昆泰 (IQV) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the QuintilesIMS Third Quarter 2017 Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded Thursday, October 26, 2017.

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

Please go ahead.

Thank you, Isaac.

Good morning, everyone.

Thanks for joining our third 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 and 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 are included in the press release and conference call presentation.

I'd also like to 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.

Thank you, Andrew, and good morning, everyone.

Thank you for joining our third quarter 2017 earnings call.

I'm pleased to report that Q3 was a strong quarter for the QuintilesIMS team.

The results were in line with or better than what we had anticipated.

As most of you previously noted, our plan for the year had a steeper ramp and was more back-end loaded.

Because the quarter was stronger than we had anticipated, we'll have a smoother glide path to our full year targets.

Let's review the quarter.

Consistent with the last 3 quarters, we're making comparisons more meaningful by discussing results on a combined company basis as if the merger took place January 1,'16.

Third quarter revenue was $2,019,000,000, and it grew 4.8%.

Acquisitions contributed about 1.5 points to revenue growth.

R&D Solutions growth was 7.3%.

R&D Solutions revenue was again negatively impacted by our early clinical development business, where we closed a facility in London last year.

Excluding the early clinical development business, revenue growth would have been nearly 8%.

Commercial Solutions grew 4%.

Growth in Commercial Solutions was negatively impacted by the sale of the legacy Quintiles Encore business.

Adjusting for Encore, the commercial business would have grown 5.5%.

Integrated Engagement Services revenue was slightly down versus the prior year.

Combined company adjusted EBITDA was $512 million.

We had a number of key wins in the quarter.

Let me provide some examples.

First, in our technology solutions business.

You will recall that we have been accelerating investments in re-platforming our global CRM and MCM capabilities.

We told you we are aiming to release our new Orchestrated Customer Engagement, or OCE, SaaS offering towards the end of the year.

This is still on track, and in fact, during the third quarter, we had our first OCE win, a 7-year deal with a leading European pharma client to deploy OCE in over 30 countries.

As a reminder, OCE is revolutionary compared to other offerings in the market.

This is not just a CRM tool, we have built a collaborative tool that utilizes artificial intelligence and machine learning to integrate various functions within our clients' commercial operations.

It is highly differentiated to the current point solutions that exist in the market.

Next, in our Real-World Insights business, where our team won a multimillion dollar deal for a first-of-a-kind study with a leading U.S. biotech.

Our differentiated approach will utilize secondary data and advanced analytics to gain regulatory approval for a label extension.

This analytics-enabled approach leverages our E360 tech platform.

We will position our clients' products for a new indication at a much faster pace.

By the way, this is a trend that we expect to accelerate as regulatory actions, such as the 21st Century Cures Act, will only increase demand for Real-World Insights.

Finally, in our R&D business.

We were encouraged by another solid quarter of contracted bookings.

In fact, third quarter net new business growth was over 40% compared to the third quarter of 2016.

Of course, as you will recall, Q3 '16 was the last stand-alone quarter for legacy Quintiles before the merger.

And bookings, you will recall, for that quarter were pretty abysmal, the result of which is the revenue headwind we are now facing in R&D Solutions, which you have all noted.

However, the strong performance in the 4 quarters since then has resulted in an uptick of our LTM book-to-bill ratio, which was 1.22 for the 12 months ended September 30, 2017.

Next gen is a big part of this.

It continues to gain traction in the market.

We now have approximately $900 million of post-merger next-gen awards.

Importantly, we are winning R&D business with clients we have done little or no work with in the past.

Examples of these accounts that we unlocked this quarter due to next gen include: a top 10 global pharma, who we have done virtually no full-service clinical work with in almost a decade.

We won 3 trials with them during the quarter, 2 of which were in oncology.

A top 20 global pharma, who predominately insources all of their R&D work.

They chose next gen due to our compelling value proposition and differentiated capabilities.

This is in the area of NASH, a terrible disease that causes liver inflammation and cirrhosis.

A top biopharma who has done nothing with us in the core clinical space for the last 12 years selected QuintilesIMS for their neurology trial.

Our next-gen offering was so compelling we were able to displace the incumbent CRO for this study, and the client also picked us to be a preferred provider.

Now as I mentioned last quarter, the traction we see in the marketplace for our next-gen solution has led us to accelerate investments in next-gen operationalization and resourcing plans.

This, of course, creates short-term headwinds for our margins, but as you can see in our numbers, we were able to more than overcome this with our cost savings and productivity initiatives.

Before I turn it over to Mike, I would like to remind you that we are holding our Analyst and Investor Conference in New York City on November 8. We're looking forward to this event.

We plan to utilize this occasion to show deeper dives in our 3 main businesses with case studies and tech demos.

You also will have an opportunity to get acquainted with a broader cross-section of our leadership team.

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

Thank you, Ari, and good morning, everyone.

Let's review the quarter.

As in previous quarters, I would like to call your attention to the more meaningful combined company comparisons in the center of the page.

Combined company third quarter revenue was $2.019 billion, which was at the high end of the guidance range we provided last quarter.

Third quarter revenue grew 4.8% reported and 4.3% at constant currency.

R&D Solutions service revenue of $938 million grew 7.3% at actual FX rates and 6.9% at constant currency.

Growth was again impacted by a decline in our early clinical development business due to the closing of a facility in Europe during 2016.

When adjusting for the early clinical development business, R&D growth was 7.8%.

Commercial Solutions revenue of $887 million grew 4% reported and 2.9% at constant currency.

As Ari mentioned, the Commercial Solutions growth rate was impacted by the sale of the legacy Quintiles Encore business.

Adjusting for Encore, growth in Commercial Solutions was 5.6%.

Integrated Engagement Services revenue of $194 million declined 2.3% at actual FX rates and 1.1% at constant currency.

Turning now to profit.

Third quarter adjusted EBITDA was $512 million.

GAAP net income was $84 million, and GAAP diluted earnings per share was $0.38.

Adjusted net income was $260 million, and adjusted diluted earnings per share was $1.19 in the third quarter.

Now let's take a look at year-to-date results.

Again, I would like to call your attention to the more meaningful combined company comparisons in the center of the page.

Year-to-date revenue was $5.899 billion.

You will recall the deferred revenue adjustment we highlighted on the last couple of calls.

For the first 9 months of 2017, it negatively impacted revenue by $8 million.

When adjusting for this and on a combined company basis, year-to-date revenue grew 2.9% at constant currency and 2.3% reported.

On a combined company basis, R&D Solutions service revenue of $2.7 billion grew 4.3% at constant currency and 3.6% at actual FX rates.

Again, growth was impacted by a decline in the early clinical development business.

Commercial Solutions revenue of $2.611 billion grew 2.5% at constant currency and 2.1% reported.

Year-to-date Commercial Solutions growth was also impacted by the sale of Encore.

Integrated Engagement Services revenue of $596 million declined 1.2% at constant FX and 2.3% reported.

Year-to-date revenue growth in the IES segment was impacted by a onetime $9 million royalty acceleration in the second quarter of 2016.

Turning to R&D Solutions net new business and backlog.

For the 12 months ended September 30, 2017, R&D Solutions as-contracted bookings were $4.37 billion.

We had a solid performance in the quarter.

Our contracted backlog was $10.32 billion at the end of Q3, and we expect to convert approximately $3 billion of this backlog into revenue over the next 12 months.

We have had good backlog progression over the last 4 quarters.

Let's take a quick look.

As you know, we already have the largest backlog in the industry.

As a reminder, when the merger closed last year, we reviewed our backlog policy and decided to implement a more conservative approach.

We now require a written, binding commitment or signed contract to record new business in our backlog.

We are happy to be back above $10 billion once again, now using our more conservative approach to bookings.

Turning now to profit for the first 9 months of 2017.

Adjusted EBITDA for the first 9 months of 2017 was $1.465 billion, and our adjusted EBITDA margin of 24.8% expanded 30 basis points.

GAAP net income was $233 million, and GAAP diluted earnings per share was $1.04 for the first 9 months of 2017.

Adjusted net income was $739 million.

Adjusted diluted earnings per share was $3.28 in the first 9 months of 2017.

Let's spend a few minutes on the balance sheet.

At September 30, cash and cash equivalents totaled $1.1 billion, and our debt was $9.8 billion, resulting in net debt of about $8.7 billion.

Our gross leverage ratio was 4.9x trailing 12 months adjusted EBITDA.

Net of cash, our leverage ratio was 4.3x.

Cash flow from operating activities was $436 million in the third quarter, capital expenditures were $89 million and free cash flow was $347 million.

You saw that during the quarter, we issued EUR 500 million worth of senior euro notes due 2025 at a rate of 2 7/8%.

We used the proceeds mostly to retire existing 4 1/8% euro notes that were due 2023.

We also refinanced our term loan B debt, raising an incremental $750 million, which was primarily used to pay down the revolver.

We repurchased $380 million worth of our shares from our private equity sponsors during September.

And toward the end of the quarter, we repurchased an additional $177 million worth of our shares in the open market for a total of $557 million of repurchases during Q3.

Let's now turn to guidance.

As you know, we were always expecting a strong fourth quarter.

The overperformance in Q3 allows a smoother trajectory for the fourth quarter and better visibility to the full year numbers.

For the fourth quarter of 2017, assuming today's FX rates remain constant through the end of the quarter, we expect revenue to be between $2.12 billion and $2.16 billion, adjusted EBITDA to be between $560 million and $585 million and adjusted diluted EPS to be between $1.28 and $1.37.

We're updating our full year adjusted book tax rate guidance, which is now expected to be approximately 28%.

Our previous guidance was approximately 29%.

So in summary, we delivered a strong quarter, driven by solid operational execution.

Next gen continued to gain traction, and we had nice wins with previously locked-out accounts.

Our technology solutions business secured their first global multiyear OCE deal.

We have repurchased $3.3 billion of our shares at an average price of $81 since the merger.

And of course, as a nice capstone to our first year as a merged company, we were honored to be included in the S&P 500.

I look forward to seeing many of you at our November 8 Analyst and Investor Conference.

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

(Operator Instructions)

And our first question comes from the line of Jack Meehan of Barclays.

Ari, I just want to start.

Great momentum with next gen.

Could you weigh in on just the general health of R&D funding?

And then, how do you think about the R&D Solutions revenues potentially accelerating in 2018 given the wins?

Thanks for the question, Jack.

Yes, look, it's a mixed bag in terms of R&D funding.

As always, there are studies that are being pulled based on developments in the market, pricing and otherwise and competing trials.

But as in -- really for the past year or 2, emerging biopharma, we see, has increasing funding.

With respect to -- and also, I would just add a comment that some large pharma in the context of perhaps more rational evaluation of their portfolios and of their cost structure at the same time are insourcing parts of their development.

Now next gen largely unaffected by this because it's new and different.

In fact, as I mentioned in my introductory remarks, we won a preferred provider status with a large pharma that essentially previously had no -- did not outsource any CRO work.

And that's largely on the back of the next-gen capabilities.

In fact, we even have clients asking us to provide the next-gen capability, if you will, in combination with their resources, and we are evaluating some of those type of hybrid joint partnership models with some of our clients.

With respect to revenue accelerating, it's a little bit more than a 1-year cycle, unfortunately.

Generally, the nice bookings we have this quarter, and again, it was a very strong bookings quarter.

I've seen some of your notes, not you particularly, but some of your colleagues' notes, and with -- again, the math is not quite correct.

The bookings are actually very strong this quarter.

It's one of the best bookings quarter -- book-to-bills we've had in a long time.

And so -- the acceleration of revenue, we still have to go through the cycle.

We had, as you know, bad bookings last year, and so we've got to cycle through that.

And probably, towards the end of '18, we will see the benefits of -- we're starting the benefits of the higher bookings this quarter and the previous one.

Thank you.

Our next question comes from the line of Tim Evans of Wells Fargo.

Ari, if we look at the Q4 revenue that was implied in your guidance last quarter, it would have been about $2.16 billion at the midpoint.

Now that guidance is $2.14 billion at the midpoint.

Just slightly lower admittedly, but the FX did help you out in the quarter.

So I'm just curious, what went the other way?

What went against you relative to your expectations last quarter?

Yes, with respect to the third quarter, the FX essentially is where we said we expected it to be when we gave guidance.

So not much has helped here.

It helps year-over-year, but relative to the guidance we gave, that is -- it has not changed.

So it didn't help us.

We actually came in higher than our guidance on every metric, revenue, EBITDA and EPS, for this quarter.

The implied -- because we came higher, the implied -- we never gave guidance for the fourth quarter, but we had a guidance for the year.

So yes, the -- since the guidance for third quarter was lower than where we came in at, then fourth quarter implied that you would have derived by subtraction, given our guidance for the year, we would have been a little higher.

But because Q3 came higher, then Q3 ends up being a little bit perhaps lower than you would have expected.

At the end -- for the year, I think we had a broad range.

You're talking about revenue of $8 billion to $8.1 billion.

And I think we have now better visibility, again assuming if everything else is the same, FX is the same.

And I think we -- if we -- you add the numbers, it's...

$8.2 billion to $8.6 billion.

Right, $8.2 billion to $8.6 billion, if you add up the year-to-date numbers with the guidance we're providing today for the fourth quarter.

Again, if you -- the other things that have changed, of course, relative to the original guidance is that we've sold Encore.

And that Encore business takes out about $25 million of the revenue.

So as you go back to the guidance we gave, which we have not -- we had not changed the entire year, right, which was $8 billion to $8.1 billion for the full year revenue.

We are now at $8.2 billion to $8.6 billion.

But since then, we took out $25 million of revenue from the Encore business.

So apples-to-apples, if you're speaking about the midpoint, I know you guys focus on the midpoint, we actually -- the number that we're providing is higher, again reflecting the strong performance this quarter and last quarter.

Yes, thank you for the question, it enables me to clarify.

Our next question comes from the line of John Kreger of William Blair.

Mike, a question about acquisition contribution in the quarter.

If we look at that 4.3% constant currency growth rate for the whole company, what would it have been on an organic basis?

Acquisitions contributed about 1.5 points to overall growth.

And by the way, on the commercial side, it's about 0.5 point or a little less than the growth on the commercial side was on acquisitions.

The rest was in R&D.

You might recall that we bought in the fourth quarter of last year a company called TKL, a small CRO that's focused on dermatology.

And so that's some of the acquisition-driven contribution to R&D Solutions' growth.

We also bought, though it was in -- sometime in the middle of the quarter, and it's not huge revenues but, nevertheless, it did contribute a little bit, a company called DrugDev, which is included in our R&D Solutions business.

And it's an attractive technology platform that has, we think, highly differentiated and very attractive tools for study startup, payments and clinical trial optimization.

We did this acquisition in the midst of the third quarter and there's a little bit of revenue.

It's very low revenue.

We paid a lot of money for it.

It's actually the bulk of the spend in the quarter, but it contributed a little bit of revenue as well to our R&D Solutions.

Okay, I hope that helps and gives you more color.

Yes, it does.

And actually, that's a good segue to my follow-up.

Ari, I think on the last call, you talked about an initiative to sort of build out a suite of clinical data technology tools.

Can you just sort of update us on that?

What's the plan?

And does that latest acquisition maybe accelerate that?

The answer is yes, it does accelerate that.

We are building tools internally.

We're also collaborating with salesforce.com.

So these tools are based on a common platform, and you will hear some more.

You might recall it's a much tinier business, but we did acquire a small company called Wingspan, which is a regulated comp and management tool and very highly complementary with DrugDev, which is more in the area of study startup and payment processing.

I am really looking forward to the investor conference in a couple of weeks because we plan to demo some of these tools and share more detail about that initiative.

So I hope that you can attend.

Also, if I may just add this.

We are actually accelerating investments there.

And we are -- that wasn't your question; I just anticipate.

We are going a little faster than anticipated on our synergy ramp and on our productivity initiatives.

And because of that, we feel we can afford the accelerated investments.

So net-net, as you probably will note, we still are, -- year-over-year, even though the compares are hard to do because we weren't a merged company last year, but we have even a little bit of margin expansion.

Year-to-date, I think it's around 30 basis points of margin expansion.

And fourth quarter, we will see maybe a little bit also of margin expansion, maybe not as much again because we are investing largely in next gen and in the clinical technology suite that you just referred to.

Thank you.

Our next question comes from the line of George Hill of RBC.

Is -- you did the merger with IMS to advance the sales process around Real-World Evidence into trial sponsors.

And we've seen a lot of other late-stage CROs try to replicate or...

Yes, I don't know what's going on here, but we have a -- is that Dave?

Is it -- who is this?

George Hill from RBC.

Oh, did you...

I'm sorry.

We missed the -- maybe you were on mute.

We missed the beginning of your question.

If you don't mind repeating.

And by the way, welcome back.

Okay, I'm sorry.

It's good to be back.

I just -- the question was around your sales process into trial sponsors around Real-World Evidence, where you guys have a differentiated offering given the close of the merger and what you guys are selling now.

I guess can you talk about the competitive environment as you've seen other late-stage CROs either through partnership or through other types of announcements?

It seems they try to replicate or compete on what you're doing in that space.

And just I worry about the -- is your sales message and your marketing message kind of getting through and resonating with clients?

Or do you feel like there's been an emergence of noise in the space?

Well, yes, it is resonating.

And yes, competitors are trying to catch up and entering all kinds of partnerships and doing acquisitions and so on.

And we think that's good.

It validates our strategy and elevates the game for everyone.

We still can see we have truly undifferentiated tool -- excuse, truly unparalleled data assets, technology platform, frankly years of experience, ahead of the curve.

So I think the message is resonating.

Yes, of course, there's always noise.

People say, well, we also have data.

We also have technology.

When you peel the onion, though, you'll see the true difference.

I mentioned in my remarks that we are starting to see a lot of interest prompted by regulatory actions in the 21st Century Cures Act, which increased the demand for Real-World Insights.

This is about trying to find new indications for existing drugs and utilizing secondary data and analytics that, frankly, we believe, we are uniquely positioned to provide.

We see a lot of demand.

So actually, the business in the quarter grew double digits, the Real-World business.

It's consistent with long-term historical growth rates that we've seen for Real-World, certainly on the IMS legacy business.

And even the late-phase study business at Quintiles grew double digits in the quarter.

So our outlook for the business remains very strong, and we continue to see synergy on how we go to market.

So very positive outlook there.

Okay.

Maybe just a quick follow-up will be, any impact on selling cycle?

Are you seeing a lengthening or a shortening of selling cycles relative to the competitive environment or are they generally steady?

No, because it is largely driven by clients and by the idiosyncratic aspects of the study.

As you know, it's highly process driven, a lot of regulatory issues, pricing, safety, et cetera.

So no, we don't see any delays, and that's an [illusion] or acceleration due to competitive pressures.

Our next question comes from the line of Derik De Bruin of Bank of America Merrill Lynch.

This is Juan Avendano on behalf of Derik.

You've been pretty diligent at disclosing the next-gen wins every quarter, and we appreciate that.

Would you be willing to tell us what percentage of your revenues nowadays, that is orders that you have actually billed, are currently from these next-generation wins?

Or would all of those orders still reside in the backlog, that is they haven't been burned?

Yes.

I mean, look, it's -- what we disclosed are the awards.

So it always takes a little bit of time to get them to contract.

Today, that's 3 quarters approximately of the next-gen awards that we disclosed, and I said we have approximately, since the merger, $900 million worth of awards.

About 3/4 of that is in the disclosed backlog, which is contracted.

How much of that has translated into revenue, it's very little so far.

I would say of that, maybe -- I think it's the high single digits, maybe 8%.

I'd like to look more precisely, but it cannot be more than 7%, 8%.

Okay.

And then just to clarify on the M&A contribution.

That was about 1.5 in the quarter.

Should that be about the run rate that we should expect in future quarters coming up, absent of any additional M&A?

Yes.

We've said that that's part of our guidance.

We've always said that acquisitions will represent 1 to 2 points of our growth.

Now it can be lumpy.

There could be a very rich quarter where we end up closing a lot of these deals or not.

So -- and this quarter happens to be that it's 1.5 points, right in the middle of what we usually expect.

You could have a quarter where it's less than 1. You could have a quarter that it's more than 2. But in general, 1 to 2 points is what we anticipate.

It generally has been historically on the commercial side.

Now this past quarter, it has been mostly on the benefit of it has been on the R&D side.

And as I said, about 0.5 point or actually less than 0.5 point of the growth on the commercial side came from acquisitions.

The rest was in R&D.

And lastly, if I may, regarding your capital deployment priorities.

You've definitely done a lot of repurchases.

But now that you've annualized the acquisition of IMS merger, should we expect an uptick in perhaps bolt-on M&A?

No.

We -- again, we -- we're just -- we're not buying to buy.

We're just buying because we are -- we have a strategy behind it.

It's all mostly technology-based companies that give us unique capabilities so that we can move to next century's clinical trial processes and improve -- or continue to improve our suite of commercial applications, number one; and number two, when there is a hole in our offerings, like in the case of the TKL acquisition on the clinical side, we bought a small CRO.

And we are, of course, always looking at that.

There aren't that many such opportunities, but we're looking at that.

With respect to larger acquisitions, of course we have an obligation to look at them, and we have and we'll continue to look when they come up.

But in every single case, we've moved away -- while we might have wanted to do the acquisition, we moved away because we felt there was a very large disconnect between the valuation expectation and what we were prepared to pay.

So we will continue to be very disciplined in our capital allocation.

As you know, we have a great problem, which is we generate a lot of cash flow.

We are very effective repatriating the overseas cash in a tax-efficient manner, and we may generate from time to time cash from a divestiture.

So the combination of our operating cash flow, our tax-efficient repatriations.

Plus we have communicated to you before that the type of net leverage that we have today, which is anywhere between 4 and 4.5, we feel, is the appropriate capital structure for a business of our type and our cash flow profile and risk characteristics.

Given the current rate environment, again our average cost of debt after tax is just over 2%.

So it will be really uneconomic to -- for us to pay down debt with our extra cash.

So absent incremental CapEx internally or absent acquisitions beyond the 1% to 2%, you're going to see us continue to actively do share repurchase, which we feel is an efficient way to return cash to our shareholders, and we believe the stock is very underpriced and is a great value.

Our next question comes from the line of Dave Windley of Jefferies.

Ari, you talked early in the integration process about applicability of next gen.

And I think you started at, say, 20% of the trials that you would see.

I think maybe since then, you've perhaps upped that percentage.

But I wondered, with the kind of time under your belt at this point, how broadly do you think the next-gen data and strategy is applicable to the trial universe that you see in your sales funnel?

Yes.

Well, thanks for the question, Dave.

The -- what, we believe today is that next-gen capabilities are applicable to 50% to 60% of the trials.

And one of the reasons that we've upped that number since the merger is because what's in the pipeline of the molecules is more and more a complex stuff, a specialty oncology.

They have these very tight areas, CG or otherwise, where the patient population is very scarce.

And again, this is all about accelerating patient -- site identification and patient enrollment.

And again, I invite you to attend our investor conference in a couple of weeks.

We plan to demo and go through a number of the case studies so you'll see the value.

Now I should add that the reason why we don't think it's applicable to 100% is not because it's not doable, it's simply because it has no value for the balance of the pipeline.

That is, you don't need to deploy those tools.

It's a really -- it's a pretty well-known therapy area.

Everyone knows where the sites and the patients are and based on empirical data and it's not that complicated.

That's not the issue in those trials.

But I think -- we think that the -- that we can have -- we can generate great value in 50% to 60% of the portfolio.

I will finally say that we also are applying next-gen tools to existing ongoing trials where recruitment is falling behind, including in studies where we were brought in to replace an existing CRO that was underperforming.

So that actually has been -- it's been great, but it's been a little bit of a distraction in terms of delaying and in terms of resources and so on.

So we've been actually recruiting faster and more than we had anticipated in terms of the ramp on next gen.

You read my mind.

That's a great segue.

And my follow-up question was going to be around application to existing backlog.

And I'm wondering if on a -- taking your backlog in totality and thinking about the projects that are actually in flight now, is that application of the data to existing backlog something that has influenced backlog conversion in the last couple of quarters?

Because it has bounced off of a bottom in the first quarter.

Or would you say that it's still kind of noise and I shouldn't overinterpret that?

Yes, I think it's the latter.

I mean, in theory, the answer would be yes, but there aren't enough trials to make a real dent.

Yes, it's maybe in the rounding.

We have a $10 billion-plus backlog.

So in the last -- there's a lot -- this is a very large company.

This is -- it's always very hard to compare our company to competitors in one segment of our business or another because it's a large company.

We have a huge backlog and lots of trials at any given point in time.

But it doesn't take much today.

Go to our resources, even one trial.

And so that, yes, certainly, revenue conversion is accelerated when we bring in next gen.

Just that -- we've seen that over and over again.

Well, the impact it has on conversion in aggregate, it's hard to see in the numbers yet.

Okay.

One last question quickly.

I appreciate your comments on capital deployment.

That's very helpful.

I'm wondering if you are running into any limitations with regard to geography of cash and how you think about tax reform and whether that matters to you and your ability to potentially repatriate cash from ex U.S.

Yes.

I think if we could -- we got a -- good point, we do have, and we've run in those limitations in the past, but we've repatriated quite a bit of cash.

Obviously, there is a tax reform that enables us to do this in an even better manner and a faster way.

And of course, we'll take advantage of that.

But as you know, these days, it's hard to predict what will or will not happen in Washington.

So I'll -- maybe I'll give Mike an opportunity to answer this.

Yes.

So David, as Ari indicated, we obviously were watching tax reforms just like every other corporation in the U.S. And at the end of the quarter, we had a significant amount of cash on hand, about $1.1 billion, and the majority of that is overseas.

And we've repatriated about $1 billion since the merger, and we will continue to repatriate as tax efficiently as we can.

And obviously, we're watching tax reform.

And to the extent that the U.S. tax rates are decreased, that can only make our repatriation efforts that much more efficient.

So we're watching that.

And hopefully, we'll get some upside if that were to come through.

Our next question comes from the line of Eric Coldwell of Baird.

I honestly did not want ask a question here on book-to-bill, but Ari, something you said is going to make me have to bite my tongue and do it.

Great.

And I know you're trying to move away from the quarterly figure, but you're dealing with a bunch of guys here that have covered you a -- the space a long time, and we're kind of stuck in our middle rut.

Sure.

So...

I think you said bookings were up 40% year-over-year versus the third quarter of last year.

And you can tell me if that's correct or incorrect, but if it is correct, then mathematically, at least based on our model and our interpretation of what was previously said, that would put a book-to-bill this quarter of around 1.25.

But I actually thought the book-to-bill was a little better.

So it's just such an important topic for investors as they start -- they see the traction of Quintiles versus the peers and with next gen rolling out.

I'm hoping you can give us a little more color.

And then finally, I'll go ahead and ask my add-on.

I know probably not a big impact from acquired backlog from the 2 deals mentioned, but maybe foreign currency had a bigger influence with the revaluation of backlog.

So if you can give us that number as well.

Yes, okay.

Thanks for the question.

And I think, well, obviously, as you said, we've previously told you that we'll try to get you off this quarterly book-to-bill going forward.

We made an exception, by the way, last quarter because we feel it's appropriate once in a while to kind of clarify the numbers, and we thought we had given you enough points that, that enables you then to understand what it is in any given quarter, and also because it was 4 quarters under the new method since the merger and we thought it was appropriate to do so.

Now you're right, FX can also skew the number.

And it's -- I have to tell you it's not simple math when you look at the FX implications simply because every quarter is a different set of FX numbers.

And then we also revalue the backlog at the end of the quarter where, in fact, the revenue is the average FX every single day during the quarter.

So the numbers are hard to interpret per se in a quarter, and the trend is more important.

Now if you do simple math on the reported numbers, okay, that is, you do the -- you take the end-of-the-quarter backlog minus last year backlog and adjust for revenue, and then the math gives you a 1.35 book-to-bill in the quarter.

And that does include FX.

And I'll tell you what it is, but the -- that, in a sense, reflects what is in the numbers.

That is, if you assume that FX are not going to change at all going forward, then that's what you have in the backlog in terms of understanding the future of the business.

That's that 1.35 for the quarter.

Now if you want to look at comparisons across quarters, we believe that you should look at the different numbers we gave you in the past.

And if you do that and you look at the numbers this quarter in terms of progression, you're probably going to calculate 1.25.

Now the -- neither -- so -- but the real number, to answer your question, is in between that 1.25 and 1.35, closer to the 1.25, as you suggested for the quarter on a -- and if we take out all FX from every single number.

So that enables you to compare quarters in a clean manner as best as we can tell, okay.

So somewhere between the 1.25 and the 1.35.

And -- yes, yes.

That makes...

So you -- yes, so your question, you said 1.26, the answer is yes, you're in the ZIP Code.

Now you also asked about the acquisition.

I told you TKL was -- yes, the TKL acquisition was largely what affected the -- those acquisition contribution in the quarter for the R&D Solutions business.

And now, of course, it is in the backlog.

That's great.

And I guess kind of one last one.

Can you hear me?

Yes, sorry.

Okay.

Can you hear me now?

Yes, go ahead.

I'm sorry.

Okay, yes.

I just want to clarify.

Last quarter was a 1.3, but a 1.37 with the FX.

And this quarter was a 1.25 without the FX and a 1.35 with.

Is that the right interpretation?

No, it's higher than 1.25.

I'm just going to stick with -- continue using that number.

It's higher than the 1.25, but it's in the range between what plays out in the 1.35.

Thank you.

Thanks for the question.

I mean, you want last question?

Okay, and our last question comes from the line of Sandy Draper of SunTrust.

As usual, a lot of questions on the development side, but I'm going to [do] the commercial side, Ari.

Again, the business growth there has been sort of [slow] in the -- in single digits, that you've historically got some headwinds about...

Sandy, we're struggling to hear you on our end.

Can you start again?

Okay.

Is this better?

Can you hear me?

It's kind of muffled.

I think you've got bad reception.

I may have bad reception.

I'll try, and if you can't (inaudible)...

Okay, that's better.

Go ahead, yes.

Yes.

So my question's on the commercial side.

Clearly, there's some pretty clear signs on the development side about business improving and accelerating.

My question is, you've got some legacy drag on the commercial side on [multiple products].

And are indications that this is going to accelerate?

Or certainly, longer term, that's a low best case, maybe mid-single-digit business?

Just any thoughts on that, Ari, would be helpful.

Yes, I'm not quite sure if I understood all your question because you're being cut off and we're missing 1 out of 3 words.

But you asked about commercial revenue, if I understand correctly.

And I just want to point out that in terms of the commercial side of the house versus the R&D, the development side, again in the spirit of just clarifying perhaps misunderstandings, when we put the company together, we, as best as we could, gave you the contours of each of the businesses.

And you will recall that we aggregated some of the commercial businesses of legacy Quintiles into the legacy IMS commercial businesses.

But since then, a few things have happened.

First, there was a small clinical trials technology business at IMS.

It was about $20 million of revenue in total.

And we moved that since then from commercial to R&D.

Secondly, there was also a small legacy IMS CSO business, contracted sales business, in Eastern Europe, which was a $5 million or so of revenue, and we moved that to IES.

And finally, as you know, we sold the Encore business, which removed $25 million -- actually more than $25 million of revenue from the second half.

So our commercial business, versus what it was when we merged the company and told you what commercial looked like, that commercial business lost $50 million of revenue between the transfer of businesses out and the sale of the Encore business.

So that's just as starters.

And in terms of the growth in commercial, actually even absent these adjustments, you will see that we continue to see robust growth.

The core IMS business historically has been growing at about 6% annually, and that was inclusive of 1 to 2 points of acquisitions.

And it's exactly been performing the same since the beginning of the merger.

So no changes there at all.

And as I told you, this quarter, actually the acquisition contribution is relatively minor.

So good organic growth, which is usually in the 4%-type range historically, has been maintained more or less since the merger.

So that -- I don't know was that exactly your question, but I just wanted to provide more color on commercial revenue.

And I think there's one more question, maybe the last question?

Yes, I think there's one more person in the queue.

Yes, our last question comes from the line of Tycho Peterson of JPMorgan.

Ari, I want to explore the contract -- the fixed-price contracts.

I know this has come up a little bit in the last couple quarters.

Just curious as to your -- where you are in rolling out fixed-price contracts.

And if you can give any commentary on how much of the backlog now is fixed price.

Yes.

Look, how much -- it's really a few deals, okay.

It's not a large percentage of the backlog.

I would say, less than, let's see.

The backlog is $10 billion, so I -- it's a fraction, really a fraction, because we just started, okay.

So it's a -- it's very, very small.

Yet, I anticipate this is going to grow, though.

We're not going to disclose exactly how much of our new business is fixed price every time.

Now we have previously said that we are applying so far next gen to about 20% of the -- of what we look at.

And of that, a portion of this is fixed price, okay.

Maybe call it 1/3, okay, to give you a rough estimate.

So of the new stuff, about 20% of pipeline, and when we look at -- that doesn't mean that we win every time, but that's what our -- over time, as I said, we hope to apply next gen to 50% to 60% of the pipe, and I'm assuming that, again, about 1/3 of that would be fixed price.

There are cases where we don't want it to be fixed price.

There are cases, as I said before, where we are hybrid, that is we sell a technology capability and upfront work separately, and that's a fixed price.

And then we sell other services, data or otherwise, that are not fixed price.

Again, we are experimenting with these new models, but we're seeing a lot of traction and a lot of interest.

It often is a clincher of the deal at the end, right, because we're willing to take more risk.

Okay.

And then just for a follow-up, just a quick clarification on the investments you're calling out in the next-gen CRO development.

Is the right way to think about that being offset by the cost synergies from the integration?

And I'm just thinking ahead a little bit to 2018 in margins.

Or will there be kind of incremental investments that you bear around next-gen development that could weigh on margins a bit next year?

Right.

So our next-gen investments are the bulk.

You'll remember we have the salesforce.com re-platforming.

So on the commercial side, we also have investments.

And then we have also sales force recruitment to try to accelerate our business development activities on R&D.

And the combination of all of that are the investments that we've made.

We're also carrying additional costs as a result of the merger.

We've been carrying additional costs throughout the year, but these are costs that we cannot adjust out.

These are -- in cases where we have to maintain redundant people or redundant facilities for a while, redundant IT systems and software licenses, all of that needs to be maintained as we transition to one or the other or a new one.

And so that creates a bucket of costs, and we cannot adjust that out because it's not a onetime kind of a merger-specific outside cost.

It's just redundant, parallel costs.

When we take it out, then it goes away, and it's being taken out over time.

So these are all the headwinds.

But despite all of that, as I pointed out before, year-to-date, we have margin expansion.

You said -- as I said before, I'd like to say we are in the business of growing revenue and expanding margins, not one or the other.

There might be some quarters where we don't have margin expansion, and my goal is certainly to have margin expansion, and I anticipate that 2018 will not be an exception to that despite all the investments that I just mentioned.

Okay, I think that's about all we've got time for today so thank you for taking the time to join us.

And we look forward to speaking with you again on our fourth quarter 2017 earnings call.

We'll be available for the rest of the day to take any follow-up questions you might have.

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.