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

Great. Well, thank you all for joining us here at the Citi Healthcare Conference. I'm Patrick Donnelly. I cover the tools, diagnostics and CROs here at Citi. Happy to have the IQVIA team with us, its CFO and the IR team. And Ron, thanks so much for being with us.

Maybe to start, not surprisingly, on this topic, the biotech funding world has been in very much focus over the past couple of weeks. So can you maybe give us a sense to your exposure to that pre-commercial biotech funding world? Are you seeing any impact or slowdown to your business? And then just remind us, I mean how about the EBP definition, what that means in terms of revenue, R&D spend. And how that compares to maybe one of your peers who put out that kind of down 25% in January commentary and kind of spooked the market a little bit? It would be great to dive into that to start.

Sure. Look, thanks, Patrick, and happy to be here. And look, as you can imagine, we received quite a few questions on the whole biotech funding issue since our earnings release as that's become very topical. So I want to try to answer your question as comprehensively as I possibly can and anticipate some of the questions that you might have, follow-up questions. And I'm going to break my response into 3 general areas. First, I want to talk about the overall EBP funding environment. And then I want to talk about what we've seen in our business, our exposure to the EBP sector in general. And then I'm going to talk a little bit about how we manage the risk that we have. But the first comment I would make, as a general comment is, I think the whole concern about EBP funding is overblown. While we have seen some recent slowdown in aspects of that funding, like the IPO levels among biotechs, funding is at a historically high level. If we look at BioWorld, which is a source of data we use, and I think a lot of the analysts use. In 2020 the total external and private funding of emerging biopharma companies was $134 billion, which is up 250% versus the average of the prior 5 years. In 2021, it was down to $118 billion, making that the second highest year. So you had a very strong surge in funding, and the EBPs are very well funded as a result of that. The second point I'm going to make, and it's really a more important point, is that we haven't seen any slowdown in our business -- excuse me, is up over 40%. That was through 2021, and we've seen that continue into the first quarter, quarter-to-date. The third point I would make around this is that even when historically, we have seen some slowdown in funding in the industry, it really hasn't affected us. We went back and we looked at the 2015, 2016 time frame when you had a dip in funding and looked at what that did to Novella, which is the predecessor company that we purchased that's now IQVIA Biotech. And what we saw was that over the 3 years following that dip, our net new business and revenue grew at an annual rate of 15%. And our book-to-bill over that same 3-year period was over 1.3, and we didn't see any significant cancellations. So historically, if you can go back to 2008, 2009, there was a similar sort of situation. So historically, we haven't seen these ups and downs in funding have a major effect on our business. The final point I would make is that what we've observed is the phenomena is when part of the funding environment dries up, let's take IPOs for instance. Large pharma will often swoop in and buy up these companies and these compounds, and they need these to fill in their pipeline. And the valuations get better because the external funding isn't there, we've seen quite a bit of activity. And in fact, last year, we saw a 30% increase in M&A exit for biopharma companies versus 2020. Now let me get more directly to the question you had about our exposure. And the first thing I would say is that on the call, we referenced a number of -- about 35% of our bookings coming from emerging biopharma. And that was an average over the 2021 period. And what we also said on the call, and I want to repeat here, is that we use a broader definition of emerging biopharma than a lot of people do. We define these companies to be companies with less than $500 million of revenue in a year and less than $200 million in annual R&D spend. So that's obviously a very broad cross-section of small pharma clients that includes a lot of clients with commercially viable products who are in a position to fund their own research, not just pre-commercial companies. But to your specific question about pre-commercial clients RFP flow, over the 2021 period, it's just about -- just below 10% of the total RFP flow was with pre-commercial clients, EBP clients. And by that, I mean clients who don't actually have revenues. In our backlog at the end of December 2021 is just over 10%. So 10%, give or take, is our exposure to that segment. So it's a small part of our business. And, of course, let's not forget that unlike other CROs, we have a very large commercial business, about 45% of our total revenues. And that's quite far removed from any concern about EBP funding. So okay, that -- those are 2 really important points. But I also want to make a point about how we manage this risk, and I'll complete my answer with that. And pre-commercial to us doesn't mean high risk. We're the leader in the CRO industry, of course, and we can be more selective with the clients we take on. In fact, we often will turn down clients that we think there's high risk there. And we typically are looking at clients who are either Phase II or Phase III, a little later stage, have established molecules, have good funding or good access to funding. But we still do a very thorough credit check. We look at their historical performance with IQVIA, capacity to pay including how much cash they have, how much is unrestricted, burn rates, things of that nature, other financial data, contract duration. We look at a whole variety of different items. And I guess the proof is in the pudding there. Our cancellation rates have been very low historically with these clients, actually much higher cancellation rates in mid- and large-sized pharma. And I think that's in part because in the bigger companies, they sometimes think that they're taking into a trial or whatever. But in the emerging biopharma, we have 1 or 2 compounds they generally are pretty committed to going through with the research work. And so we haven't seen much in cancellations, and we've seen almost nothing in bad debt either. So I guess back to my original point, I think this whole EBP funding concern is way overblown. We're not concerned about it. We haven't seen an issue in our business. And hopefully, the stats I just gave you help, kind of, flesh that out a little bit more.

No, that was a very comprehensive answer. There's some great numbers in there, I appreciate it. You did definitely hit a few follow-ups, so I appreciate that proactively. And I guess in that 10% number, which, again, to your point, is only a part of the business, have the conversations changed at all? It certainly doesn't seem that way. And you guys seem pretty confident even in that small piece of the business, that this funding environment isn't going to change anything there. But have the conversations changed at all with that client base?

No. No, they really haven't. Look, you see in the flow we're getting the people are still very anxious to go forward with their compounds. They are well funded, these companies, and they haven't changed at all. Look, there's a lot of demand for what EBP is working on. You're talking about oncology, neurology, cell and gene therapy, rare diseases, things where there's a lot of demand right now in the industry. And yes -- no, they're excited about their portfolios and their molecules and are pushing forward. So no, we haven't seen any change in our conversations with clients, really at all.

Okay. That's great. Again, that was some great information. I appreciate it. Maybe to bounce around a little bit. I mean considering some of the comments made by another CRO peer last week, biotech funding is not the only thing that we're seeing out there. Are you seeing a change on the pass-through dynamic for you guys due to DCT? Are you expecting, or should we expect you have to do any backlog adjustments related to that? Obviously, you saw a pretty big number last week related to that. So I just wanted to make sure we talked to that a little bit.

Yes. No, we saw some of that commentary as well, and the short answer is no. We're not seeing any noticeable impact or pass-through costs due to decentralized clinical trials, and we don't anticipate having to make any backlog adjustments associated with that. And look, I'd make a few comments to kind of put this in context. Over 90% of the pass-through costs are for reimbursement to investigators for patient visits, medical procedures that need to be performed as part of the trial, lab work, radiology and so forth. These visits and procedures are going to continue and aren't really materially affected by decentralized trials. When you look at decentralized trials, really the driver of decentralized trials has a lot less to do with reducing costs than it does with other factors. And in particular, what decentralized trial's big advantage there is they help patient recruitment and retention. Because they reduce the burden on the patients to get to sites and make them more likely to enroll. It's amazing step. But for the average patient, you're talking about going maybe 50, 60 miles one way to an investigator site. And that's obviously a big deterrent to participating in trials, particularly in very remote areas. And if you want to get a very representative sample of the U.S. population, you don't want to just be in big urban areas. You also want to be able to have good diversity in trials. This has been an issue. It was an issue during COVID where we've made great strides in improving diversity in the trials, and decentralized trials help with that as well. Now we have gotten some specific questions about, well, yes, don't decentralize trials, reduce your clinical research associate, CRA monitoring visits, because you can do more remotely now. And yes, I mean to an extent they do because if you can monitor data remotely, your CRAs have to visit the sites less often. Now that doesn't mean they don't have to visit them at all. There's still regulatory requirements to verify source documentation online. And I guess to put this in perspective, travel costs for clinical trial associates, our clinical research associates, which are the pass-through portion of what they do, we estimate about 5% of total pass-through costs. So even if you were to move that to 0, it wouldn't have a significant effect on pass-through and you're not going to 0. And offsetting this, is that you actually can see sometimes increases in other costs. For instance, when you're shipping in bulk like lab samples from large investigator sites, that's cheaper than shipping lab samples from people's homes. So what we're seeing is really no significant reduction in pass-through costs at all. So honestly, we don't understand the comment from our competitor on that. It doesn't make sense in light of how decentralized trials work and what we're seeing right now. I don't know how to say it other than that.

No, that's helpful. Yes, it's just certainly worth talking through given the amount of noise out there. And maybe staying in R&DS and we'll obviously get to TAS in a little bit. But obviously, at the Analyst Day, you gave some great data in terms of how you're seeing sustained demand in this segment. You're really growing the market quite a bit over the next few years. Can you just talk through where you're seeing the most demand kind of breaking down the market a little bit? Oncology-related trials, therapeutic work has obviously been a big one for you, epidemiology. Can you just talk through, I guess, where you guys are seeing the most demand and where you expect that to trend over the next few years?

Yes. Yes, you're right. I think you hit on some of the areas. There's obviously the -- we've seen some demand in the infectious disease area that spiked up as a result of COVID. We would expect that to come back down some, but still be an area for work in the future because, obviously, the attention on virology and so forth and vaccines and all, it's not going to go away altogether. But otherwise, in the more traditional therapeutic areas, you hit on it. It's oncology, it's neurology, it's cell and gene therapy. These are really complex therapeutic areas and they tend to be -- one of the reasons you've seen this surge in the importance of emerging biopharma, because they tended to focus on these areas. And they tend to be smaller trials, harder to locate patients, more difficult trials in certain ways and -- because they're rare diseases or orphan diseases or whatever. And that's actually very well suited to our business because of some of the differentiated capabilities we have. I mean we have unparalleled access to data, as you know, and we can find patients and investigators more easily than other people can. We can also help pharma with the protocol design on trials, which is really important because there's typically a wide variety of inclusion, exclusion criteria in the protocol. And 1 or 2 that are -- maybe look innocuous can actually knock out a lot of patients from your clinical trial, and we have the ability to go in and say, "No, look, if you try to design the protocol this way, you're going to reduce your patient population to a sample that's too small. But if you change this or that element of your protocol design, then you can get a broader patient population." And maybe for a cardiovascular trial where you're going after tens of thousands of patients, not a big deal or the vaccine trials. But for these rare diseases, that sort of thing can be a very big deal. So we think we're really well positioned to take advantage of that growth -- the growth in these areas. And that's what we reflected at our Analyst Meeting where we said, "look, this is where we see a lot of growth coming in our ability to take share and grow faster than the industry." And our clinical trial business is in part because of our ability to do so well in these areas where all the emphasis is right now.

Okay, And then maybe one question just on the bookings side. I mean, we've heard from some that bookings are going farther and farther out, which is a great sign for demand. Obviously, you guys have talked about the backlog being quite significant. So are you seeing more activity kind of booked further out from clients just trying to grab some of the capacity that's out there. Maybe just talk a little bit about what you're seeing on the bookings front from that point.

I think I'm not sure that I've seen that actual phenomenon. But what we have seen is that some of the trials, because of the complexity of the trials may be a little bit slower to start than they would be otherwise that it's a little bit more difficult to locate patients, locate sites and so forth. And that's why our data becomes so important, because the more complex the trial that it is, obviously, the harder it is to get started and so forth. So there's maybe been a somewhat of a shift towards more complex, as I was talking about. Trials in rare disease area and orphan drugs, which presents additional complexity in finding patients and investigators and starting up and so forth. But I wouldn't -- I don't know that internally, I've seen any evidence, and maybe I'm just missing it, that people are booking further out on trials right now. We haven't heard that at all, no.

Okay. And then maybe, Ron, we can touch a little bit on the COVID piece. I think you guys did a nice job offering transparency at the Analyst Day in terms of that $1 billion step-down in '22 of COVID-related revenue, it's obviously offset. And then some by the base business growth of, I think, a couple of billion. Can you just talk about -- has any of that changed? Obviously, the world changed a little bit since the Analyst Day with Omicron. And the latest outbreak, first half comps, obviously tougher from the revenue side, but the margin piece, maybe not so much. So how do we think about now with the second half given what happened in 4Q, that $1 billion step down? Is that still the right area to think about? Maybe if you could just talk to that a bit.

Yes, yes. No, there hasn't been any fundamental change there. I mean Omicron obviously had some impact on everybody, but fortunately, it's proven to be a relatively brief impact, interruption of big spike and a big drop-off. But no, fundamentally, the guidance we gave just as a reminder, was we said that look, in 2022 versus 2021, we're going to lose about $1 billion of COVID-related revenues. That is our COVID-related revenues are going to drop by about $1 billion year-over-year, which sounds alarming until you realize that we're looking for our traditional therapeutic areas to be up over $2 billion year-over-year in revenue. And so the net of those is we're still going to have very solid growth. And that really hasn't changed. Now you identified there is some calendarization that we have to take into account. Our strongest COVID revenues last year were in the first and second quarter, and then it dropped off thereafter. So our toughest compares are going to be in the first and second quarter. You saw that in the guidance we gave for the first quarter. But what we tried to do is give a very complete guidance around how our business look -- or looks ex-COVID, organic, constant currency in our base business. And you see the numbers continue to be very strong there. So COVID causes some noise in the reported numbers year-over-year. And there is some kind of first half, second half phenomena where the comparisons are tougher in the first half and get easier in the second half. But the underlying business remains quite strong. I think we said for Q1, it's mid-teens revenue growth, right, Nick? And that is the underlying organic base business ex-COVID for both years. And for the full year, low to mid-teens growth overall. And very strong growth, continued upper single-digit base business growth in TAS. And then for R&DS upper teens growth for the full year in the base business.

Yes. No, really healthy numbers for sure. I guess maybe just one more on COVID. How do you think about the durability of some of that COVID-related work? I mean it's one of the questions we get a lot from investors. Obviously, you guys have some exposure in areas like real world that maybe should last a little longer than some of the really short-term stuff. I guess can you just talk about client conversations? Have there been expressions of interest in kind of some of this being, I don't want to say permanent, but lasting a few years rather than kind of falling off this feared cliff, you have the $1 billion step-down now. How do we think about that just going forward at a high level?

Look, we continue to have conversations with clients around work -- COVID-related work going forward. Certainly, nothing like at the level that we had 1 year ago and even 1.5 years ago when the pandemic was at its -- was really worrying and people were looking for vaccine solutions. And there's always some shifting of the work, too. I mean, we've had some vaccine work that we anticipated that didn't come through, and then you have new work where sponsors will add work. I think what you're going to see going forward is there will be some continued work around vaccines. There will be continued work around antivirals. Whether we call those COVID related or some of them will be more general, just rebated to infectious diseases and virology, that will continue. But it doesn't change our view that over the course of 2022, we're going to see COVID work gradually step down. It will continue through 2023, again, stepping down or ramping down at a reduced pace, and we'll see after that. Now -- okay, nobody has a crystal ball. We've all been surprised by the pandemic on multiple occasions, so that could change. And certainly, we're ready if there's a spike in demand for new work to step in and do additional work. But our latest view is pretty much what we've given you in our guidance that the COVID work is going to step down by about $1 billion this year and be more than displaced by work in other therapeutic areas. And if and when that changes, then we'll certainly update you in our guidance.

Okay, sounds good. And then maybe jumping over to TAS. I know you talked about high single-digit growth. We touched on it a little bit ago for '22. Can you just talk about the market for real-world solutions, competitive landscape there? Just the general outlook would be a helpful starting point.

Sure. Look, the real-world market is a great market. It's a huge, huge market. It's highly -- I mean, by some estimates, $60 billion depending on how you define it. It's -- obviously, with that kind of market size, even if it's half that size, it's highly fragmented. There are many players in the market doing different things. We feel very good about our position in that market and ability to continue capturing double-digit growth -- strong double-digit growth in share. And what's the reason for that? Even though everybody is getting into that market and everybody claims that they have solutions, let me just kind of recap some of the areas where we think we have what are particularly differentiated capabilities. The first is we have a unique ability to be able to offer both the power we have of our longitudinal data records, which cover 1.2 billion non-identified patient lives across the world over an extended period of time. So what I mean by longitudinal, we have that to be able to provide statistical analysis for real world, which are very robust. But we also have the ability to do Phase IV trials, so you can get the richness you have of those kind of trial data. So you have -- you can combine the statistical relevance of going back and coming through large databases with the richness you get out of the clinician interactions with patients in Phase IV trials. And you can do what are known as mixed-use studies that pharma is increasingly asking for when it comes to real-world data. And I'd make a couple of points about our data. First is about the breadth. I mean, we populate our database from over 150,000 data suppliers that we brought together over decades. I mean we're not just talking in the last year, we do decades, and it covers over 1 million data feeds. It comes from pharmacy data, claims data, electronic medical records, lab, genomics, social media, all other sources of data. And this data is global. I mean we have a lot of competitors who have a niche, a particular niche of data in one therapeutic area like oncology and it's U.S. only. We cover multiple therapeutic areas from multiple sources of data and it's global data, which is really important. Another thing we have that's relatively new is our e-clinical outcomes assessment, eCOA software. We've won awards for this. It's a software solution that allows patients like to report outcomes electronically. And we've deployed it at all top 10 pharma companies and in 18 of the top 20. So that's very important to real-world evidence data collection. And finally, I would make the point that we had -- we've made a lot of innovations in the use of our real-world data. One example would be designing secondary control arms that are essentially data-driven placebo group, so you don't have to construct an actual placebo group of patients to do a study. And we also have a lot of studies incorporating both primary and secondary health care data. So yes, the real-world market, we expect to grow double digit. We expect to continue to gain share in that market, and we feel very good about our positioning. And we're not stopping at 1.2 billion patient lives. We continue to add new sources of data and new patient lives to our records virtually every day.

That's great, I appreciate that. And maybe one just on kind of the margin side, another question we get a lot is just, obviously, there's wage inflation, retention, recruiting, all the costs that go into that. Can you just talk about when you put out your, I guess, '22 and then also the long-term guide out to '25, how much you contemplated that? Are you seeing any changes, whether it's retention, net churn, the turnover? Is the worst behind us? Maybe talk through what you're seeing in the field there.

Yes. And look, it's been a topic of conversation in the industry and, frankly, across the economy now. For the better part of the year, we saw inflation spike up, a tight labor market, which isn't unique to our business, but in elements of our business like the clinical trial business. Because of the strength of the overall industry, there's been even a little bit more pressure than maybe in certain other elements of the economy. Certainly, we saw a spike up in Nutrition last year. We had to make some wage adjustments for the really high demand areas that was in it to us. I think everybody was in both with that. And obviously, as we go out to recruit for the growth that we have in our business, we have to pay market wages, which are higher than what they were before. Now that's all fully anticipated in our 2022 guidance. And when we look out to our '20 by '25 guidance, we made some assumptions there. Nobody has a crystal ball what's going to happen on inflation, but we feel comfortable with where we are in margins. And let me tell you why it's important, because we do have the ability to make pricing adjustments. The 45% of our business that I referenced, which is commercial, tends to be a shorter cycle business, and you can make adjustments relatively quickly there, and we are. Now the longer price cycle part of our business, which is the clinical trial or R&DS part of our business. Yes, we do have a big backlog. There are a couple of things going on there. First off, we adjust rate cards to reflect the reality. So as we bid on new contracts, we're putting in more current rates. But look, everybody -- when you're signing a 4-year contract or 5-year contract, because nobody has a crystal ball, you anticipate that there could be spikes in wage rates or inflation and so forth. So we bake into our contracts, pricing adjustments that are based on labor inflation and indoor MSAs, and we go back and work with our sponsors to recover cost increases. Can you recover 100%? Probably not. But you can recover a lot of it. And at the same time, we're always looking to take cost out. This is just part of our DNA as a company. We're always doing restructuring. We look at automation as a way to reduce labor costs. I would also say that we and others have gotten some benefit and cost from the pandemic. We brought real estate costs down significantly. Travel and entertainment costs have come down significantly. So there have been some inflationary pressures that we didn't anticipate coming into COVID, but remember there's some bits of cost offsets as well. So the long and the short of it is, yes, it's a challenge for our business and other people's business and particularly the attrition where you need to go out and replace people you've lost. But we're working through it and it's factored into our guidance and our outlook, and it's not a huge concern.

Okay. That's helpful. And maybe the last one, just on the margin side, just the COVID impact on margins. Can you just remind us, obviously with the pass-through impact, I know it wasn't the most profitable business. The revenue comes down, but maybe the margin holds in as COVID fades, maybe just talk through that impact on the margin side.

Yes. Yes. And I would say, on average, our COVID-related business was at lower margins than the rest of the business. Some of that because of some of the work we did on the TAS side, governments and information collection and monitoring and so forth with naturally lower margin business. Some of it is -- we just weren't pushing as hard on margins on the COVID work. Everybody is kind of trying to contribute to helping solve the crisis globally. So as that work burns off, there is a bit of a positive mix impact that we get out of that work burning off. And you can see that in our guidance for this year, we're anticipating some decent margin expansion. I think if you take the midpoint of our guidance, it's a little bit under 100 basis points of margin expansion there. And then we put out some implied margin guidance from our -- in our '20 by '25 plan, and it's not annually as strong as that. I want to say, if you did the math on it, it comes to 20 to 30 basis points of margin expansion per year. On average, in the years '23 through '25, but that's on top of very strong revenue growth, which I would remind you is 10% to 12% revenue growth that we're projecting in our '20 by '25 plan, including about 200 basis points of acquisitions in that number. So you're talking about 8% to 10% organic growth across the business. So very strong organic growth, margin expansion on top of that, double-digit profit margin expansion. It all comes together, I think, to make for a solid outlook, maybe more than solid outlook going through 2025.

Yes, absolutely. And then maybe on capital deployment. I know we only have a few minutes left, but maybe touching on that, I know on the last earnings call, you talked about internal investments, acquisitions, share repos as priorities. Maybe in terms of '22, what are your areas of focus? Obviously, we've heard from a few companies your share repurchases maybe are inching up, given what's happening in the market, to your point, fundamentals and sentiment are maybe a little dislocated. But would love your perspective on capital allocation priorities this year and even beyond.

Sure. Well, look, the first thing we always do is make sure we're doing -- funding our internal investments as they need to be. And we've spent a lot on software development because it's a growth area for us. And also on our internal data architecture, which is always important to our business. But that should be 5% or less of our revenue, and that's not going to vary greatly over time. In fact, it might even come down a little bit as our revenue continues to grow as a percentage of revenue anyway. So I think what you're really asking is what do we do with our free cash flow, which, of course, is after capital expenditures. And our first priority has typically been for acquisitions, because acquisitions help us build our capabilities, fill in holes we have in our portfolio and provide the basis for growth in the future. And that's really what we're about. It's growing that top -- continuing to grow that top line. But acquisitions are dependent on what opportunities are out there, what the pricing is like, what competition there is for properties. So they're always very difficult to predict. When we gave our '20 by '25 guidance, we said with the earnings growth we see, with the cash flow we're going to generate, we anticipate having room to do $2 billion to $3 billion of total capital deployment, and that's acquisitions and share repurchase. And I'll go to share repurchase, because that's typically been second on our list, which is to say, if we have money left over from acquisitions, which we typically do, we'll spend that money to return it to shareholders via share repurchase. And we've always been very comfortable with the price we've been repurchasing at. It's been a good investment for us. Now that said, I say acquisitions first, share repurchase, second. Now put debt reduction third. We are not oblivious to where our stock is trading at a point in time. And it's been weak lately. We thought that the whole sell-off related to the biotech funding issue was totally unjustified. And so when our stock is trading at an attractive level, like it is now, we'll be more aggressive about share repurchase than we would be otherwise. So it's kind of a balancing act. You look at what are your opportunities and acquisitions, what's your opportunity in share repurchase and you allocate between the two. Debt reduction, as I mentioned, is at the bottom of the priority list where rates are now, which even with the talk of rate increases is still at historically low level. Of course, if there was a big change there, we could always reevaluate our position. We made a commitment for our leverage ratio, that is net leverage divided by trailing 12-month EBITDA to exit 2022 between 3.5 and 4x. You saw we got there more than a year early. Now I would just say that doesn't mean we're necessarily going to continue to drive that down. What it means is that we just have more money to be able to redeploy on acquisitions and share repurchase a little earlier than we would otherwise, and that's what we'll likely do.

Perfect. I think we'll leave it there, Ron. This was really helpful, some great data for us to run through. So really appreciate the time, and I'm sure we'll talk soon. Thank you so much.

Right. Thanks for hosting us, Patrick.

Thanks, Patrick.

Thanks. Take care.