Quintiles Transnational Holdings (Q) Thomas H. Pike on Q2 2016 Results - Earnings Call Transcript

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Quintiles Transnational Holdings, Inc. (NYSE:Q)

Q2 2016 Earnings Call

July 27, 2016 8:00 am ET

Executives

Todd Kasper - Vice President-Investor Relations

Thomas H. Pike - Chief Executive Officer

Michael R. McDonnell - Chief Financial Officer

Kevin K. Gordon - Chief Operating Officer

Analysts

Ross Muken - Evercore ISI

Derik De Bruin - Bank of America Merrill Lynch

David Howard Windley - Jefferies LLC

Jonathan Groberg - UBS Securities LLC

Ricky R. Goldwasser - Morgan Stanley & Co. LLC

John C. Kreger - William Blair & Co. LLC

Tim C. Evans - Wells Fargo Securities LLC

Greg Bolan - Avondale Partners LLC

Robert Patrick Jones - Goldman Sachs & Co.

Tycho W. Peterson - JPMorgan Securities LLC

Donald H. Hooker - KeyBanc Capital Markets, Inc.

Eric W. Coldwell - Robert W. Baird & Co., Inc. (Broker)

Operator

On behalf of Quintiles, good morning, and welcome to the Quintiles Second Quarter 2016 Earnings Call Webcast. My name is Lauren, and I will be your event specialist today. At the end of today's presentation, we will have a question-and-answer session.

It is now my pleasure to turn the webcast over to Todd Kasper, Vice President of Investor Relations. Mr. Kasper, the floor is yours.

Todd Kasper - Vice President-Investor Relations

Thank you, Lauren. Good morning and welcome to Quintiles' second quarter 2016 earnings call. With me this morning are Tom Pike, our Chief Executive Officer; Mike McDonnell, our Chief Financial Officer; and Kevin Gordon, our Chief Operating 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 2015 annual report on Form 10-K filed on February 11, 2016.

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

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

Please note that we will also end today's call at 8:55 AM Eastern.

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

Thomas H. Pike - Chief Executive Officer

Thank you, Todd. Good morning to everyone and thank you for joining our second quarter 2016 earnings call. We're very pleased with our execution in the second quarter, which produced the results highlighted beginning on slide 4. Overall, we delivered 8.6% service revenue growth or 7.9% growth at constant currency rates, with Product Development accelerating to 13.2% growth or 13.1% in constant currency for the quarter. We grew diluted adjusted earnings per share by 19.2% to $0.93 per share with GAAP earnings per share of $0.71 per share, representing 6% growth.

We had a very strong quarter in net new business, growing 24.4% over the prior year quarter, closing $1.64 billion of new business, translating to a company-wide book-to-bill of 1.41. In product development, we closed $1.39 billion of new business, our second largest quarter ever, driving a book-to-bill ratio of 1.56 in this segment. This performance brought our book-to-bill ratio in Product Development to 1.26 for the first half of 2016 and helped us exceed $12.5 billion of company-wide backlog as of June 30.

We had strong cash flow from operations of $152.7 million in the first half of this year and repurchased $97.6 million or approximately 1.5 million shares of our common stock in the second quarter. We're pleased that our industry-leading Product Development business continues to operate from a position of strength. IHS performance, given our commercial sales business, as we've told you many times, can be lumpy. I'll discuss both of these segments later in the call.

Now, let me hand over to Mike, who will walk you through our financial results in more detail.

Michael R. McDonnell - Chief Financial Officer

Thank you, Tom, and good morning, everyone. Let's begin with the consolidated results on slide four. For the quarter ended June 30, 2016, consolidated service revenues grew 7.9% at constant currency compared to the same prior year quarter. At actual foreign exchange rates, service revenues grew 8.6% to $1.17 billion in the quarter, including a favorable foreign exchange impact of $7 million, driven in part by strength in the Japanese yen in the quarter.

For the quarter, the North America and Latin America region contributed approximately 44% of our consolidated revenues. The Europe, Middle East and Africa region contributed nearly 34%. And the Asia Pacific region contributed approximately 22% of the total consolidated revenues. The Product Development segment accounted for 76.3% of our service revenues, while the IHS segment accounted for 23.7%, an over 300 basis point greater contribution from Product Development compared to the second quarter of 2015, due to stronger revenue growth in this segment, including the revenue from the businesses contributed by Quest Diagnostics into Q2 Solutions.

During the second quarter, GAAP income from operations was $150.7 million, and adjusted income from operations was $184.8 million, representing a decline of 4.8% on GAAP income from operations, and growth of 12.3% on adjusted income from operations, respectively, compared to the same period last year.

The income from operations margin was 12.9%, representing a decrease of 180 basis points compared to the same period last year, and the adjusted income from operations margin was 15.8%, representing 50 basis points of expansion compared to the same period last year. The adjusted income from operations margin included the benefit of 130 basis points of favorable currency fluctuations. I'm going to discuss the margins by segment in some detail later.

For the second quarter, SG&A was $250.6 million or 21.5% of service revenues, compared to $225.9 million or 21% of service revenues in the prior year. The current year quarter included the increased cost from Quest businesses being added into Q2 Solutions, an increase in general cooperate and unallocated expenses, primarily due to $8.9 million of expense related to the proposed merger with IMS Health, and the recording of $6.8 million in bad debt expense related to some customer accounts, which we believe to be isolated. The bad debt expense and merger-related expenses added approximately 135 basis points to our SG&A as a percentage of revenue in the quarter. The merger-related expenses have been added back for our non-GAAP reporting.

We recognized $2.8 million of other income net in the second quarter compared to $11.7 million of other expense net during the same period last year. In the second quarter of 2016, this income primarily consisted of $1.6 million of foreign currency net gains. Other expense net in the second quarter of 2015 included $6.8 million of foreign currency net losses and $4.6 million related to the change in fair value of contingent consideration related to an acquisition.

During the second quarter, we increased our 2016 board-approved restructuring plan by $19 million and recognized $25.1 million in net restructuring charges under our existing plans. Net income attributable to non-controlling interests was $4.5 million in the quarter, primarily due to profits in Q2 Solutions.

Income tax expense was $36.8 million during the quarter, equating to a GAAP effective income tax rate of 27.9% compared to $31.7 million and 27.6%, respectively, for the same period last year. Reported GAAP net income attributable to Quintiles grew 2.1% to $86.8 million in the second quarter, and adjusted net income grew 14% to $112.5 million compared to the same period last year.

Diluted adjusted earnings per share grew 19.2% to $0.93 per share in the second quarter, compared to $0.78 per share in the prior year quarter, and GAAP diluted earnings per share grew 6% to $0.71 per share in the second quarter.

Our cash balance was $956 million as of June 30, 2016, of which $212 million was in the U.S. Cash flow from operations and free cash flow were $152.7 million and $95.4 million, respectively, for the six months ended June 30, 2016, compared to cash used in operations of $13.6 million and free cash flow of minus $45.5 million, respectively, for the first six months of 2015.

The net cash provided by operations during the period reflects the increase in net income, as well as lower payments for income taxes and lower cash used in days sales outstanding. The lower cash used in DSO reflects an increase in DSO in the first six months of 2016 when compared to a – reflects a smaller increase in DSO in the first six months of 2016 when compared to the first six months of 2015. Capital expenditures were $57.4 million for the first six months of the year or 2.5% of service revenues compared to $31.9 million, during the same period in 2015.

During the second quarter, the company repurchased approximately 1.5 million shares of its common stock at an average market price per share of $65.67 for an aggregate purchase price of $97.6 million. These repurchases were funded with cash on hand and there is approximately $46.8 million of authorization remaining under the current repurchase program.

Our total debt outstanding as of June 30, 2016, was $2.45 billion. Our net debt outstanding defined as total debt and capital lease obligations less cash and equivalents at June 30, 2016 was $1.49 billion. The $1.64 billion of new business booked during the quarter including foreign exchange impact on the backlog resulted in backlog of $12.5 billion.

Let's now move to the two reporting segments, beginning on slide 5. In Product Development, we booked net new business totaling $1.39 billion, representing growth of 43.2% over the same period last year and a book-to-bill ratio of 1.56 times service revenues in the quarter. This net new business comprise a favorable mix of full service clinical projects including the anticipated signing of several large cardiovascular trials and strong bookings in Q2 Solutions. Product Development's constant currency revenue grew 13.1% in the second quarter compared to the same period last year, and at actual foreign exchange rates grew 13.2% to $890.1 million, including $1 million of favorable foreign exchange impact.

Product Development's constant currency revenue growth benefited from volume-related increases in core clinical services and clinical trial support services, as well as the incremental impact of the business that Quest contributed to Q2 Solutions, partially offset by a decline in advisory services.

Product Development income from operations for the quarter was $187 million, a 6.1% increase at actual rates and 1.7% decrease at constant currency rates. The Product Development income from operations margin was 21% in the quarter, representing a decrease of 140 basis points compared to the same period last year, net of 150 basis points of foreign exchange benefits. The Product Development income from operations margin in the second quarter of 2016 includes $4.2 million of the bad debt expense previously mentioned, and a $10.1 million reserve for certain potentially non-reimbursable expenses. This bad debt expense and reserve collectively reduced the Product Development income from operations margin in the second quarter by approximately 160 basis points, and we do not expect either to reoccur.

The Product Development income from operations margin also included an increase in compensation and related expenses relative to the prior year in addition to our planned investment to expand our Global Delivery Network.

In the IHS segment, we booked net new business of $259.8 million representing a book-to-bill ratio of 0.94 times service revenues in the second quarter. IHS service revenues declined 5.9% at constant currency rates in the second quarter. At actual foreign exchange rates, service revenues were $277 million, representing a decrease of 3.8% or $11 million compared to the same period last year including favorable foreign exchange of $6 million.

The constant currency revenue decline resulted from decreases in North America commercial services due to cancellations in 2016 earlier this year, and a decrease in Encore Health revenues, partially offset by growth in the real-world and late phase research unit and an increase in Europe commercial services. Commercial services in Europe benefited by $8.9 million from the acceleration of revenue related to the modification of a royalty-based sales force arrangement.

IHS income from operations for the second quarter was $25.8 million, an increase of 37.9% at actual rates and 25.4% increase at constant currency rates. The IHS income from operations margin was 9.3% in the quarter, an improvement of 280 basis points compared to the same period last year. This margin improvement was primarily due to higher margins in commercial services resulting from the modification of the royalty-based sales force arrangement just mentioned, higher margins in the real-world and late phase unit, and the benefit of 60 basis points from favorable currency fluctuations partially offset by $2.6 million of bad debt expense.

Now, turning to our full 2016 – full-year guidance on slide 6. Today, we are adjusting our 2016 constant currency service revenue guidance to a range of 6% to 7% compared to the full-year 2015. This guidance is based on our expectations of achieving a constant currency service revenue growth of approximately 10% in Product Development in 2016, which is consistent with our prior guidance, and lower expectations for the IHS segment, where we expect constant currency service revenues to decline by approximately 3% to 6% in 2016 driven by project cancellations and scope reductions incurred and lower-than-expected additions to new business this year to-date in our commercial services business.

We are increasing our expectations of a diluted adjusted earnings per share to between $3.78 and $3.88 per share representing growth of 13.5% to 16.5% with GAAP earnings per share to a range of between $3.26 to $3.41, representing growth of 5.7% to 10.6% compared to 2015. Our annual earnings per share guidance reflects the anticipated strength of our Product Development margins for the remainder of the year.

We continue to expect the annual effective income tax rate to be approximately 29%. This financial guidance assumes foreign currency exchange rates as of the end of June remain in effect for the remainder of the year and does not reflect the potential impact of any future equity repurchases or the announced merger agreement with IMS Health.

Diluted GAAP EPS guidance includes certain merger-related costs, including actual costs already incurred and estimates of certain future costs. Actual results may differ from these estimates.

And now as we transition to slide 7, I will turn the call back to, Tom.

Thomas H. Pike - Chief Executive Officer

Thank you, Mike. Product Development business is the crown jewel of Quintiles and the team really performed this quarter from a sales and business development standpoint through operations across that entire segment of the business. We are particularly pleased with the net new business, which is attractive work as well. As you know, Product Development is the industry leader with strong therapeutic and scientific expertise, global scale and award-winning technology. We grew those revenues by over 13%, which included a contribution from our lab joint venture with Quest,

as well as strong growth in the other Product Development service lines. The market backdrop for this segment remained strong, with now over 5,400 new drug candidates in the Phase I to Phase III pipeline, a number that continues to grow on a quarterly sequential basis.

Biotech funding are down from the historic highs a year ago, still remained solid and is at or above historical averages. There is some nice discussions about this by this industry's analysts. And there were 14 NME approvals by the FDA in the first half of 2016, which is on pace with the same point last year.

In all, we remain positive on the market backdrop of Product Development and our pipeline of opportunities continues at attractive levels. As we've discussed, we continue to make investments to leverage the scale we have in operations. These include our professionally managed industry-leading Global Delivery Network, which allows us to deliver many processes in a more industrialized way with higher or better quality at lower costs.

We're also investing in process improvement and technology upgrades for our people. I do want to note that we had a number of items impacting the operating margin in the segment this quarter that we don't expect to repeat. The strong top line and operating performance allows us to continue to deliver for shareholders while we make investments.

Moving to IHS, you'll recall that since the IPO, we've said many times that the commercial business is lumpy. We grew that business in 2014 and 2015 and now the business is performing similar to 2013 when we went public. Most recently and moving forward through the year, the CSO business has been impacted from the previously discussed cancellations in 2015 as well as 2016 cancellations and scope reductions without finding shorter-term replacement business.

While there were many drug approvals last year, the particular products and companies haven't resulted in much incremental demand for CSO in this calendar year. Interestingly, we do see some good activity in that business, but it really hasn't played into new business or revenues yet. For instance, I continue to have discussions with top executives regarding leveraging a variable commercial sales workforce.

The pharmaceutical industry is still looking for better, more cost-effective solutions for dealing with the changing commercial, healthcare and payer landscape.

Also in the IHS segment is real-world late phase, which continues to have an attractive pipeline of opportunities and double-digit growth. As we've discussed before, we expect to about triple this business since we bought Outcome Sciences in 2011, but it cannot make up for the larger CSO business.

As Mike mentioned, we recorded the benefit from modification of royalty-based agreement in the quarter resulting in higher IHS margins. However, as indicated in our guidance, you should not expect a full turnaround in commercial this year.

It's important to note that the IHS segment comprises about 10% of our segment operating income in any given period. In addition, we manage expenses in that segment very tightly to ramp up and down as needed.

In closing out my remarks in the quarter, let me note a few other things. We were again named to the Fortune 500, having moved up 29 places compared to last year, our third straight year on the list. We were recognized by ISR reports as the industry leader in Phase I, II, III and IV services. We opened a technology Solution Design Studio, where expert teams will collaborate to create technology solutions to tackle some of healthcare's biggest challenges using advanced technology and simulation. And in addition, we announced our Precision Enrollment offering. This new enrollment model is designed to significantly accelerate site start-up and patient recruitment in oncology clinical trials, working with the company's network of investigative sites across the U.S. and leveraging secondary data.

Over the past several weeks, we've spoken with many analysts and investors about the announced plan to merge with IMS. I'm not going to speak about it here in my prepared remarks, but I will share that we are as excited about it now as we were when we announced it. I'm pleased that our deep bench of strong management can both work together on planning while continuing to deliver strong operating performance.

I've said many times that this company has the best management in the industry and, frankly, best people overall. As I travel around the world I'm so proud of our people, from top to bottom. This quarter demonstrated that strength, and I'd like to thank all of Quintiles for their contributions.

Now, let me turn it back to Todd to begin the question-and-answer session.

Todd Kasper - Vice President-Investor Relations

Thank you, Tom. We are now ready to take your questions. I would like to ask our participants to please limit their questions to one to allow as many participants as possible to ask questions.

Lauren, you may now open the call for questions.

Question-and-Answer Session

Operator

Our first question comes from the line of Ross Muken from Evercore ISI. Sir, your line is open.

Ross Muken - Evercore ISI

Good morning, gentlemen. So, I'd be curious, given I'm sure there was a lot of customer outreach over the last quarter, it seems like in a number of your top customers there's a lot of excitement about the potential of your combination with IMS. Can you just share a little bit of some of the conversations maybe you've had and some of the key areas where you feel like folks are most intrigued by the potential of the combination?

Thomas H. Pike - Chief Executive Officer

Hi, Ross. It's Tom. Why don't I go ahead and take that one? Yeah. As you know, I meet with a lot of customers at various levels, and we continue to have tremendous feedback about what the opportunity is together. It's pretty clear that the clinical development enterprise is ripe for organizations that want to make significant improvements to it, and our ability to use big data now, really to use de-identified patient data, the significant physician database that IMS has is, being very well-received by customers. And it ranges from discussions about setting expectations well with the regulatory authorities about how many patients there are and where the patients are, all the way to making trials much more predictable in terms of really moving from a traditional analog way of calling physicians to see if they have patients to understanding the patient population while you're designing the protocol and while you're starting the site development process.

So, I'll tell you, it's been uniformly good, interestingly, even on the commercial side, as I mentioned in the prepared remarks. I think people find it very intriguing about how we have a number of very operational capabilities associated with areas like the CSO or certainly real-world in particular, and they bring – they have so much data and analytical horsepower at IMS. And so, organizations – we're having some very intriguing discussions about how we can work together to improve the commercialization of products.

So, I'd say so far, Ross, uniformly, it's been terrific discussions, and we continue – because we're already doing it in the real-world sector, we continue to work with certain key clients on case studies and opportunities to leverage the data.

Ross Muken - Evercore ISI

Thanks, and maybe just quickly for Mike, just to clean up. Could you just help us understand the updated guidance for the remainder of the year, the benefit to op income from FX? Because I noticed the constant currency growth was a little bit lower for the overall business than I would have expected given the top line, but you did get a nice benefit from currency. Just help us think through how that's playing through the P&L the rest of the year?

Michael R. McDonnell - Chief Financial Officer

Yeah. That's fair, Ross. The updated guidance assumes essentially two high-level things, one is that we don't repurchase any more shares and the second is that the June rates, the June foreign currency rates that are in effect as of the end of June, would stay in effect throughout the remainder of the year. So, there's no currency prediction that would be embedded in the guidance. And obviously, if the U.S. dollar continues to be strong, there could be positive impacts, and vice versa.

Ross Muken - Evercore ISI

Okay.

Operator

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

Unknown Speaker

Hi, Derik. Are you there?

Derik De Bruin - Bank of America Merrill Lynch

Hey. Hi. Good morning. Hi. Sorry. Hey, the booking at the PDEV operating margin for the quarter, you're down $290 million (27:09), I realize $160 million of that was some onetime items. But can you talk about your expectations on margin expansion in that segment for the remainder of the year?

Michael R. McDonnell - Chief Financial Officer

Yeah. I mean, I can touch on that, Derik, and then, Tom or Kevin may want to add. But I think overall that the key point here is that we've increased our earnings per share guidance, at the same time, maintaining Product Development revenue and taking IHS down. So, overall, you've got an updated revenue profile that's actually overall a bit weaker. It's 6% to 7% versus the 7% to 8.5% and yet EPS was coming up and I think that that really reflects our views on our ability to get our margins to the right spot and then, start to expand them in the second half.

We talked about the 160 basis points from the bad debt and the reserve that we booked but it's important to note that we also did have increased compensation cost in the mix and then, importantly, investments in our Global Delivery Network that we've been talking about making and those were heavier in the second quarter.

And so, as we come through those items then move into the third and fourth quarter, we factored into our guidance and we think, the increase in EPS reflects the fact that we feel confident that we can expand our margins.

Derik De Bruin - Bank of America Merrill Lynch

Great.

Thomas H. Pike - Chief Executive Officer

And I'd say – Tom – from my standpoint, I just – I am really pleased with the operating performance of Product Development. I mean, really that 13% revenue growth and then given these onetime items, it's really strong operating performance and we expected that folks will see what's going on there, very much as Mike described. So, I couldn't be more pleased with how that Product Development team performed this quarter.

Derik De Bruin - Bank of America Merrill Lynch

And just one quick follow-up if I can. On the IHS business, is the – is it really just because the new business opportunities are slow or is it more competitive pressure? I mean, you do have a rather large competitor in that end-market. So, can you just talk about sort of why competitive dynamics in that market?

Thomas H. Pike - Chief Executive Officer

Yeah. This is Tom. I was looking through some of the data around this and over the last couple of weeks. And interestingly, we're seeing about the same number of opportunities but the opportunities, we haven't had the chunkier opportunities and chunkier wins this quarter or really this year. Usually, that business has somewhat of a sawtooth pattern to it. If you look at it in terms of every other quarter, we have a strong quarter. This time, we didn't have the sawtooth pattern, we just had two flat teeth and I think the – I think what you're seeing is actually a fair volume, but we're not having the chunkier transactions.

Operator

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

David Howard Windley - Jefferies LLC

I wanted to just follow-up quickly on Derik's question there. Tom, you're sort of talking about lack of chunkier deals. Is there any pricing, so I'll call it lack of discipline in the commercial services market today?

Thomas H. Pike - Chief Executive Officer

Kevin, do you want to add some comments on commercial?

Kevin K. Gordon - Chief Operating Officer

Sure. I would just – Dave, before getting to your comment, I think maybe go back to Derik's question a moment ago and the reference to the competitive nature. And I think it's important to note when you look at the competitive landscape, there is not a competitive risk position globally that we are from a commercial perspective. So, when we look at the competitive landscape and you reference a larger competitor, I think that might be isolated by region and from the markets that we're participating on and we tend to be the larger, if not the largest player in the market. So, there isn't really any one competitor, I would say, on a global basis that has the breadth and depth that we do from a commercial offering perspective. So, I think that's one important thing to note.

Dave, with respect to your question, I think, it's been a competitive market forever, really. So, we compete pretty heavily. I think the discipline in the market still remains strong. I think Tom's prepared remarks really talked about the discussions that we continue to have at very high levels of our customer base around opportunities of lowering costs than variablizing their cost structure. So, I think, those opportunities still remain in front of us. They vary a little bit potentially by region, but certainly, the opportunity we still see in that business to turn it back to a growth business.

David Howard Windley - Jefferies LLC

And if I could follow up just sticking with that, I know commercial services are overwhelmingly the largest part of the IHS revenue. Real-world late phase has been an area that you've talked glowingly about in the past. Can you help us understand, is the softer bookings environment there kind of – disproportionately low commercial services bookings offset by positive booking, kind of positive north of 1.0 book-to-bill in real-world late phase which is what we would expect, I think.

Kevin K. Gordon - Chief Operating Officer

You are absolutely on the mark, Dave, and in fact, if you look at the Product Development book-to-bill in the quarter, you can assume that the real-world late phase book-to-bill in the quarter was very similar to the Product Development. So, in many senses, some of those bookings track very much in line with the clinical side of the business and that is a very good growth opportunity.

Thomas H. Pike - Chief Executive Officer

In fact, the first half bookings were better than Product Development's, so...

Operator

We now have Jon Groberg from UBS.

Jonathan Groberg - UBS Securities LLC

Great. Thanks a million. So, I guess, my question is around bookings in PDEV. I know last quarter you highlighted that a number of bookings spilled over into the second quarter. Just kind of – if all of those materialize as you thought and whether there was anything unique in the second quarter in terms of how bookings trended, are there any pull forward or anything from the third quarter? And then, could you also just give us the organic growth or how much Quest contributed in the quarter? Thanks.

Thomas H. Pike - Chief Executive Officer

This is Tom. I'll start on the first one. Yeah, I have to say I'm really pleased with how our business development team and the sales team, and Product Development in particular, and real world performed this quarter. It's not easy to put these sales in a 90-day box. That probably pleases the folks who look at the industry. And the team really did a great job of making sure that we closed the business that was in front of us and it happened to be a little bit lumpier in the end of this quarter.

But there is nothing in particular that's pulled forward from future quarters. As we've mentioned in some venues, we actually had quite a strong pipeline this quarter and we converged on it. Now, as we go forward, we continue to see strength in the pipeline in Product Development. So, as we've probably said over the last 10 quarters that the pipeline has been pretty consistently large. And so, we still feel comfortable that this segment continue to perform but we're really pleased with the execution.

And I will say, that the work, the type of work that we won ranging across the variety of our services is very attractive work and with very attractive customers. So, I couldn't be more pleased with the Product Development performance associated with the book-to-bill and the overall sales. And then, the second...

Michael R. McDonnell - Chief Financial Officer

Yeah, the second part of your question, Jon, I can comment on quickly why we don't get into specifics beyond the segment book-to-bill. What I can say is that the bookings in Q2 in the second quarter were particularly strong.

Jonathan Groberg - UBS Securities LLC

Thanks.

Michael R. McDonnell - Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Ricky Goldwasser from Morgan Stanley.

Ricky R. Goldwasser - Morgan Stanley & Co. LLC

Good morning. Tom, can you just give us an update on the status of the timing of IMS transaction? And also, any updated thoughts around the synergies figures that you provided when you announced it?

Thomas H. Pike - Chief Executive Officer

Yeah. Rick, I can't really get into any of that here – I don't know. And I think our expectation associated with the close is fourth quarter, I can get that far. But I don't really want to get too far into the particulars of the synergies or transactions on this call, Ricky, if that's all right..

Ricky R. Goldwasser - Morgan Stanley & Co. LLC

Sure. So, maybe if you can give us some more color on source of revenue growth in bookings by customer segment. And obviously, you talked about what you're seeing on the biotech side. But are you seeing any – the changes in the behavior or are there any delays in starts coming out of biotech or anything that could be perceived as changes from how their behavior has changed from signed contracts to trial starts?

Thomas H. Pike - Chief Executive Officer

Not really. Not for us. I think we – we're still very comfortable associated with that the dynamics of the industry are consistent with what it's been before. We're not discussing issues of backlog burn or timing or any of that. So, we're, I think from our standpoint the general profile of the work looks the same, and as you can imagine with some of these larger trials, we expect that now, of course, they'll have a startup period that takes a while but they'll be very attractive work for us over the longer period of time.

I will say that what we probably are seeing is a little bit like the industry. If you look at the industry leaders, they will tell you now that between the relationships they have, the investments they have that they are being – there's an increasing number of products that are actually coming out of the emerging biotech segment as a percentage of the overall products. And we are certainly seeing opportunities grow associated with the biotechs.

So, it still represents a relatively small amount of our backlog compared to many of our peers and compared to our history, but it is – but we're definitely seeing a lot of activity associated with the emerging companies and smaller companies.

Ricky R. Goldwasser - Morgan Stanley & Co. LLC

Okay. Thanks.

Thomas H. Pike - Chief Executive Officer

Thanks, Ricky.

Operator

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

John C. Kreger - William Blair & Co. LLC

Hi. Thanks very much. Mike, can you just elaborate a bit on some of the unusual items that you called out in your prepared remarks? I think you mentioned bad debt charges and a reserve taken in both segments. Maybe what drove that? Should we view that as some rework on your end or maybe a little bit of a lower balance sheet among your clients? And similarly the conversion in – I think you called it a royalty-based sales contract within IHS, is that a pure EBIT benefit? And will anything like that carry into the second half? Thanks.

Michael R. McDonnell - Chief Financial Officer

Yes. So, John, I'll tackle the last one first. The royalty acceleration is a one-off item and it does drop straight to the bottom and is not something that would carry through. There's a very small piece of it that will carry through. It's not terribly material. So, the bulk of it is all second quarter. It all drops to the bottom. And really, it's just a longer-term royalty arrangement that we just agreed to take a lump sum and accelerate, a pretty simple transaction.

As far as the balance sheet items, a couple of thoughts, one is, on the bad debts, historically, as you know, Quintiles has had very, very low bad debt expense and very limited bad debt experience. And I think what we had in the quarter was really just a few one-off items. And I would describe them as purely transactional and not in any way systemic. It's not something that we are overly concerned about. And we just had a few spots with some smaller customers that we felt it was prudent to take reserves. And we'll obviously continue to pursue collection for work performed. But it was just a few miscellaneous accounts that obviously added up to a much larger number than what we're used to seeing. But I would just reiterate, it's not something that we see as a trend at this point.

And then, the reserve, we have lots and lots of costs that we run through, both pass-throughs as well as other contractual costs. And in this particular case, we decided that it was prudent to book a reserve for some costs that we may incur that may not ultimately be reimbursable by customers and something that we may or may not be able to pass-through. So, we took a – what we think is a prudent approach to book a reserve for the costs and not book any corresponding revenue, and obviously, something that we'll monitor going forward. But I can confidently say that both the bad debt expenses, as well as the reserve that we booked, were something that we consider to be isolated.

John C. Kreger - William Blair & Co. LLC

Okay. Thank you.

Operator

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

Tim C. Evans - Wells Fargo Securities LLC

Thank you. When you were discussing the book-to-bill, I believe you used some language there where you said that these were anticipated cardiovascular signings. I was just curious there, how confident you are that those will be signed, and what exactly the trigger was to go ahead and put those in backlog?

Thomas H. Pike - Chief Executive Officer

Yeah. I think that was – probably I didn't speak properly on it. What it really – we were talking about between quarter one and quarter two. So, there was some dialogue that we had had that we had some signings that we had hoped to be in quarter one. We'd anticipated they'd be in quarter one, but they actually occurred in quarter two. So, from our standpoint, those are sales at this point.

Tim, I do want to say, and Kevin may have a comment here, too, that I think that 1.56 book-to-bill, though, really was a strong performance by our team and just represents – you're so pleased when you talk about the strength of your pipeline, and then you deliver against that pipeline. I think Quintiles just has access to opportunities, just an unparalleled opportunity set. And our ability to execute against that with our competitive advantages is tremendous. And so, I couldn't be more pleased with that as we – from that first quarter.

Kevin K. Gordon - Chief Operating Officer

Yeah, just to add to Tom's comment, I think it was exactly the right way to explain this. We had the expectation that those would be signed in the second quarter. And they were signed in the second quarter. They have been awarded to us. And as you know, Tim, we don't put anything into backlog that doesn't come with an official award from a customer. So, the strength of that new business and the quality of that new business is very good.

Tim C. Evans - Wells Fargo Securities LLC

Okay. Got it. And really quickly, I think you called out some weakness in the Encore business. Is that new – is that effectively what is the new item kind of causing the reduction in the IHS guidance? And I guess, why is that Encore business weakening?

Thomas H. Pike - Chief Executive Officer

It's not enough to impact the guidance. So, the guidance change you see really is because of the CSO business, that lumpy CSO business. So, in the Encore business, I think the way I'd put it, Tim, is it's still finding its footing here. It has a number of items in it that can be transactional, and a number of long-term client relationship items, and it's still finding its footing. And so, on a relative basis, though, it's pretty immaterial here in terms of its overall size.

Operator

Your next question comes from the line of Greg Bolan from Avondale.

Greg Bolan - Avondale Partners LLC

Hey. Thanks, guys, and good morning. Sorry to kind of beat this over the head here. But I just want to make sure I understand. So, the Product Development operating margin, reported 21%; constant dollar, 19.5%. But then, add back 160 basis points for some of the nonrecurring items, so we're back to 21.1%. And then, Mike, you said there was a bit higher compensation expense and there was also obviously the impact from the investments in the Mumbai, India facility. So, what would be kind of the – I guess the core operating margin? Would it be maybe 21.5%, somewhere in that area? And then – the reason why I'm just kind of hawking on this is just because I want to kind of understand. I think that – the assumption is that margins will remain about at the core level throughout the rest of the year, maybe even a little bit better. And that's what's been incorporated in this slightly higher guidance. If you could just help me out, that'd be great.

Michael R. McDonnell - Chief Financial Officer

You're thinking about it right, Greg.

Greg Bolan - Avondale Partners LLC

Okay.

Michael R. McDonnell - Chief Financial Officer

I think that the core level with slight lift has been baked into the guidance going forward. And I think obviously it gets a little judgmental in terms of what you single out. But overall, the margins, if you pull out those one-offs and then those – the comp and the Mumbai, and you kind of normalize it, it's a solid margin that's equal to or better than last year and then ability to expand, as reflected in our guidance, as you said.

Greg Bolan - Avondale Partners LLC

Great. And then, just real quickly on – just kind of housekeeping. So, if I think about Product Development revenue growth this quarter, I mean I was kind of assuming Q2 was around about a 3% contribution year-on-year. Maybe it's a little bit less. But then, you had mentioned, Mike, about some lower advisory services work in the quarter. So, I guess if I net those two out, was it about flat? Do they – did they cancel – did those two cancel each other out? Or how did that work?

Michael R. McDonnell - Chief Financial Officer

Yeah, I would say that the Q2 impact to the good is probably a bit more than the advisory impact in the bad, when you net the two out. So, I wouldn't say they quite net the breakeven. But directionally, that's – what you're saying is logical.

Thomas H. Pike - Chief Executive Officer

It was so strong outside of Q2 which contributed very well and had a strong book-to-bill as previously described. I mean it was strong operating performance, though, from core clinical and then related services. So, we're really pleased with that.

Operator

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

Robert Patrick Jones - Goldman Sachs & Co.

Thanks for the question. I'll just ask, one, get us back on track with the one question each. Yes, the strong Product Development revenue obviously helped by a better conversion rate. Was there anything specific that you were able to do in the quarter as far as the back – to accelerate the backlog conversion rate?

And if I look at the back half guidance, it does seem to call for maybe that to decelerate again, just to get to the full year revenue number. Just any more detail you could share with us on backlog conversion in the quarter and how you're thinking about it for the rest of the year would be helpful.

Thomas H. Pike - Chief Executive Officer

So, we've mentioned a couple of times in prior calls that we have been working very hard to accelerate backlog where we could. And so, our team – I have to say that team who works around core clinical is doing a really good job of managing the details, trying to increase the speed of patient recruiting, and managing of the details of that business over the last several quarters.

And so, what I think you saw was just really great performance on that front in terms of us managing and driving performance. Now, you'll see some programs I announced and said in my prepared remarks, our pursuit of an enrollment offering and things. So, what we keep doing is trying to use our prime sites and use new techniques, like the precision enrollment, which actually lets us reduce the amount of time, the administrative time associated with starting up sites in oncology to try to continue to speed things up. But I think in general, what you just saw was a team really managing well.

Operator

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

Tycho W. Peterson - JPMorgan Securities LLC

Hey. Thanks. A lot of the questions have been answered. But maybe I'll ask one. Glaxo has started their RA trial in the Apple ResearchKit. And kind of given what you've done with Apple, how do you view this as impacting CROs? And can you maybe just talk about your own efforts around the real-time outcome data announced?

Thomas H. Pike - Chief Executive Officer

Yeah, this is Tom. It's going to take a while I think. Now, the challenge with all this is that the devices have to be validated by the FDA. And they really have to be consistent. And many of the consumer devices – in fact, it's – to be able to prove if they're consistent for – to the level of specificity that we need for this industry and the level of repeatability is a challenge. Interestingly, we're doing some work, including out of our Novella subsidiary. Novella actually does a fair amount of work around medical device. You may recall the acquisition we made.

And we're doing some work in helping some of the device companies, and very – we can't talk about it specifically, but device companies that are – that you know, we are helping them try to figure out how to make sure those devices are validated and really can be used in trials. We are experimenting with it though. And if you come to our Solution Design center that I mentioned some time, we can show you a whole series of technologies that we're using that range from in-home hubs to wearable devices that we think over the longer term will impact the industry.

Tycho W. Peterson - JPMorgan Securities LLC

Okay. Thank you.

Thomas H. Pike - Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Donald Hooker from KeyBanc.

Donald H. Hooker - KeyBanc Capital Markets, Inc.

Hey, great. Thank you. Just wanted to ask you, going back to the contract sales organization, when you think about the sales and marketing budgets of a lot of your clients and kind of where they're spending money to market new product, are they generally moving away from sort of on-site detailing more towards digital and Internet channels? Is there like a structural pressure on that business that maybe you could elaborate on or not?

Thomas H. Pike - Chief Executive Officer

Interestingly, I think our general view is the product still need to be detailed at this point in time. And what we see in our business, we have a combination of sales reps. And then, at times, the products are more complex and they need more of a nurse educator to potentially participate or a medical science liaison to explain.

And so, what we're really seeing is the continued need for explanation, but more sophisticated ways of thinking that detailing. That being said, there's no question that multichannel is a big part of this. And we continue to explore ways to communicate with docs. And it varies a lot around the world. How do you communicate with docs in a way that's efficient, and as they're getting more and more comfortable with mechanisms other than face to face?

So, we don't see any particular fall-off. I think a little bit of is the ebb and flow of the current sales reps that people have on board, what they think their pipeline is like, how – whether they have real blockbusters or products that are a little different, the emergence of specialty. So, you have a lot going on there. And what we're trying to do is continue to transition our company to be able to – for instance, we're doing a lot more around specialty in that area. We're doing a lot more and starting to think about how do use the IMS data to guide sales force choices, because of the access that we have.

So, it's a lot of interesting activity. But we just haven't had the chunky CSO sales that we've been able to show a lot of quarters since we went public.

Operator

And our final question comes from the line of Eric Coldwell at R. W. Baird.

Eric W. Coldwell - Robert W. Baird & Co., Inc. (Broker)

Hey. Thanks very much. Just a couple of quick ones here. First off, on the comments on foreign currency in the guidance, Great British pound, euro, both ended June almost exactly where they are today, that in your prepared comments, I – or in the Q&A, I thought you suggested that at current rates, there might be some upside in the guidance. So, I'm little unclear on that one, if we could start there.

Michael R. McDonnell - Chief Financial Officer

Yeah, Eric. It's Mike. So, we assume in the guidance that the end of June rates hold constant throughout the rest of the year. And obviously, there's been a lot of strength in the dollar. But we basically assume that wherever we were at the end of June that we hold constant through the remainder of 2016, and we don't try to predict that. And small movements aren't going to create huge impacts. It's really more of the impacts like we saw in 2015, where we had significant movements in the dollar against the other currencies.

Eric W. Coldwell - Robert W. Baird & Co., Inc. (Broker)

Great.

Thomas H. Pike - Chief Executive Officer

Eric, is that it?

Michael R. McDonnell - Chief Financial Officer

Great. Well. Yeah. Thank you for joining this morning's call and we look forward to speaking with you soon. And turn it back to Tom to...

Thomas H. Pike - Chief Executive Officer

Yeah, I think you said it. Thanks to all of you and thanks for your support. Operator?

Operator

Thank you again for joining us today. This concludes today's Web conference and you may now disconnect. Have a good day.

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