昆泰 (IQV) 2016 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Quintiles IMS third quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded Wednesday, November 2, 2016.

I would now like to turn the conference over to Tom Kinsley, Vice President, Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to our Quintiles IMS third quarter 2016 earnings call. With me this morning are Ari Bousbib, our Chairman and Chief Executive Officer; Tom Pike, our Chairman and President of Research & Development Solutions and former CEO of Quintiles; Mike McDonnell, our Chief Financial Officer; Ron Bruehlman, former CFO of IMS Health; and Todd Kasper, former Vice President of Investor Relations for Quintiles.

During this call, we will provide Quintiles' and IMS Health's standalone third quarter financial results and Quintiles IMS combined Company fourth quarter guidance.

Today, we will be referencing a presentation that will be visible during this call for those of you that are on the webcast. This presentation will be available following this call on the "Events & Presentations" section of our Quintiles IMS Investor Relations website, at ir.quintilesims.com.

Before we begin, I'd 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 statements or implied 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 Quintiles' and IMS Health's 2015 annual report on Form 10-K filed on February 11, 2016, and February 19, 2016, respectively, and subsequent SEC filings.

In addition, we will discuss certain non-GAAP financial measures on this call which should be considered as 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.

Note that historic adjusted EBITDA, adjusted net income, and adjusted diluted EPS are presented using the same legacy calculation each company previously used to calculate such financial measures.

I would also like to point out that, as with other global businesses, we have been impacted by foreign exchange and, therefore, we will discuss many of our results in constant currency to improve comparability.

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

Thank you, Tom, and good morning, everyone. Thank you for joining our first-ever Quintiles IMS earnings call to discuss the third quarter 2016 financial results of each legacy company.

Before we review the numbers, let me provide a quick update on the merger. As you know, we successfully completed the merger of Quintiles and IMS Health on October 3, 2016. The combination of these two great companies creates a leading integrated information and technology-enabled healthcare service provider worldwide dedicated to helping our clients improve their clinical, scientific, and commercial results.

The first step was to combine the companies' capital structures. At the end of the third quarter and concurrent with the closing of the merger, we executed a new term loan facility along with US and euro bond offerings for the combined Company at attractive rates. We now have a flexible capital structure with a Quintiles IMS gross leverage ratio of 3.7 times adjusted EBITDA, and we also have a cash balance in excess of $1.5 billion. This capital structure gives us ample capacity to pursue acquisitions and to repurchase shares.

Our new Board has approved a $1.5 billion share repurchase authorization, which we expect to complete by the end of 2017. This $1.5 billion authorization represents about 8% of our market cap. As you know, share repurchases have been the preferred method of returning capital to shareholders at both Quintiles and IMS Health legacy companies, and we are pleased that this authorization provides us with the flexibility to continue this capital allocation strategy over the next year.

The second area I want to highlight is the work we are doing to combine our operations. Integration teams are executing on their pre-merger integration plans. Teams from both client-facing and the functional areas are working together to implement best practices and drive process efficiencies.

These integration teams have identified additional cost synergy opportunities. And as a result, I am pleased to announce we are doubling our cost synergy target, raising it from $100 million run-rate annual savings to $200 million run-rate annual savings, exiting 2019.

Now that the merger has closed, we will be reporting three new business segments starting in the fourth quarter. The new segments are commercial solutions, research & development solutions, and integrated engagement services. Mike, our new CFO, will discuss these segments along with our new financial metrics for adjusted EBITDA and adjusted EPS in more detail later on the call.

Finally, some color on the business development side. It's been just a few weeks, but we have already begun the work needed to [productionize] our next-generation CRO. Our R&D solutions team will leverage our full range of information assets to enhance clinical trial service offerings.

The team is working hard to bring this solution to market and accelerate site identification and patient recruitment for projects that are already in our backlog. We will continue to drive this offering, and we'll provide updates on our progress in the coming quarters. I must add, clients are very excited and can't wait to work with us.

You will recall the IMS and Quintiles teams had already begun working together through the real-world collaboration before the merger. This collaboration continues to gain traction in the marketplace with a truly differentiated offering.

In fact, we won three significant multiyear deals with top-10 pharma clients within the first month of closing the merger, on the back of our combined capabilities and joint offering. On the commercial tech and apps side, for those who followed IMS before, I wanted to highlight a very significant competitive win with a top-25 pharma client for Nexxus MI --Mobile Intelligence -- our life science CRM platform, along with a critical win with the same client for OneKey, our HCP database.

Now, I'll provide you with a brief review of our third quarter financials. And remember, the merger closed on October 3. Therefore, Q3 results discussed on this call will be for IMS Health and for Quintiles on a separate, standalone basis. The third quarter financial metrics I'll be discussing are the same legacy metrics each company provided guidance on previously.

IMS third quarter revenue grew 7.5%, and adjusted EBITDA grew 9%. At constant currency, revenue growth was 6.8%; adjusted EBITDA, 5%.

Quintiles service revenue grew 3.9%; adjusted income from operations grew 11.2%. Constant currency, Quintiles service revenue growth was 3.6%, including 8.6% in product development.

Let me provide more color on the IMS results. IMS information revenue grew 2.1%, while technology services revenue increased 13%, with particularly strong growth in work flow analytics and also tech and apps.

Turning now to profit. IMS adjusted EBITDA was $238 million for the quarter, increasing 9% reported, 5% constant.

The margin contraction at constant, similar to prior quarters, for those of you who had been following us before, was the result of the lower-margin acquisitions that we did last year, as well as the faster growth of our lower-margin technology services offerings where we continue to invest. These adverse margin effects were partially offset, as in prior quarters, by ongoing cost reductions.

IMS GAAP net income was $54 million during the quarter, growing almost 25% on a reported basis; 6.5%, constant.

IMS adjusted net income was $132 million, up 2.2% on a reported basis; 4.7%, constant. The constant currency growth was driven by growth in adjusted EBITDA, partially offset by higher interest expense.

IMS GAAP diluted earnings per share was $0.16 in the third quarter, up 24.8% on a reported basis, compared with $0.13 in Q3 2015.

Adjusted diluted earnings per share was $0.39 in the third quarter, an increase of 4.9% at constant currency and 2.5% at an actual currency rate.

In summary, I'm pleased to report IMS turned in another quarter of strong financial performance.

Before handing it over to Tom Pike to provide color on the Quintiles standalone third quarter results, let me walk you through changes we will be making to the way we will report net new business in the CRO business starting this quarter. After a thorough review of the operating metrics that are most relevant to managing our business and the metrics that have traditionally been used in this industry, we've decided to make these changes.

First, we will report a backlog metric for the R&D solutions segment only, which is essentially the previous product development segment excluding some consulting-type services. R&D solutions is a long-cycle business, where contracts can run for multiple years, whereas our commercial businesses, including consulting as well as CSO, are shorter cycle, where backlog metrics are not as relevant.

Second, we've decided to report our new business and backlog metrics on an as-contracted basis, meaning that we will not recognize the value of a client award until we have receipt of a written binding commitment or executed contract. The traditional industry practice has been to report backlog based on non-binding written awards. This practice relies on a certain level of judgment and, in fact, may be inconsistently applied across industry participants.

We believe the as-contracted approach is a more conservative and more precise approach, as it requires a higher threshold and less judgment for inclusion in the backlog.

The as-contracted approach will provide you, our analysts and our investors, with a simpler and clearer view of actual bookings. Also, we believe, internally, this approach will help us drive greater operational discipline and accountability and, ultimately, better sales performance.

Third, we will begin reporting net new business on a trailing 12-month basis. We believe net new business should not be viewed in a 90-day box, as it can be somewhat lumpy as a result of cancellations or large awards that may fall in or out of a particular quarter when, in fact, the revenue from these awards will be recognized over more than a year or sometimes a period of years. We believe this will eliminate, over time, excess short-term focus on the long-term metric.

We will also, of course, continue to highlight expected backlog conversion by disclosing the portion of our contracted backlog that is expected to convert to revenue in the next 12 months.

As the market leader, we are taking these initiatives to begin moving the CRO industry to metrics that better reflect the economics of the business. We want to move to this more conservative and more informative approach, because we believe this is the right thing to do for the long run.

With that, let me turn it over to Tom Pike to provide color on the Quintiles standalone third quarter financial results.

Thank you, Ari, and good morning to everyone.

As you heard from Ari, we're off to a strong start with integration, and I'm encouraged by how well teams from Quintiles and IMS are working together. We've had many discussions with customers since announcing the merger, and it is clear that our clients are seeing the value of this powerful combination.

I will now walk you through the Quintiles standalone third quarter results.

Overall, Quintiles delivered 3.6% service revenue growth at constant currency, with product development growth of 8.6% at constant currency. At actual rates, our overall revenue growth was 3.9%, with product development growth of 7.9%.

The solid growth in product development was offset by a decline in integrated healthcare services, primarily due to an expected decrease in our more lumpy CSO business. The real-world late phase business in the IHS segment continues to grow nicely.

We grew adjusted diluted EPS by 6.4%, to $1 per share, with GAAP EPS of $0.82 per share.

We delivered improved margins on a constant currency basis in product development, which Mike will discuss in more detail.

These results were strong for the quarter.

Now, let's look at our new business development activity, and I remind you that I will be talking about product development without advisory services.

For the legacy product development segment, bookings -- which I remind you is now only contracted net new business -- was about $4.5 billion for the 12 months ended September 30, 2016, resulting in ended contracted backlog of about $9.5 billion.

The third quarter awarded net new business was softer than usual. Our pipeline this quarter had a higher proportion of emerging biopharma clients, and decision timing can be more difficult to predict.

Separately, contracted net new business was impacted by a significant project cancellation toward the end of the quarter resulting from a reprioritization of one client's pipeline. This cancellation was not due to Quintiles' performance on the study, and we remain a committed partner with this client.

Also bear in mind, since this was not one of the best quarters for new business awards, you should expect as-contracted net new business to be correspondingly impacted in the next few quarters.

From a big-picture perspective, it's important to note that we continue to see strong demand in the market, and we currently have a robust R&D solutions pipeline that should help drive the level of new business activity consistent with what you've seen from us over the long run.

Our strategic partnerships are performing well, and we are winning new business when that work is outsourced. There can be some cyclicality with these relationships, as opportunities can ebb and flow from quarter to quarter with individual clients. However, the underlying relationships and trends remain solid.

To reiterate, we continue to have a strong opportunity pipeline and have not changed our outlook on the market. Even more importantly, we are confident that we can capture an increasing share of market opportunities as we bring the benefits of the next-generation CRO to existing and new clients.

Now, let me hand over the call to Mike, who will walk you through the Quintiles standalone financial results in more detail.

Thank you, Tom, and good morning, everyone. Let's begin with the Quintiles standalone results.

As Tom noted, for the quarter ended September 30, 2016, overall service revenues grew 3.6% in constant currency compared to the same quarter last year. On a reported basis, service revenues grew 3.9%, to $1.14 billion, in the quarter.

During the third quarter, GAAP income from operations was $167.8 million. Adjusted income from operations was $199 million, up 11.2% compared to last year.

The adjusted income from operations margin was 17.5%, expanding 110 basis points versus last year, including a 70-basis-point benefit from favorable currency fluctuations.

For the third quarter, SG&A was $233.6 million, or 20.6% of service revenues, compared to $231.4 million, or 21.2% of service revenues, in the prior year.

During the third quarter, we recognized $28 million of impairment losses in our encore reporting unit.

Equity and earnings of unconsolidated affiliates was approximately $200,000 in the third quarter, compared to $5.4 million in the same period last year, with the decline primarily due to gains last year from our investment in the NovaQuest Pharma Opportunities Fund.

Net income attributable to non-controlling interests was $4.8 million in the third quarter, primarily due to the 40% minority interest in Q2 Solutions, compared to a net loss of $2.4 million in the same period last year.

Reported GAAP net income attributable to Quintiles was $99 million in the third quarter, representing a decline of 10.9% compared to the same period last year, and adjusted net income grew 2.5%, to $120.6 million, in the third quarter. Third quarter 2016 GAAP net income was affected by the $28 million impairment charge in the encore business.

Diluted adjusted earnings per share grew 6.4%, to $1 per share, in the third quarter, compared to $0.94 per share in the prior-year quarter, and GAAP diluted earnings per share decreased 7.9%, to $0.82 per share, in the third quarter.

Cash flow from operations and free cash flow were $413 million and $334.9 million, respectively, for the nine months ended September 30, 2016, compared to cash flow from operations of $269 million and free cash flow of $213 million, respectively, for the first nine months of 2015.

Let's now move to the two reporting segments. Product development's constant currency revenue grew 8.6% in the third quarter compared to the same period last year, and at actual foreign exchange rates grew 7.9%, to $874.3 million. This constant currency revenue growth resulted primarily from volume-related increases in core clinical services and clinical trial support services, partially offset by a decline in advisory services.

Product development income from operations for the quarter was $206.9 million, a 14.1% increase at actual rates, an 11.7% increase at constant currency rates.

The product development income from operations margin was 23.7% in the quarter, representing an increase of 130 basis points compared to the same period last year, including the benefit of 70 basis points of foreign exchange benefits.

IHS service revenues declined 10.6% at constant currency rates in the third quarter. At actual foreign exchange rates, service revenues were $262.1 million, representing a decrease of 7.5%, or $21.3 million, compared to the same period last year. The constant currency revenue decline resulted from decreases in North America and Europe commercial services, due to cancellations in 2015 and earlier in 2016 and a decrease in Encore Health revenues, partially offset by growth in the real-world and late phase research unit.

IMS income from operations for the third quarter was $22.8 million, a decrease of 5.3% at actual rates and an 18.4% decline at constant currency rates.

The IHS income from operations margin was 8.7% in the quarter, an improvement of 20 basis points compared to the same period last year. This margin improvement was primarily due to higher margins in the real-world late phase unit and the benefit of 90 basis points from favorable currency fluctuations, partially offset by lower margins in the former Quintiles commercial services business.

Let's now briefly discuss the combined Company capital structure. Ari mentioned earlier we executed a very successful term-loan offering and a US and euro bond issuance in conjunction with the merger. The combined Company is now levered at 3.7 times adjusted EBITDA, a very comfortable gross leverage ratio that allows us flexibility.

Our weighted average cost of debt is approximately 4%. We feel particularly good about borrowing at an average of approximately 4% since we lengthened the maturity of our debt, increased our mix of fixed-rate debt, and have a good balance of USD- and euro-denominated debt.

As a result, we have no significant near-term maturities. Our newly upsized $1 billion revolver is undrawn as of September 30, 2016, and we have a cash balance in excess of $1.5 billion.

Ari previously introduced the three new Quintiles IMS business segments. First, the commercial solutions segment includes substantially all of what was the IMS legacy businesses, plus the Quintiles legacy real-world late phase, payer/provider, and advisory businesses. Second, the research and development solutions segment, which includes substantially all of what was previously the Quintiles legacy product development segment. Third, the integrated engagement services, which includes substantially all of what was previously the Quintiles legacy contract sales organization.

Now, let's discuss the Quintiles IMS financial metrics we will provide guidance on, going forward, starting with the fourth quarter, which is our first quarter as a combined Company.

We are providing guidance for the fourth quarter of 2016 on three financial metrics: revenue, adjusted EBITDA, and adjusted diluted EPS. Revenue will be GAAP revenue. Adjusted EBITDA and adjusted EPS are non-GAAP financial metrics, and we have provided you the reconciliations from GAAP net income to adjusted EBITDA and from GAAP net income to adjusted net income. We also plan to provide guidance for the quarter and the full year on subsequent earnings calls.

Let me now turn to fourth quarter guidance. Our guidance for Quintiles IMS fourth quarter revenue starts from the same guidance both companies gave or implied on the second quarter earnings calls; so, no change. However, as a result of the merger and as a result of foreign currency changes, we have two adjustments.

First, this guidance includes an estimate for a non-cash accounting adjustment arising from the merger and is expected to reduce the commercial solutions segment and Quintiles IMS revenue by about $60 million. This adjustment is the result of purchase accounting rules, and IMS deferred revenue which would have otherwise converted to revenue in future periods, is required to be eliminated under the accounting rules. This adjustment will only impact revenue, as it will be added back to adjusted EBITDA.

Second, the guidance also reflects about a $20 million drag -- negative drag, from FX resulting from the strengthening of the US dollar since IMS and Quintiles both provided guidance on their respective second quarter earnings calls at the end of July.

As a result, fourth quarter Quintiles IMS revenue is expected to be between $1.95 billion and $1.99 billion. From a segment perspective, commercial solutions revenue is expected to be between $885 million and $900 million; research and development solutions revenue is expected to be between $875 million and $895 million; integrated engagement services revenue is expected to be between $190 million and $195 million.

For the fourth quarter, we expect adjusted EBITDA will be between $500 million and $515 million, and adjusted diluted EPS to be between $1.04 and $1.08.

For our tax rates, we expect for the fourth quarter adjusted book tax rate to be between 30% and 32% and adjusted cash tax rate to be between 11% and 13%.

It's important to note the items we exclude from adjusted net income are predominantly US expenses and are taxed at higher US federal and state income tax rates than both companies' historical GAAP effective tax rate. This results in an expected fourth quarter adjusted book tax rate between 30% and 32%, due solely to these exclusions.

Quintiles IMS does not expect to pay material US cash taxes, due to net operating loss carryforwards and foreign tax credit carryforwards, until the 2019 to 2020 time frame.

Now to provide you with some context on the full year. Although we were two separate companies for the first nine months of 2016, we thought it would be useful to walk you through combined 2016 revenue and adjusted EBITDA.

If we take September year-to-date standalone actuals for IMS and Quintiles, along with the combined Quintiles IMS fourth quarter guidance I just walked you through, this translates to full-year 2016 combined revenue of approximately $7.7 billion, representing year-over-year growth of approximately 7%, and full-year 2016 combined adjusted EBITDA of about $1.9 billion, representing year-over-year growth of about 11.5%. In the appendix, we have provided this information for each of the last four quarters.

In summary, we had a solid quarter. Both Quintiles and IMS profit metrics were at or above the high end of our guidance range.

The merger has created a $7.7 billion revenue and approximately $1.9 billion adjusted EBITDA Company, uniquely positioned to continue capitalizing on the growing outsourcing trend within pharma across both clinical and commercial areas. Integration efforts are well underway, with our cost synergy target doubled to $200 million of annual run-rate savings, exiting 2019.

We recapitalized our debt structure to take advantage of low market interest rates, providing flexibility for both acquisitions and share repurchases, and have over $1.5 billion in cash, post merger. The Quintiles IMS Board approved a share repurchase authorization of $1.5 billion that we expect to complete by the end of 2017.

Before closing, I would like to announce a couple of changes to our Investor Relations function. Todd Kasper will transition to a leadership role in our R&D solutions sales organization, and we thank Todd for all he has done for Quintiles.

Tom Kinsley, who has led IMS FP&A and Investor Relations since the IMS IPO in 2014, will provide leadership for that function until Tom retires in February 2017.

At that point, I am pleased to announce that Andrew Markwick will lead IR for the combined Company. Many of you know Andrew, as he has covered IR for IMS over the last two years. Andrew will bring continuity to the new IR team, and I greatly look forward to working with him and know you will, as well.

With that, I would like to ask the Operator to please open the lines for Q&A. Given the remaining time, we ask our participants to please limit their questions to one, in order to allow as many participants as possible to ask questions.

(Operator Instructions) Tycho Peterson, JPMorgan.

First question, on book-to-bill. Our math is about 1.28 this quarter, which was consistent with what you had done a year ago. So, that doesn't really speak to how net wins have trended since the merger was announced. I'm just wondering if you can talk a little bit more anecdotally about underlying traction with clients and how we should think about B2B trending going forward? Even though you're not technically going to be bringing it up.

Tycho, it's Mike speaking. As we noted earlier, we're moving away from the industry's traditional practice of using non-binding written confirmation, and we're only going to be utilizing as-contracted and reporting on an LTM basis.

And we gave a number of reasons: the original approach that's been used by the industry is very imprecise; it's based on judgments; and we think it sets a low bar and introduces volatility.

And we also think it's becoming outdated and the industry has really evolved from when that method was introduced. Protocols are a lot more complicated. There are a lot more in the way of client partnerships that are very different. And services have evolved.

And we think that there's been a lot of inconsistency, and a lot of the industry's own analysts have commented on that. And we also share this concern, and we think that moving to a contracted approach which is much more conservative -- it will have less volatility, and so forth -- is something that's really the right thing to do, and we hope that others will follow.

As Tom mentioned in his prepared remarks as it relates to the third quarter and the spirit of your question, third quarter awarded net new business was softer than usual, and contracted was impacted by a significant cancellation during the quarter.

And we mentioned that our LTM contracted book-to-bill was 1.29. Our contracted book-to-bill for the third quarter was 0.95. And as Tom mentioned, because this was not one of our best quarters for new business awards, you should expect that contracted net new business could be correspondingly impacted in the next couple of quarters.

Okay. That's helpful. And if I can just ask one follow-up, there's been kind of heightened sensitivity around DSO in light of some of the recent comments from some of the other peers in the CRO space. Can you maybe just talk a little bit about backlog conversion trends and DSO trends?

I think I'll make a quick comment on that, Tycho. I think, overall, the backlog conversion -- trials are becoming more complex. I think that bodes very well for Quintiles IMS. We're well suited for more complex trials, and the duration has extended out a little bit.

I do think that, again, when you move to this as-contracted method, it will give much better visibility in terms of what can actually burn into revenue more quickly. And I think that, overall, we remain very focused on that metric, and I think that we're well suited to continue to drive it as we move forward.

The thing I'd add, Tycho -- it's Tom -- is that what we're looking forward to doing now -- we've been doing a lot of work with the data and technologies of IMS and, remember, what we're going to do is, in 2017, look to apply that to the backlog.

So, you really have two things going. One is you've got the combination of these powerful sales teams working together and the new service offerings that we'll have around, the next-generation CRO. But at the same time, we're going to use these tools to look at how we really drive that backlog burn. So, more to come in coming quarters.

Okay. Thank you.

Bob Jones, Goldman Sachs.

So, just thinking about the increase to the expected cost synergies, are there specific buckets that you guys would be willing to share as far as where you're targeting to cut costs? And, I guess, along those lines, what gives you confidence in achieving that higher amount?

And then, related to that, taking a step back, I think there is some fear that cost cutting, particularly on the CRO side, could be disruptive on the client front. Anything you can share as far as how you're balancing cost cutting against the nature of the client relationship within the CRO model?

This is Ari. The buckets of cost reductions are the same. We haven't invented new areas. They are the same that we had announced before.

Bear in mind, these are two large organizations that are present in many countries: IMS is in 100 countries; Quintiles in 60, 70 countries. There is a lot of duplicate infrastructure overhead, a lot of duplicate IT systems. Think about HR, back office functions. Think about IT systems all over the world.

Third area is in the global delivery network. We have, I think, in combination over 12,000 or 13,000 people situated overseas in places like India, Sri Lanka, China, places in South America, central Europe.

So, as we looked at all of those -- not to mention, of course, the duplicate costs of corporate functions and general overhead, plus the real estate footprint -- none of the buckets I mentioned so far -- you will note, Bob -- have anything to do with clients; quite the opposite.

We believe that we are actually investing in client-facing resources and we must. We've taken people from both organizations and are hiring people from outside with the relevant expertise in order to beef up the next-generation CRO initiative.

We are actually going to mutually enhance our approach to clients, because both legacy companies had very strong relationships with -- actually, the more we looked at it, clients were not always the same ones. And so, that's actually mutually reinforcing.

So, the answer to your question is, nothing in the area of clients; quite the opposite. Client-facing resources are being enhanced or supplemented. It's all in the area of the cost of doing business in the back office.

The reason why, to the first part of your question, those costs have doubled is simply that we did not have the luxury or the ability to go deep into the organization -- the mutual organization. We were public companies, and we were in the midst of regulatory filings, and so on. And so, there was a limited amount of time and resources and ability, frankly, from a legal standpoint to get into each other's organizations.

But we have since then spent much more time and have much more visibility. And as a result, those numbers are a lot higher. So, we are confident, again, because these are tangible costs and we can touch them.

It will take some time. It's not easy. Don't get me wrong. We said it will take three years to get there, because it's not easy to put together IT infrastructures, to put together HR systems, to decide which of the two CFOs in -- I want to take a country that (inaudible). Thailand is the right one.

So, it will take a little bit of time. But that's -- again, nothing on the client side; quite the opposite, I would say. All of this on the cost and infrastructure side.

That's very helpful. Thank you, Ari.

Courtney Owens, William Blair.

It's actually John Kreger. A quick question. On both sides of the legacy business, I'm sure the bulk of your client conversations are talking about the new Company and the next-generation CRO. But just curious, as you talk to the clients about all the kind of price scrutiny that they're facing, particularly in the US, how, if at all, are you seeing that impact, how they're thinking about spending in their business? Again, both on the sort of legacy IMS side and the legacy Quintiles side.

Okay. Well, just to follow the sequence in which you asked, I'll start with the IMS (inaudible), based on my client conversations. And I'll then give it over to Tom, maybe, if you want to comment.

First, it's important to know that all the limitations on pharma pricing by governments are not new. The talk in the US seems to be new here, but IMS, as you know, John, does business in 100 countries. Most countries around the world, the government is the payer, and pricing is imposed year-in, year-out. And we've learned to deal with that. There's always been pressure on pricing from a payer standpoint, in fact, even in the US.

So, there is currently more noise around pricing. [It's been a] politically charged period, and that's always the case [when] the US elections are coming up.

But you've got to bear in mind, from the IMS standpoint, IMS information is not tied to the way pharma prices its drugs. Recall, when we price our information offerings or our analytic services or our technology, it's based on the amount of data they purchase. The more data purchased, the higher the price, and vice-versa. The variables in pricing include the number of therapy areas, the frequency of delivery, the number of geographies, the level of granularity, regions, states, ZIP codes, blocks, et cetera.

So, again, I know there is a lot of talk and a lot of noise, but it does not have to do with respect to IMS itself. It does not affect our business directly in terms of demand for our products and services.

So, now, I would say -- and again, I'll let Tom speak of Quintiles, but, Quintiles, the R&D is the lifeblood of companies -- of pharma companies, and these are long-term strategies. We work with our clients, consulting with them on their portfolio and their pipeline of drugs, and so on, constantly. And they're not making decisions on which drug to invest in based on pricing at the moment of discussion on pricing. Of course, returns on investments, and so on, are considered.

But if you step back and you look at the breadth of offerings that Quintiles IMS brings to bear in these conversations, whether it's about real-world work that we do, both combining the IMS and the Quintiles legacy capabilities, we're actually helping our clients anticipate what real pricing they'll be able to support and justify based on real outcomes in the real world for patients. How we can support them analytically with data, services, and technology to defend levels of pricing with payers and with government. All of those create -- [all those news] create demand for our real-world services.

So, I think that, on balance, there is no impact directly on our demand for our products and services, and it is actually an opportunity for our real-world work. The broader conversation when we speak to the C-suite and CEOs in pharma is: How do I preserve my margins and continue to grow my profits, even though I've got this pressure on pricing on the revenue side.

So, that leads to conversations about how can we help our clients reduce their costs -- their overall costs, not just the cost of a CRM platform or a piece of data or a clinical trial; the overall costs. And so, a lot of our conversations -- and we did not expect that there will be as many of these -- but the conversations with clients have evolved towards what we're now calling the total cost of ownership, which is how can we put together all of our capabilities and help our clients outsource to us more than they did in the past in a manner that both increases the level of quality of what they get and lowers the overall cost -- not the individual cost, but the overall cost.

Runs a little bit contrary to what the procurement organizations typically want to do, which is to parcel out business. Runs a little bit contrary to the way many pharma companies, especially large ones, are organized with a lot of silos. But those conversations are taking place as we speak.

Tom?

I think, Ari, you answered it very well. I'd only add three things, very quickly.

To your last point, I think what Ari is saying is there is no company that has the vantage point to help the pharmaceutical industry that this Company does. We understand the development process. We understand the drugs in the pipeline. And we understand how they're being sold all around the world.

We put these two companies together, and our sales force dwarfs other companies in the industry. When you think about it, we've got over 1,000 people out there now working with our clients to bring these services. And it's just -- Ari and I had the account managers get together a couple of weeks ago -- 35, or so, from each side. Incredible power as you look at the two organizations collaborating.

And then, a last point is just that, in many ways, what's happening is coming our way. Ari mentioned the point about pricing and our ability to help. But you may have seen in early September the new commissioner of the FDA talked about the importance of real-world data together with randomized clinical trial data and bringing those two together at the same time.

Our statisticians are actually working with the regulatory authorities how to bring these together. Our people are advising how to bring rigor into the medical device area from our real-world side. In many ways, this market is coming to us.

Very helpful. Thanks.

Dave Windley, Jefferies.

Congratulations on getting the deal closed. I wanted to ask a question around, Tom, your comments about deploying the data and working on accelerating backlog. Could you talk about what ability you have or, conversely, what limitations you have on applying some of the approaches or methodologies with this data to already contracted backlog? Meaning, what elements of that would need to be baked into protocols and things of that sort that might influence to what extent you could apply that data?

And then, the second part of the question would be, as you bring this next-gen CRO approach to clients that will be purportedly a more efficient way to deliver the product, will you bake that efficiency into your pricing to the client, i.e., a more, call it, lower aggressive price? Or, would you look to price competitively with the market and let that efficiency drop to your own bottom line? Thanks.

This is Tom. I think it's a little early for all those questions. We've only just come together.

But I do want to start by emphasizing that we have three powerful segments that we're bringing to the market. And it's easy to think about the CRO, and maybe it's because we kept the [Q]. I don't know, Ari. But we have three powerful segments, and all of them are powered up by this merger. And so, the opportunity here is enormous.

We've actually had a team that's been going around the world looking at the data sources of IMS, the historical data sources. And I'm really pleased to report that as they've gone into detail, country by country, and were looking especially at the top 13 countries where we recruit about 70% of our patients, the data is rich. And our leader of the clinical operations -- our president of the clinical operations entity, has been holding counsel with the teams, looking at how we can bring that forward.

And what I think has really become clear to me is the ability to have a distinctive competitive advantage because of the fact that it takes real sophistication to use the data on a country-by-country basis that gives you insights into medical providers, into patient availability, into how the practice of medicine takes place there. That kind of sophistication, actually, gives us an opportunity for even better competitive advantage.

I think, at the end of the day, we are looking very specifically at how do we help with protocol development. Because, as you know, the protocol amendments are one of the most costly and delaying aspects of the business. And we continue to believe that we can have a significant impact on reducing protocol amendments. We can do much better site selection.

And because, again, nobody has ever had access to 14.7 million healthcare practitioners. And imagine a world where instead of just having investigator database, you actually have all the [spots] who refer to that investigator, as well, and you know how to contact them.

And then, third, just recruiting faster. So, when we look at the existing backlog, what we're doing is we're teasing out the studies -- we've actually gone through a very sophisticated exercise to look across our studies -- which ones are in a stage and which ones are likely to be impacted by the data.

And then, as I say, it takes sophisticated processes to do it, but our clients are extremely interested in trying to help us help figure out how to speed things up. So, I think the reporting on the frontlines is strong.

Dave, I agree with everything Tom said.

With respect to the backlog, you asked how would we specifically work with the backlogs to track select revenues. Two very specific and concrete examples. One is, in the industry there is a term that I've come to learn which is "rescue studies"; that is, studies that are going not as well as anticipated because the ability to recruit, it is discovered during the trial, is much lower than was anticipated.

So, these rescue trials are where the populations of patients and the density of patients in the individual sites is very low. And so, we can obviously supplement with data that effort and accelerate and help those rescue studies.

Second, the complex trials that are going on. And the complex trials, they may not necessarily be rescue trials. They just are going -- they are typically going to be longer, and it's anticipated that they would be longer because they are very complex. And in those ones, again, we can use data to accelerate recruitment.

Now, it's obvious that sometimes the marginal benefit of using the data is not that great, because there are smaller studies where everyone knows where the patients are and it doesn't help very much. So, therefore, with respect to the backlog itself, again, rescue studies and complex trials is where the team is looking at.

And the second question on pricing, you are correct that, in a sense, if you have more visibility ahead of time -- in a sense, your ability to share risk is greater. And as Tom said, it's very early days. We will be looking over time how to develop models with our clients where we can leverage that capability.

Great. Thanks.

Derik de Bruin, Bank of America Merrill Lynch.

This is Juan Avendano filling in for Derik de Bruin. There has been a lot of focus on the potential benefits that the merger will bring to the CRO business, as far as backlog conversion and better patient recruitment and site selection. But I wanted to, perhaps, ask a question about the CSO business. And so, especially in light of the headwinds that the former IHS segment had been facing in commercial services, I was wondering if you could elaborate as to how, perhaps, the IMS legacy products -- specifically, the Nexxus platform and MIDAS or the OneKey reference database -- could be used to revitalize the CSO business?

It is a good question. We are working precisely along the lines that you are suggesting. Is there a way to transform this business by equipping the sales reps that are essentially contracted out to our clients with better capabilities, visibility on data, and technology? So, that gives us a superior advantage.

The fact is this industry is largely -- it's priced based. It's cost-plus and not -- it's a very low margin. And so, we are going to -- we are looking actively at all of the above.

But this is not like this industry is going to become all of a sudden a high-growth, high-margin contributor. We will improve it by doing what you are suggesting, but it will be marginal improvements. I think with respect to lumpiness, hopefully we can smooth that out by being more competitive in the marketplace.

Thank you.

Okay. Thanks, everyone, for joining us today. Andrew Markwick, Todd Kasper, [Matt Fisher], and I will be available after the call for questions. Thank you.

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