Quintiles Transnational Holdings' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 1.13 | About: Quintiles Transnational (Q)

Quintiles Transnational Holdings Inc. (NYSE:Q)

Q2 2013 Earnings Conference Call

August 01, 2013 8:00 am ET

Executives

Tom Pike - Chief Executive Officer

Kevin Gordon - Chief Financial Officer

Karl Deonanan - Investor Relations

Analysts

Ricky Goldwasser - Morgan Stanley

Doug Tsao - Barclays

John Kreger - William Blair

Dave Windley - Jefferies

Tycho Peterson - JPMorgan

Robert Jones - Goldman Sachs

Greg Bolan - Sterne Agee

Tim Evans - Wells Fargo Securities

Rafael Tejada - Bank of America

Darren Lehrich - Deutsche Bank

Sean Wieland - Piper Jaffray

Operator

On behalf of Quintiles, hello and welcome to the Quintiles Second Quarter 2013 Earnings Call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. It is now my pleasure to turn the call over to Karl Deonanan, Vice President of Investor Relations. Please go ahead, sir.

Karl Deonanan

Thank you. Good morning everyone and welcome to Quintiles' second quarter 2013 earnings call. With me today are Tom Pike, our Chief Executive Officer, and Kevin Gordon, our Chief Financial Officer. 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 statement due to risks and uncertainties associated with the Company's business. These are discussed in the Company's filings with the Securities and Exchange Commission including the filed prospective dated May 8, 2013 relating to the Company's initial public offering.

In addition, please note that 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 currently posted on the Company's website at www.quintiles.com within the Investor Relations section.

I would now like to turn the call over to our CEO, Tom Pike.

Tom Pike

Thank you, Karl. Good morning to everyone. I'd like to thank you for joining our first earnings call as a public company. As you know, quintiles has a long track record of success. During the past decade, we've established ourselves as the world's leading provider of biopharmaceutical development services and commercial outsourcing services. We're pleased with our results for the second quarter which confirms that our strategy and the diversity of our business continue to differentiate Quintiles in the marketplace and that our focus on operational delivery excellence has enabled us to drive profitable growth. Our results were in line with our expectations for the quarter and were achieved at the same time as our team committed considerable time and energy to our IPO.

Now let's begin with the presentation on Slide 3 and a few highlights. Net new business overall has grown 13% in the second quarter of 2013 and 16% on a year-to-date basis. This is our fourth sequential quarter of $1 billion or more in net new business which has contributed to a healthy ending backlog of $9 billion positioning us well for the future. The year-to-date book to bill ratio is 1.21 and for the second quarter, the book to bill ratio is 1.07 overall.

Now on the Product Development side of the house, we continue to see strong demand in the marketplace across the spectrum of our customers which include the large, midsized and small pharma including biotech. We've seen increased RFP volume through this year resulting in 22% growth in net new business in this segment through the first half. In this quarter, net new business in Product Development grew 17% to $871.4 million reflecting a book to bill of 1.2 for the quarter and 1.36 year-to-date. We've experienced relatively strong net new business across majority of our service lines in Product Development including our core clinical business lines and our global labs.

Now as the largest product development service provider with our comprehensive service offering, we recorded many significant wins this year. Importantly, we're also seeing what we believe are the beginnings of an evolution in the strategic partnering model. For instance one I will highlight is the announcement in May of the unique partnership where we are able to provide the full range of our capabilities to make drug development more efficient and unlock the knowledge and insights of both Quintiles and our customer. In this customer scenario, we will fully utilize all of our capabilities and combine them with the best of our customers' practices. This is a truly strategic partnership and we have the capacity for more partnerships like this.

Within our Integrated Healthcare segment, we have promising new business demand and revenue growth in the observational research business. However, we've experienced the slower sales environment within commercial services businesses including in the timing of award decisions. This slowing coupled with cancellations and scope modifications in commercial services contracts, in some commercial services contracts, and these took place primarily in North America and Japan, resulted in a net new business of $142.2 million and a book to bill for IHS of 0.65 for the second quarter and 0.71 year-to-date.

However, I am happy to announce that one opportunity which slipped from the second quarter was finalized just after the quarter closed. This opportunity, which was about $100 million sale, brings our book to bill ratio in IHS in line with historical rates. I would also note that in this segment, a different but attractive demand is occurring for an integrated suite of our services. The sales here are lumpy but the medium-term backdrop is promising.

Continuing with a few financial highlights for the second quarter, our net services revenues in the quarter were $944.2 million, up 2.2%, at constant currency from the prior year. Product Development segment service revenues grew about 5.8% at constant currency compared with the same period last year. Growth numbers in both of our segments reflect tough comparables in the quarter and generally met expectations but pretty increased impact of foreign exchange. We grew our adjusted income from operations 8.4% to $124.1 million and expanded our income from operations margin by 100 basis points. Adjusted net income was $62.9 million in the quarter representing growth of 12.6%. Diluted adjusted EPS of $0.50 represents an increase of 6.4% over the same period in 2012.

In summary, we've had strong operating performance with bottom line results and an increased backlog to support our future growth. Now let me hand it over to our CFO, Kevin Gordon, who will provide greater detail on the numbers.

Kevin Gordon

Thank you, Tom. Good morning to everyone joining the call today. As Tom mentioned, we've been very busy over the past several months, yet continued our consistent focus on operational execution as demonstrated by our second quarter and year-to-date results. Before I get into the financials, let me just reiterate Karl's earlier reminder that we are discussing certain non-GAAP adjusted measures today, so please reference the reconciliations included with the slides.

Turning to Slide 4, I'll begin with the consolidated results. For the quarter ended June 30, 2013, the growth in our consolidated service revenues excluding the impact of foreign currency fluctuations, which we refer to as constant currency growth, was 2.2% or $21.1 million compared to the same period last year, and at actual foreign exchange rates, our service revenues of $944.3 million were nearly unchanged from the prior year.

Our constant currency revenue growth was primarily from volume increases in clinical services in the Product Development segment. However, as expected, certain projects winding down and cancellations in scope modifications in the commercial services business negatively impacted revenue growth. We also experienced an unfavorable foreign currency headwind of $21.8 million or 2.3%, primarily associated with the Japanese yen.

The global diversification of our service revenues remained consistent with our North America and Latin America region at 40%, Europe, Middle East and Africa region at 39%, and the Asia-Pacific region at 21% of the total consolidated revenues.

For the six months ended June 30, 2013 our constant currency revenue growth was 4.2% compared to the same period in 2012. At actual foreign exchange rates, our service revenues of $1.87 billion grew 2.1%. The negative foreign currency impact on a year-to-date basis represents 2.1% and equates to approximately $38.4 million.

Adjusted income from operations grew 8.4% to $124.1 million, representing 100 basis points of margin expansion compared to the same period last year. On a year-to-date basis, adjusted income from operations was $242.5 million, representing growth of 9.8% and 90 basis points of margin expansion. The margin increase was from the larger percentage of revenues, from the higher margin Product Development segment which was further aided by improvements in the Product Development operating margins compared with the prior year.

Adjusted net income grew 12.6% to $62.9 million in the second quarter compared to the same period last year. For the six months ended June 30, 2013, our adjusted net income was $120.5 million representing growth of 11.6%.

Diluted non-GAAP adjusted earnings per share grew 6.4% to $0.50 per share in the quarter ended June 30, 2013 versus $0.47 per share last year. Diluted adjusted earnings per share of $0.98 per share grew 66.5% for the six months ended June 30, 2013 compared to $0.92 per share in the same period last year. The growth in diluted adjusted EPS was negatively impacted by the increase in weighted average outstanding shares in connection with the IPO in May.

Certain costs are not allocated to our segments and are reported as general corporate and unallocated expenses included in SG&A. These costs totaled $50.9 million during the second quarter compared to $26.2 million for the same period last year. This increase was primarily due to $26.5 million of fees paid in connection with the termination or amendment of certain agreements. Adjusted SG&A was 21.4% of revenue, flat with the prior year quarter as the amounts were nearly unchanged.

We recognized $2.8 million of net restructuring charges during the second quarter and $4.7 million year-to-date, principally in connection with our February 2013 approved restructuring plan to migrate to delivery services primarily in Product Development segment and to reduce anticipated overcapacity in selected areas in the Integrated Healthcare Services segment. We expect to incur additional costs under this plan during the remainder of the year.

The GAAP effective income tax rate was 18.9% and 31.8% for the three and six month periods ended June 30, 2013. These rates compare to 37.1% for the same periods in 2012. The current year effective tax rates for each of the periods ended June 30, 2013 were positively impacted by asserting in the second quarter that the undistributed earnings of most of our foreign subsidiaries are indefinitely reinvested outside of the United States. This assertion was reassessed as we paid $350 million of debt in May. The change resulted in a $7.3 million one-time income tax benefit in the quarter to adjust income taxes recorded on the first quarter earnings for the new lower estimated annual effective income tax rate. In our non-GAAP reconciliations, this benefit was reclassified to the first quarter of this year. Please see the reconciliation in the press release posted earlier today.

Our cash balance at June 30 was $586 million compared to $568 million at the end of 2012. We raised $490 million of net proceeds from the IPO in May. We used net proceeds from the IPO to pay all amounts outstanding under the $300 million term loan including accrued interest and related fees and expenses to repay $50 million of indebtedness under our senior secured credit facility and to pay a one-time $25 million fee to terminate our management agreement with certain shareholders. We retained approximately $106 million of the net proceeds for general corporate purposes including funding future strategic growth opportunities.

We incurred a loss on debt extinguishment of $16.5 million in the second quarter in connection with the early payment of the outstanding debt. Our net debt outstanding, defined as total debt and capital lease obligations less cash and equivalents, at June 30, 2013 was $1.46 billion compared to $1.85 billion at the end of December 2012. The reduction in leverage resulting from the debt payments is expected to trigger a 50 basis point reduction in the interest rate of approximately $1.9 billion outstanding under our secured credit facilities beginning in August.

Cash flow from operations, $5.4 million for the six months ended June 30, 2013 compared to $87.3 million last year. The current year quarter was negatively impacted by $26.5 million of cash payments that related to the termination or amendment of certain agreements, a $6 million termination fee for early payment of the term loan, and an increase of eight DSO days compared to 2012 year end due to the benefits from early customer payments in the fourth quarter of 2012 and customer negotiations this year. Long-term contracts with prepayments winding down also contributed to the increase.

Capital expenditures were $64.3 million in the first six months of this year compared to $33.9 million in 2012. We expanded and upgraded facilities in the Asia markets to start growth in those regions as well as invested in our IT innovation and customer offerings.

Please turn now to Slide 5 for a look at our two reporting segments. Our Product Development segment contributed 76% of our service revenues while our Integrated Healthcare Services segment contributed 24% on a year-to-date basis. Product Development's constant currency revenue growth was 5.8% or $40.4 million during the quarter compared to the same period last year. At actual foreign exchange rates, Product Development service revenues of $724.2 million grew 4.6%. Constant currency growth was due to volume related increases in clinical services and contribution from the Expression Analysis acquisition, partially offset by an expected decline in consulting services due to a large project that's winding down.

Product Development income from operations for the quarter was $136.1 million representing 14.2% growth at actual rates and 10.7% at constant currency rates. Product Development income from operations margin was 18.8% in the second quarter, representing an expansion of 160 basis points compared to same period last year including 100 basis point in contribution margin expansion and 60 basis points from a reduction in selling, general and administrative expenses as a percentage of service revenues.

Our focused efforts to increase productivity through the use of technology and effective resource management as well as leveraging our global infrastructure along with a small contribution from currency resulted in improved margins. We are managing hedging out in costs closely resulting in improved operating margins as we prepare for the recent sales to kick into the revenue.

Integrated Healthcare Services service revenue of $220 million in the quarter declined 13% or $32.8 million at actual foreign exchange rates compared to the same period last year, of which $13.5 million was due to unfavorable foreign currency fluctuations. Services revenues at constant currency declined 7.6% or $19.3 million primarily due to lower net new business, negative scope modifications and cancellations, and the impact of the conclusion of a major contract in 2012.

Integrated Healthcare Services income from operations for the second quarter was $12.5 million, down 38.1% at actual foreign exchange rates and 26.7% at constant currency compared with the comparable 2012 period. The income from operations margin was 5.7% for the second quarter, representing 230 basis points less than the same period last year but a 290 basis point improvement over the first quarter of this year. This sequential expansion was a direct result of our strong resourcing management and expense controls which resulted in second quarter margins more closely in line with recent levels.

In summary, our second quarter results reflect strong performance in Product Development. Our Integrated Healthcare Services business went largely as expected but timing issues in new business and increased pressure from foreign exchange unfavorably impacted revenues and profits. We continue to making our focus on executing efficiently on the business we have and on positioning ourselves to support the business we'll have in the future. Taking a look at the future, let's turn to Slide 6 for our initial guidance for the full year.

We expect to achieve service revenues between $3.76 billion and $3.81 billion which represent a constant currency growth range of 3.8% to 5.2%. The Company also expects diluted adjusted per share between $1.95 and $2.05 per share representing growth of 10.2% to 15.8%, earnings per share between $1.63 to $1.73 per share, and an annual effective income tax rate estimated between 30% and 32%. These estimates are based on the actual results for the first time but the expected results for the remainder of the year assuming June foreign currency exchange rates stay in effect.

What that, I'll turn the call back to Tom.

Tom Pike

Thank you, Kevin. I know we want to get to questions and answers, so I'll be brief here. If you take a look at Slide 7 to summarize, our Product Development segment which competes with CROs and others is differentiated and strong. With our 1,600 medical doctors and PhDs, our technology, our global reach, we believe there is no other company that can improve the probability of success or manage development as cost effectively as Quintiles.

Overall, we believe that marketplace dynamics remained strong for the larger CROs and Quintiles in particular. We're seeing an increase in overall RFP volumes which supports our belief that the industry is growing by 5% to 8%. At the same time, we're both generating and seeing customer interest and more complete strategic partnerships. In this segment, we are 100% focused on improving our value proposition for customers and there are big benefits if we are allowed to share our learnings with those customers.

Now in Integrated Healthcare Services, this business that serves primarily the commercial pharmaceutical sector, we have some evolving trends. The customer here is undergoing dramatic change. If you look at the last decade, you saw downsizing of sales forces and even recently budget pressures continued, but those of you who know the pharmaceutical industry know that the pipelines of many pharmaceutical firms are filling back up and approval rates are up, and there's an aversion among the top executives through repeating the pattern the last 15 years, hiring followed by layoffs, creating an opportunity for the right service provider, and that's Quintiles.

We have the set of services necessary to provide the expertise customers need and deliver results with salespeople, medical science liaisons and nurse educators. Yes, there are some industry challenges but our capabilities and relationships give us the strength as this market evolves.

Kevin mentioned it and I will emphasize it once more that we're also focused on operating margins and SG&A management. You can see that in the results for this quarter. We've had four consecutive quarters of strong net new business and as we're working that new business from backlog into revenue, we're managing our operating margins closely. Our SG&A programs are a constant work in progress.

Given the competitive pricing environment, we're working to improve execution to deliver benefits both for customers and shareholders. We're focused on executing our strategy which includes five things mentioned on the slide, increasing our market penetration with profitable growth, leveraging our deep scientific and clinical knowledge, continued refinement of our technology platforms which are linked by rich data and clinical trials expertise, driving productivity delivering quality while focusing on the patient, and supplementing our capabilities through acquisitions. On that last point, we continue to scan for what we call tactical tuck-in acquisitions that enhance our capabilities to serve our clients. We have a number of criteria, they need to meet our IRR hurdle (inaudible) and we target in cash EPS accretive.

To conclude, we're pleased with our first half year performance which includes 16% net new business growth and 11.6% growth in adjusted net income. I would also like to thank the entire Quintiles team. We have a smart committed group of executives and workforce and they work so hard and really deliver results for our customers, and most importantly, also focus on our patients.

So let me turn the call back over to Karl and we can begin our question-and-answer session.

Karl Deonanan

Thanks Tom. We are ready to take questions. I would ask our participants your questions to two so that as many participants can ask as many questions as possible. [Dominic] (ph), you may now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Ricky Goldwasser with Morgan Stanley.

Ricky Goldwasser - Morgan Stanley

Good morning and congratulations on the quarter. You might have addressed this in the prepared remarks but we get a lot of questions from investors on just the margin expansion opportunities that you have, and honestly in the quarter margins grew nicely, but can you provide us kind of like more detail on how you think about this opportunity going forward?

Kevin Gordon

Sure. I think, Ricky, as we've looked at this, clearly we started out or have positioned ourselves now with high-margins in respect to our Product Development business. We were able to expand those this quarter as you saw, and I think as you heard in our remarks, with respect to the preparation for the net new business. So we are effectively managing our resources to the right places with respect to the backlog that we have. As we look at the margins going forward, our expectation is we will look to maintain our margins as opposed to significantly expand those. Our drive at this point is there's a lot of opportunity out in the marketplace that we're looking to take advantage of from a sales perspective. Tom referenced 5% to 8% growth in the market, we're expecting to drive to the top end of that growth rate, and in line with doing that continue to maintain our margins. That will be our objective.

On the IHS side, I think we do have further opportunity. I think you saw in the second quarter, we started the year a bit slow, we do or have had some challenges on the top line, but in light of that top line challenge with some of those changes, we've managed those resources, we improved our margins to a point where actually they are relatively in line with where they were last year, and as we continue to drive that top line growth, we'll look for further expansion opportunities in IHS.

Ricky Goldwasser - Morgan Stanley

Okay, and just a question on the backlog, you talked about kind of like being at the high end of that 8% market growth and seeing increased income from clients, can you just give us some color on the composition of the backlog by client profile?

Tom Pike

Ricky, it's Tom, I think I can take that. We continue to serve across the sector well in terms of the product development sector. Large pharma continues to make up the largest part of for instance our wins this quarter, but we have a significant midsize pharma and small pharma. You may remember from some of the earlier discussions that we look at enterprise accounts and we have really the industry-leading customer relationship management with our larger accounts and then we have a next set of accounts that really are lead accounts that are about 15 more that we also service with dedicated teams. And what that all allows us to do is really work effectively in both the largest segment and the midsize segment.

What we're pleased with overall though is we're continuing to serve small biotech well, and given the increase in funding that I think we've all generally seen in that segment, our value proposition is well received by those companies, because we can give them such broad support in terms of trial design, trial consultation, trial execution, et cetera. And on the IHS side, I'd say it's similarly spread at this time, although interestingly recently we were seeing some demand for larger deals by larger clients.

Ricky Goldwasser - Morgan Stanley

Okay, thank you for the color.

Operator

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

John Kreger - William Blair

Tom, at the end of your prepared remarks, you sort of contrasted development in IHS and I'd like to just come back to that. As you have strategic discussions with some of your larger clients, how does the discussion differ between Development and IHS? Are they approaching outsourcing in a similar way across those two capabilities, so is it really just a case of the underlying number of products that they are working on or are they thinking about outsourcing differently on the commercialization side?

Tom Pike

What I'm seeing John is the beginning of a different kind of thinking at the most senior levels of especially the larger pharmaceutical firms on the commercial side. I've been lucky enough to spend some time with many of the leaders of the larger pharmaceutical firms, and if you look at it, many of them are facing need for new product introduction, managing mature market portfolios, et cetera, and as I said in the prepared remarks, they really don't want to go through the effort of hiring a large sales force when what will probably happen is the product introduction will be somewhat unpredictable last period of the years and then it will tail off in terms of the need for support.

And so, we are seeing increased interest at the very top of companies in terms of variabilizing sales force, but then also using outcome oriented information on what's actually happening in the practice of medicine associated with their product to target the messaging, the focus, et cetera, and that's where we're playing into it. On the Product Development side, the big discussions are about productivity and probability of success.

Now the other discussion that I would add, and I think you implied John, is that we do see more interest and understanding commercialization implications with payers and providers in especially Phase II trials, and we are seeing the med affairs folks have more interest in our clinical experience because of the complexities of some of the drugs coming through the pipelines. So as I'm in discussions, as our teams are in discussions [indiscernible] we are finding an increased interest in that type of coordination between the two segments.

John Kreger - William Blair

Very helpful, thanks. And then maybe just a quick follow-up, how are you seeing the competitive pricing dynamics across Development and IHS compared to let's say 6 or 12 months ago, any change?

Tom Pike

Pretty consistent. Those of you who have spoken to us in the last number of months know that what we saw in 2011, it was a tougher environment, it moderated a little bit in 2012, it's what I call some rationalization coming into the industry, but it is staying competitive, it's about the same. The thing that you're clearly seeing when you look across our wins and when you look across our pipeline is we're competing with the top CROs and I think the top CROs are picking up share, as we are.

Operator

Your next question comes from the line of Douglas Tsao with Barclays.

Doug Tsao - Barclays

Good morning, congrats on the quarter. Just to start, obviously the margin expansion in Product development was very strong in the quarter, I'm just curious of the components, was this driven largely by just good old-fashioned blocking and tackling or was there business and factors involved in terms of necessary to different sub-segments within Product Development?

Kevin Gordon

Doug, this is Kevin. It is really a combination of both. As you know, the breadth of service offering that we have across the Product Development segment, we offer a number of services there. So it is a bit of mix, but I would also say it's as you suggested I would say strong management of the resources that we have globally in connection with the revenue that we have. Si I'd say a little bit of both of those, and as Tom I think alluded to a little bit earlier or even in our remarks, that we continue to be very focused on how we're managing our resources, where we position those resources to provide the services that we provide.

Doug Tsao - Barclays

And Tom, in terms of the IHS segment, when you look at the landscape, obviously we have seen an uptick in terms of drug approvals. As you look at sort of prospective opportunities or opportunities that you are pursuing there, is it largely with the large drug companies or do you see more opportunity with small or midsized companies?

Tom Pike

And Doug, by the way I was thinking about you this morning when I skipped my run since you enrolled me at that marathon together, but regarding – are you thinking particularly about IHS as you asked that question?

Doug Tsao - Barclays

Yes, that was specific to IHS.

Tom Pike

We are seeing, when you look across the pipelines, there are several of the larger pharmaceutical firms who have very rich pipelines and we're definitely seeing interest in those organizations and trying to understand and utilize new models. In the midsized, it's more traditional. They have a way with benefits of using us versus partnering and the benefit of course for them if they do use us is the ability to keep the intellectual property and capture longer-term profits, and frankly do it at the same productivity rates or better than they would through partnership. But we see, the midsize is a little more traditional in terms of the demand, it's really the evolution we're seeing as in the larger organizations as they are starting to think about what am I going to do in 2014, 2015, 2016.

Doug Tsao - Barclays

Okay, great. Thank you very much Tom.

Operator

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

Dave Windley - Jefferies

Congratulations from me as well on your first quarter out. Wanted to go back to a comment you made, Tom, in your prepared remarks about the evolution of strategic partnering, and I think you were really in this case talking about Product Development, and a unique deal that you had recently signed. Wondered if you could maybe delve into that deal a little bit more and then more broadly talk about the pipeline of conversations that you're having of similar types of deals?

Tom Pike

I'll touch on it a bit. I think as a general rule, we don't like to talk about specific customers, so let me talk a bit about what excites us about it.

Dave Windley - Jefferies

I understand, but you did bring it up.

Tom Pike

I think the whole, the change that we're seeing is, as you know, this is an industry that's really focused on providing resources to supplement what the pharmaceutical firms have done or are doing in development, but the change we're seeing now is with the deep expertise that we've developed, and I think it's particularly true for us but also spilled into some of the other larger CROs, is that they are clearly coming to us for a therapeutic area knowledge, design of trials, regulatory strategies, there's how do you implement or additional commercialization considerations without collecting 25% to 35% too much data. So what you're seeing is this evolution into a real partnership that has the ability to pursue results.

Now I always find this industry interesting because we've made a lot of functional improvements over the last decade but we haven't done a lot around improving entirely at the process, and now we're getting the crack with customers in improving the process. The reason why I mentioned that deal is because that deal is one where we're really able to bring the breadth of our services in to help that customer improve their probability of success and improve their development costs and efficiencies, and we're excited about that, that will be using our technologies, using our deep expertise, and when I think about the pipeline of this, we are actually seeing quite a number of companies even coming to us, and we're making proactive efforts in cases with our great CRM capability, but we're having quite a number of companies come to us to say how can we do that too. And so, time will tell. The way Kevin and I manage the business, the results have to be in the numbers, they can't just be in the conversations, but time will tell, but right now it's an encouraging set of trends, and what's interesting about it is it's on top of RFP volume increasing.

Dave Windley - Jefferies

Got it. Okay, thank you for that. And then maybe a little bit more tactically, I think during the IPO discussions, there was some commentary about timing, certainly you had for example in 2012 some Pfizer revenues, that doesn't repeat this year as Pfizer has gone in a particular direction, and then non-client specific some fairly large programs that have been running and perhaps are coming to a conclusion, I wondered if Kevin you could help us a little bit with gating, are you going to see revenue progress fairly smoothly over the second half of the year or should we be aware of any particular wind-downs or start-ups that would have an impact on quarterly progression?

Kevin Gordon

Dave, I think over the course of the year, particularly in the Product Development side, I think you would look at the second half similar how we took the first half. So I don't know that there's any one element that jumps out with the items that you just described and that we previously talked about.

On the IHS side, we started out a little bit soft here, we did have the cancellation at the very tail end of last year and scope modifications and then another here on the second quarter. So there is that impact from those. I would say though we felt the impact a little bit of those here in the first half and it will be a bit to a lesser extent in the second half than the first.

Dave Windley - Jefferies

Okay thank you.

Operator

Your next question comes from the line of Tycho Peterson with JPMorgan.

Tycho Peterson - JPMorgan

I actually want to follow-up on Dave's first question there on the strategic, and I think there's a perception broadly within the industry that the strategic deals bring lower margin. So I don’t know if you want to go into specifics on this but can you maybe just talk about how you think about the margin profile for some of these strategic deals that you'll be pursuing? And then also, are you expecting this one to have any meaningful impact on revenues this year?

Tom Pike

In terms of these deals, as you know this is a competitive industry and so we do believe there's always going to be pricing pressure. What's exciting about the deals is the opportunity to have higher utilization of the entirety of our organization which I think should bring bottom-line benefits to us. And so we do expect consistent pricing pressures with what you've seen historically here.

Now the other thing about Quintiles, it's a little different, we do have a number of value-added services, we do have low-cost delivery locations, and so what I like about these strategic partnerships, because the historical strategic partnerships have been more preferred resourcing in many cases, what I like about these is that it lets us use that variety of organization.

You know the other thing, I think if you look historically, you might recall from some prior discussions, we have 10 customers who are over $100 million in revenue, and so we know how to wrap these larger programs in a way that I think not everybody in the industry does and we're able to do that through employees largely, minimizing contractors, so you don't have some of the situations that some of the others have encountered when they do large deals.

Tycho Peterson - JPMorgan

And you guys also signed an agreement around Central Lab during the quarter, can you maybe just talk about your thoughts in that market as we think about the back half of the year?

Tom Pike

It continued, I think you know we have the number two Central Lab business in this industry and it continues to be a key part of our growth strategy. We're seeing strong growth generally in net new business in that area, and while we don't break it out, I think that area of the business continues to serve us well.

Tycho Peterson - JPMorgan

If I can ask just one last quick clarification, your comments on Integrated Health becoming more strategic, is that more on the commercial services side or more around kind of observational studies and then maybe some of the payer solutions work that you're increasingly doing?

Tom Pike

It's interesting, Tycho. What we're seeing is this pulling together of our outcome information and data, our consulting services and our commercial services into a value proposition for the customer. So as you can imagine, if you're running a commercial organization, the key thing is having the right folks with the right messages to the right organizations and doing it all within the compliance agreements that they have. And so increasingly just product movement data is not enough and so outcome really gives us the ability to understand how the practice of medicine changes associated with the drug that's introduced, consulting lets us figure out the right resources, the right place, right messages, and then we have the unique capability among our peers to actually deliver feed on the street to improve results.

I have to say, I've been working with some customers on the value proposition of our commercial services organization versus the in-house, and it's a significant value proposition, significant improvement in the value proposition for the customer. I think the key is, and we do this really well, we have the best compliance in the business, we can comply with the laws as necessary and the corporate integrity agreements and deliver them real benefits with our feed on the street combined with our expertise.

Tycho Peterson - JPMorgan

Great, that's helpful, thank you.

Operator

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

Robert Jones - Goldman Sachs

Actually just want to go back to gross margins if I could for a second, obviously pretty solid in the quarter and the implied margins based off the guidance also pretty solid, above what we were looking for, I was hoping you could maybe just give a little bit more detail around the mix within Product Development specifically, is there anything there worth noting that could be driving the better profitability as we move to the back half of the year?

Kevin Gordon

On the mix perspective, I think it's fair to say, as we approach this our Product Development segment margins have always been higher. As I commented earlier, the service lines are encompassed in there, I think we saw a bit of a benefit from that mix and we're not really going to get into the specifics of margins by service line.

I would also pint you to, we talked about and continue to talk about how we reposition our workforce where it's needed to support revenue. We are implementing our restructuring program and some of the benefits from that restructuring program have baked into all the others, and in last year in particular have baked into those margins a little bit. So you've seen some of the benefit from the programs that we've implemented to get into the margins in the Product Development side.

Now going forward, I think with the pricing environment we have, our objectives, to be real plus in our margins, our objectives with that competitive pricing is to continue to keep our costs in line with that and really maintain margins as opposed to look to grow as we continue to drive the top line and the new business penetration.

Robert Jones - Goldman Sachs

Okay, got it. And Tom, you mentioned tuck-in acquisitions in your prepared remarks, I know you're not going to get into too much specificity here but I was hoping you could maybe comment a little bit on what are some of those areas that you're interested in, maybe even just contracting capabilities versus more of a scale type acquisition?

Tom Pike

We can't divulge into too much about this because we don't want a frenzy around what we're doing, but they really are on both sides of the house. I think on the Product Development side, even though we have the broadest and deepest capabilities. You know there are certain areas that we feel like we could supplement based on the growth in the marketplace, based on our ability to cover, and it's both the combination of bringing in skills as well as a capability addition. And on the IHS side, it's fascinating, you think about it, you have $2.6 trillion in healthcare spending here in the U.S. alone, $750 million is [indiscernible] inefficient. We do think that there are opportunities there to deepen our skills based on what both our commercial and payer and provider customers are looking for. So I'm sorry I can't go into too much detail but do know it's a key part of our strategy as we go forward here to keep looking at that opportunity. We've had good success with it in the past and you can expect it to continue.

Operator

Your next question comes from the line of Greg Bolan with Sterne Agee & Leach.

Greg Bolan - Sterne Agee

Tom, just kind of getting back to your comments around greater utilization of the organization in that somewhat mitigating price degradation and then also just the value-added services that you also spoke about, can you maybe talk about, if you look at the current installed base of biopharma customers on Product Development, where do you think we were as it relates to life safety, as it relates to pharmacovigilance, and as you look across kind of the spectrum of services or aspects of drug development, is that kind of on the lower end in terms of penetration on, if you could answer that that'd be great?

Tom Pike

It's interesting for us, I think the whole industry is evolving, Greg. If you look at it, you look at how are we really going to improve drug development here, you see opportunities in terms of planning for clinical trials, in terms of executing clinical trials, and then you see post approval the need for better market surveillance, more observational studies, and as we look across that, I think we've got a set of value-added services that really help us across the entire spectrum.

I think with regard to pharmacovigilance in particular, that market has, from my experience, it's been evolving for about five or six years in new ways. Interestingly the first evolution of it was probably to just try to lower the cost and the next evolution we think is more value-added around safety, and we think it starts playing more toward organizations like ours that have the deep expertise. It's funny, we have, we probably have as much global regulatory skill as anybody in this business, but it's only now that we're pulling it together in new ways to create new offerings on top of traditional pharmacovigilance. So I think the net of it is you're on to something important, it's a good opportunity area, but to me it's one of many that we have for value-added services given the mix that we have.

Greg Bolan - Sterne Agee

Okay, that's helpful, thanks. And then Kevin, just a housekeeping question, we know there was about kind of $5 million reversal accrual that helped EBIT in the first quarter of this year, was there any other reversals this quarter or no?

Kevin Gordon

No, no unusual items other than those that are described in the slides related to the IPO.

Operator

Your next question comes from the line of Tim Evans with Wells Fargo Securities.

Tim Evans - Wells Fargo Securities

You did come off two quarters of kind of 1.5-ish book to bill in the Product Development segment, just wondering is the 1.2 book to bill this quarter was consistent with your internal expectations and was there anything in there, any large cancellations or large bookings that you would call out specifically?

Kevin Gordon

Coming off two 1.5 quarters of book to bill is a good place for us to be and now 1.36 for the full year-to-date is also pretty good, it's clearly above our five-year average and adds more of the backlog to drive the growth rates that we're going to expect in the future. So we're pretty happy with that. I would tell you that we did, as you always do and you'll have experiences of some cancellations, there were some cancellations, cancellation rate in all honesty is pretty similar to what it was in the second quarter of last year on a year-over-year basis net of modifications. So there's nothing significant in there, I think as we've said all along, you go quarter to quarter and you're going to have some lumpiness or up and down in terms of quarter but on a long-term view I think we've been pretty consistent in that 1.2 plus and for the first half of this year lower than 1.3. So I don’t know that there's anything unusual there that we need to highlight.

Tom Pike

Tim, we have a little rule that we're going to try not to both speak about these questions, but this one in particular, we have a lot of discussion internally about how do the public markets understand that there is some lumpiness associated with the sales in this business. And the thing that we would worry about is, if we saw some kind of degradation associated with the pipeline but we don't see that. And so we feel good about the pipeline and we feel good about our proactive opportunities that I was describing before, but I do think that you'll see quarter to quarter a little lumpiness. We'll tell you though in general, as Kevin said, we're very pleased with the 22% growth associated with net new business and I think given the size of our, the scale of our operations compared to the other guys, it's really a testament to our strong CRM team and the relationships we have with the customers and the customers are seeing value in us.

Tim Evans - Wells Fargo Securities

Okay, that's great. And just to follow-up on that, if you smooth out all that lumpiness over longer periods of time, what do you feel like that Product Development book to bill needs to be to really drive that call it to 8% growth rate if that's kind of what you're aiming for?

Kevin Gordon

Tim, I think we look at that, to drive that type of growth rate, we look to be above 1.15 to get there. So our five-year historical average I think if we continue to maintain that, will help us drive that even further.

Tim Evans - Wells Fargo Securities

Great. Okay, thank you.

Operator

Your next question comes from the line of Derik de Bruin with Bank of America.

Rafael Tejada - Bank of America

Good morning, it's Rafael in for Derik. Just a quick one on the RFP volumes, you mentioned that you saw good volumes, can you give us a sense of how this compares to historical performance and just trying to gauge for approaching some of the highest that the Company has seen in the past?

Tom Pike

I'm sorry, couldn't quite hear the last word, approaching some of the high?

Rafael Tejada - Bank of America

The highest in terms of the volume RFP requests that the companies have put out.

Tom Pike

Yes, we've looked at them over the last couple of years, it's just what we're really focused on in our analysis for the call, and they are improving. So I don't want to give out exact numbers because I know you guys will ask me exactly what it is next quarter too, but I do think Rafael that we're pleased with the backdrop. And we're in such a, this industry is in such a lucky place, if you will, that when you look at the economic issues in the newspapers on a day to day basis, our backdrop is just different and the notion that we can improve development productivity for pharmaceutical firms is being embraced by the pharmaceutical firms and that's really creating this increase in RFP volume plus this increased interest in new kinds of partnerships. So if we could keep it at that level, probably best in terms of, but we're pleased with what we see and we have been looking over the last couple of years and it's clearly up.

Rafael Tejada - Bank of America

Okay, great. And just one on basically the situation that has unfolded in India in regard to clinical trials, just trying to get a sense of basically the solutions that you're providing to sponsors to help navigate through the challenges in that country.

Tom Pike

We pretty much follow their league on India. If you look at it, some view it more strategically than others and we pretty much follow their league is our general strategy. We are of course aware, I think we probably have the best regulatory understanding of that market than anybody given our scale there because we do provide services there as well as do clinical work there, and so we have terrific dock in terms of who constantly follows the policy and our own Chief Governance Officer, Derek Winstanly, is in constant communication with what's going on. Where necessary, we reallocated to other countries where the customers would prefer that but we're pretty much following their lead in terms of right now and it's had no impact at all on our service business that supports data management, pharmacovigilance, et cetera.

Operator

Your next question comes from the line of Darren Lehrich with Deutsche Bank.

Darren Lehrich - Deutsche Bank

Just wanted to touch on your outlook for IHS and where you think growth will come from over the next 6 to 12 months and maybe if you could just comment a little bit more specifically around the opportunities you're seeing in sales force, market access, in some of the markets that you think you might have opportunities in, so just again wanted to get the growth outlook that you have for IHS both near-term and longer-term.

Tom Pike

I'll handle it from a -- this is Tom, I'll talk about it more from a general and then if Kevin wants to add anything specific, he can add it in. We are expecting to see continued growth in observational research that is above market growth based on what we see both in terms of the pipeline and our unique capabilities. Many of you know that we've literally written a book on competitive effectiveness and other areas there, so we continue to expect to lead there, and we see the same thing on the consulting side. Encouragingly, even beyond $100 million sale that I mentioned, we have some promising wins already this quarter in terms of commercial services. And again, we see that being a bit of a more integrated sale, it's a little different than it's been historically just in agency type business where there is a greater interest in our expertise that we surround it with. So we do expect that the growth will come across all the pieces within there.

Our payer and provider business is nascent. A little unknown factoid about Quintiles is that we have about 2,000 paying provider customers and we're looking at ways to leverage that. We spent time yesterday looking at a very innovative collaboration that we have that has now 18 hospital's systems working within it with some pharmaceutical firms as well as what we're doing around meaningful use, that we think provides us a longer-term opportunity that should show up in the next several years in a material way with the providers and payers.

Darren Lehrich - Deutsche Bank

Okay, and then just as it relates to the commentary that Kevin made I think in the prepared remarks, can you just expand a little bit more on, I thought what I heard you say is, you still are taking out some additional capacity in IHS and you mentioned some additional charges in the second half, how do I square that with some of the opportunities you're describing and new business wins that you're describing, I want to make sure I heard you correctly?

Kevin Gordon

That's a business that really is going to ebb and flow with contrast and the nature of the contrast, it is a portion of that. So as you can see from the results this year even with some of the pressure on the revenue, we've done a nice job of managing that to allow them to continue to defer their margins. There was an element of our restructuring plan that we announced in February that included some elements of change within that particular segment of our business and most of that has already occurred at this point. So that's really behind us and it may not necessarily have been specific resource-based to projects as much as other areas.

Darren Lehrich - Deutsche Bank

Okay, that's very helpful. Alright, congrats on the IPO and thanks.

Tom Pike

Sounds like we have time for one more.

Operator

Your final question comes from the line of Sean Wieland with Piper Jaffray.

Sean Wieland - Piper Jaffray

Thanks for squeezing me in. I want to hear your thoughts around disruptive technologies for this industry, what's your role in creating new data capabilities that can really move the needle on cost and success rates, and in particular in the commercial services side?

Tom Pike

In the commercial services side, Sean, I thought you were going to go for the Product Development side.

Sean Wieland - Piper Jaffray

Well, you can hand on both.

Tom Pike

I think those of you who know us know that we strongly believe that we have a first mover advantage in the industry associated with our strong Chief Information, Chief Technology Officer and our team who foresaw the benefits of data all the way back to 2005 in a white paper and really started executing on as early as 2008, and now we're sitting in a situation where we have about 55 million electron health records in-house, we have an entity called the Digital Patient Unit with about 3 million opt-in customers associated with it.

On the Product Development side of the house, I think our obligation to our customers is to keep leading there. We have the industry-leading technology associated with designing clinical trials in our impresario design tool. On the commercial side, we do see, and on the IHS side, we do see an opportunity for us to be disruptive by using outcome information more effectively with commercial customers to make decisions about how to deploy sales reps and we're working on that right now as we speak in terms of trying to improve our offerings there.

Now over the next four or five years, I think you're going to see the commercial pharmaceutical firms moving more and more into understanding kind of observational standpoint, exactly what's happening with their products in the marketplace, understanding better how decisions are made, what docs are making more decisions, we have a number of relationships, we have some technologies that we think will play very well into that.

So what I'd say to you Sean is that on the Integrated Healthcare Services side, we want to leverage the combination of our electronic medical record expertise, our expertise associated with clinical data, and our expertise associated with registry and outcome data to really help the commercial pharmaceutical firms as well as providers in particular improve the way drugs are used in practice of medicine and thereby help the industry. So I hope that helps, can't give too much competitive stuff away, Sean.

Sean Wieland - Piper Jaffray

Got you, thanks.

Tom Pike

Alright, good. I guess at this point, we're done, we're a couple of minutes over time. Thank you very much for joining us on today's call. We really appreciate all the support that we've got and we feel confident in the ability of Quintiles to drive profitable growth and assist in developing and delivering better healthcare outcomes, and we look forward to keeping in touch and talking with you soon. So, operator, back to you.

Operator

Thank you to all our participants for joining us today. This concludes our conference call. You may now disconnect. Have a great day.

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