IQVIA - Q3 2023

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to the IQVIA third quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press Star followed by the number one on your telephone keypad. If you would like to withdraw your question, press Star again. As a reminder, this call is being recorded. Thank you. I would now like to turn the call over to Nick Childs, Senior Vice President, Investor Relations and Treasury. Mr. Childs, please begin your conference.

Nick Childs (SVP of Investor Relations and Treasury)

Thank you, Regina, and good morning, everyone. Thank you for joining our third quarter 2023 earnings call. With me today are Ari Bousbib, Chairman and Chief Executive Officer, Ron Bruehlman, Executive Vice President and Chief Financial Officer, Eric Sherbet, Executive Vice President and General Counsel, Mike Fedock, Senior Vice President, Financial Planning and Analysis, and Gustavo Perrone, Senior Director, Investor Relations. Today, we'll be referencing a presentation that will be visible during this call for those of you on our webcast. This presentation will also be available following this call in the Events and Presentation section of our IQVIA Investor Relations website at ir.iqvia.com. Before we begin, I would like to caution listeners that certain information discussed by management during this conference call will include forward-looking statements.

The actual results could differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, which are discussed in the company's filings with the Securities and Exchange Commission, including our annual report on Form 10-K and subsequent SEC filings. In addition, we will discuss certain non-GAAP financial measures on this call, which should be considered a supplement to, and not a substitute for, financial measures prepared in accordance with GAAP. A reconciliation of these non-GAAP measures to the comparable GAAP measures is included in the press release and conference call presentation. I would now like to turn the call over to our Chairman and CEO.

Ari Bousbib (Chairman and CEO)

Thank you, Nick, and good morning, everyone. Thank you for joining us today to discuss our third quarter results. So in line with our expectations, R&DS is performing very well. The TAS business continued to grow, but revenue fell short of what we had expected. About half of our total revenue shortfall came from foreign exchange headwinds versus our previous guidance, and the other half from persistent weakness in demand in the TAS segment. Despite the TAS revenue shortfall, our productivity actions allowed us to deliver on our profit guidance. We continue to receive questions about the health of the industry and customer demand, and I'd like to give you the latest of what we are seeing in the market. Let's start on the clinical development side. Demand in the R&DS segment remains strong.

Net new bookings exceeded $2.6 billion, representing a quarterly book-to-bill of 1.24 overall, including passthroughs. Given that this quarter there is a significant difference between services bookings and bookings with passthrough, I note that our services bookings were the highest ever at $2.3 billion, resulting in a 1.4 services book-to-bill. Our backlog reached $28.8 billion, growing 11.7% versus prior year, another historic high. Our quarterly RFP flow was up 10% year-over-year, with growth across all customer segments. Our strong performance is supported by continued healthy market dynamics. Emerging biotech funding was strong in the quarter. According to BioWorld, third quarter EBP funding was $18.7 billion, the largest quarter this year. Year to date, EBP funding through Q3 was up 8% versus prior year.

If you look at the first half, large pharma R&D spend, it was above 20% of net revenues, highlighting continued strong R&D activity within large pharma as well. Based on these indicators, the clinical trial industry remains healthy. Our strong market position, market wins, scale, and differentiated offerings give us confidence that our R&DS business will continue to deliver above-market growth. Turning now to TAS. On the commercial side of our business, we are obviously facing a tougher macro environment. Our clients remain cautious with their spending and have extended their decision-making timelines beyond what we would have normally expected. I'm sure you also saw that several large pharma have announced significant cost reduction programs... And obviously, we are a significant vendor to large pharma.

Now, we had anticipated to see improvements as we progress through the year, and specifically in the quarter, we usually see activity pick up in September after the slower July, August summer months. It didn't happen. While we still had growth for the segment as a whole, we experienced further declines in our analytics and consulting business, somewhat slower than expected growth in the discretionary parts of our real-world business, as well as some impact from the China situation. While the acceleration we are anticipating is taking longer than expected, based on our pipelines, we remain confident that there will be a rebound in demand sometime in 2024. We know this because the pipeline of opportunities remains strong, even as decision timelines are elongated and negotiations with our customers have become more difficult.

We also know this because historically, going back 25 years, every time there was a pullback in spend on the commercial side, the industry adapts and comes back within a year or two. With this as context, let's now review the third quarter results. Revenue for the third quarter grew 4.9% on a reported basis, 4.1% at constant currency. Compared to last year and excluding COVID-related work from both periods, we grew the top line approximately 8.5% on a constant currency basis, and that includes approximately 1.5 points of contribution from acquisitions. Third quarter Adjusted EBITDA increased 9.1%, driven by revenue growth and ongoing cost management discipline. Third quarter Adjusted Diluted EPS of $2.49 faced the ongoing headwind of the step-up in interest expense and the U.K. corporate tax rate.

If you exclude the impact of these non-operational items, our adjusted diluted EPS growth underlying was 13%. Let me share a few highlights of business activity in the quarter, and let me start with TAS. This quarter, IQVIA was awarded several noteworthy analytics contracts to support our clients' go-to-market strategies. For example, an EBP client selected IQVIA to provide analytics around key prescriber and payer trend for their women's health products. In another significant win this quarter, IQVIA secured a large U.S. data analytics contract with a top 10 pharma client that had been buying from a competitor for over a decade. We also received an award from an EBP client to support the launch of their first branded product into the diabetes market. This will be an end-to-end launch solution, including field reps, inside sales reps, OCE, information management infrastructure, data analytics, commercial compliance, and co-pay card operations.

Also in the quarter, I'm sure you saw that we received an award from Sanofi to deploy our OCE platform within the Middle East and Africa markets. Sanofi has been using IQVIA in many markets around the world to support their HCP engagements. On the tech side, we've been getting some questions about our partnership with Salesforce, and I just want to confirm that IQVIA has been a key life sciences partner to Salesforce for many years now, with offerings that span from clinical to commercial. And we plan to continue this strong partnership with Salesforce, combining our life sciences, domain expertise and intelligence with Salesforce technologies and platforms. Moving now to the real world.

We were awarded multiple rare disease studies from both large pharma and biotech clients, highlighting our expertise and differentiated offerings within this growing therapeutic area, including innovative study design, patient recruitment, and AI-enabled technology to provide unique solutions. A couple of examples: A top 20 large pharma awarded IQVIA a 10-year study to improve patient treatments for a rare genetic liver disease. A Japanese EBP client awarded IQVIA two large post-marketing surveillance studies on rare diseases in the circulatory, nervous, and muscular systems. Moving now to R&DS. We entered into a strategic collaboration with the Coalition for Epidemic Preparedness Innovations, CEPI, aimed at enhancing the world's ability to rapidly conduct clinical research for vaccines and other biological countermeasures against emerging infectious diseases.

This collaboration is a key enabler of CEPI's mission goal, which is sponsored by the G7 and G20 countries, to develop safe, effective, and globally accessible vaccines against emerging disease outbreaks within 100 days. We've also entered into an innovative strategic collaboration with argenx, a global immunology biotech company. Leveraging our Connected Intelligence capabilities, we bring together end-to-end asset development services, ranging from regulatory to market authorization, to integrated technology-enabled pharmacovigilance safety tracking. This will allow argenx to accelerate the market launch of new rare disease therapies to autoimmune patients. In the quarter, a top 10 pharma client renewed their FSP partnership with IQVIA as they look to design and launch their new clinical monitoring model. IQVIA will co-develop the solution, leveraging our expertise, innovative tech-enabled approach, and exceptional delivery performance.

IQVIA has been named the sole global medical information center provider by one of our large pharma clients. IQVIA differentiates in the market as the only provider to have successfully utilized an AI natural language processing solution for medical information. As has been the case in the last few years, R&DS continues to win big in oncology, with multiple awards in the quarter. A few examples: IQVIA won a late-stage program with a biotech company developing immuno-oncology therapies. We were selected after successful delivery of an earlier-stage trial, as well as our unparalleled data analytics to help identify patients and populations with unmet needs. We were awarded a phase three oncology trial from a large, cutting-edge biotech company. IQVIA was selected for our expertise in endometrial carcinoma cancer, as well as our ability to accelerate trial startup.

This is an important trial, given the unmet medical need and limited treatment options for patients with this condition. Also, IQVIA was awarded two large global oncology trials from a mid-sized pharma client. IQVIA was selected due to our strategic design and operational expertise in oncology, including our ability to manage multiple large, complex trials and our experience managing the unique safety profile of these molecules. With that, I will turn it over to Ron for more details on our financial performance.

Ron Bruehlman (EVP and CFO)

Thanks, Ari, and good morning, everyone. Let's start by reviewing revenue. Third quarter revenue of $3,736 million grew 4.9% on a reported basis and 4.1% at constant currency. Now, in the quarter, COVID-related revenues were about $95 million, down about $125 million versus the third quarter of 2022. Excluding all COVID-related work from both this year and last, constant currency growth was approximately 8.5%. As Ari mentioned, acquisitions contributed about 150 basis points of this growth. Technology and Analytics Solutions revenue was $1,431 million. That's up 2.2% on a reported basis and 0.9% at constant currency. And excluding all COVID-related work, constant currency growth in TAS was 5%.

R&D Solutions revenue of $2.122 billion was up 7.2% reported and 6.4% at constant currency. Excluding all COVID-related work, constant currency growth in R&DS was 11%. Lastly, Contract Sales and Medical Solutions, or CSMS, revenue of $183 million was flat on a reported basis and up 4.9% at constant currency. Year-to-date revenue of $11.116 billion grew 4.2% on a reported basis and 4.8% at constant currency. Excluding all COVID-related work, constant currency growth was 11% year to date. Technology and Analytics Solutions revenue year to date was $4.331 billion, up 2% reported and 2.4% at constant currency.

And excluding all COVID-related work, growth at constant currency in TAS year to date was 7%. R&D Solutions year-to-date revenue of $6.244 billion was up 6.5% at actual FX rates and 6.8% at constant currency. Excluding all COVID-related work, growth at constant currency in R&DS was 14% year to date. And, finally, Contract Sales and Medical Solutions year-to-date revenue of $451 million declined 3.6% reported and increased 1.2% at constant currency. Let's move down the P&L. Adjusted EBITDA in the quarter was $888 million, representing growth of 9.1%, while year to date, adjusted EBITDA was $2.603 billion, up 7.3% year-over-year.

Third quarter GAAP net income was $303 million, and GAAP diluted earnings per share was $1.63. Year-to-date, GAAP net income was $889 million, or $4.76 of earnings per diluted share. Adjusted net income was $462 million for the third quarter, and adjusted diluted earnings per share was $2.49. Year-to-date, adjusted net income was $1.378 billion, or $7.37 per diluted share. Excluding the year-over-year impact of the step-up in interest rates and the increase in the U.K. corporate tax rate, adjusted diluted earnings per share grew 13% in the third quarter and 12% year-to-date. Now, as already reviewed, R&D Solutions delivered another strong quarter of bookings.

Backlog at September 30 stood at $28.8 billion, up almost 12% year-over-year, and 33% higher in the last three years. Okay, let's review the balance sheet. As of September 30, cash and cash equivalents total $1.224 billion, and gross debt was $13.631 billion, and that resulted in net debt of $12.407 billion. Our net leverage ratio ended the quarter at 3.52x trailing twelve-month Adjusted EBITDA. Third quarter cash flow from operations was $583 million, and capital expenditures were $146 million, resulting in free cash flow of $437 million.

Now, you saw in the quarter that we repurchased $144 million of our shares, which puts our year-to-date share repurchase activity just slightly below $800 million. This leaves us with just under $2.6 billion of share repurchase authorization remaining under the current program. Okay, let's turn to guidance. We're updating our guidance to reflect both the slower growth in the TAS segment and the headwind from foreign exchange rates compared to our previous guide. We currently expect revenue to be between $14.885 billion and $14.92 billion, which represents year-over-year growth of 3.3%-3.5%.

Excluding approximately $600 million of COVID-related revenue step down versus 2022, this guidance represents growth at constant currency of approximately 9%, including about 140 basis points of contribution from acquisitions. To reflect these changes in revenue, we're also updating our guidance for full-year adjusted EBITDA to $3.56 billion-$3.57 billion, and this represents year-over-year growth of 6.4%-6.7%. It also implies 70 basis points of margin expansion for the year. Lastly, we're updating our guidance for adjusted diluted EPS to $10.16-$10.23, which is flat to up 0.7% versus the prior year.

This includes the year-over-year impact of the step-up in interest rates and the increase in the UK corporate tax rate. If you were to exclude these items, adjusted diluted earnings per share is now expected to grow 11%-12%. Now, based on this full-year outlook, our implied fourth quarter guidance is as follows: For revenue, we expect between $3,769 million and $3,804 million, or growth of 0.8%-1.7% on a reported basis and 0.7%-1.6% on a constant currency basis. Adjusted EBITDA is expected to be between $957 million and $967 million, up 4%-5.1%. Net yields margin expansion of about 80 basis points in the quarter.

Adjusted diluted EPS is expected to be between $2.79 and $2.86, growing 0.4%-2.9% year-over-year. Excluding the step-up in interest expense, and the increased U.K. tax rate, we're expecting fourth quarter adjusted diluted EPS to grow 10%-13%. Now, all of our guidance assumes that foreign currency rates as of October 30 continue for the balance of the year. Now, as is our custom, we plan to provide you with a detailed 2024 full-year guidance on our Q4 earnings call in February. However, while it's early and we're still in the midst of our planning process, we thought it would be helpful to share a preliminary view that would help you frame how we see 2024. We see reported revenue growth in the mid-single digits in 2024.

This includes a further step down of approximately $300 million in COVID revenue, which is about 200 basis points of headwind to revenue growth, as well as another 100 basis points of headwind from foreign exchange rates, assuming current foreign currency exchange rates remain in effect for 2024. We see Adjusted EBITDA margins expanding 50 basis points, and this will drive high single-digit Adjusted Diluted EPS growth. Now, I trust this preliminary look at 2024 is helpful to you. Again, we will, as is our custom, give you more detailed guidance and specificity for 2024 when we release our full-year earnings early next year. So to summarize, despite client caution and spending levels below our expectations, the TAS business continued its growth in the quarter.

While the near-term growth outlook for TAS is below our previous expectations, we're confident in the longer-term fundamentals of the business, as our pipelines indicate there will be a rebound in demand sometime in 2024. In the quarter, we delivered another, strong performance in R&DS, with 11% revenue growth at constant currency, excluding COVID-related work. Quarterly net new bookings were strong at over $2.6 billion, representing a book-to-bill of 1.24. And we reached a historic high of $2.3 billion in services bookings, representing a services book-to-bill of 1.40. Our industry-leading backlog reached a new record of $28.8 billion, up approximately 12% year-over-year.

And finally, leading indicators on the clinical side remained strong, as evidenced by our quarterly RFP growth of 10% versus the prior year, with growth across all customer segments. With that, let me hand it back over to the operator to open up the conference for Q&A.

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We request that you please limit yourself to just one question so that others in the queue may participate as well. We'll pause for a moment to compile the Q&A roster. Your first question comes from the line of Elizabeth Anderson with Evercore ISI. Please go ahead.

Elizabeth Anderson (Senior Managing Director)

Hi, guys. Thanks so much for the question. One thing that I was just trying to work through, for my own sort of benefit is sort of the, the commentary I think, Ari, you alluded to in terms of some of the pullback, in R&D spend on the pharma side and the, the sort of continued strength of R&DS in terms of bookings and what you're seeing, in terms of RFPs. Could you help us sort of think about how you think about those two factors, sort of that commentary, where you sort of think pharma's growth is gonna be for sort of the remainder of this year and next year, and that, and maybe, remind us of how that's played out in prior cycles? Thank you.

Ari Bousbib (Chairman and CEO)

Yeah, you're asking, Elizabeth, thanks for your question. You're asking about contrasting the pullback in spend on the commercial side versus-

Elizabeth Anderson (Senior Managing Director)

Yeah, not in the commercial-

Ari Bousbib (Chairman and CEO)

Strength in R&DS.

Elizabeth Anderson (Senior Managing Director)

Sorry, R&DS, more specifically. Sorry.

Ari Bousbib (Chairman and CEO)

Yeah, but there is no pullback on spend in R&DS. I don't think I said that. I said the opposite. Funding-

Elizabeth Anderson (Senior Managing Director)

Uh, yeah

Ari Bousbib (Chairman and CEO)

... in R&DS has been very strong. I'm sorry if I misspoke or was misunderstood, but there is no pullback in R&DS. Quite the opposite. I mentioned in my introductory comments that if you look at the EBP sector, which has been under pressure and people have been concerned about, we see EBP funding in the quarter actually higher than it was last year. And I think year to date, I mentioned that-

Ron Bruehlman (EVP and CFO)

Up 8%.

Ari Bousbib (Chairman and CEO)

... funding was up 8% year-over-year. So, I also mentioned that we are experiencing a strong, continued RFP flow growth. It's actually up 10%, in the quarter, year-over-year. So I think it's quite the opposite. Our awards continue at a record high level, again, higher than last year. To give you some more color, our qualified pipeline is up 16% year-over-year and, you know, continues to be very, very strong. Our total pipeline as well, very strong, record high historically. I mentioned our book-to-bill in the quarter is 1.24 on a 6-0-6 basis, including passthroughs. And when you exclude passthroughs and you just focus on services, our book-to-bill is 1.4.

Our services bookings were $2.3 billion in the quarter. That's a historic high for us. So again, nothing that we see, and we've been hammering this point over and over again in the environment or in our own internal metric, leads us to believe there is anything changed on the R&DS spend. There are different dynamics. It is true that we see our clients, large pharma especially, explore new models with more FSP or hybrid type of services awarded. I mentioned we won some large FSPs, which explains, of course, the lower amount of passthroughs in the quarter in our bookings. But other than that, the spend is strong and our prospects for the business continue to be very strong on the R&DS side.

Elizabeth Anderson (Senior Managing Director)

Thanks, Ari. That's super helpful. And so when we take the sort of pharma, R&D commentary that you said about some of the pullbacks that, and some of the spending cuts in there, you would say that you guys are seeing, you're still seeing strong demand within that specific pharma segment? Maybe, yeah, further, and they're cutting costs by pushing more into FSP, and maybe there's some anecdotal large pharma companies that are cutting, but the sort of broader strength across that. That's the correct way to interpret what you're saying on the large pharma side?

Ari Bousbib (Chairman and CEO)

... Yes, I mean, large pharma, you saw, I think 2/3 of the top 10 large pharma, and we know that that's basically the case. The vast majority of large pharma companies have announced, either publicly or internally, a significant cost-cutting program that's due to the macro environment, which is very challenging. Concerns raised by the IRA and, you know, the general issues that we see, geopolitical problems all over the world, continuing wars in Europe, the Middle East, and of course, we have the situation in China, which has all but frozen the market for multinational corporations in China. So all of those are headwinds, plus the companies that were very active during the COVID years are seeing, you know, dramatic pullbacks in revenue, and all of that is putting pressure on margins.

And as a result, large pharma has been, and I would say unusually so, very aggressive in launching cost reduction programs. Now, I said before that that is not reflected. So far, we haven't seen that in the R&D side of the house. Again, I want to reiterate, very strong strength, I mean, a good momentum in the business, and all the metrics show that there is no slowdown there. Again, not surprising, it's a long cycle business. However, we're bearing the brunt of those cost reduction initiatives on the TAS segment, where we see that projects that should take a certain amount of time are taking a lot more time to get decided or awarded. And we see our clients negotiating on terms a lot, a lot harder than they ever were.

All of that has caused us to come short on the TAS segment in our revenues. But again, we're confident that this will rebound. We know this because the pipelines continue to be very strong on the TAS segments. And if you look back at every time there was a pullback of sorts from large pharma in history, whether you go back to the 2008-2010 period or anytime some big legislation was enacted, there was always a little bit of a pullback, and then it came back. The company, the industry is very innovative and comes back roaring, and our business goes along with it. So we're confident it will come back sometime in 2024. Thank you, Elizabeth.

Elizabeth Anderson (Senior Managing Director)

Thank-

Operator (participant)

Your next question comes from the line of Charles Rhyee with TD Cowen. Please go ahead.

Charles Rhyee (Health Care Technology Analyst)

Yeah, thanks for taking the question. Just wanted to follow up on the TAS segment here. You know, you talked about sort of longer timelines, but when you're in discussions with clients, do they continue to express an intention to kind of continue with the projects, or are things sort of just on hold? And how much of this is, you mentioned, the IRA, you know, how much would you attribute to sort of, you know, these pharma companies kind of reviewing pipelines and do you have a sense on how long that kind of process, you know, could take? You mentioned, you know, sort of re-acceleration sometime in 2024, but do you think that's early next year, or could that stretch into later next year? Thanks.

Ari Bousbib (Chairman and CEO)

Yeah. Well, thank you, Charles. I mean, look, I want to distinguish again between the clinical development side of the house and the commercial, shorter cycle part of the house, where there are more pockets of spend that are more discretionary from a timeline standpoint. So again, on the clinical side of the house, yes, there are reviews of pipelines and so on, and you know which molecules are worthwhile developing. There's more analysis, but this is at the early, early stage of the process. As you know, we are primarily, almost entirely, a phase III clinical trial company, and so we are not seeing that, and we would not be seeing that for another several years if it were to affect the pipeline. I remind you that the number of molecules coming down the pipe is at a record high.

The number of FDA approval is at a record high, and all of that bodes well for our clinical business. All the metrics that we see, from funding to RFPs, to awards, to backlog and bookings, are very, very strong. Once again, we had a record, historically, a historic high in services bookings in the quarter of $2.3 billion, representing a book-to-bill ratio of 1.4, excluding passthroughs. That's for the clinical side of the house. We have not seen the impact of any revisions or rethinking of pipelines so far. On the commercial side, that's the area where we are seeing an impact of our clients being more cautious, more conservative, stepping back from some of the projects they were planning to do. But for the most part, what we do, except again, for the discretionary part, must be done.

There is discretion with respect to timing, and of course, clients are being more aggressive in terms of seeking a price reductions and better terms and so on. The pipelines that we have indicate that demand is still there. To your question, you know, when people say to us that we no longer do a project, it's no longer in our pipeline. But if it remains in our pipeline, then it means the client still intends to do it. It's just that the timeline for decision-making has been pushed to the right. What explains it? It's again general concerns about the economy, general concerns about the macro geopolitical issues, the pressures resulting from sharp revenue declines post-COVID, and what that entails from a margin point of view. As I mentioned in my introductory remarks, we are a very large vendor to pharma and to large pharma in particular.

You know, when large pharma seeks to improve their margins, they seek to reduce costs, and obviously, they come to us for further reductions, and that elongates timelines, and of course, erodes pricing as well on our side. All of that has resulted in us coming short on our revenues in TAS, along with, as we mentioned in introductory remarks, the significant FX headwinds versus what we had guided to before. So that's the environment.

Charles Rhyee (Health Care Technology Analyst)

Yeah.

Ari Bousbib (Chairman and CEO)

Thank you for your question.

Charles Rhyee (Health Care Technology Analyst)

Sorry, I meant portfolio review, but-

Ari Bousbib (Chairman and CEO)

Portfolio on the R&D side?

Charles Rhyee (Health Care Technology Analyst)

No, on the commercialization side. I misspoke. I meant, you know, how much has the RWE impacted sort of as a—has that had an effect on when pharma looks at portfolio reviews and where they put their discretionary spend? But it sounds like you're saying it's more just the general macro environment that's-

Ari Bousbib (Chairman and CEO)

Yeah

Charles Rhyee (Health Care Technology Analyst)

having an impact on

Ari Bousbib (Chairman and CEO)

Yeah. We imagine the IRA hasn't had any concrete, significant concrete, impact yet on, on the market. This is all, you know, based on hypothetical developments and, down the line. So that just adds another cloud of uncertainty and anticipation of that uncertainty that causes management teams to appropriately seek, you know, cost containment. That's all.

Charles Rhyee (Health Care Technology Analyst)

Okay. Okay, appreciate it. Thank you.

Operator (participant)

Your next question comes from the line of Dan Leonard with UBS. Please go ahead.

Dan Leonard (US Life Sciences Analyst)

Thank you. I just wanted to circle back to your 2024 framing commentary, that mid-single-digit growth figure. Can you speak to your expectations between the TAS segment and the R&DS segment? And then in R&DS in 2024, do you expect any meaningful difference in growth rates between the direct fee revenue and total revenue? Thank you.

Ari Bousbib (Chairman and CEO)

So, again, this is a very... We thought it would be helpful just because there's uncertainty, and you will recall that even in the, you know, at the peak of COVID, we decided to give you guidance early. And we're doing this because we hope that that's helpful to you. Now, it's an initial outlook based on where we are in our planning process. We have not completed that planning process, so I would caution you that this is, again, preliminary, and we will come back, as is our custom, when we release full-year earnings early in 2024 with detailed and precise guidance by segments, etc. Just on your question, we are guiding to mid-single digits overall. Revenue growth, that includes $300 million of step down from COVID, and I think that's essentially all-

Dan Leonard (US Life Sciences Analyst)

Yeah

Ari Bousbib (Chairman and CEO)

in R&DS. So if you added that back to our total revenues, that would be another couple of hundred basis points on top of that. And of course, we have we expect 100 basis points of foreign exchange headwinds, assuming FX rate remains what they are today. So when we say mid-single digits, that's really on a reported basis. Once you adjust for the COVID step down and FX, it's more high single digits, which I'm sure you agree for an about $15 billion revenue company, is quite an achievement in the current environment. With respect to segment growth, I think it's too early to give it to you. We obviously obviously have an idea, but we should... I mean, you I just gave it to you, you know.

But when we tell you that the COVID impact is 100% in R&DS, you could just assume that we are expecting, essentially, for now, assume about the same across the segments. That is, you know, mid-single digits, I would say, okay? Before the COVID adjustment.

Dan Leonard (US Life Sciences Analyst)

Thanks, Ari.

Operator (participant)

As a reminder, we ask that you please limit your questions to one. Your next question will come from the line of David Windley with Jefferies. Please go ahead.

David Windley (Managing Director)

Hi, good morning. Thanks for taking my question. Ari, I wanted to focus on, on margin. You commented in your prepared remarks about productivity initiatives that you took in the third quarter. You're talking about, the bookings mix being heavy to service, and so, you know, that could be beneficial, in R&DS to, to EBITDA growth. Just wondered if you could talk kind of expansively about any further productivity initiatives that you might be able to take and, and kind of what are the drivers to get you to that 50 basis points of EBITDA margin expansion for next year. Thanks.

Ari Bousbib (Chairman and CEO)

Well, thank you, Dave. Look, I mean, the productivity initiatives I mentioned, not just in the third quarter. You will recall we started this towards the end of last year. That's what has led us to be able to address, you know, the revenue shortfall and not, you know, completely bear the brunt of that reduction falling through EBITDA. We've been able to offset a lot of that headwinds with our those cost reduction programs. It takes time. You know, as you know, the actions that we took in Q3 are not gonna be, you know, bear benefit until Q4, Q1, Q2 of next year.

So, we constantly taking actions to restructure our overhead structure, to review our spans of control, globally, to, you know, continue our offshoring programs, to review our infrastructure footprint. That includes real estate, it includes IT, it includes really all of that infrastructure that we need to run our business. And all of those cost factors, along with the, you know, mix of the proper mix of insourcing, outsourcing, and as I mentioned, a continued offshoring of certain activities and taking advantage of our labor arbitrage among our different centers, whether it's in the Philippines, in India, in Bangladesh, in South America, et cetera. All of those things are being done on an ongoing basis, and we see the benefit in our margins this year.

You know, the actions we took, for example, in the third quarter, the carryover benefit will materialize in Q4, so the and in following quarters during 2024. The reason we feel confident about 50 basis points margin expansion in 2024 is because we see that the, it's the carryover of the actions we took this year that will benefit on a full year basis, 2024. And of course, we don't intend to stop those actions selectively.

David Windley (Managing Director)

That's great. Thank you. I'll stay to one. Thanks.

Operator (participant)

Your next question will come from the line of Justin Bowers with Deutsche Bank. Please go ahead. Justin, your line might be on mute.

Justin Bowers (Research Analyst)

Thank you, and good morning, everyone. So just wanted to take a step back and, with respect to some of the cost-cutting programs that we've seen large pharma announce, what is IQVIA's opportunity to sort of participate in some of that and help drive some of those savings? You know, whether it's in sort of RDS or TAS, and then, secondarily, on for the outlook for 2024, what's the M&A assumption embedded in that growth rate?

Ari Bousbib (Chairman and CEO)

Thank you, Justin, for your question. Yes, we are actively engaged with our customers to help them with their cost reduction programs. Look, we have to. We are a large vendor across the board, clinical and TAS, and they come to us and ask us to help them. So, you know, we have an opportunity to do that. Obviously, it affects our revenue growth. That's primarily the case in TAS, because that's where you know the pricing changes and the renegotiated terms impact us, you know almost immediately. You know, less so in R&DS, but mostly in TAS. Now, the opportunity, if you will, for us, is that in those conversations, we try to offer you know more services. That has always been the case.

That's a traditional way of engaging with our clients when they seek cost reductions. You know, we try to capture a bigger share of their spend in exchange for being able to deliver those services at a lower price point. And so the benefit for us is longer term, we get a bigger piece as they give us more volume. We've seen that happen, frankly, on the commercial side and on the R&DS side over the past five, six years, and certainly since the merger. And we certainly hope that that will materialize, but it'll take a couple of years to materialize because when clients need to switch vendors, you know, it takes time to let the contract end and convey them to us. Your next question was on the-

Ron Bruehlman (EVP and CFO)

Acquisition impact.

Ari Bousbib (Chairman and CEO)

It's about a point.

Ron Bruehlman (EVP and CFO)

Yeah, about, about 100 basis points.

Ari Bousbib (Chairman and CEO)

Yeah.

Justin Bowers (Research Analyst)

Got it. Thanks.

Ari Bousbib (Chairman and CEO)

Again, that's the assumption for 2024 at this stage.

Ron Bruehlman (EVP and CFO)

Yeah, that's what's baked in.

Ari Bousbib (Chairman and CEO)

Yeah. When we come back, we'll give you formal guidance. This is really not guidance. It's really-

Ron Bruehlman (EVP and CFO)

Yeah

Ari Bousbib (Chairman and CEO)

... a preliminary look-

Ron Bruehlman (EVP and CFO)

A look

Ari Bousbib (Chairman and CEO)

... at where we are. Thank you, Justin.

Operator (participant)

Next question will come from the line of Shlomo Rosenbaum with Stifel. Please go ahead.

Shlomo Rosenbaum (Managing Director)

Hi. Thank you very much. I just want to drill down a little bit more into TAS. You talked about the discretionary areas. Maybe you can just get a little bit more into, you know, is-- are you-- is it consulting, BPO, software, data sales? Maybe just a little bit more of detail as to how growth is trending within each one of kind of the subsegments. I know you don't break it out exactly revenue-wise, but it is helpful to kind of think about what's going on beneath the surface there.

Ari Bousbib (Chairman and CEO)

... Yes, thank you, Shlomo, for the question and the opportunity to clarify. Look, the TAS segment has continued to grow in the quarter. I mean, you know, and you can look at large-cap companies that serve the life sciences industry with products and services, you know, supporting, you know, post-drug introduction in the market. And you can see that they almost uniformly are showing declining growth this year, and sharp declines in the quarter for those who have reported. Now, we continue to have growth, and the reason for that is because some of this stuff is longer term and is, you know, somewhat mission-critical. I'm speaking about data, the stuff that's, you know, technology licenses, subscription, recurring revenue, all of that continues as is, and that's what is enabling us to continue to deliver growth.

However, the parts of our business that are more discretionary, and when I say discretionary, I don't mean to say that our clients may decide simply not to go ahead. It happens, but that's a small proportion of what we sell. It means that it can be done later. It means that it can be done in a different way, perhaps in a, quote, unquote, "slimmed down version," less bells and whistles, you know. And so the consulting and analytics part of our business, which, as you know, is about a quarter of our revenues, is showing sharp declines, sharper than we would have expected. Some of the projects have simply fallen off, but the pipelines are still there. That's what gives us confidence for a rebound in 2024. We know that these projects have to be done.

The clients are just taking a lot more time to make a decision. They are negotiating us a lot longer and a lot more, and a lot more aggressively. And this is what has happened. This is... You know, I mentioned in my introductory remarks a few examples of significant wins in TAS, and these are almost uniformly these types of projects. Helping clients launch products in new markets, helping them with their go-to-market strategies. These are things that have to be done, and the projects that we won in the quarter, frankly, some of those we should have won in the first quarter. They were in the pipeline since last year. So the decision timelines have extended, and the terms have been tougher. That's what has happened. I hope that caller helps you.

Shlomo Rosenbaum (Managing Director)

Thank you.

Ari Bousbib (Chairman and CEO)

Thank you.

Operator (participant)

Your next question comes from the line of Luke Sergott with Barclays. Please go ahead.

Luke Sergott (Director and Healthcare Equity Research Analyst)

Awesome. Thanks. So you talked about the large FSP win, and, you know, you're seeing a lot more shift to the, to that type of hybrid model. And, and, you know, you've talked in the past about this being really in cyclical nature, but, this has also come at a lower margin. So help us think about, like, the, the duration, the size of the FSP wins that you had, and, if we should expect the, you know, some mixed headwinds to your future, you know, over the next three to months to, to a year on, on this business from, regarding RDS side.

Ari Bousbib (Chairman and CEO)

Thank you, Luke. Yes, you are absolutely correct that an FSP award comes at a lower booked margin than a full service program. You're also correct that this is a cyclical development in the industry. I recall very well that at the time we did the merger, seven years ago, and, you know, coming into, at the time, the legacy Quintiles organization, it was explained to me that the industry was now in the midst of a switch from full service to FSP. And as a result of which, Quintiles at the time had pulled back from servicing these clients because they didn't want to do FSP work, given its lower margin profile.

I thought at the time that was a strategic error, and we, since then, of course, have decided to serve our clients with the full portfolio of services, including FSP and including full service, and including hybrid and everything else. We serve clients, we don't push offerings. So if at this point in time, our clients are interested in more FSP or more hybrid models, that's what we will sell to them. It is then incumbent upon us to work on our cost structure to try to recover margins when we execute the work at a higher level than what we booked it at, and try to continue to develop cost containment and cost reductions so that we can offset the margin mix impact. Look, we are a very large company. We are executing thousands of trials at any given point in time.

We manage a portfolio of businesses. Once again, we are about a $15 billion revenue company growing mid-single digits, you know, before you account for the step down in COVID revenue and the FX headwind. And we are at adjusted EBITDA margins of 24%, and we are expanding those margins. And we intend to continue that model well into the future, despite cyclical headwinds that may occur, whether it is a tougher spending environment on the tail side, whether it is a switch to FSP from some of our large pharma clients. You saw in the quarter, again, $2.3 billion of services fee revenue, excluding pass-through bookings, resulting in a book-to-bill of 1.4. Again, a historic high in our bookings. That included some FSP wins.

Again, not anything that would move the needle dramatically, but on a large number like this, you can see that we have less pass-throughs. That will materialize in our margin mix, you know, in the next couple of years, not next quarter, obviously. We fully intend to offset that with our cost reductions and continue to increase our margins. Thank you for your question.

Luke Sergott (Director and Healthcare Equity Research Analyst)

Yeah, thank you.

Operator (participant)

Your next question will come from the line of Jailendra Singh with Truist Securities. Please go ahead.

Jailendra Singh (Managing Director)

Yeah, thank you. Thanks for taking my questions. I want to ask about the capital deployment strategy over the next 12 months. Has there been any change there in terms of your priority to pay down debt versus buyback shares or even M&A allocation? And one quick clarification: what is the magnitude of the swaps rolling off next year?

Ari Bousbib (Chairman and CEO)

The first question and the second question, I'll give to the technicians here. The first question on capital allocation, look, it's fascinating that we are getting from our investors two different messages. One is, "Please, please reduce your leverage," and one is, "Please, please, do not change your leverage." And I have to tell you, we historically have been living with a level of leverage that's admittedly higher than others. We are at around 3.5 net leverage right now. I want to just, for the anecdote, tell you that we've had, in the past, much higher levels of leverage under much more difficult market conditions and much lower levels of cash flow conversion. And we've lived with that nicely because we have a highly predictable, high visibility business model.

Our strategy has been, A, to invest in the business, in capital expenditures, to innovate new products and services. B, buy companies that add, that are accretive and enable us to grow faster. And C, return money to our shareholders through share repurchases. And that has been a very effective strategy, especially when rates were extremely low. I remind you that just two years ago, Treasuries were at 0. 0. And I'm very glad that we had that amount of leverage. Today, Treasury is at, what? 5.5. I mean, we've never seen this in history, such a sharp, dramatic rise in interest rates in such a short period of time. Obviously, we are paying the brunt of our leverage, the price of that leverage, because of that, and it's costing us 10 points, 10 points of growth in earnings per share.

However, I would argue that mid-single digits Treasury rates, you know, is high versus zero, but it's not the end of the world. I will also tell you that we bore the brunt of that sharp increase in interest rates this year, in 2023. And, you know, assuming, like everyone else assumes, that the curve, if it is to be believed, you know, indicates a stabilization and even a potential decline, then that should be a headwind, I'm sorry, a tailwind to our EPS going forward, and we don't anticipate a sharp increase in rates or in interest expense going forward. And so therefore, we should be able to resume strong EPS growth going forward. That's for the leverage.

Having said that, we are working, as we speak, on obviously refinancing and readdressing some of the shorter-term maturities, which we have in 2024 and in 2025, and, we'll do that, you know, soon, hopefully. And that will continue to alleviate, that headwind that we faced this year in interest expense and continue to stabilize our balance sheet. But for now, at least, we intend to continue to use our cash to, invest in the business and do acquisition and share repurchase, especially at the levels where we are. Thank you for your question. Any comment on the swap?

Ron Bruehlman (EVP and CFO)

Yeah, we have about $800 million of swaps rolling off in the second quarter of 2024. To add anything to that next-

Which is at about an average rate of about, call it somewhere between 2% and 3%. So, you know, we'll be a headwind next year, but not to the extent that you saw on the swap that rolled off this year.

Jailendra Singh (Managing Director)

Got it. Thank you.

Ron Bruehlman (EVP and CFO)

Yes.

Ari Bousbib (Chairman and CEO)

Thank you very much.

Nick Childs (SVP of Investor Relations and Treasury)

Thank you, everyone, for joining us today. We look forward to talking to everyone on our next call, and myself and the team will be available for any follow-up calls, and any other follow-up questions you have, across the day and over the next few days, so feel free to reach out. Thanks, everyone, for joining.

Operator (participant)

This concludes today's conference call. You may now disconnect.