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

All right Let's go. Hi, everybody. I'm Elizabeth Anderson. I'm Evercore's health care technology and distribution analyst. And I am very pleased to be joined by IQVIA. We have Ron Bruehlman, EVP and CFO of the organization, who many of you know; and also Nick Childs as well, from IR, who is Senior and [indiscernible] as well.

SO, Perfect, Thank you so much. So maybe as we take a look at the business, I think hot topics have been sort of the current demand environment. This probably is no surprise to anyone in this room. So if we take TAS, and we break it into sort of the four large buckets that you guys have highlighted, we have like analytics and consulting, with info services, real-world evidence and the tech business, how do we think about the sort of pharma spending demand environment, specifically in each of these -- in these segments and what you're seeing?

Right. Well, the demand environment has become an issue because you've seen our growth rate slowed down some in the TAS business. And it hasn't been uniform across the TAS business, but we have seen about 2/3 of large pharma announced in one way or another that are looking to make some budget cuts, and it's typically focused on short-cycle promotional spending and things of that nature. So the business has been most affected of ours, and we've talked about this quite a bit, is the consulting and analytics business. A lot of that work flows out of new product launches, which have been good. And ultimately, we think a lot of the work is going to get done, but it's also deferrable sort of work. And we've definitely seen a slowdown there. It's even gone negative in terms of growth rates a couple of quarters. And that's a business that's been most affected. But ultimately, we think it will come back because it involves issues like profiling segmentation, targeting of doctors, launch planning and things of that nature that needs to get done. Now another part of our business that's kind of you would call discretionary, at least in timing in nature, is parts of the real-world evidence business. And we think about real-world evidence sometimes as being a regulatory requirement and say, 1/3 to 1/2 the cases it is, but there's also a large percentage of that business, which is discretionary in nature. It provides a good return, we believe, for our pharma clients over time, but can also be deferred, for instance, getting drugs on to -- doing real-world evidence to get drugs on formulary or to support new indications, things of that nature. So that business has, I think, started to be affected some, too. The portion of our business that is less affected is our core data business, which is about 30% of the TAS business. And that's pretty much fundamental to what pharma needs to do on a kind of day-to-day basis is track how their sales are going. And of course, we're -- we have a very strong position there. And on the margin, we can sometimes see pharma customers adjust their spending, some their frequency of data and things of that nature, but that's held up very well for us. And then last, you mentioned the tech business, and that tends to be a little bit longer cycle business. You might get some delays in decision-making from clients, but typically hasn't been as affected. So to summarize, it's been really the shorter-cycle discretionary parts of the business, consulting and analytics and parts of the real-world evidence business where we've seen the biggest impact.

Got it. And maybe specifically on the real-world evidence business, is part of that impact, that you point out, sort of cyclically driven or sort of spending slowdown driven? Is that also in part like driven by IRA and sort of like product expansion? Or is that doesn't really -- hasn't really played into the demand for the...

Well, you would say IRA shouldn't have an impact yet, I mean the first impacts don't happen until 2025, but it has forced, I think, our clients to kind of relook at their portfolio and decide -- put some things on pause perhaps and decide where they want to spend their money. So it's very hard to tie it directly to IRA, but we think that there is likely some impact there.

Okay. No, that certainly makes sense. So then, as we think about -- obviously, you have the shorter demand -- shorter-term demand environment dynamics and then the longer term, still very positive trend in that business, how you think about your investment priority is for TAS over the next couple of years?

Well, we think that there's still areas that we would like to fill in and grow more where we have a large market potential and we haven't penetrated as much as we would like. For instance, we've been -- we've done a couple of deals recently in the real-world evidence area. One, a company called Quality Metrics, that has in standardized forms and templates for investigators and for pharma professionals in the real-world evidence space to gather data from clients -- or excuse me, from patients in a standardized fashion that meets the requirements of real-world evidence generation. And Quality Metrics has over 100 of these standardized forms that are used, and it's really kind of the gold standard in the industry. We also have made some acquisitions, and that would be what I would consider like patient centricity area. We've also been growing some and putting some money into medical affairs. You think the communications between pharma and clients health care professionals would be relatively straightforward, but they're actually highly regulated, what you can say and what you can't say, how you have to present. Evidence generation is one thing. Evidence dissemination has to follow some fairly strict rules. So the process for vetting data being disseminated to health care professionals in the real-world space is pretty time-consuming. And we made a recent acquisition in Europe of a company that has found a way to shorten that process, and they found that they can take up to 90% of the time out of the process of vetting and getting information ready for dissemination. It's amazing when you think about it. It average over 60 days that it takes sometimes to get data in a form that can be disseminated to health care professionals, and they've gotten it down to around 10 days. So that's just another example of an area that we're investing in. We're investing more in the med tech area. This has historically been an area where there's been less activity. We have a decent sized business there. But in relation to our pharma business, it's pretty small. We think there's a lot of growth opportunity there. And selectively, we'll be making acquisitions in the tech area. So both a combination of internal development and acquisitions will be our investment focus across those areas like real-world evidence, medical and scientific affairs tech. And in the real-world evidence, there's also finding new data sets as well. So that's another area -- because there's always more data to capture there.

Yes. It does sound like an interesting mix of sort of new capacity expansion both in terms of your internal investments and M&A and then also productivity in tools, both for you guys internally and on the client side. That's a fair way to sort of characterize that?

Before I forget, there was another thing that's important, too, and that's digital marketing. We've seen pharma, historically, it has been very focused on the sales rep model of approaching health care professionals. Now it's getting harder for reps to get in and see docs. And you have a younger generation of doctors that are more comfortable with digital communications. So we've made some investment in those areas in digital marketing that have been very helpful to us. And you're going to see us continue to invest there as well. That's another big area of investment.

Got it. And if we talk about those digital and marketing investments for a second, where are you sort of seeing increased spend? Like how is it -- like where are you seeing like the most effective channels in your experience?

In what for digital marketing?

Yes.

Well, look, we have a company that -- DMD that has basically opting consent from health care professionals to be able to market directly to them based -- online based on their usage of journals and what they're researching in journals and so forth. So I think that kind of very targeted advertising is important. I mean we've been doing Google so the world and others have been doing very targeted online marketing for years and years. I think the Life Sciences is just catching up in that area, and that's a big area of growth. And, So how you serve up advertising and how you do outreach to health care professionals based on their very specific interest what they're researching is a big area of growth.

Got it. And even in the current and demand environment, that's something that sort of pharma is still continuing is that so?

It's still growing. I mean even that has slowed a little bit versus what it was previously, but you're still talking about strong double-digit growth in that area. It's just relative growth has slowed a little bit as our clients have pulled in their budget so little.

Got it. Okay. That makes sense. Okay. Maybe talking about R&DS a little bit. As you move to sort of through the fourth quarter and the end of year, how do we think about RFP flow? Is that continuing to sort of be this sort of similar to third quarter levels. Is there any sort of standouts in terms of therapeutic areas or service types or anything like that to call out?

What I would say is from the start is that RFP flow remains strong. We're strong through the first 9 months of this year and remains good into the fourth quarter. We haven't seen any softening of overall demand indicators. Now if you look at it by kind of Aerie, you could break it down, you could say, "Okay, well, by customer segment, what are you seeing?" We're seeing growth. Now it will vary quarter-to-quarter, RFP flow in bookings, but we've seen growth in everything from small pharma, emerging biopharma, midsized pharma, up to large pharma. And so there's been growth in all of those segments. I know there's been a lot of concern about EBP, but we just have not seen a slowdown. And we've been pretty consistent with that since the issue first popped up more than 2 years ago. By therapeutic area, of course, as we've gotten beyond COVID, we're seeing -- we've seen the emphasis shift back towards more traditional therapeutic areas. But the big growth areas are oncology, rare diseases, neurology. Surprisingly, cardiology -- and surprisingly to me, maybe not to others, cardiology remains very strong. You think that's a pretty mature field, but it really isn't. There's quite a lot going on there as well. But in general, what you tend to find is that the emphasis has shifted towards more complicated sorts of trials than in the past. And then last, there's kind of an FSP versus full service that we've talked about. That over the last couple of years, we've seen a shift, a gradual shift in the percentage growth towards more FSP versus full service, at least among large pharma. Now that the flip side of it is EBP is pretty much exclusively full service, and that's growing nicely. So that provides a bit of an offset. But there has been some shift there. But by any metric that you look at, everything remains strong. I think our book-to-bill in the third quarter was 1.24x. 12-month rolling is slightly over 1.3x and looking encouraging as we proceed in the fourth quarter.

Got it. Okay. That's very helpful. As we think about the past rounds of pharma restructuring, how do you think about -- like what do you think the right way is to think about the time line between when an internal restructuring is announced and we start to see spending cuts as well as potentially opportunities where IQVIA could help reduce costs in clinical trials?

Yes. Look, it's interesting. There is no set time line for how pharma budget cuts tend to affect clinical trials. Clinical trial business is inherently a long-cycle business. It has a lot of momentum. Certainly, trials that are in flight generally are not affected. Every now and then pharma will look -- relook at its portfolio and say, "Okay, we're going to call this clinical trial because we want to change our emphasis to a different therapeutic area or something like that." But generally not. And in fact, we -- fond of quoting the statistic, we went back and looked back to the year 2000 of revenues in -- among publicly traded CROs, and through multiple cycles, economic cycles, some of them pretty bad during the past 25 years or so. And what we found is that no given year did the CRO industry publicly traded, as a whole, have a year of negative growth. So the long cycle nature of the business tends to dampen those ups and downs quite a bit. It's not that pharma doesn't make changes, it's not that they don't reassess their portfolio, but the changes tend to flow through to the CROs pretty slowly. Where you see the quicker flow-through is on the TAS side of the business and promotion and marketing spend where when things get tight at pharma for whatever reason, be it -- well, some of the things that have happened recently coming off kind of a peak of COVID revenue to where COVID vaccine work has and therapeutics work has dried up, the concern about a recession, higher interest rates, all the things that are -- and then also just Inflation Reduction Act concern about that. All those things kind of weighing on pharma and causing them to pull in a little bit. The first place they seem to go is towards a short cycle sort of spending. The things that you can have an immediate impact, you can cut your budgets immediately. Now the way it will often happen is we've been through this cycle numerous times. It's our pharma customers, particularly large pharma will come to us and say, we really want to tighten our belts. We want to make some budget cuts. We need some help from all of our suppliers. And they'll start throwing out numbers for you to hit. And if I hadn't been in this business in a while, it could cause a bit of a panic mode because you help gee, how we're going to absorb these kinds of hits. But that's not the way it typically happens. We have contracts in place and so forth. And we go back and we try to help our customers. But very often, we do that by saying, "Look, we'll save you x millions of dollars or whatever, but here's how I think we can do it most effectively, help consolidate some more of your spend with us or we can in sort -- or you can outsource some of your work to you. We can take cost out that way." And there are a lot of different ways of kind of skinning that cat. So those are some of the discussions we're involved in right now with our clients. But we also find that what ends up happening is they just cut their spend too. So that's why you saw the growth rate in TAS dropped off from high single digits, low double digits, down into the low single-digit range was because that's part of the way they save money is just by either cutting or deferring discretionary projects in the commercialization area.

Got it. No, that makes sense. Because it occurs to me that we tend to have the same sort of panic when we go through like large pharma M&A, if it happens to be like a customer set of yours or somebody that's like go through this initial panic, consolidate, they kind of reorganize. And then I think there's sort of been historically like interesting opportunities over the longer term from that perspective.

That's true. And I would say, actually, the mergers tend to have a pretty immediate impact. We haven't seen a lot of those. But if you go back to the first decade of the 2000s, late, there were a number of large mergers there and what will end up happening, and that's when we were just at least the commercial side of the business is just IMS. They're buying data from two different companies, buying data are now buying it once in overlapping therapeutic areas. Or they're cutting duplication and spending. You also find that sometimes patent -- LOEs or patent expiries tend to trigger reductions in spending as well. There were some -- there have been some major ones over time. But when, for instance, Pfizer lost exclusivity on LIPITOR, it had a huge impact on them. And obviously, they're going to pull in from a spending standpoint. But that's more than a decade in the rearview mirror.

No, for sure. Maybe thinking sort of that growth in that demand, how do we think about TAS and the segment gross margin line in this environment? Like how fast is the growth really need to be to generate gross margin expansion? Is that not really -- or is that not really the right way to think about it? And are there any additional sort of levers you can pull depending on -- if growth continues to be slower in the near term?

Yes, I would say that the gross margin in TAS tend to be affected most by product mix. We have the highest margins typically in our data contracts. Our consulting and analytics can be a very nice business as well. Within the tech business, the license part is good margins. The implementation, not so much. Real-world evidence, it varies. If it's data generated or syndicated sort of stuff, it can be high margin. If it's just doing health economics outcome research with expensive researchers, it's just marking up labor. So kind of the mix within that business tends to be what determines the gross margin as much as anything. Yes, there's a volume impact clearly because when you have higher volume, you have higher utilization, particularly at consultants and people like that. So that's helpful on the gross margin. Where you see the biggest volume impact, though, it's actually when you get down to the EBITDA line because the SG&A is where you get your leverage. And so what we've been doing as a business has pulled in some as we've been very aggressive about taking costs out of the SG&A line. And honestly, that's where we would have to continue to look if it doesn't bounce back. Now we expect it will bounce back. Why? Because there's a pipeline of work there that we think pharma will want to do that they've been deferring. The new drug approvals are up substantially versus their 5-year average. So there are lots of those there. And there tends to be a cyclicality to the pharma spending that we've seen. It doesn't last 5 years. It's kind of 1 to 18 months to 2-year sort of thing before it bounces back. But with -- having said that, I would caution that we see it as being more likely a second half 2024 bounce back in growth rates rather than a first half bounce back in growth rates because these trends tend to have a little bit of momentum.

Yes. No, that makes sense. So is it possible, like given what you just said about the gross margin line, maybe we can talk about EBITDA, if you prefer, that if you have like a -- the data services is less affected and like the analytics and customer, that could just sort of help to offset that sort of broader decline in that from like a mix perspective?

Yes. For sure, that to the extent -- in an odd kind of way, the extent that the data becomes less of a drag from a mix standpoint because it's growing low single digits. And previously, everything else was growing high single digits or double digits. Yes, as those other parts slow down, data becomes less of a mix drag. It's kind of an odd phenomenon. So there's always a lot going on beneath the gross margin line. I mean even FX affects gross margins where your cost is, where your revenue is. So it's a bit of a puzzle to sort it out sometimes. Overall, if you focus on what we've done at the EBITDA line, forward, we don't -- we have segment disclosure for operating income, but that's also got a lot of things in it that are non-GAAP add-backs. But if you look at our overall EBITDA margin, we had about 70 basis points of margin expansion this year, and we're projecting roughly 50 next year. So we've been able to overcome those impacts so far.

Got it. And how do we think of -- I think you talked about some of the levers in TAS on the OpEx side. Are those sort of similar in R&DS too? Or is that -- is there some other way you would sort of differentiate the potential cost opportunity if that business were to slow mark?

Well the distinction in R&DS side is in TAS we can adjust pricing pretty quickly. In the R&DS business, it tends to lag. And sometimes that works to your advantage and sometimes it works against you. And recently, it's worked against us because during the COVID period, we saw, like others, a lot of pressure on attrition, labor costs that we had to absorb because we didn't have the ability to go back and adjust contracts. Contracts adjust in the R&DS business run 4 to 5 years, and they -- for clinical trials. And the pricing is typically set with annual escalators that are tied to historical rates of inflation. So if inflation is running at 2%, in 2019, when you price a contract, you're going to get a 2% escalator even if your labor costs are up 8%. So what's happened over time is that we've gradually been rolling off some of the contracts that have been negatively affected by inflation and there's more and more that we're burning off that has the new rate cards, higher labor rates in it. So it's so gradual, it's hard to even notice. But over time, it's been a tailwind for us in margins. Now the other side of it is you have FSP growing a little bit faster than full service, and FSP is substantially lower margin than full service. So net-net, R&DS margins have held up well, but those are two of the kind of countervailing forces.

Got it. And maybe just we're sort of 2 years into the sort of higher inflation period. And if we think about the typical trial being sort of 3.5, 4 years in length, is that the right way to think about it that we're sort of like 50% of the way through this sort of like rate card increase roughly?

Yes. Roughly 50% through the increase. Correct.

Got it. Okay. And then how do we think about sort of employee retention versus I think that had been sort of slowly improving earlier in the year. Now we have the sort of demand environment. Are there any sort of changes to how to think about that? Or is that kind of continuing to improve as we think about the end of this year?

Well, I think it got worse. The worst point for attrition was when I said it was third quarter of 2021, where it peaked at over 20% annual labor attrition. It came down, from that point forward -- to the end of last year, it got down to pre-pandemic levels, around 12%. And it's been bouncing around that area sense. So we've kind of returned to normal versus what we used to see. So those pressures are largely behind us. And there are pockets of the business that remain competitive, particularly in the clinical trial areas, CRAs and so forth. But not to the extent that they were previously and even among CRAs and project leads and people like that attrition has come down substantially. So that's been very helpful. It's returned to -- wage increases have returned to more of a normal what you would expect. And of course, with inflation settling down, that's helpful as well in addition to getting past that COVID surge just inflation coming down. So that's not a big issue for us right now. We're just, as you pointed out, still working through some of the backlog issues in R&DS. And like I said, that can work either way. It may be that 2 or 3 years from now, we'll get some benefit out of having some higher inflation rates baked into our contracts. It's gone both directions for us in the past.

Got it. No, that makes sense. Obviously, I think you've talked about -- and on prior calls, you've talked about sort of shifting FSP mix in pharma versus in the biotech segment. How do we think about sort of like where that could go or kind of like the ceiling of that? Is that kind of like -- obviously, it's been accelerating recently. But like I don't know. I'm just trying to understand like where you sort of think either from prior cycles experience or not, like where that could go over time?

Well, let me put some numbers around it because we get this question from time to time. If you look at the business, our R&DS revenues, including pass-throughs, FSP work as kind of across the entire, R&DS business is about 15% of our revenues. If you do it just on pure services that is before pass-through, it's about 20%, give or take, of the business. So I mean the business is still predominantly full service work. Now we have seen over the past couple of years that ticked up a few percentage points. And you can see in the RFP full-out with slightly higher for FSP work than for full service work in comparison to what our revenues are. So that's kind of a leading indicator that it's going to continue to go up. How much longer? It's hard to say. We've seen this be a trend that's reversed itself, swung like a pendulum sometimes within the industry. Some of the large pharma clients decide well, when their budgets are getting a little tough, maybe I can save some money by bringing the work in-house. And then they later decide, well, this isn't really our core competency. We're not as efficient here as we want to be or we don't have the expertise for some of these trials, so we want to outsource them. So I don't see it as being a long-term secular trend based on what's happened in the past, which is we've seen it be like a pendulum going back and forth. But right now, the movement is definitely towards more FSP work on the margin. And keep in mind, too, that you're talking about having a backlog of $28 billion and 4 to 5 years to burn off trial -- through a trial on average. So these shifts tend to be relatively gradual within the business.

If we think about that -- that's a really helpful context. If we think about like the peak to trough, like where is FSP ever been at its highest versus lowest? Like we just trying to think of the magnitude of that swing.

That's a great question. I don't have the answer to that. Has it ever been significantly higher or lower than kind of, we'll call it, the 20% service work it is right now? I don't know. Nick, do you -- have you ever seen any stats on...

I want holidays. I'm just trying to think of like relative like it's been 10% to 30%. Like it's been 18% to 22%. I'm just trying to like gauge that magnitude.

The peak now we're getting back to some of the highest levels that we've seen on the low side. I can't tell you the low it ever went, but the data I've seen is -- I think you're kind of in that 15% to 25% of the band that we pull that...

Yes. I was just trying to understand like the relative -- because I know we spend, as you say, so much time talking about this, but I'm just trying to understand -- make sure I'm understanding it versus relative importance to your business. And obviously, you pointed out some of the countervailing trends on the biotech side as well?

Yes, right, exactly. EBP is entirely full service. And over time, it should grow faster. We see it definitely growing faster.

Got it. Obviously, a hot topic over the last couple of weeks, you guys have refinanced a bunch of your debt. Can you sort of give us an update as to how do things stand now? And then how do we think about like your interest expense on an ongoing basis?

Yes. We -- there was a lot of concern expressed by both the sell-side and the buy-side about some of our near-term maturities and our exposure on interest rates and refinancing. And I think we took a really nice step in the past month to alleviate some of those concerns. We had two big issuances. We did $1.25 billion of senior secured notes that were 5-year notes. And then we followed that with $1.5 billion of term loans, both U.S. dollar denominated. Now we swap those to euros, and we got a fixed rate on those euro swaps of -- if you average out the two, but just shy of 4.9%, which was better than the rates we are paying on the debt. Now you may say, okay, but you took on euro exposure, doing that, but that isn't a concern. First off, because part of what we did was we refinanced. We took out a big slug of euro term loans. It was about $1.2 billion that was due in March of 2024. We also did take out some U.S. dollar term loans that were due in 2025, but we have plenty of euro earnings that operate as a natural hedge of that euro interest expense or the euro interest expense operates as a natural hedge of those euro earnings. And so right now, our euro-dollar net borrowing mix is around 50-50, but it's very comfortable for us. So two things we were able to do. One, we were able to take out near-term maturities or 2024 maturities and a good chunk of our 2025 maturities. We were able to get a very favorable rate, and that will help us keep interest expense flat to slightly up, maybe next year, flattish, call it, next year, given where the market sees rates going right now. And previous to that, we were looking at it actually going up because you would have a full year impact of 2024 rate increases going through. We have a swap rolling off next year. So we are looking at interest expense going up next year. Now probably flattish to maybe up a tad. It really -- the latter depends on what happens with short-term rates because we'll still have about 20% of our portfolio that's on -- a debt portfolio that's on a variable rate basis post the swaps that we just did.

Got it. And can you talk about the FX cost mix? Obviously, you just talked about the matching of the interest expense in euros to the cost. Can you just remind us what percentage of your cost base is in euros?

I don't think we've disclosed that per se. Let's just say it's considerable. And I would -- really, I think what's -- our biggest country probably for cost -- in U.K., we have a substantial amount of cost, but that's obviously pound and not euro. We have a fair amount of cross the Euro region. We have a lot in India. We have a lot in Philippines. So our cost base some in Argentina. Our cost base is spread out around the world, and we haven't disclosed the exact percentages of that. But we do have a substantial European business. I want to say in excess of 30% of our overall revenues, it generates a lot of profitability, and that's what we're -- those earnings are what we hedge with our euro interest expense.

Got it. One more thing maybe on the Europe versus sort of the U.S. and elsewhere. Is the demand environment from like pharma or biotech like different by geography? Or you would say it's pretty similar? I mean, obviously, many of these pharma companies are global in nature. So maybe that's a little less relevant, but I just wanted to see if...

It's interesting. We have seen more pressure in our U.S. business in the TAS than we have seen in Europe. U.S. companies tend to -- I mean pharma companies tend to make more money in the U.S. than they do in Europe because the pricing umbrella there. So when times are a little tougher, then that's probably where they cut back. So I'd say the pricing environment is one of the big differences. And of course, the IRA is going to affect pharma in the U.S. It doesn't affect pharma pricing so much overseas, but the U.S. business does support R&D for the world. So it's not like the IRA wouldn't have an effect on overall global pharma outlook.

Got it. And I think as -- Ari mentioned the cost sort of continued sort of leverage levels that sort of we should continue to think about those as like broadly consistent going forward with where you currently are?

Yes, we're about a -- net leverage ratio, we're at about 3.5 turns, net debt being 3.5x trailing 12-month EBITDA. And yes, that should remain there over time, let's say, through the end of 2025 should actually naturally drift downwards some just as EBITDA continues to grow. But around 3.5x, we're very comfortable with that. And no issue servicing the debt. We've been quite a bit higher in the past. So the nature of our business is such that can support a fair amount of debt.

Okay. That makes sense. One of the other things you've been talking about over your time in recent years is sort of just like net working capital improvements and continued sort of generation of free cash flow. How do we think about sort of like where you are in that journey? And sort of where do you see the opportunities to improve that over the next, just call it, 6 to 12 months?

Yes. And it's interesting that we have made progress there, but some of it is masked by the fact that -- we went through a period in COVID, where there was a lot of very quick burn studies with big upfronts associated with them. And also some of the consulting and -- that's on the R&DS side, consulting and analytics work that was done then tends to come up with bigger upfront. And we burned through a lot of that, and we're in a period now where we're not seeing as much in terms of customer advances. And we're also seeing because interest rates have risen, our pharma customers hanging on to their money a little bit more. So collections have been a bit more challenging. But it's something we put a tremendous amount of emphasis on internally, also improving our processes to reduce our unbilled. And some of our investors have picked up on the fact that our unbilled have gone up a lot. And the one thing I would caution when you look at that is -- some of that has to do with the fact that our investigators out in the field for our R&DS business have -- are under pressure in terms of labor. They've been billing more slowly. So they bill investigator fees more slowly, which we, in turn, build to our customers more slowly. So there's no cash flow impact. We have cash is changing hands, but it shows up as unbilled because we're accruing for the revenue. So some of that is a bit artificial. But some of the unbilled have to do with the nature of the unbilled and the customer advances have to do with the nature of what parts of our business are growing in the past? Some areas just have better cash flow characteristics than others where you can -- for instance, in consulting and analytics, you can build more upfront. The data business, you tend to build more in advance.

Okay. No, that makes sense. In terms of that to maybe sort of relatedly, like how do you think about your sort of M&A strategy given sort of, obviously, interest rates? And what you're just saying with the leverage and also the more assertive FTC environment?

Yes. I would say the FTC everybody is aware that we're involved in litigation right now around digital marketing acquisition that we're trying to make. So it's something that I think everybody thinks about, but doesn't have a major impact on what we pursue. I would say what we're doing is to look out -- looking to build out areas where we see the opportunity for growth. And I mentioned some of those real-world evidence area, being an area of growth, some of the tech continuing to do work in digital marketing and things around that nature. We put an emphasis, I think acquisitions have the first call on our capital. We're going to send a certain amount, call it, 4% to 4.5% maybe at the outside, 5% of our revenue internally on various things. It's either going -- software development is the biggest thing. We also do spend a lot in the IT area and a certain amount in real estate and so forth. That's not going to vary much from year-to-year. What's left over in free cash flow, acquisitions are going to have the first call that. And from time to time, they're going to be periods where our stock price gets dislocated, and we'll take advantage of that to repurchase shares. So we'll do both. And on the margin, do we pay down more debt? We'll see. I think it depends upon opportunities. I don't think we're going to have any -- we don't have an explicit strategy of going out and saying, okay, we're going to try to drive down or leverage to 2.5 turns or something like that where we've seen others say, we're comfortable where we are. And if our leverage naturally drifts down over time just because our EBITDA grows, that's fine.

Got it. And have valuations for assets changed much given the current environment? Or do you think that the people are still anchored on like 2 or 3 years ago?

It depends. Valuations of some assets definitely have started to come down. Some of the higher quality stuff, people are still expecting big dollars for it, and it's been a little stickier. The private markets tend to adjust maybe a little bit more slowly than the public market sometimes. And there's still a lot of PE money sloshing around that can make selected acquisitions difficult to do. So we have to do a -- have to have a pretty big funnel to get down to those acquisitions we can do. And we've walked away from more than a few of our valuation concerns where we just say, look, this is what the seller is expecting. This is what the indications we're getting that PE is willing to spend, and we're just not going to spend that much. And that's okay. That's fine. But it tends to be been fairly slowly. Valuation expectations are coming down, but slowly.

Got it. In the last sort of minute that we have of our time together today, what do you think the least well understood thing is about IQVIA by investors or most misunderstood?

That's a great question. I think -- I would have said, if we went back a year or so ago, that people didn't focus -- didn't focused on us purely as a CRO. And now I think with the TAS business slowing down, so maybe for the wrong reasons, we've gotten more focused there. I think just the resiliency of the growth opportunities we have in our business, in particular, like in the R&DS area, I think a lot of people tend to focus on these very micro things like -- okay. This quarter, EDP funding went down a certain point. And I mean I've been fielding questions about that for the last years. Why aren't you guys seeing anything in the R&DS business? We don't quite believe it. And business has been very resilient. And I think that people tend to underestimate that. And we keep putting up the numbers and the book-to-bill and everything quarter after quarter, and everything is good, but there still seems to be a lot of skepticism, like when's the next shoe going to drop? And I just don't see it happening. So right now, I'd say that's the biggest area of misunderstanding in our business is just how resilient the growth opportunities are within the R&DS business.

Great. Well, thank you so much. I think we're out of time, and I appreciate you coming down.

Yes. Thank you, Elizabeth.

Yes, thanks.