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

My name is Mike Ryskin. I'm on the Bank of America Life Science Tools and Diagnostics team. And I'm pleased to host IQVIA. Joining me for our next chat is Ron Bruehlman, CFO. Ron, thanks for being here.

Thanks, Mike.

Kick things off, let's maybe take a recap of the first quarter you reported a couple of weeks ago. So the key puts and takes of the results. What stood out to you? What was most surprising from put out?

Look, I think the results overall were really strong. We were above the high end of our guidance on revenue. We came in above the midpoint of our guidance on EBITDA and at the high end of our guidance on EPS. So earnings results strong, particularly pleased with the performance in TAS that was had a growth of over 7.6% and at constant currency. And so good P&L performance. Cash flow is strong. First quarter is typically the softest quarter for cash flow and actually came in up 13% year-over-year and 89% of adjusted net income, which is kind of at the high end of what we forecast for the full year. So really encouraged by that. You saw we took up our revenue guidance by $275 million. Now that was for FX. We left our profit guidance unchanged because what you typically see is we don't have much impact on the bottom line from FX, even with movements on the top line. The only thing that I suppose was a bit soft in the quarter was our bookings. I know you guys all focus a lot on book-to-bill more than we like to, but it was 1.02 in the quarter. And the interesting thing was, unlike last year where we saw an elevated level of cancellations as clients, particularly large pharma, reprioritize their portfolios. In this year's fourth quarter -- I mean, first quarter, we saw a normal -- within normal range of cancellations, nothing out of the ordinary. And it was really that we saw certain clients delaying decision-making towards the end of the quarter. We did see a lengthening of the time between -- when we got an RFP and when we got an award, it was up about 10% sequentially and year-over-year. And that can have an impact in the quarter because a lot of the decisions get made towards the end of the quarter. We also had an unusual number of EBP biotech contracts that we signed that we didn't take into orders or backlog because they didn't yet have the funding. So we have a signed contract, but our policy is we won't put something in backlog unless it has the funding. So I think those 2 things together combined to make it a little bit softer in bookings. But if you look at some of the underlying -- other underlying demand indicators, our RFP flow was up, I think, 6%. We had low single-digit qualified pipeline growth. Our backlog is up over 4% year-over-year. So the other indicators were fine. We just saw a little bit slower decision-making than we normally saw. And we attribute that to some of the uncertainty that's been generated by recent actions by the current administration.

And that slower decision-making, you talked about some of the difference between emerging biopharma and maybe large pharma. What do you think are the various pushes and pulls and what's driving that?

In the -- between large pharma and emerging biopharma?

Yes.

Well, look, in the emerging biopharma area, clearly, you've seen some slowdown in funding levels. It's actually a pretty good growth in funding of biopharma last year, particularly in the first half, but then we saw it trail off a little bit. And wasn't particularly strong in the first quarter or even in the month of April. And I think that probably -- we saw it happen with us that it slowed down putting certain orders into backlog and also just decision-making on the part of EBPs. And large pharma, obviously, funding is not an issue. I think it was just more an issue of pulling the trigger on some trials that they want to do. It's happening a little bit slower than we normally would see it.

Okay. Maybe sticking with the biotech angle first. You talked about the funding environment, yes. Year-to-date, not off to a great start. April seemed a little bit quieter as well. I think macro plays a big part in that. Any sign from your customers in terms of how they're responding to that longer term? I mean you called out that RFPs are still -- contracts are signed, but it's not shown up in orders. Is it really just a matter of funding coming back? Is that the one factor we're looking for?

Yes, that certainly would be helpful. We actually saw descent. We saw growth in biotech, emerging biopharma RFP flow in the quarter. So it's not like the demand isn't there. I'd say the better funded firms, obviously, and those that are later staged are the ones that have more activity. That's typically where we participate is in later-stage work and better funded work. I think about 10% of our backlog is pre-commercial EBP. So not a huge percentage point. I would draw that distinction between the 2. And look, we always see biotech funding go through cycles. It goes up and down, and I'm sure it's going to come back. It's just a matter of time.

And when you talk about large pharma, some of the policy, what's going on with the administration, more specifically, is it about the risk of pharma tariffs? Is it ongoing IRA conversations? Is it some of the senior agency heads and announcements, things like that? So like what are the biggest pressure points?

Well, we talked about this some on our call. And I think you can prove it broadly into 3 areas. One would be agency change, the other would be tariffs and the third would be pricing actions. And on the agency -- changes in the agency and funding and so forth, we don't see a big impact there. First off, I know some of our competitors have been affected by BARDA contracts going away. We don't have any business currently with BARDA. In fact, we do actually comparatively little business, contracting directly with the U.S. government, some in our TAS business that really hasn't been affected. On the NIH side, most of the cuts there have been to overhead rates, pulling down the maximum rate to 15% on overhead reimbursement to make some of the private universities and foundations and so forth in line with other parts of the market. So no big impact there. And FDA, most of the cuts we have seen have been to support administrative personnel not to the people who directly participate in trials. In fact, that trial work is funded by PDUFA by the pharma industry and we have seen no slowdown in trials, whatsoever, decision-making or getting FDA's attention. I mean every now and then you'll hear about an anecdotal incident that somebody will bring up. But for us, really no impact there at all. So I'd say that the agency stuff is more noise than signal. Now you go to the tariffs, we are not directly affected by tariffs. We have -- it was a little bit of lab business that we thought might be. It doesn't look like it's going to be much affected at all. Now our customers, it could be a different story. Obviously, if there were tariffs on pharma, they would be directly affected. And we just don't know where that's going to go right now. I think -- I suspect if I see what's going on with other things in the administration, the administration is going to take a practical approach towards that. Obviously, nobody wants to see no drug availability because you can't import certain drugs or certain precursors or whatever. So -- and you've seen a lot of pharma companies respond by announcing big investment programs in the U.S. So they're certainly sensitive to the issue that the administration raises about producing more molecules here in the states. I suspect that's going to be worked out. But we're going to have to see. It hasn't even been announced yet, exactly what these tariffs will be. So there's a bit of unknown there still. The pricing issue was, one, I would say we had this recent executive order come out of the Trump administration, and that's very recently. So there are a lot more questions than answers right now exactly how that's going to be implemented, what time line, what drugs, how does it dovetail with the getting rid of the pill penalty issues like that. And then there are broader issues like, does it need congressional approval? What are the legality? Back in 2020, there was a similar executive order that was struck down by the court on challenge. So a lot of questions there. We don't know exactly where that's going to end up going. But we would say this. I think the pharma industry is going to make to point out to the administration, just how important the biopharma sector is in the U.S. I mean just to quote a few numbers, U.S. biopharma firms spend $200 billion a year in R&D. They're responsible for almost $1.7 trillion in annual economic output, 5 million direct or indirect jobs at an average salary of close to $160,000, which is 2x plus the national average. The U.S. biopharma industry is dominant in both sales and in new drug development. So there are a lot of reasons to think this is a very critical sector to the U.S., and this whole issue will get worked out over time in a practical manner.

Do you feel on the R&DS, given what you just talked about in terms of large pharma, do you think it's just a matter of time until sort of the pharma companies get a little -- get their heads around the agency change and tariff impact, pricing and things sort of normalize a little bit?

Of course. Look, we've been through any number of, we call them, crisis in the industry. And everyone has its own unique dynamics. But when you look back over time, the pharma industry always works its way through these issues and emergence on the other side stronger. I mean it's really one of the most powerful forces in our economy, and we expect the same will be the case. But some of the uncertainty that's been created recently is obviously slowing down decision-making. And we saw it in our Q1 bookings as did others, but we don't expect it to be persistent.

Okay. Maybe let's pivot a little bit to TAS. As you said, that was a little bit better than expected in the quarter, mid- to high single digits constant currency growth. On the other hand, that's been a little bit choppier over the last couple of quarters prior to that. So you talked about TAS being shorter cycle and you're expecting a recovery. Is this a good sign of things to come? And sort of what drove that? What you given the pharma cautious elsewhere?

Well, when we were in the beginning of last year and our sales growth in TAS was pretty anemic, we told everybody, look, we expect it to come back in the second half of the year, pharma cutback first, post-IRA on discretionary spending, but there's been a huge amount of new drug approvals by the FDA over the last few years. And ultimately, a lot of work needs to get done around that, be it launch planning to pricing and market access to real-world evidence to support drugs going on to formularies and things of that nature. And some of it can be brought internal within pharma, but not that much and ultimately, it needs to get done and the work is going to come back because it supports the commercialization of drugs and the growth in sales and profits in the industry. And in fact, that's exactly what happened in the second half of the year, and it carried on in the first quarter of this year. And the question I've been getting at some of our private meetings today is, well, okay, but given all the atmospherics around the pharma industry, could that change in the second half of the year? And all I can say is, look, all our indicators right now in that business are green. I mean we track very carefully our pipeline of work, how that compares to prior years. Our win rate, how that compares to prior years, how much we have in the backlog versus how much is yet to come. What our customers are telling us, and we have no reason to believe that the growth is going to slow down in the second half of the year. The comparison will get a little tougher, but the actual absolute level of revenue progression will deteriorate. And okay, okay, it's a short cycle business. Things can always change. But right now, all the indicators look really quite positive.

I mean, to exactly that point, the shorter cycle business, what's the visibility like there?

Well, it depends on the part of the business. Like if you take the information business with a data business, about 1/3 of our business. Visibility is very good there. We signed, in many cases, multiyear contracts or at worst, you're signing a year at a time out in front. There are other parts of the business like real-world late phase that our contracted business that stands out for multiple years. You have technology solutions where you have extended license contracts. And then there's a portion of it, particularly a portion of real world in analytics and consulting that is more short cycle and can change very quickly. So -- and maybe you're looking in some cases that contracts that last months rather than quarters or years. It's a mix of the 2. But as opposed to R&DS where you have a backlog that's going to burn over the next 5 years, clearly, there's a mixture of longer cycle and shorter cycle there. So you can get some volatility. And so you'll see a little bit choppier levels of revenue growth there, sometimes very high, sometimes lower, but it's -- whereas the R&DS business is kind of a smooth flow.

Okay. Within TAS, one of the things you called out was the strength in real-world evidence. Can you talk about sort of what's the driver there? Is that a structural change? Is that just some timing of contracts, customer decisions? Do you still...

I don't think that's -- I think a lot of it relates to the introduction of new drugs and doing work to support commercialization of those drugs, proving to payers, be they private payers or governments that the drugs are effective in real-world settings that helps with use in new indications. This kind of -- it just has to do with the overall strength of new introductions, new drug introductions into the market. And it's a sector that I think structurally is going to continue to grow because as we and others have increasing amount of data, there's a lot that you can do with that data. And we're really in kind of the catbird seat as far as data goes and being able to use that for real-world evidence. So while we have competition in that space, there's plenty of growth for everybody. It's a real nice area. And look, there are elements of real world that people are less familiar with that we include in the real-world category like patient engagement and so forth that have been sources of growth for us as well.

Some of that work to support the new drugs. Is that projected to continue? Is there sort of like once you work through that, is there a pause until the next project start?

Well, there's always new things starting. That's -- when you have the FDA approving 50, 55 drugs per year, there always seems to be a pipeline there. So yes, you -- maybe it doesn't go away entirely, but it shifts from one drug to another drug in terms of the locus of the spender.

But I guess my question is the new drugs that are driving the growth now, is there anything unusual about them that's making them more RWE intensive? Or is it a pharma decision?

I don't think so per se that there's anything that makes them more RWE intensive per se, but there is certainly more scrutiny from payers than they're used to be. So there's more, I think, pressure on providing evidence in real-world use. And with the FDA now, that's one thing that I suppose is you could call a structural change. The new FDA Commissioner, Marty Makary, has said that this is important to them. HHS Secretary Kennedy has said the same thing that proving safety and efficacy over long-term studies in real-world groups is good, is important. They're going to put more emphasis on it. So that would be something I would say would be kind of a tailwind for the real-world business going forward. Now did we see that in our Q1 results already? No, because probably that data back to decisions that were made in the past. But I think going forward, that's a good harbinger.

And how should we think about TAS margins, specifically RWE margins relative to total company?

RWE margins are a little bit lower on average than other parts of TAS, although they have been improving over time. So you could say that there's a little bit of mix drag in that part of the business growing faster than other parts of the business, but you won't see it.

Okay. Back to R&DS, I hate asking the quarterly backlog question -- quarterly book-to-bill question, but maybe we can think about it on a trailing 12-month basis or just sort of some of the factors impacting that. Why do you think that metric or that value has sort of not been as predictive of revenue growth as it has in the past?

Well, I don't know that it's ever been the best metric. It is a metric. I understand why people focus on it because it gives you some new information about bookings. But it also has a lot of issues with it. One being that it's a single quarter metric in a long-cycle business. That's probably the biggest issue. It's a snapshot in time, and you're trying to compare it to a movie over 4 or 5 years because the average clinical trial last 4 or 5 years. The other thing I would say is that every company has slightly different policies on bookings. That's an issue. So you can't necessarily compare one to the other that well. If there's a numerator-denominator problem in that, if your revenues happen to be low, that's going to help your book-to-bill. If your revenues happen to be high, that's going to hurt your book-to-bill. Look, Ari cited this example on our Q1 call, and we have a competitor who has almost exactly the same quarterly and trailing 12-month book-to-bill as we do, actually, exactly the same on a trailing 12-month basis. And we're growing our R&DS business 4% or if you take out the COVID -- add the COVID impact back in 3% this year, and that's probably 8 points better than what they're doing in their business, which is entirely a clinical trial. So it's just an indicator that this metric is something I'd be very careful with. It can lead you to the wrong conclusions if you focus on it too much.

Okay. You mentioned one of your competitors in the space. I mean, I think ironically, a lot of companies put up a 1.02 and 1.14 trailing 12 months this quarter. But maybe you could touch on the competitive dynamics, what you've seen over the last couple of months, the last couple of quarters, touched on pricing environment.

Well, look, any time that the market tightens up a little bit, you could expect to see pricing get a little keener. That's just the nature of business. I don't care what business you're in. I think we've seen it a little bit more in the FSP business, and that's understandable because the FSP business is one where it's harder to differentiate yourself than it is in the full service business. And -- but it's crept over, I think, to a little extent in the full service business. But it's our job as management team to offset pricing pressure with cost reductions. And I'll also say that this is a metric that tends there -- a phenomenon that tends to move. When things loosen up, so does the pricing pressure and over a backlog that's going to burn over 5 years, you'll never see it, the goods and the bads tend to even themselves out. And you don't see all that much movement in gross margins as a result of it.

Okay. Are you seeing more competitive pressures, whether it's from the top 3, 4 CRO players or maybe from some of the smaller competitors?

Well, look, I think there are a few of the smaller -- first off, there are several thousand CROs. So if you're going to talk about the really small guys, we don't probably bump into some of these guys. But if you're talking about kind of the next tier down from the top 3, they're probably hurting a little bit more for business. I don't know. I hate to single out individual competitors. But naturally, the more you're fighting for business probably the keener probably you're going to be on price. Let's just leave it at that.

Okay. All right. Makes sense. Maybe we can talk about a little bit on the margin profile and how we should think about it over the course of this year and beyond, where do you see operating leverage this year given your assumptions for top line growth?

Well, first thing I would say is if you look at our adjusted EBITDA margin, I think we are projecting coming into the year about 20 basis points of growth, and we're probably projecting about 20 basis points of contraction now. And I say, "Well, gee, what's going on?" Well, it's very simple. It's FX. We we've increased our guidance on revenue by $275 million. We don't get a -- due to FX, we don't get a significant -- the same benefit on the bottom line, and so it causes some margin contraction. So if you're looking at that, it's just noise, it's FX. If FX goes the other direction, that will come back. There are some mix pressures that I talked about like faster growth in the RWE business that weigh upon us a little bit. We still have a small amount of stranded costs from the projects that were previously delayed, but I don't think that's a big deal anymore. We're working really hard to take out cost across the organization. We always do. But so any margin pressures that we're feeling, we're going to offset with cost takeout. That's just our commitment. And I think that's what you'll see going forward. Of course, FX we can do nothing about, but that's noise.

If you think about those moving pieces for this year versus sort of going forward, most of it is tied to this year, right? Is there any change in terms of how you think about the long-term margin algorithm?

No, I don't think there's any change in the long-term margin algorithm. We expect to modestly improve margins on an annual basis going forward. Most of where we're going to get our profit growth is from revenue growth. We said at our analyst meeting, expect 6% to 9% constant currency revenue growth going forward. And even in a year where we're a bumpy year, we're close to that this year. We don't have any reason to believe that's going to be different. Where do we think that's going to come from? Just to recap, 3% to 5% growth in pharma spend, a point of market share expansion per year, a point of outsourcing expansion per year and 1 to 2 points of M&A growth. And we think -- we continue to think that, that kind of growth is achievable over the medium to long haul.

Okay. Since you just touched on it, Ron, maybe I'll switch to capital deployment, M&A. Relative to debt paydown or buybacks, how do you think about the market opportunities are now today and capital deployment plans for the rest of the year?

Well, look, I'd say we tend to focus on 2 things, as you guys have seen in the past. One would be M&A and one would be share repurchase. We're less concerned about debt pay down. We're comfortable with our debt levels where they are. Our net leverage ratio has been in kind of the 3.3 to 3.5 range, and we're very comfortable with it at that range. I mean we could be comfortable at a higher range, but it's kind of in that range. And so we're looking at -- and we generate, call it, $2 billion for free cash flow and spending that split between M&A and share repurchase. And it just depends on the comparative attractiveness of the opportunities we have. M&A is nice because you can provide a platform for growth. But if we feel that our shares are out of line in terms of valuation, like I think they are now, they're cheap. It obviously becomes more attractive to repurchase shares, and we would total a little bit that way. It certainly sets a different bar for M&A, and we'll be -- scrutinize M&A transactions more carefully. I'm not saying we won't do them. We will. We'll just -- we have at least right now a higher bar for those because our shares are so attractive.

Okay. And in terms of M&A between R&DS and TAS, between scale versus new capabilities, sort of how do you think about the various options?

I would say count on us spending more on TAS and R&DS typically because there are more opportunities there and areas where we can fill in to enhance our growth. And in the R&DS area, okay, you might see us do some in the lab area or to enhance certain capabilities, perhaps in -- we've done a few in the area of clinical trials, staffing and so forth. But in the case of TAS, were -- we've recently been looking at areas like patient engagement and digital marketing and medical and scientific communications in areas that are growing and real-world evidence that are growing really well within in the industry. And there are more opportunities there. That is most likely we're going to be putting our money. And I would call that more new growth areas than scale expansion, although in some cases, we've already built a little bit of a base there. So I guess it's a little bit of both. But we're putting our money where we feel we have the need to -- both the opportunity and the need to grow.

Okay. With that, we're almost out of time. Maybe we'll go to our standard closing question. What do you think is most underappreciated or misunderstood about IQVIA?

Well, since we're short on time, I'll limit it to one thing, and that's we're not a pure CRO. We have TAS business that represents 40% of our business. And I think because we have CRO comps out there in the public market, we tend to be compared purely against them. But if you look at our comparative performance versus some of our CRO peers this year, not only are we outperforming in the R&D area, but where we have the TAS business, which is doing very well. And I think that's an underappreciated part of our business, and I try to focus everybody back on that, but we're servicing pharma across research and development and commercialization. And it's a nice place to be having that kind of breadth with our customers.

Great. Well, thanks so much, Ron. Thanks, everyone, for joining us, and appreciate it. Thanks for being here.

Thank you, Mike. Thanks for coming.