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

All right. Good morning, everyone. My name is Tejas Savant, and I'm the life science tools and diagnostics analyst here at Morgan Stanley. Before we begin, for important disclosures, please see the Morgan Stanley research disclosure website at morganstanley.com/researchdisclosures. If you have any questions, do reach out to your Morgan Stanley sales rep. So it's my great pleasure this morning to have CEO and Chairman of IQVIA, Ari Bousbib; and Head of Investor Relations, Nick Childs, on stage here with me. Now for those of you who've been following the space for a while, Ari is a bit of a rare commodity at sell-side sort of conferences. In my many years at JPMorgan, he's also one of those health care CEOs that's allergic to the Westin St. Francis. So it is truly a privilege to share the stage with you.

Maybe to kick things off, Ari, can you just outline for us what you view as IQVIA's key accomplishments this year against a decidedly sort of tough macro backdrop? What are you particularly proud of? And is there anything you wish you'd handled sort of differently going into this year?

Okay. Well, the year is not over. So we'll see what happens. But look, it's a tough environment out there. But we have 2 large businesses serving life sciences. One is our clinical trial business around the RDS segment, which is the largest one. And that's a business that's fairly resilient. Because it's a long-cycle business, it's relatively immune to economic cycles and the ups and downs that the macro environment presents. And that business has been performing exceptionally well. Our numbers obviously are -- the reported numbers reflect the step-down from the very disproportionate share of vaccine development that we all had during the COVID years. But on an organic basis, excluding M&A, FX and the COVID from all years, revenue so far on the R&DS business is double digits year-over-year, which reflects a very strong underlying operating momentum. Our bookings have been very strong. Our backlog is up 11%. Our pipeline is up 11%. RFPs were up 8% year-over-year last quarter. So the underlying momentum of the business continues to be very strong. There were questions about funding, which we frankly have not seen in our business. We have not been affected by that at all. On the commercial side, we have a significant part of our business that's more discretionary spend, and that's subject to budgetary constraints that most life science companies have put in place this year as well as we've observed delayed decision-making. So at this time last year, when we were planning for '23, we anticipated our commercial business would grow organically, that is excluding COVID from both years and excluding FX and M&A. We thought it would grow mid- to high single digits. And in fact, year-to-date, it's grown only mid-single digits. And that's what we expect for the year. We are not seeing that discretionary piece -- that discretionary spend portion of our business come back yet. So that's a disappointment. So on the plus side, our clinical side business has done very well, extremely well and is very resilient and shows no signs of slowing down. And on the commercial side, because a portion of our business is discretionary spend, that has gone down significantly year-over-year. And as a result, we're growing mid-single digits instead of mid- to high single digits as we were originally anticipating. Having said that, in the current environment, when you look at life science companies in general, tools providers and otherwise, you see that they are showing declining revenue, reflecting the budgetary constraints and delayed decision-making that pharma companies are experiencing. So in that environment, to grow mid-single digit is very good. We're very pleased with that in the current environment. And that reflects the fact that a portion of what we sell is sort of mission-critical or necessary or required by regulatory agencies, such as, obviously, the data, some of the analytics, the real-world studies that are compulsory. So that's the overall picture on our business for 2023. On the balance sheet side, we're also very pleased we were able to take advantage of a depressed stock price. That -- you asked me about disappointments. That's one of them. We've been trading at multiples that you have to go back to maybe '17, right after we announced our merger, to see multiples like that. So we were able to repurchase, I think, about $600 million of stock at attractive numbers. And we also continue to buy some interesting strategic acquisitions in the area of site management organizations and lab and some technology. So we spent about $400 million year-to-date in acquisitions. So again, overall, we are happy with the performance, not happy with the stock price.

Got it. Fair enough. So looking at sort of R&D Solutions, right, to your point, I mean, really strong quarter, low double-digit growth in backlog as well. But we hear sort of discordant commentary, if you will, from some CROs talking of elongating customer decision time lines, others talking about, not CROs, but just tools companies citing these biopharma funding headwinds. What is it that keeps your R&D Solutions segment insulated from this broader trend? And second, what convinces you that perhaps there's not going to be this weird lag effect and it will catch up with you in the back half of '24 or '25?

Okay. So again, what you cite about tools companies and so on, we are experiencing on the discretionary part of the commercial business, and that's true. But clinical trial decisions are not made by life science companies because of annual budget constraints. These are long-term projects that have been maturing over several years sometimes. So when a molecule goes through a preclinical Phase I, Phase II and is now in Phase III, you're not going to stop the trial or decide not to spend the money because of the annual budget constraint that you can experience -- that you see for tools companies or that we see in the commercial side. It's a long-cycle business. And in our case, the vast majority -- I think 100% of what we do is Phase III and some Phase II. So we are less exposed to perhaps delayed decision-making on whether or not to start the trial. Once the trial started, it goes on. You cannot just stop. And so that's one reason. Again, the nature of the business; and number two, our unique position in it where we are largely a Phase III clinical trial services provider. There were concerns about funding, and we've been saying for a long time now that there are no funding issues. I remind everyone that before the pandemic, in the 5 years, 2015 to '19, the annual biotech funding was between $50 billion and $60 billion. That was double what it was the prior 5 years. The first 5 years of the prior decade, it was between $20 billion and $30 billion a year. So that ramped up to $50 billion to $60 billion between '15 and '20. In 2020 and '21, because of COVID, there was a lot of, frankly, dumb money that was poured into all kinds of antivirals. And anyone who had the slightest idea of a formula to defeat COVID or variants of COVID got funded. And you had really -- I don't know what to call it, but 100 -- I think it was $134 billion spent in biotech funding in 2020 and $120-something billion in 2021. So of course, we are down from those levels. But those levels are absolutely an aberration. And I cannot imagine that we're going to see that anytime soon. Now in '22, the funding level was $61 billion. That's higher by, I think, 6% or 7% than the average of the 5 years before the pandemic. And in '23, the first quarter was $15.6 billion, and the second quarter was, I think, $17.1 billion. So we are on pace to have a record year of biotech funding in 2023, again, excluding the '20 and '21 years of COVID, a record year in '23. And that is in what we are describing as a very difficult, constrained macro environment.

Got it. That context is actually super helpful. How are your customers preparing for the impact of the IRA now that the initial list of drugs for price negotiation is out? There's still a lot that could change in terms of time lines for implementation, et cetera. There's legal challenges underway as well. But is there a greater sense of urgency now to prepare for a bear case outcome? And how do you expect that scenario to impact the CRO industry?

Well, I mean, the reason why there's a lot of talk about the IRA is because it's very imprecise and because we don't know exactly how it will be implemented. And if anything, the list that was published the last few days for the first 10 drugs that are being subject to negotiation -- to price negotiation, it's pretty positive. I think 7 out of the 10 drugs are, I think, diabetes indications and cardiovascular indications. And those drugs, first of all, are nearing patent expiration, I think, in '26. So we're talking about discounting or negotiating the price of drugs for 2025 that are gone anyway, become generic in '26. Secondly, those drugs, because diabetes and cardiovascular has been shot for a long time, these drugs happen to be extremely discounted already, and I mean extremely discounted. So there is not going to be much cost savings to the system from these 10 drugs. So you scratch your head, why those 10 drugs? So I know that the IRA calls for a total of 100 drugs over the next few years. They'd have other drugs. But for now, at least, I don't see the impact at all. And as you pointed out, there are legal challenges, and there's significant uncertainty on implementation. If you step back from all of that and you think about what are the implications? So the 50,000-foot reaction, if you will, is obviously, if price is going to be lower, my IRR on the development of a given molecule is going to be lower than what I expected. And therefore, I'm not going to do the program. So I think that's nonsense because when you have a molecule that's promising, when you have data that's favorable -- and I don't know of any pharma company, any biotech that is not going to get funded or -- to develop that drug that's promising to cure a specific disease. Obviously, if I were the CEO of a pharma company, I would say that you're killing research and so on and so forth, which they are saying. But I just don't believe that, that is going to be the case. For our company, look, those -- the IRA calls for a renegotiation of prices between 9 and -- I think 9 and 13 years post-market introduction, depending on if it's a small or a large molecule. And that's obviously different than the duration of the patent protection. So what that means is simply that pharma has to -- assuming this happens the way the authors of the IRA intended, which is a big assumption, if I'm a pharma company, you would look at maximizing the value of your drug earlier in the program. Now today, what happens is you let it go. And then towards the -- as you're approaching the expiry of the patent protection, you look at alternative ways of prolonging the value of that drug, including and often by seeking alternative indications and applications of the drug and seeking protection on that. Now if you want to maximize the value of the drug earlier post-market introduction, then the likelihood is you are going to seek those alternative indications much earlier in the program. And what that means for us is that we will have just more opportunities to do additional clinical trials for the same molecule. So I see that as a favorable consequence for our clinical trial business. On the commercial side of the house, I also see that this is going to be favorable because you want to maximize sales of your drug. And therefore, you want to maximize country coverage, geographic coverage, channel segments, demographics. And therefore, you need a lot more data analytics and commercialization services, which is what we do at IQVIA.

Got it. Switching to the TAS segment. You talked about the weakness there in consulting and analytics and just longer decision time lines, right? I think you've talked about sort of 2 to 3 months now become more like 6 months. So have those delays started to improve or perhaps even worsen? And you'd alluded to the new -- the need for this delayed work to eventually happen as it all relates to critical projects, right? So does this mean that we could get a catch-up at some point? Or have customers essentially moved on, supported by their internal analysis rather than relying on consulting and saying that we're going to make a decision, we're going to move on, and we'll see what happens?

Right. So some of the things that were not done are never going to happen, but there's a portion that's delayed. There are drugs that are being introduced. There are pricing studies that need to be done. There are market access studies that need to be done in a variety of related analytics. So the drugs still need to be launched in different geographies. What we have seen is, again, delayed decision-making, a bigger disconnect than usual between the pipeline of opportunities that we track in the selling process and the actual sale or booking of the project. And so we track this, obviously, with 100 different metrics. But it's unusual to observe since the beginning of the year that there is a disconnect between -- because if the product is not going to happen, then it's taken out of the pipeline. And over here, we still have the pipeline, but the revenues are not coming in at the same pace as we would have normally expected based on the pipeline. So we're not seeing that improve. We're expecting early in the year that it would turn around middle of the year, but it hasn't. And as of now, we're not expecting it to come back until '24. So that's for the budgetary management at -- within pharma. I attribute this to caution due to the uncertain environment and cost of money and unusual circumstances, but hard to predict when it's going to come back. But some of these projects have to be done. So that's why I say early '24 and onwards should come back.

Got it. You previously talked about sort of Veeva's decision to switch CRM providers as contributing to some of those delays as clients evaluate the portfolio of offerings specific to the OCE business. I mean help us sort of dimension the opportunity for share gain here on the back of the switch. And have those spiking inbounds from frustrated customers perhaps translated into meaningful wins for you yet?

So look, the -- you're talking about the CRM tool in particular. Just to step back and take a couple of minutes to discuss what this is supposed to do, the historic way of commercializing drugs or marketing drugs was for sales reps to visit health care providers face to face and in between 2 patients and squeezing a few samples to try to persuade the prescriber to go with drug A versus drug B. And we've all experienced that. You visit a physician office, and the physician will give you a sample that they just received. That's yesterday's way of marketing drugs. And as you know, the number of sales reps is disappearing -- not disappearing, but going down slowly because it still exists in many parts of the world. There's no digital interaction between physicians and drug companies. It's still face to face. But that's gradually going down. And during COVID, it has taken a significant step down. Now CRM was simply a tool that equipped those sales reps. So if you have less sales reps, over time, your CRM market, by definition, is finite and shrinking. CRM, of course, took different shapes when we introduced our competing cloud-based CRM tool, which we call OCE. This was about 5, 6 years ago. It had intelligence in it, meaning you want to go to visit your physicians and you want to know a lot about the physician, you want to optimize your routes, you have -- your selling message is targeted and customized to the health care providers that you are visiting. And over the years, we've introduced more modules. And as you know, our CRM tool is built on Salesforce, whatever they call it, Force.com or -- it's moving to Health Cloud. But it's basically a Salesforce platform -- most advanced Salesforce platform, and the same was true of the main competitor. The main competitor had essentially swept the market long before we came into the market. And we were able to recapture or win back a few of those, 3 of the top 20. And almost every competition where we bid against the main competitor, we won 2 out of 3 of those with all of -- the rest of the market that hasn't been taken over. Now recently, the competitor announced that they were going to replatform. They are a technology company. Technology companies like to have their own proprietary platform so the customer is stuck with them forever. And we all know this model. It works very well for the technology company, not so much for the users, but that's the way it is. So they've decided to move to a proprietary platform as opposed to staying on a Salesforce platform. And obviously, that will force their customers to make a change, a significant change. As a result, they are pausing. That's an opportunity for us to -- that we perhaps didn't have before to offer an alternative solution. But again, I want to emphasize that it's a declining market, it's a finite market, it's a small market in relative terms, and it's yesterday's way of marketing drugs. We are working with Salesforce. We're not a technology company per se in the same sense. We're a technology-enabled company, but we are essentially a data analytics-enabled services company. And we use technology, we create technology content and application that's specific for life sciences that's based on the Salesforce platform. And I think Salesforce has their big meeting tomorrow, and they'll continue to work with us in life sciences on a variety of topics, including AI and so on. We've got the content, others have the technology, the plumbing, if you will, and that's how we work together. It's important to understand that like most products today, marketing is shifting towards digital channels and not face to face. And as a result -- again, CRM is yesterday's tool. And as you know, we've invested considerably in the development of tools, and we bought companies that enable us to accelerate the migration of the commercialization of drugs from face-to-face marketing to digital interactions.

Got it. Fair enough. I want to hit on your data lake, right? You've got about well north of, I think, 1.2 billion patients. And you've talked about using AI to help improve and differentiate your product suite across both R&D Solutions as well as TAS. But just as important is the fact that not all health care data is created equal, right? And it's fair that your ability to cleanse and curate that data is as much a part of your secret sauce. That said, why couldn't your sort of competitors leverage publicly available databases to do the same, perhaps with some of these generative AI tools and so on, and narrow that gap?

Well, I think as -- by now, everybody knows these tools, your GPT and so on, even the GPT-4 and most -- we are working, by the way, with all of these companies. They come to us because we've got the content. And as you discussed, more importantly, the business rules of how to manage that content. That content is proprietary. It's not available on Google Search. So if you using any of these tools, try to answer the very -- any basic questions, you will get no answer, get -- we are unable to give you the answer. I would love to show you illustrations, but maybe on future forums. The important thing here is the content. You cannot -- this is a technology that requires to be trained, like you train on content, you learn. And you cannot learn on generic material that's floating out there. I mean it's just not possible. It will not happen. So on the other hand, any basic questions you want to ask, how many patients between the ages of 45 and 60 have used the -- any of the top 10 diabetes drugs in the state of Ohio in the past 5 years? It's an important question for a marketer of diabetic drugs and to understand shares and everything. We tried doing that using ChatGPT or anything, and you'll get no answer, not even a hallucination, no answers. The tool will respond to you that they are unable to give you that because that's the proprietary data. But if you use the same exact tool within IQVIA, then you'll get a very granular information cut in any way you want, the number of patients who use it, their ages, their locations, their specific conditions, which medicines, et cetera, et cetera. Again, that's a simple question, but the potential is huge. And we are using it both internally for our own process efficiencies as well as to develop new offerings.

Got it. I want to hit on China quickly, Ari. It's only 3% of your total revenue. There's a -- it's an area of focus for investors given the geopolitical risks that play here. And also more near term, the biopharma disruption there is pretty significant. We've heard at this conference other companies talk about these significant cuts to the guide and so on or incremental weakness from some of this anticorruption crackdown. Walk us through what you're seeing there in the region and how you see sort of China evolving over the next 12 to 18 months.

Right. Well, our clients in China are pharma companies, either multinationals or local pharma companies. And because of this crackdown on corruption and these investigations that the government has launched in the pharma industry, obviously, it has put the brakes on business activity on the commercial side. Now thankfully, in this case, we are -- it's relatively small piece of our business, but it's not an insignificant drop in China. We are observing it. It's costing us some amount in our revenues, but it's a drop. It's a rounding error for our company, but it is something that happens. We are a large company. We can manage things. Now that is not happening on the clinical side, right, because that's -- once again, the clinical trial business is very resilient. We got a lot of flack because when the Russia-Ukraine thing happened, still happening, unfortunately, everyone said, well, we are out of Russia. And whatever we could get out, we got out. But we can't leave patients, cancer patients or any patients that are enrolled in the clinical trials and get out of the country. It's just not possible. So there are a lot of considerations. So clinical trial business is very resilient, including to a China crackdown, to a Russian-Ukraine war, to a macroeconomic downturn, and that's an important factor. And we are in 100 countries. So whenever we have an issue in the country, we could shift sites, which is what we did regarding -- when the Ukraine situation developed. So with respect to China, on the commercial side, yes, it is -- the activity essentially interrupted on the commercial side because of the government's investigation. And with respect to the clinical trial business, it's very resilient. There's no issue there.

Got it. Last question on M&A. Where do you see the most compelling opportunities? And has there been any shift, in your view, of -- that like-for-like CRO mergers are not for you? And just in terms of -- what adjacencies make the most sense? I mean there's preclinical, there's potentially expansion into manufacturing. Has the FTC regime prompted a rethink in terms of size and type of target for you at all?

So last part of the question first, the answer is no. The FTC could do whatever they want, and we do our -- we are developing our strategy and doing the acquisitions that we think are appropriate. As you're very well aware, we are investing in the digital space. And we bought a couple of companies, and we announced about a year ago that we were buying a company called DeepIntent. And the FTC decided to block that transaction, which is what they did with virtually every transaction. We think they're wrong. They don't understand the rationale, and we're fighting them in court. The other areas of investments, again, in the lab business, where we have capabilities that we need. The CROs, there have been a number of CROs that were either for sale or has been for sale for a while or had faltered in terms of performance. We look at everything. And when we don't do something, it's because we feel that the valuation does not reflect the -- or the pricing does not reflect the underlying valuation of the business. But we will look at everything. And the FTC is not something that we are -- again, we're not buying things that are -- if we have -- if we had 50% market share, we would -- I would say this, but that's not the case.

Got it. Fair enough. Great place to leave with that. Thank you so much for joining us, Ari.

My pleasure. Thank you.

Yes. Of course.