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

Good afternoon. Thank you, everyone, for joining us. Nearing the end of the second day after a couple of weeks of conferences, so it's nice to have a solid audience here with us. Obviously, one of the more requested names at the event. Really a big honor to have IQVIA with us today. Of course, I think everyone should be very familiar with Ari Bousbib. Also, we have Nick Childs from Investor Relations up here. I pulled him on stage. I'm not sure he wanted to join us, but we can always fall back on him because I know he knows a lot. So, Ari, it's a heck of an interesting time in this group. A lot of things going on. I think obviously, your firm made some comments at another conference yesterday. I'm going to ask you to repeat some of those for the audience here that didn't get to hear Ron yesterday across town. But you might want to start with a few slides, if I understand, or a few comments [indiscernible].

Well, first of all, thank you for having us. It's a pleasure to be back in these conferences in person, and I have the pleasure of meeting a lot of you earlier at private groups. I thought I'd start with a couple of comments, and then you will ask me questions. And I'm just reusing charts that I used with our group of investors recently to address some of the issues. Most of you are familiar with who we are. It's an important point because in a market where the entire world is doing well, because the tide is high and where money is essentially free, and there's a lot of capital that's not so smart that's being poured into this industry, everybody was doing well. And it was hard to distinguish between the players. A CRO is a CRO, is a CRO. And nothing could be further from the truth. We've been screaming at the top of our lungs since we did the merger 5, 6 years ago, that we wanted to disrupt the industry and be different. And while everyone talks about the same things, data analytics, technology and expertise, the truth of the matter is, we have the goods, and they don't. And I don't like to address competition, but I heard there were issues with some of the competitors. And many of you have been asking me, why are there no issues with you? And one of the answer is on this chart. Second answer is, we have over 10,000 customers. We're not dependent on one segment or another. We're not dependent on 2 or 3 or 4 pharma companies that buy our goods and services. We are extremely diversified in terms of who we serve. There's no one, no one in the world of Life Sciences globally that doesn't buy something from us. Our performance, you're familiar. This is since the year after the merger, 5 years up to the end of last year. In essence, we shared with you what we were going to do when we did it, and the share price responded. We more than quadrupled the stock price since the merger as of the end of last year. And unfortunately, I wish I could spend the entire presentation on this chart, but that was yesterday, and you don't care about that, and I don't either, that's the reality today since the beginning of the year. And it's really a head scratcher. Of course, I think this is as of Friday, and today is a lot worse. We're not as bad as the rest of the CRO group, but worse than info services, health care, IT and certainly more than the S&P, which is terrible because the disconnect here is very frustrating. I went back and looked at other crisis, other times where we had issues. Whether it's post 9/11, whether it's the housing bubble in the 2008, '09, '10, '11 timeframe, or in '15, '16. And you look at S&P 500 companies revenue, it systematically revenue went down, was negative growth during those crisis. Not so for the CRO sector as a whole, and not so for IQVIA or the CRO part of IQVIA. Now, it's predecessor company. The reason why this is important is because while we are not recession proof, you don't even know if we're in a recession, but we're not recession proof, we are recession resilient. We always have growth. We never dipped, never had negative growth, and the reason for that is very simple. We are a long-cycle business. You can't just decide that you're going to stop your clinical trial because interest rates are through the roof, and that's a great advantage. The other big question, and I know we only discuss this in more detail, is biopharma funding. Someone sneezed at the beginning of the year about biopharma funding, and as a result of that, all of our stocks went down. Now year-to-date, we are at $38 billion. That is end of August, $38 billion of funding. I don't know what it will be for this year, but I predict it will be somewhere between $50 billion and $60 billion, maybe closer to $60 billion. That's essentially where it was in the period of time, the 5-year period of time before COVID. So we are just going back to normal levels of biopharma funding. What happened in '20 and '21 is just not normal. People poured capital, not so smart capital, into all kinds of programs, many of which are getting canceled. Hence, the issue that some of our -- I don't want to say competitors, but peer companies are experiencing. What's our exposure? This is essentially pre-commercial EVPs, companies that have a molecule or science that they are developing and haven't gone to market. Now, we are not seeing any, I repeat, any. Let me say it differently. We are seeing zero changes today versus the end of last year, zero. Our RFP growth is double digits to date, strong viable digits, similar or higher than it was in the -- through the first half. We have very little exposure to pre-commercial EBP, 10% of our backlog. Anything that gets into our backlog is thoroughly vetted rigorously, not just the funding and the plan to fund but also the science, and that's very important. We are not seeing any cancellations that are unusual. We're not seeing any delays in decision-making. We're not concerned at all. Obviously, on the commercial side, there is zero exposure to pre-commercial by definition. Another important point that start on this chart which I think people have missed, and that is that the vast majority, and I don't mean 51%. I mean, in the 90s, of what's in our backlog with respect to pre-commercial EBPs is Phase III. We don't play in a Phase I, Phase II of pre-clinical market. When a molecule is in Phase III, it means it's already at an advanced stage, and it's likely -- it's good science. It doesn't mean the drug will be approved, it doesn't mean it will enter market. The trial can still fail, but it is funded. And in the rare cases where it won't be funded, likely, a large pharma will purchase the asset. And I think because of all of these reasons, we are not experiencing what perhaps others are. Look at CROs. We are the largest hands down. We've got the largest backlog hands down. We're growing the fastest. This is '19 to '22 growth rates, and we have the highest margins. People also question level of indebtedness. We've said that we were going to reduce our leverage ratio. And Eric has been voicing those issues with me, and we've listened to you and others. And our free cash flow performance has been very strong. We've been able to reduce our leverage ratio. We've also, at the end of last year, gave you 3-year targets, 2025. As I stand here or as I sit here, there is no change to this guidance. We had 3 -- we had 2 phases so far since we merged and created the company, a 3-year merger integration. We had targets for revenue, EBITDA, EPS, capital deployment and net leverage. We then had an inflection point and grew faster from '19 to '22, and we did exactly what was in this guidance. We gave you guidance for 2025. There is nothing, I underline, nothing that's changed here from the end of last year with one possible exception, and that is the target net leverage. What has changed dramatically from the end of last year is the interest rate environment, obviously, and our capital allocation strategy was predicated on a certain rate environment. It's now changed. so we're in the process of reevaluating that and making some modeling assumptions. It could be that at some point, not yet, but at some point, may make more sense to retire debt versus buying back shares. And we haven't decided that yet, so that ratio of 3, exiting '25, may be lower if we make a different decision between now and the end of the year. And with that, I'll take your questions.

What the hell am I going to ask you? Good meeting.

What I had for lunch.

Thank you, Ari. That's fantastic. Obviously, you addressed, I think, at a good level, all of the major topics out there. So it feels really embarrassing and redundant to go back through some of them, but I do think we need to maybe clarify or not clarify, but expand upon some of the comments about biotech. Interestingly, there's a group of companies in your broader defined world, whether you want to call them, competitors or peers or just R&D ecosystem companies that have espoused different views. We've had a few companies here in the last 2 days that have said absolutely no major change. No update since Q2. Life is good, lots of demand. We've had others that have talked about weakness in pockets, a company maybe in a small discovery business or here or there, but not over our chain, not overall. And then we have others that have signaled maybe a little more what I call squishiness where whether it's one company talking about lower initial award notifications and other company foreshadowing a lower book-to-bill, another saying July had some weakness. Is a biotech not a biotech, not a biotech? I mean, how do you escape some of those where there are at the margin, where there are some of those challenges? I know you're doing mostly Phase III, but I think a lot of investors look and say, look, the number of [indiscernible] hon my desk are down, the terms aren't as good. I had a company doing 2 molecules. Now, they're doing one.

Again, July was the highest funding month of the year so far, and August was the third highest biotech funding month of the year. We don't see this drop, '21 to '22, as a major issue, it's just returning to normal, point number one. Point number two...

And if I can jump in. Normal, the 5 years pre-COVID, was more than 100% higher than the 5 years before that.

That's correct. But that's the new normal.

Right.

Point #2, we are not as exposed as others. Both the stage of the clinical trial, I insist we are Phase III, and what's in our backlog. The RFP flow is up very strong double digits. I don't want to even tell you the number. To date, as of last night, it's strong and it's a strong double digits on top of a very strong year last year. And that's the case for large pharma, for mid-sized pharma, for EBP and for pre-commercial EBP. We are just simply not seeing that. We're not as dependent on the segment, and that which we have in the segment is well vetted. Strong science, strong fundamentals.

It sounds like you're taking share.

That's also true.

Can you quantify that? Can you talk about hit rates? I mean, I know you can't compare your RFP flow to the next companies because there's no gap definition. You're not in exactly the same countries, businesses, et cetera. But how -- it feels that way, it looks that way, it smells that way. But how would you define [indiscernible]

Look, it's hard to -- contrary to other businesses, it's very hard to just take a snapshot in a given year and comparing to a snapshot in a different year and say, well, here, I have a bigger share. Because there's bookings, there's revenues, there's different mix of businesses, so the revenue conversion is different. It's apples and oranges. What I like to point to is we are the largest, and our book-to-bill ratios have consistently been the highest. So when you do the math, by definition, we are gaining a lot more dollars of what's being awarded than others. So by definition, we are gaining share. It's starting to be seen on the revenue growth and on the fact that we are not experiencing any issues. Our issues have nothing to do with revenue or margins. Our issues are more dealing with the operational disruptions that we've had this year, the Russia-Ukraine, the continued Chinese lockdowns of cities. And of course, on the right side of the balance sheet, as I said before, interest rates starting to pop up. But other than that, the underlying business is absolutely intact.

So when you laid out the '20 by '25 targets, the LRP, and you said nothing has changed, asterisk, except for possibly our view on leverage given the interest rate environment, TBD. I'm sitting here thinking, well, a lot has changed. A year ago, currency was a 3% tailwind. Now, it's a 3% headwind. Rates are going up dramatically. We have inflation. We have supply chain issues. We have a new war in Eastern Europe, china lockdowns. You've mentioned some of these. It feels like a lot has actually changed from a macroeconomic standpoint, and we know the revenue has changed. I mean, you've kind of quietly adjusted about $0.75 billion out of your backlog for FX, sticking to your targets?

Sure. Okay. Look, FX is a cosmic factor. I can't do anything about FX. I'm just telling you what the underlying -- Yes, of course, you're right. A lot of things happened.

Optically, that is an issue. But when you're thinking about nothing has changed, I just want to make sure we're not missing something in the characterization of fundamental strength, confidence versus, well, technically, FX is a headwind.

Yes. FX is a conversion, it's a translation headwind. I mean, no one cancels a clinical trial because of FX. And as you know, we have a natural hedge on our profit line. So yes, it's affecting the top line at the translation level, but EBITDA is essentially intact. That's the nature of our business.

When you talk to big pharmas about various topics like Russia, Ukraine, China, maybe even today, the Inflation Reduction Act and those long-term thinkers with 5 and 10 and 20-year strategies, what they're thinking about, reimbursements in 2026 and beyond. Have you heard any hesitation from the large pharma client base?

No. What we have heard, I mean, just to pick on the last topic, is so-called Inflation Reduction Act. Obviously, there are parts that affect our industry. But as you know, it's very generic, very undefined whether it's the issue of price negotiations for 10 drugs, Part D pricing, it's not clear how it's going to play out. It's not even clear which drugs, and it's only going to start in '25, '26 and then there's another tranche in '28. Whether it's the redesign of Medicare Part D with the trying to shift some of the cost burden from the government, which I think is about 60% of the -- approximately to get the government down to 20% and shift 40% to the drug manufacturers and to the payers and the drug manufacturers to rebates, how is that going to happen? It's completely undefined. Whether it's the mechanism where if pharma companies increase the price of a given drug more, by more than the inflation, is that even inflation is not well defined. How do they reimburse that differential to Medicare? It's really -- these legislations have so many intended and also non -- unintended consequences. Now, who do you think people, pharma companies go to, to answer these questions?

You know where I'm going.

They're coming to us. Since this legislation was passed, which is not too long ago, we spoke to a ton of people. We were engaged and asked to analyze, for their particular portfolio, those consequences. So far, it's been a pickup of business for us. We've spoken to the CEOs of each of the top 10 pharma companies. We didn't go to them, they asked us.

Let's talk about commercial, and just more broadly, whether it's TAS or CSMS. I felt like on the last call, you were spending more time giving anecdotes, talking about traction with commercial engagement with clients. And it goes -- I think it goes a lot further beyond just contract sales reps, detailers in the field. I mean, these are full end-to-end engagements around the SG&A budgets of clients. But is there something to read into this? That you're feeling better about your potential, your growth, your traction outside of the CRO, the consulting analytics, I mean, a real-world evidence has always been strong. But are some of these other businesses actually getting permanent momentum that wasn't there?

Yes. I mean, we could talk about a lot of things because in that portfolio, but it's just -- maybe just on 2 trends that are right smack in the center of our sweet spot, of our capabilities. So in the real world, look, there's enormous amount of innovation. There has never been as much innovation in R&D. Take oncology, whether it's CAR T cells or protein integrators or you've got this consequence of COVID of the development of all these antibody libraries to get antibody conjugates to -- whether they are in vivo developed or in vitro with new methods. A lot of innovation, new ways of addressing existing diseases, on the one hand. And on the other hand, you have an exponential growth of digitization of health care, really around the world. And so you have an enormous amount of very complex data that's becoming available. So how do you lead the 2? Our clients are asking, okay, how do I know what my IRR will be for this therapy on that -- with this new innovation? How much share can I grab? How do I price it? How safe is it going to be? What population of patients does it address, where? And this is highly targeted -- it's subsegments or subsegments or subsegments of one area in oncology or in a rare disease. And the fact that you get all that data, which we need to cure and bridge and make it usable, it's great. But like many other companies have experienced, so what? So we are here to provide that bridge between the availability of data that's becoming enormous and bridge the link and answer those questions for our clients. And we do that with analytics, developing algorithms that help on a continuous basis, feed that data real time and get the scientists those answers, to give the scientists and the commercial side. So that's really what's driving a lot of our real-world growth. Secondly, another change, and that's more in the marketplace, drugs used to be marketed "with sales reps" that visited doctors' offices. And in between 2 patients, the doctor would see the sales rep, look at the samples and have a little conversation, and the sales rep was hoping that they persuaded the physician to switch from whatever brand to another brand. And so for that, the next step was a CRM. You had a CRM, so you could optimize your visit on sales rep. Now, that's yesterday's news. Sales reps as a category of -- are going down. There's no -- the number of sales reps is declining. It's a fact. And that's due to many, many reasons, including the fact that primary care, which is where this type of activity existed mostly, is going down. And rare disease, oncology, specialty drugs are administered and sold differently. Secondly, doctors don't have time anymore, and they are managed. It's all about process and standardization and so on, and there is no time to grab a little coffee and conversation with the sales rep. Today, marketing of drugs is going to become digital, just like any other consumer products. I think that it's not that great, that we are marketing medicines to doctors the same way we market vacations or cars or financial products or anything else. But every time you click on your iPhone or if you have a Facebook account or anything else, there's an engine behind that knows exactly who Eric is. You think this iPhone is helping you, but you are helping it. And consumer companies, all kinds of businesses, buy that data, those analytics. There is an engine behind it, and that's why you get pop-up advertisements that are very customized and targeted to you. The enormous amount of ongoing information that's about you as a consumer or whatever it is, that's processed and that's then sold to the companies that make those products and services. Well, the same is true for drugs. So health care providers do not want to meet sales reps. They also interact with Facebook, they connect with Wikipedia, they attend a webinar, they speak at a conference, they interact in a chat room, they answer a question, whatever click is captured. And I'd like you to remember, but we bought a company a year ago called DMD. More than 90% of U.S. physicians are on that, and it's consented, it's opt-in. And we've got all of that, and we are investing and we will be buying businesses, technology platforms that enable us to continue to grow in this. So the world is changing in -- and that's our sweet spot. That's our market. That's what the old IMS was doing, helping companies market drugs to the right physicians. So it's those 2 aspects. One, the real world, which is really a science. It's measuring outcomes, it's understanding the value of the new medicine, translating that into dollars, into safety parameters, et cetera, doing that on an ongoing basis. We have licenses with our clients. They use the data on demand with the analytics and the AI ML tool that's on top of it that enables them to answer the questions that have been developed for their purpose. And the simple commercialization and marketing of drugs which uses technology that's different than your old CRM tool, and that's totally digital.

So would you say the commercial market broadly is coming to IQVIA because of your tech, your data, your history, your consulting analytics business. So it sounds like maybe CSMS is a division where years ago under the older model, you weren't as interested, maybe a little more interested in retaining it as it shifts. Is that a fair...

Well, look, we're never excited about that business. It's not a business that -- it's essentially sales reps. But what has happened is, as you remember, post merger, we tried to sell it. It didn't work out. We essentially let some of the parts of the business that were less attractive die out. We integrated it originally, and it includes highly-specialized nurses. We use that in clinical trials as we move to decentralized trials. Of course, we use technology and remote technology. But many times, the patient needs to be -- to have a physical interaction. So we have 2,500 nurses around the world that go into the home and perform certain procedures on the patients. That's part of that business. So what we've done is that we've converted that business to serve the needs of other businesses in the company that will become more remote, but that still need a physical presence occasionally. So for now, we are retaining that capability.

Perfect. Ari, you've said it all, I really appreciate it.

Thank you. Thanks for having us.

Nice to have you. Thank you for coming at the end of day 2, maybe better to avoid some of your peers yesterday, who knows. But everyone, please join me in thanking Ari, and IQVIA for being with us.