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

Hey, everyone. Thanks for joining us. My name is Tejas Savant, and I'm the life science tools and diagnostics analyst at Morgan Stanley. It's my pleasure to host IQVIA this morning. And representing the company, we have Ron Bruehlman, CFO. So thanks, Ron, for doing this.

You're very welcome.

Before we get started, a quick disclaimer statement, please go to morganstanley.com/researchdisclosures. And if you have any questions, do reach out to your sales rep.

So perhaps, Ron, just to kick things off, can you just outline what you view as IQVIA's key accomplishments this year? And what are you most excited about as you look to 2023?

Well, look, I think when we are in the '21, '22 time frame -- or excuse me, '20, '21 time frame of COVID and we started picking up a lot of COVID-related work, everybody was very concerned that we were going to see -- are we going to be facing a COVID cliff? And in fact, this year, we have seen COVID-related revenues drop by close to $1 billion year-over-year. But what we said to everyone at the time was, look, we see strong underlying demand in the industry. We expect to see a bounce back in orders and activity and other therapeutic classes, and this will more than offset the decline in COVID and that, in fact, is exactly what's happened. So we've had growth, despite COVID, revenue growth despite that and a significant FX headwind. And I consider that to be a real accomplishment because we sailed right through it, and our underlying growth has been very strong. In fact, if you look ex COVID, organic growth, constant currency, it's been in the low to mid-teens, very strong in our R&DS business close to 10% or so in our tech and analytics solutions business. And a little bit less, of course, in CSMS, which is a slower growing business. So I'd say that's one of the accomplishments that I've been happy about this year, among others, I mean, just the fact that we've been able to maintain that strong momentum.

Got it. Switching to R&D Solutions, you clearly had very strong backlog growth there. Some of your peers, particularly those with exposure to discovery work or perhaps biotech, I've talked about customer decision time lines getting prolonged a little bit. Have you seen any sort of translation of this impact in terms of your clinical stage customers? Any sort of headwinds in either RFPs or bookings?

No. The short answer to that is no, absolutely not. We see continued strong double-digit growth in RFP volume across both large commercial and EBP. Our pipeline remains very strong. We see double-digit growth there. We have seen absolutely no slowdown whatsoever.

Got it. In terms of the Inflation Reduction Act and that weighing on drug pricing over the medium term, any early indications of customers beginning to reprioritize their clinical pipeline?

No, not yet. But let's face it, it's early. There are customers who are still trying to figure out what exactly this means for them. Are there certain details that haven't been worked out around the legislation? Some of the more important provisions don't kick in until later in the decade. What we are seeing, though, from our clients is a lot of interest in us helping them analyze what's going on. We're in a very unique position given the amount of data that we have, our analytic capabilities to be able to help our large customers and smaller customers, for that matter, sort through what the implications are and run various modeling scenarios and so forth. So in the near term, it actually should generate some business in terms of our consulting and analytics area.

I see. And how are you thinking about -- what's your best guess today as you look to how the world might evolve? I mean, could we see waning interest in pursuing small molecule development, for example? And as you think about your backlog, can you just remind us what the typical split looks like for small versus large molecules?

Look, let's just talk generally about the legislation. It's obviously not a good thing from the standpoint of potential reduction in revenue for our clients, there's no question about that. How that plays out over time and how the legislation might change with subsequent administrations and subsequent legislative sessions, we'll just have to see. Look, I don't have the exact split on you -- for you on large molecule versus small molecule. Obviously, large molecule has taken increasing importance in recent years, and it's becoming a more meaningful percentage of what we work on.

Got it. Turning to TAS, you've previously spoken of very little impact from the pandemic on the segment. And I think Ari has also talked about how the industry is much better positioned today than it was in 2008. I think you pointed to some of the M&A that was going on there, the patent cliff, et cetera. How confident are you that the TAS business sees the usual year-end seasonality?

Well, look, I think the point Ari was making is that when people were looking at the recession and saying, look, how might that affect your TAS business. And for that matter, how might it affect the R&DS business and bookings and backlogs and so forth. And we've shown some slides at other investor meetings that show that, in fact, the CRO portion of the business historically has been very resilient to recessions. In fact, if you look back at the last 20 years, there have probably been 4, 5 times where the S&P 500 as a whole has gone negative on revenue and not once when either IQVIA or predecessor Quintiles went negative on revenue during that period nor the entire CRO peer set that we follow. So in the TAS business, we did see a downturn in the legacy IMS Health in the 2008, 2009, 2010 time frame, but that was largely because of 2 things. One, the patent cliff really hurt us there. You saw some significant drugs coming off a patent then. And secondly, mergers and acquisitions within the industry, when you get a combination of 2 large competitors and they're both buying your data, both doing analytics and so forth, you see a consolidation of the amount of activity. Now having said that, we're not immune from a recession, no one is. And where you might be most likely to see that would be in very short cycle businesses, like the consulting business. We haven't yet. The consulting and analytics business remains quite strong and information business and technology have more recurring revenue. We wouldn't expect to see much of an impact at all there. But we're keeping our eyes on it to say you don't want to be overconfident about it. But so far, we really haven't seen it. And we're feeling good about the balance of the year in TAS. And we're starting to put together our more detailed plans now for 2023, and we'll see how that all plays out going forward. I'm going to try not to get into 2023 guidance today. We do have 20 by 25 medium-term plans out there for everyone to see.

Got it. On your point on M&A, Ron, is the nature of M&A different today than it was in 2008 in your view? Those were sort of the mega deals where you saw the trimming of the pipeline. These days, the bulk of the M&A we see is larger companies acquiring a smaller entity for the pipeline essentially versus sort of cutting OpEx and trying to drive cost synergies. So do you think that if you were to see an acceleration in the -- some of the early consolidation we've started to see here on the pharma side of things, it would be a very different sort of dynamic for you?

Well, we had -- I think you identified correctly that what we've seen is a shift in M&A away from the large kind of combinations that we saw in the past towards more selective, for instance, large pharma buying molecules or EBPs or whomever. And we don't have any indication to see that, that's going to change. I don't know. Maybe the inflation reduction had -- causes some impetus there. I think it's way too soon to say whether that will be the case. So we'll see where that all goes. But right now, no, we're not terribly concerned about M&A activity affecting our business. In fact, it's a good thing in a way that you have the large and midsized pharma companies buying out some of the emerging biopharma companies because you've seen -- or at least you did in the first half of the year, see a slowdown in EBP funding. And when that -- particularly, public funding, IPOs and so forth. And when you see that happen, it creates an environment that's more favorable for our larger customers to come in and buy out some of the smaller customers, and that's an additional source of funding. And in fact, we've actually seen EBP funding start to come back in the last few months. And if you annualize the August year-to-date numbers, it's going to be pretty comparable, that is across both public and private funding to what we saw pre-pandemic. It's just that '20 and '21 were exceptionally strong years. And I think everybody -- there's a natural tendency to compare back to those years, but those were really kind of outliers. A lot of that money hasn't been spent yet, frankly. So there's still benefits to come from those -- that big up surge we saw in funding.

Got it. Honing in on sort of the RWE and the tech-enabled businesses, I think it's about 45% of your TAS segment. These offerings are clearly growing faster but come with lower margin versus licensing. So can you just walk us through some of the margin improvement initiatives that you have underway there? And how should we be thinking about sort of the scale of those improvements through, let's say, the next 12 months or so?

Yes. Well, look, in those 2 businesses, they tend to be -- well, I would say, certainly, the real world evidence business tends to be a little bit lower margin business on average than the rest of IQVIA, but we have seen improvement there. Now historically, real world evidence, at least on the legacy IMS side, which is looking back at our large data sets, was very service-oriented. You get a project, you throw a lot of expensive data scientists at it, and you'd mark up the labor. And it was a relatively low margin business. We're trying to move that business more towards a recurring revenue model, more licensing, had some success doing that. We've also been offshoring more of the work. That's taken some of the cost out. We're offering more innovative solutions like external comparator arms that you would use for clinical trials in lieu of having a placebo group, natural history of disease studies that draw from large masses of data from various sources to try to plot the course of diseases and things like that. So the nature of the business has changed some. We've also tried to take some cost out, and we are seeing definite improvement in margins there. There's also, of course, the Phase IV part of the business, which is largely as it has been. That's the legacy Quintiles part of a real world evidence. Now on the tech side, I'd say the biggest factor there is just getting more licensing revenue shifting from a mix -- getting to a higher mix of licensing versus implementation than we've had in the past. And as that happens over time, that will naturally improve margins. But you sell more, you end -- and provided that you're implementing, you're not outsourcing it to third parties, you end up getting more implementation revenue as well. So it isn't like it just happens overnight. It's a gradual transition towards more licensing revenue that's helping margins there. And margins on the whole actually are pretty decent in that business, but they aren't SaaS sort of margins that you might see from more mature technology firms.

Got it. That's helpful. Switching to decentralized clinical trials. I mean, obviously, it's a modality of growing importance, particularly coming out of the pandemic. Who do you see most often from a competitive sort of standpoint over there? And as you think about the longer-term opportunity here, how are you thinking about sort of maintaining your market-leading position?

This is in decentralized trials?

Yes.

Well, first off, I would say this is about decentralized trials, just to clarify some misunderstanding, there was a vision at one point in time that the whole world was going to move towards decentralized trials where you'd have one big investigator site, and everything would be done on a very decentralized basis in patient homes. The reality has been a much slower transition. There are a number of reasons for it. First would be that the regulatory constraints to doing it, you still have to verify source documentation at the investigator site. There are actually certain therapeutic areas where decentralized trials don't work as well. If you -- you have to have people come in to infusion centers for oncology and so forth. But overall, you're definitely seeing a trend in the industry towards that. And the main reason for it is, frankly, to make it easier to recruit patients. Average patient, I think as all statistic, has to travel somewhere between 60 and 80 miles to get to an investigator site partially because trials are global and people are coming from all over, including rural areas and partially because there are a limited number of investigator sites. And of course, this is a deterrent to people entering the trial. So to the extent that you can do more stuff in a patient's home or close to a patient's home, have wearable devices or have nurses, phlebotomists and so forth, visit the patient, then it makes it easier on the patient and more likely to participate in the trial. It makes it easier to get a trial started. So all of that is really important. And -- but I think there -- you asked who do we come up against? All of our competitors -- major competitors participate in decentralized trials in some fashion. We think we're very well positioned there, and there are really 3 reasons or 3 things that you need to do to be good in decentralized trials. One is have the technology, electronic data capture, e-consent, wearable devices, things of this nature, although we have various different applications that help us to collect and assimilate data remotely. You also need the services. For instance, I mentioned the nurses and phlebotomists and so forth. You need to have a network of those people to help you actually implement the trials. And you need an understanding of clinical trials and regulation in particular, so your -- whatever you're doing is in compliance with regulations. And we have all 3 of those. We don't really see any other competitors that do. A lot of them will outsource their technology to others or outsource various components of their services to other. And we think there's an advantage to being able to do everything in-house, and that's what we go to our customers with as a value proposition.

Got it. I want to switch to some of the more recent macro trends, Ron. On inflation, I mean, the pressures are clearly continuing. Can you just remind us how quickly you're able to pass through pricing on the R&D side of the business given the longer contract cycle there versus TAS?

Yes. Well, I'll start with TAS because that's the easier one. That tend to be very short contract cycles, and you can pass through price increases pretty quickly, and we've been able to do that. On the R&D side, it's obviously harder, and the reason is because you're signing contracts that are, in many cases, let's say, an average of 4 years long. And when you sign them, you do sign them with inflation adjustments baked in. But often, those inflation adjustments are based on historical inflation rates rather than current inflation rate. So you signed something in 2018 or 2019, it might be at inflation rates at that point in time. And you have to go back and negotiate with customers. And obviously, they're reluctant to give additional increases. Now what we have done is we have adjusted all our rate cards, so anything we're doing now is at higher pricing and current inflation levels. And we're working wherever we can to get price increases. But honestly, we have to absorb a fair amount of it. And we have to -- what we have to absorb, of course, is the increased labor cost because that's the primary component of our cost, and we have to try to offset as much of that as we can with productivity, which we've been largely successful in doing but, no question about it, puts additional pressure on the business to have to absorb those labor cost increases. Now just kind of anticipate the question, we get asked a lot about attrition rates, and we saw attrition in the industry peak or -- in our business, and I think probably in the industry as well, peak towards the fourth quarter of last year. And it has since been coming down, which is good. It's been on a kind of continuous downward trend. It isn't quite back to pre-pandemic levels, but it's certainly greater than -- or in a better position, lesser attrition, than it was at the peak, which is good because that means a little bit less pressure on cost because, obviously, as you lose people, you have to go up there in the market and rehire people and very often pay a premium to do so.

Got it. And Ron, on that point in terms of replacing employees who leave, but beyond that, I mean, in terms of hiring, what's your philosophy at the moment? Are you sort of a soft pause, if you will, on the hiring front? Or...

No. We're not a soft pause because we have a big backlog, and we're still hiring to meet that backlog. Now on the overhead side, we're obviously going to be cautious. But frankly, we've always been cautious on the overhead side. . It's just kind of something -- Ari and I both started at United Technology some years ago, which is a very cost-conscious firm. It's just something we brought with us, and we continually drive down overhead cost in finance. I approve every hire globally. And we've driven down finance cost substantially as a percentage of revenue, and this is true across our overhead functions. So we're always cautious about overhead spending, and no change there, but -- in overhead hiring. But for revenue generating activities, we'll hire what we need to, and we're continuing to hire right now. So it just depends. Revenue generating, yes. Non-revenue generating, no. We're going to be very, very cautious.

Got it. And as you put sort of all of that together in terms of FX, inflation pressures, what you just said about revenue generating hires, how do you think about sort of the potential for margin expansion as folks look to 2023? Is something in that 30 bps ZIP code the right way to think about it?

Well, I think the 30 bps that you're coming up with probably was from our 20 by 25 guidance, where we actually didn't give explicit margin improvement guidance. But if you kind of back into what the implied margin expansion is from our revenue and EBITDA guidance, it's 20 to 30 basis points per year. We're not going to give guidance on 2023, and I would say each year is really unique. For instance, this year, you noticed we've had good margin expansion. But you have to keep in mind, too, that we've gotten some benefit from FX there because FX has substantially affected our top line, but it's been about neutral on our bottom line. So we've gotten some benefit there. And who knows? It could occur the other way next year. I mean, that's why I think looking ahead at this point in time on margins is kind of a difficult thing to do. But having said that, we always target margin improvement, and we will target margin improvement again in 2023, I'm sure. But there sometimes can be external factors that make -- either help you or hurt you in terms of margin in any given year. So we try not to get too far ahead of ourselves on that.

Got it. Switching to some of the geographic trends here. You've had this resurgence in COVID cases in China, including sort of lockdowns in Shenzhen, Chengdu, et cetera. It's a small percent of your overall sales. I think it's about 3%-ish or so. How are you thinking about the contribution in the back half of the year? And just in terms of the impact on your clinical operations, do you still expect it to dissipate by the fourth quarter?

Yes. Look, we've been dealing with this as we've gone along through the year first in Shanghai and then, subsequently, I think Chengdu is affected right now. And we've been largely able to work around that in the same way we were able to work around it in the U.S. due to COVID restrictions. We're doing more stuff remotely. Obviously, it's had an impact. And you saw in the first quarter, we kind of absorbed it in our numbers and said, look, China is going to hurt us some, but we're not going to talk about specifically. We did talk about Russia, Ukraine, specifically. And yes, so I would say if you bifurcated China, TAS business has very little impact so far. Some impact in terms of visits and so forth and being able to build customers in the R&DS business. And we're always a little bit cautious about it because you just don't know what the next lockdown might be or the next move by the Chinese government. So you don't want to be overconfident about it. But so far, it hasn't been a major disruptor to our operations. We've been able to compensate and get through it okay. And we'll see what happens after the Party Congress. I think it's in October, and see where China goes and see what happens with the trend of COVID there. So it's a difficult one to predict.

Got it. And on Russia, Ukraine, I mean, how confident are you about recapturing that $40 million to $50 million headwind you talked about by year-end?

I don't think we'll recapture it by year-end. I think we'll recapture it over time. The reason being that we've had to shift our recruitment out of Russia and, to an extent, out of Ukraine to other parts of Europe and other parts of the world, and it takes time to find the patients. But ultimately, you need to see a certain number of patients to complete a trial, and that will happen over time. Ukraine actually has improved in recent months. We're seeing pretty good -- not return to 100%, but a return to, call it, more than 75% of prewar site visits and so forth. So it's come back to a certain extent, and that's fairly encouraging because Ukraine is a good place to recruit, no question about it. Recruiting patients for clinical trials is a little bit higher than you would expect given the -- what we would otherwise have is revenue in that region of the world. Russia now we're continuing to -- although we're finishing out trials that are in process because it's the ethical thing to do, we're not recruiting new patients there or starting new trials in Russia.

Got it. And are either of the currency devaluation or the looming sort of energy issues in Europe starting to impact customer spending trends?

Haven't seen anything on the energy or currency side, no, neither there. I mean, where -- of course, where you see the currency is just in the direct translation of our revenues, but haven't seen it affect things. We'll keep an eye on it because energy obviously could send Europe into a deeper recession. And like I said, we, like everybody else, although we're more, I'd say, recession resistant than a lot of firms, nobody is 100% recession resistant.

Got it. Last one for me on capital deployment, Ron. Can you just talk about your M&A pipeline? Are you seeing any compelling opportunities there that could enhance the value prop? And then repurchases have clearly been an important part of the framework for you. The Inflation Reduction Act sort of embeds this buyback tax. Does that sort of change the pecking order or how you approach capital deployment?

Well, look, I think the buyback tax is bad policy, but it's 1%. That wouldn't be enough to greatly affect how we approach share repurchase or, frankly, even to affect it, period. But we are cognizant of the rising interest rate environment. And where -- for a long time, we've been saying, look, debt reduction, it's pretty low priority for us given where rates are. But we'll reevaluate. If rates take off, well, rates have taken off, so we are reevaluating and we're taking a harder look at that. Now we're going to continue to do acquisitions. We'll be selective about acquisitions, and we're going to be careful and strategic. And we'll walk away from deals where we think the prices are too high, and there's still some of that, there always is. But I'd say, the big news is -- there is we will look more carefully at debt reduction when we're kind of balancing that in share buyback.

Got it. We're almost out of time, so this is a fantastic overview, Ron. Appreciate you spending the time with me this morning.

Absolutely. Thanks, Tejas, and thanks to everybody in the audience. Great group here today.

Awesome. Thank you.