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

Good morning, everybody. I'm Luke Sergott, the life science tools diagnostics analyst here at Barclays. Today, I have Ron Bruehlman from IQVIA, CFO. And I think we can just probably get right into it, if it's good with you.

Okay. Great.

So off the top here, let's go taking off the macro headwinds. Let's tick off the top today. SVB exposure and just walk us through that.

I figured that would probably be the first question. A week ago, I would have had no idea. But look, overall, what I would say is it's not a big concern for us at least so far as what we can see right now. And as far as our own relationship with SVB, we have no loans whatsoever with them. We had a small amount of cash on deposit with one of the -- our subsidiaries that we had acquired back the last year or so that we were able to move out this week. So no exposure there. No big concern. Of course, the bigger question, how about our customers? How many customers do we have the bank there? And we went back and took a look. Just under 150 customers that had some sort of relationship with SVB. It sounds like a lot, but we have 10,000 customers. So actually, not so much. And when we look at what our exposure was for these customers, we're actually in a net cash positive position, which is to say we've received more in advances than we've -- we're waiting from them. So that's good. And just the size of these customers, because, okay, 150, are they big? Are they small? Total, they represent about, well, actually less than 2% of total IQVIA revenues. And we haven't seen any issues with them, frankly. Everybody having access to cash and so forth. So, so far, no big issues. Of course, we all have to be a little bit careful about projecting what's going to happen with the overall economy. You see the markets being [ weird ] today in the banking sector, in particular, and so forth so -- or the credit market implications ongoing and so forth, who knows. That's kind of anybody's, certainly my ability to predict at this point. But with SVB, in particular, in signature, no issue at all with them.

That's great. And talk about some -- with that type of background in mind, can you talk about the industry dynamics that you're seeing right now? So we ended the year really strong for you guys. There's been some fear on the bookings environment, especially on the biotech side. That's -- there's nothing new there. So talk about as you're seeing your RFP volumes and see how that ultimately factors into your guide for the year?

Yes. Well, look, just looking at the overall industry demand picture, it's very consistent Q1 so far with what we saw in Q4. And I would break that into 2 parts. One would be our Tech & Analytics Solutions business, Commercial business. And you'll recall that in the fourth quarter, we mentioned that there was some, I guess, cautiousness on the part of customers that are particularly on discretionary sort of project, analytics and consulting work and some late data purchases and things of that nature. We didn't see the normal budget flush we normally would have seen. We anticipated that some of that cautiousness would carry over into Q1 and bake that into our guidance. And in fact, that's what's happened. It hasn't been a dramatic slowdown, but continued cautiousness on the part of customers, which I would attribute to the ongoing concern about what's going to happen in the economy. And that's on the kind of the sales and marketing side, the commercial side of our pharma customers. If you go to the R&DS side, the clinical trial side, you see absolutely no change at all there. The RFP flow remains very strong, booking's good. The -- and this is large pharma down through EBP. Even in the EBP sector, we've seen a very good continued RFP flow. So what I would say is no change there. Demand environment remains quite solid, and we're always monitoring that for any change. And last year, in particular, when we had all the concern about emerging biopharma, we were asking more and more questions of our operations. Are you seeing anything? Are you seeing anything? And so far, no, we haven't. It's been very solid.

And on that TAS business, if you could dig in a little bit more from the pause or the cautious funding environment, I think you described it, can you talk about -- are there any particular functions that are being paused or customer class or -- across the 3 different businesses in there?

I don't think it's a customer class issue so much as it is. Pharma, looking at their spend, for instance, their marketing spend or their spend on consulting work, sometimes looking at a few customers in the margin about how much data they need and so forth and just trying to trim their budgets a little bit going into this year to respond to what they see as a potential downturn in the economy. And so taking a little bit longer to make decisions. Ultimately, I mean, we're not talking about dramatic changes here, but it's on their margin. This is following a period kind of in '21 and into '22, [indiscernible] '22 that was quite strong. So it's in comparison, I would say, still growing.

Okay. Yes. And the OCE, for those wins, you're still seeing elevated RFP, and that's still [indiscernible]...

Yes. The OCE is more kind of -- those come up as they come up, which is to say, whereas companies make the decision to switch vendors or take a new look at their customer relationship management business. Those haven't been as, I would say, sensitive to the economic concerns. It's more pipeline of things that are going to be coming up for consideration from the customers, and we continue to see that. And we continue to win more than our fair share of those that do come up.

Okay. And then so on the RDS side, you guys haven't seen any of the pressure from any of the biotech funding? Can you talk about the breadth of your portfolio? Or why do you think that, that -- [ some have started ] to see it.

Right.

Why doesn't it hit you guys? Because you guys deal with so many different customers.

Yes, we do. I would say we're a little bit different than some of our peers that tend to participate more early part of the market. And where they have seen some issues, we tend to -- more customers a little bit later, Phase II, Phase III. We have a higher percentage of customers that are post-revenue customers than some others. I think our total free revenue -- emerging biopharma is about 10% of our RFP flow and our backlog. So not insignificant, but not hugely significant. We also tend to be fairly choosy about what customers we'll take. We want to make sure that they have the funding in place, and we structured the contract such that we get paid more upfront, and we might with a larger customer. And all of those things together, I think, makes us a little bit less vulnerable than some of the others who participate earlier in the market with smaller customers, more pre-commercial who are -- where you might ride a big wave of like in 2021 and then had to come back down with funding. I'd make a comment about funding, too. I mean the impression has been, boy, funding has really been [ work ]. And if you look at funding on a year-over-year basis, '22 was weaker than '21 or '20, but those were both record years. If you compare overall funding, we look at a source called BioWorld that aggregates across public, private funding follow-ons and so forth. You see that '22 was, I think, [ $61 billion ] of funding for emerging biopharma, which is consistent with or higher than -- slightly higher than the prepandemic level. So you saw a big ramp-up in 2021 that inevitably wasn't going to continue and now we're back to kind of more normal levels. And what we've seen so far -- very early in '23, of course, but what we've seen so far in '23 looks fine on that front. So we're not overly concerned about the funding issue. I think there was a lot of different comments made by competitors that got people concerned. And then just the raw year-over-year compares look ugly and told a little different story than you would get if you took a longer-term context on the issue.

Got you. And are you seeing from the RFPs coming in, is there a shift more towards FSP or any type of dynamic change in the type of project you guys are winning?

We've seen, I think, in the last, call it, 3 to 5 years a shift, a little bit more towards FSP work from full service work. The reality is most of our large pharma customers had a combination of both. In fact, we did some hybrid trials [indiscernible] trial, part of it will be FSP and certain elements of it -- certain elements will be full service. We've seen a lot of that. There are a few of our customers that are really exclusively FSP. We've seen some more shift towards more FSP work. At the same time, the faster-growing part of the market, which is emerging biopharma, tends to be more a full service to a customer because they don't have the capabilities or the global breadth and so forth to run clinical trials [ under them ]. So yes, on the margin, a shift towards FSP, but there's a lot going on underneath the surface when you look at individual parts of the business.

And does that change as you get to the maturity of a particular therapeutic [indiscernible] as something [ as -- to ] have gene therapy? There's so much -- and cell therapy, there's so much difference -- so many differences with how those trials will be run. And I would imagine that the FSP capabilities will be built before you start landing those big strategic [indiscernible].

Yes, that's the case. What you find is in cell and gene therapy and some areas like that, there -- it tends to be more oriented towards full service work, even among the large sponsors who like FSP work a lot. So yes. And then in the more mature therapeutic areas, maybe a shift more towards FSP work. And another thing about the FSP work is that pharma will do kind of [indiscernible] for a base level -- some -- certain customer's base level of FS -- of clinical trial work, and then they'll use the full service as kind of a capacity buffer for the ups and downs and so forth. So there are a lot of different elements to this.

How does the pricing work with them? How has that environment been? I'm sure it's probably stable. But when you have more FSPs, the common thinking is that, that's coming in at a lower margin.

Yes, it does. FSP work typically comes at a lower margin than full service work. There's no question about that. So that's a -- on the margin, you're going towards more FSP work that is a mixed drag on [indiscernible].

Sure. All right. So we can dig in here for the guidance for the year a little bit. So talk about the dynamics, the puts and takes that you guys have baked into the full year, like give us a sense of the pace and the kind of between the top line and the margin expansion.

Yes, yes. Sure. Well, look, when you look at the full year, there's some important things to take into consideration. And the most -- I guess the biggest of them is what's happening with COVID-related work. We signaled overall -- guided overall revenue growth on a reported basis of just over 5% to slightly under 7% revenue growth, which looks light compared to some prior years. But you have to take into account there that our COVID-related projects are coming down about $600 million in total revenue year-over-year. Now in our guidance, to be fair, we have some things going the other way. One would be we've assumed 100 basis points of M&A contribution during the course of the year. And we -- at least when we put out our guidance, there was a very slight tailwind for the year due to FX. Now that changes every day and it's probably gone against us a little bit since we did our guidance. But when you -- what we like to look at is kind of an underlying revenue growth rate, which is organic, constant currency, taking COVID out of both years. And if you do that, we're looking at very solid growth for the year overall for IQVIA that -- it's very much in line with what we've been doing all along through this period.

And so as you're thinking about the dynamics between the 2 segments in the first quarter, the TAS business is probably going to be softer than the RDS. Is that safe to assume?

Through the year, I would say, look, we -- here's the guidance we've given. We've given growth of -- we've assumed this underlying constant currency ex-COVID growth of 9% to 11% for the company as a full TAS -- under -- the various segments underneath that, TAS, 7% to 9%; R&DS about [ 10% ]; CSMS, kind of find it up low single digit or so. So yes, in that sense, R&DS growing a little bit faster than TAS, although TAS still very solid underlying growth. And that's based on the strong bookings activity we've had in [indiscernible] going back.

Yes. And that's in just a couple of years, [indiscernible] continues to improve throughout the year. I mean kind of step-up we're assuming here and the fact that [indiscernible]...

Well, yes. I mean, yes, I think one of the things that -- when you're looking at the calendarization, an important thing to consider -- there are 2 really important things to consider here. First is that the biggest part of the year-over-year COVID decline comes from [indiscernible], $600 million for the full year, over 40% of that decline comes in Q1. So it's the biggest drag in Q1. Secondly, you have the biggest FX in that. FX is -- even though we were saying in our guidance it was slight tailwind, flat to slight tailwind, it's actually over 200 basis points of drag in Q1. And this was all assuming FX rates mid-February when we released earnings. So those 2 things are affecting the year-over-year growth rate in Q1 versus the balance of the year. As we go forward, those work their way out of the system, and you'll have stronger growth rates just as a consequence of that. We're also assuming that some of the cautiousness we've seen in the spending on the TAS side from our customers starts to abate as we go through the year. And looking out in the pipeline and so forth, we're comfortable that will happen.

Okay. And that 100 basis points of M&A that you guys have baked in, you guys -- still at $1.3 billion last year. Talk about the types of assets that you're acquiring and why only 100 basis points of contribution.

Yes, I want to -- we've gotten this question a number of times, and I want to clear up what I think is a potential misperception here. And I was scratching my head about it and then said, okay, well, if you do $1.3 billion and you see you're getting 100 basis points, and boy, doesn't that sound like [indiscernible] revenue. And no, that's not the case. Because you have to remember, when you make an acquisition in 2022, you're getting some of that revenue in 2022. So 100 basis points is a year-over-year incremental contribution from acquisitions that we've made. So that's really what kind of math is, it's considerably better than the raw numbers you might suggest. As far as what we did in that $1.3 billion, I mean, there were a number of smaller acquisitions that I won't talk about, but the 2 biggest ones we did were in the digital marketing area in North America, which is Lasso, and that complements very well an acquisition we did a year earlier called DMD Marketing, and the other was in the lab space, this company called Nexelis. It does advanced bioanalytical testing and biomarker testing and complements what we've built out in our lab business in terms of additional capabilities for our customers. And just a few words on the Lasso acquisition because I don't think everyone appreciates what we're doing in the digital marketing space. As all of you know, pharma has been, to an extent, deemphasizing the use of sales reps and going towards more multichannel means of marketing. And it's not like it's a dramatic overnight shift, but it's a steady shift towards additional channels for multichannels for marketing. And we've seen this coming, and we didn't have as big a presence as we would have wanted in the digital marketing space to help our pharma customers. So we went out and we made an acquisition, first is a company called DMD Marketing in the U.S., and they have a wonderful model where they have opt-in consent from about 90% with the health care professionals around the country to be able to track as they go through medical journals and so forth that are available on our site. And you can use this data to see what are the health care professionals interested in, and we could very specifically target them -- help our pharma customers target them through digital market campaigns. And then, Lasso was a nice complement to this because Lasso is a platform that our customers use to actually place the digital ads in different digital forums and also to track their effectiveness, what's happening, what did you see. You have kind of the information and the platform coming together, and it's been a really nice source of growth for us. It's a big growth area for our pharma customers. And I think strategically important is they gradually shift away from reliance on Salesforce to call upon health care professionals.

How big is that business for you now?

We haven't specified the dollar amount. It's not huge in terms of overall -- we're not yet in the hundreds of millions of dollars, let's put it that way, but there's a lot of growth in there.

Seems like a hedge for the natural decline in the CSMS business.

Well, yes, just a little bit. And remember, a lot of what we do in the TAS space relates to campaigns and direct to health care professional marketing. We need to go out in terms of helping our customers do call planning of their sales reps, Salesforce design, deciding which doctors to call on and so forth. So it's very complementary to this. It's just a different way that pharma is going to market now than they used to, probably the industry. Health care industry is a little bit behind many other industries in this regard. I mean this digital marketing spanning out for a long time, yes.

And just to wrap up, to your last question on capital deployment. So updates on your priorities for the '23 and the [indiscernible] goes back to normal or -- how are you guys thinking about that?

Yes. Look, our guidance was -- we spent about $2 billion in terms of capital deployment this year, roughly $1 billion acquisitions, $1 billion on debt reduction. There's some debt euro term loan that expire or that come due in -- early in 2024 that are pretty favorable borrowing right now but don't look great to refinance. And so we'll likely take those out towards the end of the year. We explicitly didn't put anything into share repurchase this year, but we reserve the right to do some if you have situations or you have market dislocations or whatever where you just say, this is crazy. It's just too good an investment opportunity buying our own stock not to do that. But in any of that, we see our net leverage ratio declining to 3 or below probably by year-end. And so it's just kind of naturally coming down, not so much because we're reducing large amounts of debt. It's just we're growing as an organization, our EBITDA is growing, so our capacity to service debt continues to grow.

Got you. Got you. And so the $600 million [indiscernible].

Yes. Probably a little bit more than that. I mean it's like a -- given the exact number, I'd say somewhere in the $610 million to $620 million range right now. And we always do that based on what the outlook is for rates, and that seems to change daily, too, right?

All right. Thank you.

Okay. Great. Thank you.