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

Yes. Okay. Great. I guess big picture what do you reckon investors are potentially missing about where we are in the CRO cycle you think -- or anything we're kind of overlooking as part of opportunities or risks?

Yes. Look, I think one of the things are -- people are overlooking for IQVIA in particular, is that we are not exclusively a CRO. 55% of our revenue, give or take, is CRO-related 45% comes out of the TAS business and CSMS business so I think that, that's a big item that people overlook. I think they also tend to overlook the long-cycle nature of the industry sometimes get overly focused on the short term, in particular -- and kind of the quarter to quarter fluctuations in demand. And this business is one where you book something this quarter and it takes 4 or 5 -- it take 6 months before you get any revenue out of it, the minimum. It takes 4-plus years before you end up fully realizing the trial. So it's a business that has a lot of long-term momentum in it. The fundamentals remain very good, even with some of the recent choppiness we've seen with portfolio re-prioritization. So I guess what I would urge people to look at as kind of some of the longer-term trends. For instance, we went back and we did a study back to the year 2000 of all the publicly traded CROs to say, what happened during that period? This is a period where you had a couple of pretty significant recessions. And during that period, there was not a single year when the publicly traded CROs had negative revenue growth. Yet there were, I think, 3 years when the S&P as a whole did have negative revenue growth. So it's a business that has a lot of stability long term.

Talk a little bit about cancellations. I think you said 50% cancellations in the last quarter Was that the first time I heard that number whereas some of your competitors sort of flagged that, I guess, probably earlier last year. So is there anything that would change to why you all -- if you did see it later in the year, why that would be some your competitors [ seeing early ]?

Well, I make a comment about cancellations. We did see a very elevated level last year, about 50% above normal as you say, over the course of the year. Now there were 2 very large trials that we had that were canceled for futility. So that's very idiosyncratic. You're not going to say that, that's necessarily indicative of any sort of trend. But having said that, we also did see some particularly late in the year, portfolio prioritization effect. We think a lot of it due to IRA and how pharma companies were reacting to that. And we see that continuing on probably an elevated level of cancellations in the first or second quarter. And why other people see different than we do. It's company to company, it's customer to customer. And there's a fairly big variation in and policies around, I think, about cancellations. I look at one of our competitors and saw, they have very, very constant cancellations quarter-to-quarter. And that I just scratch my head about. I don't know how that could be. So there is flexibility, I think, in when you recognize cancellations and I think different companies take different approaches to that. I would make the overall point while we're talking about quarter-to-quarter and cancellations and things of that nature. I'm going to go back to something that Ari talked about on our earnings call, which was that we think that there's too much focus on the quarter-to-quarter and the book-to-bill in particular. And let me give you some thoughts around that. First of all, like I say, it's a long-cycle business. So any 1 quarter isn't going to tell you that much, particularly when a booking you get this quarter burns over for 5 years. The other thing is that there's a significant variability in how different customers [ treat cancellations ], but bookings -- what we've seen is some people do it like us contracted basis, some do it based on verbal awards. What goes into the backlog versus what doesn't go into the backlog varies. There are differences in how many years of FSP companies take? So there are all sorts of differences in that. So it's very hard to compare across companies. And then when you realize that there are only 4 companies out there out of all the CROs that we [ book to bill ], you don't even have a very broad base of companies to which to compare that to. The other thing I would say is I think the industry as a whole has done itself a bit of a disservice by emphasizing that too much because our that is a quarterly book-to-bills because our customers have picked up on that. And they push you at the end of the quarter because I know everybody is trying to make the quarter quarterly bookings numbers. And in our case, it's particularly frustrating too because we have a whole huge TAS business, which is practically half of the business and everything seems to come down to what's going on with the book-to-bill in a given quarter. So I can tell you that we're actively having debates internally about, is this something we even want to continue reporting on a quarterly basis. Because it just -- it gets -- just gets too much emphasis, and we put out a lot of other good metrics like next 12 months revenue from backlog, backlog growth, all those sorts of things. So anyway, I think it's worth making those points. Yes.

Revenue for [indiscernible] in early stage [indiscernible] could change [indiscernible].

About 10% of our revenue comes out of what we would consider to be pre-revenue or pre-commercial emerging biopharma company. So it's a comparatively small percentage. Overall, we do about, call it, roughly a little bit over 20% how we define EBP, and that's the other thing to be cautious about because everybody has a different definition. One of our big competitors talks about the top 50 and everybody else goes in EBP. We have a little bit narrower definition. But in any event, it's relatively small in pre-commercial, and we tend to focus on EBP customers that have funding that are in better situations more likely to go forward. We do more late-stage work that is Phase III -- Phase II, Phase III, we don't do much at all, and we do nothing in preclinical, and we do very little in Phase I. So we tend to get EBP companies that are a little bit further along in their cycle and are better funded. So in that sense we don't feel like we have much exposure there. But we do a substantial amount of our business with EBPs for sure. Probably it's -- if you want to put round numbers on it, it's probably 20% of our revenue, the way we define it and 25% of our bookings because they're growing a little bit faster than large pharma, it's mid and large pharma.

So it's 20% CRO?

Yes, CRO. Exactly.

[indiscernible] Organic growth strategies and kind of -- I know they're just trying to [ form ] the molecule. Do you want to expand into -- little earlier stage or potentially manufacturing?

Our inorganic growth strategy, I think our first emphasis is on filling in holes in our TAS portfolio where we have opportunities to grow. We haven't historically been as big in medical communications or affairs, for instance. We'd like to do more in the digital marketing area. There are a whole bunch of places that the TAS business and the commercialization of pharma is very broad. So there are all sorts of places we can fill in there. On the R&DS area, we have done some acquisitions in the lab business. We've done selective acquisitions in the CRO business where we think we can add some particular capability. But it's probably weighted 2/3 towards TAS and 1/3 towards R&DS roughly in our inorganic activity. Now U.S. -- I think you were kind of poking at, would you want to get involved the CDMO space or something that was a little earlier? I don't know. I mean it's something we could look at, we would have to convince ourselves that there was a nice fit with our business, for instance, that it would feed our R&DS business or in somehow enhance that business to be involved in. I wouldn't rule it out, but probably not likely.

The pharmas seem to want to consolidate their vendors. And I guess, other CROs are saying they're winning this business. So in the CRO business, are you looking at a margin compression or even just a flat margin in the CRO business for like the next 4 or 5 years? Given the cancellation of the contracts, the fact that you have to try to get in as to be one of the exclusive ones -- that type of thing? And then also, if you can say if the bio-pharmas, the smaller guys are getting similar terms than the bigger guys?

We went through, I think, pretty much our entire large pharma portfolio last year, and we reaffirmed all the preferred partnerships. We have preferred partnerships with 22 of the 25 large pharma. And we actually even expanded our business to some of the new therapeutic areas. We got a little bit more in the FSP business. And we -- I think in 7 of those, we actually expanded the scope of the work we're doing. Hey, Charles?

Charles -- recording [indiscernible].

No problem. Let me finish your question. I think what you're asking here is -- is there a long-term pressure margin pressure on R&DS as a result of all the activity? And short answer is we don't think so. It's been a little bit competitive in the FSP space -- so there's been some pressure there on margins. We have some short-term margin pressures because we've had some trials that were delayed and have some stranded costs there. But long term, I don't think we've seen things fundamentally change within that business. Now -- that being said, at the time of the merger, we really plucked a lot of the low-hanging fruit on costs. So it gets harder and harder to take cost out. We do it through a combination of ways, but one of them is -- we're always looking for low-cost sourcing. When we do acquisitions that allows us to reload -- I think the next big frontier for us in terms of cost reduction is a agentic AI. And you heard that we re-upped our -- or not re-up, but started a relationship with NVIDIA. And we're working with them very carefully closely to identify areas where we can use agentic AI to take cost out of our organization. And I think that, that will bear fruit over time, probably not a big 2025 impact. But going forward, I think there's a lot of opportunity. Look, we have almost 90,000 employees in the business. So it's a very labor-intensive business. And I think the combination of labor and data lends itself very well to a agentic AI. So I think you should see some progress there overall. Charles, do you want to pick up? And I'll tell you -- where we're going over old ground here.

And apologies because they had somehow double book me for something. So again, thanks for the patience. Ron. So maybe just picking up on that a little bit. You mentioned sort of margin pressures. And if we think about FSP adoption I think depending on who you ask, right, you've seen maybe a little bit more pickup. Maybe it's slowing. Where do you -- but certainly, when you listen to some of the big restructurings that are occurring among large pharma -- it does seem like there's a little bit more of a focus on bringing some capabilities in-house. The thought process behind that for pharma seems to be a little bit more, having a little more control or a little bit more visibility on some -- obviously, with big portfolio pipelines. Can you talk about how you guys can help support that? And does that change the dynamics of what the role of sort of these large CROs or someone like IQVIA would be providing in the future? I know in the past, you've talked about it tends to be cyclical. It kind of comes back and forth. Do you still think that's the case? And sort of just where do we -- where do you think we are in this kind of pendulum momentum, I guess?

Yes. Look, we still think that's the case because we've seen the cycles of pharma getting more involved in FS -- FSO and outsourcing more on an FSP basis before, and we've seen it swing back. There's no question right now we're in a cycle that's toward a little bit more FSP. What I would say is -- and we will participate in that for sure. The old Quintiles premerger did not want to do that -- and when we had the merger, we changed your view on that said, look, we want to do all work be it FSP or FSO. It's a gradual movement in that direction. It's roughly 15% of our total revenue in R&DS is FSP related. That's up a couple of percentage points versus 2 or 3 years ago. So you're talking about a move of 1 percentage point or so per year. If you looked at our bookings, it's probably more along the order of 20% or so. So there's a gradual shift. When will it shift back? I don't know. I can't call that. But what we're seeing in a lot of cases is -- we'll actually being participating in hybrid trials. It starts out as being FSP, and then the sponsor comes to us and says, "Well, we really want to do something in the safety monitoring area and want you guys to take that over or we want to do something here or there" and so it ends up being a hybrid of FSP and full service work. So it's a continuum between the two. But net-net, overall, it has been somewhat of a shift towards FSP.

Do you think hybrid then is probably more likely going to be a bigger piece of the market going forward or at least over the next several years?

Yes, I think it will be for sure.

Yes. And obviously, with this period of repatriations and pharma going through these restructurings. It's also come with sort of elevated levels of cancellations we've seen across sort of the space. Here we are part-weight through the first quarter? Any sort of commentary on what you're seeing in terms of that level of cancellations has that...

I'll be real brief here because we already covered this with the group, but yes, we do expect continued elevated level of cancellations in the first quarter and potentially in the second quarter. We think we'll see a reversal in the second half. And TAS is very helpful, instructive to us here. You might ask TAS, R&DS, why? Well, TAS being a shorter-cycle business saw the impact of pharma kind of pulling in the reins on spending, first. And we predicted that this would for 1 year or so, and then we would see a bounce back. And coming into last year, we said we expect a much stronger second half than first. And there was an understandable level of skepticism among the investors about that. And in fact, that's exactly what we saw and it was even a little bit more of a bounce back than what we expected. And we think that, that informs what's going to happen in the R&D business. We see the first half of the year being a little slow, in part because we had trials at the end of last year that were delayed some fast-burning mega trials that were laid into the back part of 2025. But also because we see from now being about 2/3 to 3/4 of the way through their portfolio -- rationalization. By the middle of the year, we think that will largely be behind us, and we expect to see things come back in the back half of the year. So the cycle for R&D will we think, take a shape pretty similar to TAS, just 1 year or so delayed.

Maybe sticking with TAS then. Obviously, you talked about sort of delayed decision making -- is kind of bounced back here. Is that because of pent-up demand? Or is it just we're kind of getting back to the normal kind of cycle, particularly as we think about maybe real-world evidence, I think the 2025 guidance, looking at sort of constant currency growth 5% to 7%. Do you think that could end up being conservative then?

It could be. I mean I think to answer your first question, I see both pent-up demand and just return to normal. I wish it were in the world where everything that was deferred back when things were slow came roaring back immediately. Honestly, I don't think that's realistic. I think a lot of the work you got done internally by pharma or -- or they just cut back on their spend. Some of it has to get done and got pushed, and we're picking that up now. But we're also seeing a recovery of normal work as a purse strings loosen up. We had -- the FDA approved 55 drugs in 2023 and 50 in 2024. And to put that into context, the average is about in the 40s, 45 or so. So there's a lot of work that needs to get done and will get done going forward. And our indicators in the TAS business right now are very solid. So to your question, we said 5% to 7% constant currency growth. Could it be better than that? Sure. It could be better than that. It's a short-cycle business. It's tough to it's tough to predict, and we want to be prudent going into the year and give you what we were seeing at the time.

And when you think about different components within TAS, it sounds like you could look at RWE and sort of commercial tech as being kind of the faster-growing parts of it kind of coming out of this cycle. Those tend to be a little bit lower margin than some of the other parts, if we think about sort of the software and analytics or information systems. Does that -- should we think about it...

Real world -- is lower margin has been, although the margins are improving there. the info tends to be the highest margin, but the slowest growth. I think we've been fairly clear about that. Actually, analytics and consulting -- should -- it can be quite high margin when you get into a an upswing period. And I think we're just getting into that right now. It's lagged a little bit behind real world, but should come back. The margins are actually improving in the tech part of the business I wouldn't consider them at all. In fact, as we get into more license revenue and away from implement -- so much in implementations in terms of weighting, the margin is improving there. So I think going forward for this year, margins should be fine in the TAS business. They're going to be pieces moving in different directions and mix always plays into it. But when you net it all out, I think we should be fine, particularly with Analytics and Consulting improving because that can be a really nice margin.

That shift away from implementation and being more focused on licensing. If we think about OCE, for example, and the partnership now with Salesforce and with them embedding OCE into their Life Science Cloud. Can you just remind us what relationship looks like going forward as they go to market or what role do you play? And how does that show up sort of in results?

Well, the first thing is we're continuing to sell the old OCE platform. Salesforce is out -- selling the new platform, which is on their new cloud-based platform, and we'll get a license fee or a royalty on that. We haven't disclosed the terms, and we won't disclose the terms on that. So we're going to continue to service existing customers probably through -- at least through 2029, maybe through the end of the decade that business isn't going away anytime soon. There will be a gradual shift over. We think onto the new platform, and we'll pick up some royalty revenues on that. Yet, net-net, it will probably be a drag on our revenue in that part of the business, but it's really not that big. I've seen numbers that grown around. It's probably, call it, roughly a $150 million business for us this year. And we have a $1.4 billion commercial TAS business. So you're never going to see it. It will be a gradual taper down, and we're going to have growth in other areas. You never see it.

Maybe lastly, within TAS, digital marketing, obviously, you tried to make an acquisition earlier and kind of got blocked. With the change in administration, maybe changing [ FTC ] leadership. Do you think this is an opportunity then to kind of go back to some of these areas?

It could be. The specific deal that we were looking at that got blocked by the FTC the which injustice, which was deep intent, I don't know whether that will come back or not. Sometimes those things they -- when they're gone, they're gone. But we certainly would be looking to do other things in the digital marketing area. And the overall comment I would make is we think the new administration will be more friendly to mergers and acquisitions and the old administration will be. Whether it be in digital marketing or another area, I think it's helpful to us overall. Now most of what we are looking at, we didn't think we have had had any issues with any way. But there are always a fuel in the margin that you're concerned about whether if you have a particularly aggressive FTC, whether it's going to make it difficult to get the deals done. And we think that it's -- that pendulum has shifted back in the favor of business on that.

Okay. That's helpful. Maybe just in the last few minutes here, talk about sort of the long-term growth outlook. That algo, right, if we think about it, 6% to 9% top line growth has typically contemplated sort of outsourcing kind of contingency increase about 1% a year in pharma. Is that sort of still the right way to kind of conceptualize the market? Because obviously, we're talking about different mixes, hybrid [ pricing ] programs. But for investors, as you kind of build out kind of how to think of the market growth. How should we think about sort of the pace of outsourcing itself now that the complexity has changed?

Let me build that up -- that number. We talked at our Analyst Day about 6% to 9% growth. That's obviously a constant currency number. We don't know which way currency is going to go. And that consisted of four components. We see overall pharma spend. This is across R&D, and the Commercial space and it's everything from EBP mid- to large pharma. So the whole thing, everything that we would play in, growing at about 3% to 5%. On top of that, we think we'll pick up another percentage point or so due to outsourcing. And that's not outsourcing an R&DS growth. It's also outsourcing growth in the Commercial space because we've certainly seen that as well. Then another percentage point or so of share gain, that's historically what we've been able to do. And on top of that, looking at probably 1 to 2 points is what we typically -- per year is what we typically target in inorganic contribution. So if you add that all up, that comes to the 6% to 9% growth that we're talking about. And look, we're very bullish on the industry long term. We you go through rough periods in individual businesses, and I think the tendency is to kind of get myopically fixed -- fixated on those things. But the underlying industry is very, very healthy, and we see very solid growth going forward.

And I think you talked earlier, right, you think what you saw experienced in TAS last year unchanged, you do see that for R&DS as well. So is it really just the first half, like what are the KPIs that you're looking at internally that kind of give you more of this kind of confidence that in the back half of this year, we will see that sort of bounce back in demand?

Well, there's -- if I start at the most aggregate level, we have relationships with everybody who's of any size in pharma. So we know where they are give or take, within their portfolio rationalization. So that's number one. We come in very well informed because we have thousands of touch points in pharma. In the EBP space, we've seen financing the -- fundraising continue to be strong. It was strong last year, highest year other than '20 and '21 and it was up substantially year-over-year. So now some EBPs have been a little bit slower to spend that money than you might think, but the funding is definitely there, and we think it will come back. We also look at, of course, the pipeline of what we see coming in -- that was up year-over-year in fourth quarter. The RRFP flow was up mid-single digits. We have a lot of indicators like that. Some of them just based on conversations customers and the relationships we have, some of them more quantitative that give us confidence that we're going to see things improve in the second half of the year. And some of the second half is just the nature of our business and what got deferred late last year and when we expect it to restart.

That's really helpful. And then maybe just in the last couple of minutes here. The guidance for this year contemplates about $2 billion deployed for -- between share repo and M&A. How should we think about that mix this year?

Well, it's one of those things that it's a a really important question, but it's also that's always difficult to answer because it depends so much on opportunity. On balance, I think we would like to spend more on acquisitions than on share repurchase, because acquisitions help us build our capabilities and give us a platform for growth. But you have to have willing sellers and you have to have pricing that's reasonable. And it's always tough when you go into a year, even when you have a pipeline of potential opportunities built up to know what's going to get done and what won't get done. It's just very difficult to predict. The other part of the equation too, on share repurchase is when the stock is depressed as it is right now, you say "Our stock may actually be the best buy of anything that we're looking at" so the combination of those two things, opportunities on both sides will dictate where we're spending our money. All else being equal, I'd rather be spending on acquisitions and share repurchase, but you see we've been aggressive about doing share repurchase when we didn't spend the money on acquisitions and when we thought it was justified by the value we think we're repurchasing our own shares.

So fair to think in the current environment, probably we're tilting more to share repurchase. I guess the pipeline though, would you say the pipeline...

We came in with a pretty good pipeline in year. It's still there. There's no question. The share price is awfully tempting right now.

Great. We'll stop it there. We're at the time. Ron, thank you so much. Thank you much for being here.

Great. Thanks, everyone.