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Edited Transcript of Q.N earnings conference call or presentation 3-May-17 1:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Quintiles IMS Holdings Inc Earnings Call

DURHAM May 5, 2017 (Thomson StreetEvents) -- Edited Transcript of Quintiles IMS Holdings Inc earnings conference call or presentation Wednesday, May 3, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Markwick

* Ari Bousbib

Quintiles IMS Holdings, Inc. - Chairman, CEO and President

* Michael R. McDonnell

Quintiles IMS Holdings, Inc. - CFO and EVP

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Conference Call Participants

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* David Howard Windley

Jefferies LLC, Research Division - Equity Analyst

* Derik De Bruin

BofA Merrill Lynch, Research Division - MD of Equity Research

* Jack Meehan

Barclays PLC, Research Division - VP and Senior Research Analyst

* John Charles Kreger

William Blair & Company L.L.C., Research Division - Partner and Healthcare Services Analyst

* Robert Patrick Jones

Goldman Sachs Group Inc., Research Division - VP

* Timothy Cameron Evans

Wells Fargo Securities, LLC, Research Division - VP and Senior Equity Analyst

* Tycho W. Peterson

JP Morgan Chase & Co, Research Division - Senior Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Quintiles IMS First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, Wednesday, May 3, 2017.

And I would now like to turn the conference over to Andrew Markwick, Vice President, Investor Relations. Please go ahead.

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Andrew Markwick, [2]

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Thank you, Amanda. Good morning, everyone. Thank you for joining our first quarter 2017 earnings call. With me today are Ari Bousbib, Chairman and Chief Executive Officer; and Michael McDonnell, Executive Vice President and Chief Financial Officer.

Today, we will be referencing a presentation that will be visible during this call today to view on our webcast. This presentation will also be available following this call on the Events & Presentations section of our QuintilesIMS Investor Relations website at ir.quintilesims.com.

Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements. Actual results could differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, which are discussed in the company's filings with the Securities and Exchange Commission, including our annual report on Form 10-K filed on February 16, 2017, and subsequent SEC filings.

In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to and not a substitute for financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the press release and conference call presentation.

I would like to also point out that as with other global businesses, we have been impacted by year-over-year foreign exchange fluctuations.

I would now like to turn the call over to our Chairman and CEO, Ari Bousbib.

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [3]

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Well, thank you, Andrew, and good morning, everyone. Thank you for joining our first quarter 2017 earnings call. Out of the gate, we had a strong start to 2017. We are pleased Q1 results came in, in line or better than what we told you to expect. Let's have a quick review of the numbers.

Consistent with last quarter, we're making comparisons more meaningful by discussing results on a combined company basis as if the merger had taken place January 1, 2016. First quarter revenue was just over $1.9 billion and grew 3.1% at constant currency. R&D Solutions growth was 4.3% at constant currency, and R&D Solutions revenue was negatively impacted by our early clinical development business, where we closed a facility in London last year. Excluding this early clinical development business, revenue growth would have been about 5.5%.

Commercial Solutions grew 2.5%, 2.4% to be precise, at constant currency. Growth in Commercial Solutions was negatively impacted by the poor performance of the legacy Quintiles Encore business, which itself declined more than 50% year-over-year. Excluding Encore, the commercial business would have grown 4%.

Integrated Engagement Services, as expected, was slightly down. Acquisitions contributed 1 point of revenue growth, and that was evenly split between R&D and Commercial Solutions. Adjusted EBITDA was $467 million, which is higher than our guidance range and about $10 million above the midpoint of the range. This beat was entirely driven by stronger operating performance.

Let me provide some color on a few key wins in the quarter. Let's start with the Real-World Insights business. The real-world team won a $15 million deal for 2 neurology studies with a top 5 pharma client. Our global data, advanced analytics and deep therapeutic expertise in neurology set us apart from the competition. The client saw a huge benefit in using retrospective data to accelerate site identification and patient recruitment for these prospective studies in both the U.S. and Europe.

Another top 5 pharma client signed a $12.5 million real-world deal based on our unique capability to lean diagnostic data, prescription data and demographic data to support a Phase 4 interventional diabetes study.

Turning to our R&D Solutions business. We saw continued improvements in our as-contracted bookings trend. At the end of the quarter, we have a contracted backlog of more than $9.6 billion. Now I've never done this, but I'm going to go off-script, guys, over here. I read -- I was just reading before the call started a few of the initial notes that some of the analysts wrote, and I still see that people are still trying to calculate quarterly book-to-bill numbers even though we tried to tell you before that it is not a meaningful indicator of how we are doing. But because those calculations are all over the place, I just want to tell you that if you do the math -- and really, it is 3 elementary computations based on the numbers we reported. If you do the math, it is just below your magic number of 1.2 book-to-bill. Again, on a contracted basis for the quarter. We've said over and over, we're not going to do it, but I can't help myself. It is actually an improving booking trend that we have observed over the quarter. And again, I'm departing from script. If you were to do the same math on an awarded basis -- and we don't have the numbers because we don't report awards anymore, we report contracts. On an award basis, that book-to-bill ratio for the quarter would have been materially higher than that "magic number of 1.2."

Now back to the script. I know people are screaming at me here, but I couldn't help myself. We are actually very encouraged by the early demand we are seeing for our next-gen clinical development offerings. Last quarter, I told you we had won over $100 million of business with next-gen since the merger closed. We now stand at more than $400 million of awards, not all of which has contracted, tied directly to the application of next-gen of clinical development within clinical trials. The fight keeps strengthening, and our team is currently engaged in more than 80 next-gen projects.

Recent examples of such wins include: For a large pharma client, we competed against 14 other CROs, and were selected for a preferred partnership based on our unique ability to improve study design, site ID and patient recruitment globally. The clients cited specifically our next-gen offering as a clear differentiator. We had another very significant win with a top 5 pharma client, European pharma client, who has awarded virtually no full-service clinical business to us over the past 6 years. This was a fixed-price award for more than $120 million. In landing this win, a key differentiator was our ability to quickly validate internal historic site performance data with real-world insights. The study has now kicked off. And from the get-go, we were able to demonstrate higher operational performance. The time from contract to first site selection visit was less than 30 days, an unusually rapid pace, and we are expecting to accelerate the client's planned time line for last patient in by 3 months.

On the commercial side, I'd like to highlight a very important alliance we announced with salesforce.com. This deal will enable us to build solutions on a global technology platform that is best-in-class and that will help our clients take their products to market more efficiently and more effectively. This will eventually encompass the entire cycle, from driving patient recruitment to managing client -- clinical trials to taking drugs to market more effectively with agile multichannel applications all built on a single platform. The initial focus of this alliance will be on multichannel stakeholder engagement. We will leverage salesforce's marketing cloud and force.com to enhance our existing capabilities in CRM and multichannel marketing.

With that, let me turn it over to Mike McDonnell, our Chief Financial Officer, to take you through the financials in more detail

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Michael R. McDonnell, Quintiles IMS Holdings, Inc. - CFO and EVP [4]

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Thank you, Ari, and good morning, everyone. Q1 was another strong quarter for QuintilesIMS. Let's review the details.

I would like to call your attention to the more meaningful combined company comparisons in the center of the page. First quarter revenue was just over $1.9 billion, an increase of 2.8% at constant currency and 1.6% reported on a combined company basis. You will recall the deferred revenue adjustment we highlighted on our last call. As a reminder, this noncash adjustment is the result of purchase accounting rules, which, at the time of the merger, requires the elimination of IMS Health deferred revenue, which would have converted to revenue in the first quarter.

Adjusting for deferred revenue and on a combined company basis, first quarter revenue grew 3.1% at constant currency and 2% reported. R&D Solutions service revenue grew 4.3% at constant currency and 3% at actual FX rates. As Ari mentioned, when adjusting for the early clinical development business, where we closed a facility in London last year, R&D growth at constant currency was 5.5%. On a combined company basis, Commercial Solutions revenue grew 2.4% at constant currency and 1.3% reported. The Commercial Solutions growth rate was again impacted by a significant decline in the legacy Quintiles Encore business. Excluding Encore, constant currency Commercial Solutions growth was 4%. Integrated Engagement Services revenue declined 0.2% at constant FX and 0.9% reported.

Turning now to profit. First quarter adjusted EBITDA was $467 million. As Ari mentioned earlier, our adjusted EBITDA performance was better than the guidance we provided last quarter due to strong operating performance.

GAAP net income was $74 million, and GAAP diluted earnings per share was $0.31. Adjusted net income was $238 million. You will recall that our adjusted net income is calculated using an adjusted book tax rate, which was about 29% in the first quarter. You should note that our cash tax rate is much lower and in the first quarter, was approximately 10%.

Adjusted diluted earnings per share was $1.01 in the first quarter. The 1.3 billion of shares that we repurchased during the quarter had no impact to first quarter adjusted diluted EPS. The strong EPS performance was primarily a result of the operational performance I just mentioned, along with slightly more than $0.01 benefit from tax.

Turning to R&D Solutions net new business and backlog. As you will recall from the previous 2 quarters, our new business and backlog metrics are now reported on an as-contracted LTM basis. For the 12 months ended March 31, 2017, R&D Solutions as-contracted bookings were $4.08 billion, resulting in an ending contracted backlog of $9.66 billion. We expect to convert approximately $2.9 billion of this backlog into revenue over the next 12 months.

Now as Ari mentioned, contracted bookings have continued to improve, and we are very pleased with this trend. I do want to also remind you that this is a long-cycle business, as Ari mentioned, and quarterly bookings can ebb and flow. This is why you should focus on overall backlog and LTM metrics rather than the book-to-bill in a given quarter.

Let's spend a few minutes on the balance sheet. At March 31, cash and cash equivalents totaled $862 million, and debt was about $8.4 billion, resulting in net debt of about $7.5 billion. Our gross leverage ratio was 4.3x trailing 12-month adjusted EBITDA. And net of cash, our leverage ratio was 3.8x.

Cash flow from operating activities was $56 million in the first quarter. Capital expenditures were $78 million, and free cash flow was negative $22 million. As is usual during the first quarter, our free cash flow was impacted by annual incentive payments to employees. Additionally, both operating and free cash flow were impacted by cash outflows in our loyalty program businesses. These Commercial Solutions businesses manage co-pay reimbursements on behalf of our pharma customers. Our customers pre-fund these reimbursements, and we include this cash on our balance sheet. We draw on this cash to pay pharmacies as consumers use the programs. The inflows and outflows should even out over time, but in any given quarter, can cause meaningful fluctuations in reported cash flow.

You saw that we issued EUR 1.425 billion of senior notes due in 2025. We also refinanced our Term D debt and extended its maturity to 2024. During the quarter, we repurchased $750 million worth of shares from 2 of our private equity sponsors and the legacy Quintiles founder. In addition, we repurchased $550 million of shares in the open market for total share repurchases of $1.3 billion. As I mentioned earlier, this did not have any impact to adjusted diluted EPS for the first quarter. We now have $231 million remaining in our share repurchase authorization.

Let's now turn to guidance. We are reaffirming our full year 2017 revenue and adjusted EBITDA guidance and raising our full year adjusted diluted EPS guidance. Assuming currency rates remain at current levels for the rest of the year, we expect total revenue of $8 billion to $8.1 billion and adjusted EBITDA of $2 billion to $2.1 billion. Now this guidance is exactly the same as last quarter. Nothing has changed. However, we did buy back $1.3 billion of our stock. We had originally planned on completing $500 million, so the additional $800 million was not in our original guidance. The additional $800 million of repurchases provides a benefit to full year adjusted diluted EPS.

Separately, we also took on additional debt that increases our interest expense and has a negative impact on full year adjusted diluted EPS. The net of these 2 items has a net benefit to full year adjusted diluted EPS of $0.04. As a result, we feel comfortable raising our EPS guidance by $0.05. We now expect adjusted diluted EPS to be between $4.45 and $4.60.

For our tax rates, we expect adjusted book tax rate to be approximately 30% for the year and adjusted cash tax rate to be approximately 16%. Now remember, the timing of tax payments can be lumpy, so you may see the cash tax rate vary by a few percentage points in any given quarter. As always, we would like to tell you what we see for the second quarter of 2017. At this point, assuming today's FX rates remain constant through the end of the quarter, we expect revenue to be between $1.93 billion and $1.97 billion, adjusted EBITDA to be between $470 million and $490 million and adjusted diluted EPS to be between $1.02 and $1.07.

In summary, we had another solid quarter. We delivered strong operational and financial performance. Our next-gen clinical development offering continues to see success in the market. We had encouraging wins with our combined Real-World Insights offering. We had steady performance in our Commercial Solutions business. We are enhancing our existing capabilities in CRM and multichannel marketing and announced an alliance with salesforce.com. We closed the bond offering for EUR 1.425 billion and extended our Term Loan B maturity until 2024. We repurchased a total of $1.3 billion of our stock, and we reaffirmed revenue and adjusted EBITDA guidance and raised full year adjusted EPS guidance by $0.05.

With that, I would like to ask the operator to please open the lines for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Tim Evans with Wells Fargo Securities.

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Timothy Cameron Evans, Wells Fargo Securities, LLC, Research Division - VP and Senior Equity Analyst [2]

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Mike, a quick question on the Commercial Solutions growth rate. I think you called out 4% constant currency, excluding Encore business. Did you have any contribution there from acquired businesses in the quarter? I guess, the same question also in the R&D Solutions.

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Michael R. McDonnell, Quintiles IMS Holdings, Inc. - CFO and EVP [3]

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Yes. Overall, the contribution from acquisitions was about 1%, and that's consistent across both Commercial and R&D Solutions in total company.

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Timothy Cameron Evans, Wells Fargo Securities, LLC, Research Division - VP and Senior Equity Analyst [4]

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Okay, great. And then the other one is on the pacing of your guidance, recognizing that the full year guidance really didn't fundamentally change much. Did the pacing through the year change relative to your initial expectations? I think, certainly, The Street had overmodeled Q2 a little bit, but did anything change relative to your own initial expectations?

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Michael R. McDonnell, Quintiles IMS Holdings, Inc. - CFO and EVP [5]

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No, no change. We expected last quarter and continue to expect the same cyclicality that we've talked about, heavier in the back end of the year and very consistent with how we've seen it all along.

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Operator [6]

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And our next question comes from the line of Robert Jones with Goldman Sachs.

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Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [7]

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I guess just trying to foot a few things on our end. I know the bookings for the 12 months ended March did see a sequential downtick from the 12 months ended December. Not knowing the quarterly bookings, I'm sure there could be some noise in there. And yet, you did highlight that the backlog grew quite nicely sequentially in the quarter. So maybe could you just talk about what you saw on a gross wins perspective and maybe a cancels perspective in the quarter just so we can understand a little bit better what is driving the backlog growth?

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [8]

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Yes, yes, yes. Again, we've tried to guide you away from this quarterly metric because it really -- I mean, I could go on and on giving you examples or -- that would show why you could derive the wrong conclusions from a number in a given quarter. The reason to address the first part of your commentary and question, the reason why the LTM is lower at the end of March than it was at the end of December is because first Q 2016 dropped out of the LTM, and it happens to be that first Q '16 was a very high number on a contracted basis. And so therefore, when you take it out of the 12 months, it's lower than the LTM at the end of December. Now if you recall, that's going to really demonstrate why it's wrong to focus on the quarter and it's also wrong to focus on awarded, and it's better to do it the way we suggest we do it now. And I just told you, the number on a contracted basis for the first quarter last year was very high. And yet, the reported quarterly book-to-bill number last year, when Quintiles was still a stand-alone company, was on an awarded basis and was 0.95, was under 1, whereas the contracted number was materially over 1. And the reason why it was materially over 1 is because, again, because we manage the business based on quarterly awards. They could be contracting in the first quarter of '16 stuff that has been awarded the year before because nobody was focusing on it. What we're trying to do here is compress the time line between award and contract, only count that which is contracted for, change operationally internally so we can compensate salesforce, et cetera, based on contracted work, not just it is awarded to you and smooth the level of cancellations and things we have to take out of the backlog because they were never meant to be in, in the first place. So again, I'm sorry for giving you the commentary, but that is the explanation for the LTM. With respect to the trend, our bookings are actually greater. It is a simple computation, as I mentioned in my introductory remarks. You just do a subtraction of what the reported backlog is at the end of each quarter. You add that to the revenue reported in the quarter, that's an addition, because that's -- the revenue was converted from the beginning of period backlog. And you divide by the revenue. And if you do that, you will see that you don't have the exact precise numbers because last quarter, we said it was about 9.5. It was slightly under that, but basically went with a contracted book-to-bill for the quarter of just under 1.2. Now again, don't focus on it. It could have been 1.1 or 1.3. Let's not just -- we have an LTM of 1.16, which we feel is very good, and the trend will continue to improve based on the pipeline that we see and the awards that we generate -- that we generated in the quarter.

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Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [9]

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That's actually usually helpful. And I think that based on the explanation, the LTM number is kind of useless then. It's really more the backlog number that everyone should be focused on based on that explanation.

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [10]

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Exactly.

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Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [11]

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And I guess, just a follow-up, Ari, move over to something more strategic. The 1Q awards from the next-gen clinical offering, you mentioned about $400 million. I was wondering if you could share any more details around maybe what types of clients or trials those were. Were these new clients to Quintiles or people that had done some work with Quintiles in the past? Just trying to understand how you're making progress on the next-gen clinical side.

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [12]

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Yes. Several cases of new clients. Or again, nobody is new to Quintiles. We have business with everybody in the world. But I mentioned, I particularly highlighted the largest such award because it kind of indicates to you what we're trying to do to change the model. This was with a top 5 European client with whom, frankly, we hadn't done very much. I think the biggest award of a full clinical service was like in the $10 million range, again, over the past 6 years, which we've looked at. We've done other work for these clients in other areas or specific work, data or stats or CSO work, but not full-service core clinical work. So this is the first time, and this is a very, very significant client with whom our (inaudible) on core clinical was very low, to say the least. And that's -- so that's the, I think, clear indication that there is something different. And the main reason we've been able to do that is that we've demonstrated a new approach, new capabilities, which actually, as I reported in my introductory comments, we already demonstrated. The project is already ongoing. It took 30 days from the signature of the contract to the first site identification, which is really a very, very small period. And we've been able to demonstrate that to the client. Another element that's unique about it is that we were so confident and we have a good view of risk, and we were able and willing to go with a fixed-price model. Again, that's something that's new and different, and that's enabled by next-gen. So that's a powerful example that I mentioned because it's large, but there are many others, smaller size. This particular one is contracted for. And as I said, we are working on it already. But in aggregate, since the merger, we've been awarded over $400 million, which we know we -- which we know have been won directly because of next-gen. I would also point out that in a few instances, we actually were able to go back and win stuff that had been awarded to somebody else and go back with a different approach using next-gen.

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Operator [13]

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And our next question comes from the line of Dave Windley with Jefferies.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [14]

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So I appreciate the answer there to Bob's question on the backlog or bookings roll-forward and understand your point about kind of focusing on awards before and bringing contracts to signature kind of not being the focus. If we do take a 6-month view, your roll-forward is down from $4.4 billion to $4.08 billion. Does that -- I mean, are we still able to say the same thing that you're seeing momentum, even though it's down, say, $320 million over a 6-month period?

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [15]

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I'm not sure I follow your question and...

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [16]

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I guess what I'm saying is, if the lag from award to book -- award to contract signature is 3 months or 6 months, the dynamic where we're seeing...

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [17]

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Or 1 year or 1.5 years.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [18]

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Is it that long? Well, if it's that's long, then maybe it's a moot point. But I guess we're seeing this tick-down of your trailing 12-month bookings number happen not just 1 quarter, but 2 quarters in a row. And I'm wondering if the -- kind of all the contract signatures landing in the first quarter of last year, making it a big quarter, if that explains both of those quarters.

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Michael R. McDonnell, Quintiles IMS Holdings, Inc. - CFO and EVP [19]

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Yes. I think you're reading (inaudible).

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [20]

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Yes. I think the number you're looking at is simply -- again, the first quarter of '16 was a huge, huge contract on a contracted basis. A huge number. For whatever reason, a lot of awards of the prior, I don't know, 1.5 years, 4 to 6 quarters, so going back to '14 and '15, were signed and contracted for in the first quarter of '16. Now nobody was tracking contracted book-to-bill or contracted backlog. Nobody was paying attention to it. It happens to be a huge number. And so when you take it out of any LTM, you are going to have a decline, by definition, okay, because it's going to bias the number. It's going to look like it's going down. But the amount of bookings that we are contracting quarter after quarter over the past 3 quarters has been on a steady uptick.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [21]

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Okay, okay. I'll leave that alone. So as I think forward, getting to kind of Tim's question about the cadence of the year, your uptick, I guess, your trajectory as you move into the second half of '17, starts to steepen. How do we think about a forward 12-month coverage number of, like, $2.9 billion relatively constant as the forward forecast needs to accelerate? How do you fill in the remainder?

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Michael R. McDonnell, Quintiles IMS Holdings, Inc. - CFO and EVP [22]

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Yes, I would say a couple things. I think -- it's Mike speaking, Dave. I think as next-gen really starts to take hold, as we've said before, we're confident in our ability to start to accelerate the burn a bit. It is fair that the $2.9 billion has been constant. We'll look to grow that over time. And I guess I would just point to the size of the backlog and the fact that when you look at the revenue guidance, you've got 79% or so that's in your contracted backlog. And so when you look at the piece that you need to fill in, it's really -- it's a great visibility business, and it's a very manageable amount to actually fill in. We've got good success doing it for a long time.

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [23]

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Yes. I mean, just -- look, these are fair observations with respect to the second quarter. It looks a little lumpy and not linear as perhaps has been modeled by The Street. I think the main reasons, if you really want to focus on the second quarter, even though we're here to speak about the first quarter. The -- first, there is an FX impact, okay? Currency hasn't really changed much since we last provided guidance. It's basically no impact. I mean, we lost over a point of growth in the first quarter due to FX year-over-year, but not since we last gave guidance. So FX from the last year's second quarter has an impact. Secondly, there's the IES segment, which is very lumpy. Q2 last year for IES, I think it was disclosed, I'm just looking at my colleagues here, it was disclosed last year. There was a onetime benefit of -- if I recall, it was almost $10 million. It was onetime royalty payment that was in IES, I think.

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Michael R. McDonnell, Quintiles IMS Holdings, Inc. - CFO and EVP [24]

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Correct.

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [25]

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Last year second quarter. Is that correct?

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Michael R. McDonnell, Quintiles IMS Holdings, Inc. - CFO and EVP [26]

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Yes.

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [27]

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And so that, again, affects the compares year-over-year for the second quarter. Third, this Encore business, which, I would imagine, this Encore business, when it was purchased a couple of years ago, was like about $100 million of revenue. And I mean, the business is -- we're trying to do something about it, but it is expected to continue to provide headwind. And then again, back to the awards discussion. The awards last year were weaker, as you know. And so that -- again, it takes at least a year for revenue from those awards to translate, so there's a little bit less. So I could give you a little bit of more color on why the second quarter is maybe not as strong as you might have expected. Why then is the second half and towards the end of the year it was stronger, that's because the revenue synergies we talked about and the next-gen that we already now contracted for and is starting to produce revenue and some of the real-world stuff that we are winning, all of that is expected to more than compensate for what would otherwise have not been -- or would have been more in line with the second quarter. And also, it's not just IES. I mean, I mentioned IES, but there's also the legacy -- or Encore. The other legacy commercial business from -- what was the name of it? IHS was the name of the division that commercial points out. They have an advisory business there that's also not doing that great. So we're kind of working ourselves through all of that, and that is basically why you see, perhaps, a little weaker. But we feel comfortable. Frankly, if we didn't see that, we would have changed the guidance already, but we're not. We feel very strongly because of the bookings because of what's in the pipe and what we see coming. So despite all of that and the FX and so on, we're comfortable maintaining -- very comfortable maintaining the guidance.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [28]

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I -- at the risk of taking another minute here, I -- so the question I wanted to ask is more forward-looking and more relevant to next-gen CRO, and that is that, Ari, research suggests that some pharma companies are bring some business in-house. And in general, that just tells me that there's a level of, say, frustration or searching for alternative models, which actually makes next-gen CRO fairly timely. And I just wanted to get your sense of having talked to a bunch of clients, which I'm sure you have at this point, and what level of receptivity on that.

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [29]

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Dave, I think -- thank you for that question. I've heard that from others. Nobody decides. I've run a lot of different companies. Nobody decides I'm going to in-source or I'm going to outsource. That is not an ending in and of itself. The reason for outsourcing or in-sourcing are based on what is the lowest-cost solution at the best quality and spec deliverable-type criteria that I can get. If I can perform the work internally at a lower cost, more effectively and within better time frames and so on, then I'll do it inside. If not, I'll outsource. So it's not an outsourcing, in-sourcing. So this isn't what's driving. What is true is that pharma, and especially large pharma, are looking for solutions that enable them to perform the work at a lower cost and more effectively. That is the primary driver of those in-sourcing, outsourcing decisions. To the degree that they can do the work, look, if all you're selling is bodies that are going to run around and visit sites and audit and fill checklists, yes, maybe it could be that it's cheaper in-house. I mean, it's not much of a benefit, right? Because why would you give any margin? If it's a cost-plus business, I do agree. But that is not what our value proposition is. We are trying to transition the business model precisely to be data analytics, expertise and technology-driven, and that is exactly our strategy. We're repositioning the business, and we believe we are in a unique position to do that. We have not seen that. I mean, some of the large pharma, specifically rumors to be stopping the outsourcing and bringing more work inside, are precisely some of the ones with whom we've won. I wish I could give the names.

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David Howard Windley, Jefferies LLC, Research Division - Equity Analyst [30]

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Yes, I would love it if you could tell me who, but I know you can't.

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Operator [31]

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Our next question comes from the line of Jack Meehan with Barclays.

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Jack Meehan, Barclays PLC, Research Division - VP and Senior Research Analyst [32]

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Ari, I also appreciate you going off-script. I was wondering if you could elaborate a little bit more on the new business wins, specifically at success at expanding the pool of awards with some of the smaller trial activity.

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [33]

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You mean with the emerging BioPharma and small -- smaller trials? Yes. I mean, again, following up also on Dave's question in terms of outsourcing. Certainly, smaller pharma and midsize biotech, it's very hard to do it in-house. It's a nonstarter. And as you know, they represented, at this point in time, a growing part of the pipeline. And so again, there's no in-sourcing there. Historically, emerging biotech has been rather reluctant to partner with larger CROs because they require high touch solution, and we, perhaps, were not as effective in providing that solution. As you know, Richard Staub, who runs our R&D business, was -- before he joined Quintiles 3 years ago, was the CEO of Novella, which was a small CRO that's precisely worked with many emerging biotech clients. He's brought this approach to Quintiles and developing a specific set of offerings and capabilities that are targeted to small biotech. And we are making inroads and being more aggressive commercially and in terms of the offering with biotech. Again, EBP requires a different set of capabilities, more customization. That could mean, for a company like Quintiles, higher cost if we were not developing a separate solution. But we are now running this separately as 2 separate offerings, obviously, leveraging the capabilities. So we are able to offer more flexible and therefore, more attractive commercially value propositions for smaller biotech, and we're making significant inroads and frankly, displacing some of the smaller guys, who had been serving that market.

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Jack Meehan, Barclays PLC, Research Division - VP and Senior Research Analyst [34]

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Great, that's helpful. And then just wanted to model, I know the overall guidance for the year, unchanged except for EPS. Can you maybe just talk about some of the underlying segment revenue for the year? Do you feel better at one end of the range for the previous guidance that you gave with respect to...

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [35]

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Yes. Well, there's no change there. Again, there could be fluctuations. It's a -- we're a large company. And even within those segments, a lot of moving parts. But generally, the guidance we provided earlier is the same, okay? I think we provided ranges for each segment, and we feel comfortable within those segments.

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Operator [36]

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And our next question comes from the line of John Kreger with William Blair.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner and Healthcare Services Analyst [37]

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Ari, could you maybe just give us an update on where kind of the next CRO -- next-gen CRO rollout stands? Have you automated the various data streams? And when do you think you can sort of take this out broadly to clients?

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [38]

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We are making a very good progress. As noted, we haven't been waiting for that to -- for that full industrialization, if you will, to go to market, and we're making good progress. It's -- we said towards the latter part of this year, and that's still the schedule. But we are accelerating a little bit. Frankly, we are spending a little bit more than we thought in ramping up the capabilities. We are hiring more people. We have built a dedicated analytics center of excellence that is quickly ramping up with data scientists and the epidemiologists, et cetera, to do this -- to continue to go take this across therapies. And I think we're making very good progress.

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John Charles Kreger, William Blair & Company L.L.C., Research Division - Partner and Healthcare Services Analyst [39]

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Excellent. And then maybe turning back to the legacy IMS business. You used to talk about how your kind of traditional data business is doing versus the technology services business. Any update there that you can provide? And is the merger impacting that legacy IMS business at all one way or another?

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [40]

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Yes. Again, we don't segment the business like this anymore because we've reorganized our business internally and so on. But essentially, the -- in many cases, the business, like in the technology services side or specifically in Real-World Evidence, we -- we've merged the businesses. So it's hard even now to look at what is the growth of the legacy IMS real-world business versus the growth of the Quintiles legacy real-world business. But I -- based on what we see, to give you an example, it's very similar to what you have seen before, okay? Again, the info business traditionally is a flat business, very low single digits. And the -- what we used to call technology services business was low double digits. And essentially, we've seen the same thing minus the drag of the less-performing -- the lower performance inherited Quintiles businesses, namely, the Advisory business, Encore and also -- to a degree, like for example, I know specifically that the real-world business, which is IMS, has been growing in the mid-teens. It's still growing in the teens, but lower mid-teens. If -- and I know because I specifically look at that and had a specific review on it. And the reason for that is that the Quintiles legacy real-world business was growing at a lower rate. So we're confident we're going to -- once we integrate and so on, we are going to continue to accelerate that growth. But it did reduce our growth rates in that -- what we used to call tech services business somewhat.

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Operator [41]

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And our next question comes from the line of Derik De Bruin with Bank of America Merrill Lynch.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [42]

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So just -- I'm just really curious on some of the moving parts in the model. So both the legacy Quintiles and the legacy IMS business were sort of low 20s operating margin -- or sorry, low 20s SG&A company. The SG&A has sort of spiked. Can you sort of give us some update on the cost synergy targets and what's going on in terms of that? And I guess, why are we seeing a spike relative to the historicals on the SG&A?

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Michael R. McDonnell, Quintiles IMS Holdings, Inc. - CFO and EVP [43]

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Yes. I think, overall -- Derik, it's Mike. The most important takeaway here is that we remain very confident in the synergy targets that we talked about back when we announced the merger, and we obviously increased the cost synergy target from $100 million to $200 million exiting 2019. We still feel very comfortable with that, and we continue to track toward that very well. We are making investments in the business overall. And I think that when you look at our performance and our margins, we're actually seeing a little bit of an uptick in our R&D business and commercial. We're making some investments there. We have the salesforce.com platform that's very important. We're spending some money there and investing. But overall, we're on a good trajectory, and we feel like the synergies are coming together very nicely.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [44]

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Great. And I guess, can you sort of give us just some basic inputs for the model like D&A for the year, depreciation, amortization for the year net of interest expense or what's embedded into your guide?

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Michael R. McDonnell, Quintiles IMS Holdings, Inc. - CFO and EVP [45]

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Yes. So the D&A is -- our capital intensity,as you know, is very low. It came in at exactly 4% for the quarter, which is in line with the intensity we see. It was kind of 5% to 6% legacy I and 1% or 2% legacy Q, comes together about 4%. D&A, I think, for the next few years is probably about $1 billion a year. But the important takeaway there is that the majority of that relates to purchase price amortization, and we don't include that, obviously, in the adjusted message. The operational depreciation is very modest. It's about $50 million. So overall -- $50 million per quarter that is. So that's the operational piece, continues to be not at all a capital-intensive business. And that's how we see it as it relates to the EPS, which is, I think, the spirit of your question.

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Derik De Bruin, BofA Merrill Lynch, Research Division - MD of Equity Research [46]

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Great, yes. And I guess just want to be going back to sort of like the operating margin numbers and sort of thinking about that. It's like when you sort of look at -- you could say go through period of investment this year and you'll get the cost synergies. It's like what can we sort of think about for annual op margin expansion opportunities sort of beyond 2017?

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [47]

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Well, we've said that it's always good to manage revenue and cost at the same time. So we are margin -- we are counting on margin expansion year-over-year. Obviously, when you have a merger like this, things tend to happen. You get higher costs that are not necessarily adjustable that relate to achieving the synergies in the first year, and that's what's happening this year. We have costs associated. Sometimes, we have to keep 2 systems running at the same time. We could -- before we can shut that one down, et cetera. That kind of can last a year or so. There are some merger-related costs that we have to carry, especially in the first half of the year, and it cannot be added back to our non-GAAP results. And the other element here that's -- this year especially, that -- again, we spoke a little bit earlier about our investments in the next-gen solution. And we are making a lot of investments there in data, technology, people to accelerate that development. And that, perhaps, is a little bit more, and we are accelerating that. On the Commercial Solutions side, we announced this deal with salesforce.com, and we're very excited about that. And that, obviously, requires us to make some investments to transition the applications to the new platform over time, and that also is an investment we're making in the business for the long term. So despite all of that, if you look at our margin -- reported margin, this quarter was basically flattish. And the reason we are reporting that even though we are having all these extra costs and investments that I just talked about is because we continue to underlying -- in the businesses, we continue to improve our competitiveness and cost position. Plus, we have the synergies that we'll be rolling in later on. Not yet, but certainly beginning in '18 in a significant way. So underlying the business, the cost structures are continuing. But we also have added costs that I just described, which are really investments in the business. So despite all of that, our margins are not -- are okay. They -- I think we should be much higher. I mean, on the R&D side -- also, I mean, you have -- you noted that there's a mix issue. The IES business has very low margins and continues to be a drag, obviously. In some quarters, it could be a little bit higher, so it has a negative impact on margin. So again, a lot of moving parts. But in aggregate, we try -- we're going to be managing markets in a way that we seek expansion. We believe that there is significant operational improvements that can be made within the R&D business. And we're actually seeing some of that already, and that kind of offsets some of the investments we're making in next-gen and others for now.

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Operator [48]

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And our question comes from the line of Tycho Peterson with JPMorgan.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [49]

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Maybe following up on some of the commentary earlier on, on SMID-cap biotech. As you push further into that market, obviously, we've been hearing some anecdotal data points from some of the peers on funding issues, reprioritization of pipelines and other dynamics. Are you starting to see any of these services as you push more into SMID-cap biotech?

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [50]

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Not really. Are you talking about cancellations, you mean or...

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [51]

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Yes. I mean, you just talked about project funding weakness, {INCRs} had delays and other dynamics, part sales, other issues. So I'm just wondering further...

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [52]

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No, not really. We haven't seen any -- the reason is -- we've seen that, but that's not unusual. Nothing unusual versus what the company has experienced historically. Nothing unusual. No trend-breaking events.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [53]

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And then, I guess, as we think about backlog conversion. Obviously, trial complexity is not new. But how are you thinking about backlog conversion dynamics going forward? Do you see further elongation of conversion?

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [54]

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Again, I would look at this over a long time period. It's a little hard to look at it quarter-by-quarter and try to make -- again, it's quarterly focus. I know what -- it is what it is. Given the nature of the business, it's such a long-cycle business. Burn rates can fluctuate because of a number of reasons. If you win a large multiyear study, then, by definition, the burn rate is going to go down. If you win more FSP work relative to the rest, then the burn rate is going to go down because depending on the length of the contract. If you have a very strong bookings quarter, again, it's going to cause the next quarter burn rate to go down. So that -- it's hard to tell. Really, ideally, you should take a look at specific projects and specific trials and see whether revenue associated with a trial is faster or lower than where we would have been otherwise. So it's hard to compare. It's such a complex business with so many moving parts. Some of them actually can look good. And in fact, it does not necessarily indicate goodness. Or it actually can look bad, and it doesn't necessarily indicate badness. So if you ask us -- if you ask me operationally, of course, we are focusing on accelerating revenue burn, and we want to do this through systematic changes in the way we do business. Again, using more data, analytics and technology, less "trial and error," experience-based site identification and patient targeting type of approach. And we believe that by doing that, we will accelerate revenue burn for individual trials that are using next-gen. And I did mention some detail on recently one such project where, again, we are able to accelerate time lines quite dramatically. And obviously, the associated revenue will come in faster.

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Tycho W. Peterson, JP Morgan Chase & Co, Research Division - Senior Analyst [55]

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Okay. And then just one last one on the commercial salesforce. IES was flat this quarter. It was down 8% last quarter. Is this signs of stabilization? In other words, are your reps starting to differentiate the offering by leveraging real-time IMS data?

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Ari Bousbib, Quintiles IMS Holdings, Inc. - Chairman, CEO and President [56]

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No, there is such a fluctuation, lumpiness in this business. It's hard to say that it has necessarily stabilized. Look, a decline -- the business grew. If you go back, the business grew nicely in '15, and then it declined a lot in '16. Q1 was flattish, I would say. And I think we expect that this year to be the same, flattish, maybe slightly negative. That's our expectation.

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Andrew Markwick, [57]

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Okay. I think that's all we've got time for. We're just coming up on the hour. So thank you for taking the time to join us today, and we look forward to speaking with you all again on our second quarter 2017 earnings call. Matt Pfister and I will be available after this call to take up any follow-up questions you might have. Thank you very much.

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Operator [58]

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Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.