IQVIA Holdings Inc. ($IQV)

I'm on the Bank of America Life Science Tools and Diagnostics team. I'm excited to be hosting IQVIA for our next fireside chat. I'm joined by Michael Fedock, Chief Financial Officer. Mike, thanks so much for being here.

Great to be here.

Usual format will be a fireside Q&A. If anyone's got a burning question, feel free to raise your hand, and we'll throw it in.

Mike, maybe just to kick things off, you recently reported 1Q just about a week ago. What were the key takeaways from the quarter? How has that impacted your confidence in the rest of the year? And just sort of any read-throughs from that?

Sure. Yes. We were very pleased with our print and the performance in the quarter. Starting out a year with revenue and EPS above the high end of our expectations was great. Also being able to show the Street the strong organic revenue growth acceleration in both Commercial Solutions and RDS. I think Commercial Solutions organic revenue grew 2x versus the prior year and RDS more than 3x. And given the AI fears that were out there, it was really good, and we got some -- a lot of good feedback from investors that our theory about the durability and AI being a tailwind for us was actually playing out in the numbers, which was great. And from an RDS standpoint to deliver just about $2.5 billion in net bookings and double-digit growth in the bookings year-on-year. And looking at the demand metrics there in the kind of mid- to high single-digit range was -- certainly gives us confidence. And on the Commercial Solutions, the pipeline is very good there. So certainly a great way to start out the year.

I mean you touched on R&DS, the strong bookings. There's obviously a lot of focus on quarterly book-to-bill. Hopefully, I'm allowed to ask that question without any surprise here. But maybe you could just touch on that 1.04 number. There were some pass-through dynamics in the quarter. Just help us sort of bridge that.

Sure. Our feelings and our opinions on the quarterly book-to-bill are well documented, so I won't waste the time we have today repeating that. But very strong double-digit growth in the net bookings and the service fee bookings were exceptionally strong, which was great to see. The pass-throughs are such a fickle thing. Honestly, I and I'm sure I'm not alone in this wish we didn't have to report pass-throughs as part of our -- on a 606 basis. But it really was just an anomaly. There was no change in clients' therapeutic strategies. No, it wasn't sort of AI related. It really just was the mix of trials that we contracted in the quarter just had low pass-throughs. And I think one analyst on the call did some back of the cocktail n in math and came up with some assumptions that were pretty well sort of spot on that if the pass-through bookings were within the historical range, like we wouldn't be having this conversation. So it was a good way to start the year.

Good. And you -- I know it's really hard to predict, but what's your expectation on that dynamic for the rest of the year? Is it going to be a conversation we'll be having again and again? Or is it sort of a little bit of a onetime thing?

Yes. Obviously, you can't predict it. I think what gives us comfort that it was just a quirky anomaly within the quarter was going back and looking at the historical trend, we went back -- I think the FP&A team went back over 5 years to look at that trending. And I can probably count on less than one hand the amount of times it sort of fell out of the at a sort of the normal range. So yes, I think it was just a one-off idiosyncratic quarter.

All right. Maybe let's just go from that to demand environment, customer behavior. We can run through all the various layers of big pharma versus emerging biotech, sort of what you saw in the quarter, how that played out.

It was great. Obviously, we're encouraged by EBP funding continues to be very strong. I think Q1 was almost double what it was last year. And then the IR team showed me yesterday the BioWorld April funding, which was up almost 400% versus April and '25. So things are strong there. And we've been asked a lot about -- you guys have said you're being increasingly successful with that customer segment and what's driving it? Is it -- are you taking share? Is it that just all boats rising because of the funding. And our honest answer is that we think it's more about our deliberate investments we've been making and focusing on that segment more so than funding in [ EBP ]. It generally takes for us somewhere between 9 to 12 to 15 months for when EBP gets that funding -- so it makes its way through their development plans into RFPs and then obviously into our contracted sort of net new bookings. So we believe we haven't even really begun to see the tailwinds from that funding. So we're very happy with the prospects for [ EBP ]. Large pharma is stable. We think the demand environment overall is certainly very constructive. But certainly, there's still some sand in the gears, so to speak, within large pharma, particularly coming off of 3 to 4 years of trying to digest and pivot with all the various policy related actions that have been sort of thrust upon pharma. But overall, the conversations with large Pharma are great and proceeding.

I mean on that topic of emerging EVP, emerging biotech, you talk about the lag of it falling through more broadly, I think in other parts of our coverage, there's been some fear that the funding might be there, but the spending is it because some of these customers might still be a little bit more nervous about funding going away, drying up because it's been so volatile over time. I know it's early, but have you had any discussions on that, do you feel that the normal transition from money into money out will happen? Or are these companies sort of building up cash forward to weather the next storm? .

We haven't seen any of that dynamic or certainly from our sales people haven't flagged that. I mean at the end of the day, for us, we deal primarily in Phase II and Phase III clinical development. So that's where the money tends to flow because it's the bet of success versus preclinical into Phase I. And the other thing is that the customers they have to proceed because in some cases, this is their only baby, so to speak, and then they need to get that baby launched into the world there. So they can't really hold back too much on deploying the funding. So we feel very constructive about the outlook there.

Okay. I mean you kind of let's roll that together in terms of R&D performance. We've had prints from some of your peers, not everybody. I think it's something that's been discussed in the calls a lot is there's not a lot of visibility given where the top 3, 5 peers sit in terms of what trends they are seeing, but still it seems like our Q is held in fairly well relative to others. What do you think is driving that performance. What's separated you the last couple of quarters?

Yes. Well, I'd say even more so the last couple of quarters. If you look back over the last couple of years, we've outperformed on the CRO side, the large competitors out there. And I won't say that it's anything dramatic. I mean, it comes down to solid execution by operations teams. We always say repeat business is the best business. So we have happy customers. But the real thing is that AI is not new to us. I mean, if you take a step back, the whole theory of the merger was taking the IMS data heritage and using that to transform clinical development. So we've been at this in October, it will be a decade that IQVIA has been doing this -- and so AI has already been embedded in almost everything that we do on the clinical and the commercial side. And what we're seeing in the marketplace is that this AI phenomenon that has just taken hold has really caused our clients to mentally truly embrace using the data in their day-to-day lives. So it's making our conversations with customers a lot more exciting. It's elevating them. And it's almost like there's now more of a meeting of the mind whereas I can give you a for instance, when 6 years or so ago, when I was CFO of the RDS segment, and we were sitting in front of clients, demonstrating our AI study optimizer and site selection tools. The clients were like, "Oh, my gosh, like, that's amazing. And it's trained on the best data that exists in the industry. But they said the pharma is obviously very conservative. And they said, "Well, we've always done it this way. So we're going to continue to run our trials this way. And now that's totally flipped on its head. So it's an exciting time for us.

Since you touched on AI, let's go there. Obviously, a lot of focus for investors, a lot of questions on how it's going to play out. I mean over the last couple -- I think, especially starting in January, that's when the concerns really amped up on our space. What's been your conversations with pharma? How are they leveraging it? How are they deploying it? Is it internally developed tools? Is it tools provided by companies like IQVIA? Is it tools provided by more of some of the tech and AI leaders and sort of how broadly adopted has this already been?

Yes. The conversations with our customers have been great. And like I just alluded to, it really has elevated the conversations with customers. And they everybody's rushing and talking about -- we're doing AI. It's almost like when you listen to pharma earnings calls, there's almost like a quota of how many AI mentions. You have to work into the transcript there. A, most of pharma's investment dollars are going towards drug discovery, and we think that's a great thing. That there -- it's a very high probability that we're going to see much more molecules come through development with higher probabilities of success. And certainly, our clients are embracing that. And also, we -- it's allowed our clients to sit down with us and they're really showing us their road maps. And then they're asking us questions and say, well, okay, like IQVIA, you guys are the AI-native life science company, well, what are you guys doing? And then we sort of show them our agentic sort of road map. And the conversations are fantastic because very quickly, pharma goes, well, hang on a second. This is in our core business. Certainly, we're going to build some point solutions and try to make our people more productive with Claude and all those shelf tools. But why do they want to buy something that we're already building. So the partnerships with clients about sort of co-developing on both the clinical and the commercial side have been great. And at the end of the day, there's a big recognition of the data. Next to our people, our data is our greatest asset. And if your models are only as good as the data that it's trained upon it really makes sense to come to IQVIA, and that's really what's happening here.

And as you said, you've been somewhat on this journey since the merger way, way back in the day. Is there -- so I see a lot of this as a continuation of that path and that strategy. Is there a step function change in 2025, '26, '27 or is it going to be a little bit more gradual?

I think step function from a level of engagement and finally getting the industry to embrace data and use it to actually sort of transform and drive productivity and get medicines to the people that need it faster? Sure. I think from a financial standpoint, you're going to see a big step function change in our numbers. No, probably not. We have 192 agents across 64 use cases. I believe it is in flight. We have 19 out of the top 20 pharma companies are already using and buying our agents and their workflows. And I think we have over 100 AI-related patents that have been filed. And our road maps are such that we should have over 500 agents in production by the end of 2027. So I think we're really encouraged by the direction of travel.

I mean to that point, where is this going to show up in the model? -- the next couple of years? Is it incremental revenue? Is it share margins?

It's going to be all of the above. And I think the way to think about it is when you look at our commercial business, it is the shortest burning cycle part of our enterprise. And the majority of our projects in our agentic AI road map on the commercial side of the business are net new offerings. So you will see that manifest itself in continued acceleration over time of our organic growth rates in commercial with accretion in the margin. The RDS side is actually very different. Most of the road map there is really inward-facing and identifying our internal processes. So over time, it will be more of a margin accretion play but also, it will enable us to take share as we maintain our first-mover advantage in that part of the business.

I mean on the margin side, I think one of the other questions we get is you just called out that a lot of it is net new offerings, but there's a question of, will this be an argument for pharma to use the price level more to sort of argue, if there is less FTE, less head count supporting whatever work is being done, can we address price on that? Those conversations happen? I mean, is there a concern of that?

Well, certainly, there's the large consulting firms never missed an opportunity to run around sort of pharma procurement and get them all sort of spun up. And that's certainly happening. So as usual, lawyers and consultants are the ones that always make the money no matter what's going on out there. But the conversations with our customers are sure, like we will share in the savings, right? We lean into productivity benefits in the clinical and the commercial side. It's good for our clients. It enables them to expand their pipelines and help the ROI of their products. So it's a good thing. But if you look at the contractual relationships we have, let's just say, on the clinical side because that was the initial knee-jerk fears we were getting from investors to say, "Oh, like, if you are more efficient, there's less hours, so there's going to be a revenue deflationary sort of effect. And that's just not the case. We have rate cards that are locked in with large pharma for 3- to 5-year sort of periods. So as we get more efficient, it doesn't matter how many hours we spend on it from a pharma standpoint, right? Like we capture that margin sort of benefit from efficiencies. And then when those come up for renewal, sure, we will sit down and show pharma. Okay, let's reopen sort of the rate card for the next 3- to 5-year period or whatever. And let's talk about sort of AI and productivity savings. And as usual, we will share in the savings. But I think the conversations with pharma are very constructive.

Okay. You mentioned in terms of the breadth of adoption you talked about 19 out of top 20 pharma already using your agents. I imagine it's not universally broad. Are there certain leaders emerging versus others? And what's what's driven that, right? Who's further along the adoption curve and why you have success there?

Trying to get me to name customers.

Pharma X, Pharma Y.

No, I won't say that there's any sort of particular leader or laggard from a customer standpoint. I think what was really interesting in this past quarter was a large pharma customer who uses is predominantly for FSP work, came to us and said, "Hey, listen, you probably heard, we are all in on AI and drug discovery. And they said, we're just letting you know that we see our pipelines expanding significantly. And we want you to be prepared to handle that volume in the coming years. And what was the most interesting thing was they said, and we're going to be outsourcing to you on a full-service basis, even though they're an FSP predominantly shop. And why that's important is that, a, it highlights what we've been saying to say the FSP and in-sourcing the economics can only go so far before they break down. As you have more volume, it doesn't become sort of cost effective to do it. So again, it's just another sort of proof that customers are really embracing AI. They're engaging us on very strategic sort of levels, and that certainly is encouraging for the future.

Okay. And this might be more of a hypothetical question. So just putting a bow on it. I think one of the one of the questions base have is like when will you start seeing tangible impact of it, right? When we think about traditional drug discovery takes 12 to 15 years development finish 4% success rate from IND, et cetera. There's 1 million metrics and there's a view that somewhere in the future, it will be 10, 7, 5. whatever -- it will be improved. It will be more efficient. Do you see that in the near-term horizon? Are we still years and years away from that? Is there going to come a point when in the near future base, okay, clearly, AI had any tangible impact this would have taken x amount of time before and now it's taking y like are you seeing that proof?

Well, I think there's -- I'll answer that kind of in 2 ways. I think on the AI discovery side. Clearly, that's 2, 3, 4, 5 years for when we'll start to see that coming into the clinical development frame. And it's great that some of our clients, like I just mentioned are already kind of putting us will notice that they see it that way. I think from a benefit standpoint, in some ways, we're already seeing the benefits in our numbers. I think what was great for us if there was a pleasant surprise, in the first quarter was in our commercial business and there are analytics and consulting. When the AI boogie man poke its head up, right, people were saying, your whole analyst consulting business is going to go away. And we quickly said, that's absolutely not the case. AI is going to be a tailwind for us. And then when we size the risk to our commercial segment, which is about $7.5 billion, we said, okay, could some of the lower-level consulting analytics work go away from good enough publicly available data, okay, fine, maybe. And that would be about $100 million out of that sort of play. And in Q1, our consulting and analytics grew mid-single digits. It was the strongest quarter we've seen in 3 years. And the pipeline in our consulting and analytics is at like new record levels. So what's happening is, is that as clients are embracing AI and mind you wrestling with it, just like everybody is wrestling with what the new role would look like, it causes them to ask more questions. And that they're engaging us not just to help them figure that out, but also how can they best leverage our data assets of over 150,000 live data feeds in 110 countries, and it's cleaned, identified, coded linked. We have 1.2 billion patient lives. And they're looking at the data that they have, and they're engaging us in various ways. And in a lot of ways, we are meeting each client where they are. They're all at very different sort of points. Some of them are coming to us for just questions like in the analyst consulting. Others are buying like our offering, which is a data AI-enabled sort of informatic platform, how can they better leverage their data and our data together and even just curious about new offerings we have. So it's really across the board, but again, still very positive about the future.

Okay. One more on AI and then we'll move on this one kind of ask you talked about 192 agents, 64 use cases, internal to your organization how much incremental investment are you putting in here in terms of incremental dollar allocation to build out your capabilities to build out your toolkit?

Yes. I think if you look at -- from a capital allocation standpoint, we're very disciplined with that. And we've done a great job over the past 4, 5 years, in particular in having our CapEx as a percent of revenue constantly get leverage off of that and decline. We certainly have reprioritized our internal CapEx investments into this AI road map. And at the end of the day, we've told our internal teams to say, keep being disciplined, but if you have a really good use case with a really good business case behind it, don't be constrained with the awful budget that the CFO sort of gave you, right? Like we're a well-capitalized company. We will fund this AI initiatives.

Okay. Maybe let's go from there on to margins overall. We talked earlier about some of the noise on mix pass-through margins held in pretty well in the quarter. Can you talk about the operational leverage you saw in the quarter and sort of also walk us through the rest of the year?

Sure. Yes. I think we're really happy with our productivity programs we have internally. And AI agentic AI that is really just another tool in our toolkit, so to speak, to constantly drive productivity of our teams. If you take a step back, and I think we've been a little bit more deliberate the past couple of quarters and helping investors actually understand our margins. And I'll use the first quarter as an example. In the first quarter, our reported EBITDA margins declined by 60 basis points. And let's break that into 2 pieces. We have nonoperational forces at play there, and it's primarily pass-throughs, which come with no margin and FX. And in Q1, FX is probably the biggest tailwinds that we're going to see in the quarter and obviously had the biggest just mathematical dilution to our reported margin. If you just take pass-throughs and FX in Q1, that was about 120 basis point margin decline, okay? So from an operational standpoint, there's really 2 things. There's mix and mix, meaning where we have lower margin offerings growing faster than higher margins. So that's a headwind, reported margins and then you have our productivity programs. And when you match those 2 operational things together, it was up about sort of 60 basis points positive, right? So ignoring the nonoperational items in the quarter, we expanded margins by 60 basis points. And as we go through the year, we expect the FX and nonoperational dynamics to sort of moderate and you'll see our reported margins flip positive in the back end of the year as our guide would indicate. And we're just really encouraging investors really focus on the EBITDA dollars, not so much on the margin, and we had one investor say to me is like, yes, I like what you just said there because you can't buy a sandwich with a percentage focus on the dollars. So [indiscernible]

I mean to that point, 60 bps, that's well above your LRP and sort of what we've come to

It is, yes. So please don't everybody start updating their models that it's going to be 60 basis points every quarter. But we're still confident of what we said at our last Investor Day that in any given year, outside of the nonoperational gyrations, we should be expanding margins by 0 to 30 basis points. And who knows? I mean this agenetic world could certainly have us surpass that.

Okay. All right. Maybe let's talk a little bit on the capital deployment, cash side. You were active on buybacks. There's always sort of a little bit of a trade-off between some M&A opportunities, buybacks, paying down debt. So how would you weigh those priorities out for the rest of the year?

Yes. Well, these -- I can tell you that the current valuations certainly make 0. I mean we were -- we had a Board meeting last week where we went and asked for an additional $2 billion worth of repurchase authorization. So we now have something like $3.1 billion at our disposal. And when we're preparing for that, we were like, gosh, our stock price now is about the same as it was in 2020 when we delivered EPS of $6.40. And our updated guide that we just put out there is going to deliver $12.80. So you explain that to me. Like this makes no sense sort of whatsoever. So certainly, it's very attractive from a share buyback standpoint. We do have a fairly full M&A pipeline. We announced we have -- we've signed, but we haven't closed the Charles River divestiture and the drug discovery side. We're excited about that. And there are some other assets that are out there, but it's always because M&A is such a binary thing. We'll see what we can get done. And we're certainly -- we like some of the assets that are in the portfolio, but can we get them at reasonable prices. We'll have to see, but we'll continue to be buying back our own shares, and we're in Vegas. So we're betting on ourselves.

Maybe kind of rolled it all together, just taking a step back as you look from where we said now in May for the rest of the year, call out a couple of swing factors or maybe potential drivers of upside you see to the higher end both on -- from a sort of a demand top line environment and on earnings versus a couple of things that you're going to keep an eye on potential risks for the lower side?

Well, I mean, there's no question that where we are now, when we look back to that same point in time last year, we're in so much better of a position and not just IQVIA, I mean the industry, the macro overhang are a lot clearer now when they were then. So again, we're going to keep our eye on how EBP funding continue to trend. We're not expecting any massive shifts in policies, especially as we come hurtling into the midterm season. So we're just keeping our heads down and continue to execute -- and we had some people come to us and said, "Geez, your commercial business was so strong in Q1. And do you think that there's upside? And the answer is like, sure, I mean -- but it's early, and it's a short cycle part of our business. So again, we'll continue to monitor our pipelines and the demand metrics. And I think overall, we're just trying to get across to investors that recovery is not necessarily a linear sort of exercise. But I think all of the metrics on the demand side from an execution standpoint, the promise of what AI could be are all sort of playing out as we anticipated.

Okay. All right. I've got a couple of minutes left, maybe I'll just go with our standard concluding question, Mike. Anything right now that based on your conversations in the last couple of weeks, you think is really misunderstood, underappreciated by investors about IQVIA or any closing remarks you don't have to leave people with?

No, I appreciate that. I think -- firstly is that with the -- maybe doing some of the segment realignment has sort of helped this because we had to talk more about it. But people are really starting to embrace the enterprise of IQVIA, the commercial side, the clinical side and what a powerful combination, those 2 things are, particularly as we're entering into a world where the expectation is, is clinical development will continue to accelerate and get more efficient, which means more drug launches, which is a huge driver of the commercial business. Having those 2 things together under our roof is certainly being well received and starting to be recognized a little more. And finally, the data assets that we have that I talked about sort of previously, I mean it is unreplicable if that's even sort of a word there. And so it's great to have sort of clients come to us, and we have discussions about what that really means and how that really can help them going forward. So yes, we remain very encouraged about the outlook for

Okay Great. Thanks so much, Mike. Appreciate it.

Thank you, everyone. Thank you for having me.