Executives: Ronnie Speight - VP, IR Jamie Macdonald - CEO Greg Rush -

CFO
Analysts: John Kreger - William Blair Dave Windley - Jefferies Tim Evans - Wells Fargo Securities Robert Jones - Goldman Sachs Eric Coldwell - Robert W. Baird Greg Bolan - Avondale Partners Donald Hooker -

KeyBanc
Operator: Good morning, ladies and gentlemen. Welcome to the INC Research First Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time.

I’d like to hand the conference over to Ronnie Speight, Vice President of Investor Relations. Please go ahead, sir.

Ronnie Speight: Good morning, everyone. The purpose of this call is to review the financial results for INC Research’s first quarter 2016. With me on the call today are, Jamie Macdonald, our Chief Executive Officer; and Greg Rush, our Chief Financial Officer.

In addition to the press release, a slide presentation corresponding to our prepared remarks is available on our website at investor.incresearch.com within the Presentations and Events section. An archive version of this webcast will be available for replay on our website

after 01:00 p.m. today. As outlined in our press release, there will also be a telephone replay of this conference call available for the next seven days. Remarks that we make about future expectations, plans and prospects for the Company, constitute forward-looking statements for purposes of the Safe Harbor Provisions, under the Private Securities Litigation Reform Act of 1995.

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, 2015, as well as our other SEC Filings. In addition, any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date. While we might update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so. During this call, we will discuss certain non-GAAP financial measures, which exclude the effect of events we consider to be outside of our core operations.

These measures should be considered a supplement to and not a replacement for measures prepared in accordance with GAAP. We believe that providing investors these measures helps them gain a more complete understanding of our financial results and is consistent with how management views our financial results. For a reconciliation of the non-GAAP financial measures with the most directly comparable GAAP measures, please refer to slides 18 through 20 in our presentation. As we will be limiting today’s call to one hour, we request that participants limit questions to one each with an opportunity to ask one follow-up question. I would now like to turn the call over to Jamie Macdonald.

Jamie?

Jamie Macdonald: Thank you, Ronnie. Good morning and thank you for joining our first quarter 2016 earnings call. I am pleased to report that we are off to a strong start for 2016, continuing to execute on our vision for the Company. Our focus remains on providing high quality service and a superior experience to our customers through our therapeutic alignment, the trusted process operating model and our strategic focus on sites and patients. We grew our net service revenue by nearly 18% compared to the first quarter of 2015.

This was net of a foreign exchange headwind of approximately $6 million, resulting in constant currency revenue growth nearly 21% compared to the first quarter of 2015. Our net new business awards for the quarter were $302.4 million compared to $255.5 million during the first quarter of 2015, representing an increase of over 18%. The ongoing strength of our net new business awards resulted in a net book-to-bill ratio of 1.2 for the first quarter and 1.3 on a trailing 12-month basis. We believe book-to-bill is best used over the longer term since net new business awards will continue to vary from quarter-to-quarter. Our net new business awards also continued to drive strong backlog growth with backlog as of March 31, 2016 at nearly $1.9 billion, up over 17% from March, 31, 2015.

As part of the strategy to expand our addressable market, we continue to invest in additional resources in business development as well as operations to support the customer proposal process. Our success to-date in this area includes adding 25 new customer relationships during the first quarter of 2016. We are also encouraged by the continued strong demand from our existing customers, which represented 85% of the dollar value of our first quarter 2016 new awards. Our top five customers represented only 35% of our revenue for the first quarter of 2016, down slightly from 36% over the same period in 2015. Our presence remains strong in areas where clinical trials are particularly complex with these areas representing approximately 68% of our backlog as of March 31, 2016.

We believe our continued strong position in these areas demonstrates the effectiveness of our therapeutically aligned project teams and the quality oriented approach of the trusted process. In this regard, we remain focused on adding further depth to our therapeutic talent including the recent addition of the Chief Scientific Officer role. We also continue to adapt our therapeutic model to address our customer needs. We recently completed a reevaluation of our organizational structure, and as a result, we are making certain structural changes to our therapeutic business units to realign management focus and optimize the efficiency of our resourcing. Specifically, we realigned the therapeutic leadership and resources that are currently under our cardiovascular endocrinology and post approval unit to report into the three remaining therapeutic units and establish a separate post approval unit.

We believe this new structure will allow us to better meet our customer needs and accelerate the growth of our post approval services. Further, we believe this will allow us to serve our customers in a more cost efficient manner. It is important to note that notwithstanding this alignment plan, we expect to continue the rapid expansion of our overall employee base to support the growth of our business. We are continuing to invest in our relationships with sites by working closely with the Society of Clinical Research Sites, SCRS, to promote the sustainable participation of sites in the conduct of clinical trials. In addition to the further enhancement of our collaboration with sites and optimize our support if the work in the clinical development process, we are continuing the build out of our Catalyst Site program that we announced during the first quarter.

Finally, we recently announced the strategic collaboration with the Center of Information and Study on Clinical Research Participation, CISCRP, to bring greater awareness to the importance of clinical trial participation in advancing public health. During the first quarter, INC expanded its total employee base to 6,600 staff compared to 6,400 staff at the end of the fourth quarter of 2015. This continued expansion and our investment in other initiatives are in support of our overall strategic goal, becoming the CRO of choice for all stakeholders, employees, customers, sites and investors around the globe. Let me now turn it over to Greg Rush for more comments on our financials.

Greg Rush: Thank you, Jamie, and good morning everyone.

As a reminder, we are presenting our results on an adjusted or non-GAAP basis, and further normalized certain metrics to improve comparability. Detail of these adjustments is presented on slides three, four and 16. We grew our net service revenue on a year-over-year basis by nearly 18% to $249 million during the first quarter, up from $211.5 million for the first quarter of 2015. Our growth in revenue reflects the strong backlog as of December and strong net awards during the first quarter. In addition, in response to our customer request, in March, we significantly accelerated the time table for delivery for their clinical trial.

As a result, revenue for both the current quarter and full year has and will continue to benefit from this full support [ph] of work in 2017. Specifically, our revenue for the first quarter included an incremental $3 million of revenue from the acceleration of this work. Our direct costs increased 20% from $124.8 million for the first quarter 2015 to $150 million for the first quarter of 2016 with gross margin declining from 41% to 39.8%. As a reminder, the first quarter of 2016 includes certain one-time benefits totaling $1.7 million. Excluding these benefits, gross margin declined slightly from 40.2% to 39.8% over the same period.

Note, the impact of foreign exchange was de minimis during the first quarter. As a reminder, both the first quarter and first half of the year typically have seasonally lower margin due to the reset of U.S. employment taxes and the annual merit increase for our staff in April of each year. We continue to drive our margin improvement initiatives which include improving our facility utilization over time, a consolidation of one clinical trial management system or CTMS and realizing the benefits of improved efficiency of the new CTMS system we adopted. Over the long-term, we also look to improve the profitability of our early phase units and recently established Japanese operations.

While we expect that these initiatives will continue to produce cost savings and efficiencies in our delivery model, as we outlined on our fourth quarter call, we are reinvesting these savings in additional recourse to support new business acquisitions due in part to our accelerated delivery to one of our customers. We’re utilizing a greater mix of higher cost contractors during much of 2016, which may result in a slight decrease in gross margins compared to 2015. We believe this is prudent in the short-term to ensure we manage our delivery for customers and our long-term employee resources in an appropriate manner. With respect to our longer term margins, we continue to see an increasingly tight labor markets for CRA, which may put some pressure on wages and may result in the need for us to use a greater mix of higher cost contractors to service our customers. Turning to SG&A, SG&A expenses increased from $35.5 million in the first quarter of 2015 to $41.9 million in the first quarter of 2016.

They remain flat at 16.8% of net service revenue. We continue to be pleased with our disciplined approach in managing SG&A expenses as we have held our SG&A costs relatively flat as a percentage of revenue despite the reinvestments we’re making to support the acquisition of new business. Our strong revenue growth, operational execution and ability to manage our SG&A costs resulted in our adjusted income operation increasing 12% from $46.4 million for the first quarter of 2015, $52.2 million for the first quarter of 2016. When the first quarter of 2015 is normalized for one-time benefits, disclosed previously and detailed on slide 16, our income from operations margin increased slightly on a year over year basis from 20.6% to 21%. Adjusted EBITDA grew by 12% to $57.1 million for the first quarter of 2016 from $51.2 million for the first quarter of 2015.

Adjusted EBITDA margins declined to 22.9% for the first quarter of 2016 from 24.2% for the same period in 2015. On a normalized basis, adjusted EBITDA margins remained flat at 22.9%. Foreign exchange had a negative impact of $1.1 million on adjusted EBITDA for the first quarter of 2016, only a de minimis impact on EBITDA margin percentage. Lastly, due to the implementation of our organizational realignment plan, Jamie referenced earlier, we recorded a restructuring charge of approximately $6 million in the first quarter of 2016 which is primarily comprising employee severance cost. We expect this realignment to foster in unit efficiency in our operations while maintaining our focus on excellent quality delivery for our customers.

Adjusted net income increased to $32.5 million for the first quarter of 2016 from $26.3 million for the first quarter of 2015. Adjusted diluted earnings per share was $0.58 for the first quarter of 2016 compared to $0.42 for the first quarter of 2015. Diluted weighted average shares outstanding were 55.9 million for the three months ended March 31, 2016, which included the impact of 1.9 million shares from equity-based employee award. At March 31, 2016, the outstanding share count was 54 million. Slide seven provides key metrics related to our cash flow and leverage position.

During the first quarter of 2016, we utilized $0.6 million of cash for our operations as compared to producing cash of $43.6 million for the first quarter of 2015. This decrease was primarily driven by an increase in our DSO to 18 days at March 31, 2016 from a negative three days at March 31, 2015. The increase on our DSO was primarily due to the timing of billings in the quarter coupled with a decline in deferred revenue as a result of the recognition of revenue from the utilization of investigator deposits. As mentioned in previous calls, we expected our DSO to increase over the short-term to mid-term to the mid teens and over the longer term to be more in line with the industry. We ended the first quarter of 2016 with $53.2 million in unrestricted cash.

Slide eight summarizes key metrics related to our backlog. We believe one of the most important leading indicators of future revenue growth is backlog coverage, which is presented in the bar chart in the bottom left corner of slide eight. As you can see, we are maintaining a favorable position with 91% coverage of our full year 2016 revenue forecast as of March 31, 2016. This is within the range of the same coverage percentages as of March 31, 2015 and ‘14. Lastly on slide eight, you can see our backlog run rate of 13.7% for the first quarter.

As we described last quarter, we have seen a slight slowing of our backlog run rate, primarily driven by a growth in our average steady duration over the past several quarters. We believe this increase in study duration is primarily driven by the overall increase and the complexity of trial coupled with our growing average trial size and increasing mix of oncology trials, which typically have longer duration. On slide nine, we’re providing our updated guidance for key financial metrics for the full year 2016. This guidance takes into account a number of factors including the acceleration of revenue I referenced earlier, our current sales pipeline, existing backlog, and our expectations for net awards for the remainder of 2016. Further, our guidance is based on current foreign currency exchange rates, current interest rates and our expected tax rate.

We expect our net service revenue for the full year 2016 to range from $1,020 million to $1,030 million, representing a growth rate of 11.5% to 12.6%. This takes into account a foreign currency headwind estimated at approximately $10 million, a negative impact to our full year growth rate of approximately 110 basis points. Accordingly, our constant currency growth rate is expected to be between 12.6% and 13.7%. We currently expect interest expense for the full year to range between $12.5 million and $13.5 million, which is a slight increase from our expectation in February. We continue to expect our effective tax to approximately 34%.

We expect our adjusted diluted earnings per share range from $2.34 to $2.46, representing growth of 22.5% to 28.8% compared to normalized EPS for the $1.92 in 2015. Lastly, we expect to earn $1.60 to $1.70 per share on a GAAP basis. Included in our GAAP earnings per share guidance is an estimated $0.17 per share impact from share-based compensation. This completes our prepared remarks, and we’d be happy to answer any question.

Operator: [Operator Instruction] Our first question comes from the line of John Kreger of William Blair.

Your line is now open. John Kreger : Jamie and Greg, could guys just review again exactly how you are investing to better support your growth? And just give us a sense about how long you expect this phase to last? Thanks.

Jamie Macdonald: Yes. John, the investment is going to be perpetual. I think you’ve got a fast-moving industry; you’ve got a need to help customers be successful, you can only do that by finding motivated investigators, being able to take those institutions up from startup and have them ready to roll patients.

So, it’s about finding more efficiency, not just for us but really helping customers do more efficient as well. So, there is a lot of activity on the sites and patients side. As Greg has referenced, we’re also investing in tools and technologies, both on the SG&A side and on the operations side as well. So, I think we don’t necessarily have a map for the next set sort of three to five years on exactly where we will invest. But I think, it’s only prudent to look at ways to be more efficient, more effective.

That can include acquiring data to help us better plan protocols, better design studies, better identify which countries we want to run studies in and then which sites and which positions we want to work with. And I think that’s going to be an ongoing effort, as trials become more complex and they move towards personalized medicine, we are going to have to invest to make sure we end up at the right places with motivated investigators and eligible consented patients.

Greg Rush: Yes. The only thing I’ll also add is if you remember from our previous calls, there is really three broad categories that we’re looking at doing that inside with patients, [ph] Jamie alluded both in the technologies, tools and actually improving that Catalyst Site program that we not only mentioned on the first quarter earnings call, the second is we ran very thin last year on staffing. Our staff was very, highly utilized their ability to go out and properly do RFP activity, as you know in our industry and the people that do the work, also glad to do sales proposals.

And so we’re trying to invest on the gross margin line to make sure that our staffs have the ability to go out and do a lot of the activity and lastly obviously investing more in our business development team. Those are three bounder categories. The bulk of those investments still see in the gross margin line with a little bit in the SG&A from the additional sales people.

John Kreger: Great, thanks. And just one quick follow-up.

What sort of staff assumption or hiring assumption is embedded in the revenue guidance that you just updated? And does that include use of contractors throughout the year? Thanks.

Greg Rush: I’ll address the contractors issue first, couple of things. One, with one of our customers, I alluded in prepare remarks, asked us to accelerate the time table, and we’re actively more than willing to do that. We’re going to execute for that customer and deliver strong results for them. So that’s a very big positive.

When we look at that accelerated work, two things presented, one the ability to get staff up and trained and ready to go was a too tight. We brought in additional contractors to help us on that. And secondly, when that bolus of work ends later in the year, we wanted to make sure that our staffing was right to look forward to the future. So, we did bring in higher cost contractors to help deliver that. So that will go through much of 2016, I wouldn’t say all the way to end, but much of 2016.

The second aspect is contactors certainly, and despite labor market, we’re seeing a little bit more need to use contractors just help supplement their staff. And we’re taking aggressive steps to help limit that, build different programs to bring on additional staff and train them. Contractors certainly will be a little bit higher. As to your other question about staff, at the gross margin line, we certainly believe that the staffing will keep pace with our revenue growth.

Jamie Macdonald: Yes, not a lot to add.

John, we did a pretty good job, as you know of sort of forecasting backlog. And that gives us not just an idea of what revenue is going to be, but particularly the activities at a project level. And then it’s about finding the right resource and the right locations for the right skills. There is not a massive amount of fungibility in our resources. In the U.S., it’s relatively straight forward.

You can bring people in and make them travel a little more. We’re trying not to hit the utilization levels that we did last year, because having high utilization I think is only manageable in the short-term. You’ve got to give people a reasonable workload and that allow them to get the job done. But, if you go outside the U.S., if you’ve got resource in Spain and you’ve got stakes in Italy, you don’t have a lot of bilingual people that you can move around across borders. So, it gets a little more challenging, as you get into countries where there is maybe language differences and maybe even work permit differences as well, particularly as you get into Asia and South America.

So, we’re trying pretty closely to watch backlog, where is that our demand going to be and then satisfy that, if we think its sustainable demand with permanent resource; if it’s a temporary increase in demand, we’ll look at more contingent later and obviously contractors are part of that process.

Operator: Thank you. Our next question comes from the line of Dave Windley of Jefferies. Your lines are open.

Dave Windley: So, Jamie, I wanted to make sure I understood the comments that you made about the therapeutic.

It sounds like you were consolidating some therapeutic units or reorganizing those in some way. I just want to make sure I understood that, particularly as it relates to the differentiator that you talk about being therapeutically aligned, down to pretty low levels in the staffing ranks?

Jamie Macdonald: Yes. So, historically, we’ve had four main business units focused at the therapeutic level. The smallest of those business units has been called CEPA which is cardiovascular, endocrinology and post approval. What we’re doing is we’re taking elements of that business and realigning it actually to a better therapeutic focus.

So, they also included ophthalmology which we believe is now better aligned within CNS as a sensory therapeutic area. So, it will move across the CNS. Other elements will move to General Medicine where the skill set is broadly applicable. Those therapeutic project managers and some of that therapeutic leadership will now be part of General Medicine. What we’re also doing is separating post approval and giving its own focus under our COO to help build out fit-for-purpose processes and systems just to be a little more cost effective in the post approval space, which we believe is a key component to winning and growing business in that space.

Greg Rush: And Dave, just to clarify, all the way down to the CRA, nothing’s changed and you’re basically picking us to -- within each of our four business units, we had sub units below that and that were focused on a particular specialty. All we did is pick up those individual pieces that Jamie alluded to and moved them under different leaderships effectively.

Dave Windley: So, in the post approval, as a follow-up to that, is that an area -- it seems like an area that has pretty strong tailwinds for the industry in general. Is that an area where maybe your clients are making requests or are pushing you to accelerate your development of that capability?

Jamie Macdonald: I think we see the market potential there. We obviously look at the industry trends.

It is a different market, because you are quite often dealing with different buyers and different decision makers at are customer groups. So, you’re quite often into the medical affairs or commercial space. Quite often, you’re sometimes dealing with different investigators as well. So, it’s a different segment; the work is very similar. It is more cost competitive.

We actually see more competition in that space as well. So, the study sizes quite often are smaller in that space. And obviously we would have to take a different approach to make sure that we are competitive in that space. So, we’ve actually done quite a bit of post approval work, everything from registry; self economics. But, I think we can maybe pick up more business in that space with some dedication in that group.

Dave Windley: My last question, I think you mentioned on this accelerated work, kind of two parts to this question. One is I think you said $3 million of revenue represented by that acceleration in the first quarter. Could you -- it sounds like you have some visibility to what are you going to do to continue to accelerate over the balance of the year. Can you quantify that? And then secondly and more conceptually, if the client can call you and say -- given speed is so important in the industry and the client calls you and says, hey, I want to speed this up, I guess I’m curious about why that doesn’t happen more often or why that speed is not baked into the feasibility upfront. It’s interesting to me that you flip the switch and pull this forward.

Thanks.

Jamie Macdonald: So, I’ll do the second part; I’ll let Greg do the first part.

Greg Rush: Yes. I don’t want to quantify individual positives but certainly the pull forward of that revenue was taken into account to our guidance. I think that Q1 was probably a little higher than we see in the other quarters as a pull forward.

The other thing I will tell you is while we’ve flipped on the switch in Q1, we anticipated that starting really at the beginning of the fourth quarter that they made, so we started gearing up for that. So, even though the switch was flipped at the end of March, we had originally expected that switch to be flipped in early Q2. And so by flipping that switch, we signed everything off of customer. We had contractors obviously well in advance of the switch and we’re doing the work quite honestly and anticipate and assume asking us to do that. As to the second piece, we do it often; customers do these things all the time.

The reason, we called this one out in particular is it our largest study by far and has the most impact on our results. But our single largest project -- other projects, that happens all the time, and Dave, we don’t mention because it’s noise.

Jamie Macdonald: I think the main driver, as you might guess, patient enrollment. So, this is study that’s progressing well. We added more sites to more countries, because we saw an opportunity to really sort of advance enrollment ahead of the original schedule.

When you do that and you have a lot of patients coming in at the same, that leaves you a lot of data, a lot of queries, a lot of analysis to be done, and it’s really the acceleration of that study, study conclusion or at least getting to some of the early analysis that drives that pull forward. The only way you can do that is by having sites open and patients enrolled.

Operator: Thank you. Our next question comes from the line of Tim Evans of Wells Fargo Securities. Your line is now open.

Tim Evans: You guys talked about the study duration phenomenon, studies getting longer et cetera. And it’s certainly not specific to you guys, but given the degree to what you spend time looking at your backlog, I was wondered if you could comment on how you see this playing out in the future. Do you think that studies are going to continue to elongate, backlog conversation is going to continue to decline or do you think that we reach a point soon where that kind of stabilize at a the new normal rate, or do you see it kind of getting better at some point in the future? Any color there would be helpful.

Greg Rush: Let me take the first part, I’ll let Jamie comment too. One, a big part of the reason why studies are elongating is mix.

One of the things that you’ve seen across the industry is oncology is a very big market now. Oncology studies have always historically been a longer tail. So, your percentage of your backlog grows with ecology that’s going to increase the average duration of your trials, which in turn has impact on your backlog burn because it decreases your backlog burn when the average length of the trials are coming in. So that’s one. Secondly, post approval study, while it’s a very small part of our market today for INC in particular, post approval studies, if that market grows, they have very long durations also.

SO, those two factors; mix is the biggest issue. Secondly, as trials become complex, I don’t know that it necessarily takes that much longer to do a particular trial as it is finding the patients. Finding patients and having the global scale that we do and our competitors do is critical in this market because finding those patients and getting sites up and running is part of the issue that you’re seeing. So, those are the two factors that’s causing the elongation. As to whether it’s stopped, you could see -- easily see backlog burn increase it’s the mixing.

But right now, if oncology continues to be a bigger market, take a bigger share, you could continue to see elongation. That’s the driver, the factors.

Jamie Macdonald: Yes, a pretty good summary from Greg. I think as we’ve talked about in the past, we see studies in three components; there is startup, conduct and closeout. If anything closeouts, probably max out as to how efficiently we can gather data and then conclude studies with tables, listings, figures, clinical study reports, I think everybody does that fairly efficiently.

Conduct, as Greg said, remains the same across the industry. You treat patients for a defined period of time. In oncology in early phase studies, you’re looking at progression as an endpoint, so that can be variable length time. As you get into later stage oncology studies, depending on the indication, you ‘relooking at overall survival, so you’re looking for events in those studies, so that can actually elongate studies in that indication. Startup is quite critical; that’s finding countries, getting competent authority approvals, finding sites, contracting with them, initiating them, and enrolling patients.

That is becoming more challenging, particularly as we’re becoming more specific on the patients that we want to treat and we’re moving towards personalized medicines. So, I think all that is a sort of headwind in terms of getting studies up, running and conducted on time. If you look out in the future, I think we had maybe more definitive clinical markers that we could measures in early stage. And I think in some dieses, we can see the effect of drug very quickly in patients and follow patients, may be for a shorter period of time, particularly as it relates to efficacy. I think on the safety side, you are going to want to follow the potential side effective of drugs for an extended period of time.

In the future, you may see studies that progress with some level of conditional approval, based on early data, but I think you’re still going to have a commitment from a safety standpoint, either in registration trials or as Greg alluded to in a post approval setting, many of these studies now are multiple years stretching out 5 to 10 years. I think we’ve even had registries that have run for 20 plus years in order to follow the true long term effect of a particular drug in a patient population.

Tim Evans: Yes. I guess from a financial standpoint, the one thing that seems most critical is do you still like you have your hands around it to the extent that you’re not going to be surprised by a sudden step down and conversion, it’s going to cause you to come in lower than your guidance; do you feel like all of these phenomenon are well contemplated in your guidance?

Jamie Macdonald: I think in the way that we contemplated, yes. I think study-by-study, the way that we not just phase it at the time that it’s won but phase it as it comes out of our trusted process and quick start camps, and then even rephrase as we get new information and maybe the competitive environment changes.

I think I’d almost take a different view and wonder how it factors in to return on investment, as you think of biotech and pharma, they’re going to investment in a study and it’s going to take longer than maybe what’s originally planned, how does that change some of the ROI viewpoint from whether the study is commercially feasible or not. That’s probably the way I look at most. And I think that’s where we’re going to help our customers to be more efficient and more effective. And then for us, it’s about delivering against that original timeline. I think that’s the most important thing in terms of customer satisfaction, managing customer budget.

You can only successfully manage your customer’s budget, if you actually deliver the study on time. If you overrun on time, it will likely have negative budget impact, and that’s not good for your customer or your relationship with that customer.

Greg Rush: And Tim, I know that people really focus in on backlog burn. As I’ve said in the past, backlog burn to me is a better indicator of the quality of your backlogs and your order policy than anything. We look at backlog coverage, and your question is have we adequately taken what is a derivative of all the things that goes into guidance of the backlog burn into account.

And if you look at our backlog coverage, which is what we view as the most important, we’re at 91% coverage and that’s compared to say 88% last year of what we actually did. So, obviously, we’re assuming we need a little bit more coverage this year in our guidance taking into account the fact that our backlog is elongating the trials. The other thing that we look at is book-to-bill over a long term, not shot term perspective but over a longer term perspective, if your backlog conversation rates are -- your average files are elongating, your book-to-bill probably needs to be a little bit higher than it has historically to offset that to take the same growth rate over a longer period of time. So, all of that has been taken into account in our guidance this year. And as we look into the future, as we think about staffing, we look at what our backlog coverage is future years.

Operator: Thank you. And our next question comes from the line of Robert Jones of Goldman Sachs. Your line is now open.

Robert Jones: Hello, great. Thanks for the questions.

A lot of mine have been asked and answered, but I did want to go back to the third party contractor commentary and also the comments you guys made around the labor market for CRA is tightening a bit. It sounds like there is two different issues that play there. So, I was hoping maybe you could just parse those out for us. The first, it sounds more timing related and arguably a good problem to have that a large client wanted to ramp up a trial. The second though on the labor market, it seems a little bit more worrisome.

I am just wondering if maybe you could talk a little bit on an industry level, if we think about backlog growth and your peers also having success with new awards, what ultimately can help supply and demand meet up on the labor side for CRAs?

Greg Rush: Hey Rob, you did parse it out correctly. There are two different issues going on with contractors. The first is a timing issue that’s going to cause a little bit of an impact on margins in 2016 because we’re accelerating network to our customers. So, you know that. The second issue, I think it’s early in the game as to whether it’s going to be a lasting impact.

It’s certainly something we’re starting to see and we’re taking proactive actions to offset it but it’s certainly something that’s been developing. So, it’s probably about mid last year and it’s become more and more acute. I think you’ve heard all of our competitors talk about it in some form or fashion about whether new talent acquisition is difficult, particularly in oncology right now. So, whenever you have imbalance of demand versus supply, that’s going to put pressure on wages. And in addition new CRAs in marketplace can make a good living as independent contractors.

So, you’re screening a lot of them choose to take that route. And as a result, the supply of those drops and then your demand continues to grow in sort of a circle. Our competitors are talking about moving things to lower cost markets to help offset that and develop talent there. We believe with our therapeutic focus that’s probably not the best answer for our business model. We are looking at bringing in staff, training them early right out of school, getting them sort of -- think of it as internship or apprenticeship with our more experienced CRAs and then developing talent that way.

You can bring them in at a much lower cost. And then once they gain the experience, they are at a little bit lower rate that helps offset it and just be more efficient. All of our cost control initiatives and in part the restructuring we did was to help offset some of that in the future. And so, those are the things that we’re certainly seeing at the early stage is it’s just a short-term blip. I can’t answer that at this stage.

We’re just taking the actions develop for the long term. In case if it does, stay with us. Jamie, I don’t know if you have any additional comments.

Jamie Macdonald: No, it’s pretty good summary. Bob, it’s more of a phenomenon in the U.S., So, I think people are more inclined to be independent contractors in the U.S.

than you’d see in some of the other markets, so that we feel a little of that in some of the established European markets, less so in Asia where it’s just not part of the culture. So, we’re obviously watching it closely. We would normally expect to have some percentage of our workforce that do CRAs as contractors and we try to manage within certain boundaries. The other thing is, at an industry level, we’ve had these discussions to see is there anything that we can do to really sort of highlight the career path in clinical development, not just at the CRA level because generally it’s not something that people that are coming out of school think about. Yes, there is a good pathway to come into this industry, not just on the CLO side by obviously biotech pharma and build a career through some of the clinical channels.

So, we have very developed sort of career leaders, how to progress people through the organization. Obviously we’re working on work life balance, improving the tools, improving travel for CRAs, all of those are designed to create the right work environment to be able to tract the best people and keep them within INC.

Robert Jones: No, that’s really helpful. I guess just one minor follow-up. I mean, I think last quarter you guys had mentioned about a $100 million worth of awards that you didn’t book in 4Q because I think it was related to you weren’t sure if the sponsor was going to proceed with the work.

Curious if any of that came into backlog this quarter and how we should think about, if there’s anything within that $100 million that’s still yet to come.

Greg Rush: Good question. Nothing came in, in the first quarter related to that. We don’t expect any of it to come forward. We made the right call on the fourth quarter.

We’ve had further discussions with both those customers; and I believe those projects are dead at this point.

Operator: Thank you. Our next question comes from the line of Tycho Peterson with JP Morgan, your line is now open.

Unidentified Analyst: Hey guys, it’s Dave [ph] on Tycho. First of all, congrats on the quarter.

Just had a quick one on the top line; I know you mentioned this in your prepared remarks and in some of the earlier questions, Jamie, around impact to the top line from the pull forward of revenue. But, even beyond that, I mean this quarter was very strong for you. Can you give us some color on what drove that? And then in terms of the follow-up, looks like the midpoint of the guidance was taken off by $10 million. Is there an element of conservatism baked in over there, given that you have this additional pull forward going on as well?

Jamie Macdonald: I’ll do a little bit of the forward. I mean I don’t think we’ve changed the way we’re operating.

I mean there’s a lot of focus on startups, getting sites initiated and then create conducive environment for those sites to find protocol eligible patients and take them through the consenting screening process. And we seem to be working on that well most of the time. I think there are still some studies that we feel are challenged and that we’re working with sponsors to try and improve some of those timelines; that all factors into backlog management. And as work hopefully accelerates as we get process quickly and patients in, that then will bring revenue forward in the backlog, and obviously we’d expect to earn that based on that schedule. Maybe if we’ve got delayed protocols or delayed drugs or competitive environment for enrollment maybe more so than we’d originally completed that obviously pushes timelines out.

So that’s part of the study by study management that our project managers, our therapeutic groups and then our finance team goes through on a monthly basis. So, not unusual, just sort of similar to the way we’ve been working. I don’t think we’ve done anything particularly different. The operating model stays the same. The tools we’re using are pretty much the same.

Greg Rush: The only color I will give is when we look at our own internal model, we don’t give quarterly guidance, as you all know. But the impact of the study on the quarter, we mentioned about $3 million; other than that, quarter looks about like we thought it was going to look, quite honestly. So, I know people’s revenue are a little bit lower on the consensus for Q1 but at least from our own internal model, revenue came in basically where we thought it would, plus the $3 million. So, that’s one of the reasons we’ve we highlighted. As to the year, when we gave guidance in February, we were already working with this customer and we knew that this work could possibly accelerate, so that was partially, not fully but partially taking into account when we gave business in February.

So, the impact of guiding up is really more confidence in the year, our backlog coverage is at 91% versus 88%. The question that was asked earlier on the call is why didn’t your guidance up even more. I certainly think that it has the opportunity to do, our sales pipeline is strong. We’ve got to deliver on the awards; we’ve got to have a really strong book-to-bill the rest of the year. And if we do that and that’s we’re trying to do, there’s a opportunity that we think is prudent, the guidance we gave now is prudent given our existing backlog and where we see the pipeline today.

Unidentified Analyst: And then in terms of CNS awards, can you talk a little bit about how they’ve been trending since the end of last year relative to oncology, particularly among your larger customers? I think earlier this year, you had called that part of the business as being a little bit softer and oncology being much stronger than your initial expectations. Is that sort of how the business has evolved through April?

Greg Rush: We had a really good quarter in CNS. As I mentioned in the past, part of CNS was where our strong customers were in their own pipeline. And so as those customers finish out studies and have success at those drugs and they’ve come out with additional studies and we’re doing a good job of winning those and got a good repeat business. So, we had a very good quarter in CNS.

Unidentified Analyst: And then finally, just in terms of priorities for cash use this year beyond sort of incremental paydown of our debt, I mean how should we think about sort of tuck-in M&A, any specific areas maybe perhaps around patient recruitment or smaller clinical trials or some stuff that you’re focused on at the moment? And then maybe just some quick thoughts on broader sort of M&A in the space; obviously there’s been a lot of speculation around targets out there and who might buy them. So, any thoughts on that would be great.

Jamie Macdonald: Thank you for not specifically mentioning the rumor. In all seriousness, I think that INC has always articulated a view that we believe that we are well-positioned to be an acquirer in the space. We have a good balance sheet to be able to do that.

And we plan to look at -- our first focus is on small tuck-in acquisitions, but we’ve also had a track record whether it’d be Kendall or MDS before that doing transformational acquisitions. But our first focus is on tuck-in and we certainly will be willing to look at larger acquisitions when in position to do that. If there is consolidation in industry, we hope to be part of that and acquirer in that space. As to where our focus is in that, post approval is a good market. We certainly will look at that and we’ll also continue to look at building our Asia Pacific presence, and ophthalmology has been an area we’ve talked about in the past from a therapeutic focus.

So, small tuck-ins, picking in those areas where see growth and where we see places to augment our strength. Sites and patients, we certainly looked at, I think we look at that more as a partnership than an acquirer and there are several people that actually bought in that area. We view that as an area that we will probably partner versus own, but that’s our strategy in that area.

Operator: Thank you. Our next question comes from Eric Coldwell of Robert W.

Baird. Your line is now open.

Eric Coldwell: First up on biotech demand, you’ve mentioned I think 25 new clients won in the quarter. Also, I guess what I’m really trying to get at is have you seen any change in the environment, whether it be demand or changes in behavior related to the financing world? And if you could also give us an update on revenue and backlog from pre-commercial accounts if you can speak to that? And then I fill follow-up. Thanks.

Jamie Macdonald: So, just on sort of biotech funding, I think if you’d asked the question maybe two months ago, obviously there had been a big correction in the market, there have been no IPOs, even the M&A side had looked pretty flat. I think fortunately it was a relatively short-term adjustment. We’ve seen some IPOs; we’ve seen some funding coming in, some follow-on funding as well. We’re also seeing pharma a little more active in some of the licensing agreements that you’ll have seen on the Wire, and even some M&A contemplated, I think both AbbVie and Sanofi, have been pretty active even this last week. So, I think overall, we still feel reasonably positive about the biotech sector, mainly because of there is a lot of good science coming out.

And as we’ve said all along, I think good science based on solid fundamentals where the ideology of the disease is strong, there is good targets, and people are bringing molecules with positive mechanisms, I think that’s always going to get funded. So, I don’t think we have a lot of concerns there. We’ve had various numbers in terms of much cash is on the balance sheet of biotech. I think I’ve heard up to $380 billion. So, I don’t see any short-term issues.

But, it is about funding good science and making sure there is follow-on fundings there for some of the biotech. I think that was one thing we may be picked up was even from the IPO market in the last 18 months, some of the biotech raises may not have been full in terms of supporting a complete development pipeline. So we’re obviously watching that but some are coming back for the secondary financing as well. So, again good science continues to get funded.

Greg Rush: Eric, as we’ve talked about in the past, I think the whole biotech thing, at least in the short run is way overblown.

The impact on our revenue for this year, if it completely dried up a 100%, which it has not moved in, I think the first few IPOs were all biotech this year, but it completely dried up, would be few percent impact on our revenue because our backlog is well-funded that can go in there without being funded. So,, obviously we’re able to raise guidance in a market where people felt like the biotech funding was impacted. To your question as what percentage of our backlog, it’s roughly in line with what it was at the end of December, at 15% now. And the reason why it’s gone up slightly, 14 at December, is mainly because of mix of burn. Some of our -- that large customer that we told you that accelerated their study is not a biotech; it’s a large pharma.

And therefore their revenue continues to burn -- the backlog decreases for that customer hit makes the bio-tech piece stop a little bit, because a lot of biotech is within oncology, as you know, which is slower burn.

Eric Coldwell: And then, on the study pull forward, you talked about the impact on revenue. I’m not sure I got that impact on EBITDA from that. And then also, did your EBITDA outlook change as the quarter progressed? I felt like there was a little more of a phasing period here in Q1 that really didn’t come to fruition. Did anything change as the quarter progressed beyond the study pull forward that would have impacted your EBITDA dollars positively, as the quarter came to a close?

Greg Rush: Yes.

For the quarter, certainly was positively impacted by that pull forward. So, if you think about, we would have expected our EBITDA margins to be a little bit lower in Q1, everything else held constant just because of the reset of FICA and also other timing. But we had to use little bit more contractors on the study and also negatively impacted our margin in Q1. That pull forward of revenue certainly helped in Q1. For the full year, our margins, we’re still effectively maintaining that EBITDA flattish, maybe slightly down now given the contractors that we’re needing to use.

So, we’re still holding with the flattish but Q1 was positively impacted by pull forward.

Operator: Thank you. And our next questions comes from line of the Greg Bolan of Avondale Partners. Your line is now open.

Greg Bolan: So, just a couple of questions.

In the slides, there was a mention with regards to an uptick in bookings from this mid-cap or mid-sized biotechs, and just all the commentary you’ve made thus far and just kind of digging through the bowels of the results, it just smells to me like -- and I know it’s very difficult for you guys to probably know this for sure. But, this seems like your market share increased this quarter or for that matter has been increasing, but you did see maybe an acceleration in market share gains this quarter, just from the sampling of RFP bake-off win rate; is that fair, Jamie, Greg to say?

Greg Rush: Well, I think we’ve been gaining market share for the last couple of years. I wouldn’t necessarily say that we saw an uptick compared to what’s in the past. But the industry as a whole is growing at around I think 6% to 8% depending on who you talk to. And our revenue and bookings each year have been growing at a much faster pace than that, high teens.

So, I think all of the big guys are taking market share from the small guys right now; it’s not good to be small, and you need to have that global footprint. So, all of us are benefiting from that. Oncology and CNS are really growth areas; we’re particularly strong in those areas, though we’re probably taking a little bit more market share there, and we’ve gotten some rescue studies and some business from some of our fellow larger CROs. So, we feel good about our position and we feel good about our business model. So, actually we’re really good there.

The other thing, I think you are alluding on the biotech mix, that’s one quarter is just timing; that’s revenue by the way. So, part of it is just timing. We don’t expect to see a significant change in that. And the way we define our large pharma versus small pharma/biotech is that the large pharma is top 50, so that slide, I think you’re referencing is slide five. We see that this is timing.

Over the long term, there’s not going to be a lot of variation there. We see sort of the same mix. All right, any other questions?

Operator: Our next question comes from line of Donald Hooker from KeyBanc. Your line is now open.

Donald Hooker: One of the things that I was impressed with was the ramp in new clients that you’ve had in the recent quarter and the quarter before I guess as well.

So, when you think going forward, I think in the past you’ve commented these new clients tend to come in small and take little bite sizes of your services and ramp over time. So, I’m wondering how much of a positive read through to the future these accelerated ramps of new clients has; maybe if you can discuss who these clients are a little bit in sort of a qualitative manner would be helpful for our forward expectations?

Jamie Macdonald: I think we’ve done a good job as identifying clients that we’re not currently working with and what their potential needs are. And it does vary. Some of the new clients are larger, more established customers as well that traditionally have not been sort of part of INC’s customer set. So, I give credit to the sales team.

They have done a good job working on understanding the upcoming pipeline or portfolio for those customers, looking at existing studies and maybe either molecules coming out of pre-clinical INDs that have been filed, even some lifecycle extensions for large pharmas. So, it’s about getting in front of those customers. I think we’ve said this all along, well in advance of the RFP process. The more time we can spend with those customers, socializing IND capabilities, the more likely it is we’ll obviously receive an RFP, but if there’s an established relationship there, then that then helps obviously in proposal, bid defense and award process. I think if all we do is wait to see a request for a proposal land on our desk, the likelihood of winning that is pretty low.

So, our sales teams are spending time with these customers well in advance. Our therapeutic people are meeting them at industry conferences, we are providing some high level consulting, some of which is paid, some of which is not paid and that usually then establishes a link to that customer for future opportunities. And we’re continuing to do that. There’s other customers out there that we’ve not yet worked with, but we’ve spent a reasonable amount of good quality time with. And as their pipeline progresses, we would expect to be in the mix for future work.

And there’s some pretty new biotechs who have received funding and haven’t really been in clinical development, they’re coming out of pre-clinical, they’re filing INDs for the first time; they’re putting molecules into Phase 1. And we’re following those to hopefully see those molecules progress and for us to be part of that mix.

Operator: [Operator Instructions] I’m showing no further questions at this time. I’ll turn the call back over to Mr. Jamie Macdonald for any closing remarks.

Jamie Macdonald: Thank you. And thank you everybody for your time today. Thank you also for your investment in our Company. We look forward to reporting back to you on our next call with further progress made during the second quarter of 2016. Have a great day.

Operator: Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program. You may all disconnect. Have a great day everyone.