Quintiles Transnational Holdings' (Q) CEO Thomas Pike on Q2 2014 Results - Earnings Call Transcript

Jul.31.14 | About: Quintiles Transnational (Q)

Quintiles Transnational Holdings (NYSE:Q)

Q2 2014 Earnings Call

July 31, 2014 8:00 am ET

Executives

Karl Deonanan -

Thomas H. Pike - Chief Executive Officer and Director

Kevin K. Gordon - Chief Financial Officer and Executive Vice President

Analysts

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

John Kreger - William Blair & Company L.L.C., Research Division

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Ricky Goldwasser - Morgan Stanley, Research Division

David H. Windley - Jefferies LLC, Research Division

Mohammed Omer

Timothy C. Evans - Wells Fargo Securities, LLC, Research Division

James Clark - ISI Group Inc., Research Division

Rafael Tejada - BofA Merrill Lynch, Research Division

Garen Sarafian - Citigroup Inc, Research Division

Alexander Y. Draper - SunTrust Robinson Humphrey, Inc., Research Division

Operator

On behalf of Quintiles, hello and welcome to the second quarter 2014 earnings call. My name is Brian, and I'll be your web event specialist today. [Operator Instructions] It is now my pleasure to turn the webcast over to Karl Deonanan, Vice President of Investor Relations. Mr. Deonanan, the floor is yours.

Karl Deonanan

Thank you, Brian. Good morning, and welcome to Quintiles' Second Quarter 2014 Earnings Call. With me this morning are Tom Pike, our Chief Executive Officer; and Kevin Gordon, our Chief Financial Officer. In addition to our press release issued this morning, a conference call presentation corresponding to our prepared remarks is available on our website at www.quintiles.com\investors.

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 the company's 2013 annual report on Form 10-K filed on February 13, 2014.

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

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

Thomas H. Pike

Thank you, Karl. I'd like to thank you for joining our second quarter 2014 earnings call.

Let's begin on Slide 3 with a few highlights. I'm pleased to report another quarter of strong performance across both of our operating segments. We delivered $1.035 billion of services revenues, representing a 9.7% growth rate compared to the same period last year. Our Integrated Healthcare Services segment contributed 15.6% service revenue growth, underpinned by strong new business wins from the prior 3 quarters. On a consolidated basis, we expanded our adjusted income from operations margin by 60 basis points and our adjusted EPS by 30% compared to the same period last year. These growth rates showcase the strength of our company.

On a net new business front, we grew 21.2%, recording $1.23 billion of net new business during the quarter, which represents a book to bill of 1.19x services revenues. In product development, we booked about $867 million of net new business, representing a book to bill of 1.1x -- 1.11x in the quarter. The net new business and book to bill in the quarter were negatively impacted by cancellations that were above our historical average dollar value, including a large cancellation late in the quarter. As we've discussed previously, it's not uncommon to have this occur from time to time. However, the strength of our net new business in this segment for the first half of 2014 has resulted in a 1.21 book to bill for this segment.

During the quarter, we saw strength in our core clinical services North America, as well as Asia, our Novella business and Phase I early clinical development services. Within our Integrated Healthcare Services segment, we booked $361 million of net new business, representing a book to bill of 1.42, which is very strong, as bookings in the commercial business can be lumpy. The majority of the bookings historically occur toward the end of the year. The bookings reflects strength for commercial services in North America and Japan, as well as continued strength in our observational real-world late phase business. Our average book to bill over than most recent 4 quarters in this segment was 1.56, which we believe is very promising, contributes meaningfully to the increase in revenue growth outlook for the year.

For the first half of this year, we had strong demand from large pharma with nearly 61% of our net new business coming from the top 20 pharma compared to about 46% the same period last year. In addition, we've grown our biotechs and emerging pharma bookings with nearly 2.5x more bookings in the first half of 2014 compared with the same period last year.

We continue to strengthen our deep relationships with customers and seek further relationship and strategic partnerships. In total, for the first 6 months of the year, we've 7 accounts that exceed $100 million or more of net new business, which demonstrates the depth and diversity of our customer relationships.

Our backlog increased in the quarter, finishing at about $10.3 billion. With this backlog is a highly diversified customer portfolio with over 500 pharmaceutical customers, as well as therapeutic and geographic diversity. We believe the diversity of our customer portfolio is a key to mitigating overall risks in helping us achieve our goal of delivering long-term consistent performance.

Now let me hand over to Kevin, who'll provide greater detail in the financial results.

Kevin K. Gordon

Thanks, Tom. Good morning, everyone. Turning to Slide 4, I'll begin with the consolidated results. For the quarter ended June 30, 2014, our consolidated service revenues grew 9.7% at actual foreign exchange rates and 8.6% in constant currency. We finished the quarter with over $1.035 billion of service revenues compared to $944.2 million in the comparable prior year quarter. As a result of the strong IHS North America and Novella revenue contributions, the global diversification of our service revenues compared to the prior year ticked up slightly in the North America and Latin America region to 42% of revenues. The Asia Pacific region was consistent at 21%, and the EMEA region moved down slightly to 37% of the total consolidated revenues.

Compared with the prior year second quarter, adjusted income from operations grew 14.4% to $141.9 million, a margin of 13.7% with 60 basis points of expansion comprised of 20 basis points from operational productivity improvements and 40 basis points from positive foreign currency exchange impacts.

For the second quarter, adjusted SG&A of $219 million was 21.2% of service revenues compared to $202.4 million or 21.4% of service revenues in the prior year. The increase was primarily due to incremental costs from the Novella business combination and increases in share-based compensation expense, IT investments and rebranding-related expenses.

We recorded a $3.2 million pretax gain in the quarter from our investment in the NovaQuest Pharma Opportunities Fund, which is accounted for under the equity method in the equity and earnings of unconsolidated affiliates. We recognized $0.9 million of net restructuring charges during the second quarter in connection with previously announced and approved restructuring plans. We expect to incur additional costs under these plans with actions to occur throughout 2014.

The GAAP effective income tax rate was 28.4% during the quarter compared to 18.9% for the same period last year. The effective income tax rate for the quarter ended June 30, 2013, was positively impacted by the accounting related to the company asserting in the second quarter of 2013 that the undistributed earnings of most of its foreign subsidiaries are indefinitely reinvested outside of the United States.

Adjusted net income grew 36.2% to $85.7 million in the second quarter compared to the same period last year. Contributing to the adjusted net income growth were: the increased service revenues; improved product development operating margins; $7.1 million, less interest expense, due to both lower interest rates and debt levels; and the equity and earnings from NovaQuest, offset by the increase in the effective income tax rate compared to the same period last year.

Diluted adjusted earnings per share grew 30% to $0.65 per share in the second quarter compared to $0.50 per share for the same period in the prior quarter. Our cash balance was $636 million as of the end of the quarter, of which $168 million was in the U.S.

Cash provided by operations was $38.7 million in the current year quarter compared to $1.4 million provided for the same period in 2013. The increase in operating cash flow reflects the increase in net income, as well as lower payments for interests of $16.3 million and an improvement of 3 days in days sales outstanding in the first 6 months of 2014 compared to the same period in 2013. In addition, the first 6 months of 2013 included cash expenses totaling $32.5 million or fees paid in connection with the termination or amendment of certain agreements. These improvements in operating cash flow were partially offset by higher payments for income taxes and previously accrued incentive compensation.

Capital expenditures were $35.8 million in the first 6 months of this year compared to $60.3 million during the same period in 2013. The lower capital expenditures were timing-related, and we expect they will normalize as a percentage of revenues in the second half of the year. Net debt outstanding, defined as total debt and capital lease obligations less cash and equivalents, at June 30, 2014, was $1.14 billion compared to $1.27 billion at the end of 2013.

During the quarter, the company repurchased approximately 3.3 million shares of its common stock for $50.23 per share from TPG Quintiles Holdco, L.P. in an accretive private transaction for an aggregate purchase price of approximately $165.1 million. The end -- as of the end of the second quarter, $59.5 million remains available under the 2013 equity repurchase program.

Please turn to Slide 5 for a look at our 2 operating segments. Our Product Development segment accounted for 75% of our service revenues, while the IHS segment accounted for 25% for the quarter, a 2% higher contribution from IHS compared with the same period in 2013. Product Development's revenue grew 7.9% to $781.2 million in the second quarter compared to the same period last year. At constant currency exchange rate, the segment service revenues grew 6.7%.

Second quarter service revenue growth resulted from an increase in North America core clinical services, growth in clinical trial support services, volume increases in our global lab business and contribution from Novella. In addition, as we mentioned in previous quarters, the company's largest clinical project in our history concluded at the end of 2013, which created a 410 basis point revenue growth headwind in the second quarter of 2014 compared with 2013.

Product Development income from operations for the quarter was $158.4 million, representing 16.4% growth at actual rates, and income from operations margin was 20.3% in the quarter. Margins improved 150 basis points, of which 80 basis point came from increased productivity in our core operations, partially offset by an increase in SG&A, principally from the Novella acquisition and IT-related costs, with the remaining 70 basis points from positive foreign exchange benefits.

IHS service revenues increased by 15.6% or $34.3 million to $254.3 million in the second quarter. At constant foreign exchange rates, service revenues increased 15.1% compared to the same period last year. The increase in service revenues for the quarter in the IHS segment were from commercial North America and Japan from recent strong bookings, as well as the continuation of very strong growth in our observational real-world and late phase research unit.

IHS income from operations for the second quarter was $11.7 million, representing growth of 3.7% at constant currency rates compared to the same period in 2013, but was impacted by $1.2 million of unfavorable foreign currency fluctuations, which drove a decline at actual foreign exchange rates of 6.4%. The income from operations margin for the quarter was 5.1% at constant currency rates and 4.6% at actual foreign exchange rates. Pricing pressure and compensation costs in the commercial business, as well as infrastructure investments in the real world, late phase business to support the rapid growth, negatively impacted margins compared with the prior year quarter.

So in summary, our 2014 first half results continued the trend of consistent performance in Product Development and a solid return to growth on our IHS segment. Book-to-bill ratios exceeded 1.2x service revenues in both segments. We recorded solid revenue growth, improved our overall operating margins with our continued focus on productivity and quality and entered the second half of the year with nearly $10.3 billion of backlog.

And now with that, let's turn to our 2014 guidance update. We are increasing both our revenue and adjusted EPS guidance based on the strength of our first half of the year, new business in IHS and the acquisition of Encore. We are now estimating service revenues will increase to between $4.2 billion and $4.24 billion, representing growth of 10.3% to 11.3% at our forecasted exchange rates.

We are raising our diluted adjusted earnings per share guidance to between $2.57 and $2.67 per share, representing growth of 22.4% to 27.1% with diluted GAAP earnings per share between $2.49 and $2.61 per share. We continue to believe that our annual effective income tax rate will be approximately 30%.

We expect the revenue increase over our previous guidance will be in the IHS segment, given the stronger bookings coming through the first half of the year. In addition, we estimate service revenues of approximately $40 million from the Encore acquisition, which is expected to have an insignificant impact on adjusted diluted EPS in 2014. These estimates assume the end of June 2014 foreign currency exchange rates and do not reflect the impact of any potential future repurchases pursuant to our 2013 equity repurchase program.

And I'll now turn it back to Tom.

Thomas H. Pike

Thank you, Kevin. Our updated guidance anticipates the realization of the conversion of our backlog and strong bookings from the prior quarters. This sets us up for strong full year results with estimated low double-digit growth on the top line for the business overall translating into 22% to 27% growth in adjusted EPS.

Now turning to Slide 7. I'm happy to say that we've had very good performance in the first half of 2014, meeting and, in some cases, exceeding our goals. A few highlights from the first half of the year as follows. IHS returned to growth with 11.5% growth at constant currency in the first half of the year. This growth has been fueled by the strong net new business over the 4 most recent quarters. Product Development continues to execute consistently with good revenue growth and productivity. We continue to focus on providing the most efficient processes and solutions to our customers while maintaining our best-in-class adjusted income from operations margin.

We have generated total company net new business growth of 10.8% through our deep relationships. We've expanded our operating margins by 90 basis points while continuously focusing on quantity, delivery of the patient and delivering value to our customers. Our diluted EPS growth was 35.7%, which incorporates the strength of our revenue growth, productivity initiatives and tax and capital structuring strategies.

As we look at the health of the Product Development, IHS markets, we continue to see strong trends. Our services and solutions remain in strong demand across both of our segments, from large pharma and midsized pharma and biotech and emerging pharma. The book to bill in the first half for Product Development is about 1.21. This is right about in the range of our historical 5-year average.

Let me give you just a little bit more color on our pipeline, because as you think about that number, the pipeline is very important. Our RFP dollars increased compared to the same quarter last year and sequentially from the first quarter. What this means is that our pipeline of opportunities remains at historical highs, which means our strong sales teams continue to generate and see a lot of opportunities. Underlying this, biotech funding continues to be strong with 92% growth in funding for the first half of 2014 compared with the same period in the prior year. We continue to see our focus or -- rather, we continue to focus our efforts on providing emerging and midsized pharma with access to our broad range of solutions and expertise.

Now on the IHS side of the house, the NME approvals are strong with about 17 approved in the first half of 2014 compared to 13 in the first 6 months of the prior year. We're pleased with the prospects of these trends and market dynamics, and they offer opportunities in both Product Development and Integrated Healthcare Services.

We've also executed against our capital deployment plan from the strategic agenda I communicated on the first quarter earnings call. We utilized cash in the quarter to repurchase common shares. We also recently completed the acquisition of Encore, which we announced during the quarter. The addition of these capabilities will enhance our electronic health record expertise, which is becoming increasingly important as biopharmaceutical customers, payors and providers focus on measuring outcomes based on real world performance and in terms of clinical effectiveness and value.

In addition, this acquisition enhances our provider relationships. We're excited about the opportunity to leverage Encore's capabilities across our broader business and publicly welcome all the Encore employees to Quintiles.

We also continue to demonstrate our leadership in a number of ways, including recognition from several prestigious organizations during the quarter. We were named to the Fortune 500. We're recognized as the industry leader in Phase I and Phase IV services by ISR, the Industry Standard Research organization. We were named one of Computerworld's 100 Best Places to Work for the 6th time. We were named to the CIO 100 for the Quintiles Infosario platform. We received great place to work awards in Europe and the U.K., and we were recognized as Britain's Healthiest Large Workplace in 2014.

In addition to the awards and recognition above, our experts are consistently requested to participate on panels and government forums. Earlier this month, our President of Clinical Development, Paula Brown Stafford, was selected to provide expert testimony in a U.S. congressional hearing on the topic of modernizing clinical trials. This is one example of how we leverage our expertise to assist with leading the evolution of clinical development as an enabler to the healthier world.

Our vision is to bring people and knowledge together for a healthier world, and our customer promise is to improve their probability of success. Our vision and our customer promise are demonstrated daily around the globe by our 30,700-plus employees. I would like to thank and recognize the entire Quintiles team for their dedication to improving health care. We delivered another quarter filled with solid operational and financial results and believe we're well positioned to execute against our strategic priorities for the second half of the year and beyond.

Now let me turn back to Karl to begin the question and answers.

Karl Deonanan

Thanks, Tom. We're ready to take the questions. [Operator Instructions] Operator, you may now open the line.

Question-and-Answer Session

Operator

And your first question comes from the line of Tycho Peterson with JP Morgan.

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Just on IHS trends. Can you maybe talk about the sustainability and then a little bit more color on some of the drivers or the strengths? And you talked about the 17 new approvals in the first half of the year on drugs, but maybe just talk about the lineups that you have to larger projects. And how much of the mix is larger pharma versus maybe mid-cap or even biotech?

Thomas H. Pike

Thanks, Tycho. This is Tom. Yes, the trends are very favorable for the IHS business right now. It's a very interesting time. I think some of the things that we had talked to you about, about a year ago continue to come true. One of the major trends is this continued push toward variabilization of the sales force, in particular, in North America, but we are seeing it all over the world. We continue to be in consistent discussions, and that's reflected by the numbers that you see here. But supplementing that are a couple of other things. The real world, late phase demand is really growing rapidly, and we are the clear leader in that business. Our purchase of Outcome Sciences a few years ago, in conjunction with our core interventional business being so strong, has created a lot of momentum behind that business. And that business is one that, in the shorter term, is growing so rapidly that it's taken some investment, but in the longer term, we think, can really help with the margins in the business. We also have a number of things around programs that we're putting in place to really provide solutions for customers that go beyond the CSO. So big focus of our leadership there are really the analytics around putting the sales force in the right place and using the right kind of resources to make sure that the market understands these new products that are coming out. You might have also seen a few of our press releases with small bio pharma. Actually, we're -- we continue to have quite a bit of success there, although, I will say, a lot of the growth that you've seen has really been driven out of larger customers, both on the real world side and on the IHS side -- I'm sorry, and on the commercial sale side. Does that help, Tycho?

Tycho W. Peterson - JP Morgan Chase & Co, Research Division

Yes, that's great. And then just for the follow-up, can you maybe provide a little bit more color on the cancellations? Because I'm sure we'll all get questions. And anything you can talk about in terms of new conversion rates? I think we've heard from some other peers that there's a little bit of disruption about converting revenues. So just wondering, more color on cancellations and then on revenue conversion.

Thomas H. Pike

I'll let Kevin talk about the conversion in a second. It's interesting because, oftentimes, if you have a cancellation -- we've had some large ones earlier. Since we've been public, we've been able to absorb and pull some things forward, et cetera. But in this case, we had one large cancellation happened very late in the quarter, and it had an impact. And the thing that I look to as a manager here is what is happening with the pipeline, because the pipeline really gives you forward visibility. And our pipeline continues to be at record highs. In fact, I have to say. I'm really pleased with the size of the opportunities in dollar value that we see. And so, Tycho, to a great degree, I think this is a matter of execution from here. And it's not a trend. If you look back at last year and you look at the book to bills, you can see that the same quarter last year actually had very similar net new business associated with Product Development, and we ended up with a 1.29 book to bill for the year. And so I think this is a little bit of the nature of the business. People who don't understand the business that well may not understand that this happens. But the key is that we don't see any fundamental changes. I think this issue associated with pharmaceutical mergers has passed us by, and again, the pipeline is very strong for opportunities. Kevin, I don't know if you want to -- go ahead.

Kevin K. Gordon

Yes, Tycho. I think everything Tom just said with respect to cancellation is right on. I think you look at long-term trends and so forth, and quarter-to-quarter, you have some of these blips. But overall, coming through the first half of the year at over 1.2 book to bill, I think, is a strong indicator, and the trends in the market are very strong. With respect to backlog conversion in the Product Development side, in particular, our conversion rate is very similar to what we've seen in recent quarters and recent periods. As we said on previous calls, I think the only thing that we're seeing is trials tend to be taking a little bit longer in the aggregate over the life of the trial. But as we start up new trials from the strong new business wins that we've had, the conversion rate coming in is very similar to what we've seen in the past.

Operator

Your next question comes from John Kreger with William Blair.

John Kreger - William Blair & Company L.L.C., Research Division

Tom, as you said, you've gotten a much better growth of IHS recently. What are your thoughts about how margins in that business can trend as the top line improves and as it seems like the mix shifts a little bit towards the real world evidence-type part of the business?

Thomas H. Pike

John, you may remember that our strategy there is really to continue to grow the services that have the higher margins. So these are really the solutions associated with our -- the commercial customers and then the real world, late phase, as you described. The funny problem we've had is we've also had some -- we're having some real success in the CSO simultaneously. We're having so much success in the real world, late phase that we're actually having to invest a little bit in growth. And so it's -- in many ways, it's a nice problem to have, probably not that well understood if you're looking at our business one quarter at a time. But we continue -- I think it's fair to say, Kevin, we continue to see this segment moving up through single -- high single-digits margin growth over time. So -- but I will say, these things are growing fast enough right now, John, that it's taking a little bit of investment to get it done. One of the wonderful things about the CSO business that people may not realize is that when you do have growth, you actually don't have much incremental cost. It's a little different than the real world, late phase side where you have to put people to work or even our interventional side. But that being said, with the kind of growth you're seeing there and the kind of sales success we've had, yes, we're going to have to invest in that growth for a little bit as we move toward the higher single digits over the longer term.

Operator

Your next question comes from Robert Jones with Goldman Sachs.

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Just -- I guess to follow up on IHS. Just given the strong revenue growth in the quarter, bookings were up, I think, 154%. I mean, any sense you can give us on how we should think about that growth flowing through the P&L? And then if I think about the full year and I think you mentioned this, Tom, in the prepared remarks, historically, the back half has typically been stronger for IHS. I mean, given the strength we've seen to date, how should we think about the cadence of bookings from that business?

Kevin K. Gordon

Bob, it's Kevin. I think you're hitting right on some really key points there. As you know, IHS bookings tend to burn into revenue quicker than Product Development revenues. So those projects will get started up more quickly. So to your question around burn, as you look at the guidance uptick that we gave with respect to revenue, you could hear us attribute that coming from our ability to convert that into revenue much more quickly in the second half, along with the Encore acquisition, so principally related to that area. And I think you'll see that ramp as we go through the second half of the year, so even stronger through the -- to the fourth and the third is the way I think I would suggest you look at that. And then in terms of going forward or second half, the strength of the first half that we had -- and you could hear that we called out, in particular, North America and Japan, we have tremendous strength in those regions, in particular with respect to net new business. So without giving too much forward looking, we certainly aren't looking at the second half today. All the trends remain very strong at book-to-bill rates similar to the first half.

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Got it. That's helpful. And then I guess just around the margins on that business. Just to put a little bit finer point on some of the comments. I mean, I think the original goal this year was to expand the margins in IHS. I mean, given where we are to date versus where you ended last year and some of the mix shift that's gone on this year, how should we be thinking about the margin year-on-year in IHS?

Kevin K. Gordon

I think if you just look at margins -- our margins last year averaged out around 5.2% in that segment. And on a constant currency basis, even come through at the second quarter, we finished that around 5.1%. So in spite of some of the investments that Tom referred to, as we look at ramping up that real world, late phase business, which -- the revenue growth has been incredibly strong, really, across the globe, we have made some investments in that area, in systems, as well as people and the growth and the support of the infrastructure. So we're doing that and really maintaining those margins. So I think as that continues to get itself -- really, the foundation there built out, we see the opportunity for those margins to move up over time.

Thomas H. Pike

Maybe I'll just add, because Kevin mentioned it, in that business, not only do we really have the scientific leadership in that organization, world-class epidemiologist, but we have also just introduced a platform for registries and capturing information that nobody else has. And we believe it's the most advanced in the industry, the IT platform, nothing else like it. So again, we see -- when you look at the real world, late phase, you look at progressive and conditional authorizations and approvals that you're starting to see not only in pharmaceuticals, but medical devices. We just see, and our customers see, that there's going to be more and more real world, late phase registry-type information, and I think we're really well positioned to capture that. And clearly, our leader there -- we've been going through our strategies over the last couple of days. Our leader there is looking for growth turning to margin expansion over time. So we're excited about that business, I have to say, and really pleased to be the leader there.

Operator

Your next question comes from Ricky Goldwasser with Morgan Stanley.

Ricky Goldwasser - Morgan Stanley, Research Division

I mean, you're very, very contact-strong commentary on the market demand, which is reflected in your numbers, excluding the cancellations. So can you talk a little bit about how your biopharmaceutical customers are thinking about the relationships? Are you seeing kind of an acceleration in the trend of moving towards kind of like one CRO partner that they work with and kind of like -- do you think that's going to affect what you're seeing reflected in your business at market share gains? Or do you think that just overall demand is accelerating?

Thomas H. Pike

I think overall demand is very strong. And it's interesting to note, Ricky, that in this quarter, the amount that was the larger pharmaceuticals. So we're seeing a real, I want to say, return, but very strong demand from the larger pharmaceutical firms because their pipelines are full right now. And at the same time, small biotech with all the funding has definitely come online, and they are looking to really leverage the skills and the breadth of capabilities that we have. What's a little different about us versus some of the others with small biotech is when you really take the breadth of capabilities, our consulting capabilities, alongside of our deep medical expertise and therapeutic expertise, we can bring a value proposition to the small biotechs that I don't think anybody else can match. And for instance, right now, we're negotiating with a small biotech that's very well funded, a sole-source deal. We have another in -- and we have a number those in process, but one in particular that's pretty meaningful. And then the sole source, we have another one that's deeply underway. And we probably won't announce it, because we just generally don't like to announce customers, but we have another one that's very deep in. I think in terms of large biopharma, they're going to tend to play with multiple players, but they are tending to continue to focus on a few players. There are some things that are happening, for instance, some guidance that some of our customers are getting around risk-based monitoring, that you don't want to have a whole lot of CROs. How can you manage risk-based monitoring effectively with a whole lot of CROs that are causing them to think not only for efficiency reasons, but also to support regulator interest of having a lesser set of CROs, which, I think, plays favorably to the leaders in the industry. So I have to say, it's interesting as we reflect on this because -- probably, it's not reflected in the Product Development book to bill this quarter, but the demand is strong. It's pretty much across the industry. Our relationships are really strong. I was just in Japan last week, Ricky, and met with the top executives of many of the largest pharmaceutical firms there, and our relationships are just terrific. And so from the standpoint of has anything changed other than us having one larger cancellation late in the quarter, no, no. I think it's a good situation for us in Product Development.

Ricky Goldwasser - Morgan Stanley, Research Division

Okay. And can you, just as a follow-up, just talk a little bit about the opportunity that you might see as IHS is gaining momentum to cross-sell between the 2 segments?

Thomas H. Pike

Yes, I'm laughing a little bit because yesterday we had a strategy session. We're planning out next year, and this was a very hot topic. Because there's just no question that if you look at the interest in the real world data, our consultants and what they can do with payors and trying to understand payor orientation, I don't know if any of our competitors have this, but we have a former Chief Medical Officer of a payor on our leadership team. And so we're talking about that exact opportunity, and what we decided to do at the end of the session is pull all the Phase II trials we're working on that are ending within 6 months and then see what we could do to go consult to those customers about how the real world data and how the payor information can help them make a better decision about how they proceed. So we do see those opportunities. And with our new acquisition of Encore, we also see this real flow of interest into the electronic health records and how our customers can really understand the practice of medicine taking place out in hospitals and in clinics associated with their drugs. And I think the capabilities we're assembling just give us unique insights for those customers.

Operator

Your next question comes from Dave Windley with Jefferies.

David H. Windley - Jefferies LLC, Research Division

On the kind of mix of business in the quarter, I guess, is where I'll focus. Relative to, I think, our expectations and looking at consensus, it looks like Product Development revenue was a little lower, yet margins kind of outperformed, held up very nicely despite what looks like a little bit lower revenues in the expected trajectory. And then conversely, in IHS, revenue is much better, but margins were a little lower. I think you've kind of addressed in IHS, maybe, that margin pressure was a result of these investments. If you can confirm that, and then maybe talk about what allowed the Product Development margin to hold up so well despite what appears to be lower revenue.

Kevin K. Gordon

Sure. Dave, this is Kevin. And yes, I think we've probably covered IHS pretty significantly. We have made some investments, not necessarily just IT, but the infrastructure to support some of that strong growth, particularly on the overall size side. Clearly, that'll continue, but the revenue growth that you see is the strength coming through that even through the second half in the guidance. I think you should expect margins to be pretty much in line there, and I think it's a good balance. On the Product Development side, we have continuously looked at and worked on our productivity metrics. So you see not only the benefit of the productivity, you see some benefit of foreign currency, which actually muted a little bit in the second quarter compared to what it was in the past. But it -- all the margin that you see there is related to the productivity and the operational improvements that we made, and we're sustaining those. So you look at it on a comparative basis, whether it's the increase over last year but sequential with what we saw in the first quarter, we're sustaining the benefits that we put in place. And as we've talked about before, we'll continue to look at more opportunities for even driving more efficiency across that. So I think revenue is important. We're leveraging the SG&A infrastructure, and we'll continue to look at more opportunities to do that to ensure that we sustain the margins.

David H. Windley - Jefferies LLC, Research Division

Since we seem to be tagging on here, I'll throw one more on. In your book to bill and in already-discussed kind of balance there, IHS growth is higher in the quarter and book to bill suggest that it will continue to be pretty attractive. So you have this shift in mix from your higher-margin segment to your lower-margin segment. How do you think about that affecting overall consolidated margin going over the next, say, 6 to 18 months?

Thomas H. Pike

I think -- Dave, it's Tom, maybe I'll make one overview comment because I think Product Development actually delivered to our expectations in terms of growth. So I want to make sure the impression isn't that it was off. We're actually really pleased with the quarter, 8% revenue growth and having margins in the 20s. Sustaining that is really something we're pleased with. So -- and then what's happening on the IHS side is growing faster than expected with that 16% growth. There's no question that the faster burn Kevin was describing before, plus the sales are really doing. So I think overall, we're pretty pleased. Because if you take that 8% and then you add the 410 basis points of headwind from the prior trial -- that prior year trial, I think you really look at a growth rate that is pretty reasonable in Product Development. So just a little perspective. I think Kevin can get into a little more detail. But we're pretty pleased with how the revenue and margins are working out in Product Development right now. I don't know do you have -- did we answer enough of your question there?

David H. Windley - Jefferies LLC, Research Division

Well, just the -- how does overall margin progress when your lower margin segment is going to be the faster grower?

Kevin K. Gordon

Yes. I think you saw, even in this quarter, then we mentioned it in our remarks, that IHS segment became 25% of revenues, whereas last year, at this time, it was 23% or even in -- probably the last quarter, it was 23%. So I think that ratio somewhat holds up as we go forward. But even with that, with the strength of Product Development in Tom's comments he just made, I think it isn't going to have, in my view, that significant of an impact on the overall margins. I think we continue to drive productivity through Product Development, and we continue to advance to improve those margins. And we do the same in IHS. So as we build up that infrastructure, as we put things in place to do that, we expect to see those margins improve. So I don't think the mix issue is going to be a big challenge for us as we go through the rest of the year.

Operator

Your next question comes from Douglas Tsao with Barclays.

Mohammed Omer

This is Mohammed in for Doug. Just curious if you've looked at any opportunities to bring down your tax rate, and whether or not you're going to be looking at that, going forward.

Thomas H. Pike

We look at tax strategies all the time as -- in terms of what we're focused on. And we expect, over time, we'll bring that down somewhat from today's range. You saw it at about 28.5% in the quarter. We expect it to be around 30% this year, but clearly, it's a focus for us strategically.

Operator

Your next question comes from Tim Evans with Wells Fargo.

Timothy C. Evans - Wells Fargo Securities, LLC, Research Division

My question relates to organic growth, which I guess can be a little bit tricky to parse out here. The first part of the question is just did you call out the contribution from Encore in the second quarter? I believe you said it was going to be $40 million in the second half. So just confirm that for me. And then secondly, if I'm running the numbers right, it looks like your organic constant currency growth is going to accelerate meaningfully in the back half of the year from something like 4.5% to 5% in the first half to maybe 8% or something like that in the second half. Can you just elaborate a little bit on what's driving that and how confident you are in your visibility with that?

Thomas H. Pike

First question around Encore is we actually didn't close the transaction until July 1, so there's no contribution in the second quarter from Encore. I'm not sure maybe your questions have -- might've been more around Novella. And Novella certainly made a contribution to the second quarter, given that we closed it in the third quarter of last year. So there's certainly contribution there. As we do, we do look at the core growth rate within Product Development improving in the second half of the year. So your analysis is correct. If we look at the backlog that we have, our $10.3 billion of backlog, the strong bookings that we've had coming through, and to the question earlier around backlog conversion, our guidance suggests, as you indicate, that we will see greater revenue growth as we go through the second half. That's certainly our expectation.

Operator

Your next question comes from the line of Ross Muken with ISI group.

James Clark - ISI Group Inc., Research Division

This is James on for Ross. Just another question on Encore $40 million contribution in the second half. I was wondering if you could give any sort of color on the margin and growth profile for that business.

Kevin K. Gordon

Rather than go specifically to margins, I think it would be probably best to just follow up with what we indicated in our remarks. We expect it to be about $40 million of revenue. And with purchase accounting adjustments, amortization, et cetera, we don't expect it to actually add significantly to our EPS. In fact, it would be a significant impact. So I think that's the best answer at the moment.

Thomas H. Pike

Yes. And you'll -- just in terms of the market, I think they -- we won't comment specifically on the growth, but they sit in a very attractive market segment. And as you may know, some of their businesses associated with implementing electronic medical record, electronic health record systems and then there's a significant advisory piece and a managed services piece, and so they are very well regarded in that segment and it's an attractive segment. And it really -- frankly, there's a number of things that as meaningful use guidelines evolve, that they're heavily involved in using clinical information to help hospitals meet those meaningful use guidelines. And then, really, we're helping evolve them toward population health, given our deep medical expertise. So there's a lot of opportunity in there if we get that one right. And it mixes -- it's very -- if you think about where real world is going, real world is registry-based, but there's also a significant component of it that is electronic health record-based. And so with the expertise to be able to work with hospitals to work with pharmaceutical firms or others using real world data out of electronic health record systems, it's a big opportunity. So we're -- I think it's another thing where the key for us is executing well against that opportunity. If we execute well and use our capabilities, it can be a nice growth engine on that side of the house with attractive margins.

James Clark - ISI Group Inc., Research Division

Okay. And then I guess a follow-up on Central Lab. I think you said volume growth in that business was a driver of some of the strengths in PD. Just wondering if you can talk a little bit more in detail about that business. I know we saw a competitor last week talk about customers, relatively speaking, becoming less price-sensitive there. Are you seeing -- relative to volume versus price, what are you seeing in that market?

Thomas H. Pike

I think the main point is that, yes, we did have good revenue growth in that segment. You probably know that we're #2 in that market, and we're pleased with our positioning. We like to be the guys who try a little harder. We think there's still a lot of opportunity there for growth, and we're growing above the market rate of growth. So in terms of pricing, I think it's an on any given day thing. When you have a customers existing, you have strong relationship, it's solid and -- but it is -- from my viewpoint, to be honest with you, I find our industry generally competitive. And so what all of us have to do to be successful is have a competitive advantage. And in lab, we're extremely strong on the scientific piece, in the esoteric testing, the more sophisticated part of it, and so that's where we tend to shine.

Operator

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

Rafael Tejada - BofA Merrill Lynch, Research Division

It's Rafael in for Derik. So just first, this question kind of goes back to what Tim was asking. Just -- with regard to Product Development, I mean, there's a couple of things that were, I guess, impacting the first half performance. But how do you see that business unfolding? And I guess I'm asking more about the pacing into third quarter and fourth quarter, whether you're expecting a more meaningful pickup in Q4 as opposed to Q3, especially given the larger -- the clinical trial cancellation that you saw this quarter.

Kevin K. Gordon

Rafael, it's Kevin. I'm going to reiterate what Tom said. We feel like the first half of our year was very strong in Product Development, and revenue was well delivered, margins improved and productivity continues to improve and so forth. So coming through the first half of the year, we feel very good about the performance of the Product Development segment. Your question around ramp-up, which Tim got to and I think I somewhat responded even from of an IHS perspective very similarly, is as we go through the year and you look at the trajectory of our outlook and you look historically, typically, our fourth quarter is our strongest and biggest revenue quarter. So I wouldn't expect this year to be out of the norm. So as you look at that ramp-up, I think it will ramp through each of the quarters as we go forward.

Rafael Tejada - BofA Merrill Lynch, Research Division

Okay. And in terms of the new bookings in Product Development, any changes in terms of the sort of complexity or therapeutic areas that you've seen in the past? I'm only asking just -- whether -- they said this could take a little longer to ramp up, and I'm thinking about the pacing into 2015.

Thomas H. Pike

Good questions. I -- it's really very consistent mix right now with where it's been in prior quarters. Oncology tends to still be strong. CNS is strong. So we're -- there's no major changes to the mix that we're seeing associated with -- one of the interesting things, though, that's a real positive for the industry is that we're definitely seeing the complexity of the trials go up. And the complexity means more work, so it actually costs more per patient. And I think that bodes generally well for our industry. And you're even seeing that spill into the labs, because the lab work is now becoming more sophisticated, as well associative. And you may have -- it's no longer strict, safety testing anymore, and now there's quite a few [indiscernible] tests going on. So I think that bodes well for us. I mean, I know that for you guys, figuring out the conversion is the tricky part. But I think the key thing to note is demand is strong, no fundamental impact. We think we can absorb that cancellation, so we don't have a fundamental impact on that. Kevin and I spoke about that yesterday, and there's -- we don't have any change to our outlook associated with it. We can absorb that based on what we see. And so as you're moving forward, I would just think strong market, continued solid results, that they're coming out of the first half, basically with some first half. And of course, Karl looks at me, there's no forward-looking statement in there. The first half was strong and no material impact other than that cancellation.

Operator

Your next question comes from Garen Sarafian with Citi.

Garen Sarafian - Citigroup Inc, Research Division

Sort of a follow-up as to the comments you were making. When I look at the net book to bill, the last 2 years, the second quarter's been your -- typically, your weakest net book to bill. So could you just remind us of why that is? So that -- I'm just trying to get an idea of if we should see the same pattern this year.

Thomas H. Pike

Yes, it's a very interesting question. We've noted the same pattern. I think it's generally the lumpiness that you see, and that's why we look so much at our own pipeline and -- as opposed to a single quarter. But you're on exactly the right issue. I mean, if you look at the last 12 months associated with Product Development, we had a 1.22 book to bill, including this quarter. And so you're on exactly the right issue. I'm not sure it's truly seasonal. The commercial side of the IHS business is a little more seasonal, but we've done really well this year, perhaps because of some of the macro trends going on. The -- but on the Product Development side, it's a little bit more steady. And sometimes, there's a little back-end loading in the last quarter associated with the sales side. So again, no fundamental changes to demand. I think it's about execution on our side. We've executed the best over the last 5 years, 1.23 book to bill over a 5-year period. So I expect that you'll -- I don't see any reason why we can't continue to execute the way that we have, given the capabilities that we have.

Garen Sarafian - Citigroup Inc, Research Division

That's very useful. And just as a follow-up. You made some comments about the strong demand from the smaller biopharma clients. So curious, how quickly does that business turn for you guys? So that if funding dried up tomorrow, how quickly would you see it? And the follow-up to that is just -- sort of just -- with a CRO your size, how much does it really move the needle?

Thomas H. Pike

It's a good question. I mean, I prefer to be an optimist on these things, because it tends to happen. A lot the funding that these guys are getting is associated with earlier-stage clinical development. And then as they become successful, the next trial is actually larger and you have data that supports the creation of the next trial. And if the data is good, it'll get funded. So here, you have a -- I think one has to realize this: if they're successful, this will continue because they'll continue into the next trial from there. So just as you're reflecting on it, give that a little bit of thought. There's no question that for a company our size and with our relationships, the top 35 guys in biopharma are a key part of our sales. As we noted, we've actually done really well with small biopharma this year versus last year with 2.5x better wins this year. But that being said, the core of our business is that top 35. And so given the relationships that we have -- I don't want to say it's immaterial. But the larger and more diverse we get, the stronger we will be through various waves. And as you know, we are the largest, by a significant measure, in clinical development. And we have the best -- I would say the best relationships top to bottom in the industry. So you can have some comfort in that diversification globally and across customers.

Operator

Your next question comes from Sandy Draper with SunTrust.

Alexander Y. Draper - SunTrust Robinson Humphrey, Inc., Research Division

My question -- most of them have been asked and answered, but this. When you think about risk-based monitoring in active trials, how broadly penetrated are those? Are we really at the very beginning and that's something that drives out the next 3 or 4 years, the increases there? And then maybe as a follow-on to that, is there anything beyond that that's very, very early you guys are working on or seeing that may be that the next wave or change around trials?

Thomas H. Pike

We are -- thanks, Sandy. We are at the beginning of RBM. There's no question. It's not moving as quickly as one would like. This is an industry where you just have to get a trial right. And so people's personal experience with how they've been successful with products in the past is definitely an influencer in how they conduct trials in the future. That being said, clearly, and many of you will come to our Analyst Day, I think it's in September, you'll see that we are the leader in that in terms of not only having technology that allows risk-based monitoring. And it is technology where there's automated reviews of variables and alerts and things. So it's a full technology. There is an approach -- I mean, how we do it is we do it with low-cost country monitoring, which is very effective. We use medical doctors for many of the aspects of it, where others use sort of business processors. And so what you'll see when you visited us is I think you'll see the leading solution, but I do think it's going to take several years to really ramp. The interesting thing for us is the margin is actually better on the overall model than it is via the monitoring and things. And risk-based monitoring as a percentage standpoint is actually better for us. In terms of the only other thing, and we're over time, is I think the real world, late phase business -- we've been talking about it a lot today. But as you start seeing more progressive authorizations and things, you're going to see more need to capture real world data to ensure safety and look for adverse events and really understand the drug and larger populations. And so we think, over the longer term, this is going to be a very significant part of the business. And so we think we're well positioned for that.

I think on that, I have to end. Thanks, again, for joining us on today's call. We feel confident in our ability to drive profitable growth while partnering with our customers on improving their probability of success and delivering better health care outcomes.

We look forward to talking to you soon. Thanks, everybody.

Operator

Thank you, again, for joining us today. This does conclude today's conference call, and you may now disconnect. Have a great day.

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