PRA Health Sciences, Inc.
Q1 2019 Earnings Call Transcript

Published: 5 May 2019

[Operator:]

Good day, ladies and gentlemen, and welcome to the PRA Health Sciences, 1Q 2019 Earnings Release Conference Call. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Tom Byrne, Vice President of Legal Affairs. Mr. Byrne, you may begin.

[Tom Byrne:]

Great. Thank you. Good morning, and thank you for joining us for the PRA Health Sciences First Quarter of 2019 Earnings Teleconference. Today, Colin Shannon, our Chief Executive Officer; and Mike Bonello, our Chief Financial Officer, will discuss our quarterly financial results. Following our opening comments, we will be available for questions. In addition to our press release and investor supplement with additional financial information is available in the Investor Relations portion of our website. Before we begin, I'd like to remind you that our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business, which are discussed in the risk factors included in our Annual Report on Form 10-K filed with the SEC on February 28, 2019. Our risk factors may be updated from time to time in our filings with the SEC. Please note that we assume no obligation to update any forward-looking statements. Certain financial measures we will discuss on this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a more helpful and complete understanding of our financial results and is consistent with how management views our financial results. A reconciliation of these non-GAAP financial measures to the most comparable GAAP measure, calculated and presented in accordance with GAAP, is available in the earnings press release and investor supplement included in the Investor Relations portion of our website. I would now like to turn the call over to our CEO, Colin Shannon.

[Colin Shannon:]

Thank you, Tom. Good morning, and thank you for joining the conference call covering our first quarter financial results. I am delighted that we have started off 2019 on solid ground and happy to report that our first quarter financial results were in line with our expectations. Our financial metrics continue to improve as we continue to expand our operating margins and adjusted net income and adjusted net income per diluted share continue to grow at double-digit rates. In the first quarter of 2019, we reported $665 million of net new business awards, representing a net book-to-bill of 1.27 times revenue. Continuing our run of quarters with net book-to-bills equal to or greater than 1.2 times our revenue. As we have previously discussed, our new business awards and calculation of net book-to-bill excludes reimbursement revenue and revenue from our Data Solutions segment. The addition of our first quarter new business award has resulted in our backlog increasing approximately 3% on a sequential basis and 15% year-over-year, finishing at approximately $4.4 billion. Please remember that our backlog does not include our Data Solutions segment or reimbursed revenue. The concentration of our new business awards continues to be well diversified with approximately 70% of our new awards coming from the pharmaceutical sector and approximately 30% coming from the biotech sector. Although the first quarter of 2019 was more heavily weighted towards pharma, it is not that far out of line with what we have seen in previous quarters and certainly not a reflection of what we are seeing in the biotech sector. I would add that overall the CRO environment remains stable. We continue to see a steady flow of RFP volume, but we continue to see the path, and we noted previously that once we are awarded business, clients are taking slightly longer to determine the final trial design which has led to slower start times. There also continues to be erratic around the pharmaceutical industry with proposals such as Medicare for all. But at this point, clients are still assessing the impact of these proposals and do not appear to be changing the development programs. Total revenue for the first quarter was approximately $722 million which represents an increase of approximately 3% year-over-year at actual foreign exchange rates and 4% on a constant currency basis. Revenue growth excluding reimbursement revenue was approximately 4% year-over-year at actual foreign exchange rates and 5% on a constant currency basis. Our first quarter revenue was within the guidance range we provided in February. However, we continue to see volatility in amount of reimbursement revenue that has been recognized period-to-period and versus our expectations. The team continues to look at ways of retaining our forecast in process to try to resist this volatility. However, the types of studies that we are awarded and our customer’s presence in the main part of activity that we will be managing continues to be a factor in the amount of revenue that has been recognized and amount of revenue that will be recognized in the future. Adjusted net income for the quarter was approximately $73 million an increase of approximately 30% versus the first quarter of 2018. While adjusted net income per diluted share was $1.10, a 29% increase versus the first quarter of 2018. Our client base continues to be well diversified with our top five clients representing approximately 38% of revenue for the quarter with our largest client representing approximately 9% of revenue. Both metrics exclude reimbursement revenue. Regarding our Data Solutions segment, as I mentioned last quarter, we concluded the annual payment for Symphony and the final annual payment was made in the first week of April 2019. During the quarter, I made leadership changes to more appropriately align the vision and culture to the larger PRA. We have a lot of great talent in this segment and with the leadership having very strong ties to the larger PRA organizations that has been very well received. This distraction unfortunately caused us to be at the lower end of our expected revenue range and it was approximately $4.5 million less than expected at $55.4 million for the quarter. We are now in the process of building out our commercial team to get it to full strength and we look continue to evolve the business by investing in new offerings more integration and international expansion. As mentioned in our press release, we are reaffirming our 2019 guidance, with an expectation adjusted earnings per diluted share will be between $4.93 and $5.80 per share, sorry and $5.08 per share. Mike will provide additional details about our reaffirmed 2019 guidance later in the call. In closing, I’d like to thank our entire staff and our clients for their continued commitment to PRA Health Sciences. 2019 is off to a solid start, and I believe we are well positioned for the remainder of the year. I would now like to hand over the call to Mike Bonello, our Chief Financial Officer, who will go through the quarterly financial results in more detail.

[Mike Bonello:]

Thank you, Colin. Good morning, everyone. For the first quarter of 2019, our consolidated revenue grew 2.9% at actual foreign exchange rates and 4.4% on a constant currency basis. We reported revenue of $722 million for the first quarter of 2019 compared to $701.8 million for the first quarter of 2018. When compared reporting revenue to our guidance, first quarter was negatively impacted by foreign currency fluctuations by approximately $2 million and lower than forecasted reimbursement revenue by approximately $5 million. Our 2019 guidance assumed a reimbursement revenue of 28% of service revenue, while actuals came in at approximately 27%. As Colin mentioned earlier, this difference in rate is purely timing related and has no impact on the earnings we reported in the quarter. Revenue by segment for the first quarter of 2019 was $666.6 million for the Clinical Research segment and $55.4 million for the Data Solutions segment. Regarding revenue concentration for the first quarter of 2019, we derived 55% of our service revenue from large pharmaceutical companies, 10% from small to midsized pharmaceutical companies, 17% from large biotechnology companies, and 18% from all other biotechnology companies. These concentration metrics exclude our Data Solution segment and reimbursement revenue and are in line with what we reported in previous quarters. Total direct costs were $377.9 million in the first quarter of 2019 compared to $381.4 million in the first quarter of 2018. The decrease in direct cost was primarily related to favorable impact of $14.8 million from foreign currency exchange rate fluctuations, which was offset by an increase in labor-related cost in our Clinical Research segment as we continue to hire to ensure appropriate staffing levels. Direct costs were 52.3% of revenue in the first quarter of 2019 compared to 54.3% in the first quarter of 2018. The decrease in direct cost as a percentage of revenue is primarily due to the favorable currency exchange rate fluctuations discussed earlier and an increase in the utilization of our staff. SG&A expenses were $97.1 million or 13.4% of revenue for the first quarter of 2019 compared to 13.1% for the first quarter of 2018. The slight increase in SG&A expenses as a percent of revenue is primarily related to an increase in stock-based compensation. As previously discussed, the increase in stock-based compensation expense is related to the initiation of our annual grant program and the expansion of our employee stock purchase plan and is consistent with the trend we saw in the fourth quarter of 2018. Adjusted net income, which excludes certain items whose fluctuation from period to period does not necessarily correspond to changes in our operating results, increased 30.3% to $73.3 million in the first quarter of 2019. Adjusted net income per diluted share grew 29.4% to $1.10 per share in the first quarter of 2019, compared to $0.85 per share in the first quarter of 2018. Cash provided by operations was $41 million in the first quarter of 2019 compared to $34.6 million for the first quarter of 2018. The increase in operating cash flow was a result of increased operational performance, offset by an increase in our working capital. Our net days sales outstanding was 20 days at March 31, 2019, and 2018 and was in line with our expectations. Capital expenditures were $19.9 million for the first quarter of 2019, compared to $13.8 million for the first quarter of 2018. Our capital expenditures continue to reflect our investment in information technology and the expansion of our infrastructure to support our growth. Our cash balance was $177.1 million at March 31, 2019, of which $50.8 million was held by our foreign subs. Net debt outstanding defined as total debt less cash and cash equivalents at March 31, 2019 was $909.4 million compared to $1.2 billion at March 31, 2018. Regarding currency concentration excluding reimbursement revenue on expenses, 84% of our revenue were denominated in U.S. dollars, while 60% of our total expenses were denominated in U.S. dollars, which is consistent with prior quarters and consistent with 2018 levels. Our euro exposure continues to be naturally hedged. As we have discussed in prior quarters, we have exposure to movements in the GBP as less than 1% of our revenue was dominated in GBP while approximately 6% of our expenses are denominated in GBP. As Colin referenced earlier in the call, the company is reaffirming its 2019 revenue guidance of between $3.09 billion and $3.20 billion, representing as reported in constant currency growth of 8% to 11%. We are also reaffirming our GAAP net income per diluted share of between $3.65 and $3.80 and adjusted net income per diluted share between $4.93 and $5.08 representing growth of 15% to 19%. We continue to estimate our annual effective income tax rate at 24%, which includes the expected impact of the U.S. Tax Cuts and Job Act. And as we have previously discussed, our effective tax rate may differ from this estimate due to, among other things, changes in the geographic allocation of our pretax income as well as changes in the guidance from regulatory agencies related to the U.S. Tax Cuts and Jobs Act. Please note that our guidance assumes a euro rate of 1.15 and the GBP rate of 1.35. All other foreign currency exchange rates are as of January 31, 2019. That concludes our prepared remarks. And now we're happy to take your questions. Please provide your name and affiliation when asking your question. Operator, you may now open the line.

[Operator:]

[Operator instructions] And our first question comes from John Kreger of William Blair.

[John Kreger:]

If I'm doing the math right, I think your guidance implies high single-digit revenue growth for the whole year and maybe low double digits for the next three quarters. How comfortable are you that, that is feasible given the slowdown over the last year? And do you think the key driver of the improvement is going to be more on your Clinical Research side or in Data Solutions?

[Colin Shannon:]

Thanks for the question. John, when we modeled the end of the year -- we've got very good backlog coverage, so a lot of this is driven by the visibility we have from our backlog. So we can get from our clinical operations -- we're getting obviously -- feel confident and because all the studies we've won over the last number of quarters are staring to ramp up. And we're seeing it. And I mean, we're already feeling the pressure of hiring, I mentioned that last quarter, we're starting to build out and ramp up rapidly to -- in order to meet these numbers. So overall, the areas and the traditional PRA I'm feeling very confident over. We mentioned the big pharma with strategic solutions. We're a little bit nervous about that piece because we're unsure about how they react to all the things that are going on with the government and the changes in pricing and everything like that. And we’ve already started noticing that they are tightening up their cost savings et cetera and they’re – we’re watching that evolve. So I don’t see a huge amount of growth there. So the rest of it is, the major part of it is coming from our traditional business. A pretty good feeling of Data Solutions now. We’ve got a new leadership we expect to see a ramp up. May still be a little bit slow in Q2, but we as you know, it’s fairly back-end loaded so we’re feeling pretty good about the latter part of the year.

[Mike Bonello:]

And John, just add – I’ll just point out, regarding kind of the historical 605 revenue, we were within, after taking into account FX and the movements from what we had budgeted $1 million from the midpoint. So it’s not like there’s a significant amount being pushed out into later quarters the biggest portion of us being towards the lower end of the range for Q1 was really the pass-through component.

[John Kreger:]

Understood. Thanks. And just one quick follow up on Symphony. You mentioned on the call and I think last time too that you see a nice opportunity to expand that business internationally. If you do that or as you do it, is that going to be a pressure on margin? Should we be thinking about maybe less of a bottom-line contribution from Symphony in the near term as you build that out? Thanks.

[Colin Shannon:]

Well, there’s a potential of -- I mean, really it depends on how we manage this, John. Because a lot of our clients are really looking for us to improve our offering so that as we know the demand is there and it’s just getting the right assets at the right pricing. So, and we are looking to evaluate many opportunities here. I think that it’s something that our clients would love us to do more. They see us as a good viable offering, the things that they are delighted to say to others. The new leadership has been out to a number of clients, the feedback has been really, really positive and very strong. So, we feel like what, a very good name out there and I’m feeling very positive about if we do expand that we can actually cover most of it. But, I’m willing to make these short-term investments because I think we’ll make sure we recover it in the longer part -- the longer-term from the other parts of the business.

[Operator:]

And our next question comes from David Windley of Jefferies. You may proceed with your question.

[David Windley:]

Thanks. Colin, could you elaborate a little bit on the factors that are influencing the delay in these study starts and for example which segment of your client base is that more prevalent? And qualitatively what -- are those more regulatory protocol design? Funding? What are the factors that are influencing that? Thanks.

[Colin Shannon:]

Well, I’ll remove funding because that’s not an issue at all. Before we even accept an award we’ve always checked our fundings, our clients are very well vetted. And we always make sure that they have the finances to cover the whole study including all of the investigator grants. We’re finding and I mentioned this over -- really since last summer. And we’ve been signing, we’re getting awards and we’re doing multiple rebids as we’re looking at various scenarios as we get the opportunity to optimize the study protocols and looking at how we direct country mix and balance that out appropriately for our cost benefit. It’s just taking more affiliations of identifying the right type of design. I mentioned that in my prepared remarks, we’re still seeing that sliding out a little bit. But, when we start to see concrete by start this when everyone get more share in this, which is why when I mentioned last quarter, we knew that this is exactly what was going to happen this quarter, and as Mike said, went on a $1 million of it and that included a $4.5 million shortage in our Data Solutions business. So we actually feel pretty confident about everything except this reimbursed revenue, we are -- and honestly, it's sharp pain at the heart.

[David Windley:]

Yes. Okay. Appreciate that. So as you're thinking about these rebid activities, is that -- and I think maybe the opportunity to clarify, not recompeting for the business, but the client evaluating strategies, correct?

[Colin Shannon:]

Correct. Yes, this is after award.

[David Windley:]

Right. Right. So not a question whether you keep the business or not.

[Colin Shannon:]

No. Correct. This is all venturing. No, we would never take anything back or anything that wasn't formerly awarded. But then as we go through it -- I mean a lot of it is actually, we're using our data analytics and giving you new opportunity -- new options, and a lot of it is just giving the client an opportunity to really hone in, in what they really want to get done. We give them best approaches, new ideas and it just takes a little bit longer.

[David Windley:]

And that's a good segue into what I was going to ask, which is are the clients' minds being open to the tools that are now allowing them to think more insightfully or intuitively or do more analysis of up front on study strategy because of the data tools, for example, that you're bringing to bear, and maybe a lot of selling activity that is -- along these lines that is going on in the industry today? Is that contributing to this, do you think?

[Colin Shannon:]

I would say, partly. It's really the uptake varies. You've got high-end very sophisticated data users wanting to know and more understanding of what's going on in the market place, what's happening with the patient population and others who are very traditional in the thought process. And we decide that we are -- our clients choose what they want to do. We are there to help them, we support them with whatever aspect they need. Our goal really is to continue to educate and allow them to use our capabilities so that will help them get the trial done faster and cheaper.

[Operator:]

And your next question comes from Donald Hooker of KeyBanc Capital Markets.

[Donald Hooker:]

So maybe help clarify with regards to the Data Solutions segment, and what have you baked into guidance for this year in terms of revenues?

[Mike Bonello:]

Donald, we haven't disclosed that at this point. We're still -- with the change of management, we want to make sure that we have fine-tuned what that estimate is, and we won't be disclosing it at this point.

[Colin Shannon:]

I mean, Don, what we have actually had is we've had planning sessions. We are creating -- we're adding on to our sales force, our commercial sales force, we're building out because it was a little bit depleted. We are looking new service offerings. We're looking to continue to elevate and get more client needs. We're looking at new data offerings. We're looking at international offerings. We're continuing to work closer with the larger PRA organizations, and that's creating opportunity. So we're excited about with the direction where we're going in, but at this point, we have not locked on exactly what it's going to convert to into numbers. We have said that it's going to grow in line with other parts of the business and we've always felt that low double digits would be where we'd be always aiming. At this point in the year, I still have that aim even though we got off to a little bit rocky first quarter start.

[Donald Hooker:]

Okay. That's helpful perspective. And then maybe switching to the Clinical Research segment. Just -- I understand from your commentary that you're recruiting pretty aggressively new staff to kind of backfill business that you won. So when I think about, sort of, gross margins, are we sort of at a high watermark? I guess we're down sequentially a little bit as you brought new staff in, but are we probably seeing pressure there going forward? Kind of where do you see gross margins sort of trending over the next 12 to 24 months?

[Mike Bonello:]

Yes. No. I don't think -- I think our gross margin should hold line with where they were in the first quarter. We obviously have that hiring baked into our forecast going forward and expect to see some higher utilization and hopefully some margin expansion towards the end of the year.

[Donald Hooker:]

Great. Now I just last one, real quick one and then jump off. In terms of obviously also backlog burn is a focus and I understand there was a shift in mix there so it's not necessarily a bad thing. But just for our -- is it sort of a low watermark there in terms of backlog burn? Or what is the bottom there in terms of backlog burn percentage?

[Mike Bonello:]

So our backlog burn, what -- as you see in our investor presentation, was 12.7% for the quarter and that was just slightly above what we had forecast at least for the first quarter. So I'm feeling like we're starting to hit that -- the bottom of the trough and should be turning back out of it more towards -- I don't know that we'll get to the levels where we were in previous years, but we should start seeing an increase in burn rate.

[Operator:]

And our next question comes from Jack Meehan of Barclays.

[Jack Meehan:]

Just to build off that, maybe just -- was hoping to get a little bit more clarification on the 2019 outlook. Do you expect growth to pick up sequentially throughout the year or do you think it's possible with some of the pickup in the burn rates that you could actually see a more meaningful step up in the quarter?

[Mike Bonello:]

I think we're probably be in line with where we were for the second quarter -- in the first quarter, so those rates should be relatively the same. And we'll see the pickup be more towards the back end of the year.

[Jack Meehan:]

That makes sense. And then, I was hoping you could give us a mark-to-market with one of your larger customers Takeda, obviously, with the deal closed. Just curious what you're seeing there in terms of awards and what the dialogue's been about potentially taking some of the Shire share, now the deal is closed.

[Colin Shannon:]

You know there's a lot of intense work being performed by our teams with the Takeda group as they are looking to evaluate the next steps. We have obviously got a nice book of business that we are just continuing to walk through at the moment and there's a -- there are a lot of workers trying to rationalize what they are doing internally, how they're going to be working with us going forward, and we have sold our main strategic partner, but there's other CROs in a mix just right now with, obviously, with Shire. So if that collaboration's getting things organized then that's a huge amount of activity. It's -- we've just obviously -- we enjoy the relationship and we have continued to be able to help them and support them in their future needs.

[Operator:]

And our next question comes from Juan Avendano of Bank of America. You may proceed with your question.

[Juan Avendano:]

Hi. Thank you. When you acquired Symphony, I believe adjusted EBITDA margins for that business were in the low 20s given some investments and implementation costs that you had to incur. Can you give us an update on the adjusted EBITDA margin of the Data Solution business nowadays?

[Mike Bonello:]

Juan, we’re not disclosing that information. We don’t manage that business anymore to that extent as you’ll see in our disclosures or if you look back to the 10-K. We manage the business only to gross margin. So there is other costs in there that obviously are being shared by both businesses. So wouldn’t allow me to give you an accurate number.

[Juan Avendano:]

Okay. And my follow up unrelated. But your gross wins growth was flat year-over-year. Is this due to competitive dynamics, lack of more capacity, I know you’re hiring back up again. Can you shed any light on this?

[Colin Shannon:]

That’s definitely a stronger competition. We’re finding pricing is always pretty aggressive, we’ve always felt that regarding it keeps everybody on as market rates are appropriate. There’s no one particular reason that we’re -- in any way that we look to say that we would be losing for a particular reason. Sometimes it maybe a little bit of pricing as you get -- as our strategies at first. A lot of it is, we are looking closely at data and understanding the risk associated with it. So, we feel like we're getting a good understanding of what is it going to take to price this study appropriately. And we’re studying that sometimes can lead to us being preceded in the higher priced yet we’re following the rest. So we’re explaining to the client that’s just the reason that we are pricing it at this manner, we’re supporting it data, we’re showing that there is lots of moving dynamics and dynamics. And all I can say is though that that is a great amount of RFP volume out there. And the service seems to be an off business to go around because looking at our competitors, everybody's winning a good share of business. We’ve got a very, very good diversified client mix and feel very good about where we’re positioned.

[Juan Avendano:]

Thank you.

[Operator:]

Thank you. And our next question comes from Sandy Draper of SunTrust. You may proceed with your question.

[Sandy Draper:]

Thanks very much. I guess, first, maybe just a couple of questions for Jack around currency, and I may have missed it. Did you give a constant currency growth number for just the research business excluding Data Solutions? And then maybe a follow up. Is there any impact of FX on Data Solutions? Or is that business 100% denominated in U.S. dollars?

[Mike Bonello:]

I didn’t break it out, I just gave it to you in total. So I’ll tell you this that the Data Solutions segment is all U.S. dollars. So, I think you can figure out the dollar piece there, Sandy. So, there was about a -- like I said about a $2 million impact from FX versus what we had guided to versus where actuals came in with respect to revenue.

[Sandy Draper:]

Okay. Okay. Got it. That’s helpful. And in terms of the -- maybe for Colin, in terms of the shortfall the Data Solutions. I understand the management change and refocus et cetera. When I think about it were you not seeing enough opportunities? You weren’t winning the opportunities? The focus wasn’t there? So there were opportunities out there that you just didn’t go after? I’m just trying to think of as you change things, is it -- how much is this is in your control versus something has to happen in the market or something is happening competitively?

[Colin Shannon:]

Oh, no. This was all in [indiscernible]. And I take total responsibility because I couldn't make the changes of -- later on in February. So and I was aware that we needed to add to our sales force and I wasn't prepared to start adding until I got the new leadership in place, and how everybody aligned and made sure that we're selected appropriately. So I was well aware that it was going to have consequences. I thought I had estimated that well enough, but it's paying new business to others as well. But it was actually -- and all said and done, the revenue streams are pretty good. What we're starting to say, there's another component, which is service in kind, and it varies a lot because it depends on the use of the value clients. And that's going to be with respect to cost over the year, but it's kind of lumpy when they actually use it. The service in kind that we're actually working with, so that was down a lot of more. And now that's really uncontrollable part. But overall, directionally I feel very good about what we did, how we're managing going forward.

[Operator:]

And our next question comes from Ross Muken of Evercore.

[Unidentified Analyst:]

It’s Luke on Ross this morning. Just a quick one, a follow up on Dave's train of thought on the slower start of times. Is this also -- could this be due to a function of more indications like gene therapy and cell therapy where pharma and these are completely new Greenfield opportunities that have -- don't have any prior experience? And so you're working with the client and it also presents you an opportunity to kind of layer on that data.

[Colin Shannon:]

Exactly. Exactly the case. It can happen with a lot of the complex studies as well, where tactical patient populations and how we best go after them. So once we've been selective with them what course, or what the client to help them really optimize a trial and looking at how to really identify where best to locate the patient population are looking forward to ensure the success of the study.

[Unidentified Analyst:]

Okay. Great. And then I guess on the investments that you talked about for the Data Solutions to get that back up and running. Now that management's new in place, besides on the sales force, kind of what innovation and technology offerings are you guys looking to expand upon? Just kind of give us an idea of that extra bill, et cetera?

[Colin Shannon:]

Well, at any point, our clients are looking. I mean the more data you have, the more you start to realize those gaps. And we look for -- we're always in a lookout for new sources to give us more capability to get this analysis done, to help our clients who'll understand what they're looking for in the marketplace. So what when we're looking for new offerings, we're saying, well, where do we get new data sources? How do we blend it together? How do we reconnect? So that there are companion looking at new ways of analyzing the data that helps give more meaningful context to what the client's looking for. So that's an important attribute. One thing that -- there's something we weren't able to do was invest overseas to then up the infrastructural capability. We've got privacy and all of the capabilities and, obviously, the overseas infrastructure to help move that forward. So we're now looking for the right opportunities to make sure that we -- as we progress that forward, we do so in a meaningful manner.

[Unidentified Analyst:]

So, it's of just finding a dataset that would be complementary what you already have.

[Colin Shannon:]

Correct.

[Operator:]

[Operator instructions] Our next question comes from Dan Brennan of UBS.

[Dan Brennan:]

Colin, I just wanted to go back to a comment you made at the kind of earlier in the Q&A about the potential influence from behavior from -- like these political headlines may be Medicare for all or drug pricing. First, could you just clarify, like, is this mostly some hesitation or impact on, like, the established pharmaceutical companies and not on the more emerging biotech? And secondly, can you just clarify like what potentially you are seeing? You mentioned something related to more cost controls I just wanted to flush out at this point.

[Colin Shannon:]

Well, our Strategic Solutions division works with big pharma primarily, and they are the ones that get more impacted with any costs constraints that the pharma sector impose. And we've been getting stuff like continued pressure there for watching costs and looking at that, looking very closely at the procurement budgets and we're seeing that they've not altered the development partly, but they're continuously looking for productivity gains, they're to deal a lot more with less. So that's definitely the feeling that they are definitely shorting up their cost structures and they are trying to watch their spending and trying to get more value of what we're currently doing. So we're obviously delighted to be working with our clients and helping them achieve that opportunity with utilizing some of our tools that we have in the other parts of the business to help support them and help improve the productivity. So -- but we're certainly feeling that there's some angst there because of what's going on in the marketplace.

[Dan Brennan:]

Great. And then just one other just on the competitive environment. I think you mentioned pricing is always, I guess, it's fair, but not necessarily changing. But you also mentioned maybe seeing stronger competition. So is there any change in the overall competitive environment that you're alluding to. I just want to kind of flush out that point as well.

[Colin Shannon:]

I think as the CROs have been entering a lot of the mergers are starting to stabilize. Obviously they are in a stronger position. So I think that it's fair to say that they are much more focused and getting a lot more attention. So I don't see anything majorly changing. It's always been competitive because there's always strong players out there. And we just got to continue to enhance our offerings, improve our service capabilities, make more use of our IT developments that we're continuously working on and prevailing data support and service for our project teams. So we are in charge of our own destiny, we make sure we lead the charge in our own way.

[Operator:]

And our next question comes from Erin Wright of Credit Suisse.

[Erin Wright:]

Great. I had just a broader question on the demand trend. Are you seeing any fluctuations at all in insourcing, outsourcing specifically across kind of both FSP versus kind of the full service relationships in any sort of unique dynamics going on potentially in the quarter? What you kind of see going forward? And then just general RFP flow, if you could comment on.

[Colin Shannon:]

Thank you for that. Yes, on the FSP type work, we're definitely seeing that a little bit flatter than previous years. We're still seeing strong opportunities and the traditional project based work and -- but we’re certainly and it may just be temporary at this point, it’s hard to assess that. But we’ve been cautious about how we’re building our forecast from that element. So as we are preparing our guidance et cetera, we are looking for how FSP continue that type of trend. What would we do to mitigate some of the effects? So, we take a lot of the caution out as we’re building out a forecast. And I think we’ve got it pretty well covered.

[Operator:]

Thank you. And our next question comes from Donald Hooker of KeyBanc Capital Markets. You may proceed with your question.

[Donald Hooker:]

Hi, great. Just a follow up. One of the questions I meant to ask was as we think about sort of -- I mean, the balance sheet looks great and as you’re paying down debt, I assume going forward. How do we think about CapEx? It looked like it was a little bit elevated in the quarter. So, I just want to make sure I get head around what CapEx spending should be as you’re making a lot of changes with the company.

[Mike Bonello:]

Yeah. I think it is -- I think I referred to this in our February call, Don. I think it is going to be higher than it has been historically I don't remember the number off the top of my head, but I want to say we were roughly around $60 million last year. We had anticipated that, that would be roughly $10 million to $15 million higher. We weren’t able to spend that money last year because of just prioritization in the staff to get some of those projects done. So, I wouldn’t expect that we will try to push some of the projects that were missed last year into this year and that will cause us to be slightly higher in 2019.

[Donald Hooker:]

Okay. So that would be kind of like a bleb. And then, I guess, thereafter maybe a more normalized trend.

[Mike Bonello:]

That’s correct. So we’ve looked at -- I looked at 2018 and 2019 kind of in total and we would still spend what we would have spent in total in those two years. So, when everything said and done, it will be about the same.

[Donald Hooker:]

That’s fair. Thanks so much.

[Operator:]

Thank you. And I’m not showing any further questions at this time. I would now like to turn the call back over to Colin Shannon, CEO for any further remarks.

[Colin Shannon:]

Well, thank you, everyone for participating in our call today. If you have any additional questions, please feel free to contact us. We hope you have a great rest of the day. Thank you very much.

[Operator:]

Thank you. Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today's program. And you may all disconnect. Everyone, have a wonderful day.