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

All right. With that, we'll kick things off. Thank you, everybody, for joining us. Next session is IQVIA. We're happy to have with us Ron Bruehlman, CFO. I'm Dan Leonard. I cover life science tools and services for Credit Suisse. And we'll kick things straight off. Ron, welcome.

Thank you.

So you just closed up your Q3 -- reported Q3 earnings. Figured a good way to start off would be to remind us of the key highlights and takeaways from the Q3 report.

Sure. Well, look, I think the #1 highlight, Dan, is that the market remains very strong for us. I know there's been concern, particularly about the emerging biotech sector. Are we seeing any softening in demand? And the short answer is, no, we aren't. We quoted a bunch of different statistics on the call just to make that point from kind of very early stage discussions with customers up through bookings and so forth. And I'll just quote a few of those to make the point because no matter what statistic you look at, it's been strong. We had our overall pipeline up 10% at the end of the quarter. Our qualified pipeline, when you narrow it down a little bit to those who are more serious and closer to proceeding, up about 19%. RFP flow in the quarter overall up about 15%. It's 10% year-to-date so it hasn't just been a onetime phenomenon. Strong across both large pharma and emerging biopharma. So no particular issues there. In fact, emerging biopharma, up 10% year-to-date on overall RFP -- actually 12% year-to-date, not 10%. You saw -- okay, that's all great to have the RFP flow and the pipeline and all that, but you got to turn it into orders, bookings. And you saw our bookings in the quarter were very strong. In fact, I think we had a record quarter of service bookings that is before pass-throughs. First time we've been over $2 billion and up 17% year-to-date. And so our book-to-bill in the quarter was 1.39 on a just a services basis before pass-throughs and 1.27 on an all-in basis. We had a little bit less in the way of pass-throughs in our bookings. But I can recall when 1.2 was kind of the standard -- the gold standard for the industry, and we've been above 1.2 for some time. For revenue, in particular, we like to talk about core revenue growth, that is ex COVID, constant currency, organic to clean out some of the noise because coming into the year, we said we expect COVID revenues to be down on the order of $1 billion year-over-year, COVID-related projects. And in fact, it's been a little less than that. It's been kind of $800 million to $850 million range is where we expect the decline to end up. But in any case, if you clean out the decline in COVID revenues, you look at it on an organic basis, you look at it constant currency, our clinical part of our business, R&DS was up 18% in the quarter in revenue, Tech & Analytics Solutions was up 12% and overall, the company up 14%. And that's been pretty consistent quarter-to-quarter throughout the year that we've kind of had low to mid-teens, what I would call, core growth. Our free cash flow was strong in the quarter. That was a highlight. I think we -- little -- some concern on the part of the Street, after second quarter, free cash flow came in a little bit weak. But we assured everybody, look, cash flow tends to be lumpy. And based on collections and sure enough, came roaring right back in Q3. So we feel good about that. And we made, I think, an important strategic acquisition in the quarter, that of Lasso Marketing. And Lasso complements our DMD marketing space. And what they do is they help our clients plan, execute, measure their use of digital marketing across multiple platforms. And -- this is Lasso, and DMD provides a lot of the information that goes into those marketing campaigns. And that's been an important area for us. Now what I would say is that on top of all of that, you see we did take down the revenue guidance a little bit. And we -- for the quarter, we took down our EBITDA guidance a little bit. We took up our EPS guidance, an interesting combination. And really, what's going on there are 2 things. The biggest is FX. FX continues to be a year-over-year drag on revenue. And that was no different, it continued to move against us on revenue during the quarter. It doesn't have much impact on our EBITDA because we're naturally hedged on our EPS. We also, as we talked about on the call, saw that the execution of clinical trials was a little bit choppy, not coming back quite as fast as we had expected because the sites are having difficulty hiring people, that is in the investigator sites. Still patient visits despite the fact that COVID looks to be largely in the rearview mirror have not come back to pre-pandemic levels yet. And our lab sample volume as a result has not quite come back to the point we expected it to, given that we've had very strong bookings. So we had a little bit of adjustment to revenue and EBITDA related to that, but nothing major. And we overall feel very good about our third quarter performance and where the year has gone.

Couple of points you made there I want to circle back to. First off on the market environment. You flagged a lot of metrics, which show a continued healthy market environment. There has been a biotech funding drought. How would you expect any biotech funding drought to eventually manifest in market health or not?

Well, I think we have to put the drought in perspective. We had $16 billion in overall funding of emerging biopharma according to BioWorld, which is the source we follow, that follows both public and private funding of emerging biopharma. And that was the highest quarter of the year. And if you annualize the first 3 quarters, you get to about $60 billion or so of funding for the year. Now that looks small in relation to '20 and '21, but those were outsized blowout years. $60 billion is more or less in line, if not slightly higher than the pre-pandemic level. So I don't think there's been a big crisis. There's just been the inevitable slowdown after a big jump there. Now look, a lot of the emerging biopharmas we deal with are still very well funded. We -- and we tend to be a little bit later stage in some of our competitors that have talked about the slowdown in the sector. We tend to do more Phase II, Phase III trials. We don't do first-in-human work for the most part. Our exposure to pre-commercial emerging biopharma is comparatively small, 10% or slightly less of our backlog and RFP flow. And the clinical trial business is pre-commercial EBP. And keep in mind that the clinical trial business is 55% of IQVIA's overall business. You have another 45% that's commercial, so post commercial by definition. And we're also very careful about the clients we take on. So historically, we do a very, very thorough credit check. Historically, we haven't seen much issue when there have been these kind of dips in funding. If you go back to the 2015-2016 time frame, which I think was the last dip, or you go back to 2008-2009. Now that was before the merger, before Quintiles was really even our predecessor company, was really even big in emerging biopharma, but they're one of the predecessor companies to IQVIA Biotech at that time. Novella was operating out in the market and they just sailed right through that period. So we haven't seen that much of a slowdown at all. I mean, it's not to say it couldn't happen. We just haven't seen it yet. So we're keeping our eyes out for it. We always ask about it. Are you seeing any slowdown in projects coming through, customer decisions, increased bad debt, anything like that? With the exception of maybe China where there's COVID-related issues that have affected funding a little bit more, and we actually see that starting to come back now, really no impact.

And that was the 2008-2009 time period that Novella saw through?

Yes. And they continued to have a double-digit growth in bookings, book-to-bill well above 1.2 during that period. And the same in 2015-2016 with the legacy Quintiles. Recall, we merged with Quintiles, that is IMS. I was at IMS, that's why I say we. So IMS merged with Quintiles before and IQVIA October of 2016.

And Ron, some of those issues you flagged on clinical trial execution, not execution as it relates to IQVIA but rather the broader ecosystem, how do you see that evolving over time?

Well, I think it will get better. Look, patients have to come back. I'm surprised that it hasn't happened more quickly because there were a lot of deferred visits as a result of COVID. People get sick. Deferred procedures are -- unfortunately, there's going to be more issues like diabetes and cancer and so forth that goes undetected. But patients will come back to their doctors. So I think that part of it will take care of itself. It's just been a little slower than we expected. As far as staffing at the investigator sites, we're working with our investigators to try to work through that issue. I think that's going to be a function of the overall labor market loosening up some, which, okay, everybody's got a view on that. We all listen to the business news. We all kind of watch the statistics about unemployment claims and so forth. But I think it's pretty hard to imagine a scenario where you have interest rates rising to the degree we expect them to rise and the market expects them to rise and not see a slowdown in overall employment. Increased unemployment is happening in the tech sector already. You see with layoffs, health care probably won't be affected as much, but we'll still be affected, of course. And I think that will help our investigators in terms of getting the staffing back up to where they need to be. And as a result of that, we'll have a -- like in our lab business, we see a big backlog of samples that are going to come through yet. And more visits, of course, means more revenue for IQVIA and running clinical trials.

Is there anything you're contemplating to try to directly influence the staffing issues? Some of your peers own site networks and they flag that as an advantage. Curious your thoughts on that.

Right. And we've looked at that. We've looked at buying site networks. We haven't made any decisions on that yet but we are looking at a few. And even if you own the network, you've still got to recruit the people. You still got to pull people through. So I don't know that that's a panacea on the margin. You say it might help a little bit because it's more under your control but it's the same dynamic supply.

And one of your peers in the lab business flagged a mismatch between outbound kits and inbound sample volume. You've talked about inbound sample volume being lighter as a result of these issues we just discussed. But do you have the outbound versus inbound dynamic as well?

Yes, yes, yes. And it's been -- inbound has been slower to come back. And we know it's not just us either because 70% of the work our lab business does is for other CROs, other sponsors, so forth. So it's not just our trials that are being affected, it's everybody's trials.

Okay. And what can you do on the pricing front to help offset some of the inflationary pressures you're seeing?

Well, pricing is an interesting issue and one that we've all been talking about in the last 1, 1.5 years because of inflation. And we have 2 distinct sides of our business. We have the commercial side of the business, Tech & Analytics Solutions, which tends to be shorter cycle, particularly more project-related. And even in the case of information where you have subscriptions, annual renewals or biannual renewals or whatever. And you can adjust pricing pretty quickly there. And we have to keep up with rising wage inflation and other inflation. But honestly, for us, labor is our biggest input. Data is second. And data is kind of an independent market. So yes, it's labor inflation. And in the TAS business, Tech & Analytics Solutions, we've been able to keep up. Now on the Research & Development Solutions, a clinical part of our business, a little bit different story because you sign long-term contracts. And typically, what our customers have wanted is certainty in the contracts, which is to say they know that there's inflation. Historically, even back 2019 and before, there was some level of inflation every year. So we will build annual inflation escalators into our contracts. But those annual inflation escalators are tied to -- on the large part to historical inflation rates at the time you sign a contract. So if you sign a contract in 2019, you're looking at kind of what prevailing inflation rates are at that point. So when you get out to '21, '22 so forth and inflation takes off, you're caught a little bit short. You have a disconnect between the cost of your labor and what you're able to recover. Now as we go forward, obviously, we can adjust our rate cards. Anything new we bid on or have been bidding on for the past year or so has been at higher labor rates. And we have escalators based on more current inflation rates baked into our contract. But it takes a while in a business where a clinical trial might run 4 years, it takes a while for that all to work its way through the system. So you have to try to do the best you can to offset with efficiency elsewhere in your network. And in select instances, you can get additional price increases from your customers, but those tend to be the exception rather than the norm. You kind of have to eat it and deal with it and that's what we've been doing so far. And it's -- to an extent that's -- we've been able to cover it most of the year, but that had a little bit to do with why we dropped our EBITDA forecast a little bit, our guidance a little bit in the fourth quarter because there's some ongoing headwind due to labor that you're absorbing.

Would the industry price more dynamically going forward? So rather than using a historical CPIs or annual inflation number baked in, use whatever is the CPI in a given forward year as what's...

Yes, that's a great question. I've been asking the same thing. And on the whole, it's been kind of back to -- with the current inflation rates are. Now the indices we use maybe aren't quite as volatile as a CPI or something like that. It's not like we're getting 9% a year. It's a Mercer labor-based index, which hasn't been rising with CPI. But on the whole, they really haven't changed too much. The contracts have been somewhat the same. And the best, I think, would be for both sides, in theory, would be to adjust based on current inflation rates. But we found our customers like the certainty. And sometimes that works to our advantage and sometimes, it works to our disadvantage.

And what are the countermeasures you could employ or efficiencies you could drive to try to offset some of that inflation internally?

Well, look, we look at everything that's controllable in our P&L, and there were some good things that in terms of the P&L that came out of the pandemic. Our travel costs are probably half what they were pre pandemic. And not -- at least nonbillable. Even the billable is down some. The real estate cost, as most everyone here knows, most offices now are hybrid or virtual and not nearly as many people are coming in. So we've been able to substantially reduce our real estate costs. We're going back and taking a much closer look at overhead cost. Anywhere we can automate, we automate. We try to make sure our span of control within our organization is sufficiently broad. For instance, if you have CRAs out in the field, you might have each supervisory position supervise a couple more CRAs so you can take more overhead out. So there are little things you can do. We continue to try to start clinical trials more quickly, using data to locate investigators, to locate patients and so forth. So there's a whole range of individual actions that we can take to take cost out. But it's -- labor is still a pretty substantial headwind to have to overcome for the industry. And in the part of the business that's long cycle, it's more difficult to do.

Understood. Can you talk about IQVIA's ability to gain market share across the business?

Sure. Well, look, I think -- I'm thinking about it broadly. If I think about it broadly, there's kind of a couple of ways you can get market share. One is through investment, acquisitions and investment in new adjacencies and so forth. But really fundamentally in your existing businesses, it's by providing superior value to your customers. And we think we've done that. We think it shows up in our numbers because that's a true test. It's one thing to say, okay, we think we're gaining share. But we have consistently, in the R&DS side of the business, put up better book-to-bills than a lot of our peers. And even going back to when our peers were putting up comparable book-to-bill numbers to us, I think as a whole, the larger CROs were taking share from the smaller CROs. Now I think you see more evidence that we're taking share from some of our larger peers as well. That's showing up in the numbers. On the Tech & Analytics Solutions side, we clearly have been growing. I mean, we've been growing at very nice double-digit rates, which we think is in excess of the market. So I think that's evidence as well. And the question is, well, how are you taking share? What do you think the differentiators are? And one would be our data. And that's -- we just have unmatched data. We have 1.2 billion, I don't know, maybe to 1.3 billion, I'm not sure right now, anonymized longitudinal patient records that we use from everything from the commercial side of pharma, performance management, launch management to real-world evidence studies. Two, and this was one of the big drivers, rationales of the merger to informing clinical trials. So protocols are better. You have fewer protocol revisions. If you know you can get the patients when you start the trial, you know where to find the investigators with the patients and so forth. So data has certainly been a huge differentiator for us. I think another differentiator for us is just our overall therapeutic expertise across the industry. No one covers the breadth of therapeutic areas that we do nor the geographic reach. That's a real big one because, for instance, the clinical trial business, a lot of the big clinical trials are global. And so you need to be able to perform globally. And in the commercial side, for instance, we're the only company that can give a brand manager a global view of how his or her brand is doing across the world. We have competitors in selected markets, but we don't have anybody that compares the reach of data that we have globally. And I would say also another differentiator in services capabilities. Take, for example, decentralized trials. You have a lot of our competitors and others who are doing -- have expertise in part of it of a clinical trial -- of decentralized trial. We have both the technology layer, the services layer, where we can bring nurse networks in, the knowledge of the regulatory environment. So we can in-house do everything we need to do in decentralized trials without outsourcing any component of it, which we think is valuable. I think we're up to probably 40% or more of our clinical trials that use some element of our decentralized trial solutions. Not many of what you would call fully decentralized trials, if any yet, but you're seeing a kind of an inexorable trend towards more decentralization, which is good because that finds -- makes it easier to locate patients, easier to get a representative patient set because it's just easier on patients. The more they can do from their home to participate in the trial rather than having to drive miles and miles and miles to investigator sites on a monthly basis.

Understood. Well, we've talked about a lot of the value drivers of the business. As we try to pull it all together, any framing thoughts you have for how to think about 2023?

Well, yes, look, we're obviously not giving guidance yet for 2023, but I can talk broadly about 2023 and talk about a few specific things that we mentioned on our call. Look, number one thing I would say is the overall demand environment, we think, remains very healthy going into 2023. So I think that will provide the tailwind to continue delivering on the top and the bottom line. We do have FX that -- we'll be fighting year-over-year in the first half if rates stay where they are. We don't know where rates are going to be obviously. All we know is we assume that current rates are going to continue, we'll certainly be wrong. But if they continued, there would be headwind, particularly in the first half of the year. We will have COVID revenues rolling off -- additional COVID revenues next year, probably on the order of another $500 million to $600 million reduction. Now wouldn't panic about that by any means because as we showed you this year, as COVID revenues roll off, we replace them with revenues from other therapeutic areas. And it's just something that we'll continue to talk about next year, and we'll try to continue to be as explicit as we were this year about, okay, where are the COVID-related revenues? And let's hope we don't see another uptick in that area because it will mean another flare-up of COVID. We did talk some about below-the-line items, one in particular in our conference call. That's the interest expense. Obviously, interest expense has ramped up quicker than we were anticipating, say, 6 months ago, a year ago because rates have come up. The Fed has been raising rates aggressively obviously and the ECB as well. So one of the things we wanted to make sure we got out on the call was, look, if you just were to take where the market is expecting rates to go, the various rate increases baked in going out into the first quarter, you would see us exit the year at a run rate of about $140 million per quarter, say, $560 million per year of interest expense. And actually, if you assume that there's some additional increases in the first quarter out of the Fed, which I think the market's looking for another couple of 25 basis point increase, plus we have a swap rolling off, a favorable swap rolling off at the end of the third quarter, we could be up close to $600 million in interest expense for the year. So that will be something -- that's kind of a onetime thing. It happens. It may end up going back the other way in a year or so. Who knows? It's just something we have to deal with. And we have taken some steps in that regard. We just retired some term loan, about $500 million in U.S. dollar term loans that will roll off or mature in the first quarter of 2024. And we're looking at some other euro term loans that will mature around that time. The rates on those are actually pretty good right now so we wouldn't be in a big hurry. But they wouldn't be so good when we -- if we had to refinance them, so we'll probably pay those down as we get towards the end of next year. We could have a little bit of tax drag next year from U.K. interest -- I mean, tax rates going up. That's been kind of back and forth with the government there. The rate there was going from, I think it was 19% to 25%. And then Liz Truss came in. She said, no, we're not going to increase it. And now that Rishi Sunak is in, he's saying, yes, it's going back so we'll see where that goes up. We do have some income in the U.K. Not a huge item but that's a below-the-line item for next year. So there's some -- a few specifics around it. But fundamentally, the backdrop for 2023 looks good, strong and really in line from a market perspective and a market penetration perspective with our 20by25 plan. Interest rates are probably the one thing that's been different.

Maybe in the last 2 minutes we have here, we'll elaborate on that. How are you thinking about changes to your capital deployment strategy as a result of the interest rate environment?

Well, if you went back a year, we would not have looked at reducing debt at all. Now I just talked about a tranche of debt that we just took out in the fourth quarter and what looking at for next year. So we're clearly looking at debt reduction is one use of capital now where previously we weren't. Now that being said, look, we're still going to look at acquisitions. Obviously, with the higher interest rate environment, we have a higher cost of capital. We probably are a little bit more picky about the acquisitions that we might do and the returns that we expect than we would have been a year ago. But we will continue to look at strategic acquisitions. And I don't think we'll be out of the share repurchase market altogether either. It's just that we're going to be doing some of all 3 now where previously was M&A, share repurchase and debt reduction was off the table. Now it's kind of back on the table, if you will. To a degree, not in a massive way, but to a degree.

All right. Well, with that, we'll close it up. Ron, thanks for your time. Everyone, thank you for joining.

Yes. Thank you, all. Thanks, Dan.