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

Okay. I think we are live. Good morning, everyone. My name is Eric Coldwell. I cover health care distribution, pharmaceutical services with Baird. It's a great pleasure to have IQVIA with us today. With us is Ron Bruehlman. He's EVP and Chief Financial Officer of the company. We will not have video of Ron today, but he is going to do a quick presentation -- or just very quick opening remarks, not really a presentation, and then we'll jump straight into the fireside chat. So with that, Ron, I'm going to hand it over to you, and then we'll do the fireside as soon as you're -- you make a couple of quick comments here.

Yes. Great. Thanks, Eric, and good afternoon, everyone. I know most of you know IQVIA pretty well, so I'm going to keep these opening remarks really brief. You see that we've gone through 2021, our financials have been very strong. We've had an excellent year so far, posting strong revenue, earnings and cash flow growth and -- this is in both our Technology & Analytics Services segment and our Research & Development group. Importantly, our bookings have been very strong, and R&DS, at the end of June, we were up 17% year-over-year. The backlog was to a record of almost $24 billion. And looking forward, we see the industry outlook as being quite favorable. We've had real biotech funding over the past 18 months. The pipeline of late-stage molecules continues to expand and is at an all-time high. Year-to-date clinical trial starts are running ahead, well ahead of 2020 and 2019 and new drug approvals by the FDA are also running ahead of last year. And of course, in addition to strong revenue growth, we've been posting the strong earnings growth. You saw that we bumped our guidance on the second quarter call to adjusted EBITDA growth of 24% to 26%, adjusted diluted EPS growth of 36% to 39%. And if you take our guidance as a whole that puts us ahead of our 3-year V-22 financial plan that we laid out back in 2019. Finally, I'd just close my opening comments by saying we're excited that we're going to be hosting an Investor Day in New York City on November 16th. At that time, we'll provide 2022 guidance, discuss our strategic priorities and also share a new set of medium-term financial targets, and we hope you can all join us then. But let me turn it over to Eric for the Q&A session because I think that's the most important part of today.

Well, Ron, thank you. You actually kind of hit on one of the questions I had right off the bat was given the spike in COVID and the increased case count and hospitalizations, everything going on, if you -- it sounds like you're still planning to go forward with a live event, is that correct?

Yes. Yes, that's right. Look, our goal would certainly be to hold the event in person. I think, we're all getting a little tired of virtual events. And most importantly, meeting in person is a way for our analysts and investors to interact with and get to know our leadership team better. But that said, we're realists. We know in the current environment, we can't make any guarantees. We're monitoring the situation locally, and we'll be prepared to make any changes that we need in the event that there's an issue, another flare up of COVID or something like that. But right now, the plan is to have it in person.

With your opening comments, you also hit on the fact that you are tracking ahead of the V-22 plan that was originally laid out a couple of years ago, and you are going to be giving some updated targets here in another couple of months. So that being said, I am curious, has anything changed -- it doesn't sound like it, but has anything perhaps changed in the world or in your thinking, whether it be this year or longer term based on the notion that COVID isn't going away and that we do have this pretty massive increase in case count over the last couple of months? Obviously, the global situation is still tough, as -- have you seen any knock-on impacts from this? I don't know if you want to call it a fourth wave now, but what are your thoughts on that? If we could just start there.

Yes. Well, let me revisit the COVID issue in general. Our operations have largely returned to normal, but we're still seeing some lingering effect on our operational metrics from COVID generally. Site access for clinical trials has plateaued at around the 80% mark. We don't see that as being an issue because we have workarounds with remote monitoring. And for the most part, the larger sites are open. Now in-site start-up and patient recruitment, they've recovered to around or above 2019 levels. So we have seen a recovery there. The one area that we see some lingering impact is in patient visits, which has not yet fully returned to pre-pandemic levels, and we're watching that as an indicator of further recovery. And when you asked about the Delta variant, in particular, we haven't seen a major impact from that per se. I suppose what we might see is it will slow somewhat the recovery to 100% normal operations like in patient visits, it's possible that some patients will be deterred from resuming visits for clinical trials because of concerns about COVID and the Delta variant. But I think it's important to give you all this in the overall context that we're operating pretty well in this environment. We've learned how to manage through the disruptions. Where we have experienced an execution delay, the work is largely being pushed to the right. We have not seen any impact on cancellation rates or study holds. And importantly, the opportunity pipeline continues to be quite strong.

That's a great setup. So with last quarter's results, you cited productivity measures as contributing to really strong margin, especially excluding the passthroughs. It's a topic we're bringing up with all of our companies. It seems to be one of the hottest topics out there. It's about labor, staffing challenges that seem to be prevalent in many industries. So I'm hoping you can talk about how you're managing, growing the business, growing your headcount, making sure you have adequate staff on hand, given that there's so much competition for folks these days? And then is it safe to assume that given the biotech financing and the strong funding environment and the high levels of demand that are out there, are you able to pass some of these higher costs that you might be seeing on the customers in the terms of rate card inflation and contract price inflation?

Right. Well, look, this is an issue that the industry as a whole has been grappling with because we have strong industry demand. And of course, it's a generally tight labor situation across the U.S. anyway. So we have seen an increase in competition for talent, increasing attrition rates and some pressure on wage rates as well. Now we feel we positioned us pretty well entering the year by protecting employment and compensation levels during the depths of the crisis in Q2 and Q3 last year because we saw a snapback coming in Q4, which, in fact, of course, happened. But that said, like the rest of the industry, we've had to step up our hiring to meet the increased demand that we've seen this year. And look, we're confident we'll be able to meet our hiring needs because we are a premier company in the industry. And we do look at our employees. But that being said, we're having to pay higher wages. We're seeing some margin pressure from that. Now I would stress that those higher costs have already been factored into our 2021 guidance. But I think specifically, maybe, Eric, what you're interested in is to what extent can we pass this along. And I think it really depends upon the circumstances. In the case of shorter-cycle businesses, like the T&CS business, where we are seeing some labor pressures, although not as much in the R&DS business. You can respond pretty quickly there in terms of pricing. Certainly, on the R&DS business, we are adjusting rate cards. We've adjusted them a couple of times this year. And on FSP deals and so forth, we're going back to sponsors and saying, "Look, we need some relief here," and I think others in the industry are doing the same thing. And -- but where we have existing full-service contracts in the backlog, not in all cases, likely we'll we be able to get relief. So we're going to have to offset some of this through productivity measures and the like. So it is an issue for the industry. It's one we're dealing with. I think we're working through okay, but I'm not going to say it's without its challenges.

So maybe you could talk about some of those productivity measures and the things you're doing to offset internally with what you do control?

Yes, for sure. Well, look, part of the margin expansion we've seen this year obviously relates to our decision last year to protect employment. So we're seeing some leverage from revenue recovery just because we needed to do less incremental hiring than we would otherwise. But more fundamentally, I would say that improving productivity is kind of at the core of what we do. We're always looking to drive efficiencies in our organization. It's something we've done since the merger and even before. And in part this productivity comes out of just keeping a lid on overhead costs as the business grows. In terms of strong revenue growth, what I've observed is it's easy to kind of take your eye off the ball and let overhead costs grow. And thinking back to the experience Ari and I've had back in our days going back to IMS Health and before that, United Technologies is something that we've always focused on a lot. It's kind of part of our DNA. Let me give you, for instance, I review and approve every finance hire across the globe here in IQVIA, whether it's a new position or a backfill. I approve all of them. My colleagues and other staff functions follow the same practice and across the company, it doesn't make a measurable difference. I would also say we're seeing positive impacts in the real estate area. We've been actively reducing our real estate footprint. COVID, if anything, has demonstrated to us that we don't need as many seats as we thought we did. I think a lot of companies are running into that. So as office space comes up for renewal, we're substantially reducing it. I don't think we're going to see levels of travel and entertainment return to 2019 levels. So those are overhead related, but we're also using more automation within our business. Now initially, the focus of automation was on kind of repetitive rule-based task in processes for corporate functions, including finance, legal and HR. But we're taking it beyond that to operational projects as well. An example of that I might give you is work we've done around safety case processing. We've automated the creation of adverse advance reports that are sent to medical authorities, which saved our medical reviewers a lot of time. Just for this one project, it's actually a 70% improvement in turnaround time and a reduction of about 50 full-time equivalent employees. Now what I find with these automation projects is any one in isolation maybe isn't a big deal. But collectively, if you do across the company, you can get pretty good leverage there. So this would be just a few examples of things we're doing kind of globally to try to get more productivity out of the organization, a lot in the overhead area and increasingly in the operations area.

Ron, that's great. I want to shift gears and hit on a topic that I think has been very relevant for IQVIA since the combination of Quintiles and IMS 5 years ago. You -- since you came in as CFO, you've made a number of improvements on the balance sheet, the cash flow profile has improved. I am interested in your thoughts on the sustainability of these improvements, maybe some of the key drivers? And then big picture, what are your plans for leveraging capital deployment in the 1 to 3 years ahead? What are you thinking? Where do you really want to get? I know you have some long-term metrics out there, but what's your real gut on how this plays out over the next 1 to 3 years in terms of capital deployment?

Okay. Well, let me kind of take those in order. And first starting with cash flow, that's a very high priority for us. In the years right after the merger, our free cash flow suffered somewhat. There are a couple of reasons for that. First, we absorbed a pretty big push from some of our larger customers to extend payment terms, seemingly all at once. We also incurred a fair amount of acquisition or merger-related integration spend, I should say. But honestly, it was more than that. But we frankly kind of took our eye off the ball on cash flow. And maybe the pandemic woke us up a little bit as we prioritized liquidity and refocused on free cash flow generation. And what you've seen since then in terms of improving free cash flow has primarily been the result of better receivables management. That's one of the largest assets on our balance sheet. And talking specifically focusing on collections, not letting current accounts receivable swift past due, working down the large balance we had of overdue receivables, which I think goes back to my comment on taking the eye off the ball. And accelerating billings by negotiating better invoice in terms of customers. That's been really important as well. I'd say the secondary drivers of good free cash flow performance has been capital spending, has been leveling off some now. So as we've grown capital spending as a percentage of revenue has been declining. Just as a reminder, most of what we spend in capital is on software development. And so you've seen the result of all this over the past year or so, and we expect the full year free cash flow to be very strong. Now the one thing I would caution is that some of the benefit we've seen over the last, say, 18 months or so we spent due to the reduction in overdues I mentioned and some COVID-related customer advances, so some of that won't recur. And in a normal year, I think we could expect free cash flow generation maybe 80%, 90% of adjusted net income. Hopefully, when we do even better than that, certainly, I will push to. But in any event, the cash flow is kind of volatile, but you're going to see a substantial and sustained improvement versus where we were in the years following the merger. That regardless of onetimers versus ongoing improvement, there will be a good ongoing improvement. Now one of the benefits we've had in the free cash flow performance, Eric, has been it's helped our liquidity position. You saw we had between our revolver, undrawn revolver and our cash and our balance sheet, it's $3.3 billion is a number that stands in my head for liquidity at the end of June. And of course, the natural question is, that's a lot of liquidity, what are your plans? Well, I think number one, what we would say is, we want to be able to continue to fund capital internally. But that will probably run about 5% of revenue. So no big increase there. Our second big priority is acquisition spend. And when I say that, it's primarily going to be bolt-on acquisitions to enhance our offerings and also expand into adjacencies. We have a good pipeline of opportunities, not anticipating any major sort of M&A of the sorts that we've seen some of our competitors do. Third priority to the extent that we don't have adequate acquisition opportunities is obviously share repurchase, and we'll always do some of that from time to time, that will go up and down depending upon the particular time and where we happen to be in terms of our other priorities. And I guess last on the list in the current interest rate environment is debt reduction. Now having said that, we know that there's a focus on leverage ratios, and we have committed to get our leverage ratio down to between 3.5 and 4 turns exiting 2022. Now, anybody who's followed us knows that we're already there. And so we get the question from time to time, look, are you guys going to do better than that? Are you going to draw down further? And I guess we don't have a lot of inclination to do that right now. We would prefer to reinvest in the business. But it will bounce around some from time to time, that net leverage ratio, but we're still very committed to staying between 3.5 and 4 turns. And look, if the environment changes, if the interest rates rise and so forth, then we can always revisit that. I mean we have a strong cash flow. We could certainly pay down debt quickly. We just don't see a lot of benefit to doing that right now. The last comment I would make is just that when you look at our deployment this year in 2021, I think we said on the last call, we expect over $2 billion -- to spend over $2 billion between M&A and share repurchase this year. And that will be more weighted towards M&A acquisitions and it will be towards share repurchase, just given the opportunities we have. And you already saw one of those, which was buying out our interest in Q2 joint venture from Quest, the 40% interest they had in the second quarter.

That's great, very detailed answer. Maybe since you went there, I'll just jump over to a question on labs. You did buy out the Quest JV. You acquired the Myriad RBM business recently. You've announced plans to expand your lab operations in Scotland. You're also developing a suite of new offerings that you call the lab of the future. I'm hoping you can talk a bit about the breadth of your lab operations, the strategy you have there and maybe some of the benefits of these recent acquisitions.

Yes, for sure. First, I would just revisit and remind people because I think it's relevant to the investment that we're doing that we purchased Quest's 40% interest in our Q2 laboratory -- clinical laboratory joint venture. And then there are really 2 drivers there; one was it is financially attractive, but strategic -- the main strategic rationale is it allowed us to streamline our investment approval process. Having 2 parties to make investment decisions is -- can be a little cumbersome at times because different companies have different investment priorities, and owning 100% of the business is going to give us the opportunity to pursue our growth opportunities in this market, which we estimated about $4.5 billion, that is the clinical laboratory services market. And it's growing mid-single digits, nice business. We've been growing faster than that. So that's -- we've been picking up share there. And look, you already saw the result of that in our recently announced acquisition of Myriad's Rules-Based Medicine business, which enhances our biomarker detection and quantification capabilities. And you also mentioned the investment we've made in Scotland to expand our lab capabilities there. But this is just one thing that we've done there. We've also expanded in China, Asia and North America. And that -- some of it is just volume related, that is to expand the amount of capacity we have to serve our growing needs of our customers. But it's also to enhance our abilities in certain parts of the business. Now what I would say for a start is, look, we already offer a full suite of clinical laboratory services. It's not like we have holds anywhere but there are areas where we're stronger than in other areas and where we'd like to build out some. And in some of the areas we'd like to build out include bioanalytical capabilities. Vaccines would be another area. Genomics and bioinformatics as a service. We're looking to do more in terms of lab integration and logistics capabilities so we can offer. Lab services on more of a decentralized trial basis where that's appropriate to do. Most works still goes to the central lab, but there are instances where it makes sense to do laboratory services on a more decentralized basis. And that takes some work because you have to qualify local labs to be able to do that. But we're investing in all of those areas, and some of it internally, some of it through acquisitions. We look at acquisitions from time to time in that space like Myriad's. And we also have a laboratory of the future program and this is going to have a brand-new laboratory information system. We're going to have more flexibility to do decentralized testing. We're going to simplify sample life cycle and future use testing using technology. So this is just in a number of other things. It's just an effort to upgrade our overall game in the lab space because we consider this to be a really attractive area for investment. And we're free to pursue those investments now that we own 100% of that business.

That's -- thank you for all the details. It's a great answer. So we have about 5 minutes left. I'd like to spend some time on your tech segment. Frankly, there's so much attention paid to Orchestrated Customer Engagement, OCE. I feel like it sometimes gets lost within the broader segment. I'm hoping you can take a minute and step back for people who maybe think that OCE is the end-all be-all of your tech business, and talk a bit more broadly about all of the things you're doing and the size of that business, how it fits into the TAS overall reporting segment, your go-to-market approach with technology more broadly. And if you want to wrap OCE, then that's great. But I think maybe some other businesses in aggregate are larger, but don't get the attention that perhaps they deserve.

Yes. Well, I'm glad you asked that because it's true. OCE is just a piece of our overall tech portfolio, which is just one portion of our overall TAS segment, which is about $5.5 billion or so. And just as a reminder, TAS segment also includes our information business, consulting and analytics services and real-world evidence and -- but anyway, if you look at our technology offerings, they really, on the commercial side cover, really -- of course, we have -- we're developing the whole clinical trial suite of applications on the commercial side because you asked about OCE. We really have a pretty wide array of client offering. That includes information management, performance management suite, compliance and quality software, social media monitoring and, of course, the Orchestrated Customer Engagement or OCE suite of products. And they're all actually very similar in size. So this is just one of many large software offerings that we have. And it's very helpful in going to market with customers because we can offer them a full suite if they're interested or we can offer them pieces. They will work together with one another interoperably, but we can also sell them individually, which some clients, that's the way they want to buy. One thing that I think maybe we don't focus on enough and it's important to mention is that having our data and analytics services is a wraparound or technology applications, it's very helpful. For instance, it allows us to pre-populate -- integrate our applications with our data assets like script data and our physician record database, which we call OneKey. We also have a ton of domain expertise to deliver insights and analytics to clients. At the same time, data is delivered. And this helps a lot in terms of saving customers' time because otherwise, they have to prepopulate all the data in their applications, and then have to deploy analytic resources to use them more efficiently, and we can do a lot of that for them. And that can really speed product launches for instance, in specialty medicine where real time or near real-time data and insights is important because you have to find patients that are difficult to find and know which doctors to go to and so forth. So we really think that the combination of assets we have in the commercial space is our strengthen. And I'm glad you asked the question because I think because we have a large competitor in the OCE space, that tends to get a disproportionate amount of attention, but we're much more than that in the technology space.

That's great. Ron, in the last minute, I'm going to take one from the audience. It does overlap with 1 of my questions, but it was asked a little -- maybe a little more succinctly than I normally do. You talked about areas you want to invest in. You've talked about M&A. Can you tell us what your thinking is on Contract Sales & Medical Solutions? You once considered selling it. There's now a competitor that's been acquired for a high price. Is this a business that remains core to the company?

Well, look, this business is one that -- we made no secret of that. We look to sell some years back. We weren't happy with what was available out there. So we rededicated ourselves to building out the business. It used to be a global business managed as one piece. Now we've broken it up and it has been run in the regions where we can integrate it better with our other commercial offerings, which has been helpful. It's actually turned -- it took a little bit of a hit from COVID, but it's done better this year than we expected it would do. We're -- like any rational business people, we'll always look at offers on any businesses if they make sense. But right now, we view this business as one where it's more likely that this is going to be worth more to us than it is to somebody else. So I would expect it would remain in the portfolio. But you never say never with any of these businesses because it wouldn't be responsible to not consider offers.

Yes. Thank you for that. Unfortunately, we've come across our time line, and I apologize to those who sent in questions. Hopefully, we can cover them later. I do want to introduce the next 4 presenting companies, which will be Maravai, SAB Biotherapeutics, Henry Schein and Mirum Pharmaceuticals. And with that, Ron, I want to thank you. I want to thank IQVIA for joining us. Good luck with the rest of the day, and thanks again.

Yes. Thanks, Eric. And thanks, everyone. Nice meeting you.

Thank you. Bye-bye.