Syneos Health, Inc.

Q3 2021 Earnings Conference Call

11/3/2021

spk04: Good morning, and welcome to the CINEOS Health Third Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. I would now like to hand the conference over to Ronnie Spate, Senior Vice President of Investor Relations. Please go ahead, sir.
spk00: 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, Paul Colvin, our Chief Business Officer, and Michael Brooks, our Chief Development Officer. 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 presentations. I would now like to turn the call over to Alistair MacDonald. Alistair? Thanks, Ronnie.
spk06: Good morning, everyone, and thank you for joining us today. I am delighted to report another quarter of strong results, demonstrating the enthusiastic customer response to our differentiated product development strategy and our continued market momentum. We again exceeded the midpoint of our guidance across all financial metrics for the quarter. Our integrated offerings, those where we work across the product lifecycle, fueled strong awards and backlog growth in both segments during this quarter. Both clinical and commercial continued their robust year-over-year growth in the quarter, and we now anticipate 2022 revenue growth rates above the midpoint we outlined during our investor event in December 2020. The demand environment remains very healthy, with strong pipelines ahead of us across our business in terms of RFPs, relationship discussions, new drug approvals, and demand for our innovative models based around the CINEOS 1 approach. Now for three key highlights from the quarter. First, overall net awards grew by 35.1% year-over-year. This performance drove third-quarter book-to-bill ratios of 1.30 times for clinical solutions and 0.89 times for commercial solutions, resulting in robust GTM bulk-to-bill ratios of 1.39 times for clinical and 1.16 times for commercial. Second, we are enthusiastic about the continued strength of our commercial solutions business and the success of our integrated solutions approach, as demonstrated by revenue growth accelerating to 18.7% and deployment solutions backlog growth of 24.9%. Third, we are pleased to have recently closed the acquisitions of StudyKick and RX Data Science, enhancing our patient engagement and data science capabilities. Both companies expand our dynamic assembly network to bring further innovation and technology-enabled service offerings to our customers. Now, moving into further details on our results. We continue to see recovery from the impacts of COVID-19, and our total company year-over-year revenue growth remained strong at 22.7% compared to the third quarter of 2020. Clinical solutions revenue grew 23.9% compared to the third quarter of 2020. Our organic growth was driven by our full-service portfolio, including the continuing ramp-up in our larger pharma relationships, particularly in oncology, as they gain full scale and efficiency. This was accompanied by rapid growth in our real-world and late-phase businesses. Our clinical team also closed another strong quarter of awards, particularly in the SMID segment. Driven by these strong sales, record-ending backlog that is up 22.3% year-over-year, and a record pipeline of new opportunities, Clinical Solutions remains well-positioned for robust revenue growth into 2022 and beyond. Before I discuss our recent acquisitions, we're sharing an update that will drive further growth across Clinical Solutions and our broader organizations. As we continue to focus on our product lifecycle model, we're rotating executive leadership across the organization to drive deep connections. Michael Brooks, our current chief development officer, will now lead our clinical solutions organization. Michael has a 25-plus year track record across clinical development and commercialization, setting strategy and driving business transformation. Paul Colvin will transition into Michael's former role and take his customer-focused approach to lead our go-to-market ecosystem as Chief Business Officer. Paul's deep customer relationships and product development mindset will accelerate deploying high-value solutions to the marketplace. We believe this partnership will be powerful, aligns to our customers, and is a competitive advantage for Cineos Health. Shifting to our recent acquisitions, we are constantly enhancing our approach to the way we engage with sites, patients, physicians, and communities. And as the clinical trial landscape evolves, we are placing increasing focus on decentralized trial capabilities and patient recruitment. We continue to expand our dynamic assembly network of service, data, and technology providers to bring additional innovative solutions to our customers. We are very enthusiastic about the advanced patient engagement capabilities added by the acquisition of StudyKick. Through their global network of patient communities and advanced technology platform, StudyKick expands our ability to accelerate site startup as well as patient enrollment engagement, helping to improve patient retention and access. Innovative capabilities include e-consent, telemedicine, and improved patient accessibility to enhance experiences for both patients and sites. with a goal of reaching more diverse patient populations and reducing the burden of clinical trial participation. In addition, patient concierge services and site support capabilities remain a key focus for our clinical solutions organization. We see a unique opportunity to connect the service support platforms of StudyKick with our home health technology platforms PatientGo and SourceGo, creating a compelling patient and site support ecosystem. PatientGo is an integrated patient concierge service and application, facilitating patient travel, reimbursement, and caregiver support. SourceGo is a recently released application that enables our mobile nurses to securely capture high-quality patient data in real-time during home health visits. Combining these technology-enabled capabilities with our home health services further positions Synios Health as a leader in decentralized clinical trial delivery. We also recently acquired RX Data Science, a specialist organization that helps biopharma customers solve challenging problems via advanced analytics, data management, and AI. RX Data Science is well aligned to our lab-to-life model, offering advanced analytic solutions across the entire product development spectrum, from clinical through real-world late phase and commercial. Combined with our existing data science and analytics capabilities, including kinetic and modern engagement capability, RX Data Science will allow us to accelerate delivery of cutting-edge analytical solutions for customers. These solutions help to drive increased performance in areas like clinical trial diversity, clinical trial protocol insights, decentralized clinical trials, real-world evidence generation, and omnichannel analytics. As biopharma companies increasingly harness data to address their most difficult challenges, RX Data Science offers excellent AI capabilities, helping to structure and organize massive data sets and rapidly develop prototypes of solutions that drive value. I'm excited about the significant strides we continue to make in bringing the latest innovation and technology-enabled services to our customers to further our goal of shortening the distance from lab to life. Turning now to commercial solutions, We saw accelerating year-over-year revenue growth of 18.7% compared to the third quarter of 2020. Growth in our core business outpaced this level, partially offset by the headwind from the 2020 divestiture of our medication adherence business. This growth continued to be broad-based across our commercial services. Deployment solutions had another high-performing quarter of new team starts, driving the number of deployed resources and ending backlog to a four-year high. Consulting had the highest growth rate of our commercial businesses, and we also experienced impressive growth in the public relations and medical communications specialties within our communications business. In addition, full-service commercial gross awards are up over 70% on a year-to-date basis compared to 2020. We expect the success of this integrated model to further enhance commercial revenue visibility and drive more consistent growth as customer adoption continues to increase. The market for our commercial services remains strong, driven in part by the pace of innovation, new drug approvals, and the biotech funding environment. We expect commercial solutions performance to continue in the fourth quarter with growth again in the high teens. Our commercial expertise continues to fuel innovation across the product development spectrum with dynamic capabilities such as Kinetic. Kinetic is designed to optimize HCP engagement in commercial and accelerate patient referrals into clinical trials through advanced targeting and digital capabilities. Our early case studies across clinical and commercial indicate that Kinetic is producing, on average, a 15% improvement in these activities. We believe this unique suite of capabilities, along with our other innovative solutions, continue to differentiate Synios Health and our key factors in driving new business awards. Cineos One, our end-to-end product development methodology, also continues to differentiate Cineos Health, particularly with our small to mid-sized customers. During the third quarter, we began the first commercial launch among the 23 assets currently managed by the Cineos One team. This marks a significant milestone for our team, demonstrating the success of this unique offering and is only the first of these launches. We have also initiated planning activities for two additional CINEOS 1 commercial launches expected during the first half of 2022, subject to final regulatory approval. This quarter, we also expanded one of our largest CINEOS 1 relationships beyond the U.S. product launch to include the European and Canadian launch activities for the same asset. We anticipate these launches will start contributing to awards and backlog in the second half of 2022. Expanding the geographic reach of an existing asset demonstrates yet another way that Cineos One can drive revenue growth and also diversify our commercial pipeline. We expect the Cineos One portfolio to increasingly contribute to commercial awards and revenue over the coming years with an expanding, diverse group of product launches in multiple therapeutic areas, indications, and regions around the globe. Lastly, I wanted to highlight the recent publication of our 2020 Sustainability Report. This marks our third annual report, which showcases our commitment to creating a diverse, equitable, and inclusive workplace for our employees while making a positive social impact. It also outlines our pledge to reduce the company's environmental impact. I am proud that these continued ESG efforts and commitments represent the fabric of our culture. I want to thank the entire Cineos Health community for their passion and commitment to these important issues while they work tirelessly to provide excellent service to our customers, sites, and patients worldwide. Jason will now provide additional comments on our financial performance and guidance. Jason?
spk12: Thank you, Alistair, and good morning, everyone. Our total revenue for the third quarter of 2021 was $1.35 billion, up 22.7% and 22% in constant currency compared to the third quarter of 2020, which was impacted by the COVID-19 pandemic. Our clinical solutions revenue for the third quarter was $1.04 billion, up 23.9% or 23.1% in constant currency compared to the third quarter of 2020. These increases were driven by growth in our full-service portfolio, including higher reimbursable expenses, the ramp in our larger pharma relationships, and strength in our real-world and late-phase business. This total growth includes a 975 basis point contribution from acquisitions, and a 750 basis point tailwind from increased reimbursable expenses. Our third quarter commercial solutions revenue was $310.8 million, up 18.7% or 18.4% in constant currency compared to the third quarter of 2020. Growth in commercial revenue was driven by broad double digit expansion across our core commercial businesses with particular strength in consulting and includes a 180 basis point tailwind from reimbursable expenses. This growth also includes the impact of a 310 basis point headwind from the 2020 divestiture of our medication adherence business. Adjusted EBITDA increased 10.8% to $202.6 million, representing an adjusted EBITDA margin of 15%, a decrease of 160 basis points compared to the third quarter of 2020. The decrease in adjusted EBITDA margin for the third quarter was primarily the result of increased costs from the expiration of temporary savings programs instituted in 2020 and and a less favorable revenue mix. These impacts were partially offset by the benefits of revenue growth and the cost management initiatives in our Forward Bound program. Adjusted diluted EPS of $1.22 for the third quarter increased by 17.3% year-over-year, primarily driven by the increase in adjusted EBITDA and lower interest expense. Our operation has generated $48.5 million in cash flow for the third quarter, in part due to the timing of billing and collections. Our year-to-date 2021 cash flow from operations has been solid, reaching $264.3 million, driven primarily by our net income as the impacts of the pandemic subside. We expect improved operating cash flow in the fourth quarter and have already seen strong billing and collections activity in October. DSO for the quarter was 48.3 days, returning to a more normalized level as revenue growth resumed, driving increased accounts receivable and unbilled revenue. Our capital expenditures were $7.6 million for the third quarter. We ended the quarter with $122.4 million of unrestricted cash and total debt outstanding of $2.95 billion, resulting in net leverage of 3.9 times. As Alistair highlighted, we closed our acquisition of StudyKit during the quarter. Given the related utilization of cash and a $30 million draw on our revolving credit facility, our net leverage ratio increased slightly compared to the second quarter. We currently expect our net leverage to be slightly higher than our prior expectations, but remain below four times through the end of this year. In addition, in October, we expanded our AR securitization facility by $35 million, which will serve to reduce our overall cost of debt, and we used the proceeds to reduce our outstanding revolver balance. Our non-GAAP effective tax rate for the third quarter is 24%, consistent with our expectations for the full year 2021. Turning now to our updated 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 are narrowing our expected range of full-year 2021 revenue to $5.2 billion to $5.28 billion, representing growth of 17.8% to 19.6%. This growth includes an estimated contribution from acquisitions of 560 to 580 basis points and a headwind from our 2020 divestiture of approximately 110 basis points. We're also narrowing our expected range of total adjusted EBITDA to $755 million to $775 million. This continues to reflect an adjusted EBITDA margin of 14.5 to 14.7 percent, up 30 basis points from the 2020 midpoint. Lastly, we are increasing our expected adjusted diluted EPS to a range of $4.35 to $4.49, or year-over-year growth of 27.6% to 31.7% to reflect lower expected interest expense and depreciation. Our guidance incorporates interest expense of approximately $80 million, a non-GAAP effective tax rate of 24%, and an estimated diluted share count of 105.1 million shares. Further, we now expect our net cash outlay for income taxes during 2021 to range from $30 to $35 million. As Alistair highlighted, based on our strong trailing 12-month awards, backlog, and pipelines in both segments, we expect our 2022 growth to exceed the midpoint of the 7% to 10% range we communicated at our investor day in 2020. Importantly, we expect notable contributions from both clinical and commercial investors particularly considering the ongoing strength in commercial. Given our expectation of a somewhat higher mix of reimbursal expenses and increased contribution from commercial, we now expect our adjusted EBITDA margin to expand in the range of 30 to 50 basis points for the full year 2022 compared to 2021. This completes our prepared remarks, and we would be happy to answer any questions. Operator?
spk04: Thank you. To ask a question, you'll need to press star 1 on your telephone. To draw your question, press the pound key. Again, if you would like to ask a question, press the star, then the 1 key on your touchtone telephone. Our first question comes from Patrick Donnelly with Citi. Your line is open.
spk01: Great. Thanks, guys. Alistair, maybe starting on the 22 commentary there, it sounds like you guys are pretty confident going into next year. Can you just talk about the visibility, the setup? Again, your conference level, it sounds like maybe a little above the midpoint is the right way to think about some of that long-term guide, but would love a little deeper on the setup there. Okay.
spk06: Yeah, well, I'll start, and Jason will add. And morning, Pat. Thanks for the question. So, yeah, I think where we sit right now, good kind of backlog visibility through the whole year with both the increased backlog that's coming through From clinical, we mentioned that we're winning a lot of oncology work. Obviously, that sets up for a long view of the backlog, so you get a lot more visibility with that. Also, from commercial, with the backlog that we're seeing coming through on the deployment side, and really the trend also around that deployment work and the fact that we're winning full-service commercial gives you a longer view through that commercial pipe, and also the amount of... new products getting approved, and the style of those new products getting approved. So I think in 2021, more than 50% of the products that have been approved are going to market with the SMID owner still in the seat. And obviously, the CineOS 1 model and the integrated commercial solution that we have is a very good model for those folks to take those products through to the market. So I think we see all that. We also see very strong pipelines in terms of RFPs, discussions we're having with customers, work that's coming our way in terms of FSP. So it's really a nice setup right across the business. We're seeing it accelerate. And I think we just have a better look at 2022 and a healthier picture than, you know, we would normally see at this point. So we're happy to, you know, let that confidence come through a little bit in bringing the guide up a little touch for 2020. Any thoughts, Jason? Any thoughts? That's a good summary. Okay.
spk01: That's really helpful. That's encouraging to hear, Alistair. And then you touched a little bit on the RFP side, but maybe can you just talk about the flows there? I mean, the site activation sounds like it's going well, kind of above pre-pandemic levels. And then just a quick update on the COVID composition of the backlog and res would be great. Thank you.
spk06: Yeah. So I think the flow that we're seeing RFPs strong across the board, both large pharma and SMID, you know, and we've been really, working on strategies to drive more penetration into the large farmer. You know, that was one of the imperatives of the merger, right, to get that scale to get into large farmer, where that scale is important. So we're seeing that. We, I think, have the most compelling SMID offering in the market, and it's a healthy part of the market. You know, there's fluctuations always in the biotech funding index, but the SMID customers have got a lot of cash on hand, and, you know, we don't see that as an issue as we go forward. And certainly from the pipe that we see, that is certainly not an issue that they see either. So I think that that setup is good. Site activity is strong, I think, and continues to recover. There are still issues in some therapeutic areas with, you know, immunosuppressed patients and things like that. They're still a little bit cautious. So enrollment, I think, in some of the therapeutic areas still lags a little bit, but it's coming back. So, you know, as that rolls forward, we've got those patients to pull through, and I think that's very encouraging. I think some of the improvements that we've made in Study Startup, Study Kick is in addition to that. There's a lot more technology around those Study Startup and patient engagement processes, which bodes well for what we do. I mean, our goal is actually, you know, not to just hit projects, timelines, but to accelerate them. So we continue to look for processes and investments and technologies and, you know, changes in the way that we conduct our business to accelerate startup, to get patients into sites faster, and get ahead of projects. And I think we're starting to see that more and more in the projects that we're delivering.
spk12: Yeah, and then, Patrick, on the COVID side, you know, we're continuing to win work there. I think we're up to, you know, 180 projects won across the business. The vaccine trial that we had in clinical... that was ramping in quarter two, did continue to ramp in quarter three. It's a bit higher, you know, in terms of contribution in quarter three than in quarter two. And then, you know, with some changes there and just burning that revenue down, the backlog of COVID has come down to about, it was slightly under 2%, I think, for clinical. So good mix there, not any super, you know, heavy concentration. So we're happy with that. Yep.
spk01: Very helpful. Thank you, guys. Thanks, Pat.
spk04: Thank you. Our next question comes from Tycho Peterson with J.P. Morgan. Your line is open.
spk08: Hey, thanks. Alistair, I'm wondering if you could talk a little bit more about the recent deals, study KFRX, data sciences, and as we think about kind of your decentralized strategy, how do these fit in with Illinois and kind of the broader approach, and what percentage of your backlog do you think goes decentralized over the next couple of years?
spk06: Yeah, good question, Taika, and good morning. So, you know, we talked about this, I think, in the last thing, it might have been the one before, but so we're looking at how we drive the business forward based around the patient, right? So it's whichever channel you go down, whether it's decentralized, traditional trial, whether you go direct to patient, you always end up with a patient. So we're looking at technologies and we're looking at capabilities that that take us to the patient regardless of those channels. So StudyKick, great addition for the team. We've worked with StudyKick for several years. The receptiveness from our customers has been tremendous. They see this as a great addition to what we do. It enables us not only to engage sites, they have a big site network that they work with that adds to the catalyst networks that we have, but also their capabilities in terms of patient identification, patient engagement, you know, their ability to deliver telemedicine, their abilities around some of the elements of decentralization are all key elements that fit together with Nillingworth. You know, we can, the strategy that we're putting together, well, that we're executing on, not putting together, the strategy that we're executing on around this, around, you know, pivoting around the patients, We can identify and engage the patient through StudyKick, help the sites get up quickly, and then deliver illingworth services to patients. I think it's a great setup. It puts us right at the forefront of that, of not just talking about decentralized trials, actually delivering them properly. You know, I was at an illingworth event a couple of weeks ago, and they were telling me about a patient that they recruited delivered illingworth all the services that lived 800 miles away from the site that they were attached to out in Russia somewhere. And that's brilliant. A rare disease patient, that patient would have been lost to the trial if we weren't able to engage them, enroll them, and then deliver the services in their home. And that's what a decentralized trial is and should look like. You're taking all their barriers down and you're taking the trial to them Things like SourceGo, PatientGo enable us to deliver that with technology, takes the burden down on the patient and the visiting nurse. So all that strategy starts to, you know, really accelerate because we can actually deliver these trials.
spk08: That's helpful. And then a follow-up on FSP. You know, if we go back to last quarter, you noted some big wins, a couple of competitive wins, multi-year deals. Can you just talk on, you know, is the momentum there continuing? You know, how much of this is being driven by Center Act? And what are you seeing given kind of the consolidation in the background from a competitive standpoint?
spk06: Yeah, not much of the FSP work is being driven by Center Act. They had a couple of small FSPs that have been absorbed into the big team now. We did add another FSP relationship, I think, in Q3, early Q3. We added another one. I think it was in the safety team. So, yeah, the demand, I think, for FSP is good. It's not just the new FSPs. I think it's the expansion of the current ones as well. We're seeing a lot of flow there as resources are more and more difficult to find. I think FSP plays a part in that as well because we can deploy FSP more rapidly through FSP. If a customer loses a resource from another, you know, relationship or loses somebody internally, we're able to backfill that for them as quickly as we can. So, yeah, I think that FSP, well, the FSP market is here to stay, right, with the larger farmers. But, you know, I think what we've got with the scale that we have, which is I think is one of the key elements of being one of the largest CROs, is that you can deliver these models quickly from a large resource pool in, well, I won't say random locations, but when a customer comes along and says, I need a CRA now and it needs to be here, we have a much better chance of being able to fill that, particularly with the resourcing networks. We have the teams. We have a recruitment agency internally, Taylor Strategy Partners, that is able to help us find needles in haystacks if we need to but you know we have a big pool of people that we work with on a regular basis contractors as well so i think we're very compelling in the fsp space i think the fsp 360 model that we launched a couple of years ago has worked very very well and will continue to drive good growth in that sector and just on the competitive front given all the consolidation in the background are you kind of seeing any change on the ground That's probably a question I'd ask Paul and Michael. I mean, are you guys seeing – well, and Michael's here today, you know, is moving over to run clinical – Mark. Paul's moving over to run the overall go-to-market strategies. So, any thoughts on those two guys?
spk11: You know, I think we're continuing to see that, you know, with the consolidation, some impacts of other partners, you know, that are having some disruptions. But overall, all the competitors are still out in the marketplace. I think we're just continuing to differentiate ourselves with our service offerings, especially in DCT. But, you know, the competitors remain strong. I think we're just competing against them with some differentiated service offerings right now.
spk07: Yeah, I agree. Many of the questions I am receiving are around culture and how stable is our culture, how engaged are our executive leaders with our employees and with our clients, which, of course, we – are very focused around that, protecting that employee life cycle, making sure we're very focused on our customers as our top priority in the current environment.
spk06: Thanks, guys.
spk07: Okay.
spk06: Thank you. Thanks.
spk04: Thank you. Our next question comes from David Windley with Jefferies. Your line is open.
spk10: Hi. Good morning. Thanks for taking the questions. Alistair, your prepared remarks as well as Jason's emphasized rampant large pharma relationships. I know this has been kind of an ongoing point of emphasis. I guess I wanted to try to better understand if you were seeing expansion in some of the early wins that are maybe, you know, two or even perhaps three years running, or if you're winning some fairly large, you know, call-out type new pharma relationships in the portfolio?
spk06: Yeah. Morning, Dave. It's a bit of both. I think when you get into a large pharma relationship, especially when you're new, so if you remember back in, I was going to say back in the day, but a couple of years ago, we won these new entry points to large pharma. you still have to prove yourself operationally. And I think we've done that. And now we're starting to get the tailwind from that a little bit as well. So we saw in Q3 some nice big oncology awards come through from a couple of those relationships that we established back then. They've seen us perform. They've seen us get trials up and running. Of course, 18 months of that two-year relationship has been through the teeth of COVID. So I think we conducted ourselves very well and delivered very well through COVID. So we've kind of not only got the hunting license and those early wins, now we're getting the repeat business, if you like, pulling through and being trusted with bigger and bigger programs. So that's what's happening in those established wins. And we are penetrating more and more of the top 50. You know, we deployed the global client solutions team recently. A couple of years ago, you know, brought in executives from some of our competitors who have been able to establish us in some of those new, you know, in additional accounts, in additional relationships, and that work is starting to come through. Now, we haven't announced anything that we've got a new preferred providership, et cetera, because we're getting to that point where they're giving us a go. We're getting a couple of trials here and there. We're picking up a couple of rescues here and there. And, you know, you prove yourself, and then you move on to the, onto the hunting license list and then preferred provider list. So, yeah, we're pleased with that, how it's going with the ones that we want and how we're moving forward in some of those newer relationships.
spk10: Excellent. Kind of a related question, but flipping over to commercial, you mentioned your investor day from last year and your prepared remarks as well. And that was a time where you did spend a fair amount of that time focused on some of the opportunities that were percolating in your commercial business, including full-service launch. I think the first of those was supposed to launch at the end of the just-closed quarter or maybe, you know, about right now. I'd be curious about your comments on, you know, how that's going and if it's playing out in the beneficial ways that you anticipated for the commercial business.
spk06: Yeah. Well, you've got Michelle grinning from ear to ear, Dave, so she's chomping at the bit to tell you, but... I'll kick it off. I mean, I think, you know, there's been a lot of skepticism about how our commercial business fits together with everything else that we do. But I think we're really starting to see the full fruition of that now and the strategies that we put together as we came out of the Inventive merger. We put Cineos One together as a model, as an idea to run with customers. Christian and his team have built you know, a pretty hefty following, 23 assets that we're pushing through, lots of conversations going on. This year we've got, we're seeing 50% of those products coming to market are in that SMID sector. We've always targeted SMID with Cineos One. And now we're starting to see that pipeline of work, that backlog of work that, you know, we've won but haven't booked starting to come through into Michelle's domain. So, yep, we are in the teeth of that launch. And I'm going to hand you over to Michelle. And she'll tell you a bit more about it.
spk05: So, David, I was counting on you asking me this question. So I'm excited to answer it. So Alistair shared with you just the success we're having with the Cineos One asset starting to layer into the commercial division. And we did go to our first launch. I was there. I was actually in Park City, Utah. It was over the summer. And we're having a lot of success with that team and what that team is going to be able to do. As you know, our second major launch coming from Cineos One, which we've, you know, announced publicly in a joint press release, that approval is in early January, and we believe that we'll start, you know, really deploying that team in Q1 of 2022. So we're very, very excited about that. You know, there's three things that we have to do in commercial to make sure that we continue to have the success we're having currently. The first is make sure we manage the CINEOS 1 assets flawlessly and bring those to fruition. I think we're doing a great job with that. The second thing is to continue to win in the commercial integration area. And, you know, we're up 70% on awards there. And the third thing is the individual businesses cross-selling and being best in class in consulting and communications and deployment solutions. And I think you've seen it's very impressive that all three of those businesses have are growing double digits through Q3. So all the things we're counting on for long-term commercial success are all firing on all cylinders right now. And so it's just very exciting for our teams to see the success they're having.
spk10: Great. Well, congrats on that. I'll leave it at that. Thank you.
spk04: Thank you. Our next question comes from John C. Krieger with William Blair. Your line is open.
spk02: Hey, guys, another one for the commercial business and Michelle. You know, now that things seem to really be picking up, can you just expand a bit on two things? One, sort of what's the makeup of the business right now across those three buckets? And particularly with the kind of commercially integrated contracts starting to ramp, should we be thinking about this business as sort of mixing up or mixing down? Thanks.
spk06: Yeah, good question, John. I'll kick you off. I think, you know, across clinical – oh, across clinical, sorry. Let me start that again. Across the deployment solutions, communications, and consulting, I think we're seeing good, strong growth in all three. Now, that's from their individual go-to-market work as well as their integration work. And I think the real kind of catalyst, that accelerator that we're seeing is from the commercialized – is from their, you know, commercial integrations. picking up the commercial end of the Cineos One launches and, you know, the work that goes into getting them to the launch, the planning, the communications, consulting, et cetera, but also then the delivery. So I think it's a bit of both, all three businesses going well. You know, Michelle's been bringing in new leadership over the last couple of years to help drive that new talent engagement with customers earlier in the life cycle. So, yeah. I think it's a combination of individual kind of business line success, but then integrating them into a package. Well, as Michelle said, that's up 70% year over year, and it was up pretty heavily last year as well. So definitely seeing, I think, a market trend that's taken us towards that delivery of the integration. Michelle?
spk05: Yeah, so the only thing I will add is, you know, we've been working really hard to diversify our backlog, right, across customers and across types of customers, and I think we're being very successful in doing that. We have great, you know, relationships with the SMID customers, and you're seeing that really flow through commercial integration and Cineos One opportunities, but you're also seeing us do really great work with, you know, top 50 pharma. So, I think it's really important that our backlog is diversified. You're not seeing any one customer or any one team or communications relationship dwarf the rest, so I think that that's been really important for this business from a visibility perspective, and I think we feel really good about that. We still say deployment solutions backlog is probably the strongest metric that we have for the commercial business because You know, we have much better visibility into that, and you saw the numbers in the script. The deployment solutions backlog is up over 24%, but it really matters the complexion of that backlog, and that backlog is very much moving into a different kind of group of folks, right? So field teams are moving to be, you know, not just sales reps anymore. We've had this conversation before. They're hybridized. We're seeing, you know, nice growth in the MetAffairs, the MSL space, and reimbursement. And so the fact that Deployment Solutions isn't a CSO, you know, we've been saying this for a while, it's not a CSO. And I think that that's a big part of, you know, the success that we know we're going to continue to see moving forward. So hopefully that gives you a little more color.
spk02: It does. And just one quick follow-up. So given all the success that you're seeing, what are you guys currently thinking about the ability to drive margins up in the coming one or two years?
spk05: So I think I'll hand that over to Jason. Yeah.
spk12: Hey, John. So you'll see in the numbers that commercial had a good move in margin sequentially during quarter three, and we anticipate that we'll continue to see that as the business grows. When you look at moving into smaller teams away from your traditional reps in the deployment solution side of things, which is still the largest component of the segment, Those are higher margin opportunities that we see, and that will continue to come through over time. And then as we get Cineos One assets in there, as well as the full-service commercial launches that Michelle's team wins, you know, standalone, but it's across services. It's multi-service. those will tend to be higher margin over time as well. You can have certain points in time whereby you might stand up a traditional team where it could be, you know, good growth, a little bit of a margin headwind, but then over time it's all going to come back around as well. So we see the opportunity to continue to grow margins there, and they're also a key contributor to Forward Bound, our program around that. optimizing our operating model on a global basis and getting everything we can, you know, more efficient, whether it's via automation or using lower-cost resources. So we see an excellent opportunity, and then they also finally get good SG&A leverage out of that business.
spk02: Sounds great. Thank you.
spk12: Thanks, Sean.
spk04: Thank you. Our next question comes from Donald Hooker with KeyBank Capital Markets. Your line is open.
spk09: Great. Good morning. I was intrigued by, I guess, Alistair, you had mentioned you threw out a metric that was intriguing that, you know, 50% or something, I think you mentioned 50%, one of the earlier questions of small SMID biopharma sponsors are taking the product all the way to commercial. Is that a reference to your own Cineos One portfolio, or is that sort of an industry metric? And can you maybe elaborate on what you're seeing there?
spk06: Yeah, I think, yeah, it's a good question, Don. Thanks. I think the Cineos One portfolio is, other than three or four of the assets, is actually all SMID. So, you know, for us, it's actually a higher percentage than 50%. So, I mean, what would that be? Four over 23. You guys are the math guys. You work that out. But I think the 50% reference is the actual marketplace, Don. So if you look at those products coming through... over 50% of the products launched this year are outside the top 50. So for us, targeting those customers in the SMID who are hanging on to their assets longer, they are resisting the temptation to sell them, they're taking them to the market, specialty medicines, personalized medicines, and I think the Cineos One platform and the way that we think about product lifecycle delivery through clinical, through metaphors, through all that, you know, planning, and then the full execution of the commercial strategy, whether we're building a team for somebody else or we're delivering it completely, is where the market is moving to, and that's kind of what we built five years ago. Was it five years? Four years ago. And I think we, at the time, said we were going to put something together that would be where the puck was going, and I think the puck is approaching us, so... I'm very pleased with where we've put the organization in that sense and the fact that we've had the time to build and learn how to deliver it, and that's all starting to come through. You know, I think it's good validation of the model that we've, you know, Michelle's on stage out in Utah launching the first product that we've pulled all the way through that model. So it's good validation of the proof of concept that we had, and now we have a line of products that are moving through that as well. So, yeah, I think the markets where we predicted kind of it would be, with access to capital and people determined to put their own products on the market and then go develop the next one. And that positions us very well.
spk09: Interesting. Thank you. And then maybe one other more mundane financial question. In terms of the cash taxes, I think it looked like it's actually going to be even lower this year. So you guys are burning through some NOLs. When are those NOLs going to expire and you're going to get a more normalized cash tax rate? at this point?
spk12: Yeah, hey, Don, it's Jason. So we've been working on that and, you know, looking at how we can maximize and optimize and think it's probably going to push out into 2023 in terms of when we'll use the final component of the NOLs. However, you know, as we move forward into 22, you know, cash taxes will go up. It's just I don't think we'll burn through all the NOLs until 2023. Okay.
spk09: Thank you so much. Have a good day.
spk11: Thanks, Tom. Thanks, Tom.
spk04: Thank you. Our next question comes from Elizabeth Anderson with Evercore. Your line is open.
spk03: Hi, guys. Thanks so much for the question. I know you talked a little bit about the statistics of the 22 margin outlook I was just wondering if you could specifically comment on the hiring environment and wages and sort of what you're seeing in there vis-a-vis what we've been hearing in the news about sort of broader inflation trends and wages, and then also specifically about the competitive environment given all the changes at some of your peers. Thanks.
spk06: Okay. Morning, Elizabeth. We'll unpack that a little bit. Yeah, the demand environment is strong, right? And I think it all starts there. So you had the COVID bubble that's Passing through, it's still there, but it's starting to ease a little bit. I think we have seen an easing in the demand environment, you know, in the hiring environment a little bit because of that as well. So, you know, I think we're an attractive organization that people want to come and work for. We've got a different model. It's about product lifecycle delivery, and people are engaged by that, and we hear that a lot. We've got a good culture. People are engaged by that, and we hear that a lot. I think we had something like 500 people at the last camp that I remember who'd left the organization and had come back pretty much instantly, which is also great. That shows that the grass is not always greener. There's been some disruption in the market that has driven people into that space. But it is, we are seeing, you know, inflationary pressures on costs, particularly, I think, in a few areas. And they're the usual hotspots, oncology, you know, some areas of Asia. some of the communications positions, et cetera. I think we've managed to add, I can't remember the last count, it's about 3,000 incremental heads through the year. So we're keeping up with the demand that we need and being able to deliver. But, yeah, that cost comes through. Now we have the ability to go back to customers and pass that through in probably the majority of contracts. We get the inflationary reviews, and obviously a big part of our inflation is the cost of the personnel we're bringing in. Now, with the forward-bound efforts and the CINEOS operations network that we have, we're able to take some of those tasks off of people and move them to lower-cost jurisdictions. We're able to handle the price pressure a little bit by that as we develop that out. There's a multitude of strategies that we've got going on always, and it's not just us, right? I think all the other CROs do the same thing, all the other service businesses do the same thing, where we're shifting costs to lower levels and we're shifting costs to lower-cost countries.
spk12: Any thoughts, Jason? Yeah, I would just say, you know, Elizabeth, as we look forward, you know, I would say the Cineos operations network has been a real success for us. We will continue to maximize that right across both businesses as well as the G&A side of things and even in certain selling side of things where we can. But probably the single biggest opportunity for us as we think about 22 and beyond is going to be automation and just simplifying things and getting more efficient within the organization to be able to scale. you know, we're very focused on that. We're getting more and more focused on that, and that'll just help us as we move into 22 and beyond.
spk03: Got it. That's super helpful. And then with some of the acquisitions that you just announced, like StudyCake and the RF Data Science, et cetera, how long is sort of the integration process for some of those assets in terms of being able to plug them into your current portfolio?
spk06: Yeah. Yeah, that's a good question. And We've worked with StudyKick for several years, so the processes and the engagement, particularly across the sales side of our business, is pretty much there already. I think there are several use cases that we are looking at where we can also attach other bits of technology that we have, patient go, source go, some of the connectivity that we have around concierge services that will need to be connected together. So that will take... well, you know, the actual connecting of those things is quite quick. But then, obviously, rolling those out to customers and pushing those through into the market takes a little bit of time. I think on the RxDataScience side, that's really, you know, we have a data science team. They're the people who built Kinetic and have driven that success. Those two groups are coming together. That's in play right now. But RxDataScience do different things to what our traditional... I don't think traditional is probably the right word for data science, but anyway, what we've done in data science in the past, where RxDataScience is going out and working with customers individually on really complex, large data questions that they have. I mean, some of the work that Rx has done, I looked at it and almost was just like, wow, this is very cool stuff. But using their capabilities, using their platform, to just handle insanely difficult questions and be able to, I mean, some of the work they've done, being able to put people, get label extensions from just looking at massive data sets and identifying where products could be used without running further trials. So for us, that adds a lot of value to our model because we're able to step into a new arena and we're able to do that with an incredibly high-reputation company that just has a different service line. Now we've got to train the BD guys to get that in the door and who the customers are and that kind of thing. And, you know, Paul, Michael, Michelle, the rest of the team are working on that because it's something we can apply right across clinical and commercial. So very excited about that. But it will take some time, you know, and it will take some time for us to optimize it in the way that we deliver it to customers.
spk03: That makes sense. Thank you.
spk06: Thanks, Elizabeth.
spk04: Thank you. Our next question comes from Luke Sergat with Barclays. Your line is open.
spk13: Hey, guys. Thanks for taking my question. So you guys didn't do a buyback in the quarter. Can you give us an update on the capital allocation priorities and if the M&A is starting to become a bigger part of your story? Just thinking now over the next, like, six to 12 months.
spk06: Yeah, morning, Luke. So, priorities are the same as before. You know, we're looking to continue to pay down debt, get the leverage down. I think we're beneath the target that we started out to hit. So, you know, we're happy to keep bringing that down. When we look at M&A, when we look at, you know, continuing in this pattern of tuck-ins that we've been doing, it's about differentiation. You know, StudyKick, RxDataScience, Sinteract, we did Ellingworth Again, looking at how we invest around the patient, how we invest around new services that bring us new entry points into customers, and, you know, that's what we continue to do. And then, you know, we've done all the buybacks that we plan to do this year. So, Jason, any thoughts?
spk12: Well, just to, you know, put a finer point on it, I mean, debt pay down, delevering, I mentioned, will be a bit higher than the three to three and a half times at the end of the year, but still you know, focused on being below four, then, yeah, I mean, M&A is something that's always been, in our minds, a second priority and tuck-ins, and that's what you see coming through. But as we move into next year, we'll continue to look at those share repurchases to prevent dilution. We've just already done that through the first half of this year.
spk13: All right, that's fine. And then, lastly, I mean, with all the recent COVID and vaccine work that you guys have been winning, that seems to be picking up. Can you give us a sense of the reimbursables contribution in the quarter? And then on your 22 outlook where you guys raised it, how much of that, if at all, was due to higher reimbursable?
spk12: Yeah, so during the quarter we did see our vaccine trial – I guess let me back up. So the majority of our trials in clinical are normal sort of burn rate and mix between reimbursable expenses and directs given their therapeutics. But we did have the one large vaccine trial that we've been talking about that ramped during quarter two and quarter three where it did have that normal, you know, you know, multiples higher of reimbursable expenses than directs, and that is starting to come down, right? We've ramped that, and it's going to start coming down. Not a hard landing, but it's going to come down into quarter four and into 2022. When you look at the 2022 update to the guidance, as I mentioned in the prepared remarks, there is some relative increase on the reimbursable expenses that puts a little pressure on margin, but nothing, you know, too significant, and that's how we're still going to be able to get to 30 to 50 basis points of margin accretion out of the year.
spk13: That's really helpful. Thank you.
spk12: Thanks, Luke.
spk04: Thank you. And there are no further questions. I'd like to turn the call back over to Alistair McDonald for closing remarks.
spk06: Thank you. Again, our sincere thanks to the entire Cineos team for all they do. to continue to manage through challenging circumstances while delivering for our customers. We remain confident in our market positioning and look forward to continued strong growth and profitability, particularly in 2022 and beyond. Thanks for your attendance today, and thank you for your interest and investment in our organization. Please be safe, have a great day, and be good. Thank you.
spk04: This concludes today's conference call. Thank you for participating. You may now disconnect.
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