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

Good afternoon, everyone. My name is Luke Sergott. I cover life sciences tools and diagnostics at Barclays. It's my pleasure to introduce, this as not Ron, it's Mike Fedock. He's the Head of FP&A from -- and former CFO of the RDS business at IQVIA; and Nick Childs. Ron was sick today. So Mike's subbing in.

Yes. It was hard to express my dedication to IQVIA to agree upon to South Florida on short notice, but that's the sacrifices I make for Ron and Ari.

All right. That's great. So I guess, as I've been doing with everybody else, let's just dive right into the macro here, go through -- let's start with the Ukraine-Russia invasion. Anything that you're seeing there from a demand perspective, any knock-on effects for trials, things like that?

So for Ukraine and Russia, our revenue is just under 1% of our total company revenue comes from Ukraine and Russia. I will say that we do have a larger proportion of our patient recruitment comes out of Ukraine and Russia, that's closer to like 3% of our global patient enrollment. So there are some disruptions there that we're feeling and working through. So in terms of the financial implications of that, we do expect to see financial implications particularly on the revenue side. We are seeing impacts in the first quarter. Those are mainly timing related. We do expect most of that to get pushed to the right and be able to recover later in the year. Obviously, costs are not dropping as quickly as revenues as we're doing what we can to protect our employees and ensuring that they're well-being and safety is obviously the most important there. But obviously, this is a very, very fluid situation. We continue to assess the impacts of that and are working through exactly what that means. The one knock-on effect and I would say the bigger sort of impact to our financials has really been the changes in FX rates. We're seeing with the dollar strengthening versus quite a few countries -- quite a few currencies across the globe. We are seeing a pretty significant impact versus our previous guidance. So in the first quarter, we're seeing anywhere from a $15 million to $20 million impact versus our previous guidance. If you roll that forward to the full year, it's approaching somewhere near $150 million of impact. So that's something that we are -- obviously, work if we want to just make sure everyone knows that, a much -- very, very little profit impact. This is mainly a top line issue for us in terms of FX as we are pretty well hedged as you work down our P&L. But I wanted to highlight that sort of look in terms of the revenue in terms of that.

All right. And so that's kind of -- that's been an incremental update here from the 4Q is really on the -- you guys are starting to -- the booking side and the actual enrollment. So give us a sense of is it easy to swap around and just increase enrollment at a different site or...

Yes. I think certainly, us and everybody learned a lot from COVID with these types of disruptions. And just to talk specifically, I think from the TAS side of our business, we're not seeing too much of a financial impact or operational disruption thus far from what's happening in Ukraine and Russia. On the RDS side of the house, I think we have 2 very different dynamics going on within Ukraine and Russia, right? In Ukraine, obviously, as you can imagine, the clinical trial recruitment activity has pretty much come to a halt and our teams are working very diligently. I was even on a business continuity executive briefing call the other day where some of our clinical staff were chasing down sort of patients and trying to get the drug product into country. They were doing that from bomb shelters, right? So we are focusing on the patients that are currently enrolled in those trials. In Russia, trials are pretty much continuing sort of normally. But obviously, we have logistical sort of issues to try to get sort of materials in and out of Russia. We have a great and I would argue sort of leading logistics and supply chain group within our lab business, which has been sort of kind of part of this business continuity process to kind of help us out there. And then part of these ongoing studies are global in nature, obviously. So the team is interactively working with sponsors to try to increase subject demands on that study. And it was pretty easy, but it's pretty seamless. For current studies that we're bidding on, we're actually doing a lot in leveraging our AI/ML and enables sort of patient identification and recruitment tools to then sort of provide recommendations to sponsors for kind of new studies that are coming on flight where they need to maybe sort of re-shift some of their priorities. And then obviously, with all these disruptions, this is just further increasing our demand for a decentralized trial sort of capabilities where you have that sort of greater flexibility in your trial design.

Okay. And talk about the change in logistics that you have to make around that, the investment there and any other offsets that you can have elsewhere in the world as a margin pressure, right? Because you're having to do extra investments and the logistics that you're talking about in Russia just gets harder.

It does get harder. I mean from an investment standpoint, obviously, you -- it is a little bit more expensive, particularly in some of the pass-through sides from instead of using sort of kind of bulk courier routes, you have to kind of find sort of local sort of routes to get it in and out of the countries. From our standpoint, from our labor standpoint, we don't see that sort of necessarily providing a margin sort of impact.

Okay. And so from just talking about just getting pushed out and so, obviously, hoping it's a lot more temporary than what it's expected to be. But how could you eventually shift over if this is a prolonged invasion? Could you shift those programs to other regions so that you recapture that 3% basically?

Yes, absolutely. You can think about it, that sort of that revenue stream will draw down in those jurisdictions and pop up and others. And obviously, you have to go through a lot of regulatory and customer-related sort of approvals in order to make that happen. But yes, that's the general dynamic.

Yes. And we've had experience during COVID kind of having intent to do this. And you've seen sites shut down, lockdown and had to be flexible in terms of moving that around. So we do have experience with the operations teams to deliver on trials.

Okay. And then so -- and I guess from the overall service offering, and this is where that whole decentralized trial, the growth in that business and I realize that's going to be longer term, but this is really where that can kind of come into play and help you guys out at least in the near term.

Absolutely.

Yes. All right. Okay. So the -- let's go down the list here on the macro. So we have biotech funding, right, the decrease in the public markets. Private market still seems okay. But at some point, if the public markets are down long enough, the private markets are going to kind of close off. So give us a sense of this $25 billion backlog. So how long would this have to last before you guys actually starting to see it in the numbers?

Yes. So I want to give you a little bit -- I mean, this is obviously -- if it's not the #1 question, it's 1b in terms of what we've been hearing since earnings. Let me give you a little more of an expansive answer and talk a little bit about the funding environment, our exposure to that and then what we do to help manage that exposure. So the first thing I would say is that we do not feel -- we feel like this biopharma funding is a little overblown. We're not seeing any of those impacts so far. The RFP flows that we had in the fourth quarter for EVPs were up 40%. If you roll that forward, usually, we don't give quarter-to-date specifics. But because this is such a big topic, we started to give that. And quarter-to-date, we're up about 15% from an EVP in terms of the RFPs, so we're still continuing to see pretty good growth. It's not really impacting our business at all. One of the things we also did was we look -- we went back and looked at the last time, there was one of these emerging bio funding downturns, so somewhere in the 2015, 2016 range. We looked at Novella, which was a business that Quintiles acquired right before the merger, and it's like kind of the precursor to IQVIA Biotech business. And looking back at that business over that same period of time, that business grew -- had a 15% CAGR over that period for both revenue and bookings. So obviously, it wasn't impacted. Book-to-bills were, I think, north of 1.3 and saw no meaningful increase in cancellation. Historically, it says that this really does not impact them that much. The other thing that I'd point out is a lot of times when you do see this downturn in biotech funding, large pharma becomes a -- is able to come in and help with that funding downturn. So they do M&A activity in order to buy up either those molecules, whatever it is that's being sold. And we saw an uptick in that towards the end of 2021 as we started to see some of these biotechs slowing down. In terms of our exposure, we've talked before that we have a much broader exposure to emerging biopharma. I mean our internal definition of that is customers that are over -- that have less than $500 million of commercial sales and spend less than $200 million on R&D spend. So it's obviously a very broad basket of clients. Those commercial clients really aren't the ones that are at the risk and need to -- and need the outside funding. So we went back and looked at our pre-commercial exposure, so those are clients that don't have any commercial sales. So we went back and looked at our backlog at the end of the year, and it was just about 10% of our backlog comes from pre-commercial. So obviously, very, very small, something that we think is very manageable. So in terms of how do we manage that and how do we limit that risk that we have on the pre-commercial side, the first thing is that we're selective in terms of the customers that we deal with. And we're also very selective in terms of the projects that we take. Most of the projects that we take are I think more later stage, so think Phase III, some Phase II studies that are much further along, less kind of speculative. The other thing we do is we have a very, very rigorous credit process where we go through and vet all of the potential clients and ensure that they've got cash and that they are able to pay for, and we feel that they're able to afford the trials. The last thing I'll highlight is, let's not forget that we have over 45% of our business is on the commercial side, outside of the CRO. And that part of the business has 0 exposure to pre-commercial. So we think this is a very manageable thing for us. We feel -- I feel like we've done a very nice job managing it and definitely feel like this is a bit overblown.

Yes. And the only thing that I would add to that, to your point, is that how long could this potentially continue, right? So we don't see that there's kind of like a penny to drop kind of dynamic here for the large pharma kind of swooping in and buying assets. And the other dynamic I'd like to highlight is that when you work on these molecules, even if they do sort of change hands when the company gets bought, you're really sticky with that molecule, right? An acquiring company would be very reticent to take off the teams who know the science, that know the patients, that know the trials and then move that to somebody else. So we think that for the 45% of our company that is not in kind of in the commercial space that doesn't have this exposure and the dynamics in the CRO side, we feel that we're incredibly diversified and really don't see this as a risk.

I think the point there is that 10% is only on the R&D side of the business, so it's about half of it. So our exposure to that pre-commercial is very, very small when you go to total IQVIA level.

Yes, that was my follow-up, which segment is more exposed. That answered it. Great. That was very helpful. As you're thinking about the variable interest rate environment and you're looking at your balance sheet, is there any interest rate risk there? As they're expected to climb, I think what are house views for hikes?

Yes. I mean, right now, if you look at our -- as of the end of the year, we had about half of our debt is fixed. So when you then include swaps in there, you get up to something about 2/3 will be fixed and when you think about -- we have quite a bit of debt over in Europe, which is right now, it's below the floor. So basically, it's effectively fixed. You get to something close to 80% of our debt is basically fixed at the end of the year. So for us, we don't see this as a big issue for us and something we can manage. In terms of your question on the rate hikes, we have multiple rate hikes baked into our guidance. We feel we've been very prudent with that. We don't see any major risk. But obviously, it's very uncertain in terms of the number, the size, how often, what might get done or the timing of it. Obviously, it's so variable out there that we'll have to manage as we go through. I think everyone agrees something is coming, the question is just how much and we'll have to be flexible with that and update our forecast as we go.

All right. So turning to the underlying business. TAS has been -- used to be the fastest growing, and now RDS is growing, outpacing it. And we're seeing commercial starting to come back and -- across the CROs, and that's really accelerating. Give us a sense as to how much TAS and those -- and a lot of those applications are driving extra RDS business and really making the acceleration there, fueling the whole system, if you will.

I think there's a couple of dimensions there, particularly in the real world side of the business, using the data that we have. And one of our biggest, I think, competitive advantages we have is over 1 billion sort of patient lives that we have. And it's not just the size of the patient lives, right? It's the globality of it, which gave the legacy Quintiles side, the RDS sort of business, unrivaled sort of power to go out and embed that in its operations. And there's a lot of other competitors out there that say that they have some data. They do, but not nearly sort of the breadth and depth that we do. And I think -- what was it, Nick, I think since the creation of the merger, that data that we got from the IMS side of the house allowed us to break into, I think, sort of 5 or so previous accounts that the legacy Quintiles business was unable to penetrate. And it really was from sort of the secret sauce that we have from kind of marrying the data with the clinical side of the house. It's very powerful.

Yes. Okay. And then on the TAS business growth itself, what's really -- I mean, because you have the data lake as essentially just a cash cow, right? I mean it's not a growing business, but it throws off a lot of cash, fuels the innovation for the rest of the business. When -- as you continue to develop those tech-enabled services in the real world, like when can we expect that to really overtake and offset the dilution from the data lake?

I guess I would describe it a little bit. I would say that business is already growing high-single digits. It's been consistently there. I mean around the merger time, it was kind of a low- to mid-single-digit grower. It's increased up. Now we're talking about high single digits. So I mean, I think that business has done very nicely, especially when you consider, like you said on the data side, which is about 30%, a little less than 1/3 of our business, really is a flat to, at best, the low single-digit grower every year. So the way that we think about that business is, obviously, you have the data piece, which is about 30% below grower, high-margin gold standard in the industry. The next part is we think about as kind of our high-growth businesses, which are both the real world and the TAS businesses, which are both growing double digits. That's about, let's call it, 40% to 45% of our business. So it's become a much bigger component, obviously, as it's grown since the merger. And over the last couple of years, it's become a real nice piece of our overall business. The third piece is the analytics and consulting business, which -- it's similar to kind of the overall TAS business, just kind of started in that mid-single-digit grower. It has really picked up. Now it has been sometimes north of double-digit growth in that business. So it's really in the capabilities on the analytics side and the consulting side that are really coming through. We're seeing a lot of demand come back in. So we feel like that's a good part of what that business is going to grow and how we'll continue to see that moving forward.

Okay. So turning to the margins. We talked a lot about the RDS margins and wage inflation. But can you talk more about the dynamics around the market profiles of TAS and CSMS? CSMS is always like the last talked about. But especially how to think about those in an inflationary environment, kind of how that factors into ultimately your long term, your [ LRP ] as well.

Sure. When you think about in sort of an inflationary environment, the biggest impact that we see are both on the real world side and then on the analytics and consulting. It's much more labor based. So therefore, they feel more of that inflationary pressure. We've done a really nice job in that business continuing to drive margins, look at productivity. We've also looked at the value pricing side of things, making sure we're pricing the value and ensuring we're getting the value out of that business. So we've made some nice improvements in that business in terms of moving forward. The data business, pretty [ all insulin ]. There's not a lot of headcount associated with that. We continue to drive productivity and look at ways to do things efficiently. The tech side, also impacted a little bit now just in terms of the amount of implementations that we have underway, rolling out some of our tech platform. So that is definitely impacted by some of this wage inflation that we're seeing. But I mean, as you think about it going forward in our 20by25 target, we're not counting on a lot of margin expansion in there. It's 20 to 30 basis points at a total company level. And a lot of that is just -- we feel that there's a lot of opportunity out there for the top line, and we want to continue to invest. We're going to continue to invest in part of growth and continue to drive the productivity mindset that we have. Ron and Ari drive that extremely hard and really always looking for opportunities to find ways to drive productivity. So we think we're going to continue that same moniker of really high top line growth, continue to grow margins. And I think that will drive shareholder return along it.

All right. And so if you're thinking about how the quarter has paced out, does that really come in line with ultimately your expectations and from your guidance for the year? Is that -- you're on track for that?

Yes. I would say -- yes, I mean, we don't see any major issues right now. Obviously, FX is a piece of it. First quarter, we're seeing some out. We're definitely seeing some impacts from Ukraine. We're definitely seeing some impacts on the FX side of things. We've traditionally been towards the higher end of our ranges. I'm not sure exactly where it will come out. But there's definitely a lot more pressure this quarter in terms of our range than potentially we had in previous quarters.

And I would just say that, obviously, we're dealing with a lot of sort of very fluid sort of dynamics here. Everything seems to change sort of by the day there. But I think the fundamentals in the business remain strong, and I think largely what we're seeing is just timing choppiness, if anything.

Okay. So when you're thinking longer-term margins here, is there an -- just on that actual sort of commercial strategy from TAS itself, is there an opportunity to convert some of this business into ultimately like a SaaS-based business?

Yes. I think there's a lot of opportunity. I mean, obviously, on the tech side as the more and more implementations that we get in, the more of our revenue turn to more of a SaaS-like licensing revenue model. I mean it's a little bit less probably on the real-world and analytics side. If you have a project base, there's going to be the many ways to do that. But that is part of the thesis on our margins that we will be able to implement on the tech side and be able to move more towards that SaaS-like revenue model.

Okay. And -- but that's still very nascent, yes? You still haven't started to convert that 30% of the [ business ]?

That's correct. We just know it takes a lot of time to continue to implement that.

What do you think needs to happen from the sponsor side to really make that -- make them start to adopt that?

Go ahead.

No. I mean I would say, I think they are. It just takes time in order to move forward. And what we've seen is that clients and sponsors are a little hesitant to go do one large infrastructure change. They'd rather do pieces of it. What we've seen is our land-and-expand model has definitely worked where we've been able to come and implement certain pieces of our tech platform, performance management, OCE, one of those things in order to get us into that customer. And then we start talking more and more about the problems that they have, which leads to more issues, which leads to other things that they're doing. And then we can then start to show more and more of the products that we have, which then leads to further adoption.

Yes. And just to add a little dimension to that, not all customer buying behaviors are the same. So what's been really interesting is that to what Nick described as large pharma coming in and being reticent to kind of do these sort of massive sort of platforms and overhauls, but emerging biopharma has a much different sort of kind of buying behaviors, right? They are more apt to buy multiple sort of modules and want that foundation there. So we feel that we're in a really good position to kind of hunt those sort of big elephants out there but also sort of be very, very aggressive in sort of the smaller deals like on the emerging biopharma side, which would then obviously gain momentum over time.

Yes. That was a big part of the strategy when our guys came on and [ started ] elephant hunting and to expand it.

Yes. Absolutely.

Absolutely.

All right. And so I guess from a market -- I have a couple of market question here. You've always been growing 4% to 6%. And the simplified sell-side model build, that was a large-scale [ farm-out ], gives you 200 to 250 basis points. You're getting another 200, 250 from biotech and then you guys are getting another 100 basis points of share, something around there. Is that model still or is that still construct still relevant right now in a normalized environment? I understand COVID had added probably 400 to 500 to the total market. But like how are you guys thinking about the overall market growth?

Look, we're still seeing around sort of in that kind of core CRO market about a 6% sort of growth. I think what also has been very interesting is really 2 things. One is I think that the COVID disruption has really put a premium on the types of global capabilities and scale that companies like IQVIA have. So clearly, we feel that we've been taking share from the small and sort of mid-sized sort of CROs. And then also, our customers' sort of buying behaviors have changed in some cases where a lot of customers tend to want full-service outsourced clinical trials. Now they're kind of going, well, maybe I want some full service, but I also actually want to use some of your clinical like FSP sort of offerings and even some of your data management functional service providers to try to augment, so we're actually seeing more hybrid solutions, which makes it, I think, a lot more faster for clients to all of a sudden look at their own internal capabilities and go, it's easy to draw down on one side and sort of spin off on our side from an FSP model. So we don't see the fundamental growth in outsourcing penetration kind of like busting out of that 6%, but it's actually been really sort of engaging. Interesting to see how large pharma has engaged us a bit differently and how big some of these emerging biopharmas come that need a completely different sort of more high touch to their delivery model. And I think that's really met the sweet spot for IQVIA Biotech and some of other sort of kind of customized delivery profiles for that market segment. So we think we're in a good spot.

Awesome. Great. Fantastic. That's all the time we have. I really appreciate the time.

Thank you.

Thanks for having us. Appreciate it. Thank you.