving the four-year expansion and adjusted EBITDA margin that is reflected in our guidance. This revenue growth includes an estimated contribution of acquisitions of approximately 610 basis points, and a headwind from our 2020 divestitures of approximately 80 basis points. This growth also includes an expected tailwind of approximately 375 basis points due to growth in reimbursable expenses. This completes our prepared remarks, and we'd be happy to answer any questions. Operator?
spk06: Thank you. As a reminder, if you would like to ask a question, press the star, then the one key on your touchtone telephone. To withdraw your question, press the pound key. And our first question comes from David Windley with Jefferies. Your line is open.
spk10: Hi, good morning. Thanks for taking my question. I wanted to focus on full service commercial, if I could. You mentioned, Alistair, in your remarks that the first one is slated to launch in the third quarter. That seems like that's kind of stayed on time to your early expectations. Could you talk about how you think that will ramp and what you know what amount of contribution that is making and then also just so we can understand a little bit better how you've taken value from that in into bookings how how do these types of deals begin to contribute to bookings or when do they thanks yeah okay good question start even a long one so good morning everybody and good morning to you day and
spk07: So that launches still on schedule. It's still moving through. We're pleased with that. I think it's probably easier to start with how we book them first and then go to the contributions from that work. So we really book those kind of almost as a combination of FSP and when the work goes to contract so that we don't trigger any of the contingencies if it doesn't get approved and that kind of thing. So we've taken the pre-planning and team-build work in terms of bookings for that. But bookings start to come through from those projects as the work kind of goes into the backlog, really. So we almost take them when contracts are signed so that we know where that work is coming through and the pacing of it, et cetera, et cetera. So those products that come through the Cineos One channel or even through the full-service commercial channel, which is you know, a growing element of Michelle's work, the bookings and the start of that work are quite close together so that we don't get ahead of ourselves, we don't, you know, artificially inflate the backlog, et cetera. If one of the contingencies, you know, the product doesn't get approved, the product doesn't get funded, et cetera, if one of those things happens, then it doesn't trigger. So I think it's quite, well, it's a very conservative way to do it. I think it's the best way to do it. It helps us to take out any of the, kind of volatility that was an element of commercial previously and helps us build a very robust backlog with that. Michelle, any additional comments on that one?
spk04: Sure. Hi, David. Hi. So a couple of things. So one of the things that's really helpful about full-service commercial awards along with the CINEOS One pipeline that will continue to feed commercial in the upcoming years is that we have good line of sight because we put a product development roadmap together of everything that the customer is going to be doing with us over time. And it has milestones that are tied to approvals, et cetera. So it gives us very good view into the future of what potentially can drop into actual revenue quarter by quarter over the next two or three years. And as Alice just said, we take, I think, a prudent approach in the fact that we book the pre-revenue work. And what we mean by pre-revenue is the pre-approval work for the asset. And then once we know the product's been approved, we then would start taking things like deploying of sales forces, et cetera.
spk07: So in that case, we've taken that pre-approval work, planning, market access, strategy work, kind of, setup of the management team, the build out of the sales team. But as that team goes into the field, that's when we'll take more of it. So we pace it through quite conservatively. So more to come, really, on that launch in terms of bookings, and then obviously we can get into the billing side too.
spk10: If I could follow up with just one last on your 3Q, 4Q cadence, suggests that I I think 3Q's up a little bit. 4Q becomes a fairly steep inflection. I know you typically in commercial have some annual bonus payments that contribute to that, but if you could perhaps comment about other factors like cadence pass-throughs that might influence both the revenue progression and then the margin progression from 3Q to 4Q. Thanks.
spk11: Yeah. Hey, Dave. Jason here. You're right, on the deployment solution side, that certainly is featuring on the commercial side in terms of quarter four continuing to sequentially ramp up. We also, you know, we launched record teams last year. We've continued to launch a significant number of teams in each quarter and anticipate that continuing in Q3 and Q4, and you get those teams to scale as well as you progress throughout the year. And then we also have you know, the normal seasonality on the communications and consulting side of the business where, you know, we see utilization max out really in quarter four. So that's really what we see on the commercial side. On the clinical side, you know, continuing to see good site activations, continuing to see good enrollment of COVID and non-COVID. We continue to win COVID work. I think we're up to 130 projects in clinical that are COVID-related and have a good tail on that, frankly, into 2022, as I think you've heard from some of our other peers. Reimbursables are recovering. We mentioned in the prepared remarks that we have tailwinds from reimbursables. We're having the guidance raised due to reimbursables, et cetera. So there is some of that as we look to the back half on the clinical side as well as the commercial side. And then on the margins, you look back to prior years, even last year, our Q4 2020 margin was 17% plus. So that's what we see on the growth of the business, the utilization maxing out, contract modifications, the bonuses you mentioned, PTO, tax accruals coming back our way. From that perspective, it's normal seasonality and in line, and nothing from our perspective has really changed when you look at the second half relative to where we were. Okay, thank you. Thank you.
spk06: Thank you. Our next question comes from Patrick Donnelly with Citi. Your line is open.
spk03: Great. Thanks, guys. Alistair, maybe one for you. I know last quarter you talked about some large bushings that were being pushed out beyond your backlog window. Can you just talk about customer behavior this quarter relative to one queue on that front? Just curious how things are trending with kind of the large bookings and if clients are still pushing things out or things being kind of acted on a little more near term.
spk07: Yeah, good question. I think we didn't see any of that really in Q2. You know, you naturally get things that move around the end of a quarter, but nothing out of the ordinary. And I think we've seen a continued kind of – you know, return to what we'd expected, that we'd always expect to see kind of pre-COVID with the activity from SMID customers being very strong, activity from large pharma customers being more normal, if you like, with decisions being made, projects coming through and getting into the clinic. So, you know, as you see, we had a great bookings quarter, very strong in clinical and commercial, very strong in CineOS 1, very strong in full-service commercial as well. So really, we're pretty pleased with all those sectors. We've got good, robust pipelines as we go into Q3, and very pleased with the demand environment that we're sitting, and I think the innovation that we're bringing to customers in terms of integrating products and selling, doing more cross-selling, et cetera, as well as the full end-to-end. So, you know, Swan is putting us in a really strong position.
spk03: Okay, that's helpful. And then maybe just on the general recovery on things like site access and RFP flow and You know, Jason, what do you see in there? And then what are you assuming also in kind of the back half in terms of continued normalization on that front?
spk07: Yeah, I'll do RFP flow. I mean, I think we are seeing a very robust environment from all sectors, both clinical, commercial, SMID, and large in both sectors as well. So a good, healthy environment. And then Paul, I think, comments on the other piece?
spk11: I think we continue to see really strong, and it's really across all segments at this point, and FSP and full service. So from my perspective, I think that's going to continue on, especially as we've looked at our partnerships and as we look to continue to expand there. We've had this quarter a couple of new partnerships that we've brought into the fold. We think those will continue to add volume as we go into the back half of this year and into 2022. Yeah, and Patrick, on the operational metrics, I mentioned the site activations continue to be well above pre-COVID levels, continue to grow. Enrollment has really hit a strong point. And some of that, frankly, is driven by the COVID vaccine trial that we have. But underneath that, enrollment continues to move forward as well. So we're encouraged by it. And I think as we talk about this internally, it's more around how we accelerate trials and get caught up as best we can for the benefit of our customers versus we can't quite get to the site and get studies started and moving. So I think we have critical mass as well and can move these projects forward. Great. Thanks, guys.
spk06: Our next question comes from Tycho Peterson with JP Morgan. Your line is open.
spk09: Hey, thanks. Maybe a couple follow-ups on the last line of questioning. Can you quantify the COVID contribution in the quarter from a revenue perspective? I know you said it's less than 4% of backlog. And then on site accessibility, you know, last quarter you said you're above 70% of sites permitting physical visits. I'm just curious where that stands today, you know, where you think that could go in the back half of the year given the Delta variant. And, you know, how are you going to be leveraging dealing worth around remote monitoring? I think, you know, previously you said about 25% of sites were up and running on that front too.
spk07: Well, let's start with Illingworth. I think we're very pleased with Illingworth's continued penetration into new categories, new projects, and also within Cineos' project. So it's really enabling us to expand the footprint of our presence with sites, being able to get out and execute visits in the home rather than people having to come to sites. And I think in Q2 operationally was a new record for Lingworth in terms of the number of visits and that looking forward through the rest of the year and actually out into 22, we see that progression continuing to go. So I think that innovation around decentralization of trials is very important, not just for the execution of the remaining COVID balance trial work, if you like, but also new therapies where people are more reluctant to get out of the office. I think we had a, example in in Russia of a of an illingworth visit to capture a patient for a rare disease trial the patient lived 800 miles from the from the from the site so for us being able to execute that in foreign land with a big gap between the site to capture that patient because I think without healing with that patient would have been lost to us is a significant step forward and I think that will continue in other trials. We continue to see sites being able to live with COVID and continue to enable patients to come in. I think what we saw through Q4, Q1, with sites working out local protocols, et cetera, has continued. The Delta variant, obviously, is a concern globally. We saw the impact it had in India. We saw the impact it had in the UK. in terms of COVID rates, but that in the countries with the high vaccination rates, if you look at the stats in the UK as the Delta variant went through, we really can see the chain has been broken between infection and hospitalization and death. So lots of sites continuing to open up, continuing to ramp up, new studies being placed, new sites opening up. So a good sign for us as we continue to go through the rest of the year.
spk11: Yeah, hey, Tychus, Jason, on the COVID contribution, right, it was, we talked about it being less than 4% of backlog. I think when you look at quarter two, it was a bit higher than that as a percentage, but both COVID and non-COVID are growing. And the way that I would think about it is consistent with how we talked about it in quarter one, which is when you look at the full year total company revenue, that revenue contribution is going to be broadly in line with that backlog percentage. So, you know, that's kind of how I would think about it.
spk09: Okay, that's helpful. Alistair, you called out the three large-scale FSP 360 wins. I'm just curious, you know, if you could kind of put these in context and, you know, how is momentum building, you know, in that side of the business? Are you seeing kind of larger orders come your way here? You mentioned these are kind of multi-year deals, even though you're only putting 12 months in the backlogs.
spk07: Yeah, absolutely. We're very pleased with that. I mean, for us to play in the large pharma sector, you have to be very capable in FSP and not just in a function, but globally. So scale-wise, three pretty big awards, two of them with brand new customers, four is in terms of that FSP sector and replacing or displacing previous incumbents. So very pleased with that, very pleased with the penetration there, and it's something that you know, we need as we continue to grow in our large pharma sector as a kind of a deployment methodology for us to be able to take shares. So very pleased with that. Long-term deals, I think all of them are at least three years. Some of them have a longer timeframe on them than that. And across clinical data services, et cetera. So in multiple different areas.
spk09: Great. One last one on commercial. You obviously had the benefit of easy comps. They're still relatively easy the next couple quarters, but I know you said the recovery was pretty widespread. As you get past the easy comps, do you feel like you're still on the recovery path here on commercial?
spk07: Absolutely. Yes, absolutely we do. I think that a lot of the strategic work that we've been doing over the past several years is really now starting to come home to roost for us in commercial with cross-selling, cross from clinical. We've really integrated clinical and commercial across several platforms, including Kinetic. We continue to see the growth of Kinetic, Digital Amplifier, a lot of those innovations that we've worked to deliver for customers in terms of patient engagement, enrollment, patient support in the commercial side of the business. The contributions from Cineos won. Most of that work was won when the products were in clinical phase. We got our first launch this quarter. We got several lined up as we've shared with you all before at investor conferences, et cetera. And also commercial itself, a much stronger team, a much more focused and dynamic team. The BD team that we built three years ago is fully operational. It understands the model of how we sell. and it's really helped us to build and sell integrated packages in line with what customers are looking for. So I think all of those things are now starting to come home to roost, and I think that's shown in the recovery of commercial, shown in how we look at commercial going forward as a much stronger entity and a much more significant contribution to the way that we win, not just in commercial itself, but also in clinical.
spk09: Okay, thank you. Thank you.
spk06: Thank you. Our next question comes from John C. Krieger with William Blair. Your line is open.
spk08: Hey, guys. Thanks. Maybe one follow-up to Tycho's question. Jason, can you give us a sense about how COVID awards figured into your Q2 bookings total?
spk11: Yeah. Hey, John. It's broadly in line with the percentage of backlog, a little bit higher, but nothing material. But You know, the good news is that work continues, the awards continue, the pipeline flow continues, and as you looked at 22, right, as I mentioned, it's not some massive headwind, right, which it could have been, you know, if we'd have believed everything we thought at the beginning of COVID. So that's where it was, and that's how we see it playing out for the rest of the year and into 22.
spk08: Great, thanks. And then a few questions relating to margin. One, you know, we've heard a lot about labor shortages. Can you just talk about how that's impacting you guys, if at all, and how you're adjusting to it? And then, Alistair, given those larger FSP awards, I tend to think of those as being a little bit less profitable. Should we assume it that way, and does that impact your thoughts about sort of margin progression over the next year?
spk07: Well, yeah. Let me start with the demand environment, well, the, you know, resource environment. So yes, I think it's easy to see that with the demand going through the CROs at the moment, recovery of COVID, COVID trials, recovery of work, and the work that got pushed to the right coming through, that there's high demand in the sector. We see that as well. We're being, I think, very successful in bringing people into the organization. We've had people who have left us gone to competitors and come back in their droves. And I think that bodes very well for us and bodes well for our culture, that we're a good organization to work for and people like to work here in this environment. We do the right things and we take care of our people. And as a people organization, that's very important. But yes, there's heavy demand in the usual areas. High demand in oncology, there's high demand in FSP. I think as large pharma places, a lot of that work out with CROs, that demand is there. So, yeah, it's a high-demand environment. We're doing well in it. I think we're net gainers in that, and we're able to attract the talent where we want it at the right time. And there's always pressure with that, but we have a great team in talent acquisition that's doing a great job. So, really pleased with where we're heading in that direction. That demand environment as well is global. I think in the early days, it was really a U.S. phenomena, as people can move positions in the U.S. a little bit more easily than in Europe, but we've seen it in Europe and Asia as well. And we continue to be successful in that and bring in the right level of people.
spk11: Yeah, and John, on the margin side, as it relates to growing headcount, etc., There are incremental costs there. I don't see it as any different than any other year in terms of the scale of that. We're always adding heads. We're always competing. We do have price escalation clauses in our contracts each year where we increase rates and things of that nature. We have some businesses where we actually can increase Prices based on this and given the demand environment and then we have other opportunities for efficiencies Via forward bound and just looking at the organization to help offset this anything that we might see that is You know unusually high, but we're just not seeing too too much of that and on the FSP versus full service and we've talked a little bit about this in the past and A lot of the FSP work comes without the reimbursable load that a full service does. So when you get down to total EBITDA, just the same as between clinical and commercial and the different businesses, we just need to grow them all and feel like we can continue to show that margin accretion over time that we've talked about in the past of the 30 to 50 basis points per year of margin accretion.
spk07: Let me add to that FSP piece as well. So a lot of the FSPs that we win we end up delivering more hybrids as well on top. So once you get through the door with an FSP, you tend to get asked in, you become a preferred provider, et cetera, you tend to get asked in to bid on the full service work, which comes with our usual margins, but as Jason says, with the pass-through load as well. So we wanna get into these accounts, deliver, whether it's FSP, FSO, commercial, et cetera. We have multiple entry points and kind of do the traditional land and expand from there.
spk08: Sounds good. Thanks, guys.
spk06: Thank you. Our next question comes from Donald Hooker with KeyBank Capital Markets. Your line is open.
spk02: Great. I was intrigued by the comments around the pharma sales force. I know you guys have been talking about this for a while now, but just wanted to hear maybe an update here. You're saying the sales teams across the pharma industry have sort of gotten smaller, which makes sense, more digital. In your view, are we at a new normal now? Has the industry fully adapted to this? Or are we going to still see this being a continuing trend going forward post-COVID?
spk07: Yeah, I think there are two trends in there, actually, and I'll get Michelle to comment as well. So I think the trend of sales teams generally getting smaller is, you know, is the norm now. There are one or two big ones out there that come through, but the norm is more specialty, more hybrid, more digitally enabled. But the second trend, I think, is that shift to digital. We've still got some ways to go on that. So we are seeing our platform, the Kinetic platform, being used more and more by customers to provide that hybridized digital support. that omni-channel kind of support to HCPs by the field teams. And that's great for us. We've got great technology. We know how to use it. We've seen better sales results for our customers by using it. And I think that's a great enhancement. And obviously, you know, if we can sell more product to customers, that's a great return for them as well. We can cover more ground with less reps. So the rep numbers, you know, don't need to expand as much for us to drive that incremental revenue and help customers get out there and get their products in the right place at the right time. So I think they're the two kind of subtle trends within it. Like Jason said, I think we've launched more teams in 2020, and I think we're on target to do that again in 2021. So continuing to help drive that model. Michelle?
spk04: Yeah, I'll add one thing. You know, Alex just commented around we've deployed more resources in the last four years, you know, as a record number. It's important to note those are deployed resources. Those are variety of resources those are sales representatives they're nurse educators you know there's a growing trend in Med affair so they're MSL reimbursement specialists you know you know patient liaisons those types of things so and the teams are much more integrated right you see digitally enabled cells and nurses and sales representatives and managed care folks and reimbursement specialists working on integrated teams And so that's really, I think, a very important distinction around the diversification of what's going on with deployment solutions.
spk02: Okay, maybe just to follow up on your comments there, thank you for that. So it seems like, I think, Alistair, what you said is we're going to, if I ask you the same question next quarter, you're probably going to give me the same answer. It sounds like the sales teams are getting smaller and smaller. They will continue to get smaller and smaller in the coming quarter. So it's not like there was one big change in the industry. This is an ongoing change. ongoing trend. Is that a fair interpretation of what you said?
spk07: I think the infield team gets smaller. So you end up with less kind of dedicated sales reps. But the whole team, because we're delivering a hybrid, you've got the call centers, you've got the team working on the kinetic platform, supporting that as well as delivering it. You've got the omni-channel pieces of that. So You know, yeah, if you had a traditional team out in the field of, I don't know, 100 people, you might have now 50 that are out in the field really interacting with the docs direct, you know, with the healthcare providers directly. But you've got a bigger portion sitting behind that in terms of analysts. You know, we're doing a lot of data crunching in that that we didn't use to do to support that, to build the insights so that we can look at, well, who should be prescribing this? Who is? How do we get it? You know, how do we optimize different sites that have a different pattern and show different patterns in their data and information? So you've got a data science team that's working on that now. You've got call center. You've got the people producing the digital materials, et cetera, and supporting and the training. So it's a more complex delivery. Yes, the sales team in the field is reduced in terms of the number of heads because they cover more ground digitally than they did driving around in a car. But you've got more revenue coming through in different channels, more digital channels, more digital enablement channels. And I think that's a really promising trend for us, for commercial in general, but also for Cineos, because we are the market leader in that capability. And we continue to roll out new innovations that Pharma A doesn't have for themselves. It makes it a little bit stickier in terms of being able to deliver not just a rep in a territory, but a rep in a territory with the right tools, with the right technology, and that technology is difficult to replicate, and the delivery of it is difficult to replicate, and I think that bodes very well for us.
spk04: One last add-on is a lot of this is due to the complexity of the products that are getting approved, right? So you're not getting like your fifth inhaler and respiratory going on the market, right, where you have to have a It's an arms race anymore. These products are highly specialized. As you look at the products that are in the pipeline, they're orphan, rare disease, they're oncology, they're cell and gene therapy. They're much more complicated delivery systems. And so the types of teams to support them have to kind of align to the capabilities that you're trying to deliver ultimately to a patient. So there is also just a need based on what the pipelines are looking like is also driving that sizing.
spk02: All right, interesting. Thank you. Thank you so much for the commentary.
spk06: Thank you. Our next question comes from Elizabeth Anderson with Evercore ISI. Your line is open.
spk01: Hi, guys. Thanks so much for the question, and congrats on the next quarter. I was wondering if you could provide just a little bit more breakdown on the revenue in the third quarter in terms of how you're thinking about it between clinical and commercial. And then also, I was just wondering if you could help us break out some of the numbers that you said regarding pass-throughs and acquisitions and divestitures just so that all of those things are clear between clinical and commercial.
spk11: Okay. Hey, Elizabeth. On the M&A activity, it might be better just to do that offline. But on the different sequential increases and the businesses between clinical and commercial, or the quarters rather, excited about both of the businesses as they continue the COVID recovery and we continue to win a lot of work and grow backlog. Commercial particularly is just establishing a lot of momentum right now. Coming out of quarter two, 1.14 booked the bill, almost 18% backlog growth. Record team launches last year and continue to see that with Cineos One launches coming up. So when you look at, on a normalized organic basis, looking at quarter three and quarter four, we're high teams carrying 20% growth in the commercial business, which is really great to see. And I think Alistair shared a little bit about how we're thinking about that longer term as well, just COVID recovery. Clinical side, really seeing good performance there as well as COVID continues to recover. We talked a little bit about the COVID trials and how they're standing up the vaccine trial that will continue into the back half. Although we did peak as we thought we would likely in quarter two on those COVID trials or the vaccine trials. But the other, you know, large relationships we have are continuing to stand up and the projects are growing. We're trying to catch those up as best we can from COVID. We had great SMID performance in sales in quarter four and quarter one. Again, in quarter two, that's starting to pull through into revenue as well in the back half. And so looking at, you know, growth there, you know, in the low to mid-20s, right, when you look at the clinical growth. So that's how we're looking at it by segment, really pleased with it. And, you know, we've If you look back at our guidance on the clinical side coming in December at our investor day and then where we've been thus far, we've been in the low 20% growth ever since that time. What you've seen is us really stick to that and I think as others in the industry have seen their COVID backlog and their other projects unfold. I think they're catching up to where we were over the year and some are going higher with their COVID awards and backlog burn pulling through. But we're really pleased just that we've been able to put that out there and go hit it.
spk01: Thanks, that's helpful.
spk06: Thank you. And we have a question from Katie Trihane with Chris Reese, your line is open.
spk00: Hi, thanks for taking my question. So outside of the three larger FSP360 awards, I mean, can you speak to the nature of the clinical net awards in the quarter in terms of what you saw from maybe a therapeutic inner customer perspective? Is there anything surprising or unusual to call out other than those three larger awards? Thanks.
spk07: Hey, Katie, it's Alistair. Not really. I think pretty well-balanced quarter. You know, we got a load of strength in the SMID. You know, we're the leader in the SMID sector, so we expect that, but I think that's particularly strong for us this time. Good FSP awards, as we mentioned, like you say, and a good contribution from large pharma. I don't think therapeutically there was any kind of bias in it. Paul's shaking his head, so I think that's right. But yeah, a pretty balanced quarter. The business therapeutic units all firing their guns and FSB winning and winning in the SMID, using Kinetic to differentiate ourselves in clinical as well as commercial and cross-selling into commercial. So yeah, pretty pleased with how well balanced it is. And that also helps, I think, I can't remember who asked the question about resources, but when you win a balance, workloads like that, it really helps to, you know, enables us to deploy the resources in a more balanced way, and we're not skewing towards oncology or somewhere else, which kind of creates a pinch point for resources by therapy. So, yeah, pretty pleased with how well balanced it was, actually. And I think the pipeline looks that way still as well. It's a well-balanced pipeline, not just therapeutically, but also globally.
spk00: Okay, great. That's helpful. And then in terms of I mean, we saw a lot of deal activity earlier this year. Are you seeing any opportunities in the marketplace, or can you provide an update on what you're seeing shake out in terms of a competitive landscape standpoint? Thanks.
spk07: From an M&A perspective, I think you mean KTS?
spk00: Yeah, or what you're seeing in terms of With all the deal activity with some of the CROs earlier in the year, I mean, how is that impacting how you're competing out in the field? Or are you seeing any opportunities to capitalize on?
spk07: Yeah, absolutely. I think one of those FSP wins could be a repercussion of some of that M&A activity. So, you know, I think our stability, our scale, the fact that we are growing pretty well, being able to become a an employer that people want to come and work for. And that really helps, because I think when you hire talent like that into an organization like ours, it gives you opportunities to go back into customers where those people worked before. So we're pretty pleased with that. But yeah, I think that's creating opportunities. You know, there's plenty of activity still going on in the M&A landscape. A lot of organizations that are coming up that we get to see the books of, et cetera, a lot of commercial assets, actually. as well that are changing hands and we're excited about that. It looks like people value that commercial capability in the private sector and we're seeing a lot of interest in that. So, yeah, we continue to be opportunistic around that and continue to use our capabilities to bring in the right people and we'll continue to do so.
spk00: Okay, great. Thanks.
spk07: Thank you.
spk06: Thank you. And I'm showing no further questions in the queue. I'd like to turn the call back to Alistair McDonald for closing remarks.
spk07: Thank you. So again, thank you. And sincere thanks go to the entire Cineos Health team for all they continue to do to manage through challenging circumstances while delivering for our customers. We remain very confident in our market positioning and look forward to continued strong growth and profitability in the second half of 2021 as the recovery from COVID-19 continues. Thank you for your attendance today and for your interest and investment in Cinehotel. Please be safe, have a great day, and be good. Thank you.
spk06: This concludes today's conference call. Thank you for participating. You may now disconnect.
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