Ladies and gentlemen, thank you for standing by, and welcome to the IQVIA Second Quarter 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded today, Tuesday, July 24, 2018. I would now like to turn the conference over to Andrew Markwick, Vice President, Investor Relations. Please go ahead, sir.

Thank you, my lad, and good morning, everyone. Thank you for joining our Second Quarter 2018 Earnings Call. With me today are Ari Bousbib, Chairman and Chief Executive Officer; Michael McDonnell, Executive Vice President and Chief Financial Officer; Nick Childs, Senior Vice President, Financial Planning and Analysis; and we're also joined by General Counsel, Eric Sherbet. Today, we will be referencing a presentation that will be visible during this call for those of you on our webcast. This presentation will also be available following this call on the Events & Presentations section of our IQVIA Investor Relations website at ir.iqvia.com. Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements. Actual results could differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, including the impact of the changes to the revenue recognition accounting standards, which are discussed in the company's filings with the Security and Exchange Commission, including our Annual Report on Form 10-K and subsequent SEC filings. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to, and not a substitute for, financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures are included in the press release and conference call presentation. Now you will have seen in our press release that we renamed 2 of our reporting segments. These changes were made to provide more clarity and better describe the offerings within these segments. Commercial Solutions has been changed to Technology & Analytics Solutions, and Integrated Engagement Services has been changed to Contract Sales & Medical Solutions. These are name changes only. Nothing has changed with respect to the composition of any of our segments. I would now turn the call over to our Chairman and CEO, Ari Bousbib.

Okay. Well, thank you, Andrew, and good morning, everyone. Thank you for joining our Second Quarter 2018 Earnings Call. I'm pleased to report that Q2 was another quarter of strong operational and financial performance. We saw our business momentum accelerate, especially across our R&D, technology and R&D -- and real-world businesses. This was driven by the strategic investments that we've been talking about over the past 18 months, Investments in the buildout of our technology suite, investments in our next generation of clinical development offering and investments in the expansion of our real-world platform and capabilities. Okay, let's review the results. Second quarter revenue was $2,567,000,000. Growth came in above the high end of our expectations at 9%. This beat of $47 million was driven by three roughly equal components, first, organic operational upside in both our R&D Solutions and our Technology & Analytics Solutions businesses; second, the higher pass-through associated with our R&D Solutions revenue; and third, the contribution from tuck-in acquisitions. As a result of this strong performance, we're raising our full year revenue guidance by $175 million at the midpoint. This is notwithstanding a $30 million FX headwind versus the last time we updated guidance. Mike will provide more detail later. Let me provide some color on our growth businesses. Second quarter Technology & Analytics Solutions revenue grew 14.2% reported and 13.1% at constant FX. Tech & Analytics constant currency organic growth was about 4%, the same as in the first quarter. We have seen continued good growth in our real-world business. We spoke to you last quarter about new capabilities in single-arm studies, and we noted last quarter a significant win. This quarter, we had another significant win, this time with a top 5 pharma client. This project will set up a retrospective synthetic real-world data…

Thank you, Ari, and good morning, everyone. Let's review the financials, which, I'll remind you, are now on an ASC 606 basis for all periods presented. Second quarter revenue of $2,567,000,000 grew 9% reported and 7.7% at constant currency. Technology & Analytics Solutions revenue of $1,011,000,000 grew 14.2% reported and 13.1% at constant currency. R&D Solutions revenue of $1,350,000,000 grew 9.6% at actual FX rates and 8.3% at constant currency. Contract Sales & Medical Solutions revenue of $206 million declined 13.4% at actual FX rates and 15.1% at constant currency. Moving down the P&L. Second quarter adjusted EBITDA of $533 million grew 14.1% reported and 14.3% at constant currency. Adjusted EBITDA margins expanded 90 basis points on a reported basis and 120 basis points at constant currency. GAAP net income was $61 million and GAAP diluted earnings per share was $0.29. Adjusted net income of $270 million grew 17.9%. Growth was primarily driven by stronger adjusted EBITDA, which was partially offset by higher interest expense. Adjusted diluted earnings per share of $1.29 grew 25.2%. Year-over-year growth was driven by higher adjusted net income, which I just discussed, as well as the lower share count year-over-year. Let's take a quick look at year-to-date revenue. First half revenue of $5,130,000,000 grew 8.8% reported and 6.5% at constant currency. Technology & Analytics Solutions revenue of $1,996,000,000 grew 14.2% reported and 11.2% at constant currency. R&D Solutions revenue of $2,715,000,000 grew 8.8% at actual rate and 7% at constant currency. Contract Sales & Medical Solutions revenue of $419 million declined 11.2% at actual FX rates and 14% at constant currency. Before we move to R&D Solutions' net new business, let me remind you of how we are reporting bookings this year. Consistent with last quarter, we are reporting backlog, including pass-through, which we will…

[Operator Instructions]. And our first question is from the line of Ricky Goldwasser with Morgan Stanley.

So Ari, in the past, you talked about the revenue growth inflection point being in kind of like the second half of 2019. But based on the demand that you are seeing and the wins this quarter, does this change your view on the revenue trajectory?

Ricky, thanks for your question. No. Look, we're still predicting the same uptick in revenue growth that we've been talking to you about since the time of the merger. We simply feel a lot better, and I think it gives us a lot more comfort that this, certainly, this inflection can be achieved then. Again, we are seeing a little bit faster, little bit -- again, I don't want to inflate the narrative here, but little bit faster revenue burn, a little bit. And so could we do a little bit earlier? Again, the middle of '19 is not that far, it's less than a year away. So thank you.

And our next question is from Eric Coldwell with Baird.

First one on OCE. I'm just curious, what is the average duration of contracts that your biggest competitor has with their clients? I think they have, I think, by some estimates, maybe 60% of the marketplace there. And I'm just curious, how long do you think you could cycle through bids against your competitor and maybe show some more of that hit rate that you just talked about?

Thanks, Eric. Yes, the market share, by some accounts, is even greater than 60%, maybe inching to 80%. But certainly if you look at large pharma. And so for us, the win here that I talked about, we are -- hopefully, we'll be able to talk more about it and say who it is shortly. But I think it's most impressive because it's a top 5 pharma and a global rollout. But the duration of the contracts, typically, it's at 3 years to 5 years. But what happens is there's a significant implementation phase that could be a year or more as we roll out the technology over many countries. And it could be 100 countries sometimes, and therefore, it takes time to roll out. It's a significant investment on the part of the sponsor or the client and on the part of the provider. And therefore, the switching costs can be very high. So sometimes, the value proposition has to be really, really compelling to switch. And it is why we are extremely pleased here.

I don't want to put words in your mouth, but it sounds like you're really happy with where you are, you've got good momentum. But we probably shouldn't get too far ahead of our skates on projecting share capture over the next year or so because this will be a multi-year RFP process as well as bigger clients needing time to implement. Is that a fair approach?

Yes, it's actually a good, fair approach. But if I can just frame that for you. Our long-stated goal here is to grow our technology business. We are a technology company in aggregate. We actually have more revenue and more products than some of those highly valued technology companies out there. We have, in our Technology & Analytics business, a large, but -- $1.5 billion or so in revenue data business, which is highly attractive and underlies what we do, but it's a 0 growth business. And so that's why our mid-single-digit revenue growth has been, quarter in, quarter out, the pattern of growth for that business in aggregate. The technology business obviously grows double digits. We are making those investments, and we anticipate that, that mid-single-digit trajectory will inch up as technology gets rolled up. But you are correct, it's not for the next year.

And our next question is from Erin Wright with Credit Suisse.

The momentum in next-gen awards seem to be continuing here, and I appreciate all the metrics that you did give earlier. I guess, can you speak to the overall win rate with next-gen? And as it relates to the nature of those awards, have you been able to establish some more meaningful preferred partnerships where you've been actually able to displace existing strategic partners?

Thank you, Erin. Look, personally, as a matter of principle, I just don't like this concept of preferred partnerships, just to answer part of your question. The reason why sponsors went to preferred partnership and established this sort of, forgive me, Erin, here, but oligopoly of sorts, where you've got half a dozen or 10 CROs competing for a finite amount of work at large pharma. And essentially, because it was a procurement gain with very little differentiation, and because it's so complex to go through an RFP, you can't just waste time dealing with 8, 9 or 10 CROs every time you have a trial. And so you need to kind of preselect the 2 or 3 ones that you are going to do business with most likely. So therefore, the model evolved towards this preferred. I want us to win every single time, whether we preferred or not preferred, on the back of very superior capabilities, which we believe next generation of clinical development offers. So that's with respect to preferred. Now having said that, I can't really speak or disclose some, but there are, and you're probably aware of this, you guys all track this industry very well. There are, as we speak, a number of processes with many large pharma companies that are reviewing the status of their preferred partnership. And I can tell you that we are in the running to substitute prior preferred partners. Again, it doesn't move the needle for us. We are winning, by the way, at -- with next-generation offering at clients that have other people as preferred partners. So it just happens to be a higher hurdle for us, though we are also winning there in some instances. With respect to the first part of your question, our experienced decision rate, and we track that very clearly, it's about -- the decision rate, the positive decision rate for us is in the 40s, in the 40s percent for regular win rate. Or maybe the win rate is usually that 1/3, if you will. And for next generation, it's probably double that, right? It's in the 60s.

That's great. And if I could just ask a follow-up here. It's more of a broader question on the regulatory landscape. And the scrutiny we've seen on drug pricing of late across the new administration, and particularly, in the U.S., I guess, is what I'm referring to. And have you seen any customers respond, if at all, from a clinical trial perspective, to the regulatory landscape? And more broadly, I guess, how are your initiatives aligned with some of the new initiatives and efforts from, for instance, Scott Gottlieb with the FDA?

Yes. Thank you, Erin. That's actually a fundamental, strategic question because the -- our clients, when they are looking at whether to put a molecule through a trial, obviously, there's a lot that comes into play. But the economics of the drug, once approved, are a major factor, and the expected pricing as well. I gave the example of the big win for this in our real-world business for our -- that single-arm model that we are building with predictive analytics. The point here is to try to anticipate the pricing based on the demonstrability of the effectiveness of the drug and using advanced, enriched patient-level data. So the point here is that the clients are asking themselves very sophisticated questions. And we believe that we have unique capabilities to bring to bear, and it's proving itself out in the marketplace, in order to demonstrate and help clients support the pricing that they want to achieve to make the drug reasonable and meaningful to develop. So you're right, but the question is more on the strategic level. I don't think there are -- the question is a strategic level, and it's molecule by molecule, it's drug by drug. Of course, the question comes up also for drugs in the market, that would constitute the bread-and-butter and the main growth engine of our real-world business. Thank you, Erin.

And our next question is from Ross Muken with Evercore.

So maybe on the bookings side. I think what I got from your commentary, Ari, is you're pretty pleased sort of with the share dynamic. I guess, as we think about some of the areas we're making inroads, how do you see a difference kind of in small and emerging biotech versus maybe where you were 12 or 24 months ago? And then in FSP versus kind of full-service, what trend are you sort of seeing in the lines there?

It's a great question. If you recall, when -- at the time of the merger, we kind of took a step back and looked at the strategy of the legacy Quintiles organization and concluded that we needed to be the leader in the marketplace across the board. We couldn't just pick and choose who we wanted to work with, under what terms, with what margins, what type of products, et cetera, et cetera. We said at the time, we want to address 100% of the market, admittedly, with different types of offerings and a more segmented approach to the market. And that meant that we needed to go after the EBP segment a lot more aggressively. We realized that, that was the engine of growth, and that is proving itself out. We continue to see extremely good bookings traction. I mentioned in my prepared remarks that we are seeing 60% growth in this quarter in terms of EBP bookings. We're doing work with a lot of clients we've never even heard of in the past within the clinical development organization. And by the way, these sometimes are large trials. Just because they are small companies, they're, as you know, are becoming extremely well funded. In fact, I might say, the next generation of clinical development offering is also very appealing. I think about 60% of our next-gen awards in the second quarter were with EBP clients. And so that's for EBP. With respect to FSP, you are correct as well. The company as a whole had walked away, literally, from resourcing work. And we -- again, we said, that is not possible because, again, you cannot pick and choose. The very same client can decide to have both a full-service clinical trial with core clinical and all the capabilities and…

And the next question comes from the line of George Hill with RBC.

I guess, Ari, as we think about the growth in next-gen, are you able to kind of parse out for us how much of the growth in bookings comes from incremental volume and how much of it comes from the price premium that you guys were able to charge for next-gen? And I guess, kind of walk us through how we should think about that mix as the next-gen business continues to grow.

George, thanks for the question. We'd love to get price premium on next generation, and we believe we deserve a price premium. However, I can assure you, there is 0, 0, pricing here. And if anything, there is, perhaps, a negative which is what one would have expected. And the reason for that is we are, again, still in the initial stages of deploying these capabilities with our clients. And as always, it's highly competitive. We are going deliberately after clients that have preferred partnerships with others. We want to demonstrate that we can do that. And the hurdle is higher because our -- it's still a highly competitive market, and people won't hesitate to drop and do work at very little margin in order not to be displaced because being displaced is a big deal. Switching costs are very high. Relationships are very established. So far, we're not even trying, by the way. Right now, we're just deploying the capabilities. And over time, what we want to do is, as we said many times, is transition the model, where we want to make this a more expensive proposition for the clients, on the contrary, because they'll have more predictable timelines, faster patient enrollment, faster approvals. As a result, they will get the product in the marketplace faster, and the value from that is tremendously higher than any cost savings they will get from a little discount on the pricing. And we might then move to a model that, so far, is essentially cost-plus to a model that has more elements of fixed pricing, which, in turn, allows us to work on our cost structure and deliver better quality at a lower cost.

Okay. Well, then, you kind of hit my follow-up question, which was going to be, were any of the bookings in the quarter -- were a significant portions of the bookings fixed cost contracts? And the progress there.

Yes. Well, I think we are increasing. That's all I should say. But we are almost half.

And our next question is from Tycho Peterson, JPMorgan.

I want to start with a guidance question. Understand the FX impact, but EBITDA is only coming up $15 million off the $175 million top line increase. Can you maybe call out how much of the top line raise was reimbursement expense that are kind of coming through at 0 margin? Why isn't EBITDA coming up more, I guess, is the key part.

Yes, I think we mentioned, it's in -- do you want to speak to [indiscernible] of the...

Yes, yes, I'd be happy to do that. Yes. So if you look at the increase in revenue guidance, Tycho, it's $175 million at the midpoint, really, over $200 million when you factor in the loss of the $30 million of currency benefit that we had talked about last quarter. So I'll break that down into 3 pieces. One is just organic, and I'll call that about half of the $200 million. And that does have drop-through of EBITDA with it. So that, call it, around $100 million gets you EBITDA, incremental EBITDA, and we raised the midpoint of the EBITDA guidance by around $15 million. So that drop-through makes sense. The other 2 pieces, the pass-throughs, which make up about half of -- 1/4 of the $200 million; and the M&A, which is the other 1/4, they really don't drop through much in the way of incremental profit, particularly the M&A. These are smaller companies that, initially, when we buy them, before we can integrate them fully, they don't have much EBITDA associated with them. So really, it's the organic piece that creates the incremental EBITDA only.

Yes, I might add, we continue to make investments in our business. And that obviously -- and we continue, of course, to take cost out. So there is an offset. Again, up until the end of 2019 we anticipate continuing to make those investments. That has been the message we've communicated to you. So if we stopped investing in next-generation capabilities and in the OCE stuff, then yes, margin would be much higher, the drop-through would be higher, and it would be, hopefully, after that. But we are investing for growth. By the way, when we win a CRM -- I'm sorry, an OCE technology contract, there is a little bit of headwind to our margin in the first phases because the first phase is implementation. That carries basically no margin. We spend a lot of money and it's more labor-intensive as we work with the client to sometimes take out the existing CRM and put our stuff in. And obviously, we don't want to make this a burden for the clients, so that's really no margin generally or very little margin and before we can get into the much more attractive SaaS margin in the long term. So again, the deployments and the wins do come with a little bit of headwind in our mix.

Okay, that's helpful. And then two quick follow-ups. You had a question on FDA earlier. Separately, has there been any residual impact from the remediation measures related to the FDA data issue? I'm just curious if you can comment on that since it came up there.

The short answer is no. None. We were -- obviously, the FDA is a very important and critical constituency for us. We have extremely good relationships with the FDA. And by the way, I might add, many, many other government agencies that use our services or data or analytics. We have ongoing interaction with the FDA, continue to support their work. Obviously, we regret there was an error in that kilogram conversion metric for the exact amount of active ingredient in one of the national market research audits in the U.S. for fentanyl patches. And again, that was corrected. We're continuing to work with the FDA to address their needs, and obviously, to improve our communication. This issue had 0 impact with any of our clients. And if I might add, that metric at issue, which, by the way, I don't think I know of any other service provider in the U.S. that has the capabilities, and even remotely, to furnish that type of analytics to the FDA or anyone else. And it's used by 1.7% of clients in that particular service, which brings it down to 0-point-something percent of our clients worldwide. So again, we do not expect this to have any impact whatsoever on our business or financial results.

Okay. And then, I guess, separately on just data integrity. I mean, how do you handicap risk around kind of data theft and hacking? I'm thinking about LabCorp's issues that they kind of experienced recently. Have you had to kind of step up your security measures?

George, after this, I think we're going to have to move to somebody else in the queue as well, just so we can get -- sorry, can you repeat the question, George, as well?

Just a question on data integrity issues. I mean, given what LabCorp experienced, I mean, how much of a concern is that?

Well, obviously, cybersecurity and the risk of hacking and all that stuff, that's -- it's a concern. And if you -- people ask me, "What keeps you up at night?" I'd say that's it. We do everything we can, and we have all kinds of measures, as you can imagine. But it is a risk that we manage and control, and we have a lot of redundancies and we are a global company. And we've been at this for a long time, as you can imagine. But yes, that's an area of big investments that you can't see and we don't talk about. But obviously, it's a part of our infrastructure. We are, as we've said in other meetings and interaction with you, a significant technology company.

And our next question is from Sandy Draper with SunTrust.

A lot of my questions have been asked already, but maybe just a follow-up to the comment, I think, I believe, Mike made about a little bit expected less -- or fewer revenue or fewer contributions from tuck-in acquisitions. And just any thoughts. Is that -- are valuations getting high? Just normal lumpiness? Your guys' appetite is changing? Just any thoughts around what's sort of driving this. Or is it really nothing we should really be focusing on for the longer term?

Yes. Thanks. No, look, acquisitions, we've always said, we are very low at CapEx. We don't invest a lot, we -- there's no constraints. We would invest in a minute if we had an attractive capital expenditure. We felt, in many cases, that it was better to acquire innovation at early stages. Sometimes, we were right, sometimes we were wrong. But we make those bets, and it's our way of investing. It's just accounted for differently because it's not the capital expenditure, it's an acquisition. But that's -- it's a tool now in our strategy and in our innovation investments. It's binary. We have a very healthy pipeline, always, as we should. And we look at 100 potential acquisitions and we buy 1. So it's hard to predict. And yes, you are correct. Valuations, we have moved away from things we would have liked to buy because of valuations. With even -- if it's only a small number, we just are trying to be extremely disciplined. Do you want one more question?

That's very helpful.

I think, yes, let's take one more question -- and then -- as we're coming up on the top of the hour, we'll end it after one more.

Our next question is from Jack Meehan with Barclays.

I was hoping you could elaborate on what you're seeing in just mid-cap biotech. I think I heard you added 150 new customers to start the year. It's obviously been really healthy on the IPO front. Just what are you doing differently to win business? And maybe just elaborate on that would be great.

Okay, thanks. I mean, the 150 number includes large pharma as well. Now there aren't that many large pharma companies out there to begin with, but it does include large pharma as well. Although the bulk, you are correct, are small EBP or midsize. What are we doing differently? We've been talking about this change, the go-to-market model, leverage the historical IMS distributed presence around the world, so relationships at the local level. It is a large number of midsized pharma companies in Italy, in Hungary and in Asia with the legacy IMS organization, extremely good relationships, C-Suite relationships. We've got -- the people funding those biotechs are essentially go-to-market model that has been changed. As you know, we've mentioned that we've invested a lot in developing and training and recruiting a sales force that was more proactive, the way we go-to-market. And again, our capabilities, which we believe are second to none in this space, with the combination of analytics and technology that heretofore haven't been big part. I mean, everyone was talking about technology, but the type of technology that were brought to bear in clinical trial is, frankly, antiquated and obsolete and essentially kind of put on a computer page, was on paper, essentially. And then we're trying to change that model and really increase the power of what we do with more precision, more focus on efficiency, on process optimization. Again, whether it is the leveraging of analytics and technology in our next generation of clinical development, whether it is the development of mobile apps for our CRAs, whether it is the e-consent tools, all of that in combination when you present that to a client, and they are open to considering it, and they can see the benefits to their business. It takes time. It takes a lot of people, even internally, we had to get ourselves to that level, okay? There's still people here that want to do business the way it was done. And so change, it takes time. And we are all very sorry that it is taking time. I would like it to be overnight, but we are very pleased that here we are, a little bit over 1.5 years after the merger, and we are beginning to see the green shoots that we've been talking about and expecting. So thank you all for your good questions. And I'll turn it to Andrew for concluding remarks.

Yes, we're at the top of the hour, then, so I think we'll end the call. Thank you for taking the time to join us again today. And we look forward to speaking again with everyone on our Third Quarter 2018 Earnings Call. And we'll be available for the rest of day for any follow-up questions you might have. Thank you.

And ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation, everyone, have a great rest of your day, and you may disconnect your line.