IQVIA Holdings Inc. (IQV) Earnings Call Transcript & Summary

All right. There we go. So it's Luke Sergott. I work for Barclays, cover life science diagnostic tools. It's my pleasure to have Ron Bruehlman, CFO, IQVIA, on the line with us. Looks like it's just going to be audio this time. You'd think that, we were the first to have the virtual conference, we'd have all the kinks ironed out, but still, they still remain. So let's get -- I guess we could just jump right into questions, if that works for you guys.

Yes. That's great, Luke. Thanks.

Awesome, awesome. So I guess as you guys started -- ended the year and looking forward to Q1 and for the rest of the year, you guys -- give us a flavor of what you were seeing at the end of the year that really improved your outlook and led to the guide raise and kind of break out what you're seeing from a traditional legacy business and then the COVID work.

Yes, sure. Look, first, let me recap our guidance changes for everyone on the line. During 2020, you'll recall we accelerated our planning process, and we provided our 2021 outlook as soon as we had some visibility, which was on our third quarter earnings call, which is about a quarter earlier than we normally would provide guidance. As we got to our fourth quarter call in February, our outlook had improved and firmed up some so we decided to raise our guidance. Just as a recap, we raised our revenue $250 million on the low end to $300 million on the high end, about 12% year-over-year growth at the midpoint. Our adjusted EBITDA, we raised $35 million at the low end and $40 million at the high end, bringing us to about 17.5% growth at the midpoint. And our adjusted diluted EPS for 2021, we raised $0.12 at the low end and $0.13 at the high end, and that brought us to over 23% EPS growth at the midpoint versus 2020. Now the increase we saw in our revenue guidance came about half from a stronger outlook for the business, and the remainder was due to favorable FX versus the guidance we provided on the third quarter call. Now the adjusted EBITDA increase was entirely the result of our stronger organic revenue growth outlook because FX actually worked slightly to our detriment versus what we projected on the third quarter call just because of the mix of where currencies changed relative to our cost and earnings. Now what drove the increase in our guidance, it was, as I said, about half operating, half FX. But most of the strength that we see in 2021 really relates to a resumption of the growth in our base business rather than COVID. We talked a little bit about that, I'm sure. The COVID work has carried over into 2021, but the bulk of the growth in 2021 is in our base business.

All right. Let's -- allow us to dig in a little bit on that. So I think a couple of things. You mentioned half coming from -- half the raise from FX, half from operations. So from an FX perspective, I think that, that's probably underappreciated by The Street. But when you get into the operational side and the -- you're thinking about the legacy business recovering, are you seeing any recovery in particular indications, so cancer or rare disease or cell and gene therapy, versus to what you -- versus what you had pre-COVID?

Well, I think what we're really seeing is we're seeing strength across all therapeutic areas in the traditional business. I wouldn't point to any one area that's particularly strong. And the issue is that a lot of that work was there. Our sponsors wanted to issue RFPs on it, but it was pushed to the right because of COVID-related work, which we took a higher priority. And also, the execution against what was in our backlog in 2020 and the traditional areas was slowed. Initially, in the second and third quarter, we had issues with site access. We had to switch over to a lot more remote monitoring than we had previously. There were also issues with study start-up, patient recruitment, patient visit, all of those things. Now all of those got better as we proceeded on from the second quarter to the third quarter to the fourth quarter, and we're back to pretty close to normal. As we said at the end of 2020, we weren't at 100% on site openings, about 70% or so, but we're compensating through virtual trials and so forth. And we really thought we had met -- we've reached a critical mass there. So it wasn't critical to be open 100%. And we saw study start-up and patient recruitment returned pretty much to normal levels exiting the year. The one place where perhaps it's been a little bit slower is getting patients back to trials that are non-COVID-related and nonlife-threatening kinds of indications. There's a reluctance on the part of certain patients to carry through with visits when it's a hassle to go to the doctor's office or they're worried about getting COVID or whatever. And so that's been a little slower to come back, but we've seen a nice recovery there as well. So anyway, to sum up the facts, this work was pushed off related to COVID-related impacts. But we're seeing really across the board in all therapeutic classes a return to strengthen. And if you look at the biopharma, emerging biopharma part of the business, I think if I go back to National Venture Capital Association's statistics for 2020, the amount of funding was up [ 50% ] year-over-year, and that's manifesting itself in the pipeline that we're seeing coming into 2020. So all looks good on the non-COVID front, but we're continuing to see carryover COVID work into 2021 as well.

There's a lot -- one of my favorite sell-side line's, "There's a lot to unpack there." So great segue, I guess, into -- when you think about virtual and remote. And the genesis of that last question is trying to figure out when we're getting -- when we're going to get back to full capacity, right? And so you're saying, if I hear you right, that because of the virtual and remote capabilities that you guys have built in, essentially, even though we're not at traditionally 100% back to normal, these other technology-enabled services and capabilities make it so that we -- it looks like it on paper. So then as I kind of fast forward to the rest of the year and those capabilities start coming back and patient access gets up to 100%, let's just assume that the vaccine and everything remains on trend, and that could be the case, is it that you'll see probably some -- we might see declines in the remote work and these virtual capabilities? Or has that really expanded what a traditional capacity looks like in the business?

Well, I think the world has fundamentally changed when it comes to virtual trials, which is to say that prior to COVID, we and some others were starting to introduce virtual trials to our clients, and there was some interest there. But it really took out -- off in 2020. We've had over 60 wins across 10 therapeutic areas in virtual trials, and 54 of those wins were added in 2020. And we're working on virtual trials with 5 of our top 10 pharma clients. And we're able to do this because we have a technology suite that we built for this purpose. It was built on Salesforce's Health Cloud, which is a purpose-built platform for life sciences. And the suite we have there combined eConsent, telemedicine, eCOA, digital communication. But you need more than the technology. We developed relationships with local ads, health care providers. We have a virtual network of investigators that participate under preset terms. We have a virtual trial team, for instance, clinical nurse coordinators. Under the old model, these clinical nurses would have been employed by sites and just being treated as pass-through expenses. Now they're our employees and leveraged across more patients. We've added a study concierge role to kind of orchestrate these virtual trials. And so we're seeing -- look, we're seeing a lot more traction here. And it certainly helps with patient recruitment and patient visits because the typical clinical trial, I think, a one-way trip for a participant could be on the average of 50 miles. And when you can do things on a more local basis, it helps with patient recruitment. It helps with adherence, patients showing up. It helps you run trials quicker. But let me put that all in context. Pharma sees the value in this now, and I think COVID has helped a lot in that regard. And we have a very good offering. But the 60 trials that we're currently working on in virtual trials, either partially or fully, compares to 2,500 trials that we'll have in flight at any point in time. So it's still a relatively small percentage of our trial. But we don't see that declining. We can see that increasing going forward, to answer your question at the beginning more pointedly.

Yes. No, that makes sense. I mean good to pull back and figure -- realize that 60 versus the 2,500 certainly puts it into context. Can you give any kind of metrics that you've seen from a benefit from the virtual and remote work? Like, I mean you talked about the demand for it, right? The average traveled time or distance is 50 miles. And you know that -- we all know that industry metrics are pretty paltry across the board. Anything that you can point to that's saying, well, out of those 60 trials that we're working, we're seeing that site start-ups are 15% faster or patient engagement is up, stuff, anything that you can point to anecdotally?

Yes. Look, I think it's too early to draw conclusions. We don't have a broad enough sample set. Clearly, we think we ought to be able to run trials more efficient on a virtual trial basis. That's why we went the way we did. But we don't have broad enough experience there yet to say. What we can say is that the number of therapeutic areas we're involved in is continually expanding, and we're also seeing regulators have become more supportive and encouraged the industry to conduct virtual trials. This is kind of a hidebound industry, and it moves slowly. Anything that's regulated is and -- but things have changed recently. So I think as we go forward and we get a broader sample set, we'll be able to answer some of those questions better. We'll get questions from people. For instance, is it going to affect your margin? Is it going to affect your revenue? And the short answer is we don't think in a major way, but we don't have enough data to prove that out yet. You have tech taking into place of some things that are more labor based, which should theoretically help margins. You're compressing trial time lines some. We just don't have enough data yet. But the whole idea, of course, behind virtual trials is that you run -- is that it speeds patient recruitment. It speeds execution. You run the trial better. Everybody benefits from that.

Yes. No, that makes sense. That makes sense. It's a little too early for me to get excited about it. So let's look back in 2018, right? You guys had your Analyst Day. You started off with the 7% to 10% growth rate in the business, which was above anybody of -- any of your peers. And the pitch, we've heard it plenty of times from your side. And we're starting to see that -- the benefits. And so my question is that, outside of COVID, we're going to see the clinical side of the business start to take off from a growth perspective out of that mid-single-digit plus and start touching that 7% to 10% this year. We already saw the tech -- the TAS business already started hitting that. So I guess as we get past COVID, is there -- are you starting to see the inflection in the clinical business from a full-service capability and starting to win share where you're going to get to that accelerating growth profile?

Well, look, we are seeing it. You see it in our guidance for 2021. Our guidance is, I believe, for revenue was, working from memory, 9% to 12% for Tech and Analytics Solutions; R&DS, 14% to 17% and down slightly; and CSMS, which is still affected -- contract sales, which is still affected some by COVID. Now there's some COVID impact mixed into all of those numbers. But what I would say is the growth is every bit as strong in 2021 or stronger [ in the ] traditional parts, non-COVID parts of our business as it is in the COVID parts of the business. And you can see what's been happening with our backlog in R&DS, up year-over-year substantially. The growth that we're expecting next 12 months out of the backlog, all of those are indicative of strong double-digit growth in the R&DS segment going forward. Our bookings, our book-to-bill throughout the year was quite strong as well. So the short answer is, yes, we are seeing share gain in the R&DS business, and that's on an overall strong industry backdrop. I know others are doing well also. And we expect that to carry forward in terms of revenue growth in future years. We're not -- look, we're going to be making projections for 2022 yet. We do that a year at a time. And we have gotten some questions. Well, how about the V-22 targets that you set out there? COVID -- you're kind of on pause for a year because of COVID, and you were already that strong in 2021, and how does 2022 look? And all I would say is that the original V-22 target are in reach despite the fact that we had more than a hiccup in 2020 due to-COVID.

That's all I was looking for. I was just seeing how your outlook has changed, if at all. It doesn't sound like it really has. And so in the last 5 minutes here, I want to dig in a little bit on free cash, right? So whenever we pitch the stock in longer-term investors and the only pushback, one of the only aspects was, one, leverage. So you take -- you're going to just mathematically take that down. And then the other one is on your free cash flow conversion profile. And so as you think about that, over the next couple of years. Walk us through -- I know that you guys -- it's a renewed focus for you, particularly. And walk us through kind of the low-hanging fruit here and some of the programs that you're instituting so we can think about how that trajectory looks over the next 2 years, 3 years.

Yes. Sure. I'm pleased and happy to do that. Well, as you said, cash flow is a very high priority for us. It's a very high priority for me personally. And it became a higher priority for everyone, an even higher priority when the pandemic hit and we and everybody else was worried about liquidity and focusing on cash generation. So it's kind of a combination of those effects in 2020. And we did see significant free cash flow improvement in 2020. We put a very strong focus on collections and not letting our current accounts receivables slip past due, which, frankly, we had done in the past. And so during 2020, we were quite successful in working down overdue receivables. We also went back and took another look at our contracts and figured out ways to accelerate billings by negotiating better invoicing terms with our customers. And we perhaps hadn't put enough emphasis on that in the past. And another phenomenon that's happened is there was a period, and I think probably some of our competitors came to attest to this as well, where for several years, there was a lot of pressure from large pharma customers to extend payment terms. And when you do that, extend payment terms to customers, big customers, you get kind of a onetime impact of receivables being stretched out. And I think we're back in more of a steady-state position. So there were some things, I'll say, in 2020 that were more temporary in nature. We got some benefit from advances on our COVID work. And obviously, year in and year out, we're not going to be able to continue to draw down overdues, and we got to a point where overdues kind of hit a steady state as well. So I'd say all this just to say, we had very strong cash flow in 2020. I think it was on the order of 105% to 110% of adjusted net income. It's probably unrealistic to assume we're going to do that every year. What we target internally is more in the nature of 80% to 90% of adjusted net income. And keep in mind, this is off of an earnings base that's growing substantially. I mean high teens for -- or over 20% even for adjusted net income, high teens for adjusted EPS -- or excuse me, EBITDA. And so the only other caveat I would say is, with cash flow, it's always a lot easier to forecast earnings than it is cash flow. Every CFO will tell you that. There's lumpiness to cash flow. And so when you think of the 80%, 90%, think of it as being kind of a multiyear average target, something where you're going to do better in some years, not as well in other years. But overall, we're going to be a strong cash generator going forward -- I'm convinced of that -- and better than we were in the past. And one reason, another reason that I neglected to mention was we had an awful lot of cash integration expenses for a while post merger, and those are largely behind us now. So that should help going forward as well.

Okay. Yes, that's, I think, a little underappreciated as well. So now that the business is fully integrated, you guys are -- we should be thinking about closer to 80% to 90%. That's...

Yes, I think that's a good average target for a year. And we always try to do better than that, but I don't want to mislead people and say it's going to be -- every year is going to be like 2020.

Yes, you got to have your employees sleep sometime, I guess, right?

That's right.

That's all right. All right. Thanks again, Ron. That's all the time we have. It's always a pleasure, and I look forward to connecting with you guys soon.

Thanks, Luke. Appreciate it.

All right. Talk soon.