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spk01: Good morning, and welcome to the Syniosis Health Second Quarter 2022 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 Speight, Senior Vice President of Investment Relations.
spk08: Please go ahead, sir.
spk00: Good morning, everyone. With me on the call today are Michelle Keefe, our CEO, Jason Meggs, our CFO, and Michael Brooks, our COO. In addition to the press release, a slide presentation corresponding to our prepared remarks is available on our website at investor.cineoshealth.com. Remarks that we make about future expectations, growth, trends, anticipated financial results, and expectations regarding the COVID-19 pandemic and the war in Ukraine constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995, and we disclaim any obligation to update them. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. These factors are discussed in the risk factors section of our Form 10-K for the year ended December 31st, 2021 and our other SEC filings. During this call, we will discuss certain non-GAAP financial measures which exclude the effects of events and transactions we consider to be outside of our core operations. These non-GAAP measures should be considered a supplement to, and not a replacement for, measures prepared in accordance with GAAP. For reconciliation of non-GAAP financial measures with the most directly comparable GAAP measures, please refer to the appendix of our presentation. I would now like to turn the call over to Michelle Keefe.
spk09: Thanks, Ronnie. Good morning, everyone, and thank you for joining us today. Cineos Health delivered another solid quarter despite incremental revenue growth headwinds from foreign exchange and reimbursable expenses related to our COVID vaccine portfolio, which Jason will address in more detail. We continue to advance our integrated value proposition, working across the organization to accelerate product development for our customers. Before I discuss several takeaways from my first few months as CEO, I want to share our view of the macro environment. Market demand is healthy, and our pipeline of opportunities remains comparable to 2021. Specific to our clinical SMID portfolio, our total pipeline of opportunities is up double digits compared to 2021 and we had record net awards during Q4 21 and Q1 22. We experienced delays in customer award decisions late in the second quarter and some moderation in RFP flow. In large pharma, we have double digit growth in our TTM RFP flow and are encouraged by the number of opportunities to win additional preferred provider relationships in service areas including clinical monitoring, pharmacovigilance, and biometrics. We also saw delays in large pharma award decisions in the second quarter. We believe the higher than normal award delays are a product of customers taking a more deliberate approach to their development plans. Our clinical win rates remain consistent with prior periods. Given our clinical TTM book-to-bill of 1.29 times and 12.1% backlog growth, excluding reimbursable expenses, as well as the market indicators, we remain confident about our ability to drive clinical growth. The commercial business remains strong and poised for further growth. As I shared with you last quarter, I've been spending time listening to our key stakeholders, customers, employees, and investors, to further inform my view about our business, organic investments, and where the industry is headed next. These discussions have validated my confidence in our culture and long-term strategy. we are continuing to focus on delivering the right mix of capabilities at the right time, while building an even more intelligent, technology-enabled approach to better serve our customers. Let me share with you what I've learned. First, customers are looking to partner with a solutions provider who can deliver data-driven, integrated solutions that leverage the right technologies to address their opportunities. In partnering with Cineos Health, they understand and appreciate our unique value proposition where we work across the product development continuum to create customized solutions. This is becoming increasingly important as they address more complex therapeutic areas where our integrated clinical to medical affairs to commercial capabilities matter. Our next step is to further invest in and grow our medical affairs offering and continue to invest in our technology-enabled intelligent solutions, specifically targeting large pharma while maintaining our leadership position in SMID. Second, the people who power these innovative solutions, our employees, are passionate about delivering customized, high-quality solutions that solve complex customer problems. As we continue to simplify and streamline the business, our priority will be to provide ongoing professional development for our colleagues with a focus on building diverse teams and a highly engaged culture which leads to high performance. Third, our investors recognize the advantages of our strategy and believe continued execution will drive growth and unlock shareholder value. As we consistently execute our strategy and deliver results, we will communicate transparently and share our progress against our goals. We are committed to these strategic initiatives and are accelerating investments during 2022 and 2023 to drive further performance and consistency. As a result of those conversations, my focus is streamlining operations for innovation, integration, and simplification. You're already seeing this in my appointment of Michael Brooks as COO to seamlessly lead across our product development continuum. Michael has made significant progress with our clinical reimagined initiative, realigning the leadership team and redesigning the organizational structure, systems, processes, and innovation to fuel growth. We plan to increase our investments in this initiative and expand these efforts across the enterprise. Next, in addition to leading our Forward Bound programs, Jason is partnering with the business leaders to implement a unified cloud-based enterprise resource planning platform. This initiative will encompass resource management, human resources, finance, and procurement, driving simplification, automation, improved visibility, and margin enhancement. We have selected the best platform and partners in the market and have a strong, dedicated internal team to drive this transformational initiative. Finally, further digitalizing our capabilities to unlock additional value. Under the direction of Baba Shetty, President of Technology and Data Solutions, we'll continue to make investments that we believe will allow us to design and develop new systems and solutions across the company. We've already seen firsthand how our recent technology acquisitions, such as RxDataScience, have given us new rapid development capabilities, particularly for advanced analytics and AI use cases. Given these early successes, I believe there are many possibilities for technology and data to drive performance in our business. To capitalize, we are conducting an in-depth assessment of other opportunities to accelerate value creation and build a more intelligent enterprise. leveraging AI to guide operational decisions. We anticipate this will drive growth and margin accretion as we launch new solutions over the coming quarters. And to further our strategy and capitalize on our unique market opportunity, I am delighted to have recently appointed Christian Toukat as Chief Business Officer. Christian is the architect of our innovative Cineos One offering, and a global operations leader with significant global business development experience. His ability to lead with a product development mindset will enhance our single service, integrated, and end-to-end offerings. We continue to see large pharma penetration in our clinical business as our most impactful organic growth opportunity. Christian and the team will continue to focus in this area. I expect these go-forward actions and accelerated investments will transform the customer-facing experience as we accelerate digital enablement and automation and further penetrate large pharma and provide incremental long-term growth while realizing the impact of our forward-bound margin enhancement programs as we move through 2023 and beyond. This is the right team with the right culture, ready to execute and accelerate our strategy. We are moving forward with a shared vision and purpose. I look forward to sharing updates on these strategic initiatives and investments as we progress through the coming quarters. Now, some key observations from this quarter's results. First, we maintain strong backlog growth in both businesses excluding reimbursable expenses, driven by 12.1% growth in clinical solutions and 19.6% in commercial solutions. Second, the strength in our commercial solutions business continued, driven primarily by deployment solutions and the Cineos One portfolio, resulting in 15.7% revenue growth. Third, we had a strong quarter of operating cash flow at $99.9 million, allowing us to repay $95 million of our outstanding debt and reducing our net leverage to 3.4 times at the end of the quarter. Now, moving into further details on our results. We delivered total company year-over-year revenue growth of 6.1% for the second quarter, driven by robust growth across both segments. which was partially offset by the impact of clinical reimbursable expenses. In clinical solutions, revenue grew 3.3% compared to the second quarter of 2021, including the impact of acquisitions. Excluding reimbursable expenses, clinical solutions revenue grew 9.6%. Our growth was primarily driven by strength in our top 50 pharma customers, including FSP, and the continued ramp in our key large pharma relationships. We are excited about the progress we are making on our top 50 pharma strategy, including a recent sole provider pharmacovigilance partnership scheduled to start towards the end of this year, and the rapid expansion of another relatively new clinical partnership. We continue to enhance our go-to-market approach for large pharma, leveraging our unique breadth of product development expertise and flexible, customized operating models that accommodate their individual outsourcing needs. Even with these continued successes, our net awards for the quarter were impacted by higher-than-normal delays in customer decisions as cancellations were within our normal range. Clinical Solutions' book-to-bill ratio was 1.06 times for the second quarter, excluding reimbursable expenses, maintaining a 1.29 times TTM book to bill at the upper end of our target range. As I mentioned, we are aggressively driving our clinical reimagined program, accelerating our initiatives to streamline the organization, simplify processes, and drive automation projects. These initiatives are focused on driving efficiency and margin enhancement while optimizing delivery for our customers. This includes simplifying our structure and ensuring our leaders are closely aligned to the execution of customer projects while enhancing our underlying technology and data capabilities as part of our accelerated investments. We believe these initiatives are already improving our employee engagement as evident in their feedback and improving retention and are consistent with the CINEOS health culture. Turning to commercial solutions, revenue growth remains strong this quarter at 15.7% compared to 2021. Commercial growth is primarily driven by global growth and deployment solutions fueled by continued strength in our SMID customer segment, including the contribution from our CINEOS One portfolio. With another strong quarter of new team starts, deployment solutions reached a new five-year high in deployed resources, spanning a variety of specialized types of professionals across our field teams and in our engagement center. The commercial team also had a solid quarter of net awards, consistent with our normal seasonality, resulting in a book-to-bill ratio of 0.83 times for the quarter and 1.11 times on a trailing 12-month basis, excluding reimbursable expenses. In closing, I want to thank all of my 29,000 Cineos Health colleagues for their energy and collaboration as we move forward together to drive performance every day. We remain confident in our market positioning and growth initiatives and look forward to successfully delivering projects for our customers and their patients. Jason will now provide additional comments on our financial performance and guidance. Jason?
spk05: Thank you, Michelle, and good morning, everyone. Our total revenue for the second quarter of 2022 was $1.36 billion, up 6.1% and 8.3% in constant currency compared to the second quarter of 2021. Excluding reimbursable expenses and on a constant currency basis, Our revenue increased 12.4% compared to the second quarter of 2021. Revenue came in below the midpoint of our guidance due to lower reimbursable expenses in clinical solutions and incremental headwinds from foreign exchange. The unexpected headwind in reimbursable expenses was primarily related to lower investigator payments on our COVID portfolio, including the impact of regulatory delays and the early wind down of a large program. That said, our adjusted EBITDA margin came in above our expectation, given the lack of margin associated with reimbursable expenses, as well as robust growth in the underlying business. Our clinical solutions revenue for the second quarter was $1.03 billion, up 3.3% as reported, or 5.6% in constant currency compared to the second quarter of 2021. Excluding reimbursable expenses and on a constant currency basis, clinical solutions revenue increased 11.7%. These increases were driven by growth across our full service and FSP portfolios with particular strength in our top 50 pharma customers. Total as reported clinical revenue growth includes a 90 basis point contribution from acquisitions and a 630 basis point headwind from reimbursable expenses. Our second quarter commercial solutions revenue was $335 million, up 15.7% or 17.5% in constant currency compared to the second quarter of 2021. Excluding reimbursables and on a constant currency basis, commercial solutions revenue increased 14.2%. Growth in commercial revenue was driven primarily by deployment solutions, including a growing contribution from the commercialization of our CNS-1 portfolio. Total as reported commercial revenue growth also included a tailwind of 330 basis points from reimbursable expenses. Adjusted EBITDA for the second quarter increased 19.2% to $208.1 million, representing an adjusted EBITDA margin of 15.3%, an increase of 170 basis points compared to the second quarter of 2021. The increase in adjusted EBITDA margin for the second quarter was primarily the result of the benefits of revenue growth foreign exchange, forward bound, and reimbursable expenses, partially offset by a less favorable revenue mix, use of contractors, and the impact of organic investments. In addition, unadjusted EBITDA for the second quarter was $183 million, an increase of 39.3% compared to the prior year. Adjusted diluted EPS of $1.25 for the second quarter increased 28.9% year-over-year, primarily driven by the increase in adjusted EBITDA and lower interest expense. Operating cash flow was $99.9 million for the second quarter, an increase of 12.6% compared to the prior year, driven primarily by the timing of collections activity during the first half of the year, partially offset by increased cash taxes as we begin to fully utilize our net operating losses this year. DSO was 48.1 days, increasing from the prior year mostly driven by increased growth in accounts receivable related to large pharma customers with longer payment terms. Our capital expenditures were $24.4 million for the second quarter. During the second quarter, we repaid $95 million of our outstanding debt. We ended the quarter with $105.9 million of unrestricted cash and total debt outstanding of $2.89 billion, resulting in net leverage of 3.4 times. In addition, during the quarter, our board approved a new share repurchase authorization of $350 million, available through the end of 2024, primarily designed to provide for our goal of offsetting the annual dilution from our equity compensation programs. Our non-GAAP effective tax rate for the second quarter was 23.5%, consistent with our estimate for the full year 2022. Turning now to our updated 2022 guidance. This updated guidance contemplates our current view of the estimated impacts of ongoing developments, including the COVID-19 pandemic, the war in Ukraine and the related Russian sanctions, and the evolving interest rate, foreign exchange, and inflationary environments. Our updated guidance is based on foreign exchange rates as of July 15th. We now expect total revenue of $5.44 billion to $5.54 billion, representing growth of 4.4% to 6.3%. It is important to note that we have reduced our as reported revenue guidance due to our current expectations for the incremental impacts of foreign exchange and lower clinical reimbursable expenses, primarily related to changes in our COVID portfolio. An important point to highlight Our expectation for constant currency revenue growth, excluding reimbursable expenses, remains unchanged from what was included in our prior guidance. Total revenue growth includes an estimated contribution from acquisitions of approximately 70 basis points and an estimated net headwind of 460 basis points from reimbursable expenses. We now expect our total adjusted EBITDA to range from $835 million to $865 million. This reflects an adjusted EBITDA margin of 15.3% to 15.6%, up approximately 80 basis points from 2021. Lastly, we now expect adjusted diluted EPS to range from $4.97 to $5.11, representing year-over-year growth of 11.4% to 14.6%. These revisions to adjusted EBITDA and adjusted EPS are made to reflect the accelerated investments in our operations during the second half of 2022. As Michelle highlighted, we are accelerating investments in the following key areas, clinical reimagined, medical affairs, business development, and technology and data solutions, all designed to enhance scalability and operational excellence while driving long-term growth and margin enhancement. Our guidance incorporates interest expense of $77 million to $86 million. This range is based upon current market forecasts for LIBOR and reflects that 40% of our debt is currently variable rate. Guidance also assumes a non-GAAP effective tax rate of 23.5% and an estimated diluted share count of 103.6 million shares. We expect our net cash outlay for income taxes during 2022 to be approximately $75 million. We expect third quarter revenue of $1.365 billion to $1.395 billion and total adjusted EBITDA of $220 million to $230 million. This reflects as reported revenue growth of 1.2% to 3.5% and adjusted EBITDA growth of 8.6% to 13.5% compared to the third quarter of 2021. Excluding reimbursable expenses and on a constant currency basis, This reflects expected revenue growth of approximately 12.6% compared to the third quarter of 2021. This revenue growth includes an estimated contribution from acquisitions of approximately 90 basis points, an expected foreign exchange headwind of $37 million, and an expected headwind of approximately 770 basis points due to reimbursable expenses. I'm now going to turn it back over to Michelle for some final comments. Michelle?
spk09: I committed to you when I was appointed as CEO that I would evaluate what we need to do to drive long-term success. As I have outlined, we are taking decisive action. We are committed to making the appropriate investments to drive long-term growth and margin expansion. This completes our prepared remarks, and we would be happy to answer any questions. Operator?
spk01: Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star 1-1 on your touch-tone telephone. Again, if you'd like to ask a question, please press star 1-1. One moment for our first question.
spk08: Our first question comes from Luke Surrogate of Barclays. Your line is open.
spk01: Mr. Surrogate of Barclays, your line is open.
spk13: Oh, hey, I didn't hear the operator's voice. Good morning, everybody. Thanks for the question. Michelle, just to follow up on the actions that you're taking and laying out for the future, can you flesh out any of this and throw some numbers around it, or is this more of just operational kind of reorganization for more efficiency?
spk09: Hey, Luke. Nice to hear your voice. Thank you for the question. So a couple things, yes. So the four areas we outlined, right, were business development, medical affairs, clinical reimagined, and our data and tech team as well for additional investment. So we're planning on really laying all this out for you in early 2023 as we put together our 2023 to 2025 strategic plan. However, I can tell you that where we're accelerating the remainder of the year is in really doubling down on clinical reimagined. Michael's having a lot of early success on some of the things that he's doing in that particular initiative, and so we're going to double down there. We're having early success as well in medical affairs and some of the things that we're developing in our data and tech solution stack. So that's where some of the investment from an acceleration perspective is happening in the back half of 2022. But I'll let Michael give you a little more color on what he's doing with Clinical Reimagined.
spk07: Sure. Thanks, Michelle. Hi, Luke. So, first of all, we're really pleased with the results that we've achieved so far this year with investments in our people and our technology. Clinical Reimagined was actually born from feedback we received from our customers. So, I'll talk into the small, mid-sized, large customers. What are they looking for in a post-COVID world? What are the frustrations that they're experiencing from other clinical providers and vendors? And we saw an opportunity. We saw an opportunity to better engage with our people, to develop new classes, job families, to actually invest in how we can provide better decision analytics, greater visibility to our project critical paths, and bring our patient and healthcare provider insights forward in clinical development. which is really the superpower of our organization. If you think about what we do in commercial vertically and medical affairs vertically and clinical vertically, I now want to invest in how I bring those across each other. And we're getting really good results already in terms of our sales cycles, being able to accelerate patient recruitment in certain projects and things of that nature. Thanks, Michael.
spk13: Okay, thanks. And then just one last one here. You guys talked about the delays and SMIDs. That follows kind of what one of your smaller peers said earlier in the week. And then the large pharma delays, this is new to the rest of the space. So can you talk about what you're seeing there and maybe how you guys are positioned where they aren't? Is it a specific indication or is it just your strategic relationships? Can you just unpack that a little bit for us, please?
spk09: Sure, Luke. Okay, so a couple things. We'll start with large pharma. I think that's where we can start. So as you know, we've been very focused on winning large pharma partnerships. I think we've been very transparent that we're undersized in the number of large pharma partnerships that we have, and we feel like that's our greatest growth opportunity. And so, you know, working with them to ensure that you know we have our win in Q1 of we added an additional large farmer partnership and that's starting to ramp now and so we're going to continue to focus on winning those large farmer partnerships and I'll let Michael give you some color on that in a second. In regards to you know our SMID portfolio, we did have some delayed decisions in our SMID portfolio, but I think it's important to note that of the awards that were One, in Q2, we actually kept our hit and our strike rate in that particular segment, so we continue to have strength there. But I'll let Michael give you a little more color on the large pharma strategy.
spk07: Yeah, absolutely. There's two key things that are going on. Right now, we're in active discussions with several customers around potential preferred or sole provider opportunities. Preferred or sole provider opportunities. That includes in clinical monitoring, pharmacovigilance, and in records management. And, in fact, we're really pleased in the second quarter to add a sole provider partnership in the safety space. And so right now we're working with that customer around the strategy for consolidating their existing work, bringing it over to us, estimating the volumes, and getting that kicked off at the end of this year. The second phenomenon that's actually really interesting as well is that there are customers that were currently locked out because of contracts they have with other providers, but they're contacting us now about potential opportunities that are not a part of those partnerships. They're really interested in our therapeutic expertise, they're interested in our commercial insights, and there was one example we had in Q2 where we won a large phase three even though we were not a preferred provider currently. for that customer. So it's really interesting how they're engaging with us in different ways now.
spk13: Okay, great. Thanks.
spk01: Thank you. Our next question comes from Dave Windley of Jefferies. Your line is open.
spk06: To start there where Luke ended off, Michelle, in your opening remarks, you talked about the 22 pipeline being comparable to 21 Correct me where I'm wrong, but I'm going to interpret pipeline as being kind of the sales funnel, total RFPs received. You said RFPs for SMID are up double digits. So am I right in thinking that large pharma is down double digits or more as the offset to get back to kind of flat year over year? Help me with the bridging there, please.
spk09: Sure, David, thanks for the question. No, I don't think that's accurate, but I'm going to let Jason walk you through that from the pipeline. But you are correct that it is the total pipe that we shared the numbers on. But a lot of this is delays. It's not decisions, right? So I want to let Jason kind of give you a little more color there.
spk05: Yeah, thanks, Michelle. Good morning, Dave. On the pipeline comments being up, that is all in pipeline in terms of what was there at the beginning of the quarter, the RFP flow, these delayed decisions, et cetera, right? So that's the overall pipeline inclusive of RFP flow and activity. You are, I guess, correct in that in the top 50, the pipeline is down a bit, and that's due to some of the award decisions and things of that nature. And that's the reason we laid out that the TTM large pharma RFP flow is up significantly year over year. And, you know, the reason we believe that TTM cadence is right there or timeframe is right there is given the fact that we are still under you know, underweight in large pharma and need to continue to grow those partnerships, which Mike will just walk you through. So we do want to continue to see those partnerships come through and continue to have more opportunities, see more of the universe than we do today. And back to Luke's comment or question, you know, we did have some large pharma delays and decisions as well. One of those was related to a new opportunity that Michael outlined that we're looking to pull across the line in Q3 or Q4, and then the other was specific to a strategic partnership that we do have already where we just had some delays in their decisions for opportunities in the pipeline.
spk06: Okay, thanks. Shifting to commercial, we listened in on Idorsia's conference call, and they seem to have fairly positive comments about the early launch activities with them. And I believe you guys have been public about that being a partner of yours. Perhaps you could talk about how CINEOS 1 or full-service launch type activities are progressing in general and kind of the pending pipeline when we might see additional layers folding into your revenue stream there.
spk09: Sure. Sure. David, thanks. So I think, you know, we're very excited about our IDORSEA partnership, and we really appreciate the fact that, you know, they have named us as their partner, not just in the U.S., but as in their imminent European launch. You know, they have a very fulsome strategy for launching in the United States. You know, they have a really strong direct-to-consumer campaign to get right directly to the patients who are suffering from insomnia. We're completely integrated with them in that messaging and that delivery. And so, you know, we feel really good about that partnership and the opportunity that's going to bring, frankly, with other customers who are watching, you know, who are watching how Idorsia, you know, is performing. And so we're excited about that. So that's the first thing. You know, we have not updated the CINEOS 1 numbers. We will do that, you know, in the coming months for January, I think, is when we do the update there. But I think the last number we gave you, David, was overall $3.3 billion pipeline. I think 1.3 has already been, you know, taken into backlog, and I think we still have, like, another 1 point whatever. I'm not sure the exact number. I'll get to the exact numbers of opportunities still in front of us. So, you know, we, you know, we have a nice, I think, over 25 assets sitting in clinical development right now for Cineos One, and we're confident that, based on the experience that we've had so far, that if those, you know, make it through clinical development and they're going to commercialize them, that we'll have, you know, our opportunity to work with those customers to commercialize those assets. a great feeder to commercial growth over time.
spk06: Great. Appreciate that. Sorry, go ahead.
spk05: Do you have the numbers, Jason? Yeah, I just want to add a little bit of color there. So on the folding into the commercial revenue and things coming through the pipe, so we are in the process of launching the additional regions of Adorsia, as you know, in terms of the the back half of this year and into next year. So that will fold in into the revenue as that stands up. We have a couple more that are slotted in 2023 that will launch. If you go back and look at the last update, as Michelle mentioned, we kind of lay out how they will fold in. At this point, none of those are as large in terms of volume as Adorsia, so they're more I'll say akin to the first launch we had in the second half of 21, still very important to us. They just don't have the same scale as Adortia.
spk06: Okay, thank you. And if I could just ask one more quick one on kind of numbers clarification. I believe your revenue and expense by foreign exchange is a fairly widespread, which would typically yield, you know, a positive benefit to EBITDA. Could you quantify the FX benefit to EBITDA for 2Q and then what's in the guidance? Thanks.
spk09: Well, the Q2 benefit is the $1.7 million, but maybe you can walk through guidance, Jason.
spk05: Yeah, so on the Q2 margins, we obviously were pleased with how we finished up, you know, with the margins, where they were, and we talked about in the prepared remarks the different contributions The FX benefit in quarter two was less than $2 million, as Michelle highlighted. When we think about the back half, considering where the rates are right now, it does increase quite a bit, Dave, to your point on the EBITDA side. We don't typically quantify it in guide. We do quantify it when we report our actual results, oftentimes in terms of the impact on the margins. What I would say on the back half margins, though, which I think is ultimately probably what you're interested in, is that we'll continue to see the benefits of growth in the business. We'll continue to see the benefits of the pass-throughs being lower than we had expected in our April guide. We'll continue to see the benefits of forward bound and things of that nature that you've come to understand from us. We are seeing a little bit of a mixed headwind in the back half. specifically in commercial as deployment solutions is growing faster than the other businesses, even relative to our April guide. And then we're seeing a little bit on the technology business unit side where we've actually, and this is within the M&A as well, we've actually pointed a little bit of that toward internal work versus focusing on the external work. And that's a little bit of a margin headwind. And then finally, as Michael alluded to, we are investing more in clinical reimagined. And that can include what we're doing around overall employee costs and retention planning that we need to do there, investments in CRA training academy type activity. And I think Michael has said before, right, we need to invest on the front end or we'll invest on the back end, and we're choosing to do it on the front end. And then Michelle also outlined, as well as I did, that we're also investing incrementally in the business in the back half. That takes us down to that $850. So all that in the back half, Dave, is sort of the puts and takes on the margin side.
spk06: Got it. Thank you.
spk00: Appreciate it. Hey, Dave, it's Ronnie. You asked one question earlier about the latest Cineus One numbers, just to provide those quickly. We reported those mid-year through 3-31, and that was currently at a $4.0 billion in total potential value and $875 million in TTM awards contribution through the end of the first quarter.
spk06: Got it. Thank you.
spk01: Thank you. Our next question comes from Patrick Donley of Citi. Your line is open.
spk14: Hey, thanks for taking the questions, guys. Maybe another one on the large pharma side. Michelle, I don't know if you can kind of quantify or talk a little bit about, you know, it seems like you're talking about maybe some delays, some kind of targeted discussions where things are softening a little bit. And then you also kind of during the prepared marks that you're kind of seeing a broadly a more deliberate approach to development plans there. Can you just talk about, I guess, is it kind of more broad and large pharma where you're seeing some slowdowns or is it more, you know, a few things here and there and overall things are still relatively healthy? Just trying to get a better sense of kind of the moving parts on that piece.
spk09: Yeah. So yeah, thank you for the question. I'm going to actually let Michael walk you through it because Michael's really close to it. So go ahead, Michael.
spk07: Sure. On the clinical large pharma, I would say much more the latter of the here and there. Each of our customers, is reevaluating their strategic approach to the back half of this year and going into next year, whether that's acquisitions they've made or may be making and how does that fit into their outsourcing strategy, whether it's the mix of FSP versus full service that they're looking at. And even in a couple of instances, there have been new leaders that have come in who are evaluating how they want to engage with their internal teams and engage external. So as Jason mentioned, We've got several key opportunities. Customers are deliberating about how they want to outsource it to us, what shape it's going to look like, what services, things like that. So I'm not seeing anything that's widespread across large pharma. It gives me any concern.
spk14: Okay, that's helpful. And then, Michelle, I think it was kind of inter-quarter at a couple conferences you were talking about, if things remain a little more muted on the funding environment, You know, you could see a scenario where things in 2023 kind of soften to more mid-single, kind of putting out that scenario of things aren't a disaster, but they could soften a little bit. I guess with what you're seeing now, you know, you add in kind of the large pharma, you know, deliberate approach, let's say. Is that the right way to think about it? Maybe just kind of help us frame the 23 scenarios, given what you're seeing now. Thank you.
spk09: Sure. Sure. I could do that. So if you recall, the context of that conversation was the concern about the biotech funding index. And as we shared in our prepared remarks, that we believe the market demand remains healthy. We're not seeing anything that is making us concerned from a macro environment perspective. So I'll start there. We did say, and it was kind of under the umbrella of the biotech funding environment, but it applies regardless of, you know, where we get the business from. that if our trailing 12-month books-to-bill in clinical falls below 1.2 for multiple quarters, we could see some softening of the 2023 clinical growth profile. Obviously, we're at a trailing 12-month of 1.29 for clinical development, so obviously we're going to watch that closely.
spk05: Okay, thank you.
spk09: Jason, do you want to add something?
spk05: Yeah, I would just add to that, Patrick, just a little more color, right, that, you know, we're in the early stages of what, you know, we do for 2023 budgeting purposes, and, you know, we tend to think about trying to give some direction relative to what we're seeing when we release our Q3 earnings. I don't see anything right now that would change sort of that timing and You know, as Michelle said, healthy pipelines, good backlog growth, healthy end market. We're focused on execution in the back half, right, to set up a good 2023. So, you know, that's what we're – we continue to believe in what we said, right? If we have multiple quarters of book to bill below 1.2, that could bring in a mid-single digit instead of 7 to 10. So, you know, still very much that's how we're thinking about it, but we're just going to wait until we get through our process to provide any formal update.
spk01: Thank you. Our next question comes from Christine Raines of William Blair. Your line is open. Christine Raines, your line is open.
spk11: Hi, yes, thank you for taking the question. My first one is just overall on what your strategy is to maintain or expand margins if the company's commercial business continues to exhibit outsized growth as it has for the past several quarters. How do you combat the potential negative mix shift here?
spk09: Christine, thanks for the question. I'll start, and then if anybody wants to add in, they can. So when we're looking at our margin expansion, obviously revenue growth helps us with margin expansion, right, because we get operating leverage. So that's definitely, you know, an opportunity for us, for sure. I think, secondly, you know that our forward-bound initiative, which is around automation initiatives along with, you know, offshoring certain roles in the organization – You know, as Jason has shared in the past, we kind of got to that party late, so there's still opportunity for us from a forward-bound perspective to continue to have opportunities in lower-cost jurisdictions, right? So we're going to continue to do that. And so, you know, we feel confident that, you know, we can, with the balance of, you know, the revenue growth along with operating leverage and forward-bound, that we can continue to deliver against the growth in EBITDA. And I think you're even seeing it in Q2. But I don't know if Jason wants to add or Michael.
spk05: Yeah, so it's a good question. And Michelle hit on a lot of the points there. I think I would just add, when we're looking at some of the investments that we talk through, whether it's our technology and data solutions, Capabilities, it's our enterprise resource planning capabilities. It's what we're doing in medical affairs. All of those areas, even some of the areas, say, Asia Pac, et cetera, that are still under scale for us or where we want to be and where we believe we can be, areas like real world that's growing quickly and is an excellent opportunity within med affairs, as an example. As those businesses get to scale, those investments mature, there's going to be plenty of margin accretion opportunity across the business. And I think that's going to be in commercial and clinical, and then certainly how we continue to leverage the G&A functions of the company.
spk11: Okay, thank you. That's really helpful. And then the next one is, given it seems like booking deceleration was primarily because of delays, do you expect bookings to be shifted now into the back half of the year? Or I guess in other words, why are you comfortable – with QH and foliar guidance on a constant currency non-pass-through basis when Q2 bookings were light and clinical? And then if you just have any thoughts on how this potentially could impact your 2023 outlook. Thanks.
spk09: Sure, I'll start. So, as you know, our backlog growth in clinical is strong, and so that's what's right in front of us, and we're very focused on delivering against that, and our deployment solutions backlog growth is very strong, right? So the trailing 12-month indicators demonstrate that we have that work right in front of us, so we're very confident in the back half of the year in regards to delivering against our guidance. In regards to ongoing quarterly sales, You know, based on all our indicators, we're very, very focused on making sure we convert every opportunity that's available to us. We are obviously also evaluating the pushes, the things that did get delayed, and making sure that we're, you know, really making sure we can convert as many of those as possible, you know, to at a minimum hit our normal hit and strike rate there. But we do have, we do know that we have, we had a very strong Q3 in 2021. as a compare, and, you know, so we're very focused on making sure that we can convert as much as possible. I don't know if anybody wants to add anything to that.
spk07: The only other thing I would add is if you look at our Q1, Q2 sales mix, it was intentionally weighted towards the neuroscience general medicine area, which are faster burn for us. It sort of enables us to fill in on backlog phasing for the back half of this year and heading into 2023, you know, compared to, you know, prior years where we were heavily, more heavily
spk03: oriented towards hematology oncology thanks michael great thanks that's really helpful that's all three thank you our next question comes from casey woodring your line is open hi thanks for taking my questions um so the full year revenue guide down aside from fx is attributable to lower reimbursables related to COVID contracts rolling off faster than expected. So can you elaborate a little bit on this? What was canceled in the quarter? And is there further downside from more COVID roll off in the back half of the year versus what's contemplated in the new guidance?
spk09: Sure. So you're correct. You know, the lower revenue guidance is primarily the COVID vaccine portfolio. I think it was addressed in the earnings, you know, script where it's basically two things, right? We had a delay. in the start of one of our COVID programs. So that was an FDA delay, right? The FDA delayed it. And so that was one piece of it. And the second was we have a customer where we were managing their investigator payments and we're no longer managing those, right? So those are, and they took that in-house. So those are the two things that affected, that are the reimbursable piece there. In regards to our revenue guidance, Nothing has changed in our underlying demand around our net service revenue underlying demand. It is a combination of that, what we just discussed, and the additional FX headwinds. Anything else we need to add there, Jason?
spk05: Yeah, I would just say, you know, we obviously understand the frustration that the street might have with reimbursables. You know, last year we talked in the fourth quarter about our pass-through costs related to decentralized trials and remote monitoring and other things that we were seeing in investments we had made in a post-COVID world. This is separate and very different from that. This is specific to investigator payments in the COVID portfolio primarily, as Michelle outlined. There are a couple other programs within the COVID portfolio that didn't necessarily impact quarter two as much that are impacting the back half that we have reflected. We believe, in addition to that, we've scrubbed and ensured that we do not have a further reduction in the back half. So, you know, we've certainly worked diligently to ensure that we have it where we believe it will land at this point.
spk03: Got it. That's helpful. And then just in terms of the step down in awards quarter over quarter on clinical, do you have a split in terms of, you know, the percentage of those delays kind of incident biotech versus large pharma? Do you have a sense of which customers that had more of an impact there? Thank you.
spk05: I think at a macro level, we probably saw 15% to 20% more decision delays than we have in prior periods, just to size it from that perspective. Within that, the lion's share was small to mid. but there were notable large pharma examples as well, and that's the reason we wanted to comment on that. So I would say the lion's share was on the small to midsize. And in quarter three, complete transparency. We've won some, we've lost some, and some we feel really good about at this point, but not many have gone to a decision at this point in the quarter.
spk08: Thank you.
spk01: Our next question comes from Sandy Draper of Guggenheim. Your line is open.
spk02: Thanks very much, and good morning. Most of my questions have been asked and answered, so I appreciate all the commentary, but maybe one follow-up. And, Jason, I don't know if you're willing to sort of give some context. I don't need exact numbers. But when I think about, as you said, the fourth quarter write-down of the reimbursables and then what's happened here. The way I sort of think about it is, in general, pre sort of COVID and vaccine trials, a sort of normal rate was maybe high 20s to maybe low 30s in terms of reimbursables was percent of revenue. In COVID with the vaccine trials, the vaccine trials were pushing 40 to 50 percent, and that's starting to wind down. One, does that seem right to you? And then Maybe where are you now? I'm just trying to think, are you back to what would be sort of with the write-down and what's happened here at a normal level of reimbursables as a percent, and that's where you're going to be going forward? Just help us understand how high it got, where it is, and as you said, how much, how scrubbed this is. That'd be really helpful. Thanks.
spk05: Yeah, I mean, hey, Sandy, if you look at the back half, right, you're going to see the lowest percentage that I think you know, that we've probably seen as a percentage of our fee revenue. And, you know, I do believe that is related to, you know, the COVID specific opportunities we've talked about as well as just the underlying therapeutic mix in the business and what we're seeing in the back half when we look at the backlog by project. Now, when you think about future years, You know, we're not going to comment yet on 23, as Michelle mentioned earlier, and I expanded on a bit. I do anticipate, though, that we will see 23 tick back up relative to the back cap of this year as a percentage, but likely not up to the, you know, high 40% range that we anticipated we might based on what we're seeing in the portfolio at this point, but too early to call. If you go back pre-COVID, you know, given what we were, you know, the portfolio of what we were managing, the SMID profile of our customer base and percentages versus large pharma, right, we've always said that given our SMID heritage, the amount of SMID work that we were doing, it was 50 plus percent of the business, we carried a higher pass-through load and that over time that would come down as we moved more into large pharma. I think we're seeing some of that now because even pre-COVID, we were in the high 40s, low 50% per quarter in terms of reimbursable load of revenue. So I think that continues to come down over time given those dynamics, the COVID, the large pharma mix, and what we're driving at over time.
spk02: Okay, that's really helpful. So basically back half is going to be a little bit flinging the other way, but when you think about 23, it comes back up. But generally, you should start to get a more normalized on an annual basis level with obviously some quarterly volatility. Is that sort of a fair summary?
spk05: I think that's right. I mean, I don't think we at this point see where we're down where some of our competitors are in terms of their reimbursable load given their mix of clients and their mix of therapeutic areas, but I do believe what you said holds up and it'll tick back up some but not where it was.
spk02: Great. Okay, that's helpful. That's my only question. Thanks.
spk01: Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star 1-1 on your touch-tone telephone. Thank you. Our next question comes from Elizabeth Anderson of Evercore. Your line is open.
spk10: Hi, guys. Thanks so much for the question. Maybe a quick follow-up to Sandy's question. With the trial that you said was the COVID trial that was delayed on the FDA's part, is that an example, like, is that one still in your guidance for 2022? Is that something that you sort of pushed off indefinitely given sort of the more uncertain timing of that one?
spk09: So I can start. Yeah, no, it is going to start. They just had some things they had to work through, and we're confident it's going to start. I don't know, Michael, if you want to give any color to that.
spk07: Yeah, routine regulatory interactions and delays. We're still moving ahead.
spk10: Okay, that's really helpful. And one of your competitors pointed out that on some of the RFP flows that they thought that some of it, particularly in the SMID cap kind of biotech range, was really focused more on, like, funding projects or sort of Is that something that you could say you saw as well in the quarter that might explain some of the award delay, or is that not something you guys saw as a general rule of thumb?
spk09: Elizabeth, I think what you're asking is, was it around portfolio prioritization or that the RFPs, they were just trying to get a sense of what was going on and what it was going to cost them? Is that what you're asking? I just want to make sure I have the question right.
spk10: Yes, that's exactly right. Thank you.
spk09: So, you know, I don't think we've seen that at any higher rate than we've ever seen that in the past. I mean, I think, you know, we feel, you know, that we vet our opportunities really clearly. We make sure that, you know, we believe that these customers either A, have the funding or B, will have a means to get the funding to start the work. So, I don't think we've really seen anything significantly different than we have in the past. But, Michael, I don't know if you want to add anything.
spk07: Yeah, Elizabeth, we've obviously been talking to our customers in depth over the last quarter about what are they seeing, what are the pressures they're facing. You know, and right now the words that come to mind for me is they're being very thoughtful, very intentional about the timing of programs going forward. I'm not hearing or seeing anything to suggest that we're at a precipice of anything negative. We have to continue to support them with good strategies and good solutions and the right pricing. But as they're making their decisions, what they really talk to us about is value, value, value, rather than should I go or not go. And that's how we view the competitive marketplace right now is what is our value versus what is our price.
spk10: Got it. That's super helpful. Thanks, Elizabeth.
spk01: Thank you. Our next question comes from Eric Caldwell of Baird. Your line is open.
spk04: I think that was me. Can you hear me?
spk09: Loud and clear. Yes, Eric.
spk04: Okay. Yeah, so two questions. I'll start with COVID. Could you give us the COVID revenue in 2Q for clinical, if there was any for commercial? Your estimate for COVID revenue is a percent of the total for 2022, and then what percent of backlog COVID currently makes up? So it's a for part one question.
spk09: Okay. I'm going to, you know I'm going to hand that to Jason. Eric.
spk05: So I think if you look at the clinical backlog, Eric, at the end of the quarter, it's right around two, two and a half percent of the total backlog. For the year of the revenue, it's higher than that. It's probably roughly double that in terms of the total revenue contribution. Within the quarter, quarter two, I don't have that top of top of mind, but I think it's relatively consistent to the full year number that I just gave you in terms of contribution.
spk04: Great. Thank you. And then the second one's a little trickier. Last year, there was a lot of debate about the firm's activity around bonuses, variable compensation. This year, I'm curious if you can give us any sense on how you're bonus accruals have played out through the year and if there's any year over year meaningful delta in performance in the first two quarters of the year based on either a easy comp or a tough comp or a change in estimate for the full year.
spk09: Okay, Eric, I'll walk you through it. So let's start with 2021. So if you recall, In the proxy, it said that we did not pay the management incentive plan, right? And what that meant was that the senior leaders have a management incentive plan that's tied to the company performance, and the senior leadership team did not get paid MIP. We did not fund MIP based on the performance metrics that are there to, you know, fund that bonus pool. However, and this is really important, The board did approve a discretionary bonus pool for that same group of people outside of the executive leadership team. The executive leadership team did not get paid. However, there was a pool for senior leaders that were in the MEP. We paid that. We paid our operational bonuses to, you know, we have lots of operational bonuses to people who do the day-to-day work that are not part of the management incentive plan. We paid that bonus. Obviously, we paid our business development commission, the bonuses on the business development team, and the board did approve some additional long-term incentives for the senior leaders that were going to work with the ELT to take Cineos Health forward to achieve our revenue and margin targets. So that's what happened in 2021. In 2022, we funded the management incentive plan, right, as we do the start of every year. It was funded. it's still funded at exactly the same amount it was funded on January 1 of 2022. Now, having said that, we have to hit our targets for the remainder of the year, and until our books are audited at the end of the year by our auditors, and we know what our final revenue and margin is, will we know what our bonus payments will be. However, as of today, it is funded at the same rate it was funded at the beginning of the year. Is that helpful?
spk04: That's extremely helpful and just the answer I was hoping for. So thank you very much.
spk09: You're welcome.
spk01: Thank you. Our next question comes from Anne Hines of Mizuho. Your line is open. Hi, thanks.
spk12: So my first question has to do with variable debt. I know that you have swapped through March 2023. Can you remind us what happens to your debt exposure in 2023 and how we should think about interest expense then? And can you just explain what's the delta between the high and low end of the guidance range for interest expense?
spk09: Sure. I will turn that over to Jason and walk you through that. Thanks, Anne, for the question.
spk05: Yeah. Hey, Anne. It's Jason. So, the variable rate debt component of the portfolio right now is around 40%. When the swaps roll off at the end of March, that goes up to 75% variable rate. The midpoint of our guide right now is I think around $81 million this year, and that contemplates the one-month LIBOR moving up into the mid to high 2% at the end of the year, which I think is based on the curve that we look at right now. When you think about next year, you know, we're obviously very focused on how we want to take the debt stack forward, and we're working on that now and evaluating the different options that we have as we move ahead. We still like being in the 40, 50 percent sort of fixed rate versus variable rate structure, and that's where we've been. So, you know, we're looking at that. We're also looking at we have our term debt that comes due in August of 2024. So we want to ensure that, you know, this time next year, we have worked through the different opportunities that we have and refinanced that inclusive of, you know, getting up into that 40, 50% fixed in that range. So, I mean, that's how we're thinking about it. If you look at interest expense next year, and I've looked at the street from time to time to see where the models are. I still think it's a little bit light last time I looked. So I would think about that 75% variable where the rates are in the curve and think about it that way as you think about 2023. All right.
spk12: And just, you know, your stock's down a lot today, down 18%. You know, maybe just address where you think the street might be getting it wrong, because obviously you kept your revenue guidance. You focus on trailing 12 months, but it may be just a clarification. When you say if you have books available below 1.2 times, two to three quarters in a row, is that quarterly or is that TMM? But, you know, obviously if you can just address, like, where you think the street might be getting it wrong right now.
spk09: So, yeah, so we say quarterly book-to-bills of 1.2 or lower consistently over time, and then obviously that would then start pulling the trailing 12-month book-to-bill down over the course of time, yes. That's the clarification.
spk12: Okay.
spk09: I don't know, Jason, if you want to add anything.
spk05: Yeah, I mean, I think, well, you know, in terms of where the street's getting it wrong, you know, not to say anyone's wrong, but, I mean, how we think about it is the business has – good growth, excluding reimbursable expenses and on a constant currency basis, right? 12.4% in the quarter and almost 12% for the year. And our adjusted EBITDA margins are growing and getting better, and cash flow is growing and getting better, and our backlog growth is at 12% in clinical and almost 20% in deployment solutions, excluding reimbursables. We have good pipeline in the business right now. We've talked about that. We have great visibility to additional preferred provider relationships. We have a good strategy that Michelle has articulated. We're putting dollars behind our investment thesis to grow revenue and margins in the out years. We have good operational teams. Turnover is down in the business, which is all very positive. So that's what we see and what we're focused on driving, and hopefully we're able to properly articulate that
spk07: uh to the street yeah and just said what we're doing is resonating with our customers the things jason described where we're investing in our people getting our retention from a low last year 72 up into the 80s now and now working to accelerate that more with future investments the superpower of our organization with these solutions crossing over from clinical to commercial to medical affairs is coming to life we have many examples already just in the last two quarters where our commercial and clinical leaders are working together on strategic opportunities, creating introductions into customers that we didn't previously have. And this obsession around delivery and quality and customers is resonating. Our customers are saying in the current landscape, we want more of that versus what we're getting in other places. So we're in this for the long haul, and we feel it's going to show through in the coming quarters as we build into next year.
spk09: And just to summarize, as I said in the prepared remarks, I mean, We're excited about the team that we have that's going to bring this strategy forward. I'm excited about our go-to-market strategy. I've got a ton of confidence in Michael's ability to really deliver in commercial and clinical and the power of the combined. And, you know, we're making the investments we need to to ensure that we're competitive and we feel really good about where we're going. So, you know... I guess that would be, you know, that would be my summary. I mean, we feel really good about the strategy and where we're going.
spk12: All right, thanks.
spk01: Thank you.
spk09: Okay, so... Go ahead.
spk01: I'll turn the call back over to Michelle Keith for any closing remarks.
spk09: So, thank you, everyone. And I want to offer our sincere thanks to the entire Cineos Health team. motivated and inspired by their commitment to our customers, sites, and patients. We remain confident in our market positioning, and we're looking forward to continuing to grow and strong profitability in 2022 and beyond as we execute our value creation plan. Thank you, everyone, for joining.
spk01: Thank you. That concludes today's conference. Thank you all for participating. You may now disconnect. Have a great day.
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