Clarivate Plc (CLVT) Earnings Call Transcript & Summary

Hello. I'm Heather Balsky, BofA's Business and Information Services analyst. And I'm pleased to be here today with the team from Clarivate. I'm here with Jonathan Collins, Chief Financial Officer; and Henry Levy, President, Life Sciences and Health Care. It's great to have you both up here. Thank you.

Great to be here.

So I want to start, Jonathan, for anyone who might be new to the story, can you give us a brief overview of Clarivate's 3 business segments? I think it would be helpful to understand what your main sources of revenues are in each line of business?

Absolutely. First of all, thanks so much for having us. Glad to be here. Just a bit of an overview in Clarivate. As Heather highlighted, we serve principally 3 markets: academia, life sciences and then the intellectual property ecosystem. And the one thing that we have in common across each of these lines of businesses is our solutions offerings are similar. We enrich data. We provide analytics and insights. We provide workflow solutions tools, typically in the form of Software as a Service. And then we provide expert or managed services for our customers. In each of those segments, we have 3 primary areas of business. So within the A&G segment, we do research and analytics. We provide workflow and software tools for libraries and higher education. And then we also have content, where we aggregate a combination of journals and books and other periodical content for libraries and their patrons. So that business was recently expanded a couple of years ago through the acquisition of ProQuest. It's our largest segment. It makes up about half of our business. And that's a business that's been growing a couple of percent over the last couple of years, we think has the potential in the coming years to grow in the 3% to 4% range, hopefully, within the next couple of years, about 4% leaving 2026. I will highlight we posted a webinar on that business last week that you can find on our IR site, where Bar Veinstein, our President, walks through and talks about his area of focus, helping to accelerate growth and leverage AI to be able to make those applications much more powerful and relevant for our customers. The other half of our business is broken up between the other 2 segments. And I have Henry Levy here with me today, who leads our Life Sciences business. Here, our lines of business really focus on helping pharmaceutical and med tech customers accelerate the pace of innovation and get drugs and therapeutics through the cycle. We do that by helping them in the early stage, what we'll call the strategy and business development. We help them through R&D, and then we also support them in the commercialization of those products. And I'll leave a little bit of that overview for Henry in just a second. And then that's about 17% of our business last year. And then about 1/3 of our business is our IP part of our overall portfolio. And our IP segment provides management systems to help manage the workflow of taking an idea and docketing it and filing it and ultimately renewing the protection of that, whether that's a patent or a trademark. We also provide intelligence around where there's freedom to operate in innovation, what prior art may exist. And then the last thing we do is manage services. We help some of the world's largest corporations renew their patents around the globe, and we often refer to that as our maintenance business. That's a business, we think, will be a mid-single-digit grower over the next 2 years. But our highest growth potential business is life sciences, and maybe I'll give Henry the opportunity to just touch on a little overview of that segment.

Yes.

Thank you for having us.

Yes. Thanks for being here.

Thank you. I think life sciences supports the pharmaceutical biotech and med tech businesses from the beginning till the end of a drug or device going to market. From the beginning, where a company is trying to decide what therapeutic area to go after, what drug to develop or what company to buy. In the R&D side of the business, figuring out what the regulatory pathway to follow, what to do with clinical trials, what to do with even the mechanism of action of many drugs. Into commercial, we actually help them figure out which patients to target, what physicians to go after, what formularies to support. And then we even support the supply chain side of the equation as to where can you find the actual ingredients that you need to actually make the drug. So I think about us as being kind of their partners in making almost every strategic decision that they make.

That's really helpful. And Henry, since we have you up here, we're going to dig into the life sciences and healthcare business a bit.

I'm excited.

So take advantage of this time. So can you start off with just the backdrop for the business? You guys have talked about that the market is growing about 8%. What's driving that strong market growth? And what do you think has prevented Clarivate from keeping pace up until now?

So I think the industry as a whole, life sciences, is somewhere between that 6% to 8% as an industry. But if you think about each of the components that I just mentioned, on the strategic side, acquisitions is the main driver for big pharma to bring in new drugs to market. If you look at top 5 to top 10, 80% of the drugs that they're selling are not drugs that they actually developed. So they have to acquire them. So the way that the industry is working is through acquisition, which is where we help them. If you think about R&D, getting through a regulatory pathway and R&D investment continues to grow higher than 6%. And then on the commercial side, issues like the IRA, the Inflation Reduction Act that we're having to deal with, is putting pressure on pricing. And the only way to get past that pressure is to find different pathways to sell, and that's what we do. So we are very well aligned with the normal growth of the industry, but it also -- we're solving problems that they need to solve in order to succeed, which makes us, I think, a bit more premium. With regards to why, I think we've struggled a little bit. I think that the changes that we made over the last couple of years where we tried to, I'll say, streamline the way that we did things across the 3 segments, that hurt us, I think, in life sciences a little bit more than in other areas. Why? Because if you think about life sciences, this is an industry that cares about PhDs, and are you an MD, are you a PhD? And when we said, let's bring somebody more generic to come and sell to a pharmaceutical company, that was a little bit less powerful than if you were selling something potentially in patent protection or to a librarian. And therefore, I think that we hurt ourselves a little bit more with that change of strategy. And then through the multiple acquisitions that make up our business, I think we've gotten a little bit static, as in we haven't made enough changes to our products, which is why I'm excited about some of the innovation that we have and the opportunity that AI brings to bring some of that innovation.

That's really helpful. Maybe I'm just going to ask you, here, you talked about innovation, then maybe talk a little bit about where you're focused and the opportunity there.

So I'll try to follow that direction that I gave. If I think about strategy, the ability for -- today, we are the industry leader in data. That is what we have. We have the best data to make decisions about who to acquire, when to acquire, what therapeutic area to go for, what drug to go after. But that's what we are. We're a static database. And therefore, AI and workflow, as in instead of having you go and access the data, we think that the data should be coming after you. It should be telling you where to go. And AI and workflow can make that happen. So I talked about in the webinar that we referenced that we made an acquisition of a company called MotionHall, which is a start-up California-based that was actually starting to do that very early. And I've made the head of that company, the CEO and the CTO, now lead our strategy business because it needs to evolve in that direction. In the R&D side of the business, we have some really great products. And I think the focus is on selling them and making them be as successful as they should be. I'll just highlight OFF-X. OFF-X is a database of bad things that happen when you take a drug, adverse events. And what's cool about it is that the FDA and a couple of other regulators in the world, including Brazil, use our product. So if you think about it, who in the pharmaceutical industry wouldn't want to have access to what the regulators that are assessing their drugs have access to? So we have a couple of examples of products like that, that we just need to focus and sell. And then on the commercial side, real-world data is what's important. We have a heritage based on an acquisition of DRG in the last couple of years of a really interesting cadre of data that nobody else has. And what we need to do is figure out how to package it in products that are going to be successful in the market. And we have an approach, which is focusing deeper on very specific therapeutic areas that we think are going to allow us to really grow that market dramatically.

Okay. And what exactly, just to help us understand, is real-world data and why is it important to your customers?

So just a simple explanation. People think about clinical trials data, that is not real-world data. Why? Because it is gathered in a very controlled environment. Real-world data is data about patient, about drugs that they've taken that is in the market, that is out there. So examples of real-world data can include EHR. So when you go to the hospital and somebody enters that information into the actual computer, that's real-world data. But it can also be claims information. So pharmacies fill in a prescription, the information about the patient that took that. What was it taken for? What was the dosage? Did they continue to refill it? It's what we call the patient journey, where a patient has a disease, they take drugs, they get procedures, they use certain things and then there's an outcome, either positive or negative. That's real-world data.

And so you touched on it a little bit, but what's the opportunity to commercialize this data?

It is a massive business because if you think about the pharmaceutical industry challenges, first, you have to find the drug. And getting it approved is hard, but even getting it reimbursed is even harder. And with the IRA, it's going to get even harder. Real-world data is the evidence you need in order to get your drug reimbursed. And then it's the map to figure out where to sell your drugs. Because it tells you which are the physicians that are prescribing your drug, which are the other physicians that are following a certain path. And it also tells you where are the patients, the epidemiology, which means where are the populations of patients that you need to target. So real-world data is the map to make a drug successful once you prove that the drug actually works.

Okay. That's helpful. And so going back to the webinar you mentioned, I think you talked about the strategy involving 3 steps. So one was driving product innovation, another was investing in real-world data, and then there's also modernizing the platform. I think we hit 2 of the 3, so innovation and real-world data. Maybe there's more you want to share there, happy to -- but also the modernizing the platform piece of that would be helpful.

Yes. If you go back to the first question or second question you asked with regards to catching up to market growth, we've been a bit static. If I talk to my customers, they say, "We love your data, we don't love the experience." As in the experience feels a bit old. So when we talk about modernizing platforms, it's as simple as using AI to improve the experience of our customers as they engage with our data. In that webinar, you see a demo of just a simple advanced search, where, instead of actually doing a Boolean search where you say, "Find this word in your data," you can now ask a question and the data will come back in a summarized way as well as highlighting what the data would be. And then you can actually query that, like you would in ChatGPT or anywhere else. So when we think about modernizing the platform, it's a combination of taking advantage of the data that's differentiated but putting it in a better experience. And then the second component is workflow. As I mentioned that, right now, we are static databases. And if we can make the data come to you and be active instead of passive, we think that the customers are going to see incremental value. And because of that, of course, there'll be growth in pricing, I'll say, positivity.

That's really helpful. And how do you think about the competitive landscape today, especially for LS&H? And then, Jonathan, it might be helpful to talk about your other 2 segments as well.

Without talking about anybody specifically, I like my chances. I think that the competition in our space is either small start-ups that are struggling to just get funded or relatively big ones that have bought 6 or 7 companies and have not brought them together. So they're just running a business as independent silos trying to catch up with us. And therefore, there's a few that we have to watch. But in general, it's not a market that has a dominating player that we really have to go after. And then beyond that, I think that our data is what differentiates us. And the fact that we belong to a company that then has the IP information and the scientific information that comes with A&G makes us even more differentiated. None of our competitors have that. I'll let Jonathan answer the question, but then I'll come back to why I think that's true.

Yes. I appreciate that.

Yes, happy to touch on the other segments. So to answer directly, not a meaningful change in the landscape in either of the other segments since we spoke last. We have formidable players in both spaces. And when we think about what really differentiates us, particularly in the A&G business, similar to life sciences, is exceptional data and well-respected metrics. We are the leading metric of identifying the quality of peer-reviewed academic journals. So the Journal Impact Factor and that editorial review process that's impartial and unbiased is so valuable to those that are seeking tenure and those that are looking to do the highest quality research in the academic market. So great there. We are, by far, the leading provider of what's effectively an ERP for an academic research library. So our flagship product, Alma, is the leading solution around the world for higher education institutions as they acquire, circulate, manage and analyze the content that they procure on behalf of the patrons within that group. And then we have a very robust aggregation business within our content, where we partner with people in the industry to bring together different content sources on the back file and help to make them relevant and discoverable within our ProQuest One platform, which is a leading solution that's there as well, too. So really great products, and the underlying information and data that we have is what differentiates us. Within the IP business, we compete in different ways. But within the software space, we've got a couple formidable players. We have a leading solution for corporations, which is IPfolio. Foundation IP covers law firms. Those are 2 great products that are doing well within the market. And we pair that with the services where we're a leader in renewing patents around the world. We underwrite that for a customer. So when you have your patent renewal book with us, we will ensure it's renewed everywhere around the world in a timely fashion, and we do so at a very attractive value for those customers. And then the final space is within Patent Intelligence. And this is an area we've been speaking with you in the past. We've acknowledged for a while a similar phenomenon to what Henry described in life sciences happened. We let the user interface get a little bit stale on a couple of those products. We've made some really meaningful investments in the prior quarters, and we'll be launching new modules on our Patent Intelligence platform in 2024 that we really believe is going to drive increased usage, value for those customers and will lead to improved revenues, taking us from a product that's been declining for a while to becoming a growing product in the next couple of years. So really making investments in that data and in that user experience to enhance the value prop for the customers and ultimately lead to more attractive growth. So that's a little bit of the competitive landscape in the other businesses.

That's really helpful. I think you said you're going to return to a thought on -- with regards to everything going on in the competition.

So I think I'm the luckiest segment because the -- if I think about my customers, a top 5 pharmaceutical company, if anybody knows pharma, the -- if one thing they do is deliver drugs, the other one is protect patents. Like that is how just recently, AbbVie has been able to extend the time line for HUMIRA. It's not because they came up with new research, but because they were doing new patents that protected them going forward. That's our IP business. And if you think about research, the pharmaceutical industry cares deeply about the research they do but also the research that's out there. That's our Web of Science business in A&G. So when I look at IP and A&G, they benefit from me a bit. I benefit from them deeply. In some customers, the other businesses of -- so in some of my pharmaceutical companies, some of my colleagues sell more than I do. That's how powerful it is. And because of that, the data behind it is incredibly powerful. I mentioned in the webinar that one of the directions we're going is biomarker intelligence. A biomarker is something that you do, either a test, a blood draw, maybe a digital device that tells you that you're going to be a good candidate to take a drug or a device. It is the underlying foundation of personalized medicine. If you've heard the word personalized medicine, it's only give somebody something that you know it's going to work for them. And biomarkers are the way you find that. So every single clinical trial, any single drug that's being developed today has a biomarker attached to it so that you know, hey, this is the drug that -- and how it works. This is the thing that tells you it's the right person. We in the biomarker space have a massive amount of intelligence in life sciences. When I went to a key customer and said, "Hey, I'm trying to develop a solution in the space." It was a customer, the one who said to me, "My biggest issue is not just finding the biomarker but figuring out who did all the research around it and what is the patent protection on that biomarker. Because depending on the patent protection, I can either go that way or go against it." So people are making decisions that are, I'll say, hundreds of millions of dollars in decisions without knowing if that biomarker is protected or where the research is being done. I have access to all of that data, and therefore, biomarker intelligence should be a space that I can grow dramatically.

That's interesting. And so I guess that was on the cross-selling opportunity. Is that -- in terms of how you go to market and the sales force, are there changes around that in order to kind of really seize on that opportunity?

Yes and no. I think that what it is, is an overlay, as in we own a pharmaceutical company from an account management perspective, but we are the ones that orchestrate and make sure that the account managers from IP and A&G can bring the value to those customers. But what it does for me is -- if you've ever tracked the pharmaceutical industry, they love big deals. They love doing big deals. And now I don't just have to talk about the things I do. I can incorporate A&G and IP into my big deals, which allows me to be a better partner. I don't have an issue with procurement, as in procurement is trying to reduce the number of vendors. I'm everyone. So it really gives me the ability to be a true partner and a transformational partner to the big pharmaceutical companies.

That helps. And Jonathan, it sounds like there's -- on the LS&H segment, there's an opportunity there on the cross-sell side. Are there -- is that kind of the biggest opportunity on that front? Is there anything on the other two, IP and A&G side, in terms of crossover in those businesses?

Absolutely. So we've highlighted that the portfolio rationale was built around the ability to share content, share technology and share commercial channels. Henry really highlighted a couple of those examples. And another one we think of is if you're doing early academic research on an emerging field, you're looking for peer-reviewed content that's published in journals. But there are also cases where someone will seek commercial protection for a new idea prior to there being a lot of research around this. That's why the Derwent innovation product that's included in the Web of Science has a great use case within academia. There's an example of sharing content and using that commercial channel to drive value and usage from the underlying patent data that's in Derwent. So we have examples of those in the other segments. I agree with Henry. It's a great example in life sciences and where we use all of them.

But I would also highlight that if you think about many of the new biotechs that are coming out are coming out of academia. So University of Pennsylvania was one of the first that kind of started it. Spark, Moderna, these are companies that came out of academia. So academia is coming to us to benefit from the life sciences side of the business, specifically in drug research and device research. So it's not broad. It's not being applied in research for, I'll say, technology. But in the pharmaceutical space, there is overlap across A&G and life sciences as well.

Okay. That's really helpful. We talked about gen AI for LS&H. So where else are there opportunities in the organization on the gen AI side?

Yes. So Henry's webinar came out yesterday. He gave some great examples from life science and has touched on some of those. I'm sure he'll add to it. But the week before, we provided some examples of how we're using it in academia. And we made a small acquisition. Bar's team, Bar Veinstein leads our A&G business, acquired a small business called Alethea late last year. And this is a small team from Israel that had developed some LLMs that were being used to engage a researcher or a student in the learning process. And what's really interesting about it is it takes the traditional notion of what you see in ChatGPT and turns it around. So rather than the bot providing an answer or a suggested set of answers, the bot's using the Socratic method to query or ask the student, "What about this? Have you looked into this situation?" Encourage them to expand their research and respond to these prompts that are provided. He thinks this is going to have a really interesting potential in a lot of our content platforms, which have teaching and learning use cases. So when someone is researching around a paper or for an assignment, this AI capability can be embedded in a number of our products over time to drive a better learning experience and better learning outcomes. So that's a great example there. I'll touch on maybe just a couple that we've brought to market over the last year within the IP space. And I don't want to steal too much of Gordon's thunder next week. We'll be putting out a webinar around the IP business and how the AI technology is affecting that. But there are 2 of them we've talked about previously within the space. The first is what we call BLA or the Brand Landscape Analyzer. So this uses a new AI technology, combined with visual recognition, to help customers scour the public domain and look for cases where there could be potential infringement on registered brand trademarks. So that's a great example. It's driving great adoption prior year in 2023. We're excited about what it's going to do this year. And then another example we talked about is the forecasting tool, helping people to understand the cost associated with maintaining their intellectual property and using some proprietary information that we've developed to help and aid in that and predict what the costs will be and potentially help them better understand return on investment. So that's another example. So each of the businesses have great examples. The demos that we released last week around A&G were helpful. I think the ones Henry's team shared yesterday are great, and then we'll have a few more for you next week to talk about in the IP space.

That's great. We look forward to it. It will be interesting to listen to. So I kind of want to talk about just current trends and what you're seeing. I think that -- maybe let's talk about just your expectations for the year on -- amid sort of everything that's been going on. You've talked about improvement through 2024 towards the end of the year or as we move through the year. What's driving that? Is it comparisons, operational changes? Is it assumptions around what's going on in terms of macro trends? Just help us unpack all of that.

Sure. So the metric that most people are focused on or interested in is our organic growth within the business. Last year, organic growth was just slightly positive. This year, we think it's going to be a bit better than that. We expect about a 1% organic growth at the midpoint of the range. We do expect our A&G business to continue to do a bit better. They expanded their organic growth last year over 2022 by about 40 basis points, went from just under 2% to above 2%. And the big improvement we saw last year was the investments that we had made in the Web of Science product in late 2021 and in 2022 being monetized in 2023. So just as an example, in late 2021, we completely redid the UI for the Web of Science. We launched that, and we saw a significant uptick in monthly active usage during 2022. So about a 78% improvement over that period. That allowed us to monetize that increased usage as the currency for us in conversations with our customers to improve our renewal rates, help to get a little bit better pricing, drive new subscription sales and upsells within the collection. So that was a real success story for us. The subscription file or that part of the business did really well in 2023. We expect to continue to see nice momentum on that as we come into 2024. The expansion of the collection, we added 9,000 new journals last year that are getting an impact factor now that didn't previously. So we think there's continued room for growth there. The other area that can help us to improve on growth in 2024 is our Workflow Solutions segment. So we announced a couple of key wins last year that will start to be implemented and come online in 2024. So expect to see a little bit of improvement in that area. So that's how we think about A&G, about half of our business. Within Henry's business, we declined last year. We had a headwind in our real-world data business. We think that was largely market-driven. We saw softer budgets commercially last year. We also are pivoting a bit our strategy on real-world data, which I'll let Henry expound on, but that caused us to be down a little bit last year. We think Henry's business is going to be relatively flat this year. So a bit of an improvement over the prior year as we lap those more challenging comps on real-world data from 2022 and we focus on bringing out the pharma-grade data earlier in the year and the new therapeutic area aligned offerings that we'll bring to market a couple of those in the second half of the year. Within the IP space, we started to see patent volumes on renewals soften a bit in the second quarter and definitely in the third and fourth quarter. So as we move into this year, we'll have some more challenging comps early in the year, but we expect that business to grow just modestly this year. Last year was essentially flat, down just a little bit. So that's a part from year-to-year that we expect to get a bit better based on the comps. We haven't underwritten a meaningful uptick in volumes. But on a year-over-year basis, we'll have a bit of a headwind and then normal market growth in the second half of the year. From a Patent Intelligence standpoint, we're launching our new models. We expect to see the -- excuse me, modules, 4 new products will be coming in this year. We expect to see usage improvements, which we hope will lead to renewal rate improvements and better new subscription sales next year. And we expect our software business to continue to be pretty strong in that space. So on balance, we think organic growth will improve a bit. We are expecting our margins to be about 41.5% at the midpoint of the range is what we guided to earlier this year. And we are committed to investing in the products, delivering the innovation that we need to drive growth, not only this year but in the future years. So that's a bit of a highlight on the guidance that we gave in earnings just a few weeks ago.

That's really helpful.

And to expand on that pivot on real-world data. In essence, we, as I mentioned, have, I think, incredibly differentiated data. And over the last couple of years, we focused on selling to data aggregators, to others who do something with that data and then sell it to the pharmaceutical industry. And as you can imagine, they're very excited to have our data. So it was, I'll call it, an easier sale, which saw the growth that we saw last year. But the growth that actually can continue is by selling to the pharmaceutical, biotech and med tech business because those data aggregators, once they buy, they're done. They want to hedge their business. They don't want to buy so much from one player that they are potentially too committed while the pharmaceutical industry just wants the good access to the data. We were not that focused on selling to them. We are pivoting in and focusing on that, which is -- it takes a little bit more time because pharmaceutical companies, I'll say, are a little bit more diligent in the way that they do a procurement process. But once we actually focus on them, the growth is more significant. I think our previous strategy got us to one level, and we would have just plateaued. The new strategy is the one that allows us to continually grow.

That's really helpful. I think it's a good place to kind of close our conversation. So thank you so much for the time. We really appreciate it. Henry, it was really nice to meet you. Jonathan, it is good to see you.

Good to see you as well.

And thank you, everyone, for joining us.

Thank you.

Thank you.