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

Good morning, everyone. Welcome back to the William Blair Growth Stock Conference. I'm John Kreger, the analyst at William Blair that covers IQVIA, which is our next session. Thank you all for joining us. From the company, we have Ron Bruehlman, the relatively new CFO of the company, but someone that's been around the IMS part of the business for a long, long time. Thank you, Ron, for joining us.

You're welcome, John.

All right. Before we jump in, I do need to just remind people that if you need to see our disclosures or conflict list, please see our website at williamblair.com. So with that, what we're going to do is take the next 30 minutes and go through a Q&A session. Most of these will be from me, but for those of you listening, do feel free to send any questions you have to me and I will do my best to work them into the discussion.

So with that, let's get going, Ron. I wanted to start with sort of a historical overview, given your very long history with at least the IMS part of the business. Can you just kind of step back, I think you joined about a decade ago when I was looking back on your bio. What did you find when you joined a decade ago and kind of contrast that to IQVIA today?

Yes, John, and thanks for having me. Look, when I joined IMS or more accurately when Ari joined IMS 9 months before he recruited me away from United Technologies, we've just been taken public by private -- public. We were previously owned by private equity -- or excuse me, we've been taken private by private equity, and we were going to go public. We had a really awful reputation on Wall Street, to be honest. We have grown kind of fat and complacent. We had a wonderful data business that we started in 1950s, but it had matured and stopped growing. And we did have a services business that grew out of consulting work for pharma clients. And that was growing, but it was limited in scope. And we took note, Ari and I, that they were all manner of firms from ZS Associates to Accenture, to Veeva, to McKinsey to whomever, they were piggybacking off our data and selling services and software to our clients, and we weren't getting a piece of that. So we decided to go after this untapped addressable market, which was really quite large, a lot larger than our data market by expanding our services, by growing more heavily into real-world evidence, and then ultimately, into technology. And the technology business we grew -- our services business, a lot of that was organic. The technology business, we grew mainly through acquisition. You'll recall, we acquired Cegedim's Life Sciences business, CRM and reference data were the biggest parts of that. And we added to that over time acquisitions and marketing campaign management, performance management, regulatory, quality, compliance, social media monitoring, so a wide range of various areas that we got into with technology. We also developed the human data science cloud for delivery and hosting of our legacy data assets and integrating them into the technology offerings we have. We expanded our RWE business. We developed E360. And we grew what is now largely the Technology & Analytics Solutions business that we all talk about. And it was -- it went from being a data business that was nice, high-margin but not growing to being a business that had plenty of room for growth within that business.

Great. Great. And kind of similar question for the Quintiles business. I think that was 5 years ago when you did that deal, which really kind of transformed the company from my perspective. What did you find there? And I guess what I'm really getting at is, is that business optimized today from your perspective? Or is there more work to do?

Yes. Well, I guess the first thing I would say is I'm not a big fan of the word optimized in business because it implies it's kind of perfection and state, and that never exists. And in fact, it's important if you take the philosophy that perfection is never -- you never arrive at perfection, that you're always looking for continuous improvement. That's certainly the way Ari and I run the business along with the rest of the team here. But in Quintiles, look, they brought a lot to the merger. They were the leading global CRO at the time, and our R&DS business still is, despite the mergers. But they had a different personality than IMS Health. They had a heavier corporate structure. They are more consensus driven, slower moving, more risk-averse. For example, they rarely did any acquisitions to speak of and they had virtually no technology whatsoever. And all of that, we changed after we became one organization, became IQVIA. And largely, the Quintiles business, which is more or less the R&DS segment that we talk about, took on the personality of IMS. And I guess the lesson from that is that there really is no such thing as a merger of equals. What I learned is whoever becomes a CEO ends up running the company and the company ends up taking on the personality of the CEO, and that, in fact, was Ari. So look, we've made a lot of improvements in the legacy Quintiles business, which was already a great business, but there's still a long way to go. I mean, it's a fragmented market. There's a lot of share to gain and huge opportunities in the technology area. You can see we've been trying to exploit by building out our technology offerings in R&DS.

Got it. Okay. And one more on this. My simplistic view of that combination was you're really trying to use the IMS data to sort of supercharge the Quintiles services business. Again, with 5 years of history now, did it work better or worse than what you kind of thought on paper back then?

It worked really as we expected, I would say, as we hoped and expected. But a little bit of history on that, I think, is instructive. We actually got together that is IMS Health with Quintiles originally over discussions about real-world evidence. Quintiles, of course, had a Stage IV clinical trials business. IMS had its retrospective real-word evidence business using, which, at the time, I think were 500,000 anonymized patient lives. And our customers were asking us to come together and do mixed-use studies using both the Stage IV and the retrospective data because it gives you both a very rich data set and a statistically significant data set. And that's really worked very much as we thought. But when we got together and started talking about real-world evidence, we realized it was a much bigger opportunity. And -- namely, that was using IMS data to help Quintiles run clinical trials more effectively. And if you all remember, John, the thesis -- this thesis was met with a lot of skepticism originally from investors and even from customers. Other CROs, even Quintiles in the past had tried this, touted the use of data, hadn't accomplished very much. And the main reason was the data sets were so limited. And IQVIA, obviously, much different situation. We can talk about that a little bit if we have time. But it did take us a little time to get traction in the market. The pharmaceutical business is conservative and slow to change. We had to sell the idea, sell our capabilities to our customers. But over time, we've shown our merger thesis to be a success. I mean, just a few statistics. Today, IMS data has been used on more than 1,200 trials, 47,000 sites been selected and 339,000 patients enrolled. And I'll note that 2/3 of those patients and sites come from outside the U.S., and that's one thing that we have that others don't, which is very the global data. Right now, greater than 85% of the studies we bid on our core power that is used the IMS core data. The results have been excellent. I'll just give you a few tidbits here. 50% reduction in site ID time versus historical benchmarks. We've achieved a 34% reduction in nonenrolling sites and 23% faster patient recruitment versus historical averages. And it's gotten to the point now where using the IQVIA core data to run clinical trials is now just routine for us. It's just how we do business.

That's great. Yes, I think you make a great point. It was sort of controversial when you announced it, but now it seems like it's much more widely accepted. So I guess the follow-on is, is it still proprietary to IQVIA? Is it still a differentiator? Or have your competitors been able to emulate it to a degree that it's now just sort of table stakes? What do you think about that?

Well, look, the first thing I'll say is nothing is proprietary about the data we have. Others could build a data set like us. However, it's extremely difficult to replicate. And just to put it in context, IMS Health was incorporated in 1954. So we've spent nearly 70 years building and curating our data assets through IMS Health and then subsequently, IQVIA post-merger. And no other company has the combination of information, technology, analytics and importantly, I'd say, scientific expertise that we have. And just a few statistics to give you a sense of the scale. We now have over 1 billion nonidentified patient lives in our IQVIA core. We have 150,000 data suppliers that covers over 1 million fragmented data feeds. It covers pharmacy, claims data, EMR, EHR, lab, genomics, social media, so a very broad array of data. And we compile this data in a way that we can track individual patient journeys on an identified basis longitudinally. Now other companies have tried to emulate that strategy. I think most notably, PRA's acquisition of Symphony, but they have a very small fraction of our data. They lack scale, the breadth and importantly, the geographic reach. Take Symphony, for instance, basically a U.S. company, but run trials for the most part globally. We use this data in a way that helps our clients solve some of the most pressing challenges they have. And of course, the whole idea is to run clinical trials faster so you can get the drug to market quicker and realize the branded pricing quicker. One of the things we've done that I think is underappreciated is we actually help pharma develop their protocols. And a protocol can have up to 50 requirements and even more, 80 to 100 in specialty therapeutic areas or oncology. And very often, all these requirements can stop you from getting patients. We can show whether a particular protocol is such that you'll be able to get in patients, enough patients or not, so you don't have costly protocol amendments. And most importantly, we can show where the patients are. So you can choose the investigators that have the patients and get the trial started faster and underway quicker. And of course, this has been the thesis we've talked about for a long time, and we've proven it out with the statistics I cited earlier.

Great. Great. Sounds good. All right. Let's change the subject and talk M&A a little bit. A couple of questions. One, just can you give us an update on what your capital priorities are now? You've really already nicely delevered the balance sheet. So just curious what your thoughts are. And maybe if you could work in, how do you view the recent consolidation in the CRO market that's been announced just in the last couple of months?

Yes. Okay, fine. Look, our capital deployment strategy and priorities have been pretty consistent, straightforward. Internal capital spending is and remains our top priority. Our biggest focus is on software development. That is building out our technology offerings. And we expect CapEx to run about 5% of revenue. It's kind of stabilized at that level. It's come up from a lower level when we were actively investing in the technology business. Our second priority for capital deployment is acquisitions. We've been pretty active, as you know, over the years since the merger, up or down depending upon the particular year and the availability of targets. These have been mainly bolt-on acquisitions to enhance our offerings or build gaps in those offerings or in some cases, to expand into adjacencies. One big deal we did recently was a bit of an exception. You'll recall, early in the second quarter, we acquired plus 40% minority interest in our Q² joint venture, and we did it for 2 reasons. First, it's very financially attractive. And secondly and most importantly, it's going to enable us to have more control of the investments in the joint venture. And we see this as being a very nice area for growth going forward. But in any event, even if you put that aside, we have a pretty strong pipeline of opportunities in the M&A area. So I think you're going to be seeing us invest some there. And third, on the hit list of capital deployment priorities and share repurchase, investment in our stock has been and it remains attractive, but it's secondary in importance to growing the business through internal investment, acquisitions and what you're going to find is, to the extent we don't have sufficient investment opportunities in any given quarter or half year or year to use our cash flow, we'll return cash to investors through share repurchase. We'll probably always do some, but the amount it's going to flex up and down with acquisition opportunities. And dead last on our capital deployment list is debt reduction. We have committed to reducing our net leverage to between 3.5 to 4x exiting 2022. And of course, we got there at the end of Q1, which was early. But that doesn't mean we're going to set a lower target and go lower still. We have strong cash flow. The interest rate environment remains very favorable. So there isn't a lot of incentive for us to pay down debt or pile up a lot of cash on our balance sheet. So what you're probably going to see is that leverage may rise or fall out of our 3.5 to 4 target range temporarily, but we're still targeting that 3.5 to 4 turns range, exiting 2022. Now you asked, John, I think about consolidation in the industry?

Yes. So I'm thinking about the ICON-PRA deal and the Thermo-PPD deal. Does that make you think any differently about M&A and how you're going to approach trying to build out a bigger business?

Yes. It really doesn't. We don't feel threatened by the recent industry consolidation, and it hasn't caused us to change our strategy in any way. Look, we may occasionally acquire a small CRO to enhance our presence in a particular geography or therapeutic area. But we don't see a whole lot to be gained by acquiring a large CRO. I mean, look, these kinds of deals are disruptive to the firms involved. I mean there's complexity, there's cultural bid issues. There's ultimately always employee attrition. Look, we even -- we saw this with the merger. And you power through those issues if you have a strong enough strategic rationale. We just don't see it with the consolidation of large CROs. And in fact, I think there even may be some dis-synergies, particularly where they're overlapping large pharma customers for some of the firms that merge. Very often, a pharma customer will have a couple or 3 preferred providers, and they don't like to see a couple or 3 preferred providers go to 2 or worse still 1 preferred provider. So you have to be a little bit careful about that when you do a large deal like that. And look, we continue to feel very good about our competitive position. It's not based on scale, although we are the largest CRO still, it's based on the data that we have. It's based on our domain expertise. Our analytics and our technology. It's a combination that we don't feel any of our competitors have. And look, there are opportunities for us to continue filling in holes in our technology offerings and adjacencies, growing our central lab business and the like, in niche acquisitions in the core clinical business. But I would reiterate, it's unlikely -- I would say highly unlikely we'll participate in any large-scale consolidation in the CRO business.

Great. Great. And that's a perfect segue to my next question. My sense is most of the deals you guys have done in recent years have been within TAS, and they've been on the smaller side. If we think about going forward, is it reasonable to assume that your priorities are still a little bit more on the TAS side of the business?